FM*** F9 June 2016 Exam was.. Instant Poll and comments ***

increase which of the following the objective of maximise shareholder wealth? 1.share price 2.divident payment 3.earning per share 4.retained profit

Question 5(b), I assumed that production and sales went on forever and accounted for a perpetuity of operating cash flow and yr 5 - yr 10 depreciation tax benefits, ending up with quite high positive NPV, about $17-18 million. I was hesitating between a yr 5-10 or a perpetuity for operating cash flow but at the end decided to go for a perpetuity. Now I realise that a yr 5 - 10 should probably have been more reasonable since the useful life of the facility was 10 years. But in F9 and finance generally, there are a lot of assumptions in calculations and investment appraisal is no exception. The question asked for "the foreseeable future" so I think there was room for assumptions. Maybe the examiner could accept my assumption and still give me credit as the facility may continue to work beyond its useful life. Question 4(b), what's about the market value of the newly issued bonds ? Did you all assume that it was the same as par value, i.e. $100 ? I forgot to calculate its cost of debt due to time pressure and at the end, combined both the old bonds and the new bonds and use the cost of debt of the old bond in WACC calculation. I also thought that after the bonds issue, gearing should change accordingly leading to a change in equity beta and cost of equity so I re-calculated the new equity beta and cost of equity using CAPM. Did anyone re-calculate the new cost of equity or you used the old cost of equity ? Overall, I think it is quite an easy paper compared to other Fs such as F7 or F8. Calculations were straightforward, but a litte bit lengthy. Discussions were all tested before, the only problem was not having enough time to write them all out in enough details.

@tayyabom said: one mcq which had current NPV of 200 and asked for sensitivity analysis, possible options were: 12.5 10 others i don't remember. It was exactly zero at 12.5 ignoring time value of money, no discount rate or period was given. i chose 10 because i thought if there is any time value involved then it can't be 12.5 so i chose closer to it. i'm not sure. any ideas?

My answer is 12.5%. The numbers provided were present values that had already been discounted so you should ignore time value here. I think you forgot to take taxation into account.

@shoaibacca said: increase which of the following the objective of maximise shareholder wealth? 1.share price 2.divident payment 3.earning per share 4.retained profit

My answer was 1 and 2, share price and dividend payment.

@shoaibacca said: increase which of the following the objective of maximise shareholder wealth? 1.share price 2.divident payment 3.earning per share 4.retained profit

Share price n sumthing else i chose.

NPV Negative 137 i saw two of you got this which is good sign. After the probabilty i got 18450 x by the volumes WACC 9.8 then reduce slightly. The 16000 had irredeable debt of cost of debt you had to use 8% if im correct? Also add the 16000 onto the 432000 something for total market value which came to 438000 something Company was over trading. Regaeding MCQs as follows: I chose the lease after tax option. One of the MCQ i chose market segmentation is this correct? How people did Shareholder return. I think dividend plus 0.32 divide 9.00. Cost of equity i got 13.4 contraction fiscal policy was high tax n supply Sales - varable 4000 minus 2000 / by NPV got 10 per cent answer. Cos was A 730 000 something For the effectivness i chose C D For the financial management i chose 2 only as option. Not cash flow but they do plan funding. Anyone agree with above? What people think? What other MCQs were there?

I did same for Q 3 I did it seperate calculation for both and did u use money market and forward hedge methods

@england said: I did same for Q 3 I did it seperate calculation for both and did u use money market and forward hedge methods

Yes. I said choose forward markwt as it was a payment.

I struggled with the MCqs I hope I can pick up enough marks in that section to pass. Rest of the questions were ok and straight forward

When are the results expected?

When are the results expected? I found the MCqs too difficult

Anyone get these MCQ answers?? Please confirm. I chose the lease after tax option. One of the MCQ i chose market segmentation is this correct? How people did Shareholder return. I think dividend plus 0.32 divide 9.00. Cost of equity i got 13.4 contraction fiscal policy was high tax n supply Sales – varable 4000 minus 2000 / by NPV got 10 per cent answer. Cos was A 730 000 something For the effectivness i chose C D For the financial management i chose 2 only as option. Not cash flow but they do plan funding.

Ok i am rily relieved that i got about the same answers as most of you have stated. So... Q1) Overtrading Calculated the ratios for the two years given for comparison in the industry average and calculated % increase in the values given in the FS. It was obvious the company was overtrading due to rapid increase in sales,payables,receivables and overdraft.Liquidiy ratios had deteriorate...etc... Q2) MV DVM i got 5.something dollars per share. I could not calculate the total MV as there was no nominal value for the shares to calculate the number of shares in issue. Net assets forgot P/E method - used the last total earnings and multiplied by the P/E ratio given Q3) Hedging net payment of 600,000 Euro by forward or money.Forward better as you get to pay 6,000 dollars less.So it woud cost you less by using forward hedge Q4) WACC (Rily confused me at one point in time) I got 9.8% for both due to rounding offs which i should not have done as i would have gotten a small difference of about 0.something,but i guess il get points for my calculations. the 8% loan notes. I took MV as the $16K and cost of debt 8%. As there were no additional info on MV and cost and the time the loan will be redeemed.So i guess it was that or nothing. Q5) NPV. Negative for the four yr period. I calculated using the perpetuity method as it said for the forseeable future but now thinking about it it should have been for 6 yrs as the asset life was only 10 yrs got a possitive high NPV.Note that the TAD had to be discounted the normal way as it was only for 10yrs. TAD-$112,000.And for the probabilities just had to find the contibution for the 3 types and multiply by the probability rate and get $18,450 which is then multiplied with the units sold. So yeah...guess i did alright.Hope its a pass.fingers crossed. But it was not such a bad paper.The mcqs was doable for me

The npv mcq of 200.asking for sensitivity. You calculate the contribution (4000-2000)=2000. so answer 200/2000*100=10% Note that the values was already given in PRESENT VALUES. No need for discount rates.

