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Basis risk is just the risk that basis doesn’t reduce to zero in a linear fashion over time. It said in the question that it did, so basis needed to be factored in to the rate
I found the exam to be too time-pressured. I struggled to get anything down for part c of question 3 as I only had 5 minutes left, and that’s with not doing as much to part ii of part b as I wanted to
Overall I found that the paper was not as tough as I was expecting it to be given the pass rate of 33-38%.
Q 1 Pretty straightforward NPV calculation with a lot of calculations….but I forgot the training costs…damn hope I only loose 1 or 2 marks….the NPV I got was $9m+
The real option of Honua they made it easy for us so that we didnt have to calculate d1 and d2 as these were given in the question….Pa is the PV of cash flows foregone if option to dispose is taken ie year 3+4 which I got 36m(wrong again because I missed the training costs) …value of put option i got 2.2mQ2 The effective interest on options I calculated as 5.07%…..the interest rate swaps i explained briefly but I couldn’t do it….I still don’t have a clue how to do it….I hate interest swaps …was hoping for FRA or futures.
Q 3 WACC before demerger 9.42%, post demerger 9.8%….then the part where I felt really smart for cracking it
I think we had to calculate asset beta of sport division to find cost of equity to discount FCFs….first I ungeared equity beta of 1.24 to find asset beta of whole company
then since they told us that asset betas of formal division is 60% weighted at 1.something and sport division is 40% ….so essentially 1.24=(0.6 x Asset beta of formal) + (0.4 x Asset Beta of Sport)….this is basically reverse engineering the combined ungeared beta calculation when there are mergers…..so the asset beta of sports is the equity beta since there is no debt…then cost of equity is calculated using CAPM….and ke is WACC since there isnt any debt so i considered this to be discount factor ..I got 500m+ as value of Poynins using FCFs.Confident about passing but really regretting forgetting training costs in the NPV calculation….goes to show how time pressured this exam is.
Option on the project in q1 was a put option, we needed to calculate p, after calculating c. This did give the positive number, but overall examiner I think is expecting overall expected value of UWA project = put option value + NPV. This gives negative value still as NPV is a mich higher negative number. Well this is if I dis correctly
It should be the estimated cost of equity for that company, as they do not have any debt.
@olgano said:
I don’t understand what should we do in Q1 with calculated in the scenario call option and Pa 46 mln for second project. I think than examiner prepared some tricks, but I can’t guess it.We had to show how we got pa i.e 46 mln. It was the present value of the future cash flows discounted at 11%. Considering the cash flows would not occur until year 4 it’s pv had to be calculated 70/1.11?
@saviojdsouza i think the value of new company is a bit high. I got around 230m. And the cost of equity of new company was 10% i think. And i also forgot to add training cost even though i calculated it in the working but didn’t add while making NPV template haha. So Pa is also wrong for me. I got put value of 2m something
i too got one close to that.If not the exact 9.56%
I forgot to calclulate the change in WACC though.Coz question asked for the change right.
So gonna lose a mark or two on thatPersonally, I didn’t think the exam was technically hard, the things that came up were my three more confident areas, I just completely lost it with my exam management , doubting myself on the little mistakes for Q1, trying to find the perfect answer I guess. Spent way too long calculating the NPV, changing it twice after. This gave me very little time to work on the BSOP, analyse and attempt question 2 and 3. (This was my first attempt and perhaps I came into it naively with the time constraints).
For the NPV, I stupidly used the deviation 30% to discount with as I missed the cost of capital amount. My NPV was negative – around (60 million including investment). So I spent ages trying to work out what I had done wrong, changing it twice without really resolving what the problem was.
Year 1 and 4 were both negative PBT values for me. My tax was calculated by adding Sales less VC, FC, TC with taxable capital allowances (machinery straight line depreciation (/4) times 15%.. adding back the scrap value % in year 4). Tax was relieved in the same year so not taken forward.
