ACCA F9 Bank

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Tulip Co is a large company with an equity beta of 1·05. The company plans to expand existing business by acquiring a new factory at a cost of $20m. The finance for the expansion will be raised from an issue of 3% loan notes, issued at nominal value of $100 per loan note. These loan notes will be redeemable after five years at nominal value or convertible at that time into ordinary shares in Tulip Co with a value expected to be $115 per loan note.

The risk-free rate of return is 2·5% and the equity risk premium is 7·8%.

Tulip Co is seeking additional finance and is considering using Islamic finance and, in particular, would require a form which would be similar to equity financing.

What is the cost of equity of Tulip Co using the capital asset pricing model?

Tulip Co is a large company with an equity beta of 1·05. The company plans to expand existing business by acquiring a new factory at a cost of $20m. The finance for the expansion will be raised from an issue of 3% loan notes, issued at nominal value of $100 per loan note. These loan notes will be redeemable after five years at nominal value or convertible at that time into ordinary shares in Tulip Co with a value expected to be $115 per loan note.

The risk-free rate of return is 2·5% and the equity risk premium is 7·8%.

Tulip Co is seeking additional finance and is considering using Islamic finance and, in particular, would require a form which would be similar to equity financing.

Using estimates of 5% and 6%, what is the cost of debt of the convertible loan notes?

Tulip Co is a large company with an equity beta of 1·05. The company plans to expand existing business by acquiring a new factory at a cost of $20m. The finance for the expansion will be raised from an issue of 3% loan notes, issued at nominal value of $100 per loan note. These loan notes will be redeemable after five years at nominal value or convertible at that time into ordinary shares in Tulip Co with a value expected to be $115 per loan note.

The risk-free rate of return is 2·5% and the equity risk premium is 7·8%.

Tulip Co is seeking additional finance and is considering using Islamic finance and, in particular, would require a form which would be similar to equity financing.

In relation to using the dividend growth model to value Tulip Co, which of the following statements is correct?

Tulip Co is a large company with an equity beta of 1·05. The company plans to expand existing business by acquiring a new factory at a cost of $20m. The finance for the expansion will be raised from an issue of 3% loan notes, issued at nominal value of $100 per loan note. These loan notes will be redeemable after five years at nominal value or convertible at that time into ordinary shares in Tulip Co with a value expected to be $115 per loan note.

The risk-free rate of return is 2·5% and the equity risk premium is 7·8%.

Tulip Co is seeking additional finance and is considering using Islamic finance and, in particular, would require a form which would be similar to equity financing.

Which of the following statements about equity finance is correct?

Tulip Co is a large company with an equity beta of 1·05. The company plans to expand existing business by acquiring a new factory at a cost of $20m. The finance for the expansion will be raised from an issue of 3% loan notes, issued at nominal value of $100 per loan note. These loan notes will be redeemable after five years at nominal value or convertible at that time into ordinary shares in Tulip Co with a value expected to be $115 per loan note.

The risk-free rate of return is 2·5% and the equity risk premium is 7·8%.

Tulip Co is seeking additional finance and is considering using Islamic finance and, in particular, would require a form which would be similar to equity financing.

Regarding Tulip Co’s interest in Islamic finance, which of the following statements is/are correct?

(1) Murabaha could be used to meet Tulip Co’s financing needs
(2) Mudaraba involves an investing partner and a managing or working partner

Peony Co’s finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months’ time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered
a 3 v 12 forward rate agreement at 7·10–6·85. 

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580m pesos, with 200m pesos being paid in six months’ time (from today) and 380m pesos being paid in 12 months’ time (from
today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6·5% per year 
Pesos 10·0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

In relation to the yield curve, which of the following statements is correct?

Peony Co’s finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months’ time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered
a 3 v 12 forward rate agreement at 7·10–6·85. 

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580m pesos, with 200m pesos being paid in six months’ time (from today) and 380m pesos being paid in 12 months’ time (from
today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6·5% per year 
Pesos 10·0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

If the interest rate on the loan is 6·5% when it is taken out, what is the nature of the compensatory payment under the forward rate agreement?

Peony Co’s finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months’ time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered
a 3 v 12 forward rate agreement at 7·10–6·85. 

