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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.
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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…….Hello cazza, u are right that we got WACC increase of diff. Of 0.3%.I think it’s bcoz the structure was given in %. I used d figures as given. May be u assumed mkt value 4 both structures…well, may be d examiner is only interest in d behaviour of WACC( i.e the changes that occurred) and not the figures.
@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.I got a much lower ke than most on here
If i remember, rf was 4%, first beta was 1.6 ,and market risk was 5%
Using CAPM, That gives 5.6%, then with change of beta 6%, then multiplied by equity share of capital in WACC
It wasn’t the market risk that was 5% but the market premium. So capm would be 4% + (1.6 * 5%) I think this is where the people getting the lower WACC figures have gone wrong as they have mistaken the premium for market risk. Market risk would have been 9% (4%+5%).
I originally made the same mistake but caught it as it made no sense for equity in a poorly performing company to be cheaper than debt.
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for q4 dvm calculation, is there anyone calculate like that: use year 3’s earning to calculate the price, then discount it to give current share price? I saw part b of 2010 June’s Q4 is somehow a similar question.
Jaysuey, u damn right. I used Premium in place of Market risk, that’s y my figure is lower, but we made d same point(conclusion) though. That was an oversight or lack of concentration due to time pressure. I probably will loose few marks there. But over all, the buck of the marks will lie on the explanation. I hope examiner understands my point.
No one has said anything on q1. The NPV. How did u guyz inflate the sales and VC ? I inflated base on the first year sales/ vc. And FC was ignored, as the examiner already told us that the cost has already been incurred. I hope I did the right thing. Never seen such kind of que. In my life.
I know I got the DCF wrong, I had a complete mide block over Nominal being the real or money rate. I’d originally decided it was the nominal = money which was correct but talked myself out of it as I decided its more of a test to change the real rate into the money rate. Easy marks thrown away by carelessness and over thinking!
I maybe remembering the questions wrong (more likely misread I always do that) but I included fixed costs as the question said they were incurred wholy for the project? I.e. they were incremental to the project being accepted.
I can’t wait to the 8th of August, I’m sitting P1 on Wednesday but atm all I can do is keep running over F9 in my head. This is the 3rd time I’ve sat this paper previously I’ve gotten 36%, 48%. This was my first time using OT’s lectures as well as my Kaplan text and yet I found this exam harder than the 2 previous. Hopefully that just means I know what I was doing!
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well the paper was not bad though i might not get a pass.
@mbangweta said:
well the paper was not bad though i might not get a pass.dont be so disappointed
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do you people know when the answers will be published ???????????????????????????????????????????????????????????????????????????????????
hey guys, any one clarify was it murabaha, trade credit, or mudaraba equity finance in the exam for 5marcs? i took it as murabaha trade credit ….??
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It was Mudaraba, the partnership thing.
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On your point about fixed costs – should we not have included them as I thought the question stated incremental?
Did anybody else include fixed costs like me!!? 🙁- Topics: 23
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@nenor said:
It was Mudaraba, the partnership thing.Is that the one where one party provides the money and the other only the expertise?
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@sarzie87 said:
@benjamincozoemenaOn your point about fixed costs – should we not have included them as I thought the question stated incremental?
Did anybody else include fixed costs like me!!? 🙁I included fixed costs in the NPV question (1) as they were all due to the project being considered and therefore relevant.
I believe that is correct. If it had been absorbed overhead then it would have been ignored (unless it was incremental etc)
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Have we decided whether it was correct to use the 12% discount rate or 7% yet?
Both were nominal (not real), but the former was pre tax and the latter after tax if I remember correctly?
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