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- This topic has 37 replies, 9 voices, and was last updated 9 years ago by John Moffat.

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- November 8, 2014 at 5:53 am #208349
No1.

PQR CO has a demand of 7500 unit per month. each unit cost $5; ordering cost $100,and inventory holding cost is 10% of purchases price per year.

there is a lead time of 30 days between placing an order and receiving delivery.

if they order the EOQ each time, at what level of inventory should a new order be place.

my answer is 6000 unit.

but correct answer is 7397 units.No.2

A new project cost $160000.

Expected life – 4 years

Expected scrap value $20000

Net operating Cash flow as follow:

Yr 1 $40,000

Yr 2 $60,000

Yr 3 $80,000

Yr 4 $20,000cost and capital 10%

what is the payback period(assumption the cash flow are received evenly with each year)?

my answer is 2yr 3mth

correct answer is 2yr 9mthNo.3

Today Exchange rate for sterling:

Euro/sterling 1.44

yen/sterling 232.11

US$/sterling 1.71

How many euro would you get to the US$?

my answer is 1.18

correct answer is 0.84No.4

XYZ plc has a PE ration of 12 as against an average for the sector of 10.2.

which statement is possible reason for the higher PE?

1 shares in XYZ are currently over valued

2 shares in XYZ are currently under valued

3 shareholder are expecting higher than average growth from xyz

4 shareholder are expecting lower than average growth from xyzmy answer is 2 and 4

Because (Mkt price/EPS=PE ratio) lower EPS given Higher PE.

Lower EPS are because sh price under value.

Correct answer are 1 and 3.No.5

4millio share issue with nominal value $0.5 per share

Dividend 24 cents per share has just been paid.

Four yr ago, the dividend was 20.51 cents per share.

Beta 0.5, risk free rate 3%, market premium 8%

what is the market capitalisation

Correct answer is $33,280,000No.6

A co. Earning Yield of 12.5%

The average PE ration for similar companies is 9.5

which statement are regarding the value of shares in the company is true?

1-It is likely that share in the company are under value

2-It is impossible to comment on the value of share

3-It is likely that share in the company are fairly valued

4-It is likely that share in the company are over valued.

Correct Answer are 1Pls explain to me about the question answer.

Thanks.

wish you have a nice weekend.November 8, 2014 at 5:24 pm #208442No 1: You have calculated the EOQ. The question does not ask for the EOQ it asks at what level a new order should be placed, which is 30/365 x (12 x 7500)

No 2: After 2 years we have got back 100,000. So we need another 60,000, which will take 60/80 of the third year.

No 3: 1 sterling buys 1.44 Euro. 1 sterling also buys 1.71 $. So 1.71$ = 1.44 Euro.

So 1 $ will get 1.44/1.71 = 0.84 eurosNo 4. the PE should be the same as the sector. If it is higher than one reason is the share price is too high (PE = share price/EPS). Also, it is standard use of PE that the higher the PE the greater the expected growth (i.e. the more you are prepared to pay for the share, so the higher PE). Watch the lectures for more on this.

No 5: From the CAPM formula, required return = 3% + 0.5×8% = 7%

Then use the dividend growth model formula. Do = 24c; g = 4%No 6: PE of A = 1.0.125 = 8. It is lower than sector which could be because it is undervalued

November 24, 2014 at 3:41 pm #212696No 1: You have calculated the EOQ. The question does not ask for the EOQ it asks at what level a new order should be placed, which is 30/365 x (12 x 7500)

The answer when I did it I got 30 but the correct answer I written down as 24 Days. How do you get 24 days please?

Thank you

November 24, 2014 at 8:01 pm #212853vipulv: you are asking about a different question – your question is not the one that Violet asked if you read carefully!!

The question that you are referring to asked how often a new order would be placed.

To do this you need the EOQ, which is 6,000.The total demand is 12 x 7500 = 90,000 per year

So they need to order 90,000 / 6,000 = 15 times a year.

With 365 days in a year, that means ordering every 365/15 = 24 days.

November 24, 2014 at 10:54 pm #212923Oh yes correct John. 🙂 That is the question I received when I did the test yesterday, I was baffled with the 24 Days makes perfect sense now. Sorry for the confusion and thanks for the help.

November 24, 2014 at 11:36 pm #212929I have a few questions if you can please help me with:

1, Issue 6% Reedemable bonds quoted at 120 ex int

Which statement is correct? Answer : Interest yield 5% and Redemption Yield 4%. How to get this?

