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Hello sir,
I solved the MJ 2023 AFM Paper available on the CBE Practice Platform and had 2 doubts in Q1 Joshua Co when I compared my solution with the examiner’s answer.
(1) When calculating the cash flows after year 4 in perpetuity, they excluded after tax synergy benefits of $9.2m. They considered it as a cash flow for year 1-4,so did I, but beyond year 4 when calculating CF in perpetuity they didn’t include it.. I don’t understand why(2) When calculating dividend capacity ie 25% of FCF for year 1, they did FCF excluding synergy benefits *25%. Again, why are synergy benefits excluded?
Kindly answer these 2 questions.
Thank you1. Under the ‘post acquisition cash flows’ heading in the question it states that there will be after tax synergies in each of the first 4 years.
2. I think that the synergy benefit should have been included in that calculation.
1. Yes I agree. But it doesn’t say that there will be no synergies from year 5 onwards
“It is expected that the acquisition will create after-tax synergies worth $9·2m per year in each of the first four years.” Information for investment in assets and PBIT is given in a similar fashion in the scenario( for the first 4 years). By this logic, investment in assets and other cash flows should also not be growing in perpetuity.“From year five onwards, the company’s free cash flows are expected to grow annually by 3% for the foreseeable future.” Isn’t this a general statement which would apply to all cash flows including the synergies?
2. Thank you for confirming 🙂
I have another doubt in Q1 Fondir Co ( December 2022 on practice platform)
When calculating net receipt from forward contract, the interest on overdraft is calculated for 4months. Is it because it is assumed that the receipt in four months will be used to pay the overdraft?In Part A for Fondir Co (Dec 2022), they are saying that $ production costs are more than production costs in Euro and so it would be recommended that products are produced in Euro to take advantage of cheaper costs of production. Can you please tell sir how depreciation of Euro against $ would make producing goods in Euro cheaper?
Kindly answer these questions sir.
Really sorry for the trouble but thought a lot about it.First question: Yes – that is the reason.
Second question: If the Euro depreciates then the $ will but more Euros so it makes it cheaper to pay for production in Euros.
Some the question says that there will be synergies for the first 4 years, one can only assume that they do not occur in later years.
If you had assumed differently, then provided you stated your assumption you would still have got credit for it.
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