F3 Exam Dumps : Financial Strategy

The assistant has discounted free cash flows to all investors at the WACC (10%). That gives the value of the business (enterprise value), not directly the value of equity.

For a geared company:

If you discount free cash flows to the firm (all investors) at the WACC, you obtain the total value of the firm (V).

To get equity value (E), you must then subtract the market value of debt (D):

E=V−DE = V - DE=V−D

Here, the company has a $6m 7% undated bond trading at par, so the market value of debt is $6m. That amount has not been deducted.

The other options are not errors:

The perpetuity discounting using 7.91.102×0.10\frac{7.9}{1.10^2 \times 0.10}1.102×0.107.9​ is correct for a constant cash flow from year 3 onward.

Using WACC (10%) is appropriate for FCFF.

Tax at 20% is already reflected in either the cash flows or the WACC; it is not “missing” as a separate line.

So the specific mistake is failing to deduct the $6m debt value, i.e. option D.

Given current structure: D:E = 25:75, tax = 25%, asset beta ≈ 1.01.

Re-gear beta for new structure D:E = 35:65

βe′=βa[1+(1−T)DE]=1.01[1+0.75×3565]≈1.01×1.404≈1.42\beta_e' = \beta_a \big[1 + (1 - T)\frac{D}{E}\big] = 1.01 \big[1 + 0.75 \times \frac{35}{65}\big] \approx 1.01 \times 1.404 \approx 1.42βe′​=βa​[1+(1−T)ED​]=1.01[1+0.75×6535​]≈1.01×1.404≈1.42

Use CAPM with rf=4%r_f = 4\%rf​=4%, rm=12%r_m = 12\%rm​=12%:

ke′=rf+βe′(rm−rf)=4%+1.42×8%≈4%+11.4%≈15.4%k_e' = r_f + \beta_e'(r_m - r_f) = 4\% + 1.42 \times 8\% \approx 4\% + 11.4\% \approx 15.4\%ke′​=rf​+βe′​(rm​−rf​)=4%+1.42×8%≈4%+11.4%≈15.4%

Closest option: 15.36% → B.

Translation risk arises when the foreign subsidiary’s net assets (in BS) are translated into the parent’s currency (A$). The most effective hedge is to match those net assets with liabilities in the same foreign currency. By financing the acquisition with BS borrowings, AAB creates a BS liability that offsets BBA’s BS net assets, reducing the net exposure to translation movements.

A$: equity in A$ doesn’t hedge BS assets.

Multi-currency bank accounts and forward contracts mainly address transaction risk, not long-term translation of balance sheet net assets.