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ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com ACCA F9 Workbook Lecture 1 Financial Strategy www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Shareholder Wealth - Illustration 1 Year Share Price Dividend Paid 2007 3.30 40c 2008 3.56 42c 2009 3.47 44c 2010 3.75 46c 2011 3.99 48c There are 2 million shares in issue. ! ! ! ! ! ! ! ! ! ! Calculate the increase in shareholder wealth for each year: II. Per share III. As a percentage IV. For the business as a whole ! ! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com EPS - Illustration 2 2010 $‘000 2011 $‘000 PBIT 2000 2100 Interest 200 300 Tax 300 400 Profit After Tax 1500 1400 Preference Dividend 300 400 Dividend 800 900 Retained Earnings 400 100 Share Capital (50c) 5000 5000 Reserves 3000 3100 Share Price $2.50 $2.80 Calculate the EPS for 2010 and 2011. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. The 3 main areas of the business that Finance Managers plan are: A. Investments, Financing & Profitability. B. Dividend Policy, Financing & Investments. C. Return on Capital, Investments, Profitability. D. Earnings per share, Profitability, Maximising shareholder wealth. 2. Examples of 3 external stakeholders are: A. Shareholders, Customers & Managers. B. Banks, Customers & Employees. C. Suppliers, Government & Customers. D. Unions, Suppliers & Investors. 3. The Agency Relationship exists between: A. Shareholders and Managers. B. Auditors and Managers. C. Shareholders and Stakeholders. D. Stakeholders and Managers. 4. The Agency problem exists because... A. Managers may be interested in maximising their own earnings. B. Shareholders have to rely on management to safeguard the assets of the business. C. Managers may be interested in short term gains over long term stability. D. All of the above. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 5. In order to maximise the wealth of shareholders, Finance Managers need to increase shareholder wealth. Shareholder wealth increases are made up of: A. Profit for the year + Dividends Paid. B. Earnings per share + Dividends Per Share. C. Share Price + Dividends Paid. D. Share Price movement + Dividends Paid. 6. ABC Co. Paid out a dividend of 35c last year and 42c this year per share. Their share price has increased from $4.33 to $5.24 in that time. What is the percentage shareholder return in the current year. A. 20.00% B. 21.10% C. 30.72% D. 24.39% 7. The following information relates to ABC Co. Year Share Price Dividend Paid 1 $4.50 82c 2 $4.71 84c 3 $3.85 86c Which of the following statements is correct? A. Between Year 1 and Year 2 shareholder wealth decreased. B. Between Year 2 and Year 3 shareholder wealth decreased. C. There was no increase in shareholder wealth between Year 2 and Year 3. D. None of the above. 8. In order for dividends to be paid a company must have made profits in the current year. Is this statement TRUE or FALSE? Answer FALSE ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 9. Miller and Modigliani stated in their theory that dividends were .......................... 10. If a company does not pay dividends then the result will be A. More tax will be paid. B. Less profit will be made. C. More cash is available for investments. D. More debt will be required. 11. The ‘signaling effect’ refers to A. A signal sent by managers to the auditors to inform them of the dividend. B. A signal sent by Auditors to inform shareholders of the dividend. C. The signal sent to the market by a company announcing their dividend for the year. D. A warning announcement that a firm will make less profit than expected. 12. The ‘Bird in the hand’ argument refers to the fact that A. Investors prefer a dividend now rather than later as there is a risk that the company could not pay a dividend at all. B. Managers prefer not to pay a dividend as they can re-invest the cash saved into new investments. C. The government want the company to pay their tax on time. D. The company has an ethical policy to look after any injured birds they might find. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 13. Which of the following best explains the ‘Clientele Effect’? A. The clients of the company want as cheap prices as possible. B. The company should choose a dividend policy and stick to it to attract investors who want that type of policy. C. The company should have a vote every year to ask investors what their dividend policy should be for the year. D. The company should not pay a dividend. 14. A company can reward investors through script dividends without paying out any cash. Is the above statement TRUE or FALSE 15. A ‘script dividend’ is where a company: A. Pays no dividend at all. B. Pays a dividend every other year. C. Pays a larger than average dividend. D. Pays a dividend in shares rather than cash. 16. A ‘share buy back scheme’ refers to a situation where a company buys back it’s own shares from shareholders and then cancels those shares. Is the above statement TRUE or FALSE? 17. A company may decide on a ‘Share-buy-back Scheme’ because A. It doesn’t have enough cash to pay a dividend. B. It has large cash reserves and wants to reward shareholders. C. The government tells it that it has too many shares. D. It wants to receive cash to pay off some of it’s debt. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 18. A company may decide not to pay a dividend for which of the following reasons A. It has retained losses rather than profits. B. It has several new investments it would like to make. C. It has low cash reserves. D. All of the above. 19. Investors would like to see a company pay a steadily rising dividend growing at a rate in excess of inflation. Is the above statement TRUE or FALSE? 20. Which of the following is an assumption of Miller and Modigliani’s dividend irrelevancy theory? A. A company pays a steadily rising dividend that grows every year. B. Dividends and capital gains are taxed at the same rate. C. Investors are irrational. D. All share dealing transactions incur heavy costs. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What are the 3 things that financial managers need to plan? 2. What is Corporate Strategy? 3. Describe the Agency Problem. 4. What are the 3 main financial objectives of the financial manager? 5. How do you calculate the increase in shareholder wealth? 6. How do you calculate EPS? 7. Outline 2 potential dividend payment strategies. 8. Why did Miller & Modigliani say that dividends were irrelevant? 9. Outline the Clientele Effect. 10. What is a script dividend? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: December 2010 Q4 Part (d) June 2010 Q4 Part (c) Now do it! ! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 2 Performance Measurement www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Performance Analysis Illustration X1 X2 X3 Non Current Assets 500 700 1000 Current Assets 150 200 300 650 900 1300 Ordinary Shares ($1) 300 300 300 Reserves 100 280 430 Loan Notes 150 200 300 Payables 100 120 270 650 900 1300 Revenue 3000 3500 4200 COS 2000 2400 3200 Gross Profit 1000 1100 1000 Admin Costs 300 350 400 Distribution Costs 200 250 300 PBIT 500 500 300 Interest 100 150 220 Tax 120 90 50 Profit After Tax 280 260 30 Dividends 100 110 30 Retained Earnings 180 150 0 $3.30 $4.00 $2.20 Share Price ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Using the information on the previous page calculate and comment on the following Ratios: I. Return on Capital Employed II. Return on Equity III. Gross Margin IV. Net Margin V. Operating Margin VI. Revenue Growth VII. Gearing VIII. Interest Cover IX. Dividend Cover X. Dividend Yield XI. P/E Ratio ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! 1. In the ROCE calculation what are the 3 ways of calculating Capital Employed? 2. What is the top line of the ROE calculation? 3. Why do we use PAT - Pref DIvs in the ROE calculation? 4. What should we compare the ratios we calculate with? 5. What does gearing tell us? 6. How do you calculate interest cover? 7. How do you calculate EPS? 8. What does the P/E Ratio tell us? 9. How do you calculate dividend cover? 10. What does dividend yield tell us? If you’ve successfully answered all of the above questions then you’re ready to do the exam question below: June 2009 Q4 (a) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 3 Finance Sources www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Rights Issue - Illustration 1 XYZ Ltd. intends to raise capital via a rights issue. The current share price is $8. They are offering a 1 for 4 issue at a price of $6. Calculate the Theoretical Ex-rights Price. Rights Issue - Illustration 2 ABC Ltd. has decided to raise capital via a rights issue. The share price is currently $5.50 and ABC intends to raise $5m. There are currently 6.25m shares in issue and ABC is offering a 1 for 5 rights issue. Calculate the Theoretical Ex-Rights Price. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Which of the following is NOT something a company will consider when choosing a source of finance? A. The cost of the finance to the firm. B. The number of employees in the firm. C. Any security that will need to be used. D. Current and future gearing levels. 2. What is NOT a function of the stock market? A. To enable companies to raise capital. B. To enable individuals to sell shares in a company. C. To facilitate transactions between buyers and sellers. D. To increase the cost of equity of listed companies. 3. Which of the following are advantages to a company of being listed on the stock exchange? 1. It will lead to a better perception of the firm by potential investors. 2. It will be more difficult for the firm to raise capital. 3. Listing may well lower the cost of equity of the firm as investors will see it as a safer investment and thus accept a lower return. 4. The company may be required to disclose more information about it’s operations. A. 1 and 2 B. 2 and 3 C. 2 and 4 D. 1 and 3 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. Which of the following are disadvantages to a company of being listed on the stock exchange? 1. It is expensive to become listed. 2. There are ongoing costs of listing compliance. 3. Control by the current owners will be increased. 4. Listing may well lower the cost of equity of the firm as investors will see it as a safer investment and thus accept a lower return. A. 1 and 2 B. 2 and 4 C. 3 and 4 D. 1 and 4 5. A company has 10m shares in issue at a share price of $7 and undertakes a rights issue of 1 for 5 to raise $12m. What is the Theoretical ex-rights price? A. $6.17 B. $6.83 C. $6.00 D. $6.44 6. Which of the following best describes an IPO? A. All of the new Shares being issued to one large institutional investor. B. An offering of new shares to all investors in the market to enable them to purchase them if they wish. C. Offering shares to current shareholders in the same proportion as they currently own them. D. An issue to current shareholders of shares instead of dividends. