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market value of loan note

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › market value of loan note

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • Author
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  • April 13, 2021 at 2:26 pm #617418
    fizaali
    Member
    • Topics: 50
    • Replies: 36
    • ☆☆

    It is a question from BPP kit which I don’t understand

    Black Co has in issue 5% irredeemable loan notes, nominal value of $100 per loan note on which interest is shortly to be paid. Black Co has a before-tax cost of debt of 10% & corporation tax is 30%.

    What is the current market value of one loan note?

    My answer:
    Interest = $100 x 5% = 5

    Market value = (5 *0.7) / .(0.10 * 0.7) = $50

    But the kit states that the correct answer is $55 which is confusing! Please correct me!

    April 13, 2021 at 3:21 pm #617433
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    Firstly, it is wrong to multiply the interest and the before-tax cost of debt by 0.7.

    It is investors who determine the market value and they are not affected by company tax. (This is commonly tested in Paper FM which is why I do stress this in my free lectures.)

    Therefore the MV is 5 / 0.10 = $50 (which I appreciate ends up as the same figure in this case, but the ways in which the examiner tests it checks that you do understand my previous sentence).

    However this is the ex-interest MV. This question says that the interest is shortly to be paid and therefore the MV will be cum-interest and will therefore by the ex-int MV plus the interest to be paid, so 50 + 5 = $55.

    I do suggest that you watch my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.

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