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The market value of a share is the present value of future dividends, and we have the formula on the formula sheet: Po = Do(1+g)/(re-g)
Usually there are growing dividends immediately and the formula gives the market value now.
However in this question the growing dividends do not start until after 2 years and so the formula gives a market value after 2 years. So we need to discount the answer by the 2 years to get the market value now.Thank you so much. I have another doubt in dec 2012 Q3 part a. How to calculate the cost of debt of convertible bonds
First you calculate what they expect the value of the shares will be on the date of repayment.
Then you decide what they expect to do – convert to shares or take cash (they will expect to do whichever gives them the most).
When you know how much they expect to receive therefore on redemption, you calculate the IRR in the normal way.
I don’t understand you. Equity is ordinary shares.
Convertible bonds give the holders the choice of taking cash or a fixed number of shares on the repayment date.
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