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  1. Avatar of cecel says

    Hi John,
    I am a little confused between e.g #2 and #4 which basically asked the same question and obviously had the same answer. I am trying to understand your explanation about using the present value to find the market value in #4. Was this to show the two ways of getting the same answer?

    • Avatar of johnmoffat says

      I don’t understand why you are confused.

      If you have finished the lecture you will realise that usually we simply use the formula that is given in the exam. However, given that 50% of the exam is writing as opposed to arithmetic, it is desperately important that you understand the logic behind what we are doing and the premise that the market value is the present value of future expected dividends.

  2. avatar says

    June 2008 past paper Ques 2 (d)
    The P/E ratio of 7.5 is used to determine the Present Value of $720,000 of the after-tax savings (96,000 x 7.5 = $720,000).
    How is it possible to use the P/E ratio to determine the present value? I think i understand “why” we use it, i just didn’t realize the P/E ratio could be used to determine the PV.

    I apologize for asking this question here but i couldn’t find the Ask the Tutor page.

    • Avatar of johnmoffat says

      He should not have used the term present value. The P/E ratio does not replace discounting and does not give a present value in that sense.

      What he means is that the value of a share (using the P/E approach) will be the EPS x P/E ratio.

      So……if the earnings increase the the market value increases.

      (PS To find the Ask the Tutor forums, click on ‘forums’ on the bar at the top of this page, and then click on ‘Ask ACCA Tutor’. Then you will get a list of the Ask the Tutor forums for each paper)

  3. Avatar of Mahoysam says

    Mr John, I have got a question – Why is that when we have a question that includes shares at par of say 25c we have to divide the share by 0. 25 in order to turn it into a $1 share? (to calculate rights issue for example) and then we want to include the shares in the balance sheet, we multiply by 0.25 in order to turn it again to a share of 0.25c!

    Sorry if this is a dumb question, this point always confuses me, I have no idea why do we need the share to be a $1 share? Why not just perform our calculations on a 25c share?

    Thanks,

    Maha

    • Avatar of johnmoffat says

      We do perform our calculations on 25c if that is the nominal value.

      What I am guessing you are confusing it with is that quite often in questions you are told the total nominal value of the shares (an extract from the Statement of Financial Position) and we need the number of shares.
      So…..if the nominal value is 25c a share and the SOFP figure for share capital is $100M, then $100M is the total nominal value of all the shares and so there must be 400M shares of 25c.

      We never turn them into $1 shares – ever :-)

  4. avatar says

    Why is it only the future expected dividend that effects the theoretical value of the share price? Why wouldn’t the expected capital gain of the share be a consideration too for instance? Thanks.

    • Avatar of johnmoffat says

      In theory, it is the expected dividends that affect the share price. If the dividends are expected to grow, then over time the share price will grow (and therefore we have a capital gain). However the only reason for the capital gain is because of increased expectation of dividends. (All in theory, obviously :-) )

  5. avatar says

    Could you help me understand why share prices on the stock exchange keep changing every day but for the same companies? for sure I know that dividends from what we have learned is a factor but not paid daily I guess and so is interest rate.

    • Avatar of johnmoffat says

      The share price is based on what investors expect in the future.
      So although dividends are a factor, it is expected future dividends.

      News about the company comes out all the time (and also about the state of the economy – which affects companies).

      If there is news that makes investors expect the company will do better in the future, then they will be prepared to pay more for the shares – and so the share price will increase.
      If there is news that makes investors expect that the company will do worse in the future, then the share price will fall.

  6. avatar says

    if there is any chance of me passing my ACCA papers it’s all due to this amazing website…. the lecturers are just superb and everything they say is engrained into our brains.. :)

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