CAP 2 SFMA CAse Study 2016/2017

tanit

There was talk on the CAP2 thread about starting this and nobody was doing so ladies and gentlemen I shall present you the "THREAD" for all your studying and hardworking pleasure.

Best of luck to everyone on the January assessments in advance and Happy "studying very hard and not partying at all" Christmas

Kmck87

Based on:
Board paper1: discusses debt&equity options. Area: SFMA-finance - Investment decisions, sources of finance. I can see it being a narrative question. We are prompted to consider "costs&risks" of these finance options. Might need to use ratios&make answer relate to the entity so as to support answers.
BP2: says we're going to be given details to "workout fixed costs&variable cost per batch". Therefore I think there will be a computational Q. Area: SFMA -Mgt, specifically Decision-making, linked with SFMA-Finance Foreign Exc.
BP3: Discusses "acquisition of factory". Area: SFMA-Finance - Company valuations, Acquisitions&mergers. She specifies she will require assistance putting figures in a "coherent way".

davindub

Kmck87 wrote: »

Based on:
Board paper1: discusses debt&equity options. Area: SFMA-finance - Investment decisions, sources of finance. I can see it being a narrative question. We are prompted to consider "costs&risks" of these finance options. Might need to use ratios&make answer relate to the entity so as to support answers.
BP2: says we're going to be given details to "workout fixed costs&variable cost per batch". Therefore I think there will be a computational Q. Area: SFMA -Mgt, specifically Decision-making, linked with SFMA-Finance Foreign Exc.
BP3: Discusses "acquisition of factory". Area: SFMA-Finance - Company valuations, Acquisitions&mergers. She specifies she will require assistance putting figures in a "coherent way".

Thanks for this, Ill add a bit to this over the next couple of days as well.

Tgt16

davindub wrote: »

Thanks for this, Ill add a bit to this over the next couple of days as well.

Me too.

Kmck87

Yea add away! That was a very brief summary to get started. The more I read BP3, the more I think NPV, investment decisions. Wud be good to hear other opinions and get cracking with som calculations.

fe1manuals

Hi all

As part of my prep for the SFMA interim exam I was looking at some past interim exam papers where similar type questions came up. In the CAP 2, SFMA, May 2014 interim exam, the solution doesn't set out and I can't work out how the cost of the 'proposed bonds' comes out at 4.47%. The bonds carry a coupon interest rate of 4% so just on a quick glance I can't understand how the cost of the 'proposed bonds' is 4.47% when you get a tax deduction for interest. I worked it out as 2.978%, being:

Kd = €32,000,000,000(.7) / €752,000,000 = 2.978%

Do you know if 4.47% is correct and if so, how do you get to this answer?

Re board paper 1 - I was thinking it could be a before and after WACC calculation depending on whether they go with the equity or debt option.

Deeman1991

Hi guys,

Just starting this forum for people to share ideas on the SFMA Interim Assessment in January 2017.

Has anybody any ideas on this?

davindub

fe1manuals wrote: »

Hi all

As part of my prep for the SFMA interim exam I was looking at some past interim exam papers where similar type questions came up. In the CAP 2, SFMA, May 2014 interim exam, the solution doesn't set out and I can't work out how the cost of the 'proposed bonds' comes out at 4.47%. The bonds carry a coupon interest rate of 4% so just on a quick glance I can't understand how the cost of the 'proposed bonds' is 4.47% when you get a tax deduction for interest. I worked it out as 2.978%, being:

Kd = €32,000,000,000(.7) / €752,000,000 = 2.978%

Do you know if 4.47% is correct and if so, how do you get to this answer?

Re board paper 1 - I was thinking it could be a before and after WACC calculation depending on whether they go with the equity or debt option.

Im getting the same as you I only briefly looked at it, i see in the solution 2.9% is the cost of debentures as well, I wonder has the figures been mixed up?

