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hi john,
kindly help me with the solution to this question especially on the discount rate to be used if it is after tax or before tax since tax is not given in the question.
abc co has 8% convertible loan notes in issue which are redeemable in five years time at a nominal value of $100 per loan note .alternatively, each loan note could be converted after five years into 70 equity shares with a nominal of $1 each.
the equity share of abc is currently trading $1.25 per share and this share price is excepted to grow by 4% per year .the before tax cost of debt is 10%and the after tax is 7%.
calculate the market value of each loan note to the nearest doller.
please emphasis on the discount rate to use since no tax is given and thats where the confusion is .
You really should watch the free lecture on the valuation of securities and then you would not need to ask this question!!
It is investors who determine the market value of debt, and company tax is not relevant to them. We always discount the expected future receipts at the investors required rate of return which is pre-tax when calculating the market value.
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