Professional Documents
Culture Documents
C
To manage the link between the company and the external environment to do with
financial decisions?
D
Q2. When considering financial management would it normally be considered as which of the
following categories?
A
An operational function
A tactical function
A strategic function
An institutional function
Q3. When considering a financial investment over the short-term which order would best
describe the priorities of the investor highest first?
A
Q4. When considering the dividend to pay out which of the following should be considered?
1
Shareholder expectations
Investment opportunities
Current profitability
1,2 and 3
1,3 and 4
2,3 and 4
Q5. When considering the permanent financing of the business, what should debt and equity
cover in balance sheet terms?
A
Current assets
Total assets
Maximising profit
Satisficing
Q7. As an employee how would you best assess your return from the organisation?
A
Salary
Payment terms
Service
Q8. What theory best describes the relationship between senior management and
shareholders?
A
Tenancy theory
Expectancy theory
Portfolio theory
Agency theory
Q9. Which of the following may be considered areas of conflict between shareholders and
directors?
1
Executive pay
Takeover strategy
Prestige projects
Risk assessment
1, 2 and 3
2, 3 and 4
1, 2 and 4
Annuity
Compounding
Present values
Perpetuities
Q2. Given a share price of $10 and a dividend per annum of $0.5 what would be the cost of
equity if there is no expected growth in the dividend?
A
4%
5%
6%
10%
Q3. If we are calculating the growth rate for dividends using the average method what would
the growth rate be using the following information to 2 decimal places?
Current dividend
5c
4c
7.72%
25%
7.49%
8.33%
Q4. Using Gordons Growth Model what would be the estimated growth rate of the dividends
given the following information?
Profit after tax
20%
60%
8%
10%
12%
14%
Q5. If a loan note (par value = $100) is irredeemable what would be the cost of debt given that
the current market value is $105 and the coupon rate is 8%. The debt is tax deductible and the
current corporation tax rate is 25%. (Calculations to 2 decimal places)
A
5.00%
5.71%
8.00%
8.71%
Q6. If we have a redeemable loan note repayable at par ($100) in one year with a coupon rate of
6% which is currently trading at $95. What is the cost of debt if the tax rate is 30% (to 2 decimal
places).
A
9.68%
4.20%
5.00%
10.00%
Q7. Given that we expect the growth rate of dividends to be 5% and the current market value of
the share is $4.5 ex div. What is the cost of equity if the dividend paid this year is 55c?
A
5.00%
10.83%
12.83%
17.83%
Q8. What is the cost of capital of a bank loan with an interest charge of 10% per annum. Tax is
payable at 35%
A
5.0%
6.5%
10.0%
Unable to be calculated
Q9. Given the following information what is the WACC to 2 decimal places?
Market Value
Return
Debt
$4m
6%
Equity
$40m
12%
9%
10.5%
11.0%
11.45%
Q10. Given the following information relating to a convertible debt would the debtholder elect
to convert or redeem the debt in year 4?
The current market value of a share is $4 and the share is expected to rise by 6% per annum.
The debt is convertible into 20 shares in three years or alternatively redeemable at par ($100).
A
Convert
Redeem
Either
Test 3 Paper F9 Financial Management NPV, IRR and investment appraisal methods
Q1. Why is investment appraisal considered such a critical decision for the organisation?
1
The uncertainty associated with the inflows generated from the investment
The size of the potential investment relative to the size of the business
1 and 2
1 and 3
2 and 3
Q2. Which investment appraisal methods primarily assesses the risk of the project?
A
Payback
ROCE
NPV
IRR
Q3. Which investment appraisal method considers the impact of the investment on accounting
profit?
A
Payback
ROCE
NPV
IRR
Q4. Which are the fundamental reason(s) for time value of money?
1. Inflation
2. Opportunity cost of capital
3 Risk
A
1 and 2
2 only
2 and 3
5%
12%
NPV
+400
-200
9.66%
8%
10.66%
7.33%
Q6. What is the present value of an annuity of $500 payable over 4 years at 10% commencing in
year 2?
A
$1,309`
$1,441
$1,585
$1,703
10
$6,000
$7,434
$9,375
$10,500
Q8. Calculate the value of $1,250 today in 4 years time at a cost of capital of 9%
A
$1,460
$1,700
$1,764
$1,840
Q9. If the cash inflow per annum are $40,000 and the investment is $110,000 what will the
payback period be?
A
2.0 years
2.5 years
2.7 years
3.0 years
Q10. What is the assumed relationship between net cash inflow per annum and profit?
A
11
Q2. Which eminent economist provided the formula to convert real to money rate and vice
versa?
