QN5. the issued share is supposed to be. 200,000/0.5= 400,000.
Help me to understand. Sir
J
John MoffatTutor·
$0.50 is the nominal (par) value per share.That is not the market value, which is $2.40 per share.
The question says that there are 200,000 shares.
Y
Yokheshwari·
shouldn't the market value be (200,000/0.50)*$2.40 ? why did't you consider nominal value
J
John MoffatTutor·
There are 200,000 shares. The MV is $2.40 per share. Therefore the total market value if 200,000 x $2.40 = $480,000. The nominal value is of no relevance.
(Have you watched the free lectures on the calculation of the WACC?)
D
David·
Hi sir, where does the 7 per annum in q3 come from?
J
John MoffatTutor·
The coupon rate is 10%, there is tax at 30%, so the net interest cost to the company on $100 nominal is 70% x 10 = 7 per year.
Did you watch the free lectures on this before attempting the test?
J
Jones·
Nice Test
J
John MoffatTutor·
:-)
N
naveedicaew·
Sir i am not getting 5 percent growth rate in question 2. Kindly help. When i take root (36/33.1)^.3333 i get different answer.
J
John MoffatTutor·
I don't know where you are getting 33.1 from.
It should be (36/31.1)^0.33333 - 1 = 0.05 (or 5%)
R
roxaana·
sir in question 3 ,
I don't get why we multiply 36 by 1.05
why do we not just divide 36 by 540 and then add the 0.05
R
roxaana·
sorry i meant question2
J
John MoffatTutor·
Because that is what the formula provided on the formula sheet requires!! Did you not watch the free lectures first?
F
Fedde·
Sir there is an issue with the question 3 answer. The annuity df for 5 yrs is 3.791, not 3.761 as you stated in a previous comment. The npv @10% is $ -4.847 .The irr will come to 12.89%
F
Fedde·
The npv @10% is *$ + 4.847
J
John MoffatTutor·
I assume that you are referring to my comment from 2017. There was indeed a mistake in my comment and I have now corrected it. The IRR is not 12.89% however. It is 11.45%.
A
Ahmed·
Hello Sir,
Can you please explain how the IRR is 11.45% and not 12.9%? Because I also got 12.9% as my answer and am very confused. Thanks.
N
Naledi·
Thank you so much for your brilliant lecture Mr John.I failed(44%) FM December 2020.I have a question which i was suppose to calculate Wacc.There were saying the share price grows at 5% for 5 years in perpetuity,the question was on convertible debts.I would like to know if i was suppose to use that 5% growth as growth for calculating cost of Equity too,because i only used the 5% for redeemption purpose only in the exam.
J
John MoffatTutor·
The only relevant of the growth in the share price when calculating the cost of debt is to decide whether on redemption they will be taking cash or taking shares (worth whatever their expected value is after inflating at 5% per annum). Obviously they will be expected to choose whichever is the higher and then cost of debt will then be calculated on that basis.
N
Naledi·
Thank you so much Mr. John, I now understand clearly. God bless you .
J
John MoffatTutor·
You are welcome :-)
E
eceesay·
Hi John,
I am a little bit confuse as to when to use post tax and pre tax when calculating the cost of debt. I did watch your free lectures about a thousand and one times but to avail.
COULD YOU PLEASE HELP IN THIS INSTANCE BY EXPLAINING IT TO ME. Looking forward to your swift response.
J
John MoffatTutor·
The cost of debt is always calculated post tax. It is the return to investors that is pre-tax.
E
eceesay·
Hi John,
Am so grateful thanks.
J
John MoffatTutor·
You are welcome :-)
S
SOLANKAR·
80percent
D
draganel·
Hi, I'm confused in Q5, we have 200,000 in issue by nominal 0.5 c, why in responses is multiplied 200,000 by 2.40. I think should be 200,000/0.5*2.40. Am I write? Can you help me please here?
J
John MoffatTutor·
No you are not right.
The question says that there are 200,000 shares. (You would only have been right if the question had said that the nominal (balance sheet value) of the shares was $200,000)
D
draganel·
Oooo thank's a lot, it is tricky, and i should be more attentive
J
John MoffatTutor·
You are welcome :-)
I
ijastb27·
why is IRR calculated for q3 ?
J
John MoffatTutor·
Because that is how we always calculate the cost of redeemable or convertible debt!
Have you not watched the free lectures on this?
C
Cherry·
Sir with regards to question 2 chp 17, i dont understand how u got the cube root to b 5. I am getting an answer of 5.5.If i were to round it up it would have been '6'.Please explain .
J
John MoffatTutor·
You must be doing something wrong on your calculator. The cube root of 36.0/31.1 is 1.04998. Therefore g is indeed 5%.
