Financial Management

1. Which TWO of the following statements are correct in respect of financial

intermediation?
A saver's capital will be at risk from bad lending decisions even if the
intermediary is financially sound.
The intermediary does not lend its own capital to borrowers.
Financial intermediaries provide borrowers with a source of long-term funds.
Intermediaries provide savers with a convenient way to store money

2. Morgan Co use the return on capital employed ratio to assess the company's
performance.
The results for 20Y0 were as follows:

Sales $150,000
Operating Profit $72,000
Total assets $70,000
Equity finance $40,000
Non-current liabilities $20,000
Current liabilities $10,000

Calculate the ROCE for 20Y0 (give your answer to the nearest whole percentage).
120%

The ROCE for 20Y0 is ​ %

3. The following information relates to the ordinary shares of BC Co.

Earnings per share $0.50
Dividend cover 2.5
Published dividend yield 3.2%

The price of BC Co's ordinary shares implied by the data above is:
o $0.78
o $1.53
o $6.25
 o 39.06

4. Which of the following are the THREE main decisions facing the financial manager in
a company?

Dividend decision
Financing decision
Lease or buy decision
Invesment decision
Asset replacement decision

5. ABC Co and DEF Co are listed companies in the same country. Their P/E ratios and
share prices are shown below.

P/E ratio Current share price ex div

ABC Co 8 $5
DEF Co 12 $3.90

Which of the following statements will best explain the higher P/E ratio of DEF
Co?
o DEF Co is a much larger company than ABC Co.
o DEF Co is regarded as a higher risk investment than ABC Co.
o DEF Co has higher earnings per share growth prospects than ABC Co.
o DEF Co retains a higher proportion of its annual post-tax profits than ABC
Co.

6. The figures shown in the table below are an extract from the accounts of Ridgeway
Co. Capital employed is $1.5m.
What is the asset turnover ratio?
Revenue $1,000,000
Less: Cost of sales $400,000)
Gross profit $600,000
Expenses $(300,000)
$300,000
Interest $(50,000)
Income expenses $(100,000)
Distributable profit $150,000
Dividends $(50,000)
Retained profit $100,000

o 20%
o 27%
o 40%
o 67%

7. Under a system of floating exchange rates, if the value of 1.000 Euro falls from USD
1.125 to USD 1.110 then:

o The USD has depreciated against the Euro.

o The USD has been devalued.
o Goods produced in the US are becoming cheaper.
o The USD has appreciated against the Euro.

8. Of what type of market is the following statement a definition?

'A short-term wholesale market for securities maturing in one year, such as certificates
of deposit, treasury bills and commercial paper.'

o Capital market
o Stock Exchange
o Alternative Investment Market
o Money market
9. Which of the following will NOT reduce the agency problem experienced by
shareholders?

o Salary bonuses for management based on financial performance.

o The use of corporate governance codes of best practice.
o The granting of share options to management.
o The use of restrictive covenants in bond deeds.

10. At the end of 20X8 the share price of Craddock Co is $4.50 which includes a capital
gain of $0.50 from the beginning of the period. A dividend of $0.20 has been declared
for 20X8.
What is the total shareholder return as a % to 1 decimal place?
______________
17.5 %

11. The government of country C has taken action to reduce

the value of the currency of country C (the C$).
Which TWO of the following impacts on the companies
based in country C would belikely to result from a
reduction in the value of the C$?
Higher costs from goods supplied by companies
outside country C..
Higher costs in C$ to repay foreign currency bank
loans
Higher prices for goods exported outside Country C
A rise in country C’s balance of payments deficit

12. A capital market is best defined as a market in which:

o Organisations raise long-term finance.

o Organisations raise short-term finance.
o Non-current assets are traded.
 o Organisations raise any form of finance.

13. Not for profit organisations attempt to achieve value for money (VFM) by seeking
three E's.
The three E's are:

o Economy, Efficiency and Effectiveness.

o Efficiency, Electronic commerce and Effectiveness.
o Economy, Ergonomic and Easily achievable.
o Ethical, Efficient and Economic

14. The figures shown in the table below are an extract from the accounts of Ridgeway
(capital employed is $1.5m).
What is the return on capital employed (ROCE)?

Revenue $1,000,000
Cost of sales ($400,000)
Gross profit $600,000
Distribution expenses ($300,000)
and administration cost
Profit before interest and $300,000
tax
Finance cost ($50,000)
Profit before tax $250,000
Income tax expenses ($100,000)
Profit after tax $150,000

o 40%
o 20%
o 10%
o 7%

15. A connected stakeholder deals with a company on a regular basis but is not part of
the
 organisation itself.

Which FOUR of the following are connected stakeholders?

Bankers.
Customers.
Employees.
Government.
Local Communities.
Pressure groups.
Shareholders.
Suppliers

16. The figures in the table below are an extract from the statement of profit or loss of
Boon Co.
Reserves are $4.5m. There are 3.5m ordinary shares in issue (nominal value 50 cents
each) with a market price of $2.

Profit before tax $2,500,000

Less: tax $750,000
Profit after tax $1,750,000
Dividend $500,000
Retained profits $1,250,000

What is the price/earnings (P/E) ratio?

o 1.0
o 2.8
o 4.0
o 5.6
 17. The figures in the table below are an extract from the statement of profit or loss of
Arnold Co.Reserves are $4.5m. There are 3.5m ordinary shares in issue (nominal value

50 cents each) with a market price of $2.

Profit before tax $2,500,000

Less tax $750,000
Profit after tax $1750,000
Dividend 500,000
Retained Profits $1,250,000

What is the dividend yield?

(Ignore taxation.)

o 7%
o 20%
o 30%
o 40%

18. The following terms relate to financial intermediaries.

Match the four terms with their correct explanation.
(a) Risk transformation
(b) Maturity transformation
(c) Aggregation
(d) Pooling of risks

Economy of scale in lending/ borrowing (i)

Spreading of the costs of default (ii)
Transforming high risk investments into low risk investments by the intermediary (iii)
picking up the impact of loan defaults.
Linking of lenders and borrowers needing deposits/ funds over different periods (iv)

​(a) ______
​
(b) ______

​(c) ______
​
(d) ______
19. Which of the following markets is not a money market?

o The interbank market.

o The finance house market.
o The Stock Exchange.
o The intercompany market.

20. What is any person or organisation who brings together providers and users of
finance, whether as broker or principal, known as?

o Business angel
o Venture capitalist
o Merchant banker
o Financial intermediary

21. A company has a two-month receivables cycle. It receives in cash 45% of the total
gross revenue in the month of invoicing. Bad debts are 7% of total gross revenue value
and there is a 10% discount for settling accounts within 30 days.

