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MC Question 22
Ring Co has in issue ordinary shares with a nominal value of $0·25 per share. These shares are traded on an efficient capital market. It is now 20X6 and the company has just paid a dividend of $0·450 per share. Recent dividends of the company are as follows:
| Year | 20X6 | 20X5 | 20X4 | 20X3 | 20X2 |
|---|---|---|---|---|---|
| Dividend per share | $0·450 | $0·428 | $0·408 | $0·389 | $0·370 |
Ring Co also has in issue loan notes which are redeemable in seven years’ time at their nominal value of $100 per loan note and which pay interest of 6% per year.
The finance director of Ring Co wishes to determine the value of the company.
Ring Co has a cost of equity of 10% per year and a before-tax cost of debt of 4% per year. The company pays corporation tax of 25% per year.
What is the market value of each loan note?
A. $109·34
B. $112·01
C. $116·57
D. $118·68