AFMACCA Paper AFM December 2020 Exam was.. Instant Poll and comments

I found the paper quite difficult this time around, From what I remember: Question 1 - APV calculation, including determining a cost of capital Question 2 - selling off a division that has been experiencing trouble and focusing on the core business Question 3 - interest rate collars and swaps. Question 1 was quite straightforward, an NPV and APV calculation. Also a calculation of a suitable cost of capital. The company, who was focusing on radio was deciding to expand into music streaming, which was the project. Question 2, in my opinion, was a real problem. There was a question about proving that the cost of equity is 11%, wasn't sure how to approach that. I think I got 12%, but showed all workings regardless. Also asked about the difference between a demerger and divestment, if I remember correctly. Question 3 was very unlike any of the past papers, which had futures, options, etc. It asked about the %'s in the collars and swaps, and maybe I misread it, but the borrowing was for 3 years? It also had a lot of discussion (about 11 marks I think).

60% discursive 40% calculations

Question 3: Haven’t seen a hedging question like this before. Especially the 3 year borrowing period.

Question 1: Any idea if we were required to incorporate inflation on the €180 fee?

@chally - I think the scenario said the price will inflate by the country's inflation rate of 3% for the first 2 years, then 2% per year thereafter. Also, the number of customers (subscribers) will increase by 2% per year.

Yes you’re right. I inflated the year 1 price with the inflation for year 1(3%) but i was doubting whether it was inflated already.

@chally It should only be 5 months. The questions said they were only worried about fluctuations till the end of the current year.

@mubariz123 thanks for the insight.

I put the fee as €180 in Year 1. I understood it was already inflated. Then adjusted by inflation Years 2 as onwards.... I don't recall the 5 months???

For Q1 about Non financial factors for the Shareholders/BOD to consider for the music streaming project....until I submitted I did not notice the fact that they were going to sell the project after 4 yearses to a RIVAL?. Even the 40% calculations were awful

For Q1 I got Foreign investment appraisal which wasn’t too bad some calculation parts were tricky but discussion parts were okay 2) The question on the swaps and collars threw me off! So think I did poorly on this question 3) reorganization question on a football club which I thought was fine, seems like the calculation parts were simple so feel like probably did them wrong Overall there were a lot of of discursive parts

Yes same here! Didn't the question state that it had to be inflated. I initially wrote it as 180 but upon reading that part again ended up inflating it for all the years. Was I right in doing so? I wonder where the 5 months are coming from.

the exam was quite tough and very time pressuring and tough to go in the given time had a lot of calculations and theory wasn’t able to complete it fully.. there was a lot of theoretical discussions Q1 3 NPV calculation, calculation in F Currency and then converting it n home currency and then calculating the total cashflows NPV in $ (Home currency) Recommendation and justification of assumptions, Whether the project should be proceeded or not If proceeded with the project, the implication of relocation and redundancy Advice on the statement about issuing a public report and about the things company is doing for the stakeholders, the topic was on CSR and how it could add shareholder value River pollution due to a project in Germany and bad publicity about the company in the country and the advice on the what steps should be taken by the company regarding it Q2) the interest rate swaps and collar hedge (13 marks) with 3 year borrowing rate (something not seen before) Benefits and drawbacks of interest rate swaps over the traded collars (8 marks) Explain the impact of time on the expiry of real option (4 marks) Q3) A company facing financial difficulties (foot ball company) had 2 proposals so had to calculate the SOFP and SOP% Loss of the two proposals (10 marks) evaluate the effectiveness of both proposals and the suitability of proposal in terms of stakeholders (15 marks).

Seems like people had very different questions to me: Q1. NPV in 'Nasi' then NPV of 'Nasi' Project in US Q2. Football Club SPL and SOFP Q3. Interest rate swap and collar on options Wish I could have got the APV question :( Went well, but a lot of the more challenging stuff I prepared a lot for didn't come up and a lot of it seemed like more logic than preparation.

Collar should have been to end of year only so 5 months @alinatariq

Question 1 – APV calculation, including determining a cost of capital. A lot of adjustments, but after reading that they got 1% of market share - my cashflows were all negative?? Question 2 – selling off a division that has been experiencing trouble and focusing on the core business - ran out of time Question 3 – interest rate collars and swaps - as I practised a lot of these, I knew everything about it. without too much thinking, it took me 1.5 hours to do all calculations and to make comments! I felt that this was very time pressured exam.

Guys, could you please share your ideas Q about Football Club , proposal of share issue 150 shares : what is effect is on Share capital (on balance sheet as a whole)

I also found that this time questions were quite tough especially question 2. I couldn't figure out how to calculate the 11% linking P/E ratio and cash flow. also I could not find Bequity to calculate Basset. Were there Bequity given in the exam paper? May be because of stress i was not able to see it.

If I recall correctly, the cashflows for the first 2 or 3 years were negative but that was enough to make my base case NPV and APV negative as well.

I do not recall seeing that they worried about till the end of the month i.e. 5 months. I remember that they wanted to borrow for 3 years and and on 1st December they wanted to borrow funds, and future rate was given as December.

For swaps , called it a 36 months period and finally gave a percentage rate effective as 12/36. But yes , they confused with this 3 years thing. Hopeing that doing the above doesn't affect many marks

Did you include the disposal 10M? I had negative cash flows for years 1 and 2 only. Managed to get a positive base npv and i included the disposal. Maybe I shouldn’t have?

I am not sure why but it seems we are having different questions being set.... I had Q1 APV etc etc Q2 Interest rate swaps and collars Q3 Demerger etc etc So much calculations to do and explanations - very easy to overrun on time (as I did). The problem, as always, is to try and remember everything I believe. No matter how much you practice. Not very good unfortunately - March 2021 here we come again again. I wish ACCA improve on their Excel - it is totally different from what we use in real life I think.

I included the disposal proceeds as well (in year 4) Surely this is a cash flow, although it did say the residual of the asset was NIL.

it was a weird exam... i wish i had APV... i also prepared alot of stuff but didnt came up at all...

I did include the disposal. But still got negative flows in all years. Just that contribution from revenue was so small and additional fixed costs were quite large. Maybe I misinterpreted the part about them having 1% of market share. And the revenues (3,765m - or similar) were about the whole market...

drizzley wrote:I did include the disposal. But still got negative flows in all years. Just that contribution from revenue was so small and additional fixed costs were quite large. Maybe I misinterpreted the part about them having 1% of market share. And the revenues (3,765m – or similar) were about the whole market…

No, I don't think you misinterpreted it, that's what I got from it as well and I ended up getting a negative answer too, I was pretty confident of my method but since I got a negative APV too I was cast into doubt.

And the tax aswell. I think it was taxable in year 4 only. When i added back the depreciation i got the last two positives.

I got negative cash flow for first two and then positive...with regards to market share they said it will double so 1%, 2%, 4 and 8%...not sure if correct though...I left 14 marks for section B calculation...could not do so much in 3.15 mins.

Yep! That’s exactly what i did for the market shares.