- This topic has 3 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
Sir i want to know how the examiner in solution has calculated the expected market value of loan note after 7 years of $990.82 that being 1070 x .926 . Why has he used these figures?
Would it have been okay if we compared with the nominal redemption of $1000 ? Because i think i read in the examiner report that he has not allowed if we compared it with redemption after 8 years. I dont understand why? this is kind of harsh to not give any credit if we compare it with the redemption after 8 years. As i dont even know how to calculate that expected market value and i have never seen that in any past exam or syllabus.
Please if u can explain the mechaincs behind those calculation.
Thank You Sir, Take care of yourself 🙂
The market value of debt is always the present value of the expected receipts discounted at the investors required rate of return.
The choice here is to convert the debt in 7 years time or wait until repayment in 8 year time. So the investors will make the decision in 7 years time.
In 7 years time, they will either take shares or they will not convert in which case they will expect 1 year later to receive interest of $7 and repayment of $1,000 – a total of $1,070.
So the market value in 7 years time will be 1,070 discounted for 1 year at 8%.With regard to the marking, since there is only 1 mark given for this calculation then you can only really be given 1 mark or 0 for this part of the question. (It would not stop you getting the other marks)
Let me know if i am right.
To get the market value of debt in year 7 we need to discount it for one year only?
The only part which was confusing me were the previous 7 years as its 8 years in total but those years wont count as its the market value we want at year 7 and only one year is remaining right?
You are right its only one mark but i failed this exam with one mark:P
In current format these type of questions might come as scenario based questions. Do u think if we make one silly mistake we might be at risk to lose all the marks? as there wont be any step marks now.
What you write is correct.
As regards the marking. In the scenario MCQ’s you either get 2 marks or zero for each question. However, getting one of them wrong will not affect the other questions – they are always designed in a way that one question does not depend on the answer to another of the questions.
- You must be logged in to reply to this topic.