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ACCA P4 Advanced Financial Management

Sample Study Note

For exams in June2014

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© Lesco Group Limited, April 2015

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise, without the prior written

permission of Lesco Group Limited.

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Sample Note Content:

Main study note content [Total Pages: 218] ...................................................... 4

Product Summary .......................................................................................... 5

Live online note sample plan ........................................................................... 6

Live online course timetable: ........................................................................... 7

Free cash flow ............................................................................................. 11

Adjusted Present Value(APV) ......................................................................... 17

Business Valuation ....................................................................................... 31

Please note:

This is just the sample study note extracted from the main study note in your tuition study

[This tuition study note is consistent in basic/super/gold package]. There would be more

chapters in the main study note covering the whole ACCA syllabus.

You can also take a look at the content within the main study note below:

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Main study note content [Total Pages: 218]

Chapter1 Financial Crisis & Corporate Governance

-Why financial crisis

-corporate governance

Chapter 2 Accounting Equation: Assets=liability+Equity

Sessoin1 Assets

-session1.1 Domestic investment appraisal

-session1.2International investment appraisal

-session1.3Business Valuation

-session1.4Risk Management

Session2 Liability+Equity

-session2.1 Financing decision

-session2.2 Dividend Policy Decision

Chapter 3 How to grow and save your business?

-session3.1 International Trade

-session3.2 Mergers & Acquisitions

-session3.3 Business Reorganization and Reconstruction

Chapter4 Other current issues

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Product Summary

content Basic

package

Super

package

Gold

Package

Oxford Brookes BSc in Applied Accounting

ACCA HD quality super tuition videos

ACCA HD quality super revision videos

Last minute revision

ACCA Live online tuition(4sessions)

ACCA Live online revision(14hours)

ACCA Mock exams(with tutor mark)

ACCA Tutor support

ACCA Electronic study note

ACCA Student online forum

Pass Guarantee

ACCA Final revision mock exam paper

ACCA Super Live online session (20-

30hours)

ACCA Super Live online revision

(Super 3 days)

ACCA 1V1 Career Advice

ACCA Extra exam techniques

demonstration

Live online mentoring

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Live online note sample plan

Live online tuition note plan for June2014 P4 Exam

[Only for super / gold package (there would be a unique plan for gold package)]

Live sessions: [2 hours/session---live online + recorded after class]:

Live session1 topic: Investment appraisal Summary

Live session2 topic: Financing decision + Business Valuation Summary

Live session3: Risk Management Summary

Live session4: overall summary of knowledge in P4 exam

Live revision note for June2014 P4 exam: [will be available since mid April 2014]:

Live revision1+2: [There would be a separate live revision note detailing all

past exam questions with answers to go through]

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Live online course timetable:

Live session/revision for F4-P7

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*Please Note: This Timetable may be subjected to future changes. Kindly check regularly for any possible updates.

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Domestic investment appraisal

The idea behind this is to use techniques to evaluate whether the investment

proposal is worthwile.

Techniques would be classified between:

Non-discounting techniques Discounting techniques

Payback period Net present value(NPV)

Other decisions

Asset replacement

Capital rationing

Lease or buy decision

Free cash flow

Risks&Uncertainty

Sensitivity analysis

Monte Carlo simulation

Value at risk

Option pricing model

Real option

Black-Scholes

option pricing

model

Accounting rate of return(ARR/ROCE/ROI) Adjusted present value

Internal rate of return(IRR)

Discounted payback period

Duration/ Macaulay Duration method

Modified internal rate of return(MIRR)

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Free cash flow

Free cash flow to equity is free cash flow-interest expense(net of tax)-net debt

borrowing.

Once we have calculated the free cash flow to equity we can then establish the

dividend cover based on free cash flow to equity. We have learnt how to calculate

dividend cover where we take PAT/Dividend paid. But before PAT is profit and it’s

subject to manipulation by management so we can use a cash flow approach to do

this.

Free cash flow to firm is cash flow

from operations+ interest expense -

cash flow from investing activities.

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There are 2 ways to calculate free cash flow to equity:

Direct method:

PAT x

Adjustment for non cash item x

Adjustment for changes in working capital x

-cash flow from investing activities x

Adjustment for net debt borrowing x

Free cash flow to equity x

Indirect method:

Free cash flow x

-interest paid(net of tax)-because in free cash flow we have subtracted the whole taxes x

Adjustment for net debt borrowing x

Free cash flow to equity x

Free cash flow needs to be assessed not in a single period because sometimes

company would spend money into expanding the business in the current year so

the current year’s free cash flow would be low but it does benefit the company for

the long term.

