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Dear Sir i am self studying paper p5 for sept 2016 attempt and having some difficulties in Kaplan exam kit question Named “Snowwell” dec 03 ammended
I dont understand the calc of Mv of Debt and also why increase in working capital included in free cash flows calc ? Is there any full format for free cashflows so we can understand what comes into it ?
Can you help me with that ?I’m sorry, but I don’t have access to the Kaplan P5 kit. I’ve searched the Internet and can’t find a copy of the question there either. If you could provide a summary pf the MV Debt question (and their answer) I would have a look.
As for the working capital adjustment, if you sell an item you will generate cash – eventually. But not until receivables pay up.
Therefore any increase in receivables, increase in inventory or decrease in payables will decrease the cash available to the business
Dear Sir, is there any possible way where i could email you the question and its solution page in a picture?
Managed to find a copy.
The market value of shares and debt can be estimated by finding the present value of the inflows that those investments create (eg the dividend valuation model, Paper F9)
We are told that the debt has a current redemption yield on the loan stock is 8%. Essentially, 8% is the discount rate that will equate the market value of the debt to the interest and redemption amount.
So modelling the cash flows on a nominal value of 100, there will be three years of interest @14% then redemption at par for $100.
The W3 simply works out the PV of these flows at 8%.
Is that OK?
Yes Sir thanks , but one last thing ,
why does it say in free cashflows w4 that theres ” increase in working capital ? Infact working capital from previous year has decreased from -24 to -22 . Is the increase added or deducted ?
Please state the format for calculating the Free Cashflows?
So i can easily know what to subtract and what to add in it ?X2 wc = 164 – 188 = -24
X3 wc = 193 – 215 = -22
The working capital deficit has therefore decreased by 2; or working capital has increased by 2.
If WC increases, it consumes more cash (just think about inventory increasing) so reduces the free cash flows.
Note that this is a very old question from a different syllabus and at least two examiners ago.
I don’t think you should worry about it much more.
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