[John1998m]

Thanks for that. I am studying F7 currently but whenever i get any problem i ask you guys in respective forum!

1. Little clarification needed. When you say that the true value of an asset or a liability is actually their fair values then in the case of the assets the value of assets is increased or decreased based on its condition at the time of sale but how that works with a liability?

2. When the fair value of the assets increase then we record this gain in the statement of other comprehensive income but when do we record the revaluation surplus in the SOFP?

3. Is there a difference between fair values and market values?

4. Is it true that in case of liquidation we calculate the fair values of total assets and total liabilities respectively which refers to the price of asset agreed between buyer and seller?

5. But the equity worth is determined by its market values (not fair value) which refers to the price of equity items of a business de by the stock exchange?

6. Do we study in any ACCA paper about the factors that decide the market value of a business based on the balance of its total equity items?

Thanks again ?

[John1998m]

Thanks for your reply SIR.

Sorry if I go a bit off-topic here but it is essential to know for my understanding. I’d be happy if i get the answers 🙂

4. I know it is not part of paper MA BUT we use future values for investment prospects only because it cannot be used for borrowing like in leasing etc.

5. I will go little technical here. The discount factor of interest 10% after one-year would be 0.909 (in percentage term 9.09%) but what exactly is causing it?

It is correct to say that interest is reduced merely due to inflation effect. That’s why we will get lesser amount in future because our interest is decreased (similarly explained by Fisher equation).

6. I watched your lecture but pardon me English is not my first language.

(i) Present value is the current amount of future money in today’s term?

(ii) Annuity value is the calculated when the payment is made based on yearly term like we have to make payments as the end of each year?

(iii) Perpetuity is calculated when the payment or income is paid or received forever. We assume that we will usually receive the money in future unceasingly which is in reality untrue!

7. Is it true that time factor will decrease the Interest rate over time because the inflation will come in conflict with it. Inflation will directly affect the nominal interest rate which will affect the real interest which is exactly explained by Fisher equation?

8. For example, 10% interest rate will be 9.09% in one year’s time and lesser in future but what factors affect this?

[John1998m]

I couldn’t get the complete understanding of these issues. Could you please explain it to me?

1) Discount rate is the interest rate that company pay on its borrowing so if we remove the interest element then we will get the Present value which helps us decide how much we have to pay today?

2) Discount rate can be called an interest rate because the time factor is involved in that. That’s why it is discount rate?

3) BUT interest receive on investments is actually the rate of return (not the discount rate) that company receives by investing?

4) Investors can use Present value for both the borrowing and investment prospects but Future value involves only used for investment?

5) I find it problematic to understand but hoping you would clear that. The present values chart given at the beginning of the kaplan book are actually discount rates (and not the interest rates). So we use them for discounting the future cashflows only to convert them into present cash flow?

6) What is the difference between these three formulae Present values, annuity values and perpetuity. And when to use them?

[John1998m]

Sir I passed both exams (MA and FM) but I don’t recall the Fisher model clearly. If you don’t mind could you please help me with points 5 , 6 and 7?

Secondly, when we use compounding formula we always see how many times in a year an interest is being compounded which refers to how many times we have to pay or receive interest in case of borrowing and investment which denotes by (n) in the given formula below.

Compound interest = (1+r)^n

Is that correct?

[John1998m]

And opportunity cost is calculated when we have limited resources such as material kilos and labour hours are not enough to satisfy both parties (To decide between the relevant contract and existing work). Whether we should put the kilos and labour into relevant contract or use them into the usual work.

[John1998m]

Thanks for your answer 🙂

Could you please tell me the way opportunity cost (ie lost contribution) in material and labor is calculated in relevant costing questions?

I know it depends on the question but is there any usual way?

[John1998m]

In your lecture, you calculate the new investment of the company based on additional profit and capital investment but you maybe it is a mistake because it is the manager that has made a new investment by investing additional capital investment of $100000 to make a profit of $17000 return ROI of 17% (not the company).

The company has made capital investment of $500000 to make a profit of $82000 gives ROI of 16.4%. This new investment is compared with target ROI of 15%. Since the company has done well by making a new investment so it is financially viable.

The investment that the division (or manager) has made is actually the profit of $82000 and capital investment of $500000 gives ROI of 16.4% which is compared with new investment making a profit of $99000 and capital investment of $600000 return ROI of 16.5%. Since the company has done well by making a new investment so it is financially viable.

Thats what I was saying!

[John1998m]

1) When solving marginal revenue equation for the maximum profit (which is where MR = MC) using differentiation we are actually looking for the demand where we have the maximum profit because when we have less demand but more price which is where we earn maximum profit.

2) BUT when solving marginal revenue equation for the maximum revenue (which is where MR = 0) using differentiation we are actually looking for the demand where we have the maximum revenue because when we have more demand but less price which is where we earn maximum revenue.

3) Maximum profit is where we have higher price but lower demand from the customers since we are charging them higher price. BUT maximum revenue is where we have lower price but higher demand from the customers since we are charging them lower price.

This is due to the inverse relationship between price and demand explained by the price demand equation.

