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Lammer Plc june 2006 kaplan kit

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Lammer Plc june 2006 kaplan kit

  • This topic has 1 reply, 2 voices, and was last updated 3 months ago by John Moffat.
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  • April 10, 2022 at 1:48 am #652966
    tinkle
    • Topics: 50
    • Replies: 43
    • ☆☆

    In a typical financial year Lammer plc has net dollar imports of $4.2 million. This is
    expected to continue for five years.
    The company’s cost of capital is estimated to be 11% per year. Taxation may be
    ignored, and cash flows may be assumed to occur at the year end.
    Required:
    Assuming that there is no change in the physical volume or dollar price of imports,
    estimate the impact on the expected market value of Lammer plc if the market
    expects the dollar to strengthen by 3% per year against the pound.

    I don’t understand what the question exactly wants Sir, I do get the calculation but I don’t understand how does it give us the impact on market value, why did we take the difference from spot in the answer? why not the total import value?

    Estimated effect on value:

    Spot…….. 1.9156…….. 2,192,525
    1 year…… 1.8581……… 2,260,374 …….67,849 ……0.901……. 61,132
    2 years…. 1.8024 ……….2,330,226 …….137,701….. 0.812……. 111,813
    3 years….. 1.7483………. 2,402,334……. 209,809….. 0.731……. 153,370
    4 years………1.6959……. 2,476,561 …….284,036 …..0.659…….. 187,180
    5 years……. 1.6450………. 2,553,191…… 360,666…… 0.593 …….213,875
    …………………………………………………………………………………………… –––––––
    …………………………………………………………………………………………..727,370

    April 10, 2022 at 9:18 am #652976
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49902
    • ☆☆☆☆☆

    The question does not ask for the total value, but asks for the impact (i.e. the effect) on the market value if the dollar strengthens. If the dollar strengthens then the costs in pounds will be higher than they would otherwise be, and therefore the PV of the changes (i.e. the change in the market value) will be lower than it otherwise would be.

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