ACCA Paper F9 FINANCIAL MANAGEMENT

Transcription

1 PL E June 2015 Edition REVISION QUESTION NK S M Paper F9 FINNIL MNGEMENT ecker Professional Education has more than 20 years of experience providing lectures and learning tools for Professional Qualifications. We offer candidates high-quality study materials to maximise their chances of success.

2 ecker Professional Education, a global leader in professional education, has been developing study materials for for more than 20 years, and thousands of candidates studying for the Qualification have succeeded in their professional examinations through its Platinum and Gold LP training centers in entral and Eastern Europe and entral sia.* ecker Professional Education has also been awarded pproved ontent Provider Status for materials for the iploma in International Financial Reporting (ipifr). Nearly half a million professionals have advanced their careers through ecker Professional Education's courses. Throughout its more than 50-year history, ecker has earned a strong track record of student success through world-class teaching, curriculum and learning tools. We provide a single destination for individuals and companies in need of global accounting certifications and continuing professional education. *Platinum Moscow, Russia and Kiev, Ukraine. Gold lmaty, Kazakhstan ecker Professional Education's Study Materials ll of ecker s materials are authored by experienced lecturers and are used in the delivery of classroom courses. Study System: Gives complete coverage of the syllabus with a focus on learning outcomes. It is designed to be used both as a reference text and as part of integrated study. It also includes the Syllabus and Study Guide, exam advice and commentaries and a Study Question ank containing practice questions relating to each topic covered. Revision Question ank: Exam style and standard questions together with comprehensive answers to support and prepare students for their exams. The Revision Question ank also includes past examination questions (updated where relevant), model answers and alternative solutions and tutorial notes. Revision Essentials*: condensed, easy-to-use aid to revision containing essential technical content and exam guidance. *Revision Essentials are substantially derived from content reviewed by s examining team. SMPLE

3 PPER F9 FINNIL MNGEMENT REVISION QUESTION NK For Examinations to June 2015 SMPLE 2015 evry/ecker Educational evelopment orp. ll rights reserved. (i)

4 No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, editor or publisher. This training material has been prepared and published by ecker Professional evelopment International Limited: 16 Elmtree Road Teddington TW11 8ST United Kingdom opyright 2015 evry/ecker Educational evelopment orp. ll rights reserved. The trademarks used herein are owned by evry/ecker Educational evelopment orp. or their respective owners and may not be used without permission from the owner. No part of this training material may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system without express written permission. Request for permission or further information should be addressed to the Permissions epartment, evry/ecker Educational evelopment orp. cknowledgement SMPLE Past examination questions are the copyright of the ssociation of hartered ertified ccountants and have been reproduced by kind permission. (ii) 2015 evry/ecker Educational evelopment orp. ll rights reserved.

5 REVISION QUESTION NK FINNIL MNGEMENT (F9) ONTENTS Question Page nswer Marks ate worked MULTIPLE HOIE QUESTIONS (Section Questions) 1 The Financial Management Function The Financial Management Environment Investment ecisions iscounted ash Flow Techniques pplications of iscounted ash Flow Techniques Project ppraisal under Risk Equity Finance and ebt Finance ost of apital apital sset Pricing Model Working apital Management Inventory Management ash Management Management of ccounts Receivable and Payable Risk Management usiness Valuation and Ratio nalysis Section of the Examination will not include questions with less than 10 marks. Those included below provide additional question practice on topics that could be examined within longer questions. THE FINNIL MNGEMENT FUNTION 1 ompany objectives The financial management function Financial management decisions ( J10) Value for money ( J03) Non-For-Profit ( 11) QSX o ( J10) gency problem ( 08) Listed company objectives ( J13) Goal congruence ( 13) THE FINNIL MNGEMENT ENVIRONMENT 10 Money markets Tagna ( J03) Financial intermediaries ( 09) SMPLE INVESTMENT EISIONS 13 Payback and ROE ( 04) irectors views ( 10) ISOUNTE SH FLOW TEHNIQUES 15 OKM o ( J10) Limitations of NPV Ridag o ( J12) QK o ( 12) HW ( J13) arn o ( 13) evry/ecker Educational evelopment orp. ll rights reserved. (iii)

6 FINNIL MNGEMENT (F9) REVISION QUESTION NK Question Page nswer Marks ate worked PPLITIONS OF ISOUNTE SH FLOW TEHNIQUES 21 Replacement cycles ( J10) asril o ( 03) avic o ( 06) SOP o ( 09) Equivalent annual benefit ( 09) Spot o ( 13) PROJET PPRISL UNER RISK 27 Risk and uncertainty ( 07) Warden o ( 11) Incorporating risk ( J12) EQUITY FINNE N ET FINNE 30 Islamic finance Short-term finance SME finance ( 01) Nugfer o ( 10) ar o ( 11) ividend policy ( 10) Zigto o ( J12) onds, placing and venture capital ( J13) Riba ( 13) OST OF PITL N GERING 39 KFP o ( J09) o ( 09) K o ( 12) MH o ( J13) apital structure and company value ( 13) PITL SSET PRIING MOEL 44 Project-specific discount rate ( 08) J o ( 10) usiness, financial and systematic risk ( J12) PM and risk ( J13) ard o ( 13) SMPLE WORKING PITL MNGEMENT 49 lin ( J04) old o ( 11) XP o ( 09) Working capital policy ( J12) TG o ( J13) Objectives, role and policy ( 13) (iv) 2015 evry/ecker Educational evelopment orp. ll rights reserved.

