In: Finance
question 1a
kumapito Ltd issued a GHC 50,000,000, three years convertible Bond
at par. there were no issue cost. the coupon rate is 10% payable
annually in arrears on 31st December. the bond is redeemable at par
on 1 January 2014. bondholders may opt for conversion. the term of
conversion are two shares for every GHC 1 owned to each bondholder
on 1 January 2014. bonds issues by similar companies without any
conversion rights currently bear interest at 15%.
required
assume that all bondholders opt for conversion in full, how will
this accounted for kumapito Ltd
b) dimadakel Ltd issued 2,000 convertible Bonds at the beginning of
2014. the bonds have a three years term and are issued at par with
a face value of GHC 1,000 per bond given total proceeds of GHC
2,000,000. interest is payable annually in arrears at a nominal
annual interest rate of 10%. each bond is convertible at any time
up to maturity into 250 shares. when the bonds were issued, the
prevailing market interest rate for similar debt without conversion
was 15%
required
Determine the equity component of the compound instrument.
please solve it step by step.
a). Equity component = proceeds from debt issue - Present Value (PV) of debt payments discounted at the straight bonds' interest rate of 15%
Initial recognition:
Dr cash (proceeds issue) = 50,000,000
Cr bond liability = 44,291,937
Cr equity = 5,708,063
After the initial recognition, debt is considered as a regular liability and is amortized, as follows:
The carrying amount on 1st January 2014, are:
Equity = 5,708,063
Debt = 50,000,000
Total = equity + debt = 5,708,963 + 50,000,00 = 55,708,963
When the conversion happens:
Number of shares issued = debt value*2 shares = 50,00,000*2 = 100,000,000 shares
So, value of the shares to be issued becomes number of shares*value per share = 100,000,000*0.25 = 25,000,000
Share premium = total amount - value of shares to be issued = 55,708,963 - 25,000,000 = 30,708,863 (Note: A valuer per share of .25 has been assumed as that is missing from the question. If that changes, the value of shares to be issued wll change, as well.)
Final entries:
Dr equity = 5,708,063
Dr Bond liability = 50,000,000
Cr Share capital = 25,000,000
Cr share premium = 30,708,863