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In C of this question you are asked to calculate the capital gearing of the company. I am slightly confused with the answers.
MV of bond A = 20m * 0.9508 = 19.016m, now i get where the figures have come from but what i don’t get is why they have used 0.9508 when it says that the ex interest market price of the bond is $95.08. so why has this changed for the calculation… is it because it has a par value of $100.00 so £95.08 per $ is $95.08/100?
Hi Jemma,
I hope you don’t mind me having a go an answering this, before the tutor steps in.
You were correct when you said “is it because it has a par value of $100.00 so £95.08 per $ is $95.08/100?”
Another way of looking at it, is to calculate how many bonds there are. In this case there are 20,000,000 / 100 = 200,000. Then multiply the number of bonds by the market value. So 200,000 * 95.08 = 19,016,000 or 19.016m. So basically it is 20m / 100 * 19.08, which is the same as 20 * 19.08/100, or 20 * 0.9508.
Thank you, your logic makes more sense to me then how they showed it in the answer now i look at it and think how simple it is…
Many thanks
JemmaMy pleasure. You wouldn’t believe how long I got stuck trying to work out the MV of the bond price, the first time I had to do it, so you’re not alone!
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