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Dear John,
In Q31 requirement (a)-Answer part, i have some questions which seeking explaining and guidance from you :
1- Working #5 of discount factor: V(d)= $40m x 0.9488. it mentioned that ”0.9488 represents the fraction of the par value at which the trading”
Could you explain in simple term what does it mean?2-The answer said ”We are not told the ratio of Vd and Ve => we will assume that it is 1” So we ALWAY assume that it is ” equal to 1”’whenever it is not told?
3-In the financing side effects working:
Why the issued cost have to multiply by the fraction of 4/96? what is this fraction ?4-Tax Shield working: how do we get the borrowing rate 5.5%?
Best Regards,
1. This has nothing to do with discount factors!
The question says that the bonds are trading at $94.88 per $100 nominal. So 40M nominal will have a market value of 40M x 94.88/1002. No – it depends on the wording of the question (and normally you will be told in the question).
3. If issue costs are 4% of the total raised, then the amount available will be 96%. So the issue costs will be 4/96 times the amount available.
4.The government yield rate is 4.5%. Fubuki can borrow at 300 basis points above government yield rate, so 7.5%. The subsidised loas is 200 basis points before Fubukis borrowing rate, so 5.5%
Dear John,
Thank for your explanation.
#1 to # 3, i have understood.
But #4, i am still not clear about it. The 7.5% we get it by ( 4.5%+ 300/100), right ?
So The subsidised loan is 200 basis points should be 6.5% (4.5% + 200/100)
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