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.
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Tulip Co (Q.207 BPP book)
5y ago#1Interest 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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