ACCA Financial Management
Mock Exam 1
Student
RASHNA DALAL
Test Date
Tuesday, December 3, 2019
Time Taken
3 hours 25 minutes
Score
28 out of 100
Section A - Question 1
You scored 0 / 2
Which TWO of the following are objectives of macroeconomic policy?
✓ Low in ation
✓ Rapid economic growth
✓ Full employment
✓ Balance of payments surplus
Section A - Question 2
You scored 2 / 2
JH Co, a UK company, is planning to sell an asset to a foreign business. The invoice will be in US dollars to be settled at the end of July and the business is looking to hedge the transaction using a forward
contract as it anticipates a fall in the dollar value over the next few months.
Forward rates have been quoted as follows:
3 month forward: $1.271 – $1.281 = £1
6 month forward: $1.312 – $1.416 = £1
If the value of the invoice will be $765,000 and today’s date is 31 January, what will be the £ value of the receipt under the forward contract?
£594,807
£597,190
£583,079
£540,254
Section A - Question 3
You scored 0 / 2
A company has $450,000 to invest and is considering the following projects:
Project 1
Project 2
Project 3
Project 4
Capital needed at time 0
$
200,000
300,000
150,000
250,000
NPV
$
55,000
75,000
45,000
65,000
Each project is in nitely divisible and none can be delayed. What is the maximum NPV that can be earned?
Type your answer without commas or decimal points.
$ 120000
Section A - Question 4
You scored 2 / 2
Willocks Co is looking to invest in a project that has a different business risk level to its current operations. It has decided to use the capital asset pricing model (CAPM) to nd an appropriate equity cost
of capital. It has found an equity beta from a company in a similar business area to the project.
Proxy equity beta value
Proxy company gearing
Willocks Co gearing
1.5
(E:D) 2:1
(E:D) 3:2
Calculate (to 1 decimal place) an appropriate equity beta for Willocks to use in the CAPM. Assume the debt beta is zero and that there is no tax.
0.6
1.3
1.5
1.7
Section A - Question 5
Which TWO of the following statements are true?
✓ Offering credit to customers improves competitiveness.
✓ Offering credit to customers reduces the need for funding.
✓ Offering credit to customers increases the risk of doing business.
✓ Offering credit to customers increases liquidity.
You scored 2 / 2
Section A - Question 6
You scored 2 / 2
Which of the following is NOT one of the roles of a nancial intermediary?
Risk minimisation
Bringing together lenders and borrowers
Aggregation
Maturity transformation
Section A - Question 7
You scored 0 / 2
Which of the following statements are true?
(1) A negative interest rate gap occurs when interest-sensitive liabilities maturing at a certain time are greater than interest-sensitive assets maturing at the same time.
(2) An inverted yield curve can be a sign of an upcoming recession.
(3) Liquidity preference theory is where investors have a preference for shorter maturity investments and will therefore expect those investments to have a higher yield.
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Section A - Question 8
You scored 0 / 2
A company announces that after many years of paying no dividends at all it is about to start paying dividends on an annual basis. One of its major shareholders then decides to sell its shares in the
company as a result of the change in policy; further clarifying that it is ‘for tax reasons’.
What is this an example of?
Signalling effect
Dividend irrelevancy effect
Liquidity effect
Clientele effect
Section A - Question 9
You scored 2 / 2
A project NPV is calculated as $4,650 at a discount rate of 8%. Details of the project include the following:
Sales price $6, sales volume 9,000 units per year for 5 years, variable cost $2.50, xed costs $17,000 per year.
Calculate the sensitivity of the project to a change in sales volumes. Ignore taxation.
2.2%
3.7%
4.2%
8.0%
Section A - Question 10
You scored 2 / 2
Which TWO of the following statements are true?
✓ Fiscal policy involves maximising taxes paid to the government.
✓ Corporate governance rules state that the chairman and the CEO of a company should not be the same person.
✓ Pro t seeking organisations cannot use the Value for Money approach as their primary objective is to maximise shareholder wealth.
✓ Monetary policy involves in uencing both interest rates and the volume of money in circulation.
Section A - Question 11
A company currently places 40 orders of inventory per year, ordering 2,000 units each time, but is to change to an ordering system based on the economic order quantity (EOQ) model.
Its ordering costs are $75 per order. Units cost $8 each and the company’s cost of nance is 10% per annum. Other costs of holding inventory amount to $0.70 per unit.
Calculate the quantity that would be ordered using the EOQ model.
1,549 units
2,000 units
2,828 units
4,140 units
You scored 0 / 2
Section A - Question 12
You scored 2 / 2
Which of the following forms of Islamic nance is most like equity nance?
Murabaha
Ijara
Sukuk
Mudaraba
Section A - Question 13
You scored 2 / 2
A company has some redeemable debt with the following features:
The coupon rate is 8% and the debt is redeemable in 8 years’ time at a premium of 10%. The required return for the investor is 7% and the tax rate is 30%.
What is the current market value of the debt (to the nearest $)?
$ 112
Section A - Question 14
You scored 2 / 2
A business decides to use the Miller-Orr cash management model to ensure that it holds an appropriate amount of cash at all times.
