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Hello,
Question 1 b iii)
Forecast financial position
I can’t understand why the $120 shares is deducted from the share capital, $ 1200 deducted from reserves, and the $1320 from NCLForecast earnings:
Also why need to calculate NET of tax for the interest payable on additional borrowings? 3.57% × $1320m x (1-0.15) , why not simply 3.57%x$1320m ?The answer to your first question is that it is the normal financial accounts entry when shares are bought back.
The are paying $1,320 and so cash reduces by $1,320.
The shares are bought back at the current share price of $11, so they are cancelling 1,320/11 = 120 shares. The nominal value is $1 per share, so the share capital is reduced by $120. The extra $1,200 is subtracted from reserves.Interest is allowable for tax, so paying more interest also means an extra tax saving. So the net affect on the earnings is the after-tax interest.
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