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

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

@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.

for the 2nd proposal I think the risk free rate plus spread came to 6.2 so I concluded that the the market value was the book value. I may have been wrong in any case.

i did ..only in the second proposalw as the mv of debt equal to its book value because the coupon and cost of debt was the same

@michellep said:
Does anyone remember the Mark allocations especially for sections A?

The 1st question was for 8marks (biz risk and financial risk and how they are related then risk mitigation vs diversification
the second was 17 marks Ke and WACC for the current and two proposals

Third was 8 marks…. effect on earnings and financial position

fourth was 7 marks which was about recommendations and assumptions for b(i) and b(ii)
then there was a separate question about discussing the third proposal about first evalauting the current status blah blah for 6 marks. I may have mixed up the marks from the third but I think the margin of error is small.

I did the report for question one something like this:

For proposal one, ungear equity beta with current capital structure to get about 0.85 I think. Then use the asset beta in proportion to the assets that were sold for the manufacturing division by using simultaneous equations. MV of debt was about 105, discounting at credit rating plus risk free rate. Anyway, under this proposal, the wacc was higher cause of the higher weighting of equity.

Proposal 2 increased debt and assets and the overall income. Wacc was lower, and CoE was calculated simply by using the equity beta given of 1.21. Cost of debt was 6.2% tax adjusted (same as proposal 1), and we had to find MV by discounting at risk free rate plus the rating given which gave a MV of debt to be 100.01, so rounded to 100. I believe wacc came to around 9%.

I recommended to either staying as is or choosing proposal 2 if their intention was to take on more projects, although prop 2 increased gearing to 49%.

I think I went on to screw up part a and b considerably. They weren’t hard, I just wasn’t expecting them and they threw me off. For part a I explained the relationship of volatility of cash flows inherent to a business and the increased risk of defaulting from financial risk, but it was all rubbish I made up, doubt it’s worth 2 marks.

@fard786 said:
Increasing debt was proposal 2 is not it?
Please enlighten me on this.

Hello.

I guess we are on the same page. I recommended proposal 1 because proposal 2 increases the financial risk, & also increases the cost of equity for investors,that would be it’s downside.

Also proposal 1 would yield an additional 6% return because 30 % reduction in assets would have lost 9 % of after tax return but the 30% reduction would have been sold at 15 % after tax, that was my justification. I screwed up wacc under proposal 1, I used the right method, but didn’t consider the 70:30 ratio to calculate asset beta. Hope that doesn’t cost me too much.

Can’t remember for how many marks, but the third director proposed to assess the whole organisation and all its divisions on both types of risk (business and financial). I have mentioned director one focusing on financial risk (reducing debt) and director two on business risk (entering new sector) while actually both should be considered..

Same here i also calculated growth

If i may ask how did you find the closing futures price when no expected spot rate was given?

Gosh…thanks got it

assume its the cfp or the forward rate if you are given. since we werent i assumed its the cfp like it is done in the bpp text