I have found a few questions in the recent CBE test of f9. For the convertible loan, if it can be converted into shares in seven years and redeemed into eight years, how should we solve the question? Should we calculate share value, related interests in seven years, convertible value and interests in eight years and discount the two values on the same year basis? By the way, I remember I have WACC of 11%. Can somebody help me with it?
Compare the 7 years conversion value (i.e no. of ordinary shares per loan note multiplied by current share price) and the redemption value at 8 years time, choose which ever is higher (i.e either to convert or to redeem). Now you will discount the before tax interest and the chosen value (between to redeem or to convert) with before tax WACC. This gives you the Market value of the loan note.
Conversion into shares based on 7 years time should be calculated and redemption should be calculated on 8 years time. After getting both the values check for the higher option and cost of debt can be calculated on the higher option obtained. My wacc was not same as yours