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@jcbacca said:
Did anyone pick up that it was 3 million bond? And not $3 million bonds? So had to multiply nominal value by 3 to give you 300 million? I missed had to change last second.. I knew something had to be wrong, why would the examiner make us calculate and regret with a company value of 1500m and 3m nominal value of bonds…..Yes you’re right they meant 3 million bonds and not $3 million bonds. The market value came out to be a bit over $300 million.
Any idea whether question paper is available or not. In Dec18 it came out very fast , ie, within a day or two after the exam date
YUNE,
Cost of debt can only be calculated through yield curve +basis on a one year loan/bond As im sure you are aware, the yield curve and spread fluctuates between different years.
So after you were meant to calculate the value of each bond which was around 105 (6 % coupon) You would then use IRR to work out the effective interest rate.
To be honest, i doubt it, as acca are reverting back to releasing past papers of combined sittings as previous.
Pretty sure you passed Ause, this your last exam? Found this interesting, i just sat ATX in Dec18. ATX is simple but the syllabus is a monster. Where as AFM had a small syllabus but there is just too many damn ways they can tweak the question.
As an english person they caught off guard. Im very impressed by people where there mother tongue is not enlgish sitting these.. good on you guys. I could do this in your languages.
Had to do Q3 in a rush, the target value could be calculated in two ways; on share price value that was around 540 m if I remember correctly and based on dividend growth rate. The question stated that 90% of the distributable profit has been paid out as dividends. 10% retention x 14.5% return on capital( CAPM as the beta was given) gave me a growth rate of 1.45%. using the growth formula with the 63m dividend (90% of the 70m profit) resulted in 489.8 MV which was the minimum they would have accepted as aquisition price.
The value of the combined company was the after tax profit figure of the target (70) + the additional synergy cash flow (9) + the profit of the aquiring company (forgot the figure) multiplied by 8 + the increase of 5 % (8.4) which was something like 1100 m.
From this figure the MV of the aquiring company and the 489.8 + the 14% premium had to be deducted to get to the total additional value created.If 60% of the additional value would have gone to the shareholders of the acquiring company, the remaining 40% would have been the amount paid on top.
Can anyone confirm?
This is my worst exam . I couldn’t remember how to work the weighted asset beta and the spot yield and it threw me off completely. I answered the other two questions ok. Sooo much to remember
Same here! I’ve practised my whole bpp revision kit and all past papers on the website but I could not even figure out the questions. This is so unfair. I just hope they do the corrections leniently.
@jez22 said:
Had to do Q3 in a rush, the target value could be calculated in two ways; on share price value that was around 540 m if I remember correctly and based on dividend growth rate. The question stated that 90% of the distributable profit has been paid out as dividends. 10% retention x 14.5% return on capital( CAPM as the beta was given) gave me a growth rate of 1.45%. using the growth formula with the 63m dividend (90% of the 70m profit) resulted in 489.8 MV which was the minimum they would have accepted as aquisition price.The value of the combined company was the after tax profit figure of the target (70) + the additional synergy cash flow (9) + the profit of the aquiring company (forgot the figure) multiplied by 8 + the increase of 5 % (8.4) which was something like 1100 m.
From this figure the MV of the aquiring company and the 489.8 + the 14% premium had to be deducted to get to the total additional value created.
If 60% of the additional value would have gone to the shareholders of the acquiring company, the remaining 40% would have been the amount paid on top.
Can anyone confirm?
I calculated minimum price as finding market capitalisation + 14% premium + 40% synergy (since predator wants to keep 60% of gain).
Ause: I was in a little bit doubt that maybe I pass in this attempt but your answers remove my suspicion. But I want to discuss with you few things.
1- Firstly I attempted 75% paper. As my last question was disaster just do 5 marks in numerical as I’m left with only 20 min for this question. did complete Q.1 & 80% Q.2. In 20 min I can only understand scenario and do 5 marks working as it was the topic which I hate the most. didn’t revise properly thinking a report on it has come in previous attempt. So hopefully gaining only 1/25 in this question.
2- Now coming to Q.1 while many people wrote about it that it was disaster. I actually like it as I completed it which was surprise for me as I could’t do in any past paper practice but then Q.3 disaster was compensation of this. But after reading some comments on Q.1 and thinking myself too after exam. I found that I did several mistakes which will prevent me in scoring maximum in it and I can only score maximum 30/50 including professional marks.
