Convert Co issues a convertible loan that pays interest of 8% per annum in arrears. The market
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Question:
Convert Co issues a convertible loan that pays interest of 8% per annum in arrears. The market rate is 10%, being the interest rate for an equivalent debt without the conversion option. The loan of $3 million is repayable in full after three years or convertible to equity. Discount factors are as follows:
Year | Discount Factor @ 10% |
1 | .909 |
2 | .826 |
3 | .751 |
Required:
- Split the loan between debt and equity at inception
- Calculate the finance charge for each year until conversion/redemption.
- Calculate the amount of outstanding Liability at end of each of the three years.
Related Book For
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
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