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I see.
So in a more normal direct question, say:
Initial combined value is $2,200
Cash payment is fixed at $200
New combined value is $2,000 (2200 – 200)No. of shares 1,000
Share price $2 ($2,000 new combine value / 1000 shares)Payment by shares $400 (200 shares * $2)
Total payment $600 ($200 cash payment + $400 shares payment)Is this understanding correct?
I get it now. When it is an option to expand, the additional expansion option benefit is added to the initial NPV. When it is an option to delay, the entire benefit of the delay is the new NPV.
Thanks, John. I have the same idea too. Basically, every section (A to E) has a few technical skills that need to be learned. The volume that needs to be learned is actually not that much. I am thinking of just running through your lecture notes (which have my own points and notes added) one month before the exam and then doing the questions to test my knowledge and strengthen my techniques.
mrjonbain wrote:In exam terms and in real world terms, a lot of this involves de-gearing and then re-gearing in order to ultimately get appropriate cost of finance for a given project. It’s simpler than it sounds but harder to explain without a question. Beta is probably best thought of as a measure of volatility for a sector. Excluding debt component is useful in this context to get purer idea of risk. It is similar to reason why return on capital employed is generally better metric of comparison between companies than return on equity because a highly geared company will show better return on equity purely based on its decision to debt finance it’s operations. Particularly in decisions involving acquisitions, return on capital employed is a better measure as ultimately if you take over control of company then you will determine the level of debt to equity with which you wish to finance the operation. Sorry for long explanation. Hope it is of some help.
Thanks a lot for the explanation. It makes more senes when brought into the real world context.
For my better understanding, is the sector beta calculated by the average movement of the sector vs the market as a whole? I assume this is considered the asset / ungeared beta for the sector regardless of the various levels of gearing of the companies within the sector. Some companies within the sector could be higher and some even lower than the sector beta? Or did I misunderstood how the sector beta is calculated?
Hi John,
Sorry, I need to rephrase. VAR is positive but it is higher than the average.
It was in an example in the BPP textbook whereby NPV for 4 years is $2mil and standard deviation for 1 year is $1mil.
At 95% confidence level for the 4 years, it is 1.645 * $1mil * square root of 4 = $3.29m.
Using $2mil to deduct $3.29m, I get -$1.29m. Does this mean that I am 95% confident that the return will be a loss of $1.29m and there is less than 5% chance that the loss will be greater than $1.29m?
Thanks John. This is just for my own understanding. Really appreciate your help!
Thanks John. Do I need to deduct issue cost from market value when calculating IRR / Kd?
Thanks for the explanation John.
Suppose I invest in 10 companies with lower gearing, thereby with lower equity beta and lower total systematic risk rather than investing in 10 companies with higher gearing. In this sense, I am reducing my total systematic risk (lower weighted average equity beta) even though I am investing within the same sector with same asset beta. Can this be seen as diversifying away some of the systematic risk (even though theoretically systematic risk cannot be diversified).
Thanks for the explanation. I understand that systematic risk is the risk that can’t be diversified away and is equivalent to beta.
Suppose that A is in a sector where asset / ungeared beta is 1.5. A has gearing and thus equity / geared beta is 1.8, an additional 0.3 beta. This is actually company-specific as other companies might have other levels of gearing or not at all. Assume that I buy all the shares of the companies in this particular sector, couldn’t I in theory be diversified enough that the 0.3 additional beta be neglible? Of course, it could be that other companies are geared in the same level or higher and thus the 0.3 could be even higher.
I understand that the definition of systematic risk composes geared and ungeared. Business risk / ungeared cannot be eliminated but the geared beta (debt portion) is debatable in my opinion. It’s not going to affect the exams but I’m just trying to understand this portion.
Not sure if I’m right but I will give it a try.
Interest is an expense and therefore a P&L item so it is subjected to the NOPAT definition. If it is added back to profit, then the amount is subjected to tax and therefore only the net-of-tax amount is added back.
R&D, marketing, provision and non-cash items are added back not as expense items as these costs should not be deducted in the first place and should be capitalized just like an amount spent to buy fixed assets rather than being an expense. The amount capitalized is therefore not subjected to tax and no further adjustment to tax is needed for these items capitalized.
The examiner was even praised for the well-balanced exam, which I think is B….
Something is very, very wrong. I got 49 last June but failed with 34% this time. This was my most confident paper so far but I did worse than before and even P4, which I expect to fail anyway. ACCA should sack the examiner.
Thanks Delfia!
This is so simple. How could I have missed it.
I am sure that the stress is getting to me.
I am wondering if I should give up P4 this time round. I did not touch the book at all before this and I have only 7 days to revise the subject.
This is a really tough and technical subject. I have always managed to get through other subjects with 1 week or less of studies before the exam for other subjects except P2 and most probably P4 this time round.
It sucks.
