*** P4 June 2011 Exam was … Post your comments here and vote in Instant Poll ***

Fu*&ing horrible

Ran out of time for Q1, could only answer part of Q2.

Q4 & Q5 not too bad but I seriously doubt that I scraped enough marks to pass.

Same time in 6 months then……………

Q1 was technically not hard, but it needed a lot of time to calculate all differents parts and time consuming. Q2 was straight forward. Q4, Q5 was reasonable. all in all, it was much more reasonable than previous examiner’s very hard technical questions.

shishir has made me speechless , i did what i could do in preparations but after coming out of the exam i was confused. The questions were time consuming , can ACCA have anather way of assessing people rather 3 hr papers.
people fail not that they dont know the things but because of time pressure.

Fairly Easy Exam.
Q.1 Fairly straightforward
Q.2 Fairly easy on the currency forex part
Q.4 again an easy one
Q.5 Reflection of P1.

Unless they reduce the pass rate to say 35% i am doomed. Mr Malde is clearly trying to complicate a course that is seemingly supposed to be enjoyable and beneficial to future finance professionals.

it was my 3rd attempt to pass the paper. it is my final paper and i cannot manage to pass it. i believe that this was my last attempt i will change paper on december as i do not have any desire to read once more the same things!!!

@magyverlast said:
Pretty much horrible paper on the first sight but i think as you try to read and grab things up many us would had managed…..
Q1. i think in part a of the report he was requiring you to calculate present value of free cash flows till perpetuity of fodder co, add this up with the value of pursuit company which was given and then compare this sum with the value of the combined company…….if the value of combined company was less than the sum, than the acquisition was not beneficial for shareholders of pursuit co. i think the combined value was less than the sum of individual……we had to find growth rates by this formula: sales revenue 3=sales revenue(1+g)^3. limitation included: CAPM limitations, growth rate assumptions, constant margin assumption, real options ignored etc………than what we had found out in part as value of fodder, add 25% premium and deduct from cash reseves of pursuit co to find out how much using bond finance was required…….i hope ive done it right……
Q4 was quite confusing only to the extent of timing of cashflows…….i took 7 in year 0, 7 in year 1, 35 in year 2, and all the cash inflows from year 3 onwards…….this way i got a negative npv of 2.99…………than i took present value of cash inflows as Pa, and present value of investment as Pe, t as 2, and got 6.44 as value of option to delay, and i concluded that if option was incorporated in valuing project positve npv of 4 would result, and talked about its limitations and change of decision in part b.
Q5. Didnt had enough points, my head got absorbed till this point:
a) Fishermen interests, may give them employment
b) share options, agency problem
c) water pollution
d) wildlife

Q2. was a bit confusing except part a and c……in part a we just had to use bid forward rate, i futures we had to find expected lock in rate…..i think basis was 0.0008 and 0.00016 at closing date……..options required call options…..and was a detailed working……
PLEASE GIVE FEEDBACK

Honestly, the paper is not technically complex. It is fairly easy, however tricky and very time consuming to absorb the information given.

I have attempted the paper the same way you are.

Q1) calculated the fcf of fodder co. and then the combined firm. However, I am not sure did I miss out or there is really no operating profit margin given for Fodder Co. but for combined company it is 30% of sales. For the Fodder Co. I got the value of the firm of approximately $104m++, while value of the combined firm at $366m. Hence there is synergy which concluded that the acquisition is beneficial.

Q2) Fairly straightforward too. The basis risk is 0.0080, and the remaining basis risk is 0.0080/5 = 0.0016. However, didnt finish part d), just managed to get half of part d). For part a), forward contract is the most benefit.

Q4) I got the same answer as you, although I made quite a lot of mistake in the beginning, cuz I missed out that the cash flow is start from Y3. However, cancelled it, and corrected. I have discounted the investment too, 7+7+35, although now I doubt whether should I discounted it or take the full cost.

Q5) Stakeholder – fisherman welfare
wildlife
the strategic fit of the project
political risk.

Hope to get 50% though.

