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Question:
Ring Co also has in issue loan notes which are redeemable in 7 years’ time at their nominal value of $100 per loan note and which pay interest of 6% per year
Ring Co has 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 $100 loan note?
my question is how to do this.
As I explain in detail (with examples) in my free lectures, the market value of debt is determined by the investors, and is the present value of the receipts to the investor discounted at the investors required rate of return.
The investors are not affected by corporation tax and therefore we use the receipts before tax, and the required return by the investors is before tax (i.e. in this question 4%).
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
so if the question ask “what is the market value of debt” it is automaticly from investor point of view?
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