Acca Afm Debrief Jun 22

ACCA Paper AFM – Advance Financial Management
Mock Exam Debrief June 2022
World-class Qualifications
For over two decades, Crescendo has been providing some of the most internationally valued
qualifications with notable success. Since 2001, it has produced over a thousand Cambridge
A Level graduates and ACCA graduates while giving rise to several world-class prize winning
students in both programmes along the way.
Crescendo is also the only private college in Johor recognised by the University of London to
deliver its prestigious academic programmes in Southern Malaysia; thereby, presenting its
students with exclusive access to world-class degrees that subsequently make them highly
sought-after by top corporations worldwide. And over the years, many of Crescendo's
University of London students have graduated with 1st-class Honours and won the World's
Highest Mark awards.
Ordinary People Extraordinary Dreams

At Crescendo, students are meticulously educated to achieve extraordinary success despite
taking on some of the world's most rigorous and challenging programmes (e.g. Cambridge A-
Level and ACCA). Our students have won World prizes and Malaysian prizes in the University
of London, ACCA, and A Level exams. Many graduates of the College now serve in
professional firms, multinationals and public-listed companies in Malaysia, Singapore and
overseas.
Strategic Location
To international and outstation students, Crescendo's location provides easy access to
Singapore and is a springboard to many local tourist spots in Johor as well as to other states
of Malaysia.
© Chow Kim Tai CA (M) FCCA MBA (Finance) 1

Our Definition of 'Quality', and What It Means to You

"Quality" means having competent and passionate lecturers who could provide quality notes,
lecture in ways that students can easily understand, and challenge them to think creatively
and solve problems. In addition, the programmes offered by the University of London are
world-class programmes, which not only enhances graduates' employability but are also a
source of pride for our graduates.
Our Students' Achievements, Your Assurance

Crescendo students have won World Prizes in Cambridge A level exams, graduated with
First-Class Honours from the University of London (UOL), won World Highest marks awards
in UOL exams, and won ACCA awards. Work hard and you may be our future achiever.
Our Philosophy: Ordinary People, Extraordinary Dreams

We strongly believe that education should be affordable - not an overburden to hardworking
parents. And this philosophy is reflected through our motto: "Ordinary People, Extraordinary
Dreams". By making fees affordable, we make higher education now accessible to the
ordinary people. Students who previously didn't even dare to think of becoming a lawyer, an
accountant, or university graduate, can now realise their extraordinary dreams through
Crescendo. Our sincerest thanks also goes to PTPTN for providing students with study loans.
If you share the same belief as us, please visit us: We are honoured to be given an
opportunity to equip you with a world-class qualification.
Contact Details
Telephone NO: +6078636888

Telephone NO (WhatsApp): +01113052008
Email address: [email protected]
Address: Crescendo International College, PTD 204446, Lebuh Cemerlang, Taman Desa
Cemerlang, 81800 Ulu Tiram, Johor Darul Takzim.
Website: www.crescendo.edu.my

Mr CHOW KIM TAI CA(M), FCCA, MBA (Finance)
ACADEMIC QUALIFICATIONS
Mr. Chow is a Chartered Accountant of Malaysia and a fellow member of the Association of Chartered
Certified Accountants, UK (FCCA). He also holds an MBA (Finance) from Charles Stuart University
Australia. He was formerly a World Gold Medal for LCCI examinations and completed his ACCA
examinations in the minimum period of 2 years with straight passes, scoring 91 marks for equivalent
of paper APM now. Mr. Chow adapts his excellent academic background and learning experience in
teaching his students.
LECTURING EXPERIENCE
Mr. Chow has 29 years of experience in teaching Financial Management and Management
Accounting. In ACCA, he specializes in lecturing paper MA, PM, FM, AFM and APM. He lectures
extensively all over Asia in Malaysia, Singapore, Hong Kong (SAR), China, Vietnam, Brunei and
Indonesia. Over these years, he has trained more than 20,000 students worldwide. Students rated
his teaching skills as excellent, very systematic and easy to understand. Many students followed him
through from paper MA to AFM. Besides ACCA, he also lectures on MBA and degree courses. He is
also a trainer for ‘ACCA Train-The-Trainers Program’ organized by “Inspire Professional Academy” in
conjunction with ACCA Malaysia.
PROFESSIONAL EXPERIENCE
Mr. Chow started his career as Audit and Tax Assistant in a Public Accounting firm. He was once the
General Manager and Academic Head of the Business School division of a Private University in
Malaysia. Currently he is a freelance lecturer and consultant in his own practice. He has conducted
many public seminars and in-house trainings for various listed companies and MNCs. such as
Petronas, Berjaya Group, National Panasonic, Big 4 audit firms, Vietnam Auditing Company, Brunei
Shell, etc. Mr. Chow was a co-writer and reviewer of the Financial Management Learning Pack for
Hong Kong Society of Accountants (HKSA). This learning pack is used by candidates to prepare for
financial management examinations similar to ACCA paper AFM.

