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1. Why is 0.7 used to compute for the PV of the principal? 2. Why is 4 used to compute for the PV of interest payments?

1. Why is 0.7 used to compute for the PV of the principal? 2. Why is 4 used to compute for the PV of interest payments?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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1. Why is 0.7 used to compute for the PV of the principal?

2. Why is 4 used to compute for the PV of interest payments?

3. Why is 7.48% used to compute for the interest expense?

Total Proceeds (P1,000 x 1,000) Less: Fair value of the bonds without conversion privilege 1,000,000 900,000 100,000 Total Share Premium (A) Using 7.48% Present value of Principal (1,000,000 x 0.7 ) Add: Present value of interest payments (50,000 x 4) Total present value 700,000 200,000 900,000
Transcribed Image Text:Total Proceeds (P1,000 x 1,000) Less: Fair value of the bonds without conversion privilege 1,000,000 900,000 100,000 Total Share Premium (A) Using 7.48% Present value of Principal (1,000,000 x 0.7 ) Add: Present value of interest payments (50,000 x 4) Total present value 700,000 200,000 900,000
On January 1, 2021, Lanao del Norte Company Co. issues convertible bonds with a maturity of five years. The issue is for a total of 1,000 convertible bonds. Each bond has a par value of P1,000, a stated interest rate of 5% per year, and is convertible into 5 ordinary shares of Lanao del Norte Company. The convertible bonds were issued to Lanao del Sur Company at par. The per-share price of Lanao del Norte share is P15. Quotation for similar bonds issued by Lanao del Norte without the conversion privilege suggest that they can be sold for P900,000.
Transcribed Image Text:On January 1, 2021, Lanao del Norte Company Co. issues convertible bonds with a maturity of five years. The issue is for a total of 1,000 convertible bonds. Each bond has a par value of P1,000, a stated interest rate of 5% per year, and is convertible into 5 ordinary shares of Lanao del Norte Company. The convertible bonds were issued to Lanao del Sur Company at par. The per-share price of Lanao del Norte share is P15. Quotation for similar bonds issued by Lanao del Norte without the conversion privilege suggest that they can be sold for P900,000.
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