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

Corvin plc has issued a convertible bond with a nominal value of $100. It can be converted into 20 Corvin shares in three years, or redeemed at par. The current share price is $4.00 and is expected to grow at 10% a year. What is the expected conversion value at the end of year 3, to the nearest $0.1?

The expected conversion value is about $106.5. The share price grows from $4.00 to $5.324 after three years at 10%, and multiplying by 20 shares gives $106.48, which exceeds the $100 par redemption value, so conversion would be preferred.

  1. A$80.0
  2. B$106.5Correct
  3. C$99.3
  4. D$87.8

Explanation

Future share price = 4.00 x 1.10^3 = 4.00 x 1.331 = $5.324. Conversion value = 20 x 5.324 = $106.48, about $106.5. Using the current price gives $80, which ignores growth. Using only two years of growth gives 4 x 1.21 x 20 = $96.8, not offered; $99.3 and $87.8 are not from the correct method.

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