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Dear Tutor
I have some queries regard FM study
1. preference share
Is it equity finance or debt finance?
2. cost of debt: irredeemable loan, does it exist in the real world? any example? if not, why some exam kit questions still request to calculate cost of debt
3. Beta in CAPM
how does beta calculate by share market? where it comes from? how does the company decide which Beta to use? where does the company get the beta source from?
4. in DGM, what is the meaning of D1/P0?
5. any relationship between WACC and gearing ratio? WACCincludes the cost of debt and cost of equity, say if current equity increase, what is the effect on WACC, or no effect?
6. I don’t think I fully understand tax effect on cost of capital,
“Tax reduces the cost of capital to a company because interest payments are tax
deductible.”
I understand interest will be charged by tax, but it applies to the person who receives interest, what does it mean ” reduces the cost of capital” and “interest payments are tax deductible”7. what is floor value of convertable loan? can you give an example? how to calculate floor value?
8. why equtiy beta presents business risk and financial risk of a company? what is business risk and which ratio presents it?
9. how do we use asset beta? what is asset beta presents?
10. what is gearing and ungearing about? why do we need to use gearing and ungearing? I might miss one of your lecture video
sorry it’s lots of questions. thanks for your help
. Irredeemable preference shares are equity. Redeemable preference shares are debt.
2. Irredeemable debt is very rare in the real world, but in theory it can and the exam tests you on theories as well as practicalities.
3. Betas are full explained in my free lectures – you cannot expect me to type them all out. here ?
4. D1 is the dividend in one years time. Po is the market value. Again, this is all explained in my free lectures.
5. It depends whether or not there is tax. Again, you must watch my lectures on capital structure..
6. Interest reduces the taxable profit for the company and therefore saves the company tax.
7,8,9 and 10 These (yet again) are all explained in detail my free lectures.
It seems that you have missed more than one of my lectures. Please do not expect me to type out all my lectures here – everything is explained in the lectures.
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