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In future you must say which exam sitting the question is from – I can’t remember the name of every question that has ever been sat, and I am certainly not going to look through every past paper to find it 🙂
This question is from the June 2015 exam.
The question says that the loan (principal and interest) is repaid in equal instalments.
The PV of the payments must always equal the initial borrowing (of here $30M).
If the repayment is X per year, then the PV is X x the 4 year annuity factor.
Since we know this must equal $30M it is just working backwards to find X.ok john what happens if loans are redeemed at premium or its always going to be PV of payments equal to intial borrowings.Hope you dont mind writing on this thread as i always look for threads to see if there is existing similar questions already been asked to you.
But that cannot happen – if the loan is repaid at a premium, then it is not being repaid in equal instalments.
Repayment at a premium will apply to bonds etc., and the PV of the interest payments and the repayment at a premium will be equal the current market value.
ok so you saying PV of loan repayment in equal installments is equal to the original amount of the loan.
In that case interest rate and required return or YTM is going to be same for loans repaid in equal installment.Am right john?I am a little confused how did they get operating profit in part b when working out estimate of profit and retained earnings after MBO
The operating profit in 2015 was 12,200 from the question. In the last paragraph of the question it says that the operating profit will increase by 11% per year.
To get the retained earnings, take the operant profit and subtract the interest and the tax and then the dividends are 25% of the available earnings for the next four years, so 75% is retained.
Sir , could you please guide me through how they got the annual dividend rate of 18.7 percent in part (c) ?
We have previously calculated that the divided at time 1 is 1989 and at time 4 is 3330.
Between the two there are three years growth.If the average annual growth rate is g, then (1+g)^3 = 3330/1989 = 1.6742
Therefore 1+ g = third root of 1.6742 = 1.187
g = 0.187 or 18.7%
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