Question: On 1 July 2015 Sunshine Ltd issues convertible notes with a face value of $20 million. The convertible notes have a 12-year term and mature

On 1 July 2015 Sunshine Ltd issues convertible notes with a face value of $20 million. The convertible notes have a 12-year term and mature on 30 June 2027. Interest is payable semi annually in arrears, 30 December and 30 June each year. The coupon rate of interest is 12% annually. At around the same point in time, companies with a similar credit rating issue debt security without a conversion option with a coupon rate of 16% payable annually.

Require

a. Determine the debt and equity components of the convertible notes issued using the residual valuation method.

b. Prepare an amortisation table of the convertible note liability for the period 1 July 2015 to 30 June 2018.

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