Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › March/ June 2017 Q1
- This topic has 7 replies, 3 voices, and was last updated 5 years ago by John Moffat.
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- June 5, 2018 at 11:43 am #456308
Hi John
Question on Chrysos Co.
First Question
Referring to answer sheet (Option2: Management buy out, and Appendix 3: Estimate of value), when calculated net cash flow, when should we include interest, depreciation, and is tax always the last one?I’ve seen example where after deducting tax, we add back depreciation. And for this example interest is not included.
June 5, 2018 at 11:51 am #456310Same question, referring to the growth model.
the growth rate must be in perpetuity for it it be considered in the formula?
As you can see from the question, page 4, 3rd para, 2nd line, it mentioned 8% @ the first year. Could this be used as the growth rate as part of the growth model to get the market value of firm?
June 5, 2018 at 1:15 pm #456329Hi john, another for Lirio Co. March/ June 2016
Q1
Para 4 Item 2. It mentioned an investment equivalent to the amount of dep’n to keep its ……non-current assets of $50million.
Why is this amount i.e. $50mil x 25% = $12.5mil not deducted from the calculation for dividend capacity of Lirio?
June 5, 2018 at 3:43 pm #456442First question:
When looking at free cash flow we never include interest in the cash flows because it is accounted for when discounting at the WACC. (It is only when looking at the free cash flow to equity that we subtract interest).
Depreciation is added back because it is not a cash flow. However the question specifically says that the annual reinvestment needed to keep operations at their current levels is equivalent to the tax allowable depreciation. The annual reinvestment is a cash flow, so there is no need to add back the depreciation.
June 5, 2018 at 3:46 pm #456451Second question:
The formula is the same formula we use for dividends and applies when there is a constant growth rate (it works also for constant dividends – the growth rate is then 0).
The question does say that the flows will increase by 8% in the first year only. After that they stay fixed, and so the growth rate from then on is zero.
June 5, 2018 at 3:49 pm #456455Third question:
In future you must start a new thread when you are asking about something different. (The reason is that we do not give personal tuition and our answers are to benefit everyone – people use the search box on each page to look to see if their question has already been answered.)
It is not deducted because the depreciation has not been added back. Adding back the depreciation and then subtracting the investment would have zero net effect on the cash flows.
May 15, 2019 at 1:52 pm #516014Sir, why is it that only Value created for VCO is calculated when the questions asks for “Chrysos Cp’s value to the equity holders”?
May 15, 2019 at 4:58 pm #516028Bu that is not all they have calculated. That is only in appendix 4 and has been done because it is specifically asked for in question (b) (iii). Look also at appendix 3. You will see from the marking scheme that the impact on the VCO’s accounts for 3 to 4 of the marks (out of a total of 37 marks for part (b)).
Have you read the report in the answer, where this is all explained and commented on?
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