– The first thing which I found incorrect of mine I didn’t bother to find Market value of debt assuming it is given in question though after completing this requirement I was thinking marks are more available and also due to credit spread available I was thinking cost of debt is calculated through IRR, so what will I do with it so I calculated cost of capital alternatively again. Now the question is that the MV of debt of 6% coupan of govt. bonds were given that was 106 or 107 something so I just pick the figure taht they have already provided maybe my assumption was wrong but even if I make this assumption I think I need to justify in the next requirement which I didn’t. I just explain it and after explaining focus on word justify. Although I think things which were required in the requirement I calculated appropriately kd ke and WACC. but yes I also calculated MVe wrongly as 1800 instead of using 15 share price. Actually i thought to refer that 15 in next requirement by referring to opinion but taking it as 18 but since i forgot to mention in next requirement and also every body else calculated as 1500 so my MVe will be wrong and I m loosing marks for both MVd and MVd in both requirements but how many marks will be available for their calculation? Hopefully I think a total of 5. What would u say???. Then spot yield curve to be calculated was for 3 years. Though for Rf we need for year 1 so I just calculate it for year 1 and didn’t for yr 2 and 3. Now if I calculate MVd, I’ll still not be calculating for yr 2 & 3 as i will choose for yr 4 which was also given and add in it credit spread for 4 yrs to calculate pre tax Kd to use it as a discount rate for coupon payment and redemption value and then finding MVd through it. so do we really need to calculate spot yield curve for year 2 and 3 or not. As if it was required, then I’m again loosing 2 marks further. Kindly confirm it plz. And in choosing b/w npv and apv I explain all factors very well but just using new construction project and name of company in relation to scenerio without linking strongly as company is all equity finance and project is totaly debt instead i mention if capital structure of new project changes and there is financial risk then due to which I think I loose half of marks there too. And then comes final requirement in which I remember securitization of deb but there was lease income I started writing it mentioning Special purpose Vehicle but left it quickly thinking i may go wrong and i have only 20 min for Q.3 so I don’t think i would gain any mark in it if possible maybe 1, though I found in internet they were using lessee and lessor terms but concept was same so thinking i should completely explain the concept so that maybe I get 2 or 3. Kindly give ur comments how many marks do u think i will gain in Q.1 as it can only save me ehich I don’t think now. The very first requirement was easy though I wrote almost 6 points from which i think i’ll get 5 out of 8. And with Q.2 I know complete hedging did all steps but my futures has higher receipt than forwards unlike u and collar had lower than future and forward in both cases. less when interest rate rises but i justify it maybe due to premium payment and recommended futures but keeping in mind drawbacks and advantages of both forwards and futures explain them infact. With theory requirement of Q.2 I only explain gamma and delta. delta hedging I don’t understand so don’t write. Hopefully 15/25. so in Section B I’m securing only 16 or 17/50. Now it all depends on section.A my predictions are 30/50. so failing@45/100. Last attempt I was also at this point. And this was my last attempt so already feeling down that my journey is over.@auseklis said:
Q1.At first calculate asset beta at 80% from company’s beta. Then take 50% of each company’s asset beta, get asset beta 0.85. Calculate equity 1500m. MV of Debt 317M, taking 3 million 100$ bonds (6% coupon, 3% premium). I got re around 10%, rd around 5%, wacc don’t remember maybe around 9%. Risk free rate as 1 year govt bond yield which is 3%. Govt yields added with BBB rating, get bond price around 105$.
APV better due to change in capital structure (previous gearing 0, now around 17%).Wrote report to board of directors.
Q2 Forward rate FRA4-8 used, got 3.19 eff interest rate and $358 eur reciept or someting, Futures June, 48 contracts, don’t remember the receipt (maybe around $346) but it was worse than for FWD rates. Interest rate collars – sell call, buy put, premium has net from sell and buy. In interest rates rise, collar gave better result, but worse if interest rates declined.
Delta hedge – buy shares, sell call options on these shares to hedge against decrease of share price. can be calculated ar N=Nr of shares/N(d1). Gamma , rate at which value of option changes, as delta changes.
