IMS Limited issues a partly convertible debenture for 1000, carrying an interest rate of 10 percent. 360 will get compulsorily converted into two equity shares of IMS Limited a year from now. The expected price per share of IMS Limited's equity a year from now would be Rs 300. The non-convertible portion will be redeemed in four equal installments of Rs 160 each at the end of years 3, 4, 5 and 6 respectively. The tax rate for IMS is 33 percent and the net price per share IMS would realise for the equity after a year would be Rs 220.
Required:
(a) What is the value of convertible debenture? Assume that the investors' required rate of return on the debt component and the equity component are 13 percent and 18 percent respectively.
(b) What is the post-tax cost of the convertible debenture to IMS?