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Debt

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Debt

  • This topic has 5 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • November 15, 2015 at 12:39 pm #282537
    aftaab1390
    Member
    • Topics: 22
    • Replies: 24
    • ☆

    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.

    November 15, 2015 at 5:48 pm #282599
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51599
    • ☆☆☆☆☆

    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).

    November 16, 2015 at 4:03 am #282728
    aftaab1390
    Member
    • Topics: 22
    • Replies: 24
    • ☆

    Thank you for your precious explanation. What if they were repaid at par value. Will it be 90 x 100/112.5?

    November 16, 2015 at 7:29 am #282745
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51599
    • ☆☆☆☆☆

    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)

    November 16, 2015 at 8:12 am #282757
    aftaab1390
    Member
    • Topics: 22
    • Replies: 24
    • ☆

    MERCI 😀

    November 16, 2015 at 9:32 am #282771
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51599
    • ☆☆☆☆☆

    De rien 🙂

  • Author
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