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In other questions, the value of the option was computed by adding the NPV + the option value as the figures represent the intrinsic value and the time value respectively but in this question, only the option value was used to compute the percentage gain in the value of the follow-on product to Nente Co share, i’m quite confused on this.
Hi John, why not add the earnings and cost synergy of Nente Co to the earnings of Mjie and compute the % change?
Why do we deduct the amount paid for the shares of Nente Co (7.08 million) from the additional increase in share price?
As the question is asking for the increase in value of the share price, is it indirectly asking what is the increase in the value of the company?
Hi John, Under Proposal 1, I couldn’t understand the rationale of using the earnings of Nente Co to compute the percentage gain of Mije Co?
Hi John, the question mentions that $15 million is an additional expenditure in 3 years time if the Naswan Govt is able to obtain funding to expand, I did not understand why it is used to calculate Pa as it seemed more like an additional capital injection in year 3. Would that not be the Pe instead since there is no mention of capital injection in Year 0.
Alsoo, there is mention of the negative NPV of $1.01 million and expected NPV for the expansion being $0. Would these information not to be used to calculate the Pa and Pe?
For Part a, the answer states:
“according to PPP the ‘law of one price’ holds because any weakness in one currency will be compensated by the rate of inflation in the currency’s country (or group of countries in the case of the euro).If PPP holds, then companies may not be affected by exchange rate fluctuations, as lower currency value can be compensated by the ability to raise prices due to higher inflation levels. This depends on markets being efficient.”
How does the weakness in one currency be compensated by the rate of the inflation? The difference in inflation rate multiply the spot rate today in the PPP formula will derive the future spot rate which will be impacted by the difference in inflation rate of the 2 countries. If the base country has a higher inflation rate, the future spot rate will be lower than the spot rate today vice versa. However, the exchange rate will still fluctuate. I didnt quite understand how the company will not be affected. Also what does “prices” in the 2nd paragraph refer to?
Hi John, in calculating the interest saved, why is 10% coupon rate used instead of the pre-tax cost of debt of 9%. I thought coupon rate refers to the cash flow whereas the cost of debt is the actual interest rate?
For part (a), i saw that the answer did not include an explanation on the impact on Eview Cinema Co’s SOFP, forecast EPS and WACC which were computed. Would an explanation be required as they stated “demonstrate the impact”
Hi John, I was able to get the FCF to perpetuity of 4698 but i proceeded to multiply by the discount rate of 10% to get the present value. The answer did not do this step.
Hi John,
My understanding of the formula, yield+credit spread = cost of debt. However, the answer uses this formula to calculate coupon rate. Coupon rate= yield + spread= 5.1%+0.9%=6%
Does this mean that the coupon rate that should be applied to the new debt issue to ensure it is fully subscribed is coupon=cost of debt which also means the bond will be issued on par? In this case, why would coupon=cost of debt ensure it is fully subscribedIs it correct to say that the cost of debt determines the market value of the debt. Therefore, the answer, ” If the company’s investment bankers set the spread too high, the debt will be issued at premium and if the spread is set too low, the debt will be issued at a discount” Does the spread refer to the credit risk spread which is mentioned in the question and is this sentence referring to the cost of debt or coupon?
Hi John, why do they use the cost of capital of Terranian at 15% when the NPV has already been converted to Sterling.
Hi John, I see that you are saying this note is relating to the additional tax payable. However, I still don’t understand what this note means. Does it mean that the tax authorities where Lamri is based in will charge additional tax on 100% of the profits made by subsidary companies because of their stakeholding. Giving full credit for tax already paid by overseas subsidiaries” means that they will allow the tax paid by overseas subsidiary to offset the tax to be paid at home country’s tax rate.
Hi John,
For the additional tax Lamri needs to pay on the dividend from Magnolia (6%x5.4million), why does it not account for only 75% of the PBT as the dividend given to Lamri is only 75%.
Also, the answer for the option contract did not include the gain earned from exercising the call option (Difference between 1.1559 & 0.85 Spot rate vs Call option rate). Is it wrong to calculate the gain and include it in the cash inflow?
For the option contract, the rate used to calculate the premium is $1.1618 which is on the right side(bank buy $1.1618 per Euro1 which means Co sell $1.1618 to bank to get Euro 1). Why is this so? The premium is in euro and to convert to $, should we not use $1.1585(bank sell $1.1585 per Euro1 which means Co buy $1.1585 to bank with Euro 1)?
Hi John, I have the following questions on this question:
1. For part (a), why do we have to compute the net exposure for both forward contract & money market hedge? Furthermore, for the money market hedge, I initially calculated both import (ARS490)& export (ARS890+750) instead of using the net amount of 1150 to calculate the importer(Deposit,Convert,Borrow). The computation only require importer.
2. For the futures method, even though the contract is due in Dec, it needs to be sold in Oct. In the answer, the rate used to sell in Oct is the Dec rate. Does this mean that no matter the month it was sold in before the due date, the rate is locked and will not change?
3. For the put option,
the question states:
Currency options prices, ARS/$ options $31,250(centavos per dollar).
(Note: One Argentine peso is divided into 100 centavos).Therefore, the call & put option premium is to divide by 100. E.g Dec put option for 1.92 is 6.55/100. Is this because the premium charge for each $1 of options is in centavos as stated in the question. The question stated ARS/$ and centavos per dollar so I found that confusing.
4. When the Company exercise the right from the put option to sell S$593,750(31,250×19) at 1.92 to get ARS1,140,000, the company will also buy $593,750 at 1.90293. Therefore, there will be a gain of ARS10,135.
The company then sell to the bank at the forward rate of 1.9081.
I wanted to ask if my understanding above is correct. Also, how do we decide when to use futures or forward contract? Above, there is a mix of future spot rate and forward rate used in this put option method.5. For the option market, 1150,000/60,000=19.17 contracts.
For the remaining 0.17 contracts, it is assumed that it will be hedged in the forward market. Do we need to calculate the impact of the 0.17 contracts?Dear Sir,
Referring to the answer for part bi, the tax payable for Year 1 is -1,796( a tax return to the company). Why is this so? I understand that Year 1 was a loss and there was a tax allowable depreciation of 5,250 so I had recognised no tax payable on the loss before tax in Year 1 and a tax claim of 1,050(20%x5250). I did not recognise a tax return of 746.
Dear Sir,
1. I didn’t understand for proposal 1, the total realisable value of assets not sold as going concern was used in calculating the return. Is the total realisable value referring to Realisable value of the total assets?
2) qn(i) return of the debt holders, Ans: Debt holders only receive 55·7c for every $1 invested and the shareholders receive nothing (see appendix, proposal 1).
Can my answer:
Payables 39 (70/260×156)
Bank overdraft 33 (33/260×156)
Unsecured loan stock 67 (120/260×156)
Other unsecured loan 17 (30/260×156)
