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On 1 July 2015 Sunshine Ltd issues convertible notes with a face value of $20 million....

On 1 July 2015 Sunshine Ltd issues convertible notes with a face value of $20 million. The convertible notes have a 12-year term and mature on 30 June 2027. Interest is payable annually in arrears, 30 June each year. The coupon rate of interest is 9% annually. At around the same point in time, companies with a similar credit rating issue debt security without a conversion option with a coupon rate of 13% payable annually.

Require

  1. Determine the debt and equity components of the convertible notes issued using the residual valuation method.

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Answer #1

Annual Interest $20,000,000*9%=$1,800,000.

Present Value of Convertable Note=[PVA13%,12*Annual interest ]+ [PVF13%,12*Face value]

=6.68694*$1,800,000+0.2607*$20,000,000

=$12,036,492+$5,214.000

=$17,250,492.

Equity Component =$20,000,000-$17,250,492.

=$2,749,508.

Date Account title Debit credit
1 July 2015 Cash 20,000,000
Convertible Note Payable 17,250,492
Share premium-Equity conversion 27,749,508

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