ACCA PAPER AFM ADVANCE FINANCIAL MANAGEMENT
PART A: INTRODUCTION
1. Syllabus:
Main topics:
1. Role and responsibility towards stakeholders
2. Advanced Investment Appraisal
3. Acquisitions and Mergers
4. Corporate Reconstruction and Reorganisation
5. Advance Risk Management
2. Format of Paper
The examination is a three hour and 15 minutes paper in two sections. First 15 minutes is reading time,
Candidates are highly recommended to spend the reading time browse through the question paper and
use it for planning your question answering sequence as well as the answer itself. Do not rush to start
the exam. Section A will comprise of ONE compulsory question worth 50 marks. The section A question
will typically be scenario based question. Section B contains 3 optional questions worth 25 marks each.
Candidates will be required to answer two of these questions. Both section A and B questions will contain
a mix of computation and discursive elements. The balance between computational and discursive
elements will remain largely constant from one examination to the next, will be as reflected in the past
papers.
Section A : One compulsory question (long case study) (50 marks)

Section B : Two compulsory questions (short case study) (25 marks each)
Time allowed: 3 hours and 15 minutes
3 STUDY MATERIALS
ACCA approved textbooks:

1. Kaplan Publications
2. BPP Publications
Other reading texts:

1. R H Pike, C W Neale Corporate Finance and Investment Prentice Hall
2. J M Samuels, F M Wikes, R E Brayshaw Management of Company Finance Chapman and Hall
3. I Demirang, S Goddard Financial Management for International Business McGraw Hill
4. Student Accountants articles
Look out for relevant technical articles related to paper AFM, the examiner’s reports and students notice
board!
You can download these articles from the ACCA website : http://www.accaglobal.com

ACCA AFM ADVANCE FINANCIAL MANAGEMENT
Hot Topics
Focus topics for exam:
1. Mergers and Takeovers. Need to put attention on FCFF model and FCFE model as
well as earnings (PE ratio) model valuation. Evaluation of gain for bidder and target
companies are likely. Question may include calculation of cost of capital of combined
company with beta adjustments. Some readings on defense tactics and post
acquisition management will help.
2. Risk management (hedging interest rate risk or currency risk).
3. Investment appraisal with NPV or APV. Need to focus on FDI. Question likely to ask
calculation of project specific discount rate (beta adjustment). Other appraisal
techniques like BSOP model, Macaulay duration, VAR and MIRR need attention!
Exclusion clause
The tips are forecasted base on my best knowledge from analyzing past trends and developments.
Therefore, I cannot be held responsible for the accuracy of the tips and will take no liability for
whatever consequences (financial or otherwise), which may occur from relying on the tips.
The tips should be used as the area of the syllabus to focus but not the only area to study.
Best wishes to your exam,
Chow Kim Tai CA(M) FCCA MBA (Finance)






PART B MERGERS AND TAKEOVER

MERGERS & TAKEOVER
Co AA
CO Co
COBB
Business Valuation methods
Net Assets method Earnings model Dividend model

Equity value = Share price = Share price =
Free Cashflow model
Free cashflow to the firm (FCFF) Free cashflow to equity (FCFE)

Cashflow attributable to capital providers Cashflow attributable to shareholders only
of the firm, i.e. shareholders and
debtholders Operating profit/PBIT X
Less: Interest X
Operating profit/PBIT X PBT X
Less: Tax % X Less: Tax % X
Depreciation X Depreciation X
Less: Capital replacement X Less: Capital replacement X
Add/Less: Working capital Add/Less: Working capital
(increase)/decrease X (increase)/decrease X
FCFF X FCFE X
Valuation (using perpetuity with growth)

