- This topic has 6 replies, 3 voices, and was last updated 10 years ago by
.
- Posts
Hello,
I struggled with 3 questions that came up in the MCQ test – I hope someone can help.
1) a company has sales of £200m. Customers currently pay after 40 days. The co is considering offering a disc of 1% for payment within 15 days. It expects that 60% of customers will take the disc. What’s the effective annual cost of offering the discount?
I thought I had to use that horrible formulae ((disc./%left)^n)-1 maybe I am applying it incorrectly:
((0.01 / 0.99)^(365/25))-1
it doesn’t come out right in my calculator :/2) The share price of CP is $4p/s. They announce a 1:5 rights issue @ $3.10 p/s.
I did:
(5 x $4)+($3.10) all divided by 6?3) A co. has just paid a div of $0.23 p/s. S/holders expect the div to remain @ $0.23 next yr but to increase by 3% pa thereafter.
S/holders req’d rate of return is 12&, CT 25%.
No idea how to arrive to $2.56…Thank you
Silvia
i can answer the first one if John doesnt mind, you forgot to add 1 in the equation i.e (1+0.01/0.99)^(365/25) -1 ………. that gives 15.8% amirite or am I right ?
Thanks Fahad 🙂
Question 2:
What you have written is correct if the question asked for the theoretical ex-rights price.
However, the same information appears in three questions – one asks for the TERP, another asks for the value of the rights (which of course is different), and the other asks what % of the rights an investor needs to take up in order for their to be no cash effect.
I don’t know which question you got (because the computer selects them at random).Question 3:
Have you watched all of the free lectures?
You use the dividend valuation formula from the formula sheet.
23/(0.12-0.03) = 256c (or $2.56)@John Moffat welcome :), regarding question 3 , we will also have to multiply the growth rate to dividend right ? 23(1.03/(0.12-0.03) and since it is increasing in year 2 wont we discount it back to year 0 ?
No.
Do(1+g) in the formula is next years dividend. Usually it is this years dividend plus growth, but here we know next years dividend is 23c, so 23c appears on the top of the formula.
Hi,
Thank you both.I was adding growth too but I knew it wasn’t right. It makes sense now.
As per Q2, sorry I forgot to write the actual question. It asked for the theoretical value of the rights. I see what you mean 🙂 I stopped at the TERP which gave me $3.85. Then I had to deduct this from my s/price of $4. EUREKA! 😉
Thanks
Sil
- You must be logged in to reply to this topic.