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# CAP 2 SFMA ASSESSMENT 2010

• Registered Users Posts: 2,734

MAX72 wrote: »
Skilled 0
Unskilled 60 + 16 = 76

That would appear to be the view of the majority.......

Skilled is 0
Unskilled is 60

I've posted a couple of times as to why I think this is the case.

What is the reasoning behind including the 16 as an incremental cost?

• Registered Users Posts: 4

in scenario 2 of the wacc calc, where further ordinary shares are being issued, is it just the market value of the shares on the calculation that has to be changed or does the cost of equity change?

• Registered Users Posts: 26 ✭✭✭

in scenario 2 of the wacc calc, where further ordinary shares are being issued, is it just the market value of the shares on the calculation that has to be changed or does the cost of equity change?

No I think that the cost of equity remains the same. All you do is increase the shares by 70 * 4.2 = 294

• Closed Accounts Posts: 2

Student456 wrote: »
Any one breakeven with the relevant costing??!

Could any1 please put up workings for the three WACC Scenarios?!

Any ideas for theory questions?!

S1 = 14.28%
Market value is increased to £600M currently trading at £100
Cost: Calculated over 21years (found present value tables on the internet)

S2 = 15.24%
Adjusted market value to include new £70M issued ordinary shares
Cost: Adjust the market value in the cost formula, all other figures remain the same.

S3 = 15.19%
A 1 for 5 rights issue will result in an additional £336M of equity,
Cost: Adjust the market value in the cost formula, all other figures remain the same.

Can anyone agree or disagree with these workings? not 100% sure they are that accurate but hopefully they are along the right track.

• Registered Users Posts: 25 ✭✭✭

smith24 wrote: »
S1 = 14.28%
Market value is increased to £600M currently trading at £100
Cost: Calculated over 21years (found present value tables on the internet)

S2 = 15.24%
Adjusted market value to include new £70M issued ordinary shares
Cost: Adjust the market value in the cost formula, all other figures remain the same.

S3 = 15.19%
A 1 for 5 rights issue will result in an additional £336M of equity,
Cost: Adjust the market value in the cost formula, all other figures remain the same.

Can anyone agree or disagree with these workings? not 100% sure they are that accurate but hopefully they are along the right track.

Yep I did the exact same! Hopefully we're right!!:):):)

Anyone else get this??

• Registered Users Posts: 30 ✭✭✭

smith24 wrote: »
S1 = 14.28%
Market value is increased to £600M currently trading at £100
Cost: Calculated over 21years (found present value tables on the internet)

S2 = 15.24%
Adjusted market value to include new £70M issued ordinary shares
Cost: Adjust the market value in the cost formula, all other figures remain the same.

S3 = 15.19%
A 1 for 5 rights issue will result in an additional £336M of equity,
Cost: Adjust the market value in the cost formula, all other figures remain the same.

Can anyone agree or disagree with these workings? not 100% sure they are that accurate but hopefully they are along the right track.

Hi just wondering why you didn't change the cost of equity Ke in both scenario 2 and 3 aswell as the market value. I think thats why I got slightly different answers to you! Also for scenario 1 should the period not be 20 years from 2011 to 2031? Again i'm not too sure either so just wondering if I was completely on the wrong track?

• Closed Accounts Posts: 99 ✭✭✭

Newaglish wrote: »
Skilled is 0
Unskilled is 60

I've posted a couple of times as to why I think this is the case.

What is the reasoning behind including the 16 as an incremental cost?

I am with the 76000 people on this one too! The way to look at it is (this is explained very well in the Drury books if anyone gets a chance to look at them) that the €150/hour contribution is after taking away labour cost of €40 euro also!

Therefore the total lost contribution is €190 per hour (as you should disregard labour as it will be used either way) and thus 190*400 = 76000

What confuses many is the other way to calculate it by using the 150*400 = 60000 and then add back the labour of 16000. This method is basically a shortcut and doesnt explain what you are doing.