Olliewaterford

I think this is how they arrived at 4.47%
800*6%(discount on par value) = 48

48*(1-0.3)= 33.6

33.6/752= 0.04468 ~ 4.47%

What do ye think

davindub

So quick calculations based on the P/e Ratio = 8 for 2016

Annual profit 2016 (after int + tax) - 262.5 m
(Profit based on solving P/E ratio = 8)

EPS = 53c

Div Yield 2016 = 5.23%
Div Yield 2015 = 3%

Div cover = 2.38 times

Gearing = .375 - usually medium level gearing

Part of the instruction mentions "improve share price", I didn't do CAP1 finance, were there methods in the finance book or just generic things like show growth, increase EPS, decrease gearing etc?

Also mentioned had recently issued shares and lowered gearing so may be a clue to calculate the above before and after.

Anyone else pick up anything from the share pricing etc? Any significance given to ex-dividend (normally you would take the ex-dividend price as being discounted by the amount of the dividend announced?)

davindub

Olliewaterford wrote: »

I think this is how they arrived at 4.47%
800*6%(discount on par value) = 48

48*(1-0.3)= 33.6

33.6/752= 0.04468 ~ 4.47%

What do ye think

Works out, I need to actually get a chance to read the Q, but what the figures, the proposed cost of bond?

davindub

Deeman1991 wrote: »

Hi guys,

Just starting this forum for people to share ideas on the SFMA Interim Assessment in January 2017.

Has anybody any ideas on this?

http://www.boards.ie/vbulletin/showthread.php?t=2057683385

Deeman1991

Thanks!

Deeman1991

I was thinking that ratios are going to be a definite for the interim, the fact that turnover has grown by 400% shows that overtrading is an issue.

Also, that the new MD is a specialist in corporate recovery suggests that all is not ok in the company.

fe1manuals

Olliewaterford wrote: »

I think this is how they arrived at 4.47%
800*6%(discount on par value) = 48

48*(1-0.3)= 33.6

33.6/752= 0.04468 ~ 4.47%

What do ye think

Olliewaterford is right. I also emailed the lecturer and said he thinks it is a typo and that the question should read "The bonds will carry a coupon interest rate of 6%" (as opposed to 4%) and then you get back to the answer of 4.47%.

davindub - re your comment "Anyone else pick up anything from the share pricing etc? Any significance given to ex-dividend (normally you would take the ex-dividend price as being discounted by the amount of the dividend announced?)" - As I understand, the ex-div amount already reflects the discount for the dividend announced (which I think is the point you are making). The ex-div amount is relevant when calculating the WACC.

Just to get things back on track, I'll look at the ratio's points people mention above and let you know my thoughts.

Feel free to chime in if ye think I'm wrong on any of the above!

Tgt16

Just had a general read through:
Dividend policy narrative type question perhaps & calculate dividend growth over the last few years for the WACC?

BP1: WACC before and after additional funding. Risks associated with each of the proposals.

BP2: accept or reject sunglasses order? Relevant costing question.

BP3: Investment Appraisal: determine whether or not Omagh factory acquisition meets ANTs investment criterion to deliver after 2 years a positive pre-tax NPV at a discount rate of 10%.

fe1manuals

davindub wrote: »

So quick calculations based on the P/e Ratio = 8 for 2016

Annual profit 2016 (after int + tax) - 262.5 m
(Profit based on solving P/E ratio = 8)

EPS = 53c

Div Yield 2016 = 5.23%
Div Yield 2015 = 3%

Div cover = 2.38 times

Gearing = .375 - usually medium level gearing

Part of the instruction mentions "improve share price", I didn't do CAP1 finance, were there methods in the finance book or just generic things like show growth, increase EPS, decrease gearing etc?

Also mentioned had recently issued shares and lowered gearing so may be a clue to calculate the above before and after.

Anyone else pick up anything from the share pricing etc? Any significance given to ex-dividend (normally you would take the ex-dividend price as being discounted by the amount of the dividend announced?)

Thanks for this davindub. On the gearing ratio, €300,000,000 / €800,000,000 = .375 - should the market value of the equity be used such that the gearing ratio is .121 or 12.1%?

Deeman1991 - Re the ratios - how do you / people see them coming up? I can't see what kinda question we would get on them. Would welcome peoples thoughts.

