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A company has 7% loan notes in issue which are redeemable in seven years’ time at a 5% premium to their nominal
value of $100 per loan note. The before-tax cost of debt of the company is 9% and the after-tax cost of debt of the
company is 6%.
Sir, in the solution they have used the Discounting factor and Annuity factor of before tax cost of debt of 9% and I wanted to know why.If you had watched my free lectures on the valuation of securities, then you would know why (and you cannot expect me to type out all of my lectures here 🙂 ) !!
It is investors who determine the market value, and investors are not affected by company tax. So the market value is the present value of the flows (ignoring tax) discounted at their required rate of return (which is the same as the cost of debt to the company but before tax).
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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