- This topic has 3 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
The loan notes are redeemable at nominal value in 20X4. Current market prices for the company’s securities are: 50c ordinary shares, 280c; 10% loan notes 20X4, 120. The company is paying corporation tax at a rate of 30%.
The cost of the company’s equity capital has been estimated at 12% pa.20m shares in issue.
10% loan notes at book value $7mSir how r we supposed to calculate wacc from this? The time to redemption is not given.
In the answer its said as current market value is equal to redemption value we can use the irredeemable debt formula. They simply calculated cost of debt using coupon rate and multiplied it by .7 which i think is wrong. And the mv is also different apparently..
I don’t know where you found this question and so I can’t check that you have copied it all correctly.
If the current market value of the loan notes is $120 then the answer is wrong.
If loan notes are redeemed at the same amount as the current market value, then the cost of the debt certainly is (int x (1-T) / MV. However usually the redemption is at a different amount than the current MV which is why we usually have to calculate the IRR.
So here, if the current MV was $100 and they are redeemed at $100 then the answer would be correct (and the time to redemption is irrelevant). However if the current MV is $120 and the redemption was at $100, then the answer is wrong and you would need to know the number of years to redemption.
- You must be logged in to reply to this topic.