[libratype]

Pass 65% – affiliate now!
Thank you very much OT, you do a great job!

[libratype]

Some question:

Investment in equipment of 800m depreciates on a straight line basis 4 years and also capital allowance of 50% in the 1st year is available.

Tax rate is 30%.

The total tax relief will be 800/4×30% (for depreciation) plus 800×50%x30% (for allowance)?? They add together giving a large tac relief?

Why in this question the depreciation doesn t give any tax relief? (Only the allowance)

Thank you!

[libratype]

Thank you very much Sir, and sorry for spoiling your meal:). Since studying P4 I always have something on my mind that bothers me till I understand it in full.

Back to Q2/dec 2010 we may conclude there is a mistake in the answer sheet since that assumption is mentioned in part b as being applied in part a to the calculation of NPV, but in part a actually the assumption does not apply. (calculation of NPV is in the “usual” way with no reinvestment in non-current assets).

[libratype]

December 2010 question.

In the same question as I understand they do assume that debt is risk free to be able to calculate the ungeared cost of equity from MM prop 2. as kd (cost of debt)=risk free int rate.

Thank you again, Sir.

[libratype]

I’m sorry for bothering you but I want to be sure I understand clear.

The total asset beta is the weighted average of the individual asset betas if and only if level of gearing does not change?

In Bpp text book for type III acquistion (so both financial and business risk does change) there is a standard procedure “to calculate the average asset beta….”

In Q4 June 2012
we have Elfu portfolio (2 activities) asset beta 1.217
we have Elfu asset beta of one activity 1.078
and again we calculate the second activity asset beta using an weigheted average:
1.217= second avtivity asset beta x 0.25+ 1.078 (1st actvity asset beta) x 0.75

where 0.25 and 0.75 are the proportion of equity allocated to the 1st respective 2nd activity (but the debt are allocate in different proportion 0.2 to 1st activity 0.8 for 2nd activity).
This is another exeption that should have been mentioned in the question (?

Thank you again, promise this is the last question on this issue.

[libratype]

In other words how are the weighted averages of the individual asset betas calculated:

1. as a proportion of company total (equity+debt) market value /market value of combined (debt+equity) or
2. only equity market value of each company/equity market value of combined.

There are two ways of calculated this weigheted averages of individual asset betas.
Thank you!

[libratype]

Thank you for your reply.

I try to be more specific. Q1/June 2011
Combined Company: Cost of capital calculation
Asset beta (Pursuit Co) = 1·18 x 0·5/(0·5 + 0·5 x 0·72) = 0·686
Asset beta (Fodder Co) = 1·53 x 0·9/(0·9 + 0·1 x 0·72) = 1·417
Asset beta of combined co. = (0·686 x 140,000)/(140,000 + 40,095) + 1·417 x 40,095)/(140,000 + 40,095) = 0·849

In calculation of combined asset beta here:
we use the proportion of Pursuit (debt+equity) market value(140.000) / market value (debt+equity) of combined (140.000+40.095) * it s asset beta (0.686) + the proportion of Fodder market value/market value of combined * it s asset beta (0.849)

but in other instances
we will use only the proportion of EQUITY of Pursuit/combined value of EQUITY of combined *it’s asse beta (0.686)+ the proportion of EQUITY of Fodder/combined value of EQUITY *it’s asse beta (0.849)

That is confusing me one time we use to proportionate asset beta only the EQUITY of the two separates companies per total equity of combined and in other examples equity is replaced by equity+debt!

For example in q4 2012:
1·217 = component asset beta x 0·25 + 1·078 x 0·75 (0.75 and 0.25 – are the proportion of EQUITY and not of the total capital (equity+debt).

[libratype]

Thank you very much! You do a great job for us, especially at this exam which I find to full of assumptions.

Maybe my English it;s not so good but from the question I understood that the closure costs actually suggest shutting down that facility (followed by the sell of assets and redundancy costs).

[libratype]

63% happy:)

[libratype]

I have got exactly the same numbers in q1:)
myopia – consider focus on shorter term ROCE (delaying investments) rather than on overall objective of wealth max (suggestested Eva instead);
ossfication -mamagers reluctant to change the actual perf. sys although proble arise (complaints from customer, instit. shareholders etc):

Good luck to you!

[libratype]

Thank you! In case of this subject it will be useful to draw the pyramid (as in the answer of past exam answer) or just use words to explain it?

[libratype]

No, Mr. Little.
It’s not a logical explanation in BPP study text- just the formula.

In december 2009 1st problem part a requires exactly this to calculate gain loss on disposal of a sub.

The matter come up also in anotther past exam question where there is also a gain previously recognised in OCI (in a disposed subsidiary which become a associate) and this previously recongised gain is increasing the profit group has made on disposal.

When you have time maybe you can help me to sort out this issue: what is the difference if a disposed subsidiary had a gain/loss recognised in OCI when the profit.loss on disposal is calculated? Per past exam questions and BPP (no explained formula) this previously recognised gain is adjusting the profit/loss on disposal.

Thank you! Have a nice flight!

[libratype]

Ok I will try to be more specific.
IEI= Investment in equity instrument
Past exam paper (December 2009)

Disposal 60% of a wholly owned subsisdiary. (become an associate)
Proceedds from disposal 23 mil.
Goodwill in disposed sub. 7 mil
FV of the remaining equity 13 mil.
Net assets at disposal 36$ compared with FV of NA at the acquistion of 32 mil. From this 4 mil increase 3 are reported in Profit or lost and 1 is reported in other comprehensive income.

I do not understand why 1 mil from other comprehensive income adjust the loss on disoposal?? What is the difference that 3 mil were reported in P/L and 1 in OCI?? Aren’t all the 4 mil. part of the net assets of the subs??
If all the 4 mil would have been reported in P/L the loss would have be 7, but with this million reported in other comprehensive income the loss is 6?

Thank you.
The solution in exam paper is below.

Fair value of consideration 23
Fair value of residual interest 13
Gain reported in comprehensive income 1
––––––––
less net assets and goodwill derecognised
net assets (36 )
goodwill (7 )
––––––––
Loss on disposal (6 )

[libratype]

@kachaloo said:
spread was given as 75,000 so did not need any transaction cost etc to use the formula.
Minimum level 200000+spread 75000 = 275000 Upper level
Return point 20000+1/3 of 75000= 250000
Cash to be transferred out when hit upper limit = 50000 (I mentioned it in discussion)

return point 200 000+ 1/3 75000=225 000

[libratype]

@royyston said:
Hi for Q4 did anyone get Ke= 12%, WACC= 10% and new Ke = 14% and new WACC = 10.3%? Thanks

we are three with same results!:)

[libratype]

7% for a NPV always use after tax since cah flows are after allowing for the tax(see past questions)
12% for b – say to ignore taxation

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