ACCA F9 - Financial Management Multiple Choice Questions for June 2015 Exam

Transcription

1 F9 - Financial Management Multiple hoice Questions for June 2015 Exam F9 test 1 Introduction to financial management and governance Q1. What is the role of financial management? To prepare financial statements for internal use by management To prepare financial statements for external use by shareholders To manage the link between the company and the external environment to do with financial decisions? To manage the internal operations of the business Q2. When considering financial management would it normally be considered as which of the following categories? n operational function tactical function strategic function n institutional function Q3. When considering a financial investment over the short-term which order would best describe the priorities of the investor highest first? Return, Risk, Liquidity Return, Liquidity, Risk Liquidity, Return, Risk Risk, Liquidity, Return 1

2 Q4. When considering the dividend to pay out which of the following should be considered? 1 Shareholder expectations 2 Investment opportunities 3 urrent profitability 4 past dividends paid 1,2 and 3 1,3 and 4 2,3 and 4 ll of the above Q5. When considering the permanent financing of the business, what should debt and equity cover in balance sheet terms? urrent assets Total assets Total assets less current liabilities Net current assets Q6. What is considered the primary aim in financial management? Maximising profit Maximising shareholders wealth Satisficing orporate social responsibility 2

3 Q7. s an employee how would you best assess your return from the organisation? Return on capital employed Salary Payment terms Service Q8. What theory best describes the relationship between senior management and shareholders? Tenancy theory Expectancy theory Portfolio theory gency theory Q9. Which of the following may be considered areas of conflict between shareholders and directors? 1 Executive pay 2 Takeover strategy 3 Prestige projects 4 Risk assessment 1, 2 and 3 2, 3 and 4 1, 2 and 4 ll of the above 3

4 Q10. What are the three fundamental decisions in financial management?. Investment, Financing and ividend. Management, Investment and Financing. Management, Investment and ividend. Management, Financing and ividend 4

5 F9 Test 2 ost of capital and W Q1. When calculating the cost of equity using the dividend valuation model which time value of money concept is most likely to be used? nnuity ompounding 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? 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? urrent dividend ividend 3 years ago 5c 4c 7.72% 25% 7.49% 8.33% 5

6 Q4. Using Gordon s Growth Model what would be the estimated growth rate of the dividends given the following information? Profit after tax 20% ividend payout ratio 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%. (alculations to 2 decimal places) 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). 9.68% 4.20% 5.00% 10.00% 6

7 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? 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% 5.0% 6.5% 10.0% Unable to be calculated Q9. Given the following information what is the W to 2 decimal places? Market Value Return ebt $4m 6% Equity $40m 12% 9% 10.5% 11.0% 11.45% 7

8 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). onvert Redeem Either Unable to make a decision 8

9 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 Long-term implications to the business 2 The uncertainty associated with the inflows generated from the investment 3 The size of the potential investment relative to the size of the business 1 and 2 1 and 3 2 and 3 ll of the above Q2. Which investment appraisal methods primarily assesses the risk of the project? Payback ROE NPV IRR Q3. Which investment appraisal method considers the impact of the investment on accounting profit? Payback ROE NPV IRR 9

10 Q4. Which are the fundamental reason(s) for time value of money? 1. Inflation 2. Opportunity cost of capital 3 Risk 1 and 2 2 only 2 and 3 ll of the above Q5. alculate the IRR from the following information iscount Rate 5% 12% NPV % 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? $1,309` $1,441 $1,585 $1,703 10

11 Q7. alculate the present value of a perpetuity of $750 at a cost of capital of 8% $6,000 $7,434 $9,375 $10,500 Q8. alculate the value of $1,250 today in 4 years time at a cost of capital of 9% $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? 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? Net cash flow minus depreciation equals profit Net cash flow plus depreciation equals profit There is no relationship between the two 11

