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QUESTION `1. [ XXXXXXXXXX = 16 Marks.] a) This is a two period certainty model problem. Assume that Daisy Brown has a sole income from Fantasy Ltd in which she owns 15% of the ordinary share...

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QUESTION `1. [ XXXXXXXXXX = 16 Marks.]

a) This is a two period certainty model problem.

Assume that Daisy Brown has a sole income from Fantasy Ltd in which she owns 15% of the ordinary share capital. Currently, she has no savings.

In February, 2018, Fantasy Ltd reported net profits after tax of $600,000, and announced it expects net profits after tax for the current calendar year, 2018, to be 30% higher than last year’s figure. The company operates with a dividend payout ratio of 75%, which it plans to continue, and will pay the annual dividend for 2017 in late-May, 2018, and the dividend for 2018 in late-May, 2019.

In late-May, 2019, Daisy wishes to spend $100,000, which will include the cost of an overseas trip. How much can she consume in late-May, 2018 if the capital market offers an interest rate of 10% per year?

b) This is an annual equivalent costs problem.

Y Ltd has received two offers for a new computer system. System P will cost $200,000 now, has a three year life and costs $10,000 a year to operate. System Q costs $240,000 now, has a four year life and costs $12,000 a year to operate. The relevant discount rate is 6 per cent per annum. Ignoring depreciation and taxes, calculate the AEC for each. Which do you prefer, and why?

QUESTION 1 continued.

c) This question relates to the valuation of interest-bearing securities.

Wildcat Bank Ltd has experienced large losses on its commercial loan portfolio and is unable to meet its next two annual interest payments on its recent issue of unsecured notes. The notes are of $1,000 face value each, mature in May, 2023 and bear a yearly interest coupon payment of 14% per annum.

The Bank paid the interest due this month (May, 2018), and following a meeting of creditors, arranged to defer payment of the next two interest coupons due in May, 2019 and May, 2020 respectively. Under the arrangement with creditors, the Bank will pay the remaining interest coupons (due in May, 2021, May, 2022 and May, 2023) on their due dates, and pay the two deferred coupons (without interest) along with the normal final interest payment and face value of the notes on the maturity date.

Wildcat Bank Ltd’s notes are now seen as risky, and require an 18% per annum return.

REQUIRED: Calculate the current value of each Wildcat Bank unsecured note.QUESTION `1. [ XXXXXXXXXX = 16 Marks.]

a) This is a two period certainty model problem.

Assume that Daisy Brown has a sole income from Fantasy Ltd in which she owns 15% of the ordinary share capital. Currently, she has no savings.

In February, 2018, Fantasy Ltd reported net profits after tax of $600,000, and announced it expects net profits after tax for the current calendar year, 2018, to be 30% higher than last year’s figure. The company operates with a dividend payout ratio of 75%, which it plans to continue, and will pay the annual dividend for 2017 in late-May, 2018, and the dividend for 2018 in late-May, 2019.

In late-May, 2019, Daisy wishes to spend $100,000, which will include the cost of an overseas trip. How much can she consume in late-May, 2018 if the capital market offers an interest rate of 10% per year?

b) This is an annual equivalent costs problem.

Y Ltd has received two offers for a new computer system. System P will cost $200,000 now, has a three year life and costs $10,000 a year to operate. System Q costs $240,000 now, has a four year life and costs $12,000 a year to operate. The relevant discount rate is 6 per cent per annum. Ignoring depreciation and taxes, calculate the AEC for each. Which do you prefer, and why?

QUESTION 1 continued.

c) This question relates to the valuation of interest-bearing securities.

Wildcat Bank Ltd has experienced large losses on its commercial loan portfolio and is unable to meet its next two annual interest payments on its recent issue of unsecured notes. The notes are of $1,000 face value each, mature in May, 2023 and bear a yearly interest coupon payment of 14% per annum.

The Bank paid the interest due this month (May, 2018), and following a meeting of creditors, arranged to defer payment of the next two interest coupons due in May, 2019 and May, 2020 respectively. Under the arrangement with creditors, the Bank will pay the remaining interest coupons (due in May, 2021, May, 2022 and May, 2023) on their due dates, and pay the two deferred coupons (without interest) along with the normal final interest payment and face value of the notes on the maturity date.

Wildcat Bank Ltd’s notes are now seen as risky, and require an 18% per annum return.

REQUIRED: Calculate the current value of each Wildcat Bank unsecured note.QUESTION `1. [ XXXXXXXXXX = 16 Marks.]

a) This is a two period certainty model problem.

Assume that Daisy Brown has a sole income from Fantasy Ltd in which she owns 15% of the ordinary share capital. Currently, she has no savings.

