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Sir,
I would like to refer an example,
8% $1 preference shares- 6m
12.5% loan notes 20X6 – 8m
The loan notes are redeemable at nominal value in 20X6.The company is paying corporation tax at the rate of 30%.The current market prices of the company’s securities are as follows.
8% $1 preference shares -92c
12.5% loan notes 20X6- $1001- my doubt is as the loan is redeemable, we are to calculate irr. what is the percentage taken to calculate present cashflow . should we include tax relief on that? like 12.5%*(1-.30)= 8.75.
2-could you explain how the market value increases in M&M’s theory with tax when more debt is introduced in the capital structure.
thankyou
For the redeemable loan the cost of debt is the IRR of the after-tax flows.
This and your question about M&M are both explained in detail in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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