CAP 2 SFMA Assesment HELP!!!

MrMatisse

Trying to figure out the above. i reckon theres a question on corporate governance, ratios, but the part that looks like lease v buy has really thrown me, as anyone got any idea where i could find a similar sample question with solution??

Also what are they looking for in the last part before they start asking about lease v buy is it the breakeven point?? I really havnt a clue and am starting to get very worried

Any help would be great:o

im plz new be nice:P!!!!!!!!

Hanley

I wouldn't be TOO worried... it looks fairly straight forward and there's loads of time left before Jan 10th.

FWIW, I think it's worth looking at the NPV of the project over 3 years based on purchasing the machinery, and by leasing it. Whichever has the higher NPV should preferable.

It's been a while since I looked at the question, but AFAIR, the only two sources of finance available are thru reserves and leasing. It might be worth mentioning somewhere in the solution that even tho it's not stated, it would be wise to consider debt for the positive tax benefits.

I'm gonna sit down tomorrow when I feel a bit better and go thru it so if I see anything else I'll stick it up here.

I agree that ratio's and corporate governence are the other two questions which have been fairly obviously redflagged.

How are people getting the market price of a share for the P/E ratio?? There's two methods that I can see, firstly taking the nominal value and using that, and second Net Asset Value/Number of shares in issue. I believe the second method's preferable as it reflects the state of the company at a point in time. Whereas the nominal value doesn't change wit the underlying economic circumstances.

MrMatisse

Thanks Hanley!

Just also wondering from antone out there how are people deciding how much revenue those schemes will generate given it doesnt say what proportion of students in each school will take up its offer of photographs?

Dell2009

I need lots of help with this too.To get the market Value of the shares you suggest dividing the Net Asset Value by the number of shares in Issue. Is this as follows

2,861-1,228/400 (all Millions) to get an answer of €4.08 per share??IS this correct

Hanley

Dell2009 wrote: »

I need lots of help with this too.To get the market Value of the shares you suggest dividing the Net Asset Value by the number of shares in Issue. Is this as follows

2,861-1,228/400 (all Millions) to get an answer of €4.08 per share??IS this correct

As far as I'm concerned, yes, that's correct.

I've been doing some work on it with guys I went to college with, and we haven't really formed a definite consensus as to what is "correct" value tho.

Obviously there's no market for the shares since they're a limited company. So we can't rely on a market price.

The obvious way to do it would be to divide what Global Investment PLC paid by the number of shares they got, but that's not given.

However it does say the shares are issued for the first time to non family members in '06 (ie a new issue), and if these shares were issued at a value above the nominal amount, there should be a share premium reserve, but from reading the question there isn't. Which would probably indicate they were issued at their nominal value. Which probably implies that's the "market" price - ie €2.

My issue is that this nominal value doesn't actually reflect the underlying economic conditions that exist at the purchase date, so to sell them low when the valuation per the NAV method is so high seems ridiculous.

I'm gonna ask a couple of managers in work what they think on Monday, and I'll ask around the rest of the CAP 2's and see what way they're approaching it.

For the purpose of the question, and based on the info given, I'd say using the nominal value is probably what they're looking for you to do, but I honestly don't think it's the most suitable method.

Just be sure to state the basis of your assumptions and why you're doing what you're doing and you shouldn't be marked too harshly on it. Hell maybe even do it both ways, but focus on one (if that makes sense?).

Hanley

Really-Stressed wrote: »

Thanks Hanley!

Just also wondering from antone out there how are people deciding how much revenue those schemes will generate given it doesnt say what proportion of students in each school will take up its offer of photographs?

I'm assuming full uptake.

In the abscence of further information it's the only resonable thing to assume. Again, be sure to state your assumptions.

The feel I got from Bernard Vallely when he was doing the tutorial was that since it was the first year they'd try to be as fair as possible, and if you state your assumptions and more importantly WHY you're assuming it, you should be ok.

Hanley

Ok so I did some more research and there might be another method.

The problem with NAV is that is only uses asset values, and discounts future earning potential. So for service companies who are asset light and trade mostly on intellectual capital, it may not be too suitable.

The other option is - Market Based Multiples. Basically using your co's EPS and multiplying it by the industry average, or that of another similar co. to give you the market value of the share.

The industry average P/E is 10x (per the question.

