AFM*** ACCA Paper AFM March 2019 Exam was.. Instant Poll and comments ***

did anyone remember mark allocation for Q2 and Q3?

Risk adjusted WACC, FRA, futures, options - interest rate risk, APV, benefits of acquisition, what to consider when getting debt finance, pre-bit & post-bid strategies against takeover, etc.

@beth18 said: Was it tougher than the Dec exam?

Hell yes! Good luck for June sitting

The question 1 was a total disaster . I could not get around the bond valuation and cost of debt. who knows how many marks that was, \I just ended up guessing to allow me to get cost of equity. The asset beta was what ? And on the risk management FRA got 468 000 interest furture got 483 200 or so collars I just calculated premium and moved on

This is as far as I remember questions and mark allocations Question 1 a Discuss factor affecting financing decisions (debt or equity) 8marks bprepare a report which shows bi calculate asset beta of new construction project 7 marks bii calculate cost of equity, cost of debt and cost of capital 15 marks biii explain and justify the methods used calculation of above estimates 6 marks c show how APV would give better estimate than NPV 6 marks Question 2 a recommend hedging strategy between collar futures and FRA 16 marks b Discuss the director view that interest rates should not be hedged or be hedged using internal techniques such as smoothing 5 marks c explain delta and gamma and how they can be used in delta hedging 4 marks Question 3 Calculate minimum price that the target shareholders would take estimate valuation in FCFE if 60% of the synergy benefits accrue to acquiring shareholders. Estimate %% gain from acquisition 10 marks Discuss suitability of targets Lagrid and Popham 5 marks In a due diligence review of acquisition target what would be the main concerns of the BOD of acquiring firm 4 marks

The information for how to calculate the government yields can be found on the technical article on the acca website labelled ‘Bond valuation and bond yields’ This was required to calculate the yield for bond A to get the risk free rate, to calculate the bond issue price and then finally to calculate the cost of debt using IRR.

Question 1 b iv was for apv and npv discussion 6 marks. And c was for securitisation something. I'm sorry but I cannot remember the exact words. To explain or discuss how this would help the company to get funds in future. Something like that. Worth 5 marks.

Got the same answer!

@jez22 said: Risk free Rate was the Spot Yield rate of year 1 which was 3% I think. Asset Beta weighted 0.85 MV Bond was around 105... cost of debt the IRR, roughly 5% pre tax. Cost of capital 9.2 % something WACC around 9% Hedging FRA 4.1 was best Futures 48 contracts

Got the same one!

Very, very hard exam. Maybe possible to finish but with an hour extra or two... Didnt finish Q3, skipped some parts to come back later but no time at all... Q1: i got KE around 8.11- used equity beta for it, aset beta 0.84 as far as i remeber, cost of debt very low -5%.. using IRR. Wacc over 7%. Rf rate 3%. Bond was around 105. Q2 fra 4-8, I did options instead of collars ? (but now i remember they asked for OPTIOn collars!!! Q3 hardly started. Disaster!

Examiner article is must in this exame, skipping it will cost you atleast 10 marks in exame so please print and read them. Dont make the mistake that i did. Q3: was more than half theoritical, only 10 marks for calculation and requirements were very confusing for example Effectivness and feasability of reverse bid and white night. Q2: calculation a bit straight forward but discussion again confusing like “ smoothing, gemma” Q1: lenghty based on degear and regear of betas, market value of debt and then wacc.

My advice would be to wait until you get your results, you never know, plus it will give you much needed rest. In the event you do fail my advice would be to go practice every question in the BPP practice kit and to read the technical articles. I would aim to do 2 of the 45 min questions each day in the week and 6 on each of the weekend days. Thats 22 45 min questions per week which means you’ll need around 3 weeks to get through them all. As you will have around 6-7 weeks from results to exams I would repeat again for another 3 weeks and then spend the last 1-2 weeks doing 1.5 hour questions (1 per day in the week) 2 or 3 per day on the weekends (Do these under timed conditions). Aside from that during the whole period you should be watching John Moffats videos, he has around 60 on AMF and they cover everything you need and make it very clear. Watch these alongside the 6 weeks you spend doing the 45 min questions. There is no such thing as reaching your limit its just a matter of practice. This is just the approach I would take and everyone is different so do what works for you but hopefully you get some value from this. PRACTICE PRACTICE PRACTICE! Remember... “Everything always seems difficult, until it isn’t”

I got wacc approx 12 .7 something

There was no investment appraisal Q anywhere. I thought that investment appraisal was standard to be asked somewhere? Small 5 marks on Q1 as to why they should appraise using APV. Happy that interest rates came up & only studied bond valuations and yields the other day so that was ok. Other than that I got completely lost In Q1. Q3 was a head wreck & had no time to even read it properly let alone figure out what was being asked! I really hope I don't have to sit this for 3rd time, but doubt I got to the 50%

Hi, Best of luck to all appeared in Mar 2019 attempt. I am getting prepared for June, pls share precisely which topics were tested in Mar. Thanking you in anticipation!

I wrote about having real option like option to follow/expand, any ideas?

