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Question 1: MBI and MBO
Recerse take over and IPO
Equity value of 3 companies ans offersQuestion2 :
Futures and options
OTC/ future/ forward differenceQuestion 3:
APV
Long debt discussionSection A
1. Differentiate MBIs and MBOs? And why was MBI preferred by company? (4)
2. Discuss organizational and portfolio restructuring and why the company turned from conglomerate to current business structure. (5)
3. Report (4)
i) Value of predator and target before acquisition and value of combined company (10)
ii) percentage gain to predator and target under different proposals of acquisitions (12)
iii) reaction of predator and target company shareholders for different proposals (7)4. Differentiate reverse take over and IPO. Adavtanges and disadvantages.
Section B
2.
1. Hedge using futures and option for foreign currency receipt (12)
2. Why should a company choose exchange traded derivatives to market derivatives and why forwards are better than options? (7)
3. Explain mark to market in futures and some calculations (6)3.
1. APV calculation (15)
2. Why should a company for long term finance and why they should be flexible. (10)Really enjoyed this exam!
Q1:
A) distinguish between MBO and MBI and discuss why the company may have disposed through an MBI instead of MBO (4 marks)B) explain what portfolio restructuring organisation reorganising is and explain why the company may have gone from a conglomerate to 2 sectors as a result of change in shareholders (5 marks)
C)
– estimate equity value of companies pre and the combined value (10 marks)
– percentage gain of the financing of the three offers (12 marks) (to both shareholders)
– discuss the shareholders likely reactions to all 3 offers ( 7 marks)D) explain reverse takeover and IPO and ads/disads of them
Q2
A) calcuate hedge receipt through futures and options (12 marks)
B) explain advantages of drawbacks between using forward and OTC options and explain why the company may prefer exchange traded derivatives over OTC derivatives (7 marks)
C) explain and use calculations to show how marked to market works as well explain key terms in the question (6 marks)Q3
A) APV (15 marks)
B) explain factors to discuss over them using longer term finance and factors that would make them change the policy down the line (10 marks)Couldn’t agree more. What a fine paper this was. As this was my last one – I tried to go in there and enjoy it.
Unfortunately, I relied on the assumption that an interest rate question would come up. I was obviously wrong. I had not practiced FX rate risk questions enough.
Other parts of the paper were very reasonable. Especially MBO vs MBI and IPO vs RTO.
Anyways, I wish you all a very happy Christmas break.
Peace.
I found this exam a lot harder than it should have been and don’t quite think I’ve done enough ( or more so I’ve lost too many little marks all over the place)
I found myself in the last hour just clock watching as I kept thinking of earlier parts in the paper I had made errors on and having to go back and recalculate and adjust…. which is a lot harder to do on paper than the spreadsheet versions I have been used to with the skills.
I know currency futures quite well, but it threw me that there was no spot price for 31 may…. I ended up using the 6 month forward rate, just so I had a figure to use. If someone can tell me what I was supposed to actually use I’d appreciate it
Good luck to everyone. I hope I’ve done enough to pass, fingers crossed
@nieffee said:
I found this exam a lot harder than it should have been and don’t quite think I’ve done enough ( or more so I’ve lost too many little marks all over the place)I found myself in the last hour just clock watching as I kept thinking of earlier parts in the paper I had made errors on and having to go back and recalculate and adjust…. which is a lot harder to do on paper than the spreadsheet versions I have been used to with the skills.
I know currency futures quite well, but it threw me that there was no spot price for 31 may…. I ended up using the 6 month forward rate, just so I had a figure to use. If someone can tell me what I was supposed to actually use I’d appreciate it
Good luck to everyone. I hope I’ve done enough to pass, fingers crossed
Don’t worry you’re all okay for the futures calc.
You can do it one of two ways when they don’t give you the spot price in May.
1) use the effective futures rate which is the opening futures price – basis remaining
2) assume that the 6m forward rate is the spot rate as of May and compute your closing future price and thus gain or loss
Both will give credit, ones just quicker to do is all
Ironically my future price (done Via the effective rate method) gave me the same as the 6m forward anyway!
What you guys wrote for this one. 3 b) explain factors to discuss over them using longer term finance and factors that would make them change the policy down the line (10 marks)
@adarshjanan said:
What you guys wrote for this one. 3 b) explain factors to discuss over them using longer term finance and factors that would make them change the policy down the line (10 marks)not sure whether it is correct but i wrote external (bank covenants, riskiness of projects, shareholders risk model) and internal (gearing, secured assets, dividend policy).