Justin ltd's EPS is €1.225 (489m/400m)

So the market value of one share is €12.225 (1.225x10)

Total mkt val of Justin = €4,892,000,000 (12.225 x 400,000,000)

Seems incredibly high for a small family business. Buuuuuuuuut I guess it's resonable when you consider profit for the year was €489,000,000.

Another factor to consider is that for limited companies it's normal to discount the P/E ratio by 30-50% when making your calculations if the P/E ratio given is that of a PLC. Which brings up the Q, how does one select a suitable factor given that we dont know???

What's peoples take on this method??

More can be read in the Anne Marie Ward book from pg: 685 onwards.

Hanley

The more I read, the more I have a feeling they made a balls of the amounts in the case study.

All figures are listed as being in millions, so revenue for 08's €2,481 million.

The project they're considering generates gross revenue of only €2.8 million year on year.

That is to say, if it was in place in '08, only 0.1% of the total revenue for the year.

However if the columns were headed with thousands instead of millions, the new project would be generating approx. 116% extra revenue, which seems more realistic considering their buisness strategy is growth thru product development.

stejk11

Yea i was thinking that myself it was a bit strange to have the figures stated in millions!

Once again the institute makes a balls of things...

MrMatisse

It does seem the institute have as said above made an absolute mess of this.

Hanley how did you come to the figure of 2.8 million generated by the project?

I cant figure it out as it does not say how much they expect to sell in each school.


Cheers again!!

Hanley

Really-Stressed wrote: »

It does seem the institute have as said above made an absolute mess of this.

Hanley how did you come to the figure of 2.8 million generated by the project?

I cant figure it out as it does not say how much they expect to sell in each school.


Cheers again!!

Assuming full uptake of each student in the school that invites them back...

5,000 schools x 10% = 500 schools who'll buy photos

500 x 400 average pupils per school = 200,000 photos sold

200,000 x €14 selling price = €2.8m

EDIT: this is 2.8m per annum, the selling price is fixed for 3 years so assume annual income is 2.8m in each of the 3 years.

Dell2009

Yr0 Yr1 Yr2 Yr3

Initial Outlay -1,000,000
Revenue Generated 2,800,000 2,800,000 2,800,000
Cost of Sales Rep -140,000 -145,600 -151,424
Cost of Photograher -100,000 -110,000 -121,000
Cost of Sample Photo's -20,000 -20,000 -20,000
Cost of Full Size Photo -1,000,000 -1,000,000 -1,000,000
Profit Generated -1,000,000 1,540,000 1,524,400 1,507,576
Tax Paid (year in arrears) -258,000 -215,780
Net Cash Flows -1,000,000 1,540,000 1,266,400 1,291,796
8% Discount Factor 1.00 0.9259 0.8573 0.7938
NPV -1,000,000.00 1,425,886.00 1,085,684.72
1,025,427.66

Hanley

Dell2009 wrote: »

Yr0 Yr1 Yr2 Yr3

Initial Outlay -1,000,000
Revenue Generated 2,800,000 2,800,000 2,800,000
Cost of Sales Rep -140,000 -145,600 -151,424
Cost of Photograher -100,000 -110,000 -121,000
Cost of Sample Photo's -20,000 -20,000 -20,000
Cost of Full Size Photo -1,000,000 -1,000,000 -1,000,000
Profit Generated -1,000,000 1,540,000 1,524,400 1,507,576
Tax Paid (year in arrears) -258,000 -215,780
Net Cash Flows -1,000,000 1,540,000 1,266,400 1,291,796
8% Discount Factor 1.00 0.9259 0.8573 0.7938
NPV -1,000,000.00 1,425,886.00 1,085,684.72
1,025,427.66

How are you getting 215780 as your tax charge for y3?

Dell2009

Cap allowance Tax effect 37,500 (187,500*20%)
Taxation on Net Cash Flow -253,280 (net cash flow yr 2 *20%)
215,780


it could be completely wrong and am well wide open to correction

Hanley

Dell2009 wrote: »

it could be completely wrong and am well wide open to correction

Like wise... here's mine;

Operating profits:1524400
Capital Allowance: (187500)
Taxable Profit: 1336900
CT @ 20%: 267,380 (payable in y3)


Capital allowance was got by;

1,000,000-250,000 = 750,000 WDV year 2

750,000 * 25% = 187,500 = capital allowance

Dell2009

i think u are right, i was doing it a completely complicated way which i didn't understand. Thanks for the correction. What was the NPV, something like €1,657,307??

MrMatisse

thanks for the earlier reply hanley, appreciate the help.

