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Source of finance

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Source of finance

  • This topic has 1 reply, 2 voices, and was last updated 10 months ago by John Moffat.
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  • August 9, 2021 at 12:30 pm #630894
    maeesha
    • Topics: 5
    • Replies: 0
    • ☆

    The finance director of Coral Co has been asked to provide values for the company’s equity and loan notes. Coral Co is a listed company and has the following long-term finance:
    $m
    Ordinary shares 7.8
    7% convertible loan notes 8.0
    15.8
    The ordinary shares of Coral Co have a nominal value of $0.25 per share and are currently
    trading on an ex dividend basis at $7.10 per share. An economic recovery has been forecast and so share prices are expected to grow by 8% per year for the foreseeable future.
    The loan notes are redeemable after 6 years at their nominal value of $100 per loan note, or can be converted after 6 years into 10 ordinary shares of Coral Co per loan note. The loan notes are traded on the capital market.
    The before-tax cost of debt of Coral Co is 5% and the company pays corporation tax of 20% per year.

    Assuming conversion how to find the market value of each loan note?

    August 9, 2021 at 4:37 pm #630912
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49600
    • ☆☆☆☆☆

    I explain how to calculate the market value of debt (including convertible debt) in my free lectures on the valuation of securities.

    The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.

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