The convertible loan notes of Tower plc currently trade in the capital market at £140 per £100 nominal. The notes pay annual interest of £9.625 per £100 nominal. They may be converted in exactly five years’ time at a rate of 50 ordinary shares in the business per £100 nominal of loan notes. The present price of the ordinary shares is £2.20, which is expected to grow by 5 per cent p.a. over the next five years. What is the cost of the convertible loan notes?

Assume that corporation tax is charged at 20 per cent.