AFM*** ACCA P4 June 2018 Exam was.. Instant Poll and comments ***

It is a disaster. First question is bsop. I didn't expect that. I didn't study this part at all bcoz my lecturer told me it already out last march. Question 2 fcff is a complicated one. I seriously don't know what they want. Question 4 int rate hedge. It is okay, just i dont know how to do swaption. I think i fail this bad time. First time i fail so hard.

I found it really hard too. Defo got the Depreciation / capital allowances wrong in Q1. Hadn’t a clue what to do. What cost of capital did u use to discount the cash flows? Couldn’t figure out what to use. Used 12% myself. Aaaagggh, what a nightmare!

I calculate WACC as the company wanted to have a mix bt debt/equity of the engaged company. I calculated the Ke of the Ruva company using MM2. with the rest of the data I calculated the WACC. it was around 7.2% I took 7% to make it easy looking at the tables. No sure if i didn't ok, I haven't seen this way in any other practice books. I also took the incorrect cost of capital first so I have to re-do my calculations on the exam. big deal specially because my answer look messy and dirty :(

I didn't remember clearly about all info provided about discount rate by the question... but based on my member which might be wrong.. the question provides the equity beta of a business that engages in business activity similar to project E and says that management team believe it can use this equity beta... so I used such equity beta to calculate Ke based on CAPM, then used Kd and capital structure data of the targeted company provided in the question to calculate WACC. I got 8.8% if correctly remember, and used it to discount all cash flow of project E, except for cash outflow i.e. initial investment needed by phase two as the question says 5%, Kd of targeted company should be used here.....anyway, the NPV I got for negative NPV for both phase one and phase two, which I felt odd and probably made mistake somehow..... anyway, I hope I can pass:-)

For qs one I used the same all equity cost of equity ..because I made an assumption that project e phase one is financed by equity only as similar company cost of equity ungeared was given .... Also then for phase two I separated did caclution where I used cost of debt for investment to be discounted and ..annuity facot for 10 years to discount back at 12% .which was given I don't know overall opinion of all .and I know it's not all correct but I made few assumptions let's c .how it comes out to be

For heding I did calculated 49 contracts ..based length of time which was 7 months so 7/ 3 * 105000000/500000 But suddenly I changed it to 6/3 because I realise that heding risk is only for 6 months 1 June to 1 Dec I don't know how much I will score or lose

So I put 42 contracts ...but I m afraid how much will I lose

To be fair the exam is not too bad but as usual I spent too long on question 1 ...anyway the discount rates used was 9%. I used APV to valuate phase one and the NPV was negative. I then used 5% as suggested in the scenario by the CFO to discount phase two and add the two together as the answer for Q1 (1). Too late to discuss about it, what will be will be!

@adolf121 said: The question gave us the ungeared Ke. So we need to use the MM formula to get the geared cost of equity. With Ve = .60 and Vd =.40. Then we need to find the WACC using the above proportion 40/60. Long story short WACC was 11% me thinks.

Mine was the same using 11%. For delay option for PV of future cashflow. I use the figure and 11% and by until anunity table of 6 year. too.. How to use 5% when it is cost of debt . That why question ask to comment on CFO belief.

@adurich said: So I put 42 contracts ...but I m afraid how much will I lose

Contract should be 49 contract. Using 10.5m÷0.5×7/3

Yeah I actually did 49 contracts but ..I mixed the period of loan and hedging risk period which was 6 ..so I cancelled 49 and put 42 instead ....ahhhhhh I m feeling so sad now

How did you use Capm ? I wanted to but I couldn’t work out the market risk premium for the equation. Your plan sounds good!

Well I used same discount factor 12% on phase one .. But also I assume the market return as it was not given..so I assumed it be 10% ...so when I wasted much time calculating I realised that it would be around 12% anyway ....so I just assumed that examiner wants us to use the same project specific discount rate as this is the only project asked about ..but phase one only !! Well these are my own thinking and assuption I m not saying these are correct but I assumed things alot ..so that I could move on in the paper .so much time pressure ..I also did not complete one optional question which was qs 2 So I really don't know but I enjoyed doing the paper !!

That’s what I have done, but I took Vd and Ve the othe way round ... :|

My Npv phase one was negative ...with option not delayed And if delayed I found positive npv ....so I suggested that real options are better as they take risk and rewards as opportunities and evaluate those risks using such options by bsop bla bla and assumptions ..I took away all my time ...please someone also left some or completed whole paper

Q1, I got discount rate 8.8% which can be rounded to 9%, so should be the same as yours... but I didn't use APV for phase one since there is no financing effect based on my memory of the info provided by the question....

