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Hi John
could you help with this question?:
a company has 7% loan notes, redeemable in seven years time at 5% premium to nominal value of $100. before-tax cost of debt of the company is 9% and the after-tax cost of debt to the company is 6%.
what is the current market value of each loan note (to 2 d.p.)?
answer: MV= (7*5.033)+(105*0.547)= $92.67
I don’t understand how the “5.033” and “0.547” are derived. I understand the rest.
please help.
They are taken from the tables!!
5.033 is the 7 year annuity factor at 9%.
0.547 is the normal present value factor for 7 years at 9%I do suggest that you watch my free lectures on the valuation of debt.
Hi John
I did watch them! I intend to rewatch.
I was mistakenly looking at the 7% factors, instead of 9%.
Thank you for your help.
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