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580m pesos, with 200m pesos being paid in six months’ time (from today) and 380m pesos being paid in 12 months’ time (from
today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6·5% per year 
Pesos 10·0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

Using exchange rates based on interest rate parity, what is the dollar income received from the project?

Peony Co’s finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months’ time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered
a 3 v 12 forward rate agreement at 7·10–6·85. 

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580m pesos, with 200m pesos being paid in six months’ time (from today) and 380m pesos being paid in 12 months’ time (from
today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6·5% per year 
Pesos 10·0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

In respect of Peony Co managing its interest rate risk, which of the following statements is/are correct?

(1) Smoothing is an interest rate risk hedging technique which involves maintaining a balance between fixed-rate and floating-rate debt
(2) Asset and liability management can hedge interest rate risk by matching the maturity of assets and liabilities

Peony Co’s finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months’ time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered
a 3 v 12 forward rate agreement at 7·10–6·85. 

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580m pesos, with 200m pesos being paid in six months’ time (from today) and 380m pesos being paid in 12 months’ time (from
today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6·5% per year 
Pesos 10·0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

In relation to the use of derivatives by Peony Co, which of the following statements is correct?

Melanie Co is considering the acquisition of a new machine with an operating life of three years. The new machine could be leased for three payments of $55,000, payable annually in advance.

Alternatively, the machine could be purchased for $160,000 using a bank loan at a cost of 8% per year. If the machine is purchased, Melanie Co will incur maintenance costs of $8,000 per year, payable at the end of each year of operation. The machine would have a residual value of $40,000 at the end of its three-year life.

Melanie Co’s production manager estimates that if maintenance routines were upgraded, the new machine could be operated for a period of four years with maintenance costs increasing to $12,000 per year, payable at the end of each year of operation. If operated for four years, the machine’s residual value would fall to $11,000.

Taxation should be ignored.

Assuming that the new machine is operated for a three-year period, evaluate whether Melanie Co should use leasing or borrowing as a source of finance.

Melanie Co is considering the acquisition of a new machine with an operating life of three years. The new machine could be leased for three payments of $55,000, payable annually in advance.

Alternatively, the machine could be purchased for $160,000 using a bank loan at a cost of 8% per year. If the machine is purchased, Melanie Co will incur maintenance costs of $8,000 per year, payable at the end of each year of operation. The machine would have a residual value of $40,000 at the end of its three-year life.

Melanie Co’s production manager estimates that if maintenance routines were upgraded, the new machine could be operated for a period of four years with maintenance costs increasing to $12,000 per year, payable at the end of each year of operation. If operated for four years, the machine’s residual value would fall to $11,000.

Taxation should be ignored.

Using a discount rate of 10%, calculate the equivalent annual cost of purchasing and operating the machine for both three years and four years, and recommend which replacement interval should be adopted.

Oscar Co designs and produces tracking devices. The company is managed by its four founders, who lack business administration skills.

The company has revenue of $28m, and all sales are on 30 days’ credit. Its major customers are large multinational car manufacturing companies and are often late in paying their invoices. Oscar Co is a rapidly growing company and revenue has doubled in the last four years. Oscar Co has focused in this time on product development and customer service, and managing trade receivables has been neglected.

Oscar Co’s average trade receivables are currently $5·37m, and bad debts are 2% of credit sales revenue. Partly as a result of poor credit control, the company has suffered a shortage of cash and has recently reached its overdraft limit.
The four founders have spent large amounts of time chasing customers for payment. In an attempt to improve trade receivables management, Oscar Co has approached a factoring company.

The factoring company has offered two possible options:

Option 1
Administration by the factor of Oscar Co’s invoicing, sales accounting and receivables collection, on a full recourse basis. The factor would charge a service fee of 0·5% of credit sales revenue per year. Oscar Co estimates that this would result in savings of $30,000 per year in administration costs. Under this arrangement, the average trade receivables collection period would be 30 days.

Oscar Co pays interest on its overdraft at a rate of 7% per year and the company operates for 365 days per year.

Calculate the costs and benefits of Option 1 to find the net benefit.

Oscar Co designs and produces tracking devices. The company is managed by its four founders, who lack business administration skills.

The company has revenue of $28m, and all sales are on 30 days’ credit. Its major customers are large multinational car manufacturing companies and are often late in paying their invoices. Oscar Co is a rapidly growing company and revenue has doubled in the last four years. Oscar Co has focused in this time on product development and customer service, and managing trade receivables has been neglected.