Q2 Interest rate risk: FRA, Futures & collars Q1 Change of capital structure with bonds. Calculation government yield, bond valuation & yield. New asset beta & cost of equity etc. No similar past papers like it. Q3 potential merger/ acquisition of 2 different companies. FCFE figures provided no cash flow calculations. Q2 was probably most predictable and similar to other past papers. The other 2 were challenging!! No investment appraisal or fcfe calculations

Guys, the question regarding hedging, I believe didnt mentioned about collars, it said options on interest rate futures. where did you notice "collars"?

@tural199227 said: Guys, the question regarding hedging, I believe didnt mentioned about collars, it said options on interest rate futures. where did you notice "collars"?

I think it said option collars... You are not the only one who did options instead of collars.

@beatab said: I think it said option collars... You are not the only one who did options instead of collars.

The question was quite similar to Sep-dec 17 past paper Q4.

@aishling82 said: Q2 Interest rate risk: FRA, Futures & collars Q1 Change of capital structure with bonds. Calculation government yield, bond valuation & yield. New asset beta & cost of equity etc. No similar past papers like it. Q3 potential merger/ acquisition of 2 different companies. FCFE figures provided no cash flow calculations. Q2 was probably most predictable and similar to other past papers. The other 2 were challenging!! No investment appraisal or fcfe calculations

In Q3, minimum acceptable price, was there net asset of the target company? I couldnt find thats why I found MV of equity + 60% of synergy.

Q1 a: Factors affecting financing through debt. I discussed gearing risk (which was low), whether tax benefits could be realized, availability of cheap debt finanance, whether sufficient cash flow will be available to service debts (profits were fluctuating) and the need to match long term debts with project cash flows. Q1 b: My aset beta came out as 0.85 as well. Cost of capital 9% (rounded up). Can’t remember cost of debt though but used IRR for that and used post-tax coupon cash flows. Redemption was at 103 i.e. 3% premium. Q1 c: Discussed how APV is calculated but my answer was weak in convincing why APV was a better technique. Q1 d: The part which asked about securitization of lease inflows if I remember it right. I left it blank coz couldn’t remember the topic well. Q2 a: Net interest income on FRAs was 456k, on futures 458k at both 4.5% and 3.5% spot rates. Collar returned higher benefit but only if interest rates rose and lower than both FRAs and futures if interest rates fell. Since interest rates were expected to fall, I advised against collars and recommend futures instead. Q2 b: I stated something like: in the long term cash flows do smooth out but in short run losses can be significant. Don’t know if this is the right answer. Q2 c: Gamma and stuff. Left blank :p Q3: The numeric part was a disaster. What did they mean by FCFE multiple of 8? Apart from this, I found the question really vague in details needed to value the companies. But I did quite well in the discussion parts coz I also studied for SBL. Best of luck everyone!!

Can anybody tell me how we need to calculate beta asset. for first similar competitive company... I have calculated total ba of first competitor company...then it was said that it is engaged in two activity which 20 % similar to marte co and beta asset of its 80% operation was given so I calculated 20 % beta asset value of first similar company and second similar competitor has all the same activity so normally calculated beta asset by using formula and then added them both and divided by 2.....is I am right....????

What was new market value of debt and equity you used..as I think for equity it was 100×15 and for debt I used 3 million ×mv of bondthen divided by 100

@accaayush said: Can anybody tell me how we need to calculate beta asset. for first similar competitive company... I have calculated total ba of first competitor company...then it was said that it is engaged in two activity which 20 % similar to marte co and beta asset of its 80% operation was given so I calculated 20 % beta asset value of first similar company and second similar competitor has all the same activity so normally calculated beta asset by using formula and then added them both and divided by 2.....is I am right....????

Did the same, because the finance director asked for both asset betas to be weighted equally

@accaayush said: What was new market value of debt and equity you used..as I think for equity it was 100×15 and for debt I used 3 million ×mv of bondthen divided by 100

Based on cost of debt I calculated it was some $3.2m and value of equity $1500 given the share price would change after construction project

@beth18 said: Best wishes with your results. Hope you pass this sitting.

Thanks a lot! Hope so too Good luck for June sitting... :)

@accaayush said: Can anybody tell me how we need to calculate beta asset. for first similar competitive company... I have calculated total ba of first competitor company...then it was said that it is engaged in two activity which 20 % similar to marte co and beta asset of its 80% operation was given so I calculated 20 % beta asset value of first similar company and second similar competitor has all the same activity so normally calculated beta asset by using formula and then added them both and divided by 2.....is I am right....????

I first ungeared the beta to get overall asset beta of first company. Then put that into an equation such that: overall asset beta = 0.80*Ba of non-tech contruction + 0.20*x Then solved for x to obtain beta asset relevant to contruction of tech parks. Then added the tech-devision asset beta as above and that of second company and divided by 2.

@accaayush said: What was new market value of debt and equity you used..as I think for equity it was 100×15 and for debt I used 3 million ×mv of bondthen divided by 100

They said there were 3 million bonds so we didn’t have to divide by 100.

In Q1b, we were just supposed to calculate Asset beta of that 1st company right? And no bond was given directly. So we had to find the value of the bond using the yield rates and the 6% bond information right? Can you guys tell me if that is the way of doing Q1b? And for the cost of capital we had to use the combined asset beta right?