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Sir, am unable to understand how the examiner has accounted for the probabilities. Could you please explain how he has arrived at the EPV of the cash flows before and after undertaking the project?
Thanks a bunch!
Best is for you to watch my lecture working through this question. It is explained there.
The lecture is split into 3 parts (because it is a long question!) and you can find the links here:
Went through the lecture sir. You have explained everything so comprehensively!! I couldn’t make heads or tails out of the examiner’s answer. Thanks a lot for the lecture!! Really helped! 😀
Thanks – I am pleased you found it useful 🙂
(I recorded two more question 1’s today from the previous two exams – they will be uploaded today or tomorrow all being well)
Thank you so much for your sacrifice in giving us so much of your time and obviously priceless knowledge of this interesting and challenging paper. I just don’t seem able to work out how Keshi,s (P4 question 2a Dec 14) effective borrowing rate (after swap) of 5.04% was arrived at, I am sorry if you have answered this question before, I scrolled through but couldn’t find it hence my asking. Thank you for your continued patience Sir.
In future please start a new thread if it is question on a different topic 🙂
I am not sure which part of the answer is giving you the problem. If you are happy with the fact that there is an overall benefit to be gained by swapping of 0.8%, then the question says that 70% of the benefit goes to Keshi which is therefore 70% x 0.8 = 0.56%
If Keshi did its own borrowing at fixed rate they would be having to pay 5.5%. If instead they enter into the swap, then they will end up saving 0.56% which would bring it down to 4.94%, but they have to pay 0.10% to the bank, which ends up being in total 5.04%.
The free lecture on swaps may help you. Also, you can find on here my lecture going through question 1 of the June 2014 exam, where part(b) was another example of a swap.
Thank you ever so much Sir! It did occur to me to start a new thread, but hey it is P4 we are talking about here 😀 ! Thank you once again for your patience with our countless (and sometimes repetitive) questions.
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