2. Share price $4

Rights issues 1 for 5 at £3.10

What % of rights offered to a shareholder does shareholder need to take up so have no net cash flow resulting from issue?Answer : 1.948. % How to do this please?

3, Debt: Debt+Equity) = 30%

Tax = 30%

Ungeared beta 1.3

Risk Free: 5%

Market return: 12:What is cost of equity? (Answer is 16.10%)

I assumed equity and debt be 15% each but I did not get it even using the (1-T) and then using CAPM, could you show me this please?

4, Apple Plc unquoted company orange currently paying Dividend of $0.20 per share, dividend cover is 3.2, quoted company PE ratio is 9.

What price should be sensible for apple for orange. Answer is: $5.76I believe the dividend cover 1/3.2 =0.3125 I am confused how to use the inverse ratio to go further.

5, Finally:

Beta bout to pay dividend of $0.40 per share. dividend growth is 5% p.a

Shareholders requried return is 20% p.a.

Tax is 25%What is MV per share: Answer is $3.20

I was using PO = Do (1+g) divide by Ke – g = I got 2.1 not sure what to do with tax? Tax I believe would be tax deductible from dividend?Please help me 🙂

Thank you for your effort.

November 25, 2014 at 8:52 am #213035Vipulv: In future, if you want me to answer then you must ask in the F9 Ask the Tutor Forum – this forum is for students to help each other.

Question 1:

The interest yield is interest/MV = 6/120 = 5%.

You can not be asked to actually calculate the redemption yield, but you are expected to know that it takes into account not just the interest but also the loss there is on redemption. So here it must be lower than the interest yield, and only one of the answers satisfies that.

November 25, 2014 at 8:55 am #213037Question 2:

If you watch the free lecture you will find I go through an almost identical question.

If there is to be no cash effect, then the total MV of shares held after the rights issue must be equal to the total value of shares held before the rights issue.

If someone owned 1000 share before the issue then they would be worth $4000.

The TERP is $3.85, so to be worth in total 4000 after the issue they must then have 4000/3.85 = 1039 shares.

So the must have taken up 39 shares. They were entitled to take up 1/5 x 1000 = 200

So they took up 39/200 = 19.5%November 25, 2014 at 8:58 am #213039Question 3:

How on earth can debt and equity be 15% each? 15% of what?

If debt is 30% of the total, then equity must be 70% of the total.

We know the asset beta (1.3), so use this in the asset beta formula to get the equity beta.

Then use the equity beta in the normal CAPM formula to get the cost of equity.

November 25, 2014 at 9:02 am #213041Question 4

How can dividend cover be 1/3.2 when the question says that dividend cover is 3.2??

If dividend cover is 3.2 then EPS must be 3.2 x dividend = 3.2 x 0.20 = 0.64

If PE is 9, then MV = 9 x 0.64 = $5.76

November 25, 2014 at 9:05 am #213042Question 5

Po = Do(1+g) / (Re – g)

Do = 0.40; g = 0.05 ; Re = 0.20

So Po = $2.80The formula gives an ex div value, but since the dividend is about to be paid we need the cum div value. Cum div value = 2.80 + 0.40 = $3.20

November 26, 2014 at 10:09 am #213349Hi John,

Thank you so much for your perfect help! 🙂 Sorry to write directly into here first place, I am quite new.

Thank you

November 26, 2014 at 11:14 am #213401You are welcome 🙂

November 28, 2014 at 9:12 am #214003AnonymousInactive- Topics: 0
- Replies: 2
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(Debt: (Equity+Debt) = 30%

Tax = 25%

Risk Free: 5%

Market return: 12

Beta: 1.2What is cost of equity? (Answer is 16.10%)

Kindly advise. Thanks.

November 28, 2014 at 12:05 pm #214067Look at my answer to vvipulv’s ‘Question 3’ above.

December 1, 2014 at 7:10 pm #215381Hello,

can you please help me. There are 2 questions in MCQ, that I don’t know how the results were got:

1. RI Co has in issue 6% redeemable bonds, quoted at 120% ex int.

Which of the following statements is consistent with the above information:The correct answer is Interest yield 5%; redemption yield 4%.

How it was calculated?

2. A company has sales of $200M per year.

Currently customers take on average 40 days to pay.

