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The following are extracts from the statement of financial position of a company:
$000 $000
Equity
Ordinary shares 8,000
Reserves 20,000
––––––
28,000
Non?current liabilities
Bonds 4,000
Bank loans 6,200
Preference shares 2,000
––––––
12,200
Current liabilities
Overdraft 1,000
Trade payables 1,500
––––––
2,500
––––––
Total equity and liabilities 42,700
––––––
The ordinary shares have a nominal value of 50 cents per share and are trading at $5.00 per
share. The preference shares have a nominal value of $1.00 per share and are trading at
80 cents per share. The bonds have a nominal value of $100 and are trading at $105 per
bond.
What is the market value based gearing of the company, defined as prior charge capital /
equity?
A 15.0%
B 13.0%
C 11.8%
D 7.3%In the denominator , the market value of equity is calculated as $8000* $5 * $2. I didn’t understand why we multiply by 2.
2.
Country X uses the dollar as its currency and country Y uses the dinar.
Country X’s expected inflation rate is 5% per year, compared to 2% per year in country Y.
Country Y’s nominal interest rate is 4% per year and the current spot exchange rate
between the two countries is 1.5000 dinar per $1.
According to the four?way equivalence model, which of the following statements is/are
true?
1 Country X’s nominal interest rate should be 7.06% per year
2 The future (expected) spot rate after one year should be 1.4571 dinar per $1
3 Country X’s real interest rate should be higher than that of country Y
A 1 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3I’m clear about the 2nd option. Could you explain how to calculate nominal rate and real interest rate…ie option A and option B. I don’t get the calculation given in the kit.
1. The shares have a nominal value of 50 cents and therefore the number of shares is 8,000/0.50 = 16,000.
2. The real interest rates (i.e. without inflation) should be the same in both countries, so (3) Is not correct.
Using the Fisher formula, where r is the real interest rate, then for country Y: 1+ r = 1.04/1.02
Using the same formula for country X, then where h is the nominal rate: 1+ h = 1.05 x 1.04/1.02 = 1.0706, so the nominal rate = 0.0706 or 7.06%
(I do explain the use of the Fisher formula in my free lectures on investment appraisal with inflation.)
The answer for 1st answer is 15%
In the kit, gearing is calculated as (4000*1.05)+ 6200+(2000*0.8)/(8000*2*5)= 12,000/80,000 = 15%
I know already what you have said , but i didn’t get why they multiply it by 2 in the denominator..?
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