Oscar Co’s average trade receivables are currently $5·37m, and bad debts are 2% of credit sales revenue. Partly as a result of poor credit control, the company has suffered a shortage of cash and has recently reached its overdraft limit.
The four founders have spent large amounts of time chasing customers for payment. In an attempt to improve trade receivables management, Oscar Co has approached a factoring company.

The factoring company has offered two possible options:

Option 2
Administration by the factor of Oscar Co’s invoicing, sales accounting and receivables collection on a non-recourse basis. The factor would charge a service fee of 1·5% of credit sales revenue per year. Administration cost savings and average trade receivables collection period would be as Option 1. Oscar Co would be required to accept an advance of 80% of credit sales when invoices are raised at an interest rate of 9% per year.

Oscar Co pays interest on its overdraft at a rate of 7% per year and the company operates for 365 days per year.

Calculate the costs and benefits of Option 2 to find the net benefit.

Which of the following statements is/are correct?

(1) Monetary policy seeks to influence aggregate demand by increasing or decreasing the money raised through taxation.

(2) When governments adopt a floating exchange rate system, the exchange rate is an equilibrium between demand and supply in the foreign exchange market.

(3) Fiscal policy seeks to influence the economy and economic growth by increasing or decreasing interest rates.

Which of the following statements are correct?

(1) The general level of interest rates is affected by investors’ desire for a real return.

(2) Market segmentation theory can explain kinks (discontinuities) in the yield curve.

(3) When interest rates are expected to fall, the yield curve could be sloping downwards.

Which of the following statements is correct?

Which of the following statements is NOT correct?

Which of the following statements are correct?

(1) The sensitivity of a project variable can be calculated by dividing the project net present value by the present value of the cash flows relating to that project variable

(2) The expected net present value is the value expected to occur if an investment project with several possible outcomes is undertaken once

(3) The discounted payback period is the time taken for the cumulative net present value to change from negative to positive

Which of the following statements is/are correct?

(1) The asset beta reflects both business risk and financial risk

(2) Total risk is the sum of systematic risk and unsystematic risk

(3) Assuming that the beta of debt is zero will understate financial risk when ungearing an equity beta

Which of the following statements are correct?

Which of the following are financial intermediaries?

(1) Venture capital organisation

(2) Pension fund

(3) Merchant bank

0 A company has in issue loan notes with a nominal value of $100 each. Interest on the loan notes is 6% per year, payable annually. The loan notes will be redeemed in eight years’ time at a 5% premium to nominal value. The before-tax cost of debt of the company is 7% per year.

What is the ex interest market value of each loan note?

Which of the following statements are correct?

(1) Capital market securities are assets for the seller but liabilities for the buyer

(2) Financial markets can be classified into exchange and over-the-counter markets

(3) A secondary market is where securities are bought and sold by investors

Which of the following statements are correct?

(1) A certificate of deposit is an example of a money market instrument

(2) Money market deposits are short-term loans between organisations such as banks

(3) Treasury bills are bought and sold on a discount basis

Which of the following statements are correct?

A company needs $150,000 each year for regular payments. Converting the company’s short-term investments into cash to meet these regular payments incurs a fixed cost of $400 per transaction. These short-term investments pay
interest of 5% per year, while the company earns interest of only 1% per year on cash deposits.

According to the Baumol Model, what is the optimum amount of short-term investments to convert into cash in each transaction?

Which of the following statements is/are correct?

(1) Factoring with recourse provides insurance against bad debts

(2) The expertise of a factor can increase the efficiency of trade receivables management for a company

7 An investor plans to exchange $1,000 into euros now, invest the resulting euros for 12 months, and then exchange the euros back into dollars at the end of the 12-month period. The spot exchange rate is €1·415 per $1 and the euro interest rate is 2% per year. The dollar interest rate is 1·8% per year.

Compared to making a dollar investment for 12 months, at what 12-month forward exchange rate will the investor make neither a loss nor a gain?

Which of the following statements are correct?

(1) If a capital market is weak form efficient, an investor cannot make abnormal returns by using technical analysis

(2) Operational efficiency means that efficient capital markets direct funds to their most productive use

(3) Tests for semi-strong form efficiency focus on the speed and accuracy of share price responses to the arrival of new information

9 On a market value basis, GFV Co is financed 70% by equity and 30% by debt. The company has an after-tax cost of debt of 6% and an equity beta of 1·2. The risk-free rate of return is 4% and the equity risk premium is 5%.