7 REVISION QUESTION NK FINNIL MNGEMENT (F9) Question Page nswer Marks ate worked INVENTORY MNGEMENT 55 EOQ and JIT FLG o ( J08) Product KN5 ( 10) SH MNGEMENT 58 aumol model ( 05) HRG o ( J09) Wobnig ( J12) ash and receivables management ( 12) MNGEMENT OF OUNTS REEIVLE N PYLE 62 PK ( 07) WQZ o ( 10) older o ( 11) KXP ( 12) Plot o ( 13) RISK MNGEMENT 67 GN o ( 09) Gorwa o ( 08) oluje o ( 08) Zigzag ( J12) Interest rate risk ( 12) N o ( 12) Types of currency risk ( J13) USINESS VLUTION 74 NSX ( J10) X o loser ( 11) Phobia o ( 07) Efficient Markets Hypothesis ( 07) NN o ( 10) orhig o ( J12) WWW o ( 12) GXG o ( J13) SMPLE SPEIMEN EXMINTION PPER MQ at o GWW o ZPS o PV o o evry/ecker Educational evelopment orp. ll rights reserved. (v)

8 FINNIL MNGEMENT (F9) REVISION QUESTION NK (vi) 2015 evry/ecker Educational evelopment orp. ll rights reserved. Formula Sheet Economic order quantity = h o 2 Miller Orr Model Return point = Lower limit + ( 1 / 3 spread) Spread = 3 1 interest rate cash flows variance of transaction cost The apital sset Pricing Model E(r i ) = R f + β i (E(r m ) R f ) The asset beta formula βa = e d e e β T 1 V V V + d d e d β T 1 V V T 1 V The Growth Model P O = g g e O r 1 Gordon s growth approximation g = br e The weighted average cost of capital W = e d e e K V V V + T K V V V d d e d 1 The Fisher formula (1 + i) = (1 + r) (1 + h) Purchasing power parity and interest rate parity S 1 = S 0 b c h 1 h 1 F 0 = S 0 b c i 1 i 1 SMPLE

9 REVISION QUESTION NK FINNIL MNGEMENT (F9) Present Value Table Present value of 1 i.e. (1 + r) n where r = discount rate n = number of periods until payment iscount rate (r) Periods (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% SMPLE evry/ecker Educational evelopment orp. ll rights reserved. (vii)

10 FINNIL MNGEMENT (F9) REVISION QUESTION NK nnuity Table Present value of an annuity of 1 i.e. 1 ( 1 r) r where r = discount rate n = number of periods n iscount rate (r) Periods (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% SMPLE (viii) 2015 evry/ecker Educational evelopment orp. ll rights reserved.

11 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) MULTIPLE HOIE QUESTIONS 1 The Financial Management Function 1.1 Which of the following is one of the 3Es value for money concept? Earnings Equity Evaluation Effectiveness 1.2 Which of the following is most consistent with maximising shareholder wealth? Profit maximisation Market share growth Minimising the firm s cost of capital Maximising earnings per share 1.3 Which of the following statements is correct? Profit maximisation results in shareholder wealth maximisation ivorce of ownership and control can lead to agency costs Maximising earnings per share results in shareholder wealth maximisation Increasing market share will lead to increased shareholder wealth 1.4 Which of the following is the best indicator of shareholder wealth? Profit before interest and tax Sales revenues Market price of the share Price/earnings ratio 1.5 Which of the following is not a consequence or symptom of the agency problem? Managers diverting funds into their own pet projects Managers selecting quick payback projects Managers engaging in empire building Managers increasing the firm s level of financial gearing 1.6 Hathaway o has just paid a dividend of 21 cents per share and its share price is $3 50 per share. One year ago its share price was $3 60 per share. Working to one decimal place, what is the total shareholder return over the period? 8 9% 8 6% 3 1% 0 9% 1.7 Which of the following actions is MOST likely to increase shareholder wealth? SMPLE The average cost of capital is increased by a recent financing decision The firm s cash operating cycle becomes longer The board of directors decides to invest in a project with a quick payback period The annual report declares full compliance with the corporate governance code 2015 evry/ecker Educational evelopment orp. ll rights reserved. 1

