ACCA Applied Skills · Financial Management · The valuation of debt and other financial assets
Zeta Co has in issue $100 nominal convertible loan notes. At the redemption date in 5 years, holders may convert each note into 25 ordinary shares. The current share price is $3.20 and is expected to grow by 5% a year. What is the expected conversion value of each $100 loan note at the redemption date?
The conversion value is $102.10. The share price grows from $3.20 at 5% a year for five years to about $4.084, and multiplying by the 25 shares received on conversion gives $102.10 per $100 loan note.
- A$102.10Correct
- B$80.00
- C$97.24
- D$100.00
Explanation
Future share price = 3.20 × 1.05^5 = 3.20 × 1.2763 = $4.084. Conversion value = 4.084 × 25 = $102.10. Using today's price gives $80.00, which ignores growth. Using only four years of growth gives $97.24.
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