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

@2833833abc said:
how was p/e ratio valuation done??????? Q4(a)

Well I have no idea on how to do it initially but i have figured that since the equity and debt are given in percentage

–SECTOR AVG PER = 5 times
–EPS ( substitute with divided pay out ratio which you can calculate using infos)
= 500/EAIT (i dont remember how much exactly)
= say 40%
–Then get the share price using PER = 70 cents
–Corgic value = 70 cent x 0.75 of equity
=$52m

#I seriously spent 5-10 mins approx figuring these damn thing out and I was like I am not going to leave these blanks and boomed these popped out of my mind.Even if these are wrong,I should have at least 1/2 marks just to play safe

I messed Q 4 also. Even though I had enough time:-(
On my opinion, CAPM and MM combined was the most difficult part of syllabus. With very strange and sometimes not logic calculations.
But I have to admit that the rest of questions were ok.

@benfabregas said:
I messed up question 4 completely. I started de-gearing then figured I didnt need to. Hope I picked up some marksalong the way but definetely nowhere near the answer. Also was unsure about the difference between financial, business and systematic risk?

Also, on question 2 I wasnt sure exactly what they were asking about working capital?!

@vjsharksn said:
wooaaaa!!!! what i did was,
1. i left 2.(b)
* Q3. Islamic dinance confused with musharka :(!!! 5 marks wore incorrect :'(
*Q4 bcoz i time pressure i didnt saw the tax rate xD so i assumed it 30% clearly writting my assumption and then calculated WACC xD and that divident valuation was incomplete!!!! so i guess 20 marks gone hanged xD

Remaining marks!!!!! battle to PASS!
Will pass INSHA ALLAH

I managed to answer all with slack in WC (theory part-9marks) and sensitivity analysis (7 marks) and mudabarah (5 marks). Hope my bullshitting explanations carries at least 1 mark.

For the question of islamic finance,
I give definition of mudaraba
Stating about how profit or loss shout be allocated
and the rab-al-mal cannot interfere with the way mudarib manage the business.
then i further states that speculation and extreme risk is not allowed in islamic finance, and that company is planning to hedge export receipt. So cannot use future contract because islamic finance prohibits this.

Then i have no idea what to write for the 5 marks

Q4(a) I got $3million x 5 = $15 million

Actually you do not have to figure out the value of equity, question already given the proportion (and stated is based on market value).

Guys was the discount rate in Q 1) 20%?

I cudnt understand the terminology muradhba. The examiner should translate that in English and keep that in bracket. Listen to me tony mr examiner , it’s absolutely not fair to give 5 marks for that. There are hardly 3 full sentences about it. Examiner could you suggest me what do I write? And how do u expect us to understand the terminology which we never use in our real lives. Translate that into English next time so that we can write which is which without a confusion. If I fail I blame u

What discount rate did everyone use for the NPV and EAC question? I used the after tax rate both times… I seem to remover something about always using the after-tax rate even if you’re ignoring taxation. Still, a stab in the dark an hopefully won’t lose too many marks.

Also, my revision note show using the cost of borrowing instead of the wacc for a cost comparison of two projects, but wasn’t given, so I used the WACC anyway?

What did everyone else use? I used 7% both times instead of 12% pre-tax.

Q1= took all the figures to the nearest $000…sensitivity analysis and probability can’t say anything abt it
Q2= part b about working capital…dunno if its right or wrong
Q3= went well…i guess forward contract was more suitable…don’t remember exactly now but probably it was giving more earning
Q4= supposed shares to be 75,000 Calculated EPS by dividing earnings with the assumed shares and did the rest of the part…i don’t think so any regearing was needed all we had to do was to re-calculate the equity using the new equity beta…the new wacc after the issuance of debt was around 10% i guess

@melindamarchal said:
What discount rate did everyone use for the NPV and EAC question? I used the after tax rate both times… I seem to remover something about always using the after-tax rate even if you’re ignoring taxation. Still, a stab in the dark an hopefully won’t lose too many marks.

Also, my revision note show using the cost of borrowing instead of the wacc for a cost comparison of two projects, but wasn’t given, so I used the WACC anyway?

What did everyone else use? I used 7% both times instead of 12% pre-tax.

used after tax wacc for project 1 but used before tax wacc for project 2…may be u r right so 1 mark gone here 🙁

Note to Royyston…
I got the MM hedge as being a lower amount, BUT it was a RECEIVABLE in euros, the the better option would have been a forward. Only 1 mark though, so wouldn’t worry.

@royyston said:
1a) NPV, I think I messed up for the inflation rates portion, but still managed to obtain a positive NPV. 1b) EAC= NPV/Annuity factor, tax & CA were ignored so pretty straightforward, should be machine 1 as EAC is cheaper. 1c) Theory- Sensitivity analysis – “What If” analysis to identify critical variables where NPV = 0, probability analysis – choosing the best outcome of each project.

2a) Overtrading- 7 symptoms of overtrading. 1) Rapid increase in sales, 2) Decrease in GP margin, 3) Deterioration of quick and current ratio, 4) increase in inventory days, receivable days, payable days, 5) Asset turnover increased, 6) Overdraft increased, finance costs increased. 7) No change in equity shares, no change in L/T debt. Compare with industry average.

2b) Compare and contrast wc financing policy vs wc investing policy- made a little link to conservative, matching and aggressive policies. short-term/long term in nature.

2c) Miller Orr Model- Upper limit calculated wrongly 🙂

3a) SMEs vs large companies- define agency problem. lack of finance for SMEs, risk is not as high as large companies.

3b)Debt finance and factors- ??

3c) Mudaraba- Equity financing. Emphasised that it is similar to public issue, private placement, rights issue etc.

3d) Money market hedge and forward market hedge. Should be money market hedge as it is cheaper.

3e) PPP theory, calculated spot rate wrongly. 🙂

4a)P/E ratio- ?

4b) Ke- Use Capm to find Ke first by plucking in values like Rf and the risk premium. Next with Ke, use DVM to find MVE. Hope it is correct.

4ci) WACC- Ke from part(b), and Mve from part (b) + Kd (given) and Mvd by using proportion because of 75% vs 25% on market value basis. After which can derive WACC. WACC= 10% if I’m not wrong ii) Risk adjusted WACC, Ke changes- find new Ke using Capm formula. Kd is given once again. After which derive both Mve and Mvd by using proportion, this time 60 %, & 40%.. WACC = 10.3%. Discuss variation.

4d) Management of risks- Totally gave up on this one.

Overall, tough paper. 🙂

i guess it was forward rate because it was a receipt hedging not payment hedging 🙂

Oh yes, my bad. I think I put a forward contract too cos most of the questions I attempted previously were always forward contracts rather than a mm hedge.