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Example Human Ltd

The following statement of profit or loss relates to Human Ltd.

$m

Sales 90

Cost of sales (30)

Gross profit 60

Operating expense (20)

PBIT 40

Interest (10)

PBT 30

Tax@20% (6)

PAT 24

During the year loan repayments are expected to amount to $20 million.

Issue of new debt is $69m.

Deprecation charge is $30 million and capital expenditure is $10 million.

Human ltd bought $3 inventory during the year.

Human Ltd ha 100m shares in issue and DPS is $0.03.

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Required:

1, calculate free cash flow to firm

2, calculate free cash flow to equity

3, calculate dividend cover using free cash flow to equity method.

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Answer:

1, FCF to firm:

PBIT 40

Tax at 20% on PBIT (8)

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Depreciation 30

Working capital (3)

Capital expenditure (10)

FCF to firm 49

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2, FCF to equity:

Indirect method:

FCF to firm 49

-interest net of tax(10x(1-20%)) (8)

Adjustment to net debt borrowing

(69-20)

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FCFTE 90

Direct method:

PAT 24

Adjustment to non cash item

Depreciation

30

Adjustment to working capital (3)

CAPEX (10)

Adjustment to net debt borrowing

(69-20)

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FCFTE 90

3, dividend cover: = FCFTE

Dividend value

= 90

100mX0.03

=30times

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Adjusted Present Value(APV)

We have looked at NPV calculation and we use WACC(weighted average cost of

capital) to discount cash flow.

WACC has incorporated debt and equity element and one of the arguments for this

is future sales, costs incurred have nothing to do with financing but instead they

are something to do with operations.

So that’s why we developed APV to separate business option from financing.

APV is used when you are appraising a project where its financial risk is changed.

This means we use cost of equity(ungeared) to discount the basic cash flow

including revenue & expenses because they are something to do with business not

finance.

APV is used when you are appraising

a project where its financial risk is

changed.

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We can then establish present value of finance effect including issue cost, tax

saving on interest and subsidy as well and for these items we use risk free rate/cost

of debt to discount because APV doesn’t specify which discount rate we should

choose and you can argue that eg, for tax saving on interest we have no idea when

tax rate may change and as a result we can use Rf or Kd to discount the cash flow.

Here notice you can either use Rf or Kd to discount cash flow and whichever you

use your examiner would give you a mark in the exam(although your answer may

be different from examiner’s and that’s totally acceptable).

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Calculation:

APV= Base case NPV + PV of Finance Effect

Issue costs Tax savings on interest Subsidy

Only include relevant cash flow from operations

Discount factor would only include BR(Keu)

But when Co is geared(2approach to separate (Keu))

M&M preposition Beta

2 cost of equity Keg=Keu+(Keu-Kd)D(1-T)

E

Geared Ungeared

3 WACC WACC(g)=WACC(ungeared)(1-Dt )

(Keu) D+E

1,

ungeared

βa= βe [ E ]

E+D(1-T)

2,CAPM Keu=rf+βa(Rm-Rf) Keu=rf+βa(Rm-Rf)

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PV of finance effect calculation:

Issue costs:

1, % X amounts raised(not amounts required)

2, net off with tax saving

3, discount them

Tax saved on interest:

1, interest expense

2, multiply by tax rate

3, discount it

Subsidy:

1, PV of tax shield on interest

2, PV of subsidy(amounts saved net of tax because save interest=save expense so

increase in tax )

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Base Case NPV Example1:

Company A is an equity finance company with Ke=10%.

Company B is considering a project that would cost $100,000 to be financed 50%

by equity (ke= 21.6%) and 50% by debt (kd(pre-tax) =12%).

Required:

Calculate Keu for company A and company B.

Answer:

Company A: Keu=10%

Company B:

Keg=Keu+(Keu-Kd)D(1-T)

E

21.6% =Keu +(Keu-12%) X 50X(1-30%)

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Keu=17.6%

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Base Case NPV Example2:

Company has the following market value of finance:

Value of debt is $6m.

Value of equity is $11.8m.

Company’s current WACC is 19.7%.

Tax rate is 30%.

Required:

Calculate Keu for company.

