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Chap 16, Example 3..OT notes

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Chap 16, Example 3..OT notes

  • This topic has 3 replies, 3 voices, and was last updated 8 years ago by John Moffat.
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  • Author
    Posts
  • January 7, 2017 at 8:25 am #365390
    mansoor
    Participant
    • Topics: 424
    • Replies: 542
    • ☆☆☆☆

    Good afternoon

    in example 3, the last line of the answer is

    WACC for B = (100/140 x 22.29%) + (40/140 x 7%) = 17.92%

    where kd=7%.

    shouldnt the 2nd term be: 40/140 x 7 x (1-0.25)?

    regards

    January 7, 2017 at 9:48 am #365416
    alpha2006
    Participant
    • Topics: 19
    • Replies: 18
    • ☆

    A UK company owes a US supplier $1,000,000 payable in April.
    The spot rate is $/£ 1.4850 – 1.4870 and the UK company is concerned that the $ might strengthen.
    Traded options are available at prices as shown in the following table:
    $/£ Options £31,250 (cents per £1)
    Calls Puts
    Strike price Mar Apr May Mar Apr May
    1.425 6.29 6.32 6.49 0.02 0.14 0.45
    1.450 3.81 4.17 4.54 0.03 0.48 0.98
    1.475 1.53 2.45 2.92 0.13 1.20 1.84
    (a) Show how traded $/£ currency options can be used to hedge the risk at 1.475.

    Sir this was in one of ur lectures… what doubt me was when u were calculating the premium you used 1.4850 rather than 1.4870.since the premium is a payment i think we should used the higher spot rate of 1.4870?

    January 7, 2017 at 6:32 pm #365544
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Mansoor:

    Good afternoon you as well 🙂

    No. The cost of debt it automatically after tax relief, unless you are specifically told that it is before tax.

    January 7, 2017 at 6:33 pm #365545
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Alpha2006:

    Your question has nothing to do with the title of this thread (chapter 16 example 3)!!!

    Please start a new thread if you want to ask a question on a different topic.

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