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Part c – Jupiter Co BPP question 28

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Part c – Jupiter Co BPP question 28

  • This topic has 11 replies, 3 voices, and was last updated 10 years ago by John Moffat.
Viewing 12 posts - 1 through 12 (of 12 total)
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  • November 30, 2012 at 11:23 am #55962
    ashleyjosh
    Member
    • Topics: 1
    • Replies: 3
    • ☆

    Could you please explain how can I arrive at the 6.2% required return to ensure shareholders’ wealth is not affected? Thank you in advance.

    December 1, 2012 at 3:02 pm #109274
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    The debt is increasing by $1600 and the PBIT needs to increase by $99.14M

    99.14 / 1600 = 6.2%

    December 1, 2012 at 7:31 pm #109275
    ashleyjosh
    Member
    • Topics: 1
    • Replies: 3
    • ☆

    thank you sir. 🙂

    December 2, 2012 at 5:29 pm #109276
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    You are welcome 🙂

    March 25, 2015 at 7:02 am #238676
    hanhvn
    Member
    • Topics: 9
    • Replies: 50
    • ☆☆

    Dear Mr Moffat,

    It relates to question Jupiter, December 2008. It said that “the free cashflow to equity model has provided a reasonable estimate of the company equity market valuation in the past” but we will have to understand that it will be correct to use the model to evaluate the valuation in the future as the answer provided in part (c). Is it correct?

    Also, please would you help me to understand why the earnings growth rate 4% is not used to calculate the value after the capital restructure but by taking from 30% retention earned at the cost of equity?

    Besides, I am wondering if I am supposed not to ask too much so that the other students can ask you then? (sorry for this silly question but I’m afraid people think I am rude or there is rule that I have not been aware before posting the questions here).

    Many thanks.
    Hanh

    March 25, 2015 at 8:17 am #238699
    hanhvn
    Member
    • Topics: 9
    • Replies: 50
    • ☆☆

    Dear Mr Moffat,

    Another question in relation to part (c) is that the answer does the “back work” to convert the free cash flow (FCFE) from into the pretax by dividing to 0.75. However, as the FCFE is after interest, tax and reinvestment so if we divide it by 0.75 the result will not the PBT. It makes me confusing….Please help.

    Thanks

    Hanh

    March 25, 2015 at 11:14 am #238734
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    With regard to FCFE – yes. The fact that the question said it had worked in the past implies that you should use it to answer the question.

    There is an argument for using 4% as growth, and you would have got the marks if you had have used 4% instead of using Gordon’s growth approximation.

    For part (c) BPP have (correctly) divided by 0.75 to get the profit before tax, and have then added the interest to get the profit before tax and interest.

    March 26, 2015 at 12:43 am #238885
    hanhvn
    Member
    • Topics: 9
    • Replies: 50
    • ☆☆

    Thank you very much Mr Moffat.

    March 26, 2015 at 1:28 am #238886
    hanhvn
    Member
    • Topics: 9
    • Replies: 50
    • ☆☆

    But if the growth rate 4% was used then the FCFE would be lower than the it is before the new loan introduced to replace the current loan. Thus there will be a reduction in the PBIT?

    March 26, 2015 at 7:35 am #238925
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    That is true. (There is rarely just one correct answer for P4 questions. It depends on your assumptions, which is why you must state your assumptions. If your assumptions are sensible then you still get the marks.)

    March 27, 2015 at 1:08 am #239048
    hanhvn
    Member
    • Topics: 9
    • Replies: 50
    • ☆☆

    Many thanks Mr Moffat.

    March 27, 2015 at 8:41 am #239076
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    You are welcome 🙂

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