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Chapter 20

Valuation of debt and preference shares

Uses the same principles seen in the cost of capital chapter, with the calculations
rearranged.

Preference shares P 0 = D/K p

Irredeemable debt MV = I/r

Redeemable debt MV = PV of future interest and redemption
receipts (or value of converted shares if convertible debt) discounted at
investors’ required return rate.

Question 9

Preference share valuation

A firm has in issue 10% preference shares with a nominal value of $0.50 each.
The required return of preference shareholders is currently 13%.

Calculate the value of a preference share.

P0 = D/kp

P0 = $0.05/0.13 = $0.38 per share

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

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