- This topic has 7 replies, 3 voices, and was last updated 3 years ago by
.
- Posts
A company has outstanding $660,000 of 8% bonds on which the interest is payable annually on 31 December. The debt is due for redemption at par on 1 January 20X6. The market price of the bonds at 28 December 20X2 was $95. Ignoring any question of personal taxation, what do you estimate to be the current cost of debt?
Sir in the answer the interest payments are being taken from 2003. Why not from 2002?
We always assume that market values are ex int (unless the question specifically says that they are cum div). It is very unusual for an exam question to use 28 December as a date (is this a past exam question, because I would be surprised if it was?).
However by 28 December the bonds will already have gone ex div (and even if they were sold to someone else on that date, the original holder would still be getting the interest payable on 31 December, not the person buying them).
So the answer is correct in what they have done. For anyone investing in these bonds, the first interest they will receive will be at the end of 20X3.
Oh okay i get it. Its from bpp book
But for the same question part b) we have to calculate MV of the bond if pre tax cost of debt becomes 12% there they have used year 0 interest as well. 🙁I would need to see the actual question, because it does sound strange.
If it is in the Revision Kit, then tell me which question and I will check.
(I only have the Revision Kit, not the Study Text)Its from the text not kit.
The whole question.> (a) A company has outstanding $660,000 of 8% bonds on which the interest is payable annually on 31 December. The debt is due for redemption at par on 1 January 20X6. The market price of the bonds at 28 December 20X2 was $95. Ignoring any question of personal taxation, what do you estimate to be the current cost of debt?(b) If the pre-tax cost of debt rises to 12%, what effect will this have on the market price?
(c) If the effective rate of tax on company profits is 30%, what would be the after-tax cost of debt of the bonds in (a) above? Tax is paid each 31 December on profits earned in that year.
For a and c part they are taking interest from 2003 while in b part from 2002.
I think it might be a mistake in part b.You are correct – it does appear to be a mistake!
Incidentally, I would suggest that your time is better spent watching my free lectures (using the lecture notes that go with them) rather than working through the Study Text. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
If you do that, then far more important than the Study Text is the Exam Kit because that contains lots of exam standard questions (many of which are past exam questions) to practice on, and practice on these questions is vital.
- The topic ‘Cost of debt’ is closed to new replies.