12 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 1.8 Which of the following statements concerning not-for-profit organisations is correct? Not-for-profit organisations often have multiple stakeholders with conflicting objectives The provision of value for money embodies economy, equality and effectiveness Not-for-profit organisations usually have one dominant stakeholder The key objective of not-for-profit organisations is to make profits 1.9 The following are extracts from the statement of profit or loss of IQ o: $000 Sales income 60,000 ost of sales 50,000 Profit before interest and tax 10,000 Interest 4,000 Profit before tax 6,000 Tax 4,500 Profit after tax 1,500 80% of the cost of sales is variable costs. What is the operational gearing of IQ o? 2 0 times 2 5 times 0 5 times 3 0 times 1.10 Which of the following statements concerning financial management are correct? (1) It is concerned with investment decisions, financing decisions and dividend decisions (2) It may use information from management accounting (3) It must hedge all of the firm s currency risks 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and Which ONE of the following statements concerning a company with low operating gearing is true? SMPLE change in sales will have a relatively small impact on profits The company has a relatively low proportion of debt finance The company will have higher risk and increased potential return The company will have low interest cover (22 marks) evry/ecker Educational evelopment orp. ll rights reserved.

13 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 2 The Financial Management Environment 2.1 Which of the following is least likely to act as a financial intermediary? Insurance company Pension fund redit rating agency Islamic bank 2.2 Which of the following lists of securities is ranked in order of increasing risk to the investor? Ordinary share; Unsecured loan; Preference share Unsecured loan; Preference share; Ordinary share Preference share; Unsecured loan; Ordinary share Ordinary share; Preference share; Unsecured loan 2.3 Which of the following best describes commercial paper? Secured long-term loan notes issued by companies Secured short-term loan notes issued by companies Unsecured long-term loan notes issued by companies Unsecured short-term loan notes issued by companies 2.4 Which of the following would be LEST likely to be a function of a treasury department? Managing relationships with banks Liquidity management including investment of surplus funds urrency management Investment appraisal 2.5 Which of the following is likely to have the LOWEST expected rate of return? Unsecured bank loan Preference shares Secured bonds Ordinary shares 2.6 Which of the following statements are features of money market instruments? (1) Interest-bearing instruments usually trade at less than face value (2) The yield on commercial paper is usually higher than that on treasury bills (3) Negotiable instruments can be sold before their maturity date SMPLE 2 only 1 and 3 only 2 and 3 only 1, 2 and evry/ecker Educational evelopment orp. ll rights reserved. 3

14 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 2.7 Governments have a number of economic targets as part of their fiscal policy. Which of the following targets relate predominantly to fiscal policy? (1) Increasing tax revenue (2) ontrolling the growth in the size of the money supply (3) Reducing public expenditure (4) Keeping interest rates low 1 only 1 and 3 2 and 4 only 2, 3 and Freely fluctuating exchange rates perform which of the following functions? They tend to correct a trade surplus or deficit They make imports cheaper and exports more expensive They eliminate the opportunity for currency speculation They eliminate business exposure to currency risk 2.9 Supply side economic policy is designed for what purpose? To raise the level of demand in the economy To increase the provision of state services To improve the ability of the economy to produce goods and services To reduce interest rates by increasing the money supply 2.10 Which ONE of the following government policies would NOT tend to raise national income over time? 3 Investment ecisions Increased expenditure on infrastructure Tax cuts to encourage higher spending by consumers Supply side policies to increase labour flexibility Incentives to encourage personal saving 3.1 Harvey o is evaluating a capital investment proposal with the following information: Initial cost $500,000 Life 10 years nnual operating cash inflow $200,000 Scrap value $100,000 The investment will be depreciated using the straight-line method. What is the payback period for this investment? 3.25 years 2.67 years 2.5 years 2 years (20 marks) SMPLE evry/ecker Educational evelopment orp. ll rights reserved.

15 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 3.2 project requires an initial outlay of $1,000. The forecast cash inflows are: Year 1 $200 Year 2 $200 Year 3 $400 Year 4 $400 What is the investment s payback period? 4.0 years 3.5 years 3.4 years 3.0 years 3.3 Which of the following statements about investment decision making methods is true? The discounted payback method takes into account cash flows for all periods The payback method ignores all cash flows after the end of the payback period The net present value rule is to accept investment opportunities when their rates of return exceed the company s weighted avergae cost of capital The internal rate of return rule is to accept the investment if the weighted average cost of capital is greater than the internal rate of return 3.4 Which of the following statements is correct regarding investment decision making? Opportunity costs are not relevant The accounting rate of return considers the time value of money strength of the payback method is that it is based on profitability apital budgeting is based on predictions of an uncertain future 3.5 company with an 8% cost of capital purchases a machine for $43,000. The forecast operating cash flows generated by the machine are as follows: Year 1 $10,000 Year 2 $15,000 Year 3 $20,000 Year 4 $27,000 What is the discounted payback period in years? SMPLE Kuchman Kookies will invest $100,000 in new equipment. The firm s discount rate is 8% and the operating cash flows from the investment are expected to be as follows: Year 1 $35,000 Year 2 $38,000 Year 3 $25,000 Year 4 $20,000 Year 5 $10, evry/ecker Educational evelopment orp. ll rights reserved. 5

