Page 545 - FM Integrated WorkBook STUDENT 2018-19

Answers

Question 10

Irredeemable debt valuation

A company has issued irredeemable loan notes with a coupon rate of 6%. If the
required return of investors is 5%, what is the current market value of the debt?

MV = I/kd

MV = $6/0.05 = $120 per loan note

Question 11

Redeemable debt valuation

A company has issued 8% redeemable loan notes with 7 years to redemption,
which will be at par. Investors require a return of 12%.

Calculate the market value of the loan notes.

At current MV, PV of future cash flows from ownership of the debt will equal the
market price:

df/af 12% PV
$
t0 (P0 value) (?) 1 (81.71)
t1-7 Interest 8 4.564 36.51
t7 Redemption value 100 0.452 45.20

NPV 0.00

Current market value is $81.71

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