'A' Ltd. issues 1,000 optionally convertible debentures at a coupon of 12% convertible into 50 equity shares on a date exactly 5 years before maturity. The date for optional conversion has come. The shares are quoting at

Market value of shares = No. of shares x market price = 50 × ₹ 25 = ₹ 1250 Fair value of debentures: Annual interest payment = FV × coupon rate = ₹ 1,000 × 0.12 = ₹ 120 Principal repayment = ₹ 1,000 Years to go = 5 years YTM = 10% Yield PV PV of interest PVAF 10%,5 3.7908 × 120 ₹ 455 PV of principal repayment PVF 10%,5 0.6209 × 1,000 ₹ 621 Fair market price ₹ 1076 Since the market value of shares is more than the fair value of the debentures therefore conversion is suggested.