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BlackCo has in issue 5% irredeemable loan otes, nominal value of $100 per loanote, on which interest is shortly be paid. Black Co has a before-tax cost of debt of 10% and corporation tax is 30%
Options$55 $50 $75 $40
I got $50 , but i didn’t get why they add $5. I calculated the value based on investor’s perspective. bt it seems they got answer based on company’s perspective. I’m confused about the question
The answer is based on the investors perspective.
It is because the question says that the interest is shortly to be paid, and so we need a cum interest value.
The ex interest value is indeed $50, but they are going to also receive interest immediately of $5, which give the total present value (and therefore the market value) of $55.
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