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April 22, 2015 at 9:56 pm
Was wondering if you could help me with this quick exam question, cannot understand the answer, please. A co has 7% loan notes in issue redeemable in 7 years at 5% premium to nominal value $100. Before tax cost of debt is 9% and after tax cost of debt is 6%. Current MV? Thank you very much in advance. Marina
John Moffat says
April 23, 2015 at 9:36 am
In future please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.
The market value is the present value of the future receipts discounted at the investors required rate of return.
On $100 nominal, the future receipts are interest of $7 per year for 7 years, and repayment of $105 in 7 years time.
You discount these flows at 9% (the investors required return).
Tax is not relevant because it is the investor who fixed the market value, and company tax does not affect them.
April 24, 2015 at 7:32 pm
Thank you very much, John. Sure, next time will send to the correct email.
October 2, 2016 at 6:21 pm
Sir, how does the investor fix the market value? Also, wont the interest income affect the tax which will be paid by investors?
October 2, 2016 at 9:23 pm
If you watch my free lectures in order (they are a complete free course for Paper F9) then you will see that it is the investors who determine the market value.
The interest income will affect the tax that investors pay, but we always ignore personal tax in Paper F9. Company tax does not affect the investors.
October 3, 2016 at 12:08 pm
Thank you sir 🙂
October 3, 2016 at 8:49 pm
you are welcome 🙂
April 20, 2017 at 7:38 am
As per below your answer that “On $100 nominal, the future receipts are interest of $7 per year for 7 years, and repayment of $105 in 7 years time.
You discount these flows at 9% (the investors required return”.
Market value is $92.67.
DF@9% Present Value
1-7 Interest $7 p.a 5.033 $35.231
7 Redemption $105 0.547 $57.435
So, Net Present Value( Market Value) is $92.67?
April 20, 2017 at 7:48 am
November 13, 2014 at 6:52 am
audio not clear at all…
November 13, 2014 at 8:31 am
Sorry – one day I will re-record it, but until then if turning up the volume does not help then I am afraid you will have to pay for professionally recorded lectures from elsewhere.
March 2, 2014 at 2:39 pm
I dont understand the coclusion that you gave in the end regarding the two options,Please explain it.
March 2, 2014 at 3:12 pm
Don’t worry too much about it.
It is just that some investments give low returns from year to year (in terms of the interest payment or (in the case of shares) in terms of dividends) but the market value grows.
On the other hand there are other investments that give high returns from year to year, but the market value doesn’t grow (or might even fall).
Overall, you would expect the total return (cash each year + capital growth) to be similar, but investors have the choice between investments giving high return and low capital growth or low returns but high capital growth.
You don’t need to worry about numbers here at all.
February 22, 2014 at 6:58 pm
very difficult to understand even with head set the voice is not clear.. 🙁
November 22, 2013 at 1:06 pm
Tip: Use earphones/headsets to hear the lecture better. 🙂
June 2, 2013 at 11:58 am
no calculation is showed for debenture redemption yield.
June 2, 2013 at 2:40 pm
As I wrote in my reply to the question immediately below, you cannot be asked to calculate the redemption yield in F9!
(and I say this in the lecture).
April 23, 2012 at 5:35 pm
sir can u show the calculation of redemption yield
April 23, 2012 at 8:14 pm
@m23ahmuda, You cannot be asked to calculate the redemption yield in Paper F9 (only in P4). In F9 you are simply expected to know what it is.
April 17, 2012 at 2:55 pm
The redemption yield takes into account not just the interest each year but also the “gain or loss” on redemption (repayment) – i.e. the difference between the price to pay now (market value) and the amount repaid on redemption.
June 24, 2012 at 12:22 pm
@johnmoffat, so if we paid 140 for 100$ loan note it means on the date of repayment we are suffering loss of 29%. 100 divide by 140!! m i right sir??
June 24, 2012 at 2:56 pm
@atiq422, There is a capital loss, but this is not the redemption yield for two reasons.
Firstly it is the ‘overall’ return including the interest that is receivable.
Secondly it is the annualised return.
Although you cannot be expected to calculate it, it is in fact just the IRR of the flows.
April 17, 2012 at 2:49 pm
i am still confused with the logic of redeeption yeild…
April 17, 2012 at 2:50 pm
November 28, 2012 at 5:07 pm
@jibran89, whats that confusing you… first decide on that !!
November 28, 2012 at 5:08 pm
@cris1993, oh i just saw the date of post… probably you already appeared in june 😛
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