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Hello John,
Greetings.
First question – Could you please very kindly (and urgently) explain the following conundrum: in question 3 (a) of the F9 March June 2016 hybrid examination answer, the ACCA examiner stated as follows – ‘the expected market value of $990.82 per loan note at the end of seven years (0.926 x $1,070).’
I do not understand how or why the examiner chose $1,070 or multiplied by 0.926 to get $990.82. I understand the other parts of the calculation including redemption of the bond and conversion to equity. A scan of the PV of 1 table shows that 0.926 corresponds to a discount rate of 8% and a period of 1. Why period 1 and why $1,070? Thanks.
Second question – under NPV, when calculating tax allowable depreciation benefits for depreciation on a reducing balance basis, we deduct the scrap value for the figure for the final year. If it is instead straight line depreciation that has a scrap value, do we deduct the scrap value before calculating the annual depreciation amounts and also therefore not deduct the scrap value for the figure for the final year?
Thanks.
Please do not ask for questions to be replied to urgently.
We state that we try to reply within 24 hours, and I always do. I cannot sit in front of my computer 24 hours a day 🙂1. If the loan notes are redeemed in 7 years time then they would be redeemed for $1,000 (they are not redeemed, but that is when they could be converted into shares).
If they waited for 8 years, then they would still be redeemed for $1,000 but there would also be an extra years interest at 7%, hence a total receipt of $1,070. This then need discounting for 1 year to get to a year 7 value in order to decide whether or not it is worth converting in 7 years time.2. For tax purposes, straight line depreciation should be calculated on the original cost (ignoring the scrap value). In one question, the examiner did in fact subtract the scrap value before calculating the depreciation, but he did state in his examiners comments (as you will no doubt have read) that full marks were given for ignoring the scrap value in the calculation.
Thanks John.
Sorry about the urgent comment.
And thanks a lot for your answers. I couldn’t have possibly imagined the answer to the first question, but it’s clear now. I actually had thought that the examiner had made a mistake!
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