Download f9-specimen-s16.pdf and more Schemes and Mind Maps Financial Management in PDF only on Docsity!
Fundamentals Level – Skills Module
Time allowed: 3 hours 15 minutes
This question paper is divided into three sections:
Section A – ALL 15 questions are compulsory and MUST be attempted
Section B – ALL 15 questions are compulsory and MUST be attempted
Section C – BOTH questions are compulsory and MUST be attempted
Formulae Sheet, Present Value and Annuity Tables are on pages 14–16.
Do NOT open this question paper until instructed by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
Paper F
Financial Management
Specimen Exam applicable from
September 2016
The Association of Chartered Certified Accountants
Section A – ALL 15 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
1 The home currency of ACB Co is the dollar ($) and it trades with a company in a foreign country whose home currency is the Dinar. The following information is available: Home country Foreign country Spot rate 20·00 Dinar per $ Interest rate 3% per year 7% per year Inflation rate 2% per year 5% per year
What is the six-month forward exchange rate? A 20·39 Dinar per $ B 20·30 Dinar per $ C 20·59 Dinar per $ D 20·78 Dinar per $
2 The following financial information relates to an investment project:
$’ Present value of sales revenue 50, Present value of variable costs 25, ––––––– Present value of contribution 24, Present value of fixed costs 18, ––––––– Present value of operating income 6, Initial investment 5, ––––––– Net present value 1, –––––––
What is the sensitivity of the net present value of the investment project to a change in sales volume? A 7·1% B 2·6% C 5·1% D 5·3%
3 Gurdip plots the historic movements of share prices and uses this analysis to make her investment decisions.
To what extent does Gurdip believe capital markets to be efficient? A Not efficient at all B Weak form efficient C Semi-strong form efficient D Strong form efficient
8 The management of XYZ Co has annual credit sales of $20 million and accounts receivable of $4 million. Working capital is financed by an overdraft at 12% interest per year. Assume 365 days in a year.
What is the annual finance cost saving if the management reduces the collection period to 60 days? A $85, B $394, C $78, D $68,
9 Which of the following statements concerning financial management are correct?
(1) It is concerned with investment decisions, financing decisions and dividend decisions (2) It is concerned with financial planning and financial control (3) It considers the management of risk A 1 and 2 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3
10 SKV Co has paid the following dividends per share in recent years:
Year 20X4 20X3 20X2 20X Dividend ($ per share) 0·360 0·338 0·328 0· The dividend for 20X4 has just been paid and SKV Co has a cost of equity of 12%.
Using the geometric average historical dividend growth rate and the dividend growth model, what is the market price of SKV Co shares on an ex dividend basis? A $4· B $5· C $5· D $6·
11 ‘There is a risk that the value of our foreign currency-denominated assets and liabilities will change when we prepare our accounts’
To which risk does the above statement refer? A Translation risk B Economic risk C Transaction risk D Interest rate risk
12 The following information has been calculated for A Co:
Trade receivables collection period: 52 days Raw material inventory turnover period: 42 days Work in progress inventory turnover period: 30 days Trade payables payment period: 66 days Finished goods inventory turnover period: 45 days
What is the length of the working capital cycle? A 103 days B 131 days C 235 days D 31 days
13 Which of the following is/are usually seen as benefits of financial intermediation?
(1) Interest rate fixing (2) Risk pooling (3) Maturity transformation A 1 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3
14 Which of the following statements concerning working capital management are correct?
(1) The twin objectives of working capital management are profitability and liquidity (2) A conservative approach to working capital investment will increase profitability (3) Working capital management is a key factor in a company’s long-term success A 1 and 2 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3
15 Governments have a number of economic targets as part of their monetary policy.
Which of the following targets relate predominantly to monetary policy? (1) Increasing tax revenue (2) Controlling the growth in the size of the money supply (3) Reducing public expenditure (4) Keeping interest rates low A 1 only B 1 and 3 C 2 and 4 only D 2, 3 and 4
(30 marks)
5 [P.T.O.
