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Annual Lease Payment & Investor return on irredeemable bonds

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Annual Lease Payment & Investor return on irredeemable bonds

  • This topic has 4 replies, 3 voices, and was last updated 10 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • November 28, 2014 at 4:41 am #213968
    dhonaa
    Member
    • Topics: 2
    • Replies: 1
    • ☆

    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

    November 28, 2014 at 11:27 am #214047
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54664
    • ☆☆☆☆☆

    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 🙂

    November 28, 2014 at 11:29 am #214048
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54664
    • ☆☆☆☆☆

    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.

    December 1, 2014 at 1:56 pm #215116
    Felicia
    Member
    • Topics: 0
    • Replies: 2
    • ☆

    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 🙂

    December 1, 2014 at 3:26 pm #215192
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54664
    • ☆☆☆☆☆

    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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