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Sir could you please clarify my doubts related to this Blipton question from Kaplan Exam kit.
doubt1) initial investment should be in yr 0 no? even though it took a year to get it built, the money must have been deployed at the start of yr 1, which is nothing but yr0.
doubt2) in order to find open MV of property at the end of 6years, pound 6.2m investment should be multiplied with (1.08×1.025)^6. because the by the end of yr 1 when the construction got over, the property value would have appreciated by 1.08×1.025
doubt3) TAD should be from yr 2, because as construction only finished in Yr1. But they take TAD from yr 1. which is strange.
doubt4) sir in this question’s part d) I don’t understand why we deduct the PV of future dividend that will be paid in a year’s time? The current market price is already ex-div, which means its not including the bygone year’s dividend, let aside any future dividend. Its really flustering me to see a dividend getting reduced from ex-div Market price/share.
Thank you for your patience!
I will answer you but I really would not waste too much time on this. It was the previous examiner and the ACCA removed after only 2 years because to many of his questions were ridiculous.
1. Note 1 of the question says that the construction costs occur at the end of the year concerned.
2. The 6.2M is multiplied by (1.08 x 1.025^5). We then subtract the charge for repairs and renewals as per notes 2 and 3 in the question and this in inflated at 2.5% p.a.
3. The question says that tax is paid in the year the profits arise – there is no 1 year delay.
4. There is no part (d) in the original exam questions.
re: doubt 1. Yes sir my bad. just re-read the question and spotted my fault. But now i have different doubt, why has this initial investment figure not been inflated to a arrive at its nominal value?the first note itself says this:
“All cash flows including construction costs are assumed to arise at the end of the year concerned and are to be projected in nominal (money) terms over the six year period.”
re: doubt 4) sir in this question’s part d) I don’t understand why we deduct the PV of future dividend that will be paid in a year’s time? The current market price is already ex-div, which means its not including the bygone year’s dividend, let aside any future dividend. Its really flustering me to see a dividend getting reduced from ex-div Market price/share.
Here it is:
d) Evaluate whether or not the proposed share option scheme is likely to be attractive to middle managers of Blipton.Blipton’s board of directors is considering the introduction of an executive share option scheme.
The scheme would be offered to all middle managers of the company. It would replace the existing scheme of performance bonuses linked to the post-tax earnings per share of the company. Such bonuses in the last year ranged between $5,000 and $7,000. If the option scheme is introduced, new options are expected to be offered to the managers each year.
It is proposed for the first year that all middle managers are offered options to purchase 5,000 shares at a price of 500 cents per share, after the options have been held for one year. Assume that the tax authorities allow the exercise of such options after they have been held for one year. If the options are not exercised at that time they will lapse.
The company’s shares have just come ex-div and have a current market price of 610 cents. The dividend paid was 25 cents per share, a level that has remained constant for the last three years. Assume that dividends are only paid annually.
The company’s share price has experienced a standard deviation of 38% during the last year. The short-term risk-free interest rate is 6% annum.I will answer this question but I will not spend time answering any more on it because of what I wrote in the first like of my previous reply.
1. The question says that the construction costs are estimated to be $6.2M and so presumably have already taken account of inflation. If you assume differently then fine, but state your assumption.
2. This years dividend will have already been paid, but there will be another dividend during the one year that the options will be held.
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