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· B $109· C $94· D $69·
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 of the following statements are problems in using the price/earnings ratio method to value a company?
(1) It is the reciprocal of the earnings yield (2) It combines stock market information and corporate information (3) It is difficult to select a suitable price/earnings ratio (4) The ratio is more suited to valuing the shares of listed companies A 1 and 2 only B 3 and 4 only C 1, 3 and 4 only D 1, 2, 3 and 4
7 [P.T.O.
The following scenario relates to questions 21–
ZPS Co, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. ZPS Co does not have any income in pesos. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable.
ZPS Co must pay interest on the dates set by the bank. A payment of 5,000,000 pesos is due in six months’ time. The following information is available:
Spot rate 12·500–12·582 pesos per $ Six-month forward rate 12·805–12·889 pesos per $
Interest rates which can be used by ZPS Co:
Borrow Deposit Peso interest rates 10·0% per year 7·5% per year Dollar interest rates 4·5% per year 3·5% per year
21 What is the dollar cost of a forward market hedge?
A $390, B $387, C $400, D $397,
22 Which of the following statements relate to purchasing power parity theory?
(1) The theory holds in the long term rather than the short term (2) The exchange rate reflects the different cost of living in two countries (3) The forward rate can be found by multiplying the spot rate by the ratio of the interest rates of the two countries A 1, 2 and 3 B 1 and 2 only C 1 and 3 only D 2 only
23 What are the appropriate six-month interest rates for ZPS Co to use if the company hedges the peso payment using a money market hedge? Deposit rate Borrowing rate A 7·5% 4·5% B 1·75% 5·0% C 3·75% 2·25% D 3·5% 10·0%
24 Which of the following methods are possible ways for ZPS Co to hedge its existing foreign currency risk?
(1) Matching receipts and payments (2) Currency swaps (3) Leading or lagging (4) Currency futures A 1, 2, 3 and 4 B 1 and 3 only C 2 and 4 only D 2, 3 and 4 only
The following scenario relates to questions 26–
Ridag Co operates in an industry which has recently been deregulated as the government seeks to increase competition in the industry.
Ridag Co plans to replace an existing machine and must choose between two machines. Machine 1 has an initial cost of $200,000 and will have a scrap value of $25,000 after four years. Machine 2 has an initial cost of $225,000 and will have a scrap value of $50,000 after three years. Annual maintenance costs of the two machines are as follows:
Year 1 2 3 4 Machine 1 ($ per year) 25,000 29,000 32,000 35, Machine 2 ($ per year) 15,000 20,000 25,
Where relevant, all information relating to this project has already been adjusted to include expected future inflation. Taxation and tax allowable depreciation must be ignored in relation to Machine 1 and Machine 2.
Ridag Co has a nominal before-tax weighted average cost of capital of 12% and a nominal after-tax weighted average cost of capital of 7%.
26 In relation to Ridag Co, which of the following statements about competition and deregulation are true?
(1) Increased competition should encourage Ridag Co to reduce costs (2) Deregulation will lead to an increase in administrative and compliance costs for Ridag Co (3) Deregulation should mean an increase in economies of scale for Ridag Co (4) Deregulation could lead to a decrease in the quality of Ridag Co’s products A 1 and 4 B 2 and 3 C 1 and 3 D 2 and 4
27 What is the equivalent annual cost of Machine 1?
A $90, B $68, C $83, D $70,
28 Which of the following statements about Ridag Co using the equivalent annual cost method are true?
(1) Ridag Co cannot use the equivalent annual cost method to compare Machine 1 and Machine 2 because they have different useful lives (2) The machine which has the lowest total present value of costs should be selected by Ridag Co A 1 only B Both 1 and 2 C 2 only D Neither 1 nor 2
29 Doubt has been cast over the accuracy of the year 2 and year 3 maintenance costs for Machine 2. On further investigation it was found that the following potential cash flows are now predicted: Year Cash flow Probability ($) 2 18,000 0· 2 25,000 0· 3 23,000 0· 3 24,000 0· 3 30,000 0·
What is the expected present value of the maintenance costs for year 3? A $26, B $18, C $21, D $35,
30 Ridag Co is appraising a different project, with a positive NPV. It is concerned about the risk and uncertainty associated with this other project.