What percentage of the first month's revenue will be received in the second
month?

43%
__________ ​%

22. A company maintains a minimum cash holding of $1400. The variance of its daily
cash flow has been measured as $270000. The transaction cost for each sale or
purchase of treasury bills is $30. The daily interest rate is 0.025% per day and is not
expected to change in the foreseeable future.

Using the Miller-Orr cash management model, the maximum cash holding level
would be:
10,089
Enter your answer to the nearest dollar $ ________________
 ​
23. Company Z is considering selling its accounts receivable to debt factors. The debt
factor will pay 90% of the value of invoices finally paid with the balance kept as their
service charge.Company Z normally gets 40% of the amount invoiced within 30 days
with the remainder received after 60 days subject to the information below.

A comparison of experience of bad debts between the company and the debt factors
reveals the following:

Bad debts:
Company Z - 20% of the 60-day balance
Debt factors - $10 in every $100 invoiced
If Company Z sells its debts to the debt factors, by how much will cash flow
change for every $100 factored?

o $2 increase.
o $1 increase.
o $7 decrease.
o $8 decrease

24. Frampart has annual credit sales of $825,000, and its customers pay, on average,
after 60 days. In order to encourage speedier remittances, it is decided to offer a 5%
discount to those paying within 30 days.

Frampart's working capital is financed at a cost of 20%.

If all of Frampart's customers took the discount, calculate the annual cash effect
of the discount policy, assuming a 360-day year.

(Use a minus sign before any decrease in cash)

-27,500
$ ________________

25. Which of the following is NOT a method of reducing the risks associated with
collecting amounts owed from foreign receivables?

o Export factoring.
o Export credit insurance.
o Forward contracts.
 o Documentary credits.

26. From the following extracts from a draft statement of financial position,
calculate the quick (acid test) ratio:

Assets $m $m
Non-current assets 10.5
Inventories 4.2
Receivables 2.8
Cash in hand 03
Non-current liabilities
Loan repayable in 5 years 6.5
Current liabilities
Trade payables 2.6
Other short term payables 0.8

0.91
The quick (acid test) ratio is: ​(to two decimal places)

27. The following information relates to Lara Co.

Non current assets $25 million

Current assets- minimum $12 million
Current assets- maximum $20 million
Long term sources of funds $35 million

Is the company's approach to financing:

o Aggressive.

o Balanced.
o Conservative.
o Passive

28. Digital requires 20,000 units of a certain component every year.The purchase price
per unit is $40 and it costs $64 to place and receive delivery of an order irrespective of
its size. The company's cost of capital is 10% per annum. The company currently
places orders for 800 units, although a discount scheme for larger orders exists which
works as follows:

Minimum order Discount rate

1,000 1%
4,000 2%
8,000 3%

What size of order should the company place if its aim is to minimise costs?
o 800 units
o 1,000 units
o 4,000 units
o 8,000 units

29. Pebble's cost of holding a unit of inventory for a year has just gone down.
How does this affect the company's Economic Order Quantity (EOQ) and total
annual cost of placing purchase orders (PO)?

o EOQ higher, PO higher.

o EOQ higher, PO lower.
o EOQ lower, PO higher.
o EOQ lower, PO lower.
30. Pratac uses 240,000 units of component X in its production each year, at a steady
rate. As the supplier is very reliable, replenishment orders may be placed such that
they arrive just as inventories run out; Pratac currently orders once a month.

Each time a replenishment order is placed, at a purchase price of $480 per 1,000 units,
administration costs of $50 are incurred, and the supplier charges $15 per 1,000
components for delivery.The company's cost of capital is 15%, and other variable
holding costs amount to $24 per 1,000 units. Both these costs are assumed to vary
with the average inventory level. The warehouse costs attributable to these inventories
are $12,000 per annum.

Calculate the total annual cost of ordering, handling and holding inventory,
excluding purchase price.

The total annual cost of ordering, handling and holding inventory, excluding purchase
price is: $ _____________
17,160

​
31. Georgie Co is planning to implement a just in time (JIT) approach to inventory and
production management.

Which TWO of the following are NOT likely to result from the implementation of
JIT?

Lower risk of stock-outs

Reduced use of stores facility.
Lower insurance costs.
Higher bulk purchase discounts

32. Poco Co, a training business, has annual sales of $1.05 million and a gross profit
margin of 60%. It is currently experiencing short-term cash flow difficulties, and
intends to delay its payments to trade payables by one month.

To the nearest dollar, calculate the amount by which the cash balance will benefit
in the short-term from this change in policy, assuming sales are spread evenly
over the year, and inventory levels remain constant throughout.
​
After assumptions, the amount by which the cash balance will benefit in the short-
term from this change in policy is $ ______________
35,000
33. Almondvale have prepared a cash flow forecast as follows:
April May June
Inflows 100,000 120,000 180,000
Outflows-expenses (120,000) (110,000) (200,000)
Dividend-interim (50,000)
Capital expenditure (120,000)
Taxation (90,000)
Closing balance 160,000 270,000 290,000

The capital expenditure is a new machine that will gradually increase capacity but
incurs a number of fixed costs. It is expected to generate positive monthly cash flows
after two months.The interim dividend has not yet been declared. The company has an
agreed overdraft of $250,000.
Which of the following actions would be most appropriate?
Option:
I. Cancel the interim dividend.
II. Defer the capital expenditure.
III. Defer the taxation payment.
IV. Defer the interim dividend

o I.
o II.
o III.
o IV

34. Aaron Products is considering the implementation of a revised receivables policy,

which will result in an increase in average collection period from the current 60 days
to 90 days. This is expected to lead to a 20% increase in annual revenue, currently
$960,000, resulting in additional inventories and trade payables of $30,000 and
$16,000 respectively. It is expected that all customers will take advantage of the
extended credit period.
 Calculate the net increase in working capital investment that would result from
the change in policy, assuming a 360- day year.

The net increase in working capital investment that would result from the change in
policy, assuming a 360-day year, is: $ ______________
142,000

35. Which THREE of the following services does a factor most commonly offer?
Administration of the client's payables ledger department.
Provision of finance against the client's outstanding receivables.
Protection against bad debts.
Administration of the client's invoicing and debt collection.
Provision of credit rating information for prospective customers.

36. A firm's working capital comprises cash of $2,000, inventory, receivables and trade
payables. The cost of sales for the year is $28,800. Financial statistics include:

Gross profit margin 40%

Inventory-holding period 1 month
Trade payables payment period 1.2 months
Working capital (current) ratio 3.1

What is the receivables collection period?

o 1.26 months.
o 1.06 months.
o 0.98 months.
o 0.98 months.

