One method of valuing compound instruments between their liability and equity portions is the residual value method. Use this to calculate the equity component of the financial instrument described below.

W Co issues 1,500 convertible bonds at the start of 20X7. The bonds have a 2 year term and are issued at par with a face value of $500 per bond. Interest is payable annually in arrears at a nominal annual interest rate of 5%. Each bond is convertible at any time up to maturity into 200 common shares.

When the bonds were issued the prevailing market interest rate for similar debt without conversion options was 7%.

Over the 2 year term of the bonds dividends of 10c per share are expected at the year ends. The risk free annual interest rate for a 2 year term is 4%.

What is the value of the equity component of the bond (in $s)?