12 F9 Test 3 Time value of money, inflation and discounting Q1. If the question has more than one inflation rate illustrated in the question which combination of cash flows and rate must be used in the analysis? Real cash flows and real rate Real cash flows and money rate Money cash flow and real rate Money cash flows and money rate Q2. Which eminent economist provided the formula to convert real to money rate and vice versa? Keynes Smith Fisher Friedman Q3. Which specific investment appraisal technique may be only concerned with the present value of the costs? apital rationing decision sset replacement decision Sensitivity analysis Lease or buy decision 12

13 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? 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? 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 1 PV of cost $8,000 sset life (yrs) 1 year Project 1 Project 2 Project 3 2 $13,000 2 years 3 $18,000 3 years annot be calculated from the above information 13

14 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? Non divisible projects ivisible projects Mutually exclusive projects None of the above Q8. In capital rationing which reasons are there for hard capital rationing? 1. Economy wide factors 2. ompany specific factors 3. Internal decisions 1 only 1 and 2 2 and 3 ll of the above 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? $35,000 $34,770 $33,816 $33,703 14

15 Q10. How is tax relief calculated on a finance lease? 25% W on the underlying asset Full relief on the lease payments 100% first year allowance there is no tax relief on an operating lease 15

16 F9 Test 5 Ratio analysis and issues of equity This data relates to question 1-4 company is investing $70m in a new project and will be funding part of the investment by debt and the remainder by equity through a rights issue. The current share price is $4 and the market capitalisation is $200m. The rights issue price will be at a discount of 20% to the current share price. The rights issue will be on a 1 for 5 basis Issue costs are expected to be $2m. urrent equity gearing (debt/equity) is 40% Q1 How many new shares will be issued? 5 million 10 million 50 million 60 million Q2 How much gross funding is raised by the rights issue? $16m $20m $32m $40m Q3 What is the theoretical ex rights price? $3.87 $4.00 $4.64 $

17 Q4 What is the revised equity gearing of the company? 40.0% 42.9% 40.7% 41.5% The following information relates to questions 5-10 company has the following data for the past three years Turnover ($m) PIT ($m) Earnings ($m) ividends ($m) Ordinary shares($m) (par value 50c) Reserves ($m) Long-term debt ($m) Share price ($) Q5 What is the ROE for year 2? 14.89% 28.36% 30.24% 82.47% 17

18 Q6 What is the ROE for year 2? 14.89% 28.36% 30.24% 82.47% Q7 What is the dividend payout ratio for year 1? 52.63% 42.59% 52.50% 50.00% Q8 What is the dividend yield in year 3? 7.52% 3.76% 4.23% 6.41% Q9 What is the total shareholder return for year 2? 21.32% 18.36% 27.76% 6.43% 18

19 Q10 What is the earnings per share in year 3? 50c 67.5c 72c 81.5c 19

20 F9 Test 6 ost of capital Q1. Which of the following are necessary pre-requisites for using the W measure for investment appraisal purposes? 1. Similar risk profile 2. Relatively small size of investment 3. apital structure is unchanged 1 and 2 1 and 3 2 and 3 all of the above Q2. When considering the traditional theory of capital structure which of the following best describes the impact on the W? The W is not affected by the apital Structure W falls as the level of debt finance rises There is an optimum capital structure at which the W is minimised There is no relationship between apital structure and the W 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%)?

21 Q4. What is the risk associated with the asset beta? The risk relating to the systematic or business risk of the industry 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 The quantified risk of the investment returns not being achieved 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? annot be determined from the information provided Q6. What is the W given the following information? apital structure Ke Kd (d/e) 20/80 12% 6% 6% 7.2% 10.8% 12% 21

22 Q7. What is the cost of equity if we are given the following information? eta 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 Investors hold a portfolio of shares in proportion to the market portfolio 2 risk free return may be earned by investing solely in short-dated government bonds 3 The risk is calculated in relation to the existing risk suffered by the company 4 The project is considered as another investment from the investors perspective 1 and 2 1, 2 and 3 2, 3 and 4 1, 2 and 4 22

