*** P4 December 2013 Exam was.. Post your comments ***

Yes but as you were buying the part from yourself I.e the head office you would need to tax it.

I may have misunderstood (which would be normal) but was sure the brought it from the parent company.

How to calculate exercise price in Q2?

Q2 was a dream. Straight forward hedging. Did part a first and then moved on to q1 as wanted to get the calcs right in hedging before absorbing q1. I agree many working in q1. Would have thought at this level would not be a test of the speed of punching numbers in the calculator. Did my forward rates in w1. Discount factor was already given so no need to calc. So after remittance in $ adjusted for benefit of dtr of 5% and discounted at df given. Then worked out value of the put option using bsop. Ran out of time on report though. Stated the obvious and assumptions. Sadly did not have time to talk business risk and exchange and political risk. Agree way too much to ask in 90 mins.
Q2 was type 3 i think. Asset betas were already given. So had to find average asset beta and regear to find be of the combined. Gearing was already given so used that. Calculated ke then wacc of the combined. Since question asked for fcff used that to calculate pv of years 1 to 4 and to perpetuity. Combined value post acq less value of individual cos gave value to equity. Was just about to state no of shares post acq so that can work out premiums when it was all over… 🙁

\what was question 4? i didn’t even read it . Was it all about Islamic Finance??, why didn’t i read it?

This was an indeed fair paper but I don’t think it was time tested before given to us bcos my opinion is that the examiner may not finish all that is req under 3hrs.
Q1. I did all adjustments except adjusting for working capital, tax savings and sales values of assets.

b part had an intricacy of adding the $28m to have a Pa of over $28m, so d1 will not end in negative. Saw that in BPP kit Q25.

Q2 was also confusing with the 0.9% uncertainty.

Wanted to attempt Q3 but had only 15mins left so opted for Q4 bcos of the attraction of c part.

Hope I pass this.

how do u calculate exercise price?

My strategy was to start with section B – chose questions and planned them in the reading time, then allowed 85 mins for writing them, 5 mins for reading Q1 and 90 mins to attempt it. This meant I couldn’t spend 2 hours on Q1 as others have mentioned (I had I bad experience of this in a different exam which I only just scraped through!)

Q3 – okay on the whole I think
Bit confused by the 30% vs 50% premium bit. They gave up 2 low-value shares, got a cash premium and then acquired a share in the new company that was worth loads more (something over $7 equity value from part a divided by 310 shares??) – the 50% premium seemed unnecessarily generous. Clearly I missed something there!!

Q4 – okay on the whole too
By my calculations it was better to sell as a going concern and the demerger wasn’t as good an option financially.
I had the Islamic finance articles fresh in my mind and there were clues in the question pointing to a venture capital type of arrangement. Also mentioned loss sharing aspect.

Q1 – obviously I didn’t finish although was quite pleased there was only a page of scenario to read compared to some of the mocks I have done. Also glad of easy working capital and straight line depreciation.
Got down a few bits about role of WTO – I don’t remember the question asking for advantages and disadvantages though??
Worked methodically through the NPV and should have done ok although who knows what mistakes I was oblivious to in my haste!
Decided to focus on part d as it was more marks than part c so I left space in my ‘report’ to come back and moved onto assumptions etc. Then got as far as writing down equations for Black Scholes and starting to put values next to r, s, t etc. (not sure that will get me even a mark!!) and hastily wrote in the report that I hadn’t had time to value the option but assumed it would increase the NPV making it more worthwhile!!

@zain23, there’s what’s called OFR (OWN FIGURE RULE), So pls don’t worry and relax.
You are not marked wrong twice. So when you get a part wrong continue and the rest
would marked right.
Many thanks.

Pa/Po = Value of Underlying asset = P.v Of Cash Inflows?
Pe = P.v of Cash Outflows ?
T = 2 Yrs?
So it was like $28 & $35, which one is Pa & which one is Pe? Coz I got a call value(c) as negative, then put in the formula to get put, does it sounds about right? Hopefully, I get marks for the steps shown!

Q1: I got NPV +$12m, put option
In Q1, do you guys include the $200 as the income for the Parent company as well? Since it’s intra activities.
What about the tax allowable depreciation? 10% every yr (st line) so tax saving is MP1250x10% x 25% tax rate=MP31.25 per year and last yr need to consider the MP500 sold and claimed the remaining tax allowable depn, am I correct?

Q3: WACC 9%
In Q3, part a), how do you guys calculate the value created?
I used the whole combined company value x(1+g) ^4 then use this to calculate using dividend growth model FCF x(1+g) / r-g, r=WACC=9%. I also added the PV of synergy benefits to the value. Then I use the value of total co minus those two individual companies.

Do you guys remember what number you came up with?

Q2: got tricked… I thought the question mentioned basis risk now is 0… so i ignored the basis risk calculations 🙁

So…. I believe it was easier than on June 2013 session. But – still I’m not sure if I will pass. Probably not as it is “killer” exam 😉
In Q1 I got negative NPV of the project … I thought I did something wrong but I left it as not having time to check where the error might be. So I was answering th question assuming my calculations are ok. I did Black-Scholes put option valuation. Well, maybe not commented it properly, but I was pretty sure my Cash flow calcs were wrong.
Q3 – I think I got WACC of 8% (but maybe it was a rounding issue?). I wasn;t sure about premium in b) but I assumed it is the difference between: 1 share of $5.8 less 2 shares per $2.4, so $1.0 by 200 million shares. 50%-30% premium = 20% * 200 milion shares * $1 = $40m. I’m pretty sure it’s wrong but it’s the only thing I git in my mind at the exam with the time pressure and feeling that I failed Q calcs ;)))
Q4 – I decided t do it only because few marks on Islamic finance that I was reading about last night (it was on tips to Dec 2013 exam!). Otherwise I’m not sure if I did a and b properly, it seemed that sale of supermarkets division was better. And that demerger doesn’t make sense. Probably I was wrong.
So overall – 3rd attempt to pass this monster exam will be in June 2014. So far I’m enjoying the idea that I DON’T HAVE TO REVISE TO EXAMS any longer and I can read some normal novels (well… until May 2014 😉
Good luck – with the results of P4 and with any other papers if you are going to take them this session!

PE is the exercise price ( not discounted) which was the £28m PA was the Pv of cash flow from year 3to year 5, together with the other variable you had to calculate the d1 and d2 and the call option .. after that you had to value the put option ( option to withdrawn) , I came up with a negative value ….

Anyone else used the same approach?