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Hello sir. I ve bought a mock from Kaplan. The questions that arose:
1)Balance of payments surplus. Is it when Exports higher then Imports?
2) proxy business in CAPM. is it the business that we say “beta asset is the same as our project?” and first calculate beta asset of this business then using same beta asset we calculate our Equity beta with our own gearing. please comment on steps and the term “Proxy business” itself.
3)Synergies after the takeover. What is synergy? Ive heard of it smwhere dont know what is it…
4)Section C
“Prepare a revised calculation of the net present value of the proposed investment project, commenting on the mistakes made on the draft version. Comment on the project’s acceptability.”(17 marks) How can we comment on the mistakes. What would your approach be. Just list the mistakes? or make an official letter with headings?
5)Section C
“The ordinary shares have a nominal value of $0.75 each and are currently valued in the market at $4.20 each. The bonds have a nominal value of $100, a coupon rate of 6% and are currently valued at $112.50. The bank loans are repayable in 10 years’ time and incur an interest charge of 5%. The preference shares have a nominal value of $1 each and a current market value of $0.96. Preference share dividends are paid out annually.”
Figures from SOFP:
8% preference shares = 1,500
Profit after taxation 1,550
Dividends = 620(Dividends given after profit after tax so it is for ordinary shareholders or preference shareholders?)
My confusion is Preference shareholders are paid dividends annualy but they are known as Interest based source of debt. 3 questions:
1)Preference shares are paid as dividends but it’s interest or dividend
2)Shall we include them into DEBT when calculating gearing or EQUITY?
3) when calculating MV of Bank loan, if its redeemable in 10 years. Shall we discount it? under what cost of capital?1. Yes
2. A proxy business is one that is in the same type of business as the project that we are appraising. The steps are all explained in my free lectures.
3. Synergy is when you combine two businesses and the total profit is more than the two businesses profits added together (because of things like economies of scale).
4. Just list the mistakes.
5. You have not said what the question wants. I assume it wants you to calculate the WACC. The cost of preference shares is calculated in exactly the same way as the cost of equity (the dividend growth rate is obviously zero).
6. The market value of a bank loan is whatever the amount of the borrowing is. (Discounting would arrive at exactly the same figure and would therefore be wasting time).
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