UK Modelling a Convertible Loan

[CasimirXCI]

Hi -

I'm trying to work out how to model a convertible loan on a balance sheet, where the loanholders decide whether to convert. Have created a very simplistic toy model - see attached.

I have no problem when:

1. Loanholders elect not to convert. At maturity, (1) cash goes down, (2) as the liability is paid off. (3) No changes to equity. Everything balances.
2. Loanholders convert, at a £ for £ basis - £500 of liability becomes £500 of equity. (1) No change in cash. (2) Liability clears. (3) Equity increases by £500. Everything balances.

My issue is in thinking about what happens if the conversion is not £ for £ - say for example, that the conversion is at £4.00 a share. Equity increases by £125 as the new shares are issued. The convertible liability of £500 is cleared. What happens with the remaining £375? Or am I going about this the wrong way?

Many thanks in advance!

 

[Kat Maple]

Hi Casimir

Your model is too simple. When it converted the 500 GBP into equity it did this incorrectly. It divided the 500 GBP by 4 and got 125 GBP and just added that to equity. You should be converting into shares of stock and not into GBP. That means the 125 figure is shares of stock and those shares have a book value of 500 GBP, not 125 GBP. So modify your model to show number of shares of stock.

Best Regards

Kat