[kaimingsong]

thanks for your reply , i want to make the concpet more clearly , lets say the bond have been issued have a current market price $110( ex interest) per $100 nominal value , when the bond first issue to the public , the company promised will pay 10% interest on the nominal value for 10 years , also in the last year the bond will be redeem with nominal value . However , the company already paid the interest for the first 3 years .

so when we workup the cost of debt , is the cash flows in the calculation will only have the rest of the interest receivable (the next 7 years interest ) and the redemption amount right ?

[kaimingsong]

In the real world , it still have the possibility the sub-subsidiary also own the shares of subsidiary , maybe it will not end up with 100% .( shares own by parent + shares own by sub-subsidiary )

However, what are the consequeses ,if this does happern ? Lets assume this does happern , but the C Co only own another 10% of B Co instead of 20% . ( more realistic )

Again, what are the treatment ? Ignore it or adjust the effective interest in B Co to 84.8% ( 48%x10%) ?

[kaimingsong]

The answer given by BPP
$10m x 8% x 6/12 = – $400,000 ( loss of investment income )
$400,000 x 60% =$240,000 ( Additional sharing profit from Fly )

So , that will result the group retained earning reduced by $160,000 . However, i think the answer should be no effect (one of the option in the answer ) , since we only eliminate the interest only for the sake of consolidated financial statement , and actually take into account the effect of interest when we calculate the group retained earning .

So is this question got problem or this is a question set on a different point to test the ” what if we really want to eliminate the intra- group loan interest ” , and what are the consequence if we eliminate the interest ?

[kaimingsong]

Also , if we recognise the present value of the loan note , what is the treatment for the balancing figure ?

[kaimingsong]

so will the finance cost still present in the consolidated profit & loss ? or only where calculate the profit attribute to NCI ?

[kaimingsong]

The answer from the BPP revesion kits

Profit for the year $1,300,000
Intra Group Interest ($400,000)
Impairment ($20,000)
$880,000

Profit attribute to NCI = $880,000 x 30%
= $264,000

However , we shall eliminated the intra group interest right , therefore we should not deduct the interest right ( if Dorset has not yet take into account the Interest ) , and we should add it back to the profit right ( if Dorset already take the interest into account )

please tell me what your thought about this question , whether is the question problem or i misunderstanding any thing .

[kaimingsong]

I can’t understand why the 40% of excess depreciation will become profit to the non-controlling interest .

I can understand the P Co only will get cover 60% of the excess depreciation , since it only hold 60% of S Co . However , i really struggle why the balance of the excess depreciation will become profit to the non-controlling interest .

[kaimingsong]

Dr Group Retained Earning $1.500
Non – Controlling Interest $1,000
Cr Non-Current Assets $2,500

Dr Acc . Depreciation $250
Cr Group Retained Earning $150
Non-Controlling Interest $100

This is another way to do the adjustment, this adjustment is likely to tell us the 40% of the excess depreciation is become profit to the non-controlling interest .

[kaimingsong]

By using the question for your lecture notes as well , the cost of new project it will cost £80,000 and the interest rate is 10% p.a

I’m really can’t understand why the interest rate is take to discount the operating cashflows .

The interest payment should be £8,000 per year . There is nothing do with the discount of 10% with the operating cashflows .

However , if we take the interest rate as opportunity cost . This will be make sense .

The future value of £1 now is £1.1 , that mean no matter what you get next year will equal to the same value with the initial investment only after discount by 10 % . This is also the way discount factor come from (1/1.1) = 0.909

The thing actually done by the NPV analysis is , it can covert the cashflows back to the same value of the amount you invest in the first place . In short , the money you receive now can’t compare with the same amount in last year.

[kaimingsong]

The thing I’m really struggle is the interest payment , using the same question before . If the interest payment is also 10% of the amount we invest , is just about £100 for the payment . It quite different with the the discounted amount (£1000 x 0.909 ) .

[kaimingsong]

I thought the discount factor is relevant with the inflation and the time value of money .

Let’s said , an investment is required £1000 and get a return of £1000 after one year . I have been told the discount factor is to measure the different value of money . Assume the market interest rate is 10%. That mean the £1 now, will become £1.1 after a year due with the interest rate . Or the thing you can buy with £1 now , you need to paid £1.1 for the same thing after one year .

So go back to the investment project ,if we judge the investment without any further analysis ,it will be no gain no loss . However, if we take the inflation or the opportunity cost ( the interest we can gain if we deposit the amount rather than invest to this project ) into account , we actually loss because of the opportunity cost and inflation .

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