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In MJ23 Q3 on Blackbosca Co, the question said that:
“Blackbosca Co will receive a royalty payment from the investment in Üskistan, payable annually. The first year’s royalty payment is fixed at $2·5m but this will increase annually at a rate of 5% in subsequent years.”
To calculate cash flow, the answer is as bellow:
Royalty is included as positive figure in TL. I understand this point.
But Royalty also is included as negative figure in cash flow in $.I do not understand this point.
Please explain.
Thank you.
Uskistan is paying the royalty to Blackbosca. So it is an outflow in Uskistan’s cash flows, and an inflow in Blackbosca’s cash flows.
Thank you. I understand.
In question Q2a, regarding to discussion on NED’s view on the acquisition of Ludham Co, can I get mark if saying that:
Non-executive director’s views that the acquisition does not reduce risk and will be of no value to Oxwick Co. seems reasonable since Oxwick Co is a listed, shareholder’s porfilio has been well diversify away.
In Q3b, regarding to Oxwick Co’s acquisition of Ludham Co, the question said that:
“After four years, the annual growth rate of free cash flows is expected to be 5% for the foreseeable future”
the answer is :
Post tax cash flow of year 4: 355.9
FCF of year 4 : 337.3To calculate cash flow year 5 onwards, the examiner uses 355.9 instead of 337.3.
Please explain why.
Q3b – it is because the question says that there will be no additional investment from year 5 onwards.
In MJ23, Q3b: the question says that there will be no additional investment from year 5 onwards.
Post tax cash flow of year 4: 355.9
FCF of year 4 : 337.3To calculate cash flow year 5 onwards, the examiner uses 355.9 instead of 337.3.
In MJ22, Q3ai: the question is silent on saying that whether there will be no additional investment from year 5 onwards.
Post tax cash flow of year 4: 388
FCF of year 4 : 282To calculate cash flow year 5 onwards, the examiner uses 282 instead of 388
Can I use this rule to apply in the exam :
Whenever the question says that ” there will be no additional investment from year 5(for example) onwards”, I will use post tax CF of Y4 to calculate cash flow year 5 onwards.
If the question is silent on this, I will use FCF of Y4 instead of.
Thank you.
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