F2 Flashcards
Investment in Associate
+Cost
+Share of Post Aq reserves
-impairments to date
Methods an unquoted company can use to get a listing on the stock exchange?
IPO
Placing
Introduction
Differences between IPO and Placing?
Placings are cheaper
Placings are quicker
Placings require less disclosure of information
Placings mean more control to institutional investors (as they have more of the shares)
Sometimes there are restrictions on how much can be placed/minimum that must be offered to the public.
What is an introduction?
A methods of obtaining a quotation on the stock market, without needing to issue shares.
What is a rights issue?
A rights issue is an offer to existing shareholders to buy more shares at a lower price then the current market price, and in proportion to their shareholding.
What are primary and secondary markets?
Primary-for organisations to raise Finance.
Secondary-for existing investors to sell investments.
Formula for cost of equity with no dividend growth?
Ke = d/P0
Return/investment
d=regular annual dividend
P0=current share price
Formula for cost of equity with dividend growth?
Ke=d1/P0 + g
d1 is the next dividend (not this one)
P0 is share price exdiv
g is dividend growth
Increasing to decreasing risk type for investors?
-Least Creditors with fixed charge Creditors with floating charge Unsecured creditors Preference shares Ordinary shares. -Most risk
What do we mean by cost of capital?
The cost to the organisation for the capital they are getting.
Formula for g (growth in re-investment)?
g=r*b
Growth
Return on investment
Balance of profits reinvested
Formula for cost of debt (bank loan)?
Post tax cost of a loan=
Pre-tax cost * (1-tax rate)
E.g
8%= 10%* (1-20%)
Cost of debt (irredeemable bonds) (not tax deductible) formula?
Kd= I/P0
I=interest paid
P0=market value of the debt
Cost of debt (irredeemable bonds that are tax deductible) formula?
Kd= I(1-t)/P0
I is interest paid
P0 market value of debt ex-interest.
Types of Financial assets?
Held to maturity (like bond)
Loans and receivables (AR)
At fair value through profit or loss (Shares)
Available for sale. (As an investment)
Properties of a “held to maturity) fa?
Like a bond:
Initial measurement: At FV (transaction price)+ transaction cost.
Subsequent measurements:
“Amortised cost” method
Properties of “loans and receivables” FA?
Like AR
Initial measurement: At FV (transaction price)+ transaction cost.
Subsequent measurements:
“Amortised cost” method
Properties of “Fair Value through profit or loss” FA?
Like short term shares.
Initial measurement:
At FV
Subsequent measurements:
Fair value, (gains and losses go to P&L)
Properties of “available for sale” FA?
Like a long term investment.
Initial measurement: At FV (transaction price)+ transaction cost.
Subsequent measurements:
At FV, gains and losses go to the OCI. (Move to P&L when sold)
Amortised cost method, steps?
Given: Nominal value Interest rate Initial cash Payment Effective interest rate (IRR)
Then: Year 1 Initial cash cost Interest rate (above*effective) Receive cash (interest*nominal) End of year sofp: sum above.
Year 2 Start with carrying value SOPF above Interest Receive cash End of year sofp:sum above:
Types of financial liabilities?
And measurement
Most financial assets (AP, Loans, bonds) Initial measurement: FV - transaction costs. Subsequent measurements Amortised Cost
At fair value through P&L (Sell share "short", derivatives.) Initial measurement: FV Subsequent measurements FV (gains and losses to P&L)
Convertible debt, formulas for equity component and financial liability component?
Equity component=proceeds-FLC
FLC=PV of principal* + PV of interest rate*
*discount using market interest rate of equivalent non convertible debt.
What is double entry of convertible debt?
DR Cash
CR FL
CR Equity
Cost of Redeemable bond?
Use internal rate of return.
One rate
Second rate
ABAnANaNb
A + (B-A)Na/(Na-Nb)
What is a financial instrument?
A contract that gives rise to both a financial asset of one entity and a financial liability / equity instrument of another entity.
Derivative-what are the three characteristics?
Value changes in response to an underlying variable
It requires little or no initial net investment.
It is settled at a future date.
What is a provision?
A liability of uncertain timing or amount.
3 criteria of a provision?
Present obligation from past event
Probable outflow of economic resource.
Reliable estimate can be made
Two things a contingent liability can be, and their criteria?
A “possible obligation”, if something needs to happen for it to exist.
A “present obligation” -not recognised because:
- not probably that there is an outflow
- amount cannot reliably be measured.
Disclosure of a contingent liability?
For each class:
- Nature of CL
- Estimate of amount
- What the uncertainties about amount/timing are.
- Possibility of any reimbursements.
What is a possible asset?
It’s a contingent asset. Whose existence is confirmed by the occurrence of one or more uncertain future events.
