- This topic has 3 replies, 2 voices, and was last updated 7 years ago by
.
- Posts
Hi,
I’ve got three questions I’m hoping you can help me with please! It’s relating to question one of Lignum Co, 12th of December exam, but I’m referring to it in my BPP practice and revision kit (question 72 in mine).
The first question is, for the Black Scholes option pricing model, are we given the exponential constant in the exam, or are we expected to memorize it? Only, it’s not given in the BPP book questions, but I wonder if they give it in the actual exam.
Secondly, for part (b) I notice that they convert the nominal discount rate to the real rate, to discount the cash flows. I know you’ve explained the reasons for doing so in F9, but I’m still not clear the reasons for when we should use the nominal discount rate, and when we should use the real discount rate.
Relating to the previous question, the real rate turns out to be 0.07692 pa, which needs to be converted into a 12 year annuity. The way they do this in the BPP answer looks very confusing to me, but there is a formula above the annuity table in the BPP book which is different but seems to work… (1-(1+r)^-n))/r. Does that formula appear above the annuity table in the exam, do you know?
Otherwise, can I just calculate the annuity using an appropriate amount between the 7% and the 8% annuity, i.e. for 12 years with 7.7% real rate per annum, 7.536 + (.3 * (7.943-7.536) = 7.6581? Would that be an acceptable way of doing it in the exam?
Many thanks for your help.
First question:
You are not given the value of ‘e’ in the exam. But you must have a scientific calculator anyway and there should be an ‘e’ button on it 🙂
Second question:
Depending on the information in the question (and the length of the project), you either discount the nominal (actual) cash flows (with inflation) at the nominal (actual) cost of capital), or alternatively you discount the current price flows (i.e without inflation) at the real cost of capital. Usually it is the first option, but if (for example) it is a perpetuity then you have no choice but to use the second option.
Third question:
Yes – the formula is given above the annuity table (you can see in our free lecture notes a copy of the tables as they are given in the exam). If (to save time) you decide to do what you suggest, then I doubt that you would lose more than 1 mark.
Thanks very much! I remember now, you did explain about the ‘e’ button in the lecture, it had slipped my mind!
- The topic ‘Lignum Co, December 2012’ is closed to new replies.