Hanley

Dell2009 wrote: »

i think u are right, i was doing it a completely complicated way which i didn't understand. Thanks for the correction. What was the NPV, something like €1,657,307??

It looks like you were changing methods half way thru? Like you did the first years tax the way I did, and then changed to a different method.... I'll post back tomorrow and let anyone who cares know whether my way was right or not. I think it was!!

Here's what I have;

Years 0 1 2 3 4
Initial Outlay -1,000,000 (year 0 only)
Revenue Generated 2,800,000 2,800,000 2,800,000
Cost of Sales Rep -140,000 -145,600 -151,424
Cost of Photograher -100,000 -110,000 -121,000
Cost of Sample Photo's -20,000 -20,000 -20,000
Cost of Full Size Photo -1,000,000 -1,000,000 -1,000,000
Profit Generated -1,000,000 1,540,000 1,524,400 1,507,576
Tax Paid (year in arrears) -258,000 -267,380 -189,015 (in year 4)
Net Cash Flows -1,000,000 1,540,000 1,266,400 1,240,196 -189,015 (year 4)
8% Discount Factor 1.00 0.9259 0.8573 0.7938 0.7350
Present Value -1,000,000.00 1,425,886 1,085,685 984,468 -138,926

NPV = 2,357,113

Kelso

Why is the 1m figure in year 0 used for the equipment and not 400k in yrs 0-2 (or should it be 1-3?). Works out cheaper does it not?

Hanley

Kelso wrote: »

Why is the 1m figure in year 0 used for the equipment and not 400k in yrs 0-2 (or should it be 1-3?). Works out cheaper does it not?

There's two finance options - purchase out of reserves for 1m, or finance lease with 3 equal payments of 400k (ie a total cost of 1.2m).

What I did was calculate the NPV of both and which ever was higher was the better option.

Per my calculations the finance lease was preferable by about 131k.

the1andonly1

why do you need to discount the cost of the lease? the cost of capital (i.e. the purchase of the machine) is the cost of using reserves, but the lease does not come out of your reserves.

Any ideas?!

Hanley

the1andonly1 wrote: »

why do you need to discount the cost of the lease? the cost of capital (i.e. the purchase of the machine) is the cost of using reserves, but the lease does not come out of your reserves.

Any ideas?!

Because the profits you make in years 1, 2 and 3 will have a different present day value than they do in the year you make them so they need to be discounted back to present day values to asses the projects.

Very simply, 1,000 now is worth more than 1,000 in a year, because by then you could have invested it, spent it or done any manner of other things with it.

So if the present value of money now is greater than in the future, the future value needs to be scaled down (ie discounted) to reflect that.

I hope I'm explaining that alright....

I think what you're getting at is the opportunity cost of using cash reserves when you could have used a finance lease?

That is, there's lots of other things you could have used your reserves for, but chose to spend them on this project instead.

As it stands, another plus for the finance lease (apart from giving a greater NPV) is that debentures are repayable this year, and debt is up 56% so reducing your reserves on capex in this scenario isn't a good idea at all.

Think of how it would look to the banks, especially in the current climate.

Dell2009

With regard to the financing by Leasing, i have posted what i have got but i think it needs correction!

Revenue Generated 2,800,000 2,800,000 2,800,000
Cost of Sales Rep -140,000 -145,600 -151,424
Cost of Photograher -100,000 -110,000 -121,000
Cost of Sample Photo's -20,000 -20,000 -20,000
Cost of Full Size Photo -1,000,000 -1,000,000 -1,000,000
Profit Generated -1,000,000 1,540,000 1,524,400 1,507,576
Lease Payments -400,000 -400,000 -400,000
Net Profit after lease payments -1,000,000 1,140,000 1,124,400 1,107,576
Tax Paid (year in arrears) 0 0 -228,000 -224,880 -221,515
Net Cash Flows -1,000,000 1,140,000 896,400 882,696 -221,515
8% Discount Factor 0.9259 0.8573 0.7938 0.735
NPV 1,055,526.00 768,483.72 700,684.08 -162,813.67

To get an NPV of 2,361,880

Is this correct?

Dell2009

on Page 3 of the Case Study for Justin Ltd.Can someone please explain why it Says Income Tax Expense at the end of the Income Statement? Should this not be Corporation Tax. Furthermore, should the Tax Expense not be a % of the Profit Before Tax, The Tax expense has risen in 2008 even though the profit has fallen.


