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Hi John
Thanks for the lectures, today in my exam I had a wacc question which included that the redeemable loans were to be redeemed at 1 for 11 in 8 years and if not taken then would be redeemed at nominal value in year 10. Now I’ve done plenty of question practice but didn’t come across one where the 1 for x was different to the redemption year. Obviously I can’t recall the whole question but I used the years 1-10 and year 10 in my calculation. Should I have used 8 years?
First you would decide whether the investor would be expecting it would be better to take the shares in 8 years at whatever price they expect the shares to be in 8 years time, or to take cash in 10 years time. Then you calculate the IRR based on whichever of the two options was the best.
I really can’t say more without actually seeing the whole question.
Ah thanks John, shame I’ve not got full marks there then, I also had a multiple choice question were the following was given:
it said the value of right per share is 0.40 and the current share price is $7 rights issue of 1:4 what is terp and what is rights price.
Initially I did the rights price as 6.60 as I thought was mv-rights but then for the terp I couldn’t get an answer to be one of the selections.
I then took it as 0.40 per share and 4 shares so rights price was 5.40 and terp was 6.60 after my calc, hoping this is right as it threw me
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