ACCA FM Syllabus E. Business Finance - Redeemable debt - Past Papers ^{1 / 2}

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:

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

Darlga Co is partly financed by 7% loan notes which are redeemable at their nominal value of $1,000 per loan note in eight years’ time. Alternatively, the loan notes are convertible after seven years into 110 ordinary shares of Darlga Co per loan note. The ordinary shares of Darlga Co are currently trading at $6·50 per share on an ex dividend basis. The current cost of debt of the convertible loan notes is 8%.

Required:
(a) Justifying any assumptions which you make, calculate the current market value of the loan notes of Darlga Co, using future share price increases of:

(i) 4% per year;

(ii) 6% per year. (6 marks)

A company has in issue loan notes with a nominal value of $100 each. Interest on the loan notes is 6% per year, payable annually. The loan notes will be redeemed in eight years’ time at a 5% premium to nominal value. The before-tax cost of debt of the company is 7% per year.

What is the ex interest market value of each loan note?

A. $94·03
B. $96·94
C. $102·91
D. $103·10

A company has 7% loan notes in issue which are redeemable in seven years’ time at a 5% premium to their nominal value of $100 per loan note. The before-tax cost of debt of the company is 9% and the after-tax cost of debt of the company is 6%.

What is the current market value of each loan note?

A. $92·67
B. $108·90
C. $89·93
D. $103·14

Luke Co has 8% convertible loan notes in issue which are redeemable in five years’ time at their nominal value of $100 per loan note. Alternatively, each loan note could be converted after five years into 70 equity shares with a nominal value of $1 each.

The equity shares of Luke Co are currently trading at $1·25 per share and this share price is expected to grow by 4% per year. The before-tax cost of debt of Luke Co is 10% and the after-tax cost of debt of Luke Co is 7%.

What is the current market value of each loan note to the nearest dollar?

A. $92
B. $96
C. $104
D. $109