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1. In the part (a), where can I find growth rates of 5% and 4% for Burcoene and PetroFrancais ?
2. In part (a) Where did the answer sheet get 7.31 in the calculation of the time value in option value
3. After question 2, answer calculated 17.42 million. Frankly, I have difficulties understanding this part. Why do the answer have multiplied with (1-0.05)^3 x 0.8 to get 17.42 million ???
I really do not get this part.4. In part (B) in validity of the free cash flow to equity model, how did the answer get 12.5 billion ?
5. Moreover for the same part (B) (i), how did they get the estimation error of 1.9% and 5.3% as it was not mentioned in both the answer sheet or the question ?
1. You are given 4% in the first paragraph of the question. You are given 5% in the second paragraph of the question.
2. The question says ‘Your estimate is that the options have a time value of $7.31’
3. The question says that there is an attrition rate of 5% per annum. To reduce by 5% a year for 3 years, we multiply by (1-0.5)^3. The question also says 20% are expected not to have achieved the standard of performance required – the reduce by 20% we multiply by (1-0.20)
4. Add together the MV’s of the equity and debt give in the question – this gives the total MV of the company.
5. (13.2 – 12.874)/12.874 = 2.5%. I have absolutely no idea where you are finding 1.9% and 5.3%. However, it is not terribly relevant – it wasn’t asked for and is just something you could mention in the briefing paper.
I assume that you are attempting questions yourself before looking at the answers? Just auditing the answers is not the way to prepare for this exam 🙂
Dear Sir
Your last paragraph:
I assume that you are attempting questions yourself before looking at the answers? Just auditing the answers is not the way to prepare for this examWould you mind elaborating on that please
There is nothing to elaborate! There is no point in looking at answers until you have attempted the question properly yourself. That is the only way to learn from past questions.
For example, the growth rate in the original posting were given in the question. It is easy to miss them, but by the time of the exam it is vital to get used to not missing things like that, and you get used to it by practice. Just looking straight to the answer and then trying to decide where they came from does not really achieve anything.
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