What is the after-tax weighted average cost of capital of GFV Co?

TKQ Co has just paid a dividend of 21 cents per share and its share price one year ago was $3·10 per share. The total shareholder return for the year was 19·7%.

What is the current share price?

Which of the following statements is/are correct?

1. Securitisation is the conversion of illiquid assets into marketable securities

2. The reverse yield gap refers to equity yields being higher than debt yields

3. Disintermediation arises where borrowers deal directly with lending individuals

Which of the following statements are correct?

1. Maximising market share is an example of a financial objective

2. Shareholder wealth maximisation is the primary financial objective for a company listed on a stock exchange

3. Financial objectives should be quantitative so that their achievement can be measured

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is correct?

A company has 7% loan notes in issue which are redeemable in seven years’ time at a 5% premium to their nominal value of $100 per loan note. The before-tax cost of debt of the company is 9% and the after-tax cost of debt of the company is 6%.

What is the current market value of each loan note?

Which of the following statements concerning working capital management are correct?

1. Working capital should increase as sales increase

2. An increase in the cash operating cycle will decrease profitability

3. Overtrading is also known as under-capitalisation

Which of the following is LEAST likely to fall within financial management?

Which of the following statements concerning profit are correct?

A company has annual credit sales of $27 million and related cost of sales of $15 million. The company has the following targets for the next year:

Trade receivables days - 50 days
Inventory days - 60 days
Trade payables - 45 days

Assume there are 360 days in the year.

What is the net investment in working capital required for the next year?

An investor believes that they can make abnormal returns by studying past share price movements.

In terms of capital market efficiency, to which of the following does the investor’s belief relate?

Which of the following statements is/are correct?

1. An increase in the cost of equity leads to a fall in share price

2. Investors faced with increased risk will expect increased return as compensation

3. The cost of debt is usually lower than the cost of preference shares

Governments have a number of economic targets as part of their fiscal policy.

Which of the following government actions relate predominantly to fiscal policy?

Which of the following statements is correct?

A company has just paid an ordinary share dividend of 32·0 cents and is expected to pay a dividend of 33·6 cents in one year’s time. The company has a cost of equity of 13%.

What is the market price of the company’s shares to the nearest cent on an ex dividend basis?

Which of the following is/are usually seen as forms of market failure where regulation may be a solution?

1. Imperfect competition

2. Social costs or externalities

3. Imperfect information

The aim of a company’s investment policy should be to:

A machine that was bought in January 20X4 for $44,000 and has been depreciated by $8,000 per year is expected to be sold in December 20X6 for $17,600.

What is the net cash inflow that will appear in the cash budget for December 20X6m, to the nearest dollar?

There are a number of motives that influence how much a business wishes to hold in cash.

Complete the following statement:

When a company holds cash in order to make the payments that are necessary to keep the business going, such as wages, taxes and payments to suppliers, the motive behind this is the _________________ motive

An asset costing $24,000 is expected to last for three years, after which it can be sold for $16,000. The corporation tax rate is 30%, tax-allowable depreciation of 25% is available, and the cost of capital is 10%. Tax is payable at the end of each financial year.

Capital expenditure occurs on the first day of a financial year, and the tax depreciation allowances are claimed as early as possible.

What is the cash flow in respect of tax allowable depreciation that will be used at time 2 of the net present value calculation?

Which of the following is an example of a financial objective that a company might
choose to pursue?

If an increase in inventory levels is funded by an increase in the bank overdraft, what will be the effect of the quick (liquidity) ratio?

What is the payback period of the following investment?

Year 0: $325,000 spent on a new machine
Years 1 to 6: $50,000 cash inflow per annum
Years 7 to 10: $25,000 cash inflow per annum
Year 11: Machine sold for $62,857

Which of the following statements is true?

Consider the truthfulness of the following statements.

1. The optimum replacement period (cycle) will be the period that has the lowest
equivalent annual cost, although in practice other factors may influence the final
decision.

2. The replacement analysis model assumes that the firm replaces like with like each time it needs to replace an existing asset.

The concept of ‘value for money’ in a not for profit organisation can be defined as
‘achieving the desired level and quality of service at the most economical cost’. Performance measures have been developed to permit evaluation of value for money in public sector organisations.