Deeman1991

I'd agree with Tgt16 on that layout of the exam paper.

fe1manuals- Re the ratios, looking at the turnover of 400%, we may have to look at Gross Profit margin percentages, the price earnings ratio in the case looks extremely volatile, the share price has dipped significantly since 2014, also as the new MD is a specialist in Corp.Recovery that may point to something going on behind the scenes in the company.

I had heard from a lecturer before that variances are a popular topic within a manufacturing case study.

davindub

fe1manuals wrote: »

Thanks for this davindub. On the gearing ratio, €300,000,000 / €800,000,000 = .375 - should the market value of the equity be used such that the gearing ratio is .121 or 12.1%?

Deeman1991 - Re the ratios - how do you / people see them coming up? I can't see what kinda question we would get on them. Would welcome peoples thoughts.

I'm open to correction but I would say you use the balance sheet values rather than market value as Gearing is based on historical information?

Cost of equity is based on MV as it is the cost of issuing new equity?

fe1manuals

Tgt16 wrote: »

Just had a general read through:
Dividend policy narrative type question perhaps & calculate dividend growth over the last few years for the WACC?

BP1: WACC before and after additional funding. Risks associated with each of the proposals.

BP2: accept of reject sunglasses order? Relevant costing question.

BP3: Investment Appraisal: determine whether or not Omagh factory acquisition meets ANTs investment criterion to deliver after 2 years a positive pre-tax NPV at a discount rate of 10%.

Now that I have gone through the paper in detail, I agree with this.

davindub

fe1manuals wrote: »

Thanks for this davindub. On the gearing ratio, €300,000,000 / €800,000,000 = .375 - should the market value of the equity be used such that the gearing ratio is .121 or 12.1%?

Deeman1991 - Re the ratios - how do you / people see them coming up? I can't see what kinda question we would get on them. Would welcome peoples thoughts.

Just coming back to this, I think you may be right, MV is preferable to use!

fe1manuals

Board paper 2 - Re the line "I think we will have to work out the fixed costs for the factory to find the variable cost per batch of sunglasses".

Can people explain what this means as I'm not sure?

I understand from page 39 of the Management Accounting textbook that production overheads are all manufacturing costs other than direct material and direct production labour (and other direct costs, if any). Production overheads can be broken down into: (i) fixed overheads; and (ii) variable overheads.

Do they just mean that we will be supplied with "production overhead" figures for April 2017 on the day of the exam?

I think I'm confused as they are talking about working out "fixed costs" in order to work out the "variable cost per batch" - is this to do with absorption costing in that the fixed costs are spread out over the number of batches produced to give the variable cost per batch?

CERWAT

davindub wrote: »

So quick calculations based on the P/e Ratio = 8 for 2016

Annual profit 2016 (after int + tax) - 262.5 m
(Profit based on solving P/E ratio = 8)

EPS = 53c

Div Yield 2016 = 5.23%
Div Yield 2015 = 3%

Div cover = 2.38 times

Gearing = .375 - usually medium level gearing

Part of the instruction mentions "improve share price", I didn't do CAP1 finance, were there methods in the finance book or just generic things like show growth, increase EPS, decrease gearing etc?

Also mentioned had recently issued shares and lowered gearing so may be a clue to calculate the above before and after.

Anyone else pick up anything from the share pricing etc? Any significance given to ex-dividend (normally you would take the ex-dividend price as being discounted by the amount of the dividend announced?)

I am just wondering how you calculated the profit figure for 2016?

fe1manuals

CERWAT wrote: »

I am just wondering how you calculated the profit figure for 2016?

EPS x Number of shares
52.5 cents x 500,000,000 = €262,500,000

Davindub - correct me if I'm wrong.

CERWAT

Is the 52.5 not the Price Earnings Ratio and you would use that to calculate your profit for the year which gives the €262,500,000.

To calculate the EPS you would less the tax of 20% giving you €210,000,000 - then to calculate your EPS you divide the €210,000,000 by the 500,000,000 to give you .42c.

Correct me if I am wrong

The J Stands for Jay

I think for the first paper WACC needs to be calculated. I'm not sure how to go about it though.

Should it be using this formula:
Market value = Earnings/WACC
=> WACC = Earnings/Market Value
which gives 12.5%?

