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The net cash raised by the rights issue will be used to redeem part of the loan note issue. Each loan note has a
nominal value of $100 and an ex interest market value of $104. A clause in the bond issue contract allows
Grenarp Co to redeem the loan notes at a 5% premium to market price at any time prior to their redemption date.
The price/earnings ratio of Grenarp Co is not expected to be affected by the redemption of the loan notes.Sir I dont understand why how the nominal value is found. shouldn’t it be the opposite of
the market value? 100/109.2?Nominal value of loan notes redeemed = 10,920,000/(109·20/100) = $10,000,000
Before-tax interest saving = 10,000,000 x 0·08 = $800,000 per year
After-tax interest saving = 800,000 x (1 – 0·3) = $560,000 per year
Earnings after redeeming loan notes = 8,400,000 + 560,000 = $8,960,000 per yearI think you are misreading the answer:
10,920,000 / (109.20/100) is the same as 10,920,000 x (100/109.20)
However you write it, redeeming loan notes with a nominal value of 10M will cost them 10.92M (which is the amount that have have available from the rights issue).
Dear Sir
I do not understand where the interest rate of 0.08 is derived from.
Before-tax interest saving = 10,000,000 x 0·08 = $800,000 per year
After-tax interest saving = 800,000 x (1 – 0·3) = $560,000 per yearThanks
I assume that you are using the BPP Revision Kit.
The original exam question (which you can find on the ACCA website) listed the loan notes as “8% loan notes”.
BPP have missed out printing the 8% in the question!
Thank you so much. I have wasted 4 hrs analyzing where is the 8% from.
Thanks again.
Very helpful! 2 years later they still haven’t corrected it so I was going crazy finding the 0,8 until I found it here 😉
Thank you so much.
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