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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?

A. 13.3%

B. 10.7%

C. 8.1%

10.3%

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?

A. 3.0%

B. 5.2%

C. 6.9%

D. 5.7%

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?

A. The model assumes that all shareholders of Tulip Co have the same required rate of return

C. The model assumes that capital markets are semi-strong form efficient

D. The model assumes that Tulip Co’s interim dividend is equal to the final dividend

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?

A. Equity finance reserves represent cash which is available to a company to invest

B. Additional equity finance can be raised by rights issues and bonus issues

C. Retained earnings are a source of equity finance

D. Equity finance includes both ordinary shares and preference shares

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

A. 1 only

B. 2 only

C. Both 1 & 2

D. Neither 1 & 2

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?

A. Expectations theory suggests that deferred consumption requires increased compensation as maturity increases

B. An inverted yield curve can be caused by government action to increase its long-term borrowing

C. A kink (discontinuity) in the normal yield curve can be due to differing yields in different market segments

D. Basis risk can cause the corporate yield curve to rise more steeply than the government yield curve

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?

A. Peony Co pays bank $600,000

B. Peony Co pays bank $250,000

C. Peony Co pays bank $450,000

D. Bank pays Peony Co $600,000

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?

A. $112·3m

B. $114·1m

C. $116·0m

D. $112·9m

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

A. 1 Only

B. 2 Only

C. Both 1 & 2

D. Neither 1 or 2

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?

A. Interest rate options must be exercised on their expiry date, if they have not been exercised before then

B. Peony Co can hedge interest rate risk on borrowing by selling interest rate futures now and buying them back in the future

C. An interest rate swap is an agreement to exchange both principal and interest rate payments

D. Peony Co can hedge interest rate risk on borrowing by buying a floor and selling a cap

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.

A. Financing

B. Borrowing

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.

A. Every 5 years

B. Every 4 years

C. Every 3 years

D. Every 2 years

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.

A. $244,804

B. $384,804

C. $104,804

D. $168,804

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.

A. $347,982

B. $244,804

C. $168,804

D. $804,804

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.

A. 2 only

B. 1 & 2 only

C. 1 & 3 only

D. 1, 2 & 3

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.

A. 1 & 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

Which of the following statements is correct?

A. One of the problems with maximising accounting profit as a financial objective is that accounting profit can be manipulated

B. A target for a minimum level of dividend cover is a target for a minimum dividend payout ratio

C. The welfare of employees is a financial objective

Which of the following statements is NOT correct?

A. Return on capital employed can be defined as profit before interest and tax divided by the sum of shareholders’ funds and prior charge capital

B.Return on capital employed is the product of net profit margin and net asset turnover

D. Return on equity can be defined as profit before interest and tax divided by shareholders’ funds

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

A. 1 and 2 only

B. 1 and 3 only

C. 2 and 3 only

D. 1, 2 and 3

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

A. 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

Which of the following statements are correct?

A. Share option schemes always reward good performance by managers

B. Performance-related pay can encourage dysfunctional behaviour

C. Value for money as an objective in not-for-profit organisations requires the pursuit of economy, efficiency and effectiveness

Which of the following are financial intermediaries?

(1) Venture capital organisation

(2) Pension fund

(3) Merchant bank

A. 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

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?

A. $94·03

B. $96·94

C. $102·91

D. $103·10

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

A. 1 & 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

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

A. 1 & 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

Which of the following statements are correct?

A. Interest rate options allow the buyer to take advantage of favourable interest rate movements

B. A forward rate agreement does not allow a borrower to benefit from a decrease in interest rates

C. Borrowers hedging against an interest rate increase will buy interest rate futures now and sell them at a future date

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?

A. $38,730

B. $48,990

C. $54,772

D. $63,246

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

A. 2 only

B. 1 only

C. Neither 1 or 2

D. Both 1 & 2

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?

A. €1·223 per $1

B. €1·412 per $1

C. €1·418 per $1

D. €1·439 per $1

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

A. 1 & 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

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?

A. 5.4%

B. 7.2%

C. 8.3%

D. 8.8%

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?

