*** F9 June 2013 Exam was.. Post your comments ***

I thought that this paper was a lot more straightforward in the way the questions were asked than the last 2 sittings, I was really worried when I looked at Dec 12 and June 12 papers. I thought it was a decent paper, hopefully the study will have paid off and I will have scored enough to pass.

Good luck everyone who sat the paper today.

I wrote the financial objectives of profit maximisation and growth/expansion,Positive NPv and higher market share

the ques 4 part regarding the working capital policy i calculated the current operating cycle and then the revised operating cycle by recalculating a/c recv, payable and inv days.
Then i calculated the revised a/c recv, a/c pay and inv vales on the basis of the revised recv, pay and inv days.
My revised a/c recv days and inv days had shortened and the new a/c recv value had decreased. i calculated the amount of decrease in a/c recv and applied the 5% interest on it to calculate the finance cost saving. was this procedure correct?

Exam was fair but there was the issue of time constraint … want to say a big thank you to team OT and to the big guy John thanks a bunch …

sir john thanks alot for your great lectures….

i made all the correct calculations but made a mistake by choosing MMh rather than FMH as preferable..how many marks will i lose?

My Answers.

Q1a – NPV postive approximately $4.5million. make sure you inflated selling price, variable cost and fixed costs from the first year onwards. tax and capital allowance one year in arrears with balancing addition in y5. scrap value in y4, working capital of 575 regained in y4. initial wc in y0 with additions in y1, y2 & y3.

Q1b – Nominal and real.
Nominal takes into account inflation and interest i.e. fisher effect, not actual cash flows. Real is the actual cash flows but does not take into account the time value of money. (this may be incorrect)

Q1c – primary objective is maximizing shareholder wealth either through revenue or capital gains. secondary objective of a listed company is value for money. This would be the primary objective of a NFP.

Q2a – WACC was 11.24%.

Preference shares are included. 4% / 0.40$ = Kps 10%, market value 3000 * 0.40 = 1200
Bank loan 4% – 30% tax = Kd 2.8% = Bank loan = 1000
for OSC I do not remember.

Q2b – CAPM can be used to find specific project Ke because the B can be manipulated and i.e. companies B’s in other fields can be ungeared and regeared to your capital structure to find your company specific Ke in that field.

Q2c – Ke is more expensive then Kd because of pecking theory. Equity shareholders are the last to get paid. Kd is usually also secured with either floating or fixed charges and perhaps a covenant of some type.

Q3a – WCC – 67 days after changes from 130 (or 140 days).
Extra financing cost I believe was $32000 (difference in overdraft * 5%, i believe i forgot to account for taxation savings here)
Q3b – Receivables policy – competition in industry, investment/risk wanted – longer rec. period more chances of bad debts, startups & small companies must give longer periods to lure customers, business environment – i.e. supermarket has little or no receivables, construction company has receivables which might be years old. aging analysis should be done etc and also the benefit of cash received must outweigh the cost of securing the payment.
Q3c – forex risk – The 3 risks for a multinational are translation, transaction and economic risk.
Q3d – forward market hedge was +2000$ more profitable

Q4a – find share price in 2-3 years, discount back to current price. I suggested this was unsuitable because even though it would give future growth, it is signalling to shareholders their are underlying problems with the company. Furthermore, even though M&M stated that shareholders do not care between revenue and capital growth, revenue orientated shareholders will be driven away.

Q4b – EPS will rise but will dilute ownership pool

Q4c – Debt issue will give the best EPS and will not dilute ownership. Must take into account gearing of the company in order to ensure the new debt will not raise the cost of the Ke and therefore negate the savings of the lower Kd. Convertible debt should be considered since it is a form of delayed equity and will not affect currently the EPS.

Q4D – Venture capital / Traded Bonds / Equity Finance
VC – high risk / high reward, ke required of > 30%. not for listed companies. good for aggressive moves i.e. takeovers.
Equity finance – pecking theory states will require the highest return of all financing.
Bonds – usually secured with a floating or fixed charge or a covenant of some type, lowest cost of all three finance options here (i think maybe this is incorrect).

<cite> @semreh said:</cite>
My Answers.