MOCK EXAM CASE STUDY (Question 1 in Exam)
Trans Pacific Air (TAC) company is a reputable budget airline company operating in the Asia Pacific
region. The company was formed in the late 1990s. Jimmy Teoh, the CEO of the company, bought over
the loss-making airline from a government linked organisation for $2 and mortgaged his own residential
property for the working capital to fund the operations. TAC has managed to turnaround the airline in
just 2 years and has been expanding rapidly in the last two decades, winning various prizes and awards
in the aviation industry.
At the dawn of 2020, the Covid-19 pandemic hit the world, resulting in unprecedented worldwide lock
downs, and countries closing international borders. This has adversely affected the aviation industry
with many airline companies suffering serious financial difficulties, with some having to close down.
TAC is no exception. Although TAC still has sufficiently large cash reserves accumulated from its pre-
pandemic profitable operation, Jimmy realised that it would not survive if the company continued to
operate without any breakthrough strategic change as the business has been suffering significant
financial losses over the last two years, with a significant rise in the level of debt financing.
Jimmy is therefore considering diversifying the business, to reduce reliance on its core business. It
plans to offer delivery and runner services for food and grocery deliveries, as well as offering ad-hoc
services to individuals or businesses for various tasks, such as paying bills and accompanying patients
to seek medical treatment. The service can be ordered via mobile phone applications. Jimmy considers
taking over an existing established business offering these services as the best way to diversify since
it does not have any prior experience in this venture. However, some other board members prefer
organic growth, wanting TAC to venture into the business by setting up a new company.
eThunder Company
eThunder company is an established company in the delivery and runner services sector, matching the
type of venture TAC is considering to diversify into. The service is provided by human riders as well as
automatic drone delivery. As the business has expanded tremendously during the pandemic, the
owners of eThunder see the opportunity to sell their business for a handsome capital gain. The owners
consider a premium of 50% over the existing equity market value of eThunder to be a reasonable price
to sell their company. eThunder has two main divisions, providing delivery and runner service and
manufacturing and selling drone.
The latest financial statements of eThunder shows the following extract:
$000
Revenue 2800
Profit before interest and tax (PBIT) 504
Equity
Ordinary shares (nominal value 50 cents) 5000
Reserves 3200
Non-current liabilities
7% Bank loan 2000
Delivery and runner service accounts for 60% of its latest revenue and PBIT. eThunder current share
price is $1.20 per share.
Combined company valuation and performance
Jimmy has no intention to venture into drone manufacturing as he believes manufacturing drones
requires specialised technology and skills that TAC will not be able to master effectively. TAC has found
another company willing to buy the drone business at an agreed price of $15 million, after it has acquired
eThunder.
TAC estimates that the delivery and runner service business of eThunder will continue to grow after the
takeover, with its revenue growing at a rate of 10% per year for the first four years after takeover, before
stabilising to a growth rate of 4% per year to perpetuity thereafter. The operating profit margin is

expected to be 22% per year. This is better than current performance due to cost-based synergy
expected from the combination of eThunder with TAC. Tax allowable deprecation is expected to be
equivalent to the capital investment needed to maintain current operations. However, TAC estimates
that it would need an investment of $0.40 per $1 increase in sales of eThunder delivery and runner
service business after the takeover. It is agreed that the valuation of the delivery and runner service
business should be done using the free cash flow to firm method with the combined company WACC
used as the discount rate.
TAC’s current share price is $0.50 per share with 100 million shares in issue. The Finance director of
TAC is of the view that the company’s current fair value should be much higher than the current equity
market value as the aviation industry is expected to recover soon since many countries have opened
their borders, with Covid-19 entering the endemic phase. The finance director believes that the
reasonable fair value of TAC should be based on 70% of its pre-pandemic level earnings of $25 million
and 80% of the aviation industry average P/E ratio of 10 times before the pandemic. The announcement
of the takeover has increased the share price of TAC by approximately 30%.
Combined company weighted average cost of capital (WACC)
It is agreed that the WACC of the combined company should be based on the betas of TAC and
eThunder. The current equity beta of TAC is 2.10. TAC has $300 million of redeemable bonds in its
statement of financial position, currently valued at $92 per $100 nominal. eThunder’s asset beta for its
delivery and runner service business is 0.75. The asset beta of the combined company should be the
weighted average of the asset betas of TAC and eThunder delivery and runner service business,
weighted by the market value of equity of each company. The pre-tax cost of debt of the combined
company will be 8%. TAC will maintain its existing capital structure after the takeover.
Both companies pay tax at 22% per annum in the year the tax liability arises. The risk-free rate of return
is 3% and the equity risk premium is 6%.
Real options valuation
Jimmy has attended a seminar on share options and how options can be used to value risky start-up
technology businesses. Jimmy feels that delivery and runner service business can be regarded as a
risky start-up business, as referred to in the seminar and wishes to gain more knowledge on this.
Required
(a) Critically discuss the advantages and disadvantages of organic growth over acquisitions for
TAC company.
(8 marks)
(b) Prepare a report to the Board of Directors of TAC company, focusing on the following:
(i) Calculate the current value of TAC company based on the finance director’s suggestion.
(3 marks)
(ii) Calculate the weighted average cost of capital for the combined company.
(7 marks)
(iii) Calculate the value attributable to TAC from acquiring eThunder and sale of the drone
manufacturing division.
(12 marks)
(iv) Evaluate the takeover of eThunder by TAC. In the evaluation, discuss the assumptions and/or
limitations of the valuation methods used and provide justification of the valuation basis of
current TAC value proposed by the finance director.
(8 marks)
Professional marks for the format, structure and presentation of the report (4 marks)
c) Explain how real options can be used to price start-up companies in risky ventures, like
eThunder.
(8 marks)
(50 marks)

