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Not too sure how to feel about the exam…
Started with Section C, the first question was on an investment decision via a rights issue or a loan. Gearing/ interest cover etc, it threw me to start with as I felt like not enough calculations were needed in part b to warrant 7 marks? Anyway I think I got 32% gearing/ 10 times interest cover via a rights issue, and 43% gearing/ 6 times interest cover via a loan. Spoke about the loan being riskier vs the company benchmarks, and how reduced value per share in Option 1 was offset by higher volume of shares per shareholder, so recommended Option 1. Not sure if I went down the right route! Second part was on the pecking order theory, I’m annoyed as I stupidly said that equity would be chosen after retained earnings and ahead of debt! But put that they would use $1.1m of their $2m retained earnings, and wouldn’t go with either option.
Second Section C question was on Dink Co, had to decide between borrowing to buy machinery or leasing. I think my lease NPV cost was around $86k lower than purchasing, so suggested leasing. Other parts were on them being an SME and capital rationing, so spoke about hard vs soft rationing and then recommended business angel/ venture capital/ crowdfunding finance.
Sections A felt quite fair – a lot of theory (with the usual ‘answer a load of questions within a question, get one wrong and you score zero’ fun). For Section B I had what felt like a horrible question on factoring (total interest cost in AR if factor is used, with admin fees/ advance funding etc), it wasn’t multiple choice either so I’m sure I got that wrong. Other scenarios were exchange rate risks and business valuations, some sticky questions but not too bad.
All in all it wasn’t an easy exam, but there were also no major shocks. I was surprised at how little NPV was involved (and zero IRR), but here’s hoping for a pass next month!
Hope everyone else found it ok 🙂
Hello, it sounds like we got the same questions.
For the one asking about the interest cover, i used PBIT/Interest and gearing was given debt/(debt+equity)
With the rights issue it meant that the gearing got better as there was more equity compared to debt. The interest cover also improved as the PBIT increased by 30%.
For the debt issue I had the interest cover going down as interest increased greater than the increase to PBIT. And I had the gearing fall as the debt was up compared to debt + equity.
Is this correct?
Also for the second question, the present value of buying the machinery and the lease. I was completely stuck.
The lease was 200k a year x 4. What was I supposed to do with this figure?
Then for the buying I was able to do the tax deductible depreciation but there wasn’t a whole lot on there either.Was I supposed to multiply these figures by a discount rate? I couldn’t see there being one given?
Cheers!
It was actually ok…Section C was about EOQ/Bulk discount which was easy enough and worth 10 marks, capital rationing explanation worth 10 marks, working capital funding policy explanation and a lease vs buy. I was a little confused on where to put the tax implications for lease vs buy but I got the same answer as the post above so hopefully correct. Section B was a lot of foreign currency and some WACC q’s. Section A was ok too. I hopefully did enough to get a pass although already second guessing things I wrote/calculated!!
Good luck everyone!!!
@fmexam1219 said:
Hello, it sounds like we got the same questions.For the one asking about the interest cover, i used PBIT/Interest and gearing was given debt/(debt+equity)
With the rights issue it meant that the gearing got better as there was more equity compared to debt. The interest cover also improved as the PBIT increased by 30%.
For the debt issue I had the interest cover going down as interest increased greater than the increase to PBIT. And I had the gearing fall as the debt was up compared to debt + equity.
Is this correct?
Also for the second question, the present value of buying the machinery and the lease. I was completely stuck.
The lease was 200k a year x 4. What was I supposed to do with this figure?
Then for the buying I was able to do the tax deductible depreciation but there wasn’t a whole lot on there either.Was I supposed to multiply these figures by a discount rate? I couldn’t see there being one given?
Cheers!
For the lease vs buy question, I calculated the buy like a normal NPV calc, with initial investment going out along with any costs then corp tax savings coming in, then TAD savings coming in with working scrap value/balancing charge or allowance.
For the lease, you would do the £200k going out each year, starting in T0 I believe as it said first payment at start, then tax savings coming back in – although I did get confused and couldn’t remember what year to start the tax in!!
The DF you would use is the 8.6% interest on the bank loan to finance the investment, at the after tax rate so 8.6% x (1-T), which I believe was 6%.This my first exam back in the UK after sitting F5-F8 in Australia.
I much prefer the paper based to CBE and didn’t practice enought in Excel for the NPV of an Investment question.
It was a bit of a shock to have a blank box to type the answer compared to a choice of 4 answers – at least you know if you’re on the right lines when you have a choice of 4.
Having said that I have completely screwed this exam up anyway and didn’t do anywhere near enough mock exam practice.
Nailing two double espresso’s before the exam didn’t help either!
