Question
Tea Ltd is a public company whose common shares are traded in the stock market. Tea recently issued various financial instruments to the public, as
Tea Ltd is a public company whose common shares are traded in the stock market. Tea recently issued various financial instruments to the public, as described below.
(a) 7% convertible bonds with a face value of $1,000 and maturity date on December 31, 2027. Each bond can be converted into whatever number of Teas common shares such that the value of the common shares which the holder receives from conversion is equal to $1,500.
- 5% convertible, cumulative, redeemable preference shares. Each preference share can be converted into 5 of Teas common shares at the conversion price of $10 per common share. The conversion period is from January 1, 2022 to June 30, 2026. At the date of issue of the convertible preference shares, Teas common shares were traded at $50 per share.
If the preference shares are not converted by June 30, 2026, it will be mandatorily redeemed on July 1, 2026 at the redemption price of $300 per share.
- 2% perpetual bonds (bonds with no maturity date which pay a stream of interest forever as long as the issuer still exists). The bonds entitle the holders to a 2% interest to be paid annually in arrears on December 31. In addition, the holders can receive the repayment of principal when the issuer (Tea) liquidates in the future.
Required: Discuss the classification of the financial instruments above.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started