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X exercises

R

Risc1

Member
Hi,

question X1.3ii)b indicates that a life company purchased shares in a company which immediately afterwards had a rights issue. The life company did not participate in the rights issue, but the memo adjusts the purchase price for the rights issue. Is this correct?

Further on in the same question it indicates that the life company would pay CGT at a rate of 22% (after indexation allocation). I thought the rate was 20%?


In question X3.3v it asks you to calculate the Basel I capital ratio. The bank has share capital of 40 and sub-ordinated debt of 100. The memo indicates that tier 1 capital is 40 and that tier 2 capital is min(40,100). Why is the min function used for tier 2 capital? Isn't tier 2 capital = 100?

I would appreciate any help.

Thank you
 
Assignment queries

Hi

Your first comment on the rights issue question X1.3 asks whether the adjustment to the purchase price of the shares would depend on whether the company participated in the rights or not. The price of everyone's shares would be adjusted for a rights issue whether they participated or not. So the calculations shown in the question are valid.

The second observation about the 22% capital gains rate is an error. It changed to 20% and has not been updated. thanks for pointing this out - I will adjust it for the coming session.

Your third question relates to the Basel rules. Basel limits tier 2 capital to the amount of tier 1 capital. Hence the maximum here. This is just part of the rules, and is referred to in the notes. Hope this helps.

Colin
 
Thanks

Hi,

Thank you for the prompt reply. I need to read my notes again:eek: .

I am still confused about the rights issue. The investor purchases 250 share at 4 pounds. The investor does not take up the issue and therefore forfeits their right. After the issue the investor still has 250 shares whose value depends on the price in the open market. The shares then get split...

However, if they had sold the rights then this would need to be factored into the return calculation, but how can you adjust your purchase price without this information? The market values the shares.

Am I missing something? :confused:
 
X1.3

Hi

Thinking about this again, I think you are right. Adjusting the price for the rights issue assumes that the life company takes up the rights. (But the question says it doesnt). I will re-write this question, which is in need of an overhaul. If the question had said that the company takes up the issue, then the correct calculations would be that the company has 250 + 125 shares at an average price of 3.33. This is then adjusted for the scrip to leave the company with 500 shares, with an average entry price of 2.50. Then the calculation of the indexation would be 1250*1.02^2 = 1300.50 and the sale price = 500*£5 = 2500, giving a tax (at 20%!) of £239.90. The annualised return would follow.
Alternatively if the company didnt take up the rights, the number of shares after the scrip would be 250*4/3 = 333 at an average price of £3. These are sold for £5 leaving a gain of 1666.67- (1000*(1.02^2) ) = £125.25. the return would follow.

I will change it to one of the above next year - as it stands it is a mixture of the two. Sorry for the confusion and thanks for pointing it out.

Colin
 
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