It wishes to keep a minimum cash balance of $15,000 to ensure its daily cash needs are covered. Every time it transfers money to and from its short-term investments there is a xed fee of $25. The
standard deviation of its cash ows is $5,000 per day and the interest rate is 0.01% per day.
Using the Miller-Orr model, calculate the maximum cash balance that should be set by the business.
$15,633
$25,817
$31,736
$65,207
Section A - Question 15
You scored 2 / 2
Arc Co, a US company, is due to receive 996,000 Euros from one of its customers in 6 months’ time and has decided to use a money market hedge to protect against the transaction risk on the payment.
The following data is available.
Current spot rate: €0.94 = $1
Interest rates:
US$ deposit 5% per annum
€ deposit 3% per annum
US$ borrowing 7% per annum
€ borrowing 4.5% per annum
Working to the nearest $100, what is the $ value of the expected receipt in 6 months?
$1,057,000
$1,059,600
$1,064,600
$1,062,200
Section A
You scored 0 / 0
This section of the exam contains 15 objective test (OT) questions.
Each question is worth 2 marks and is compulsory.
This exam section is worth 30 marks in total.
Select Next to continue.
Section B
This section of the exam contains three OT cases.
Each OT case contains a scenario which relates to ve OT questions.
Each question is worth 2 marks and is compulsory.
This exam section is worth 30 marks in total.
Select Next to continue.
You scored 0 / 0
Section B - Question 16
Kermeen Co is a UK company that has recently moved into the export market. Kermeen Co
has had some successful recent transactions with companies in France (where the currency is
the Euro (€)) and would like to build on those. This would necessitate building a new
distribution depot near to a UK ferry port. Kermeen Co is planning to borrow £5 million for
nine months to fund this, but the managing director is worried as the borrowing won’t be
needed for another six months and there is anticipation that interest rates will rise in that
time.
The managing director is also aware that the sterling exchange rate uctuates and wishes to
use an appropriate method to minimise the risk associated with the cash ows that will be
coming in from the French customers. The sterling exchange rate has been very weak recently
and the MD expects it to strengthen soon and keep on strengthening for a long time.
You scored 0 / 2
If the interest rate in six months’ time is 2.5% per annum and Kermeen Co takes out the
necessary borrowing at this rate, what will be the amount paid/received to/from the FRA
provider?
£18,750 received from the FRA provider
£18,750 paid to the FRA provider
£112,500 received from the FRA provider
£112,500 paid to the FRA provider
As part of the MD’s research, they have found an appropriate forward rate agreement (FRA)
with an interest rate spread of 3% – 2.8% per annum. They have read that interest rates in the
UK are predicted to be 3.1% over the coming year and that interest rates in the Eurozone are
predicted as 3.9% and knows that this information can help them predict exchange rates but
isn’t sure how. The current spot rate of exchange is €1.18 = £1.
The MD has also read about forward exchange and futures contracts but is confused about
the differences between them.
Section B - Question 17
Kermeen Co is a UK company that has recently moved into the export market. Kermeen Co
has had some successful recent transactions with companies in France (where the currency is
the Euro (€)) and would like to build on those. This would necessitate building a new
distribution depot near to a UK ferry port. Kermeen Co is planning to borrow £5 million for
nine months to fund this, but the managing director is worried as the borrowing won’t be
needed for another six months and there is anticipation that interest rates will rise in that
time.
The managing director is also aware that the sterling exchange rate uctuates and wishes to
use an appropriate method to minimise the risk associated with the cash ows that will be
coming in from the French customers. The sterling exchange rate has been very weak recently
and the MD expects it to strengthen soon and keep on strengthening for a long time.
As part of the MD’s research, they have found an appropriate forward rate agreement (FRA)
with an interest rate spread of 3% – 2.8% per annum. They have read that interest rates in the
UK are predicted to be 3.1% over the coming year and that interest rates in the Eurozone are
predicted as 3.9% and knows that this information can help them predict exchange rates but
isn’t sure how. The current spot rate of exchange is €1.18 = £1.
The MD has also read about forward exchange and futures contracts but is confused about
the differences between them.
You scored 0 / 2
Using the predicted interest rates in the UK and the Eurozone, indicate, by clicking on the
relevant box, the predicted Euro to sterling forward exchange rate for delivery in 6 months’
time.
€1.1754 = £1
Section B - Question 18
Kermeen Co is a UK company that has recently moved into the export market. Kermeen Co
has had some successful recent transactions with companies in France (where the currency is
the Euro (€)) and would like to build on those. This would necessitate building a new
distribution depot near to a UK ferry port. Kermeen Co is planning to borrow £5 million for
nine months to fund this, but the managing director is worried as the borrowing won’t be
needed for another six months and there is anticipation that interest rates will rise in that
time.
The managing director is also aware that the sterling exchange rate uctuates and wishes to
use an appropriate method to minimise the risk associated with the cash ows that will be
coming in from the French customers. The sterling exchange rate has been very weak recently
and the MD expects it to strengthen soon and keep on strengthening for a long time.
You scored 0 / 2
Which of the following statements about interest rate risk and currency risk is true?
An exporter invoicing in the currency of its customers will face economic risk but not
transaction risk.
A business whose foreign currency transactions are few and far between will not
bene t substantially from hedging against currency risk.