Again the drury books explain it very well imo!

• Registered Users Posts: 4

Cocomonkey wrote: »
Hi just wondering why you didn't change the cost of equity Ke in both scenario 2 and 3 aswell as the market value. I think thats why I got slightly different answers to you! Also for scenario 1 should the period not be 20 years from 2011 to 2031? Again i'm not too sure either so just wondering if I was completely on the wrong track?
Should the period for scenario one not be 22 years, as yr 1 is y/e 31/12/10, yr 2 is 31/12/11, therefore y/e 31/12/2031 will be year 22. I dont think when it says replacing the debentures (30/12/2011), that it is talking about replacing them from that date, i think it just means replacing those debentures which are redeemable in 30/12/2011, anyone else agree?

• Registered Users Posts: 58 ✭✭✭

Should the period for scenario one not be 22 years, as yr 1 is y/e 31/12/10, yr 2 is 31/12/11, therefore y/e 31/12/2031 will be year 22. I dont think when it says replacing the debentures (30/12/2011), that it is talking about replacing them from that date, i think it just means replacing those debentures which are redeemable in 30/12/2011, anyone else agree?

i agree "im ron burgundy" it should be 1-22years.if the original scenario from 2009 to 2011 is 2 years then for the second scenario 2009 to 2031 its 22 years.2009 will be years 0 and then count on from there.

• Closed Accounts Posts: 2

salmagoo wrote: »
No I think that the cost of equity remains the same. All you do is increase the shares by 70 * 4.2 = 294

yeah i got 294 as well.

What did you use as market value for 1st option??
Did you subtract the interest
i.e is it 600m or (100-8) x 6 = 552m

• Closed Accounts Posts: 3

Should the period for scenario one not be 22 years, as yr 1 is y/e 31/12/10, yr 2 is 31/12/11, therefore y/e 31/12/2031 will be year 22. I dont think when it says replacing the debentures (30/12/2011), that it is talking about replacing them from that date, i think it just means replacing those debentures which are redeemable in 30/12/2011, anyone else agree?

Ya agree with that it should be 22years..

• Closed Accounts Posts: 3

You know if im working out the capital structure gearing %

Long Term Liabilities/LTL + Equity *100

It seems to me that Preference shares are part of long term liabilities along with debentures, loan stock and any long term debt but txt seem to include prefs as equity.

Anyone have any strong feelings or is it a bit of a grey area??

Also at the start of the case study it states EE no.s are 2100 of whom 1900 are direct production EE's. Anyone think of why they have specifically provided this info?? It's nagging at me..

Also Giles Fabian has to be the coolest name i've ever heard!

• Closed Accounts Posts: 11 ✭✭✭

smith24 wrote: »
S1 = 14.28%
Market value is increased to £600M currently trading at £100
Cost: Calculated over 21years (found present value tables on the internet)

S2 = 15.24%
Adjusted market value to include new £70M issued ordinary shares
Cost: Adjust the market value in the cost formula, all other figures remain the same.

S3 = 15.19%
A 1 for 5 rights issue will result in an additional £336M of equity,
Cost: Adjust the market value in the cost formula, all other figures remain the same.

Can anyone agree or disagree with these workings? not 100% sure they are that accurate but hopefully they are along the right track.

I was doing the same until one of my colleagues at work suggested that we meant to use the ex-rights price for our MV and on this basis revise our Ke. I tried to research on this one, could not find anything specific, but it made me thinking that it can be right. Does anyone else have some idea about it?

• Registered Users Posts: 58 ✭✭✭

Coldplayer wrote: »
I reckon that they might ask how to counter translational risk and there is only 2 methods i know of.

Temporal Method

Current Rate method.

To be honest i'm kinda stuck for the theory end of things apart from the obvious questions.

Are we expected to research away from the text or is it only stuff from the text that we are examinable on??

