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

Guys, in q1:
# of contracts for futures – 5060000/price of 6m future/125000=38 contracts. Am I right?

I had 38 contracts, then hedged the over/under using forwards

right or wrong, that was my strategy

Q1d Costs of Setting up a treasury function and its affect on shareholders value, furthermore the benefits of establishing a treasury department in the long-run. Also considering the fact that for the proposal 2 an effective treasury department should be present to control operations in four different countries with four different CURRENCIES

I think the inflation rates were given to make use of them for the future spot rate. It couldve been done by:

s1 = s0 * (103.33/100.33)

the 103.33 = the 4 month inflation assuming annual inflation was 4% [considering CHF inflation was 1%

Didnt we had to just assume the inflation?

for me is i didnt round up. so i only put 37 contracts. the rest i hedge under forward contract

Q3 was a disaster for me also and wish I had chosen Q4 🙁

Anyone Answered Question 4??

Q4
(i) We were to talk about Real options and Investment appraisals (delay, expand, redeploy and abandon)

(ii) Had no clue to be honest But still talked about how options can help maximize equity value if considered?

(iii) factors affecting options – value of the asset, exercise price, risk free rate etc?

Vega relates to Volatility (less volatility, less value of option and vice versa?)

I did pretty much the same, except for part iii. Dont recall that part but I think it was about why companies in financial distress may have positive equity value.

Q1: (a) Futures (spread bet on a fall in futures price) 38 contracts – evaluated based on the lock in method – estimated through the trend on 3 month to 6 month futures price to give an estimated 4 month ‘lock in’ rate. Option was PUT – ‘right to sell contract currency’ 37 contracts with 25,000 covered via the FRA rate.

I knew I’d struggle for time so I decided to go past (b) and (c) and concentrate on (d)

Part (1d) – spoke about risk management and losses devaluing shareholder wealth. hedging with anything but options is relatively inexpensive. Talked about additional benefits of central treasury e.g netting similar currency payments and receipts, lower transaction costs etc

Part (2d) – spoke about different goals for branch management v head office – the latter having SH wealth maximisation in mind. Cultural differences, Branches perhaps wanting to seek too much risk relative to the company. Spoke about mitigation through agreed strategic objectives, reward, regular performance evaluation etc.

Q2: Inflated NPV’s – Got 12% for Kei – used as DF – Did APV for issue costs, tax shield and subsidised loan – Got a negative NPV throughout – so something probably not quite right!

Q3: Closed Div C – made $5m gain; got a valuation for Div B at around $140m and then finally got a post acq valuation for the firm plus DivA combined using combined PAT, plus $7m synergy and using bootstrapping PE method to get a valuation. Took off firms current value to give a maximum premium.

Q1. A. Calculated forwards, futures (lock in rate) and option (net rate), the highest rate was selected as it was indirect quote giving lowest payment amount. I.e forwards.
I did not calculate rates on transaction date as the question asked only for appropriate hedging strategy and did not ask to construct it.

B. Calculated swaps with 0.4 % gain after deducting bank fees.
Had to demonstrate by assuming interest rates at redemption but didn’t know how to do it

C. Calculated till mcculay duration only, forgot the formula of modified duration

D. Proposal 1: cost of derivatives compared with benefits of hedging. Decrease in shareholder value due to adverse movements in interest rates, if transaction is not hedged. Benefits of treasury.

Proposal2: issues and example of agency problems between controlling management and central management that could arise and mitigating the issues by giving divisional managers autonomy etc.

Q2. A. Inflated revenues by 8% and cost by 4%
Calculated inflated residual value of 4.6
Calculated 20% tax on profits
Adjusted tax savings from capital allowance after calculating balancing charge on residual value.
After Incremental working capital and initial investment discounted at KE of 12% .. Bas case npv was $8.6 approx.

Adjusted pv of financing side effects discounted at rf of 2% at annuity factor for 4 years.
Pv of tax shield
Net issue cost
Subsidized load
Tax saving on spare debt capacity
Giving adjusted apv of approx $42.1 m

B. Assumption of apv, approach and corrections

Q4. A. Left due to time management issues but had to discuss real options, financial distress and assumption of black schole pricing model

B. Black schole pricing model used to calculate value of equity. (For business valuation purpose) Defined the determinants to put in formula.
Similarly OPT used to calculate default risk probability, defined the determinants.

C. The five determinants of time, rate, underlying asset, volatility and exercise price.
Vega is volatility which measure change in value of option due to 1% change in volatility of underlying asset price.

Me too. Disaster!

– editted: sorry this was supposed to be a reply to Heather1985 re Q3

I still don’t really get the time pressure with this paper, its easily the most demanding of all the ACCA papers I have sat, thats both with regards to content and how much you are expected to do

Is there a reason for this? based on the comments here, the time pressure has a big affect on students performance