June 2012 Q2)a) - Ennea Co

As is so often the case in P4, a lot depends on assumptions and provided you make your workings clear (so that the marker can see what assumptions you have made) then you will get the marks even though you will often get a different answer. With regard to the return on investment, there is a logic to what you have and it would be accepted. However ROI is more usually calculated on balance sheet figures and therefore I think what the examiner has done is actually better. With regard to the profit on sale, I certainly agree with you (and the examiner has said in his note that you could have brought in the after-tax profit which would then change all the figures. You would get full marks either way.

Dear Sir I have another query regarding this particular Question. Under Proposal 1: I did not understand the split between Share Capital and Retained Earnings where it was calculated as $20m*40c/320c where $2.5m goes to share capital and 17.5m to Retained Earnings. I did not understand how the R.E 320c came from. and the basis for the split Thanks Salim

The share price is $3.20 and so when they buy back the shares they pay $3.20 per share. So.......they buy back 20M/3.20 shares. However on the balance sheet, the share capital only falls by the nominal value of the shares redeemed, which is 0.40. That gives a reduction in share capital of 20M/3.20 x 0.40. Hope that makes sense :-)

Thank you sir Much appreciated. :)

You are welcome :-)

Dear John, the reduction in retarined earnings of 17.5m, would the double entry for this be from a reserve account in the balance sheet? also the interest calculation 20m * 6%...what's the 1-0.2 for? sorry its a stupid question. Please could you,let me know how this works. many thanks, devi steven

Yes - from a reserve account. The 1-0.2 is to account for the tax saving on interest of 20% - the net cost to the company of extra interest is only 80% (or 0.8).

Dear John, many thanks, Devi

You are welcome :-)

i am sorry if this sound stupid, but where you get $320000 in proposal 1? tq

It is not me, it is the examiner :-) I assume that you mean the extra interest of 320,000? If so, then the answer does explain - it is an extra 0.25% on 160M x 0.8 (because of tax relief on the interest of 20%)

Hey John For the same question, why have they reduced the retained earnings by 17.5? Thanks

I assume that you are referring to Proposal 1 (although you have not said so in your question!!). They are repaying 20M to shareholders and so the total owing on the SOFP to shareholders (i.e. share capital plus reserves) must reduce by 20M. The nominal value of the shares repaid is 2.5M and so share capital reduces by 2.5M and so the remaining 17.%M must reduce the reserves (i.e. here, retained earnings). This part is really financial accounts rather than financial management.