23 Q9. In what circumstance is it necessary to use project specific discount rates rather than the W to appraise investments? ifferent industry sector New investment Financial gearing remains unchanged 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? 6% 10% 14% 23.3% 23

24 F9 Test 7 usiness finance Q1. Which profitability measure shows the underlying profitability of the business before financing? Gross profit margin Net profit margin ROE ROE Q2. If you are asked to calculate the financial gearing measure by dividing the debt by equity what would this be best called? Operational gearing apital gearing Total gearing Equity gearing Q3. What does a P/E ratio assess? The cash return from holding a share The future expected growth in earnings from holding a share The ability of the company to maintain the dividend Something else 24

25 Q4. When raising equity capital as an unlisted company what is the critical initial consideration that all companies face? The cost of financing the equity The dilution of existing shareholders wealth The difficulty attracting new potential shareholders The transactions cost of raising equity Q5. When floating (or listing) a company on the stock exchange, which method is associated with raising no new capital? onus issue Offer for sale 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? $3.0 $3.4 $3.5 $3.8 25

26 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? $0.25 $0.30 $1.23 $1.50 Q8. WhaT factors will affect the dividend cover of a company? 1. Profitability 2. ash flow 3. ividend Policy 4. Legal restrictions 1,2 and 4 1,3 and 4 2,3 and 4 ll of the above Q9. If a company is unlisted which of the following are ways that it may raise equity capital? 1 friends and family 2 venture capital 3 bonus issue 4 rights issue 1 and 2 1,2 and 3 1,2 and 4 ll of the above 26

27 Q10. If a company wishes to list by offering shares to the widest range of possible investors what method of listing would it use? Offer for sale Placing Introduction Rights issue 27

28 F9 Test 8 Sources of finance and Working capital management Q1. What type of finance is described below 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. Overdraft onds Preference shares Equity Q2. What type of finance is described below The investors are part owners in the business and normally enjoy full voting rights. The cash return from this investment is not tax deductible Overdraft onds Preference shares Equity Q3. What is being described below n option to buy shares in the future at a pre-determined price and on a fixed date. These may be linked to bonds to make them more attractive onvertibles Leases Ordinary shares Warrants 28

29 Q4. s a small unlisted company which of the following are most likely sources of finance 1. ebentures 2. Government grants 3. Retained earnings 4. onvertible debt 1, 2 and 3 2 and 3 1, 3 and 4 2 and 4 Q5. What are the three services provided by a factor Finance, debt collection and administration and credit assessment Management of working capital, administration and debt collection and finance redt assessment, management of working capital and debt collection Finance, debt collection and administration and credit insurance Q6 What are the two conflicting issues when managing working capital Profitability and liquidity urrent assets and current liabilities Inventory management and payment terms Receivables and payables 29

30 Q7 What is the following type of finance? Finance provided normally relating to a specific asset which allows the use of the asset without any ownership rights. The term may from a few days up to the effective life of the asset. Hire purchase Variable rate loan Finance lease Operating lease Q8 What are the specific symptoms of overtrading from the following list 1 Substantial increase in overdraft 2 Increase in activity with no corresponding increase in permanent funds 3 Higher levels of inventory 4 Extended payable days 5 Extended receivables days 1,2, 3 and 5 1,2 and 4 1,3 and 4 2,3 and 5 30

31 Q9 What measures could be identified when a company assesses the credit status of a new customer 1. Trade references 2. Published accounts 3. redit rating agencies 4. ank references 1, 2 and 4 1, 3 and 4 2 and 3 ll of the above Q10 company has sales of $75m and its customers take on average 100 days to pay. The overdraft rate is 7%. y how many days would the company have to decrease the receivables days by to reduce the cost of receivables to below $1m. 30 days 31 days 69 days 71 days 31