Anyone???

eoferrall

Hi, just been reading through this and its helping me!:D

what are people doing regarding the investments? if assuming the figures should be in thousands in the statements ie not cover full cost of investment as 1million & reserves are 833k. I have gone with there has been no correction so the millions are right...thus retained earnings cover the investment fully (but 833mill in reserve!?) that seems very high and would be better off invested earning a return no??

what do people think?

P.S. I reckon we will be given a sales volume in the requirement, as if the expenses and flows are done it is very quick to add in 14 X "units" and 5 X "units" and finish of the calc?

again what do people think on that?

MrMatisse

Yeah i reckon we will get sales volume etc,


anyone any ideas why they have given 06 figures for inventory?

stejk11

Dell2009 wrote: »

Profit Generated -1,000,000 1,540,000 1,524,400 1,507,576

Where did u get the -€1,000,00 in yr 0 from when calaulating ur lease?

stejk11

Really-Stressed wrote: »

Yeah i reckon we will get sales volume etc,


anyone any ideas why they have given 06 figures for inventory?

I'd say they'll prob give us some sales and purchases figures from 06 and ask to compare stock turnover, debtor and creditor days for 3 years.

Dell2009

sorry Stejk,

That was a mistake, i have removed it now.

Also, not sure why they gave us the 2006 figures. Can you calculate any ratio's or come to any conclusions with Just Inventories, Payables and receivables. I just noted the increase/decrease of these figures in comparison with 2007 and 2008 figures?

commercegrad07

Hanley wrote: »

It looks like you were changing methods half way thru? Like you did the first years tax the way I did, and then changed to a different method.... I'll post back tomorrow and let anyone who cares know whether my way was right or not. I think it was!!

Here's what I have;

Years 0 1 2 3 4
Initial Outlay -1,000,000 (year 0 only)
Revenue Generated 2,800,000 2,800,000 2,800,000
Cost of Sales Rep -140,000 -145,600 -151,424
Cost of Photograher -100,000 -110,000 -121,000
Cost of Sample Photo's -20,000 -20,000 -20,000
Cost of Full Size Photo -1,000,000 -1,000,000 -1,000,000
Profit Generated -1,000,000 1,540,000 1,524,400 1,507,576
Tax Paid (year in arrears) -258,000 -267,380 -189,015 (in year 4)
Net Cash Flows -1,000,000 1,540,000 1,266,400 1,240,196 -189,015 (year 4)
8% Discount Factor 1.00 0.9259 0.8573 0.7938 0.7350
Present Value -1,000,000.00 1,425,886 1,085,685 984,468 -138,926

NPV = 2,357,113

Im at a loss as to how you worked out the tax payable in year 4. from my understanding the twd value of the equip should be 562,500. ( 750000-25%)
the capital allowance would then be 562500*25%=140625
1507576(y3 profit)-140625=1366951
1366951*20%= 273,390

looking at it myself here something does not quite add up, but i cant seem to spot. im wide open to correction.
many thanks

stejk11

commercegrad07 wrote: »

Im at a loss as to how you worked out the tax payable in year 4. from my understanding the twd value of the equip should be 562,500. ( 750000-25%)
the capital allowance would then be 562500*25%=140625
1507576(y3 profit)-140625=1366951
1366951*20%= 273,390

looking at it myself here something does not quite add up, but i cant seem to spot. im wide open to correction.
many thanks

Because the machinery is scrapped after 3 years, you are allowed to take the remaining balance for you capital allowances not used and net it against the value your recived on the disposal. (My understanding of it anyway!)

Because the company will get nothing for the equipment they are allowed to take all of the remaining capital allowances.

So the tax charge in year 4 is:

Profit for year 3: €1,507,576
Remaining cap allowance: €562,500
Taxable profit: (1,507,576 - 562,500) = €945,076

Corporation Tax charge @20% = (945,076 x 20%) = €189,015 (Payable yr 4)

Hope this clears it up for u!

Dell2009

You are forgetting about the balancing allowance

€140,625 + the TWDV at end of year 3 of €421,875
This gives a capital allowance of €562,500 (€140,625+€421,875)
Profit €1,507,576 - €562,500 = €945,076
Taxed as follows €945,076 * 20% = €189,015.2

commercegrad07

stejk11 wrote: »

Because the machinery is scrapped after 3 years, you are allowed to take the remaining balance for you capital allowances not used and net it against the value your recived on the disposal. (My understanding of it anyway!)

