[Simone]

OK – That’s fine. I understand that, but earlier (Saturday) you said that the first question was Debt, and the second question was equity… that’s why I got confused and asked how will I know which is which if they both refer to Debt first in the ratio.

Thanks for your help.

[Simone]

LOL great… thanks. I will try to figure it out myself.

[Simone]

Sure no problem. Thanks for helping. Questions are below:

199
Shyma Co is a company that manufactures ships. It has an equity beta of 1.6 and a debt:equity ratio of 1:3. It is considering a new project to manufacture farm vehicles. Trant Co is a manufacturer of farm vehicles and has an asset beta of 1.1 and a debt:equity ratio of 2:3. The risk free rate of return is 5%, the market risk premium is 3% and the corporation tax rate is 4%.
Using CAPM, what would be the suitable cost of equity for Shyma to use in its appraisal of the farm machinery project?

200
Leah Co is an all equity financed company which wishes to appraise a project in a new area of activity. It’s existing equity beta is 1.2. The industry average equity beta for the new business area is 2.0, with an average debt/debt+equity ratio of 25%. The risk free rate of return is 5% and the market risk premium is 4%.
Ignoring tax and using CAPM, calculate a suitable risk-adjusted cost of equity for the new project?

[Simone]

OK Thanks.

How do you know from the question which is debt and which is equity? To me, they are both referring to debt.
So in the first example debt is 25% and in the second example debt is also 25%

[Simone]

Thank you so much for your help, but I’m afraid I don’t get it, and to be honest I am not going to spend anymore time on it – I’m going to move on. Your initial answer of 3% makes sense and that’s the answer I got.

My frustration with BPP is that they throw in curveball questions and answers that haven’t be covered in the workbook and they provide no explanation in their answers. They just expect you to know how the answer was calculated. If we knew that, we’d all pass our exams first time without needing tuition.
Which is why I am seriously considering not using them for my PM exams in June.

[Simone]

Apologies.
I’m trialing BPP’s Stay Sharp subscription – The question is in Step Ladder 2.

[Simone]

The question is in the original post…

“The current terms are payment in full within 90 days, which Benden Co meets. The supplier has offered a discount of 3% for payment in full within 30 days.

Assume a 360 day year.

(4) Which is the annual percentage cost of ignoring the discount and continuing to pay after 90 days?”

[Simone]

Apparently it’s 18.54%, and they have used 3.09% to get to answer (see below), but I have no idea where 3.09% comes from…

This can be converted into an annual equivalent by multiplying 3.09% by 360 days / 60 days to give 18.54%.

Notes on incorrect answers

18.00% – incorrectly based on the cost of the lost discount as a % of the amount paid after 90 days (288/9,600)
3.09% is not annualised
3% again is not annualised or based on the amount that would be paid after 30 days

[Simone]

OK Great – thank you. I will remember to choose 15%.

[Simone]

OK so if I get 10.7% in the exam using 5% and 7%, would it be marked right or wrong?
Because how am I supposed to know which % will give me a negative result.

[Simone]

I can’t comment on whether Open Tuition is enough, but if you are referring to studying without actual tuition, whether it be in person or online classroom, then I think it all depends on your learning style and the amount of time you have to study and revise.

I have a learning difficulty so I find the pace of BPP classes way too fast for me (I can’t comment on Kaplan). The tutor was very unhelpful, however the revision tutor was really nice and often stayed late to help with additional questions – however, by that time it was too late for me as I was feeling very overwhelmed. Thankfully I passed the exam by the skin of my teeth.

For my March exam and I am doing self-study, which has allowed me to study at my own pace, however I have noticed that I do feel a bit lost without a tutor’s insight into how the exam is structured and when I am stuck on questions, sometimes it’s helpful to speak to someone in the here and now, rather than submitting questions and then waiting hours to get a response, especially if your daily study time is limited. So for my June exam, I am going to do a mixture of self study and invest in a private tutor for a few hours a month.

OpenTuition is a great resource, it’s been around for years, so they are obviously doing something right.
I would suggest that you try a mixture to figure out what’s best for you as everyone is different. Maybe for this exam, you could try just using OpenTuition. If the resources are enough and you pass the exam, then it’s all good!! However, your next exam might be a bit harder for you to get to grips with, and you might find that although there are loads of resources available on OT, you could benefit from having an actual tutor to speak to.
You can always start a study group too.

Hope this helps 🙂
Good Luck!

[Simone]

Sorry, when you say “If your answer is + choose 15″… what do you mean exactly?
I won’t know what my answer is prior to choosing the rate, so I’m very confused.

Also, I did as you suggested and plucked 2 rates out of thin air and I got the answer wrong.

