AFMACCA AFM exam was – September 2021 Exam – Instant Poll and comments

I had the following questions: 1) Company wants to build some construction. Pros and cons of using debt Get asset beta based on equity beta from competitors (calculate market value of debt and equity; adjust asset beta for one company 20:80). Calculate yield and market value of debt Calculate equity beta, gear Calculate market value of debt and equity Calculate WACC Write report (but there wasn't much to write???) (I did not have to calculate NPV or APV... or did I miss that???) Explain why APV may be better than NPV Can they use securitisation on the new construction for future investment? 2) Hotel company bought restaurant company, it's not doing well. 3 options: Shut down Restructure Sell Explain what MBI is Show balance sheet after restructuring Create valuation with FCF and growth model Talk about MBI: how much do they need to raise; what valuation How would company decide what to do? 3) Multilateral netting: show table and cash flows Forward and money market: simple calculation Explain when to use forward contract vs money market What policies does company need for derivatives

sorry I duplicated my answer

Hi I had question about securitization of assets 6marks NPV calculate APV calculate and pros and cons Report Interest risk hedge and calculation options/ futures/ FRA 25marks Synergy after merger Question about treasury function centralisation (company is considering foreign investment) what factors would affect centralisation 25marks

You got really nice one! I wish i had this Mine was difficult?

@tbm 13 you got really nice paper! I wish i had this Mine was difficult :(

Paczi88 Same But Q3 was different

Mine was ok but chances of passing are remote second attempt…

What was the cost of capital and cost of equity and they mentioned rf will be the bond a ytm what was this ?

I had the same paper. Did you use the M&M formula to calculate the asset beta of the wind power business using the S Co cost of equity ? What was the APV you got? Also for the interest rate hedging What was the one which gave the best effective rate? For me it was the forwards followed the futures and then the options

Yes FRA give rate of 4.75 then forward 4.80 and option 4.912

Q1 -Factors to consider for debt finance compare to equity finance -Estimate average asset betas -Estimate cost of debt, cost of equity and cost of capital -Justifies and i think advise on estimate calculated above -Apv vs npv _Secutisation of income i think Q2 Hedging payment if interest increase to 4.4% -FRA, futures and options and recommendation FRA lower and options highest -Value at risk for Npv -Centralized treasury dept Q3 -Calculate expected sales and Impact on FS and EPS -Comment on directors view not to improve liquidity and to keep NCA i think Feasibility of selling division and if co. Agree to it something like that

was unhedged better than the option for the interest rate question?

Hi i had the same set of questions. In the question 1 I don’t remember this question- Factors to consider for debt finance compare to equity finance. For how many marks it was asked? I think I overlooked it and might have missed it. I completed the whole paper except that one Anyways the time would not have permitted me to write that question. Kindly reply

I think it was for 8 mrks Apv vs npv 6 mrks Discussion on estimates 6 mrks Estimate asset beta 7 mrks Ke kd and wacc 13 mrks Secutisation 6 mrks Professional mrks 4 mrks Can someone check if this is correct for Q1

How did you guys answer about the revised cost of equity for question 1? I used only the figures of Forttu Co I ungeared it to obtain the systematic risk and then regeared according to the required company's MV of debt and equity to obtain equity beta of the required company. Then I computed the revised cost of equity. Anybody came up with the same solution?

What expiry date you used when choosing futures. I was so confused, transaction is 1st of Sep so at first at picked December's futures then I went for September, thinking that it expires at the end of the month, leaving 1 month unexpired basis.

Same here one month unused basis and September future contract unused basis was 0.25*1/5= 0.05

I have used both competitors but i think i have done wrong

You used fra 4-9 or?

Yes and i think it is correct and inc by 0.7 means 3.7 less 4.4 inc in libor

@lkleponyte "What expiry date you used when choosing futures. I was so confused, transaction is 1st of Sep so at first at picked December’s futures then I went for September, thinking that it expires at the end of the month, leaving 1 month unexpired basis" That sounds correct to me.

@pacmq "I used only the figures of Forttu Co" You had to use both companies. I think the question said 50:50 weighted (rather than by market value). Forttu had the complication that their business was 80% other and 20% construction. So you had to adjust the figure.

Hiii did it have extra info regarding the competitor that we did NOT need to use ...the info on the division which was not the scooter maker??

Generally when selecting the futures or options expiry date we go with the one that's closest to expiry after the transaction date right? So I went with September since the transaction was on the 1st of September and it said that the basis reduces to zero and expiry is at the end of the relevant month. For contracts I got 38 For the premium I got around 18,000 odd and the effective rate was lowest for forward but I mentioned about the counterparty risk when giving a recommendation

@siwela1 They had info about 3 companies The main company Zhichi Co or something which was looking into getting into the motor scooter industry Liyu Co which already had the asset beta given but 60% of the business was motor scooter and 40% was wind power business Then S Co which was involved in wind power business. Which only had the cost of equity given and it's debt to equity ratio of 20% to 80% To my approach was to find the asset beta of the wind power business using the ungeared cost of equity (Kei) using M&M 2 formula. It was a real headache finding the value when using spreadsheet and having no scrap papers to work it out. Then used the Kei to find ungeared beta (asset beta) using the CAPM formula and took that as the asset beta for wind power business and then used the appropriate ratio of 60% to 40% to find the asset beta of the motor scooter business. And then used the asset beta to find the cost of equity since they say Z Co is all equity financed asset beta is equal to equity beta so I assumed that and used it in the CAPM formula to find the discount rate. It was way too much work for 6 marks I should've simply assumed some figure and gone about with it. Would've helped me save some valuable time to spend in the last question but that is ACCA for you. Hold us up in the 1Q but it was my bad I should've gone with an assumption

The exam was fair but couldn't even write the report,that makes me sad. Qsn 1 NPV APV calculation of DF using the proxy CO's Betas which required some ungearing and apportioning the Ba per department or business unit Section b IR hedging and business valuation

We wrote the same exam,it was fair but time did beat me in the exam. Left the decentralization question and VAR question plus could not even finish writing the report. Part 1a question skipped it also due to insufficient time

Hey,did I fail to read the question? Because it wanted the discounting factor assuming that the project is all equity financed, which meant that there was no debt hence we only had to use the Ba to calculate ke ungeared.my thought

No of contract are 35

Yes 35, sorry made a typo @dee05 Yes it is the asset beta of the motor scooter business only. However Liyu Co had two businesses under them. 60% and 40% So to find the motor scooter business asset beta alone we have to apportion the total asset beta of Liyu Co according to the asset beta of motor scooter and wind power business. To find the asset beta of wind power thing we have to find the Kei of S Co and through that using CAPM find the asset beta of it ( the third company which was given who was said to be involved in the wind power business) Then use that and apportion accordingly to Total asset beta of L Co = Asset Beta of Motor scooter × 60% + Asset beta of wind power × 40% Solve this to find the asset beta of motor scooter and use it to find the Ke of the Z Co (which is the discount factor if all equity financed) This is the thinking I had, it may not necessarily be correct. So don't think that this is the correct way to do it. As long as you've stated your assumptions you're good to go