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DEAR SIR,
AS PER YOUR LECTURE YOU SAID UNDER WACC METHOD THE ANSWER WILL BE SIMILAR TO PART b OF THE QUESTION.BUT I AM GETTING A NPV OF 24.52M WITH NEW COST OF EQUITY OF 24.5%.WHY IS IT SO OR SOME ADDITIONAL INFORMATION AS REGARDS THE MV OF DEBT AND EQUITY NEEDS TO BE ADDED TO THE QUESTION IF 30%/70% GEARING NO LONGER REMAINS VALID WHEN THE PROJECT GAIN UNDER THIS GEARING LEVEL GOES TO SHAREHOLDERS.IN SHORT, WHY THE TWO METHODS GIVE DIFFERENT ANSWERS AND HOW TO RECTIFY IT.What you are writing is correct (although I am not sure that your new cost of equity is correct – I think it should be 23.19%. Remember that Kd is 5% even though the cost of debt is 3.5% because of tax relief).
However, I need to change the lecture because the WACC approach will only work if the returns from the new project are in perpetuity (instead of being for just five years) because that is one of M&M’s assumptions.
For the exam it is not a problem because it will be very clear from the question is they want you to take an adjusted present value approach (and obviously you do what they tell you to do!!). 🙂
I am sorry that I have caused you more work 🙁
HELLO SIR,
FOR CHAPTER 20 EXAMPLE 7 WHY THERE IS NO ANSWER AT BACK OF COURSE NOTES.OTHERWISE COULD YOU PLEASE WRITE THE ANSWER AGAINST WHICH I CAN CHECK MINE.THANKYOU(Please don’t write in capital letters 🙂 )
For a collar, you would only be asked to illustrate the idea and not required to use exact figures. So the following will be all that is needed:
If we buy a September put option at a strike of 94.25, then this would be effectively fixing a theoretical maximum of 5.75% + 1.4% (Agnes’s premium) = 7.15%. The cost would be 0.19%
If we also sell a September call option at a strike of 94.75, then this would be effectively fixing a theoretical minimum of 5.25% + 1.4% = 6.65%. We would receive 0.03% premium.
So…….the net cost would be 0.16% and we would have a collar with a maximum of 7.15% and a minimum of 6.65%.
(Or, if we include the net premium of 0.16% it would be a maximum of 7.31% and a minimum of 6.81%.)These ignore the basis risk and the fact that the contract size may mean that we cannot hedge the exact amount of the loan. However you would not be expected to go into any more detail if you were asked to give an illustrative collar.
(You could of course use another pair of strikes to illustrate a collar).
DEAR SIR,
I HAVE A DOUBT AS TO WHETHER FROM JUNE 2012 Q4 PART c CONCERNING VALUE AT RISK IS EXAMINABLE IN SIMILAR MANNER FROM 2013 AND TO WHAT EXTENT OVERALL WILL THE PORTFOLIO THEORY BE EXAMINED CONSIDERING THAT TWO ASSET PORTFOLIO FORMULAE IS REMOVED FROM FORMULAE SHEET.Value at risk is still examinable.
Also you are still expected to know about portfolio theory (the idea of diversifying to remove the unsystematic risk) but you will not be expected to do any portfolio theory calculations.DEAR SIR,
i have a problem in pilot paper for 2013 exams as regards the question DORIC CO.PART c. i altough understood the majority of the question but am unable to reach the tax figure of $7.8m in latter part of the answer while calculating for value of new company.is it not the case that tax of 20% on profit after depreciation of $41.7m should be calculated as a figure of $8.34m (50-8.3) and why the ending figure is before interest.DEAR SIR,
also could you please provide a brief understanding of the illustration of INTEREST RATE COLLAR in pilot paper 2013 under question ALECTO CO. as although i am reasonably ok with interest rate futures and options ,i have problem in coming up with collars.Also is there any other alternative to how examiner has illustrated the answer to collars as i found it extremely difficult to get around it after simple straightforward mechanism you have put forward for futures and options.
Although the written part is quite easy to come up with sensible points even involving collars (if the understanding of latter is under grasp)With regard to Doric, I can only assume you are looking at Kaplan’s answer. The examiners own answer (on the ACCA website) has the tax at 8.3 as you have got. I don’t know where Kaplan got 7.8 from!
We want the figure before interest because we are discounting at the WACC which ‘takes account’ of the interest.With regard to Alecto, it should be clear that to limit the maximum interest you would buy a put. To have a collar you would also fix a minimum interest rate by selling a call. (Because you would receive a premium by selling a call, it will reduce the net cost.
Because the question specifically said that interest rates could rise of fall by 0.5%, then for full marks you should have illustrated the effect of both in the way the examiners answer does (and the way my lectures show the way that interest rate options work).
However, another approach that you could have taken (which would not get full marks because of what I have written above, but which would certainly get more than half the marks for this part of the question) would be to ‘predict’ the maximum and minimum effective interest rates.
Buying a put at 96.00 would limit the maximum interest to 4% + 0.8% (companies premium) + 0.073% (net premium for the options) = 4.873%
Selling a call at 96.50 would limit the minimum interest to 3.5% + 0.8% + 0.073% = 4.373%(These differ from the exact maximum and minimum because of the basis, but it would get you enough marks because it would prove some understanding)
dear sir,
while looking at examiner answers for black scholes option pricing, in calculation of d1 and d2 values examiner rounds the figure to 3 decimal places and then takes the weighted average of figures from distribution table to account for 3rd decimal place number.while your lectures suggests rounding of to 2 decimal places and taking the figure straight from distribution table for n(d1) and n(d2).is it appropriate still to do so or should the aim be to get as precise figure as possiblemoreover sir I do understand interest yield, curves ,bonds and coupon relationship theories but do struggle to get into grips with numbers on these issues. sir what important parts are essential to these areas and the best approach when doing such questions as there are no available lectures around them
As to your first question, although the examiner does usually approximate between values in the tables, there is no need to do. You will not lose marks by rounding to 2 decimal places and then using the tables.
(The marks in the exam are really for approach and proving understanding – not for precise answers.)With regard to your second question, if you are happy with the understanding, then this is the most important thing. Any questions relating to this would almost certainly be in the choice section, and there would almost certainly be as many marks for writing about them as for any calculations. The only real way of getting to grips with the calculations in by practicing past questions – especially the last 6 real exams (before then it was a different examiner and the style was a bit different).
dear sir,
what are the hot topics for written question in june 2013.For Islamic finance how indepth the topic is examinable.moreover sir in a question MARENGO involved d1 answer with a negative figure of -0.06 and yet examiner added 0.5 to the figure taken from distribution table.Is it not that d1 less than 1 the figure from distribution table to be deducted by 0.5.
In Marengo, although d1 was negative, the question was asking about a put option and it said in the requirements to assume you use N(-d1). Minus a negative number gives a positive number 🙂
With regard to Islamic finance, best is to read the chapter in our course notes and also to read the recent Student Accountant article by Sunil Bhandari.
DEAR SIR,
what other areas are likely to form part of written Q5.moreover I have read that money markets are removed from exchange risk mgmt. whether this is true
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