Or should I be calculating it for the debt and equity? Debt is OK, but how do I get the cost of equity? Assume no dividend growth? Not sure what to do there since there's been a new share issue meaning the historic info is not relevant.

Using WACC = Earnings/Market Value for the new all equity option seems to be OK, but for the new debt option it still gives me 12.5% and suddenly the same number of shares a the same price is a lot less expensive. Not sure what to do here.

davindub

CERWAT wrote: »

Is the 52.5 not the Price Earnings Ratio and you would use that to calculate your profit for the year which gives the €262,500,000.

To calculate the EPS you would less the tax of 20% giving you €210,000,000 - then to calculate your EPS you divide the €210,000,000 by the 500,000,000 to give you .42c.

Correct me if I am wrong

The 26250000 is after interest and tax as I used the P/E ratio to solve for EPS as the earnings was not given.

I cant really represent the formula too well here, but it was along the lines of set the p/e ratio= 8 & swop the eps figure for the eps formula and solve using algebra.

davindub

McGaggs wrote: »

I think for the first paper WACC needs to be calculated. I'm not sure how to go about it though.

Should it be using this formula:
Market value = Earnings/WACC
=> WACC = Earnings/Market Value
which gives 12.5%?

Or should I be calculating it for the debt and equity? Debt is OK, but how do I get the cost of equity? Assume no dividend growth? Not sure what to do there since there's been a new share issue meaning the historic info is not relevant.

Using WACC = Earnings/Market Value for the new all equity option seems to be OK, but for the new debt option it still gives me 12.5% and suddenly the same number of shares a the same price is a lot less expensive. Not sure what to do here.

That's the part you don't know, it will be given on the day I think!... to be prepared i suppose if we have all possible methods already on paper, even if using assumed figures, then its only copy and change values rather than thinking having to think about how to calculate. Thats my plan anyway!

fe1manuals

CERWAT wrote: »

Is the 52.5 not the Price Earnings Ratio and you would use that to calculate your profit for the year which gives the €262,500,000.

To calculate the EPS you would less the tax of 20% giving you €210,000,000 - then to calculate your EPS you divide the €210,000,000 by the 500,000,000 to give you .42c.

Correct me if I am wrong

Hi Cerwat

My understanding is as follows:

P/E ratio = MV per share
EPS

We are told the P/E ratio is 8 so it is worked out as follows:

€4.20 = 8
EPS

EPS = 52.5 cents

The 52.5 is the EPS, not the Price Earnings Ratio.

The EPS is the after tax figure.

If you take your workings of EPS = 0.42 cents, then you get a P/E multiple of 10 (ie, €4.20 / 0.42 cents) which does not tie in with the earnings multiple of 8 in the question.

People, fee free to chime in here if I'm wrong (the above is just my understanding).

CERWAT

Thank you!

CERWAT

davindub wrote: »

That's the part you don't know, it will be given on the day I think!... to be prepared i suppose if we have all possible methods already on paper, even if using assumed figures, then its only copy and change values rather than thinking having to think about how to calculate. Thats my plan anyway!

Should we be calculating the WACC using the current figure for ordinary shares and the bank loan & then reassess the WACC taking into consideration the additional funding?

The J Stands for Jay

CERWAT wrote: »

Should we be calculating the WACC using the current figure for ordinary shares and the bank loan & then reassess the WACC taking into consideration the additional funding?

That's what I'm thinking.

CERWAT

McGaggs wrote: »

That's what I'm thinking.

Have you calculated the WACC using the current figures - when calculating the cost of equity did you use the dividend valuation model with growth and use the figures provided for the 5 years using the square root formula?

The J Stands for Jay

CERWAT wrote: »

Have you calculated the WACC using the current figures - when calculating the cost of equity did you use the dividend valuation model with growth and use the figures provided for the 5 years using the square root formula?

I'm worried about the different number of shares in issue. I'll give it a go now.

The J Stands for Jay

CERWAT wrote: »

Have you calculated the WACC using the current figures - when calculating the cost of equity did you use the dividend valuation model with growth and use the figures provided for the 5 years using the square root formula?

I'm getting growth of 10.05% which gives me a cost of equity of 15.81%. Anyone gettign similar?

