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Solved by Expert Tutors
Question

(a) Determine whether the following financial instruments should be 

classified as a financial liability or equity instrument of the respective 

companies. Give reasons for your answer.

(i) Lemon Bhd issues 1,000,000 RM1 convertible loan stock. The loan 

stocks pay interest at 6.75%. The market rate for similar debt 

without the conversion option is 9%. The note is not redeemable, 

but it converts at the option of the holder into shares that will have a 

value of exactly RM1,100,000.

[2 marks]

(ii) Peppermint Bhd issues 1,000,000 redeemable preference shares 

for RM1.00 each. The shares are redeemable at the option of the

Peppermint Bhd. The shares carry a cumulative 7% dividend. On 2 

January 2020, Peppermint Bhd announces its intention to redeem 

the shares on 31 December 2022 for cash at 10% premium.

[3 marks]

(b) Wintergreen Bhd enter into an agreement with a landlord to lease a 

building for 6 years. The lease rental for the first year is fixed at 

RM500,000, payable in arrears at the end of the year.

Required:

Determine whether the lease agreement contains an embedded

derivatives if the subsequent lease rentals are:

(i) increased at a rate of 7.5% per annum.

(Ii) are adjusted for equivalent changes in the property price index.

(4 marks)

Step-by-step answer

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