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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 valuationWe 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
Yes 35, sorry made a typo
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
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Although the questions was fair I stuck and couldn’t attempt the questions due to keyboard and mouse issues. Keyboard was quite hard and mouse was really like real mouse. Fed up with this things. My so much hardwork and preparations have gone into vein.?
The NPV and APV qn.
Do u remember the marks allocated?
And the VAR qn what was the marks allocated.
Do u rememberI think
in Q1;
Wacc (6)
Npv (7)
Apv (9)
(10) for discussion, splitting into 5 each
(4) professional marks.Q3 was,
Interest Rate risk hedging, FRA, Futures, Options (15)
Value at Risk (4)
Centralised Treasury Dep (6)How did you approach the discount rate Q in the first question? Did you find the Kei of the wind power business to find the Asset beta of it? Or used a different approach
ranganaherath wrote:Yes 35, sorry made a typo
How did you find Kie of S without Kd? we were given cost of equity and D/E proportion only for that entity
Hey, i did it the same way,
Al though i didn’t use the Kei formula, i used Ba and Be , the weighted average beta was already given which was the total Ba of Zuchhi , it was like zucchi beta =0.6x + 0.4* wind power company beta,I ungeared both companies equity betas to get Ba of both companies and then we used it in the above equation to get the x (beta of motor manufacture) , It took some thinking to solve this question , but i am confident i got it correct and so did you.
Also for the APV part, the tax shield discount factor had to be used from 2-5 because of one year delay, I got APV as +5 million, NPV -1 million
Effective rates for the interest risk management questions i got
Fwd-4.75%
futures-4.8%
premium-4.91%I was very close to attempting the M&M Kie forumla on the S company as I was aware of the asset beta problem of Liyu. However, when I couldn’t see their Kd, I scrapped it and decided I was wasting too much time on it and instead just plugged the Liyu asset beta in to the capm formula to get an ungeared Ke and went with that.
Hope they give on or two marks out of the 6 for using capm and going with KeOpss I forgot to apply the delay on the tax shield. Had it in mind when reading the question but I think I forgot to apply it when doing the financing side effects part. Hopefully that wouldn’t count for much. I made an assumption and stated that the issue costs were included in the loan to the total loan was 82Mil I couldn’t remember seeing whether it was financed through available cash and was short of time to read the case again so just stated the assumption and went ahead with it. I got a negative 5 NPV and postive 1 APV. Opposite of yours but still the recommendation would’ve been the same. Let’s hope for the best
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