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Have a couple!
1. PQR has a demand of 7,500 units per month.
Each unit costs £5
Ordering cost is £100 per order.
Holding cost is 10% of purchase price per year.
Lead time is 4 weeks.
Whats the EOQ?A. 6,000 units
2. A Company whose home currency is the € expects to receive $800,000 in 3 months times.
The following interest rates available.Borrowing – Home-6% Foreign- 10%
deposit – Home – 4% Foreign – 8%Sport rate is $1.50.
A. 525,500
3. AJT has a gearing ratio of 30%
Pays corp tax 35%
Ungeared asset 1.2
Risk Free rate – 5%
Market rate – 12%
Whats the cost of equity?A. 16.1%
4. A company has 6% bonds in issue which are redeemable in 5 years times at a premium of 10% to their nominal value of $100 per bond.
Before tax cost of debt of the company is 10%
After tax cost of debt to the company is 7%What’s the market value of each loan note?
A. 91.07%
5. R plc has in issue £400,000 8% bonds redeembable in 5 years time at a premium of 10%
Invesotrs require a 12% return
corp tax is 35%whats the market value of debt?
A. 364,840
I’m just getting in a bit of a pickle working these out!
Any help would be greatly appreciated!
Thank you!
A couple is 2 (and you have asked 5 🙂 )
Question 1:
Use the EOQ formula on the formula sheet.
D = 12 x 7500 = 90,000
Co = 100
Ch = 10% x 5 = 0.50Question 2:
You really need to watch the free lecture on money market hedging to understand.
They need to borrow $800,000 / 1.025 = 780488
They convert at spot 780488 / 1.50 = 520325
They invest at 4% to receive 520325 x 1.01 = 525,528Question 3:
You have copied the tax rate wrongly – it is 25% not 35%.
You need to calculate the equity beta (using the asset beta formula from the formula sheet backwards). The equity beta is (70 + 22.5)/70 x 1.2 = 1.586
Then use the normal CAPM formula to get a cost of equity as 5% + 1.586 (12% – 5%) = 16.1%
(The free lecture on this will help you)
Question 4
The market value is the present value of the future receipts to the investor, discounted at the investors required rate return of return.
The future receipts (on $100 nominal) are interest of $6 per year for 5 years, and a repayment of 110 in 5 years time. These flows should be discounted at 10%.
(Tax is not relevant when calculating the market value – it is irrelevant for investors. It is only relevant when calculating the cost to the company, because they get tax relief on the interest.)
The same logic exactly applies to question 5.
(The free lecture on the valuation of securities will help you with these)
If you have any further problems then please ask in the Ask the Tutor Forum – this forum is for students to help each other.
Dear Mr John,
About the Question 1 MCQ Jess asked above, what is the role of the lead time provided? Is it a distraction only? Do the MCQs in real exams have this kind of distraction data?
Tks you so much!
The lead time is irrelevant (and MCQ’s in real exams have this kind of distraction also 🙂 )
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Hi can u plz snd mi the computation
It is strange, but in online version of MCQ I’ve got this question:
PQR has a demand of 7,500 units per month.
Each unit costs £5
Ordering cost is £100 per order.
Holding cost is 10% of purchase price per year.
Lead time is 30 days between placing an order and receiving delivery.
Whats the EOQ?I’ve also thought that lead time is irrelevant in computation and the answer should be 6,000 units, but after submiting answers computer showed me the correct answer as 7,397 units 🙁
And I’ve also found 1 more question on the same text. It was asking:
‘If they order the economic order quantity each time, how frequently will they place an order (to the nearest day)?
Correct answer is ‘every 24 days’Could you help me with it? Thanks)
Some more question:
1. A company has just paid a dividend of $0.23 per share.
Shareholders are expecting the dividend to remain at $0.23 per share next year, but to increase at an average rate of 3% per annum thereafter.
Shareholder rrequired rate of return is 12%, and the rate of corporation tax is 25%.
Correct answer is $2.56First, I’ve used Growth model: [0.23*(1+0.03)] / (0.12-0.03) = $2.63 ((((
but than I’ve recalculated by taking into account that tax of 25% and no growth rate:
0.23/(1-0.25) =0.3067 and divided by 0.12 & got = rounding $2.56/So is it a trick not to take into account that 3% growth?
First question:
That question appears twice. One of them asks for the EOQ (which is indeed 6,000).
The other one (which is the one that you are referring to) asks for the reorder level. The reorder level is 30 days multiplied by the demand per day, which is (12×7500)/365 = 246.58.
So reorder level = 30 x 246.58 = 7397Second question:
Since the EOQ is 6,000, and the total demand is 12 x 7500 = 90,000, it means that they will place 90,000/6,000 = 15 orders a year.
There are 365 days in a year, so it means they will order every 365/15 = 24 days.
Third question:
The bit on top of the formula (Do(1+g)) is the dividend in 1 years time – it is normally the current dividend (Do) together with growth.
However, here the dividend in 1 years time is 23 (not 23 plus growth).
So the formula gives 23 / (0.12 – 0.03) = 256c ($2.56).
Tax is never, ever relevant when valuing equity!!!!
I went throught Opentuition Revision notes and found there answers on all my quesions.
Thanks!
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