) WN ltd issued a GH₵ 40 million 15% convertible loan note at a par on 1 January 2010 with interest payable annually in arrears. Three years later, on 31 December 2012, the loan note is convertible into equity shares on the basis of GH₵ 100 of loan note for 50 equity shares or it may be redeemed at par in cash at the option of the loan note holder. WN financial Accountant has observed that the use of a convertible loan note was preferable to a non-convertible loan note as the latter would have required an interest rate of 20% in order to make it attractive to investors. The Accountant has also commented that the use of a convertible loan note will improve the profit as a result of lower interest costs and, as it is likely that the loan note holders will choose the equity option, the loan note can be classified as equity which will improve the company’s high gearing position The present value of GH₵ 1 received at the end of the year, based on the discount rate of 15% and 20% can be taken as:
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
B) WN ltd issued a GH₵ 40 million 15% convertible loan note at a par on 1 January 2010 with interest payable annually in arrears. Three years later, on 31 December 2012, the loan note is convertible into equity shares on the basis of GH₵ 100 of loan note for 50 equity shares or it may be redeemed at par in cash at the option of the loan note holder.
WN financial Accountant has observed that the use of a convertible loan note was preferable to a non-convertible loan note as the latter would have required an interest rate of 20% in order to make it attractive to investors. The Accountant has also commented that the use of a convertible loan note will improve the profit as a result of lower interest costs and, as it is likely that the loan note holders will choose the equity option, the loan note can be classified as equity which will improve the company’s high gearing position
The present value of GH₵ 1 received at the end of the year, based on the discount rate of 15% and 20% can be taken as:
15%20%
GH₵GH₵
End of Year 10.8700.833
20.7560.64
30.6580.579
Required:
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