Interest rate oors are most useful for borrowers to keep the borrowing rate low.
Interest rate swaps involve swapping interest payments on oating and xed rate loans
but not swapping the loans themselves.
As part of the MD’s research, they have found an appropriate forward rate agreement (FRA)
with an interest rate spread of 3% – 2.8% per annum. They have read that interest rates in the
UK are predicted to be 3.1% over the coming year and that interest rates in the Eurozone are
predicted as 3.9% and knows that this information can help them predict exchange rates but
isn’t sure how. The current spot rate of exchange is €1.18 = £1.
The MD has also read about forward exchange and futures contracts but is confused about
the differences between them.
Section B - Question 19
Kermeen Co is a UK company that has recently moved into the export market. Kermeen Co
has had some successful recent transactions with companies in France (where the currency is
the Euro (€)) and would like to build on those. This would necessitate building a new
distribution depot near to a UK ferry port. Kermeen Co is planning to borrow £5 million for
nine months to fund this, but the managing director is worried as the borrowing won’t be
needed for another six months and there is anticipation that interest rates will rise in that
time.
The managing director is also aware that the sterling exchange rate uctuates and wishes to
use an appropriate method to minimise the risk associated with the cash ows that will be
coming in from the French customers. The sterling exchange rate has been very weak recently
and the MD expects it to strengthen soon and keep on strengthening for a long time.
As part of the MD’s research, they have found an appropriate forward rate agreement (FRA)
with an interest rate spread of 3% – 2.8% per annum. They have read that interest rates in the
UK are predicted to be 3.1% over the coming year and that interest rates in the Eurozone are
predicted as 3.9% and knows that this information can help them predict exchange rates but
isn’t sure how. The current spot rate of exchange is €1.18 = £1.
The MD has also read about forward exchange and futures contracts but is confused about
the differences between them.
You scored 0 / 2
Which TWO of the following statements about the similarities and differences between
forward exchange contracts and futures contracts are true?
✓ Both forward exchange contracts and futures contracts x the rate of exchange on a
future currency transaction.
✓ Forward contracts can be traded on the stock market but futures contracts cannot.
✓ Forward contracts are a binding commitment but futures contracts can be allowed to
lapse.
✓ Forward contracts can be for any date but futures contracts can only be settled on
particular dates.
Section B - Question 20
Kermeen Co is a UK company that has recently moved into the export market. Kermeen Co
has had some successful recent transactions with companies in France (where the currency is
the Euro (€)) and would like to build on those. This would necessitate building a new
distribution depot near to a UK ferry port. Kermeen Co is planning to borrow £5 million for
nine months to fund this, but the managing director is worried as the borrowing won’t be
needed for another six months and there is anticipation that interest rates will rise in that
time.
The managing director is also aware that the sterling exchange rate uctuates and wishes to
use an appropriate method to minimise the risk associated with the cash ows that will be
coming in from the French customers. The sterling exchange rate has been very weak recently
and the MD expects it to strengthen soon and keep on strengthening for a long time.
You scored 2 / 2
Which TWO of the following would be appropriate methods of minimising the foreign
exchange risk on the future receipts from French customers if the MD’s expectations about
the exchange rate are correct?
✓ Buy Euro denominated futures up front and sell on close out.
✓ Sell Euro denominated futures up front and buy back on close out.
✓ A put option on Euros.
✓ A call option on Euros.
As part of the MD’s research, they have found an appropriate forward rate agreement (FRA)
with an interest rate spread of 3% – 2.8% per annum. They have read that interest rates in the
UK are predicted to be 3.1% over the coming year and that interest rates in the Eurozone are
predicted as 3.9% and knows that this information can help them predict exchange rates but
isn’t sure how. The current spot rate of exchange is €1.18 = £1.
The MD has also read about forward exchange and futures contracts but is confused about
the differences between them.
Section B - Question 21
Kennaugh Co is looking to take over another company, Kewley Co, and so needs to value
Kewley Co in order to put together a takeover bid. It has gathered the following information.
Kewley’s Co's earnings last year were $460,000, but this was after a deduction for a one off
bad debt of $50,000 as well as having paid what the directors of Kennaugh Co believe to be
an excessive salary of $250,000 to the managing director. If the takeover proceeds, this
managing director will retire to be replaced with an individual from Kennaugh Co at a salary
of $140,000. Earnings are otherwise anticipated to grow at a rate of 3.5% and the earnings
yield gure for Kewley Co is currently 13%.
Kewley Co has non-current assets on its books with a historic cost value of $5,500,000 but an
independent valuation recently put their current replacement cost at 20% higher than cost.
Kewley Co’s current assets of $1,200,000 include a long outstanding debt of $50,000 that is
unlikely to be paid. Kewley Co has loan notes with a nominal value of $1,350,000 in issue
which are due to be redeemed at a 5% premium next year.
If the takeover of Kewley Co falls through, Kennaugh Co has also targeted a property
development company, Corkill Co, to takeover instead. Kennaugh Co would want to run the
business as a going concern after the takeover and Corkill Co’s future growth is strongly
anticipated to be in line with its growth over the past few years.
The managing director of Kennaugh Co has recently heard that an old colleague has been
jailed for participating in insider trading. They know that the rules on insider trading are
needed because of the ef ciency level of the stock market but can’t remember any more
detail than that.
