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Hi,
I’ve done several examples on calculating market value of loan note (including conversion option). In some cases, discounting rate is used before-tax rate, in some cases after-tax rate. Can you explain in which cases should an after-tax and before-tax rates be used for discounting purposes?
Thanks 🙂
You have obviously not watched my free lectures, and I do suggest that you do because this is all explained in detail.
It is investors who determine the market value of debt, and so you discount the expected receipts (ignoring tax) at their required return (which is pre-tax).
You have never seen an exam question discounting at the after-tax rate to calculate the market value of debt, because that would be wrong!It is the company who gets the benefit of tax relief on the interest. So when we calculate the WACC for the discounting of projects invested in by the company, we obviously use the after-tax cost of debt.
Also when calculating the cost of debt to the company, we use the net of tax interest in the calculation.A company has 7% loan notes in issue which are redeemable in seven years’ time at a 5%
premium to their nominal value of $100 per loan note. The before?tax cost of debt of the
company is 9% and the after?tax cost of debt of the company is 6%.
What is the current market value of each loan note?Sir, i am really confused with it….should i use after tax or before tax here ?
here as the market value has been asked , they are the investor who decide the value so before tax to be used ?
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