CERWAT

Yes that is what I calculated too

The J Stands for Jay

Will that cost of equity be the same as the cost of equity when the new equity is issued? Or is this a case where we need more info?

CERWAT

McGaggs wrote: »

Will that cost of equity be the same as the cost of equity when the new equity is issued? Or is this a case where we need more info?

I am not too sure about the equity aspect of Paper 1 - perhaps we need more info. on the day?

Deeman1991

Yeah I got the same numbers, we more than likely will be given more info

fe1manuals

McGaggs wrote: »

I'm getting growth of 10.05% which gives me a cost of equity of 15.81%. Anyone gettign similar?

I got the same.

fe1manuals

McGaggs wrote: »

Will that cost of equity be the same as the cost of equity when the new equity is issued? Or is this a case where we need more info?

I was operating on the basis that the cost of equity will be the same. I suppose now that you say it, the cost of equity could go up / down based on the return expected by the sovereign wealth funds. I guess we will only know this on the day of the exam.

Aoife_

McGaggs wrote: »

I'm getting growth of 10.05% which gives me a cost of equity of 15.81%. Anyone gettign similar?

McGaggs did you get the 15.81% using the formula for Ke on Pg.449 of the book?
Mines only coming out at around 14%

The J Stands for Jay

Aoife_ wrote: »

McGaggs did you get the 15.81% using the formula for Ke on Pg.449 of the book?
Mines only coming out at around 14%

Yeah, the Ke formula. I threw it into excel as well as using my calculator just to be sure.

Growth was 10.05%
=((Dividend_16/Dividend_12)^(1/4))-1

Do €0.22
Po €4.20
g 10.05%

=((Do*(1+g)/Po))+g
= 15.81%

ronnie75

Tgt16 wrote: »

Just had a general read through:
Dividend policy narrative type question perhaps & calculate dividend growth over the last few years for the WACC?

BP1: WACC before and after additional funding. Risks associated with each of the proposals.

BP2: accept or reject sunglasses order? Relevant costing question.

BP3: Investment Appraisal: determine whether or not Omagh factory acquisition meets ANTs investment criterion to deliver after 2 years a positive pre-tax NPV at a discount rate of 10%.

Hi,
Did anyone else get 14.33% for the WACC before they look at the 2 financing options, they will look to lower this with either option

The J Stands for Jay

ronnie75 wrote: »

Hi,
Did anyone else get 14.33% for the WACC before they look at the 2 financing options, they will look to lower this with either option

That's what I got.

MOY0904

Is it true that the big four do up sample questions and answers that could be asked?

Fiskar

MOY0904 wrote: »

Is it true that the big four do up sample questions and answers that could be asked?

I have heard that the big 4 pull their students in and go through the case study and direct their students as to what to expect in the un-seen material. Possibly extends to what you are indicating.
Kind a leaves the distant student and non big 4 students at a big disadvantage. I have fed back through the ACA surveys my thoughts on their support of distance students. Suggest others do likewise.

ACAguy

This is a great help for the exam for someone like myself who hasnt done mgt accounting or finance in a couple of years. Has anyone gone to the ACA revisions course or is anyone going to the Chartered Grinds School one tomorrow?

ronnie75

Phew, thought I might have been calculating the value and cost of the existing long term loan incorrectly.

Do you think they will ask us to calculate the fixed costs for the sunglasses using the high low method because it gives the existing costs for 2 months and more information to follow suggesting the fixed costs will have to be worked out. We will then be able to calculate contribution for the sunglasses in that question using the variable costs. It doesn't say how long it will take to produce the order but will probably be in the additional information.

fe1manuals

ronnie75 wrote: »

Hi,
Did anyone else get 14.33% for the WACC before they look at the 2 financing options, they will look to lower this with either option

I got the same.

fe1manuals

Fiskar wrote: »

I have heard that the big 4 pull their students in and go through the case study and direct their students as to what to expect in the un-seen material. Possibly extends to what you are indicating.
Kind a leaves the distant student and non big 4 students at a big disadvantage. I have fed back through the ACA surveys my thoughts on their support of distance students. Suggest others do likewise.

I was of the same opinion and I fed this back in the surveys too but I haven't seen any change since last year.