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Hi, for part (a), the predicted after-tax profits of EV clubs are $454m. The expected proceeds which Eview Cinemas Co receives from selling the EV clubs (which is the aforementioned $454m) will be used firstly to pay off the 10% loan notes. Therefore, in the calculation of the impact on EPS, the amount of $454m is deducted from the predicted post-tax profits. From this interpretation, the profit from sale of EV clubs is hence $454m.
However, in the last sentence of question’s note 2, it’s said that the profit on the sale of the EV clubs should be taken directly to reserves. In this case, the amount is calculated as $7,674m (desired sales proceeds/revenue) – $3,790m (NBV) = $3,884m (profit). Now, the profit from sale of EV clubs is $3,884m.
I’m quite confused here; please may I know what’s difference between the $454m profit and the $3,884m profit, both also from sale of EV clubs? Thank you.
The $454 is the normal yearly profit that is currently being made by EV clubs. So if they sell EV clubs then EV Cinemas total profit per year will fall by the $454 that they will no longer be getting.
Completely separately, if they do sell EV Clubs then the proceeds will be more than the book value and so there will be a profit on sales of $3,884 which will go to reserves.
I see. Thanks a lot for enlightening me.
By the way, as per note 2, the expected proceeds which Eview Cinemas Co receives from selling the EV clubs will be used to pay off the 10% loan notes. Does that mean that the expected proceeds is the aforementioned $3,884m (profit on sale)?
If I interpret it as follows, please may I know whether I am correct:
“The $3,884m is used firstly to pay off the 10% loan notes ($3,200m). The remaining amount now is $3,884m – $3,200m = $684m. As per note 2, part of the remaining amount (which is part of $684m) will then be used to enhance liquidity by being held as part of current assets, so that the current ratio increases to 1.5. Such current ratio increase is then used to calculate the increase in current assets, since the current liabilities of $2,166m is given in the SOFP. Subsequently, the rest of the remaining amount will be invested in PPE. The current NBV of the NCA of EV clubs to be sold can be assumed to be $3,790m. Since the desired sales revenue is $7,674m, after deducting the NBV ($3,790), the profit on sale is $3,884m, which is to be transferred directly to reserves.”
Am I correct, or am I wrong in any of these? Thank you. 🙂
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