I-Merge Ltd (I-Merge) is considering taking over I-Doit Ltd (I-Doit). Both companies are listed on the JSE and are in the same business sector.

Financial information relating to I-Doit is as follows:

Number of ordinary shares 5 million

Earnings per share 40c

Recent dividend per share 23c

Dividend per share one year ago 22c

Dividend per share two years ago 21c

Dividend per share three years ago 18c

Equity beta 1.4

Equity holders required rate of return 14.6%.

Financial information relating to I-Merge is as follows:

I-Merge recently issued the 9% redeemable bonds in an attempt to raise sufficient capital to purchase all of I-Doits shares. The bonds may, at the holders discretion, either be redeemed at its par value of R100 in five years time, or converted into I-Merge shares in the ratio of 1:20 (1 Bond = 20 shares) in five years time. The yield to maturity (YTM) for similar bonds is 9.5% per annum. I-Merges share price is expected to be R5.95 per share in five years time.

Other relevant financial information

Average sector price/earnings ratio 10

Risk-free rate of return 4.6%

Return on the market 10.6%

Tax rate 28%

b) Calculate the current market value of I-Merges convertible bonds if: (i) The issued bonds are redeemed in five years time; (ii) The issued bonds are converted into shares in five years time.

Show all calculations clearly. Round all amounts to the second decimal point.