A company issued its 12% irredeemable loan notes at 95. The current market price is 92. The company is paying corporation tax at a rate of 30%.
What is the current net cost of capital per annum of these loan notes (to one decimal place)?
Answer : (12%*100*0.7)/92 = 9.1%
My answer =12%*100/92 = 13%
I am unable to understand why tax saving on interest of irredeemable debt? These interest are deducted after tax in SOPL calculation.
Can you help me?
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Irredeemable shares
3y ago#1Interest is not deducted after tax!!
Interest is tax allowable and therefore paying more interest means that the company saves more tax. This is essential knowledge for several topics in the Paper FM syllabus.
I do suggest that you watch my free lectures on this.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Make the solutions clear? i thought we could use the formula for irredemable debt
Kd=I(1-T)/po
Kd=0.12(1-0.3)/92= 0.09%
But my doubt was, what are we doing with the first 95? Thankyou
3y ago#3The issue price is not relevant. Po in the formula is the current ex int market value, which is 92.
Have you watched my free lectures? :-)
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