8

Question
Following data pertains to a bond issued some time ago by Brain Limited:

Face Value of the bond 100

Coupon rate 12%
Remaining term 3 Years

Case 1
Calculate the market value of the bond assuming
- Market rate is 15%
- No taxes are applicable
- Redemption value will be Rs 105

Case 2
Calculate the market value of the bond assuming
- Market rate is 11% post tax
- Tax rate applicable is 25%
- Redemption value will be Rs 100

Case 3
Calculate the market value of the bond assuming
- Market rate is 10% post tax
- Tax rate applicable is 40%
- Redemption value will be Rs 105

Case 4
Calculate the Cost of Debt (Mkts rate) of the bond assuming
- Market Value is Rs 96
- No Tax is applicable
- Redemption value will be Rs 100

Case 5
Calculate the Cost of Debt (Mkts rate) of the bond assuming
- Market Value is Rs 102
- Tax rate applicable is 25%
- Redemption value will be Rs 100

Case 6
Calculate the Cost of Debt (Mkts rate) of the bond assuming
- Market Value is Rs 104
- Tax rate applicable is 40%
- Redemption value will be Rs 110
 Sol 8

Solution

Case 1
1.00 2.00 3.00
Interest 12.00 12.00 12.00
Redemption Value 105.00
Net Cash flows 12.00 12.00 117.00
PV at 15% 10.43 9.07 76.93
Market Value 96.44

Case 2
1.00 2.00 3.00
Interest 12.00 12.00 12.00
Tax savings (3.00) (3.00) (3.00)
Redemption Value 100.00
Net Cash flows 9.00 9.00 109.00
PV at 11% 8.11 7.30 79.70
Market Value 95.11

Case 3
1.00 2.00 3.00
Interest 12.00 12.00 12.00
Tax savings (4.80) (4.80) (4.80)
Redemption Value 105.00
Net Cash flows 7.20 7.20 112.20
PV at 10% 6.55 5.95 84.30
Market Value 96.79

Case 4
- 1.00 2.00 3.00
Market Value (96.00)
Interest 12.00 12.00 12.00
Redemption Value 100.00
Net Cash flows (96.00) 12.00 12.00 112.00 NPV
PV at 10% (96.00) 10.91 9.92 84.15 8.97
PV at 15% (96.00) 10.43 9.07 73.64 (2.85)

a 10% b 15%
A 8.97 B (2.85)

Irr 13.79%
 Sol 8

Case 5
- 1.00 2.00 3.00
Market Value (102.00)
Interest 12.00 12.00 12.00
Tax (3.00) (3.00) (3.00)
Redemption Value 100.00
Net Cash flows (102.00) 9.00 9.00 109.00 NPV
PV at 6% (102.00) 8.49 8.01 91.52 6.02
PV at 10% (102.00) 8.18 7.44 81.89 (4.49)

a 6% b 10%
A 6.02 B (4.49)

Irr 8.29%

Case 6
- 1.00 2.00 3.00
Market Value (104.00)
Interest 12.00 12.00 12.00
Tax (4.80) (4.80) (4.80)
Redemption Value 110.00
Net Cash flows (104.00) 7.20 7.20 117.20 NPV
PV at 6% (104.00) 6.79 6.41 98.40 7.60
PV at 10% (104.00) 6.55 5.95 88.05 (3.45)

a 6% b 10%
A 7.60 B (3.45)

Irr 8.75%