You scored 0 / 2
Calculate, using earnings yield, a valuation for Kewley Co from the information above?
$4,358,000
$4,936,000
$5,846,000
$6,755,000
Section B - Question 22
Kennaugh Co is looking to take over another company, Kewley Co, and so needs to value
Kewley Co in order to put together a takeover bid. It has gathered the following information.
You scored 0 / 2
Which THREE of the following pieces of information would be needed to calculate a
discounted cash ow valuation for Kewley Co?
Kewley’s Co's earnings last year were $460,000, but this was after a deduction for a one off
bad debt of $50,000 as well as having paid what the directors of Kennaugh Co believe to be
an excessive salary of $250,000 to the managing director. If the takeover proceeds, this
managing director will retire to be replaced with an individual from Kennaugh Co at a salary
of $140,000. Earnings are otherwise anticipated to grow at a rate of 3.5% and the earnings
yield gure for Kewley Co is currently 13%.
✓ Synergies after the takeover.
Kewley Co has non-current assets on its books with a historic cost value of $5,500,000 but an
independent valuation recently put their current replacement cost at 20% higher than cost.
Kewley Co’s current assets of $1,200,000 include a long outstanding debt of $50,000 that is
unlikely to be paid. Kewley Co has loan notes with a nominal value of $1,350,000 in issue
which are due to be redeemed at a 5% premium next year.
✓ Kewley Co's budgets for the past two years.
✓ Pro ts on disposal of assets post takeover.
✓ Value of Kewley Co’s debt.
✓ Appropriate discount rate.
✓ Kennaugh Co's existing price earnings ratio.
If the takeover of Kewley Co falls through, Kennaugh Co has also targeted a property
development company, Corkill Co, to takeover instead. Kennaugh Co would want to run the
business as a going concern after the takeover and Corkill Co’s future growth is strongly
anticipated to be in line with its growth over the past few years.
The managing director of Kennaugh Co has recently heard that an old colleague has been
jailed for participating in insider trading. They know that the rules on insider trading are
needed because of the ef ciency level of the stock market but can’t remember any more
detail than that.
Section B - Question 23
Kennaugh Co is looking to take over another company, Kewley Co, and so needs to value
Kewley Co in order to put together a takeover bid. It has gathered the following information.
Kewley’s Co's earnings last year were $460,000, but this was after a deduction for a one off
bad debt of $50,000 as well as having paid what the directors of Kennaugh Co believe to be
an excessive salary of $250,000 to the managing director. If the takeover proceeds, this
managing director will retire to be replaced with an individual from Kennaugh Co at a salary
of $140,000. Earnings are otherwise anticipated to grow at a rate of 3.5% and the earnings
yield gure for Kewley Co is currently 13%.
Kewley Co has non-current assets on its books with a historic cost value of $5,500,000 but an
independent valuation recently put their current replacement cost at 20% higher than cost.
Kewley Co’s current assets of $1,200,000 include a long outstanding debt of $50,000 that is
unlikely to be paid. Kewley Co has loan notes with a nominal value of $1,350,000 in issue
which are due to be redeemed at a 5% premium next year.
If the takeover of Kewley Co falls through, Kennaugh Co has also targeted a property
development company, Corkill Co, to takeover instead. Kennaugh Co would want to run the
business as a going concern after the takeover and Corkill Co’s future growth is strongly
anticipated to be in line with its growth over the past few years.
The managing director of Kennaugh Co has recently heard that an old colleague has been
jailed for participating in insider trading. They know that the rules on insider trading are
needed because of the ef ciency level of the stock market but can’t remember any more
detail than that.
You scored 0 / 2
Calculate, using asset values suitable for Kennaugh Co, a valuation for Kewley Co from the
information above (to the nearest $000)?
$5,300,000
$6,332,500
$6,400,000
$6,650,000
Section B - Question 24
Kennaugh Co is looking to take over another company, Kewley Co, and so needs to value
Kewley Co in order to put together a takeover bid. It has gathered the following information.
Kewley’s Co's earnings last year were $460,000, but this was after a deduction for a one off
bad debt of $50,000 as well as having paid what the directors of Kennaugh Co believe to be
an excessive salary of $250,000 to the managing director. If the takeover proceeds, this
managing director will retire to be replaced with an individual from Kennaugh Co at a salary
of $140,000. Earnings are otherwise anticipated to grow at a rate of 3.5% and the earnings
yield gure for Kewley Co is currently 13%.
You scored 0 / 2
Which TWO of the following would be appropriate valuation methods for Corkill Co?
✓ Asset valuation based on NRVs
✓ Dividend growth model
✓ PE valuation
✓ Discounted cash ow valuation
Kewley Co has non-current assets on its books with a historic cost value of $5,500,000 but an
independent valuation recently put their current replacement cost at 20% higher than cost.
Kewley Co’s current assets of $1,200,000 include a long outstanding debt of $50,000 that is
unlikely to be paid. Kewley Co has loan notes with a nominal value of $1,350,000 in issue
which are due to be redeemed at a 5% premium next year.
