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Sir can you please tell me why r they dividing benefit by integrands wacc for calculation of publicity.
One thing more which beta i mean equity or asset do we use in calculating capm
Rf+(E(rm)-rf)B
Am i right that we always use equity beta but if infrmation is given about debt n equity in that case and equity beta in that case we use asset beta. ThanksNote (i) says that if they buy Oberberg then they will save EUR 1M per year on advertising. So it is effectively an extra cash inflow for Integrand.
It is always the equity beta that determines the cost of equity.
The equity beta will be higher than the asset beta if there is gearing in the company, and therefore if you know the asset beta you have to use the asset beta formula to calculate the equity beta in order to calculate the cost of equity.Hi John, In his question c (i), when calculating Free cash flows, why is the interest not deducted?
Is it because the requirement says only to calculate Free cash flows, not free cash flow to equity?And one more thing, why isn’t the investment for expansion of € 9 million in 20X5 deducted when calculating Fcf in c (i)?
Interest is never subtracted in arriving at the free cash flows (because the discounting effectively takes account of the interest). It is only when looking at free cash flows to equity that we need to take out the interest.
The investment for expansion of $9M has been included. If you discount the $9M for three years at the WACC of 10% then it has a present value of $6.8M, which does appear in the answer.
Hi John, when calculating the PV of benefit of extra publicity, why €1m is multipled by the UK tax rate?
Why is the redundancy cost of €5m not considered?The redundancy costs have been brought in!! (see present value of other relevant cash flows just above note (i) in the examiners answer, and then look at note (vi) of the answer).
The extra publicity is the equivalent of Intergrand spending 1M and if they had spent it then they would have saved UK tax.
Hi John, when calculating the PV of lost exports, £800000*5%*0.70 will result £28000 not £280000.
Yes it does. But I have no idea why you want to multiply be 5% when you should be multiplying by 0.5 (as the examiner’s answer does).
Read note (xvii) of the question!I might well be wrong, but I get the impression that you are ‘auditing’ the answers rather than working through the questions yourself first, and only then checking yourself against the answers.
The only way to properly prepare for P4 is to attempt the questions first and only then to check the answers.
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