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Hello Sir, for PYQ Sep/Dec 2017 Q2 (a)
Why the answer does not account of the lower interest cost as the pre-tax
cost of debt currently 9% and assumed to fall to 8% when 10% loan notes are redeemed?Thanks
But the answer does account for it – in the calculation of the revised WACC the answer uses 8% as the pre-tax cost of debt.
Thank you for your reply
I have further question on this question1)why the Revised/forecast retained earnings figures(11801) afrer selling off the EV club does not account for the revised forecast profit? And only take into account of profit on sale of EV clubs as the adjusted profit have increase from 1135 to 1331?
2)for part(b), 3rd paragraph :” but the level of demand for big cinema complexes may be doubtful and there may also be practical problem like negotiating change of use”. What negotiating change of use will be needed for cinemas?
Thank you.
1. Because the answer is looking at the immediate effect on the SOFP.
2. It depends what businesses were in the buildings that they are using for the new cinemas.
Hi John, in calculating the interest saved, why is 10% coupon rate used instead of the pre-tax cost of debt of 9%. I thought coupon rate refers to the cash flow whereas the cost of debt is the actual interest rate?
For part (a), i saw that the answer did not include an explanation on the impact on Eview Cinema Co’s SOFP, forecast EPS and WACC which were computed. Would an explanation be required as they stated “demonstrate the impact”
The coupon rate is the interest rate on nominal and is the actual interest being paid. That is all that is relevant in the SOPL.
Part (a) only asks you to demonstrate the impact – it does not ask for an explanation.
It is in part (b) that you can discuss the figures in so far as they are relevant to the decision to sell EV clubs.
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