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Hello John,
Black Co has in issue 5% irredeemable loan notes, nominal value of $100 per loan note, on which interest is shortly to be paid. Black co has a before tax cost of debt of 10% and which corporation tax is 30%.
What is the current market value of one loan notes?
– The answer is $50( 50+5).
-Could you please explain why the $5 has been added.Thanks
The question says that the interest is shortly to be paid.
That implies that the loan notes are cum interest and therefore have a MV that if $5 more than the ex interest MV.
Hello John,
Thank you for your reply.
Actually I am little bit confused. What we’ve calculated is the cum interest market value?
If so, what the use of using the cum interest market value. Isn’t the ex div market value the only value that we should take into account?Thanks
Why?
If the question says that the interest is about to be paid and asks for the MV, then it is wanting the cum interest MV.
If nothing is stated then we always assume ex interest MV’s but the question you asked specifically asked for the value given that the interest has not yet been paid!
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