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FAE 2013 Mock Exam

FAE 2013 Mock Exam. Primary Indicators. Prepare a comprehensive and motivating one page summary of MIL’s mission strategy Prove that the group do not see the full value of MIL

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FAE 2013 Mock Exam

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  1. FAE 2013 Mock Exam

  2. Primary Indicators • Prepare a comprehensive and motivating one page summary of MIL’s mission strategy • Prove that the group do not see the full value of MIL • Prepare an assessment of what impact the possible sale of 30% of MIL may have on the share price of the Mayflower Group • Calculate the impact of the sale of the 30% stake of MIL will have on the group financial statements including journal entries

  3. Primary Indicators • Classify the Internal Audit findings and explain your logic for each • Consider the issue with regard to the staff who have a moral dilemma (three step approach; identify the issue; clarify and evaluate; action and review) • Consider the position of the MIL board • Provide advice on which MIS we should go for

  4. True economic performance of MIL • PBT per forecast results €600 • Reverse the allocation of R&D – there’s a strong argument for reversing all of the €2,100 as we’re told on page 10 that the group don’t do any R&D for MIL • Group administration costs should be allocated based on something like turnover rather than employee numbers as we don’t subcontract out staff costs – therefore add back approx €1,500

  5. True economic performance of MIL • Transfer pricing • 50% of consulting sales is intercompany priced at VC + 10% (€2,420 *50% * 110*) = €1,331 • Total sales = €3,993 meaning that the other half of sales are charged out at (3,993-1,331) €2,662 • As a result we’re undercharging the intercompany sales by €1,300

  6. Economic value of MIL • Profit per management accounts €600 • Group R&D €2,100 • Administration costs €1,500 • Transfer pricing €1,300 • True profitability €5,500

  7. Impact on the share price of a 30% disposal of MIL • Current market value of MIL (using PE of 8) • €600*.8*8 = €3,840 (pre tax profit 600, tax rate 20%) • Realistic value of MIL (based on AME and a PE of 22); • (€5,500)*.8*22 = €96,800 • Current value of MG equity = 400m shares at €1 = €400,000 • Take out the €3,840 • Increase it by the cash we receive on selling 30% of MIL (30% * 96,800) = €29,040less 20% CGT = €23,232 • Add back the value of the remaining 70% of MIL (96,800*.70) = €67,760 • Total = €487,152 (or €1.22 per share) • (error in solution, uses 400 as current earnings instead of 600)

  8. Mission Statement • Not excessive in length! (one page summary MAX – as per the case) • Part of a plc • Aim to be leading RCV manufacturer in Europe • Will invest in R&D • Will attract best people • Will invest as necessary • Link with manufacturing • Importance of consulting

  9. Internal Audit considerations

  10. Accounting for disposal • IFRS 10 – didn’t lose control, continue to consolidate • Based on my earlier valuation (ignoring tax charge) €32,208 • Dr Bank (less transaction costs of 200) 32,008 • Cr Payables 200 • Cr NCI (net asset value * 30%) 900 • Cr equity 30,908 • No impact on earnings • Transaction costs go to equity • Disclosures re NCI on face of SOCI and SOFP

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