June 2016 Question 3

Darlga Co is partly financed by 7% loan notes which are redeemable at their nominal value of $1,000 per loan note
in eight years’ time. Alternatively, the loan notes are convertible after seven years into 110 ordinary shares of
Darlga Co per loan note. The ordinary shares of Darlga Co are currently trading at $6·50 per share on an ex dividend
basis. The current cost of debt of the convertible loan notes is 8%.
Required:
(a) Justifying any assumptions which you make, calculate the current market value of the loan notes of
Darlga Co, using future share price increases of:
(i) 4% per year;
(ii) 6% per year

Here they have calculated an expected MV at the end of seven years by multiplying 1070 to 0.962( 8% Df for yr 1). I did not understand why so. Please clarify