Akili Limited has issued a debenture whose par value is Shs. 1,000. The debenture can be redeemed at par after four years or converted to ordinary shares at a conversion rate of Shs. 100 per share. The projected market price of the share after the four year period could either be Shs. 90 or Shs. 120 based on the company‟s performance. The investors required rate of return is 10%.
The value of the debenture based on each of the expected share prices.
Conversion ratio = Sh. 1,000 = 10 shares per debenture Sh. 100 At end of yr 4, the shares could be trading @
(i) Sh. 90 x 10 shares per debenture = Sh. 900 per debenture P.V. @ 10% = 900 x PV1F10%, 4 = 900 x 0.683 =614.7. Price of debenture = Sh. 614.7
(ii) Sh. 120 x 10 shares = Sh. 1,200 per debenture P.V. @ 10% = 1,200 x 0.683 = Sh. 819.6.