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1 [13:00:14] peternewman : My Tips for F9, June 2010 Investment Appraisal Chapters 9 & 10 OpenTuition Lecture NotesNumeric: Capital Rationing and/or Sensitivity Analysis. Of course, you must know how to calculate NPV, IRR, P/B, Discounted P/B and ARR. And discuss advantages and disadvantages of each. [13:00:34] haziq : hi [13:00:58] peternewman : Theory: Risk v- Uncertainty featuring a brief description of Sensitivity analysis, Simulation, Probability analysis and Decision Trees. [13:01:05] peternewman : Cost of Capital Numeric: WACC calculation possibly involving Ungearing and Re-gearing the beta of the CAPM when finding the Ke.. and Convertible Redeemable Debt for KDAT (using IRR) [13:01:21] peternewman : Theory: When is the USE of WACC acceptable as he DF in Investment Appraisal? Compare CAPM and the DVM when calculating Ke? [13:01:48] peternewman : Business Valuations Numeric: Rights Issue ~ Calculate TERP, Value of Right and change in Wealth after Rights Issue. Calculate Current theoretical share price based on P/E Model and DVM [13:02:03] peternewman : Financial Analysis Numeric: Most likely from a Shareholders perspective your approach needs to be under the following headings: Profitability, Shareholder Ratios (TSR, EPS, DPS, etc,) and maybe Gearing depending on the wording of the question. [13:02:22] peternewman : Numeric: A Financial Analysis Question on Capital Structure or Gearing should also not be ruled out see Gorwa (past paper), which involves an understanding of Interest Rate Risk Management. [13:02:36] peternewman : Foreign Exchange & Interest Rate Risk. Numeric: Forex 4 way Equivalence Model (PPPT or IRPT + Fisher Effect) Interest Rate Risk calculate the payment under an FRA Theory: Compare Currency Future Contract with Forward Contract..Describe the main features of Interest RO s (CAP, FLOOR, COLLAR), I [13:03:06] peternewman : Interest RF, and Interest RateSwaps.. [13:03:21] peternewman : Working Capital Management Numeric: Stocks Management (EOQ and calculate Total Inventory Costs pa, with DISCOUNTS). Cash Management (Baumol and Miller-ORR). Debtors and the cost of a discount and/or change in credit Policy. [13:03:35] peternewman : Theory: Factors affecting the SIZE of the Investment in W/C. Compare Debt Factoring with Invoice Discounting. Describe the FUNDING GAP faced by SME s and what remedies are available (Business angels, Venture Capital, SFLGS, Government, Local Authorities, Banks, Equity, suitable. ST Sources of Funds [13:06:18] peternewman : Has anyone any further questions??? [13:19:37] haziq : has anybody any questions to ask from the tutor??
2 [13:20:24] baguma : still struggling with cost of capital calculation. what is the main thing to consider [13:21:59] baguma : is this the right place to ask the tutor? I am confused? [13:22:28] haziq : r we expected to thoroughly read from the first 2 sections of bpp book?? i.e. financial mgmt function and environment [13:25:17] peternewman : {Haziq} Did my page of Tips for june go up onto the chat room just now? [13:25:57] haziq : i dont know it luks like some1 deleted it... i m having net problems so i got disconnected [13:26:12] haziq : but i will request admin to put them back [13:26:37] peternewman : {Haziq} Ok - I'll do it again now... stand by! [13:27:08] haziq : {peternewman} oh so sweet of u! [13:27:09] baguma : My second question is i am always getting the IRR calculation wrong, what is the best way to deal with the calculation? i think my calculator is okay its just me [13:27:17] peternewman : My Tips for F9, June 2010 Investment Appraisal Chapters 9 & 10 OpenTuition Lecture NotesNumeric: Capital Rationing and/or Sensitivity Analysis. Of course, you must know how to calculate NPV, IRR, P/B, Discounted P/B and ARR. And discuss advantages and disadvantages of each. [13:27:33] peternewman : Theory: Risk v- Uncertainty featuring a brief description of Sensitivity analysis, Simulation, Probability analysis and Decision Trees. [13:27:47] peternewman : Cost of Capital Numeric: WACC calculation possibly involving Ungearing and Re-gearing the beta of the CAPM when finding the Ke.. and Convertible Redeemable Debt for KDAT (using IRR [13:28:09] peternewman : Theory: When is the USE of WACC acceptable as he DF in Investment Appraisal? Compare CAPM and the DVM when calculating Ke? [13:28:25] peternewman : Business Valuations Numeric: Rights Issue ~ Calculate TERP, Value of Right and change in Wealth after Rights Issue. Calculate Current theoretical share price based on P/E Model and DVM [13:28:51] peternewman : Financial Analysis Numeric: Most likely from a Shareholders perspective your approach needs to be under the following headings: Profitability, Shareholder Ratios (TSR, EPS, DPS, etc,) and maybe Gearing depending on the wording of the question. [13:29:11] haziq : ppl get ur answers prepared as the tutor is here to assist u in exam preparation! [13:29:15] peternewman : Numeric: A Financial Analysis Question on Capital Structure or Gearing should also not be ruled out see Gorwa (past paper), which involves an understanding of Interest Rate Risk Management.
