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Question a (i)
MV of XY CoSir,
I have calculated the mv by discounting
cash flow using 3 year cost of debt which is 5.20%
According to my method of calculation MV is $96.75 per $100 bondBut
In the kaplan kit answer
They have calculated 3 different rate of cost of debt for 3 year and discounted the cashflow of each year by that particular year cost of debt
According to kaplan method of calculation MV is $96.86 per $100 bondHere, my concern is whether my way of calculation is correct or not. That’s why i have asked u this question previously so that i see how you calculate the mv
As I told you before, I do not have the Kaplan Kit.
However, from what you have written Kaplans answer is correct, Each year should be discounted by the relevant required return relating to that year. (Incidentally, we are never discounting at the cost of debt – the cost of debt will be lower than the investors required return because of tax relief. It is the investors required rate of return that determines the market value.
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