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@zohaibahm3d said:
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 !Why would one do that, where inflation is concerned?
Anyway, hope I am right…and that my concepts are brushed up.
Otherwise I’ll have something else to worry about, because investment appraisal is supposed to be the topic I am strongest in- Topics: 23
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I went blank with Q1 as to which nominal rate to use. I used 7% for the NPV of the project as we were including tax, and used the 12% rate for the machine part as it told us to ignore tax. That was the only logic I could go on at the time. Not too worried though as it is only a couple of marks. I got it as being machine 1 as the one to purchase.
On Q2 I said the company was overtrading. With part b, was that about aggressive, conservative and moderate policies?
The question on WACC completely threw me even though I’d gone through WACC so much yesterday. Absolute nightmare.
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@zohaibahm3d said:
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 !OH MY GOD.
They could be right O.O
The sales price and variable cost given were different in each year…so…perhaps…errrrr.
Okay I am incredibly confused now. I’ll just go sit in a corner and cry and wait for the results- Topics: 23
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The inflation bit in Q1, the prices were in time zero (current), so year 1 was selling price x 1.04, year 2 was selling price x 1.04^2, and so on up to the power of 4.
Same with variables at 2.5% was it?
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@razmataz
the last step of deposit USD doesn’t mean how much USD you will deposit after receivie EURO, but means how much USD deposit you will lost due to buy EURO at spot rate. That is my understanding.
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The exam was fair, except from the… marudaba, anyways, respect to the examiner… I also sat the F5 paper (had nothing to do with the syllabus questions were out of this universe and so on… it was like a statement to start an essay, you get the picture…) that is why I am paying my respects :))
@curiousmeerkat said:
The inflation bit in Q1, the prices were in time zero (current), so year 1 was selling price x 1.04, year 2 was selling price x 1.04^2, and so on up to the power of 4.Same with variables at 2.5% was it?
I do the same thing with you. I assume all price are given in year zero term.
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For hedge, I choose Forward Market too because the receipt in USD would be larger than in MM hedge. Luckily I divided the annual interest rate to 6 months to make it comparable! It is always tricky for this hedging question!
Also.. I selected 7% for NPV because the Net cashflow is post-tax .. using post-tax WACC sounds sensible for me. And using pre-tax @12% because the EAC ignore taxation….
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@mkate said:
@razmatazthe last step of deposit USD doesn’t mean how much USD you will deposit after receivie EURO, but means how much USD deposit you will lost due to buy EURO at spot rate. That is my understanding.
In my understanding, it is the USD that we will receive by deposit in MM hedge. We dont need to care about EUR loan as it will be being settled by the receipts.
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@angusyiu said:
For hedge, I choose Forward Market too because the receipt in USD would be larger than in MM hedge. Luckily I divided the annual interest rate to 6 months to make it comparable! It is always tricky for this hedging question!Also.. I selected 7% for NPV because the Net cashflow is post-tax .. using post-tax WACC sounds sensible for me. And using pre-tax @12% because the EAC ignore taxation….
Same. I have been thinking whether to use before or after discount for the EAC. But finally decide to use 12%
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can i get the answer for cuerrent and new WACC, current ke and new ke please??? can i have an estimate of the MMH n FMH?? i got like $248000 ofr money hedge and $251000 for forward..
Did you guys notice anything about q1b on machine 2 has included inflation. Then how about machine 1? Isit the figures before inflation?
@sohanidevi said:
how much did u guys got for the forward exchange and money market?I got $251256 for forward. The difference for mine was $2400+ btw the 2 answers
@imtired
I got $251256 for forward. The difference for mine was $2400+ btw the 2 answersi got the same thing. the best option was the forward exchange rate since it offers a higher receipt
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@sohanidevi said:
@imtired
I got $251256 for forward. The difference for mine was $2400+ btw the 2 answersi got the same thing. the best option was the forward exchange rate since it offers a higher receipt
the difference for mine is more than that. By the way, did you guys divided the annual borrow rate/deposit rate to get 6 mth rate for your calculation?? I think we have to?
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F9 paper analysis June 2012
1a) NPV using nominal before tax cost of capital of 12%. I think I messed up for the inflation rates portion, but still managed to obtain a positive NPV. Thus accept project as it leads to maximization of shareholders’ wealth. 1b) Calculate NPV of machines 1&2 using nominal after tax cost of capital of 7%. Next, EAC= NPV/Annuity factor and 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. This took me around 40 mins.
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, my goodness. Miller Orr Model assumes that when we are about to hit the lower limit, we liquidate ST investments so that we have adequate cash to return to the return point. Similarly, when we are close to the upper limit, we invest surplus cash to ST investments, which will then drop the cash level to return point which is deemed as the optimum cash balance.