Suggested answer
(a) Advantages of organic growth over acquisition:

1. It is generally cheaper to start a business from scratch than to buy over an existing established
business as the bidder company normally needs to pay a premium to buy over an established business.
2. Since all the employees are newly employed from the start of the company, there will be no problem
of existing employees rejecting change or adapting to a new culture as is the case when acquiring an
existing business.
3. Growing organically can prevent the bidder company from problems arising during a takeover bid
such as defence tactics employed by the directors of target company to prevent the takeover from
materialising (such as golden parachutes and poison pills) or potential legal proceeding to prevent the
takeover by referring the bid to the competition commission.
4. TAC could have full control over the new company in an organic growth scenario. In an acquisition,
the target company shareholders may wish to retain some ownerships and control over the company
after the takeover.
Advantages of acquisition over organic growth:

1. Acquisition of a business in delivery business such as e Thunder could help to improve the market
perspective of TAC’s future prospects. This could provide a boost to improve TAC’s share price which
has fallen significantly due to the Covid-19 pandemic. Delivery businesses are among some of the small
number of industries which have benefited from the pandemic.
2. TAC can acquire the technical knowledge and skills needed to operate an e-delivery business when
acquiring eThunder. This can save huge time and effort in trying to learn new skills, when compared to
organic growth.
3. The risk of diversifying and running a new business is much lower when taking over an existing
business than starting organically. The target company is already established and stabilised.
4. A company could normally grow faster through acquisition than growth organically. Acquisition can
be an effective way to diversify and grow quickly. Comparatively, organic growth takes a longer time to
achieve the desired market share.
1 point with explanation 1 mark (max 8 marks)
(b)
REPORT
To: Board of directors, TAC company
From: Finance Director
Date: 20 April 2022
Title: Takeover of eThunder company
Dear sir,
This report evaluates the takeover of eThunder by our company. Free cash flow and earnings valuation
models will be used in the evaluation. Justification will be made on the revaluation done on our company
together with discussion of the limitations which could affect the reliability of our valuations. Finally, an
explanation of real option valuation approach to value new start-up in technology firms will be discussed.
Evaluation of takeover of eThunder
The takeover of eThunder resulted in a net gain of $___________ to TAC, therefore, is financially viable
to TAC. Although the net gain can be considered small in comparison to the value of TAC, it could help
to boost the future prospect of TAC as the aviation industry has been very much negatively affected by
Covid-19 pandemic. Already we are seeing increased demand in TAC company shares causing a rise
of it share price by 30% with the takeover announcement. (2 marks)
Revaluation of TAC Company
The current low share price of TAC is largely due to negative impact of Covid-19 pandemic on aviation
industry over the last two years. Unprecedented worldwide lock downs and closer of international
boarders have forced many airlines into loss making and even closed down for good. With many
countries start to ease their restriction and opening up of boarders, there is good sign that the aviation

industry will rebound soon. As such, suggestion to revalue TAC based on pre-pandemic earnings
seems reasonable. However, full opening up worldwide to pre-pandemic level may not materialise in
the next 12 months as some countries are still sticking to their zero Covid strategy. Besides, many
businessmen have learnt that they can effectively conduct meetings online and reduce the frequency
of business travel to reduce operating costs. Therefore, suggestion of using 70% earnings and 80%
P/E ratio of pre-pandemic level will be a more prudence valuation. (3 marks)
Assumptions/Limitations of the valuation:

