Convertible bonds - DCF model mechanics
I have a dcf model and would like to add a convertible note.
Having some trouble conceptualising the dilutive impact of the bond and the “if converted” part.
Prior to adding the CB I took the present value of my ufcf and pv of terminal value to get terminal enterprise value, subtracted current net debt to get equity value, then divided by shares outstanding to get per share value. If that’s over the share price trading today it’s trading at a premium and it’s a buy.
If the bond is converted in the future it’s dilutive to equity and the debt is defeased. But that debt is subtracted from TEV to get equity value, so is there a circularity?
I’m ultimately trying to calculate an IRR on the CB and want to convert the bond at maturity, last year of model.
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