Question 1

**Section B - Case 2: Quantum Mesh Inc**

*Scenario:* Quantum Mesh Inc is a tech startup developing AI-driven satellite mesh networks. A venture capital firm is considering a buyout. Quantum Mesh has an operating profit (EBIT) of $5m, depreciation of $1m, and a corporate tax rate of 20%. Capital expenditure for the year was $1.5m, and working capital increased by $0.5m.

**Question 2:** Quantum Mesh previously issued convertible bonds. The bonds have a nominal value of $100, a coupon rate of 5%, and 3 years to maturity. Similar non-convertible debt yields 8%.

What is the 'floor value' of one convertible bond? (Discount factors at 8%: Yr 1-3 annuity = 2.577, Yr 3 PV = 0.794)

Accepted Answer

The floor value of a convertible bond is its value if it is never converted (i.e., its value as straight debt). Discount the future cash flows (annual interest and final redemption) at the market rate for non-convertible debt (8%).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Discounting at the coupon rate (5%) instead of the market yield (8%), which would just give $100.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 5

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