FM*** F9 June 2012 Exam was … Comments and Instant Poll ***

hello again,
i do understand the the rest, but to calculate the spread u need variance of cash flow, transaction costs and interest rate . And either i was stupid or i was confused but i didnt saw these figures any where in the question.
And i am more confused because it was an easy Q (if i had the figures).

@ammar-shabbir said:
Hello Everyone i just want to comment regarding Q.1 for the calculation of npv i used after tax rate of 7 % the reason being that in WACC there r 2 components Ke & Kd in case of Ke there is no tax but in Case of Kd it is tax deductible thus for npv calculation i took 7 % rate after tax.... however in part b asset replacement Qs...
i used 12% the reason being that it explicitly stated that ignore tax & capital allowance....thus i used 12 % before tax so do comment whether it was logical or not..... thanks.....
In Q4 i did make a blunder i took year 3 dividend value & use that in dvm formula & got an utterly ocnfusing figure 1444444... something like that.... but hoefully i might get 2.5/4 as i correctly calculated Ke.....

for the dvm i got 11444 million. i took yr three since the question mentioned the company was struggling financially for the last two yrs

@aneelraja said:
hello again,
i do understand the the rest, but to calculate the spread u need variance of cash flow, transaction costs and interest rate . And either i was stupid or i was confused but i didnt saw these figures any where in the question.
And i am more confused because it was an easy Q (if i had the figures).

hey the spread was given so we didnt had to calculate it. the spread given was 75000

@ochieng said:
the p/e qn required us to compute the current earnings given the earnings of 3 prior years. earnings thus grew by by the square root of 4300/3000)-1 which gave me about 19.6percent. used that to compute the current earnings and multiplied the earnings by 5 to get the mkt value

Well I said if the earings were forecasted as with 3% growth. So if the earings of 30,000 in Year 1 including the 3% growth so the current earning must have been 30,000/1.03=29126 and use that in PE vaulation as 29126x5=14563 Hope I get some credit for it ;)

@royyston said:
Hi for Q4 did anyone get Ke= 12%, WACC= 10% and new Ke = 14% and new WACC = 10.3%? Thanks

I did the same... So we both are either right or wrong...;)

@aneelraja said:
hello again,
i do understand the the rest, but to calculate the spread u need variance of cash flow, transaction costs and interest rate . And either i was stupid or i was confused but i didnt saw these figures any where in the question.
And i am more confused because it was an easy Q (if i had the figures).

spread was given as 75,000 so did not need any transaction cost etc to use the formula.
Minimum level 200000+spread 75000 = 275000 Upper level
Return point 20000+1/3 of 75000= 250000
Cash to be transferred out when hit upper limit = 50000 (I mentioned it in discussion)

@royyston said:
Hi for Q4 did anyone get Ke= 12%, WACC= 10% and new Ke = 14% and new WACC = 10.3%? Thanks

we are three with same results!:)

@kachaloo said:
spread was given as 75,000 so did not need any transaction cost etc to use the formula.
Minimum level 200000+spread 75000 = 275000 Upper level
Return point 20000+1/3 of 75000= 250000
Cash to be transferred out when hit upper limit = 50000 (I mentioned it in discussion)

return point 200 000+ 1/3 75000=225 000

@royyston said:
Hi for Q4 did anyone get Ke= 12%, WACC= 10% and new Ke = 14% and new WACC = 10.3%? Thanks

me

@libratype said:
return point 200 000+ 1/3 75000=225 000

sorry you are right it was typo...

@royyston said:
Hi for Q4 did anyone get Ke= 12%, WACC= 10% and new Ke = 14% and new WACC = 10.3%? Thanks

Yep. me too. Think that's 5 so far.

@cazza99 said:
Yep. me too. Think that's 5 so far.

so got 5 marks r8...thnx god

@rawfay said:
Q4

For people complaining about no dividends in the current year. Remember the dividend for the 2nd year were given.

And remember that DVM formula in which Do(1+g) = D1

so you were already given the D1 value :D

is'nt it was a forcast of future earnings and dividend…..n the question asked for the current mv ……so i think u gt the mv of the forcasted yr1…which is nxt year….bt what abt current year…..but u did an exellent job….of thinking abt the d(1+g) as a whole….nice

So, has anyone come up with a definitive way of valuing Co with DVM with no dividends?? I can't figure out how we were supposed to do it.

@cazza99 said:
So, has anyone come up with a definitive way of valuing Co with DVM with no dividends?? I can't figure out how we were supposed to do it.

i guess we hv 2 w8 till the examiner speaks....

