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On 1 January 2017, sefakor issues a 5percent convertible loan note at par. interest payable annually...

On 1 January 2017, sefakor issues a 5percent convertible loan note at par. interest payable annually in arreas on 31st December each year. The loan note is redeemable at par or convertible into equity shares at the option of the loan note holders on 31 December 2019. the interest on an equivalent loan note without the conversion rights would be 8percent per annum. The present values of GHS1 receivable at the end of each year based on discount rates of 5percent and 8percent.

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Answer #1
Present Value of the Note = (Par value * Interest rate) * PVIFA(market yield,n) + Par Value * PVIF(market yield,n)
Present Value of the Note (Dis rate 5%) = (1000* 5%)* PVIFA(5%,3) + 1000 * PVIF(5%,3)
Present Value of the Note (Dis rate 5%) = 50 * 2.7232 + 1000 * 0.8638 = 999.96 or 1000
Present Value of the Note (Dis rate 8%) = (1000* 5%)* PVIFA(8%,3) + 1000 * PVIF(8%,3)
Present Value of the Note (Dis rate 5%) = 50 * 2.5771 + 1000 * 0.7938 = 922.66
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