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it is the question of jun 2004,I am using kaplan revision kit I want to know its quetion c answer and that how it has calculated change in working capital as
year 20X5 20X6 20X7 20X8
change in working capital 15 27 – 56
I want only to know how this change in working capital has been calculated,but according to my calculation for 20X5 change in inventory 448-448=0
change in receivables 615-564=(51)
change in payables 514-472=42
so change in working capital =-9i also want to know that why in calculating the market value of company only the free cash flow for the company after 20X8 have been used that is FCF 20X8 (1+g)/WACC -g =419(1.06)/.11-.06 =8,883
I want to know only why free cash flow after 20X8 has been used to calculate market value of the company and why not free cash flow for the year 20X5 to 20X8 is not used since now it is only 20X4 ,and I think free cash flow from year 20X5 to 20X8 is relevant in calculating the market value of company based and equity and hence share price based on the model of free cash flow to the company,
I think I am wrong some where so please tell me where I am wrong in the theoryInventory in 20X5 is not 448,, it is 488!
The working capital in 20X5 is 1125 – 780 = 345
In 20X4 it is 1032 – 702 = 330The increase is 345 – 330 = 15
The question does not ask you to calculate the current market value (the share price is given in the question).
It asks you whether the managing directors claims are achievable – he claims that the share price should increase by 100% in 4 year (note xi) and so it is the price in 4 years time that we need in order to check his claim.now it is the end of 20X4 and after four year mean that after 20X5, 20X6,20X7 and 20X8 so that if it has asked to calculate share price after four year then we have to consider cash flow only after 20X8 any why not cash flow of 20X5,20X6,20X7and 20X8 relevant in calculating share price since it is now the end of 20X4?
As I wrote before, we are only interested in the share price in 4 years time. Share prices are determined by future expectations – what happened in earlier years is not relevant (except for using the information to help decide on future expectations).
Sir,
why do we account for cash in hand when we calculate working capital? Change in cash account is not taken into consideration when we calculate cashflow, is not it?
I also wonder why short-term loan is included in working capital calculation? Long-term and short-term loans relate to financing activity and included in financing part of a cash flow and not used in Free cash flow calculation is not it?
Short term borrowing (including overdrafts) is not taken into account in calculating the WACC. Only long-term borrowing.
John,
Still do not get it,
Is it correct to include cash and short-term loans to calculate WC adjustment for FCFF calculation?
As far as I remember normally only inventory, AP and AR are used for calculation of Operating Cash Flow but not the cash and short-term loans.
As is always the case in P4 (certainly always in question 1), it depends on assumptions.
Because note (iv) of the question suggests that the cash is need to maintain the sales, it is assumed that it is not available for distribution to shareholders and therefore not part of FCFE.As the examiners answer states – other calculations of FCFE were accepted.
Could you please suggest, how short term borrowings and interest payables were calculated?
The short-term borrowings are the balancing (missing) figure to make the Statements of financial position balance.
The interest is the interest on the long-term borrowing of 580 at 8%, plus interest on the short-term borrowing at the start of the year (end of previous year) at 7%. (So, for example, in 20X6 it is (8% x 580) + (7% x 266) = 65.02)
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