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Current interest coverage ratio = 49m/10m = 4·9 times
Revised interest coverage ratio = 49m/(10m – 6·4m) = 49m/3·6m = 13·6 times
Current debt/equity ratio = 100 x (125m/140m) = 89%
Revised book value of bonds = 125m – 80m = $45 million
Revised book value of equity = 140m + 90m – 10m = $220 million
A loss of $10 million is deducted here because $90 million has been spent to redeem bonds with a total nominal value (book
value) of $80 million.
Revised debt/equity ratio = 100 x (45m/220m) = 20·5%tutor why the new value of equity is not 155 (90/6 X1)=15
the question ask for the book value, the new share shouldnt be taken at theirs nominal value?
thanks.The book value of equity is the nominal value plus the retained earnings.
So it is currently 140 (from the SOFP given in the question) and increases to 220 (as you have written in your question).
Sir,
I have a confusion but it relates to the b part of this question (bpp latest edition kit q- 199 bar co (12/11)
Calculate and discuss whether using cash raised by right issuevto buy back bonds is likely to be ginancially acceptable to shareholders,where current price/earnings ration (PE ratio) remains constant.
The income statement extract has an interest of $10 m already decutible from profit before interest and tax of $49m.
According to sofp the company has total 1,250,000 bonds in issue but can buy back only 800,000 bonds wih right issue proceeds of 9m$ as the market price of each 100$ bond is 112.5.
Now i am not understanding whether the company will no longer have the 1.25 million bonds it had earlier and will have only 800,000 bonds or this will add up with the ealier ones?
This rises confusion as to how i should calculate the interest charged on the PBIT. I calculated it as : 80m$ (nominal value of 800,000 bonds) x 8% =$ 6.4m.
And then deducted it from the PBIT of $49m directly, ignoring all the interest charge whichexisted earlier. But the answer is entirely different and i didn’t really understand why and how did they calculated an interest saved? How is it an interest saved? Please explain me sir.Didn’t really understand their terminology.
Thank you so much in advance.Please do not type out whole questions (because of copyright issues). If it is from the BPP Revision Kit then just give me the number of the questions; if it is a past exam question then just give the name and the date of the exam.
The company currently has in issue 125M bonds, and they are buying back 80M. This means that the 80M will disappear and so they will then be left with only 45M.
Therefore they will pay less interest than at the moment, they will save the interest on the 80M that no longer exist.
Oh ok i didn’t know about the copyright issue. Sorry Sir 🙂 and wow i am so glad that i understood the whole question because of you explaining me the “meaning of buying back bonds”. I am so glad that i came across this site. Little bit sad, that i didn’t know about it my whole journey of f1-f8.. I can not do anything for such a generous act of opentution team but can just pray for them, their life and their success. Thank you once again sir.
In part c of this ques. Why dont we take into account the revised retain earnings?
If buying back bonds that means
Revenue: 472
Less cos : (423)
Pbit: 49
Interest: (125-80)*8% = 3.6
Pbt : 49-3.6 = 45.4
tax (30%) : (13.62)
Pat: 31.78 ( goes to retain earnings)
Revised RE = 80-27+31.78= 84.78
Revised total equity = 60+$6*15+84.78 = 224.78Can u explain for me this point?
Although the buying back of the bonds will affect future profits and therefore future retained earnings, it will not affect the current years profits.
However the examiner has been a bit inconsistent in that the same could be said to apply to the interest coverage ratio, and so he would have to allow what you suggest also.
Ok, I understand your first paragraph, meaning that buying back happened after the accounts published, not during this yr. Therefore it will only affect the next yr financial affair
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