If the takeover of Kewley Co falls through, Kennaugh Co has also targeted a property
development company, Corkill Co, to takeover instead. Kennaugh Co would want to run the
business as a going concern after the takeover and Corkill Co’s future growth is strongly
anticipated to be in line with its growth over the past few years.
The managing director of Kennaugh Co has recently heard that an old colleague has been
jailed for participating in insider trading. They know that the rules on insider trading are
needed because of the ef ciency level of the stock market but can’t remember any more
detail than that.
Section B - Question 25
Kennaugh Co is looking to take over another company, Kewley Co, and so needs to value
Kewley Co in order to put together a takeover bid. It has gathered the following information.
Kewley’s Co's earnings last year were $460,000, but this was after a deduction for a one off
bad debt of $50,000 as well as having paid what the directors of Kennaugh Co believe to be
an excessive salary of $250,000 to the managing director. If the takeover proceeds, this
managing director will retire to be replaced with an individual from Kennaugh Co at a salary
of $140,000. Earnings are otherwise anticipated to grow at a rate of 3.5% and the earnings
yield gure for Kewley Co is currently 13%.
Kewley Co has non-current assets on its books with a historic cost value of $5,500,000 but an
independent valuation recently put their current replacement cost at 20% higher than cost.
Kewley Co’s current assets of $1,200,000 include a long outstanding debt of $50,000 that is
unlikely to be paid. Kewley Co has loan notes with a nominal value of $1,350,000 in issue
which are due to be redeemed at a 5% premium next year.
If the takeover of Kewley Co falls through, Kennaugh Co has also targeted a property
development company, Corkill Co, to takeover instead. Kennaugh Co would want to run the
business as a going concern after the takeover and Corkill Co’s future growth is strongly
anticipated to be in line with its growth over the past few years.
The managing director of Kennaugh Co has recently heard that an old colleague has been
jailed for participating in insider trading. They know that the rules on insider trading are
needed because of the ef ciency level of the stock market but can’t remember any more
detail than that.
You scored 2 / 2
What is the highest level of ef ciency for which rules against insider trading would be needed
for a stock market?
Not ef cient
Weak form ef ciency
Semi-strong ef ciency
Strong ef ciency
Section B - Question 26
You scored 0 / 2
Extracts from Kerruish Co’s most recent nancial statements are shown below.
$000
Pro t before taxation
Taxation
$ 0.08
2,214
664
–––––
Pro t after taxation
Dividends
1,550
620
$000
$000
Equity
Ordinary shares
9,000
Reserves
2,620
––––––
11,620
Non-current liabilities
Bonds
2,800
Bank loans
5,300
8% preference shares
1,500
––––––
9,600
Current liabilities
Trade payables
1,750
––––––
1,750
––––––
Total equity and liabilities
Calculate Kerruish Co’s earnings per share for the year, in dollars to the nearest cent.
22,970
––––––
The ordinary shares have a nominal value of $0.75 each and are currently valued in the
market at $4.20 each. The bonds have a nominal value of $100, a coupon rate of 6% and are
currently valued at $112.50. The bank loans are repayable in 10 years’ time and incur an
interest charge of 5%. The preference shares have a nominal value of $1 each and a current
market value of $0.96. Preference share dividends are paid out annually.
Section B - Question 27
You scored 0 / 2
Extracts from Kerruish Co’s most recent nancial statements are shown below.
5.1 times
$000
Pro t before taxation
Taxation
2,214
6.1 times
664
9.4 times
–––––
Pro t after taxation
Dividends
14.2 times
1,550
620
$000
$000
Equity
Ordinary shares
9,000
Reserves
2,620
––––––
11,620
Non-current liabilities
Bonds
2,800
Bank loans
5,300
8% preference shares
1,500
––––––
9,600
Current liabilities
Trade payables
1,750
––––––
1,750
––––––
Total equity and liabilities
Calculate Kerruish Co’s interest cover for the year.
22,970
––––––
The ordinary shares have a nominal value of $0.75 each and are currently valued in the
market at $4.20 each. The bonds have a nominal value of $100, a coupon rate of 6% and are
currently valued at $112.50. The bank loans are repayable in 10 years’ time and incur an
interest charge of 5%. The preference shares have a nominal value of $1 each and a current
market value of $0.96. Preference share dividends are paid out annually.
Section B - Question 28
You scored 0 / 2
Extracts from Kerruish Co’s most recent nancial statements are shown below.
$000
Pro t before taxation
Taxation
Pro t after taxation
Dividends
16.4%
2,214
664
19.6%
–––––
20.7%
1,550
26.2%
620
$000
$000
Equity
Ordinary shares
9,000
Reserves
2,620
––––––
11,620
Non-current liabilities
Bonds
2,800
Bank loans
5,300
8% preference shares
1,500
––––––
9,600
Current liabilities
Trade payables
1,750
––––––
1,750
––––––
Total equity and liabilities
Calculate Kerruish Co’s capital gearing (measured as debt / total capital) using market values
(include preference shares as part of the debt value).
22,970
––––––
The ordinary shares have a nominal value of $0.75 each and are currently valued in the
market at $4.20 each. The bonds have a nominal value of $100, a coupon rate of 6% and are
currently valued at $112.50. The bank loans are repayable in 10 years’ time and incur an
interest charge of 5%. The preference shares have a nominal value of $1 each and a current
market value of $0.96. Preference share dividends are paid out annually.
