Motown Ltd. has issued 100,000 units of convertible bonds with a nominal value of Rs.1000 each. The coupon rate of the bonds is 10% payable annually. Each of the Rs.1000 convertible bonds can be converted into 50 ordinary shares @ of Rs. 20 each in three years’ time. If any bonds are not converted, such bonds would be redeemed at Rs.1100. The expected share price on the conversion day is Rs. 25. Should the investor select conversion or redeem the debenture. The required rate of return is 12%. Mention any two reasons for the companies to issue convertible debentures.?
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:
Motown Ltd. has issued 100,000 units of convertible bonds with a nominal value of Rs.1000 each. The coupon rate of the bonds is 10% payable annually. Each of the Rs.1000 convertible bonds can be converted into 50 ordinary shares @ of Rs. 20 each in three years’ time. If any bonds are not converted, such bonds would be redeemed at Rs.1100. The expected share price on the conversion day is Rs. 25.
Should the investor select conversion or redeem the debenture.
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