Fall 2010 Class 4

Bonds similar bonds without conversion feature have

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Unformatted text preview: valued – Whichever is easier to value • The other component is assigned the The remaining value remaining Incremental Method Incremental Method Given: • $1,000,000 par value, 3-yr, 6% convertible $1,000,000 bonds. bonds. • Similar bonds (without conversion feature) have Similar a 9% interest rate. 9% • The bond is sold at par value. • Each $1,000 bond convertible to 250 common Each shares (current market price of $3) shares Incremental Method Incremental Method Total proceeds from the bond issuance ($1,000,000 at par value) ($1,000,000 = $ 1,000,000 PV of the liability without the PV without conversion option, discounted at 9% ) = $ 9% 924,061 924,061 Residual allocated to the option Residual 75,939 75,939 Cash $ 1,000,000 Bonds Payable Contributed Surplus-stock option 924,061 75,939 Proportional Method Proportional Method • PV for the pure debt component is established – PV of cash flows for similar debt may be used • Fair value of conversion option is determined using Fair options pricing model options • The total proceeds are then assigned to the The respective debt and equity components on a pro-rata basis: basis: – – Value allocated to A = Total Proceeds * {A/(A+B)} Value allocated to B =Total Proceeds * {B/(A+B)} Proportional Method Proportio...
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This note was uploaded on 03/15/2012 for the course BUS 303 taught by Professor Brown during the Spring '11 term at Simon Fraser.

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