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Dear Sir,
I have two questions for part (a):
– for the workings 5 and 6, I don’t understand why the AF of 5yrs less the DF of 1 year (x4.329-0.952) is used?
– for working 1, I understand from the question that tax losses are carried forward but from the workings it looks like they carried forward the adjusted cash flows losses forward? I don’t understand this as no tax (loss) has been calculated yet
Hope this makes sense.
Thanks, JustineAlso, on Q2 part (b), the examiner stated that the shareholders may be concerned that there is no maximum cap on the convertible loan notes, allowing Tippletine to force conversion if the share price reaches a high enough level (last sentence of part b). But the effective price of conversion is $2.75 per share so surely there is a cap if this is the set price?
Many thanks again tutor, your help is very much appreciated.
JustineBecause the tax flows are from years 2 to 5, we calculate the discount factor as the 5 year annuity factor (which is the total for years 1 to 5) lets the factor for 1 year. The difference in the total for years 2 to 5.
The adjusted cash flow is the tax loss. Therefore there is no tax payable at time 1, but the loss reduces the taxable profits in the later years.
Although they are allowed to convert at $2.75, they will want to convert if the price is higher than this. So the problem is that suppose the price went up to $100 – then obviously people would convert and make an enormous profit. So the shareholders would prefer that the company set a limit on the maximum price and then forced them to convert if the share price reached the limit.
but how come conversion upon high price is listed under a disadvantage, we have already covered the dilution of control in another disadvantage, even though note holders convert how come is this a disadvantage please ?
It is because of the fact that some of the subscribers for the notes will be the directors. So if they are converted to shares it will mean that the directors will hold more shares which the other shareholders might not be happy about. (The answer does not say that it will necessarily be a problem, just that it is something that other shareholders might be concerned about).
ok so the answer is stressing upon a dilution in control again, under a different circumstance. Thank you
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