Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › MCQ revision test
- This topic has 4 replies, 3 voices, and was last updated 9 years ago by John Moffat.
- AuthorPosts
- April 18, 2015 at 5:53 pm #241740
Could you please explain how the answers are arrived at for:
1. R plc has in issue $400,000 8% bonds, redeemable in 5 years time at a premium of 10%. Investors require a rate of return of 12% pa. The rate of corporation tax is 35%
What is the total market value of the debt in issue?
2. X plc has a dividend yield of 8% and dividend cover of 2.4. What is the P/E ratio?
Much appreciated!
April 19, 2015 at 10:06 am #2417931 The market value is the present value of the expected receipts discounted at the investors required rate of return.
The expected receipts are the interest of 8% a year (so 32,000 per year) for 5 years; and the repayment of 440,000 in 5 years time. The market value is the present value of these flows, discount at 12%. Tax is not relevant – it is only relevant for the company when calculating the cost of debt. It does not affect the investors and it is the investors who fix the market value.
(The free lecture on the valuation of securities will help you)
April 19, 2015 at 10:12 am #2417942. PE ratio = MV / EPS
Dividend yield = dividend / MV, so MV = dividend / Divi yield
Dividend cover = EPS / Dividend, so EPS = Dividend x Dividend cover
So PE ratio = (dividend / divi yield) / (dividend x dividend cover)
= 1 / (divi yield x divi cover) = 1 / (0.08 x 2.4) = 5.21April 20, 2015 at 12:34 am #241866AnonymousInactive- Topics: 0
- Replies: 5
- ☆
Could you please explain how you worked out 1 and dividend = 0.08 ?
Thanks
April 20, 2015 at 8:00 am #241881For 1, I divided top and bottom by “dividend”
It is dividend yield that equals 0.08 (which is the same as 8%)
- AuthorPosts
- You must be logged in to reply to this topic.