June 2011 q4

The question is a bit ambiguous.

The answer assumes that we will pay the 7M anyway, but then we have the option to delay spending the 35M to actually produce the game.
On this assumption, it costs 35M to exercise (Pe) and the value (Pa) is the present value of the flows that will then be generated.

Many times in P4 you need to make assumptions (just as you would in real life).
If you are not sure, then state your assumption and provided it is at all sensible then you will get full marks for doing things correctly on your assumption (even though you may end up with a different answer from the examiner. There is very often no one correct answer – the markers are good at P4 and will give you the marks.)

With regard to International and Singapore – I guess that there must be differences (otherwise there would not be a separate variant), but I am afraid that I do not know. I would guess that the most likely difference might be the tax rules in Singapore, but I am sorry – I have no idea at all about Singapore tax 🙁 )

However, the question Mercury was the same question and answer for both the Global and the Singaporean variant.
The examiners answer is correct, but he really does make it look ridiculous (it was set by the previous examiner who was removed a few years ago).
You do not need to calculate the tax adjusted gearing at all. All you need to do is to use the asset beta formula from the formula sheet, together with the fact that if you combine investments in two areas that have different betas (as in this case) then the overall asset beta will be the weighted average of the individual asset betas.
Why on earth the examiner did not simply use the formula that he gave on the exam sheet defeats me (this is probably one of the reasons that he is no longer the examiner 🙂 )

If you can possibly get hold of a revision/exam kit produced by Kaplan or BPP, then you will see that their answers get the correct answer a much more logical way using the formulae on the formula sheet.