Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Q1 Dec 2007
- This topic has 15 replies, 2 voices, and was last updated 9 years ago by John Moffat.
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- July 17, 2014 at 3:52 pm #179080
hi sir, i wish to clarify on this…
(a) when the question requires us to produce a cash flow forecast, is it implied that we should only analyse the operating cash flow…?
in other words, is the net cash inflow from operating activities the same as net cash flow before reinvestment…?
is there a possibility where a -ve cash flow before reinvestment is derived…?
(b) ‘where new capital has been introduced this is deducted from the capital expenditure during the year to give the amount of investment financed from the free cash flow..’
i don’t understand what is meant by the above sentence. can you explain in layman term…?
for the term reinvestment, is it only capital expenditure is included…?…or there are other items included…?
dividend capacity is determined by cash flow before reinvestment less out only capex…why the debt repayment is not deducted…?
What is that with the 18 days of cost of sales is unfunded…?…which part in the question mentioned this…?
18/365 x (143.2-28)= 5.68 mil…
Totally confused with this calculation. Please assist..‘The sortfall has been taken from the firm’s cash reserves..’ what is the shortfall…?..is it the 4 mil…?…and which part of the question mentioned that it was taken from cash reserves…?…or we just simply assumed…?
‘Whether the firm has over distributed in terms of its capital account depends upon the firm’s level of earnings for the year and its target rate of retention..’
Don’t understand the above. Can you explain in a simpler way…?
Thanks…
July 17, 2014 at 5:22 pm #179091a) a cash flow forecast is effectively asking for a Statement of cash flows (although as the question says you are not required in P4 to use the IAS7 format)
You do not have to analyse anything – but to calculate the cash flow from operating activities you need to adjust the profit just as you have to in financial accounts papers.
The net cash flow from operating activities is the net cash flow before investing activities and before financing activities (i.e. before net reinvestment).It is possible to have a negative cash flow from operating activities (just as it is in financial accounts papers when preparing a cash flow statement).
b) If there is new investment then the cash necessary must either have been generated from profits or must have been raised from elsewhere (e.g. a new issue of shares). The net reinvestment is the new capital investment less the new capital raised – any extra must come from the free cash flow.
If you look at the cash flow statement, the net cash change is the free cash flow (operating cash flow) less the capital expenditure, less the dividend, and less the debt repayment.
Because the net cash change is negative, it means that they have paid more dividend than they can afford to this year out of this year’s cash. They could only really afford to have paid 28 – 4 = 24M.
I have no idea how he got 18 days unfunded (this was the previous examiner who set some dreadful questions, even though the rest of this one is not actually too bad). What other books have done for this question (and is more sensible) is to say that the working capital is increasing by 1.1+3.5+0.5 = 5.1 (see the top part of the statement) and that therefore to maintain the working capital cycle they need another 5.1 cash, which leaves a maximum dividend of 24 – 5.1 = 18.9M
Hope that helps 🙂
August 10, 2014 at 6:13 pm #189232Hi…a continuation for the same question…part (c)
For the gearing ratio, is the examiner using the formula debt / debt + equity ?
If yes, why we cant straight away quote the equity as 179 as provided in the question ?
For the calculation of EVA for both 2007 and 2008, why deferred tax is excluded, since it forms part of non current liabilities too ?
For the return on capital employed for both years, using the formula quoted, i got the following :-
2007 : 102.3 / (179 + 62) = 42.4 %
2008 : 108.8 / (253.9 + 55.6) = 35.1%
Why is it different from the suggested answer of 51.2 % and 42.4% respectively ?Thanks for helping…
August 10, 2014 at 8:31 pm #189260Yes – he is using debt/debt + equity (although unless specified in the question, you could use debt/equity instead. It is equally valid and would get full mark).
179 is the value in the Statement of financial position, which is book value and means little. You should use the market value of the equity (which is what the examiner has done).
EVA is an attempt to use cash flows. Deferred tax is not a cash flow.
The examiners answer has, again, used market value rather than Statement of financial position values. It is more sensible, but you would still have got the marks for using your values. What matters in P4 is the discussion rather than exact figures – there are rarely exact figures in P4.