1. Operating profit margin is assumed to remain at 22% for the next 4 years. This may not be reasonable
especially there is still a lot of uncertainty posted by the Covid-19 pandemic in the coming few years
ahead.
2. Assuming debt beta of zero for TAC may be unrealistic. TAC is currently highly geared and since a
number of airline companies have gone into liquidation, it is not reasonable to assume TAC debt is risk
free.
3.The valuation assumes eThunder delivery and runner service business will continue to growth at a
high rate of 10% per year for the next four years. There could be many new comers into the industry
which could reduce the growth rate. There is also a possibility that delivery and runner business may
slow down once countries remove restriction of movement due to the pandemic as people start to
become mobile again.
Each point with explanation 1 mark: max 3 marks

Report format 1 mark
Structure 1 mark
Presentation 2 marks
APPENDICES
Appendix 1 (Part (b)(iii))
Evaluation of takeover of eThunder by TAC

$000 $000
Value of combined company
(TAC + eThunder delivery business) =
Sale of eThunder drone manufacturing business ________ (1 mark)
Less: Value of TAC now (Part (b) (i))
Value of eThunder now _______ (1 mark)

________
Synergy (1 mark)
Less: Premium of takeover ________ (1 mark)
Net gain ________ (1 mark)
Revaluation of TAC company (Part (b)(i)) (3 marks)

Valuation of eThunder delivery and runner service business after the takeover ($000) (7 marks)
Year 1 2 3 4 5 onwards
Revenue (10% growth)
PBIT (22% revenue)
Less: Tax 22%
Less; capital investment

for sale increase
FCFF
DF 8% (Appendix 2)
Present values

Appendix 2 - Combined company WACC (Part (b)(ii)) (7 marks)

c) Real option valuation
Share options are derivative securities which give the right to buy (call options) or to sell (put options)
share at the exercise price over a specific future date or range of dates. The value of a call share option
is the difference between the share price and the exercise price. For example, if share price is $10 and
exercise price is $7, the call option will be exercised and worth $3 per call. If the share price is lower
than exercise price, the call option will not be exercised and will be valueless. (3 marks)
When a firm is liquidated, the shareholders will receive distribution only after all the outstanding debts
are settled. If the assets realised say $10 million and outstanding debt was $7 million, the shareholders
will receive $3 million. If the debt outstanding is greater than the assets value realised, the shareholders
will receive nothing. As such, the equity value of a firm in risk of liquidation is equivalent to the value of
a call option on share with the exercise price equals the outstanding debt value. (3 marks)
A new start up in technology firm can be regarded as a risky venture and can face high risk of liquidation
if the technology is not successful and cannot attract sufficient customer to maintain profitability.
Therefore, the real option valuation method could be appropriate here. (2 marks)

PART C CURRENCY RISK

Hedging techniques for currency risk
1. Forward contract
2. Money market
3. Currency futures
4. Currency Options
BASIC OF EXCHANGE RATE RULES:

Forward contract, Currency futures, Currency options (ACCA: Nutourne Dec 2018)
Nutourne Co is a company based in the USA, supplying medical equipment to the USA and Europe.
It is 30 November 20X8. Nutourne Co’s treasury department is currently dealing with a sale to a Swiss
customer of CHF12·3 million which has just been agreed, where the customer will pay for the
equipment on 31 May 20X9. The treasury department intends to hedge the foreign exchange risk on
this transaction using traded futures or options as far as possible. Any amount not hedged by a
futures or option contract will be hedged on the forward market.
Exchange rates (quoted as US$/CHF 1)

Spot 1·0292–1·0309
Three months forward 1·0327–1·0347
Six months forward 1·0358–1·0380
Currency futures (contract size CHF125,000, futures price quoted as US$ per CHF1)
Futures price
December 1·0318
March 1·0345
June 1·0369
Currency options (contract size CHF125,000, exercise price quotation US$ per CHF1, premium:
US cents per CHF1)
Calls Puts
Exercise price December March June December March June
1·0375 0·47 0·50 0·53 0·74 0·79 0·86
Futures and options contracts mature at the month end.
Non-executive director’s comments
The non-executive director has heard about the mark-to-market process and wants to understand the
terminology involved, and how the process works, using the transaction with the Swiss customer as
an example. The treasury department has supplied relevant information to answer his query. The
contract specification for the CHF futures contract states that an initial margin of US$1,450 per
contract will be required and a maintenance margin of US$1,360 per contract will also be required.
The tick size on the contract is US$0·0001 and the tick value is US$12·50. You can
assume that on the first day when Nutourne Co holds the futures contracts, the loss per contract is
US$0·0011.
Required:
Evaluate which of the exchange-traded derivatives would give Nutourne Co the higher receipt,
considering scenarios when the options are and are not exercised. (12 marks)
(b) Explain to the non-executive director how the mark-to-market process would work for the
CHF futures, including the significance of the data supplied by the treasury department.
Illustrate your explanation with calculations showing what would happen on the first day,
using the data supplied by the treasury department. (6 marks)

