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@royyston said:
Discount rate – (a) use nominal before tax cost of capital 12% , (b) use nominal after tax cost of capital 7%I use after-tax 7%
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Very patchy exam had a few moments where i realised i was going wrong and could backtrack.
The problems in q4 revolved around valuing a company where there had been a series of decreasing dividends with no div paid in current year but increasing dividends predicted from the coming year onwards.
No optimistic but who knows.
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@xiaofang81 said:
I use after-tax 7%For both parts?
For the NPV I used 7%. For the EAC I used 12% as the question said to ignore tax?
Can anyone please explain from beginning to end how you would figure out the market values for the equity and debt in WACC calculation?
A few points on other comments:
– I used 12% for NPV and 7% on EAC. The rationale behind it was that in NPV you already take account of tax during all the calculations. Whilst you don’t do that on EAC
– Upper limit was 200k+75k
– Return point is 200k+1/3 spread
– My MMH value was $1m compared to $995k on forward – I am gutted about this, as I never managed to remember how you should do it!!!!
– Finance risk – it is exchange and interest risks, which you manage through hedging, matching, netting, leading, lagging, etc.
– Business risk – the systematic risk – consequences of entity’s activities, decisions, strategies. Minimise by diversification
– Unsystematic risk – market risk, notthing you can do about it. I should have said that you avoid or transfer it (as per P1) but didn’t!
– Compare and contrast fin and invesment policies for WC – that was a bit of a surprise..didn’t really know what to say so I kind of talked about each one of them. they both aim to maximise profits, don’t they – profitable investments and cheapest finance@royyston said:
For both parts?yes, for both..am i right?
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@xiaofang81 said:
yes, for both..am i right?I used 12% for the first part and 7% for the second because for the EAC calculations, it had something to do with lease or buy decisions which often used nominal after tax cost of capital.
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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 forward market hedge as it is a receipt and not a payment.
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. 🙂
7% for a NPV always use after tax since cah flows are after allowing for the tax(see past questions)
12% for b – say to ignore taxationquestion 1& 2 seemed pretty fair, other than financing and investment parts of working capital. 3 ok other then murbada or whatever it was, q4 part a seemed very complicated for 4 marks and couldnt do it which didnt help with part b think i got wacc right, was the cost of equity 12% here? on question about interest rate hedging payment i got forward rate to be $24 better option is this right? 50% at best i think!
q1.i. npv = 2234 may be, used before tax discount factor… 12%
ii. EAC, chosen machine 1 as less costly. used after tax discount factor, 7%
iii. probability & sensitivity.. hope written enough to get 3-4 out of 7..q2.i. over-trading.. calculated 6 ratios which was already given as sector average .. comment
ii. working capital investment & funding 9 marks.. clearly couldnt understand what to write.. left it to write letter..
iii. easy upper & return point & discussion..q3.i. sme & medium compared to big co. .. i mentioned about the agency problem
ii. what company will look to take fin and what providers will check to give credit?
iii. mudaraba.. dont know in details.. just written basic things.. hope will get 1-2 out of 5..
iv. forward & money market hedge.. i have chosen forward as will receipt more..
v. purchase power parity.. next year spot rate came 1.9.. dont know exactly but hope described correctly..q4. worst question for me..
i. valutione pe.. multiplied first year;s earnings by industry pe 5.. and discussion..
ii. cost of equity ke & dividend valuation.. no dividend so how to calculate?!! i did from 3rd year as constant g from 3..
iii. wacc= 10%.. used ke 12% ve = 75% & vd = 25%… new wacc= 10.55% ke 14 may be .. ve60% vd40%..
iv. business, financial & systematic risk.. didnt do too well here .. may get 3-4 out of 9…please share where i have done wrong or right.. i didnt answe well wroking capital investment and funding theory 9marks and mudaraba 5… in this 14 i hope i may hardly get 5-6… other than the whole exam was ok.. hope to get 60+..
