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Hello there please help me out with this one too
A company has in issue loan notes of nominal value 100 each .interest on the loan note is 6% payable at the end of the year .the loan note will be redeemed in eight years time at 5% premium to nominal value .the before tax cost of debt of the company is 7% and the after tax cost of the debt is 5%
What is the ex interest market value of the loan note
My doubt here is which cost of debt to take after tax or before tax ??
Is it that if you take before tax cost of debt you should take the interest without deducting the tax and use 7% as the basis for the present value calculation or if you take after tax interest rate you should use 5% is this assumption true ??? kindly help me out In hereIt is investors who determine the market value of debt, and they are not affected by company tax. We discount at their required rate of return, which is the pre-tax cost of debt.
Tax is only relevant when calculating the cost of debt to the company, because it is the company that gets the tax relief.
Again, please watch my free lectures on this. Valuing debt is something I stress because this is very common in the exam.
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