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Hi Sir,
The text says that the 3% loan notes of nominal value $100 per note will be redeemable after 5 years at nominal value or convertible at that time into ordinary shares with a value expected to be $115 per loan note.
Q.207 requires calculating IRR, so I calculated the NPV of this with -$100 in time 0, 3%*$100 interest received from time 1 to 4, and the expected value $115 in time 5. This got me the cost of debt of 5.2%.
But the answer in BPP book shows that 3% interest is received in time 1-5, why is this please?
Thank you so much.
Interest is paid at the end of each of the years that the loan notes exist.
The loan notes are not redeemed or converted until the end of 5 years and so there sill be interest for each of the five years and in addition the redemption or conversion at the end of 5 years.
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