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And I am not sure, but I recall my cost of capital for Fodder was 10.5%. Anyone here agrees?
Of course, the cost of capital for the combined company would depend on your valuation of fodder, we had to weight the beta alpha according to market capitalization, then progress towards calculating the combined Beta equity, moving on to CAPM, and then moving on to WACC calculation, where we would be borrowing at 6.4% (combined company).
I dont quite remember my values, but ya even my Pa and Pe were in 40s…I guess 43. something and 41. something million; value of option was I guess around 8 point something.
And question 2 was very easy, you just had to calculate the lockin rate. Subtract from the futures rate today’s spot. This difference would have closed down in 5 months, and it was actually 0.0080. At the end of the 4th month (this is when you will be selling your $ receipt), your REMAINING difference would be 0.0080/5 which is equal to 0.0030 if I am not mistaken. Just deduct this from today’s future’s price and you will be get the lockin rate, which would be your effective rate of transaction at the end of the 4th month.
Forward was your best option though; it gave you the most receipts. Then part b wasn’t tough once you knew on which rate to transact at (which was forward rate).
C seemed easy but I ran out of time. I left 30 maarkkssss and i KNEW the answers…I just wish they would give us like 30 mins more! Its humanly impossible to complete the paper AND get it right in such a tight time frame :'(
I am going to give p5 in next attempt; not going to risk my qualifying attempt with audit again. What a bulldozer!! I would really like to see Lisa trying to tackle all the questions in the allotted 3 hours!
Sorry for the absence; I realized I was seriously lagging in p4 preparation…I am so0o0 sc…never mind 🙁
And well yes, thats exactly how you do it. 🙂 There is a related post regarding Interest Rate Parity, where the confusion was which rate to use as the numerator and which one to use as the denominator in the formula above. Its a very straightforward process actually but if you do get confused over the same issue, read the posts at here and you should be fine 🙂
Happy studying!
Okay, here is how to remember this…go with the concepts.
When you are buying CALL options, you are buying a RIGHT to buy. Right? =p
Should you choose to exercise this right, you will have to make an outflow of exercise price (you will be buying the commodity at your exercise price whereas the actual spot at that time would be higher than the exercise price, giving you an advantage). However, this is not the only outflow from your part; you have already paid a premium to purchase this option therefore in the case where you do exercise the option, your total outflow would equate to exercise price + premium already paid.
Obviously, you, as the company would hate paying more, and would look to buy an option which would allow you the minimum outflow. Therefore, add the exercise prices and premiums of all the options and compare. Then choose the lowest one..For put options, you are buying a right to sell… so when you actually exercise your call option, you will end up receiving money. For example, you bought a put option with an exercise price of 1.50 CU. The spot went down to, say, 1.40 CU on a later date. Now, if you were transacting at spot, you would have to sell the commodity you are holding at 1.40CU, but thanks to the put options you have, you can sell the same commodity at 1.50CU resulting in an inflow of 1.50CU. However, this will not be your only cashflow. Remember you paid a premium in order to buy this option in the first place, in this case, let it be 0.08CU. So, essentially, you are receiving 1.50CU at one hand, but on the other hand you are also paying 0.08CU, meaning in net, you are only receiving 1.42 CU (1.50 – 0.08).
Again, its rather obvious that you, as the company, would love to gain as much as you can, hence you will calculate the net put values of all the put options as shown above, and choose the one which gives you the highest receipt
Now about the question your teacher did @nikitasia, was your company selling a put option by any chance? In such a case, you would add the premium as you would be receiving the premium from the purchaser but in the case where the buyer exercises the option, your exercise price will become your cash outflow.
Easiest way to work this out is by being consistent.
In the formula you have quoted above in your first comment, overseas inflation rate is taken in the numerator, whereas domestic inflation rate is used in the denominator.
Therefore, the spot you use should be quoted as Overseas/Domestic.
