[sohyh1318]

Passed with 72%!
Can’t do it without Opentuition and Mr Moffat.
Literally camped at the forum two weeks before the exam.

[sohyh1318]

Thank you so much!!
This answer had cleared up the doubts I had all this while.

I keep thinking that it’s not sensible if, I only consider the cashflow without taking account into the net profit, when reasonably speaking, my capacity to distribute dividends would only have been $10k instead of $100k. I was not aware of the concept of ‘legal limit’.

Therefore, can I say that even though my dividend capacity is $100k, the legal limit that I can distribute dividends is actually $10k?

[sohyh1318]

Yes I do, but I get especially confused when doing interest rate hedge due to the P=100-r formula.

But either way, thank you for explaining to me! Crystal clear.

[sohyh1318]

I thought the question said “The exercise price quotation is in Wirtonia $ per €1, premium is % of amount hedged, translated at today’s spot rate.”?

Since it’s per €1, is this not a Euro option?

[sohyh1318]

(1) to (4): Thank you! I can see it clearly now.

(2):
I don’t quite understand why dividend capacity only takes into account the cashflow available for distributing without considering the net profits.

For instance, I have $100k cashflow, and perhaps $90k of accrued expenses.
Because I indeed have not paid for the expenses, I still have a cashflow of $100k.

In this case, is it sensible to consider that my dividend capacity is $100k instead of the $10k profit? My point is that had I really distributed full $100k as dividends to shareholder, I won’t have any funds left to pay my expenses.

Thank you!

[sohyh1318]

But why does it convert to $ when in the question, the options are in Euro?

[sohyh1318]

Just a bit more, sorry!

(4)
Why is it that for the (a)(ii), the number of shares, the answer did 90m x 4/3?

It said one-for-three shares, why is it not 3/4?

(5)
In the question it said, “Hittyland gives full credit for corporation tax already paid….” and “Hittyland gives no credit for withholding tax paid on dividends…”

What is this credit?
I don’t see any technical articles on this so can you please point me to the suitable material to refer to?

Thank you!

[sohyh1318]

Hi sir,

(1)
Can I know which sentence in the question that hinted that ‘the profit on disposal is non-cash element?’
Also, why is the profit for the disposal not considered for tax? Since it is a ‘profit’?

(2)
Why is it that they add back ‘cash received on disposal’?
Technically speaking, if we are looking for dividend capacity, we are looking at the amount that can be distributed to the shareholders.

The cash received on disposal is not the ‘actual’ profit from the disposal, it is merely the cash inflow without taking into account accumulated depreciation (the actual profit will be $5.9m).
I don’t quite understand why we only consider the cash inflow and not the actual gain of the transaction.

(3)
Why is it they add back ‘depreciation’?
(I am guessing this is the TAD and because the depreciation has been deducted from the operating profit, so this step is just to add back the TAD?)

Thanks in advance!

[sohyh1318]

In that case, wouldn’t the $15m of capital expenditure (Pe) will need to discount by 3 years as well since the $15m additional investment is at three years time as well?

[sohyh1318]

Can I ask why is converting at spot rate not sensible?

For instance if the management expects the home currency to weaken in the near future, is it not more beneficial if they convert the underhedged amount at spot rate?

(*if the forward rate is not given and we have to convert at spot rate)

[sohyh1318]

Dear sir,

1. Why is it different if both of them remove the elements of debt to get pure equity? I am referring to FCFE and base NPV (without adjusting for financing costs yet)?
I am wondering if adding effects of financing costs to FCFE makes it an adjusted APV…..

2. While we are on this topic, I am going to ask quite a basic question that I couldn’t understand for quite long, hope you don’t mind.

There are times in question when we have to value a company and the information they give are revenue, costs, depreciation…etc, with the cashflow growing at 3.5% perpetuity. So usually the steps to do these will be:

(i) Compute profit after tax (FCF)
(ii) use formula FCF(1+g)/(discount rate – g) = MV of equity (market share price x no of shares)

In (ii), why is it that the answer we get is ‘MV of equity’ instead of ‘MV of equity + debt (value of firm’?
Or is it that FCF can be either FCFE or FCFF depending on what we computed for our profit after tax?

I know it’s a weird question/way to ask but I am troubled by it for quite a while and couldn’t find anything that is similar.

Thanks in advance!

[sohyh1318]

Dear sir,

Does it not mean that the net profit of the year = the amount that is available to distribute dividends to the share holders?
After distributing the dividends, the remaining amount goes into the retained earnings in bal sheet.

In that case, doesn’t dividend capacity = net profit of the year?

[sohyh1318]

Dropping my understanding here because I am not sure if I am correct or not as well!

I think dividend capacity will be the amount that is available to be distributed as dividends to the shareholders.

Considering retained earnings (bal sheet) = whatever left after distributing dividends, I assumed dividend capacity to be ‘net profit of the year’ – dividends paid to shareholders = retained earnings

I think if they mentioned requiring to maintain a certain PE ratio/EPS, then we have to take into account that as well when calculating the dividend capacity.

Not sure if I am correct or not though, haha

[sohyh1318]

1. I have come to my senses after a good night’s sleep now. Thank you!

2. I see. Since in calculating beta, we always assume the beta of debt = 0 (assuming no risk for debt), do we have to specifically write that assumption down in our calculations?

[sohyh1318]

In that case, what about if a candidate got a scenario completely wrong?

For instance in risk management, what if the candidate mistook a company to be receiving foreign currency funds when the question asks for paying foreign currency funds?
This will meant they got all the prices for buying and selling currency wrong.

[sohyh1318]

I think I get it now, thank you sir! Have a nice day.

[sohyh1318]

Hi!
Will leave my question here since it is the same question number. Hope that’s alright.

-Machinery unit: Management buy out-

In this part, the question stated that the ‘after tax profit will grow by 8% for the first year only, and will remain at this level for foreseeable future.’

In that case, I assumed that it meant:

After tax profit
Y0: $435m
Y1: $470 (108% of Y1)
Y2 onwards: Maintain at $470

The answer for this part is 435(1.08)/0.1= 4698m (value of machinery unit)

I do not understand 3 parts of this:
1. Why is it that the question stated ‘the 8% growth is for only for first year, and no growth for foreseeable future’, but the answers assumed the ‘g’ to be 8%? In my understanding, having g = 8% implies that the cashflow will grow infinitely at 8%, which was not what the question stated.

2. Why is it that in the printed answer, they did not deduct the growth rate of 8% in the denominator? (Under usual circumstances it’d have been 435(1.08)/(0.1-0.08), but in the answer they did 435(1.08)/0.1).

3. I also don’t understand why they immediately took Y0 cashflow ($435m) to calculate.
Usually, we would find the value by (Y0)+(Y1 discounted)+(Y2 grow at perpetuity) = value of business unit, which will be $470(1.08)/(0.1-0.08).

I hope I didn’t phrase it too confusing! Thank you in advance.

[sohyh1318]

Got it, thank you so much!

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