We're now going to take a look at the cash conversion option for convertibles under US gap at conversion.

So we're gonna start with again.

Mark Incorporated has issued a thousand par value convertible. We'll assume the proceeds have been a thousand, got a 70 year maturity, but callable by the issuer in year five.

And the bonds have got a 5% coupon.

The conversion price is a hundred and the share price at year three is 150.

Similar non-convertible two year bonds have a yield of 6%.

And we made this a little bit more complex and I'll explain why we need that information.

The bondable settled at conversion with cash up to the principal amount and the rest by shares obviously equal to the value of the conversion option.

The power value of shares is two.

So the first thing we've got here is the 6% yield on non-convertible bonds with the two year maturity.

And the reason we've got that is we need to kind of revalue the bond at the conversion point.

'cause remember it's actually a seven year maturity bond, but we are converting it in year five.

So we have to do a present value calculation using the 6%.

It's a two year period, a 5% cash coupon and a par value of a thousand.

So we get the value of the bond, uh, of 981.

The value of the cash conversion element is a thousand. Obviously the par value and we've got the value of the stock element is 500.

And that's calculated by taking the par value divided by the conversion price of a hundred, multiplied by the share price of 150, which gives us 1500 minus the par value of the bond, which is the thousand giving us the value of the stock element of 500.

The share price is 150, the par value is two.

So to calculate the number of shares issued, we take the value of the convertible, um, conversion, the stock element and divide by the share price of one 50, which means we'll have to issue 3.3 shares to settle the value of the stock element of the conversion.

So how does the accounting work? The cash goes down by 1000.

The debt we're going to reduce from the balance sheet and remember the debt is the original value.

Okay, so that was the debt on the balance sheet, um, at the amortized cost over time.

So that's using the old yield here, the 10.3%, um, with two years left, 5% cash coupon and a thousand par value.

Now because we revalued the debt and notice that the debt here is valued at 9 8 1, what we have to do is take a loss on the debt extinguishment.

Okay? 'cause the debt has to be revalued.

So actually what happens is the debt gets revalued by 9 81 and it sits on the balance sheet and that's actually what gets taken off.

It's a little bit confusing, but the reason it's worth highlighting this is that this means that you can get a loss on the debt extinguishment if you kind of convert the convertible slightly early.

The par value is going to be the two times the 3.3 shares. So that's gonna go up by 6.7.

And then we'll just plug the difference to apic.

The actual mechanics of the accounting is a little bit more detailed 'cause they do double entries, but it's easier on an overview to understand this as a whole.

So just to recap, what we have to do is we've got to mark the debt to market and that's why the debt actually goes up to 9 81.

And then we take a loss on extinguishment.

But rather than putting that into two entries, I've just taken the debt off at 9 0 8, the loss on the debt ex institution extinguishment of 73.6, and then the rest is the, um, equity plug.

So that's the mechanic. So it's a bit more complicated if you convert the bond early 'cause you may have a loss or potential gain on debt. Extinguishment.