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COST OF CAPITAL
Debt (kd)
Convertible debt:
Example:
A company has in issue 100 000 R10 debentures which carry a 12% annual interest
payment. The debenture holders have the option of converting the debentures at
the end of 5 years into 20 000 ordinary shares with a par value of R12 each or
continue with existing debentures at a market related interest rate.
Similar debentures are currently trading at a 16% yield to maturity.
The shareholders required rate of return is 20% and dividends have been
paid at time t amounting to R8 per share.
o
Company growth is 6%
Current tax rate is 28%
You are required to:
Calculate the present value of the debentures and state whether they would be
shown as debt or equity and the appropriate cost of the security.
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