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To value the company by dvm and going by previous exams when no dividend in current year so no growth to next year …..use year 1 as current year so yr2 dividend is div + g divide this by the cost of equity(i think 12%) you now have a value in year 1 terms so multiply by year 1 12% disc rate and you have the answer.Got it wrong myself i just divided yr1 div by 12%,i dont think it is right and going by pevious exams its wrong but techniqne right so maybe a couple of marks anyway
Test not too bad, Islamic finance new topic so had to be expected,wish i had read the article on ACCA website a couple more times.I suppose the dividend growth model question in Q4 was a matter Of using Yr 2 dividend and then discounting the answer at a year 1 discount ?
In relation to the transfer pricing question it seems to me that under general transfer pricing rules the 20000 spare capacity that B can sell to A can be priced at a minimum of $20 to a maximum of $65.I priced it at $20 as that seems to be the “law” if a division has excess capacity.The company would not get a different result as long as the transfer price is between 65 to 20.Part c of the question iis the tricky bit how to get both of the managers to agree and be happy with the transfer price.The manager of A would be happy as long as the price is not above $65 but a transfer price at variable cost of$20 wiil not be agreeable to the manager of B as this would lead to a fall (i think) of $800000 profit from the original transfer price of $75.A minimun transfer cost for b would need at least an extra contribution from the 20000 units of 800000 ie $40 per unit.Therefore the minimum transfer price agreeable to manager B would be $20 + $40 ie $60.The transfer price needed to make both manager work for the benefit of the company and keep them happy is therefore in the range $60 to $65.A few words about this all being dependant on current conditions and costs/prices staying the same would probably have looked good too.I think this is the right answer and i wish i had written it all in the exam but time was very tight.