ACCA Applied Skills · Financial Management · Estimating the cost of capital
Kiln Co has irredeemable 9% loan notes with a nominal value of $100. Investors currently require a pre-tax yield of 12% on this debt. What is the expected market value of each $100 loan note, ex-interest?
The market value is $75 per $100 note. Annual interest of $9 divided by the 12% required yield gives $75. The value is below nominal because the coupon is lower than the yield investors demand.
- A$100.00
- B$56.25
- C$133.33
- D$75.00Correct
Explanation
For irredeemable debt, market value = annual interest / required yield = 9 / 0.12 = $75. Using the 12% pre-tax yield with tax-adjusted interest would wrongly give a lower value of $56.25 (if a 25% tax rate were applied). Investors are taxed separately, so the company's tax relief does not affect the market value here.
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