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A company has 7% loan notes in issue which are redeemable in seven years’ time at a 5% premium to their nominal
value of $100 per loan note. The before-tax cost of debt of the company is 9% and the after-tax cost of debt of the
company is 6%.
What is the current market value of each loan note?
Here shd we not take the interest after tax and the before tax cost of debt?Before tax.
It is investors who determine the market value by discounting the future receipts at their required rate of return. Investors are not affected by company tax and receive the full amount of the interest.
Please do watch my free lectures on the valuation of securities because I stress this point.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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