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Hi sir,
Do we use risk free rate or company’s cost of debt in getting ungeared cost of equity in M&M proposition 2 formula? As in Fubuki’s case, risk free is used. But when I practice ques on Kaplan mock exam, company’s cost of debt is used instead. Please advice. Thanks.
Hi sir,
Regarding part b, why when we calculate Npv for year 3 we don’t need to use exchange rate 120.87 to convert the MShs 1500? Since it is a Forex swap I would say, is it?Thanks sir, your article is as wonderful as you, couldnt refuse to ‘bow’ on you and the efforts you put!! ?
Having said that, can I clarify something with you so that you can correct my understanding (if I’m wrong)?
1. In your example, we buy put and sell call, effectively this reduces the premium paid by us from buying put options.
2. Despite the reduction in premium that we have to pay, we may ‘lose out’ by limiting ourselves to the minimum interest that we gotto pay ( which is limit the interest to 4% instead of benefiting from 3% market rate in your example).3. Putting 1. & 2. together can we say we MIGHT still incur loss ( in the case where 2. above is higher than 1. above), of which if this is the case it can lead to a saying that “it’s better not to use collar since we will suffer more losses as compare to the use of options as a hedging strategy”?
Hi sir,
Refer to the suggested answer for futures contract, I wonder what is the rationale for us to use the difference between 2-mth futures and 5-mth futures to calculate the basis, so as to calculate lock-in rate? Bcos what I understand from Kaplan textbook is, basis is the difference btwn spot rate and future rate. Please kindly correct my understanding, thanks.