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bpp revision kit airline business , i didn’t understand why its said existing debt value will be reduced in part b (market value of existing debt will be reduced , why its calculated so 0.4/1.044 ?? I didn’t understand the brief given in BPP text …Its said the credit rating will be reduced because of new debt ..how and why?
The market value of debt is always the present value of future receipts discounted at the investors required rate of return.
If the credit rating is reduced then investors will require a higher rate of return and therefore the market value will be lower.
More debit in a company always makes the company more risky and this is why the credit rating is reduced (and hence the yield increases).
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