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Sir for calculating EVA its nopat- wacc×cap employed.Then why in this question they r taking profit before tax.I know they r deductinh later on but then figure will be different in both cases. Thanks
I don’t know where you are finding this question.
I have the original exam question in front of me and EVA is not asked for 🙂
(However without knowing which question you mean, it could be the fact the we want net operating profit after tax (but before interest). So it means working out what the tax would have been if there had been no interest.)
Sir can you please explain me point (iii) of acquisition method which says cash offer and convertible bond in it. Many thanks
Sir its part b maximum premium based on excess earni g method,in which second line they say its similar to Eva i m also ysing printout from Acca website.Thanks
Do you mean for me to explain what the acquisition method means, or how they got the answer?
The question itself means that for every 20 shares in Strand ($5 nominal but $0.25 nominal value per share), they one bond plus they will get $1.25 for each share (or $25 for every 20 shares).
The bonds will give them $3 a year interest for 6 years, and at the end of 6 years they will have a choice of taking $100 cash or 12 shares in Hav (so they will take whichever is the bigger of the two).You are correct, and I do apologise (I am very tired today) 🙁
However, the logic remains the same as what I wrote in brackets in my previous answer.
Sorry sir still not clear. My question iswhy r they not doing like
373×.8-(20%×$869.3)The answer says that it is similar to EVA (not that it is exactly the same).
The question says that the want the PV of the after-tax excess earnings over the average ROCE. It also says that the 20% ROCE is pre-tax.
Good afternoon! I apologise if this has been answered elsewhere… I know we are not given the required return on debt for Hav, but in calculating the premium derived from the convertible bond (option) 3, should we not in theory be concerned with the MV of such bond? Similarly, should we not be trying to estimate the future value of shares at the end of year 6 to get the true value of the bond now… or am I getting confused about the whole approach to valuing bonds (have been doing too many past exams in the last few days) 🙂 Thank you
Because these are new bonds being issued, they are issued at par/nominal value which is $100. However you are correct in what you say in that the market value of the bond stands to immediately change depending on the investors required rate of return.
However there is no way this would have been expected – partly because of the lack of information and also because of the number of marks expected.
The examiner has effectively covered this point in the written part of his answer by referring to the fact that the actual return on the bonds stands to be different.
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