37. Mast Quires currently achieves credit revenue of $140,000 per month. Extracts from
the accounts are as follows:
Revenue $140,000
Cost of sales (50% variable, 50% fixed) $100,000
Gross profit $40,000
Bad debts (1% of sales) ($1400)
Distribution and administration expenses ($18,600)
Profit before tax $20,000
 The management think that by increasing the period of credit allowed to customers
from 1 month to 2 months, revenue will rise by 25%, but bad debts would increase to
5% of revenue.

The increase would leave fixed costs, average inventories and average payables
unaffected. The company's cost of capital is 15% per annum.

The new credit policy would increase annual profits, after additional financing
costs, by: $ 150,300.
_______________

38. Dens Co have been offered a prompt payment discount by an important supplier that
is experiencing some short-term cash flow problems.If they pay within 7 days they
will be given a discount of 2%. The normal terms are 30 days but they actually pay on
average after 26 days.The average debt with the supplier is $100,000. Dens Co can
invest spare cash at 8% per year.

Should the company:

o Pay in 7 days?
o Carry on paying after 26 days?
o Pay after 30 days?
o Pay after 30 days?

39. A company's budget includes the following figures.

Monthly revenue (60% of which are on credit) 80,000
Gross profit margin on revenue 30%
Inventory turnover 10 times per year
Receivables collection period 1.2 month
Payables payment period (all purchases are on 1 month
credit)

All non trading expenses are paid in cash and there is no cash balance at the end of
the month.

What bank overdraft will produce a current (working capital) ratio of 2 at the end of
the month?
o $25,600
o $20,800
o $6,400
 o $1,600

40. The following information is relevant for Down Co

Receivables collection period 3 weeks
Inventory holding period 5 weeks

Suppliers' credit period 7 weeks

Production period 2 weeks

What is the operating cycle of Down Co

The operating cycle is:___________weeks.
3

41. An investment has a net present value of $35,000 at 10% and negative $15,000 at
15%.
What is the approximate internal rate of return?
13.5
______________ ​% (to one decimal place)

42. An investment of $5000 is required at the commencement of project A and annual

costs of $15,000 each year until the end of year 4. ​
What is the net present value of the costs of project A if the cost of capital is
10%?
(use discount factors to three decimal places)

o $42,550
o $4,315
o $14,315
o $52,550

43. What is the 'internal rate of return' of an investment?

o The discount rate at which the investment should be appraised.
o The rate charged on loans used to finance the investment.
o The average profit divided by the average investment.
o The discount rate at which the net present value of the investment is zero.
44. A project has a cash inflow of $2,600 in time 4 and this expected to remain constant
in future time periods (to perpetuity).

If the cost of capital is 10% per annum, what is the present value of the total cash
inflows from this project?

19526
​(to the nearest $100)

45. Which of the following approaches could be taken to reduce the uncertainty of a
capital investment project?

o Reduce the required payback period.

o Increase the required payback period.
o Use a higher discounting rate.
o Discount at a risk-free rate.

46. BC Co has identified two mutually exclusive projects which have an equivalent
effect on the risk profile of the company. Project 1 has a payback period of 2.8 years,
an NPV of $17,200, an internal rate of return of 18% and an average accounting rate of
return of 19%. Project 2 has a payback period of 3.2 years, an NPV of $15,700, an
internal rate of return of 22% and an average accounting rate of return of 21%. The
cost of capital is 15%.

Assuming that the directors wish to maximise shareholder wealth and no shortage of
capital is expected, which project should the company choose?

o Project 1 because it has the shorter payback period.

o Project 1 because it has the higher net present value.
o Project 2 because it has the higher internal rate of return.
o Project 2 because it has the higher accounting rate of return.

47. Which of the following items would NOT be a relevant cash flow in a discounted
cash flow calculation?
 o Scrap value of equipment to be used on the project.
o Annual interest payments on the loan taken out to finance the project.
o Directly attributable fixed costs.
o Initial capital expenditure.

48. Which TWO of the following statements about the IRR/NPV methods of
investment appraisal are correct?
If the project has conventional cashflows, the graph of the net present value
against discount rate has a negative slope.
If the net present value of an investment at r% is positive, the NPV will be
negative at a rate of s% if s% is less than r%.
The internal rate of return can be obtained exactly using algebra whereas the
graphical method provides only an approximate rate for the IRR.
An estimate of the internal rate of return requires the calculation of the net present
value at two different discount rates.

49. Which of the following is a disadvantage of the payback method of investment

appraisal?
o It may lead to excessive investment in short-term projects.
o It tends to maximise financial and business risk.
o It is a fairly complex technique and not easy to understand.
o It cannot be used when there is a capital rationing situation

50. The payback period is the number of years that it takes a business to recover its
original investment from net returns calculated on what basis?
o Before depreciation and before taxation.
o Before depreciation but after taxation.
o After deprecation but before taxation.
o After deprecation and after taxation

51. Which of the following is an advantage of the IRR method of appraising

projects?
 o It ignores the relative size of investments.
o If the cashflows from a project are not conventional, it may have more than one
IRR.
o The IRR method should not be used to select between mutually exclusive
projects.
o The information it provides is easily understood by managers.

52. To what does the internal rate of return equate the present value of expected
future net cash receipts?
o Initial cost of the investment outlay.
o Depreciated value of the investment.
o Terminal (compound) value of future cash receipts.
o Zero.

53. In a comparison of the NPV and IRR techniques, which of the following
statements are true?
o Both methods give the same accept or reject decision, regardless of the pattern of
the cash flows.
o IRR is technically superior to NPV and easier to calculate.
o The NPV approach is superior where discount rates are expected to vary over the
life of the project.
o NPV and accounting ROCE can be confused

54. Which of the following methods of investment appraisal is based on accounting

profits?
o NPV
o IRR
o Payback
o ARR

55. The Glass Jar Company is considering expanding its product range by making a new
design of decorative bottle.
Which TWO of the following costs will be relevant in its DCF calculations?
Rent and rates allocation on the currently unused building on the main factory site
where the new line will operate.
The salary and other costs of replacing the project engineer who will be assigned
 to the project from other duties.
The costs of a recently commissioned market research study.
Heat and light to the currently unused factory building where the new line will
operate.

56. Which TWO of the following timing conventions are used in the DCF appraisal
of capital investment projects?
A cash outlay incurred at the start of the project is assumed to occur in year 1.
A cash flow that occurs during the course of a time period is assumed to occur at
the start of that period.
A cash flow that occurs during the course of a time period is assumed to occur at
the end of that period.
A cash flow that occurs at the start of a time period is taken to occur at the end of
the previous period.

