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Dear Sir
i would like to know the workings for the questions mentioned below. These questions were originally from the quiz. i have shortened them
1- lease period 8 years with equal annual payments paid at start of each year. NPV at 10% is 52000. what is the lease payment?
2- 8% irredeemable bonds in issue at 86% ex int. Corp tax is 25%. what is the return to investor?
Thankyou
Question 1:
The PV of all the lease payments must be equal to 52,000.
If X is the lease payment per year, then the first payment is now – so the PV of this is X
There are then 7 payments starting in 1 years time, so the PV of these is X x 4.868 (the 7 year annuity factor at 10%)So the total PV is X + 4.868X = 5.868X
This must be equal to 52,000, so you can now calculate X 🙂
Question 2:
The return to the investor is 8/86 = 9.30%
(Tax is not relevant – the investor receives the full interest. Tax is only relevant when calculating the cost of debt to the company because the company gets tax relief on the interest.)
I assume that you have watched the free lectures? I do go through this point in detail in the lecture.
Hi sir ! Is the answer for Question number 2 9.30% ?? If yes why it mark me wrong in the Mock exm test ?
Advise please thank you 🙂It marked you wrong because you answered 9.30% to a different question!!
There are two questions with the same information. One asks for the return to investors, and the correct answer is 9.30%
The other asks for the cost of debt, and this is 6.98%.The test selects questions at random and you got the second question – that is why you were marked wrong!
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