Reference no: EM132653170

Question 1: Distinguishing financial liabilities from equity instruments Determine whether Aster Lid has a financial liability or equity instrument resulting from the issue of securities in each situation below. Give reasons for your answer.

1. Aster Ltd issues 100 000 $1 convertible notes. The notes pay interest at 7% p.a. The market rate for similar debt without the conversion option is 9%. Each note is not redeemable, but it converts at the option of the holder into however many shares that will have a value of exactly $1.

2. Aster Ltd issues 100 000 $1 redeemable convertible notes. The notes pay interest at 5% p.a. Each note converts at any time at the option of the holder into one ordinary share. The notes are redeemable at the option of the holders for cash after 5 years. Market rates for similar notes without the conversion option are 7% p.a.

3. Aster Ltd issues 100 000 $1 redeemable convertible notes. The notes pay interest at 5% p.a. Each note converts at any time at the option of the holder into one ordinary share. The notes are redeemable at the option of the issuer for cash after 5 years. If after 5 years the notes have not been redeemed or converted, they cease to carry interest. Market rates for similar notes without the conversion option are 7% p.a.

4. Aster Ltd issues 100 000 $1 redeemable convertible notes. The notes pay interest at 5% p.a. The notes are redeemable after 5 years at the option of the issuer for cash or for a variable number of shares (calculated according to a formula). If after 5 years the notes have not been redeemed or converted, they continue to carry interest at a new market rate to be determined at the expiration of the 5 years.

5. Aster Ltd issues redeemable preference. The shares are redeemable at the expiration of five years at the option of the holder. The shares carry a cumulative 6% dividend.

6. Aster Ltd issues redeemable preference shares. The shares carry a cumulative 6% dividend. The shares are redeemable for cash if the company makes an accounting loss in any year. Aster Ltd is highly profitable and has a history of profits and paying ordinary dividends at a yield of about 4% annually without fail for the past 25 years. The market interest rate for long-term debt at the time the preference shares were issued was 7% p.a.