57. A contract is to be commenced immediately. In one year’s time it will require

material EH. The material costs $7,800 now but will cost $8,800 in one year’s time.
The cost of storing EH for one year is $110 payable in one year’s time.

If the contractor’s cost of capital is 10% per annum, what is the present value of
using the material if the contractor wishes to maximise profit?
o $7,900

o $7,999

o $7,800
o $7,910

58. A company, which uses a discount rate of 15% for investment appraisal, is
considering buying a machine now at a cost of $15,000 which will produce a cash flow
of $10,500 in one year and $8,200 in two years.

What will the cost of capital be when the project's NPV becomes zero (to 1 dp)?
(Use a second discount rate of 20% where needed)

16.9
The cost of capital can increase to ​%

59. Banbridge Co is about to carry out net present value analysis on a project. If the
project is undertaken, a machine will be used that cost $300,000 when it was
purchased two years ago and has a current written down value of $250,000. If the
 project is not undertaken, the machine could either be sold for $150,000 or used for
another purpose. If it is used for another purpose, the company will be spared the cost
of acquiring a new machine for $220,000. However, some improvements to the
existing machine, costing $20,000, will be necessary.

What is the relevant cost of the machine when calculating the net present value
of the project?

200,000
$ _______________ ​

60. A company has calculated the NPV of a new project as follows:

Present value
$'000
Sales revenue 4,000
Variable costs (2,000)
Fixed costs (500)
Corporation tax at 20% (300)
Initial outlay (1,000)
NPV 200

What is the sensitivity of the project decision to a change in sales volume?

o 12.5%
o 6.3%
o 10.0%
o 5.0%

61. B Co is considering buying a machine, which will reduce the amount of labour
employed, saving $10,000 per year in current terms. The first saving will be 1 year
from now.
The company expects:
• inflation in wage rates to be 6% per year.
• inflation in general to be 10% per year.
• its nominal cost of capital to be 8%.

If the labour savings are expected to continue to perpetuity, what is the

maximum worth spending on the machine?
(All workings should be to 1 dp of a %)

Maximum cost of machine is $ _____________

 62. The current project under appraisal, an investment in the fast food industry where
Martha Co has no other investments, is expected to need non-current assets of
$1,050,000 initially, and these would have negligible value after five years. The non-
current assets attract 25% per year tax allowable depreciation on a reducing balance
basis.

Assuming tax at 30%, the first claim for tax allowable depreciation at the end of
the first year and a one year delay in payment of tax, calculate the cash saved
from tax allowable depreciation each year, each to the nearest $1,000.

0
Time 1 $ __________,000 ​
79
Time 2 $ __________,000

59
Time 3 $ __________,000

44
Time 4 $ __________,000
​ 33
Time 5 $ __________,000

100
Time 6 $ __________,000

63. Mr Idu Knotcare is a risk neutral investor.

He is deciding which one of four mutually exclusive projects to invest in. Each of the
projects has 3 possible outcomes: worst, most likely and best.
He has constructed the following payoff table.

Net profit in $000s

if outcome turns out to be:
Project Worst Most likely Best
1 100 150 180
2 80 190 250
3 120 140 160
4 90 180 300
​
Which project should he undertake?
o 1
o 2
 o 3
o 4

64. The management accountant at Jackman Co has been asked to produce a DCF
appraisal of a new product line. The nominal WACC is 15%, inflation is 5% and all
revenues and costs are expected to increase in line with inflation.

Which of the following is the preferred approach?

o Compute the expected revenues and costs for each year taking inflation into
account, and then discount the cash flows at 15%.
o Make no adjustment to the annual cash flows and discount at 20.75%.
o Compute the expected revenues and costs for each year taking inflation into
account, and then discount the cash flows at 20.75%.
o Make no adjustment to the annual cash flows and discount at 15%.

65. Kingfisher Co is considering a project. The present value of the initial investment of
the project is $60,000, the present value of the project’s variable costs is $26,000, the
present value of its cash inflows is $180,000 and the present value of its total net cash
flows is $21,000.
What percentage change is required in the value of the initial investment to make
Kingfisher Co indifferent between accepting and rejecting the project?

35
Percentage change is ​ ​ ​ %. (Please enter to 2 decimal places)

66. A company, which uses a discount rate of 15% for investment appraisal is
considering the following project:
Time 0 (now) 1 2
Initial investment (15,000)
Variable cost (5,000) (5,000)
Cash inflows 15,500 15,500
Net cash flow (15,000) 10,500 10,500

By what percentage can variable costs increase before the project becomes not
worthwhile?
The discounting factors are as follows:
Year 1 0.870
Year 2 00.756
 (please state your answer to one decimal place)
The variable costs can increase by __________%
67. Rock Co is considering a project and predicts:
i. That wage rates paid to the necessary skilled labour will rise by 8% per year.
ii. That the annual increase in inflation will be 10%.
iii. That the company's money/nominal cost of capital is 20%.

What is the appropriate discount rate to apply to discount the project's net cash flows
in calculating the NPV?
o 8%
o 10%
o 13%
o 20%

68. A project has a normal pattern of cash flows (ie. an initial outflow followed by
several years of inflows).
What would be the effects on the internal rate of return (IRR) of the project
andits discounted payback period (DPP) of a decrease in the company's cost of
capital?

o IRR: Decrease
DPP: Decrease
o IRR: No Change
DPP: Increase
o IRR: Decrease
DPP: Increase
o IRR: No Change
DPP: Decrease

69. A company is considering whether to invest in a project involving an initial

capital outlay of £220,000. The cost of capital is 9%, and the project cash flows
would be as follows.

Time Cashflow Discount factor @

£ 9%
0 (220,000) 1
1 50,000 0.907
2 90,000 0.842
3 80,000 0.772
4 60,000 0.708
5 40,000 0.650

What, to the nearest month and assuming constant monthly cash flows each year,
is the discounted payback period?
o 3 years 2 months
o 3 years 10 months
o 3 years 9 months
o 3 years 0 months

70. Lucky Co is planning to purchase a machine for $100,000 on 31 December 20X1,

the last day of its accounting period. The company can claim tax-allowable
depreciation of 25% reducing balance for each full year the machine is in operation,
making the claim on the last day of the relevant accounting period. Tax is payable with
a one year time delay, and the tax rate is 30%.

To the nearest $100, what is the present value of the cash flows relating to the tax
allowance on the machine during the first five years the machine is in operation.
Lucky's cost of capital is 10%.
o $15,300
o $18,300
o $50,900
o $60,900

71. Which TWO of the following are useful approaches for ranking investment
projects, assuming that projects are divisible?

