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can u help me with this question as i dint understand the last line in question.
Example 11 Rafa
The 10% loan notes of Rafa plc are quoted at $120 ex int. Corporation tax is
payable at 30%. They will be redeemed at a premium of $20 over par in 4 years
time
Required:
What is the net of tax cost of debt
(a) Using redeemable debt calculation?
(b) Using irredeemable debt calculation?For part (a)
For $100 nominal, you set up the flows:
0 Market Value (120)
1 to 4 After tax interest 7 p.a.
4 Repayment 120Then you calculate the Internal rate of return.
However, because the repayment is of the same amount as the current market value (which is unusual) the Cost of Debt (IRR) is simply 7/120 = 5.83%
(which is the same answer as you will get for part (b), but only because the repayment is of the same amount as the current market value)
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