High PG Ltd is a production company with an average eturn on assets of 8 of -796

Question

High PG Ltd is a production company with an average eturn on assets of 8 of -796-Thécompanyneeds to raise additional funds in a competitive market environment. The Balance Sheet shows the company is currently financed as follows: nd an average Cost of de Equity and Uabilities Posltion AUD Current Liabilities Non-Current Liabilities 33,033,000 9,317,000 42,350,000 85,425,000 (28,475,000) 56,950,000 $ Total Liabilities Share Capital Accumulated losses $ Total equity As the personal assistant of the CFO L. Winters, you have been asked to evaluate the following opportunities to acquire $15 million of new capita and to Rrovide advice at the board of directors meeting on September 10th, 2018. High PG Ltd Step-up Bond Instrument Issue size Coupon Issue Price Settlement date Maturity date Step-up Bond AUD 15million 8%, 10%, 12),annual payment par on 01-January-2019 31-December-2021 High PG Ltd Convertible Bond Convertible Bond AUD 15million 5%, annual payment 01-January-2019 31-December-2021 15million $1 shares at maturity Sm Shares Without the conversion feature, the bond would be priced the same as the corporate-Bond. tep -up nstrument Issue size Coupon Settlement date Conversion rate Note

Explanation / Answer

At the time of 8% coupon:

All amounts are in AUD million

Annual coupon @8%

Issue size

15

Annual interest expenses (15 x 8%)

1.2

0.077

Year

Annual interest ($)

Present value factor @7.7%

Present value of annual interest

2019

1.2

0.928505

1.114206

2020

1.2

0.862122

1.034546

2021

1.2

0.800484

0.960581

Present value of total interest

3.109334

Add: Present value of redemption value (15 x 0.800484)

12.00727

Present value of Bond

15.1166

Journal entries

Date

Account titles and explanations

Debit (AUD' Million)

Credit (AUD' Million)

01-Jan-19

Bank

15

Discount on issue of bond

0.1166

8% Set-up Bond

15.1166

(Being bond issued)

31-Dec-19

Interest expenses (15 x 8%)

1.2

Bank

1.2

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.238867

Discount on issue of bond (0.1166/3)

0.038867

Interest expenses (15 x 8%)

1.2

(Being profit and loss account adjusted)

31-Dec-20

Interest expenses (15 x 8%)

1.2

Bank

1.2

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.238867

Discount on issue of bond (0.1166/3)

0.038867

Interest expenses (15 x 8%)

1.2

(Being profit and loss account adjusted)

31-Dec-21

Interest expenses (15 x 8%)

1.2

Bank

1.2

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.238867

Discount on issue of bond (0.1166/3)

0.038867

Interest expenses (15 x 8%)

1.2

(Being profit and loss account adjusted)

8% set-up bond

15

Bank

15

(Being the set up bond redeemed)

When coupon rate is 10%:

All amounts are in AUD million

Annual coupon @10%

Issue size

15

Annual interest expenses (15 x 10%)

1.2

0.077

Year

Annual interest ($)

Present value factor @7.7%

Present value of annual interest

2019

1.5

0.928505

1.392758

2020

1.5

0.862122

1.293183

2021

1.5

0.800484

1.200727

Present value of total interest

3.886667

Add: Present value of redemption value (15 x 0.800484)

12.00727

Present value of Bond

15.89393

Journal entries

Date

Account titles and explanations

Debit (AUD' Million)

Credit (AUD' Million)

01-Jan-19

Bank

15

Discount on issue of bond

0.893933

10% Set-up Bond

15.89393

(Being bond issued)

31-Dec-19

Interest expenses (15 x 10%)

1.5

Bank

1.5

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.797978

Discount on issue of bond (0.893933/3)

0.297978

Interest expenses (15 x 10%)

1.5

(Being profit and loss account adjusted)

31-Dec-20

Interest expenses (15 x 10%)

1.5

Bank

1.5

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.797978

Discount on issue of bond (0.893933/3)

0.297978

Interest expenses (15 x 10%)

1.5

(Being profit and loss account adjusted)

31-Dec-21

Interest expenses (15 x 10%)

1.5

Bank

1.5

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.797978

Discount on issue of bond (0.893933/3)

0.297978

Interest expenses (15 x 10%)

1.5

(Being profit and loss account adjusted)

10% set-up bond

15

Bank

15

(Being the set up bond redeemed)

When annual coupon rate of bond is 12%:

All amounts are in AUD million

Annual coupon @12%

Issue size

15

Annual interest expenses (15 x 12%)

1.8

0.077

Year

Annual interest ($)

Present value factor @7.7%

Present value of annual interest

2019

1.8

0.928505

1.671309

2020

1.8

0.862122

1.551819

2021

1.8

0.800484

1.440872

Present value of total interest

4.664

Add: Present value of redemption value (15 x 0.800484)

12.00727

Present value of Bond

16.67127

Journal entries

Date

Account titles and explanations

Debit (AUD' Million)

Credit (AUD' Million)

01-Jan-19

Bank

15

Discount on issue of bond

1.671267

12% Set-up Bond

16.67127

(Being bond issued)

31-Dec-19

Interest expenses (15 x 12%)

1.8

Bank

1.8

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

2.357089

Discount on issue of bond (1.671267/3)

0.557089

Interest expenses (15 x 12%)

1.8

(Being profit and loss account adjusted)

31-Dec-20

Interest expenses (15 x 12%)

1.8

Bank

1.8

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

2.357089

Discount on issue of bond (1.671267/3)

0.557089

Interest expenses (15 x 12%)

1.8

(Being profit and loss account adjusted)

31-Dec-21

Interest expenses (15 x 12%)

1.8

Bank

1.8

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

2.357089

Discount on issue of bond (1.671267/3)

0.557089

Interest expenses (15 x 12%)

1.8

(Being profit and loss account adjusted)

12% set-up bond

15

Bank

15

(Being the set up bond redeemed)

All amounts are in AUD million

Annual coupon @8%

Issue size

15

Annual interest expenses (15 x 8%)

1.2

0.077

Year

Annual interest ($)

Present value factor @7.7%

Present value of annual interest

2019

1.2

0.928505

1.114206

2020

1.2

0.862122

1.034546

2021

1.2

0.800484

0.960581

Present value of total interest

3.109334

Add: Present value of redemption value (15 x 0.800484)

12.00727

Present value of Bond

15.1166

Journal entries

Date

Account titles and explanations

Debit (AUD' Million)

Credit (AUD' Million)

01-Jan-19

Bank

15

Discount on issue of bond

0.1166

8% Set-up Bond

15.1166

(Being bond issued)

31-Dec-19

Interest expenses (15 x 8%)

1.2

Bank

1.2

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.238867

Discount on issue of bond (0.1166/3)

0.038867

Interest expenses (15 x 8%)

1.2

(Being profit and loss account adjusted)

31-Dec-20

Interest expenses (15 x 8%)

1.2

Bank

1.2

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.238867

Discount on issue of bond (0.1166/3)

0.038867

Interest expenses (15 x 8%)

1.2

(Being profit and loss account adjusted)

31-Dec-21

Interest expenses (15 x 8%)

1.2

Bank

1.2

(Being annual interest paid)

Profit and loss account {(0.1166/3) + 1.2}

1.238867

Discount on issue of bond (0.1166/3)

0.038867

Interest expenses (15 x 8%)

1.2

(Being profit and loss account adjusted)

8% set-up bond

15

Bank

15

(Being the set up bond redeemed)

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