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Hi sir
In bpp solution, when calculating the cost of the the finance source b), the bank loan, they calc the IRR.
I seem to recall That the cost of bank loans is normally the interest x (1-t)…is the difference here that the loan is redeemable?Thanks
Same question, for financ resource f, the floating rate 6 yr loan, the cost if calculated as L+3 * (1-t)….no IRR calc done??
…is the IRR calculation not need here because the loan is floating whereas the loan in option b) is fixed??
1. With regard to the bank loan, usually it is interest x (1-t). The reason that here it is the IRR is not because it is redeemable (bank loans are always repayable) but because there is the extra payment of the initial fee (in addition to the normal interest payments).
2. Yes – it is because it is floating 🙂
Sir, do I understand correctly that we recieve in Y0 44,48 from the bank. Then in accourdance with loan agreement interest is accrued on grossed-up amount 44,48/99*100*0.07 = 3,14 and paid to the bank annually
And then in 5 years we repay principle 44,48 and fee calculated based on grossed up amount 44,48/99*100**0,01 = 0,443
Which gives in total 44,93???
Why there is a so strange way for the fee calculation? And interest calculation? Is this the way of fee and principle calculation expected from candidates? It is unclear from the requirement that it should be calculated in that way…
Sir, regarding (c) issuing commercial paper –
Why do not we calculate irr there?It is also unclear how much cash will raised in Y0? 15m usd? Or discount should be applied… What amount is repayble in 1 year time?
@petrochina said:
Sir, do I understand correctly that we recieve in Y0 44,48 from the bank. Then in accourdance with loan agreement interest is accrued on grossed-up amount 44,48/99*100*0.07 = 3,14 and paid to the bank annuallyAnd then in 5 years we repay principle 44,48 and fee calculated based on grossed up amount 44,48/99*100**0,01 = 0,443
Which gives in total 44,93???
Why there is a so strange way for the fee calculation? And interest calculation? Is this the way of fee and principle calculation expected from candidates? It is unclear from the requirement that it should be calculated in that way…
Sir, do not answer for that part, I got it
As 44,48 accounts for 99% so we need to borrow 44,93 (100%) less 1% fee paid would give us 44,48
With regard to the commercial paper – you don’t need an IRR (and can’t calculate one anyway) because the interest rate is given in the question. There is no premium on redemption or anything, so it is like a bank loan.
They are able to borrow up to $15M
Thank you, I will assume that in that question Commercial paper issued at par. May be it is an old question and we do not need to pay too much attention to it but BPP and Investopedia says commercial papers are issued at a discount:
Hi sir, i have a few questions on this question.
1. In the irr calculation For fixed rate sterling loan, issue net of issue costs is given 44.48..isnt it supposed
To be 44.93?2. The calculation of the amount raised in the swiss franc loan is 80(1-0.03)/2.298..why is it not [80×100/97]/2.298?
1. Strictly the answer is right because although the issue was for 44.93 (and that is what the interest is charged on, and is the amount of the repayment) the issue costs of 1% x 44.93 are part of the costs and therefore make the cost of debt a little bit higher.
I doubt that you would have lost any marks at all is you had used 44.48 (and the IRR would have been only a tiny bit different).2. The wording in the question is not really clear. The examiners answer has assumed that because it is a bank loan then the 3% is charged on the amount of the loan.
The important thing in the exam is to state what you have assumed (which is why certainly Q1 in the exam almost always specifically asks you to state your assumptions). If your assumptions are reasonable then you still get the marks (even if your answer ends up being a bit different as a result).
(This question was set a long time ago and the examiner has changed twice since then. The current examiner is usually much clearer in the questions.)
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