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Adjusted Present Value

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Adjusted Present Value

  • This topic has 7 replies, 3 voices, and was last updated 5 years ago by John Moffat.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • January 12, 2019 at 9:33 pm #501123
    Noureen
    Participant
    • Topics: 14
    • Replies: 16
    • ☆

    Hi John,

    Please can you let me know how the Ke as if ungraded is calculated in this question of Dec 2018 ?

    Amberle Co is a listed company with divisions which manufacture cars, motorbikes and cycles. Over the last few years, Amberle Co has used a mixture of equity and debt finance for its investments. However, it is about to make a new investment of $150 million in facilities to produce electric cars, which it proposes to finance solely by debt finance.
    Project information
    Amberle Co’s finance director has prepared estimates of the post-tax cash flows for the project, using a four-year time horizon, together with the realisable value at the end of four years:
    Year 1234 $m $m $m $m
    Post-tax operating cash flows 28·50 36·70 44·40 50·90 Realisable value 45·00
    Working capital of $6 million, not included in the estimates above and funded from retained earnings, will also be required immediately for the project, rising by the predicted rate of inflation for each year. Any remaining working capital will be released in full at the end of the project.
    Predicted rates of inflation are as follows:
    Year 1234
    8% 6% 5% 4% The finance director has proposed the following finance package for the new investment:
    Bank loan, repayable in equal annual instalments over the project’s life, interest
    payable at 8% per year 70m
    Subsidised loan from a government loan scheme over the project’s life on which
    interest is payable at 3·1% per year 80m
    150 ––––
    Issue costs of 3% of gross proceeds will be payable on the subsidised loan. No issue costs will be payable on the bank loan. Issue costs are not allowable for tax

    Financial information
    Amberle Co pays tax at an annual rate of 30% on profits in the same year in which profits arise.
    Amberle Co’s asset beta is currently estimated at 1·14. The current return on the market is estimated at 11%. The current risk-free rate is 4% per year.
    Amberle Co’s chairman has noted that all of the company’s debt, including the new debt, will be repayable within three to five years. He is wondering whether Amberle Co needs to develop a longer term financing policy in broad terms and how flexible this policy should be.
    Required:
    (a) Calculate the adjusted present value (APV) for the project and conclude whether the project should be
    accepted or not. (15 marks) (b) Discuss the factors which may determine the long-term finance policy which Amberle Co’s board may adopt
    and the factors which may cause the policy to change. (10 marks)

    Thank you
    Noureen

    January 13, 2019 at 10:51 am #501180
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    Please do not type out ACCA questions in full like this – they are copyright of the ACCA and they get annoyed if they are produced elsewhere.
    I have access to all the questions so all you need to is state which exam and which question.

    The ungeared cost of equity is calculated using the asset beta in the normal way, and is therefore:
    4% + 1.14(11% – 4%)

    January 13, 2019 at 11:14 am #501185
    Noureen
    Participant
    • Topics: 14
    • Replies: 16
    • ☆

    Hi John,

    Sorry about copying the question. I was not aware of it. Thanks for letting me know.

    And many thanks for your reply

    January 13, 2019 at 3:24 pm #501213
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    You are welcome 🙂

    August 21, 2019 at 10:57 pm #528371
    misbahkiran
    Participant
    • Topics: 109
    • Replies: 194
    • ☆☆☆

    hi sir
    in this question

    “Over the last few years, Amberle Co has used a mixture of equity and debt finance for its investments.”

    i interpret this statement as 50:50 of debt to equity. so i calculate beta equity of 1.94 and my ke is 17 percent

    then i calculate WACC which is 11% assuming kd 8 percent

    is it correct? as in the question it is not mentioned that it is all equity financed.
    or i am missing something?

    August 22, 2019 at 8:44 am #528386
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    But this question is asking for the adjusted present value.

    The question does not assume that it is all equity financed – it actually says that it will be. all debt financed!!

    However for APV we always calculate the NPV as though all equity financed and then adjust for the tax benefit associated with the debt. This is standard APV.

    I do explain this in my free lectures.

    August 23, 2019 at 12:21 am #528458
    misbahkiran
    Participant
    • Topics: 109
    • Replies: 194
    • ☆☆☆

    thanks alot sir that was a big point i overlooked. silly me.

    August 23, 2019 at 9:57 am #528489
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    You are welcome 🙂

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    Posts
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  • The topic ‘Adjusted Present Value’ is closed to new replies.

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