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Sir in this question where did DF of 10% comes from?It was not mentioned in Qs
2)For calculating g by formula g=rb, if b is unknown , so can we calculate b by a general formula i,e b= EPS – DPS divided by EPS. Is this formula correct? (I have just made it on the basis of example 6 of chap 17
3) In example 6 of chap 17 the questions says that estimate the market value per share in 2 years time, so here is it asking current market value?
4) Also sir I did not understand part c i.e MV per share in 2years time, is their any formula for it?
5) Sir in redeemable debt, in calculation of return to investors and cost to company, will company ALWAYS get tax relief? And can investor get tax relief?
1. There is a line missing from the question – I will have it corrected immediately.
It should say “Investors require a return of 10% p.a.”2. That is correct.
3. No – the question asks for the market value of the debt. In order to calculate it we need to calculate the expected market value of the shares in 2 years time. I explain this in the lectures.
4. The market value of the shares will be expected to grow at the same rate of growth as the dividends. Again, I explain this in the lectures.
5. The company will always get tax relief on the interest (whether the debt is redeemable or irredeemable) in Paper F9, assuming that there is tax in the question. Investors certainly do not get tax relief but personal tax is not examinable in Paper F9
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