Q.1

It seemed that students have no concept about the rates to be used for buying or selling currency. In many cases, they applied the buying rate instead of selling rate and vice versa. While calculating the gain/loss on hedge, the same mistake was repeated. Another common mistake was that market lots were ignored and gain/loss on hedging transactions was calculated on the exact amount which was to be paid or received..

Q.2

This was a simple question and majority of the students gained good marks. The common mistakes were as under:

• Issue cost of debt was ignored.
• In calculating the gross equity to be raised, many students multiplied the net amount required to be raised by 1.07 (7% being the issue cost) instead of dividing the net amount by 0.93

Q.3

This was also a simple question. Students were required to estimate, analyze and interpret the alpha values, which is the difference between the expected market return and CAPM return. The companies having positive alpha values are preferred for investment. The calculations were straightforward and most of the students gained good marks.

Q.4

In this question different investment opportunities available to the company were given and students were required to identify the projects having IRR above the WACC of the company. They were supposed to discuss the dividend policy in changed circumstances keeping in view the earnings available, opportunities of growth and investment and the broader corporate objectives. As a first step they were supposed to calculate the amount available for payment of dividend after making necessary investment in the feasible projects. The common mistakes committed by the students were as under:

• While calculating WACC of the company, debt equity ratio of 75:25 was used instead of 0.75:1.
• After ascertaining the feasible projects, the total amount of investment was compared with the earnings to conclude that the earnings were only sufficient to carry out two projects. In fact, since the debt equity ratio was 0.75:1 only 1/1.75 of the total investment was required to be invested out of earnings (equity). The remaining amount should have been arranged by way of debt. This fact was not considered by many students.

Q.5

This question involved three steps:

• Calculation of revised cost of equity using APV technique, in view of the expectation of a fundamental change in business and financial risks of the company.
• Calculation of tax benefit/charge from profit and loss account.
• Computation of cash flows, NPV and APV.
  

 Majority of the students computed the cash flows and tax effect correctly, however, instead of applying the APV technique they used the existing WACC for discounting purposes.

Q.6

While working out the cash flow, many students treated accounting depreciation just like any other cash expense, which was really astonishing at this level.

 Q.7

• Computation of purchase consideration and goodwill.
• Computing the fair value of debt using the market rate as discount factor.
• Computing the total number of debt instruments to be issued.

• In calculating purchase consideration, the transaction cost of Rs.1.5 million was also adjusted although, it was to be borne by SuperOne Limited.
• While calculating goodwill, the transaction cost of Rs.1.5 million should have been included in the cost of acquisition. It was ignored by majority of the students.
• Number of debt instruments to be issued was computed with reference to their face value, instead of fair value.

Majority of the students were unaware of the mechanism of zero coupon bonds and could not proceed with the answers. The others did manage to perform better but made few errors. For example, many of them ignored the issue costs whereas many others applied incorrect discount rates on the bonds offered to public, as they ignored the fact that in the given scenario six months have already passed after the date of purchase of non-callable government treasury bonds.