Section A – All questions are compulsory and must be answered.
(15 questions × 2 marks = 30 marks)
1. In an environment of rising inflation rates, a financial analyst needs to determine which
asset valuation method will most likely show an increased return on investment due to
the appreciating values of assets.
Which asset valuation method is expected to reflect an increase in return on investment
under rising inflation?
A. Historical Cost – Based on the original purchase price of the asset.
B. Current Market Value – Based on the price the asset would fetch in the current
market.
C. Liquidation Value – Estimated amount if the asset were sold in a distressed scenario.
D. Amortized Cost – Cost allocated over the asset’s useful life.
2. XYZ Corporation adheres to an inventory ordering policy where it places orders of 75,000
units whenever inventory levels drop to 10,000 units. The cost for placing and processing
each order is $300, and the holding cost per unit per year is $0.25. Orders have a lead
time of two weeks, and the annual production requirement is 450,000 units across 50
weeks.
Calculate the total cost associated with XYZ Corporation’s inventory ordering policy for
the next year.
A. $3,000
B. $6,750
C. $12,425
D. $6,700
3. Scenario: Islamic finance operates under principles that prohibit certain types of financial
transactions.
Which of the following activities are explicitly prohibited under Islamic finance
principles?
1. The use of interest-bearing debt.
2. Financing activities related to immoral or unethical sectors.
3. Engaging in speculative financial instruments such as derivatives.
A. 2 only
B. 1 and 3
C. 1, 2, and 3
D. 2 and 3
4. A company is evaluating its inventory management approach and needs to understand
the interplay between Economic Order Quantity (EOQ) and Reorder Level (ROL).
Which statements accurately describe the relationship and influencing factors between
EOQ and ROL?
A. The EOQ determines the ROL.
B. The ROL determines the EOQ.
C. Both EOQ and ROL are influenced by product demand.
D. Both EOQ and ROL are influenced by the lead time.
5. A company has just paid a dividend of $0.32 per share and is expected to increase this to
$0.336 per share in the following year. The cost of equity for the company is 13%.
What is the market price of the company’s shares on an ex-dividend basis, rounded to
the nearest cent?
A. $3.20
B. $4.41
C. $2.59
D. $4.20
6. A company has issued 7% loan notes that are redeemable in seven years at a 5% premium
over their nominal value of $100. The company’s before-tax cost of debt is 9%, and its
after-tax cost of debt is 6%.
Determine the current market value of each loan note.
A. $92.67
B. $108.90
C. $89.93
D. $103.14
7. ABC Corporation plans to acquire a machine costing $100,000, with a lifespan of five years
and no residual value. The machine is expected to enhance annual operating cash flows
by $50,000, and it will be depreciated on a straight-line basis in alignment with taxallowable depreciation policies. ABC’s tax rate is 35%.
Calculate the annual after-tax cash flow generated by the machine.
A. $19,500
B. $30,00
C. $32,500
D. $39,500
8. Central banks use various tools to influence the economy through monetary policy.
Which of the following are commonly used monetary policy instruments?
1. Altering reserve requirements for commercial banks.
2. Adjusting government expenditure levels.
3. Modifying the national base interest rate.
4. Changing personal income tax rates.
A. 1 only
B. 1 and 3 only
C. 2 and 4 only
D. 2, 3, and 4 only
9. For Calc Co., a publicly listed company, the following data is available: a dividend just paid
of $0.05 per share, an average annual dividend growth rate of 10%, a dividend cover ratio
of 2.4, and a price/earnings (P/E) ratio of 8.
What is Calc Co’s cost of equity?
A. 13.8%
B. 15.2%
C. 15.7%
D. 23.8%
10. A firm is considering the impact on its cost of equity if it redeems all its outstanding debt.
The risk-free rate is 3%, the market premium is 6.5%, the firm's equity beta is 1.15, and
the asset beta is 0.85.
What will be the firm's cost of equity if it redeems all its outstanding debt?
A. 7.0%
B. 10.5%
C. 8.5%
D. 6.0%
11. A company with annual credit sales of $27 million and a cost of sales of $15 million targets
the following for the next year: trade receivables days of 50, inventory days of 60, and
trade payables days of 45. Assume a 360-day year.
Calculate the net investment in working capital required for the next year.
A. $8,125,000
B. $4,375,000
C. $2,875,000
D. $6,375,000
12. A UK-based company is observing the impact of a foreign competitor’s currency
weakening against the British pound (GBP).
What is the likely effect on the UK-based company when the foreign competitor's
currency weakens compared to the GBP?