Which of the following is not a measure fundamental to the understanding of value for money?

The director/shareholder conflict has been addressed by the requirements of a number of corporate governance codes.

Which of the following statements is not true?

What is the present value of a perpetuity of $21,000 starting immediately, to the nearest dollar? Interest rates are 10%.

Freakshow Co is considering investing in a new project.
The following information relates to the new project:

Capital cost, payable immediately - $100,000
Length of project - 5 years
Post tax operating cash flow in the first year - $30,000
Annual rate of inflation - 5%

Freakshow Co’s real cost of capital is 9.5%.

What is the net present value (NPV) of the project (to the nearest $1,000)?

Freakshow Co is considering investing in a new project.
The following information relates to the new project:

Capital cost, payable immediately - $100,000
Length of project - 5 years
Post tax operating cash flow in the first year - $30,000
Annual rate of inflation - 5%

Freakshow Co’s real cost of capital is 9.5%.

What is the internal rate of return of the project (to the nearest whole percentage point)?

Use discount rates of 15% and 20% in your calculation.

Freakshow Co is considering investing in a new project.
The following information relates to the new project:

Capital cost, payable immediately - $100,000
Length of project - 5 years
Post tax operating cash flow in the first year - $30,000
Annual rate of inflation - 5%

Freakshow Co’s real cost of capital is 9.5%.

Which of the following is not an advantage of the IRR?

Freakshow Co is considering investing in a new project.
The following information relates to the new project:

Capital cost, payable immediately - $100,000
Length of project - 5 years
Post tax operating cash flow in the first year - $30,000
Annual rate of inflation - 5%

Freakshow Co’s real cost of capital is 9.5%.

The payback period is the number of years that it takes a business to recover its original investment from net returns, calculated

Freakshow Co is considering investing in a new project.
The following information relates to the new project:

Capital cost, payable immediately - $100,000
Length of project - 5 years
Post tax operating cash flow in the first year - $30,000
Annual rate of inflation - 5%

Freakshow Co’s real cost of capital is 9.5%.

The company is also considering spending $60,000 on a machine that will have an
estimated life of ten years and no residual value. The machine is to be depreciated by 10% of its cost each year. Estimated operating cash flows are:

Year 1 ($2,000)
Year 2: $13,000
Year 3: $20,000
Years 4–6: $25,000 each year
Years 7–10: $30,000 each year

What is the average accounting rate of return (ARR), calculated as average annual profits divided by the average investment?

The following information has been calculated for D Co:
Raw material inventory turnover period - 19 days
Work in progress inventory turnover period - 14 days
Trade payables payment period - 40 days
Finished goods inventory turnover period - 31 days
Trade receivables collection period - 52 days

What is the length of the working capital cycle?

The purchase price of an inventory item is $42 per unit. In each three-month period the usage of the item is 2,000 units. The annual holding cost associated with one unit is 5% of its purchase price. The EOQ is 185 units.

What is the cost of placing an order (to 2 decimal places)?

A company is planning to open a new store in a new geographic location. An initial site evaluation has taken place at a cost of $7,000 and a store location has been found. The new store can be rented for $7,500 per annum. It will require refurbishment at a cost of $310,000.

Which of the following costs are relevant for an NPV calculation?

(i) $7,000
(ii) $7,500
(iii) $310,000

Which of the following ratios would be used to assess the liquidity of a company?

(i) Return on capital employed
(ii) Gross profit percentage
(iii) Acid test ratio
(iv) Gearing ratio

A government is looking at assessing hospitals by reference to a range of both financial and non-financial factors, one of which is survival rates for heart by-pass operation.

Which of the three E’s best describes the above measure?

The government in a country is following an expansionary fiscal policy.
How might this affect many businesses?

Which one of the following is false regarding simulations?

Which of the following is the correct statement of the conclusion of Modigliani and Miller on the relevance of dividend policy?

Which of the following best describes Murabaha as a source of finance within the Islamic banking model?

Comment on the validity of the following statements, in relation to the Efficient Market Hypothesis.

Statement 1: An inefficient market is one in which the value of securities is not always an accurate reflection of the available information. 

Statement 2: In a semi-strong form market the share price incorporates all past information and all publicly-available information.