Answer:

WACC(g)=WACC(ungeared)(1- Dt )

(Keu) D+E

19.7% =WACC (ungeared) X 1- 6X30%

6+11.8

WACC(ungeared) (Keu)=21.9%

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Base Case NPV Example3:

Company diversifies its business by entering into the mining industry.

The company’s equity beta is 0.85, and its financial gearing is 60% equity, 40%

debt by market value.

The average equity beta in the mining industry is 1.2, and average gearing 50%

equity, 50% debt by market value.

Tax rate is 30%.

The risk free rate is 5.5% per annum and the market return 12% per annum.

Required:

Calculate Keu.

Answer:

1,

ungeared

βa= βe [ E ]

E+D(1-T)

βa=1.2 x 50

50+50X(1-30%)

=0.71

2,CAPM Keu=rf+βa(Rm-Rf) Keu=5.5%+0.71X12

%=10%

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Base Case NPV Example4:

Company has an equity beta of 0.85 and asset beta of 0.5.

Rf=5%

Rm=10%

Required:

Calculate Keu.

Answer:

Keu= Rf+βa(Rm-Rf)

=5%+0.5x(10%-5%)

=0.075

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Example: (JOJO Ltd) (issue cost)

CAPEX required: $20m

How to raise $20m: from a 1 for 3 rights issue at a price of £2 per share.

Right issue cost: 5%.

Rf: 10%.

Required:

Calculate issue cost to be incorporated into APV calculation where:

1, issue cost is not a tax allowable expense

2, issue cost is a tax allowable expense and tax is paid 1 year in arrears while tax

rate is 30%.

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Answer:

1,

Amounts raised – issue costs = amounts required

100% 5% 95%

20m

20/0.95

=21.05 21.05-20=1.05

21.05X5%

DF@yr 0= 1.05X1=1.05

APV= base case NPV - 1.05

2, DF@10% PV

Issue cost = 1.05 (1) yr0 1 (1.05)

Tax saved: 30%X1.05 =0.315 yr1 0.909 0.32

(0.73)

APV= base case NPV - 0.73

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Example: TT Ltd (tax saving on interest)

CAPEX required: $10m.

How to raise $10m: use a 5 year bank loan(year1-5) and interest expense is 10%.

Tax is paid 1 year in arrears at 30%.

Rf=10%.

Required:

Calculate tax saving on interest to be incorporated into APV calculation.

Answer:

1, interest 10%X$10m=$1m.

2, tax saved: 30% X$1m= $0.3m

3, discount it:

1 year in arrears based on year 1-5

$0.3X AF(YR2-6) @10%

$0.3XAF1-6 XDF(yr 1-5)@10%

=0.3X 1/0.1 X(1-1/1.1^5)X0.909

=0.3X3.791X0.909

=1.03

So APV=base case NPV + 1.03

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Example: SS ltd

CAPEX required=$20m

Company would normally borrow at 8%

Government has offered a loan at 6%(which is lower than market rate)

Risk free rate=5%

Project is for 5years

Tax rate is at 30% paid in the current year.

Required:

Calculate subsidy to be incorporated into APV calculation.

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Answer:

1, PV of tax shield on interest

$20m X6%X30% XAF@5%(1-5yr) = 1.56

4.33

2, PV of subsidy

Subsidy %= 8%-6% =2%

Total subsidy p.a.= 2% X$20m=0.4

PV of subsidy(net off tax) 0.4X(1-30%)XAF@5% 5yrs =1.21

APV=base case NPV +1.56+1.21

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Comment of APV

1, Difficult to choose an appropriate discount rate for side effect, ie, tax shield.

2, when establish the discount rate for base case NPV, ie, Keu, the beta factor is

based on M&M assumptions.

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Business Valuation

Session overview:

1. Reasons to value a business 2. Types of valuation methods

3. Payment methods 4. Defense 5. Regulation regarding takeover

In this session we are going to

look at how to value a

business.

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Reasons to value a business

The 1st question is why do we need to value a business?

Well, the reasons being:

We want to acquire another company so we need to determine how much we are

going to pay for them.

For listed companies you would notice they have their own share price then we can

take it multiply by number of shares giving us total market capitalization then why

do we still need to value them?

The reason is because we are in a semi market hypothesis so the share price

quoted may not include insider information then we need to do extra calculation to

verify whether that share price is the value of the company.