32 F9 test 9 Working apital Management Q1. company has to decide whether to use a factor to collect receivables. It currently collects the receivables over an average of 80 days and the current sales of the company are $50m. If the company factors the debt then it is expected that there will be cost saving in the administration of the credit control of $400,000. The use of a factor is expected to reduce the receivables collection period by 20 days. The factor charges a fee of 1.2% of sales value for its services. The current overdraft rate is 10% Required: alculate the net benefit/(cost) of factoring the debts Saving $619,178 Saving $19,178 ost ($380,822) ost ($600,000) Q2. In the EOQ model which of the following cost is assumed to be zero Ordering costs Holding costs Stock-out costs Purchase costs 32

33 Q3 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 Holding cost Purchase cost (without discount) Monthly demand $15/ order $40/ unit per annum $10/unit 5,000 units Required: what is the benefit/(cost)of adopting the trade discount? enefit $12,415 enefit $415 ost ($415) ost ($12,000) Q4 Which of the following are not likely to be benefits of adopting just in time purchasing arrangements with suppliers Reduced inventories of raw materials Wide range of supplier choice Increased quality of materials delivered loser links between suppliers and customer 33

34 The following information relates to question 5 to 7. The minimum cash balance is $30,000. The standard deviation of the daily cash flows is $5,000. The transaction cost is $50 for en-cashing and investing funds and the annual interest rate is 10.95% Required Q5. The spread (to the nearest $) $13,876 $14,620 $25,789 $34,873 Q6. The upper limit (to the nearest $) $34,873 $46,620 $51,962 $69,746 Q7. The return point (to the nearest $) $14,620 $25,789 $46,620 $34,873 34

35 Q8. 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 aumol model what is the amount that should be invested in short term securities in each transaction (to the nearest $) $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. heaper financing cost 2. Relatively easy to arrange 3. Secure over time 4. Matching concept 1 and 2 3 and 4 1, 2 and 3 1, 2 and 4 35

36 Q10. What overall measure of working capital would best illustrate the efficiency of the organisation? urrent ratio Quick (acid test) ratio Receivables days Operating cycle 36

37 F9 Test 10 Valuation and Risk Q1 ompany has an earnings yield of 8% and currently generates $20m per annum profit after tax. It is being considered as a takeover target by another company,, that believe that they will be able to generate cash savings of $5m before tax. orporation tax is at 30% What is the value of company to company using the earning yield method? $200m $250m $293.75m $312.5m The following information relates to questions 2 5 The information below relates to company urrent earnings per share 50c ividend payout ratio 40% ividend 3 years ago 15c Equity risk premium 6% Risk free return 6% Equity beta for 1.3 Required Q2 What is the current dividend for company? 20c 15c 30c 50c 37

38 Q3 What is the expected annual growth rate for dividends given that the average method is used? 7.6% 10.1% 11.1% 13.3% Q4 What is the current cost of equity for ompany using the PM? 6% 12% 13.8% 15.6% Q5 What is the share price valuation of ompany using the dividend valuation model? 145c 159c 541c 595c 38

39 The following information relates to questions 6 9 Z ompany, a company that trades in $s, has made a sale in a European country for 300,000 receivable in 3 months time. It has the following information. Spot rate Three month forward rate $: $: Money market rates per annum for Z company are orrowing eposit ollar interest rate Euro interest rate 4.8% 4.5% 4.1% 3.7% Q6 What risk is illustrated in this question? Economic risk Transaction risk Translation risk Political risk Q7 Using the forward market hedge what should the company receive in dollars? $236,090 $239,904 $375,150 $381,210 39

40 Q8 Using the money market hedge method what should the company receive in dollars? $239,252 $374,131 $371,212 $352,751 Q9 onsidering the information in the question which statement is true? ollar is appreciating against the euro oth currencies are appreciating Euro is appreciating against the dollar It is not possible to tell Q10 Which of the following hedging techniques will assist in hedging interest rates over the long-term? Swaps Forward rate agreement Interest rate guarantee Interest rate futures 40