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another question under Business valuation QN 213
ATV co
conversion value -133.1
Redemption value -115I just considered tax rate in calculation of interest pay per per year and derived wrong answer.Answer says corporation tax is not allowable as investor pays market price.
If i took redemption value 115 and in this case conversion value is lower than 115, will tax rate be deducted from interest?I usually deduct tax rate from interest including in conversion value option too but first time faced such case.
NCW: It would be an annuity if it was for a fixed number of years. It is not for a fixed number of years – the earnings have always been 10M and in future are expected to always be 12M.
ATV: There is no question called ATV in either the current edition of the BPP Revision Kit, or the previous edition. (The question NCW is in both editions, but with a completely different number, so I have no idea which edition of the Revision Kit you are using.)
However, if it is asking for the market value of the debt, then tax is never relevant because it is investors who determine the market value and they are not affected by company tax. (Tax is only relevant when calculating the cost of debt to the company).
This is a very common question in the exam and I stress the point in my free lectures.a 9% redeemable loan note in ATV co is due to mature in 3 year’s time at a premium of 15% or convertible into 25 ordinary shares at that point.the current share price is $4 expected to grow at 10 % per annum.Atv co pays CT 30%
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