@nomie200031 said:
thnx peksun but technically fcf is not market value is it? examiner shouldnt have used the word market value.
No it said taxable depreciation was dependent on the operating levels. For operating levels we had to take new investments based on additional revenues. We had to calculate extra investments and then we had to calculate taxable profits based on them. because we have to adjust for taxation too in FCF. the question was talking about taxable depreciation which was going to rise in years 1-4 based on operating levels and additional revenue. that was pretty complex. Actually the examiner purposefully used ambiguous wordings. I spent so much time on q1 hoping to do as good as possible. After that when i asked for time as there was no clock there i found only 90 minutes left i had no idea how the 90 minutes were passed. and then i panicked and couldnt concentrate on anything just messed up because i had already realised i was more than half an hour late for question one.

There is no way to calculate the depreciation, as there is no % given. I assumed that tax is 28% of the operating profit. For the additional assets, it is depend on the increament of the operating revenues. Market value = Present value of FCF for the first 4 years + terminal value after 4 years. I am no longer hope for 80% tho..just hoping for 50% lol…

Agree with Murat, didn’t used gearing/ungearing betas in Q1 as well. I think it was needed there, but probably i am mistaken.

About Q4 I have read some similar questions in BPP Kit, and logic was as follows.
Co will go for development costs (7+7) if value of real option is higher that this development costs. So it was needed to reconcile 7+7 discounted with value of options of future cash flows in 2-6 years, where Pa was doscounted income and Pe was discounted costs. IMHO

I did ungear to get asset beta… Didn’t the question say the combined beta was weighted asset beta of the two company, then to get the cost of capital for the combined company???

@magyverlast said:
Pretty much horrible paper on the first sight but i think as you try to read and grab things up many us would had managed…..
Q1. i think in part a of the report he was requiring you to calculate present value of free cash flows till perpetuity of fodder co, add this up with the value of pursuit company which was given and then compare this sum with the value of the combined company…….if the value of combined company was less than the sum, than the acquisition was not beneficial for shareholders of pursuit co. i think the combined value was less than the sum of individual……we had to find growth rates by this formula: sales revenue 3=sales revenue(1+g)^3. limitation included: CAPM limitations, growth rate assumptions, constant margin assumption, real options ignored etc………than what we had found out in part as value of fodder, add 25% premium and deduct from cash reseves of pursuit co to find out how much using bond finance was required…….i hope ive done it right……
Q4 was quite confusing only to the extent of timing of cashflows…….i took 7 in year 0, 7 in year 1, 35 in year 2, and all the cash inflows from year 3 onwards…….this way i got a negative npv of 2.99…………than i took present value of cash inflows as Pa, and present value of investment as Pe, t as 2, and got 6.44 as value of option to delay, and i concluded that if option was incorporated in valuing project positve npv of 4 would result, and talked about its limitations and change of decision in part b.
Q5. Didnt had enough points, my head got absorbed till this point:
a) Fishermen interests, may give them employment
b) share options, agency problem
c) water pollution
d) wildlife

Q2. was a bit confusing except part a and c……in part a we just had to use bid forward rate, i futures we had to find expected lock in rate…..i think basis was 0.0008 and 0.00016 at closing date……..options required call options…..and was a detailed working……
PLEASE GIVE FEEDBACK

i got the same answers in q4 as u. but i couldn’t do q1 well, even i didn’t calculate wacc for the combined co. lets see what happens.

Demanding paper in terms of time.

Q1 fcff. Calc value of Fodder using FCFF (excluding interest) for years 1 0 4 and then perpetuity based on yr 4. calc value of combined entity using fcff again. This less value of Fodder and marke value of acquiring company equals +ve/-ve value.
Think it was marginal in terms of whether acquisition made sense.
Spent way too long on this question to the detriment of Q2.

Q2 – found difficult – didn’t attempt all parts as left this one until the end.

Q3 – Maculay duration. Think was ok. Calc yield of bond using IRR.

Q4 – Options. Little tricky about timing of cashflows.Wasn’t 100% what was Pa and what was Pe. I calc a -NPV value so I reckoned that Call Option to delay would be +ve.

