The valuation of securities – The valuation of debt – ACCA Financial Management (FM)
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Hello sir,
If Po = Do(1+g)/Ke -g and Dn = Do(1+g) ^n.
Then why can’t we use either way to calculate Po. Is there any difference in above two formulas?
Thanks you
Avinash
The first formula is to calculate the market value of a share.
The second formula is to calculate what the dividend will be in n years time.
Noted sir, but correct me if I am wrong, in case of constant growth of market value of share can we use Pn = Po (1+g)^n
Thanks,
Avinash.
That formula will give you the market value in n years time (assuming that you know what the market value is ‘now’ and usually you have to calculate the MV ‘now’ which means using the first formula).
Noted sir, thanks for your usual help
You are welcome 馃檪
lecture well delivered
Thank you for your comment 馃檪
Hi Sir, if we were to calculate market value of redeemable debt, would we discount the interest at before or after tax cost of debt and why?
But I explain this in the lectures (because it is so often asked in the exam)!!!!
We discount at the debt lenders required rate of return (which is effectively the before tax cost of debt) because it is they who determine the market value and they are not affected by company tax.
Hi sir, you do not touch on Gordon growth or Modigliani-Miller model here. Is it because the exams do not ask them?
They are both covered in detail in the lectures but they are not relevant for the valuation of debt!
sir should we use the return on investor after tax relief or what about the cash inflow(intrest)? if pre tax cost of capital is used and pre tax cash flow is used will it give the same result? (market value)?
The market value of debt is determined by the holders of debt and is the present value of the receipts to investors discounted at the investors required rate of return. Both the receipts and the required rate of return are before tax because investors are not affected by company tax.
(We certainly do not use the cost of capital, and it would certainly not give the same result.)
Dear Sir,
On conversion premium calculation you take the current share price (4.5*20=90)
my question is why do you ignore the growth?
Is it because now the period is 2007?
What if it would 2010?
(20*4.5*1.07^3) is it correct for the 2010 conversion premium?
We are calculating the conversion premium as of ‘today’.
As a result it is the difference between the market value of the debt ‘today’ (which does take account of the expected growth) and the market value of the 20 shares as of ‘today’.
In 2010 the debentures are redeemed and so any calculation of conversion premium becomes irrelevant. (And in addition, just because investors as of now are expecting growth of 7% p.a. certainly does not mean that there will necessarily be 7% growth. 7% is simply the rate that they are currently expecting.
Hi sir,
First of all thank you all the lecture of Fm are really good ?.
While going through this unit of business finance I have a question related to this. Which is as follow.
In the case of the premium on the redemption of debenture at what value we will calculate the premium if we have given the market value, face value or nominal value?
The premium is always calculated on the nominal value.
Hi,
for example 12 at the end: how come we don’t consider the expected growth rate when we calculate the conversion premium?
TIA
Because that is the way that the conversion premium is defined!
Thank you 馃檪
You are welcome 馃檪
Sir, in example 12 why do we take into account the interest for the year 2007? Is interest always paid at the year end?
Good day.
will you please explain how do we got to 3.605 discounted amount in Example 10
It is the 5 year annuity factor at 12%, read from the tables provided in the exam.
(Have you watched the earlier lectures on how to use the tables?)
Hi, Sir can you please explain why we haven’t calculated the total debt value in Example 08 & 09. Calculation showing the total value of Debt ? i.e for P total value is $ 625,000 (5,000*125)
Is the answer is complete with giving value of Nominal $ 100 debt only ?
Unless the question specifies different you can give the answer as the MV per unit or as the total capitalisation. (Section A and B questions will specify which)
Example 12, Convertible debt, I believe there is a calculation error, i.e 8 x 2.487=18.90, should be 19.896
Nina
Yes – it is an error 馃檨
I must re-record the lecture.
Hi, can you please tell there are some differences between Loan note and debenture?
They are the same – different names for the same thing 馃檪
ok thanks 馃檪
Hi,
I got quite confused that, in the question the debentures are redeemed at par(I think that is $100), but in the working it is calculated with the expected share value (which is $110.23).
The question says that the debentures are convertible to 20 shares. Debenture holders will currently be expecting to convert because they are expecting the value of 20 shares to be more than par/nominal (which the question says is $100). So the MV of the debentures will be as per the lecture. (I assume that you have downloaded the free course notes?)
Oh I think I understand now. Thank you, sir!
You are welcome 馃檪
Sorry john I got 19.90 for the interest 1-3 discounted at the present value is that correct? Thank you
You right. It was small error.