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Why do we add the call value of 2248 at year 0 this must be the amount that we have to pay for the project and should be deducted? Please explain.
Because you say the question is adapted, I assume that you are looking at it in the Kaplan Kit (it isn’t in the current edition of the BPP Kit).
I only have the original exam question and answer.
In the original answer, part (a) is the valuation of the option which is $2,241.
Part (b) asks for the calculation of the coupon rate to the lenders so as to give them a 13% return. So as far as the lenders are concerned, then are paying 10,000 immediately and receiving a warrant worth 2,241. So the net amount effectively being lent by them at time 0 is 10,000 less 2,241.
But this call option given to shareholder will depend upon whether they exercise or not, so why we take its value on 0 year?
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