[htung00]

Thanks for the reply.

Continuing with the practice questions I noticed that in PQ 8 part b a different method is used to calculate the net effect of using the currency options.

Instead leaving the transaction at risk then adding the gain and subtracting the premium (converted on the day of purchasing the option) the answer works it out as if we excercise the option and make the payment using the funds from the option including the premium and any remaining amount is converted on transaction day to be added/subtracted from the contract amount.

The two methods create two different answers, is the one in the suggested answers wrong?

Also there is an error for the 3 month amount, it should be a recievable amount and not payable.

[htung00]

Can’t seem to find the edit post button, so I’ll have to triple post.

Onto Question 5 now:

For calculating the market value of an ungeared company we are given a forumula MVU= MVG -DT.

I understand the logic is that the value of an ungeared company is equal to that of the same company geared without it’s tax benefit from debt.

What I don’t understand still is why the tax benefit portion is “DT” and not a perpetuity of the INTEREST discounted at the risk free rate. We should only get tax benefit on interest not on the full debt amount so this really confuses me.

[htung00]

I have another question regarding the practice questions, this time Question 2 part d.

In the calculation for cost of debt there is an interest payment at year 0, is it normal for the interest at year 0 to be non tax deductible and the full amount of interest to be deducted from the total debt value?

My value for Y0 is 100(0.95) – 5(1-0.35) = 91.75

[htung00]

@johnmoffat said:
The logic is this:

If there was no subsidy, the benefit would be the tax saving at 30% on the full interest.
As it is, they are only getting the tax saving benefit on the lower interest actually paid.

However the are also obviously getting the benefit of the subsidy, but losing the tax benefit that they would have had without the subsidy. So the overall benefit of the subsidy is only 70% of the interest they are saving.

Thanks, in the same question in year 1 there is a tax loss and we are told that tax losses can be carried forward shouldn’t they have carried the loss forward to offset taxable profits in years 2 and 3?

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