Convertible debt calculations - part 2

In this lesson

1. 0:00 Introduction to convertible debt features
2. 0:52 Calculating conversion ratio and value
3. 2:02 Understanding conversion premium
4. 3:16 Cost of convertible debt methodology
5. 5:33 Working through Martha Co example
6. 8:51 NPV calculations at different rates
7. 10:48 Calculating IRR and final cost
8. 13:05 Summary and practice guidance

About this lesson

This video walks you through a complete worked example using Martha Co, showing you the step-by-step technique for each calculation and explaining what the results actually mean for investors and the company. The cost of convertible debt calculation is the most complex element covered here. You'll discover why it requires two NPV calculations at different discount rates, how to compare the share conversion value against the cash redemption option, and how to use the IRR formula to find the final cost percentage. The video emphasises that this is a technique-based calculation where practice is essential—you'll see how to structure your working clearly and avoid common errors like miscalculating the difference between NPV figures. This content is directly relevant to Financial Management (FM), Advanced Financial Management (AFM), and Strategic Business Leader (SBL) papers, where convertible debt valuations appear regularly in both objective tests and case studies. Understanding these calculations helps you analyse how companies can raise finance and what it actually costs them, which is crucial for strategic financial decision-making. If you found the working involved, don't worry—these questions follow the same pattern repeatedly, so focused practice will build your confidence and speed.

Duration: 14m