Which of the following statements about risk, uncertainty and the project is true? A Sensitivity analysis takes into account the interrelationship between project variables B Probability analysis can be used to assess the uncertainty associated with the project C Uncertainty can be said to increase with project life, while risk increases with the variability of returns D A discount rate of 5% could be used to lessen the effect of later cash flows on the decision
(30 marks)
11 [P.T.O.
32 DD Co has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the company is $0·50 per share and it expects that its next dividend per share, payable in one year’s time, will be $0·52 per share. The capital structure of the company is as follows: $m $m Equity Ordinary shares (nominal value $1 per share) 25 Reserves 35 ––– 60 Debt Bond A (nominal value $100) 20 Bond B (nominal value $100) 10 ––– 30 ––– 90 ––– Bond A will be redeemed at nominal in ten years’ time and pays annual interest of 9%. The cost of debt of this bond is 9·83% per year. The current ex interest market price of the bond is $95·08. Bond B will be redeemed at nominal in four years’ time and pays annual interest of 8%. The cost of debt of this bond is 7·82% per year. The current ex interest market price of the bond is $102·01. DD Co has a cost of equity of 12·4%. Ignore taxation.
Required: (a) Calculate the following values for DD Co: (i) ex dividend share price, using the dividend growth model; (3 marks) (ii) capital gearing (debt divided by debt plus equity) using market values; and (2 marks) (iii) market value weighted average cost of capital. (2 marks)
(b) Discuss whether a change in dividend policy will affect the share price of DD Co. (8 marks)
(c) Explain why DD Co’s capital instruments have different levels of risk and return. (5 marks)
(20 marks)
13 [P.T.O.
Formulae Sheet
Economic order quantity
Miller–Orr Model
The Capital Asset Pricing Model
The asset beta formula
The Growth Model
Gordon’s growth approximation
The weighted average cost of capital
The Fisher formula
Purchasing power parity and interest rate parity
2C D
C
0 h
Return point = Lower limit + (^1 3
spread
Spr
× )
eead
transaction cost variance of cash
× ×
3 4 fflows interest rate
1 3
E r( ) =i R (^) f + βi (^) (E r ( (^) m (^) )–Rf)
βa e β e d
e
d
e d
V
V V T
V T
V V
( +^ ( ))
( ) 1 +
( ( – – T^ )) d
β
P
D g o r (^) e g
( + ) ( )
g =bre
WACC
V
V V
k
V
V V
e k T e d
e
d e d
= (^) + d
((1 – )
(^1 +i) =^ (^1 +r)^ (^1 +h)
S S
h h
c
b
1 0
0
= ×
( + ) ( + )
F S
i (^0) i
c
b
0
= ×
( + ) ( + )
Annuity Table
Present value of an annuity of 1 i.e.
Where r = discount rate n = number of periods
Discount rate (r)
Periods (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1 2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2 3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2·487 3 4 3·902 3·808 3·717 3·630 3·546 3·465 3·387 3·312 3·240 3·170 4 5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3·890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4·486 4·355 6 7 6·728 6·472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7 8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8 9 8·566 8·162 7·786 7·435 7·108 6·802 6·515 6·247 5·995 5·759 9 10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6·418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7·499 7·139 6·805 6·495 11 12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7·161 6·814 12 13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13 14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14 15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1 2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2 3 2·444 2·402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3 4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2·690 2·639 2·589 4 5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3·498 3·410 3·326 6 7 4·712 4·564 4·423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7 8 5·146 4·968 4·799 4·639 4·487 4·344 4·207 4·078 3·954 3·837 8 9 5·537 5·328 5·132 4·946 4·772 4·607 4·451 4·303 4·163 4·031 9 10 5·889 5·650 5·426 5·216 5·019 4·833 4·659 4·494 4·339 4·192 10
11 6·207 5·938 5·687 5·453 5·234 5·029 4·836 4·656 4·486 4·327 11 12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4·439 12 13 6·750 6·424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13 14 6·982 6·628 6·302 6·002 5·724 5·468 5·229 5·008 4·802 4·611 14 15 7·191 6·811 6·462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
1 – (1 + ————–– r ) – n r
End of Question Paper
Answers
14 B
Both statements 1 and 3 are correct.
