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Market value

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Market value

  • This topic has 2 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • April 13, 2021 at 2:19 pm #617415
    fizaali
    Member
    • Topics: 50
    • Replies: 36
    • ☆☆

    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!

    April 13, 2021 at 2:28 pm #617419
    fizaali
    Member
    • Topics: 50
    • Replies: 36
    • ☆☆

    I have got the answer for this Sir 🙂

    April 13, 2021 at 3:23 pm #617435
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51543
    • ☆☆☆☆☆

    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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