I shall definitely be resitting in December!Exam wasn’t really ‘easy’ by any stretch of the imagination, although, there were some easy marks across both section a and b, section b had a WACC calculation which I found a little bit challenging,
Section c, standard run off the mill NPV question, only issue was I overran on time but luckily made up for it after blitzing the ‘theory’ questions,
Another question about receivables factoring for 6 marks was pretty simple but I the figures I got were a bit suspect, hopefully the OFR rule comes in to save me life again,Comments about profitability and liquidity which I hadn’t revised but vaguely remembered from f5 so here’s hoping!
Baumol vs Miller Orr discussion wasn’t sure about it but I tried to make up an answer using simple common sense
Overall I reckon a pass fingers crossedPart a was tricky always is you think you are right but one mistake and the answer is also there as a choice , part b the same but the topics were ok – some of the theory multiple choices I had to wither down to a 50/50 call . Part c the appraisal on the project with the r and d , working capital was hard enough for the marks – suggested making the appraisal better by including some sensitivity analysis and looking for competitors reports for guidance .think the final part of the q related to risk and how what they could do with it in relation to projected sales . Second part c q was the equity v loan – there was a rights issue but didn’t give the issue numbers itself eg 2 for 5 , think that was to throw people but the overall figure was all that was needed , second part spoke about the effect of each v the industry norm briefly – the third part about the dividends not being paid I spoke about m and m and the irrelevancy theory which I think the director was talking about but in this case I advised the trad theory to pay may be better due to signaling , benefits of the loan tax shield etc – anyway always hard to judge but please let me know if I am miles off – hope everyone is now relaxing – good luck !
Seems like the morning paper and the afternoon paper differed a lot. I sat the afternoon one and there was too much theory. Not many calculations. Even the C questions were based on wordy parts by 50%. And in two out of three section B scenarios, only one question was based on calculations, the other ones were just theory based.
I struggled with the npv with the tax allowances with the 100 allowance I wrote it off as no tax but I really was clutching at straws and could think! Then when it said 3 m reducing the next years by 50 percent I couldnt for the life of me think whether that meant 3 mil them 1.5 or 2 years at 3 mil! Just simple stuff then think I put 5k not 5m for scrap so think I majorly messed up something that should be so simple. I’m really annoyed with myself….for the dividends theory bit i wrote about the irrelevance theory residual theory and clientele effect I didnt mention m and m though 🙁
Think I may be resitting in dec. I put so much time into this aswel think nerves got to me
@ Claudia, do you remember your answer to the current market value of the loan note?
also, the interest charged from using the factor, was it the factors fee and advance was the only cost since they didnt ask for the net benefit or cost? those questions to me were tricky…There were the usual tricky questions which concentrated more on your understanding of the English language rather than general understanding of FM.
NPV was ok. Discussed Risk and Uncertainty over the guess on sales and how they could minimise this risk.
I started writing about pecking order theory when it came to using dividends for the 18k project but believe I was taking the wrong road so discussed M & M dividend irrelevance and traditional theory and signalling effectStill not certain I did enough as I’m sure we all know how that feels. Only six weeks to wait though
@petriep said:
@ Claudia, do you remember your answer to the current market value of the loan note?
also, the interest charged from using the factor, was it the factors fee and advance was the only cost since they didnt ask for the net benefit or cost? those questions to me were tricky…I’m afraid I can’t temember my exact answer to either of them – I may have put £7,488 for factoring interest cost? I assumed 20% of the remaining TRs would have overdraft finance costs, but I think the question was worded very confusingly. To be honest I knew I was unlikely to get the exact answer, so didn’t spend too much time dwelling on it! I think I put £4,222 as a TR net benefit too somewhere in section B?
I got a few other theory questions, like derivative characteristics – I couldn’t choose between ‘settlement is always at a later date’ and ‘always little to no initial costs’. I put the former as options have premiums, but I always end up second guessing myself in these situations! Same with choosing 4 government macroeconomic goals…
Anyway, the good thing about having a Friday exam is results day feels slightly sooner. I still need to decide on options papers, kind of hard when you’re still waiting for the results of one potential choice!
@Claudia, thanks so much for responding. I had the same issue with Macro. There were a lot of theory in this exam I must admit and MCqs are no fun. Either wrong or right. Sigh. We just have to wait but let’s hope for the best.
@Lavinia69 said:
There were the usual tricky questions which concentrated more on your understanding of the English language rather than general understanding of FM.
NPV was ok. Discussed Risk and Uncertainty over the guess on sales and how they could minimise this risk.
I started writing about pecking order theory when it came to using dividends for the 18k project but believe I was taking the wrong road so discussed M & M dividend irrelevance and traditional theory and signalling effectStill not certain I did enough as I’m sure we all know how that feels. Only six weeks to wait though
I did the exact same mistake, I realised I was writing the wrong answer when I started writing about WACC, what answer did you get to that MCQ 9.5% loan and 7% yield
@claudia123 said:
I’m afraid I can’t temember my exact answer to either of them – I may have put £7,488 for factoring interest cost? I assumed 20% of the remaining TRs would have overdraft finance costs, but I think the question was worded very confusingly.You are right. the question was worded very confusingly. VERY confusingly.