A
Keynes
Smith
Fisher
Friedman
Q3. Which specific investment appraisal technique may be only concerned with the present
value of the costs?
A
Sensitivity analysis
12
Q4. If a project has a revenue per annum of $100,000 and a contribution per annum of $25,000
for 4 years and a NPV of $10,000 and the cost of capital is 8%, what is the amount by which the
sales volume may change before the NPV drops to zero?
A
3%
6%
9%
12%
Q5. If a project has a revenue per annum of $100,000 and a contribution per annum of $25,000
for 4 years and a NPV of $10,000 and the cost of capital is 8%, what is the amount by which the
sales price may change before the NPV drops to zero?
A
3%
6%
9%
12%
Q6. Using asset replacement theory which replacement strategy would be selected from the
following at a discount rate of 10%
Project
PV of cost
1
$8,000
$13,000
$18,000
2 years
3 years
Project 1
Project 2
Project 3
Q7. In capital rationing if the project can be taken in part and the return is proportionate to the
part undertaken which of the following describes that situation?
A
Divisible projects
Q8. In capital rationing which reasons are there for hard capital rationing?
1. Economy wide factors
2. Company specific factors
3. Internal decisions
A
1 only
1 and 2
2 and 3
Q9. If inflation is evident in the question, what is the inflated value of labour in year 4 if we
know that inflation is at 3.5% and the cash flow in real terms is $30,500?
A
$35,000
$34,770
$33,816
$33,703
14
15
5 million
10 million
50 million
60 million
$16m
$20m
$32m
$40m
$3.87
$4.00
$4.64
$5.00
16
40.0%
42.9%
40.7%
41.5%
Turnover ($m)
28.0
24.0
22.0
PBIT ($m)
10.0
8.8
7.5
Earnings ($m)
5.4
4.0
3.8
Dividends ($m)
2.3
2.1
2.0
4.0
4.0
4.0
Reserves ($m)
12.0
10.1
8.3
15.0
15.0
15.0
7.65
4.95
4.08
14.89%
28.36%
30.24%
82.47%
17
14.89%
28.36%
30.24%
82.47%
52.63%
42.59%
52.50%
50.00%
7.52%
3.76%
4.23%
6.41%
21.32%
18.36%
27.76%
6.43%
18
50c
67.5c
72c
81.5c
19
1 and 2
1 and 3
2 and 3
Q2. When considering the traditional theory of capital structure which of the following best
describes the impact on the WACC?
A
Q3. Given that a proxy company from the appropriate industry has an equity beta of 1.70 and
currently has a capital structure (debt:equity) of 30:70 what is the industry sector asset beta (tax
rate = 30%)?
A
1.19
1.31
2.21
2.43
20
The risk of both the financial risk and the systematic risk of the business
The overall risk of the industry including both systematic and unsystematic risk
Q5. If the asset beta for the industry is the 1.6 and the company is financing the project wholly
by equity what will be the equity beta applying to the project?
A
1.0
1.6
2.0
(d/e)
Ke
12%
Kd
6%
6%
7.2%
10.8%
12%
20/80
21
Q7. What is the cost of equity if we are given the following information?
Beta
1.1
Rf
4%
Risk premium
5%
9.5%
9.9%
5.1%
4.8%
Q8. Which of the following are assumptions relating to the use of project specific discount
rates?
1
A risk free return may be earned by investing solely in short-dated government bonds
The risk is calculated in relation to the existing risk suffered by the company
1 and 2
1, 2 and 3
2, 3 and 4
1, 2 and 4
22
Q9. In what circumstance is it necessary to use project specific discount rates rather than the
WACC to appraise investments?
A
New investment
New technology
Q10. If we know the risk free rate of return is 4% and the return on the investment is 10%. If the
beta of the investment is 0.6 what is the market rate of return?
A
6%
10%
14%
23.3%
23
ROCE
ROE
Q2. If you are asked to calculate the financial gearing measure by dividing the debt by equity
what would this be best called?
A
Operational gearing
Capital gearing
Total gearing
Equity gearing
Something else
24
Q4. When raising equity capital as an unlisted company what is the critical initial consideration
that all companies face?
A
Q5. When floating (or listing) a company on the stock exchange, which method is associated
with raising no new capital?
A
Bonus issue
Introduction
Placing
Q6. If the existing share price is $4 and a rights issue is made on a 1 for 4 basis at a discount to
the issue price of 25% what will the theoretical ex-rights price be?
A
$3.0
$3.4
$3.5
$3.8
25
Q7. If a company has an existing share price of $6 and the issue price in a rights issue is $4.5
based on a 1 for 5 issue what is the value of a right per existing share?
