[semreh]

@ifeyan said:
Q2 did anyone notice that the natural disaster was after the year end. So I felt the carrying value didn’t need any adjustment. Therefore, the contingent asset should only be provided for only when it is certain. I was so time constrained….. Hoping for the best

IAS 10

The nature and estimate of the financial impact of material non-adjusting events shall be disclosed in the financial statements. –

Examples of material non-adjusting events include:

Major losses suffered as a result of a natural disaster occurring after the end of reporting period

[semreh]

– it was just under 5% if i remeber, i did 10% and 5% and then i also did 4%.
– paper asked for nominal.

[semreh]

Ke is unsecured so there is a risk/reward demand there that Kd does not have. Kd will be paid its interest, then tax, then preference shares and everybody else (all prior charge capitals) and whatever is left, if there is anything left will go to Ke and Ret. Earnings.

Ke is the last in line to get any money in the form of dividends so they expect a higher return because of the greater risk.

[semreh]

My Answers.

Q1a – NPV postive approximately $4.5million. make sure you inflated selling price, variable cost and fixed costs from the first year onwards. tax and capital allowance one year in arrears with balancing addition in y5. scrap value in y4, working capital of 575 regained in y4. initial wc in y0 with additions in y1, y2 & y3.

Q1b – Nominal and real.
Nominal takes into account inflation and interest i.e. fisher effect, not actual cash flows. Real is the actual cash flows but does not take into account the time value of money. (this may be incorrect)

Q1c – primary objective is maximizing shareholder wealth either through revenue or capital gains. secondary objective of a listed company is value for money. This would be the primary objective of a NFP.

Q2a – WACC was 11.24%.

Preference shares are included. 4% / 0.40$ = Kps 10%, market value 3000 * 0.40 = 1200
Bank loan 4% – 30% tax = Kd 2.8% = Bank loan = 1000
for OSC I do not remember.

Q2b – CAPM can be used to find specific project Ke because the B can be manipulated and i.e. companies B’s in other fields can be ungeared and regeared to your capital structure to find your company specific Ke in that field.

Q2c – Ke is more expensive then Kd because of pecking theory. Equity shareholders are the last to get paid. Kd is usually also secured with either floating or fixed charges and perhaps a covenant of some type.

Q3a – WCC – 67 days after changes from 130 (or 140 days).
Extra financing cost I believe was $32000 (difference in overdraft * 5%, i believe i forgot to account for taxation savings here)
Q3b – Receivables policy – competition in industry, investment/risk wanted – longer rec. period more chances of bad debts, startups & small companies must give longer periods to lure customers, business environment – i.e. supermarket has little or no receivables, construction company has receivables which might be years old. aging analysis should be done etc and also the benefit of cash received must outweigh the cost of securing the payment.
Q3c – forex risk – The 3 risks for a multinational are translation, transaction and economic risk.
Q3d – forward market hedge was +2000$ more profitable

Q4a – find share price in 2-3 years, discount back to current price. I suggested this was unsuitable because even though it would give future growth, it is signalling to shareholders their are underlying problems with the company. Furthermore, even though M&M stated that shareholders do not care between revenue and capital growth, revenue orientated shareholders will be driven away.

Q4b – EPS will rise but will dilute ownership pool

Q4c – Debt issue will give the best EPS and will not dilute ownership. Must take into account gearing of the company in order to ensure the new debt will not raise the cost of the Ke and therefore negate the savings of the lower Kd. Convertible debt should be considered since it is a form of delayed equity and will not affect currently the EPS.

Q4D – Venture capital / Traded Bonds / Equity Finance
VC – high risk / high reward, ke required of > 30%. not for listed companies. good for aggressive moves i.e. takeovers.
Equity finance – pecking theory states will require the highest return of all financing.
Bonds – usually secured with a floating or fixed charge or a covenant of some type, lowest cost of all three finance options here (i think maybe this is incorrect).

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