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@mhmdfazil said:
“Correct me if I’m wrong…!! :(“U r right………but three marks for this only????
@mhmdfazil said:
“The question specifically said that solving the problem is not necessary…!!
You have to.
(i) Identify the variables (Say D1 = Proportion of D1 investment undertaken, D2 = Proportion of D2 investment undertaken…. etc…)
(ii) Identify the objective function (Maximize NPV = 380D1 + 400D2 …. etc) (I’m just making up figures.. used as they were in the paper)
(iii) Non negativity constraint
( 0<=D1 + D2 +D3 + D4+ D5 <= 1)
(iv) and the capital constraints
e.g : Period 1,
(1200 D1 + 1500 D2 + …….+ 2500 D5 = 9000Possibly I wasted my time on this ……………!
@mhmdfazil said:
” I think a Linear programming model was required.. Not profitability Index. This was a multi period capital rationing.. PI’s are only for single period capital rationing…”Then how that part should be tackled
@thieuson
for capital rationing i assumed invetsments are in PV values…………coz i was going out of time that was only 3 marks questions and then on basis of profitibility index distributed capital budgets……..what u say???
Yessss I wrote like that !!!!!!! and commented that since debt has reduced MV of equity should be increased as shareholders’ risk have decreased…..and some general cooments…………..what abt Q4 sensitivity????
In capital rationing for sensitivity i divided calculated NPV with number of units of and NPV per unit and commented that if S.P decreases by this amount NPV would be zero right?????????
Hey for Economic Risk I translated amount that are in MR @ first spot then devalued rate by 20% and then value and difference is loss…am i right?
I think ………try to solve Questions from past papers (I know most of the questions are from Kit surely but that will give exam style impression) and once again try to make answer plans i.e just planning means 8 marks expected 8 ideas…..like this…..!!!!
Theory would be also good option specially Chap 2,5,7 from BPP..
100 shares are included because we have multiplied $ 22.41 with 100 to get
$ 2,241…. U can solve with only 1*C% then $ 22.41 will be used and nominal par value will be 100 i.e ($100) @ T-0…………No lender pays $ 10,000 for each bond (1600000/10000) and he will have warrant attached with each bond (means at repayment automatically lender will be able to own shares)…….and present value of each bond today is $ 2,241. You can say that lender has paid excercise price in form of bond i.e $ 10,000 for each bond.
U can say that at T0 it seems that lender is in loss but $ 2241 just value of call when lender gets share (5 years interests) price may change …U can also check this with 6.6% coupon rate so u will get interest also…
Each warrant is comprising 100 shares that’s why have been included in working
We are using Value of Call because question says lenders are ready to offer finance against loan notes having warrant attached ,so repayment would be at par in form of shares….so value of shares using BSOP is $ 2234…
I think there is only value of call adjusted with initial investment ($ 10,000) and giving value of $ 7.7K
Collar hedge criteria (“FLOOR” in case of Borrowing and “CAP” in case of Lending) should be specifically given in exams. If we are borrower (7%) and u want max/cap and similarly we set min/floor (5%) to minimize our premium cost….Ideally examiner will tell us that about that min/floor to set set like How collar hedge would be structured at 5%…Am I right????
In mutually exclusive projects with IRR approach we have to see not only rate of return but also amount of return too…so in above example amount of return is more with lower rate (i.e 14%)….
One an other reason for this problem is IRR is relative measure (%s) whereas NPV is absolute measure (no confusion of rate-direct amount in $)
Yes ideally lunch is accepted as insignificant courtesy and doesn’t give rise to threat….
Hmmm but i think if we take average price and calculate number of contracts that would be acceptable also…
Yessss I did the same and question has specifically said to do like this otherwise in article its compounding…………….so we have see question also for exception