Present value of cash inflows divided by amount spent on the project.

Project NPV.
Equivalent annual benefit.
Internal rate of return

72. Which of the following is NOT an example of soft capital rationing?

o Management don't want to issue more shares which would dilute control.
 o The company is averse to debt.
o Only retained earnings will be used by the company to finance capital.
o The company's credit rating does not allow any further borrowing.

73. Spotty Co has appraised three capital investment projects. The following results were
found:
PROJECT CAPITAL PV OF NPV OF PROFITABILITY
OUTLAY $ CASHFLOWS $ PROJECT INDEX
X 120,000 250,000 130,000 2.08
Y 150,000 300,000 150,000 2.0
Z 200,000 410,000 210,000 2.05

Capital is restricted to $280,000.

Calculate the maximum NPV that can be achieved assuming that all three projects are
divisible.

Maximum NPV assuming all 3 projects are divisible is $ ___________

74. Which TWO of the following statements are true about the profitability index?
PI can be used to rank any projects to maximise NPV when capital is rationed.
PI can only be used when the capital rationing is soft.
PI concentrates on NPV and does not take into account the timing of cash
flows.
PI ignores the size of a project

75. When choosing between mutually exclusive projects with unequal lives on the basis
of lowest annualised equivalent cost, we usually ignore which THREE of the
following?
Annual running costs.
Future changes in cost of capital.
Future changes in technology.
That the product is unlikely to be produced forever.
Replacement costs.
 76. What is the equivalent cost of spending a present value of $24,870 every 3 years if
the discount rate is 10%?
(use discount factors to three decimal places)
The annual equivalent cost is $ ________

77. Alplas Co is a manufacturer of plastic boxes. It is considering whether to lease a new

machine for making coloured lids. It is evaluating the merits of purchasing the
machine separately from those of leasing it.
What discount rates should be used in calculation?
o Buy: after-tax cost of capital. Lease: after-tax cost of capital.
o Buy: pre-tax cost of capital. Lease: after-tax cost of capital.
o Buy: after-tax cost of borrowing. Lease: after-tax cost of borrowing.
o Buy: after-tax cost of capital. Lease: after-tax cost of borrowing

78. An investor using a discount factor of 5% is indifferent between replacing a machine

every 2 years and replacing every 4 years. The present value of the first 2 year
replacement cycle is $18,000.
What is the present value of the first 4 year replacement cycle?
Discount rates
Yr 1 1
Yr 2 0.907
Yr 3 0.864
Yr 4 0.823

33,924
The present value of the first for year replacement cycle is $ __________ ​
(do all workings to the nearest $)
79. What is the annual equivalent cost of spending a present value of $59,000 every
4 years if the discount rate is 20%?
Discount rates
Yr 1 0.833
Yr 2 0.694
Yr 3 0.579
Yr 4 0.482
​Cumulative discount rate for 4 years: 2.588
22,798
Annual equivalent cost is $ ___________(To nearest $)
Project Capital outlay PV of cashflows NPV Profitability
index
AA $120,000 $250,000 $130,000 2.08
BB $150,000 $300,000 $150,000 2.00
CC $200,000 $410,000 $210,000 2.05
80. TOTC Co has appraised three capital investment projects. The following results are
were found.

Capital is restricted to $280,000.

Calculate the maximum NPV that can be achieved assuming that all three
projects are indivisible.

Capital is
Maximum NPV assuming all three projects are indivisible is $ restricted to
(do all workings to the nearest $) $280,000.
Calculate the
maximum
81. Office Quality Co is a family owned regional business that produces individually
NPV that can
designed suites of office furniture. be achieved
A number of important issues are currently under discussion assuming
by the directors,
and you have been asked to advise which of these could be most thatappropriate
all three for
attracting venture capital. projects are
indivisible.
Maximum NPV
o A programme of planned replacement of manufacturing equipment entailing an
assuming all
investment of 10,000 per year over the next three years. three projects
o A lease on a new building that will cost $50,000 per year. Thisarewill
indivisible
replace the
is $ 280000larger
existing premises (leased for $35,000 per year) and will provide slightly
manufacturing capacity. (do all
workings to
o A $50,000 expansion of the design consultancy division of the business.
the nearest $)
o An acquisition of Desks Direct Co, a firm that operates in the same region
supplying the cheaper end of the market.
82. Identify which of the following statements about leasing are true or false by
clicking on the relevant boxes in the table below.
True False
Capital allowances available on a leased asset are claimed in the
books of the lessor.

Interest payable on a lease will not impact on a company’s interest

cover ratio.

Using lease finance to fund a right of use asset will avoid an increase
the company’s gearimg ratio

83. Which of the following statements about convertible securities is false?

o They are fixed return securities.

o They must be converted into shares before the redemption date.
o The price at which they will be converted into shares is predetermined.
o Issue costs are lower than for equity.

84. Which of the following statements is usually true in relation to considering

different sources of finance?

o Debt finance is often cheaper than equity finance because the investor can claim
tax relief on interest received but not on dividends received.
o Debt finance is often cheaper than equity finance because the company can claim
tax relief on interest paid but not on dividends paid.
o Debt finance is often more expensive than equity finance because the company's
retained profits will be less easy to control.
o Debt finance is often more expensive than equity finance because the company's
 total expenditure is easier to predict if equity finance is used

85. Which of the following statements are correct?

1. Venture capital organisations might provide loan capital as well as equity funds to a
company.
2. Venture capitalists will insist on taking a controlling stake in companies that they
invest equity in.

o Statement 1 only is correct.

o Statement 2 only is correct.
o Statements 1 and 2 are both correct.
o Neither statement is correct.

86. There are several reasons why an organisation might prefer to acquire key assets of
the
business under a lease arrangement rather than by buying them outright with a loan.
Which TWO of the following are possible reasons? Select all that apply.

Its tax position might mean that it cannot benefit from the tax allowances that
would be available for purchasing, thus removing one of the benefits of buying
compared to leasing.
It may have insufficient cash to afford to buy.
It wants to maintain its current gearing ratio rather than increase it.
It may want the option to upgrade or modernise the asset during the term of the
lease, which the terms and conditions of a finance lease arrangement may allow.

87. Xylos Co, a computer software company, wishes to raise capital to finance a new
Internetbased product. It has 500,000 shares in issue of $2 nominal value, and it
proposes to make a one-for-five rights issue.
How many new shares will be issued?
o 200,000
o 2,500,000
o 100,000
o 50,000

88. A company issues $1m of debt at a price of $50 per $100 debt, redeemable at $105 in
ten years' time, with a charge over the company's trade receivables. No interest is
 payable.
What type of debt is this?
o Deep discount debt.
o Zero coupon debt.
o Unsecured debt.
o Convertible debt.

