ACCA Applied Skills · Financial Management · The valuation of debt and other financial assets
Vantor Co has a 5% convertible loan note, $100 nominal, currently priced at $90 and redeemable in 5 years. Holders may instead convert into 20 shares. The current share price is $3.50, growing at 3% a year. Using the discount tables, which is closest to the pre-tax cost of this convertible debt?
The cost is about 7.5%. Conversion value is only about $81, so holders redeem at $100. The IRR of paying $90 now and receiving $5 a year plus $100 at year 5 lies between 7% and 8%, and interpolation gives roughly 7.5%.
- A7.5%Correct
- B5.0%
- C8.3%
- D10.0%
Explanation
Conversion value = 3.50 × 1.03^5 × 20 = about $81.15, below the $100 redemption value, so holders redeem. Find the IRR of −90, +5 for 5 years and +100 at year 5. At 7%: 5 × 4.100 + 100 × 0.713 = 91.80. At 8%: 5 × 3.993 + 100 × 0.681 = 88.07. Interpolating: 7 + 1.80/3.73 = about 7.5%. The 5.0% option is just the coupon rate.
Did you get it right without looking?
One question tells you little. A timed set on The valuation of debt and other financial assets shows your real accuracy, how long you take and where you lose marks.
More The valuation of debt and other financial assets questions
- A bond pays a single redemption payment of $1,000 in three years and no coupons. The spot yield curve is: 1 year 3%, 2 years 4%, 3 years 5%.…
- Zentra Co has in issue irredeemable bonds with a coupon rate of 6% on a nominal value of $100. Interest is paid annually and the next paymen…
- Under the pure expectations theory, the current 1-year spot yield is 4% and the current 2-year spot yield is 5%. What is the implied 1-year …
- Which statement about an inverted yield curve is correct?
- Kiln Co has a $100 convertible bond that can be redeemed at par or converted into 40 shares in 3 years. The current share price is $2.50, ex…
- Orla Co has a convertible bond with $100 nominal value and an 8% coupon, paid annually. It is redeemable at par in 4 years. A similar non-co…