All will be revelaed when solutions posted on acca site

@nomie200031 said:
Well for q1:
First we had to calculate FCF (not FCFE) so we had to calculate after tax FCF before deducting interest costs and after adjusting taxable depreciation. First complication was about tax allowable depreciation. It wasnt growing at the same rate as revenue (6%), as the question said tax allowable depreciation was dependent on operating levels and for each additional $ of revenue 18 cents of new investment had to be made (kind of asset turnover $1 revenue on 18 cents of assests, $1/0.18=5.55). So first we had to calculate additional investment in each year from 1-4, based on that we had to adjust for tax allowable depreciation in those years and investments had to be deducted to get FCF in years 1-4. Present values of those cash flows had to be added along with the pv of perpetuity of FCF from year 5 onwards incorporating the growth rate in the formula. Then we had the Value of the total firm (Debt + Equity) of fodder.
Second we had to calculate the FCF of combined company using incremental cash flows as given. These cash flows had to be discounted at the WACC of combined company. Beta assets of two companies had to be weighted according to the market value of the two companies. Market value of predator was known that wasnt a problem. the value of fodder calculated from FCF had to be adjusted with the market based gearing levels given in the question for fodder to calculate value of equity and from those two market values we had to estimate asset beta of combined company. Then we had to adjust that asset beta based on what was told in the question that the capital structure of combined company wouldnt change from the predator company, so we had the gearing level of predator and we calculated beta equity of combined company. After weighting for cost of debt and cost of equity of combined company we had WACC. Then we had to discount the already calculated FCF of combined company based on that WACC. It gave us the total value of combined firms (debt +equity). Then we had to calculate the current total value of predator from its share price and market value of debt which was given in the question. Then we had to add this total (D+E) market value of predator and the total value of fodder (D+E) we had calculated from FCF. The sum of this had to be compared to the total value of combined companies calculated from combined FCF. This would have told us whether the acquisition was adding value to the shareholder or not.

I want to have some feedback guys dont know how the examiner could have expected us to do all this for one part and the problem was without the first part how would you comment on the later parts. thanks

@nomie200031 said:
Well for q1:
First we had to calculate FCF (not FCFE) so we had to calculate after tax FCF before deducting interest costs and after adjusting taxable depreciation. First complication was about tax allowable depreciation. It wasnt growing at the same rate as revenue (6%), as the question said tax allowable depreciation was dependent on operating levels and for each additional $ of revenue 18 cents of new investment had to be made (kind of asset turnover $1 revenue on 18 cents of assests, $1/0.18=5.55). So first we had to calculate additional investment in each year from 1-4, based on that we had to adjust for tax allowable depreciation in those years and investments had to be deducted to get FCF in years 1-4. Present values of those cash flows had to be added along with the pv of perpetuity of FCF from year 5 onwards incorporating the growth rate in the formula. Then we had the Value of the total firm (Debt + Equity) of fodder.
Second we had to calculate the FCF of combined company using incremental cash flows as given. These cash flows had to be discounted at the WACC of combined company. Beta assets of two companies had to be weighted according to the market value of the two companies. Market value of predator was known that wasnt a problem. the value of fodder calculated from FCF had to be adjusted with the market based gearing levels given in the question for fodder to calculate value of equity and from those two market values we had to estimate asset beta of combined company. Then we had to adjust that asset beta based on what was told in the question that the capital structure of combined company wouldnt change from the predator company, so we had the gearing level of predator and we calculated beta equity of combined company. After weighting for cost of debt and cost of equity of combined company we had WACC. Then we had to discount the already calculated FCF of combined company based on that WACC. It gave us the total value of combined firms (debt +equity). Then we had to calculate the current total value of predator from its share price and market value of debt which was given in the question. Then we had to add this total (D+E) market value of predator and the total value of fodder (D+E) we had calculated from FCF. The sum of this had to be compared to the total value of combined companies calculated from combined FCF. This would have told us whether the acquisition was adding value to the shareholder or not.

I want to have some feedback guys dont know how the examiner could have expected us to do all this for one part and the problem was without the first part how would you comment on the later parts. thanks

I think you had to take an average of asset betas of both cos using their market values (for pursuit it was given and for fodder you found out using fcf) and than regear that to pursuit cos gearing level since it was stated that combined companys gearing would be the same as gearing of pursuit company!