N
natoyaworkin·
hi john for q 3 i don't understand why choice 90pc for mv
J
John MoffatTutor·
The first sentence of the question says that the market value is 90.
Did you watch my free lectures on this before attempting the test?
N
natoyaworkin·
hi john for q 2 how do you get 5% for growth 36/31.1is 1.157556 gi am trying to find the cube but not finding it
J
John MoffatTutor·
You do need to have a scientific calculator, and it will have a cube root button.
N
natoyaworkin·
sir thank you i get it was so worried i would not get it
J
John MoffatTutor·
You are welcome :-)
S
SAHANA·
dear sir, in question no. 1 why the answer is not 8% they have told in one years time know sir? so the formula will be
D1/Po+G
J
John MoffatTutor·
33.6/420 + 0.05 equals 13%, not 8% !!
S
SAHANA·
ohh thank u so much
J
John MoffatTutor·
You are welcome :-)
C
Coco·
I have a question regarding Quizz question 5. When you compute the MV of debt, you do 200.000 * 90/100 = 180.000$. But but shouldn't it be multiplied by 100 ? Because the market value of debt is as said 90p.c which is 90%*100 = 90 instead of 0,9.
Therefore, i get a WACC of 7,20% which is not within the answers proposed... It get me confused.
Thanks in advance,
Kr
J
John MoffatTutor·
The market value is $90 for every $100 nominal.
Therefore $200 nominal is worth $180; $300 nominal is worth $240, and so on.
$200,000 nominal is worth 200,000 x 90/100 = $180,000.
Think about it, if the value of $100 nominal is only $90, how on earth can the value of $200,000 nominal be more than $200,000!!!
R
rinta·
In question why the share price is taken as 420 instead of 4.20....?
R
rinta·
In question.1) why the share price is taken as 420 intead of 4.20?
J
John MoffatTutor·
It doesn't matter whether you put the share price and the dividend both in $'s (so $4.20 and $0.32) or both in cents (so 420 and 32) - the answer is the same.
(Did you actually watch my free lectures before attempting the test? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
F
fola94·
I would appreciate it if I could get a detailed explanation for Question 3. I do not seem to understand how the NPV figures were arrived at. Thank you so much John.
J
John MoffatTutor·
The correct figures are:
At 10%, the NPV = - 90 + (7 x 3.791) + (110 x 0.621) = 4.85
At 15%, the NPV = -90 + (7 x 3.352) + (110 x 0.497) = -11.87
The IRR = 10 + (4.85 / (4.85 + 11.87)) x 5 = 11.45%
F
fola94·
Please, has question 3 been corrected?
I do not seem to understand as to how you arrived at the NPVs listed in the correction that comes up after selecting the wrong answer.
Question one why not 8percent?
By rearranging the formula
I got
re = D(1+g)/(P-g)
J
John MoffatTutor·
You have rearranged the formula wrongly.
If you watch my free lecture, you will see that rearranging the formula gives:
Re = (Do(1+g) / P ) + g
I do suggest you watch the lecture because this is an incredibly common question in the exam!!
N
nikkyrykiel·
Dear John,
Thank you for organizing those quizes. They helped a lot
I was able to significantly improve my knowledges and restore everything I knew before in a short time.
<3 <3 <3
J
John MoffatTutor·
I am pleased they have helped you :-)
I
ifeoluwapo·
Please I would like to know the formula used to arrive @ the cost of equity for question 1
A
Amit·
Question 3
IRR of the flows:
0 M.V. (90)
1-5 Int. 7 per annum (because tax allowable)
5 Repayment 110
In your calculation debt interest is not tax adjusted; i am confused sir. Pls kindly explain.
J
John MoffatTutor·
Sorry - you are correct and it is a mistake.
I will have it corrected - thank you for pointing it out.
L
loong·
question 3 of 5 CHAPTER 17 PRACTISE QUESTIONS
The NPV that i get by using discount factor 10% was 16.22 but not 6.22.
therefore the final answer I get 15.1%
J
John MoffatTutor·
You are correct - the NPV at 10% is 16.22.
However that gives the correct IRR as 14.50%.
Thanks for spotting the error - I will have it corrected.
A
artid1·
question 2 of 5 CHAPTER 17 PRACTISE QUESTIONS
Please can you explain why the cost of equity is 12%? how is the calculation done?
thank you
J
John MoffatTutor·
g = (cubed root of 36.0/31.1) - 1 = 0.05 or 5%
Cost of equity = ((36.0 x 1.05) / 540) + 0.05 = 0.12 or 12%
(I am currently entering workings so that when you submit an answer, the software will show the working for the correct answer. So far this is happening for the first 10 tests, but it will happen for all the tests within a few more days :-) )
C
chandni·
Dear Sir,
I would like to know why 540 is being used instead of 5.40.
J
John MoffatTutor·
Because I have shown all the workings in cents!!!
