Smack co. issues a convertible loan that pays

interest of 2% per annum in arrears. The

market rate is 8%, being the interest rate for

an equivalent debt without conversion

option. The loan of $ 5 million is repayable

in full after three years or convertible to

equity.

Required:

Split the loan between debt and equity at

inception and calculate the finance charge for ther year until redemption.