Coldplayer
i dont tink that these methods (Temporal Method Current Rate method) are on the cap1 or cap2 course so they are not examinable.i got these two methods on google myslef but not relevent i tink as not on course

• Registered Users Posts: 58 ✭✭✭

jhn_noln wrote: »
I am with the 76000 people on this one too! The way to look at it is (this is explained very well in the Drury books if anyone gets a chance to look at them) that the €150/hour contribution is after taking away labour cost of €40 euro also!

Therefore the total lost contribution is €190 per hour (as you should disregard labour as it will be used either way) and thus 190*400 = 76000

What confuses many is the other way to calculate it by using the 150*400 = 60000 and then add back the labour of 16000. This method is basically a shortcut and doesnt explain what you are doing.

Again the drury books explain it very well imo!

just read a very similar example in the "cost accounting,practise and principles" 2002 book by alan upchurch on page 392.so i agree it is 190 contribution x 400 hours = 76000.
what are up putting in for variable overheads if you dont mind me asking??

• Closed Accounts Posts: 4

Quote:
Originally Posted by jhn_noln
I am with the 76000 people on this one too! The way to look at it is (this is explained very well in the Drury books if anyone gets a chance to look at them) that the €150/hour contribution is after taking away labour cost of €40 euro also!

Therefore the total lost contribution is €190 per hour (as you should disregard labour as it will be used either way) and thus 190*400 = 76000

What confuses many is the other way to calculate it by using the 150*400 = 60000 and then add back the labour of 16000. This method is basically a shortcut and doesnt explain what you are doing.

Again the drury books explain it very well imo!

just read a very similar example in the "cost accounting,practise and principles" 2002 book by alan upchurch on page 392.so i agree it is 190 contribution x 400 hours = 76000.
what are up putting in for variable overheads if you dont mind me asking??

The whole problem imo is wether in the €150 contribution that the "company" calculated they included the unskilled labour cost and the variable overheads. Variable overheads is either the 12,000 or 4,000. Problem being it is not well enough explained wether the Variable overheads in the "other contract" are also €/£20 per labour hour worked or if they have been included in the €150 contribution.

Whichever way people choose to go with, we must make sure that the figure taken for unskilled labour and variable costs is explained well and in line with each other - as they are interlinked.

• Closed Accounts Posts: 12 ✭✭✭

Cocomonkey wrote: »
Hi just wondering why you didn't change the cost of equity Ke in both scenario 2 and 3 aswell as the market value. I think thats why I got slightly different answers to you! Also for scenario 1 should the period not be 20 years from 2011 to 2031? Again i'm not too sure either so just wondering if I was completely on the wrong track?

Surely the cost of equity and debt changes in scenaro 1,2 & 3. As MV of equity increases the cost of that equity must increase??? My reviesd WACC figures are:

For scenario 1 14.20% (cost of debt 6.47%)
scenario 2 15.24% (cost of equity 17.87%)
scenario 3 15.04% (cost of equity 17.55%)

Anyone agree with this?

• Closed Accounts Posts: 10 ✭✭✭

can anyone tell me how to calculate the present value for years 1-22 I cant remember the formula for this for the life of me and as you know the tables jump from 20-25 not helpful!
I know that for calculating present value to be received after t periods is 1/(1+r)n

• Closed Accounts Posts: 451 ✭✭

Formula's in the book

• Registered Users Posts: 7 ✭✭✭

post_it wrote: »
Surely the cost of equity and debt changes in scenaro 1,2 & 3. As MV of equity increases the cost of that equity must increase??? My reviesd WACC figures are:

For scenario 1 14.20% (cost of debt 6.47%)
scenario 2 15.24% (cost of equity 17.87%)
scenario 3 15.04% (cost of equity 17.55%)

Anyone agree with this?