Other reason includes eg, why we need to value the company would be company

may want to go listed onto the stock exchange then how would you determine your

share price? Of course you need to value it first then divide by the number of

shares and hence you can get share price you are going to quote.

Or we would like to merge another company(Co1+Co2=Co1) or acquire another

company in order to make it become a subsidiary, eg, creating synergies(1+1>2)

so we need to understand how much it’s worth before we purchase it.

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Types of valuation methods

The 2nd question being how we can value a business?

There are three types of valuation including type1, type2 and type3.

Type 1 acquisition means after acquiring this company the existing business risk

and financial risk would not change.

Type 2 acquisition means after acquiring this company the existing business risk

would not change but financial risk changes.

Type 3 acquisition means after acquiring this company both business risk and

financial risk change.

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Type 1 acquisition

We are going to use book value approach, market based approach and cash flow

based approach to value the business.

1. Book value approach

The simple idea is to look at total equity within statement of financial position BUT

that figure doesn’t include up to date information like:

Replacement cost: cost of setting up the same business now.

Net realizable value: value to sell something now.

Potential intangible assets: slogan, brand name etc.

And we need to subtract goodwill in the valuation process as well.

After we’ve looked the above things we need to consider how to value an

intangible asset.

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Example: Hum ltd

Hum has the following elements within its FS:

$

Non-current assets:

PP&E 100

Goodwill 30

Other intangible assets 20

Current assets:

Inventory 10

Receivable 15

Total equity 150

Total liability 25

Note:

The property, plant and equipment have a replacement value of $50.

30% of the inventory are no longer required by Hum ltd and they can only be sold to customers for $2.

Required:

Calculate the valuation for Hum Ltd based on its net asset method.

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Answer:

$

Non-current assets:

PP&E 50

Goodwill 30

Other intangible assets 20

Current assets:

Inventory 10-3+2=9

Receivable 15

Total equity 150

Total liability 25

Asset excluding goodwill - liability =39(net assets)

50-30+20+9+15 -25

After we’ve looked at how to value a business using net assets approach then we

can start thinking about how to value its intangible assets because we know that an

asset can be recognized in its FS if it’s identifiable (price agreed between two

parties) but for company name, slogan, relationship with customers, they are not

identifiable and how can we come up with a value for those items?

And for goodwill(the excess we paid for the reputation, slogan and relationship of

company) maybe that’s not worth this value and how can we value this as well?

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We use:

CIV approach(calculating intangible value) Market to book value

The simple idea behind CIV approach is we compare:

Average operating profit

Average assets base

With industry figure and the excess amount would be due to the value of intangible

assets.

The simple idea behind market to book value approach is to compare:

Book value of equity with market value of equity(share priceXnumber of shares)

And the excess amount would be due to the value of intangible assets

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Example: Independence Ltd(CIV)

Average profit before interest and tax of Independence Ltd is $66.2.

Average assets of Independence Ltd are $230.

Average Pre-tax return on asset in the industry is 20%.

Tax rate is 30%.

Cost of capital is 11%.

Required:

Calculate the value of intangible assets using CIV approach.

Answer:

Return on asset of Independence Ltd is 66.2 =29%

230

Excess return=ROA of independence – industry average

=29%-20%=9%

Intangible asset value before tax=9%X230=21

Value of intangible asset after tax=21X(1-30%) =134

11%

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Example MB plc

At the year end the book value of total equity of MB ltd is $200m.

Share price as at the year end is $20 and there are 20m shares in issue.

Required:

Calculate the value of intangible assets.

Answer:

MV=$20X20m=$400m

BV =$200m(include any possible replacement cost/NRV is necessary)

So the value of intangible assets=MV-BV=$200m.

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2. Market based approach

Under market based approach we are going to use

P/E ratio

Dividend yield model to value a business.

After looking at the above techniques we can start thinking about why

valuing high growth company is very difficult?

Well firstly most of these companies are loss making and hence using P/EXloss per

share to value them becoming market price? Well this is difficult.

Secondly maybe these companies don’t have much cash to pay to shareholders and

hence when using dividend valuation model to value a company because Do=0 so

Price of company=0?

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P/E ratio

This is useful when value a business for majority shareholders.

Share value= earnings X P/E

Target company acquirer

There are some limitations when using this method:

1, for earnings for target company, are you going to use the average earnings over

5years? 3years? Or are you going to use current year earnings?

