Knocking - I think that can only come from something lose. I'd want to check it isn't the other end of the drivetrain, there's simply more there to knock. Bottom bracket, cranks, chainring, pedals... even if everything feels OK, I'd be tempted to remove, clean, re-grease and re-fit. On the hub, I'd examine the sprocket, there should be no play. Then look for any play in the bearings, simply see if there's any sideways movement of the wheel. and of course the wheel build should be tight, lose spokes might make the wheel knock, though it's quite unlikely. Decide your own order of elimination, I tend to do the easiest checks first, even if they're not the most likely cause. If everything external is moving freely with no play, then the knocking has to be internal, that's a service centre job, highly unlikely, but not impossible.
Disc brake conversion - The thread John links to is me asking the same questions five years ago (Where does the time go??) I've just re-read it and ought to update my Mercury appraisal, it's more positive now! Along with the shell conversion at the cost quoted, there were the parts to change from internal to external shifting, about £200 all in, though I've no idea what that would be today.
You would have to seriously consider if you wanted disc brakes that much, I didn't, but I did want that frameset. If I were to do it again, I'd sell what I had and buy new, the eventual price difference wasn't a lot and I'd have made slightly different choices, plus of course it would come without the wear and have a new warranty.
