Question 1

Section A

WindForce Inc has issued convertible green bonds. The current market value is $105 per $100 nominal value. The bonds pay annual interest of 5% and mature in 4 years. At maturity, investors can either redeem at par or convert into 20 ordinary shares. The current share price is $4.50 and is expected to grow at 6% per year. The corporate tax rate is 20%.

What is the expected conversion value of the bond at maturity?

Accepted Answer

First, calculate the expected share price in 4 years using the compound growth formula: Current Price * (1 + growth rate)^n. Then multiply this future share price by the number of shares offered on conversion.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Calculating the current conversion value instead of the future conversion value, or applying the tax rate to the share price.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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