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Hi Sir
I have 3 questions regarding the mock test:
1. A company has $400000 of 8% redeemable bonds in 5 years at a premium of 10%. Investor required rate of return is 12%, corporation tax 35%. What is the total MV of debt in issue?
2. A company just paid divided of $0.23 and expect the remain for next year. But there is a growth rate of 3% thereafter. Shareholder required rate of return is 2 and corporation tax is 25%. What is current MV per share?
3. 6% redeemable bond quoted at $120 ex int. What is the interest yield and redemption yield/.
Thank you so much for your time and help
1. The market value is the PV of the future receipts. I always do it for $100 nominal first – so the receipts are $8 per year for 5 years and then $110 in 5 years time. Discount these at 12%. When you have it for $100 nominal, the total market value will be $400,000/100 time the figure.
(Tax is irrelevant. Investors determine the market value, and they get the full receipts. Tax is only relevant when calculating the cost of debt, because the company gets tax relief on the interest.)2. Us the growth model formula with Do = 0.23; g = 3%; Re = 12%.
However, this would give the MV if growth began immediately. Here it starts in 1 years time, so it gives the value in 1 year. So add this to the 0.23 dividend in 1 year and discount the total at 12% to get the MV now.3 Interest yield is 6/120 = 5%. You cannot be asked to calculate the redemption yield, but you are expected to know that it takes account of the interest and the gain or loss on repayment. In this question, the MV is 120 and the repayment will be 100, so a loss on repayment, so the redemption yield will be less than 5%. Only one of the choices satisfies this.
Thank you so much for your answer. They are very clear and helpful.
I have 1 more questio. regarding to EOQ:
Demand for 1 month is 7500, cost $100/ order, purchase price is $5, holding cost is 10% purchase price per unit.
Lead time of 30 days/
If they order EOQ each time, at what level of inventory should a new order be placed? and how frequently they will place an order?
Thanks and all the best !
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