V Co issued $10 million convertible loan notes on 1 October 2018 that carry a nominal...

 

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V Co issued $10 million convertible loan notes on 1 October 2018 that carry a nominal interest (coupon) rate of 5% per annum. They are redeemable on 30 September 2021 at par for cash or can be exchanged for equity shares in V Co on the basis of 20 shares for each $100 of loan. A similar loan note, without the conversion option, would have required M Co to pay an interest rate of 8%. The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8% can be taken as: End of year Required: (i) (ii) 1 2 3 5% 0.95 0.91 0.86 8% 0.93 0.86 0.79 Explain why the nominal interest rate on the convertible loan note is 5%, but for the non-convertible loan note would be 8%. Prepare extracts to show how the loan notes and the finance charge should be treated by V Co in its financial statements for the year ended 30 September 2019. V Co issued $10 million convertible loan notes on 1 October 2018 that carry a nominal interest (coupon) rate of 5% per annum. They are redeemable on 30 September 2021 at par for cash or can be exchanged for equity shares in V Co on the basis of 20 shares for each $100 of loan. A similar loan note, without the conversion option, would have required M Co to pay an interest rate of 8%. The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8% can be taken as: End of year Required: (i) (ii) 1 2 3 5% 0.95 0.91 0.86 8% 0.93 0.86 0.79 Explain why the nominal interest rate on the convertible loan note is 5%, but for the non-convertible loan note would be 8%. Prepare extracts to show how the loan notes and the finance charge should be treated by V Co in its financial statements for the year ended 30 September 2019.

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i The nominal interest rate on the convertible loan note is 5 because ... View the full answer