Question Tag: Convertible Loan Stock

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  • 20 Marks

FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

Honey Comb Plc has issued 10% convertible loan stock, which is due for redemption in 10 years’ time (i.e., December 31, 2025). The option to convert is open only for another two years. If conversion does not take place by December 31, 2017, the option will lapse. The issue was sold to the public at a price of N920 for N1000 of convertible loan stock. The conversion rate at January 1, 2016 was 250 equity shares for N1000 of stock. Non-convertible loan stock in a similar risk class is presently yielding 12%. The market price of Honey Comb Plc equity shares has been increasing steadily over time, reflecting the performance of the company. The shares currently pay a dividend of N0.30 per share. The current price of the convertible security is N960, and each share is currently valued at N3.00. A holder of the convertible loan stock is considering whether to sell his holdings or continue to hold the stock. Ignore taxation while answering the questions.

Required:
a. What is the value of the security as simple unconvertible loan stock? (5 Marks)

b. What is the expected minimum annual rate of growth in the equity share price that is required to justify the holder of convertible loan stock holding on to the security before the option expires? (12 Marks)

c. What recommendation would you make to the holder of the security and why? (3 Marks)

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  • 20 Marks

SFM – Nov 2016 – L3 – Q2 – Capital Structure Decisions

Evaluation of convertible loan stock value and growth rate for investment decision-making in Honey Comb Plc

Honey Comb Plc has issued 10% convertible loan stock, redeemable in 10 years on December 31, 2025. The conversion option is available only until December 31, 2017. The issue was sold at ₦920 per ₦1000 of convertible stock. Conversion rate as of January 1, 2016, is 250 equity shares per ₦1000 stock. Non-convertible loan stock with similar risk yields 12%. Current convertible stock price is ₦960, with each equity share priced at ₦3.00 and dividends of ₦0.30 per share.

A holder of this convertible loan stock is contemplating selling or retaining it. Ignore taxation.

Required:

  • (a) What is the value of the security as simple unconvertible loan stock? (5 Marks)
  • (b) What is the expected minimum annual rate of growth in the equity share price to justify holding the security before the option expires? (12 Marks)
  • (c) Recommend a course of action to the security holder with justification. (3 Marks)

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  • 4 Marks

FR – May 2021 – L2 – Q2c – Basic and Diluted Earnings Per Share under IAS 33

Calculate basic and diluted earnings per share based on the financial information provided.

Dome Ltd has 5,000,000 ordinary shares in issue and also had in issue in 2020:

  • GH¢1,000,000 of 14% convertible loan stock, convertible in three years at the rate of 2 shares for every GH¢10 of stock.
  • GH¢2,000,000 of 10% convertible loan stock, convertible in a year’s time at the rate of 3 shares for every GH¢5 of stock.

The total earnings in 2020 were GH¢1,750,000. The rate of income tax is 35%.

Required:
In accordance with IAS 33: Earnings Per Share, calculate the basic and diluted earnings per share.
(4 marks)

 

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  • 12 Marks

FR – May 2016 – L2 – Q3a – Financial Reporting Standards and Their Applications

Calculate basic and diluted earnings per share for Ghana Trust for the years ended 31st March 2014 and 2015.

(i) The issued share capital of Ghana Trust, a publicly listed company on the Ghana Stock Exchange, at 31st March 2013 was GH¢10 million. Its shares are denominated at 25 pesewas each. Ghana Trust’s earnings attributable to its ordinary shareholders for the year ended 31st March 2013 were also GH¢10 million, giving an earnings per share of 25 pesewas.

Year ended 31st March 2014:
On 1st July 2013, Ghana Trust issued eight million ordinary shares at full market price. On 1st January 2014, a bonus issue of one new ordinary share for every four ordinary shares held was made. Earnings attributable to ordinary shareholders for the year ended 31st March 2014 were GH¢13.8 million.

Year ended 31st March 2015:
On 1st October 2014, Ghana Trust made a rights issue of shares of two new ordinary shares at a price of GH¢1.00 each for every five ordinary shares held. The offer was fully subscribed. The market price of Ghana Trust’s ordinary shares immediately prior to the offer was GH¢2.40 each. Earnings attributable to shareholders for the year ended 31st March 2015 were GH¢19.5 million.

Required:
Calculate Ghana Trust’s earnings per share for the years ended 31st March 2014 and 2015 including comparative figures. (7 marks)

(ii) On 1st April 2015, Ghana Trust issued GH¢20 million 8% convertible loan stock at par. The terms of the conversion (on 1st April 2018) are that for every GH¢100 of loan stock, 50 ordinary shares will be issued at the option of loan stockholders. Alternatively, the loan stock will be redeemed at par for cash. Also, on 1st April 2015, the directors of Ghana Trust were awarded share options on 12 million ordinary shares exercisable from 1st April 2018 at GH¢1.50 per share. The average market value of Ghana Trust’s ordinary shares for the year ended 31st March 2015 was GH¢2.50 each. The income tax rate is 25%. Earnings attributable to ordinary shareholders for the year ended 31st March 2015 were GH¢25,200,000. The share options have been correctly recorded in the statement of profit or loss.