Q3 Describe what will determine success of acquisition of company. Wrote about synergies – financial, revenue and cost. Describe feasability of Pacman defense and White knight tactics against hostile takeover. Wrote that it would be challenging to find buyer for $580M company, and a lot of resources needed for taking over the bidder (need to raise debt or equity)
Didn’t have much time for Q3. Calculated the equity value before and after, using FCF of both companies + 7, then multiplying by FCF to equity multiple to get the equity value after the acquisition. Then calculated synergy benefit and split to each shareholder.Ause: I was in a little bit doubt that maybe I pass in this attempt but your answers remove my suspicion. But I want to discuss with you few things.
1- Firstly I attempted 75% paper. As my last question was disaster just do 5 marks in numerical as I’m left with only 20 min for this question. did complete Q.1 & 80% Q.2. In 20 min I can only understand scenario and do 5 marks working as it was the topic which I hate the most. didn’t revise properly thinking a report on it has come in previous attempt. So hopefully gaining only 1/25 in this question.
2- Now coming to Q.1 while many people wrote about it that it was disaster. I actually like it as I completed it which was surprise for me as I could’t do in any past paper practice but then Q.3 disaster was compensation of this. But after reading some comments on Q.1 and thinking myself too after exam. I found that I did several mistakes which will prevent me in scoring maximum in it and I can only score maximum 30/50 including professional marks.
– The first thing which I found incorrect of mine I didn’t bother to find Market value of debt assuming it is given in question though after completing this requirement I was thinking marks are more available and also due to credit spread available I was thinking cost of debt is calculated through IRR, so what will I do with it so I calculated cost of capital alternatively again. Now the question is that the MV of debt of 6% coupan of govt. bonds were given that was 106 or 107 something so I just pick the figure taht they have already provided maybe my assumption was wrong but even if I make this assumption I think I need to justify in the next requirement which I didn’t. I just explain it and after explaining focus on word justify. Although I think things which were required in the requirement I calculated appropriately kd ke and WACC. but yes I also calculated MVe wrongly as 1800 instead of using 15 share price. Actually i thought to refer that 15 in next requirement by referring to opinion but taking it as 18 but since i forgot to mention in next requirement and also every body else calculated as 1500 so my MVe will be wrong and I m loosing marks for both MVd and MVd in both requirements but how many marks will be available for their calculation? Hopefully I think a total of 5. What would u say???. Then spot yield curve to be calculated was for 3 years. Though for Rf we need for year 1 so I just calculate it for year 1 and didn’t for yr 2 and 3. Now if I calculate MVd, I’ll still not be calculating for yr 2 & 3 as i will choose for yr 4 which was also given and add in it credit spread for 4 yrs to calculate pre tax Kd to use it as a discount rate for coupon payment and redemption value and then finding MVd through it. so do we really need to calculate spot yield curve for year 2 and 3 or not. As if it was required, then I’m again loosing 2 marks further. Kindly confirm it plz. And in choosing b/w npv and apv I explain all factors very well but just using new construction project and name of company in relation to scenerio without linking strongly as company is all equity finance and project is totaly debt instead i mention if capital structure of new project changes and there is financial risk then due to which I think I loose half of marks there too. And then comes final requirement in which I remember securitization of deb but there was lease income I started writing it mentioning Special purpose Vehicle but left it quickly thinking i may go wrong and i have only 20 min for Q.3 so I don’t think i would gain any mark in it if possible maybe 1, though I found in internet they were using lessee and lessor terms but concept was same so thinking i should completely explain the concept so that maybe I get 2 or 3. Kindly give ur comments how many marks do u think i will gain in Q.1 as it can only save me ehich I don’t think now. The very first requirement was easy though I wrote almost 6 points from which i think i’ll get 5 out of 8. And with Q.2 I know complete hedging did all steps but my futures has higher receipt than forwards unlike u and collar had lower than future and forward in both cases. less when interest rate rises but i justify it maybe due to premium payment and recommended futures but keeping in mind drawbacks and advantages of both forwards and futures explain them infact. With theory requirement of Q.2 I only explain gamma and delta. delta hedging I don’t understand so don’t write. Hopefully 15/25. so in Section B I’m securing only 16 or 17/50. Now it all depends on section.A my predictions are 30/50. so failing@45/100. Last attempt I was also at this point. And this was my last attempt so already feeling down that my journey is over.In calculating market value of debt, we have to calculate discount factor for every year separately using spot yield curve + credit spread as per-tax discount rate. I haven’t calculated MVd as I thought it was given in scenerio of 4 yr govt.bond but even if I do, I will use 4 year spot yield curve+ credit spread to use as discount factor as pre tax Kd as the bond was for 4 years because of my less understanding.