3a) SMEs vs large companies- define agency problem (S/H wealth maximisation vs directors’ remuneration). 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. Answers should be around 250000+/-, rather close. And I chose forward agreement contract to hedge.
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. 🙂
Q1. I used 7% for NPV and got $1.6m (ish)
ALso used 7% for EAC – Chose machine 1 as cost less ($6k ?). Explanation part i said close call but cashlow my be an issue.
Probability & sensitivity – said that sensitivity doesnt incorporate rik, just highlights the vulnerable variables. Proability does incorporate risk as that is the certainty which management gives it but therein lies the problem with quality of info.
Q2 – Overtrading – recalculated all given ratios and made conclusion of overtrading. No new equity or long term finance to support 40% increase in turnover.
Working capital – Investment policy – was a bit of a sticky one but went with these are the choices of levels of investment.
Financing policy – how to fund decisions made above.
Problem was finding the similarities and diffs…………….
Miller Orr – worked out the return point but couldnt remember what the upper should be. Went with $300k.
Q3 – Agency problem (i’m doing P1 so was a bit of a gift for me!) so Directors of SME are quite liklely to also be shareholders hence Agency problem reduced.
Co would look at Equity/Bonds/straight debt. concerns would be control/interest charged.
Finance provider would look at Credit history and business plan.
Islamic Finance – i had only yesterday memorised the definitions and they were the last thing i looked at before going in (another gift).
Mudarabah = Equity deal – one party brings skill – one party brings capital. Both share risk of profit /loss. Case Co would need to consider potential loss of profit as no interest (Riba) is payable as it is banned.
Money Market Hedge Vs Forward rate
Forward was 6 month (cant remember exch – 1.99 i think)
MMH – borrowed Euros now (500k/1.025) – switch at spot to $ now – put $ on deposit @3% (6 mths of 6%) = end up with $x in 6 months
Forward rate came out as receiving the most $ in 6 months.(by @$2.4k?)
(i may have got the interest rates round the wrong way there – cant remember what they were)
PPP = think i worked it out at 1.97 or 1.98 – i know it was only 0.01 diff to the 1 year forward.
Q4 – PE = 5×3000 = Value $15m
Said PE may not be appropriate as may have diff capitl structures and case co had just repaid a shedload of debt.
Ke – got 12%
Dividend valuation – really baffled me. How can you do a Div calc with no Div’s?
So I did a div calc on year 1. A div calc on year 2. a iv calc on year 3. then a div calc on year 3 with growth. Examiner can take his pick !!
Wacc – gave us the debt : equity ratio so no need to look for actual values. Got 10% (Used Rf as 4% and Erm as Rf+Prem = 9%)
After financing Wacc – also gave us debt:equity so quick swap with prev formula. Gave us new Beta to work out new cost of capital = Ke 14% Wacc 10.3%
said rise in Wacc expected as more debt introduced so risk has increased.
Business Risk – put Industry comparison/ business news/ economic climate / goods & services supplied may be luxury.
Financial risk – put analyse gearing (cant remember the rest)
Systematic – Beta implies risk involved so need to look at that.Overall – spent way to much time on Q1 by 15 mins and Q2 by 10 mins but managed to catch up with 2 mins to spare.
feel like i did enough – was kinda out to prove a point as i failed in Dec with 44 so i practised my butt off.
Good luck to allAll my calculations r lame…d NPV threw me off balance, wot is it wif forecast info. With inconsistent figures, how could sales, variable cost, even wif inflation be lower compare 2 previous yrs, it is unrealistic…wot I did was 2 inflate year2 by 1.04 on year 1 value and so on…1.04, 1.04^2 and so on…however, I dnt fink que. 4 is all abt ungear and gear…am hoping on essays 2 pass me.
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@razmtaz
question 2
With part b,
the one for working capital finance and management difference , was that about aggressive, conservative and moderate policies?i tried 2 link that with aggressive, conservative and moderate policies……. fingure crossed…@z
@zohaibahm3d said:
Quote:question 2
With part b,
the one for working capital finance and management difference , was that about aggressive, conservative and moderate policies?For question 1 I disregarded fixed costs as there was nothing mentioned about them that they are additional (incremental) fixed costs.
I was wondering about that but all the practise questions I did there was clearly mentioned about FC. Here they seemed to me irrelevant.
Anyway at the end of the day it’s probably 1/2 mark for including them, I stated the comment why I didn’t take them into account….- Topics: 0
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@angusyiu said:
the difference for mine is more than that. By the way, did you guys divided the annual borrow rate/deposit rate to get 6 mth rate for your calculation?? I think we have to?Hi, I got something like that as well, can’t remember the exact amount, but the forward rate was favourable. The examiner gave us a bit tricky/unrealistic conversion rate, I have almost made a mistake! Deposit rate you have to time apportion to 6 month.
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