BBS STORE JUNE/06 (BUSINESS RESTRUCTURING)

[John Moffat]

Ask as many questions as you want, but please start a new thread if it is about a different question. It is so that other people can get the benefit as well.

[hanhvn]

Dear Mr Moffat,

I have a question in relation to the beta asset.

In this question, I am happy with the method of finding betas as instructed from the question’s information and from your further explanations. However, in the real life, would it be the case that the beta asset of the retail business sector is higher than the one in property as I think it is riskier when investing in property line?

Thanks alot.

Hanhvn

[John Moffat]

Oooh – we could argue about that for ever, and there is no real answer.

All I would say is that in the long-term property does tend to be a fairly safe investment (in the short term, certainly property prices can fluctuate a lot, but in the long term they tend to increase). Retail however does tend to be more volatile (certainly in the UK) with changes in peoples buying habits and with new competition appearing. The large supermarkets in the UK are a good example at the moment, with all the long-established names suffering falls in profits currently due partly to consumers having less money, and partly due to new, cheaper, supermarket chains appearing.

[hanhvn]

Great! I am enlightened!

Getting know about this, in particular with your real examples, seems excellent.

Thank you very much.

[John Moffat]

You are very welcome 🙂

[Maja]

Dear Mr Moffat,
J have a question to part a of the question. Why adjusted earnigs for 20X8 figure doesn’t affect Retained Earnigs Figure in SOFP?

Thank you very much.

[John Moffat]

It is only Option 2 that will affect the earnings and the retained earnings under Option 2 have been adjusted.

[Maja]

Yes, with the share buy-back amount. but I meant adjustments to earnings like property rent foregone and return on reinvested funds. They impact earnings for the year, so why aren’t reflected in the R/E amount?

[John Moffat]

But 20X8 has already happened. It is only the changes at the year end that will have any impact on the SOFP for 20X8..

When it comes to the future earnings per share then there will be an impact in the future and there the return on the reinvested funds has been dealt with in the answer.

[lehalinh610]

Dear Sir, I think share buy-back happen at the end or 20X8 –> impact on RE of 20X8 also. Why do we exclude of comparative SOFP of 20X8?
– And also, in calculating comparative EPS of 20X8, why do we take into account interest saved…that happened in future?
Thanks in advance!

[John Moffat]

I am not sure that I quite follow you.

The questions is asking what the effect of the two options will be, and we can only use the 20X8 statement to show the effect (because that is all we have).

20X8 has already finished, but again we can only use 20X8 to illustrate the effect.

The share buy-back is only with option 2, and an adjustment has been made to retained earnings.
Interest would not be saved in 20X8 – only in the future. But again, because we only have the information for 20X8, we are using those statements in order to illustrate what the effect would have been.

[lehalinh610]

– About RE of SOFP of 20X8: I’ve looked back the answer, they already included in RE:)). Thank you so much!
– But with EPS, I still confused: why do we include interest saved of coming years… in comparative earning, because impact in earning –> impact in RE. But in RE we exclude these.

[John Moffat]

I am please you are happy with the first point 🙂

With regard to the second point, I now understand you and I suppose that you could have taken the interest into account in the comparative SOFP’s (and would still have got the marks).

The examiner chose to look at the two things separately.

[Anonymous]

Mr.Moffat, why did we take the 6800 equity value as the total value? Why didnt we take the the sum of the market values of equity 6800 & debt 1130?

[John Moffat]

It is a moot point and this question was set by the previous examiner. He was assuming that it was equity that bore the risk and therefore used equity for combining the betas.

[parisnaaa]

Hi John, when calculating the eps, why is 770m *0.65*0.3 done (when we should take only the 360m impact) ? Why is Roe calculated?

[John Moffat]

Why only the 360M impact?

There is a reduction of the credit spread for the 770M (and the saving is calculated net of tax at 35%).

There is no need to calculate the ROE because it was not required in the question 🙂

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