By all means show them in dollars (dividend = 0.36, MV = $5.40) and you will get exactly the same answer!!!!
J
John MoffatTutor·
The question says that there are 200,000 shares (not 400,000). (It does not say that the nominal value is $200,000)
Therefore the total market value of the equity is 200,000 x 2.40 = $480,000
The market value of the debt is $180,000.
Therefore the WACC = (480,000/(480,000+180,000)) x 15%) + ((180,000/(480,000 + 180,000)) x 7%) = 12.82%
C
chenweijosh·
Hi John
Thank you for explaining!
Such is a careless mistake of mine.
J
John MoffatTutor·
You are welcome :-)
S
swweex·
I just read the exact same thing for this. I saw it as $200,000 worth of shares not just 200,000 shares. Which I do all the time, I don't read the question properly!! At least I know what I'm doing wrong :)
J
John MoffatTutor·
The more you make mistakes, then less chance that you will make them in the exam :-)
Help me to understand. Sir
The question says that there are 200,000 shares.
(Have you watched the free lectures on the calculation of the WACC?)
Did you watch the free lectures on this before attempting the test?
It should be (36/31.1)^0.33333 - 1 = 0.05 (or 5%)
I don't get why we multiply 36 by 1.05
why do we not just divide 36 by 540 and then add the 0.05
Can you please explain how the IRR is 11.45% and not 12.9%? Because I also got 12.9% as my answer and am very confused. Thanks.
I am a little bit confuse as to when to use post tax and pre tax when calculating the cost of debt. I did watch your free lectures about a thousand and one times but to avail.
COULD YOU PLEASE HELP IN THIS INSTANCE BY EXPLAINING IT TO ME. Looking forward to your swift response.
Am so grateful thanks.
The question says that there are 200,000 shares. (You would only have been right if the question had said that the nominal (balance sheet value) of the shares was $200,000)
Have you not watched the free lectures on this?
Did you watch my free lectures on this before attempting the test?
D1/Po+G
Therefore, i get a WACC of 7,20% which is not within the answers proposed... It get me confused.
Thanks in advance,
Kr
Therefore $200 nominal is worth $180; $300 nominal is worth $240, and so on.
$200,000 nominal is worth 200,000 x 90/100 = $180,000.
Think about it, if the value of $100 nominal is only $90, how on earth can the value of $200,000 nominal be more than $200,000!!!
(Did you actually watch my free lectures before attempting the test? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
At 10%, the NPV = - 90 + (7 x 3.791) + (110 x 0.621) = 4.85
At 15%, the NPV = -90 + (7 x 3.352) + (110 x 0.497) = -11.87
The IRR = 10 + (4.85 / (4.85 + 11.87)) x 5 = 11.45%
I do not seem to understand as to how you arrived at the NPVs listed in the correction that comes up after selecting the wrong answer.
I got:
d.f. PV@10% d.f. PV@5%
0 MV (90) 1 (90) 1 (90)
1-5 Int 7 3.791 26.54 4.329 30.30
5 Red 110 0.521 57.31 0.784 86.24
NPV= -6.15 NPV= 26.54
By rearranging the formula
I got
re = D(1+g)/(P-g)
If you watch my free lecture, you will see that rearranging the formula gives:
Re = (Do(1+g) / P ) + g
I do suggest you watch the lecture because this is an incredibly common question in the exam!!
Thank you for organizing those quizes. They helped a lot
I was able to significantly improve my knowledges and restore everything I knew before in a short time.
<3 <3 <3
IRR of the flows:
0 M.V. (90)
1-5 Int. 7 per annum (because tax allowable)
5 Repayment 110
In your calculation debt interest is not tax adjusted; i am confused sir. Pls kindly explain.
I will have it corrected - thank you for pointing it out.
The NPV that i get by using discount factor 10% was 16.22 but not 6.22.
therefore the final answer I get 15.1%
However that gives the correct IRR as 14.50%.
Thanks for spotting the error - I will have it corrected.
Please can you explain why the cost of equity is 12%? how is the calculation done?
thank you
Cost of equity = ((36.0 x 1.05) / 540) + 0.05 = 0.12 or 12%
(I am currently entering workings so that when you submit an answer, the software will show the working for the correct answer. So far this is happening for the first 10 tests, but it will happen for all the tests within a few more days :-) )
I would like to know why 540 is being used instead of 5.40.
By all means show them in dollars (dividend = 0.36, MV = $5.40) and you will get exactly the same answer!!!!
Therefore the total market value of the equity is 200,000 x 2.40 = $480,000
The market value of the debt is $180,000.
Therefore the WACC = (480,000/(480,000+180,000)) x 15%) + ((180,000/(480,000 + 180,000)) x 7%) = 12.82%
Thank you for explaining!
Such is a careless mistake of mine.