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Hello mr JM trust you are good. Am having difficulty to understant debt in cost of capital. It is assumed that they have nominal value of 100. In question Bar Co ( dec 11) it say notes are currently trading at 112.5 and will be bought back at market value. Fund raised is 90m. Is there any logical mean to find m.v of loan? Am stuck on the whole question :'( dont know where to start and what should be compared with.
The question says that they are trading at 112.5 and that they will bought back at this market value.
The market value is $112.50 for every $100 nominal.So if they spend $90M repaying the bonds it will mean that they repay bonds with a nominal value of ($90 / 112.50) X $100 = $80M (and will therefore save interest on bonds with a nominal value of $80M).
Thank you for your precious explanation. What if they were repaid at par value. Will it be 90 x 100/112.5?
No. Par value is another word for nominal value and so if they were repaid at par value they would repay $90M of the bonds. ($90 x 100/100)
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