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Advanced Financial Reporting Questions 106–110 (page: 23)

XY has in issue a 6% convertible bond which is redeemable at par or convertible into equity shares in one year's time. The conversion terms are 20 equity shares for each $100 of convertible bond. The conversion value in one year's time is expected to be $105 per $100 nominal of the bond based on the current share price of $5.25.
Which of the following statements about the bond is correct?

CORRECT TEXT
CD has 200,000 equity shares with a current market value of $2.50 each. The annual dividend of $0.50 a share is about to be paid.
CD also has redeemable debt with a nominal value of $100,000. This is currently trading at $90 for each $100 of nominal value.
The cost of equity is 20% and the post tax cost of debt is 6%.
What is CD's weighted average cost of capital?
Give your answer in % to one decimal place.
? %

Which TWO of the following are TRUE in respect of preparing a consolidated statement of cash flows where there has been an acquisition of a subsidiary part way through the year?

UV has raised $100,000 through the issue of two irredeemable financial instruments:

· 6% debentures with a current market value of $101.50 per $100 nominal value; and · 8% preference shares with a current share price of $2.20 each.
The corporate income tax rate is 20%
What is the post tax cost of debt for each of these instruments?

AB and CD are competitors supplying components to the car manufacturing industry. AB operates in Country X and CD operates in Country Y. Both entities were incorporated on the same day, are the same size and prepare financial statements to 31 March each year using international accounting standards.
Which of the following statements taken individually would limit the usefulness of the comparison of the return on capital employed ratio between the two entities?