[stacie395]

Hi sir,

Syllabus changes just took place in September 2016. If I plan for September 2017 sitting, do you think changes is going to take place again…?…thanks..

[stacie395]

Hi John,

Syllabus just changed in September 2016. If I plan for September 2017 sitting, do you think changes will take place again…?

[stacie395]

Hi are there any materials covering behavioral finance and reverse takeover…?

Thanks..

[stacie395]

Hi sir,

Woulc like to ask about the discount rate of 9% and 12%. Does the examiner just want us to use 12% as what the finance director feels, or we have to consider the change in business risk first…?

By the way no change in business risk right…?

[stacie395]

Hi sir,

Regarding the interest swap, can you please clarify the following :-

(a) The 0.8% is the benefits before bank charges. Can we deduct the 10 basis points first and then only calculate the advantage derived…?

(b) How do we determine how much Keshi will receive or pay…?

(c) Is the benefits derived for Rozu bank calculated as 0.3*0.8 = 0.24…?

(d) Under the alternative way of working through the swap, i only managed to figure out that the 0.1% is the bank charges. How are the two other components derived…?

Thanks…

[stacie395]

Hi sir…

It’s the question on Black Scholes model, Digunder.

‘The Black and Scholes model makes a number of assumptions about the underlying nature of the pricing and return distributions which may not be valid with this type of project. More problematically it assumes that continuous adjustment of the hedged position is possible.’

A bit unclear on this still. How come the assumptions in dis model is not valid with this type of project…?

Thanks…

[stacie395]

Question mentioned that the free cash flow to all classes of capital invested can be reliably approximated as NOPAT less net reinvestment.

So NOPAT – net reinvestment is equal to cash flow or profit…?

[stacie395]

Hi sir,

This is regarding the assessment of the validity of the free cash flow model.

‘Our estimates of the value using NOPAT as a proxy for free cash flow produces values that are reasonably close to the current market valuation of both companies. The models value Burcolene at $12.855 bil and PetroFrancais at $11.873 bil compared with current market valuations of $13.1 bil and $12.5 bil respectively. The estimation error is 1.9% and 5.3% respectively.’

My questions are :-
(i) For FCF method, isn’t it we are using NOPAT all the while? How come in this question seems like NOPAT acts as a substitute?

(ii) The 4 valuation figures are derived using FCF method right? The only difference is the smaller figures take into consideration the options outstanding and the pension deficit. Since the larger figures are 1 step behind, how can this form a basis for comparison? Is it right if we take the difference as errors…? Isn’t it we only make comparison if different methods are being employed to derive at the 2 sets of figures…?

Thanks…

[stacie395]

Is the retraining costs also subject to the same assumption…?

thanks…

[stacie395]

Hi sir,

With regards to the building costs of 600 and 3,300…the tax saved on capital allowances…is from T? to T?…?

thanks…

[stacie395]

Hi sir,

Here is the whole question :-

‘Bongolong Plc manufactures agricultural machinery and has their head office in London. The directors are currently considering investing in a small manufacturing facility in Mexico to serve both the North and South Americas.

If the decision is taken to go ahead, the project would commence immediately. It will require equipment costing 1.625 mil pounds and working capital of 1 mil pounds. The project should have a five-year life, at the end of which time the equipment, net of dismantling costs, is expected to have a zero value. The working capital would all be recovered.

Bongolong proposes to finance the equipment expenditure with a 65 mil peso 5-year term loan at 12% from the Bank of Mexico, whilst the working capital will be financed by exporting sterling.

The manufacturing facility is expected to produce a net cash flow, before tax and interest, of 25 mil pesos in the first year, and this is expected to increase by 10% per year.

In Mexico, corporation tax is charged at a rate of 50% on the annual net cashflow after interest charges and straight-line depreciation. In addition, Bongolong have negotiated a concession with the Mexican government to allow a notional annual interest charge of 15% per year on the exported sterling used to finance working capital.

Tax is paid twelve months after each year-end and tax losses can be carried forward and set-off against future tax liabilities. The Mexican government has undertaken to allow Bongolong to remit all cash surpluses and deficits to the UK at each year-end. Bongolong’s tax adviser has indicated that no additional UK tax will be payable on UK-remitted funds.

