M
mtm
Member
I have done mock exam 2007 and am hoping that the forum members could shed some light on some of my problems. I would really appreciate a reply within the next few days. :0)
Q1:
Pg 1 of the solutions gives the dividend income from the US equity portfolio as 250x2.2%=£5.5m. Not a big deal but if I didn’t include cash and instead calculated 2.2% of 245m – would that also be ok?
Pg 2 of the solutions calculates the value of the loan stock as £55m using 6.5%. Firstly the solution is using a yield (6.5%) meant for secured stock. Surely unsecured stock should enjoy a higher yield, say 7%? Secondly the solution happily assumes that there are 10 years left to expiry, i.e. that it is now 2006. Nowhere can I find this in the question that there is only 10 years left to maturity. Is this a plain thumb suck? I calculated the MV using the equation L=A-E, but I suppose this is more an accounting equation (i.e. using book values) and the equation is not being used in the correct situation here. I however calculated L=250-(400x0.42)= £82. There is however no value of n that will solve the loan stock equation of value using 6.5%, so I guess this method is wrong. Any comments?
The question talks about a new £75m preference share issue. From CT1 when referring to a bond one usually refers to its nominal value, so although this isn’t exactly a debt issue I took £75 as the par value and not the market value. The solution takes this £75 as being the market value of the stock. This is not obvious to me - could this not have been a bit more clearly put?
At the bottom of pg 2 solutions the accounting NAV is taken as 265 – MV(pref shares). As I understand it investments (and cash) will be recorded at market value so that the assets are recorded at £265 in the balance sheet and their market value is also around £265. But, are preference shares (on the liability side of the balance sheet), especially here when a zero ‘bond’, taken as amortised cost in the balance sheet, i.e. the value increases with interest as expiry approaches, and thus at t=0, taken as £75 and at expiry as £496? I was thinking that perhaps the preference shares should be recorded at £496 in the balance sheet, although I realise that such a large value causes a negative NAV and completely “takes over” the balance sheet.
Thanks!
Q1:
Pg 1 of the solutions gives the dividend income from the US equity portfolio as 250x2.2%=£5.5m. Not a big deal but if I didn’t include cash and instead calculated 2.2% of 245m – would that also be ok?
Pg 2 of the solutions calculates the value of the loan stock as £55m using 6.5%. Firstly the solution is using a yield (6.5%) meant for secured stock. Surely unsecured stock should enjoy a higher yield, say 7%? Secondly the solution happily assumes that there are 10 years left to expiry, i.e. that it is now 2006. Nowhere can I find this in the question that there is only 10 years left to maturity. Is this a plain thumb suck? I calculated the MV using the equation L=A-E, but I suppose this is more an accounting equation (i.e. using book values) and the equation is not being used in the correct situation here. I however calculated L=250-(400x0.42)= £82. There is however no value of n that will solve the loan stock equation of value using 6.5%, so I guess this method is wrong. Any comments?
The question talks about a new £75m preference share issue. From CT1 when referring to a bond one usually refers to its nominal value, so although this isn’t exactly a debt issue I took £75 as the par value and not the market value. The solution takes this £75 as being the market value of the stock. This is not obvious to me - could this not have been a bit more clearly put?
At the bottom of pg 2 solutions the accounting NAV is taken as 265 – MV(pref shares). As I understand it investments (and cash) will be recorded at market value so that the assets are recorded at £265 in the balance sheet and their market value is also around £265. But, are preference shares (on the liability side of the balance sheet), especially here when a zero ‘bond’, taken as amortised cost in the balance sheet, i.e. the value increases with interest as expiry approaches, and thus at t=0, taken as £75 and at expiry as £496? I was thinking that perhaps the preference shares should be recorded at £496 in the balance sheet, although I realise that such a large value causes a negative NAV and completely “takes over” the balance sheet.
Thanks!