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Sir, please help me understand why debt finance is included the way it is?
I’m kind of confused……. can you explain with reference to the year number we are standing on each time we do calculation for ratios?
I am sorry but I cannot help you.
I only have past exams going back to December 2007, because before then the exam was completely different and the syllabus was a combination of what are now Papers PM and FM.
I do also have the BPP Revision Kit, but this question is not in the current edition of their kit.
Maybe you are finding it in the Kaplan Kit, but I do not have that.
If you found it on some website then I certainly cannot help because it is illegal for anyone to share it on a website because of the ACCA copyright rules.
I am sorry 🙁
Oh ok and for some reason I’m not able to copy paste it here from kaplan kit?
Thanks though…..
Sorry 🙁
Since it is in the Kaplan Kit it might be worth asking in the other Paper FM forum. Another student might have the Kit and might be able to help.
Oh it is in kaplan kit……………….
TFR is a small, profitable, owner-managed company which is seeking finance for a planned
expansion. A local bank has indicated that it may be prepared to offer a loan of $100,000 at
a fixed annual rate of 9%. TFR would repay $25,000 of the capital each year for the next
four years.
Annual interest would be calculated on the opening balance at the start of each year.
Current financial information on TFR is as follows:
Current revenue: $210,000
Net profit margin: 20%
Annual taxation rate: 25%
Average overdraft: $20,000
Average interest on overdraft: 10% per year
Dividend payout ratio: 50%
Shareholders’ funds: $200,000
Market value of non-current assets $180,000As a result of the expansion, revenue would increase by $45,000 per year for each of the
next four years, while net profit margin would remain unchanged. No tax allowable
depreciation would arise from investment of the amount borrowed.TFR currently has no other debt than the existing and continuing overdraft and has no cash
or near-cash investments. The non-current assets consist largely of the building from which
the company conducts its business. The current dividend payout ratio has been maintained
for several years.Required:
(a) Assuming that TFR is granted the loan, calculate the following ratios for TFR for
each of the next five years:(ii) medium to long-term debt/equity ratio
John Moffat wrote:Sir, please help me understand why debt finance is included the way it is?
Ans:
Debt finance (current-year5) Nil, 75,000 , 50,000 ,25,000,Nil ,Nil
They borrow $100,000 now and the question says that they repay 25,000 in each of next 4 years.
So in the first year they repay $25,000 and are owing 100,000 – 25,000 = $75,000 at the end of the year. They repay another $25,000 in the following year and so are owing $50,000 at the end of that year. And so on.
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