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Hi. The examiner’s answers to the June 2014 exam paper have finally been published on the ACCA website:
https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f9/exampapers/F9-2014-jun-a.pdfQuestion 4
In part (c), the examiner deducts the issue costs to calculate the TERP (just like the solution uploaded on OpenTuition).However, we had worked out a similar past exam question in class, June 2008 Q2 – THP Co, whereby the approach taken was different. In this case, the issue costs are not deducted to find the TERP in part (b)(iii), whereas in part (b)(iv), they are subtracted to find the market capitalisation after the rights issue. I remember our lecturer saying he did not agree with this method.
The only other question which involves TERP combined with issue costs is December 2009 Q3(a). Once again, the issue costs are not deducted to calculate the TERP, as shown below (copied from the examiner’s answers; the issue costs are the $0.312m in the third calculation):
Amount of equity finance to be invested in euros = 13m/2 = €6·5 million
Amount of equity to be invested in dollars = 6·5m/1·3000 = $5 million
The amount of equity finance to be raised in dollars = 5m + 0·312m = $5·312m
Rights issue price = 4·00 x 0·83 = $3·32 per share
Number of new shares issued = 5·312m/3·32 = 1·6 million shares
Current number of ordinary shares in issue = $100m/4·00 = 25 million shares
Total number of shares after the rights issue = 25m + 1·6m = 26·6 million shares
Theoretical ex rights price = ((25m x 4) + (1·6m x 3·32))/26·6 = 105·312/26·6 = $3·96 per shareAs a result, I got the impression that issue costs are only deducted to calculate the market capitalisation after a rights issue. But it seems like I was wrong! 🙁
Question 1
In part (b), there was no need to calculate the NPV for the combination of projects including B – only the NPV resulting from combination EDCA. My only concern here is that when I ranked the projects, I ignored the fact that B and D were mutually exclusive (i.e. I ranked the projects solely on the basis of the PI ratio) BUT when I draw up the investment schedule, I correctly chose D and I explained the reasoning below. I hope I did not lose that 1 mark.Question 4:
The wording is different in the two questions, and what the examiner has does is perfectly correct in his answers to both of the questions.
In THP, you are told how much is raised from the rights issue in the second sentence. Later, you are told there are issue costs and so these need subtracting from the amount raised to find how much is left for investment.
E.g.: if you raise 100 and have issue costs of 10, then 90 is available to invest.In June 2012 Question 4, you are told how much is needed for the investment and later told that the issue costs come out of the amount raised. So the amount raised has to be the amount needed for investment plus the issue costs.
E.g.: if you need 90 to invest and there had been issue costs of 10, then you would need to raise a total of 100.With regard to question 1, if you explained properly then you should not lose any marks.
I know I am being somewhat fussy here, but I will not put my mind at rest until I get this!
Despite the differences in the wording in these two questions, the TERP calculation in BOTH questions does not deduct issue costs from the cash raised from the rights issue (unless I’m overseeing something).
In my opinion, what you explained above is only relevant to determine the actual amount available for investment from the rights issue (for instance, in NG Co, the amount left over from the rights issue which will be used to develop the storage and packing network).
My concern is about the amount which should be used in the TERP calculation:
(a) total cash raised from rights issue, or
(b) cash raised from rights issue after deducting issue costsLet me explain further. I will simplify the workings to highlight my point.
In THP (June 2008 – examiner’s answer):
TOTAL cash raised from rights issue = $3,840,000
Issue costs = $320,000
=> Cash available to buy CRX = $3,520,000TERP = (Pre-rights MV + $3,840,000) / Ex-rights no of shares = X
(i.e. TERP ignores issue costs, as opposed to the actual amount used to buy CRX)BUT then (and here comes in the unclear reasoning to me),
Market capitalisation after rights issue = Pre-rights MV + ($3,840,000 – $320,000) = XI remember that my tutor had said that the examiner has calculated two share prices:
one showing the fall in share price due to the rights issue ($4.56) and another showing the fall in share price due to the issue costs ($4.48), treating the two events separately. In fact, the examiner puts down the following at the end of this part:
“The issue costs result in a decrease in the market value of the company and therefore a decrease in the wealth of shareholdersequivalent to 8c per share.”[It is for this reason I ignored issue costs in the exam.]
In NG Co (December 2009 – examiner’s answer):
Cash needed for investment = $5,000,000
Issue costs = $312,000
=> TOTAL cash raised from rights issue = $5,312,000TERP = (Pre-rights MV + *$5,312,000) / Ex-rights no of shares = X
(i.e. TERP ignores issue costs, as opposed to the actual amount used to invest in the storage, packing and distribution network)
*The examiner arrives at this figure like this: 1.6m shares x $3.32HOWEVER, in MFZ Co (June 2014 – examiner’s answer):
Cash needed for investment = $9,200,000
Issue costs = $200,000
=> TOTAL cash raised from rights issue = $9,400,000TERP = (Pre-rights MV + *$9,400,000 – $200,000) / Ex-rights no of shares = X
(i.e. TERP is adjusted for issue costs AS WELL, unlike the above two scenarios)
*The examiner arrives at this figure like this: 2.5m shares x $3.76Having gone thoroughly through all past papers, during the exam I instantly remembered the approach used in previous questions, so I wrote down the following to be on the safe side:
TERP = (Pre-rights MV + $9,400,000) / Ex-rights no of shares = X
Market capitalisation after rights issue = Pre-rights MV + ($9,400,000 – $200,000) = XNeedless to say, my second working will not be given credit whatsoever as only TERP was required.
I hope you got the point I am trying to make here, unless I’m so dumb I’m overlooking something. Apologies for being a nuisance, picking on minor technical details, however I feel that the June 2014 answer is inconsistent with the other two. In Paper F6 (Maltese variant), one of the difficulties me and my friends encountered was having to straighten out (many!) inconsistencies apart from those due to changes in legislation. Actually, there are two other F9 past exam discussion questions which are inconsistent, related to receivables management (can’t remember references) – they were actually after each other in the BPP Revision Kit, and the answers (identical to the examiner’s answer) were different.
Thank you for reading this.
Sorry – I take your point. He has been inconsistent in the June 2014 exam – he should really have got the TERP as being $4.54 per share.
The reason for the market capitalisation ending up being different is really due to assumptions. The TERP assumes that shareholders do not know what it being done with the money raised. You obviously accept that it ignores how the money is being invested (and that will effect the actual share price and therefore the market capitalisation). We would normally assume that the shareholders would not know what the issue costs would be (for calculation of the TERP) although again, it would affect the actual share price and hence market capitalisation.
Don’t worry too much about it – I am sure it will be allowed for in the marking.
I cannot comment on your paint about F6 Maltese.
With regard to the F9 questions on receivables, I think I can guess the questions that you are referring to. However, for written questions, the examiners answers are only suggested answers and the markers are told to give credit for all sensible points. Both answers to the questions that I am thinking of would have got the marks.
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