All of the following are variables that can be manipulated to affect monetary policy
except

Jayco Ltd has decided that it needs to improve its cash position. The finance manager has targeted a reduction in the time taken for customers to pay and is considering various options.

It currently has a $4.5m balance on receivables and an 82 day average time period for receipt of cash from customers. Its annual sales are $20m and the business has an overdraft currently charging a rate of 8%.

An invoice discounter offers to help Jayco collect cash faster for a fee. They promise that with their help, 60% of the sales will be collected in 30 days and the remainder in 60 days.

Jayco is also considering using the offer of a settlement discount to customers to encourage them to pay more quickly. Customers would receive the discount if they paid in 30 days.

Jayco’s other option under consideration is to use a debt factor agency.

What would Jayco’s new average receivables balance be to the nearest $000 if it used the invoice discounter and cash came in at 30 and 60 days as promised?

Jayco Ltd has decided that it needs to improve its cash position. The finance manager has targeted a reduction in the time taken for customers to pay and is considering various options.

It currently has a $4.5m balance on receivables and an 82 day average time period for receipt of cash from customers. Its annual sales are $20m and the business has an overdraft currently charging a rate of 8%.

An invoice discounter offers to help Jayco collect cash faster for a fee. They promise that with their help, 60% of the sales will be collected in 30 days and the remainder in 60 days.

Jayco is also considering using the offer of a settlement discount to customers to encourage them to pay more quickly. Customers would receive the discount if they paid in 30 days.

Jayco’s other option under consideration is to use a debt factor agency.

What would be the effective annualised cost of Jayco offering a 1% discount to their customers and all customers took up the offer?

Which one of the following statements is untrue about debt factoring?

Which of these is not a key aspect of a credit policy?

If valuing a business using asset values, when would a valuation using net realisable
values NOT be appropriate?

Which of the following would not be deducted in a calculation of free cash flows?

Zigzag Co operates in a country where the home currency is $. It has recently begun exporting to a European country and expects to receive €500,000 in six months’ time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigzag could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigzag is 4.5% per year.

The following exchange rates are currently available to Zigzag:

Current spot exchange rate: 2.000 euro per $
Six-month forward exchange rate: 1.890 – 1.990 euro = $1
One-year forward exchange rate: 1.883 – 1.981 euro = $1

Zigzag is also considering the use of futures or options contracts but the finance director doesn’t feel that she knows enough about them to make an informed decision.

If Zigzag uses a money market hedge, what values will need to be borrowed and deposited today in setting up the hedge?

Zigzag Co operates in a country where the home currency is $. It has recently begun exporting to a European country and expects to receive €500,000 in six months’ time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigzag could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigzag is 4.5% per year.

The following exchange rates are currently available to Zigzag:

Current spot exchange rate: 2.000 euro per $
Six-month forward exchange rate: 1.890 – 1.990 euro = $1
One-year forward exchange rate: 1.883 – 1.981 euro = $1

Zigzag is also considering the use of futures or options contracts but the finance director doesn’t feel that she knows enough about them to make an informed decision.

Calculate the one-year expected (future) spot rate predicted by purchasing power parity theory.

Zigzag Co operates in a country where the home currency is $. It has recently begun exporting to a European country and expects to receive €500,000 in six months’ time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigzag could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigzag is 4.5% per year.

The following exchange rates are currently available to Zigzag:

Current spot exchange rate: 2.000 euro per $
Six-month forward exchange rate: 1.890 – 1.990 euro = $1
One-year forward exchange rate: 1.883 – 1.981 euro = $1

Zigzag is also considering the use of futures or options contracts but the finance director doesn’t feel that she knows enough about them to make an informed decision.

Which of the following statements about the use of a futures contract for Zigzag’s hedging requirement is true?

Zigzag Co operates in a country where the home currency is $. It has recently begun exporting to a European country and expects to receive €500,000 in six months’ time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigzag could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigzag is 4.5% per year.

The following exchange rates are currently available to Zigzag:

Current spot exchange rate: 2.000 euro per $
Six-month forward exchange rate: 1.890 – 1.990 euro = $1
One-year forward exchange rate: 1.883 – 1.981 euro = $1

Zigzag is also considering the use of futures or options contracts but the finance director doesn’t feel that she knows enough about them to make an informed decision.

Which of the following statements about the use of a currency option for Zigzag’s hedging requirement is true?

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