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I am continuing from the previous thread, but because it was a new question, i created a new thread.
In the last thread you said that market value of debt is always the PV of the future receipts discounted at the investors required rate of return.
However in Bento Co they have used the coupon of 8% to find the annuity. The 8% is not investors’ required rate of return, it is the coupon. Why in the world have they used the coupon?
thankyou!
It has nothing to do with calculating the market value.
The loan is at 8% interest and the question says that the interest and repayment of the loan are to be equal annual payments over 4 years.
The present value of the repayments at the interest rate of 8% must equal the amount owing of $30M.
I have another confusion. In part (C) they have calculated value of company using dividend valuation model and net asset valuation model.
Now, i think i might be going slightly crazy. Is the value of equity same as the value of company? Because in using DVM they have used Ke, so that will just give value of equity. Similarly in net asset valuation, they have subtracted all liabilities from all assets, that too just leaves behind value of equity. Is equity the value of company?( Isn’t value of company equal to value of long term debt + value of equity)Part (c) is effectively asking whether or not what they are considering buying is worth more or less than the $60M that Bento is wanting.
Read the first notes (i) and (ii) of the question. The only liabilities being transferred are the ‘trade and other payables’ – not the bank overdraft and not the non-current liabilities.
Thankyou, thankyou!
However please confirm. When we use dividends to value company, that will just give us the value of equity, not the value of entire company (even if it has long term debt)?
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