89. Which of the following is an Islamic finance transaction that is similar to

conventional leasing?
o Sukuk
o Ijara

o Murabaha
o Mudaraba

90. Which of the following conditions does not need to hold for a Murabaha
transaction?
o There must be an immediate transfer of an asset.
o The asset must be owned by the financing company.
o There can be no penalties for late payment creating profit for the seller.
o Any losses must be split according to capital contribution.

91. Martha Co prefers to issue bonds while corporate investors prefer holding preference
shares.

A. Preference share dividends are not tax deductible for the issuing company and are
not taxed on the company holding the shares.
B. It is more difficult for the issuing company to keep track of shareholders than debt
holders.
C. Bonds are seen as more risky than preference shares by the investing company.
D. Preference shares usually carry voting rights

92. In formulating a dividend policy, the board of directors of a quoted company might
apply which TWO of the following guidelines in practice?
 A. The company should seek to attract investors as shareholders who prefer the
dividend policy of the company.
B. The company should have a long-run target for the dividend payout or dividend
cover ratio.
C. The company should adjust its dividend payments each year in response to
changes in its annual earnings.
D. Dividend policy should be decided only after the company has decided how much
of its profits should be retained for reinvestment.
E. The company might use dividends as a means of signalling to the market the
future prospects for the company.

93. Which of the following would NOT be a reason for a low dividend payout policy?

A. Investing for growth.

B. A lack of alternative sources of long-term finance.
C. Using dividends to give a signal to the stock market.
D. Low profitability.

94. A few companies have a long-term dividend policy of paying out no dividends.
Which of the following are the THREE strongest and most likely reasons for justifying
a no-dividend policy over the long term?

A. The company is a growth company and investors buying shares in the company
recognise that all profits will be reinvested for growth.
B. Shareholders needing cash can sell shares in the stock market at any time, and so
do not need dividends.
C. The tax treatment of capital gains is more favourable than the tax treatment of
dividends.
D. Paying no dividends will protect the company's cash flows.
E. Retained profits are a cheaper source of new finance than raising new capital in
the markets.

95. Which of the following sources of finance to companies is the most widely used in
practice?
 A. Bank borrowings.
B. Rights issues.
C. New share issues.
D. Retained cash.

96. Which of the following is most likely to be an advantage of using a 10 year lease to
fund an asset compared to buying the asset outright with a bank loan?

A. Tax relief obtained from capital allowances.

B. The interest cover ratio will be much lower.
C. The gearing ratio will be much lower.
D. The asset may be upgraded to the latest model during the lease term

97. Which TWO of the following are NOT sources of short term finance?

A. Trade credit.
B. Debt factoring.
C. Overdraft.
D. Loan note.
E. Stock split.

98. Which of the following is NOT a valid reason why the directors of a company might
decide to retain earnings rather than pay them out as dividends?

A. Finance from retained earnings has no cost as a source of finance.

B. The shareholders generally wish to make a capital profit.
C. Retention of earnings avoids the possibility of a change in control resulting from
an issue of new shares.
D. Retention of earnings allows the directors to undertake investment projects
without involving the shareholders

99. Which of the following factors are company directors LEAST likely to take into
account when setting the level of dividends for the year?
 A. The law on distributable profits.
B. The previous level of dividends.
C. The level of financial gearing
D. The level of other payables.

100. Company X is financed equally by equity and by long-term fixed rate debt with 20
years until the debt needs to be repaid.
Which of the following factors will NOT influence Company X's dividend policy?

A. The effect of inflation.

B. The company's liquidity position.
C. The level of interest rates.
D. The signalling effect.

101. Extracts from the projected statement of profit or loss of SD for the year to 30 June
20X1 shows the following figures.

Profit before interest and tax operating profit $100,000

Finance cost $40,000
Profit before tax $60,000
Income tax expense $18,000
Profit after tax $42,000

The directors of SD estimate that the additional purchase of new equipment on 1 July
20X1 for $140,000 would increase the projected profit for the year by $18,000.
The machine would be financed by a loan raised on 1 July 20X1 with a coupon rate of
5%.

What would the projected interest cover for the company become if the directors
purchased the new machine?

A. 0.66
B. 0.94
C. 2.13
D. 2.51

102. Crispin has decided to calculate its gearing ratio according to the formula: prior
charge capital / equity capital (including reserves).
 At which of the following levels would it be neutrally geared?

A. 200%
B. 150%
C. 100%
D. 50%

103. MFW Co is considering a $1,000,000 expansion of its business. They are

considering either a loan in the form of 7% bonds or issuing 400,000 equity shares at
$2.50 to raise the same amount of funds. The expansion will generate $500,000 of
extra operating profit each year. Assume tax of 25%. Ratios currently stand as follows:

Gearing (Prior charge capital/Equity) = $2,500,000/$7,200,000

= 34.7%
Interest cover (PBIT/Interest payable) = $2,522,000/$223,000
= 11.3 times
Earnings per share = PAT/Number of equity shares in issue
= $1,724,000/3,000,000
= 57.5c per share
Which one of the following is correct?

A. Earnings per share are increased most by using debt.

B. Interest cover is reduced using either source of finance.
C. Equity reduces gearing and gives the best earnings per share.
D. Earnings per share and interest cover both worsen using debt.

104. Financial gearing refers to the variability of returns caused by debt interest, and
therefore financial risk is often measured by the debt to equity ratio.

Operating gearing refers to the variability of returns caused by the fixed costs of the
business operation, and therefore business risk is best measured by which of the
following?

A. Operating profit to sales.

B. Contribution to PBIT.
C. PBIT to Interest, tax and dividends.
D. Sales to fixed costs.
105. Rocky Co achieved earnings of $250,000 and profit before tax of $300,000 for
year ended 31 December 20X0. At 31 December 20X0 the company was financed as
follows:
8% Bonds $1,000,000
6% Preference shares $500,000
Ordinary shares $250,000
Reserves $780,000

What was the interest cover ratio?

​_4.75
_____ times (to 2 decimal points)

106. The following information has been extracted from the statement of financial
position of Rafter Co:
$

Ordinary share capital ​ ​ 150,000

60,000 shares, current market price $8.20
8% Preference share capital ​ 100,000
200,000 shares, current market price $0.48
Retained earnings ​ ​ ​ 250,000
Total equity ​ ​ ​ ​ 500,000

Total assets less current liabilities amount to $700,000. Bonds issued by the company
are currently trading at 95%.

