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).

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.

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.)

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.

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?

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)

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?)

avishco says

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

John Moffat says

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.

avishco says

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.

John Moffat says

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).

avishco says

Noted sir, thanks for your usual help

John Moffat says

You are welcome 馃檪

Hopewk says

lecture well delivered

John Moffat says

Thank you for your comment 馃檪

JojoBeat says

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?

John Moffat says

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.

JojoBeat says

Hi sir, you do not touch on Gordon growth or Modigliani-Miller model here. Is it because the exams do not ask them?

John Moffat says

They are both covered in detail in the lectures but they are not relevant for the valuation of debt!

dennissherpa101 says

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)?

John Moffat says

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.)

rafa says

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?

John Moffat says

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.

sarabjeet@26 says

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?

John Moffat says

The premium is always calculated on the nominal value.

KimR says

Hi,

for example 12 at the end: how come we don’t consider the expected growth rate when we calculate the conversion premium?

TIA

John Moffat says

Because that is the way that the conversion premium is defined!

KimR says

Thank you 馃檪

John Moffat says

You are welcome 馃檪

ilham9089 says

Sir, in example 12 why do we take into account the interest for the year 2007? Is interest always paid at the year end?

Nkanyi03 says

Good day.

will you please explain how do we got to 3.605 discounted amount in Example 10

John Moffat says

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?)

Ahmadhassan0709 says

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 ?

John Moffat says

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)

ninaaxtopol says

Example 12, Convertible debt, I believe there is a calculation error, i.e 8 x 2.487=18.90, should be 19.896

Nina

John Moffat says

Yes – it is an error 馃檨

I must re-record the lecture.

draganel says

Hi, can you please tell there are some differences between Loan note and debenture?

John Moffat says

They are the same – different names for the same thing 馃檪

draganel says

ok thanks 馃檪

zjanus says

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).

John Moffat says

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?)

zjanus says

Oh I think I understand now. Thank you, sir!

John Moffat says

You are welcome 馃檪

manishatai says

Sorry john I got 19.90 for the interest 1-3 discounted at the present value is that correct? Thank you

tabusheev says

You right. It was small error.