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April 2014 CB1 question 19(I)

C

Chirag Wadhwa

Member
Can someone tell me in question 19 part (b), how the expected share price has been obtained?
 
Hi

Just checking - I think you're referring to April 2014 Q19 here?

This question part is rather unusual. The expected share price has been obtained by re-estimating the earnings allowing for the change in the amortisation of the manufacturing rights, and then assuming that the EPS is constant to use this revised earnings estimate to estimate the share price. Hope that helps in putting together the figures

Best wishes
Lynn
 
Yes, it was April 2014 paper.
Can you tell me how was the amortisation amount based on 15 years and the increase in earnings were obtained as I am not able to get it from the paper?
How was the revised earnings obtained?
 
On the original amortisation basis (from initial £400m, over 10 years), amortisation would be £40m each year.
So, after 1 year, at year ending 31 March 2013, value of rights is £360m.
If at that point change amortisation basis to do over 15 years from then, amortisation amount would be £360m/15 = £24m each year.

The revised earnings is then obtained by adding back the original amortisation for year to 31 March 2014 (+£40m) and subtracting the revised amount (-£24m) from the original earnings of £33.5m (which is EPS of 0.67 x number of shares 50m).

Worth noting that we're asked to state any additional assumptions made. I'd hope this means that we could make slightly different assumptions, resulting in different figures, and still get the marks on offer here.

Hope that helps fill in the gaps
Lynn
 
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