*** ACCA P4 December 2016 Exam was.. Instant Poll and comments ***

The paper was fair and with good time management one will easily score a pass mark.I did question 2 and for some reasons failed to see that premium was already calculated because I am used to see scenarios where premium will need to be calculated.

Question 4 was straight forward I did my best and was left with less than 1hr 30 mins to do question 1.

However I am hoping for the best.

@munpong96 said:
the cost of debt is already mentioned in question, valued at face value ($120m) for cost of capital calculation. Nvm, under pressure , read it fast and come out with calculation.For me, I have burnt 10 minutes on NOTHING just read through the first question and find it difficult.

I also thought about that but then I considered that they gave all those credit ratings for a reason. The 6.2 was the coupon rate but if your credit rating worsens then it will probably cost more to raise debt.

Anyone know how to deal with the q3 market capitalisation fcfe increasing by 20% i blur when i see this i cannot find the combined value of both company anyone still remember

i remember angmering current share price is 9, 1000millon share fcfe 1500m
findon flight current share price is 3.8 500millon fcfe 170 ke 14 g 0.049 as the ke and growth rate are related to findon itself right?

@kolkleen said:
I think we were supposed to get the current P/E ratio which was market value divided by FCFE (9000/1500 = 6). The P/E ratio was to increase by 20% in scenario 1 and 10% in scenario two. The value of the combined company would then be the new P/E ratio per each case multiplied by the combined FCFE. That was my logic anyways.

How did u get the combined company free cash flow to equity?

I also had a problem with valuing the combined company. Still regret why i didn’t do question 4

I used 360m for both proposals as it did not change

I chose put option in Q2, do you explain your choice?

I thought that the question stated use market values for debt? I used The Rf +spread to calculate PV of the 4 year redeemable debt to calculate mv. Think it worked out about 1.04 * 120m.

Did nobody do this?

Sorry but the option to hedge against payment in USD is a put option, you cannot buy a USD call option as there isn’t one so you have to sell your EUR therefore you buy ‘Put’ Option.

I think the FX hedge question was easy but I think I made a mess on my convertion net outcome calculation.

I also used the two future rates for 3 months and 5 months to calculate Future outcome instead of spot hope that was correct.

I thought it’s the lock-in rate you use to get your futures outcome?

@hpanchoo2206 said:
Silly mistake from ny side…didnt calculate any asset beta….assumed kd same as coupon rate of 6.2%. Any idea how many marks i could lose? ?

I don’t think its a silly mistake, I also was thinking the same. If you have put don’t your assumptions that the bonds were issued at 6.2% and no matter what the credit rating it will stay the same I don’t think that’s wrong, is it? I applied changed the interest rates based on credit rating which took a lot of my time on repetitive calculations but like others I felt the credit ratings were given for a reason, perhaps it was simply for discussion purpose?

I hate this type of ambiguous question where it is not clear exactly what the examiner wants us to approach the question.

@prad41 said:
Hey, yes I did the same, Market value of equity was not changing only the debt due to proposal 1 and 2 stating either increase or decrease debt. The tricky and annoying part was calculation of Cost of debt as I felt it was quite confusing especially depending on the proposal different interest rate was paid and the calculation were extremely repetitive by the third time I did it I was exhausted! lol

Anyhow, I think the correct recommendation to directors was that even though more debt was taken in Proposal 2 the WACC of company has reduced further. This is in line with M&M theory, where it states debt is good for company as they have to pay tax and increases their income. I can’t think from top of my head what were my WACC but I think proposal 2 had the lowest, hence I recommended that.

Same answer!!!

However, I stated in the conclusion that the assumption of not change in share price was not realistic. Also that the increase in gearing was risky in real life.

@ninhvanquy said:
I think 20% used to add in share price to determine capitalise value of Findon flight

the 20% was supposed to be used to increase the PE ratio of the combined firm. The “multiplier” in the question was a PE ratio of some sorts. you then multiply the new PE ratio by the combined FCFE of both companies.

the multiplier was calculated as (9*1000)/1500=6
then increase by 20% thats 7.2
you then multiply 7.2 by the combined FCFE i.e 7.2(1500+170) = $12,024m before adding the synergy benefit.total for scenario 1 was $12,074m for me.

I think for proposal 2 cost of equity actualy increases and wacc decreases i said due to increase in debt risk of company may be increasing an thus shareholders demanding more in return to compensate extra risk and wacc decreasing due cheap debt in the financing mix.i said in overall both of the proposals were not making much difference to the original cost of equity and capital and said before taking any decisions they must consider the assumptions i mentioned above and said that proposal 1 is slightly better overall than proposal 2.
any feedback For my answer would be much appreciated