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October 26, 2020 at 2:56 pm
is 16.86 not 18.86
John Moffat says
October 26, 2020 at 5:22 pm
What is ???
January 12, 2021 at 9:51 am
The fall of NPV from 6.06 to negative 10.22. Video reference @ 20:07
January 12, 2021 at 1:44 pm
You are quite correct and I have made a silly mistake in the lecture – I must re-record it. I should have used 16.28 instead of 18.28 and so the answer is slightly different (but the printed answer in the lecture notes does have the correct answer). Sorry about that.
(Although (and I am not using this as an excuse) I would still have almost certainly got full marks in the exam despite the mistake because the approach was correct and the difference it makes is minimal (and the answer is of course only ever an approximation anyway ? ))
October 6, 2020 at 10:38 pm
So since we’re considering both the rate and the premium with IRR in redeemable, am I correct to assume that the Cost of Irredeemable debts is in fact effective rate of interest?
October 6, 2020 at 10:40 pm
Sorry, cost of redeemable debts.
Great lecture. Very clear!
October 7, 2020 at 8:20 am
Yes – it is the effective rate of interest the company is paying. (The effective interest being received by the investor is the IRR of the pre-tax flows)
October 8, 2020 at 10:52 pm
Okay. Thank you. ^^
October 9, 2020 at 8:39 am
You are welcome 🙂
February 4, 2020 at 7:33 am
Thanks for the excellent lecture.
Just wondering are we allowed to take a financial calculator into the exam? Thanks heaps!
February 4, 2020 at 7:36 am
It is a scientific calculator that you need for the exam, not a financial calculator.
Two things – one is that whatever calculator you use it must display only numbers and not letters. The other is that you still need to show workings because it is the workings that get the marks and not the final answer.
Thanks for the comment 🙂
February 9, 2020 at 8:54 am
Thank you 🙂
February 9, 2020 at 9:46 am
October 3, 2019 at 4:24 pm
Dear sir, In case of making loss in fiscal year, is there still tax relief for the interest paid or a recalculation of interest rate for business review? Please kindly enlighten me this. Thank you very much.
October 4, 2019 at 8:26 am
It would only be relevant if the business as a whole made a loss (not just the project in question). However for the exam we assume that we always get the tax relief on the interest.
September 24, 2019 at 2:59 pm
since the premium of 10% can be accounted as an interest, wouldn’t the premium be tax allowable too?
September 24, 2019 at 3:02 pm
sorry, the answer was already in the comments.
September 24, 2019 at 3:48 pm
No problem – I am pleased that you found the answer 🙂
September 24, 2019 at 1:53 pm
Hello Sir, In redeemable debt part b, as suggested if take +85 and other cashflows negative the NPV turns out to be Positive. in this case will the company issue debentures? whereas if we take -85 the NPV is -ve. Will the decision change?
September 24, 2019 at 3:49 pm
What decision? 🙂
As far as the IRR is concerned it will not change – the IRR is when the NPV is equal to zero and minus zero is still zero 🙂
September 25, 2019 at 10:30 am
Decision about whether the Gplc shall issue debentures or not. I have this understanding that if IRR is greater than Cost of capital then the company shall issue the debentures and if the case is vice versa then the company shall refrain from doing so.
Due to this understanding i had a doubt that if we get different IRR(+ve/-ve) with different approaches which shall be considered?
please correct me if i have understood it incorrectly.
September 25, 2019 at 1:52 pm
But what you have written is not the case. If the company needs to raise money then they have the choice of issuing debentures or using equity finance. We do not compare with the cost of capital (the cost of capital will change anyway depending on how finance is raised).
As far as the IRR is concerned I repeat what I said before – the IRR will be the same regardless of the approach taken!
It may help you to watch my free Paper FM (was F9) lectures on this, because this is revision of Paper FM.
September 26, 2019 at 2:45 pm
Thank you very much. It did help clear my concept.
September 26, 2019 at 3:12 pm
March 25, 2019 at 7:32 pm
With redeemable debt, why cant you claim tax relief on any premium you pay at the end of the term? I.e. take out a loan with a nominal value of $100 and 10% premium, at the end of the term you pay $110. Why cant you claim tax relief on thr extra $10 which is effectively interest paid on maturity?
November 2, 2018 at 10:14 am
how did we got 18.28 i just can,t seem to understand this concept
November 2, 2018 at 2:16 pm
It is the difference between the NPV at 10% (+6.22) and the NPV at 15% (-10.22).
If you have forgotten IRR calculations then looking at the relevant MA (F2) and FM (F9) lectures will remind you.
January 20, 2020 at 2:11 pm
But the difference between +6.06 – (-10.22) = 16.28? So how come it is 18.28 in this instance? I don’t get it at all
January 20, 2020 at 3:36 pm
You are quite correct and I have made a silly mistake in the lecture – I must re-record it. I should have used 16.28 instead of 18.28 and so the answer is slightly different (and the printed answer in the lecture notes does have the correct answer). Sorry about that.
(Although (and I am not using this as an excuse) I would still have almost certainly got full marks in the exam despite the mistake because the approach was correct and the difference it makes is minimal (and the answer is of course only ever an approximation anyway 🙂 ))
May 6, 2020 at 2:21 pm
thanks for clearing that up.
May 6, 2020 at 3:05 pm
No problem 🙂
September 14, 2018 at 11:39 pm
With regards to example 8, part a, I don’t understand why the PV should equal zero. Shouldn’t the PV be positive for an investor to want to invest?
September 15, 2018 at 10:24 am
Good heavens, no !!
The amount investors will be prepared to pay is the PV of the future expected receipts discounted at their required rate of return.
I suggest that you watch the Paper FM lectures on the valuation of securities, because this is revision from Paper FM (F9).
September 3, 2018 at 6:32 pm
Please what’s the difference between yield to maturity and cost of debt
September 4, 2018 at 8:09 am
The first is the return to investors, the second is the cost to the company.
August 16, 2018 at 7:45 pm
How did you get 18.08?? This is my first time seeing IRR calculated like so.
August 16, 2018 at 7:56 pm
March 25, 2019 at 7:57 pm
Because that is UK tax law!
The interest is tax allowable but the premium is not tax allowable.
July 23, 2019 at 4:18 pm
It’s 16.86 not 18.86
Nigel Wilson says
August 12, 2018 at 10:04 am
For example 8(a) the answer is 11.86% not 11.66%. The movement in NPV is -16.28 and not -18.28, due to which the answer you getting is 11.66%
August 12, 2018 at 1:55 pm
Thanks – I will correct it when I have time. However the answer printed in the lecture notes is correct at 11.86% 🙂
July 29, 2018 at 3:35 pm
Very clear, thank you!
July 30, 2018 at 7:21 am
Thank you for your comment 🙂
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