Because the company will get nothing for the equipment they are allowed to take all of the remaining capital allowances.

So the tax charge in year 4 is:

Profit for year 3: €1,507,576
Remaining cap allowance: €562,500
Taxable profit: (1,507,576 - 562,500) = €945,076

Corporation Tax charge @20% = (945,076 x 20%) = €189,015 (Payable yr 4)

Hope this clears it up for u!

cheers for that.. i think it looks pretty straight forward otherwise, and id imagine they'll tweak it slightly by giving exact figures for how many students took up the offers etc

Dell2009

eoferrall wrote: »

Hi, just been reading through this and its helping me!:D

what are people doing regarding the investments? if assuming the figures should be in thousands in the statements ie not cover full cost of investment as 1million & reserves are 833k. I have gone with there has been no correction so the millions are right...thus retained earnings cover the investment fully (but 833mill in reserve!?) that seems very high and would be better off invested earning a return no??

what do people think?

P.S. I reckon we will be given a sales volume in the requirement, as if the expenses and flows are done it is very quick to add in 14 X "units" and 5 X "units" and finish of the calc?

again what do people think on that?

This €833m, which is supposidly used to finance the Investment, am i right in saying that this money is currently tied up in assets as there is 0 in the bank.Is this correct?

Newaglish

Dell2009 wrote: »

on Page 3 of the Case Study for Justin Ltd.Can someone please explain why it Says Income Tax Expense at the end of the Income Statement? Should this not be Corporation Tax. Furthermore, should the Tax Expense not be a % of the Profit Before Tax, The Tax expense has risen in 2008 even though the profit has fallen.


Anyone???

Income tax for a company is corporation tax, it's just a presentation thing. I always thought it sounded strange myself.

Newaglish

In case anyone needs it, I've done out the NPV in Excel for both financing options: I'm fairly sure they're right but I'm open to correction.

I used the formula to work out the discount factors so they won't match exactly to the discount factors you'd get in the tables, but it's not a big difference. You'd probably be better off using the three decimal point figures given to you but I don't actually have them!

suckslikeafox

Hi all, been reading over everything so far and its been a good help. I havn't started crunching my own numbers yet so cant give my 2 cents there.


One of the things I'm expecting is an overall review of the company's financial management, if you look at the last sentence of the third paragraph on page 5 you'll see something that could be straight out of the requirement. Obviously the cash situation is something to focus on here, I plan on bashing their management of it to a fair extent with the help of ratios, etc. The problem I have is a cash flow statement, it'd fit really well with any answer but my reading of it is that theres not enough info to do one. Am I wrong?

Dell2009

Newaglish wrote: »

In case anyone needs it, I've done out the NPV in Excel for both financing options: I'm fairly sure they're right but I'm open to correction.

I used the formula to work out the discount factors so they won't match exactly to the discount factors you'd get in the tables, but it's not a big difference. You'd probably be better off using the three decimal point figures given to you but I don't actually have them!

I got the same 2 NPV's for my projects so hopefully they are both right!!

Hanley

Dell2009 wrote: »

on Page 3 of the Case Study for Justin Ltd.Can someone please explain why it Says Income Tax Expense at the end of the Income Statement? Should this not be Corporation Tax. Furthermore, should the Tax Expense not be a % of the Profit Before Tax, The Tax expense has risen in 2008 even though the profit has fallen.


Anyone???

Just a presentation fcuk up I think. Are we really THAT surprised tho??

The tax expense may have risen even tho profit has fallen because they've charged non tax deductible expenses to their income statement, which would be added back to their profit for tax calculation purposes.

Depreciation is the obvious one that springs to mind.

eoferrall wrote: »

Hi, just been reading through this and its helping me!:D

what are people doing regarding the investments? if assuming the figures should be in thousands in the statements ie not cover full cost of investment as 1million & reserves are 833k. I have gone with there has been no correction so the millions are right...thus retained earnings cover the investment fully (but 833mill in reserve!?) that seems very high and would be better off invested earning a return no??

what do people think?

I think they're just screwed up with that, like I said earlier, we're appraising a project which will add .1% to revenue if those figures are correct, but if it should be in thousands, we're assesing a project they can't afford to fund out of reserves like you said. It's a total mess, we just have to dea lwith it as written tho!!

P.S. I reckon we will be given a sales volume in the requirement, as if the expenses and flows are done it is very quick to add in 14 X "units" and 5 X "units" and finish of the calc?

again what do people think on that?

