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On 1st Jan 2004 Energiser issued a loan note, the details of which are:
Nominal value issued $60m
Discount on issue 6%
Nominal interest rate 8%
The loan note is redeemable on 31st Dec 2007 at a premium of 10%. Interest is payable annually on 31st Dec.Energiser’s accounting period ends on 31st Dec.60 – 6% discount is the cash received ( less any related expenses )
8% of 60 is the finance charge – so, 4,800.
Of this, interest will presumably be paid annually ( but you haven’t told me the interest rate at which the loan was issued ). Deduct any interest actually paid.
Now we have 60,000 + 4,800 – interest paid = say 62,000
next year 62,000 x 8% – so 4,960 – is therefore 66,960.Deduct the interest actually paid and keep repeating the exercise until you get to redemption date at which point the obligation SHOULD be equal to60,000 + 10% premium payable on redemption
Does that help?
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ok now the answer is what i was amazed about in the text of kaplan, They have calculated it this way:
Principal amount = $60000
Add premium = $6000
Add interest paid for
4 years(4×8%x4800) = $19,200
Less net proceeds
from issue = ($56,400)
Total Finance cost = $28,800/4 = $7200 Finance Cost per year
What sort of working is this I’ve never seen these kind of questions what do you think?Not sure that I like it! I don’t have a Kaplan study text nor revision kit, but I still don’t like it. I have a very strong feeling that dcf techniques should be in there somewhere!
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i think ur method is correct, whats dcf?
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