Section B - Question 29
You scored 2 / 2
Extracts from Kerruish Co’s most recent nancial statements are shown below.
✓ A low PE ratio suggests that investors are not very con dent about a business’s future.
$000
Pro t before taxation
Taxation
✓ The lower the interest cover value, the lower the risk of the business not being able to
2,214
cover its interest payments.
664
✓ A dividend yield calculation tells the investor about both the dividend and capital
–––––
Pro t after taxation
Dividends
growth seen on the shares.
1,550
✓ Dividend cover is calculated using pro t after preference share dividends but before
620
$000
ordinary dividends.
$000
Equity
Ordinary shares
9,000
Reserves
2,620
––––––
11,620
Non-current liabilities
Bonds
2,800
Bank loans
5,300
8% preference shares
1,500
––––––
9,600
Current liabilities
Trade payables
1,750
––––––
1,750
––––––
Total equity and liabilities
Which TWO of the following statements are true in relation to nancial ratios?
22,970
––––––
The ordinary shares have a nominal value of $0.75 each and are currently valued in the
market at $4.20 each. The bonds have a nominal value of $100, a coupon rate of 6% and are
currently valued at $112.50. The bank loans are repayable in 10 years’ time and incur an
interest charge of 5%. The preference shares have a nominal value of $1 each and a current
market value of $0.96. Preference share dividends are paid out annually.
Section B - Question 30
You scored 2 / 2
Extracts from Kerruish Co’s most recent nancial statements are shown below.
(1) they are more relevant to the level of investment made.
$000
Pro t before taxation
Taxation
2,214
(2) they are consistent with the way that investors measure debt and equity.
664
(3) they are readily available.
–––––
Pro t after taxation
Dividends
Which of the following are advantages of using market values in a gearing calculation?
1,550
1 and 3
620
2 and 3
1 and 2
$000
$000
Equity
Ordinary shares
9,000
Reserves
2,620
––––––
11,620
Non-current liabilities
Bonds
2,800
Bank loans
5,300
8% preference shares
1,500
––––––
9,600
Current liabilities
Trade payables
1,750
––––––
1,750
––––––
Total equity and liabilities
22,970
––––––
The ordinary shares have a nominal value of $0.75 each and are currently valued in the
market at $4.20 each. The bonds have a nominal value of $100, a coupon rate of 6% and are
currently valued at $112.50. The bank loans are repayable in 10 years’ time and incur an
interest charge of 5%. The preference shares have a nominal value of $1 each and a current
market value of $0.96. Preference share dividends are paid out annually.
1, 2 and 3
Section C
You scored 0 / 0
This section of the exam contains two constructed response questions.
Each question contains a scenario which relates to one or more requirement(s) which may be split over multiple question screens.
Each question is worth 20 marks and is compulsory.
This exam section is worth 40 marks in total.
Important: Please show all workings within your answers in the live exam otherwise they will not be marked. Remember, any notes/workings made on the Scratch Pad or on your workings paper will not
be marked.
Select Next to continue.
Section C - Question 31(a)
You scored 0 / 17
An inexperienced nancial accountant has put together a draft investment appraisal for a project that is being considered by Hyem Co. The appraisal and the project information that was used to
prepare the appraisal are as follows:
Year
0
1
2
3
4
5
$000
$000
$000
$000
$000
$000
550
825
825
275
(200)
(210)
(221)
(232)
(20)
(20)
(20)
(20)
(20)
____
____
____
____
____
(20)
330
595
584
23
6
(99)
(179)
(175)
Contribution
Fixed costs
Interest Payments
Taxable cash ow
Taxation
Asset purchase / sale
(1,500)
200
Tax savings on allowable depreciation
Working capital
(7)
375
281
211
433
(140)
(210)
(210)
(70)
630
____
____
____
____
____
Net cash ows
(1,660)
126
661
616
889
426
Discount at 5%
1
0.952
0.907
0.864
0.823
0.784
____
____
____
____
____
____
(1,660)
120
600
532
732
334
____
____
____
____
____
____
Present values
Net present value = $658,000 so the project should be accepted.
Project information:
(1) The project has undergone a feasibility study, performed by a market research rm, costing $60,000, half of which has not yet been paid.
(2) To do the project, Hyem Co would have to purchase a brand new production line costing $1,500,000.
(3) Contributions per unit are not known for certain. The following probabilities apply:
20% chance of earning $50 per unit, 40% chance of $55 per unit, 40% chance of $60 per unit. Whichever value is earned, sales prices and variable costs are not expected to rise over the life of the
project.
(4) Fixed overhead costs: $200,000 in year 1, rising at 5% per year.
(5) Interest costs of $20k per annum are payable on a loan used to help fund the project, with the rst amount payable immediately and the last due in 4 years.
(6) Working capital requirements of 10% of sales revenue and needs to be in place at the start of each year. The anticipated contribution to sales ratio is 40%.
(7) Annual sales of 10,000 units in the rst year, 15,000 in the next 2 years and 5,000 in the last year of the four year project.
(8) The production line would be sold at the end of the project for $200,000.
(9) The real cost of capital that Hyem Co uses is 5%. The company anticipates general rates of in ation over the life of the project to be 3.8%.