A. $3.50

B. $3.71

C. $3.31

D. $3.35

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

A. 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

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

A. 1 & 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

Which of the following statements is correct?

A. A bonus issue can be used to raise new equity finance

C. Miller and Modigliani argued that the financing decision is more important than the dividend decision

D. Shareholders usually have the power to increase dividends at annual general meetings of a company

Which of the following statements is correct?

A. Tax allowable depreciation is a relevant cash flow when evaluating borrowing to buy compared to leasing as a financing choice

B. Asset replacement decisions require relevant cash flows to be discounted by the after-tax cost of debt

C. If capital is rationed, divisible investment projects can be ranked by the profitability index when determining the optimum investment schedule

D. Government restrictions on bank lending are associated with soft capital rationing

Which of the following statements is correct?

A. Once purchased, currency futures have a range of close-out dates

B. Currency swaps can be used to hedge exchange rate risk over longer periods than the forward market

C. Banks will allow forward exchange contracts to lapse if they are not used by a company

D. Currency options are paid for when they are exercised

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?

A. $92·67

B. $108·90

C. $89·93

D. $103·14

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

A. 1 & 2 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

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

A. The dividend payment to shareholders is increased

B. Funds are raised to finance an investment project

C. Surplus assets are sold off

D. Non-executive directors are appointed to the remuneration committee

Which of the following statements concerning profit are correct?

A. Accounting profit is not the same as economic profit

B. Profit takes account of risk

C. Accounting profit can be manipulated by managers

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?

A. $8,125,000

B. $4,375,000

C. $2,875,000

D. $6,375,000

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?

A. Fundamental analysis

B. Operational efficiency

C. Technical analysis

D. Semi-strong form efficiency

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

A. 1 only

B. 1 & 3 only

C. 2 & 3 only

D. 1, 2 & 3

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

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

A. Decreasing interest rates in order to stimulate consumer spending

B. Reducing taxation while maintaining public spending

C. Using official foreign currency reserves to buy the domestic currency

D. Borrowing money from the capital markets and spending it on public works

Which of the following statements is correct?

A. Governments may choose to raise interest rates so that the level of general expenditure in the economy will increase

B. increase B The normal yield curve slopes upward to reflect increasing compensation to investors for being unable to use their cash now

C. The yield on long-term loan notes is lower than the yield on short-term loan notes because long-term debt is less risky for a company than short-term debt

D. Expectations theory states that future interest rates reflect expectations of future inflation rate movements

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?

A. $3·20

B. $4·41

C. $2·59

D. $4·20

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

A. 1 only

B. 1 & 2 only

C. 2 & 3 only

D. 1, 2 & 3

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

A. Maximise future profits

B. Maximise shareholder wealth

C. Maximise the total value of the company

D. Maximise future cash flows

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?

A. $8,800

B. $17,600

C. $35,000

D. $44,000

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

A. Speculative

B. Transactions

C. Finance

D. Precautionary

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?

A. $1,350

B. $896

C. $1,013

D. $3,375

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

A. Achieving returns of 15% on new manufacturing equipment

B. Improving brand awareness within Europe

C. Dealing honestly and fairly with customers on all occasions

D. Producing environmentally friendly products

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?

A. Increase

B. Decrease

C. Remain the same

D. Increase, decrease or remain the same depending on the initial size of the quick 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

A. 7 years

B. 6 years

C. 6.25 years

D. 7.25 years

Which of the following statements is true?

A. The Expected Value technique takes into account the investor’s attitude to risk and considers the fact that some investors are more likely to take risks than others.

B. Using mathematical models, a simulation exercise produces a distribution of the possible outcomes from a project. The probability of different outcomes can then be calculated.

C. Sensitivity analysis assesses the likelihood of a variable changing.

D. The lower the sensitivity margin, the less sensitive the decision to the particular parameter being considered.

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.

A. 1. True 2. True

B. 1. True 2. False

C. 1. False 2. True

D. 1. False 2. True

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?

A. Economy

B. Evolution

C. Efficiency

D. Effectiveness

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?

