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How to calculate spread in the calculator? Because every time it doesn’t give the right answer neither in standard calculator nor in scientific calculator?
Arwin plans to raise $5m in order to expand its existing chain of retail outlets. It can raise
the finance by issuing 10% loan stock redeemable in ten years’ time, or by a rights issue at
$4.00 per share. The current financial statements of Arwin are as follows:Statement of profit or loss for the last year
$000
Sales revenue 50,000
Cost of sales 30,000
––––––––
Gross profit 20,000
Administration costs 14,000
––––––––
Profit before interest and tax 6,000
Interest 300
––––––––
Profit before tax 5,700
Taxation at 30% 1,710
––––––––
Profit after tax 3,990
––––––––
Changes in equity
$000
Dividends 2,394
Net change in equity (retained profits) 1,596
Statement of financial position
$000
Net non?current assets 20,100
Net current assets 4,960
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25,060
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Ordinary shares, nominal value 25¢ 2,500
Retained profit 20,060
12% loan stock (redeemable in six years) 2,500
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25,060
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The business expansion is expected to increase sales volumes by 12% in the first year, with
no change in sales price. Variable cost of sales makes up 85% of cost of sales.
Administration costs will increase by 5% due to new staff appointments. Arwin has a policy
of paying out 60% of profit after tax as dividends and has no overdraftHow to calculate Debt finance under equity?
I do not understand your question for several reasons.
Firstly, ‘spread’ can be measured in several ways (and the calculations are explained in the Paper MA lectures), but is not asked in the Paper FM exam.
Secondly, the question Arwin was asked in the 2004 exam (19 years ago!!) and required forecast income statements and the calculation of financial ratios. The calculation of ‘spread’ did not come into it. You ask ‘how to calculate debt finance under equity’ which does not make sense because debt finance is not equity! The nominal value of the debt finance is 2,500 directly from the SOFP. The actual value can not be calculated because the question does not give the market value of the debt.
Well , yeah, Spread is not part of this question. I jaz want to know how do i calculate spread in the calculator using the formula given in the kit ( long formula) becoz most of the times it doesn’t show a correct value ?
But how are you wanting to define spread? (Do you mean the standard deviation, or the range, or the mean deviation).
And why do you want to know given that it is not asked for in Paper FM?
I show how to calculate the standard deviation, the mean deviation and the range in my free Paper MA lectures.
There are question in the kit for calculating spread.
Spread = 3(3/4*Transaction cost *variance of cashflows/Int rate)^1/3
Please start new threads when you are asking about different topics.
The formula you now quote is specifically (and only) relating to questions on the Miller Orr approach to cash management.
I explain it, and the calculation, in my free lectures on cash management. You really cannot expect me to answer questions unless you have watched the lectures!
K.
There is a doubt regarding Arwin Co. Do i have to use all the possible methods to find the ratiosFor example , Financial risk can be measured using Debt/equity and capital gearing.
So, Do i have to show the workings of both these methods?No. You can calculate the gearing as either debt/equity or as debt/(equity + debt). Either will get the marks, unless the question specifies which is wanted (which is not the case in Arwin), Most of the marks are for the discussion which will be the same whichever way you choose to measure the gearing.
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