15 C
The two targets relating predominantly to monetary policy are controlling the growth in the size of the money supply and keeping interest rates low (2 and 4).
Section B
16 D
The secured loan notes are safer than the bank loan, which is secured on a floating charge. The redeemable preference shares are above debt in the creditor hierarchy. Ordinary shares are higher in the creditor hierarchy than preference shares.
17 C
Future share price after seven years = 10·90 x 1·06^7 = $16·39 per share Conversion value of each loan note = 16·39 x 8 = $131·12 per loan note
18 B
Market value of each loan note = (8 x 5·033) + (126·15 x 0·547) = 40·26 + 69·00 = $109·
19 C
An equity beta of greater than 1 indicates that the investment is more risky than the market as a whole.
20 B
It is correct that the price/earnings ratio is more suited to valuing the shares of listed companies, and it is also true that it is difficult to find a suitable price earnings ratio for the valuation.
21 A
Interest payment = 5,000,000 pesos Six-month forward rate for buying pesos = 12·805 pesos per $ Dollar cost of peso interest using forward market = 5,000,000/12·805 = $390,
22 B
Exchange rates reflecting the different cost of living between two countries is stated by the theory of purchasing power parity. The theory holds in the long term rather than the short term. The forward rate is found by multiplying the spot rate by the ratio of the inflation rates of the two countries.
23 C
Dollars will be borrowed now for six months at 4·5 x 6/12 = 2·25% Pesos will be deposited now for six months at 7·5 x 6/12 = 3·75%
24 C
Currency futures and swaps could both be used. As payment must be made on the date set by the bank, leading or lagging are not appropriate. Matching is also inappropriate as there are no peso income streams.
25 A
The correct procedure is to: Borrow euro now, convert the euro into dollars and place the dollars on deposit for three months, use the customer receipt to pay back the euro loan.
26 A
Deregulation to increase competition should mean managers act to reduce costs in order to be competitive. The need to reduce costs may mean that quality of products declines.
27 A
Since taxation and capital allowances are to be ignored, and where relevant all information relating to project 2 has already been adjusted to include future inflation, the correct discount rate to use here is the nominal before-tax weighted average cost of capital of 12%. 0 1 2 3 4 Maintenance costs (25,000) (29,000) (32,000) (35,000) Investment and scrap (200,000) 25, –––––––– ––––––– ––––––– ––––––– ––––––– Net cash flow (200,000) (25,000) (29,000) (32,000) 10, Discount at 12% 1·000 0·893 0·797 0·712 0· –––––––– ––––––– ––––––– ––––––– ––––––– Present values (200,000) (22,325) (23,113) (22,784) (6,360) –––––––– ––––––– ––––––– ––––––– ––––––– Present value of cash flows ($274,582) Cumulative present value factor 3· Equivalent annual cost = 274,582/3·037 = $90,
28 D
Both statements are false. The machine with the lowest equivalent annual cost should be purchased not the present value of future cash flows alone. The lives of the two machines are different and the equivalent annual cost method allows this to be taken into consideration.
29 B
EV of year 3 cash flow = (23,000 x 0·2) + (24,000 x 0·35) + (30,000 x 0·45) = 26, PV discounted at 12% = 26,500 x 0·712 = 18,
30 C
The statement about uncertainty increasing with project life is true.
