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Dear Tutor,
I have a few issues regarding Morada question:
1) under proposal 1 how is the value of current liabilities of 18.900 derived?
2) I often get confused with the balancing figure: how do I know if we shall use cash or retained earnings as balancing figure. In this case I used the R.E. and the examiner used cash.
3) Profit on sale of NCA is 12,600 per answer. Why is this figure not adjusted for 20% tax?
4) Interst saved due to lower borrowing: Should we not consider the after tax interest saved due to lower amount of borrowing of 96.000 (96.000×3,76%) and also savings on the remaining loan due to better credit rating (24.000 x (4,7%-4,4%)x0,8)). The examiner used the 6,2% rate (tax adjusted).
5) Interest payable on additional borrowing: Here the examiner only calculated interest on 70.000 additional borrowing, but compared to the current situation the old borrowing will also bear increased interests due to the worsened credit rating. So I included this difference in increased interests as well. Would this be also correct?
Thank you for your help.
1. The question says that under proposal 1, the current liabilities will reduce by 10%.
2. We can calculate the new retained earnings – the balancing figure must be the cash.
3. The question specifically says that 15% is the after-tax profit.
4. A better credit rating may mean that investors will be happy with a lower yield, but this would affect the market value – not the actual interest paid each year. They are 6.2% bonds and remain 6.2% bonds.
5. I think I have answered this in my answer to point 4.
Dear Tutor,
thank you very much for this clarification. I’ve totally confused the issue with interests. And it seems that I have to read the scenario more accurately. Hope such misreading won’t happen on Friday…
Thank you for your help.
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