August 12, 2014 at 7:32 pm #189717Hi sir,
Still a bit confused here.
For the gearing ratio, why is it only the value of the share capital is taken up as equity ? What about the other reserves and retained earnings ? Shouldn’t these be included also ?
Just for the sake of comprehensive understanding, can you show me the workings on how the return on capital employed for both years are derived ?
Thanks…
August 13, 2014 at 6:10 am #189769The market value of the shares effectively includes the reserves. (The most obvious reason for expecting the market value to be higher than the nominal value is surely the fact that the company has retained profits.) To add the reserves to the market value of the shares would be ‘double counting’ them.
With regard to the ROCE, this is always calculated using Statement of financial position figures (as opposed to market values).
I don’t know whether you are referring to the examiners answer, or to the answer in one of the Revision/Exam Kits. The examiners answer is wrong.
I agree with Kaplan’s answer which is that for 2007, the ROCE = 102.3 / (179 + 45) = 45.7%
For 2008, ROCE = 108.8 / (253.9 + 34) = 37.7%(It is annoying about the examiners answer – this was the previous examiner and it happened several times that a wrong figure would appear from nowhere with no workings. The current examiner took over 3 years ago and there is no longer this problem.)
August 15, 2014 at 1:34 pm #190383In calculating capital employed, should we exclude or include deferred assets and liabilities…? What is the reason for the exclusion or inclusion…?
thanks…
August 16, 2014 at 8:45 am #190482There is not really one correct answer here – ROCE is not an exact measure ever, only an indicator (particularly because it is using year-end. balance sheet figures). However, we would normally exclude deferred liabilities on the basis that they are not really a source of long-term finance.
August 19, 2014 at 7:28 pm #191550Part (c) of the question. Examiner’s answer mentioned that the profit before tax should increase to 108.6 mil from 102.3 mil, that is an increase of 6.16%. On what basis this is determined ?
August 20, 2014 at 6:35 am #191591The examiners answer is looking at the operating profit. It goes from 102.3 to 108.8 which is actually an increase of 6.35% (he made a little mistake).
Alternatively you could have looked at the profit before tax (after interest), in which case it has increased from 100 to 107 – and increase of 7%.
(I had better mention that this question was set by the previous examiner (not the current one). I am afraid that on several occasions he would produce figures from nowhere in his answers, or make little mistakes. This does not happen with the current examiner.)
September 25, 2014 at 6:00 am #196335In part (c) the report to management, it is mentioned that the increase in NOPAT is offset by an increased capital charge incurred by the expected increase in the book value of capital employed and the increase in the firm’s cost of capital.
i can justify from the question that the book value of capital employed has increased. But how about the increase in cost of capital ? Since the question has mentioned that the company’s cost of debt capital remains at its current rate, and we are to assume that the current cost of equity capital remains unchnged.
September 25, 2014 at 7:29 am #196374What the examiner has written in that sentence in his answer is rubbish!
The cost of capital has been assumed to be the same in both year (9.82%). What has increased is obviously the actual charge (because in the second year, the 9.82% has been applies to a larger figure of capital employed.I told you earlier that this exam was set by the previous examiner – this is another example of why that examiner was replaced. You can be pretty confident that the current examiner does not make that sort of rubbish comment!
September 29, 2014 at 7:56 am #202113Hi, can i know how to calculate the EVA margin for both years…?
September 29, 2014 at 3:42 pm #202171EVA is the net operating profit after tax minus the WACC x (equity + debt) at balance sheet values.
So for 2007, the operating profit is 102.3. After tax at 30% it is 0.7 x 102.3 = 71.61
The WACC is 9.82%.
The balance sheet value of equity is 179, and of debt is 45. Total is 224.
So the EVA is 71.61 – (9.82% x 224) = 49.61
Same workings for 20X8
September 29, 2014 at 5:40 pm #202201No, i am not referring to EVA calculation, but EVA margin. The answer mentioned that the EVA margin fall from 22.54% to 18.24%. How this is derived…?
September 30, 2014 at 8:48 am #202237I am sorry, but I have no idea where he got those figures from!!
EVA margin is not a standard term, and is not in the syllabus (and no marks were specifically given for it).
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