A. The foreign competitor will have a competitive advantage in the UK market.
B. The foreign competitor will face a disadvantage in the UK market.
C. There will be no significant effect.
D. The UK-based company will benefit when GBP strengthens.
13. A firm maintains a dividend payout ratio of 30% and expects future projects to generate
a post-tax return on investment of 15% and a pre-tax return of 20%.
What is the firm’s expected annual rate of growth?
A. 4.5%
B. 6.0%
C. 10.5%
D. 14.0%
14. A firm maintains a 30% dividend payout ratio, with future projects anticipated to yield an
annual post-tax return on investment of 15% and a pre-tax return of 20%.
What is the firm's expected annual rate of growth?
A. 4.5%
B. 6.0%
C. 10.5%
D. 14.0%
15. A company is evaluating the advantages of issuing long-term debt to support its expansion
plans.
What is a major advantage of issuing long-term debt?
A. Increased financial flexibility
B. Reduction in profit before tax
C. Decreased financial risk
D. Reduction of shareholders’ control over the company
The following scenario relates to questions number 16 to 20
Par Co currently has the following long-term capital structure:
$m
Equity finance
Ordinary shares
Reserves
$m
30.0
38.4
68.4
Non-current liabilities
Bank loans
8% convertible loan notes
5% redeemable preference
shares
Total equity and liabilities
15.0
40.0
15.0
70.0
138.4
In seven years, each of the 8% loan notes is convertible into eight common shares. The loan
notes have the option to be redeemed at their $100 nominal value on the same future date
if they are not converted. Par Co's annual cost of debt is 9%.
The par value of each of Par Co's common shares is $1. As of right now, the company's exdividend share price is $10.90, and for the foreseeable future, share prices are predicted to
increase by 6% annually. Par Co. has an equity beta of 1.2.
16. Arrange the following sources of finance of Par Co in order of the risk to the investor with
the riskiest first.( mark it with numbers 1- 4)
Finance Source
Order of Risk
Loan notes
Ordinary shares
Redeemable preference shares
Bank loan
17. Calculate the conversion value of the 8% loan notes of Par Co after seven years (to two
decimal places).
$
18. Assuming the conversion value after seven years is $126.15, what is the current market
value of the 8% loan notes of Par Co?
A. $115.20
B. $109.26
C. $94.93
D. $69.00
19. Which of the following statements relating to the capital asset pricing model is correct?
A. The equity beta of Par Co considers only business risk
B. The capital asset pricing model considers systematic risk and unsystematic risk
C. The equity beta of Par Co indicates that the company is more risky than the market
as a whole
D. The debt beta of Par Co is zero
20. Which TWO of the following are problems in using the price/earnings ratio method to
value a company?
A. It is the reciprocal of the earnings yield
B. It combines stock market information and corporate information
C. It is difficult to select a suitable price/earnings ratio
D. The ratio is more suited to valuing the shares of listed companies
(Total 10 marks)
The following scenario relates to questions number 21 to 25
Alpha Group anticipates receiving €500,000 within the next three months from a client
located in Europe. As of right now, the forward rate for the next three months is €140 per
$1, while the spot rate is €135 per $1. The interest rate table that is currently available for
Alpha Group is shown below.
Deposit Rate in %
Borrowing Rate in %
Euro
1 p.a.
5 p.a.
Dollars
0.5 p.a.
2 p.a.
Since Alpha Group does not yet have the liquid funds to directly hedge the projected Euro
receipts, it is investigating the use of financial derivatives including futures, options, and
swaps to reduce currency risk. Furthermore, Alpha Group wants to know the effects of any
changes in interest rates because it is worried about them.
21. How can Alpha Group protect itself from the risk of the Euro depreciating against the
dollar before the €500,000 is received?
A. Deposit €500,000 at the current deposit rate.
B. Engage in a 3-month interest rate swap.
C. Enter a forward contract to sell €500,000 in 3 months.
D. Utilize netting to manage the payments and receipts of €500,000.
22. What is the dollar equivalent of a forward market hedge for Alpha Group in three months'
time?
A. $3,333
B. $3,450
C. $2,857
D. $3,600
23. If Alpha Group opts for a Money Market hedge, what is the borrowing rate for the period?
A. 0.25%
B. 0.5%
C. 1%
D. 5%
24. Which statement accurately describes currency risk management tools?
A. Currency futures contracts are settled on a specific date at the contract's
conclusion.
B. Currency swaps are typically used for managing exchange rate risks over shorter
periods than forward contracts.
C. Financial institutions usually allow the extension of forward contract expiration
dates upon request.
D. Currency options require an upfront premium, not payable at execution.
25. What would the deposit rate for Alpha Group be if it opts for a Money Market hedge for
the expected payment?
