Skip to content

ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

Alpha Co offers a convertible bond with a nominal value of $100, 6% annual coupon, redeemable at par in 4 years. Each bond is convertible into 20 Alpha shares at maturity. Alpha's current share price is $4.00 and is expected to grow at 6% a year. What is the conversion value per bond at the end of year 4, to the nearest dollar?

The conversion value is about $101 per bond. The share price grows from $4.00 at 6% for four years to roughly $5.05, and multiplying by 20 shares gives $101, which is slightly above the $100 redemption value, so holders would convert.

  1. A$80
  2. B$101Correct
  3. C$105
  4. D$126

Explanation

Expected share price in year 4 = 4.00 x 1.06^4 = 4.00 x 1.26248 = $5.05. Conversion value = 20 x 5.05 = $101. Since $101 exceeds the $100 redemption value, conversion is preferable. $80 ignores growth; $126 wrongly compounds on the conversion ratio of 25 or the bond value.

Did you get it right without looking?

One question tells you little. A timed set on Financing acquisitions and mergers shows your real accuracy, how long you take and where you lose marks.

Practise Financing acquisitions and mergersFree diagnostic mock

More Financing acquisitions and mergers questions