A. At least sixty percent of the members of the board, excluding the chairman, should be independent non-executive directors

B. All directors should submit themselves for re-election at least every three years

C. There should be clear disclosure of directors’ emoluments

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

A. $231,000

B. $210,000

C. $23,100

D. $207,900

A. $9,000

B. $110,000

C. $10,000

D. $100,000

A. 21%

B. 20%

C. 19%

D. 18%

A. It considers the whole life of the project

B. It uses cash flows not profits

C. It is a measure of absolute return

D. It considers the time value of money

A. Before both depreciation and taxation

B. Before depreciation but after taxation

C. After depreciation but before taxation

D. After both depreciation and taxation

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?

A. 75%

B. 55%

C. 38%

D. 28%

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?

A. 52 days

B. 76 days

C. 118 days

D. 128 days

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. $10.47

B. $9.65

C. $4.49

D. $1.20

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

A. (i) only

B. (i) and (ii)

C. (ii) and (iii)

D. All of the above

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. (i) and (ii) only

B. (iii) only

C. (iv) only

D. (iii) and (iv) only

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?

A. Economy

B. Effectiveness

C. Efficiency

D. Externality

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

A. Higher taxes, less government contracts being offered, less subsidies, lower demand

B. Lower interest rates, increased availability of credit from banks, higher demand

C. Lower taxes, increased government subsidies and contracts being offered, higher demand

D. Higher interest rates, less availability of credit from banks, lower demand

Which one of the following is false regarding simulations?

A. They can consider several variables changing simultaneously

B. They have a clear decision rule

C. They give a better understanding of risk

D. They describe a range and probability of possible outcomes

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

A. Increase in retentions result in a higher growth rate

B. All shareholders are indifferent between receiving dividend income and capital gains

C. The value of the shareholders’ equity is determined solely by the firm’s investment selection criteria

D. Discounting the dividends is not an appropriate way to value the firm’s equity

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

A. A form of trade credit or loan

B. The equivalent of lease finance

C. A special kind of partnership where one partner gives money to another for investing it in a commercial enterprise

D. A relationship between two or more parties, who contribute capital to a business, and divide the net profit and loss pro-rata

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.

A. 1. True 2. True

B. 1. True 2. False

C. 1. False 2. True

D. 1. False 2. False

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

A. credit restrictions achieved via the banking system

B. government expenditure on goods and services

C. the volume of money in circulation

D. the rate of interest

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?

A. $2,466,000

B. $1,644,000

C. $3,288,000

D. $2,301,000

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?

A. 10.4%

B. 12%

C. 1%

D. 7.3%

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

A. Debt factors can take over the credit control function

B. Customers will be unaware that their supplier uses a debt factor

C. Factors can take responsibility for unpaid debts under a ‘non-recourse’ arrangement

D. Factors can offer credit insurance to their client

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

A. Set credit limits for customers

B. Invoice promptly and collect overdue debts

C. Offer discounts to speed up cash receipts

D. Assess creditworthiness

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

A. For the seller to use as a maximum price

B. When the business is not a going concern

C. For a purchaser who wishes to immediately break up the business after purchase

D. If the business is a property investment company

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

A. Annual investment in non-current assets

B. Ongoing director's salaries

C. Dividends

D. Tax

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?

A. €492,610 deposited, $246,305 borrowed

B. €492,610 borrowed, $246,305 deposited

C. €487,805 deposited, $243,903 borrowed

D. €487,805 borrowed, $243,903 deposited

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.

A. €1.971 = $1

B. €1.981 = $1

C. €2.019 = $1

D. €2.029 = $1

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?

A. Zigzag should buy € futures and sell them on close out.

B. Zigzag should sell € futures now and buy them back on close out.

C. Zigzag should buy € futures now and also on close out.

D. Zigzag should sell € futures now and also on close out.

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?

A. Zigzag should use a call option on Euros as it gives the right to sell Euros at a fixed rate at a point in the future.

B. Zigzag should use a call option on Euros as it gives the right to buy Euros at a fixed rate at a point in the future.

C. Zigzag should use a put option on Euros as it gives the right to sell Euros at a fixed rate at a point in the future.

D. Zigzag should use a put option on Euros as it gives the right to buy Euros at a fixed rate at a point in the future.

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