The company is considering offering a discount of 1% for payment within 15 days and expects that 60% of customers will take advantage of the discount.What is the effective annual cost of offering the discount?

The correct answer is: 15.8%.

I’ve calculated that there is a benefit from decrease in trade receivable days, that brings lower trade receivables by $8 220 and there is an additional cost from 1% discount that is equal to $ 1200. How to calculate the annual cost of offering the discount?

Thank you very much!

Ina.December 1, 2014 at 7:43 pm #215412AnonymousInactive- Topics: 0
- Replies: 33
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Hi Ina,

The only thing i can help with in question 1 is the interest yield is 5% because it’s calculated as interest/MV meaning 6/120 which is 5%.

In question 2 The discount is 1/99 = 1.010101% over a period of 25 days (40 – 15).

To convert this into an annual rate, then strictly 1 + annual rate = 1.010101^(365/25)

1+ annual rate = 1.1580Annual rate = 0.1580 or 15.80%

December 1, 2014 at 8:34 pm #215501sorry, I found out the answer to question 1, it was replied above to vipulv.

I have one more question:3. R plc has in issue $400 000 8% bonds, redeemable in 5 years time at a premium of 10%. Investors require return of 12% p.a.

The rate of corporation tax is 35%.What is the total market value of the debt in issue?

the correct answer is $364 840.

How was calculated that?

Thank you very much!

Waiting for your reply.Regards,

Ina.December 1, 2014 at 8:39 pm #215510Thank you very much, Aleksanders!

I’m still confused with the formula, can I find it somewhere in study or practice text?

Thank you!

Ina.December 1, 2014 at 8:44 pm #215516For question 1, you are not expected to be able to calculate the redemption yield, but you are expected to know what it is.

It is the return taking into account not just the interest but also the gain or loss on redemption.

Since there is a loss on redemption (the market value is currently 120 and they will be repaid at nominal of 100) the redemption yield must be lower than the interest yield.Only one of the choices has the redemption yield lower than the interest yield of 5%.

December 2, 2014 at 8:51 am #215766Thank you, John!

Can you, please, help me with the other 2 questions:

1. A company has sales of $200M per year.

Currently customers take on average 40 days to pay.

The company is considering offering a discount of 1% for payment within 15 days and expects that 60% of customers will take advantage of the discount.What is the effective annual cost of offering the discount?

The correct answer is: 15.8%.

I’ve calculated that there is a benefit from decrease in trade receivable days, that brings lower trade receivables by $8 220 and there is an additional cost from 1% discount that is equal to $ 1200. How to calculate the annual cost of offering the discount?

and

3. R plc has in issue $400 000 8% bonds, redeemable in 5 years time at a premium of 10%. Investors require return of 12% p.a.

The rate of corporation tax is 35%.What is the total market value of the debt in issue?

the correct answer is $364 840.

How was calculated that?

Thank you!

Regards,Ina.

December 2, 2014 at 9:16 am #215778and one more question:

3. A company has agreed to lease a machine for a period of 8 years, with equal annual payments payable at start of each year.

The NPV of the agreement at a rate of 10% is $52 000.

What is the annual lease payment (to the nearest $)?

My calculation is: 52 000 / 5.335 (from annuity table the amount from discount rate 10% and period 8) and the result is $9 747, but the correct answer is $8 862. Why?

Thank you very much!

Ina.December 2, 2014 at 9:24 am #215786Question 1:

This is a ‘simple discount’ question.

The discount is 1/99 = 1.010101% over a period of 25 days (40 – 15)

To turn it into a yearly rate, if r is the yearly rate then 1+ r = 1.010101^(365/25)

r = 0.1580 or 15.80%December 2, 2014 at 9:29 am #215787Question 2:

For every $100 nominal, the expected receipts are:

1 – 5 $8 p.a.

5 $110The market value is the PV at 12%, which is $91.21

So the total market value = 400,000 x 91.21/100

(The tax is always irrelevant when calculating market value – the investors receive the full interest. It is only relevant when calculating the cost of debt, because the company gets tax relief on the interest.)

December 2, 2014 at 9:31 am #215791Question 3:

You answer would have been correct if the lease payments were at the end of each year. However they are at the start of each year.

So the first payment is ‘now’ (discount factor 1), and the other seven payments are 1 to 7 (discount factor 4.868).So total discount factor = 5.868.

So lease payment = $52000 / 5.868 = $8,862

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