AFM*** ACCA Paper AFM December 2018 Exam was.. Instant Poll and comments ***

Ok

Question 1: MBI and MBO Recerse take over and IPO Equity value of 3 companies ans offers Question2 : Futures and options OTC/ future/ forward difference Question 3: APV Long debt discussion

Section 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)

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!

Hi...can u tell me did u divide or multiply to get fw. rate.

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)

We should sell future right?

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 costs So 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

was it a put option or call option??

@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

Was anyone’s APV negative ?

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

Did anyone get a negative APV? In Q2, I got the basis also in negative. Anybody? The spot rate was lower than futures I think.

@w01122 said: 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

I have got NPV about negative 5 mln, Tax relief for bank loan I did separately for 4 years, and yes, with deducting the repayments. Actually by using the annuity factor. Then I applied df 4% (as risk free, was given). The tax 30% on the summary of 4 discounted numbers For subsidized loan, apart from the tax relief on 3.1%, I additionally calculated tax relief on the difference of (rfr 4% - 3.1%)

For question 1c What did you have to do with the 400 m debt for Tai and what did you calculate as current value of a Tai share. I got a very small figure so my gains were extremely high. Couldn't recall what I did in my past exam practice questions..

I got a negative NPV and positive APV. Around -5m NPV can’t remember my APV Remember that you need to do the bank loan on an amortised approach. It’s paid in equal annual instalments therefore is 70/80 (can’t rememebr whjcb one) over the annuity factor of 8% (you can either use 8% or risk free 3.1% both give credit) Then take your starting loan, apply interest of 8% then take off the repayment amount Repeat this for 4 years Take the interest per year and apply tax of 30% then finally discount at the respective year discount rate

@vind1994 said: Did anyone get a negative APV? In Q2, I got the basis also in negative. Anybody? The spot rate was lower than futures I think.

I got the basis as positive but that’s how I do it I took opening futures, took off the basis remaining (*1/7) and calculated my future receipt Future opening was 1.3ish and spot was 1.2ish so I got positive basis

Guys, I think fretting over APV being positive or negative is futile. We can even assume the net cash flows and make APV positive or negative provided we do all other calculations correctly. Obviously we must write the decision whether to accept the project or reject accordingly. Own figure Run (OFM) applies in AFM as well. Chill :)

Btw what was your answer of Portfolio and organization restructuring??

Question 2 I got put options, 98 contracts. I got negative APV in question 3. I think the exam was fair and covered the syllabus well compared to the September sitting. Good luck everyone :)

Did you guys divide to convert or multiply for question 2

Ok . I did that too but the way those rates were written has me unsure. But I wasn't wasting time trying to do something different to what I practised. I'm very nervous. Need to pass.

Multiplied. I think it was quoted US$/CHF 1.034... so it was 1.3some US for every 1 CHF so you always had to multiply to get the US$.

Oh no. Wonder how many marks I'll lose for that