Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Required:
- Discuss the process of determining the fair value of the asset acquired from VLB as prescribed by MFRS 13 Fair Value Measurement.
![Gramax Health Bhd (GHB), a company operates in a health industry, is working in a project to
develop a test kit that is able to determine the level of immunity a person has towards Covid-
19 based on his or her antibodies with higher accuracy rate compared with other similar test
kits that are available in the market. In a recent business combination, GHB acquires a research
and development (R&D) project of Vital Life Bhd (VLB) to develop a similar test kit with the
one it develops. GHB does not intend to complete the project that had been acquired as it would
compete with its own project. Its main intention to acquire the project is to prevent its
competitors from obtaining access to the technology.
Meanwhile, as part of its effort to fund its R&D projects, on 31 December 2019 GHB issued at
par in a private placement a RM3 million 5-year fixed rate bond with an annual 10% interest
coupon rate. On 31 December 2020, GHB's credit spread has deteriorated due to a change in
its non-performance risk. If the bond was issued on 31 December 2020, the instrument would
need to have an interest rate of 11%. In reducing its reliance on third party service, GHB also
plans to acquire Magnificent Sdn Bhd, a local transportation company. Magnificent Sdn Bhd's
estimated cash flow (before tax) for the next four years are RM167,500, RM182,200,
RM191,300, and RM198,300 with probability of attainment of the cash flows are 95% for the
first two years and 85% afterwards. The cash flows of Magnificent Sdn Bhd beyond year four
is expected to be indefinite. The estimated weighted average cost of capital for Magnificent Sdn
Bhd is 9% although it is expected that an additional risks premium of 1% will be applicable to
Magnificent Sdn Bhd due to its smaller size and unlisted status. GHB accounting year ends on
31 December.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F04e1183c-72b4-44b7-ac13-b292c356863e%2Fb6b65156-fc62-411b-957c-4b40be90d782%2F58ul3d_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Gramax Health Bhd (GHB), a company operates in a health industry, is working in a project to
develop a test kit that is able to determine the level of immunity a person has towards Covid-
19 based on his or her antibodies with higher accuracy rate compared with other similar test
kits that are available in the market. In a recent business combination, GHB acquires a research
and development (R&D) project of Vital Life Bhd (VLB) to develop a similar test kit with the
one it develops. GHB does not intend to complete the project that had been acquired as it would
compete with its own project. Its main intention to acquire the project is to prevent its
competitors from obtaining access to the technology.
Meanwhile, as part of its effort to fund its R&D projects, on 31 December 2019 GHB issued at
par in a private placement a RM3 million 5-year fixed rate bond with an annual 10% interest
coupon rate. On 31 December 2020, GHB's credit spread has deteriorated due to a change in
its non-performance risk. If the bond was issued on 31 December 2020, the instrument would
need to have an interest rate of 11%. In reducing its reliance on third party service, GHB also
plans to acquire Magnificent Sdn Bhd, a local transportation company. Magnificent Sdn Bhd's
estimated cash flow (before tax) for the next four years are RM167,500, RM182,200,
RM191,300, and RM198,300 with probability of attainment of the cash flows are 95% for the
first two years and 85% afterwards. The cash flows of Magnificent Sdn Bhd beyond year four
is expected to be indefinite. The estimated weighted average cost of capital for Magnificent Sdn
Bhd is 9% although it is expected that an additional risks premium of 1% will be applicable to
Magnificent Sdn Bhd due to its smaller size and unlisted status. GHB accounting year ends on
31 December.
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