16 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK What is the investment s payback period in years? iscounted ash Flow Techniques (12 marks) 4.1 Gunning Industries is considering investment in a new machine. The following information is provided: The new machine will cost $190,000 and has a five year life with zero scrap value. The investment in the new machine will also require an increase in working capital of $35,000. Tax-allowable depreciation is available on a straight-line basis. Gunning is subject to a 40% tax rate and has a 10% cost of capital. What is the present value of the tax saving on the first year s tax-allowable depreciation? $13,817 $15,200 $16,762 $20, Wendy s Sandwich Shop acquires an asset for $100,000 that has no residual value and a 10- year life. Wendy s tax rate is 40%. Tax-allowable depreciation is available on a straight-line basis. What is Wendy s annual tax saving from the asset? $10,000 $6,000 $4,000 $2, Which of the following events would decrease the internal rate of return of a potential investment? SMPLE ecreased tax-allowable depreciation available on the investment ecreased working capital requirements ecreased cost of capital Using reducing balance, instead of straight-line depreciation 4.4 Which of the following changes would result in the highest present value for a series of cash flows? $100 decrease in taxes each year for four years $100 decrease in the cash outflow each year for three years $100 increase in disposal value at the end of four years $100 increase in cash inflow each year for three years evry/ecker Educational evelopment orp. ll rights reserved.

17 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 4.5 Which of the following is an advantage of the net present value method? It is measured in time, not dollars It uses accrual basis, not cash basis accounting for a project It uses the accounting rate of return It accounts for compounding of returns 4.6 o plans to buy a new machine. The cost of the machine is $100,000 and it has a fiveyear life with no disposal value. The machine will be depreciated on a straight line basis which matches the policy for tax-allowable depreciation. The machine will increase annual operating cash flows by $50,000. s profit tax rate is 35%. What is the annual after-tax cash flow generated by the machine? $19,500 $30,000 $32,500 $39, company has identified two mutually-exclusive projects which have an equivalent effect on the risk profile of the company: Project I Project II iscounted payback period 2.8 years 3.2 years Net present value $17,200 $15,700 Internal rate of return 18% 22% ccounting rate of return 19% 21% The company s cost of capital is 15%. ssuming that the directors wish to maximise shareholder wealth and no shortage of capital is expected, which project should the company choose? Project I because it has the shorter payback period Project I because it has the higher net present value Project II because it has the higher internal rate of return Project II because it has the higher accounting rate of return 4.8 project has an initial cash outflow followed by several years of cash inflows. What would be the effects on the internal rate of return (IRR) of the project and its discounted payback period (PP) of a decrease in the company s cost of capital? SMPLE IRR PP ecrease ecrease ecrease Increase No change ecrease No change Increase 2015 evry/ecker Educational evelopment orp. ll rights reserved. 7

18 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 4.9 company has a money cost of capital of 21% per year. The general inflation rate is 9% per year. What is the real cost of capital? 9% 11% 12% 21% 4.10 The following data is relevant to the evaluation of a particular project: ost of capital in real terms General inflation rate 10% per year 5% per year Specific inflation rate of the project s annual cash inflow 6% per year Specific inflation rate of the project s annual cash outflow 4% per year Which of the following sets of adjustments will lead to the correct calculation of net present value? ash inflow ash outflow iscount rate 5% annual increase 5% annual increase 15.5% 6% annual increase 4% annual increase 15.0% 6% annual increase 4% annual increase 15.5% Unadjusted Unadjusted 10.0% 5 pplications of iscounted ash Flow Techniques 5.1 Which of the following is a limitation of the profitability index? It uses accounting profits rather than cash flows It ignores the time value of money It is inconsistent with the goal of shareholder wealth maximisation It cannot deal with multi-period capital rationing (20 marks) 5.2 o is trying to decide between keeping an existing machine and replacing it with a new machine. The old machine was purchased just two years ago for $50,000 and had an expected life of 10 years. It now costs $1,000 a month for maintenance and repairs due to a mechanical problem. new machine is being considered to replace it at a cost of $60,000. The new machine is more efficient and it will only cost $200 a month for maintenance and repairs. The new machine has an expected life of 10 years. In deciding to replace the old machine, which of the following factors should not consider? SMPLE ny estimated scrap value on the old machine The original cost of the old machine The estimated useful life of the new machine The lower maintenance cost on the new machine evry/ecker Educational evelopment orp. ll rights reserved.