The current Mexico peso/pounds spot exchange rate is 40.00. Bongolong’s treasury department has estimated that the peso is likely to appreciate against sterling by two pesos per year in each of the next two years and then appreciate by one peso per year in each of the following two years and thereafter remain stable.

Agricultural machinery manufacturing is expected to produce anannual return of around 20% in the UK.’

thanks…~

[stacie395]

Hi all,

Wish to verify the following…:-

(a) For the dividend element (D1) should we take the dividend paid or declared, or both…?

(b) For the cum div share price, should we minus out dividend paid or declared, or both…?

Thanx…~

[stacie395]

Hi sir
(a) it is assumed that no additional investment in non current assets or working capital is needed, even though sales revenue is increasing.

Is this referring to the 5% growth for the new business venture…?

(b) it is assumed that additional initial working capital requirement is part of the new venture investment of $50 mil.

This means that all the investment in non current assets and working capital for the new venture will be covered by the $50 mil. Is this correct…?

[stacie395]

Hi all,

In which part of the question did it mentioned that the PPE will be sold at the end of the project life…?

Thanks…~

[stacie395]

Hi all,

When we use purchase power parity theory to forecast exchange rate, we have to correctly identify the home country and the foreign country, right…?

Just wondering in this question, between UK and US, which is the home country and which is the foreign country…?…is there any indicator in the question on this…??

[stacie395]

Hi all,

For the profit on sale of equipment, shouldn’t it be a 9 (40-31)…?

thanks…~

[stacie395]

Hi sir,

It is assumed that no additional investment in non current assets or working capital is needed, even though sales revenue is increasing.

Is the increase in sales revenue referring to the 5% growth for the new business venture…?

Thanx…!

[stacie395]

Hi sir,

It is assumed that no additional investment in non current assets or working capital is needed, even though sales revenue is increasing.

Is the increase in sales revenue referring to the 5% growth for the new business venture…?

Thanx…!

[stacie395]

Sir, hopefully my queries answered…thanks…~

[stacie395]

Sorry…but what i meant is the profitability index for the 5 projects in part (a)…

Thanks…

[stacie395]

Hi sir,

(a) still a bit confused here…so in this particular question the phrase ‘tax allowable depreciation’ refer to depreciation charge or capital allowance charge…??

(b) when we calculate value attributable to shareholders, it means free cash flow to equity right…?…isn’t it we need to minus out the debt repayment and its related interest costs too…?

Thanks…

[stacie395]

Hi sir,
Assumptions :-
It is assumed that, as before, the depreciation and the amount of capital investment needed are roughly equal.

Will we get credit for putting down this assumption since it has already being mentioned in the question..?

Thanks…

[stacie395]

Hi sir,

(i) in this question it seems like we have to assume tax allowable depreciation (capital allowance) and depreciation are the same…?
They are totally different right…?

(ii) regarding the value attributable to shareholders, why is it only the value of bank loan is deducted…?…what about the payables (they are providers of finance too) and the finance costs of $3.36m (0.07 * 60 * 0.8)…?…they need to be deducted too right…?

Thanks…

[stacie395]

Hi sir,

When we calculate IRR using trial and error, we need to derive at two discount rates, one resulting at +ve NPV and another one resulting at -ve NPV right…?…

What i wish to clarify is is there only one IRR for one debt instrument…?…Or there will be more than 1 IRR…?

This is because more than likely there will not only be 1 discount rate which can give a +ve or -ve NPV.

Or should we keep trying until we get the discount rate which result in +ve or -ve NPV which are the nearest to zero…?

Thanx…

[stacie395]

Sorry sir, just facing too much problems here. However is one or two questions possible here…?

(i) can i further clarify why you said that share options will not appear on the SOFP…?

(ii) estimated value based on cash flows to perpetuity (proposal 2)

(a) $20.56m / 0.065

(b) ($20.56m / 0.065) * (1+0.065)^-n

solution (a) is correct because the estimated value is right after the restructuring process. Am i right at saying that…?

Thanx…

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