P-04-Business Analysis

Before I answer your question, can I make a few general points.

Firstly, at P4 there is no exact ‘correct’ answer (as there was in Paper F9). In P4 so much depends on assumptions and approximations that there are often more than one ‘correct’ answer. Provided you have made sensible assumptions and that you are approaching the question in the right way, then you will get the marks. The markers for this paper are good and understand the topics.

Secondly, be careful with this pilot paper. It was prepared by the previous examiner. Although he is a very intelligent person, his questions (and answers) were not always terribly good, which is one of the reasons that there is now a different examiner. Also, the syllabus has changed slightly since this pilot paper (question 2, for example asks about the Grabbe variant – this is no longer in the syllabus (and the answer is not correct anyway).

Having said that, the first point you make is perfectly valid. The FCFE should take into account interest paid etc.. OK, in this question the amounts involved are relatively small, but even so they should have been taken into account.

With regard to your second point, it really depends how you define the value of the company. The value really is the value of the equity, and so having used FCFE to value the equity then you do not need to subtract the debt. (The total value of the equity will equal the net asset value).

Hope that helps 🙂