- This topic has 23 replies, 4 voices, and was last updated 10 years ago by
.
- Posts
sir,
actually i can’t figure out why the statement of financial position can balance.
(i) ln the question it was mentioned that the existing ordinary shares will be cancelled and ordinary shareholders will be issued with 40 mil new $1 ordinary shares in exchange for a cash payment at par. Is the following double entry correct…?
To cancel the existing shares, dr share capital and cr cash…?
To take up the new share issue, dr cash and cr share capital…?
So effectively this transaction did not cause any change to the statement of financial position right…?
(ii) The existing unsecured bonds will be cancelled and replaced with 270 mil of $1 ordinary shares. The bond holders will contribute $90 mil in cash. All the shares will be listed and traded. How should we account for this transaction so that the statement of financial position will balance…?
(iii) The directors of the restructured company will get 4 mil $1 share options for an exercise price of $1.10, which will expire in four years. Why is it that this transaction is not adjusted…?…
Thanks…
The share options will not appear on the SOFP.
I am puzzled by the rest of your question – we are not worried about double entries in P4. You can see from the answer that the SOFP does balance. So ask about items on the SOFP that you do not see where they came from.
The share options will not appear on the SOFP.
I am puzzled by the rest of your question – we are not worried about double entries in P4. You can see from the answer that the SOFP does balance. So ask about items on the SOFP that you do not see where they came from.
Hi sir,
(i) can i further clarify why you said that share options will not appear on the SOFP…?
(ii) estimated value based on cash flows to perpetuity (proposal 2)
(a) $20.56m / 0.065
(b) ($20.56m / 0.065) * (1+0.065)^-n
solution (a) is correct because the estimated value is right after the restructuring process. Am i right at saying that…?
(iii) in this question it seems like we have to assume tax allowable depreciation (capital allowance) and depreciation are the same…?
They are totally different right…?(iv) regarding the value attributable to shareholders, why is it only the value of bank loan is deducted…?…what about the payables (they are providers of finance too) and the finance costs of $3.36m (0.07 * 60 * 0.8)…?…they need to be deducted too right…?
(v) assumptions
(1) it is assumed that, as before, the depreciation and the amount of capital investment needed are roughly equal.Will we get credit for putting down this assumption since it has already being mentioned in the question..?
(2) it is assumed that no additional investment in non current assets or working capital is needed, even though sales revenue is increasing.
Is this referring to the 5% growth for the new business venture…?
(3) it is assumed that additional initial working capital requirement is part of the new venture investment of $50 mil.
This means that all the investment in non current assets and working capital for the new venture will be covered by the $50 mil. Is this correct…?
(vi) estimated value based on cash flows to perpetuity (proposal 3)
(a) $28.4 / (0.11-0.05)
(b) $28.4 / (0.11-0.05) * (1+0.11)^-n
Solution (a) is correct because the constant growth takes place right after the management buy-out. Is this correct…?
(c) ‘this is over 50% in excess of the funds invested in the new venture’.
What is this sentence trying to tell…?
Thanks…!
I am sorry Stacie, but I am answering over 50 questions a day (as well as lecturing).
I cannot possibly answer so many questions from you – especially when each question contains so many parts as this one does.You are going to have to refer back to your Study Text or to the free lectures – I cannot be your private tutor on here.
Sorry sir, just facing too much problems here. However is one or two questions possible here…?
(i) can i further clarify why you said that share options will not appear on the SOFP…?
(ii) estimated value based on cash flows to perpetuity (proposal 2)
(a) $20.56m / 0.065
(b) ($20.56m / 0.065) * (1+0.065)^-n
solution (a) is correct because the estimated value is right after the restructuring process. Am i right at saying that…?
Thanx…
(i) As far as I am aware it is a financial accounts rule 🙂
(ii) Yes you are correct 🙂
Hi stacie,
I’m looking into that question now. I think I may discuss it with you.
I can answer (iv). The suppliers are providers of finance BUT not to the shareholders. They provide finance to the working capital, to manufacture goodsto be sold. I am answering based on what I understand.
The rest of the question, I will try to answer or I can even discuss it with you if you don’t mind. This way, we don’t have to disturb the tutor unless both of us are stucked.
Why do u want the sofp to balance. The question is not asking us abt balancing the sofp
Hi sir,
(i) in this question it seems like we have to assume tax allowable depreciation (capital allowance) and depreciation are the same…?
They are totally different right…?(ii) regarding the value attributable to shareholders, why is it only the value of bank loan is deducted…?…what about the payables (they are providers of finance too) and the finance costs of $3.36m (0.07 * 60 * 0.8)…?…they need to be deducted too right…?
Thanks…
(i) The word depreciation on its own refers to the method used in the financial accounts. The word capital allowances refer to the method used by the tax authorities when calculating taxable profit. In practice the two may be the same, but often are not.
However, when he used the phrase ‘tax allowable depreciation’ it means that both the depreciation method in the accounts is allowed for tax by the tax authorities.
(ii) No. The value of the firm is equal to the value of the long-term capital (equity + non-current liabilities). Payables are just part of the net working capital of the firm.
The interest is subtracted in the income statement, but does not affect the immediate SOFP.Hi sir,
Assumptions :-
It is assumed that, as before, the depreciation and the amount of capital investment needed are roughly equal.Will we get credit for putting down this assumption since it has already being mentioned in the question..?
Thanks…
Hi sir,
(a) still a bit confused here…so in this particular question the phrase ‘tax allowable depreciation’ refer to depreciation charge or capital allowance charge…??
(b) when we calculate value attributable to shareholders, it means free cash flow to equity right…?…isn’t it we need to minus out the debt repayment and its related interest costs too…?
Thanks…
(a) As I wrote before, it refers to both. It is allowable for tax purposes (but of course it is not a cash flow). Here there is a cash flow of the same amount because it is assumed that the reinvestment needed is the same as the depreciation.
(b) The answer values the business (by taking the free cash flow – before interest) and then gets the value of the equity by subtracting the debt.
Hi sir,
It is assumed that no additional investment in non current assets or working capital is needed, even though sales revenue is increasing.
Is the increase in sales revenue referring to the 5% growth for the new business venture…?
Thanx…!
Hi sir,
It is assumed that no additional investment in non current assets or working capital is needed, even though sales revenue is increasing.
Is the increase in sales revenue referring to the 5% growth for the new business venture…?
Thanx…!
Hi sir
(a) it is assumed that no additional investment in non current assets or working capital is needed, even though sales revenue is increasing.Is this referring to the 5% growth for the new business venture…?
(b) it is assumed that additional initial working capital requirement is part of the new venture investment of $50 mil.
This means that all the investment in non current assets and working capital for the new venture will be covered by the $50 mil. Is this correct…?
- You must be logged in to reply to this topic.