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- January 4, 2023 at 9:07 am #675358
The following are extracts from the statement of financial position of a company:

$000 $000

Equity

Ordinary shares 8,000

Reserves 20,000

––––––

28,000

Non?current liabilities

Bonds 4,000

Bank loans 6,200

Preference shares 2,000

––––––

12,200

Current liabilities

Overdraft 1,000

Trade payables 1,500

––––––

2,500

––––––

Total equity and liabilities 42,700

––––––

The ordinary shares have a nominal value of 50 cents per share and are trading at $5.00 per

share. The preference shares have a nominal value of $1.00 per share and are trading at

80 cents per share. The bonds have a nominal value of $100 and are trading at $105 per

bond.

What is the market value based gearing of the company, defined as prior charge capital /

equity?

A 15.0%

B 13.0%

C 11.8%

D 7.3%In the denominator , the market value of equity is calculated as $8000* $5 * $2. I didn’t understand why we multiply by 2.

2.

Country X uses the dollar as its currency and country Y uses the dinar.

Country X’s expected inflation rate is 5% per year, compared to 2% per year in country Y.

Country Y’s nominal interest rate is 4% per year and the current spot exchange rate

between the two countries is 1.5000 dinar per $1.

According to the four?way equivalence model, which of the following statements is/are

true?

1 Country X’s nominal interest rate should be 7.06% per year

2 The future (expected) spot rate after one year should be 1.4571 dinar per $1

3 Country X’s real interest rate should be higher than that of country Y

A 1 only

B 1 and 2 only

C 2 and 3 only

D 1, 2 and 3I’m clear about the 2nd option. Could you explain how to calculate nominal rate and real interest rate…ie option A and option B. I don’t get the calculation given in the kit.

January 4, 2023 at 4:45 pm #6753771. The shares have a nominal value of 50 cents and therefore the number of shares is 8,000/0.50 = 16,000.

2. The real interest rates (i.e. without inflation) should be the same in both countries, so (3) Is not correct.

Using the Fisher formula, where r is the real interest rate, then for country Y: 1+ r = 1.04/1.02

Using the same formula for country X, then where h is the nominal rate: 1+ h = 1.05 x 1.04/1.02 = 1.0706, so the nominal rate = 0.0706 or 7.06%

(I do explain the use of the Fisher formula in my free lectures on investment appraisal with inflation.)

January 6, 2023 at 8:17 am #675408The answer for 1st answer is 15%

In the kit, gearing is calculated as (4000*1.05)+ 6200+(2000*0.8)/(8000*2*5)= 12,000/80,000 = 15%

I know already what you have said , but i didn’t get why they multiply it by 2 in the denominator..?January 6, 2023 at 9:03 am #6754158,000/0.50 is the same as 8,000 x 2. Whichever way you choose to write it, there are 16,000 shares.

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