Q1a – NPV postive approximately $4.5million. make sure you inflated selling price, variable cost and fixed costs from the first year onwards. tax and capital allowance one year in arrears with balancing addition in y5. scrap value in y4, working capital of 575 regained in y4. initial wc in y0 with additions in y1, y2 & y3.

Q1b – Nominal and real.
Nominal takes into account inflation and interest i.e. fisher effect, not actual cash flows. Real is the actual cash flows but does not take into account the time value of money. (this may be incorrect)

Q1c – primary objective is maximizing shareholder wealth either through revenue or capital gains. secondary objective of a listed company is value for money. This would be the primary objective of a NFP.

Q2a – WACC was 11.24%.

Preference shares are included. 4% / 0.40$ = Kps 10%, market value 3000 * 0.40 = 1200
Bank loan 4% – 30% tax = Kd 2.8% = Bank loan = 1000
for OSC I do not remember.

Q2b – CAPM can be used to find specific project Ke because the B can be manipulated and i.e. companies B’s in other fields can be ungeared and regeared to your capital structure to find your company specific Ke in that field.

Q2c – Ke is more expensive then Kd because of pecking theory. Equity shareholders are the last to get paid. Kd is usually also secured with either floating or fixed charges and perhaps a covenant of some type.

Q3a – WCC – 67 days after changes from 130 (or 140 days).
Extra financing cost I believe was $32000 (difference in overdraft * 5%, i believe i forgot to account for taxation savings here)
Q3b – Receivables policy – competition in industry, investment/risk wanted – longer rec. period more chances of bad debts, startups & small companies must give longer periods to lure customers, business environment – i.e. supermarket has little or no receivables, construction company has receivables which might be years old. aging analysis should be done etc and also the benefit of cash received must outweigh the cost of securing the payment.
Q3c – forex risk – The 3 risks for a multinational are translation, transaction and economic risk.
Q3d – forward market hedge was +2000$ more profitable

Q4a – find share price in 2-3 years, discount back to current price. I suggested this was unsuitable because even though it would give future growth, it is signalling to shareholders their are underlying problems with the company. Furthermore, even though M&M stated that shareholders do not care between revenue and capital growth, revenue orientated shareholders will be driven away.

Q4b – EPS will rise but will dilute ownership pool

Q4c – Debt issue will give the best EPS and will not dilute ownership. Must take into account gearing of the company in order to ensure the new debt will not raise the cost of the Ke and therefore negate the savings of the lower Kd. Convertible debt should be considered since it is a form of delayed equity and will not affect currently the EPS.

Q4D – Venture capital / Traded Bonds / Equity Finance
VC – high risk / high reward, ke required of > 30%. not for listed companies. good for aggressive moves i.e. takeovers.
Equity finance – pecking theory states will require the highest return of all financing.
Bonds – usually secured with a floating or fixed charge or a covenant of some type, lowest cost of all three finance options here (i think maybe this is incorrect).

congratulations u passed 😀
however for the question of why ke is greater than kd, u said becuz if pecking order thoery ? :O isnt it just a preference for sources of finance?

yeah ques 3 and 4 were tricky, i also re calculated overdraft…

i really despise this paper. I am sick of this garbage for a paper ACCA has. I mean most of these things in the syllabus would not even be used in the real world…

I failed this paper 3 times already only paper i ever failed for ACCA (finger cross) even finished P papers and not this F9. I think i did well for the first 3 questions , but Question 4 really sucker punch me and now i doubt i would gain a 50 overall cause i only attempted part of this question.

<cite>@thebear said:</cite>
according to my study text , BPP already give a reminder that the preference shares should not be included in the WACC calculations

to quote chapter 15 , page 302 of the study text by BPP

” when calculating the weighted average cost of capital , the cost of preference shares is a separate component and should not combined with the cost of debt and cost of equity “

I may be mistaken but sure Pref.shares are included in wacc calcs

<cite> @skay123 said:</cite>
Hi guys,
In the WACC calc….working out the cost of the redeemable loan note ……in the irr calc for df@5%and 10% for both Npv I got was negative…did anyone get this or maybe I went wrong with the calculator….????.?

I got that but the 5% was so close to zero I decided it rounded to 5% in the end!!!!!