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The cost of capital (part 2) – ACCA (AFM) lectures

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      • 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 ? ))

  4. 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.

  6. 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.

  7. 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 🙂 ))

    • 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).

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