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

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

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.

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 !!!!

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

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).

@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!

@williams1977
I got the same too

@ kamdarvivek, like I said I “assumed” as there was no time to think at all in that exam. My goal was to do as much as I could within the allotted time. I never completed the put option because I was already getting a negative figure for the call option so I abandoned it….So yes, your logic might be right and you might get the marks.

Q1 was like the whole syllabus and then some… My heart sank! Didnt know where to start let alone come to any conclusions!
this is my final paper and i hadnt failed one to date… Really gutted as wanted this wrapped up 🙁

@williams1977 said:
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

If you see his previous papers he hardly gives info which is not needed like other examiners. So I wasted sometime on this. At first I thought it could be bootstrapping, then confused it with VCQ, so left it alone.

@felixt said:
this is what I do, $7.5 is meant for us to get the MV of Nahara Co. and then 7.2 is the FCFE multiple, meaning FCFE x this multiple should equal to MV of Nahara Co. Hence, we got the FCFE. Then the question said that the combined multiple will be 7.5. Meaning that, (FCFE of Nahara Co + FCFE of Fugae co + synergy) x multiple = MV of the new combined company. To get the additional value. MV of the combined company – MV of Nahara Co originally – MV of Fugae Co (however I used 1.3x Fugae co MV instead, as this is what Acem co were requested to pay).

CMIW

but in the above you have not used gordons growth model, and it sounds like a lot of people used that way to calculate the MV of Fugae co

Hey Folks.

Just going through what I did

Q 1 (a) (b)

Theory I think it was about Diverstification of the Company and also buying undervalued companys….write a bit on that and have a decent argument it should not be to bad to get some marks.

The other part was about Selling the business if they were going to purchase another company in the same country. I think you mentioned on competitivness, Competition and Monopoly power you would have been generally okay. Again all depends on the discussion.

C (i)

What a disaster spent about 25 mins and to be honest my answer barely half a page, just used the Ratio think it was 7.5 to calculate the company of the combined company. I took that the say 800 share capital at 50 cent was 1600 shares for example. I made a whole load of other calcs to get growth and dividend growth model of Farage was it? but they were talking about it from Neons point of view and gave enough information to base it off that. Calculated all sorts of stuff just desperately trying to get something that will stick to get some marks.

(ii)

So I ungeared, then regeared based of the companys equity. I also then used the new beta to calculate the Capm to get the Ke, I then made the assumption that you needed to use this to calculate the value of the cash flows. I did 3 seperate cash flows for the 3 different scenarios and then weighted them based on 20% probability to get the cash flow.

Once that was done I noticed for 18 marks there has to be something tricky. I realised it was a put option as they would be abandoning the project for the 50 million. I calculated the value of a call option which was negative and then used the call option in the Put Call Parity formula to get the value of the Putt. Which added value for me.

Now all this was very rushed etc and mistakes were made in the caluation of the Beta, but there simply wasnt time to calc and then have a think about it. Approach hopefully gets marks.

(iii)

Just waffled on, said the acquiree it was not worthwhile but for the acquirer it was. Pure waffle ran out of time.

3

(a) Theory can’t remember exactly but didn’t seem to difficult. Was it to do with Free Trade?…..

(B) IRR, MIRR and VAR was okay….the 90% was a strange we are obviously never given a value but once we knew that the standard deviation and the time was the same you could assume that the the other value of the other company matched the 90% value. Sneaky sneaky question right there. Explain VAR and then recommend which project. I went for the highest NPV as normal as it the best valuation method.

(C) Legal risk of working in a different country. Again just used my brain and tried to backup as best I could.

4 (a)

What is EVA and explain the advantages and Disadvantages…..tough to get a full 6 marks out of this, you needed to flesh out everything like how useful it is for comparing between different years.

(b) Calculate EVA , straightforward

(C) Evaluate, I did ratios under liquidity, Investor, Turnover and Gearing. I agreed with the analyst that the company was not that well suited. Massive increase in gearing couple that with increased interest costs also and PE ratio lagging behind industry etc.

Was straight forward enough that part but again its all interpretation.

Overall I felt C of Question 1 was brutally tough that really was there to expose the student. The real option part maybe the difference between a 33% pass rate and a 40% pass rate. I did both Q3 and Q4 first, I hope my marker see’s that I did some decent(not great tbh) work there and gives me enough that when he reads Q1 they have already decided if I pass or fail.

Won’t hold my breath but Jeez that was tricky. Time again a issue, just finished.

Sounds like they may struggle to get people over the line in this exam, Q1 c may be marked very easy as a result.

Key differences are:

Salam Contract

i) Not standardised
ii) Not traded on Exchange
iii) Risk of default very high
iv) It is an over-the-counter transaction