CHARTERED INSTITUTE OF
STOCKBROKERS
ANSWERS
Examination Paper 1.1
Financial Accounting and Financial Statement Analysis
Economics and Financial Markets
Quantitative Analysis and Statistics
Professional Examination
September 2010
Level 1
1
SECTION A: MULTI CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
C
D
D
A
D
B
C
A
D
D
A
B
B
A
B
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
C
A
C
B
C
D
C
D
B
D
A
C
D
A
B
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
C
B
B
C
A
D
B
A
B
C
B
D
C
B
C
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
D
C
C
A
B
A
C
C
D
A
B
A
A
B
D
(60 marks)
SECTION B: SHORT ANSWER QUESTIONS
Financial Accounting and Financial Statement Analysis
Question 2
2(a) Going concern is one of the fundamental concepts in accounting. It is the
assumption that a business will continue to operate into the foreseeable future
and will not go out of business or significantly curtail its level of operations.
(1 mark)
2(b)
i.
Management – they use ratios to assess the performance of the business
(hence their own performance), and plan for the future
ii.
Equity Investors (Shareholders) – to assess their investment returns and
project future expectations
iii.
Finance Providers – to assess the ability of the firm to meet its obligations
as/and when due
iv.
Suppliers – To assess the firm’s ability to provide profitable business
opportunities through the relationship with the firm
v.
Government/ Government Agencies- This depend on the government agency.
For instance the tax authorities use ratios for tax purposes
vi.
Customers
½ mark for each category mentioned with uses
½ bonus mark for clarity and expression
(maximum 2 marks)
2
2(c) Components of equity include:
i.
Ordinary share capital
ii.
Share premium
iii.
Retained earnings
iv.
Revaluation reserve
v.
Other reserves
¼ mark for each category
(maximum 1 mark)
Economics and Financial Markets
Question 3
3(a) GDP is the total value of goods & services produced within the territorial
boundary of a country during a particular period , while GNP is the total value of
goods and services produced by all nationals of a country (whether within or
outside the country).
GNP = GDP + NIRA (Net Income Received from Abroad).
(1 mark)
3(b) The point of profit maximization for a firm in perfect competition is when Marginal
cost equals marginal revenue.
That is, MC = MR = P
(1 mark)
3(c) The modern version of Phillips curve explains that there is a relationship between
unexpected inflation and cyclical unemployment. The higher the unexpected
inflation, the lower the rate of unemployment
(1 mark)
Quantitative Analysis and Statistics
Question 4
4(a) The concept of time value of money explains the equivalence between cash flows
with different dates. Put differently, N1 received today has more value than N1
received in a year’s time since it can be invested to earn interest.
(1 mark)
4(b)
4(c)
dQ/dP = 2P + 1
(1 mark)
Coefficient of determination measures the correlation between the dependent and
independent variables in a regression analysis. It measures the fraction of the total
variation in the dependent variable that is explained by the independent variable.
3
(1 mark)
SECTION C: COMPLUSORY QUESTIONS
Financial Accounting and Financial Statement Analysis
Question 5
5(a) The figures which prompted Egoh Ibrahim's reaction.
EQUITY SHARES
RESERVES
TOTAL EQUITY CAPITAL
LOANS
TOTAL CAPITAL EMPLOYED
2008
N’000
100,000
150,000
250,000
40,000
290,000
2009
N’000
150,000
220,000
370,000
40,000
410,000
PROFITS (NET AFTER TAX)
60,000
70,000
RETURN ON TOTAL EQUITY
24%
18.9%
5(b) Memorandum to Egoh Ibrahim
The reduction in profits from 24% to 18.9% of total equity needs to be analyzed into its
causal factors. During the year the net profits have increased but not as fast as the
equity capital which has gone up by N120,000 over the year. If the increase reflected an
investment late in 2008/9 it would reduce returns because a full year's profit could not
be earned.
It is therefore essential to examine the nature of the investment and the future. Before
shares are bought it is essential to examine future prospects. If these are good, the
historic analysis may not be important. However, if the new funds were used — clearly
prospects may not be good and shares should not be bought.
5(c) Why a company builds up and maintains reserves.
Reserves are profits retained within the business. The profits may be from revenue, i.e.
from profits which could be distributed as dividends to shareholders or capital — for
example where fixed amounts are revalued upwards to reflect current market value.
The creation of reserves reflects an increase in capital in the organization which would
normally be to reflect an increasing scale of operation. In this sense, reserves reflect
an alternative to issuing new shares. In the case of capital reserves from revaluation these are simply 'paper adjustments' to value which do not in themselves indicate
more resources in the organization.
Revenue reserves may in fact be distributed as dividends whereas capital reserves
would not normally be available for this purpose and are more akin to share capital.
4
Economics and Financial Markets
Question 6
6(a) The current equilibrium level of national income:
Y = C + I + G + (X-M)
Y = 60 + 5 +8 +7 – 10 = 70
(4 marks)
6(b) Increase in government expenditure represents an expansionary fiscal policy.
This leads to a shift to the right of the IS-Curve. All other things being equal this
rightward shift in the IS curve leads to an increase in income and at the same
time an increase in interest rates.
In Economic terms, an increase in government expenditure induces an increase
in overall demand for goods and services; therefore overall output rises as well.
With this rise in output, there is an upward pressure on interest rate.
From the diagram below, the initial point of equilibrium is i1Y1. Increase in
government expenditure shifts the IS curve to IS2 from IS1. The new point of
equilibrium is i2Y2 at which income rises to Y2 from Y1 and interest rate rises to
i2 from i1.
Explanation - 4 marks
Graph
- 2 marks
Total
- 6 marks
5
Question 7 - Quantitative Analysis and Statistics
7(a) The discounted figures are:
Year
Investment/
yield
0
1
2
3
4
-100,000
25,000
35,000
30,000
15,000
Discount
factor
Discounted
yield
0.9091
0.8264
0.7513
0.6830
22,727.3
28,925.6
22,539.4
10,245.2
Total
84,437.5
The present value (N84, 437.5) is less than the initial outlay (N100,000).
7(b) Using linear interpolation, IRR could be computed. We need to obtain two
different NPVs using two costs of capital – preferably one giving negative
NPV and the other positive NPV
Year
Investment/
yield
0
1
2
3
4
(100,000)
25,000
35,000
30,000
15,000
Discount
Factor@
10%
1
0.9091
0.8264
0.7513
0.6830
Present
Value
(100,000)
22,728
28,924
22,539
10,245
Discount
Factor@
2%
1
0.9804
0.9612
0.9423
0.9238
(15,564)
IRR= Lower D/F +
NPV L
NPV H + NPV L
= 2%
+
Present
Value
(100,000)
24,510
33,642
28,269
13,857
278
x (Higher D/F - Lower D/F)
x (10% -2%)
278
15,564 + 278
= 2% + (0.01755 x 8%)
= 2.14%
6