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Liability and interest cover ration are complexed.

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Liability and interest cover ration are complexed.

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by MikeLittle.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • November 7, 2017 at 10:58 am #414662
    stepstothebest
    Member
    • Topics: 62
    • Replies: 15
    • ☆☆

    Sorry about the silly question before

    Apollo took out a new loan on 1 January 2016. This loan carries an effective interest rate of 8%. The initial proceeds of the loan are $2.5m, which is after paying issue costs of $250k. The coupon rate on the loan is 6%. Apollo must keep an interest cover ratio of 9 times under the arrangements made with the bank.

    What operating profit must be maintained by Apollo in the year ended 31 December 2016, in order to meet the minimum interest cover ration specified by the bank?

    the answer is 1,800,000

    but my answer is 1,980,000

    cuz only nominal value is used to get an interest payment which is 220,000 in this question.

    I already looked over all the questions solved before about getting interest payments.
    in this case, only nominal value must be used…. we haven’t considered issue costs and so on to get that interest payment.

    why was that issue cost considered?

    November 7, 2017 at 11:27 am #414664
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    “The initial proceeds of the loan are $2.5m, which is after paying issue costs of $250k.”

    I believe that this is the crucial element of the question

    Apollo has borrowed $2,500,000. There’s no specific information that says that the amount of $2,500,000 is the net figure of $2,750,000 – issue costs of $250,000 = $2,500,000

    What would the loan figure be if that $250,000 had been paid from existing resources?

    Can you give me an exam reference date?

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    Posts
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  • The topic ‘Liability and interest cover ration are complexed.’ is closed to new replies.

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