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SBL Pre-September 2024 Mock has been released today. But I can not copy, paste information from exhibit to the answer. Do you face the same issue ?
Please share with me. Thank you
I just read pre seen information and exhibit 1 to answer task 1a and have not yet read exhibit 2 to 4.
But in this case point could be made from all exhibits and not come from a single one.
I often read the requirement first, read the headline of each exhibit and after that make a reference of each exhibit to each task; then concentrate to read 1 exhibit to find relevant point to 1 task.
Please advise me effective way to use all relevant information in all exhibits to answer 1 task?
Thank you.
This is the question. Please help me to answer above question 1 and 2. Thank you.
The following exhibits, available on the left-hand side of the screen, provide information relevant to the question
1. Redwood Co – Diversification
2. Project cash flows
3. Other financial information
(a) Estimate the Adjusted Present Value (APV) of the proposed investment.(10marks)
(b) Explain the difference between APV and NPV as methods of investment appraisal and comment upon the circumstances under which APV might be a better method of evaluating a capital investment than NPV.(5marks)
(c) Explain the major differences between Islamic finance and other conventional forms of finance such as those being considered by Redwood Co. Identify, and briefly discuss, two Islamic financial instruments that could be of use to Redwood Co in the above situation.(5marks)
Professional marks will be awarded for the demonstration of skill in analysis and evaluation, scepticism and commercial acumen in your answer.(5 marks)1. Redwood Co – Diversification
Redwood Co, a company known for its success in the paper manufacturing industry, are planning for a transformative change. The managers of Redwood Co are investigating a potential $25 million investment.
This venture represents a diversification away from their familiar mainstream activities and into the printing industry. To make this vision a reality, they intend to allocate $6 million from their own internal funds, generate $10 million through a rights issue, and secure an additional $9 million through long-term loans. This strategic move signifies Redwood Co’s commitment to a dynamic future, one where they blend their established expertise with the evolving world of printing.
2. Project cash flows
The investment is expected to generate earnings before depreciation& tax of approximately $5 million per year, for a period of ten years. The residual value at the end of Year 10 is forecast to be $5 million after tax.
What makes this investment even more compelling is its alignment with the government’s development goals. In a move to foster growth in this specific sector, a favorable opportunity presents itself: a subsidized loan worth $4 million out of the overall $9 million required for the investment. This specialized loan comes at an attractive interest rate, standing at 2% below the company’s normal cost of long-term debt finance, which typically rests at 8%. This subsidy not only enhances the feasibility of the investment but also underscores the government’s commitment to nurturing and bolstering the industry.
3. Other financial information
Redwood Co’s financial profile is a critical component of their investment evaluation. Their equity beta,stands at 0.85. In terms of financial structure, they maintain a balance of 60% equity and 40% debt based on market value.
Comparatively, when assessing the broader printing industry, the industry norm presents an average equity beta of 1.2. The industry tends to have an even split between equity and debt financing, with a 50-50 ratio based on market value.
To calculate this cost of capital, the risk-free rate, currently at 5.5% per annum, and the market return, standing at 12% per annum, are taken into account.
Furthermore, it’s important to note that the funds raised for this investment are net of issue costs. These issue costs are estimated to be 1% for debt financing (excluding the subsidized loan) and 4% for equity financing. These expenses are non-deductible for tax purposes. The corporate tax rate is 30%.3. When the question is “Calculate WACC” and “Estimate NPV”, I already prepared all the calculation on spreadsheet. Should I must write in the content of report :
WACC is…(see Appendix 1)
NPV is… (see Appendix 2)In question 1 :
“It has an ‘A’ rating according to the biggest credit rating agency in Madonk, and this corresponds to a credit spread of 55 basis points.”
Why A credit rating = risk free rate ?
In the question, Pryso will pay 20% tax in Elan, but it is exempt for first two years.
Pryso will pay 30% tax in Marteg.
A bi lateral tax treaty exist between 2 countries, hence Pryso must pay additional 10% tax in Marteg.
But In the year 1, Pryso has profit, and exempt. So I understand that it must pay full 30% tax in Marteg ?
