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Hi John,
Sorry for bothering you again.
Here is the another question in BPP again. In revision question Q41, when working out the FCFE, I do know in the answer the $87.2M came from $210M+$1.5M-$4.1M-120.2M=$87.2M, but I do not understand that why it did not subtract the loan repayment of $31.00M, which also incurred in 2005?
Do I misunderstand the FCFE definition?
I am sorry but I am away from home until Thursday and I do not have the BPP books with me.
I will reply on Thurrsday when I get back (and please post a reminder if I forget 🙂 )It is because we are trying to estimate the FCFE for the future, and the loan repayments are more ‘one-off’ rather than be forecastable for the future.
Dear Sir,
I have two other questions on this question:
1) The BPP answer evaluates the FliHi gearing based on book values: Loan 150 m and NA considerred as equity – 120 m;
I’ve used a different approach: MV of a loan = BV of a loan => MV of loan =150m; MV of Equity = PAT * PE = 50 *10 = 500
This gives completely different equity beta for FliHi compared to the BPP answer.
Would I get the marks for such an approach?2) BPP assummes that repayment of principal is one-off. It seems that we allways assumme that prinicpal repayment is one off (based on your response above).
However, the prior year principal repayment is (25) which is close to (31) for the current year. Therefore some doubts whether this is one-off or not are possible.
The question states that there’s been a programme of reinvestment recently.
Please clarify whether I should consider that it’s had influence over principal repayment only?Please clarify what items should we consider as one-off to comply with examiner expectations?
Or, perhaps, one should just state reasonable assumptions to get all the marks.
Is it OK?Thank you in advance.
1. Gearing should be based on market values where possible. However there is a problem with your calculation in that you are not given the PE ratio for FliHi.
You would lose marks but not many (assuming that you calculated the beta correctly using your gearing ratio).2. It is a valid point about the principal repayment (although 31 is not so close to 25 – it is 20% different 🙂 ) Reinvestment would be expected to lead to growth, not to repayments.
(Incidentally, the assumptions are not BPP’s assumptions – they have copied them from the examiner’s answer. Also, 20% of the marks in the question were for stating assumptions. As always, if the assumptions are sensible then you still get the marks.)
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