Calculate pv of cash flows, Financial Accounting

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Q. Calculate PV of cash flows?

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Estimated market value                                              $116·26 per $100 of debentures

The value of 45 shares in 5 years' time is expected to be $4 × 45 = $180. The value of debenture redemption will be $110. Therefore it is likely that conversion will take place.

(ii)

Questionably the most important reservation concerns the future value of the share since it is likely to be the most uncertain aspect of the calculation. Other things that may be relevant but which are less uncertain, are issue price, and the cost of capital used.

 (c)

By maximising the conversion premium the greatest amount of funds are raise for the fewest number of new shares issued.

Companies are able to issue convertibles with a high conversion premium because firstly the calculation in part (a)i produces a positive NPV against issue costs and, secondly because there is high growth potential in share value.


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