(10) Tax allowable depreciation is available at 25% reducing balance and tax is paid one year in arrears at a rate of 30%.
Required:
(a) Prepare a revised calculation of the net present value of the proposed investment project, commenting on the mistakes made on the draft version. Comment on the project’s acceptability.
(17 marks)
A
1
2
3
4
5
6
7
8
9
10
11
12
CALCULATION OF NPV
YEARS
C
1
560.00
=C38
- FIXED COSTS
TAXABLE CASH FLOW
INITIAL INVESTMENT
D
0
CONTRIBUTION
0.00
=B3+B4
-1530.00
=-1500-30
360.00
=C3+C4
840.00
=D38
-210.00
-200.00 =C4*1.05
630.00
=D3+D4
-108.00
=-C5*0.3
112.50
=D45
- TAX TO BE PAID
+TAX SAVINGS
SCRAP
INCREMENTAL WORKING CAPITAL
AFTER TAX CASH FLOW
DISCOUNTING FACTOR @9%
-140
=B54
-1670.00
=SUM(B5:B10)
14
SINCE NPV IS NEGATIVE THE PROJECT IS NOT FINANCIALLY VIABLE.
16
17
MISTAKES MADE ON THE DRAFT VERSION ARE AS FOLLOWS:
1. CONTRIBUTION VALUES
19 THE AMOUNT TAKEN ARE BY NOT CONSIDERING THE PROBABLITIES OF UNITS
20 THAT WOULD BE SOLD IN THE COMING YEARS.
18
21
22
2. INTEREST PAYMENTS
THE INTEREST PAYMENTS WILL BE CONSIDERED WHILE CALCULATING THE
24 DISCOUNTING FACTOR AND WILL NOT APPEAR IN CALCULATION OF TAXABLE
23
To see the full submission Download the Spreadsheet here
-210
=C54
150.00
=SUM(C5:C10)
1.00
-1670.00
=B11*B12
13
15
B
-350
=D54
284.50
=SUM(D5:D10)
0.92
137.55
=C11*C12
0.8
239.55
=D11*D12
Section C - Question 31(b)
You scored 0 / 3
An inexperienced nancial accountant has put together a draft investment appraisal for a
project that is being considered by Hyem Co. The appraisal and the project information that
was used to prepare the appraisal are as follows:
Year
0
1
2
3
4
5
$000
$000
$000
$000
$000
$000
550
825
825
275
(200)
(210)
(221)
(232)
(20)
(20)
(20)
(20)
(20)
____
____
____
____
____
(20)
330
595
584
23
6
(99)
(179)
(175)
Contribution
Fixed costs
Interest Payments
Taxable cash ow
Taxation
Asset purchase / sale
(1,500)
Working capital
375
281
211
THE CURRENT WACC IS NOT APPROPRIATE TO BE USED DUE TO THE
FOLLOWING REASONS:
2. CAPITAL STRUCTURE HAS CHANGED
3. THE UNSYSTEMATIC RISK DOES NOT REMAIN AS IT IS ASSUMED THAT
INVESTORS MAINTAIN A DIVERSIFIED PORTFOLIO
(7)
433
(140)
(210)
(210)
(70)
630
____
____
____
____
____
Net cash ows
(1,660)
126
661
616
889
426
Discount at 5%
1
0.952
0.907
0.864
0.823
0.784
____
____
____
____
____
____
(1,660)
120
600
532
732
334
____
____
____
____
____
____
Present values
(3 marks)
1. THE BUSINESS RISK OF INVESTMENT COULD BE DIFFERENT TO THE RISK
OF CURRENT BUSINESS OPERATIONS
200
Tax savings on allowable
depreciation
(b) If the project is to go ahead, the loan funding used would represent a signi cant increase
in debt funding for Hyem Co. Explain why this might make the current WACC inappropriate
to use.
Net present value = $658,000 so the project should be accepted.
Project information:
(1) The project has undergone a feasibility study, performed by a market research rm,
costing $60,000, half of which has not yet been paid.
(2) To do the project, Hyem Co would have to purchase a brand new production line costing
$1,500,000.
(3) Contributions per unit are not known for certain. The following probabilities apply:
20% chance of earning $50 per unit, 40% chance of $55 per unit, 40% chance of $60 per unit.
Whichever value is earned, sales prices and variable costs are not expected to rise over the
life of the project.
(4) Fixed overhead costs: $200,000 in year 1, rising at 5% per year.
(5) Interest costs of $20k per annum are payable on a loan used to help fund the project, with
the rst amount payable immediately and the last due in 4 years.
(6) Working capital requirements of 10% of sales revenue and needs to be in place at the start
of each year. The anticipated contribution to sales ratio is 40%.
(7) Annual sales of 10,000 units in the rst year, 15,000 in the next 2 years and 5,000 in the
last year of the four year project.
(8) The production line would be sold at the end of the project for $200,000.
(9) The real cost of capital that Hyem Co uses is 5%. The company anticipates general rates of
in ation over the life of the project to be 3.8%.
(10) Tax allowable depreciation is available at 25% reducing balance and tax is paid one year
in arrears at a rate of 30%.
Section C - Question 32(a)
You scored 0 / 9
Damerell Co has the following nancial information.
