AFM*** P4 December 2014 Exam was.. Instant Poll and comments ***

Also about why the co would want to be set up in the EU free trade zone.

What a paper.... I haven't felt this bad about an exam in ages and I actually like/understand the syllabus! =(

I am sincerely gutted! I studied so much I thought what question will they bring that I won't be able to answer? I was soon to be proved wrong! Indeed nothing prepares you for the level of difficulty to expect in the P4 scenarios. I can't seem to get over that Q1.

@lzyjzy said: For q1 I calculated the probability of each scenario (scenario 1, 60%, scenario 2 25% and scenario 3 15%) and took a weighted average of npv.

Was it correct? As I remember 50% that the return would be 40%. If it's the high case, then 20% that return in Y2-4 would be 40%. Anyone please confirm and tell me how you did it?

@brizraj said: Hi Felix Refer to the examiner's answer for Dec 12 Q1 Coeden Co Same approach was required. It is some sort of weighted average

Thanks, meaning I need to sit for the June exam. my approach was Beta Asset^2 = Beta non-lux^2 + beta lux^2 never thought that it would be as easy as weighted average the beta.

@felix Thanks.

So many topics which required long detailed calculations were covered in Question 1. The examiner made it as difficult as only possible. Apart from calculations which we are expected to be able to perform under the syllabus, we had to find out some numbers for this calculations in the mess of unclear info, make guesses what the examiner really wanted from us under the examination time constraint. In question one it was unclear whether to discount the project at cost of equity or to use WACC. At first I discounted cahflows at ke, but then I changed my mind and calculated WACC. I stopped several times during question one and thought that I might had been doing something wrong... Question killed my brain and motivation to go on. I started question 2 and did not even attempted any other question.

Felix, you had a percentage of 15% for the luxury business. So the rest is 85% other business, like a weighted average....

@vinograd said: So many topics which required long detailed calculations were covered in Question 1. The examiner made it as difficult as only possible. Apart from calculations which we are expected to be able to perform under the syllabus, we had to find out some numbers for this calculations in the mess of unclear info, make guesses what the examiner really wanted from us under the examination time constraint. In question one it was unclear whether to discount the project at cost of equity or to use WACC. At first I discounted cahflows at ke, but then I changed my mind and calculated WACC. I stopped several times during question one and thought that I might had been doing something wrong... Question killed my brain and motivation to go on. I started question 2 and did not even attempted any other question.

I think it should be Ke as the cash flow given were FCFE?

Decision trees, black scholes all in q1??? The confusion is that most questions we did in revision or past exams you have to calculate the FCFE from sales revenue/op cash flow less interest etc. They already gave the FCFE! On top of that there was ROI and changes in FCFE. Where does the put call option come in here and how is it used? I did not know what to do with the probabilities, I completed ignored since that would be under expected valued and probability analysis.

@hale said: Was it correct? As I remember 50% that the return would be 40%. If it's the high case, then 20% that return in Y2-4 would be 40%. Anyone please confirm and tell me how you did it?

Can't say if it was correct. But I took 75%*80% for probability of the first scenario as that would be the probability of both normal growth in the first year (100-25%) AND (multiply) normal growth in the second year (100-20%)... Made up a standard deviation figure for input in the option pricing model. No time to think!!!

Yes I do agree the proxy beta is a weighted average but we must first ungear the equity beta for the luxury business before adding it on to the asset beta for the non luxury business to get the combined asset beta which is the weighted average using 85% and 15%.

Where does the put call option come in here and how is it used? I did not know what to do with the probabilities, I completed ignored since that would be under expected valued and probability analysis.</blockquote The put option was the Lumi offer, means option to abandon(put option) and sell to Lumi for $50m (I think)

Hei guys, i used FCFE to calculate the market vale of the company, after that the WACC should have been used to discount

@kamdarvivek said: Decision trees, black scholes all in q1??? The confusion is that most questions we did in revision or past exams you have to calculate the FCFE from sales revenue/op cash flow less interest etc. They already gave the FCFE! On top of that there was ROI and changes in FCFE. Where does the put call option come in here and how is it used? I did not know what to do with the probabilities, I completed ignored since that would be under expected valued and probability analysis.

