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Dear Sir
I am struggling to see how they calculate the hotel part of that question;
Proposal 3 is to diversify inro the hotel business IF political party A wins and inflation stays at 5%. It also states the hotel business will be run together with Daron’s business.
Therefore my take on it is that it is an acquisition and the asset beta must be calculated which i did and I got .82. There is however one problem. The examiner has used the ungeared beta as the beta when it should be geared again to take into account the new d/e calculation. It takes convertible bonds (yet to be converted nor any idea they will be), therefore a loan, so the asset beta should in fact be regeared back to the 9,2 equity and 7 existing debt plus 9.2 new debt on the convertible bonds (including costs).This then takes the equity beta to 1.83 and the ke to 20.54 and teh WACC to 11.89 or 12%
Please tell me why the examiner when aski8ng for them joined showed them separately in the answer?
Reagrtds
Question 2 on the futures
Gives todays date as 20th April and calculates answer as beginning april
I used your lock in rate and got 273670 for 2 months when they got 273870
Please say which date I must use
I deducted the difference in basis from the spot to get the overall net effect. Was i correct and why is examiner different?
regards
First question:
Because we are asked to look at the free cash flows, we need to discount at the WACC.
Therefore the relevant beta to calculate the cost if equity must be regeared in order to take account of the debt.
Whether or not the convertible bonds will be converted is of no direct relevant – they are bonds and therefore they are debt borrowing, and therefore are part of the gearing.Second question:
Please in future start a new thread when you are asking about a different question or topic. The reason is that our answer are to benefit everyone (we do not offer private tuition), and many search using our search box, for previous answers to do with the same question or topic, instead of simply asking the same question.
Today is 20th April and therefore the transaction in 3 months time will be on 20th July so we use July futures (which expire on 31st July).
The BPP answer for using the lock-in rate is not actually correct (they have assumed the closing basis to be zero – this is not the case because it will only be zero on the 31st July, not on the 20th July). Your answer is more correct (although the difference of 200 is not terribly significant on a total of almost $300,000, and would not really make a difference to the marking in the exam 🙂 ).
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