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I hope you are doing very well Sir John.
The Company valutions by net assets have been very popular in exams. i was wondering if u have added a lecture for those in your website? I mean even one example will be enough by u for this if u have dont this in any of your revison kit live? Thank You . Take care of yourself
Have you watched the lectures on the valuation of securities (practical issues)?
Net asset valuations are covered (but are almost not worth having a lecture on because it is just common sense (total net assets divided by the number of shares!)). That is why net asset valuations in the exam are only ever very few marks indeed.
Yes i have watched all of your lectures 🙂 I was just asking because it gets clear when u explain it. Anyways i will try questions on it and if i find any problem i will ask you here. Thank You So much and have a good day. 🙂
One thing is bothering me that is Market Value of Debt with cost of debt.
I understand that Market value is the present value discounted at investors requires rate of return and that is cost of debt. and i do understand all the calculations part in it higher the cost of debt lower the market value.
My question is why the market value goes low with higher cost of debt i understand the calculations part and i know high debt means the company is more at risk but i fail to understand why it happens? Thanks in advance
Firstly you have written one thing wrong. The investors required rate of return is not the same as the cost of debt. It is because the company gets tax relief on debt interest and therefore the cost to the company is lower than the return required by investors.
With regard to the main question you are asking, if general interest rates increase (nothing to do with risk) then to be prepared to invest in bonds/loan stock, you will want a similar, higher return. However, bonds/loan stock pay fixed interest on the nominal/par value and therefore in order to get a higher return you will only be prepared to pay a lower amount to invest in the bonds.
There is a question in BPP Revision kit Question 83 6/11
Part b. Identify and briefly discuss the factors that influence the market value of traded bonds.
I understand all the factors but fail to understand this particular factor.
Answer. Cost Of Debt.
The Cost of debt is the rate of return required by bond investors and is influneced by perception of the company and its level of risk. This may be indicated by company credit rating. As the cost of debt increases. The present value of the intrest payment decrease as does the market value of debt.The rate of return demanded by investors depends on how risky they think the debt is. The more risky it is then the higher above the general interest rate they will want.
If it is more risky, they want a higher return, and therefore the market value will be lower.
Thank You Sir. Understood.
But thn again u confused me a bit up there 😛 You are saying yourself rate of return demanded by investors.
Lets just forget tax for a minute. the cost of debt does depends all on investors required return but thn cost of debt for company gets tax releif and therefore u said its not same as cost of debt.
Am i right ? 😛
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