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€48,601 × (1 + 0.037/3) = €49,200
(Use borrowing rate on the assumption that extra funds to pay costs need to
borrowed initially; investing rate can be used if that is the stated preference)
Net income = €985,915 – €49,200 = €936,715.Pls explain this calculation
The option premium of $48,601 is payable immediately, whereas the income from the option arrives in 4 months time.
Assuming that the money to pay the premium is borrowed (at 3.7% p.a.), then the amount owing in 4 months time will be 48,601 x (1 + (4/12 x 0.037) = 49,200.
The net income in 4 months time is therefore the 985,915 less the 49,200.
if we don’t assume premium cost is borrowed .
and then show net outcome =985915-48601
will it be fine.
AS i could not find anywhere in my kaplan exam kit in question that we are going to borrow premium costs.
It does not say that the money will be borrowed. However either the money will be borrowed and there will be interest to pay, or alternatively the money is already available in which case they will lose interest that they could have earned. That is why the examiners answers states that either rate of interest could be used depending on the assumption.
If you ignored interest completely you would still get almost all of the marks, but it would be a nice thing to mention even if you did not calculate it.
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