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Hi Sir,
I have encountered the following queries:
Can you explain to me why under high inflation rates, the nominal cash flow becomes greater than the real cash flow please?
Re: Modigliani and Miller Why when a company increase its gearing and do not have enough profits, it wouldn’t obtain tax benefits and also wouldn’t benefit from increased tax shields?
Why with a decrease in WACC the market value would increase please? Wouldn’t it be less risk thus the market value would also decrease?
Q1:
A project has the following projected cash inflows:Year 1 100,000
Year 2 125,000
Year 3 105,000Working capital is required to be in place at the start of each year equal to 10% of the cash inflow for that year. The cost of capital is 10%. What is the present value of the working capital?
The ans is $2735 negative. Can you kindly explain?OT notes,Chapter 15 Example 2:
Isn’t the 15c dividend per share paid on every 50c ($0.50 per share) and thus for every $1 (2 shares) the amount of dividends paid will be 30c, with the equation being 30c divided by 12% please?
Chapter 23: Forward Contracts (pg 124 notes)
If the rate is expressed as a premium from say spot £/$ 0.8434 – 0.7942, in this case and the forward rate is 0.62-0.51cpm, we have to add or also subtract?Thank you in advance
In future, you must ask questions on different topics in separate threads, and make the heading about the topic being asked.
The reason is so that everyone can see the topic and can benefit from my answers 🙂1. The nominal cash flow is the actual cash flow, whereas the real cash flow is the flow ignoring inflation. With inflation the actual cash flow will be higher.
2. The tax benefit of debt only exists because interest reduces the taxable profit and results in less tax to pay. If there is no profit then their is no tax bill to reduce.
3. The lower the cost of borrowing, then the better of the company is and therefore the higher the market value. Also if there is less risk then people are prepared to pay more for the same shares, so again, higher market value.
Q1:
This forum is not somewhere to expect full answers to full questions!
You must have answer in the same book in which you found the question and so you should ask which bit of the answer is causing you the problem and then I will try and explain.Q2:
You subtract a premium (pm) and you add a discount (dis).It seems that you are not watching the free lectures (because everything you have asked is explained in my lectures), and there is no point at all in using the lecture notes on their own – they are lecture notes (not a Study Text) and it is in the lectures that I explain and expand on the lecture notes.
The free lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well. If you are not watching the lectures for any reason, then you must buy a Study Text from one of the ACCA approved publishers and study from that.Dear Sir, Thank you for your reply.
I actually did listen to all the lectures, however when I was working out some questions and revised the notes as I went along, I encountered these 2 problems I asked you above re the OT notes :/.
I apologies if I am bothering you, but I am really trying all my best to pass from this exam :(, can you still explain to me the following? as I still can’t get it :/
Isn’t the 15c dividend per share paid on every 50c ($0.50 per share) and thus for every $1 (2 shares) the amount of dividends paid will be 30c, with the equation being 30c divided by 12% please?
Thank you so much in advance.
You are not bothering me at all!
Certainly for every 2 shares the dividend will be 30c.
However you are asked to calculate the market value of 1 share, and that depends on the dividends on that one share. If a share gives a constant dividend of 15c and shareholders require a 12% return, then they will be prepared to pay 15/0.12 = $1.25 for that share. The nominal value of the share is of no relevant at all.
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