Highwood Q2) iii) – statement of financial position

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    flowerpower
    Participant
    • Topics: 3
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    Hello Mike,

    For the Highwood question, the liability part of a hybrid bond is assigned to non-current liabilities. Please could you tell me
    1. why the current year’s payment isn’t removed (as in my mind it is no longer a liability because it has been paid?)
    2. why next year’s liability isn’t moved to the current-liabilities section?

    Thanks,

    FP


    Avatar of MikeLittle
    MikeLittle
    Keymaster
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    I thought the bond was payable in x years’ time. Surely the only adjustment is the unrolling of the discount and there is in fact no payment of cash being made.

    I may be wrong – I don’t have the question handy. If you believe that my answer is incorrect, please post again


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    flowerpower
    Participant
    • Topics: 3
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    Hi Mike, the question says “Interest is payable annually in arrears on 31 March each year”. I’m not sure if cash is actually paid or rolled over, how can I be sure?

    Thanks,

    Dan


    Avatar of MikeLittle
    MikeLittle
    Keymaster
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    If it’s payable annually in arrears, it’s been paid. Is there not an “effective” rate of interest which should be applied to the amount outstanding and adjusted for?


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    flowerpower
    Participant
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    It’s described as an “8% $30 million convertible loan note” and then later it says:

    “Highwood’s finance director has calculated that to issue an equivalent loan note without the conversion rights it would have to pay an interest rate of 10% per annum to attract investors”


    Avatar of MikeLittle
    MikeLittle
    Keymaster
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    Ok, issue a $1,000 8% loan note which has an effective rate of 10%

    After 1 year, the finance charges should be 10% of 1,000 ie 100. The obligation is therefore 1,100. But we will have paid 8% by way of loan interest ie 80, so that will reduce the obligation back to 1,020 and that’s the figure to carry forward.

    Next year, the finance charge is 10% of 1,020 ie 102. The obligation now stands at 1,122. Butt we will pay interest of 8% of 1,000 and that brings the obligation figure to carry forward into the next year back to ( 1,122 – 80 ) 1,042.

    And thus it goes on!

    At the end of the course notes, around page 200, you’ll find the mini-exercises. To improve your chances of success in F7, you really should do all those mini-exercises!!

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