Calculating ‘return to investors’ on a redeemable debt example

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    yawkusi
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    Hi

    I am looking at a practice example and I’m not entirely sure what is being asked of me;

    A plc has 5% debentures redeemable in 5 years at 8% premium. Current market price is £92 ex interest. Corporation tax rate is 30%.

    I have used the IRR to calculate the cost of debt. Is the return to investors something that I calculate based on my IRR working?

    Also how would I best calculate the MV of these debentures?

    Thanks


    Avatar of johnmoffat
    John Moffat
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    For the cost of debt you will have used the after tax interest.

    However if you were to be asked for the return to investors, then the tax relief would be irrelevant and you would use the full interest of $5 per annum (and then calculate the IRR).
    There is no quick way of going from the return to investors to the cost of debt (or vice versa) if it is redeemable debt.

    As regards the MV, you are given the MV in your question and so why on earth do you want to calculate it? :-)

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