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PV factor whether before tax or after tax to calculate market value of debt

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › PV factor whether before tax or after tax to calculate market value of debt

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • February 12, 2015 at 6:28 am #227994
    lakshmana iyer krishnan
    Member
    • Topics: 14
    • Replies: 46
    • ☆☆

    Qn9 Dec2014 MCQ: A company has 7% loan notes in issue which are redeemable in seven 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% and the after-tax cost of debt of the
    company is 6%. What is the current market value of each loan note.

    The answer is based on using PV factor of 9%
    MV = (7 x 5·033) + (105 x 0·547) = $92·67.

    My doubt why after tax rate of 6% is not used for discounting, which will give a higher market value of 108.9?

    February 12, 2015 at 3:53 pm #228141
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    It is the investor who fixes the market value and therefore it is the return required by the investor that matters. The investor wants the pre-tax return (company tax is irrelevant to them).

    Tax is only relevant to the company and makes the cost to the company lower because of tax relief.

    I suggest that you watch the free lecture on the valuation of equity and debt, where I stress this point.

    February 13, 2015 at 3:37 am #228196
    lakshmana iyer krishnan
    Member
    • Topics: 14
    • Replies: 46
    • ☆☆

    Thanks a million, sir for the very prompt reply.
    I will watch the video, as suggested by you. It is really a great blessing to have somebody to clear doubt and if one goes through all doubts raised by others, that itself will be a great learning.
    Best wishes and warm regards
    Krishnan

    February 13, 2015 at 9:32 am #228226
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    You are welcome 🙂

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