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 7. Which of the following are disadvantages of an IPO? i) It can be very expensive. ii) It may need to be underwritten to ensure the shares are taken up. iii)The company will need to to deal with one large institutional investor only. iv)The share price achieved for the issue may not be as high as expected. A. i) iii) and iv) only B. i) ii) and iv) only C. All of the above D. i) ii) and iii) only 8. Which of the following best describes a placing as a means of issuing shares? A. All of the new Shares being issued to one large institutional investor. B. An offering of new shares to all investors in the market to enable them to purchase them if they wish. C. Offering shares to current shareholders in the same proportion as they currently own them. D. An issue to current shareholders of shares instead of dividends. 9. Who demands covenants to be placed on debt? A. Shareholders B. Banks C. The market D. The government 10. Which of the following is NOT a function of the treasury department in a company? A. To set and achieve the financial objectives of the firm. B. To manage the liquidity of the firm. C. To prepare the financial statements of the firm. D. To manage any currency risk that the firm may be exposed to. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What 5 things will a company consider when choosing a source of finance? 2. What is the primary function of the stock market? 3. What are the advantages to the company of being listed? 4. Are there any disadvantages of being listed? 5. A company has 10m shares in issue at a share price of $7 and undertakes a rights issue of 1 for 5 to raise $12m. What is the Theoretical ex-rights price? 6. What is an IPO? 7. What are the disadvantages of an IPO? 8. What is a placing? 9. Who demands covenants to be placed on debt? 10. What is the function of the treasury department in a company? If you’ve successfully answered all of the above questions then you’re ready to do the exam question below: June 2009 Q4 (b) & (c) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 4 Economic Environment www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Which of the following is not a target of government economic policy? A. Full employment. B. Price stability. C. High, stable growth. D. Low consumer prices. 2. Which of the following are examples of cost-push inflation. 1. Wage increases. 2. Rising cost of commodities. 3. Sales tax decreases. 4. High demand in the economy A. 1 and 2 B. 2 and 4 C. 3 and 4 D. 1 and 4 3. Fiscal policy can be described as tax revenues raised by the government and spent on services and subsidies for the public. Is this statement A. TRUE B. FALSE ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. An increase in interest rates is likely to lead to which of the following: 1. Higher cost of borrowing for companies. 2. More consumer demand in the economy. 3. More sales for many companies. 4. Less consumer demand in the economy A. 1 and 2 B. 2 and 4 C. 3 and 4 D. 1 and 4 5. Which of the following might cause policy makers to decide to decrease interest rates? 1. Excessive consumer demand in the economy. 2. Reduced consumer demand in the economy. 3. Concerns that growth in the economy may be low. 4. Expectations that the economy will grow strongly. A. 1 and 2 B. 2 and 3 C. 3 and 4 D. 1 and 4 6. Money markets could be best described as: A. A market for newly printed notes and coins. B. A market for the trade of foreign currency. C. A market for the trade of commodities such as oil and wheat. D. A market to enable banks to borrow and lend to each other. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 7. How can financial intermediaries help to make the market more efficient? A. By buying commodities from sellers and trading them on the commodities exchange. B. By providing insurance on transactions for buyers and sellers. C. By providing finance to enable transactions to take place. D. By selling foreign currency on the currencies exchange. Short Form Questions 1. What are the 4 targets of economic policy? 2. Name 2 examples of cost-push inflation. 3. What is fiscal policy? 4. How is an increase in interest rates likely to effect the economy? 5. When might policy makers decide to decrease interest rates? 6. What are the money markets? 7. How can financial intermediaries help to make the market more efficient? 8. Name 5 types of securities? If you’ve successfully answered all of the above questions then you’re ready to do the exam question below: Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 5 Working Capital www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Working Capital Illustration Balance Sheet $‘000 ASSETS Non Current Assets 1000 Inventory 300 Receivables 200 Cash 300 1800 LIABILITIES Ordinary Shares 800 Reserves 200 Long term Liabilities 700 Payables 100 Overdraft 1800 Income Statement $‘000 Revenue 1000 COS 800 Gross Profit 200 Other Costs 100 Net Profit 100 Other Information: All sales are made on credit. Required: Calculate the Cash Operating Cycle for Inter Ltd. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Working Capital Illustration Part II Show the journal entries and calculate the Revised Balance sheet if the operating cycle changes to: Item Days Inventory Period 200 Collection Period 100 Less: Payables Period 30 270 Working Capital Illustration Part III Show the journal entries and calculate the Revised Balance sheet if the operating cycle changes to: Item Days Inventory Period 90 Collection Period 30 Less: Payables Period 60 60 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Which of the following are components of working capital within the financial statements: 1. Non Current Assets. 2. Inventory. 3. Payables. 4. Intangible Assets. A. 1 and 2 B. 2 and 3 C. 3 and 4 D. 2 and 4 2. Which of the following are indicators of overtrading. i) Reliance on long term finance. ii) Offering lax credit terms. iii) Build up of inventory. iv) Rapidly decreasing sales. v) Deteriorating Current ratio. A. i) iii) and iv) only B. ii) iii) and v) only C. All of the above D. i) ii) and iii) only ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 3. The following information has been calculated for A Co: Trade receivables collection period Raw material inventory turnover period Work in progress inventory turnover period Trade payables payment period Finished goods inventory turnover period 52 days 42 days 30 days 66 days 45 days What is the length of the working capital cycle? A B C D 103 days 131 days 235 days 31 days 4. If inventory days go up from 100 to 150 the company will need to invest more cash in the business. Is this statement: A. TRUE B. FALSE 5. 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 B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 6. 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 aggressive approach to working capital investment will increase profitability 3 Working capital management is not a key factor in a company’s long-term success A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 7. 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 moderate approach to working capital investment will increase profitability 3 An aggressive approach to working capital investment uses more long term finance than short term. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 8. Which of the following statements concerning working capital management are correct? 1 A conservative approach to working capital investment employs uses long term finance to finance some fluctuating current assets. 2 An aggressive approach to working capital investment will increase profitability 3 Working capital management has no effect on profitability of the company. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What are the components of working capital? 2. State 6 indicators of overtrading. 3. What is the Quick Ratio and what does it tell us? 4. How do we calculate the cash operating cycle? 5. If my inventory days go up from 100 to 150 will I need to invest more or less cash in the business? 6. What are permanent current assets? 7. What are fluctuating current assets? 8. What is the matching principle? 9. What are the advantages of an aggressive working capital financing policy? 10. What are the advantages of a conservative working capital financing policy? If you’ve successfully answered all of the above questions then you’re ready to do the exam question below: June 2009 Q3 (a) & (b) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 6 Managing Receivables www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Receivables - Illustration 1 Credit sales: 1200 3 month credit terms Overdraft rate = 10% New Policy 2% discount if paid in less than 10 days 2 month terms for everyone else. 20% will take the discount Receivables - Illustration 2 Receivables are currently $4,600,000. Sales are $37,400,000 A factor has offered to take over the administration of trade receivables on a non-recourse basis for an annual fee of 3% of credit sales. The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will save $100,000 per year in administration costs and $350,000 per year in bad debts. A condition of the factoring agreement is that the factor would advance 80% of the face value of receivables at an annual interest rate of 7%. The current overdraft rate is 5% ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. How can a company assess the credit worthiness of their customers? 1. Get trade references from other suppliers or from banks. 2. Use a credit rating agency. 3. Offer initial high levels of credit. 4. Ask for a written promise to pay. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 2. Which of the following are benefits of a company offering a discount to customers for early payment of invoices? 1. Better liquidity for the firm. 2. Less interest as less or no overdraft will be required. 3. Risk of more bad debt as customers take longer to pay. 4. Loss of customers who don’t take advantage of the discount. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 3. 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 $85,479 B $394,521 C $78,904 D $68,384 4. Which of the following are disadvantages of debt factoring for a company? 1. It can be expensive. 2. It creates a bad impression with customers because the debt is collected by the factor. 3. It can increase the liquidity of the company. 4. It can lose the goodwill of customers. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 5. Which of the following statements relate to invoice discounting through a factor? 1. The company retains the risk of bad debt. 2. The factor collects the debt. 3. The factor advances a percentage of the invoice value to the company. 4. Invoice discounting can be used by any company. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. How can a company assess the credit worthiness of their customers? 2. Outline 3 ways of maintaining good credit control. 3. What are the benefits of offering a discount to customers? 4. How do you decide whether to offer a discount or not? 5. What is debt factoring? 6. What are the disadvantages of factoring for a company? 7. What is invoice discounting? 