In February, 2018, Fantasy Ltd reported net profits after tax of $600,000, and announced it expects net profits after tax for the current calendar year, 2018, to be 30% higher than last year’s figure. The company operates with a dividend payout ratio of 75%, which it plans to continue, and will pay the annual dividend for 2017 in late-May, 2018, and the dividend for 2018 in late-May, 2019.

In late-May, 2019, Daisy wishes to spend $100,000, which will include the cost of an overseas trip. How much can she consume in late-May, 2018 if the capital market offers an interest rate of 10% per year?

b) This is an annual equivalent costs problem.

Y Ltd has received two offers for a new computer system. System P will cost $200,000 now, has a three year life and costs $10,000 a year to operate. System Q costs $240,000 now, has a four year life and costs $12,000 a year to operate. The relevant discount rate is 6 per cent per annum. Ignoring depreciation and taxes, calculate the AEC for each. Which do you prefer, and why?

QUESTION 1 continued.

c) This question relates to the valuation of interest-bearing securities.

Wildcat Bank Ltd has experienced large losses on its commercial loan portfolio and is unable to meet its next two annual interest payments on its recent issue of unsecured notes. The notes are of $1,000 face value each, mature in May, 2023 and bear a yearly interest coupon payment of 14% per annum.

The Bank paid the interest due this month (May, 2018), and following a meeting of creditors, arranged to defer payment of the next two interest coupons due in May, 2019 and May, 2020 respectively. Under the arrangement with creditors, the Bank will pay the remaining interest coupons (due in May, 2021, May, 2022 and May, 2023) on their due dates, and pay the two deferred coupons (without interest) along with the normal final interest payment and face value of the notes on the maturity date.

Wildcat Bank Ltd’s notes are now seen as risky, and require an 18% per annum return.

REQUIRED: Calculate the current value of each Wildcat Bank unsecured note.QUESTION `1. [ XXXXXXXXXX = 16 Marks.]

a) This is a two period certainty model problem.

Assume that Daisy Brown has a sole income from Fantasy Ltd in which she owns 15% of the ordinary share capital. Currently, she has no savings.

In February, 2018, Fantasy Ltd reported net profits after tax of $600,000, and announced it expects net profits after tax for the current calendar year, 2018, to be 30% higher than last year’s figure. The company operates with a dividend payout ratio of 75%, which it plans to continue, and will pay the annual dividend for 2017 in late-May, 2018, and the dividend for 2018 in late-May, 2019.

In late-May, 2019, Daisy wishes to spend $100,000, which will include the cost of an overseas trip. How much can she consume in late-May, 2018 if the capital market offers an interest rate of 10% per year?

b) This is an annual equivalent costs problem.

Y Ltd has received two offers for a new computer system. System P will cost $200,000 now, has a three year life and costs $10,000 a year to operate. System Q costs $240,000 now, has a four year life and costs $12,000 a year to operate. The relevant discount rate is 6 per cent per annum. Ignoring depreciation and taxes, calculate the AEC for each. Which do you prefer, and why?

QUESTION 1 continued.

c) This question relates to the valuation of interest-bearing securities.

Wildcat Bank Ltd has experienced large losses on its commercial loan portfolio and is unable to meet its next two annual interest payments on its recent issue of unsecured notes. The notes are of $1,000 face value each, mature in May, 2023 and bear a yearly interest coupon payment of 14% per annum.

The Bank paid the interest due this month (May, 2018), and following a meeting of creditors, arranged to defer payment of the next two interest coupons due in May, 2019 and May, 2020 respectively. Under the arrangement with creditors, the Bank will pay the remaining interest coupons (due in May, 2021, May, 2022 and May, 2023) on their due dates, and pay the two deferred coupons (without interest) along with the normal final interest payment and face value of the notes on the maturity date.

Wildcat Bank Ltd’s notes are now seen as risky, and require an 18% per annum return.

REQUIRED: Calculate the current value of each Wildcat Bank unsecured note.

Answered Same Day May 06, 2020

Solution

Abr Writing answered on May 08 2020
127 Votes
part a
            2018    2019
        Net Profit    600000    780000    profit in 2019 = 600000*(1+30%)
        Dividend paid    75%    75%
        Dividend Amount    450000    585000    75%*net profit
        Share of Daisy
own    15%    15%
        Amount of Dividend received by Daisy    67500    87750    Share of Daisy Brown *Amount of dividend received by Daisy
        Capital Market rate    10%
        Amount in May 2019    74250    87750    Only the amount received in 2018 will appreciate
        Amount Daisy can spend    162000
        Ampunt spent for foreign trip    100000        No appreciation since amount is spent in may 2019
        Remaining amount Daisy can spend    62000
part
    Year    System P    System Q    Discount rate    PVIF    Discounted cost P    Discounted cost Q
    0    200000    240000    6%    1    $ ...
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