FM Chapter 12 Questions – Sources of finance – debt
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Hi Sir. please how did you arrive at the answer for q4?
If the debt had been irredeemable then the yield would have been 8/92 = 8.70%. Here is is redeemable and is redeemed at an amount higher than the MV of 92. Therefore the yield must be higher than 8.70% and only one of the choices is higher.
Greetings.
Could you be kind enough to give the exegesis behind the choice of rankings in Q2 ? Risk of highest to lowest from lender’s perspective ? Please do generously polish our rusted memory from past studies.
You presumably know what each of the four types of investor are, in which case the order in the answer is the order in which they will get repaid if the company closes down as per company law.
Hi John, could you please throw more light on the ranking in question 1
Hi John, for question 3 the formulae you used in calculating the interest yield, I thought the formulae was for the irredeemable shares, and that for the redeemable shares, we calculate the interest yield with the formulae similar to that of IRR
The IRR is the overall return to investors (the redemption yield). The interest yield it the interest as a % of the market value.
How the trade payables are riskier than the secured loans ?
Honestly, the best lectures.
I have been studying now for 3 months with other providers on fm and I was getting so stressed because I couldnt understand the material.
John, your lectures are really, really good!
Nina
Dear John –
In relation to Q #4: in the lecture notes it is mentioned that we “will not be required to calculate the redemption yield” – only expected to understand what it represents. Why then a question on calculating the redemption yield in the test questions?
Thank you!
Ah – after reading through the answers for the question it makes sense. The question alone confused me.
i didnt understand question number 5. How the answer is 10,000. Please explain
The question says that the debentures are redeemable at par and the par value (nominal value) is given as being $10,000.
This is more than the shares will be worth if they convert, and so they will choose not to convert and take the cash.
Did you not watch my free lecture before attempting the test?
Thank u very much!!
You are welcome 🙂
Hi John, at the time of repayment when we have an option to convert to shares, will the number of shares be multiplied by the number of debentures held by the person so as to get the value of shares?
We could, but in the exam we calculate the value for one $100 debenture.
hello john
A simple question .The par value per debenture is 100 as far as understand in question 5.
This is not stated .Is it always true? please let me know .
Thank you for your time
Yes – the nominal/par value is always $100 unless stated otherwise.
I do state this in my free lectures – the lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
Hi there, in question 3 what is the formula for interest yield that is used to calculate the answer?
Thanks for your help,
Ruby
It is the coupon rate divided by the market value.
(I do go through this in my free lectures – the lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
on question 5 why has the interest of 10000*0.06=600 been ignored? i thought the answer should be 10600.
You are correct on saying that the holder will receive interest.
The question should be clearer in specifying that what is required is the amount receivable on maturity.