3 [13:29:36] peternewman : Foreign Exchange & Interest Rate Risk. Numeric: Forex 4 way Equivalence Model (PPPT or IRPT + Fisher Effect) Interest Rate Risk calculate the payment under an FRA [13:29:50] peternewman : Theory: Compare Currency Future Contract with Forward Contract..Describe the main features of Interest RO s (CAP, FLOOR, COLLAR), Interest RF, and Interest RateSwaps.. [13:30:09] peternewman : Working Capital Management Numeric: Stocks Management (EOQ and calculate Total Inventory Costs pa, with DISCOUNTS). Cash Management (Baumol and Miller-ORR). Debtors and the cost of a discount and/or change in credit Policy. [13:30:28] peternewman : Theory: Factors affecting the SIZE of the Investment in W/C. Compare Debt Factoring with Invoice Discounting. Describe the FUNDING GAP faced by SME s and what remedies are available (Business angels, Venture Capital, SFLGS, Government, Local Authorities, Banks, Equity, suitable. ST Sources of Funds [13:31:16] peternewman : Ok - these are my main Tips. I feel if you can do all of these sections you should be ok. [13:31:55] haziq : {peternewman} what about the first 2 parts (A & B) of BPP book?? [13:32:30] haziq : financial management function and inancial management environment?? [13:32:38] haziq : r they examined?? [13:33:32] haziq : {peternewman} :? [13:33:45] peternewman : {baguma} The approach to use for IRR is as follows: [13:35:12] peternewman : {baguma} 3 steps: (1)NPV calculation no1 (2) NPV calculation no.2 using a different DF (3) Interpolate between the 2 rates using the formula. [13:35:41] baguma : thanks this is makes more sense [13:36:09] peternewman : {Haziq} Sorry about the delay there: [13:36:24] haziq : {peternewman} no problem :) [13:37:18] peternewman : {Haziq} These 2 sections are very important - they are always examined! But perhaps this point is less obvious then some of the other sections. [13:39:35] peternewman : {Haziq} Popular questions include: (1) Discuss the Agency Problem... the problem between management and the shareholders. (2) Discuss the problem that exists between S/h objectives and all of the other stakeholders, (3) understanding odf key shareholder ratios etc., is ESSENTIAL [13:40:06] peternewman : {Haziq} To answer your question: Know those first 2 chapters very well!
4 [13:40:28] haziq : ok thanx 4 a comprehensive answer [13:40:46] haziq : {peternewman} plz can u explain marginal cost of capital approach? [13:42:25] peternewman : {Haziq} remember to always QUALIFY your answer to a purely Financial Question or calculation. For example, which is better... a money market hedge or a forwrdd market hedge? [13:43:01] haziq : {peternewman} ok [13:43:09] peternewman : Qualify your answer by stating that the Non - Financial Factors have been ignored!!!!!!! Do you see it in play now? [13:43:32] haziq : yeah [13:43:38] haziq : thanx alot! [13:43:46] haziq : :) [13:43:51] peternewman : {Haziq} You are very welcome! [13:44:11] haziq : {peternewman} plz can u explain marginal cost of capital approach? [13:45:07] peternewman : {Haziq} Marginal just means incremental?... I'm not sure what you mean... are you talking about F9 here? [13:45:33] haziq : yeah [13:45:49] haziq : its on page 271 on my bpp book [13:46:38] haziq : i hope u have the bpp book otherwise i will ask it from u on the forums [13:47:27] haziq : actually i have problems mainly in theoritical areas [13:47:48] haziq : like pecking order theory etc [13:48:57] peternewman : {Haziq} I don't really think this is an issue for this exam. I think what you are refereing to is perhaps the intrioduction of additional equity or debt which in turn leads to a change in the WACC. Therefore, you can not use the Existing WACC to evaluate the new project. You must then establish [13:50:26] peternewman : then establish a NEW WACC which reflects the risk associated with the new combination of DEbt and equity. [13:51:14] baguma : do we have another F9 chat session with you Peter? i missed yesterdays? this i s very useful [13:51:58] haziq : it says " the MC of capital approach involves calculating a marginal cut-off rate for acceptable investment projects by: 1) establishing rates of return 2. relating dividends or interest to those values to obtain a mc 4 each component3.
