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Problem 3 in BPP Revision Kit P4

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Problem 3 in BPP Revision Kit P4

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • January 17, 2018 at 3:06 pm #430813
    quytuan
    Participant
    • Topics: 116
    • Replies: 46
    • ☆☆

    A part of the problem is as followed:
    “…There is also a view, expressed by some of the company’s principal equity investors, that the company should consider returning cash to them through the sale of its property holdings. The company has over 200 stores nationally and 15 overseas, of which all except five are owned by the company. In the domestic economy, growth in the value of commercial property has averaged 8% per annum in recent years whilst retail growth has remained static at 5.5%.
    A sale and leaseback, or the flotation of a separate property company that would rent the stores to Solar Supermarkets at commercial rates, are two suggestions that have been made at investor meetings. Either approach,it is suggested, would return value to investors and create a supply of capital for further expansion…”

    I think the problem is quite contradictory, as it states that the company is willing to return cash to the investor through the sale of its property holdings. However, a sale and leaseback, or the flotation of a separate property company that would rent the stores to Solar Supermarkets would create cash to Solar Supermarkets, not returning cash to the investor.
    Please help me to verify this!

    January 17, 2018 at 7:42 pm #430864
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54737
    • ☆☆☆☆☆

    A sale and leaseback would generate cash – Solar Supermarkets would then have cash that they could return to shareholders would sell the assets to the lease company and then lease the assets from them.

    Similarly, if a new company was formed, they would buy the property from Solar Supermarkets which would again generate cash that could be returned to shareholders.

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