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R plc has in issue $400000 8% bond redeemable in 5 years at a premium of 10%. Investor require return of 12%. corporation tax 35%
What is total market value of debt in issue?The market value is determined by the investors and is the present value of the investors expected receipts discounted at the investors required rate of return. Tax is no relevant to the investor – it is only relevant to the company when calculating the cost of debt.
On 400,000 nominal, the expected receipts are interest of 32,000 a year for 5 years and a repayment of 440,000 in 5 years time. Discounting these flows at 12% will give the market value.
I do suggest that you watch the free lecture on the valuation of securities!
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