A
$0.25
$0.30
$1.23
$1.50
Profitability
Cash flow
Dividend Policy
Legal restrictions
1,2 and 4
1,3 and 4
2,3 and 4
Q9. If a company is unlisted which of the following are ways that it may raise equity capital?
1
venture capital
bonus issue
rights issue
1 and 2
1,2 and 3
1,2 and 4
26
Q10. If a company wishes to list by offering shares to the widest range of possible investors
what method of listing would it use?
A
Placing
Introduction
Rights issue
27
The finance has a redemption date when issued. It provides funding for at least one year and it
offers a fixed return and the cash return is tax deductible.
A
Overdraft
Bonds
Preference shares
Equity
Q2.
The investors are part owners in the business and normally enjoy full voting rights. The cash
return from this investment is not tax deductible
A
Overdraft
Bonds
Preference shares
Equity
Convertibles
Leases
Ordinary shares
Warrants
28
Q4. As a small unlisted company which of the following are most likely sources of finance
1. Debentures
2. Government grants
3. Retained earnings
4. Convertible debt
A
1, 2 and 3
2 and 3
1, 3 and 4
2 and 4
Q5.
Q6 What are the two conflicting issues when managing working capital
A
29
Hire purchase
Finance lease
Operating lease
Q8 What are the specific symptoms of overtrading from the following list
1
1,2, 3 and 5
1,2 and 4
1,3 and 4
2,3 and 5
30
Q9 What measures could be identified when a company assesses the credit status of a new
customer
1. Trade references
2. Published accounts
3. Credit rating agencies
4. Bank references
A
1, 2 and 4
1, 3 and 4
2 and 3
Q10
A company has sales of $75m and its customers take on average 100 days to pay. The overdraft
rate is 7%. By how many days would the company have to decrease the receivables days by to
reduce the cost of receivables to below $1m.
A
30 days
31 days
69 days
71 days
31
Saving $619,178
Saving $19,178
Cost ($380,822)
Cost ($600,000)
Q2. In the EOQ model which of the following cost is assumed to be zero
A
Ordering costs
Holding costs
Stock-out costs
Purchase costs
32
Q3 A company may either use the EOQ or alternatively it may order 1,000 units per order. If it
orders 1,000 units it will benefit from a trade discount of 2% of sales value.
Ordering cost
$15/ order
Holding cost
$10/unit
Monthly demand
5,000 units
Benefit $12,415
Benefit $415
Cost
($415)
Cost
($12,000)
Q4 Which of the following are not likely to be benefits of adopting just in time purchasing
arrangements with suppliers
A
33
$13,876
$14,620
$25,789
$34,873
$34,873
$46,620
$51,962
$69,746
$14,620
$25,789
$46,620
$34,873
34
Q8. A company generates a surplus of $120,000 per annum. The interest rate available to short
term investments is 5% per annum. Transaction costs are $50 for investing in short-term
securities.
Required: using the Baumol model what is the amount that should be invested in short term
securities in each transaction (to the nearest $)
A
$12,000
$15,492
$18,000
$18,342
Q9. When a company is considering whether to finance its working capital it may consider longterm or short-term sources. Which of the following would be considered advantages of using
short-term funding?
1. Cheaper financing cost
2. Relatively easy to arrange
3. Secure over time
4. Matching concept
A
1 and 2
3 and 4
1, 2 and 3
1, 2 and 4
35
Q10. What overall measure of working capital would best illustrate the efficiency of the
organisation?
A
Current ratio
Receivables days
Operating cycle
36
$200m
$250m
$293.75m
$312.5m
50c
40%
15c
6%
6%
1.3
Required
20c
15c
30c
50c
37
Q3 What is the expected annual growth rate for dividends given that the average method is
used?
A
7.6%
10.1%
11.1%
13.3%
Q4 What is the current cost of equity for Company C using the CAPM?
A
6%
12%
13.8%
15.6%
Q5 What is the share price valuation of Company C using the dividend valuation model?
A
145c
159c
541c
595c
38
$: 1.2505
$: 1.2707
Deposit
4.8%
4.5%
4.1%
3.7%
Economic risk
Transaction risk
Translation risk
Political risk
Q7 Using the forward market hedge what should the company receive in dollars?
A
$236,090
$239,904
$375,150
$381,210
39
Q8 Using the money market hedge method what should the company receive in dollars?
A
$239,252
$374,131
$371,212
$352,751
Q10 Which of the following hedging techniques will assist in hedging interest rates over the
long-term?
A
Swaps
40