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Sir it is a question from BBP kit
A company has 7% loan notes in issue which are redeemable in 7 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% & the after-tax cost of debt of the company is 6%
What is the current market value of each loan note?
My problem is with the cost of debt BPP kits answer calculated market value based on before-tax cost of capital while I remember that u said that we always use the after-tax cost of debt. Confused here!
As I have written in my answer to your other post, the after-tax cost of capital is irrelevant when calculating the MV of debt. It is the investors who determine the MV and they are not affected by company tax.
The after-tax cost of debt is only relevant when calculating the cost to the company.
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