The put option was the Lumi offer, option to abandon and sell the project to Lumi for $50m (I think).

am i right in saying mr gordon was in this exam aswell ,so in one question basically nearly the whole forumla sheet was tested plus more lol

Also i had lost time to calculate the market value of debt, as the interest rate was 5,4 but the market rate for B rated companies was 4,8......

Can someone please clarify in Q1 the question said something like "the share price is $7.5 which is a multiple of 7.2" and they hope earnings will be a multiple of 7.5? Was this just a red herring, false information there to mislead us

I really cannot understand what is this examiner think we can do in 3 hours .. this exam is disaster in all the word meanings ...and cannot be completed in 3 hours

yah gordon growth model had to be used (the question 77.3% was remitted and the remaining was kept for future investments) @toyosi - you are right in what you said. I didnt even attempt this part as didnt know how to get the standard deviation

Paper was challenging guyz, but, I ddnt panick, I remain composed, started with question 2 then moved to qn 4, , by the time, I finished, being confused, n vafter waffling, @ times, I had 1:30, in full 4 qn, 1, n wat was my approach to qn 1, I guess, I had scored, 25-35 marks, so in qn 1, needed, 25marks, I only calculated wat I know, estimated discount factor(10%), n concerntrated on confusing written parts, The calculation part of the exam was terrible Don't panic, with Acca, I think, the examiners @ times are asking qns, outside the. Scope of their syllabus, I 1st learn n to believe u can score less than 50%, in an exam, after you have read a textbook, cover to cover n dd 90 past qns, with Acca, Its high time we engage Acca, on level of difficulty and syllabus coverage, confusion!!

even if this exam was 4 hours dont think there is still a decent chance of passing since the information was there to completely confuse you in many different ways most people spent more time thinking than writing - dont understand what is the point of doing past exam questions if it is not similar.

@Williams1977, that sentence threw me off balance. I found the MV of equity which was 7.5 x (800/0.5) then I thought...now what? What do I do with this multiple? So I multiplied it by the MV of equity to give me the Freecashflow. But then at the last minute, I thought the multiple might be the growth for the Freecashflow so I CANCELLED my valuation and did MV x 1.072 instead, my gut instinct tells me I am wrong!

I sat there for around 3 hours and lost around 45 mins trying to understand question 1 and thinking what to write.This is the worst paper I sat so far. Terrible !!!!

@brizraj, to be honest I just assumed the standard deviation had to be the second one which affected the cash flow from year two if the project grew according to plan in the first year, also coupled with the fact that Lumi wants to buy the tourism project at the start of year 2.

Mee too, but i think we should also use the first year probability though....

I calculated market value of debt to be $102 (plus some cents) did anyone get the same?

Use Ke (11% given) discount FCFE to perpetuity to calculate MV of equity of Co F. There was growth which I missed but he had given info on retained earning which can be used with Gordon growth formula to give u g WACC Use it to discount the project. Ungear the other company equity beta, do weighted average to get the beta asset of luxury biz alone. Regear using the MVE calculated above and MVD (we needed to calculate this as well) of company F, get ke and risk adjusted WACC. Real Option: What was your answer? As someone said above my calculation using probability was giving crazy results so I stopped. Also Pa amount was quite large. Q4. How many people read it and thought there was a mix up? It looked more like a P5 question, (which I will be taking next).

Yes I got the same @williams1977. Then I applied that on the book value of the debt to get the toral market value of debt.

@Toyosi isn't one way of calculating standard deviation is the square root of variance - they gave the cash flows and the probability that the growth will reduce by 20%. The differences between each year are the variances and square root of that is the s.d. I am completely guessing here and shooting blanks but on a good day they could be generous and credit you for trying!