6% convertible loan notes with a NV of $100 and trading at $108.51. On 31 Dec x9 the investors holding the loan notes might convert them into 20 ordinary shares.
The ordinary shares are trading at $5.55/share and have a NV of $0.50 per share. Tax is 15%

I chose 5% and 7% for the IRR
@5%:
Y0 Loan note (108.51) * 1 =(108.51) PV
Y1-3 After tax interest = 6%*.085 = 5.10 * 2.723 (AF1-3) = 13.89
Y3 Redemption ($5.55 *1.06^3) = 132.20 * 0.864 = 114.22
Total ( -108.51 + 13.89 + 114.22) 19.60

@7%:
Y0 Loan note (108.51) * 1 =(108.51) PV
Y1-3 After tax interest = 5.10 * 2.624 = 13.38
Y3 Redemption = 132.20 * 0.816 = 107.88
Total ( -108.51 + 13.38+ 107.88) 12.75

IRR= 5 + 19.6/(19.6+12.75) * (7-5)
Answer = 6.21%

Answer per text book using the rates 10% and 15% – again, they don’t say why they have chosen these rates:

10+3.45/(3.45+9.87)*(15-10)=11.3%

I thought that maybe I had put the brackets in the wrong place in the calculator, but when I edit my entry and replace my numbers with the ones from the text book, I get 11.3%, so there isn’t an issue with my input – it has to be due to the interest rates I have chosen.

[Simone]

What is “Floor value”? Is that another term for “market value”?

[Simone]

Thank you

[Simone]

No – I literally dont have a lot of time after working all day. I will just leave this one as it’s way above my head.

[Simone]

Thanks
So if a question like this came up in the exam, you’re saying I can just pluck 2 rates out of thin air??
– Sorry, I’m not trying to be rude, but I just don’t understand how that can be possible.

[Simone]

OK, so that’s yet another mistake in BPP’s text books. They gave the answer as 650 x 3.79. Spent ages trying to figure out where they got 650 from!!

Thanks for your help.

[Simone]

I failed on my first attempt, got my results today and passed.

Tips I was given:

1) Do pass papers… if you get some questions wrong, dont worry about it, move on to the next pass paper or practice test. There’s no point wasting time going over and over the same question because another paper will tackle the same question worded differently.

2) Make sure you learn key words and phrases… like “Substantive”, use words like “Agree the balance against… “instead of “Check”.

3) Be methodical in your answers, Give your answer and explain why your answer is right, and what the response should be, even if you think your answer may be wrong, or you do not even know the answer.. you should still write something. never leave a question unanswered.

4) Book your June exam NOW! and start studying a few hours per week… give your brain time to take in the info, rather than leaving it until the last min.

5) drink loads of water and take regular breaks.

Good luck! you can do it

[Simone]

Why is interest calculated on top of interest?

[Simone]

Hi Mike,

Sorry but I’ve just tried to do a similar question and I got the answer wrong.

I don’t actually understand this as much as i thought I did.

Why are we calculating interest on top of interest: 30m x 8% = 2,400 x interest again = $5976?

Not only that, but the 0.75 we included included to get 5976, will be added in again once the loan is redeemable.

To top it off, an additional 10% will be paid on top of all the other interest payable.

I’m totally confused… I feel like I should just accept thats the way it is rather than trying to understand why, but I if I am asked a slightly different question in the exam, i may not be able to answer it.

[Simone]

Yes, Thank you very much!

[Simone]

Not sure why it matters where you post the question.

I asked my Tutor and she emailed me this last night:

There are a couple of very small syllabus changes as follows:
*IFRS 15 Revenue from contracts with customers – replaces IAS 18 Revenue and IAS 11 Construction contracts
*IAS 41 – includes amendment for bearer plant based biological assets

[Simone]

Yes I’d like to know this too.

[Simone]

If I was take BPP’s answer to this question and apply it to the work environment, my Financial Statements would be incorrect, so no I do not think it’s not harsh especially when you consider the amount of money we pay BPP.

Their answers always seem to be final… there is never explanation for why the answer is right. I shouldn’t have to spend my weekend trying to find other resources to explain an answer or have to bother my manager with these questions even though I secretly know he likes it.

There are a few other inconsistencies I noticed yesterday on the revaluation of assets… one example clears all the accumulated depreciation prior to revaluation and then reposts depreciation on the revalued amount from the date of acquisition, another leaves accumulated depreciation as it is, and posts the current periods’ depreciation based on the revalued amount.
– All very confusing…

[Simone]

Mike,

I spoke to my manager.. he is the CFO. Here is his explanation:

Unless there is an active market, it should not be revalued. Intangible assets are strange things – unless there is a buyer, then it is not possible to revalue as there is no way to gauge what the actual value is at a specific point in time.
A good example would be the pharma market, say a cancer drug designed by GSK. GSK may be able to make a lot of money from holding the patent on that particular drug but they can’t say with any certainty what the value of the patent is because no-one has bought it. There may well be an active market in cancer drugs generally so they may estimate that the patent’s value has increased but until they actually sell that patent, they have no way of knowing what it is actually worth – at least not with any sufficient degree of certainty to be able to book the increased value in their accounts
—

Although Patents aren’t frequently bought and sold, it would be incorrect to assume that because a patent is unique there is absolutely no active market for them, therefore BPP are incorrect in their interpretation, and your article in the link is correct.

Thanks 🙂

[Author]

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