Doubtful imo, we were told there'll be no additional figures given. There might be an instruction to assume full uptake on the photos, but I doubt they'll start throwing out new percentages for sales at us!

Hanley

Really-Stressed wrote: »

Yeah i reckon we will get sales volume etc,


anyone any ideas why they have given 06 figures for inventory?

stejk11 wrote: »

I'd say they'll prob give us some sales and purchases figures from 06 and ask to compare stock turnover, debtor and creditor days for 3 years.

Dell2009 wrote: »

sorry Stejk,

That was a mistake, i have removed it now.

Also, not sure why they gave us the 2006 figures. Can you calculate any ratio's or come to any conclusions with Just Inventories, Payables and receivables. I just noted the increase/decrease of these figures in comparison with 2007 and 2008 figures?

It's for the cash conversion and operating cash cycle - a measure of how quickly the money we spend on inventory and purchases is converted into cash received from creditors, and sales (op cash cycle). Respectively they are;

Inventory Conversion Period + Debtors Conversion Period - Creditors Conversion Period

and

Inventory Conversion Period + Debtors Conversion Period

To get inventory conversion for '07 it's; average stock/COS * 365

Average stock for '07;
/2

And for '08;
/2



Debtors Conversion Period: averge debtors/sales *365

Average debtors for '07;
/2

And for '08;
/2



Creditors Conversion: average creditors/purchases * 365

Average creditors for '07;
/2

And for '08;
/2

These cycles will have disimproved when you do the calc's, which backs up the theory that company is having liquidity issues.

Hanley

commercegrad07 wrote: »

Im at a loss as to how you worked out the tax payable in year 4. from my understanding the twd value of the equip should be 562,500. ( 750000-25%)
the capital allowance would then be 562500*25%=140625
1507576(y3 profit)-140625=1366951
1366951*20%= 273,390

looking at it myself here something does not quite add up, but i cant seem to spot. im wide open to correction.
many thanks

stejk11 wrote: »

Because the machinery is scrapped after 3 years, you are allowed to take the remaining balance for you capital allowances not used and net it against the value your recived on the disposal. (My understanding of it anyway!)

Because the company will get nothing for the equipment they are allowed to take all of the remaining capital allowances.

So the tax charge in year 4 is:

Profit for year 3: €1,507,576
Remaining cap allowance: €562,500
Taxable profit: (1,507,576 - 562,500) = €945,076

Corporation Tax charge @20% = (945,076 x 20%) = €189,015 (Payable yr 4)

Hope this clears it up for u!

Spot on!

Hanley

Dell2009 wrote: »

This €833m, which is supposidly used to finance the Investment, am i right in saying that this money is currently tied up in assets as there is 0 in the bank.Is this correct?

No, it's held in the reserves in theirequity and reserves section. It's a seperate thing.

Do be aware tho, they've effectively burned thru circa 620m in cash in the last year - the 250m drop in bank plus the 378m increae in ST borrowings.

Newaglish wrote: »

In case anyone needs it, I've done out the NPV in Excel for both financing options: I'm fairly sure they're right but I'm open to correction.

I used the formula to work out the discount factors so they won't match exactly to the discount factors you'd get in the tables, but it's not a big difference. You'd probably be better off using the three decimal point figures given to you but I don't actually have them!

Same on purchase out of reserves, but I got something different... for the purposes of taxable profit, isn't it only the lease cost that's deductable?? Like not the full lease amount, because if that was the case you'd be reducing your profits by the capital cost AND taking a capital allowance later on.

AFAIK, lease cost is 200,000 (400k x 3 - 1,000k)

Split over 3 years it;

Y1: 100,000
Y2: 66,667
Y3: 33,333

So like it'd come out as;

Op CF: 1,540,000 1,524,400 1,507,756
Lease Cost: (100,000) (66,667) (33,333)
Cap. All.: (250,000) (187,500) (562,000)
Taxable CF: 1,119,000 1,270,233 911,743
CT @ 20%: 238,000 254,047 182,349 (all paid a year in arrers)

The 400k is deducted after operating CF, before CT is deducted but for the purposes of the tax comp, only the lease cost and not the capital portion is allowed.

I THINK - open to corrections!

EDIT: Are capital allowances not discounted when leasing???

Hanley

suckslikeafox wrote: »

One of the things I'm expecting is an overall review of the company's financial management, if you look at the last sentence of the third paragraph on page 5 you'll see something that could be straight out of the requirement.

