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Question revision mock exam opentution
R Plc has in issue $400000 8% bond redeemable in 5 years time at a premium of 10%.Investors require a rate of 12% p.a
The rate of corporation tax is 35%
What is the total market value of debt in issue?
And the answer shows that$364840(present value discounted at investors required rate of return of 12%=$364840
How to get the amount 364840?You discount the interest receipts of 32,000 per year using the annuity discount factor for 5 years at 12%, and you discount the redemption of 440,000 using the present value factor for 5 years at 12%.
Obviously the tax rate is not relevant because it is the investors who determine the market value, and they do not get the benefit of the tax relief.
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