19 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 5.3 company is considering whether to buy or lease two assets: sset 1 has a 10-year economic life with a zero residual value. It can be purchased for $80,000 payable immediately. lternatively, it can be leased with 10 lease rentals of $12,000 per year payable annually in advance. sset 2 has a five-year economic life. It can be purchased for $81,000 payable immediately and will have a residual value of $40,000 after five years. lternatively, it can be leased with five lease rentals of $14,000 per year payable annually in arrears. The appropriate discount rate is 10% per year. How should the company finance each asset? sset 1 sset 2 Lease Lease Lease uy uy Lease uy uy 5.4 The cost of purchasing a machine is $100,000 payable immediately. Its disposal value is expected to be $10,000 in five years time. The same asset can be leased for a period of five years with rentals of $25,000 payable annually in advance. What is the net present value (to the nearest $10) to the lessor if it purchases the machine then leases it to the user on the above terms if it applies an annual discount rate of 10%? $990 positive $10,460 positive $1,960 negative $11,440 negative 5.5 machine costing $150,000 has a useful life of eight years, after which time its estimated resale value will be $25,000. nnual running costs will be $5,000 for the first three years of use and then $8,000 for each of the next five years. ll running costs are payable on the last day of the year to which they relate. Using a discount rate of 20%, what is the equivalent annual cost of the machine (to the nearest $100)? SMPLE $46,600 $43,900 $43,300 $21,100 (10 marks) 2015 evry/ecker Educational evelopment orp. ll rights reserved. 9

20 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 6 Project ppraisal under Risk 6.1 uring a typical year, eet o experiences the following power cuts: Number of power cuts Number of per month months Each power cut results in additional costs of $400. For $500 per month, eet can lease a generator to provide electricity during power cuts. If eet leases the generator what is the estimated annual savings/ (additional cost)? ($3,600) ($1,200) $1,600 $1, Excalibur o has developed a model to predict sales levels for its beachwear based on longrange weather forecasts. The probability of various temperatures and related sales units are as follows: Unit sales Temperature Probability 10,000 below 20 5% 30, % 50, % 40, % 25,000 over 32 5% What sales volume, in units, would Excalibur o anticipate using the expected value approach? 31,000 40,250 50, , shopkeeper has determined the following probability distribution of weekly demand for one of his most popular products. emand Probability The shopkeeper must order each week s sales in advance and any items left in inventory at the end of the week are scrapped. The items cost the shopkeeper $2.50 and he sells them for $3 each. SMPLE evry/ecker Educational evelopment orp. ll rights reserved.

21 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) What is the optimal quantity to be ordered each week? company has constructed a model for predicting profits. Net profit or loss depends on two variables: gross profit and overheads. The following are independent probability distributions of the two variables. Gross profit Probability Overheads Probability $ $ 12, , , , , , , , What is the probability that the company will make a positive net profit? drian is contemplating purchasing for $60,000 a machine which he will use to produce 10,000 disks per year for five years. These disks will be sold for $9 each and unit variable costs are expected to be $5. Incremental fixed costs will be $14,000 per year for production costs and $5,000 per year for selling and administration costs. drian has a discount rate of 10% per year. y how many units must the estimate of production and sales volume fall for the project to be regarded as not worthwhile? 575 1,293 1,623 2, The following financial information relates to an investment project: $000 Present value of sales revenue 50,025 Present value of variable costs 25,475 Present value of contribution 24,550 Present value of fixed costs 18,250 Present value of operating income 6,300 Initial investment 5,000 SMPLE 2015 evry/ecker Educational evelopment orp. ll rights reserved. 11

22 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK What is the sensitivity of the net present value of the investment project to a change in fixed costs? 7 1% 5 3% 5 1% 2 6% 7 Equity Finance and ebt Finance 7.1 What is a major advantage of issuing long-term debt? Increased financial flexibility The reduction in profit before tax ecreased financial risk The reduction of shareholders control over the company (12 marks) 7.2 When issuing new bonds what would be the primary reason for a debt covenant limiting the firm s future level of debt? To cause the firm s share price to rise To lower the company s credit rating To reduce issue costs To reduce the coupon rate 7.3 ander o is determining how to finance some long-term projects. ander has decided that it prefers the flexibility of no fixed servicing cost, no fixed maturity date and an increase in the credit rating of the company. Which of the following would best meet ander s financing requirements? Irredeemable bonds Ordinary shares Long-term bank loans Preference shares 7.4 Which of the following statements is/are correct regarding corporate debt and equity securities? (1) oth debt and equity holders have an ownership interest in the company. (2) oth debt and equity securities have an obligation to pay income. 1 only 2 only oth 1 and 2 Neither 1 nor Which of the following types of bonds is most likely to maintain a constant market value? SMPLE Zero-coupon Floating-rate Irredeemable onvertible evry/ecker Educational evelopment orp. ll rights reserved.