That's what I'm expecting too!!

Obviously the cash situation is something to focus on here, I plan on bashing their management of it to a fair extent with the help of ratios, etc. The problem I have is a cash flow statement, it'd fit really well with any answer but my reading of it is that theres not enough info to do one. Am I wrong?

There's not enough info for a CF statement afaik, but you can use the liquidity ratios, cash conversion cycles etc etc to asses their liquidity position, and any deterioration of it.

Newaglish

Hanley wrote: »

Same on purchase out of reserves, but I got something different... for the purposes of taxable profit, isn't it only the lease cost that's deductable?? Like not the full lease amount, because if that was the case you'd be reducing your profits by the capital cost AND taking a capital allowance later on.

AFAIK, lease cost is 200,000 (400k x 3 - 1,000k)

Split over 3 years it;

Y1: 100,000
Y2: 66,667
Y3: 33,333

So like it'd come out as;

Op CF: 1,540,000 1,524,400 1,507,756
Lease Cost: (100,000) (66,667) (33,333)
Cap. All.: (250,000) (187,500) (562,000)
Taxable CF: 1,119,000 1,270,233 911,743
CT @ 20%: 238,000 254,047 182,349 (all paid a year in arrers)

The 400k is deducted after operating CF, before CT is deducted but for the purposes of the tax comp, only the lease cost and not the capital portion is allowed.

I THINK - open to corrections!

EDIT: Are capital allowances not discounted when leasing???

See here re: tax treatment of leased assets.

Capital allowances can only be claimed on leased assets where the asset is purchased by the lessee at the end of the lease period. Capital allowances are then based on the (arm's length) purchase price at the date of transfer.

In this scenario, given that the asset is still technically owned by the leasing company, and is scrapped at the end of the lease term, there is no tax written-down value to write off via capital allowances.

It's important to remember that this is only a small case study (15% or so?) and you could easily go wrong by over-complicating the details given. It's primarily a finance exam and won't require overly detailed tax knowledge - if the case study tells you "lease payments are tax deductible in the year of payment" you can take that as a given.

I'll call one someone I know in tax tomorrow (a 12.40am call about capital allowances may be weird) just to be sure about this, but I've certainly never come across that kind of computation before.

Hanley

Newaglish wrote: »

See here re: tax treatment of leased assets.

Capital allowances can only be claimed on leased assets where the asset is purchased by the lessee at the end of the lease period. Capital allowances are then based on the (arm's length) purchase price at the date of transfer.

In this scenario, given that the asset is still technically owned by the leasing company, and is scrapped at the end of the lease term, there is no tax written-down value to write off via capital allowances.

Hmmm.... that revenue page didnt help at all (but it is 12.50am now!!!). I just assumed since the basic substance of the transaction was that the company was effectively buying the asset and paying the finance company a fixed amount for this, they would be allowed capital allowances.

I'll have a proper look at it tomorrow and see if I can figure out what's going on.

It's important to remember that this is only a small case study (15% or so?) and you could easily go wrong by over-complicating the details given. It's primarily a finance exam and won't require overly detailed tax knowledge - if the case study tells you "lease payments are tax deductible in the year of payment" you can take that as a given.

I'll call one someone I know in tax tomorrow (a 12.40am call about capital allowances may be weird) just to be sure about this, but I've certainly never come across that kind of computation before.

Let me know whatcha come up with....

Like I said, I'm gonna have a dig around and see what the buzz is too. I'll dig out my tax notes from college too and see what we did there. They're hardly gonna give out if it's done that way??

Thanks for the heads up! Just as I think I have it almost over and done with, it all confuses me again :mad::D:pac:

Newaglish

AFAIK there's going to be three questions, which I imagine will be:

1) Carry out a detailed independent review of the company's financial performance and financial management for Jim Sawyer's February board meeting

2) Identify potential corporate governance weaknesses and make recommendations for future improvements for Jim Sawyer's meeting with investors next month

3) Review the new photography service and recommend whether or not it should go ahead and if so, which financing option to recommend. Include other qualitative factors in your recommendation.

Answer-wise I'd take the following approach:

1) Classic case of overtrading (i've attached a description from an ACCA book I have). Inventories, receivables and payables have all increased by 91%, 102% and 87% respectively, despite only a 50% increase in sales. Cash has been wiped out from €250m down to negative €378m - that's a €628m decrease in the company's cash position despite a very strong year of trading. I haven't computed the ratios but I imagine they're outperforming the industry standards.

