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John Moffat.
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- May 21, 2018 at 2:03 pm #453130
1.is there a question for the option to switch/redeploy( in types of real options) ?
2. When shares are overvalued, why do companies make acquisition ?
3. What is it mean by improving equity base ? is it like adjusting gearing ratio of the company ?
4. opentuition notes state that debt interest is deducted after calculating free cashflow however if we look at LAMRI CO(dec 10 adapted), the question has included the debt interest right after the operating profit and taxation amount was obtained after interest was operating profit.
If we follow the opentuition method, taxation amount will be wrong since interest will only be accounted after free cash flow therefore opentuition method will lead taxation amount of 28% x 24,000
As a result, does it mean that we can either put debt interest right after net operating profit or after free cash flow ?
May 21, 2018 at 4:32 pm #4531651. I don’t know – I guess there might be one in your revision kit.
2. If the shares of the target company are over-valued then it would not be normal for another company to acquire them (unless obviously they could get them for less).
3. Increasing the share capital and thereby reducing the gearing.
4. The only place where our notes say that debt interest is deducted after calculating the free cash flow, is where we are calculating the free cash flow to equity.
Tax is always calculated on the taxable profit after interest – this is basic Paper F6.
However in normal free cash flow calculations (and hence normal project appraisal) we do not bring in the interest (or the tax saving on the interest) because the after tax cost of debt is accounted for when we discount at the WACC.It is only when calculating the free cash flow to equity (as we are in Lamri) that we do subtract the interest and the tax saving on the interest.
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