23 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 7.6 company currently has 1,000 ordinary shares in issue and no debt. It has the choice of raising an additional $100,000 by issuing 9% long-term debt, or issuing 500 ordinary shares. The company has a 40% tax rate. What level of earnings before interest and taxes (EIT) would result in the same earnings per share (EPS) for the two financing options? $27,000 $21,000 $18,000 $10, company currently has 10 million $1 shares in issue with a market value of $3 per share. The company wishes to raise new funds using a 1 for 4 rights issue. The resulting theoretical ex-rights price per share has been calculated as $2 80. How much new finance was raised? $2,500,000 $4,000,000 $5,000,000 $7,000, Which of the following may be regarded as an advantage to existing shareholders of listing the firm on a major stock market? Reduced disclosure requirements Larger dividends can be paid Shares become more marketable Reduced risk of takeover 7.9 Which of the following defines dividend cover? ividend per share divided by earnings per share. Earnings per share divided by dividend per share. Share price divided by dividend per share. Retained profit per share divided by dividend per share 7.10 The Stock Exchange may provide a quotation for a company s existing shares without that company making any new shares available to the market. What is this method of obtaining a quotation called? SMPLE n offer for sale n introduction placing scrip issue 2015 evry/ecker Educational evelopment orp. ll rights reserved. 13

24 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 7.11 Which of the following is prohibited under Islamic financing principles? (1) The use of debt (2) The financing of immoral activities (3) The use of derivatives 2 only 1 and 3 1, 2 and 3 2 and Which of the following statements concerning a rights issue are correct? (1) The new shares are normally issued at a discount to the existing price (2) There will be no change in shareholder wealth (3) The main purpose of a rights issue is to raise finance (4) The new shareas must be issued to the existing shareholders 1, 2 and 3 only 2, 3 and 4 only 1, 3 and 4 only 1, 2 and 4 only 7.13 Which of the following statements concerning a bonus (scrip) issue is correct? The new shares are issued at par value Earnings per share would be expected to rise The main purpose of a bonus issue is to raise finance The bonus shares do not carry voting rights 7.14 Which of the following is the correct definition of a warrant? Security or collateral provided for debt Shares issued in lieu of a cash dividend Restritive covenants written into debt contracts Share options attached to a debt issue 7.15 Which of the following is an example of supply chain finance? Finance raised to invest in supply chain infrastructure Taking loans from suppliers Selling a sales invoice to a customer s bank for immedidate payment Issuing shares to a supplier 7.16 Which of the following is NOT true of peer-to-peer (P2P) lending? SMPLE It can also be referred to as debt-based crowdfunding It involves individuals lending money to other individuals or to small businesses It requires a financial institution to act as an intermediary It is an example of microfinance evry/ecker Educational evelopment orp. ll rights reserved.

25 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 7.17 Which of the following statements concerning crowdfunding is correct? 8 ost of apital It involves either issuing shares or loans to large group of investors It is only available to unlisted companies Reward-based crowdfunding does not raise any cash for the business It is particularly appropriate for early stage seed finance (34 marks) 8.1 Which of the following usually determines the optimal capital structure for an organisation? Maximum degree of financial gearing Maximum degree of operating gearing Lowest weighted average cost of capital apital structure used by competitors 8.2 Which of the following rates is most commonly compared to a project s internal rate of return to evaluate whether to make an investment? Risk-free rate ccounting Rate of Return Weighted average cost of capital ost of equity 8.3 company with a tax rate of 30% has the following capital structure: Weight Instrument Pre-tax cost of capital 40% onds 6% 50% Ordinary shares 12% 10% Preference shares 8% What is the company s weighted average cost of capital? 9.2% 7.7% 8.2% 8.5% 8.4 company has in issue 9% $20 nominal value preference shares. Their current market price is $40 and the company s tax rate is 30%. SMPLE What is the company s cost of preference shares? 4.5% 3.15% 9.0% 6.3% 2015 evry/ecker Educational evelopment orp. ll rights reserved. 15

26 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 8.5 Which three elements are needed to estimate the cost of equity using the dividend growth model? urrent dividends per share, expected growth rate in earnings per share and current market price per share urrent earnings per share, expected growth rate in dividends per share and current market price per share urrent earnings per share, expected growth rate in earnings per share and current book value per share urrent dividends per share, expected growth rate in dividends per share and current market price per share 8.6 firm has a share price of $30, a forecast dividend per share after one year of $3 and thereafter an expected growth rate of 10%. What is the firm s cost of equity? 21.1% 12.2% 11.0% 20.0% 8.7 firm has a bank loan with a 10% interest rate. The firm also has in issue 8% preference shares trading at par and has estimated that its cost of ordinary shares is 18%. The firm has a 30% tax rate. What is the weighted average cost of capital if the firm uses a capital structure comprising 50% debt and an even split between preference and ordinary shares? 11.50% 10.00% 9.40% 8.05% 8.8 firm s weighted average cost of capital is minimised when its debt to equity ratio is 4:1. Which of the following statements is most accurate? The value of the firm is maximised when it uses more equity than debt higher ratio than 4:1 means debt holders will require a lower return higher ratio than 4:1 means equity holders will require a higher return The value of the firm will be maximised if it is 75% debt financed SMPLE evry/ecker Educational evelopment orp. ll rights reserved.

