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Chapter 17

4.5 Convertible debt

 Calculate the value of the conversion option using available data.

 Compare the conversion option with the cash option. Assume all investors will
choose the option with the higher value and use this as the redemption value in
the calculations.

 Calculate the IRR of the flows as for redeemable debt.

Note: there is no tax effect whichever option is chosen at the conversion date.

4.6 Non-tradeable debt

 Cost to company = Interest rate × (1 – T).

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