Required:
Calculate Ghana Trust’s basic and diluted earnings per share for the year ended 31st March 2015. (5 marks)

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  • 20 Marks

FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

Honey Comb Plc has issued 10% convertible loan stock, which is due for redemption in 10 years’ time (i.e., December 31, 2025). The option to convert is open only for another two years. If conversion does not take place by December 31, 2017, the option will lapse. The issue was sold to the public at a price of N920 for N1000 of convertible loan stock. The conversion rate at January 1, 2016 was 250 equity shares for N1000 of stock. Non-convertible loan stock in a similar risk class is presently yielding 12%. The market price of Honey Comb Plc equity shares has been increasing steadily over time, reflecting the performance of the company. The shares currently pay a dividend of N0.30 per share. The current price of the convertible security is N960, and each share is currently valued at N3.00. A holder of the convertible loan stock is considering whether to sell his holdings or continue to hold the stock. Ignore taxation while answering the questions.

Required:
a. What is the value of the security as simple unconvertible loan stock? (5 Marks)

b. What is the expected minimum annual rate of growth in the equity share price that is required to justify the holder of convertible loan stock holding on to the security before the option expires? (12 Marks)

c. What recommendation would you make to the holder of the security and why? (3 Marks)

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  • 20 Marks

SFM – Nov 2016 – L3 – Q2 – Capital Structure Decisions

Evaluation of convertible loan stock value and growth rate for investment decision-making in Honey Comb Plc

Honey Comb Plc has issued 10% convertible loan stock, redeemable in 10 years on December 31, 2025. The conversion option is available only until December 31, 2017. The issue was sold at ₦920 per ₦1000 of convertible stock. Conversion rate as of January 1, 2016, is 250 equity shares per ₦1000 stock. Non-convertible loan stock with similar risk yields 12%. Current convertible stock price is ₦960, with each equity share priced at ₦3.00 and dividends of ₦0.30 per share.

A holder of this convertible loan stock is contemplating selling or retaining it. Ignore taxation.

Required:

  • (a) What is the value of the security as simple unconvertible loan stock? (5 Marks)
  • (b) What is the expected minimum annual rate of growth in the equity share price to justify holding the security before the option expires? (12 Marks)
  • (c) Recommend a course of action to the security holder with justification. (3 Marks)

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  • 4 Marks

FR – May 2021 – L2 – Q2c – Basic and Diluted Earnings Per Share under IAS 33

Calculate basic and diluted earnings per share based on the financial information provided.

Dome Ltd has 5,000,000 ordinary shares in issue and also had in issue in 2020:

  • GH¢1,000,000 of 14% convertible loan stock, convertible in three years at the rate of 2 shares for every GH¢10 of stock.
  • GH¢2,000,000 of 10% convertible loan stock, convertible in a year’s time at the rate of 3 shares for every GH¢5 of stock.

The total earnings in 2020 were GH¢1,750,000. The rate of income tax is 35%.

Required:
In accordance with IAS 33: Earnings Per Share, calculate the basic and diluted earnings per share.
(4 marks)

 

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  • 12 Marks

FR – May 2016 – L2 – Q3a – Financial Reporting Standards and Their Applications

Calculate basic and diluted earnings per share for Ghana Trust for the years ended 31st March 2014 and 2015.

(i) The issued share capital of Ghana Trust, a publicly listed company on the Ghana Stock Exchange, at 31st March 2013 was GH¢10 million. Its shares are denominated at 25 pesewas each. Ghana Trust’s earnings attributable to its ordinary shareholders for the year ended 31st March 2013 were also GH¢10 million, giving an earnings per share of 25 pesewas.

Year ended 31st March 2014:
On 1st July 2013, Ghana Trust issued eight million ordinary shares at full market price. On 1st January 2014, a bonus issue of one new ordinary share for every four ordinary shares held was made. Earnings attributable to ordinary shareholders for the year ended 31st March 2014 were GH¢13.8 million.

Year ended 31st March 2015:
On 1st October 2014, Ghana Trust made a rights issue of shares of two new ordinary shares at a price of GH¢1.00 each for every five ordinary shares held. The offer was fully subscribed. The market price of Ghana Trust’s ordinary shares immediately prior to the offer was GH¢2.40 each. Earnings attributable to shareholders for the year ended 31st March 2015 were GH¢19.5 million.

Required:
Calculate Ghana Trust’s earnings per share for the years ended 31st March 2014 and 2015 including comparative figures. (7 marks)

(ii) On 1st April 2015, Ghana Trust issued GH¢20 million 8% convertible loan stock at par. The terms of the conversion (on 1st April 2018) are that for every GH¢100 of loan stock, 50 ordinary shares will be issued at the option of loan stockholders. Alternatively, the loan stock will be redeemed at par for cash. Also, on 1st April 2015, the directors of Ghana Trust were awarded share options on 12 million ordinary shares exercisable from 1st April 2018 at GH¢1.50 per share. The average market value of Ghana Trust’s ordinary shares for the year ended 31st March 2015 was GH¢2.50 each. The income tax rate is 25%. Earnings attributable to ordinary shareholders for the year ended 31st March 2015 were GH¢25,200,000. The share options have been correctly recorded in the statement of profit or loss.

Required:
Calculate Ghana Trust’s basic and diluted earnings per share for the year ended 31st March 2015. (5 marks)

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