Suggested Answer
(a) To hedge receipt of CHF12.3m in six months time:
(I) Forward contract
(II) Currency CHF futures
Now (Nov 30)
1.
2. Maturity date:
3. No of contracts:
4. Tick value:
Later (May 31)
Cash transaction: Futures transaction:
Note 1:
Note 2:

(III) Currency CHF options
Now (Nov 30)
1.
2. Maturity date: Exercise price:
3. No of contracts:
4. Options premium:
Later (May 31)
Assuming exercise options (being prudence):
$
Step 1: Exercise options:
Step 2: Shortfall:
Step 3: Options premium:
If options not exercised:
Recommendation:



Acca Afm Debrief Jun 22

Uploaded by

Copyright:

Available Formats

Acca Afm Debrief Jun 22

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Acca Afm Debrief Jun 22

Uploaded by

Copyright:

Available Formats

ACCA Paper AFM – Advance Financial Management

Mock Exam Debrief June 2022

Ordinary People Extraordinary Dreams

© Chow Kim Tai CA (M) FCCA MBA (Finance) 1

Our Definition of 'Quality', and What It Means to You

Our Students' Achievements, Your Assurance

Our Philosophy: Ordinary People, Extraordinary Dreams

Telephone NO: +6078636888

© Chow Kim Tai CA (M) FCCA MBA (Finance) 2

Mr CHOW KIM TAI CA(M), FCCA, MBA (Finance)

© Chow Kim Tai CA (M) FCCA MBA (Finance) 3

ACCA PAPER AFM ADVANCE FINANCIAL MANAGEMENT

Section A : One compulsory question (long case study) (50 marks)

ACCA approved textbooks:

Other reading texts:

© Chow Kim Tai CA (M) FCCA MBA (Finance) 4

ACCA AFM ADVANCE FINANCIAL MANAGEMENT

Best wishes to your exam,

Chow Kim Tai CA(M) FCCA MBA (Finance)

© Chow Kim Tai CA (M) FCCA MBA (Finance) 5

© Chow Kim Tai CA (M) FCCA MBA (Finance) 6

© Chow Kim Tai CA (M) FCCA MBA (Finance) 7

© Chow Kim Tai CA (M) FCCA MBA (Finance) 8

© Chow Kim Tai CA (M) FCCA MBA (Finance) 9

© Chow Kim Tai CA (M) FCCA MBA (Finance) 10

PART B MERGERS AND TAKEOVER

Business Valuation methods

Net Assets method Earnings model Dividend model

Free Cashflow model

Free cashflow to the firm (FCFF) Free cashflow to equity (FCFE)

Valuation (using perpetuity with growth)

© Chow Kim Tai CA (M) FCCA MBA (Finance) 11

MOCK EXAM CASE STUDY (Question 1 in Exam)

The latest financial statements of eThunder shows the following extract:

Combined company valuation and performance

© Chow Kim Tai CA (M) FCCA MBA (Finance) 12

Combined company weighted average cost of capital (WACC)

Real options valuation

© Chow Kim Tai CA (M) FCCA MBA (Finance) 13

(a) Advantages of organic growth over acquisition:

Advantages of acquisition over organic growth:

1 point with explanation 1 mark (max 8 marks)

Evaluation of takeover of eThunder

Revaluation of TAC Company

© Chow Kim Tai CA (M) FCCA MBA (Finance) 14

Assumptions/Limitations of the valuation:

Each point with explanation 1 mark: max 3 marks

Appendix 1 (Part (b)(iii))

Evaluation of takeover of eThunder by TAC

Sale of eThunder drone manufacturing business ________ (1 mark)

Less: Value of TAC now (Part (b) (i))

Value of eThunder now _______ (1 mark)

Less: Premium of takeover ________ (1 mark)

Net gain ________ (1 mark)

Revaluation of TAC company (Part (b)(i)) (3 marks)

© Chow Kim Tai CA (M) FCCA MBA (Finance) 15

Revenue (10% growth)

PBIT (22% revenue)

Less: Tax 22%