I had a quick question regarding the calculation of annuity factor in Example 8 (Redeemable Debt). I know this can be obtained from the Annuity Table provided during the exam, but is there any way to calculate this on the Scientific Calculator to save some time? Any tips would be appreciated! Thanks in advance.

No company will retain 100% of its earnings for ever. At some stage they will pay a dividend.
Certainly they may retain 100% for a few years and therefore only pay dividends at some time in the future, in which case the MV will be the PV of rite future dividend as always.

Retained earnings are used to expand the company which leads to increases in profits which in turn leads to increases in dividends.
I do suggest that you watch the relevant Paper FM (was F9) lectures, because this is all revision from Paper FM.

You are quite correct and I have made a silly mistake in the lecture β 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 ? ))

I couldn’t reply to your post on 12 Jan 2021 at 13h44 below, so am doing so here.

I believe there to be a tiny error in the answer to Example 8 (b) on page 125 of the lecture notes – the math operator in the denominator of the term in brackets ought to be “+” not “x” –> “6.06 + 10.22” not “6.06 x 10.22”.

A quick question regarding how we might calculate the IRR in the CBE: Microsoft Excel has NPV and IRR formulae that enable one, in my opinion, to use the power of Excel and set out the answer in an easy-to-follow way. Are either of these formulae available in the CBE spreadsheet functionality?

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?

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)

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.

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.

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.

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?

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.

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.

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?

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 π ))

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?

thulasikaur says

Hi Sir,

through using ACCA spreadsheet platform IRR function, I got 10.67% for part (a) and 9.03% for part (b). Is my answer acceptable?

John Moffat says

Yes, of course π

nkengdieudonne says

Hello sir Moffat

Can I depend on these well explained notes and video for the December 2022 session??

??

John Moffat says

Yes you can π

nkengdieudonne says

Thanks sir

John Moffat says

You are welcome.

parvathinair195 says

Hi,

I had a quick question regarding the calculation of annuity factor in Example 8 (Redeemable Debt). I know this can be obtained from the Annuity Table provided during the exam, but is there any way to calculate this on the Scientific Calculator to save some time? Any tips would be appreciated! Thanks in advance.

gulabsagar says

how will i value a company share where 100% earnings is retained ?

John Moffat says

No company will retain 100% of its earnings for ever. At some stage they will pay a dividend.

Certainly they may retain 100% for a few years and therefore only pay dividends at some time in the future, in which case the MV will be the PV of rite future dividend as always.

gulabsagar says

why we discount only dividends to arrive at MV of share and not retained earnings , as retained earnings brings growth in MV of share too ?

John Moffat says

Retained earnings are used to expand the company which leads to increases in profits which in turn leads to increases in dividends.

I do suggest that you watch the relevant Paper FM (was F9) lectures, because this is all revision from Paper FM.

mbopentuition says

is 16.86 not 18.86

John Moffat says

What is ???

ATHAR97 says

The fall of NPV from 6.06 to negative 10.22. Video reference @ 20:07

John Moffat says

You are quite correct and I have made a silly mistake in the lecture β 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 ? ))

Mishern says

Hi John,

I couldn’t reply to your post on 12 Jan 2021 at 13h44 below, so am doing so here.

I believe there to be a tiny error in the answer to Example 8 (b) on page 125 of the lecture notes – the math operator in the denominator of the term in brackets ought to be “+” not “x” –> “6.06 + 10.22” not “6.06 x 10.22”.

A quick question regarding how we might calculate the IRR in the CBE: Microsoft Excel has NPV and IRR formulae that enable one, in my opinion, to use the power of Excel and set out the answer in an easy-to-follow way. Are either of these formulae available in the CBE spreadsheet functionality?

mehrfatima says

Hi,

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?

mehrfatima says

Sorry, cost of redeemable debts.

Great lecture. Very clear!

John Moffat says

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)

mehrfatima says

Okay. Thank you. ^^

John Moffat says

You are welcome π

jocelynjm says

Hi John,

Thanks for the excellent lecture.

Just wondering are we allowed to take a financial calculator into the exam? Thanks heaps!

John Moffat says

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 π

jocelynjm says

Thank you π

John Moffat says

You are welcome π

gnoii says

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.

John Moffat says

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.

ashrf16 says

since the premium of 10% can be accounted as an interest, wouldn’t the premium be tax allowable too?

ashrf16 says

sorry, the answer was already in the comments.

John Moffat says

No problem – I am pleased that you found the answer π

rohanmehta says

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?

John Moffat says

What decision? π

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 π

rohanmehta says

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.

John Moffat says

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.

rohanmehta says

Thank you very much. It did help clear my concept.

John Moffat says

You are welcome π

cswannell says

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?

wajahat14 says

how did we got 18.28 i just can,t seem to understand this concept

John Moffat says

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.

kaysonkod says

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

John Moffat says

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 π ))

Ruciegbunu says

thanks for clearing that up.

John Moffat says

No problem π

asher100 says

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?

John Moffat says

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).

kim says

Please what’s the difference between yield to maturity and cost of debt

John Moffat says

The first is the return to investors, the second is the cost to the company.

4tcube says

How did you get 18.08?? This is my first time seeing IRR calculated like so.

4tcube says

gotten it.

cswannell says

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?

John Moffat says

Because that is UK tax law!

The interest is tax allowable but the premium is not tax allowable.

salwa1786 says

Itβs 16.86 not 18.86

Nigel Wilson says

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%

John Moffat says

Thanks – I will correct it when I have time.

However the answer printed in the lecture notes is correct at 11.86% π

okssana says

Very clear, thank you!

John Moffat says

Thank you for your comment π