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Here is the answer for Q2a
Sir could you explain on this paragraph? what is the claims means?Customers and suppliers have claims on a company which create shareholder value but are conditional upon Boullain Co’s
survival. Suppliers may invest in production systems which create value in the form of lower costs. For customers, these
claims reflect promises of quality and after-sales service levels which enable Boullain Co to charge higher prices. In both
cases, shareholder value is created as long as the customers and suppliers believe these claims will be honoured. One way of achieving this is by implementing a hedging strategy and communicating it to stakeholdersWell it is written in a very confusing way 🙂
All the examiner is trying to point out is that it is not only foreign exchange risk that needs dealing with, but that there are many other risks that the company needs to try and reduce. For example, customers are stakeholders and they will want the company to look at ways of reducing the risk of delivering poor quality. The more the company informs customers of the methods they are taking to reduce risk then the more confident customers will be and so communicating to them can only improve the value of the company.
Dear Sir,
Thank you for your explanation. It is become more clearer alreadyMay i know how about for supplier claim?
Besides sir I have a question for same pass year paper question 3a(iv) comment part.
Answer state: the project generates a positive NPV of $7·02 million and should therefore be
accepted in preference to the option to sell the concept for $4·3 million.First, My question is the project has the potential to generate $7.02m why the option to sell in $4.3m will be acceptable?
Another comment state: when the finance director’s objections are incorporated into the appraisal, the expected NPV is only $4·19 million and should therefore be rejected in favour of the option to sell.
Second, my question is the project only able generate $4.19m while now I am able sell it out at $4.3 m so suppose is a gain for me nut why rejected?
Thank you.
Suppliers will want the company to be a steady customer and so they will be wanting the company to reduce any risk of keep changing what they require from the supplier.
Second question:
It is because of the probabilities involved and the use therefore of expected values.
As the examiner states, if the probabilities are ignored then it is better to accept the project in preference to selling the concept.
However when the probabilities are taken into account, the expected NPV from he project is lower than the NPV of selling to Gepe and so it would be better to sell to Gepe.
However the problem is partly the estimates of the probabilities and partly the use of expected values, as the examiner states.
Dear Sir,
Thank for you explanation on first questionFor the second question, my understanding will be correct when there is no possibility assumption is it?
However, when the project include the element of possibility, we assume the possibility will goes into negative way which detrimental to company value so better to sell off immediately?Is it correct my way of understanding? Pls correct me if has mistake
Thank you.I assume that you mean ‘probability’ rather than ‘possibility’. Otherwise your understanding is correct.
Dear Sir,
Thank you for correct the term that i used and also Thank you for your explanation.
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