Yup I just realized I only considered operating cash flows and additional investment …forgot the tax(silly mistake cos I was at the 45 min mark doing this question so I kind of rushed through it in order to stick to the time allocation of 49 min for a 25 mark q)
Honestly, this paper was easy.
I was just too tired after writing my fourth paper in a week
For number 1, i did well, got negative NPV ($2.2m) and $10.59 million for the real option. This would make the project cool to undertake.
For jigua, $46.1 million, i honestly don’t know what the examiner required of us. My concern was that when i summed up the apportioned marks for question 1, it was 41. I don’t know where 9marks would be allocated to.
I spent so much time in Q1 that i barely had one hour for the remaining two questions.
I practised hedging very well but lost my confidence when computing the option. I got contract size of 84 for put option, calculated a premium of $64,000 and advised that they should excercise the option. I also identified that unexpired basis was 0.05. But when i looked at the question again, i saw that cost of $2million was 95.05. This threw me off balance and i didn’t complete the calculation.
I didn’t look at the swap; a cheap question though because of time pressure.
I ran to number 3 and it was hellish absorping those information. I presumed that the initial Newimber’s WACC was arrived at by blending their asset beta; because different business have different risk. I ungeared the equity beta of the old company to the combined asset beta. Using the 60:40 weighing, i took out the asset beta of the pyonin and using this new asset beta of the demerged company, computed the Ke using CAPM and then the Wacc. I arrived at 6.5% as the wacc
I performed below my expectation in this exam.
My advise to those writing this exam is to prepare very well like i did but have good night sleep a day before the exam. Also be time conscious.
I’m considering writing P5 inlieu of this come September
Questions roughly from what I remember….
Question 1
A. Discussion around real options and why the company would use them. 5 marks
B. Report
Bi. Calculate NPV Uwa project. 12 marks
Bii. Address the FD concerns. 9 marks
Biii. State assumptions and whether project should go ahead. 10 marks
4 marks available for professional.
C. Discussion around the ethical constraints using companies in denia. Options around Sales price of drones. 10 marks.Question 2
A. Adv and dis of using swaps 5 marks.
B. Calculate options and swap. 15 marks.
C. Critics CEO views relating to statement of using juniors in treasury department. 5 marks.Question 3
A. Pros and cons of demerger. 5 marks
B. Calculate WACC and value using operating cash flows. 15 marks.
C. ?? Can’t actually remember this one! 5 marks.As I say. This is roughly what I remember them to be.
I had to rush question 3 and skim the information. I am questioning whether I read the first requirement of part b correctly …
Was it to find the new WACC of the demerged company after the sports division had been bought out? Rather than to find the WACC of the new company that was to be created from the sports division?
@nieffee said:
Questions roughly from what I remember….
Question 1
A. Discussion around real options and why the company would use them. 5 marks
B. Report
Bi. Calculate NPV Uwa project. 12 marks
Bii. Address the FD concerns. 9 marks
Biii. State assumptions and whether project should go ahead. 10 marks
4 marks available for professional.
C. Discussion around the ethical constraints using companies in denia. Options around Sales price of drones. 10 marks.Question 2
A. Adv and dis of using swaps 5 marks.
B. Calculate options and swap. 15 marks.
C. Critics CEO views relating to statement of using juniors in treasury department. 5 marks.Question 3
A. Pros and cons of demerger. 5 marks
B. Calculate WACC and value using operating cash flows. 15 marks.
C. ?? Can’t actually remember this one! 5 marks.As I say. This is roughly what I remember them to be.
the last question was issues on shareholders and stakeholders in information communication
@olaair said:
the last question was issues on shareholders and stakeholders in information communicationOh yes! I remember writing something about integrated reporting now you mention it!
Black Scholes was tested differently. I dindn’t know wat was required. A question on ethics for 10 marks was difficult. communication policies seemes to be out of the syllabus. Overall, the exam was difficult. The examiner explicity said it will be a challenge. It was really a challenge.
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