Question Tag: Convertible Loans

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  • 12 Marks

CR – Nov 2021 – L3 – Q2b – Earnings Per Share (IAS 33)

Calculate basic and diluted earnings per share (EPS) from Nsukka Plc’s consolidated financial statements.

b. The following financial information relates to Nsukka Group for the year ended June 30, 2021.

Nsukka Group Consolidated Statement of Financial Position as at June 30, 2021

Additional Information:

  1. Nsukka PLC reports a profit after tax, after adjusting for all current year accounting issues, of N1,850,000 and an effective tax rate of 20%.
  2. For the first time, Nsukka PLC issued 1,000,000 ordinary shares and granted options for 400,000 shares on July 1, 2020. The exercise price was the market price of N1.50 per share at the grant date. Options vest on July 1, 2020, and expire on June 30, 2022. The average market price of shares in Nsukka Plc during the year ended June 30, 2022, was N1.834.
  3. A rights issue of 1 for every 20 shares was made on May 31, 2021, at a price of N1.30 per share. The market price at this date was N1.60, and the average price for the year to June 30, 2021, was N1.65.
  4. Nsukka PLC has N1,000,000 of 6% convertible loans included in other non-current liabilities. These were in issue throughout the year and may be converted into 100,000 ordinary shares. No loans were converted during the year. There are no dividends in arrears on the 3% preference shares.

Required:

Evaluate basic and diluted earnings per share from the consolidated statement of financial position as at June 30, 2021, for Nsukka Plc.
(12 Marks)

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  • 20 Marks

FM – Nov 2022 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluating financing options (rights issue vs convertible loans) for Balama Plc's expansion.

Balama Plc. (Balama) is a listed manufacturer of dairy products. In recent years, the company has experienced only a modest level of growth, but following the recent retirement of the chief executive, his replacement is keen to expand Balama’s operations.

The board of directors has recently agreed to support a proposal by the new chief executive that the company purchase new manufacturing equipment to enable it to expand its range of dairy products. The new equipment will cost N50 million, and the company is seeking to raise new finance to fund the expenditure in full. However, the board of directors is undecided as to how the new finance is to be raised. The directors are considering either a 1 for 5 rights issue at a price of N2.50 per share with a theoretical ex-rights price of N2.92 or a convertible loan of N50 million.

The loan will be secured against the company’s freehold land and buildings. The company’s share is presently quoted at a price of N3.00 per share.

Required:

a. Explain the terms ‘rights issue’ and ‘convertible loans’. (3 Marks)

b. Explain how the ‘theoretical ex-rights’ price of N2.92 is calculated and why the actual price might be different. Show your workings. (4 Marks)

c. Prepare a report for the board of directors that fully evaluates the two potential methods of financing the company’s expansion plans. (13 Marks)

(Total 20 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q3b – Convertible Loan Accounting under IFRS 9

Accounting treatment of investment in a convertible bond under IFRS 9.

During the year ended 31 December 2018 Pakyi Ltd invested in a convertible bond on its issue date. The bond matures four years after the issue date and at that date the bond can be converted into ordinary shares of the investee or repaid at par. The entity’s plan for the bond is to hold it until it matures and collect the cash flows.

Required:

Advise the directors of Pakyi Ltd of the accounting treatment on the above transaction under IFRS 9: Financial Instruments for the year ended 31 December 2018.
(4 marks)

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  • 12 Marks

CR – Nov 2021 – L3 – Q2b – Earnings Per Share (IAS 33)

Calculate basic and diluted earnings per share (EPS) from Nsukka Plc’s consolidated financial statements.

b. The following financial information relates to Nsukka Group for the year ended June 30, 2021.

Nsukka Group Consolidated Statement of Financial Position as at June 30, 2021

Additional Information:

  1. Nsukka PLC reports a profit after tax, after adjusting for all current year accounting issues, of N1,850,000 and an effective tax rate of 20%.
  2. For the first time, Nsukka PLC issued 1,000,000 ordinary shares and granted options for 400,000 shares on July 1, 2020. The exercise price was the market price of N1.50 per share at the grant date. Options vest on July 1, 2020, and expire on June 30, 2022. The average market price of shares in Nsukka Plc during the year ended June 30, 2022, was N1.834.
  3. A rights issue of 1 for every 20 shares was made on May 31, 2021, at a price of N1.30 per share. The market price at this date was N1.60, and the average price for the year to June 30, 2021, was N1.65.
  4. Nsukka PLC has N1,000,000 of 6% convertible loans included in other non-current liabilities. These were in issue throughout the year and may be converted into 100,000 ordinary shares. No loans were converted during the year. There are no dividends in arrears on the 3% preference shares.

Required:

Evaluate basic and diluted earnings per share from the consolidated statement of financial position as at June 30, 2021, for Nsukka Plc.
(12 Marks)

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  • 20 Marks

FM – Nov 2022 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluating financing options (rights issue vs convertible loans) for Balama Plc's expansion.

Balama Plc. (Balama) is a listed manufacturer of dairy products. In recent years, the company has experienced only a modest level of growth, but following the recent retirement of the chief executive, his replacement is keen to expand Balama’s operations.

The board of directors has recently agreed to support a proposal by the new chief executive that the company purchase new manufacturing equipment to enable it to expand its range of dairy products. The new equipment will cost N50 million, and the company is seeking to raise new finance to fund the expenditure in full. However, the board of directors is undecided as to how the new finance is to be raised. The directors are considering either a 1 for 5 rights issue at a price of N2.50 per share with a theoretical ex-rights price of N2.92 or a convertible loan of N50 million.

The loan will be secured against the company’s freehold land and buildings. The company’s share is presently quoted at a price of N3.00 per share.

Required:

a. Explain the terms ‘rights issue’ and ‘convertible loans’. (3 Marks)

b. Explain how the ‘theoretical ex-rights’ price of N2.92 is calculated and why the actual price might be different. Show your workings. (4 Marks)

c. Prepare a report for the board of directors that fully evaluates the two potential methods of financing the company’s expansion plans. (13 Marks)

(Total 20 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q3b – Convertible Loan Accounting under IFRS 9

Accounting treatment of investment in a convertible bond under IFRS 9.

During the year ended 31 December 2018 Pakyi Ltd invested in a convertible bond on its issue date. The bond matures four years after the issue date and at that date the bond can be converted into ordinary shares of the investee or repaid at par. The entity’s plan for the bond is to hold it until it matures and collect the cash flows.

Required:

Advise the directors of Pakyi Ltd of the accounting treatment on the above transaction under IFRS 9: Financial Instruments for the year ended 31 December 2018.
(4 marks)

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