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Hi John,
I wonder if you could help me with the above question as part of which I had to calculate the total market value and cost of debt for the WACC.
The question stated that the 7% bonds were redeemable in 7 years time and interest had just been paid. I thought that I was okay with these calculations but my answer was wrong because I adjusted MV to be ex-int. The answer used the cum-int value so I’m confused – I thought that these calculations always needed ex-int?
Could you give me a definitive rule on when to adjust as I can’t figure out why I’m going wrong?
Many thanks,
Jenny
The question said that interest has just been paid, and therefore the current market value given (of 107.14) is an ex-int value.
Ex int is when the interest has just been paid. Cum int is when they are about to pay the interest. (And we always assume values are ex int unless told otherwise).
The answer has correctly used the ex-int value in the calculation of the cost of debt – there was no need to adjust the value.
(Similarly for equity, the ex div value is when the dividend has just been paid, the cum div value is when the dividend is about to be paid)
Hello John,
When calculating the cost of convertible/redeemable debt, an IRR needs to be arrived at through trial and error discount rates/percentages.
How would one pick the “best” lower and upper percentages to use?
There are no ‘best’ percentages to use. Any two guesses will do (even though the resulting answer will be slightly different because the relationship is not linear).
I usually take 5% as my first guess (when it is the cost of debt we are looking at) and then either a bit higher or a bit lower depending on whether the NPV at 5% is positive or negative.
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