2, for P/E ratio, if the target company is a listed company then P/E can be obtained

from share market but what if the target company is not listed? So you may need

to adjust the P/E using your own experience, expertise or you can take a company

in the similar industry to adjust it.

Here’s a very simple example to show how it works:

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Example: Pipi Ltd

Sisi plc wants to acquire Pipi ltd and profit after tax of Pipi ltd is $300 whilst P/E

ratio of a company in a similar industry with Pipi is 6. And P/E of Sisi plc is 8.

Required:

What is the value of Pipi Ltd?

Answer:

Share value=P/E X earnings=8X$300=$2,400

Sisi plc Pipi Ltd

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Dividend yield basis

Dividend yield= DPS X100

Share price

This is one of the ways to maximize shareholders wealth and for listed companies

this can be taken out from stock market.

This is often greater than interest rate because if this is not the case, from

shareholders’ perspective why bother taking additional risks to invest money in

shares but instead they can put their money directly into banks and enjoy a higher

return.

We use this method to value a business normally unlisted but we can

reasonable estimate the dividend per share of that company.

So share price of target company = DPS(target Co)

Dividend yield (similar listed Co)

Example: Don ltd

Gun plc wants to acquire an unlisted company called Don ltd. Don has 10m shares

in issue and expects to pay out a total dividend of $300,000.

Dividend yield of a company in the same industry of Don Ltd is 2%.

Required:

Calculate share price of Don Ltd using dividend yield basis.

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Answer:

share price of target company = DPS(Don Co)

Dividend yield (similar listed Co)

= $300,000/10m =$1.5/share

2%

Maybe we can further adjust $1.5/share by reducing it by 30% because

it’s unlisted companies? But this is based on industry experience and

expertise.(just a guess work)

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3. cash flow based approach

dividend valuation model(dividend growth model)

free cash flow method

Economic value added(EVA)

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Dividend valuation (growth) model

Here we are focusing on perpetuity whereby we are going to take future

dividend(cash element) discounted at ungeared cost of equity.

In simple terms this is the PV of future dividend at cost of equity ungeared.

Note: this is future dividend not current dividend.

This is useful when value a business whereby shareholders hold a minority stake

because they tend to prefer dividend rather than capital gain.

Future dividend would remain constant or would grow.

If it’s constant then

Po= D

Ke

If it’s with growth then

Po= Do(1+g)

Ke -g

Notice:

1. Po is ex dividend because we need to consider the net effect after paying out

dividend to shareholders and forms ke to our company.

2. g is dividend growth rate not earnings growth rate.

3. If examiner tells you to value a business using DVM cum dividend then you need

to take Po + g.

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Comment:

Advantage:

It’s useful when valuing a company for minority shareholders.

Disadvantage:

When calculate growth rate etc using CAPM then disadvantages associated with

CAPM would also apply.

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Example: DIDI plc (DVM Model)

1, DIDI plc expects to pay a constant annual dividend of 45c per share and the

market expects a rate of return of 15%.

2, DIDI plc expects to pay dividend of 30c next year and dividend growth rate is

5% whilst earnings growth rate is 10%. Ungeared cost of equity is 10%.

3, DIDI plc expects to pay dividend of 30c next year and dividend growth rate is

5% and the market expects a rate of return of 15% and what is the cum dividend

value of share?

4, Current dividend of DIDI plc is 30c and dividend growth rate is 5%. Risk free

rate is 5% and market rate of return is 10% and beta is 1.3.

5, DIDI plc expects to pay dividend of 30c next year. Ungeared cost of equity is

10%. Dividend in 4years ago was 20c per share and now is 25c per share.

6, DIDI plc expects to pay dividend of 30c next year. Ungeared cost of equity is

10%. DIDI plc has an accounting rate of return of 11% and pays out 35% of its

profit after tax as dividend each year.

7, DIDI plc has a DPS of 30c and has just paid out whilst dividend growth is

expected to be 10% in the next 2 years and 5% in year 3. DIDI plc estimates a 3%

growth of dividend till perpetuity after year3. Ungeared cost of equity is 5%.

Required:

Using DVM calculate share value of DIDI plc.