8. How can a company seek to ensure that foreign receivables are collected? If you’ve successfully answered all of the above questions then you’re ready to do the exam question below: Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 7 Inventory Management www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! EOQ - Illustration 1 Demand of 1200 units per month. Cost of making an order of $12. Cost of one unit $10. Holding cost per year of 10% of the purchase price of the goods. Calculate the EOQ & check that it is correct. Buffer Stock - Illustration 2 Company orders when the level of stock reaches 50,000 It takes 4 weeks to receive new stock from the time of ordering. The company uses 7,500 units on average per week. Calculate the buffer stock. www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com EOQ With Buffer Stock - Illustration 3 Dec 07 Exam Question The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625,000 units. The cost of placing and processing an order is €250, while the cost of holding a unit in stores is €0·50 per unit per year. Both costs are expected to be constant during the next year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year. Calculate EOQ with buffer stock EOQ with discounts - Illustration 4 Demand is 1000 units per month. Purchase cost per unit £11. Order cost £30 Holding cost 10% p.a. of stock value. Required Calculate the minimum total cost with a discount of 1% given on orders of 1500 and over ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Which of the following types of cost we are seeking to minimise by using the Economic Order Quantity? A. Holding costs and inventory movement costs B. Ordering costs and holding costs C. Ordering costs and insurance costs D. Holding costs and security costs 2. If a company uses the Economic Order Quantity as the level at which to order, how will they calculate total ordering costs for the year? A. Cost per order x (Annual Demand / EOQ) B. Annual Demand x (Cost per order /EOQ) C. (EOQ / Cost per order) x Holding costs D. Annual demand x EOQ 3. ABC Co. sells widgets and expects annual demand of 3.4m units. The cost of making an order is $49.71 and the cost of holding one unit for one year is $0.50. What is the total ordering costs per year: A. $5,687.34 B. $6,413.81 C. $6,500.54 D. $6,430.32 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 3. ABC Co. sells widgets and expects annual demand of 1.2m units. The cost of making an order is $25.21 and the cost of holding one unit for one year is $0.50. What is the total holding costs per year: A. $2,850 B. $3,750 C. $2,450 D. $2,750 4. Layla Co. sells 200m wigs in a year with each order taking 15 days to be delivered once made. They make an order every time their stock levels reach 10m wigs. What is the buffer stock level for Layla Co. A. 1,780,822 B. 6,666,666 C. 9,333,333 D. 2,345,632 5. Which of the following are drawbacks of a company using the Economic Order Quantity method of stock management? 1. Assumes constant ordering costs. 2. Assumes constant demand. 3. Assumes known annual demand. 4. Assumes no buffer stock or lead time. A B C D 1, 2 and 4 only 1 and 3 only All of the above 1, 2 and 3 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 6. Stavros Co’s current inventory policy is to order 60,000 units when the inventory level falls to 55,000 units. Forecast demand to meet production requirements during the next year is 800,000 units. The cost of placing and processing an order is $90, while the cost of holding a unit in stores is $1 per unit per year. Both costs are expected to be constant during the next year. Orders are received three weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year. What is the total cost of ordering at the EOQ level? A. $12,000 B. $6,000 C. $7,000 D. $19,000 Short Form Questions 1. What are the two types of cost we are seeking to minimise? 2. How do we calculate total ordering costs for the year? 3. How do we calculate total holding costs for the year? 4. How do we calculate the buffer stock? 5. What are the problems with the EOQ method? 6. What are the steps in calculating the total costs when there is a buffer stock? 8. Why might we not use the EOQ when there are bulk discounts available? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: June 2009 Q3 (d) December 2010 Q3 (a) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 8 Cash Management www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Baumol Cash Model - Illustration 1 A business expects to move 500,000 from it’s interest bearing account into cash over the course of one year. The interest rate is 7% and the cost of making a transfer is $250. How much should the business transfer into cash each time it makes a transfer? Baumol Cash Model - Illustration 2 Using the information in illustration 1 calculate the total cost to the business each year of their cash management policy. Baumol Cash Model - Illustration 3 Subsonic Speaker Systems (SSS) has annual transactions of $9 million. The fixed cost of converting securities into cash is $264.50 per conversion. The annual opportunity cost of funds is 9%. What is the optimal deposit size? ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Miller-Orr Model - Illustration 4 If a company must maintain a minimum cash balance of £8,000, and the variance of its daily cash flows is £4m (ie std deviation £2,000). The cost of buying/ selling securities is £50 & the daily interest rate is 0.025 %. Calculate the spread, the upper limit & the return point ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Which of the following are the reasons for a company to hold cash? 1. Speculation 2. Persuasion 3. Transaction 4. Reaction A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 2. Revaile Co. has annual transactions of $30 million. The fixed cost of converting securities into cash is $500 per conversion. The annual opportunity cost of funds is 6%. What is the optimal deposit size? A. $21,213 B. $42,426 C. $707,107 D. $42.43 3. Which of the following are problems with the Baumol Model? 1. Assumes constant cash disbursements 2. Assumes that there are no cash receipts, just movements 3. Assumes a risk free interest rate 4. Assumes no safety buffer for cash A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. If a company must maintain a minimum cash balance of £20,000, and the variance of its daily cash flows is £6.25m (ie std deviation £2,500). The cost of buying/ selling securities is £80 & the daily interest rate is 0.035 %. What is the upper-limit using the Miller-Orr model of cash management? Short Form Questions 1. What are the three reasons to hold cash? 2. What does the Baumol Model tell us? 3. Why is there a cost of holding cash? 4. How do we calculate the total trading costs in the year? 5. How do we calculate the total holding costs in the year? 6. What are the problems with the Baumol Model? 7. Why does the Miller-Orr model tell us to buy securities with extra cash? 8. How do we calculate the variance of cash flows? 9. If the interest rate is 8% what figure should be included in the Miller-Orr model for i? 10. How do we calculate the upper limit? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: Pilot Paper Q3 (You now know enough to do this all) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 9 Investment Appraisal I www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com ARR - Illustration 1 ABC Ltd are considering expanding their internet cafe business by buying a business which will cost $275,000 to buy and a further $175,000 to refurbish. They expect the following cash to come in: Year Net Cash Profits (£) 1 45,000 2 75,000 3 80,000 4 50,000 5 50,000 6 60,000 The equipment will be depreciated to a zero resale value over the same period and, after the sixth year, they can sell the business for $200,000 Calculate the ARR or ROCE of this investment ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Relevant Cash Flow Criteria - Illustration 2 A business is considering investing in a new project. They have already spent $20,000 on a feasibility study which suggests that the project will be profitable. The headquarters of the company has spare floor space which will be allocated to the project with $7,000 of the current monthly rent allocated to the project. New equipment costing $2.5m will have to be bought and will be depreciated on a straight line basis over 10 years. A manager who earns $30,000 per year and currently runs a similar project will also manage the new project taking up 25% of his time. State whether each of the following items are relevant cash flows and explain your answer. I. The cost of the feasibility study. II. The rent charged to the project. III. The new equipment. IV. The depreciation on the new equipment. V. The Managers salary. ACCA F9 Financial Management Full Course Workbook Questions! Payback Period - Illustration 3 Initial Investment of $5.8m. Annual Cash Flows of $400,000. Calculate the Payback Period. Payback Period - Illustration 4 Initial Investment of $6.2m. Cash Flows of: Year 1: ! $1,200,000 Year 2:! $2,200,000 Year 3:! $2,500,000 Year 4:! $1,700,000 Calculate the Payback Period. www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Discounted Cash-flows - Illustration 5 An investor wants a real return of 10%. Inflation is 5% What is the MONEY/NOMINAL rate required? Discounted Cash-flows - Illustration 6 A company undertakes a project with the following cash-flows: Year Cash-Flows 1 5,000 2 7,000 3 8,000 4 10,000 5 11,000 6 9,000 The company has a cost of capital of 10%. Calculate the present value of the cash flows for each of the six years and in total. ACCA F9 Financial Management Full Course Workbook Questions! Discounted Cash-flows - Illustration 7 A company undertakes a project with the following cash-flows: Year Cash-Flows 1 5,000 2 5,000 3 5,000 4 5,000 5 5,000 6 5,000 The company has a cost of capital of 10%. Calculate the present value of the total cash flows for the six years Discounted Cash-flows - Illustration 8 A company expects to receive $100,000 per year forever. Their cost of capital is 10%. Calculate the present value of the perpetuity. www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. JoJo Ltd are considering investing in a new project which will cost an initial $375,000 and they expect the following cash to come in: Year 1 2 3 4 5 6 Net Cash Profits (£) 25,000 55,000 70,000 80,000 40,000 30,000 The investment will be depreciated to a scrap value of $175,000 over the period of the project. What is the Accounting Rate of Return (Return on Capital Employed) of the project? A. 6% B. 3% C. 18% D. 12% 2. Which of the following are weaknesses of the Accounting Rate of Return (Return on Capital Employed)? 1. The calculation uses accounting profit rather than cash. 2. It disregards the timing of the inflows. 3. It does not consider the whole life of the project. 4. No discount rate is used to allow for inflation and risk. A B C D 1, 2 and 4 1 and 3 only 2 and 3 only 1, 2 and 3 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 3. Aldios Co. intends to make an investment of $4.5m in a project lasting 5 years. The project cashflows are forecast to be as follows: Year 1 2 3 4 5 Net Cash Profits (£) 250,000 550,000 2,700,000 2,800,000 400,000 The investment will be depreciated to a scrap value of $1.5m over the period of the project. What is the Payback period of the investment? A. 3 Years 4 months B. 2 Years 6 months C. 4 Years 2 months D. 2 Years 4 months 4. Jpeg Co. uses a real discount rate of 8%. They are carrying out an investment appraisal using an inflation rate of 5%. What discount rate should be used to discount the cash flows for the project: A. 8% B. 5% C. 13% D. 11% ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What are the 6 steps in investment appraisal? 2. Why carry out a post-completion audit? 