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Sir could you please explain me how the market value of debt is calculated.In solution it says 5.6/1.0465 +5.6/1.0456square and so on for four year then it comes 103.40. Then total value is calculated as 800×103.4%=827.2.
Is the current borrowing of 800 is not straight away the mv of debt. And for calculating this 103.4% is there any other different way. ThanksThe market value of debt is always the present value of the future receipts (interest receipts and the redemption), discounted at the investors required rate of the return.
On a nominal value of $100, the interest is $5.60 a year. Dividing by 1.0465 is normal discounting at 4.65%.
800 is the nominal value of the debt borrowing. So the market value will be 800 x 103.4/100
There is no other way of doing it.
The free lecture on the valuation of securities will help you.
Sorry to trouble again,under which heading is this lecture. And wanted to thank you for your lecture on swap,you have made things really easy. Thank you sir.
Sorry – there is not a separate lecture (because it is revision of Paper F9).
Best it to watch the Paper F9 lecture on the valuation of securities.
If the bond is being discounted at ytm which is actually before tax, then to convert it into kd we have to make ytm after tax i.e kd=ytm (1_tax) . I dont get y in wacc calculation where kd after tax is taken always, he has rather taken ytm?? Thanksss a lot
By ytm you mean the return to investors and it is the return to investors that determines the market value of debt.
The cost of debt is after tax but it only Kd(1-t) if the debt it irredeemable.
Usually in the exam the debt is irredeemable and therefore you need to calculate the IRR of the after tax flows.I do suggest that you watch the free lectures on calculating the cost of capital.
Hi Sir, i refer to part A answer WACC cost of debt
why we need to use 4.65% x (1-0.25) as cost of debt? since this current debt is redeemable
why we are not using IRR method to find out the cost of debt for this redeemable debt : receipt in year 0 $103.396, y1-y4 interest $5.6×75%= $4.2, y4 redemption $100, use 4% & 3% as discounting rate, and find out the IRR 3.16%= cost of debt after tax?
The examiner should strictly have calculated the IRR because as you say, it is redeemable.
However the difference in the eventual WACC is minimal.
Hi Sir, does it mean if i use the IRR method as mentioned above, the IRR=Cost of DEbt=3.16% also correct?
Hello
Could you please explain me why in part b the MV of debt is 2400m? In part a of the question we calculated the MV of debt. Why don’t we use the same method for the new bond as well?
Thank you
Because the question says (on the third line) that they will raise $2,400M from new debt.
Hello
Thank you for your reply. Does this mean that for new bonds the market value will be equal to the book value?
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