To value the company by dvm and going by previous exams when no dividend in current year so no growth to next year .....use year 1 as current year so yr2 dividend is div + g divide this by the cost of equity(i think 12%) you now have a value in year 1 terms so multiply by year 1 12% disc rate and you have the answer.Got it wrong myself i just divided yr1 div by 12%,i dont think it is right and going by pevious exams its wrong but techniqne right so maybe a couple of marks anyway

time was very pressing. too many discussion ques to answer. Q1 and Q2 took me almost 2hr. Q4 was a disaster for me!

For Q1, can anyone tell me if fixed cost should be included in calculating NPV? I included it and thought I made mistake just when I handed in papaer!!!

For q1, do we use pre-tax cost of capital of 12% for (a) and post-tax 7% for (b), or do we use post-tax cost of capital of 7% for both? Thanks!

@zahidbd said:
so got 5 marks r8...thnx god

I too got the same answer - so it's 6 so far :)

Will the examiner give decent marks if i 'assumed' a dividend and no. of shares value? I mentioned my assumption in bold writing.

besides when will they upload the question paper? audit was uploaded within HOURS!

@cazza99 said:
Yep. me too. Think that's 5 so far.

Cool, seems like all 6 of us have the same answer for 4b. ;)

Hi all, I found Q4 a massive challenge! I have never seen a question on WACC based on that type of scenario in all the past papers I studied from! I was completely confused and gutted! The examiner really tweaked the question this time round on a section of the paper that has been somewhat similar in the past papers, I feel 25 points robbed! I would have accepted it had it been in past paper & I chose to ignore it but never has it been structured in this way!! I have the previouse comments and most of you feel like me, unsure how to work the answer out! I wish we could do something to put out thoughts forward to ACCA. The questions asked in Q4 were exactly how they were presented in past papers but the scenario was tweaked hugely (I felt) by the examiner. I just feel gutted as studied so hard and I know I will have to re-take the exam due to the scenario being so different. What do you all think?

got the same answers for question 4b too...:)

I would like to share your feelings, as i studied also very hard and long. It's a pity to fail only because of that question.

@harjit29 said:
Hi all, I found Q4 a massive challenge! I have never seen a question on WACC based on that type of scenario in all the past papers I studied from! I was completely confused and gutted! The examiner really tweaked the question this time round on a section of the paper that has been somewhat similar in the past papers, I feel 25 points robbed! I would have accepted it had it been in past paper & I chose to ignore it but never has it been structured in this way!! I have the previouse comments and most of you feel like me, unsure how to work the answer out! I wish we could do something to put out thoughts forward to ACCA. The questions asked in Q4 were exactly how they were presented in past papers but the scenario was tweaked hugely (I felt) by the examiner. I just feel gutted as studied so hard and I know I will have to re-take the exam due to the scenario being so different. What do you all think?

I agree that Question 4 is very challenging, but consider the level of difficulty in question1,2,3 is just fine, it is very clear that examiner set question 4 to differentiate candidates of different level.

I also got 10% and 10.3% for the WACC. for P/E market value i got $15million.

Yes, some exam questions were rather unexpected. Concerning DVM of question 4, I think, it may be solved as follows:

1. Multiply each future dividend by growth rate (d*(1+g)).
2. Find PVs of the results of the above and divide by (r-g).

Here is a revision lecture on this issue (the exact name of lecture I don't remember).

However I remembered this solution only at the end of the exam and couldn't finish the calculations.

Y is everybody getting 10% and 10.3% for d WACC ? I got 5.2% and 5.52%. respectively...and my reasons r dat even though d capital structure changed from 75%equity: 25%debt to 60%equity: 40%debt, the risk(:) also increased from 1.6(can't even remember d figure again, but I fink it's 1.6) to 2...and so the WACC also increased, ordinarily WACC should reduce as a result of increase in debt and decrease in equity, but d risk was also increased.

@benjamincozoemena said:
Y is everybody getting 10% and 10.3% for d WACC ? I got 5.2% and 5.52%. respectively...and my reasons r dat even though d capital structure changed from 75%equity: 25%debt to 60%equity: 40%debt, the risk(:) also increased from 1.6(can't even remember d figure again, but I fink it's 1.6) to 2...and so the WACC also increased, ordinarily WACC should reduce as a result of increase in debt and decrease in equity, but d risk was also increased.

Hi Ben
The increase in WACC was due to the new cost of equity (14%) found by using the new Beta (2) in CAPM again. My understanding is that you would only expect the WACC to decrease on the initial introduction of debt capital, but as debt was already in the structure (at 75:25) then it is an increase in debt which inevitably increases the risk (:) which increases the cost of equity which increases the WACC.
That was my take on it anyway..... However I could be wrong!

Ben. I'd be interested to know what diff figures you used from a few of us to get 5.2?
Maybe when the q's come out it may be easier to see. Curious that we all got an increase in WACC of 0.3 though.......