3. What is the calculation for the ARR or ROCE? 4. How do you calculate the average investment? 5. What are the weaknesses of the ARR? 6. What are the 3 relevant criteria for cash-flows in investment appraisal? 7. What are the advantages of using the payback period method? 8. Why do we need to discount cash-flows? 9. If the real discount rate is 7% and inflation is running at 3% what is the nominal/money discount rate? 10. If I am going to receive $8,000 per year for 6 years and my cost of capital (discount rate) is 8% what is the present value of the total of these cash-flows? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: June 2009 Q2 (a) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 10 Investment Appraisal II www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com WDA - Illustration 1 A business buys a piece of equipment for $100. Capital allowances are available at 25% reducing balance. The tax rate is 30% After the 4 year project the equipment can be sold for $25. Working Capital - Illustration 2 A business requires the following working capital investment into a four year project: Initial Investment:! ! 30,000 Year 1!! ! ! 35,000 Year 2!! ! ! 45,000 Year 3!! ! ! 32,000 Show the working capital line in the NPV calculation. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com NPV - Illustration 3 A business is evaluating a project for which the following information is relevant: I. Sales will be $100,000 in the first year and are expected to increase by 5% per year. II. Costs will be $50,000 and are expected to increase by 7% per year. III. Capital investment will be $200,000 and attracts tax allowable depreciation of the full value of the investment over the 5 year length of the project. IV. The tax rate is 30% and tax is payable in the following year. V. Working Capital invested will be 20% of projected sales for the following year. VI. General inflation is expected to be 3% over the course of the project and the business uses a real discount rate of 9%. Calculate the NPV for the project. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Asfor Co. plans to undertake a project with an initial investment of $5m. The inflation adjusted cash flows expected from the project are as follows: Year $ 1 $1.2m 2 $1.8m 3 $2.1m 4 $2.2m 5 $2.5m Asfor Co. uses a real discount rate of 6% and general inflation is expected to be 5% per year for the duration of the project. What is the NPV of the project ignoring tax: A. $8,178 B. $8,108 C. $2,010 D. $7,010 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 2. Asfor Co. plans to undertake a project with an initial investment of $16m. The cash flows (profit) before inflation expected from the project are as follows: Year $ 1 $4.2m 2 $4.9m 3 $5.5m 4 $5.8m 5 $6.1m Asfor Co. uses a real discount rate of 10% and general inflation is expected to be 3% per year for the duration of the project. The tax rate on profits is 30% payable the following year. What is the NPV of the project: A. $417 B. $2,048 C. -$298 D. $2,233 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 3. Asfor Co. plans to undertake a project with an initial investment of $16m and a scrap value of $3m at the end of the project. The cash flows after inflation expected from the project are as follows: Year $ 1 $4.2m 2 $4.9m 3 $5.5m 4 $5.8m 5 $6.1m Asfor Co. uses a nominal discount rate of 10%. Inflation is expected to be 3% per year. The tax rate on profits is 30% payable the following year. Tax allowable depreciation is available at 25% reducing balance. What is the NPV of the project: A. $1,477 B. $6,945 C. $17,477 D. $3,340 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. Asfor Co. plans to undertake a project with an initial investment of $10m. The cash flows (profit) after inflation expected from the project are as follows: Year $ 1 $4.2m 2 $4.9m 3 $5.5m 4 $5.8m 5 $6.1m Asfor Co. uses a nominal discount rate of 10%. The working capital requirement will initially be $1m rising by 5% each year before being returned at the end of the project. The tax rate on profits is 30% payable the following year. What is the NPV of the project: A. $4,605 B. $9.566 C. $4,097 D. $4,293 Answer D ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 5. Asfor Co. plans to undertake a project with an initial investment of $6m and scrap value of $1m. The sales price per unit in real terms is $30 with cost per unit of $15. Year Units 1 200,000 2 300,000 3 350,000 4 400,000 5 320,000 Asfor Co. uses a nominal discount rate of 10%. The sales are expected to be subject to inflation of 5% with the costs subject to inflation of 3%. The tax rate on profits is 30% payable the following year. What is the NPV of the project: A. $11,079 B. $5,912 C. $4,097 D. $8,111 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 6. Asfor Co. plans to undertake a project with an initial investment of $600,000 and scrap value of $100,000. The sales and costs in real terms are forecast to be Year Sales $ Costs $ 1 200,000 100,000 2 300,000 125,000 3 350,000 155,000 4 400,000 160,000 5 320,000 145,000 Asfor Co. uses a nominal discount rate of 10%. The sales are expected to be subject to inflation of 5% with the costs subject to inflation of 3%. The tax rate on profits is 30% payable the following year. What is the NPV of the project to the nearest ‘000? A. -$33,000 B. -$2,000 C. $72,000 D. $107,000 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What are we comparing in NPV analysis? 2. Why do we need a period 0? 3. Why do we assume that cash-flows occur at the end of each period? 4. If I have profits in period 2 of $4,000 and a tax rate of 30% how much tax will I pay and when? 5. If I receive 25% capital allowances and have a tax rate of 20% what will my tax saving be in each year over a 5 year project if the capital investment is $7,500 with a residual value of $1,500? 6. What makes up working capital? 7. How do we account for working capital in NPV analysis? 8. If my cash flows in my NPV analysis are inflated should I use the real or the nominal discount rate? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: June 2010 Q3 (a) & (b) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 11 Investment Appraisal III www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com IRR - Illustration 1 ABC has evaluated a project and come to the following conclusions. At a discount rate of 10% the NPV will be $100,000 At a discount rate of 15% the NPV will be -$75,000 What is the IRR? ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Which of the following best describes the result of calculating the Internal Rate of Return of a prospective project? A. The forecast return on the project as a percentage of the capital invested. B. The amount of time expected to be taken for the capital invested in the project to be returned. C. The amount of shareholder wealth expected to be created by the project. D. The discount rate at which the NPV of the project is expected to be zero. 2. If a project has cash inflows of $5,000 per year for 5 years and had an initial investment of $17,000 what is the IRR? A. 14.5% B. 11.5% C. 10.0% D. 15.0% 3. If a project has cash inflows of $6,000 per year for 5 years and had an initial investment of $23,000 what is the IRR? A. 11.05% B. 10.07% C. 12.07% D. 9.23% ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. Which of the following are advantages of using the Internal Rate of Return (IRR) as an investment appraisal technique? 1. IRR gives an answer in the form of an understandable percentage. 2. IRR uses accounting profit to assess the project. 3. IRR covers the payback period of the project. 4. IRR focuses on the maximisation of shareholder wealth. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1 and 4 only 5. Which of the following are disadvantages of using the Internal Rate of Return (IRR) as an investment appraisal technique? 1. It gives an absolute figure rather than a percentage as the result. 2. All of the figures are based on forecasts. 3. It is possible to get multiple IRRs depending on the timing of the cashflows. 4. IRR assumes that all returns are re-invested in the project which is not necessarily the case. A B C D 1, 2 and 4 2, 3 and 4 2 and 3 only 1 and 3 only ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What are we trying to find with the Internal Rate of Return? 2. What is the formula for the IRR? 3. If a project has cash inflows of $5,000 per year for 5 years and had an initial investment of $17,000 what is the IRR? 4. What are the advantages of the IRR? 5. What are the disadvantages of the IRR? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: June 2009 Q2 (b) & (c) December 2010 Q1 (a) & (b) December 2007 Q2 (a) & (b) Pilot Paper Q4 Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 12 Further Appraisal www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Expected Values - Illustration 1 A business is considering 2 different projects. The likely profit made from each project is outlined below: Project A Project B Projected Profit Percentage Likely-hood Projected Profit Percentage Likely-hood $10,000 10% $10,000 15% $15,000 30% $15,000 25% $20,000 40% $20,000 30% $23,000 20% $23,000 30% Calculate the expected value for each of the projects. Sensitivity Margin - Illustration 2 A business is considering a project which will cost them an initial 20,000 The sales expected for the 2 year duration are 20,000pa. The variable costs are 2,000pa Cost of capital 10% Calculate the sensitivity margin of: I. The initial investment. II. The variable costs of the projects. III. The sales of the project. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lease V Buy - Illustration 3 Machine cost $10,000 The Machine has a useful economic life of 5 years with no scrap value Capital allowances available at 25% reducing balance Finance choices 1) 5 year loan 14.28% pre tax cost 2) 5 year Finance Lease @ $2,200 pa in advance If the machine is purchased then maintenance costs of $100 per year will be incurred. The tax rate is 30%. The leasing company will maintain the machine if it is leased. Should the company lease or buy the machine. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Equivalent Annual Cost - Illustration 4 Machine Cost 30,000 Running costs Year 1 10,000 Year 2 11,500 Residual Value (if sold after..) Year 1 19,000 Year 2 16,000 Cost of capital = 10% Is it better to replace the machine every year or to replace it every 2 years? ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. A business is considering 2 different projects. The likely profit made from each project is outlined below: Project 1 Project 2 Projected Profit Percentage Likely-hood Projected Profit Percentage Likely-hood $12,000 10% $12,000 15% $16,000 30% $16,000 25% $25,000 40% $25,000 30% $30,000 20% $30,000 30% Project 3 Project 4 Projected Profit Percentage Likely-hood Projected Profit Percentage Likely-hood $12,000 12% $12,000 18% $16,000 35% $16,000 30% $25,000 44% $25,000 30% $30,000 9% $30,000 22% Which of the projects should be chosen on the basis of the Expected Values? A B C D Project 1 Project 2 Project 3 Project 4 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 2. A company is considering investing in a project with an expected life of four years. The project has a positive net present value of $280,000 when cash flows are discounted at 12% per annum. The project’s estimated cash flows include net cash inflows of $320,000 for each of the four years. No tax is payable on projects of this type. What is the sensitivity margin of the cash inflows of the project? A 87.5% B 21.9% C 3.5% D 28.8% 3. A five year investment project has a positive net present value of $320,000 when discounted at the cost of capital of 10% per annum. The project includes annual net cash inflows of $100,000 which occur at the end of each of the five years. What is the sensitivity margin of the cash inflows of the project? A 31.25% B 118.5% C 84.4% D 18.5% 4. Davos Co. intends to lease a machine on a 5 year operating lease for a payment of $3,500 payable in advance. The tax rate is 30%. The pre-tax cost of borrowing is 15.71%. What is the present value cost to the business of leasing the machine? A. $9,440 B. $10,480 C. $10,864 D. $10,974 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 5. Davos Co. intends to buy a machine a payment of $2m. Tax allowable depreciation is allowable over 5 years at 25% reducing balance. The tax rate is 30%. The pre-tax cost of borrowing is 17.14%. Maintenance costs of $65,000 are payable each year. What is the present value cost to the business of buying the machine? A. -$1,786 B. -$1,615 C. -$1,849 D. -$2,172 6. Kevlar Co. has a piece of machinery which cost $40,000 and is trying to decide how often to replace it based on the Equivalent Annual Cost (EAQ). The following information relates to the machine. Machine Cost 40,000 Running costs $12,000 per year Residual Value (if sold after..) Year 1 19,000 Year 2 16,000 Year 3!! 14,000 Year 4!! 14,000 Cost of capital = 12% When is best to replace the machine based on the EAQ? A. At the end of year 1 B. At the end of year 2 C. At the end of year 3 D. At the end of year 4 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What is the difference between risk and uncertainty? 2. How can we deal with each of risk and uncertainty in investment appraisal? 3. What is an operating lease? 4. Why might a company want to lease an item rather than buy it? 5. What are the relevant costs of buying the item? 6. What are the relevant costs of leasing the item? 7. If I have a pre-tax borrowing rate of 13% and the tax rate is 25% what is the post-tax borrowing rate? 8. What does the equivalent annual cost method tell us? 9. What is the equation for the EAC? 10. I have an item of plant costing $30,000 new and $5,000 to maintain each year. The residual value after 3 years is $7,000 and after 4 years is $5,000. If I have a cost of capital of 10% after how long should I replace the asset? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: December 2009 Q1 (a) & (b) December 2007 Q2 (c) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 13 Further Appraisal II www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Profitability Index - Illustration 1 A business has identified the following projects. They have $200,000 to invest and the projects are divisible. Project Investment NPV A 90,000 15,000 B 110,000 25,000 C 50,000 10,000 D 75,000 22,000 E 70,000 -8,000 Which projects should the business undertake? Investment Choices - Illustration 2 A business has identified the following projects. They have $200,000 to invest and the projects are non-divisible. Project Investment NPV A 90,000 15,000 B 110,000 25,000 C 50,000 10,000 D 75,000 22,000 Which projects should the business undertake? ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Equivalent Annual Annuity - Illustration 3 ! ! ! ! NPV Duration Project 1 300 5 yrs Project 2 200 3 yrs Project 3 350 6 yrs Calculate the EEA of each project given a cost of capital of 10% ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. An investment project requires an initial investment of $500,000 and has a residual value of $130,000 at the end of five years. The net present value of the project is $140,500 after discounting at the company’s cost of capital of 12% per annum. The profitability index of the project is: A B C D 0.38 0.54 0.28 0.26 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 2. A company has a maximum of $80 million available for investment and seven independent projects in which it could invest as follows: Project Investment NPV A 10 4.20 B 40 6.10 C 20 8.50 D 40 13.70 E 50 3.80 F 20 4.90 G 20 4.33 None of the projects can be carried out more than once. Each project is divisible therefore investment in part of a project can be undertaken. What is the maximum NPV that could be achieved from investing the $80m using the Profitability Index? A. $28.85 B. $31.3m C. $45.53m D. $26.4m 3. Which of the following best describes ‘hard’ capital rationing? A. A limited amount of capital is available to the company due to external factors such as banks unwillingness to lend. B. A limited amount of capital is available to the company due to internal factors such as management unwillingness to take more risk. C. Extra capital is available to the company due to external factors such as banks who are keen to lend. D. Extra capital is available to the company due to internal factors such as excess cash from operations. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. Which of the following best describes ‘soft’ capital rationing? A. A limited amount of capital is available to the company due to external factors such as banks unwillingness to lend. B. A limited amount of capital is available to the company due to internal factors such as management unwillingness to take more risk. C. Extra capital is available to the company due to external factors such as banks who are keen to lend. D. Extra capital is available to the company due to internal factors such as excess cash from operations. Short Form Questions 1. What is the difference between divisible and non-divisible projects? 2. If the projects are divisible,which method should be used to decide which projects to undertake? 3. How do we calculate the Profitability Index? 4. If projects are non divisible how do we make a decision? 5. What is the equivalent annual benefit? 6. What is capital rationing? 7. What is hard capital rationing? 8. What is soft capital rationing? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: December 2009 Q1 (c) & (d) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 14 Business Valuations www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Net Assets Valuation Method Illustration 1 Non Current Assets 550,000 Current Assets 170,000 Current Liabilities -80,000 Share Capital 300,000 Reserves 200,000 10% Loan Notes 150,000 The Market Value of property in the Non Current Assets is $50,000 more than the book value. The Loan Notes are redeemable at a 5% premium. What is the value of a 70% holding using the net assets valuation basis? DVM - Illustration 2 ABC pays a constant dividend of 45c. It has 3m ordinary shares. The shareholders require a return of 15%. What is the Value of the business? ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com DVM - Illustration 3 A business has Share Capital made up of 50c shares of $3 million Dividend per share (just paid) 30c Dividend paid four years ago 22c Required Return = 12% Calculate the Value of the business using the dividend valuation method. P/E Ratio Method - Illustration 4 X1 X2 X3 $‘000 $‘000 $‘000 Revenue 3000 3500 4200 COS 2000 2400 3200 Gross Profit 1000 1100 1000 Admin Costs 300 350 400 Distribution Costs 200 250 300 PBIT 500 500 300 Interest 100 150 220 Tax 120 90 50 Profit After Tax 280 260 30 Dividends 100 110 30 Retained Earnings 180 150 0 Industry P/E Average 13 12 14 Calculate the Value of the Company for each of the 3 years using the P/E Ratio method. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com P/E Ratio Method - Illustration 5 X1 X2 X3 $‘000 $‘000 $‘000 Revenue 3200 3800 4800 COS 2000 2400 3200 Gross Profit 1200 1400 1600 Admin Costs 300 350 400 Distribution Costs 200 250 300 PBIT 700 800 900 Interest 100 150 220 Tax 120 90 50 Profit After Tax 480 560 630 Dividends 100 110 150 Retained Earnings 380 450 480 Industry P/E Average 17 15 18 Number of Shares 3m 3m 3m Calculate the Earnings Per Share for each of the 3 years Calculate the Value of the Company for each of the 3 years using the EPS you calculate. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Earnings Yield - Illustration 6 X1 X2 X3 $‘000 $‘000 $‘000 Revenue 3100 3700 4600 COS 2000 2400 3200 Gross Profit 1100 1300 1400 Admin Costs 300 350 400 Distribution Costs 200 250 300 PBIT 600 700 700 Interest 100 150 220 Tax 120 90 50 Profit After Tax 380 460 430 Dividends 100 110 150 Retained Earnings 280 350 280 Earnings Yield 0.15 0.18 0.17 Number of Shares 4m 4m 4m Calculate the Earnings Per Share for each of the 3 years and the share price using the earnings yield. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Present Value of Future Cash Flows - Illustration 7 ABC Company earned $100,000 in cash inflows this year. They expect this to increase in each of the next 5 years by 5% and after that to increase by 2% forever. The company uses a cost of capital of 10%. Calculate the value of the company using the present value of future cash flows method. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Non Current Assets 700,000 Current Assets 250,000 Current Liabilities -100,000 Share Capital 500,000 Reserves 300,000 10% Loan Notes 200,000 The Market Value of property in the Non Current Assets is $100,000 more than the book value. The Loan Notes are redeemable at a 10% premium. What is the value of a 80% holding using the net assets valuation basis? A. $730,000 B. $664,000 C. $584,000 D. $444,000 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 2. ABC Co. has Share Capital made up of 50c shares of $5 million. They have just paid a dividend per share of 50c and paid a dividend per share four years ago of 35c. The cost of capital is 14%. Calculate the Value of the business using the dividend valuation method. A. $343.6m B. $389.3m C. $109.3m D. $54.65m 3. SKV Co has paid the following dividends per share in recent years: Year 2013 2012 2011 2010 Dividends 36.0 33.8 32.8 31.1 The dividend for 2013 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 to the nearest cent on an ex dividend basis? A $4·67 B $5·14 C $5·40 D $6·97 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. The following information relates to Stovie Co. $‘000 Revenue 3000 COS 2000 Gross Profit 1000 Op. Costs 500 Net Profit 500 Number of Shares 1m Share Price $5 Industry P/E Average 15 What is the the Value of the Company Using the P/E ratio calculation? A. $5m B. $7.5m C. $8m D. $5.5m 5. Archie Company expects to earn $100,000 in cash inflows this year. They expect this to increase in each of the following 4 years by 8% and after that to increase by 4% forever. The company uses a cost of capital of 10%. Calculate the value of the company to the nearest $‘000 using the present value of future cash flows method. A. $1,902,000 B. $2,795,000 C. $1,340,000 D. $3,675,000 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 6. Archie Company expects to earn $500,000 in cash inflows this year. They expect this to increase in each of the following 4 years by 7% and after that to increase by 3% forever. The company uses a cost of capital of 10%. Calculate the value of the company to the nearest $‘000 using the present value of future cash flows method. A. $7,569,000 B. $9,638,000 C. $8,137,000 D. $11,790,000 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. When is it appropriate to use the Net Assets Valuation method? 