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Dear Sir,
Hope you are doing well.
I have created this account only to ask this question as I have been struggling over past few days on one issue. I know for redeemable bonds cash interest payments, we have to take coupon rate with par/nominal/book value given in the question unless if not stated then we assume 100 as par value. But I have seen some questions use 100 as par value although nominal is given in the Q. I am so confused. Please kindly help me?
for e.g
A company has 13% redeemable loan notes with a nominal
value of $7 million, trading at $105. They are due to be redeemed at
nominal value in five years’ time.
If the rate of corporation tax is 33%, what is the company’s
WACC?
Answer
Interest payment
(13 × (1– 0.33)) = 8.71Why they didn’t multiply 13% with 7 million here even nominal value is given here in Question.
whereas in other question I don’t remember the details, but it was as follows:-
Debt 10% loan stock 20Y3 $80m Book value and market value $85m and while calculating IRR instead of taking 10% * 100 * (1-0.3) , they took 10% * 80m * (1-0.3), why?For your first example, 8.71% is the interest cost to the company as a %. It is the % that is required and it is irrelevant how much is borrowed.
As far as your second example is concerned, the IRR will be the same whether you calculate it on the whole amount of the borrowing or just on a nominal value of $100.
I do suggest that you watch my free lectures on the calculations of the cost of debt and on the weighted average cost of capital.
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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