Angela Corporation issues 1,500 convertible bonds at January 1, 2013. The bonds
ID: 2470861 • Letter: A
Question
Angela Corporation issues 1,500 convertible bonds at January 1, 2013. The bonds have a 3-year life, and are issued at par with a face value of $1,000 per bond, giving total proceeds of $1,500,000. Interest is payable annually at 6%. Each bond is convertible into 250 ordinary shares (par value of $1). When the bonds are issued, the market rate of interest for similar debt without the conversion option is 7%.
Compute the liability and equity component of the convertible bond on January 1, 2013. (Round answers to 0 decimal places, e.g. 5,725.)
Explanation / Answer
Present Value of Cash Flow from Bonds:
Year Cash Flow PVF @ 7% Present Value 1 90000 0.935 84150 2 90000 0.873 78570 3 90000 0.816 73440 Liability Component 236160 Equity Component 1263840 Total 1500000