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Gadner Co wishes to calculate its weighted average cost of capital. The company has the following sources of finance:
$’000
Ordinary shares 8,000
10% Preference shares 2,000
8% Loan notes 6,000
Bank loan 2,000
18,000
The ordinary shares have a nominal value of $0·20 per share and are currently trading at $6·35 per share.The equity beta of Gadner Co is 1·25.The preference shares are irredeemable and have a nominal value of $0·50. They are currently trading at $0·55 per share.
The 8% loan notes have a nominal value of $100 per loan note and a market value of $108·29 per loan note. They are redeemable in six years’ time at a 5% premium to nominal value.
The bank loan charges fixed interest of 7% per year.
The yield on short-dated UK treasury bills is 4% and the equity risk premium is 5·6% per year. Gadner Co pays corporation tax of 20%.
(a) Calculate the market value weighted average cost of capital of Gadner Co. (11 marks)
In this question- I need to calculate the IRR – I use 5% as one DF but to calc IRR I need another % – how do you choose which % to use?
Hi Sir please could you explain how to get to the answer for the above question
Hi Sir – in Triage Co F7 Sept 2016 exam, – they take don’t take the additional amount of interest as the adjustment – here they have taken the finance cost at 8% as the adjustment. I’m confused – what is the correct way to adjust for convertible loan notes?
answers
https://www.accaglobal.com/content/dam/ACCA_Global/Students/fun/f7/s16_f7_a.pdfThank you for confirming – are you able to let me know if the answer for example 4 Chapter 25 is correct in the notes? I am getting PFY $266million.
Example 4 – Group SPL incl. associate
Helvellyn
$m
Scafell
$m
Revenue 1,645 1,280
Cost of sales (1,205) (990)
Gross profit 440 290
Operating costs (190) (120)
Profit before interest and tax 250 170
Finance costs (55) (30)
Profit before tax 195 140
Taxation (35) (30)
Profit for the year 160 110The following information is relevant in the preparation of the group financial statements:
On 1 January 2020, Helvellyn acquired 80% of the equity shares of Scafell, a public limited company, for a
cash consideration of $90 million. The fair value of the identifiable net assets acquired was $85 million and
the fair value of the non-controlling interest was $25 million. The fair value of the net assets at acquisition
was not materially different to their book value.
On 1 June 2020 Helvellyn acquired 25% of the equity shares of Armboth and exerted significant influence
through its representation on the board of directors. Armboth’s profits for the year were $200 million.
It is the group policy to measure the non-controlling interest at acquisition at fair value.
During the year, Helvellyn sold goods to Armboth for $40 million at a margin of 20%. At the reporting date
Armboth still held half of the goods in inventory.
Goodwill has been impairment tested at year-end and found there to be no impairment in Scafell but the
investment in Armboth has fallen by $ 1 million.
Assume that profits accrue evenly during the year.
(a) Calculate the goodwill on acquisition of Scafell
(b) Prepare a consolidated statement of profit or loss for the Helvelyn group for the year-ended 31 December 2020I received the same Sec C questions! Was thrown by the 10 marker operational & planning calculations though!
I raised a complaint to ACCA regarding this as I find it so unfair but the response I got was:
‘Sorry to inform you but as per ACCA policy , you won’t be allowed to use scrap paper otherwise the invigilator will cancel your exam.’
I wrote a pretty lengthy email and they responded with one line.
Don’t really understand how a toilet break is allowed and scrap paper isn’t. It’s really stressing me out as the on screen scratch pad is pretty useless and doesn’t allow you to write things down as fast as you could on actual paper and in the way you would want to see it. It’s really unfair.
Hi Maheshr1, I sent an email to ACCA too and they responded with:
The code F1/F2 and sometimes F3 relate to the time of day that particular exam will be sat for example F1 being morning and F2 being afternoon. This is the only difference between the exams, they are exactly the same in terms of content and qualifications gained.
I think I ended up choosing option F3 as it had afternoon exam options.
Hope this helps.
I failed my first attempt – 42% 🙁 I found the questions pretty impossible to interpret. Need a new way of attempting this exam. Also ran out of time. I have rebooked for December but not feeling very confident. I am using BPP content and notes but just seems the questions in the lectures are nothing like what I saw in Sept PM exam.