5 [13:52:11] peternewman : {Haziq} remember, the over-riding assumption with the use of WACC as the DF is that the projects under consideration are MARGINAL...in SIZE. This means that taking them on will NOT change the Existing WACC [13:53:02] haziq : 3. applying the mc to each component depending on its proportinate weight within the captal structure [13:53:17] haziq : and adding the weighted average cost [13:54:05] peternewman : {Haziq} Ask me the question later in the F9 Forum and I'll have achance to look at the BPP Text reference you mention.... But I guess we are talking about the area of when is acceptable to use WACC as the Df factor? [13:54:34] haziq : {peternewman} ok i will ask it there [13:54:50] haziq : yeah [13:56:18] peternewman : {baguma} You can still access yesterdays Chat as it has been recorded and is on the OT website > I will be here again next week and the week after... so you have lots of opportunities to ask questions... Don't forget to use the F9 forum if you any problems and I will get back to you in 24 hours! [13:56:35] haziq : y is everybody silent... dont u have any questions to ask??? exams r so near?? [13:57:08] haziq : {peternewman} what is a tsr among the s/h ratios?? [13:57:14] haziq : TSR* [13:57:24] baguma : than [13:57:43] haziq : u mentiones it in ur tips [13:57:50] haziq : mentioned* [13:57:52] baguma : {peternewman} Thanks [14:00:24] peternewman : {Haziq} TSR stands for Total shareholder Return. Remember the total return to a shareholder comprises 2 components DIVs + Capital Gain... as a % of the purchase price of the share, this is the TSR. Compare it to the Ke derived under CAPM for example to see is the company under or over performing [14:01:04] haziq : {peternewman} thanx [14:03:22] baguma : {peternewman} where can i find the Gorwa past paper? [14:05:25] peternewman : {baguma} december 2008, Question 2 [14:06:01] baguma : {peternewman} thanks, let me have a look at it tomorrow [14:06:36] peternewman : {baguma} This really is an important question to understand re: Financial Analysis of capital structure together with the principles of interest Rate Risk management
6 [14:08:38] baguma : {peternewman} Thanks Peter [14:09:05] haziq : {peternewman} do u think pecking order theory is important for the exam?? [14:11:35] peternewman : {Haziq} This was examined within Question, Part 9c) June so I doubt if it will be an issue this time...but heh, who knows! Anyway, it's really quite simple! [14:12:11] haziq : ok [14:12:16] peternewman : {Haziq} That should read Question 1, Part (c) [14:12:42] haziq : yeah i was also woondering how it cud be q9 :D [14:12:49] baguma : {peternewman} do you have recommendations of good questions to help with learning WACC? [14:14:41] peternewman : {Haziq} There are 4 approaches to finding the Optimal Capital Structure 91) Traditional View (2) M6M 1958, No Tax (3)) M6 M 1963, with Tax (4) Pecking Order Theory... First, RE Second Debt, Third Equity!!!! [14:14:50] candijordan : well i take it im late [14:15:19] haziq : ok [14:15:44] haziq : {candijordan} its ok u can our gr8 tutor peter wotever u want :) [14:15:51] haziq : u can ask * [14:16:09] peternewman : {baguma} Every singe paper under the new F9 syllabus has a question on WACC. There is only about 5 of them altogether. I would do them all if I was you... several times over!!! [14:17:23] peternewman : Has anyone any further questions before I go???? [14:17:45] baguma : {peternewman} Nice one Peter,talk soon [14:17:58] haziq : thanx 4 the wonderful question [14:18:12] haziq : thanx 4 the wonderful session! [14:18:15] candijordan : will the session be online? [14:18:40] haziq : {candijordan} hurry up if u want to ask any question from our tutor PETER [14:18:56] peternewman : Don't forget - you can leave a question for me on the F9 Forums anytime and I will be back to you within 24/48 hours. [14:18:57] haziq : {candijordan} its a question answer session [14:19:16] haziq : {peternewman} thanx [14:19:27] prakash : hello [14:19:35] prakash : me prakash
7 [14:19:47] prakash : nice to join u all [14:20:13] baguma : {prakash} we are logging off now [14:20:29] peternewman : I will see you all again NEXT TUESDAY at the same time...all the very best with your preparations for the exam...work on my my tips BEFORE next week! BYE. [14:20:41] prakash : ok bye [14:21:02] prakash : how can i get ur tips [14:21:33] prakash : hello peternewman [14:21:37] haziq : {prakash} the chat history will be uploaded soon
This session was conducted on OpenTuition chatroom (http://www.opentuition.com/chat/)
[13:01:26] peternewman : Hello all, this is Peter Newman... your F9 Tutor for this evening. How can I assist you? [13:02:08] mrasheedat : pls i need u to explain to me the permanent current asset nd the
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