@lesbella said:
We should sell future right?i understand the futures were in chf, so that we need to sell futures in order to get rid of chf (i.e. buy usd).
according to this logic, we were to buy put options (june ones).
I have put June Put options as well, 98 contracts.
Q3. How have you used the asset beta. What was the discount factor to use for calculations? This has confused me. In the question was mentioned that company has mixture of debt and equity, but no further info only that project is financed fully by debt.
Hi!
In the hedging with futures market we were to receive the CHF amount of money.
The size of contract was also in CHF 125000 or something like that.
My question is: In order to define the number of contracts did we suppose the receipt of CHF mln. to divide to the contract size?
Or first convert the amount into $ with today spot rate, and afterwards to convert to CHF by using the future rate?Thanks
@bejkaad said:
I have put June Put options as well, 98 contracts.Q3. How have you used the asset beta. What was the discount factor to use for calculations? This has confused me. In the question was mentioned that company has mixture of debt and equity, but no further info only that project is financed fully by debt.
Hi,
for Q3 I found out the Ke = Rf+b*(Rf-Rm). This Ke I used then as a discount factor for the NPV. Afterwards, separately I calculated the tax shield for both loans and loan issue costsSo that we receive the APV. I guess I was correct?
hi!
can you tell me how did you calculate the % gain for share offer and bond offer
its was quite tricky
also what about the synergies?is the excess value of the combined company over the market value of the individual company become the synergy??
@jmmyjimmy said:
i understand the futures were in chf, so that we need to sell futures in order to get rid of chf (i.e. buy usd).according to this logic, we were to buy put options (june ones).
Hello,
I defined as call option as we had to buy $. But now I see that I was wrong, the future contract was in CHF, so we had to sell CHF…. Oh, pity@moijn said:
was it a put option or call option??i think call option
@moijn said:
was it a put option or call option??put option as the contract currency is in CHF and we need to sell CHF to obtain USD (as it’s a sale and we’re based in USA)
Therefore sell futures and buy put options
Does anyone remember what they got for the APV? All i remember was that the financing impact had a big positive effect for my base case NPV calculation. I assume I went wrong somewhere, but couldn’t figure it out.
How did you treat the tax relief for the bank loan? The question said that the loan is paid back evenly over the 4 years, so did you deduct the repayment per year, and then calculate interest and tax relief of the netted amount?
I thought b) was quite weirdly worded, still not really sure what they were asking
in Q3 B – I was confused what they were asking about. I wrote about optimal capital structure and M&M theory mainly. Was that anyway relevant?
In Q3 A – There was no mention of capital allowances or depreciation (or else I missed it). Were we to assume there was some as investment reaidual value was a lot lower than investment. Also was this residual inflation adjusted.
Overall I found the exam ok ish but was sometimes I thought the information giving was ambiguous. Like Q1 said something like net assets and working capital were 23m, was that between them or each?
Hello everyone
For Question 3:
CAPM = 12%
APV = positive
loan = 70 * 8% * 30% * PVIFA 8% 4years
subsidized loan – tax relief = 80 * 3.1% * 30% * PVIFA 8% 4years
subsidized loan – interest saving = 80 * (8% – 3.1%) * 70% * PVIFA 8% 4years
issue cost = 4% * 80
Question 2 was a disaster was me..
* Gone blank seeing that the company trades in $ but the rates & contract provided was in CHF
* tried only for forward mrk hedge by converting the rates to per $
*tried to assume that the swiss co has to pay the Netourne co CHF 12.3 in 6 months in $
* lost the 25 marks
question 1 was okay
* MBO & MBI – managed* restructuring n reorganization – tried
* value of equity – before acquisition
– Opao co = $ 2.5 * 2m shares
– Tai = tried to work with the profit adjusting the depn n additional investment* value of equity – after acquisition – combined co
– FCF + 2nd planning horizon* % gain in value – tried a bit but couldn’t proceed
* theory – shareholders reaction -managed to do
* IPO & reversal takeover – totally blank on that
Overall it was a fair paper. Just that didn’t expect this kind of question for hedging as it came in Sept 2018 exam
Now hope for the best.. Fingers cross
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