ACCA FM Syllabus F. Business Valuations - The valuation of debt - Notes ^{1 / 1}

To value a redeemable debt you need to do the following:

1. Take the capital and the interest payments

2. Discount them down at the cost of debt

Illustration

2,000 3 years 6% redeemable loan 10% premium - cost of debt 10%

Solution

Note:

Capital is always 100 - unless there’s a premium or its a convertible loan (use the FV of the shares if higher than 100)

The interest above I ignored tax as it wasn’t mentioned in the scenario

If tax is mentioned you have a choice:

1. Tax adjust the interest and use the after tax cost of debt

2. Don’t tax adjust the interest and use the before tax cost of debt