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Ring Co question BPP

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Ring Co question BPP

  • This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • May 30, 2022 at 5:39 am #656820
    nanisaid98
    Participant
    • Topics: 13
    • Replies: 17
    • ☆

    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.

    May 30, 2022 at 8:44 am #656827
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    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.

    May 30, 2022 at 10:06 am #656829
    nanisaid98
    Participant
    • Topics: 13
    • Replies: 17
    • ☆

    so if the question ask “what is the market value of debt” it is automaticly from investor point of view?

    May 30, 2022 at 4:40 pm #656877
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    It cannot be anything else. MV’s are determined by investors.

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