Required:
SFP extracts as at 31 December 20X6
(a) Discuss the different strategies for funding working capital and from the gures above
determine which strategy Damerell Co has adopted.
$000
(9 marks)
Non-current assets
Land and buildings
3,000
Plant and equipment
4,000
Working capital
Inventory
1,700
Receivables
2,650
Cash
Current liabilities
425
1,500
Damerell Co keeps a buffer inventory of $1m. The receivables balance uctuates. Its lowest
balance this year has been $2.2m. The cash balance also uctuates, with a lowest balance this
year of $0.1m.
Damerell Co currently has credit terms from its suppliers of 30 days but has been paying on
average at 40 days. Its supplier has offered Damerell Co a discount of 0.5% if it pays it within
15 days. Damerell Co's funding costs for working capital are 6% per year. Assume 365 days
per year.
DIFFERENT STRATEGIES FOR FUNDING WORKING CAPITAL ARE:
1 CONSERVATIVE STRATEGY
HERE ALL PERMANENT ASSETS AND MOST OF THE FLUCTUATING
CURRENT ASSETS ARE FINANCED THROUGH LONG TERM DEBTS.
2 AGGRESSIVE STRATEGY
HERE ALL THE FLUCTUATING AND PART OF THE PERMANENT ASSSETS
ARE FINANCED THROUGH SHORT TERM DEBTS.
3. MODERATE STRATEGY
HERE PERMANENT ASSETS ARE FINANCED THROUGH LONG TERM FUNDS
AND FLUCTUATING ASSETS ARE THROUGH SHORT TERM FUNDS
DAMERELL CO HAS ADOPTED MODERATE STRATEGY SINCE IT HAS KEPT
A BUFFER FOR ITS INVENTORY AND FOR THE FLUCTUATING ASSSETS LIKE
CASH AND RECEIVABLES IT HAS TAKEN A SHORT TERM FUNDING.
Section C - Question 32(b)
You scored 0 / 5
Damerell Co has the following nancial information.
SFP extracts as at 31 December 20X6
$000
Non-current assets
Land and buildings
3,000
Plant and equipment
4,000
Working capital
Inventory
1,700
Receivables
2,650
Cash
Current liabilities
425
1,500
Damerell Co keeps a buffer inventory of $1m. The receivables balance uctuates. Its lowest balance this year has been $2.2m. The cash balance also uctuates, with a lowest balance this year of $0.1m.
Damerell Co currently has credit terms from its suppliers of 30 days but has been paying on average at 40 days. Its supplier has offered Damerell Co a discount of 0.5% if it pays it within 15 days.
Damerell Co's funding costs for working capital are 6% per year. Assume 365 days per year.
(b) Calculate whether Damerell Co should accept the early settlement discount offer from its supplier.
(5 marks)
A
B
C
1
2
3 TRADE PAYABLES DAYS
4
5
6
PAYABLES BEFORE DISCOUNT
TRADE PAYABLES AFTER DISCOUNT
DECREASE IN TRADE PAYABLES
40
164
=1500*40/365
61
=1500*0.995*15/365
103
=B4-B5
7
8
9
10
FINANCING COST
VALUE OF DISCOUNT
NET BENEFIT
11
12 HENCE COMPANY SHOULD ACCEPT EARLY SETTLEMENT DISCOUNT OFFERED BY SUPPLIERS
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
Download the Spreadsheet here
6.2
=B6*0.06
75
=1500*0.05
68.82
=B9-B8
D
E
F
G
Section C - Question 32(c)
You scored 0 / 6
Damerell Co has the following nancial information.
SFP extracts as at 31 December 20X6
(c) Discuss the dif culties that small and medium sized businesses can come across when
sourcing funding.
(6 marks)
$000
Non-current assets
Land and buildings
3,000
Plant and equipment
4,000
Working capital
Inventory
1,700
Receivables
2,650
Cash
Current liabilities
425
1,500
Damerell Co keeps a buffer inventory of $1m. The receivables balance uctuates. Its lowest
balance this year has been $2.2m. The cash balance also uctuates, with a lowest balance this
year of $0.1m.
Damerell Co currently has credit terms from its suppliers of 30 days but has been paying on
average at 40 days. Its supplier has offered Damerell Co a discount of 0.5% if it pays it within
15 days. Damerell Co's funding costs for working capital are 6% per year. Assume 365 days
per year.
THE FOLLOWING ARE THE DIFFICULTIES FACED BY SMALL AND MEDIUM
SIZED BUSINESS (SME) WHEN SOURCING FUNDING OPTIONS:
1. LITTLE HISTORY
THE SME'S HISTORY IS VERY LITTE BECAUSE OF WHICH PAS TRENDS ARE
DIFFICULT TO KNOW.
2. FEW ASSETS
SME HAVE VERY FEW ASSETS TO GET SECURED AGAINST DEBTS THEY
WOULD WANT TO HAVE FOR FUNDING.
3. CONTROLS
THE CONTROLS ARE VERY WEAK IN AN SME
4. UNMARKETABLE SHARES
DUE TO LOWER TURNOVER AN LOWER PROFITS, IT WILL NOT BE ABLE TO
ENTER STOCK EXCHANGE TO RAISE EQUITY FINANCE
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