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5% irredeemable debt, cost of debt 10%, corporate tax 20%
requirement : what is the market value of the debt ?
You really should watch my free lectures on the valuation of securities.
The market value is the present value of the future receipts discounted at the investors required rate of return (which is the same as the pre-tax cost of debt).
Since irredeemable debt is a perpetuity, you multiply the $5 coupon rate by 1/r.
Assuming 10% is the pretax cost of debt, the market value = 5/0.10 = $50 (per $100 nominal).
The question would make it clear that the pre-tax cost of debt was. Simply writing ‘cost of debt’ would imply that it was after-tax.Again, I do suggest that you watch the free lectures. They are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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