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Dear Sir,
Came across below question which answer and explanation sound strange to me.
Could you please help?BPP exam kit from Sept 2016 to June 2017
A 9% redeemable loan note in ATV is due to mature in 3 years time at premium of 15% or convertible into 25 ordinary share at that point.The current share price is $4, expected to grow at 10% per annum. ATV pays corporation tax at rate of 30%
What is the current market value of the loan note if loan note holder require 10% return?
Based on my calculation is 115.63
Capital 133.1 (25*4*1.10 3 times) * 0.751 = 99.96
Interest 6.3 (9*.70) * 2.487 15.668
Book’s answer is 122.34 as tax was not relevant as investors pay market price and they receive gross dividend.
As far as I know interest is tax allowance therefore tax should be applied.
Then, the book answer does not make sense to me. if the shareholders get dividend why the interest is being still included into the calculation?How should approach a question when convertible loan is redeemed at the share price.
Should the interest be subjected to tax?Thanks and Regards
Gabriella
Interest is only tax allowable to the company – not to the investor (and it the investors who fix the market value.
You must watch my lectures on the valuation of securities!
Dear Sir,
I went back to the lecture and now is more clear. Thanks
Gabriella
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