4) Please tell me whether differentiation is used when we have an inverse relationship between two variables to find out the value of one variable and using that value we find out the value of another variable?

Please correct me if I am wrong anywhere. Thank you so much.

[John1998m]

Yes, I watched the lecture but maybe I didn’t get this.

Just like we assess the performance of the manager by calculating the ROI with new investment like this (99000 / 600000) = 16.5%.

Why don’t we actually use this way to assess the performance of the company with new investment. Because to calculate the performance of the company why do we only take the additional profit and additional capital employed?

[John1998m]

If the sales trend for next year is as follows:
Quarter 1 = 100,000
Quarter 2 = 120,000
Quarter 3 = 150,000
Quarter 4 = 200,000

Then we can forecast the next years sales using seasonal variations averages.

Years———————Quarters—————————-Total
——————–Q1——–Q2——–Q3——–Q4
2000————————————-(-4)—–(+1.75)
2001———-(-0.63)—(+1.50)—(-3.88)—(+1.12)
2002———-(+0.75)–(+4.75)
Average——(+0.06)—(+3.13)—(-3.94)—(+1.44)—-(+0.69)
—————–(-0.17)—-(-0.17)—-(-0.17)—(-0.18)—-(-0.69)
Total———–(-0.11)—(+2.96)—-(-4.11)—(+1.26)——-0

Forecast = Trend sales +/- seasonal variation average
Quarter 1 = $100,000 – (10000 x 0.11) = $98900
Quarter 2 = $120,000 + (10000 x 2.96) = $90400
Quarter 3 = $150,000 – (10000 x 4.11) = $108900
Quarter 4 = $200,000 + (10000 x 1.26) = $187400

I am taking seasonal variation averages in ten thousands (‘0000)

Is that correct?

[John1998m]

Thank you so much. 🙂
Please say about this too.

Correlation Coefficient:
It measures how linear the relationship is between two variables such as whether it is perfectly positive linear correlation or not using this formula.

r = (n(Exy) – Ex Ey / squareroot n(Ex^2 – (Ex)^2)) x (nEy^2 – (Ey)^2)

+ 1 = The points are exactly on a straight-line going upwards
1 = The points are closely on a straight-line going upwards
– 1 = The points are exactly on a straight-line going downwards
0 = No correlation at all (straight-line is not possible to draw)

The correlation coefficient is used only to see whether the straight-line which is passing through the points are perfectly or not perfectly positive or negative.

Is it correct?

Is it also correct that linear relationship refers to the straight-line which passes through points (or variable points) but the linear relationship refers to only two variables only. I don’t understand why is it important though?

[John1998m]

I have seen your lecture on regression analysis but I could not understand it completely.

What I understand is that regression analysis is used to identify a straight line that shows a linear relationship between two variables.

Is it true that these two variables are total cost (y) and the number of units (x)?

It shows the relationship between two variables that if one variable (number of units (x)) is increasing then the other variable (total costs (y)) will also be increasing. It simply means that with more units produced there will be more total costs of production.

To show this relationship we need to calculate the fixed cost and variable cost using regression analysis formula

Y = a + bx

We could be asked regression analysis calculations only in sections A and B in paper PM?

[John1998m]

Thanks for the link on big data. It was helpful.

I only found one video on time series analysis (chapter 20) in F2 lectures but I am afraid I did not find anything like correlation and regression. Could you please send me the link to that lecture (please state which chapter of F2 notes has correlation and regression)?

Please tell me whether the examples of the F2 notes would be enough for the preparation of time series and correlation and regression for paper PM?

[John1998m]

Thank you 🙂

Could you please correct me about the difference b/w flexible & flexed budgets?

Flexible budget is made for different activity levels because we do not know what activity levels would be in actual at the year-end so due to this obscurity we make several fixed budgets with different activity levels known as flexible budget.

Flexed budget is made for the actual activity level because we compare the actual results with the flexed because both the production volume both in actual and flexed are the same and they can be compared with each other to see whether there is any difference in the results that are known as variances.

So we need to always compare with the same activity levels between original fixed budget and actual result of 12,000 units which would be done by flexed budget.

[John1998m]

BUT you are considering that every product is taking one hour to make their units but this might not be the case!!!

Such as in your example 1 (chapter 5) of the notes we do have 2 hrs per unit for product A and 1 hrs per unit for product B. In my example, we do not know the hours that every product is taking unless we assume that every product is taking one hour to make their units.

So you are saying that when we do not know that how many hours every product is taking then we do assume that every product is taking one hour. (correct?)

[John1998m]

What I understood from your response is that with ROI we assess the performance of the company and manager whether the new investment is good to undertake by them or not.

With RI we assess only the divisional manager’s performance (not the performance of the company) whether new investment is good or not.

Are both points true???

[John1998m]

Yeah, that what I meant. Please say what I say about divisions being in one geographical area is all correct?

[John1998m]

This is an MCQ that asked about several methods of transfer pricing.

Which TWO of the following bases for setting a transfer price are most likely to
result in goal congruent behaviour by BOTH the selling and receiving
divisions?