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Answer:

1, Po=$0.45 =$3/share

15%

2, Po= $0.3 =$6/share

10%-5%

3,Po+Dividend = $0.3 +$0.3=$3.3/share

15%-5%

4, Po= $0.3X(1+5%) = $4.85/share

5%+1.3X(10%-5%) -5%

5, g=(current dividend )^1/4 -1 =(25/20) ^1/4 -1 =5.7%

Dividend 4 yrs ago

Po= $0.3 =$6.98/share

10%-5.7%

6, g=11%X(1-35%)=7%(Gordon’s growth method)

Po= $0.3 =$10/share

10%-7%

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7,

Years Dividend DF @5% PV

1 30X(1+10%) =33 0.952 31c

2 30X(1+10%)^2=36 0.907 33c

3 36X(1+5%)=38 0.864 33c

$0.97

Year4 dividend into perpetuity=38x(1+3%)=$20/share

5%-3%

X year3 discount factor X 0.864

Year 3value $17/share

So total share value=$0.91+$17=$17.91/share

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Free cash flow Basis

This is again perpetuity approach to discount future free cash flow at discount

factor.

There’re 2 free cash flow from the previous study:

Free cash flow to firm (cash available to debt and equity holders)

Free cash flow to equity(cash available to equity holders)

If there’s no grow of cash flow we can use:

PV= FCFo -value of debt

WACC

PV=FCFTE

Ke

If there’s cash flow growth then we can use DVM model like:

PV= FCFo(1+g) -value of debt

WACC-g

PV=FCFTE(1+g)

Ke -g

Notice: g is cash flow growth rate or you can use inflation rate as well.

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Example Nente Co(June2012 Q1)(adjusted)

Free cash flow of Nente Co is $1,180. Free cash flow in 3 years ago was $970 and

now is $1,230. It’s expected that growth rate will reduce to 25% of the original rate

for the foreseeable future. Weighted average cost of capital is 11%.

Value of debt from statement of financial position is 6,500.

Number of shares of Nente Co is 2,400shares.

Required:

Using free cash flow to firm approach calculate current value of a Nente Co

share.

Answer:

PV= FCFo(1+g) -value of debt

WACC-g

=1,180X(1+0.0206) -6,500

0.11-0.0206

=$13,471-$6,500

=$6,971

Share price=$6,971/2,400shares =$2.9/share

g=(1230/970)^1/3

=0.0823

X25%=0.0206

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Economic Value Added(EVA)

Free cash flow approach just looks at valuation of a company as at a point in time,

ie, discounting future cash flow to the present value and if the company has spent

money into buying non-current tangible and intangible assets then the total cash

flow would decrease and hence value of the firm and share would decrease as well.

But for economic value added method we are going to focus on a period rather than

just a point in time. We are going to take profit-cost associated with finance and

make LOTS OF adjustments(in the real life there are more than 160 adjustments

we need to make).

Calculation：

EVA= net operating profit after tax -(WACC X capital employed)

Operating profit(1-T%)

Or PAT + int net of tax

NOPAT:

Operating profit(before tax) X

-Operating profitXCT% (X)

Normal operating profit after

tax

X

Adjustments:

Non cash items-depre/amotisation X

Research expenses X

Training costs X

Interest expense net of tax X

Operating leases X

Net operating profit after tax X

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Capital employed:

long term debt+total equity *

*there are lots of adjustments in the real life but in the p4 exam your examiner

tends not to complicate these issues but in p5 you can expect some other

adjustments to be made like capitalized operating leases etc.

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Example: EVA plc

The statement of profit or loss for EVA plc is as follows:

2013-2014($m)

Sales 80

Other Expenses (10)

Training costs (10)

research costs (10)

Interest expense (10)

PBT 40

Tax expense @30% (10)

Profit after tax 30

The statement of financial position of EVA plc is as follows as at 2014:

2014($m)

Total Assets 100

Equity

Ordinary shares($1 par value) 30

Retained earnings 20

Total equity 50

Long term liabilities-traded debts 40

Current liabilities 10

Total equity and liabilities 100

WACC is 5%.

Required:

Using EVA to value the EVA plc and the value of EVA plc share.

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Answer:

Operating profit 40

-Operating profitXCT%(40X30%) (12)

Normal operating profit after

tax

28

Adjustments:

Research expenses 10

Training costs 10

Int net of tax(10X0.7) 7

Net operating profit after tax 55

Capital employed=LTD+equity=40+50=90

EVA=net operating profit after tax-(WACC%Xcapital employed)

=55-(5%X90)

= 50.5

-value of debt (40)

Total value of firm 10.5m

Number of shares 30m

Share price $0.35/share