Question 1

**Section B - Case 3: AeroFreight Logistics**

*Scenario:* AeroFreight Logistics operates drone deliveries across Europe and Asia. The company is based in the UK (GBP). It owes a supplier €500,000 payable in 6 months. 
Spot rate: €1.1500 - €1.1550 / £1
6-month forward rate: €1.1400 - €1.1460 / £1
UK 6-month borrowing rate: 4% (annual)
Euro 6-month deposit rate: 2% (annual)

**Question 4:** AeroFreight has irredeemable debt in issue with a nominal value of £100, paying an annual coupon of 6%. The current market price of the debt is £80 ex-interest. The corporate tax rate is 25%.

What is the post-tax cost of this debt?

Accepted Answer

Use the formula for the cost of irredeemable debt: Kd = [i × (1 - t)] / P0, where 'i' is the annual interest payment, 't' is the tax rate, and P0 is the current market price.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to apply the tax shield (resulting in 7.5%) or dividing by the nominal value (£100) instead of the market value (£80).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 5

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