Calculate the gearing ratio for Rafter Co as a percentage of total capital employed
based on market values (put your answer to one decimal place).
__________
36.8% %

107. Which of the following sources of funds for business is NOT commonly offered by
commercial banks?

A. Overdraft facilities.
B. Short-term loans.
C. Medium-term loans.
D. Long-term unsecured loans.

108. A company has entered into a lease transaction with the following terms:
Annual lease payment: $1,000 paid in advance
 Term: 5 years
The company has an after tax borrowing rate of 5% and tax is paid one year in
arrears at 30%.

What is the present value cost of leasing the asset? (to the nearest $, no brackets or
minus sign required)
$______________
3309

109. Which of the following sources of finance is NOT suitable for a small company?

A. Owner financing.
B. Business angel financing.
C. An initial public offer.
D. Leasing

110. Indicate whether each of the following statements about small and medium sized
entities is true or false?
TRUE FALSE
Medium-term finance is often difficult to access.
Capital rationing is likely to be a problem.
Crowd-funding is unlikely to be accessible.

111. Are the following statements about the difference between the cost of equity using
the dividend growth model and the cost of equity using the CAPM, true or false?

TRUE FALSE
The CAPM allows for a premium for financial risk, which the dividend
growth model does not.
The CAPM allows for a premium for business risk, which the dividend
growth model does not.
The CAPM allows for return to be in the form of capital gain or
dividends, whereas the dividend growth model allows for expected future
dividends only.
The CAPM valuation of the cost of equity is based on a beta which is
derived from share price observations over time, whilst the dividend
valuation model is not.

112. The equity shares of Front Co have a beta value of 0.90. The risk-free rate of return
is 5% and the market risk premium is 4%. Tax is 25%.
What is the expected return on the shares of Front Co?

A. 7.7%
B. 8.1%
C. 8.6%
D. 13.1%

113. Kahn Flowers Co's equity has a beta factor of 0.9. The company is financed by a
mixture of equity, preference shares and irredeemable long term debt capital, as
follows

Ordinary shares: 40 million shares, market value $2 per share

7% preferred shares of $1 each: 20 million shares, market value 50p per share
12% Debt capital: $20,000,000, market value $80 per $100 nominal value

If the market rate of return is 18%, the risk-free rate of return is 12% and the rate of
tax 35%, what is the company's weighted average cost of capital?

15.9
15.9%
The company's weighted average cost of capital is _______% to one decimal place

114. The following data relates to the ordinary shares of Homer Co.
Current market price, 31 December 20X1 ​ ​ ​ ​ 50c
2
Market price one year ago, 31 December 20X0 ​ ​ ​227c
Earning per share, 20X1 ​ ​ ​ ​ ​ ​ 7.73c
5
Dividend per share, 20X1 ​ ​ ​ ​ ​ ​35c
Expected growth rate in dividends and earnings ​ ​ ​10%
per annum
Average market return ​ ​ ​ ​ ​ ​20%
Risk-free rate of return ​ ​ ​ ​ ​ ​13%
Basic rate of income tax ​ ​ ​ ​ ​ ​30%
Beta factor of Homer Co's equity ​ ​ ​ ​ ​1.5
What is Homer Co's cost of equity, using the the capital asset pricing model?
 The estimated cost of Homer Co's equity, using the capital asset pricing model
(CAPM), is: 23.5%
_________% (to one decimal place).

115. The following data relates to the ordinary shares of Lye Cheese Co.
Current market price, 31 December 20X1 ​ ​ ​ ​ 50c
2
Market price one year ago, 31 December 20X0 ​ ​ ​227c
Earning per share, 20X1 ​ ​ ​ ​ ​ ​ 7.73c
5
Dividend per share, 20X1 ​ ​ ​ ​ ​ ​35c
Expected growth rate in dividends and earnings ​ ​ ​10%
per annum
Average market return ​ ​ ​ ​ ​ ​20%
Risk-free rate of return ​ ​ ​ ​ ​ ​13%
Basic rate of income tax ​ ​ ​ ​ ​ ​30%
Beta factor of Lye Cheese Co's equity ​ ​ ​ ​1.5

The estimated cost of Lye Cheese Co's equity, using the dividend growth model and
market price, is:

A. 24.0%
B. 25.4%
C. 30.0%
D. 32.0%

116. Which of the following is NOT a feature of the cost of capital of a company?

A. It is the return that investors expect to be paid for putting funds into the company.
B. It is the minimum return that a company should make on its own investments.
C. It can be estimated from the average market returns.
D. It can be used in investment appraisal.

117. Grebe Co has 8% bonds in issue that are redeemable at par in four years' time.
Interest is paid annually, and an interest payment has just been made. The current
 market price of the bonds is $108.00. Tax is 25% and tax is payable in the same year
as the profit to which the tax relates.

Using the discount rates below, and no other discount rates, estimate (by calculating an
internal rate of return) the cost of the bonds.

YEAR DISCOUNT RATE DISCOUNT RATE

(3%) (5%)
0 1.00 1.00
1 0.97 0.95
2 0.94 0.91
3 0.92 0.86
4 0.89 0.82

3.8
Using discount rates to two decimal places, the after-tax cost of the bonds is ____ %
(to one decimal place)

118. Corbet Co has just paid a dividend of $1.20 per share. The last financial statements
show that its earnings per share were $2.50, and that the value of its assets was $6
million. There are 500,000 shares in issue, which are currently quoted at $8.00 ex div.

What is the cost of capital of Corbet Co?

A. 15.00%
B. 21.88%
C. 27.42%
D. 31.25%

119. The price of a company's share is currently $40 ex div. The latest dividend is $3.00
per share. If the company's cost of equity is 10% pa, what is the implicit constant
annual dividend growth rate?

A. 2.33%
B. 2.50%
C. 7.50%
D. 10.00%

120. A company has issued 6% irredeemable preferred shares of $1 each, and 6%

irredeemable bonds. The current market value of the preferred shares is $0.75 each and
 the current market value of the bonds is $96.00 per $100 nominal. The rate of tax is
25%.
What is the cost of the preference shares and the cost of the bonds?

A. Cost of preferred shares 6%, cost of bonds 4.5%

B. Cost of preferred shares 6%, cost of bonds 4.7%
C. Cost of preferred shares 8%, cost of bonds 4.5%
D. Cost of preferred shares 8%, cost of bonds 4.7%

121. Which of the following risks can be eliminated by diversification?

A. Inherent risk.
B. Systematic risk.
C. Market risk.
D. Unsystematic risk.

122. A company has issued 10% bonds that are redeemable at par in three years' time.
Interest is paid annually, and the interest payment for the most recent year has just
been paid. The current market price of the bonds is 103.2. The rate of tax is 25%.