For question 3 the issue of new bond had a cost of debt of 8-effect of tax 8*.75 is the real Kd. Also for change in gearing I assume we had to mention something like gearing has decreased slightly because of issue of debt but in reality it should have increased because we issued new debt which would have increased the risk of bankruptcy hence share holder asking for more return but in our answer we have assumed share price constant which really not the case of reality. also in NPV question Tax was paid in that year only so we were not to do any lagging.

@sharoz said: For question 3 the issue of new bond had a cost of debt of 8-effect of tax 8*.75 is the real Kd. Also for change in gearing we I assume we had to mntion something like gearing has decreased slightly because of issue of debt but in reality it should have increased because we issued new debt which would have increased the risk of bankruptcy hence share holder asking for more return but in our answer we have assumed share price constant which really not the case of reality. also in NPV question Tax was paid in that year only so we were not to do any lagging.

It was irredable debt 8 per cent you had to use. Not repayable so you do not tax 8 per cent by .75 that is what i seen every where. So i did 16000/ 438 000 sumthing divide by 8% for wacc bit.

What mcq's do u remember?

For the mcq for sensitivity anaylysis i first thought i have to do something with tax. But i changed my mind because i think u only do that if its for the selling price or an expense. But because it was contribution you didnt need to. But now im unsure cos of fixed costs. If that makes sense.

@mynameisearl said: What mcq's do u remember?

Some of the MCQ i remembered. I chose the lease after tax option. One of the MCQ i chose market segmentation. How people did Shareholder return. I think dividend plus 0.32 divide 9.00. Cost of equity i got 13.4 contraction fiscal policy was high tax n supply Sales – varable 4000 minus 2000 / by NPV got 10 per cent answer. Cos for the payable day ques was A 730 000 something For the effectivness i chose C D For the financial management i chose 2 only as option. Not cash flow but they do plan funding.

In question when new debt was issue was that redeemable or irredeemable. Also were we suppose to do 8 net of tax or it was not needed

For Overtrading question 1 i found it easy.. I work out the ratios- of the co and compare with industry ratios- then made a comment upon revenue, being decreased-probably the co invested in non current assets that generates the sales but with the long term loan being the same at $3000 for the two years. and also comment upon profitability increase < increase in sales Increase in terms of trade of customers, quick ratio- too small- too much cash tied in inventory. Too much Overdraft- co face liquidity problem- not able to pay off liabilities.. There is a reduction in net working captial- that s mean undercapitalised /overtrading to overcome the problem- i talked about issue of long term loan, invoice discounting, review terms of trade, make necessary action to sell inventory quickly to generate cash. hopefully could get maximum marks.. i found question 5 very difficult me.. else for the no business valuation also was ok and foreign exchange one and for the wacc, got stuck in for the second wacc.. mcqs were very tricky..

If it was irred then you are correct. I thought it was redeemable. If that is the case then my bad

@vipulv said: Some of the MCQ i remembered. I chose the lease after tax option. One of the MCQ i chose market segmentation. How people did Shareholder return. I think dividend plus 0.32 divide 9.00. Cost of equity i got 13.4 contraction fiscal policy was high tax n supply Sales – varable 4000 minus 2000 / by NPV got 10 per cent answer. Cos for the payable day ques was A 730 000 something For the effectivness i chose C D For the financial management i chose 2 only as option. Not cash flow but they do plan funding.

hi my answers were more or less same, though i didn't choose market segmentation as reason for invert yield curve, i chose because short term interest rates are higher than long term rates, something like that.

@vipulv said: Share price n sumthing else i chose.

i chose share price and divident payment..........

I found this MCQ question so weird thus I had to memorise it. I don't remember what question number it was but it goes like " Fad co is entering into a sale and repurchase agreement on the money market. The co has agreed to sell $10m of trial balance for $9.60m and will buy them back in 50 days time for $9.65m . Assume 365 days. What is the implicit annual interest rate. (A) 0.50% (B) 0.52% (C) 3.65% (D) 3.80%

9.65/9.6= 0.52%. Then 0.52/50*365 = 3.8%. That's what I did

I had no idea, didn't know what to do just picked with closed eyes

There was another mcq about interest rate parity. The interest rates for 1st and 2nd years. 3% then 4% in one country, 2 or smth else I don't remember exactly. How did you calculate that and is there anyone else who remembered this?

@ azaramirov: That question got me confused as well. In the end, i have calculated the rate for Y1 using the given interest rates and spot rate, then, using the rate i got i calculated the rate for year 2.

I got 3.8 too. What did people get for NPV first part? I did sales ninus cost got contrihution x by probabilties. 18450. My final NPV was negative (137) anyone else got this?