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I made it this time. am now an affiliate. my sincere gratitude to the entire opentuition team
let me try to answer the question for you student. from the information that will be given to you in the question you will be able to tell which to use. for exam you cannot use FCF without knowing ke and if there is any growth. you may have to calculate Ke and g anyway but from the information that will be given in the question you will be able to tell.
the other one us using the share price. but you cannot use it if you don’t know PE. thus if you are given PE in a question and given the number of shares and the shar price you can just use it. remember there is no one way to value a company. they are many. you use the one you can based on the information given. hope it helps
thanksi asked two questions. the other question was with regards to the strike price to choose. in the solution to past exam questions, the calculations have been done for both strike price before stating the one that is better. what if i choose the better option (comparing the strike price with the pemium) and do the calculation only for it
great John. thanks for the lectures. they will definitely help but we also need some on valuation of companies
its obvious that an item which is trivial will not be material but can something be trivial and be material i dont think so unless so many of such trivial items combine as you put it. what i think is that when something is trivial its obvious that it is immaterial
the exam for me was a disaster, i attempted question 2 and 3 first. they were ok but for the islamic finance that i have never read and i dont even know what it is all about. when i started question section a and b was not bad. when i reached section i didnt know what to do. i felt like leaving the hall. anyway let me taste failure for the first time. will take try it again in June with P7. maybe luck will be on my side. Sir John is always there.
thank you i think i now have an idea on what is happening. i am ready for the challange come tuesday
so if the mean is 50000 and the standard devaition is say 5000 it means with a 95% confidence level, there is a 5% chance that the maximum loss will be 1.65 x 5000 = 8250. am i right?
yes John i did try it in the other forum. so if i get you well, by swapping they will save 1.2% and if i then deduct the bank charges of 0.4%, the net gain is 1.2%-0.4% = 0.8% . this will give a net gain to each party of 0.4% since they gain equally. am i right?
i just posted an extract of the june 2014 question in the ask the tutor forum. if i follow the approach you gave above
CMC borrows fixed and counter party variable they will pay in total 2.2 + yield rate + 0.8 = 3% and CMC borrows variable and counter party borrows fixed they will pay 3.8 +0.4 = 4,2%
net gain for both parties = 4.2- 3 = 1.2% and if shared equally each will gain 1.2% if i am correct. how can i proceed from herei will help you by explaining and i hope you understand it because i am sure we will be meeting something like this on tuesday. 262.55 are the year four cash flows. thus if the perpertuity was to start from the year 3. use year 3 cash flows. the formular used is based on the formular P = D(1+g)/(re-g)
in this case D is the year 4 cash flows. but since our perpetuity starts from year 4 onward, in order to discount it to year0 multiply the answer from above by the year 4 discount factor. it is just a matter of copying from the tables. dont worry yourself using the perpertuity formular
hope it helpsthank you but i think i asked the question wrongly. i will look for the question and ask again there is a past question where they will gain by swapping
hi John i have some issues with the arithmetic here. in calculating tha future price from basis you subtracted spot rate from future price (1.4900-1.5100) to -0.0200, suppose i subracted future price from spot rate i will get 0.0200 instead. on the the date of the transaction the basis will have fallen to .0067 , to get the future price should i add this .0067 to the mid market rate (1.5250 +1.5370) = 1.531 or should i subtract it. in your lecture its subtracted. my question may sound stupid but but i have been having little problems like this and subtract or adding will give a different future price which will definitely determine if i exercise an option or allow it to lapse
thank youi will try to explain it to you in simple english. 95% confidence level means there is a 5% chance of making a loss. from the shape of the normal diagram there is a 50% chance that some will be above the mean and 50% chance that some will be below. those above the mean are the positive ones and those below are the negative ones. since we a looking at the negative side of things ie if things go wrong, thus subract 5% from 50 and you will get 45% which is 0.45 go to your normal distribution table and look for the figure that will give you 0.45. you will find that it lies between 1.64 will give you 0.04495 and 1.65 wil give you 0.4505. i hope it helps
NOW I WILL ADD THIS TO THE QUESTION IF ANYONE CAN HELPWHAT IS THE SIGNIFICANCE OF THIS 1.65
thank you john i think the problem was the way i was looking at it. i think i now understand. to conclude, with a call option if the price goes down but i had the right to buy at a higher price i will allow it to lapse and if it goes up i should exercise because i have the right to buy at a lower price and sell back at this price. with a put option i had the right to sell at a price but if the price goes down below what i have the right to sell at i should buy at the lower price and sell at the price i have a right to sell at f it goes up i should allow it to lapse because exercising will mean buying at a higher price and selling at a lower price
angelkay thank you but it sounds like what you are saying contradicts what John wrote. using the example i gave; with a call option John wrote if the price goes up to 1.6 and i have the right to buy at 1.5 i should exercise, likewise with the put option if i have the right to buy at 1.6 and the spot rate goes to 1.7 i should not excercise. i am confussed here.
i already asked the tutor the same question. look at an earlier post poseted by me. concerning the issue of adding the issue cost, the examinar stated that credits will still be given to those who did it that way. thus to me it seems like it is not a rule to always add. maybe different people treat it differently
thank youthank you John, I can see the exam is really full of tricks that one really needs to spot them
so you mean that if a question says annul reinivestment in plant and machinery = depreciation, should we still calculate tax on profit and then later add back the tax benefit on the capital allowance as in your lectures or should we deduct the depreciation figure as it was done in this question
thank you
