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I have been trying to solve this question for sometime now and looking answer isn’t making any sense either.
The loan notes are currently trading at $106 and are redeemable at par in 5 years time.
And the balance sheet extract has 12% loan notes – $1500
Am really confused on how this 1500 was converted to the market value of $1590.
Can you please help me out here?
On the Statement of Financial Position (we do not call it the balance sheet) loan notes are always shown at their nominal value. As I explain in my free lectures, the nominal value of each loan note is always $100 (unless specifically told otherwise).
Therefore there are 1,500/100 = 15 loan notes, and the market value is 15 x $106 = $1,590.
I do suggest that you watch my free lectures. They are a complete free course and cover everything needed to be able to pass the exam well.
RS Ltd is considering using a machine made by BC Ltd. The machine would cost £60,000 and
at the end of a 4-year life is expected to have a resale value of £4,000, the money to be received
in year 5. It would save £29,000 per year over the method that RS Ltd currently uses. RS Ltd
expects to earn a DCF return of 20 per cent before tax on this type of investment.
RS Ltd is currently earning good profits, but does not expect to have £60,000 available
to spend on this machine over the next few years. It is subject to corporation tax at 35 per
cent and receives capital allowances of 25 per cent on a reducing balance basis.I have been having trouble understanding how the how the tax relief on Writing Down Allowance in the 5th year was equal to £7500.
Kindly help.In future please start a new thread when you are asking about a different topic, and please state the topic (it is because many students use our search box to see if their problem has already been answered 🙂 ).
The tax written down value after 3 years at 25% on a reducing balance basis is $25,315.
It is sold in the 4th year for $4,000, and therefore there is a balancing allowance of $21,313 in the 4th year. This gives rise to a tax saving of 35% x 21,313 = $7,459 and assuming that the question says that tax is payable one year in arrears, this will be at time 5. I can only assume that the answer has just rounded it to $7,500. Does the answer you have not show the workings?
Have you watched my free lectures on investment appraisal with tax where I explain the rules relating to capital allowances? As I wrote in my previous reply to you, the lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Alright Sir, I have taken note of that.
No sir it does not show the workings. It only shows the figures.
Yes I have, I just started watching them this week. They have proven to be very insightful.
Thank you.
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