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Question 11.5: Cosmo plc began trading ten years ago. It has 2 million £1 o...

Cosmo plc began trading ten years ago. It has 2 million £1 ordinary shares in issue that have a current market value of £5 per share. These shares were issued at their nominal value when the business was founded. The business also has £6 million 10 per cent loan notes. The book value of the loan notes is the same as their current market value. In addition, the business has retained earnings of £3 million.

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The market value added can be calculated as follows:

£m £m
Market value of investments
Ordinary shares (2m × £5) 10
Loan notes \underline{6}
16
Total amount invested
Ordinary shares (2m × £1) 2
Retained earnings 3
Loan notes \underline{6} \underline{(11)}
Market value added \underline{5}

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