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Dear Sir,
Can you please explain the proxy for Pe when using the call option formula.
I am finding different kinds of calculations from books and past papers.Thank you
There is not normally a proxy for Pe.
I cannot give you a general answer – you will have to refer to a specific past exam question.
ok sorry about that.
In jun10 Q2 – AggroChem Co.
For the value of Pe the examiner has calculated the PV of a zero coupon bond with same yield as the current debt $3000M*1.08^-5 = $2.04176MIn Book – Eg $100 debt at carrying 5% interest, 5 years to maturity, the company’s cost of debt is 8%
The PV of the redemption value and interest for 5 years has been calculated giving a total of $88.08. Then the value of Pe = 88.08*1.08^5 = $129.42I am a bit confused about these 2 calculations
Thank you for your answer
In both cases, the MV is the PV of the future receipts.
In Aggrochem, the question told you to do it for a zero coupon bond, so in that question the interest each year is zero.
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