2. What are the downsides of using the Net Assets Valuation method? 3. A company pays a constant dividend of 50c and has a cost of capital of 13%. Calculate the share price using DVM. 4. A company pays a dividend of 50c and paid a dividend of 40c 4 years ago. The company has a cost of capital of 13%. Calculate the share price using DVM. 5. What are the downsides of using DVM? 6. Why do we use a proxy P/E Ratio when valuing a business with this method? 7. When and how can we adjust the P/E Ratio used? 8. The industry average P/E ratio for the fashion industry is 13. We are valuing an unlisted fashion business who have an EPS of 22c and 12m shares in issue. What is the value of the firm? 9. What are the downsides of using the P/E ratio method? 10. A business is expected to earn $250,000 this year that is expected to grow at 4% forever. What is the value of the business using the present value of future cash flows if their cost of capital is 14%? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: December 2007 Q1 (a) June 2008 Q2 (a) & (b) December 2008 Q1 Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 15 WACC I www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Cost of Equity using DVM - Illustration 1 ABC Company has just paid a dividend of 35c. The current share price is $3.25. Calculate the Cost of Equity (Ke) using DVM. Cost of Equity using DVM - Illustration 2 ABC Company has just paid a dividend of 35c. The dividend paid has grown by 4% per year for the past 5 years. The current share price is $3.25. Calculate the Cost of Equity (Ke) using DVM. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Cost of Equity using CAPM - Illustration 3 Company A has a Beta of 1.2. Government bonds are currently trading at 4%. The average return than investors in the market can expect is 15%. Calculate the Cost of Equity using CAPM. Cost of Equity using CAPM - Illustration 4 Company A has a Beta of 1.2. Company B has a Beta of 1. Government bonds are currently trading at 5%. The average return than investors in the market can expect is 12%. Calculate the Cost of Equity using CAPM for each company. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Cost of Equity using CAPM Illustration 5 Company A has a Beta of 1.3. Company B has a Beta of 1.2. Government bonds are currently trading at 5%. The average market risk premium is 6%. Calculate the Cost of Equity using CAPM for each company. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Entrie Company has just paid a dividend of 75c. The dividend paid has grown by 3% per year for the past 4 years. The current share price is $6.54 What is the cost of equity using the dividend growth model? A. 12% B. 15% C. 7% D. 11% 2. Company Alpha has a Beta of 1.1.Government bonds are currently trading at 4%. The average market risk premium is 7%. What is the cost of equity using the capital assets pricing model? A. 12.2% B. 11.7% C. 7.3% D. 11.4% 3. Which of the following statements about ‘systematic risk’ are correct when referring to the capital assets pricing model? A. Systematic B. Systematic C. Systematic D. Systematic risk risk risk risk affects the overall market, not just a particular stock or industry. is company or industry specific risk. is risk that can be diversified away by investors. is determined by the gearing of the company. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. Which of the following statements about ‘unsystematic risk’ are correct when referring to the capital assets pricing model? A. Systematic B. Systematic C. Systematic D. Systematic risk risk risk risk affects the overall market, not just a particular stock or industry. is company or industry specific risk. is risk that can be diversified away by investors. is determined by the gearing of the company. 5. Which of the following are assumptions made by the capital asset pricing model (CAPM) are correct? 1. It assumes that investors can borrow at the risk free rate. 2. It assumes a capital market with high transaction costs. 3. It assumes that all investors are diversified. 4. It assumes that the risk free rate is 5% A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1 and 4 only 6. Which of the following are downsides of the capital assets pricing model (CAPM) are correct? 1. The 2. The 3. The 4. The A B C D Beta used is calculated using historic data. dividend growth is based on historic data. assumptions it makes are not necessarily reflected in reality. share price fluctuates on a daily basis. 1 and 2 only 1 and 3 only 2 and 3 only 1 and 4 only ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What is the weighted average cost of capital? 2. Set out the creditors hierarchy. 3. Why is debt cheaper to service than equity (2 reasons!)? 4. If a company has a dividend of 40c and a share price of $3.45 what is the cost of equity? 5. If the dividend in question 4 is growing at a rate of 5% what is the cost of equity? 6. What are the two types of risk mentioned in the CAPM lecture? 7. Why can we ignore unsystematic risk? 8. What type of risk is CAPM a measure of? 9. What does Beta tell us? 10. What are the assumptions of CAPM? 11. A company has a Beta of 1.3. The market risk premium is 6% and government bonds are trading at 4%. Calculate the cost of equity using CAPM. 12. Is a company with a Beta of 1.2 a more risky or less risky investment than a company with a Beta of 1.6? 13. How is Beta calculated? 14. What are the downsides of CAPM? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: You’re not Ready Yet - Do the next lecture! Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 16 WACC II www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! Irredeemable Debt - Illustration 1 A company has issued 10% irredeemable debt. The market value of the debt is $90. The tax rate is 30% Calculate the cost of debt (Kd). Redeemable Debt - Illustration 2 A Company has issued debt which is redeemable in 5 years time. Interest is payable at 8%. The current market value of the debt is $102. Ignore taxation. Calculate the Cost of Debt (Kd). www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Redeemable Debt - Illustration 3 A Company has issued debt which is redeemable in 5 years time. Interest is payable at 10%. The current market value of the debt is $104. Tax is payable at 30%. Calculate the Cost of Debt (Kd). Convertible Debt - Illustration 4 A Company has issued debt which is convertible in 5 years time. Interest is payable at 10%. The current market value of the debt is $120. On conversion, investors will have a choice of either: I. Cash at a 15% premium; or II. 18 shares per loan note. The current share price is $6 and it is expected to grow in value by 4% per year. Tax is payable at 30%. Calculate the Cost of Debt (Kd). ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Preference Shares - Illustration 5 A company has issued 8% preference shares with a nominal value of $1. The market value of the shares is 80c. The tax rate is 30%. Calculate the cost of the preference shares (Kd). Bank Debt - Illustration 6 A company has a bank loan of $2m at an interest rate of 10%. The tax rate is 30%. Calculate the cost of debt (Kd). ACCA F9 Financial Management Full Course Workbook Questions! WACC - Illustration 7 Company A is funded as follows: Item Capital Structure Cost Equity 85% 15% Debt 15% 7% Calculate the Weighted Average Cost of Capital. www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com WACC - Illustration 8 Company A is funded as follows: Balance Sheet Extract Ordinary Shares (50c) 3000 Loan Notes 2000 Bank Loan 1000 The cost to the company of each of the above items has been calculated as: Ordinary Shares 13% Loan Notes 8% Bank Loan 5% The Loan notes are currently trading at $94. The current share price is $1.50 Calculate the Weighted Average Cost of Capital. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com WACC - Illustration 9 Company A is funded as follows: Balance Sheet Extract Ordinary Shares (50c) 2000 12% Loan Notes 1500 8% Preference Shares ($1) 500 Bank Loan 750 Details on these are as follows. The company has an equity beta of 1.2. Government bonds are currently trading at 6% and the average market risk premium is 7%. The Loan notes are currently trading at $106 and are redeemable at par in 5 years time. The preference shares are trading at 92c. The bank loan has an interest rate of 10%. The current share price is $1.25. The tax rate is 30%. Calculate the Weighted Average Cost of Capital. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Avecas Co. has irredeemable debt in issue that interest at a rate of 12%. The market value of the debt is $84 and the tax rate is 30%. What is the cost of debt? A. 14% B. 12% C. 10% D. 11% 2. A company has 10% irredeemable debt in issue at a market value of $97. If the tax rate is 30% what is the cost of the debt? A. 7.2% B. 9.7% C. 6.5% D. 8.2% 3. A Company has issued debt which is redeemable in 5 years time. Interest is payable at 12%. The current market value of the debt is $102. Tax is payable at 30%. What is the cost of debt (kd) using linear extrapolation and discount rates of 5% and 15% in the calculation? A. 12.00% B. 8.47% C. 9.00% D. 7.24% ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. A company has 5 year 8% redeemable debt in issue at a market value of $103. The tax rate is 25%. What is the cost of debt (kd) using linear extrapolation and discount rates of 5% and 15% in the calculation? A. 6.26% B. 5.95% C. 7.19% D. 5.4% 5. Jeeves Company has issued debt which is convertible in 5 years time. Interest is payable at 12% and the current market value of the debt is $108. On conversion, investors will have a choice of either: Cash at a 10% premium; or 14 shares per loan note. The current share price is $7 and it is expected to grow in value by 3.5% per year. Which of the following statements is correct? A. Based on the information available, investors would be better off choosing to take the cash option by $6.39. B. Based on the information available, investors would be better off choosing to take the conversion option by $6.39. C. Based on the information available, investors would be indifferent between the cash and conversion option. D. Based on the information available, investors would be better of choosing to take the cash option by $8.94. 6. A company has 8% preference share in issue at a current value of 94c. The tax rate is 30%. What is the cost of the preference shares? A. 8.5% B. 6.0% C. 8.0% D. 5.6% ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 7. A company has a bank loan of $7m at a rate of 6%. The tax rate is 35%. What is the cost of the bank debt? A. 6.0% B. 2.1% C. 3.9% D. 4.2% 8. Company A is funded as follows: Balance Sheet Extract Ordinary Shares (50c) 2500 Loan Notes 1000 Bank Loan 500 The cost to the company of each of the above items has been calculated as: Ordinary Shares 17% Loan Notes 7% Bank Loan 6% The Loan notes are currently trading at $98. The current share price is $3.50 What is the Weighted Average Cost of Capital? A. 11.56% B. 16.19% C. 13.34% D. 17.24% ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What is the nominal value of issued debt? 2. What is convertible debt convertible into? 3. What is the calculation for irredeemable debt? 4. A company has 10% irredeemable debt in issue at a market value of $97. If the tax rate is 30% what is the cost of the debt? 5. A company has 5 year 8% redeemable debt in issue at a market value of $103. The tax rate is 25%. What is the cost of the debt? 6. A company has 10% convertible debt in issue at a market value of $111 that is redeemable in 5 years at either cash or 5 shares per nominal. The current share price is $18 and is expected to grow at 2%. The tax rate is 30%. What is the cost of debt? 7. A company has 8% preference share in issue at a current value of 94c. What is the cost of the preference shares. 