They will definitely want you to calculate the cash conversion cycle and the relevant ratios as they've given you the required 2006 figures.

Long story short, company needs to sort out a long-term debt finance agreement with the bank and tighten up on its cash conversion cycle.

2) Corporate governance is a fairly handy one, I don't have my notes to hand but if anyone wants I can post up a list of 4 or 5 issues and recommendations once I dig them out.

3) NPV is straight-forward once you have the calculations done; yes accept the project as NPV is positive and go with the leasing option - NPV slightly higher but more importantly the outlay is spread over the project period so it requires less of a cash injection immediately. Also consider future earnings after the three year period, management time required, potential increase in material costs over the three years...

The only other question I can really see being asked would be to carry out a valuation of the company - I'm not sure if that's something that's been covered as part of your lectures yet though.

Hanley

Newaglish wrote: »

AFAIK there's going to be three questions, which I imagine will be:

1) Carry out a detailed independent review of the company's financial performance and financial management for Jim Sawyer's February board meeting

2) Identify potential corporate governance weaknesses and make recommendations for future improvements for Jim Sawyer's meeting with investors next month

3) Review the new photography service and recommend whether or not it should go ahead and if so, which financing option to recommend. Include other qualitative factors in your recommendation.

Answer-wise I'd take the following approach:

1) Classic case of overtrading (i've attached a description from an ACCA book I have). Inventories, receivables and payables have all increased by 91%, 102% and 87% respectively, despite only a 50% increase in sales. Cash has been wiped out from €250m down to negative €378m - that's a €628m decrease in the company's cash position despite a very strong year of trading. I haven't computed the ratios but I imagine they're outperforming the industry standards.

They will definitely want you to calculate the cash conversion cycle and the relevant ratios as they've given you the required 2006 figures.

Long story short, company needs to sort out a long-term debt finance agreement with the bank and tighten up on its cash conversion cycle.

2) Corporate governance is a fairly handy one, I don't have my notes to hand but if anyone wants I can post up a list of 4 or 5 issues and recommendations once I dig them out.

3) NPV is straight-forward once you have the calculations done; yes accept the project as NPV is positive and go with the leasing option - NPV slightly higher but more importantly the outlay is spread over the project period so it requires less of a cash injection immediately. Also consider future earnings after the three year period, management time required, potential increase in material costs over the three years...

The only other question I can really see being asked would be to carry out a valuation of the company - I'm not sure if that's something that's been covered as part of your lectures yet though.

Really good post....

Pretty much exactly what I've done too.

Dell2009

Am i correct in saying that the directors have allready paid themselves enormous sums of money this year in the form of Dividends Paid (€350m * % holding of each director) without the need to reward themselves with Bonuses €80,000 (€50,000+(€10,000*3)).

Also where will the company get the money to pay these bonuses as they currently have €0 in the bank? Will they need to loan this money?

suckslikeafox

Dell2009 wrote: »

Am i correct in saying that the directors have allready paid themselves enormous sums of money this year in the form of Dividends Paid (€350m * % holding of each director) without the need to reward themselves with Bonuses €80,000 (€50,000+(€10,000*3)).

Exactly the point that needs to be made in the governance element I'd say. Recommend a fixed bonus scheme based on growth & profit targets that can't be interfered with in the short-term or something similar. The decision to over triple bonuses while net profit decreases is dubious to say the least, never mind the cash situation.

Dell2009 wrote: »

Also where will the company get the money to pay these bonuses as they currently have €0 in the bank? Will they need to loan this money?

Good question, also would the bonuses not be a current liability seeing as they are approved?

Dell2009

suckslikeafox wrote: »

also would the bonuses not be a current liability seeing as they are approved?

Therfore you are assuming that the bonuses have been agreed and paid before the financial statements were finalised and the payment of these bonuses is reflected in the financial statements?

I thought that theses bonuses were only agreed after the adoption of the financial statements and therefore these figures are currently not in the Financial Statements.

suckslikeafox

Dell2009 wrote: »

Therfore you are assuming that the bonuses have been agreed and paid before the financial statements were finalised and the payment of these bonuses is reflected in the financial statements?

I thought that theses bonuses were only agreed after the adoption of the financial statements and therefore these figures are currently not in the Financial Statements.

I was assuming that they've been agreed but not paid which would make them a liability but you are right about why they wouldnt be included, my bad there. Thats what I get for trying to be smart before my morning caffine dose!:D