CA Final · Advanced Financial Management · Security Valuation
Himalaya Finance has issued irredeemable debentures of face value ₹100 with a coupon of 9% p.a. paid annually. An investor requires a return of 12% on similar risk. Which is the intrinsic value of one debenture?
The debenture is worth ₹75. An irredeemable debenture is a perpetuity, so its value equals the annual interest of ₹9 divided by the required return of 12%. Since investors demand more than the 9% coupon, the debenture trades below its ₹100 face value.
- A₹75.00Correct
- B₹100.00
- C₹108.00
- D₹83.33
Explanation
For a perpetual instrument, value = annual interest / required return = 9/0.12 = ₹75. The value is below face value because the required return exceeds the coupon rate. ₹83.33 comes from wrongly using a ₹10 interest figure, and ₹108 multiplies instead of dividing.
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