27 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 8.9 Recent statistics relating to the ordinary shares of alc o, a quoted company, are as follows: ividend (just paid) 5 cents verage annual growth rate of dividends 10% ividend cover 2.4 Price/earnings ratio 8 What is alc o s cost of equity? 13.8% 15.2% 15.7% 23.8% 8.10 firm has achieved an average growth in dividends over the last five years of 10.5% per year. It is now widely believed that the long-run average annual dividend growth rate will be 9.16% per year. The firm s current dividend yield is 4.8%. What is the firm s cost of equity? 13.96% 14.40% 15.30% 15.80% 8.11 Which of the following statements concerning capital structure theory is correct? In the traditional view, there is a linear relationship between the cost of equity and financial risk Modigliani and Miller said that, in the absence of tax, the cost of equity would remain constant Pecking order theory does not suggest an optimal debt to equity ratio Modigliani and Miller said that, in the presence of tax, the weighted average cost of capital would remain constant 9 apital sset Pricing Model (22 marks) 9.1 olt o has an equity beta factor of 1.15 and an asset beta factor of The risk-free rate of return is 8.5% and the market return is estimated at 12.4%. The corporate tax rate is 25%. SMPLE What is olt s cost of equity geared? 11.82% 12.99% 9.74% 14.26% 2015 evry/ecker Educational evelopment orp. ll rights reserved. 17

28 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 9.2 The risk-free rate of return is 3% and the market premium is 6.5%. firm s equity beta is 1.15 and asset beta What will the firm s cost of equity be if it redeems all outstanding debt? 7.0% 10.5% 8.5% 6.0% 9.3 firm s equity beta is 1.10 and its asset beta is The market premium is 4.50% and the risk-free rate 3% What is the firm s cost of equity geared? 7.95% 4.65% 6.83% 4.28% 9.4 What type of risk cannot be eliminated through diversification? usiness risk Unsystematic risk Financial risk Systematic risk 9.5 The risk-free rate of return is 6% and the required return on a security with a beta factor of 1 2 is 15 6%. What is the required annual rate of return on the market portfolio? 11 52% 13 00% 14 00% 17 52% 9.6 The beta of company X s shares is 1 6, the risk free rate is 5% and the required return on company X s shares is 16 2%. ompany Y is quoted in the same stock market, but its shares have a beta of 1 4. What is the required rate of return on company Y s shares? 12 0% 13 0% 13 2% 14 8% 9.7 Which of the following measures business risk? SMPLE Equity beta ebt beta Volatility of net income sset beta evry/ecker Educational evelopment orp. ll rights reserved.

29 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 9.8 Which of the following are assumptions of the capital asset pricing model? (1) Linear relationship between risk and required return (2) onstant dividend growth rate (3) Perfect capital markets 2 only 1 and 3 1, 2 and 3 2 and 3 10 Working apital Management 10.1 Which of the following would increase the net working capital of a firm? ash collection of accounts receivable Refinancing of accounts payable with a two-year bank loan Payment to suppliers Payment of a dividend (16 marks) 10.2 uring the year, Mason o s current assets increased by $120,000 and current liabilities decreased by $50,000. What was the effect on net working capital? Increased by $70,000 ecreased by $170,000 Increased by $170,000 ecreased by $70, Which of the following indicates that a company is becoming more conservative in its working capital funding policy? Increase in the ratio of current liabilities to non-current liabilities ecrease in the operating cycle ecrease in the current ratio Increase in the ratio of long-term finance to current liabilities 10.4 Which of the following may indicate overtrading? Significant new issues of long-term finance Rising profits but falling margins Rising receivables turnover Falling revenues 10.5 Which working capital financing policy exposes the firm to the greatest risk of being unable to meet its obligations as they fall due? SMPLE Financing fluctuating current assets with long-term debt Financing permanent current assets with long-term debt Financing permanent current assets with short-term debt Financing fluctuating current assets with short-term debt 2015 evry/ecker Educational evelopment orp. ll rights reserved. 19

30 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 10.6 company has a current ratio of 2 3 and a quick ratio of 0 8. It increases its overdraft in order to buy more inventory as a cash purchase. What will happen to the company s ratios as a result of this transaction? urrent ratio Quick ratio Increase Increase Increase ecrease ecrease Increase ecrease ecrease 10.7 Which of the following is LEST likely to characterise overtrading? Increased short-term borrowing Increased cash balances Increased revenue Reduced working capital 10.8 The following information has been calculated for o: Trade receivables collection period Raw material holding period Length of the production cycle redit taken from suppliers Finished goods holding period What is the length of the working capital cycle? 3 days 27 days 57 days 169 days 25 days 24 days 30 days 56 days 34 days 10.9 Which of the following statements concerning working capital management are correct? (1) The twin objectives of working capital management are profitability and liquidity (2) n aggressive approach to working capital financing can increase profitability (3) Poor working capital management is a signal of overtrading 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 SMPLE (18 marks) evry/ecker Educational evelopment orp. ll rights reserved.