I didn’t think it was too bad overall, had to guess a few in section a and b as usual but hoping for a pass so I can move on to the P papers. Did anyone have the 12mark NPV for Doppel? Any idea how to deal with the 100% tax allowance in the first year? I had the same thing in Junes attempt and couldn’t find the answer between then and now and it bloody came up again!! Typical!! My friend had the same question and did it completely different to me, so who knows!!
@claireday88 said:
Did anyone have the 12mark NPV for Doppel? Any idea how to deal with the 100% tax allowance in the first year? I had the same thing in Junes attempt and couldn’t find the answer between then and now and it bloody came up again!! Typical!! My friend had the same question and did it completely different to me, so who knows!!I did. I didn’t understand that part that the company needed 8% out of the total revenue as their working capital every year. I had no idea how to incorporate that into the NPV calucation.
@katie8223 said:
It was actually ok…Section C was about EOQ/Bulk discount which was easy enough and worth 10 marks, capital rationing explanation worth 10 marks, working capital funding policy explanation and a lease vs buy. I was a little confused on where to put the tax implications for lease vs buy but I got the same answer as the post above so hopefully correct. Section B was a lot of foreign currency and some WACC q’s. Section A was ok too. I hopefully did enough to get a pass although already second guessing things I wrote/calculated!!Good luck everyone!!!
How was the EOQ question? Because there was a trick included in the question I guess.. They had given overdraft percentage and i guess you need to include the cost of this overdraft into the holding cost of inventory..because of the reason of the lost interest on the capital(cash) tied up in inventory..
I am not sure anyways..
Section A kinda had a greater sum of theory which really fried my brains. However, thankfully, there were still some calculations that looked promising to gain back confidence.
Section B; the first one was on receivables management in particular focusing more to factoring the second one was a foreign exchange risk question leaning towards money market hedge and the last being an NPV question with regards to lease or buy.
For Section C, I got an NPV question (NPV, ROCE, capital constraint (rationing), simulation analysis) and a business finance question (gearing & interest cover of both equity & debt finance options, pecking order theory.
I’ve got the same one. I was also very confusing about the factoring one. I clearly remember I spent a lot of time thinking whether the extra factoring advanced interest cost should be accounted as ‘account receivable cost’? I am also very confusing about the market hedging one.
@therockky said:
How was the EOQ question? Because there was a trick included in the question I guess.. They had given overdraft percentage and i guess you need to include the cost of this overdraft into the holding cost of inventory..because of the reason of the lost interest on the capital(cash) tied up in inventory..I am not sure anyways..
Hmmm I’m not sure I saw an overdraft cost in mine? I probably wouldn’t have included it though because the annual order/holding amount was still the same 1.5m units, so the annual overdraft cost would have been the same. The only thing we were working out was how many units to order and hold each time, through the year and whether the bulk discount was cheaper. I may be completely wrong though 🙂 none of the past papers I did had any other costs in so it seemed like a pretty each question to me…but the examiners do always like to trick you so I could have missed it??
@katie8223 said:
Hmmm I’m not sure I saw an overdraft cost in mine? I probably wouldn’t have included it though because the annual order/holding amount was still the same 1.5m units, so the annual overdraft cost would have been the same. The only thing we were working out was how many units to order and hold each time, through the year and whether the bulk discount was cheaper. I may be completely wrong though 🙂 none of the past papers I did had any other costs in so it seemed like a pretty each question to me…but the examiners do always like to trick you so I could have missed it??Yea, you are right that none of the past papers had these other costs. But I came across a to a similar question in kaplan kit and also here below in ask the tutor forum.
https://opentuition.com/topic/eoq-31/
But yea, I might be wrong too. Let’s hope for the best.
Felt the exam was pretty fair and agree with comments so far.
Opted for lease over buy but feel like I may have included too much or not enough tax for the lease. I could be wrong but I remember John explaining in his lecture that you get one more/less year of tax relief from leasing due to the up front payments. Not too worried as it’s only a mark or two.
I went for 6% cost of capital in financing for lease vs buy.
Capital rationing I talked more about government and regulatory restrictions but looking back think the question wanted answers around SME specific problems.
Fx money market hedge question was unusual as it only took the answer as far as the amount received in local ccy rather than adding the interest that could be received by depositing.
Nothing on Islamic Finance thankfully.
Nothing on CAPM which I revised a lot.
I got 6% too and opted for lease over buy, I remember John when I saw that question, the first tax timing for the lease option would be at T2 since the tax was payable in arrears, the tax allowable depreciation I did it for 5 years instead of 4… John I thank you so much……….Such a pity that factoring and early settlement discount was worded so confusingly……..
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