Question Two $(20$ Marks$)$

Kwacha Ltd is a privately owned company that is seeking to raise finances in order to fund the construction of a hospital. However, one of the directors argued that a hospital is a public institution that would not meet the objective of Kwacha Ltd which is to maximize the shareholder's wealth. The company expects to issue $10\%$ bonds which are redeemable at their par value of K$100$ in six $(6)$ years' time. Alternatively, it is expected that each bond may be converted on that date into $20$ ordinary shares of the company. The currentordinary share price of Kwacha Ltd is K$5\mathrm{.}1$ and this is expected to grow at a rate of $6\%$ per year for the foreseeable future. Kwacha Ltd has a cost of debt of $8\%$ per year.

Required:

$($a$)$ Calculate the following current values for each K$100$ convertible bond:

$($i$)$ market value;

$($ii$)$ floor value;

$($iii$)$ conversion premium.

$(12$ marks$)$

S$17$

$($b$)$ Compare the public sector objective of 'value for money' and the private sector objective of 'maximization of shareholder wealth'. $(8$ marks$)$