While working at a Big4 accounting firm you have been assigned the following project. One of your clients, OGOYA Ltd, has asked for your advice on the following matter.
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans. It is hoping to raise $10 million dollars from a debt issuance. It is considering the following options:
A. Issue 2-year 8% debentures at par on January 1, 2019. Interest payments are made annually at the end of each year. The debenture matures on December 31, 2020.
B. Issue 2-year 4% convertible debentures at par on January 1, 2019. The debentures can be converted into 10 million $1 shares at maturity on December 31, 2020. Interest payments are made annually at the end of each year. Without the conversion feature, the debenture would be priced the same as option A.
(Hint: Compound Financial Instruments)
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