[cyh]

hi sir, i understand the your answer

Dr Cash Cr Irrecoverable debts expense account

but i have a question, for the Irrecoverable debts recovered, how should i present in income statement?

should i include as separate column as an income , or can i just direct offset bad debt?

for eg, this year Irrecoverable debts is 800, Irrecoverable debts recovered is 500, can i show the net Irrecoverable debts 300 in income statement? or should i separate show Irrecoverable debts 800 (expenses), Irrecoverable debts recovered 500 (income ) in income statement?

[cyh]

so can we assume the 3 month forward rate as spot rate after 3 months to calculate the profit on option? in case question didn’t mentioned any spot rate after 3 months?

[cyh]

Hi Sir, i can’t find the related increased debt capacity in your lecture note and lecture.
may i know is in which page and which lecture?

and regarding the subsidiary loan, the annual subsidiary benefit formula = interest save on subsidiary loan x (1-tax rate), am i correct?

because i refer to BPP text book, , there is no x(1-tax rate), but i refer to June 2014 Q2A, the annual subsidiary benefit got x (1-tax rate)

[cyh]

do we need to separate the interest payment and the tax shield on interest payment?

for eg, FCF after tax is 100, interest payment is 30, tax rate is 30%, what is the FCFE?

100-21?

[cyh]

i noticed that in page 50, example 2 answer also got same problem : gearing ratio

[cyh]

so the total market value should be $100+80,
new Ke is 22.63%
new WACC is 13.9%

am i right?

[cyh]

Hi Sir, I am confused on the extra 6% tax.
Limni received 15M dividend, o which annual tax of 20% on average has been paid.

So it mean 15M / 0.8= 18.75 original profit in oversea
pay tax in oversea 18.75M x 20% = 3.75M
pay tax to limni local gov when remited the dividend 18.75 x 26%= 4.88M

Difference : 4.88M-3.75M= 1.13M additional tax to Limni local gov

why my answer is different from the examiner answer?

[cyh]

hi sir, does it mean that the net effective annual interest rate still is 4.82% as quoted by the bank?

[cyh]

Hi Sir, if in this question (option part), we calculate all the possible outcome (3 possible exercise price) and EIR and we didn’t comment which exercise price we choose , (but definitely is march put option).

can we still get the full mark? because i feel the exercise price 94250 is also suitable for company since the EIR also below 6.6% no matter the LIBOR is +1 % or -1%

[cyh]

when we calculate the number of contract , why we need to use 4124236 / lock in rate 1.5353 / 62500, why not like normal 4123236 / future price 1.5275 / 62500? (i refer to bpp answer , i can’t find the original acca answer from google)

i watched your lecturer video lock in rate, it mentioned it is effective fixed exchange rate on the date of transaction but i still confused the purpose of lock in rate in this question.

[cyh]

can we just ignored the “lock-in-rate” part?

i dunno what is the useful of lock in rate in this part answer

[cyh]

now i understood. thank you so much Sir

[cyh]

Hi Sir, thank you for your reply.

regarding the your reply in question 2, The cost of debt is always after tax unless specifically told differently.

In this Nahara question mentioned : The debt is rated at B+ and the credit spread on
B+ rated debt is 80 basis points above the risk-free rate of return.

and in examiner answer,this cost of debt 4.8% is before tax, so need to x80% in order to find out WACC. but i dun think that question got mentioned this 4.8% is before tax.

so do we need make the assumption in our answer every time regarding the Cost of debt given by question is after tax/before tax?

[cyh]

Regarding the cost of debt that u explained above, does it mean the every time given by question, we must always assumed that That cost of debt is always after tax?

[cyh]

Thank you Sir 🙂

[cyh]

hi Sir, i refer to your reply above, u mentioned that recently the current examiner has said that it was wrong.

can you advise which article / examiner report can we refer to in order to get the most correct answer? because i am using bpp text book it seem liked haven’t amend it.

i am a bit confuse with the real option so that i hope can refer to correct answer/ article

[cyh]

Thank you Sir, now i am clear with the answer already.

[cyh]

hi Sir, i just want to know if in normal NPV calculation, do we need to include the issue cost? or just ignore it?

(assumed the question is not related to APV)

[cyh]

Sir, Thanks for your clarification.

i would like to know if in normal NPV calculation, do we need to include the issue cost? or just ignore it?

(assumed the question is not related to APV)

[cyh]

if i ignore this opportunity cost in my NPV calculation, is it wrong? or we must included this loss as part of our cost?

[cyh]

Hi Sir, it is December 06 question which is related to your topic the impact of financing in your study guide 🙂

[cyh]

thank you Sir

[cyh]

if the same question happen in exam? what should we do? show we follow our own answer which the PV of the tax shield is 100,000*50% * 30% = $15,000

[cyh]

Whole QUESTION from BPP text book as below:

A company is considering a project that would cost $100,000 to be financed 50% by equity (cost 21.6%) and 50% by debt (pre-tax cost 12%). The financing method would maintain the company’s WACC unchanged. The cash flows from the project would be $36,000 a year in perpetuity, before interestcharges. Tax is at 30%.

Appraise the project using firstly the NPV method and secondly the APV method.

Whole ANSWER from BPP text book:

Before tax 36,000
Less tax (30%) 10,800
After tax 25,200
NPV of project = –$100,000 + (25,200 / 0.15)
= –$100,000 + $168,000
= $68,000
Note that the tax relief that will be obtained on debt interest is taken account of in the WACC, not in theproject cash flows.

Since $100,000 of new investment is being created, the value of the company will increase by $100,000 + $68,000 = $168,000, of which 50% must be debt capital.
The company must raise 50% x $168,000 = $84,000 of 12% debt capital, and (the balance) $16,000 ofequity. The NPV of the project will raise the value of this equity from $16,000 to $84,000 thus leaving the gearing ratio at 50:50.

The APV approach to this example is as follows.
(a) First, we need to know the cost of equity in an equivalent ungeared company. The MM formula we can use to establish this is as follows.

MM formula to get ke = 17.647%

(b) Next, we calculate the NPV of the project as if it were all equity financed. The cost of equity would be 17.647%.
NPV = ($25,200 / 0.17646) – $100,000 = $42,800

(c) Next, we can use an MM formula for the relationship between the value of geared and ungeared companies to establish the effect of gearing on the value of the project. $84,000 will be financed by debt.

Vg (APV) = Vu + (value of debt × corporate tax rate)
= $42,800 + ($84,000 x 0.30)
= $42,800 + $25,200
= $68,000
The value of debt x corporate tax rate represents the PV of the tax shield on debt interest; that is, the PV of the savings arising from tax relief on debt interest.

This can be proved as follows.
Annual interest charge = 12% of $84,000 = $10,080
Tax saving (30% x $10,080) = $3,024.00
Cost of debt (pre-tax) = 12%
PV of tax savings in perpetuity =3,024/ 0.12 = $25,200
(by coincidence only this equals the project net of tax cash flows)

[cyh]

hi Sir, i also confused with this BPP question

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