8. A company has a bank loan of $7m at a rate of 6%. The tax rate is 35%. What is the cost of the bank debt? 9. The company has each of the types of debt in questions 4 to 6 on their balance sheet at a book value of $10m for each of them except for the bank debt which is on the balance sheet at $7m. If the company has a market value of $110m with a cost of equity of 14% then what is the company’s weighted average cost of capital? 10. What if the company has each of the types of debt in questions 4 to 6 on their balance sheet at a book value of $8m for each of them except for the bank debt which is on the balance sheet at $7m. If the company has a market value of $99m with a cost of equity of 12% then what is the company’s weighted average cost of capital? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: December 2008 Q3 (a) June 2010 Q2 June 2008 Q1 Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 17 Capital Structure www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Capital Structure - Illustration 1 A company has total capital of $1,000 with debt making up $300 and equity making up $700 of the total. The company’s cost of debt is 5% and cost of equity is 14%. I. II. Calculate the company’s current WACC. Calculate the WACC if the company substitutes $200 of equity for $200 of debt causing their cost of equity to rise to 16%. III. Calculate the WACC if the company substitutes $300 of equity for $300 of debt causing their cost of equity to rise to 25%. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Which of the following statements concerning capital structure theory is correct? A. In the traditional view, there is a linear relationship between the cost of equity and financial risk B. Modigliani and Miller said that, in the absence of tax, the cost of equity would remain constant C. Pecking order theory indicates that preference shares are preferred to convertible debt as a source of finance D. Business risk is assumed to be constant 2. Which of the following statements concerning capital structure theory is correct? A. The traditional view of capital structure suggests that the company can minimise their weighted average cost of capital B. Modigliani and Miller said that, incorporating tax, the weighted average cost of capital would remain constant C. Pecking order theory indicates that preference shares are preferred to convertible debt as a source of finance D. Modigliani and Miller said that, incorporating tax, as gearing levels increase so the value of the company will decrease 3. Which of the following are assumptions that Modigliani and Miller made in their ‘no tax’ model? 1. No risk of bankruptcy no matter how much debt the company has. 2. High transaction charges. 3. The company is able to borrow at the risk free rate. 4. The company has no debt in it’s capital structure. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1 and 4 only ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. What does the M&M model with tax suggest a company should do with their capital structure? A. As there is greater financial risk at high levels of gearing the company should have as little debt as possible. B. As the transaction costs will be high the company should retain their current capital structure for as long as possible. C. As taking on more debt reduces the weighted average cost of capital the company should increase their gearing levels. D. The company should find the optimum capital structure at which it can minimise its weighted average cost of capital. Short Form Questions 1. What is capital structure? 2. What does the traditional view suggest you can do with the WACC? 3. Why would you want to do this? 4. What other assumptions did M & M make? 5. What does the M&M model with tax suggest we should do with our capital structure? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: Pilot Paper Q1 (b) June 2009 Q1 (c) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 18 Financing & Investment www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Project Specific Discount Rate - Illustration 1 Company A intends to undertake a project in an unrelated industry. The following details are relevant: Item Company A Proxy Company Equity Beta (βe) 1.2 1.4 Value of Equity 1000 800 Value of Debt 400 500 The risk free rate is 4%. The average return on the market is 12%. Calculate a project specific discount rate. Ignore Tax ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Project Specific Discount Rate - Illustration 2 Company A intends to undertake a project in an unrelated industry. The following details are relevant: Item Company A Proxy Company Equity Beta (βe) 1.1 1.3 Value of Equity 1200 900 Value of Debt 500 450 The risk free rate is 4%. The average return on the market is 12%. The tax rate is 30%. Calculate a project specific discount rate. Ignore Tax ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Company Alpha is financed with $1,000 of equity and $400 of debt and intends to undertake a project in an unrelated industry. They have identified Horizon Co. as a company in the new industry with $700 of equity and $300 of debt. Alpha Co. has a Beta of 1.3 whereas Horizon Co. has a Beta of 1.2. The risk free rate is 4% and the average return on the market is 12%. The tax rate is 30%. Which of the following would be the project specific discount rate for Alpha Co. when entering the new industry? A. 12.34% B. 10.25% C. 11.12% D. 13.42% 2. Company Alpha is financed with 60% equity and 40% debt and intends to undertake a project in an unrelated industry. They have identified Horizon Co. as a company in the new industry with 75% equity and 25% debt. Alpha Co. has a Beta of 1.1 whereas Horizon Co. has a Beta of 1.4. The risk free rate is 6% and the average return on the market is 14%. The tax rate is 30%. Which of the following would be the project specific discount rate for Alpha Co. when entering the new industry? A. 19.38% B. 18.00% C. 17.20% D. 16.32% ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 3. Company Alpha is financed with debt/equity of 1/4 and intends to undertake a project in an unrelated industry. They have identified Horizon Co. as a company in the new industry with debt/equity 1/3. Alpha Co. has a Beta of 1.05 whereas Horizon Co. has a Beta of 1.24. The risk free rate is 6% and the average return on the market is 14%. The tax rate is 30%. Which of the following would be the project specific discount rate for Alpha Co. when entering the new industry? A. 16.23% B. 15.49% C. 17.26% D. 18.28% Short Form Questions 1. What are the two types of risk included in a company’s equity Beta? 2. When do we use the WACC as a discount rate? 3. What is capital structure? 4. What are the steps to calculate a project specific discount rate? 5. Our business has a Beta of 1.2, debt with a market value of 100 and equity with a market value of 400. If the proxy has a Beta of 1.4, debt with a market value of 100 and equity with a market value of 200 calculate a project specific discount rate. The risk free rate is 4% and the average market risk premium is 7%. Ignore tax. 6. What are the 3 types of market efficiency? 7. Describe weak form market efficiency. If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: December 2008 Q3 (c) June 2010 Q3 (c) (iii) December 2010 Q1 (c) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 19 More Debt www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com December 07 Exam Question (6 marks) Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in five years’ time. Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The current ordinary share price of Phobis Co is $4·45 and this is expected to grow at a rate of 6·5% per year for the foreseeable future. Phobis Co has a cost of debt of 7% per year. Required: Calculate the following current values for each $100 convertible bond: (i) market value; (ii) floor value; (iii) conversion premium. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. Luke Co has 8% convertible loan notes in issue which are redeemable in five years’ time at their nominal value of $100 per loan note. Alternatively, each loan note could be converted after five years into 70 equity shares with a nominal value of $1 each. The equity shares of Luke Co are currently trading at $1·25 per share and this share price is expected to grow by 4% per year. The before-tax cost of debt of Luke Co is 10% and the after-tax cost of debt of Luke Co is 7%. What is the current market value of each loan note to the nearest dollar? A. $92 B. $96 C. $104 D. $109 2. A bond has a coupon rate of 8.5% per annum. The next interest payment will be made in one year’s time. The bond will repay the par value of $100 when it matures in seven years’ time. The before-tax cost of debt is 7% and the after-tax cost of debt is 5%. What is the the expected current market price of the bond to the nearest dollar? A. $98 B. $93 C. $108 D. $106 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 3. A bond has a coupon rate of 6% per annum and will repay its face value of $100 on its maturity in four years’ time. The yield to maturity on similar bonds is 4% per annum. The annual interest has just been paid for the current year. What is the the expected current market price of the bond to the nearest dollar? A. $96 B. $92 C. $110 D. $107 4. Angus Co has 8% convertible loan notes in issue which are redeemable in five years’ time at their nominal value of $100 per loan note. Alternatively, each loan note could be converted after five years into 35 equity shares with a nominal value of $1 each. The tax rate is 30% The equity shares of Angus Co are currently trading at $2·25 per share and this share price is expected to grow by 6% per year. The before-tax cost of debt of Luke Co is 10% and the after-tax cost of debt of Luke Co is 7%. What is the current market value of each loan note to the nearest dollar? A. $87 B. $96 C. $98 D. $108 5. A $100 bond has a coupon rate of 8% per annum and is due to mature in four years time. The next interest payment is due in one year’s time. Similar bonds have a yield to maturity of 10%. What is the the expected current market price of the bond to the nearest dollar? A. $96 B. $94 C. $110 D. $100 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. How is the market value of convertible debt calculated? 2. What will the capital repaid figure in the IRR calculation be the higher of? 3. What is the floor value of convertible debt? 4. How is the floor value calculated? 5. What is the conversion premium? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 20 Currency Risk I www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Buy or Sell Currency - Illustration 1 You have an invoice to pay to a US business of $1250 and you are a UK business. The rate offered by the bank is $:£ 1.2500 - 1.3500 How many £ will it take to pay the $125? Buy or Sell Currency - Illustration 2 You have issued an invoice to a US customer of $2000 and you are a UK business. The rate offered by the bank is $:£ 1.4500 - 1.5500 How many £ will you receive for the $2000? ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Purchasing Power Parity Theory - Illustration 3 The current exchange rate is 2$ per £. Inflation in the US is 6%. Inflation in the UK is 8%. What will the FX rate be in 1 years time? Interest Rate Parity Theory - Illustration 4 The current exchange rate is 2$ per £. The interest rate in the US is 3%. The interest rate in the UK is 2%. What will the FX rate be in 1 years time? Forward Rate - Illustration 5 ABC Company has entered into a contract whereby they will receive $500,000 from a US customer in 3 months. ABC is a UK company. A 3 month forward rate is available at $:£ 1.6000 +/- 0.0500. Calculate the amount of £ ABC would receive under the forward contract. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Money Market Hedge - Illustration 6 A UK business needs to pay $350,000 to a US supplier in 3 months time. Exchange rate now: $:£ 1.6500 - 1.7000 Deposit rates UK 4% annual US 6% annual Borrowing rates UK 5% annual US 6.5% annual How much £ will the transaction cost using a money market hedge? Money Market Hedge Illustration 7 A UK business will receive $350,000 from a US supplier in 3 months time. Exchange rate now: $:£ 1.6500 - 1.7000 Deposit rates UK 4% annual US 6% annual Borrowing rates UK 5% annual US 6.5% annual How much £ will the business receive using a money market hedge? ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. The home currency of ACB Co is the dollar ($) and it trades with a company in a foreign country whose home currency is the Dinar. The following information is available: Home Country Spot Rate Foreign Country 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 B C D 20·39 Dinar per $ 20·30 Dinar per $ 20·59 Dinar per $ 20·78 Dinar per $ 2. What is the impact of a fall in a country’s exchange rate? 1 Exports will be given a stimulus 2 The rate of domestic inflation will rise A B C D 1 only 2 only Both1 and 2 Neither 1 nor 2 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 3. The date is 31 January 2014 and Avecas Co. has entered into a contract whereby they will receive $300,000 from a US customer on 01 April 2014. Avecas Co. is a UK company. The following forward rates are available: 2 Month Rate $:£ 1.6000 +/- 0.0500. 3 Month Rate $:£ 1.5000 +/- 0.0500. 6 Month Rate $:£ 1.4000 +/- 0.0500. What amount in £ will Avecas Co. receive under the appropriate forward contract to the nearest £.? A. £181,818 B. £193,548 C. £206,897 D. £495,000 4. Hilasys Co. is a UK business that needs to pay $250,000 to a US supplier in 3 months time. The spot rate now is: $:£ 1.6500 - 1.7000. Deposit rates in the UK are 5% annual and in the US are 7% annual. Borrowing rates in the UK are 3% annual and in the US are 4.5% annual. What will the transaction cost Hilasys Co. to the nearest £ using a money market hedge? A. £181,818 B. £245,700 C. £148,909 D. £150,026 5. Varys Co is a UK business that will receive $500,000 from a US supplier in 3 months time. The spot rate now is: $:£ 1.6500 - 1.7000. Deposit rates in the UK are 5% annual and in the US are 6.5% annual. Borrowing rates in the UK are 3% annual and in the US are 4% annual How much to the nearest £ will the Varys receive using a money market hedge? A. £256,732 B. £294,846 C. £291,206 D. £495,050 ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. $/£ 1.35 - 1.45 which currency is the counter currency? 2. UK company receiving $500. Spot rate is $/£ 1.35 - 1.45. How many £ will the company receive? 3. UK inflation is 5%, US inflation is 2%. The spot rate is $/£ 1.35. What will the FX rate be in one year’s time? 4. What are the internal methods of hedging currency risk? 5. What are the disadvantages of a forward contract? 6. How many £ will a company receive if they take a forward contract at a rate of $/£ 1.55 +/- 0.05 for an amount of $400,000? 7. How does a money market hedge eliminate the foreign currency risk? 8. A UK company is going to pay $400,000 to a US supplier in 3 months time. The UK deposit rate is 4.5% and the borrowing rate is 5.5%. The US deposit rate is 5.5% and the borrowing rate is 6.5%. Calculate the cost of the payment if the company uses a money market hedge? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: Pilot Paper Q2 (All except part (a)) December 2008 Q4 (a), (b) & (c) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 21 Currency Risk II www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. ‘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 B C D Translation risk Economic risk Transaction risk Interest rate risk 2. Which of the following are advantages of a using a futures contract to hedge foreign exchange risk? 1. High transaction costs. 2. It can be traded and thus closed out at any time. 3. It is an effective hedge. 4. The company can take advantage of “upside risk”. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1 and 4 only 3. Which of the following are disadvantages of a using a futures contract to hedge foreign exchange risk? 1. They can be arranged for standard contract sizes only 2. They are available for a a wide range of currencies 3. There is no upside risk if the currency movement is in your favour 4. There is a large premium to pay on the contract. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1 and 4 only ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. Which of the following are advantages of a using an option on a currency to hedge foreign exchange risk? 1. High transaction costs. 2. It can be traded and thus closed out at any time. 3. It is an effective hedge. 4. The company can take advantage of “upside risk”. A B C D 1 and 2 only 1 and 3 only 3 and 4 only 1 and 4 only 5. Which of the following are disadvantages of a using an option on a currency to hedge foreign exchange risk? 1. They can be arranged for standard contract sizes only 2. They are available for a a wide range of currencies 3. There is no upside risk if the currency movement is in your favour 4. There is a large premium to pay on the contract. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1 and 4 only ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What are the 3 types of FX risk? 2. Explain each of the 3. 3. What is a futures contract? 4. What are the advantages of a future? 5. What are the disadvantages of a future? 6. How do you undertake a future contract? 7. What is an option? 8. What is the main advantage of an option? 9. Are there any downsides to an option? 10.What type of risk will an option hedge? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: Pilot Paper Q2 (a) December 2008 Q4 (d) Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 22 Interest Rate Risk www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice Questions 1. In relation to hedging interest rate risk, which of the following statements is correct? A. The flexible nature of interest rate futures means that they can always be matched with a specific interest rate exposure B. Interest rate options carry an obligation to the holder to complete the contract at maturity C. Forward rate agreements are the interest rate equivalent of forward exchange contracts D. Matching is where a balance is maintained between fixed rate and floating rate debt 2. Which of the following are disadvantages of using an interest rate swap to hedge interest rate risk? 1. There is a risk that one of the parties fails to pay their side of the swap. 2. It is a reversible agreement. 3. The decision to move into the swap may be the wrong decision as interest rates may change unexpectedly. 4. The transactions costs can be very high. A B C D 1 and 2 only 1 and 3 only 2 and 3 only 1 and 4 only 3. Which of the following statements are correct in reference to using an ‘over the counter’ interest rate option to manage interest rate risk? A. It constitutes an contract with a bank to secure a specific interest rate no matter what happens. B. It is an agreement with a bank that ensures that the company can take advantage of low rates, but secure against high rates. C. It is an exchange traded contract that can be closed out at any time. D. It enables the company to swap from a fixed interest rate to a floating rate or vice-versa. ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com 4. In relation to hedging interest rate risk, which of the following statements is correct? A. The flexible nature of interest rate futures means that they can always be matched with a specific interest rate exposure B. Interest rate options carry an obligation to the holder to complete the contract at maturity C. Forward rate agreements are the interest rate equivalent of money market hedging of foreign exchange risk D. Smoothing is where a balance is maintained between fixed rate and floating rate debt 5. Which of the following statements about the yield curve is correct? 1. In normal circumstances the curve is upward sloping. 2. Liquidity preference theory explains the yield curve on the basis that investors generally prefer cash. 3. Expectations theory explains the yield curve as the market generally expects interest rates to be lower in the future. 4. The yield curve can be used to predict interest rates. A B C D 1, 2 and 3 only 1 and 3 only 2 and 3 only 1, 2 and 4 only ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Short Form Questions 1. What internal methods may a firm use to manage interest rate risk? 2. What is an FRA? 3. Why might a firm use an interest rate option to manage interest rate risk? 4. What is an Interest Rate Swap? 5. What are the disadvantages of an interest rate swap? 6. What does a Yield Curve plot? 7. In what way does a Yield Curve slope? 8. What are the three ways in which theorists have sought to explain the slope of the yield curve? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: Now do it! ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Lecture 23 Islamic Finance www.mapitaccountancy.com ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com Test Your Knowledge If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area! Multiple Choice 1. In relation to Islamic Finance, which of the following statements is correct? A. It is possible under certain circumstances to charge interest on an Islamic Finance product. B. There is a lot of use of partnerships and joint ventures under Islamic Finance. C. It is not possible for a financial product to be compatible with Sharia law. D. Islamic Finance is only available to those of the muslim faith. Short Form Questions 1. What is the main principle behind islamic finance? 2. What should money only be generated by? 3. What are the Islamic terms for ‘forbidden’ and ‘permitted’? 4. How will a mortgage work under islamic financial principles? 5. What is the islamic term for a bank loan? 6. How will lease finance (ijara) work under islamic finance? 7. What must debt finance relate to under islamic finance principles? 8. What is the islamic finance term for a joint venture? If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below: Now do it!
