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Dear tutor,
I Have this ques
“A co. Has 7% loan notes in issue which are redeemable in 7 years time at a 5% premium to their nominal value of $100 per loan note. The b4 tax cost of debt of the co. Is 9% and after tax cost of debt is 6%. What is the current market value if each loan note?”
My answer is
Current mkt value = pv of future interest + pv of redeemption valueCurrent mkt value = $100 x7% x annuity factor @ 6% 7yrs + $100 x 1.05 x discount factor @ 6% 7 yrs
= 108.9But instead of using after cost of debt of 6% , the answer used 9% – b4 tax cost of debt
Can u explain for me why is that?
Please don’t ask me to study opentuition lec note because im learning it already and just got a few misunderstanding in practice questions
I won’t ask you to study our lecture notes, but I do ask you to watch the free lectures.
Using the lecture notes without watching the lectures is completely pointless – it is in the lectures that I explain and expand on the notes. If you are not watching the lectures then you need to buy a Study Text from one of the ACCA approved publishers and study from there if you want to pass the exam!As I explain in the lectures, it is investors who fix the market value (not the company). Investors do not get the benefit of tax relief on interest and so the market value is the PV of the receipts at their required rate of return which is the before tax cost of debt.
The examiner keeps asking the same question in order to test the understand of this.
Ok so before tax cost of debt is the rate of return required by investors and after tax cost of debt is the rate of return required by who? A company?
The after tax cost of debt is not the return required by anybody! (Why would the company expect a return??!)
The after tax cost of debt is the cost of debt borrowing to the company,
Again, you really must watch my free lectures. I cannot simply type them all out here (and using the notes without the lectures is pointless – they are not a Study Text) 🙂
Thank u very much. Of course both of them are simultaneously used at the same time.
Can u refer to GXG ques – 06/2013, please explain for me part (a)The answer is
The co. Capital value at end of yr 2:
2.5 /(0.09 -0.04) = $50m ( agreed)The capital value of the dividend at yr 0:
50/1.09^2 = $42.1m (agreed)The current PV of dividends to shareholders, using the existing 3% dividend growth rate:
1.6×1.03 / (0.09-0.03) = $27.5mI wonder where is the 1.6 come from?
Another thing:
Is that 4% is the dividend growth from 3rd yr onwards? And 3% is backwards?If you look at the SOPL in the question you will see that the current dividend is 1.6M.
The current share price will be based on the dividends that shareholders currently expect which is growth at 3% per year. Future dividends will only be expected to be different if they adopt one of the options listed.
So 1.6 is the dividend will pay in this current yr but defferring until 3rd yr?
Ok i see thank u sir
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