Market value of debt: FV = $10,000,000, PMT = $400,000, N = 10, I/YR = 13.65%. Solving for PV gives the answer $7,999,688. "
While solving it, I am not able to get this PV of $7,999,688. Can you guys please help me figuring out where I m not understanding…
Above is the PV calculation of debt of the below problem as mentioned in the solution :-
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The correct answer is B, 15.5%
Weights are 40% debt 60% equity. Now regarding the PV of the debt…
The answer above is incorrect because it mixes redemption and interest payments. This is actually pretty straight forward:
The redemption is discounted for 5 periods at 13.65%. The interest payments are discounted for 10 years at a discount rate of 6.825% (13.65/2). This gives me a PV of 8.1M .
Is this Qbank?
I think it shall be the case of half-year coupon payement for 5 years, calculation is as follows.
FV = -$10,000,000, PMT = -$40,000, N = 5x2=10, I/YR = (13.65%)/2=6.825% => PV = 7,999,687.6
This is a practice problem of Reading 37. thank you for the clarification…
I would argue that this is wrong, because the redemption is not paid semi-annually. Therefore the effective semi-annual interest rate is not just (i/yr)/2, but (i/yr)^0.5. In other words, you will have different results if you take the redemption of $10M and discount it with 13.65% over 5 years vs. 6.825% over 10 years.