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Sir there is a question in kaplan kit as follows:
Ring co has in issue ordinary shares with a nominal value of $0.25 per share. these shares are traded on capital market. It is now 20×6 and company has just paid a dividend of $0.45 per share. recent dividends of company are as follows:
Yr DPS
20×6 $0.45
20×5 $0.428
20×4 $0.408
20×3 $0.389
20×2 $0.370
ring co also has in issue loan notes which are redeemable in seven years time at their nominal value of $100 per loan note and which pay
interest of 6% year.
The finance director of ring co wishes to determine the value of the company.
ring co has a cost of equity of 10% per year and a before -tax cost of debt of 4% per year.
The company pays corporation tax of 25%per year.
What is the market value of each loan note?Sir as we discount it at investors required rate of return , but in the above question what rate we will use as investors required rate of return?
Secondly instead of taking years in rows and PV and DF in columns, can we take PV and DF in rows and years in columns?
You calculate the market value of the equity using the dividend valuation formula.
You calculate the MV of the loan notes by discounting the inflows at 4%.
I explain all this in my lectures.
What you set us as rows and columns is of no relevance. However for a normal NPV calculation is makes sense to set it up the way that the examiner does in his answers (and the way I do in my lectures) because it will then be easier for the marker.
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