AFM*** P4 December 2012 Exam *** Instant Poll and comments***

Q1. Financial Reconstruction
Firm demerges and pays of 70% Debt and balance reinvests in company with funds recd.
a) Find Ke,Kd & WACC B4 and after payoff
b) Does mrkt capital (Equity) reduce or increase with the payoff
c) Demerger Vs sell off

Q2. Risk Mangement
Gave three cases: transaction, Economic & Translation risk
a) Explain the 3 cases
b) Hedging case 1 (Forward & options)
c) Hedging case 2 (Can we hedge against economic risk, if yes which hedge)
d) Hedging case 3 (what hedge to choose)
e) Professional marks (4)

Q4. NPV
a) Simple Npv with Sensitivity analysis (6)
b) & c) Multi period capital rationing (5+3 marks)
d) Capital Investment monitoring – why & benefits (6)

Q5 International Monetary fund & European Debt Crisis (Discursive)
A middle priced clothes and clothes accessories retailer in Europe. Facts: Low & high priced better fared crisis than middle priced sectors.
a) What is IMF, its aims? Austerity measures: how and why did it affect middle priced sectors? (10)
b) Why in your opinion low priced and high priced clothes and clothing sector fared better than middle priced clothes and clothing sector? (4)
c) How can middle price sectors cut cost and boost profit. (6)
Q1
a) 20 marks
b) 5 marks
C) 8 marks
Q2
No idea about marking scheme (Sorry!!!!!)

Q1 I Got the following:
Kd: 3.9 and 3.7 (After tax)
Ke: 10.7 (stays same)
Wacc: Initially low (around 7%) after pay off around 9%

And Market value of equity increase after payoff (as less Interest paid) Also the 30% reinvestment into capital

Can any1 confirm..........PLEASE

@lastpaper
question was asked to calculate the cost of equity before and after the implementation of the proposal. before implementation cost of equity is around 10.26 but after implementation beta factor will be changed and this will result in change in cost of equity to 13%

irrespective of the cost of equity change questioned assumed to consider that the VALUE OF EQUITY remains unchanged. Is not it?

re Q1: I thought Ke changes - as after the proposal company is engaged only in hospitality business - I adjusted assets beta following the proposal (minus assets beta of property companies) - after proposal ke increased to 12% - I can not remember the scenario well enough now - stressed out :(

Please some one tell me it was a really bad one..in my country the exam got cancelled!!! So that I can comfort myself saying that I could not have even passed with the question... :(

any 1 attemptep question3 ? ? what was the pe ratio of dentro co ? was it 9 ?
and it share price was 450cents?

Yes, I did Q3 and got PE for Dentro 9 and share price 4,50$. I got that the highest value increase arose in Model 3 with bond issue.

oh dear, why cancel? which country? will acca refund the exam fee?

q1 was dreadful. did not make too much out of it..

Ya I got the same Dentro 9 share price €4.5,
For option two did You.
- Revalue combined by Adding PAT and x by PE
- Add 30% of equity of Doric for Synergy
-Calculate new Shares in issue
- Dorics share number * 3/2
- Add number of existing share
= Total Number of shares
New Cobined vale/New share amount
Then compare 2old vs 3 new share amounts
I got a reduction in Value for the Dorics share holders

did anyone find q1 easy and answered in full?

not easy at all... T.T

Exam looked easy but i was busy computing and looking for figures that were already given. This is the effect of the technicality of the old examiner and past questions that one has had to deal with.

i found only that question very tough.

I'm sure that there were some things that looked very easy but we will have a surprise when we see the answers

I have a mistake that did not take distributed cashflow of of FCF to compute firm value ;)

omg...u all can remember all the Qs and the marks allocated? with the probable answers? i just hope to pass...nothing more that...i didn't finish all the Qs...i just hope im good enough to pass..i dont want to be perfect...

Q1: both ke and wacc are changed because it's gearing changed and kd changed due to rating of the firm changed

well, yo

@thieuson said:
Q1: both ke and wacc are changed because it's gearing changed and kd changed due to rating of the firm changed

well, you've got at least 5 marks for the explanation..

The questions were ok, especially Q1 with all that overwhelming degearing-regearing stuff. But for me it was huge time pressure. I hope for some easy marks on Q3 for PE ratios, number of shares and share prices.
Easy NPV in Q4, I think. ) But I calculated it negative, which I think is an evidence of silly mistake )

yep, that is correct. of course both WACC and Ke will be changed. but in calculating WACC after implementation we have assume that the cost of equity has not been changed as the question says.

In the sub part there was a separate question asking validity of that assumption.

What do you think?

In Q4 I also got it negative ~100k $, and I suspect that's due to picking the wrong discount rate for cash flows in years 4-15...

I dont think so. The question said that the equity market value is remain unchanged not cost of equity. Equity require rate of return unchanged due to Rf unchanged, Beta unchanged...but cost of geared equity will be changed

we can not perform regeering and degeering calculations in question 1. As i remembered question says that 60% hotel services and 40% property business. and the it was mentioned the bets factors for the hotel service business and the property business. then only thing we can do is wegting the beta factors as per the percentages given.

Plz confirm

Q4: my NPV for Dur5 is 360k, annuity factor for 11% with 15 year is 7.191

@piranha18.. so what u gonna do now?? ANy refunds or other exams or what???

Beta of combined business (1.1) = beta property x weight of property + beta service x ?eight of service => beta service => equity require rate of return of new firm with only service

@thieuson said:
Q4: my NPV for Dur5 is 360k, annuity factor for 11% with 15 year is 7.191

Yeah, but it was delayed till year 4 so should be further discounted to T0 by 4yrs DF@11%, i.e. 7.191x0.659. I might be wrong )

Yes, correct, splitua

every problem was ok, if you had 2 hours for each...I don't understand what is the purpose of making things even messier than reality