Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Peter Parker Inc.
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John Moffat.
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- December 30, 2022 at 6:09 pm #675240
Q3.a. Peter Parker Inc. has no debt but can borrow at 5.9%. The firm’s Weighted Average Cost of Capital (WACC) is currently 9.20% and the tax rate is 21%.
i. What is the company’s cost of equity?
ii. If the company converts to 25% debt, what will its cost of equity be?
iii. If the company converts to 50% debt, what will its cost of equity be?
iv. What is the company’s WACC in parts (ii) and part (iii)?10 marks
Q3.b. Suppose your company needs to raise $65 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 4.9%, and you’re evaluating two alternative issues: (1) a semi-annual coupon bond with a coupon rate of 4.9%; and (2) a zero-coupon bond. The tax rate is 21%. Both bonds will have a par value of $1,000.
i. How many of the coupon bonds would you need to issue to raise the $65 million? How many of the zeroes would you need to issue?
ii. In 20 years, what will your company’s repayment be if you issue the coupon bonds? What if you issue the zeroes?
iii.Based in your answers in parts (i) and (ii), provide explanations why would you ever want to issue the zeroes? To answer, calculate the firm’s after-tax cash outflows for the first year under the two scenarios. Assume the Tax Office’s amortization rules apply for the zero-coupon bonds.
Hint: (1) For the cash flow of the coupon bonds, we need to account for the tax deductibility of the interest payments. (2) For the zero-coupon bonds, the first-year interest payment is the difference in the price of the zero at the end of the year and the beginning of the year. The total cash flow for the zeroes will be the interest deduction for the year times the number of zeroes sold, times the tax rate.December 31, 2022 at 10:34 am #675257There is no point in typing out full questions and expecting to be provided with full answers.
You must have an answer in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about and then I will explain.
Everything needed to be able to pass Paper FM well is covered in my free lectures (and the second question could not be asked in the Paper FM exam because it refers to “the tax office’s amortisation rules’ without stating what the particular rules are!)
January 1, 2023 at 7:24 am #675267the questions are online and only showed the final answers, for the workings to be shown there has to be payment made. I posted this to get a grasp on how the proper working should be like.
Sorry for the inconvenience caused!
*this is the same for the other 2 questions i have posted as well*
Scenario Analysis
Hawkins News Ltd.January 2, 2023 at 7:35 am #675289I am sorry but we do not provide answers to questions that you have found online.
You should be using a Revision Kit from one of the ACCA Approved Publishers. They have answers and full explanations. If you then have any problem understanding any of the workings then do ask here and I will explain.
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