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P4 revision note

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › P4 revision note

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • April 26, 2015 at 6:30 am #242749
    310zcx
    Member
    • Topics: 52
    • Replies: 66
    • ☆☆

    sir
    I have already went through the revision not. the following questions I do not understand when I looked at
    1. in what situations can we use the risk free rate to calculate the cost of debt? in the revision note, some of the places used the risk free rate tot get the cost of debt directly.
    2.Example, this is question is attached in the revision note
    Company is financed as follows:
    Equity: 10M $0.50 shares, quoted at $1.20.
    Debt: $6M 9% irredeemable debenture (unquoted)
    The ? of a share in the company is 0.85
    The market return is 20%, risk free rate is 12%
    Corporation Tax is 30%; Ignore Income Tax.
    Calculate:
    (a) the market value of debentures
    (b) the WACC of the company
    in the answers I do not understand ‘(No ? given for debenture, so assume risk free therefore investor require 12%)
    M.V. Debt = 9/12% = $75 p.c.’ what does it mean? also when calculate the cost of debt, use 12%*(1-30%)? what situations can I use this method to get the KDat?
    thanks!

    April 26, 2015 at 8:53 am #242769
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54724
    • ☆☆☆☆☆

    Why are you not watching the free lectures? I can’t type out all the lectures here 🙂

    If you are not given enough information to calculate the cost of debt then we have no choice but to assume it is risk free. However, the risk free rate will not be the cost of debt because the company gets tax relief and so the cost of debt will be lower.

    $75 pc means that the market value is $75 for $100 nominal.

    If debt is irredeemable then the cost of debt is Kd(1-t) to account for the tax relief. If debt is irredeemable then it is necessary to calculate the IRR of the after tax flows. If not told, then we assume debt is irredeemable.

    April 26, 2015 at 10:16 am #242776
    310zcx
    Member
    • Topics: 52
    • Replies: 66
    • ☆☆

    Ok. Thanks. May be I was missing some point during the lectures.

    April 26, 2015 at 2:53 pm #242804
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54724
    • ☆☆☆☆☆

    You are welcome 🙂

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