Bloody idiots. In Q.1 b ii- They ask to calculate cost of equity,cost of debt and cost of capital in such a long requirement can’t they mention to calculate market value of debt too. I just thought it was given in scenario as govt. bond of same no. of years and same coupon rate has a market price so I assumed it was that. However I was thinking though why credit spread was given then as cost of debt is calculated through IRR. but couldn’t understand as MVd was given I thought no need to calculate. loosing 6 marks oh GOD
Government bonds are nearly risk free so you can’t simply take their market value as the market value of the company’s bonds. Even if bond life and all the cash flows on the two bonds are exactly the same, govt. bonds will have higher market value because of low risk.
@jcbacca said:
Pretty sure you passed Ause, this your last exam? Found this interesting, i just sat ATX in Dec18. ATX is simple but the syllabus is a monster. Where as AFM had a small syllabus but there is just too many damn ways they can tweak the question.As an english person they caught off guard. Im very impressed by people where there mother tongue is not enlgish sitting these.. good on you guys. I could do this in your languages.
Thanks, whishing for the best as I spent a lot of evenings studying and revising. I have one more exam to go. I think I will chose APM, as the syllabus is not so huge. I won’t choose ATX because it has quite large syllabus, pass rates are low, plus I didn’t like first Taxation exam and also I don’t want to study UK taxation as I don’t live in UK. How did it go with ATX for you? Why didn’t you choose APM? I completely agree with you about AFM syllabus. It’s not very large but exam can take many twists, and change in some details completely changes the question. Hope you will all do fine and never lose faith! It’s just matter of practice and not giving up.
@auseklis said:
Q2 Forward rate FRA4-8 used, got 3.19 eff interest rate and $358 eur reciept or someting, Futures June, 48 contracts, don’t remember the receipt (maybe around $346) but it was worse than for FWD rates. Interest rate collars – sell call, buy put, premium has net from sell and buy. In interest rates rise, collar gave better result, but worse if interest rates declined.
Wasn’t the FRA 4-8 4.1% which is also the effective rate p.a.?
As regards the collar, since it was an investment, the company needed to set a floor and hence, bought a call and sold a put.
In my scenario the FRA was the best choice
@jez22 said:
Wasn’t the FRA 4-8 4.1% which is also the effective rate p.a.?As regards the collar, since it was an investment, the company needed to set a floor and hence, bought a call and sold a put.
In my scenario the FRA was the best choice
But in my case future gives higher result in both cases. and collar gives lowest in both case though higher when interest rate rises. I justify it that due to premium payment. I don’t know ausi is right in all his answers so I consider myself wrong but I performed all the steps and reasonable recommendation on the basis of my calculations so hopefully scoring maximum 13 or 14/16 and it should be as I’m in hoping of failing this exam and this is my last attempt 🙁
@jez22 said:
Had to do Q3 in a rush, the target value could be calculated in two ways; on share price value that was around 540 m if I remember correctly and based on dividend growth rate. The question stated that 90% of the distributable profit has been paid out as dividends. 10% retention x 14.5% return on capital( CAPM as the beta was given) gave me a growth rate of 1.45%. using the growth formula with the 63m dividend (90% of the 70m profit) resulted in 489.8 MV which was the minimum they would have accepted as aquisition price.Can anyone confirm?
Jens, you picked up a really good point on valuing the aqcuiree. I dont recall the question explicitly mentioning the methodology, but how much the buyer thinks company L is willing to accept (14% percent premium – something like that))
But i just wanted to highlight that it really does depend on whether the company was listed or not. If a company is listed, unless the question specifies otherwise, the market value will always be the market capitilzation. This is because as a listed company, your share price is what the market is willing to pay for it.
In short, if its listed, you are right, if not, most of people on this forum including me got it wrong.