Options:
A. Opportunity cost
B. Market price
C. Actual cost
D. Standard full cost plus

Is it correct that both market price and opportunity cost are part of a sensible transfer pricing which is used to achieve goal congruence and managers are motivated in this approach because both the divisions will be profitable using sensible transfer pricing?

[John1998m]

Is it correct that our aim is to reduce cost gap which can be done by reducing expected actual cost so that we’ll have equal cost as compared to target cost which can be done by following ways:

1) Reduce material costs; Reduce labour costs
2) Less wastage; Poor quality material
3) Acquiring new technology such as new machinery to work faster
4) Employ Skilled Labour
5) Increase Learning rate and Reduce Labour inefficiencies
6) Cost reduction techniques
7) Value engineering which is a cost reduction technique by having less cost but high value for the product

[John1998m]

I’m confused with the fact that in Chap 9 example 3 where we buy the machine, the outflow is on the last day of accounting period so the tax is calculated immediately at Time 0. In this case, the tax flow is one year after the end of the accounting period, which is Time 1;

Therefore in ASOP Co the License fee was also payable at the end of the year (i.e. last day – just like the machine was bought on last day) the outflow is on the last day of accounting period so the tax is calculated immediately at Time 0. In this case, the tax flow is one year after the end of the accounting period, which is Time 1.

What you said about Tax effect in the lecture on Investment Appraisal with Tax is different than what you said in the Lease & Buy lecture where you give us a rule specifically used for lease n buy questions only..

[John1998m]

Since the license fee of $104,000 is payable at the end of the first year (i.e. last day on 31 Dec) which means that the first cashflows of the license fee is on the last day of the accounting period therefore the first tax effect would be at Time 1 (rather than Time 2 as mentioned in the answer)

There is a rule that you wrote at the end of the lease n buy which I already mentioned to you in my earlier response many times!

If we take the tax-saving on license fee & put it at time 2 because the tax paid is in arrears (which you said earlier which would be a case in normal NPV question) then what is the point of having a rule which looks at the first cashflows and then we have to see the timing of tax & tax-savings?

[John1998m]

Yes, you are right that I’m confusing the fact that since the machine was bought on last day of accounting period (in lease & buy) so the first tax-saving would be at Time 1 because the cash flow was on the last day of the accounting period. So I thought that since the License Fee is payable on the last day of accounting period same rule is going to apply but why not the first tax-saving on license fee was on Time 1?

In your lecture investment appraisal with tax what you stated I have completely understood that if tax is one year in arrears then the tax flow occurs one year after the end of the accounting period which is at time 2 [since this is not a normal NPV question rather it is a lease vs buy so this is not going to apply here – so no problem here :)]

But the question, ASOP Co is a lease vs buy question where you stated the rule at the end of the lecture which is going to apply if the tax is paid one year later (i.e. in arrears).

Since you mentioned a different rule for lease & buy questions when tax is in arrears which are:
1) If first cashflow is on first day of accounting period then the first tax effect will be on Time 2
2) If first cashflow is on last day of accounting period then the first tax effect will be on Time 1

So if any cashflow is on the first day of the accounting period then its tax-saving cashflow will be on Time 2; Otherwise, if any cashflow is on the last day of the accounting period then its tax-saving cashflow will be on Time 1 (which is the case in ASOP Co).

I still don’t understand your explanation and I don’t know what you are referring to when you say that you didn’t say!)

[John1998m]

Let me rephrase the question because I didn’t mean that dividend will stop after 2 years but rather mean that how can we calculate the share price of year 4.

[Question]
The dividend remains constant at 20c for two years but thereafter it grows at 4%. BUT we need to calculate the MV of share price of year 4 (rather than year 3 like in previous question).

[Answer]
Since Dividends will grow after year 2 in perpetuity DVM formula therefore becomes relevant.

DVM:
P2 = 20 (1.04)^2 / 0.15 – 0.04
P2 = $1.96

This gives me the market value of Year 4; And we have to discount it back to Year 2 Discount Factor;

PV = 20 / (1.15)^1 = 0.1739
PV = 20 / (1.15)^2 = 0.1512
PV = 1.96 / (1.15)^2 = 1.48

Total = $1.8051 (at Po)

So the Market Value of a Share Price of Year 4 would be $1.8051 TODAY (at Year 0)

Is it correct NOW?

[John1998m]

Please correct me here!

[John1998m]

My apologies, I have given you examples 1 & 4 in my previous question although I was referring to examples 3 & 4.

For example 3 you have used the formula to calculate the Market value of a share such as:
MV = 15c / 12% = $1.25 (ex-div)

But For example 4 you have used Perpetuity because the dividend stream remains constant in the future years (but it was also the case in example 3 but you didn’t use the perpetuity for that):

Perpetuity formula = 15c x 1/12% = $1.25

My question is that since both ways the formula & perpetuity approach result in the same answer of $1.25 (ex-div) so it doesn’t matter which one to use and we can either use the formula (MV = Div / r) or Perpetuity approach (1/r) to calculate the market value of a share. It won’t change our answer because they both pretty much work the same way.

In both of the ways, it is assumed that the dividend stream will continue in the future in perpetuity.

Is there anything wrong what I said? Thanks for your last reply, it was helpful. 🙂

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