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

how did you all calculate the debt in question 1 i used the debt yield method to get pv

I also got negative npv for question 2

Sadly enough ..NO...acca is not going to refund any money back..the exam got cancelled because of a silly strike...:( ..we have to prepare again for the next session...bit I think this question was fair enough...that makes me saddder :(

Question about exchange rate risk:

I) 3 exposure: case 1: transaction; case 2: economic; case 3: translation
Ii) mitigate economic: use power parity => counterpurrchase, bartender...
Iii) computing case 1: forward: get about 956k; call option: 937k above and alternative is money market hedging get about 950k
Iv) gain/loss translation: do not remember exactly but loss about 480, all item except equity will be translate at the spot rate and the difference will be transsfered to equity as gain/loss

Mthomas
I used the debt yield method too, but got strange results.

Hey for Economic Risk I translated amount that are in MR @ first spot then devalued rate by 20% and then value and difference is loss...am i right?

I found q2 difficult, got confused ... :(
Q3 I also discounted it to yr 4, as mentioned above. As it is at end of year 4 than needs discounting to yr4, if anything you lost 1 mark here, max!
Anyone chose q5?

harripool: not debt yield. Question said that the firm bond rate is bbb and change to a+ and the rate of bbb is risk free rate plus 90 points, a+ is risk free rate plus 60 point => bond value before and bond value after

Sorry meant q4, not q3

@aqadirshaikh said:
Hey for Economic Risk I translated amount that are in MR @ first spot then devalued rate by 20% and then value and difference is loss...am i right?

Yes! You got your 50 marks!

In capital rationing for sensitivity i divided calculated NPV with number of units of and NPV per unit and commented that if S.P decreases by this amount NPV would be zero right?????????

Did anyone else calculate the forward rate on Q2 using parity theory. Also I found the option part hard because there was no contract size given if i remember right. What did people use for this to calculate premium?

Theiuson I have done same for Kd

This examiner definitely makes you think nothing like passed questionns

What were the relevant points for "Equity being unchanged assumption"...........

@kristina88 said:
I found q2 difficult, got confused ... :(
Q3 I also discounted it to yr 4, as mentioned above. As it is at end of year 4 than needs discounting to yr4, if anything you lost 1 mark here, max!
Anyone chose q5?

"Hey... If the Annuity begins at the end of Year 4, the PV calculation using the annuity factor brings it to Year 3....!! Isn't it..?? So I discounted it by 1/1.11^3 to bring it Year 0 terms...?"

Aq: it means that you do not need to recalculate the equity market value, it also means that the equity require rate of return not changed....

It relates to question b: my answer is that it is not validity infact because the firrm changed its capital structure, financial structure, gearing => financial risk changed => requirate of return changed => market value changed

@thieuson

i think what you have mentioned in most of the cases are correct, Case 01 - it was the transaction risk due to the exchange rate differences between the transaction date and subsequent settlement date. Case 02 - It was translation Risk whiich is refres to translation of operation of a foreign subsidiary. Case 03 - was economic Risk
Isnt it?

Yessss I wrote like that !!!!!!! and commented that since debt has reduced MV of equity should be increased as shareholders' risk have decreased.....and some general cooments..............what abt Q4 sensitivity????

Oh! In case 1 i have forgotten to mention about money market hedges as an alternative hedging method. i will loose some marks for that hope still i got enough marks to get through? how many marks were allocated to that sub part? anyone remember?

@thieuson

for capital rationing i assumed invetsments are in PV values............coz i was going out of time that was only 3 marks questions and then on basis of profitibility index distributed capital budgets........what u say???

@thieuson said:
Aq: it means that you do not need to recalculate the equity market value, it also means that the equity require rate of return not changed....

It relates to question b: my answer is that it is not validity infact because the firrm changed its capital structure, financial structure, gearing => financial risk changed => requirate of return changed => market value changed

I agree that the MV of equity need not to be calculated... But the Ke of the new (After proposal) firm changes because the Beta changes..

(i) I degeared the 1.1 Equity Beta of the company and arrived at it's Asset Beta...
(ii) I then Used it as follows:
Asset Beta as per (i) = 60% * Beta (Leisure) + 40%*0.4 (Property Beta - Given)
Assumed that the Combined Asset Beta is the weighted average of the individual Betas.
(iii) Solving for Beta (Leisure) you get the pure hotel service asset beta.
(iv) I regeraed it under new capital structure. (reduced debt + Same MV equity)
(v) Applied it to CAPM to get new Ke.

@aqadirshaikh said:
@thieuson

for capital rationing i assumed invetsments are in PV values............coz i was going out of time that was only 3 marks questions and then on basis of profitibility index distributed capital budgets........what u say???

" I think a Linear programming model was required.. Not profitability Index. This was a multi period capital rationing.. PI's are only for single period capital rationing..."

@mhmdfazil said:
" I think a Linear programming model was required.. Not profitability Index. This was a multi period capital rationing.. PI's are only for single period capital rationing..."

Then how that part should be tackled

@aqadirshaikh said:
Then how that part should be tackled

"The question specifically said that solving the problem is not necessary...!!
You have to.
(i) Identify the variables (Say D1 = Proportion of D1 investment undertaken, D2 = Proportion of D2 investment undertaken.... etc...)
(ii) Identify the objective function (Maximize NPV = 380D1 + 400D2 .... etc) (I'm just making up figures.. used as they were in the paper)
(iii) Non negativity constraint
( 0<=D1 + D2 +D3 + D4+ D5 <= 1)
(iv) and the capital constraints
e.g : Period 1,
(1200 D1 + 1500 D2 + .......+ 2500 D5 = 9000

@mhmdfazil said:
"The question specifically said that solving the problem is not necessary...!!
You have to.
(i) Identify the variables (Say D1 = Proportion of D1 investment undertaken, D2 = Proportion of D2 investment undertaken.... etc...)
(ii) Identify the objective function (Maximize NPV = 380D1 + 400D2 .... etc) (I'm just making up figures.. used as they were in the paper)
(iii) Non negativity constraint
( 0<=D1 + D2 +D3 + D4+ D5 <= 1)
(iv) and the capital constraints
e.g : Period 1,
(1200 D1 + 1500 D2 + .......+ 2500 D5 = 9000

Possibly I wasted my time on this ...............!

@aqadirshaikh said:
Possibly I wasted my time on this ...............!

"Correct me if I'm wrong...!! :("

@mhmdfazil said:
"Correct me if I'm wrong...!! :("

U r right.........but three marks for this only????

I did question 5. Anyone else?

I did q5, thought it was easier to pick up marks than q3. Especially re quality control point.

Yes I felt the same. The quality control point threw me. I just hope I wrote enough on the IMF bit for q5