Before the report it was 5 marks to discuss use of real options build on Npv

Capital allowance was on 25% reducing balance machinery What I did was 25% of 120000=30000 90*25%=22.5 67.5*25%=16.875 50.625 In the last year I took the whole 50.625 and applied tax rate as the qs said that the capital allowance would be left zero at the end of phase2 ( 4 yrs)

No surprise that time management issue came up, as such was pointed out as top one problem in the examiner report of the past few exams... I spent about 2 hours 15 minutes for question 1 and sadly had to totally skip last sub-question about soft capital rationing even though... I really rushed for optional question 2 and 4.... I probably only "reserved" (seriously totally unplanned) less than 30 minutes for question 4. I once thought I could do very little of question 4 because hedging usually required lots of calculation. Though I fully skip the last sub-question of question 4 (even didn't have time to read what that was at all:-(, I was relatively satisfied as I managed to finish more than expected in this question....

No the option was to delay ..the question said it ..so it was call option .

Same question.. could anyone please share the marks assigned to (d) soft capital rationing of question 1 and (c)..? of question 4?

@accastudentz said: What were the theory bits and Mark allocation in Q1 Something like Soft capital rationing and finance avail if not used for 9 marks And then something at the start before the report ??

I followed same logic and used balancing method for year 4, though I don't remember the initial NCA investment figure

@adurich said: Capital allowance was on 25% reducing balance machinery What I did was 25% of 120000=30000 90*25%=22.5 67.5*25%=16.875 50.625 In the last year I took the whole 50.625 and applied tax rate as the qs said that the capital allowance would be left zero at the end of phase2 ( 4 yrs)

Yes absolutely the qs 1 was totally based on acca technical article Investment appraise and use of real options Fully adapted from that

@adolf121 you are right, either delay or expand, it's a call option, making no difference when applying BSOP to calculate value of the option. Just for discussion:-), the question says that the company has no obligation to conduct phase 2, and can decide by start of year 5 instead of now. According to below TA, it seems to me (i) an option to delay a decision to a future date, instead of (iii) an option to exploit follow-on opportunities which may arise from taking on an initial project, because both opportunities, phase one and phase two, are known now. https://www.accaglobal.com/sg/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/investment-appraisal.html

@adolf121 said: Hmm. Cant remember them specifically saying that Project E was a delay option. But its just a technicality since both are call options. But I highly doubt it. Anyone reading this, I highly recommend reading the technical article. The question was entirely based on this. https://www.accaglobal.com/lk/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/real-options.html

Just wanted to ask, do i need to plus the 40 basis??? i didnt add it because the question say the maximum interest will only go over 5 and minimum 3.4

@streetgold yes, 40 basis point need be added on top of base rate to derive the actual borrowing rate for the company when calculating the NCF

@streetgold said: Just wanted to ask, do i need to plus the 40 basis??? i didnt add it because the question say the maximum interest will only go over 5 and minimum 3.4

I think that’s what I got. Does anyone know the calculation for the 1/4 swaption at 5% was?!!? I Hadn’t a breeze what to do on that so just answered with theory hoping for a few marks!

@adolf121, no unfortunately as I was in such a rush when working on question 4:-(.. the only thing I remember is for increasing base rate scenario, my EIR for both future and option is more than 5%, and EIR of future is higher than that of option; for decreasing base rate scenario, my EIR of future is 2.xx%, and EIR of option is 4.xx%.

@adolf121 said: @ivonne do you remember anything about the futures hedge? What effective rate did you get?

@elaine, totally skipped this sub-question due to out of time:-( do you by any chance remember the marks assigned to this sub-question of swap?

@unnysnowflakes said: I think that’s what I got. Does anyone know the calculation for the 1/4 swaption at 5% was?!!? I Hadn’t a breeze what to do on that so just answered with theory hoping for a few marks!

@adolf121, out of time, totally skipped the swap, but should the EIR be 4.6% = -(L+0.4%)+L-5% according to the info you mentioned below? anyway, I got no mark from this sub-question:-(

@adolf121 said: I think the swaptions wanted us to explain what 1 X 4 meant and then show the effective rate achievable. Since hickamore can and usually does borrow at L+.40 They will receive L Pay 5% giving an effective rate of 5.40% Im not quite sure about this tho.