## Cost of Convertible Debentures
Convertible debentures give holders the option to convert into equity shares at maturity instead of receiving cash redemption. The 'redemption value' is therefore the market value of the equity shares received, not a fixed cash amount.
### Step 1: Compute the effective redemption value
```
RV = Number of shares received per debenture × Expected share price at maturity
Expected share price at maturity = Current market price × (1 + g)^n
```
Where `g` = expected growth rate in equity price and `n` = years to maturity.
### Step 2: Approximation Method
```
Kd = [I(1−t) + (RV − NP)/n] / [(RV + NP)/2]
```
### Step 3: IRR Method
Compute PV of after-tax interest cash flows and RV at two trial rates, then interpolate:
```
Kd = RL + [PV_RL − NP] / [PV_RL − PV_RH] × (RH − RL)
```
### Key concept
Because the redemption value is tied to equity growth, a higher equity growth rate → higher RV → higher cost of convertible debt. This is why convertible debentures can be more expensive than straight (non-convertible) debt when the company's share price is expected to grow rapidly.