- July 23, 2023 at 3:50 am #688744neoh0714Participant
- Topics: 12
- Replies: 10
I have some questions about the VIU.
1. The question states that “the discount rate used was the weighted average cost of capital (WACC) and Estoil used the 10-year government bond rate for its jurisdiction as the risk free rate in this calculation.”
=> based on my understanding, the discount rate should not include risk free rate, but in the model answer did not discuss about this, may I know my understanding is correct?
2. Question states that “During 2014, Estoil experienced financial difficulties marked by a
decline in revenue, a reorganisation and restructuring of the business and it reported a loss for the year. An impairment test of goodwill was performed but no impairment was recognised”
=> can I argue that no impairment recognised is incorrect as the entity is experienced financial difficulties marked by decline in revenue, reorganisation and restructuring of business? The entity should redo impairment test to reflect entity current condition as indication of impairment occurred.
3. Question states that ” The projected cash flows were calculated by adding back depreciation charges to the budgeted result for the period with expected changes in working capital and capital expenditure not taken into account.”
=> may I know adding back the depreciation of the asset in the cashflow projection is it correct as depreciation is non cash item should not have movement in cashflow?
Hope sir can clarify my questions. Thank you so much!July 23, 2023 at 8:17 am #688747Stephen WidbergKeymaster
- Topics: 15
- Replies: 3073
1. Discount rate = reflect risk in assets.
2. My assumption is that they the impairment test properly.
3. I guess they mean they added back the depreciation to profit in order to get a ‘cash’ figure.
Please don’t forget that the exam is very different to 2014. At that time students had a choice of very hard questions. Try and focus on questions from the last few years.
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