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For ACCA AFM revision kit, question 34 Bento (6/15), (b) section:
Please may I know how do I get the finance costs of $3,600 (year 1), $3,067 (year 2), $2,492 (year 3), and $1,871 (year 4) as stated in the answer?
Thank you.
The ACCA does not produce any Revision Kits – only BPP and Kaplan produce approved kits 🙂
The interest on the 8% loan is as calculated in the first part of the answer to part (b). Because the $30M loan (together with interest) is repayable in equal instalments, the amount of the repayment each year is the amount of the loan divided by the 4 year annuity factor at 8%). This is because however a loan is being repaid, the PV of the repayments (including interest) must always equal the amount borrowed.
So at the end of the first year, the interest added on is 8% of the 30,000 borrowed. The repayment is subtracted leaving 23,342 still owing at the start of the second year. The interest added at the end of the second year is 8% of the 23,342, and the repayment is subtracted, and so on each year.
In addition to the interest on the 8% load, there is interest on the 6% bond which is 6% x 20,000 = $1,200 each year.
By the way, for the book value of debt of $43,342, I realized that it is the sum of $20,000 + $23,342. I understand that the $23,342 is the closing loan balance as calculated above (after adding $2,400 interest and deducting $9,058 annuity payable). But how about $20,000? Why is there no interest of 6% included, but the original amount of $20,000 is used?
Thank you.
It because with the 20,000 there is no repayment until the end of the loan. Each year all they do is pay the interest on the 20,000 and the amount outstanding remains at 20,000.
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