ACCA FM Syllabus F. Business Valuations - The valuation of debt - Notes
The valuation of debt
To value a redeemable debt you need to do the following:
Take the capital and the interest payments
Discount them down at the cost of debt
Illustration
2,000 3 years 6% redeemable loan 10% premium - cost of debt 10%
Solution
Cashflows | Discount @ 10% | ||
---|---|---|---|
Capital | 110 | 0.751 | 82.61 |
Interest | 6 | 0.909 | 5.454 |
6 | 0.826 | 4.956 | |
6 | 0.751 | 4.506 | |
97.526 |
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:
Tax adjust the interest and use the after tax cost of debt
Don’t tax adjust the interest and use the before tax cost of debt
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Syllabus F. Business Valuations
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Syllabus F. Business Valuations
F4. Efficient Market Hypothesis (EMH)