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Question Two ( 2 0 Marks ) Kwacha Ltd is a privately owned company that is seeking to raise finances in order to fund the
Question Two Marks
Kwacha Ltd is a privately owned company that is seeking to raise finances in order to fund the construction of a hospital. However, one of the directors argued that a hospital is a public institution that would not meet the objective of Kwacha Ltd which is to maximize the shareholder's wealth. The company expects to issue bonds which are redeemable at their par value of K in six years' time. Alternatively, it is expected that each bond may be converted on that date into ordinary shares of the company. The currentordinary share price of Kwacha Ltd is K and this is expected to grow at a rate of per year for the foreseeable future. Kwacha Ltd has a cost of debt of per year.
Required:
a Calculate the following current values for each K convertible bond:
i market value;
ii floor value;
iii conversion premium.
marks
S
b Compare the public sector objective of 'value for money' and the private sector objective of 'maximization of shareholder wealth'. marks
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