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Hi, here is a link to this session’s paper:
https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f9/exampapers/F9-2014-jun-q.pdfI have some issues about the paper, and I would appreciate if somebody from OT could give me some feedback.
Question 1
For part (b) I only calculated one combination of projects (the one which gave the maximum NPV) i.e. Projects E, D, C and A. In order to get full marks on this part, did we have to provide calculations for the combination when B is chosen instead of D (to ensure the PI approach results in no sub-optimal decisions)?Question 3
Unbelievably, I managed to stumble in the CAPM formula…I used the 11% as risk premium rather than as the average market return. Apart from this, all calculations are correct, though I repeated the same mistake in part (b). Can anyone please tell me what is the maximum marks they would deduct? I figure it could either be 3 or 4.Question 4
It seems that with regards to the second objective (reaching growth in EPS of 3.5% per year), the answer differs depending on whether you take decimal places or not for EPS. If decimal places are taken into consideration (for example, EPS in 2014 is 106.67), the objective is not reached in neither of the two periods. However, if the EPS is rounded off (for example, EPS in 2014 is 107), the objective is reached in the last period. Will the markers allow for both methods? I have doubt about this because EPS is usually quoted with a decimal place, but somehow I decided to round off during the exam.With regards to part (d), are Eurobonds a suitable source of finance? I only had 5 minutes to scribble something, so I just wrote about 10 lines where I very briefly described bonds and convertible bonds, and I discussed Eurobonds. I also mentioned bank loans but time was up. Could we have mentioned finance leases?
Thanks for your time – much appreciated.
Q1. Yes, for full marks you needed to check EBCA as well (which I think gives a higher NPV)
Q3. You will probably only lose one mark. (They never penalise the same mistake twice, so provided that you did everything else correctly you would not lose more marks in part (b))
Q4. I don’t think you will be penalised for rounding. (The calculations will carry very few marks anyway – more marks will be for discussing.)
Eurobonds are not really too relevant here. It will be interesting to see what the examiner includes in his answer, but it is primarily bonds (and good to also mention convertibles) and bank loans.
I’m not sure about finance lease – if they are using some of the money to buy equipment then it might be relevant.Thanks for your quick reply! 🙂
Re Q1, EDCA gives an NPV of $3,050 whereas EBCA gives an NPV of $2,980.
Q2: So even if I put the same 11% as risk premium in part (b) and used the correct calculated equity beta, I will get the full four marks? That’s great! 😀 Re the CAPM formula, last Friday I went through all marking schemes (yes, I am that fussy about marks, haha) and I noticed that whenever CAPM came up, the cost of equity always carried 2 marks. Hopefully only one of them will be attributed to the risk premium.
Re Q4, I only got enough time to write something on the lines of:
“MFZ can finance the $9.4m through an issue of bonds which are loans split up into negotiable parts of normally $100 each. They can also be convertible, in which case the holder will be given the option to convert them into ordinary shares on a predetermined date. Bonds can also be in a foreign currency.
An example of this is Eurobonds, which are long-term finance in a foreign currency, they are unsecured (no covenants) since they are issued by companies with a high credit rating. Moreover, they are cheap since they are very liquid – investors can sell them on.
Another source of finance is bank loans.”
Hopefully I managed to pick up at least 2 marks! Of course, I knew a lot more detail but as I told you earlier on I was out of time as a result of giving a lot of detail on other theoretical parts of the exam.
In Q2(d), are the following methods of internal hedging correct:
– open bank account in foreign country
– lagging and leading
– invoice in foreign currency and create costs in foreign currency, by for example opening up factories in the countries where goods will be soldSorry for being so fussy, but frankly this was the easiest F9 paper, so a mark below 85 would not do for me, given the amount of effort I put in – I went through all past exam papers for a third time two days before the exam!
Sir my NPV was +145, i think i have done some mistake, most of the students were saying it’s (-46). Please explain which is correct.
Thanks. 🙂I will post answers when I have the time to prepare them.
It is irrelevant now – forget it.
(and there are no marks for the final NPV – the marks are for your workings and each part of the workings is marked separately.)
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I think the correct combination for 1b should be EBCA based on the profitability index, this gives total npv of $3517
Yes – it is capital rationing and so as always it should be based on the profitability index.
However, as I wrote, you would still be expected to check both EBCA and EDCA because of the mutually exclusive.
I agree with you – I think EBCA is the better of the two.The initial cost is given in the first table of the question.
The balance charge is calculated in the normal way – the difference between the sale proceeds and the tax written down value.
Our free lectures on Investment appraisal with tax show how to calculate the tax flows.
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