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Hello,Sir!
In the 2nd director’s proposal the MV of debt = BV of debt due to “the basis points for the Ca3 rated bond is 240 basis points higher than the risk-free rate of interest, giving a cost of debt of 6,2%”.
Does this mean that if cost of debt equals to the interest rate of bonds then MV=BV of debt?
Could a situation where cost of debt is higher than the interest rate exist?Thank you in advance!
Please tell me where to find the question – either which past exam it was in, or alternatively the number of the question in the current BPP Revision Kit.
Sorry, but I can’t remember the name of every question in every exam 🙂
The MV of debt is the PV of the future receipts discounted at the required return. If the required return is the same as the coupon rate (and is redeemable at par) then the market value will equal the book value.
However, there it is perfectly possible (and more likely in general) for the required return not to equal the coupon rate, in which case the MV will not equal the book value.
My lectures on the valuation of debt will help you.
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