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The finance director proposes to decrease the weighted average cost of capital of AQR Co, and hence increase its market value, by issuing $40 million of bonds at their par value of $100 per bond.
These bonds would pay annual interest of 8% before tax and would be redeemed at a 5% premium to par after 10 yearsa) While calculating kd for new bond issue which would be equal to IRR, but while calculating kd, what we will use as MV as it is not given in question
b)Sir suppose here the question ask that what is the total nominal value of new debt? So here the total nominal value of new debt would be $40m, Right?(a) The question does give the market value of the bonds. It is a new issue and they are being issued for $40M – this is therefore the market value at the date of issue.
(b) Yes – the nominal value is $40M. Par value means nominal value.
@johnmoffat said:
(a) The question does give the market value of the bonds. It is a new issue and they are being issued for $40M – this is therefore the market value at the date of issue.(b) Yes – the nominal value is $40M. Par value means nominal value.
Sir, in computing the new WACC due to the issue of 40M bonds, with the 2 bonds ( old and new) does this always apply to separate both bonds in WACC computation? I initially added the 2 bonds having 100M in total and multiplied by the ex interest market price.
Thanks in advance.
You must take each source of finance separately.
There is no reason why the cost of each type of debt should be the same (and it isn’t here) because debt with different redemption dates are likely to have different costs.
Have you watched my free lectures on this?
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