31 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 11 Inventory Management 11.1 Which of the following would affect the optimal level of inventory? (1) Holding cost per unit of inventory (2) urrent level of inventory (3) ost of placing an order for inventory (4) emand 1, 2 and 3 only 2, 3 and 4 only 1, 3 and 4 only 1, 2 and 4 only 11.2 In inventory management, which of the following will tend to increase the level of safety stock? Holding cost increases ost of running out of inventory decreases Variability of lead-time increases Reliability of demand forecasting increases 11.3 Which of the following assumptions is associated with the economic order quantity model? The holding cost per unit will vary with quantity ordered The cost of placing an order will vary with quantity ordered Holding costs depend on the average level of inventory The purchase cost per unit will vary based on quantity discounts 11.4 To measure inventory management performance, a company monitors its inventory turnover ratio. Selected data from the company s accounting records show the following: urrent year Prior year nnual sales 2,525,000 2,125,000 Gross profit 40% 35% Opening finished goods inventory for the current year was 15% of the prior year s annual sales volume at cost and closing finished goods inventory was 22% of the current-year s annual sales volume at cost. What was the company s inventory turnover for the current year? 4.55 times 5.61 times 6.51 times 6.81 times 11.5 Which of the following statements about the economic order quantity (EOQ) and the reorder level (ROL) are true? SMPLE The EQO determines the ROL The ROL determines the EOQ oth are influnced by demand oth are influnced by lead time 2015 evry/ecker Educational evelopment orp. ll rights reserved. 21

32 FINNIL MNGEMENT (F9) REVISION MULTIPLE HOIE QUESTION NK 11.6 Which of the following is LEST relevant to the economic order quantity model for inventory? Safety stock nnual demand Holding costs Order costs 11.7 Which of the following is/are usually seen as benefits of the just-in-time approach to inventory management? (1) Reduced risk of stock outs (2) Reduced holding holds (3) Reduced dependence on suppliers 2 only 1 and 3 only 2 and 3 only 1, 2 and 3 12 ash Management 12.1 The FO of Lang o wants to earn a higher return on the company s cash holdings. (14 marks) Which of the following comparable maturity investments will earn Lang the highest expected return? ertficates of deposit Treasury bills ommercial paper ank deposits 12.2 Which of the following securities has the least amount of default risk? orporate bonds Treasury bills ommercial paper ills of exchange 12.3 Which of the following best describes the risk associated with the ability to sell a shortterm investment quickly without significant impact on the price? SMPLE Interest rate risk Purchasing power risk Financial risk Liquidity risk evry/ecker Educational evelopment orp. ll rights reserved.

33 REVISION MULTIPLE HOIE QUESTION NK FINNIL MNGEMENT (F9) 12.4 Which of the following statements about the Miller-Orr cash management model is/are true? (1) The greater the variability in cash flows, the greater is the spread between the upper and lower cash balance limits. (2) When short-term investments are liquidated the firm s cash balance should return to the lower limit. 1 only 2 only oth 1 and 2 Neither 1 nor company uses the aumol cash management model. ash disbursements are constant at $20,000 each month. Short-term investments yield 5% a year, while cash held in the company s bank account earns zero interest. Switching costs (that is, for each purchase or sale of short-term investments) are $30 for each transaction. What is the optimal amount (to the nearest $100) to be transferred in each transaction? $500 $1,700 $4,900 $17, Which is the following is an assumption of the aumol model but not of the Miller-Orr model? onstant usage of cash Holding cash incurrs an opportunity cost Fixed commission for switching between cash and cash equivalents Variability of cash flows 13 Management of ccounts Receivable and Payable (12 marks) 13.1 supplier offers a 3% discount for payment within 10 days or full payment within 45 days. ssuming a 360-day year what is the annualised cost of not taking the discount? 37.11% 36.00% 24.74% 31.81% SMPLE 13.2 company has daily sales of $150,000. debt factor has guaranteed to reduce the company s receivables collection time by four days for a monthly fee of $2,500. ash surpluses can be invested in money market deposits yielding 4% per annum. What is the additional annual income/(loss) from using the cash management service? $6,000 $(6,000) $12,000 $(12,000) 2015 evry/ecker Educational evelopment orp. ll rights reserved. 23