Does anyone remember whether the company was listed, i jumped the gun and assumed.
@irfanullahjan said:
Government bonds are nearly risk free so you can’t simply take their market value as the market value of the company’s bonds. Even if bond life and all the cash flows on the two bonds are exactly the same, govt. bonds will have higher market value because of low risk.Can u tell how many calculations were required for MVd. I think 6 marks as we have to calculate spot yield curve too? And if anyone has taken 18$ as share price instead of 15$ will it be wrong?
@ahmadraza2 said:
Can u tell how many calculations were required for MVd. I think 6 marks as we have to calculate spot yield curve too? And if anyone has taken 18$ as share price instead of 15$ will it be wrong?For Vd
3 IRRs
PV of 6% bond using spot plus credit spreadMultiply 3m by $100 nominal value, multiplied by PV of 6% bond ÷100.
$15 has to be correct, because the question was asking for cost of capital of project which included the new debt. This new debt was estimated to cause the value of the shares to drop to 15 from 18.
Did you argue that the estimated drop may be inaccurate because the value of the new project will increase shareholder wealth and offset, Ke?
@auseklis said:
Thanks, whishing for the best as I spent a lot of evenings studying and revising. I have one more exam to go. I think I will chose APM, as the syllabus is not so huge. I won’t choose ATX because it has quite large syllabus, pass rates are low, plus I didn’t like first Taxation exam and also I don’t want to study UK taxation as I don’t live in UK. How did it go with ATX for you? Why didn’t you choose APM? I completely agree with you about AFM syllabus. It’s not very large but exam can take many twists, and change in some details completely changes the question. Hope you will all do fine and never lose faith! It’s just matter of practice and not giving up.AUSE,
I totally understand what you are saying.. the ATX syllabus is a monster! I wouldnt do it again, if i had to fail a paper. It wouldnt be that one. Worked my ass off to pass it, was lucky in and ended up getting 79%.
As for APM or AAA, i think those two are extremely easy for english speakers. I am someone who prefers numbers and found tax interesting.
You sound logical so should fly throigh APM. I think Jens will pass too. Alot of logical responses from you guys.
Ahmad, q1 numbers were only 15 to 17 marks (right?). So even if you lost 6 marks, it isnt the end of the world. It Depends on the strength of your theory answers. I split out the 20 percent
And you sound confident with your interest rate answers. If you get 20 from interest rates.. 2 from professional.. you only require 28 marks from remaining Q1 and Q3. We can do this guys!
@ahmadraza2 said:
But in my case future gives higher result in both cases. and collar gives lowest in both case though higher when interest rate rises. I justify it that due to premium payment. I don’t know ausi is right in all his answers so I consider myself wrong but I performed all the steps and reasonable recommendation on the basis of my calculations so hopefully scoring maximum 13 or 14/16 and it should be as I’m in hoping of failing this exam and this is my last attempt 🙁I think you are right, made a mistake and took the FRA rate as the effective, but you have to deduct the 0.2% premium…
@jcbacca said:
For Vd3 IRRs
PV of 6% bond using spot plus credit spreadMultiply 3m by $100 nominal value, multiplied by PV of 6% bond ÷100.
$15 has to be correct, because the question was asking for cost of capital of project which included the new debt. This new debt was estimated to cause the value of the shares to drop to 15 from 18.
Did you argue that the estimated drop may be inaccurate because the value of the new project will increase shareholder wealth and offset, Ke?
Multiplication step I performed right Don’ know whether I will be rewarded a mark due to wrong Bond price assumption.
I knw how to calculated bond price but didn’t again due to wrong assumption of govt. bond price.
3 IRR. ???? What does it mean.. I calculated once for cost of debt.
When I took 18 I thought I will discuss 15 in next requirement but forgot to mention.
I completed Q.1 but strongly regret as these are very simple points which I know. As I found Q.3 difficult + lackage of time and thus a disaster. Only Q.1 can save me but not now.
@jez22 said:
I think you are right, made a mistake and took the FRA rate as the effective, but you have to deduct the 0.2% premium…No I took out FRA wrongly in beginning but when doing futures I realize that I have to compare on a similar basis so made a correction in FRA by deducting 0.20 from 4.10 but nevertheless will score maximum but not full marks which I necessarily required for passing.
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