Why in the answer, Pryso will pay only addition 10% of tax ?Please explain the logic behind “alternative” method by examiner.
And what is the mistake in my method?So, there is not any case we will include only increase of capital investment in NPV calculation?
In MJ23Q2, the reason that we use the incremental of Invesment in asset is that it includes of working capital ?
In MJ23 Q2 on Oxwick, the question says that ” an additional investment in asset will be required of $28m in Y1 . In Y2 to Y4, additional Invesment in assets at the end of each year will be $0.8$ for every $1 increase in post tax cash flow in that year.”
But in the answer, only incensement of investment in asset is included in NPV calculation.
It is different with the answer in MJ22.
Please explain why.
In MJ23, Q3b: the question says that there will be no additional investment from year 5 onwards.
Post tax cash flow of year 4: 355.9
FCF of year 4 : 337.3To calculate cash flow year 5 onwards, the examiner uses 355.9 instead of 337.3.
In MJ22, Q3ai: the question is silent on saying that whether there will be no additional investment from year 5 onwards.
Post tax cash flow of year 4: 388
FCF of year 4 : 282To calculate cash flow year 5 onwards, the examiner uses 282 instead of 388
Can I use this rule to apply in the exam :
Whenever the question says that ” there will be no additional investment from year 5(for example) onwards”, I will use post tax CF of Y4 to calculate cash flow year 5 onwards.
If the question is silent on this, I will use FCF of Y4 instead of.
Thank you.
In which chapter, can I watch your lecture on the content of treasury function ?
The calculation of profit/loss on future also applied for interest rate future only, not for FX future ?
Thank you.Issue cost
Whenever there is a sentence in the question: Issuse costs are payable out of available cash reserves, It is no need to gross up the fund to calculate issue cost ?In MJ21 Robson, to calculate cost of equity, Ke = Rf + Be (Rm-Rf).
Why Be = Ba = 1.222 in this case ?In Q3b, regarding to Oxwick Co’s acquisition of Ludham Co, the question said that:
“After four years, the annual growth rate of free cash flows is expected to be 5% for the foreseeable future”
the answer is :
Post tax cash flow of year 4: 355.9
FCF of year 4 : 337.3To calculate cash flow year 5 onwards, the examiner uses 355.9 instead of 337.3.
Please explain why.
Thank you. I understand.
In question Q2a, regarding to discussion on NED’s view on the acquisition of Ludham Co, can I get mark if saying that:
Non-executive director’s views that the acquisition does not reduce risk and will be of no value to Oxwick Co. seems reasonable since Oxwick Co is a listed, shareholder’s porfilio has been well diversify away.
So the key word here is significant. And by saying it is significant or not from the viewpoint of each company’s shareholder, I would be awarded for evaluation professional mark?
In the answer, 10% additional tax in Marteg is firstly calculated in ED, after that it is converted to M$.
The same approach is applied for sale and tax on Elan.
My approach is that calculate all figures in ED (including of 10% additional tax in Marteg) , and after that convert the result to M$.
My question is that will I be awarded 2 mark for the calculation of 10% additional tax in Marteg by this approach ?
Please answer my question.
Other person sent the questions later than mine but has received the answer sooner.I understand, actually, my answer should be : 0.97*(0.7+(1-0.18)*0.3)/0.7) = 1.31
Just add “)” after 0.3.
Thank you.If the management of target company does not comply with IAS 37 on making provision for sale return, they make provision base on sale amount, why audit firm should pay attention to this matter before tendering due diligence engagement.Please help me to explain.This is also a part of my exam yesterday, I just tell that that estimate is subjective and subject to management bias, breach of financial reporting rule.so, audit firm should pay attention.May I be award any marks for this?
I confuse with this question.
So far I apply your method in the lecture to deal with all question on swap and it has the result the same with examiner.
But in this question, it did not the same.
You said that a half of my answer is correct.
Could you please show me how to solve the remaining part of the answer using the method as your lecture ?
Why in your lecture and other question, the calculation of end result does not take into account of bank charge but in this question, it must to take into account of bank charge?