Compare this to the bpp solution you have given above. The rate was given as US dollar/dinar. Therefore, this rate is divided by (1+US rate)/(1+dinar rate). Note how US dollar and US rate both come in the numerator, and how the dinar and dinar rate come down in the denominator. You should be consistent when multiplying the two; like with like.
Hope this helped.
you gross up the cost of debt when issue costs are included in the value given. For example, if the question says that you are investing dollars 800,000 including issue costs, it means that you are going to raise debt of more than 800,000, so that when you deduct the issue costs, you get a net amount of 800,000.
so for eg, if issue costs are 5%, you will have to raise (800,000/95%) 842,015 dollars, 5% of which (42,101 ie) will go towards raising the finance, giving you a net amount of 800,000 to invest in your project (above figures are rounded to the nearest dollars, so expect negligible differences).
Quote:Well, if you do now understand it but didn’t before – do you not think that others may be in the same situation? Why not post a summary of your F8 tutor’s helpful explanation?2 weeks. 4 days. No reply.
tsk tsk tsk =p@Ivy,
If I am understanding the question correctly, you wish to incorporate the effect of the inflation rates to estimate what the future spot rate would be right? In order to do that, you will need to make use of Purchasing Power Parity, but before you can do that, you need to know the inflation rates for $H, $ and Bt. Though you have provided the inflation rates, its not really clear as to which inflation rate relates to which currency. Could you please specify which of the columns above reflect the inflation rates for $H, $ and Bt respectively?
Cheers!Quote:good post – it’s an area which I have never even considered important and so have never learned the difference. I’m grateful to you for educating me!Indeed its not that important!
Seriously, when you scan the p7 syllabus, pointing out petty differences b/w comparatives and corresponding figures is perhaps the last thing Lisa Weaver would consider asking, but its always good to know anyway. Might come in handy someday 🙂
Glad I could be of some help.As far as I can tell, both corresponding and comparative figures are there to allow users of the financial statements to compare current year’s financial performance with that of prior year(s)’. The difference is:
a) in the way such a comparison is presented, and
b) respective role of an auditor.Corresponding figures are “comparative” figures presented on the face of the financial statement. For example, if you have statement of comprehensive income and a statement of financial position for the year ended 2011, but also have figures for, say, 2010 right next to the figures of 2011 (two columnar statement), you are looking at corresponding figures. Corresponding figures are hence not complete financial statements on their own, and must only be seen and evaluated in correspondance with current year’s figures. If you get confused between the two, the best way to remember this is with the very spelling of “corresponding” figures; the word “corresponding” has two “Rs”, one right next to the other, so the financial information of two years would be presented side by side too, on the face of the statement. Hence the example in your second post @marionb is an example of corresponding figures.
When the entity is issuing corresponding figures, the auditor’s role is to only cast an opinion on current year’s figures, which in our case is 2011. Their audit report will not refer to the prior year statements.Comparative figure financial statements are slightly different. In these statements, your SOFP and SOCI will present current year figures. However, along with a complete set of current year FS, the entity will also issue prior year(s) FS attached within the same binding/book. These prior period(s) financial statements are in a complete form able of standing and being interpreted on their own and unlike corresponding figures (which are merely figures and not entire statements), do not form an integral part of the current year’s financial statements. For this reason, the auditor in his report will make references to these statements as well. The auditor may cast more than one opinion, for example, the auditor may qualify or include an emphasis of matter paragraph in relation to one statement, but may pass an unmodified report on the other statement.
There are other related issues as well, for example auditor’s response if prior period’s reports were qualified, or unaudited, or were unqualified by mistake. The key point here to understand is the differences in the auditor’s report. Both corresponding and comparative figures are there for the purpose of making a comparison, however, it is the auditor’s report that makes the major difference.
I hope the above helped you better understand the fundamental differences between the two types of statements. Happy studying, and best luck with the exams.
NB If anyone has any doubts about this, please do speak up. Above is what i could gather from my text books, but that does not guarantee the validity of my claims.
