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A company has 6 % bonds in issue which are redeemable in 5 years time at a premium of 10% to their nominal value of $100 per bond. The before tax cost of debt of the company is 10% and after cost of debt is 7%. What is the current market value?
Answer is 91.07
Why it is calculated at 10% and not at 7% ?
It is because it is investors who determine the market value and they are not affected by company tax – it is only the company who is affected and it is only relevant when calculating the cost to the company.
You really should watch the free lectures that work through the whole syllabus for Paper F9 – all of this is explained in the lectures!
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