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

exactly i also calculat wacc 9 %

Question 1&2 was ok but got stuck with 3. Not sure to go through.

Oviyan excluded market value of debt in calculations. Makonis has debt ( as evidenced by different Be and Ba, unlike Nuvola). The debt has to be calculated first in my opinion. That give a slightly different discount rate. 8.887% I think, which was rounded to 9% anyway. I am surprised that I am only one who did this, probably means I am wrong. But the question said market values, not market values of equity.

Makonis Ve =1.218 Billion
Nuvola Ve =$480 Million
Since Nuvola’s Ba and Be are the same Nuvola has no debt.
Makonis has debt.
Using Asset beta formula

And assuming Bd =0
Makonis pre acquisition Debt =507.5 Million.
So combined market values =1,218+507.5+480=2205.5 million.
The question says asset betas are the proportion to current market values ( not market value of equity, market values) so we need to take the whole amount.
Multiplying $1,725.5 by 0.9 and $480 by 1.2 and dividing by 2205.5 we get Asset Beta of combined company at 0.9653
Regearing at 40:60 debt using 20% tax rate and same formula above, and assuming debt is risk free ( it is not, it is 2.55% above risk free rate), we get
Beta Equity = 1.48.
Using CAPM we get Ke =12.36
And WACC = (12.36*0.6) + (4.55 *0.4*0.8) = 8.872%
Which is rounded to 9% in any case.
I have not found a single person who did it this way, so possibly my method has a flaw but I cannot see it.

Can somedody tell me what calculation must have been done with the 2 growth rate given in Q3 relevant to FCF? one was for Y1-Y4 if I can still remember it right, then there was another growth rate…I got stuck with these growth rate but I did my calculation for the debt of 1 Co, weighted Beta of combined Co and use of CAPM formula and WACC.

That’s the way i did and got WACC of 9%. hoping that was correct ooo

Asked for extra time, but was not given.

I was late by one hour, because of road confusion.

Very sad Ramesh. I am not happy for you. May God help you pass.

This is what I thought about the paper:
Q1. The option was a put option and pa was equivalent to the PVs of cashflows from years 3 to 5. I used the formula:
P=PeN(-d2)e^-rt _PaN(-d1) Coz I didnt have much time to calculate the call option first for the other formula. The risk free rate was the rate of treasury bills, that was, I think 4% ?

Q2. The tricky part was recognising that it was an investment and not borrowing, therefore buy futures (for futures contract) and buy call options. I think it was an unbelievable question coz I was expecting something tougher than that. Hopefully I wasn’t mistaken about any of the information given *fingers crossed*

Q3. Jeez! I forgot the synergy benefits so am completely hopeless on this one but am hoping I’ll get some marks for the weighted asset betas and the equity betas.
Overall the paper was easy.