I got 15.55% for the current WACC

Scenario 1: 14.28% (cost of debt 6.84%)
Scenario 2: 15.26% (cost of debt 17.84%)
Scenario 3: 15.22% (cost of debt 17.74%)

• Closed Accounts Posts: 3

wdarling wrote: »
I got 15.55% for the current WACC

Scenario 1: 14.28% (cost of debt 6.84%)
Scenario 2: 15.26% (cost of debt 17.84%)
Scenario 3: 15.22% (cost of debt 17.74%)

I got the same..

• Registered Users Posts: 7 ✭✭✭

Trumanshow wrote: »
I got the same..

Just out of interest.... for scenario 1 I calculated the redeemable debenture cost of capital using cashflows for Yr 0 as (600m) but I can't help wondering if we should factor in the fact that there will have to be a redemption fee paid for the existing 300m debentures. No one else seems to have applied this... just wondering if anyone else had a think about this ?

• Closed Accounts Posts: 91 ✭✭✭

Which do people recommend they invest in CHina or France and with which fiance option?

• Closed Accounts Posts: 12 ✭✭✭

wdarling wrote: »
I got 15.55% for the current WACC

Scenario 1: 14.28% (cost of debt 6.84%)
Scenario 2: 15.26% (cost of debt 17.84%)
Scenario 3: 15.22% (cost of debt 17.74%)

Can you put your workings up for this as i see someoen else has got the same. I want to compare to my workings to see were the differences are

If you want i can put mine up

thanks

• Registered Users Posts: 30 ✭✭✭

wdarling wrote: »
I got 15.55% for the current WACC

Scenario 1: 14.28% (cost of debt 6.84%)
Scenario 2: 15.26% (cost of debt 17.84%)
Scenario 3: 15.22% (cost of debt 17.74%)

yep got practically the same... difference down to rounding i'd say

15.55% for the current WACC

Scenario 1: 14.27% (cost of debt 6.81%)
Scenario 2: 15.24% (cost of debt 17.86%)
Scenario 3: 15.23% (cost of debt 17.78%)[/quote]

• Closed Accounts Posts: 3

Is it an issue that Pref share dividend hasn't been paid and ordinary dividend has been this year?

If they declare/pay a pref dividend after balance sheet date and b4 completion of accounts it goes in next years accounts and just a note disclosure of an event after balance sheet date in this years accounts.

Is this correct?

Should we just assume this is whats happening and forget about it?

6% dividend of 200m pref shares is 12m and they only have 8m cash, so i suppose they couldnt pay it if they wanted...

• Closed Accounts Posts: 2

Hey all,

fair play for all the work everyones put in so far, will try to help out as best i can!

if possible, could someone help us out in relation to redeemable debentures calculation? as im not sure i have it right!

for my final wacc figure im getting 15.58%. most people seem to be getting between 15.51 - 15.56% am i correct in saying this?

my breakdown is as follows

ord shares : 18.67%
pref sh : 5%
irredeemable deb : 8%
redeemable : 12.39%

so im out by a couple point percentages, if someone could help, id appreciate, if workings need to be shown, just ask

• Closed Accounts Posts: 1

Hi Guys
Sorry me title is wrong hehe - should be redeemable debentures

So I have calculated my WACC and I have been able to get my new WACC's under the options for a new share issue and a rights issues. They basically work out the same as a lot of the other posters bar rounding.

However I cannot for the life of me work out how to begin with the redeemable debentures being replaced by 600m 8% ones and was wondering if anyone could help me. I don't get how to calculate the cost of debt or where the 22 years in the annuity tables fits in yet and I can't find the formula in the book.

Thanks very much,

Francie D x

• Registered Users Posts: 4

For the WACC I got:

Ord:
Value 21.b , Cost 18.67%

Pref
Value 240m , Cost 5%

Irredeem
Value 400m, Cost 8%

Redeem
Value 290m, Cost 12.39%

WACC : 15.58 %

Thats my answers without breakdown of how I got there, but I could upload workings?

Could someone upload workings of how they got the new WACC for each scenario? I am a bit stuck on this one!