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Q1
(a) NPV calculation involving inflation and taxation (12 marks)
(b) Asset Replacement (6 marks)
(c) Sensitivity and Probability Analysis (7 marks)Q2
(a) Calculation of some easy ratios to determine working capital and overtrading analysis (Ratios being: Current ratio, quick ratio, inventory, receivables, payables, sales revenue/net working capital) -12 marks(b) Working capital policy affecting
(i) WC Investment
(ii) WC Finance
(9 marks)(c) Miller Orr (4 marks)
Q3.
(a) SME- Explain why Shareholder vs Director conflict is less than in larger companies (3 marks)
(b) Factors affecting debt financing, and what loan providers should consider when providing loan (8 marks)
(c) Mudaraba- explanation and how the company can use it to finance expansion (5 marks)
(d) Forward and Money Market Hedging calculations (6 marks)
(e) Purchasing power parity to determine rate for one year forward contract (3 marks)
Q4.
(a) P/E ratio
(b) Determining cost of equity and using that to find out the value of the business
(c) Current WACCA and New WACC after changing debt:equity ratio
(d) Business, Finance and some other Risk…
Overall impression of the paper:
1. Time constrained
2. TOO MUCH THEORY.
3. WAY TOO MUCH THEORY.
4. Theory, anyone?Couldn’t finish the paper. Attempted about 65%. Went in thinking I’d ace it, came out hoping to clear somehow
God help us all!
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xiaofang81 said 1 hour, 1 minute ago:
@royyston said:
For both parts?
yes, for both..am i right?me too. but someone said ignore taxation in project 2, so……
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Also,
Just last night I forced my baby brother to listen to me reciting the names used in Islamic finance…Just couldn’t get it. He helped me by making me associate them with something. So Mudaraba was “MotherofAbba” or something…which is why I managed to remember at the last minute. So 5 marks are all thanks to him.
I’m thinking of forcing him to sit through my prep for P3 so he can help me with more memory jogs lol.
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I had time issues having spent one hour each on Questions 1 and 2.
Did Q3 and 4 in a panic and was sweating when I couldn’t see what dividend and growth to use in Q4 – just made assumptions e.g.3% growth rate – doesn’t sound right though!
Hopefully enough done to get through the exam however!- Topics: 0
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royyston said 1 hour, 25 minutes ago:
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.gosh, i did the same mistake
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@mkate said:
gosh, i did the same mistakeHmm so it was a forward contract, yes?
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Question 4 was disaster! How to find dividend & how to calculate dividend!
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royyston said 2 minutes ago:
@mkate said:
gosh, i did the same mistake
Hmm so it was a forward contract, yes?But, let me think over. Isn’t it to calculate the USD cost to receive the euro? I still believe should be money market.
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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 (Business, Financial & Systematic)- Totally gave up on this one. 🙂
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how was the inflation to be appplied in the q1 sales volume ?
like 1,04^2 for year two ?It was average.
Big thanks to opentuition and John.What is the answer for the 2nd part of Working capital?
Question was something like differences and similarities between
1, Working capital investment
2, Working capital financeAnd what is the answer for Q4 section 4?
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@mkate said:
But, let me think over. Isn’t it to calculate the USD cost to receive the euro? I still believe should be money market.The home country was using $’s
Company wanted to receive 500 K euros…
So in money market hedging…
the steps would be
1. Apportion interest rate of buying euros (higher rate)
2.Buy Euros
3.Convert euros to dollars
4.Apportion interest rate of depositing dollars (lower rate)
5.Deposit dollarsI think for me, forward contract was cheaper. Don’t remember anymore. I’m glad it’s over.
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@zohaibahm3d said:
how was the inflation to be appplied in the q1 sales volume ?
like 1,04^2 for year two ?Sales Price x (1.04)^2 for year two 🙂 —-if indeed, 4 percent was the inflation rate. Don’t remember
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wow it was indeed 4% it means i did good among many who told me that it was to be applied with sales price X 1.04 irrespective of whichever year !
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