A. 0.25%
B. 0.5%
C. 1%
D. 2%
(Total 10 marks)
The following scenario relates to questions number 26 to 30
For Jade Enterprises, the cost of a component is $7.50, the cost of ordering is $200 every
order, and the cost of keeping components in stock is $1.00 per component year. Daily rentals
are available for warehouse space. For orders of 30,000 or more components, the supplier is
offering a 3.6% bulk buy discount. Keeping components in inventory would cost $2.20 per
component year if the bulk purchase discount is applied. Additionally, if payment is made
within 20 days, the supplier is offering a 2% settlement discount. Presently, Jade Enterprises
has a 15% annual overdraft charge and requires 60 days' credit from the supplier. Let's say a
year has thirty-six days.
26. What is the total annual cost of ordering, purchasing, and holding inventory if the bulk
purchase discount is taken?
A. $901,400
B. $883,400
C. $934,400
D. $936,160
27. Which of the following is most likely if Jade Enterprises changes from renting warehouse
space on a daily basis to signing a long-term lease?
A. Financial flexibility will increase
B. Financial gearing will decrease
C. Insurance costs will decrease
D. The space required will increase
28. What is the annual value of the settlement discount (in percentage terms), and should the
discount be accepted or rejected?
Value of discount | Decision
A.
18.4% | Reject
B.
18.0% | Accept
C.
18.4% | Accept
D.
18.0% | Reject
29. Which of the following are potential benefits to Jade Enterprises of implementing just-intime inventory management?
(1) Less dependence on suppliers
(2) Shorter operating cycle
(3) Reduced risk of stockouts
A. 2 only
B. 1, 2, and 3
C. 2 and 3 only
D. 1 only
30. Which of the following are characteristics of an “aggressive” policy relating to the level of
investment in current assets?
(1) Allowing extended credit to customers
(2) Taking extended credit from suppliers
(3) Holding no buffer stock
A. 1 only
B. 1, 2, and 3
C. 2 and 3 only
D. 3 only
(Total 10 marks)
Section C – All questions are compulsory and must be answered.
Question 31
A major publicly traded firm called Elite Industries is evaluating whether to invest in the
production of Product W33, which the company's research and development team found to
be a promising product during recent test marketing trials. The manufacturing procedure for
Product W33 would involve complete automation, which is anticipated to result in increased
noise levels at Elite Industries' facility. These are the specifics of the investment:
Initial Investment:
Selling Price (current price terms):
Expected Selling Price Inflation:
Variable Operating Costs (current price
terms):
Fixed Operating Costs (current price terms):
Expected Operating Cost Inflation:
$2 million
$20 per unit
3% per year
$8 per unit
$170,000 per year
4% per year
The demand forecast, influenced by expected technological changes impacting the product
lifecycle, is estimated as:
Year 1
Year2
Year 3
Year 3
60,000 units
70,000 units
120,000 units
45,000 units
It is anticipated that every unit produced will be sold, in accordance with Elite Industries'
goal of keeping no completed goods inventory. After four years, there is no anticipated
scrap or terminal value for the machinery. Elite Industries targets a yearly return on capital
employed of 30% and evaluates the investment using a notional 10% annual discount rate.
This study does not include tax concerns.
Required:
(a) Calculate the Net Present Value (NPV) of the investment and evaluate its financial
viability, rounding off to the nearest $1,000.
(15 marks)
(b) Explain the potential drawbacks of relying solely on the Net Present Value method
for evaluating investment decisions.
(5 marks)
(Total 20 marks)
Question 32
Glacier Ltd. has been paying out dividends at a rate of 40% for a number of years. The
business expects to raise the next dividend per share, which is due in a year, to $0.52 from
the current $0.50 per share.
The following describes Glacier Ltd.'s capital structure in detail:
Component
Amount
($m)
Equity
Ordinary shares (nominal value $1 per share)
Reserves
Total Equity
Debt
Bond X (nominal value $100)
Bond Y (nominal value $100)
Total Debt
Total Capital
25
35
60
20
10
30
90
Bond X yields 9% interest annually and can be redeemed at face value in ten years. With an
annual cost of debt of 9.83%, its ex-interest market price is currently $95.08. Bond Y has an
eight percent annual interest rate and a seven and a half percent cost of debt. It is scheduled
to be redeemed in four years, and its ex-interest market price is currently $102.01. The cost
of equity for Glacier Ltd. is determined to be 12.4%. Tax implications are not included.
Required:
(a) Calculate the ex dividend share price, using the dividend growth model;
(b) Calculate the capital gearing (debt divided by debt plus equity) using market
values;
(c) Calculate the market value weighted average cost of capital.
(d) Explain why Froste Co's capital instruments have different levels of risk and return.
(Total 20 marks)
END