Using the discount rates given below and the IRR interpolation method, you are
required to calculate the cost of the bonds, to the nearest one decimal place.

YEAR DISCOUNT RATE 5% DSICOUNT RATE 10%

1 0.95 0.91
2 091 0.83
3 0.86 0.75

6.3
To the nearest one decimal place, the cost of the bonds is ________ %
​
123. Four years ago a company paid a dividend of $610,000 on a share capital of 4
million ordinary shares of 50c. It has just paid a dividend of $960,000 on the same
capital, and the current market price of the shares is 300c. What is the estimated cost
of equity capital?

A. 020.0%
B. 21.0%
 C. 22.3%
D. 23.5%

124. The dividends and earnings of Bayle Eaves Co over the last 5 years have been as
follows.

YEAR DIVIDENDS ($) EARNINGS ($)

20X1 300,000 713,000
20X2 316,500 735,000
20X3 334,500 764,000
20X4 361,000 794,000
20X4 379,000 834,000
The company is financed entirely by equity, and there are 2,000,000 shares in issue,
each with a market value of $1.18 ex div.
On the assumption that the data for 20X1 - 20X5 provides a basis for estimating
future trends, what is the cost of equity?

A. 16%
B. 21%
C. 22%
D. 23%
125. When calculating the weighted average cost of capital, which of the following is
the preferred method of weighting?

A. Book values of debt and equity.

B. Average levels of the market values of debt and equity (ignoring reserves) over
five years.
C. Current market values of debt and equity (ignoring reserves).
D. Current market values of debt and equity (plus reserves).

126. Mex Turbs Co has the following capital structure.

$m
40 million equity shares of 50c 20
Retained earnings 120
9% bonds 30
170
 The bonds are irredeemable and have a current market value of $119 (cum interest).
The company's rate of tax is 40%. Its cost of equity has been estimated at 18% per
annum. The current market price per share is 108c ex div.

The company's weighted average cost of capital, for investment appraisal purposes,
is: 12.3
_______
12.3 % (to one decimal place)

127. In which TWO of the following circumstances would it be correct to use the
current weighted average cost of capital (WACC) in project appraisal?

A. The marginal cost of capital is roughly equal to the current weighted average cost
of capital if risk is unchanged.
B. If the new investment has different business risk characteristics from the existing
operations.
C. The new project is marginal in size.
D. If the new project alters the financial risk of the whole company.

128. Extracts from the statement of financial position of Drum Co are as follows.
$m
6 % irredeemable bonds 800
Equity shares of 25c each 100
Reserves 1,000
1,100
The shares have a market value of $5 each and the cost of equity is 9%. The bonds
have a market value of $105.0. Tax is 25%.
What is the weighted average cost of capital of Drum Co?

A. 6.0%
B. 6.1%
C. 7.1%
D. 7.6%

129. The statement of financial position of Rafiel Co shows a financing mix of 50%
equity shares ($1 nominal value, $3 market value), 20% retained earnings and 30%
bonds (coupon rate 10%). The cost of equity has been calculated as 15%, and the cost
of debt is equivalent to the coupon rate. The bonds are trading at nominal value.
What is the best method of calculating the WACC?
 A. (15% × 70%) + (10% × 30%)
B. (15% × 85%) + (10% × 15%)
C. (15% × 83%) + (10% × 17%)
D. (15% × 62.5%) + (10% × 37.5%)

130. Falstone Co have just issued 1m 8% preferred shares with a nominal value of $1.
These preferred shares are currently trading at $1.02. The company's ordinary
dividends are expected to grow at 5% pa.
What is the cost of preferred share capital?

7.84
The cost of preferred share capital _______% (2 dec places).

131. What is unsystematic risk?

A. Risk that cannot be eliminated by diversification and is common to all firms.

B. Risk that can be eliminated by diversification.
C. Risk that remains when all the hedging techniques have been used by a firm.
D. Risk that the whole financial system will be affected by the failure of a key
financial institution.

132. A company has just paid an ordinary dividend of 20c per share and the shares are
currently trading at 510c.
If dividend growth is expected to be 4% per annum what is the company's cost of
equity (to the nearest whole %)?

A. 6%
B. 7%
C. 8%
D. 9%

133. Freitag Co has a beta factor of 1.2 and a cost of equity of 9%. The risk free rate of
return is 3%.
What is the market rate of return?
 8
The market rate of return is currently _______%

134. Sonntag Co has a cost of equity of 10%. The market return is 8% and the risk free
rate of return is 4%.
What is Sonntag's beta factor?

1.5
Sonntag's beta factor is _______.

135. The following information relates to Growth Co.

Dividend cover 2.2 times

Earnings after tax and preference dividends $125,000
Return on capital employed 12.5%
Preference dividend $10,000
Dividend per ordinary share 30c

What would be the appropriate dividend growth rate to include in a cost of capital
calculation?

A. 12.5%
B. 5.7%
C. 6.8%
D. 2.2%

136. A company has just paid an ordinary dividend of 20c per share and the shares are
currently trading at 530c.
If dividend growth is expected to be 4% per annum what is the company's cost of
equity to the nearest whole number?

A. 6%
B. 7%
C. 8%
D. 9%

137. In the creditor hierarchy, which of the following are considered to be the most at
risk?
 A. Ordinary shareholders.
B. Unsecured payables (creditors).
C. Payables (creditors) with a fixed charge.
D. Preference shareholders.

138. Which of the following statements concerning capital structure is incorrect?

A. The traditional view is that there is an optimal capital mix at which the average
cost of capital is minimised.
B. Under the traditional theory of cost of capital, the cost rises initially and then falls
as gearing increases.
C. Modigliani and Miller believed that, ignoring taxation, the firm's WACC is not
influenced by changes in its capital structure.
D. Tax relief on interest payments lowers the WACC

139. According to pecking order theory, the order of preference for sources of finance
is:

A. Equity shares, preference shares, convertible debt, straight debt.

B. Retained earnings, equity shares, preference shares, debt.
C. Retained earnings, debt, preference shares, equity shares.
D. Debt, preference shares, equity shares, retained earnings.

140. Two companies are identical in every respect except for their capital structure. XY
has a debt:equity ratio of 1:3 and its equity has a ß value of 1.30. PQ has a debt:equity
ratio of 2:3. Tax on profits is at 30%. Estimate a ß value for PQ's equity.

A. 1.054
B. 1.300
C. 1.546
D. 0.647

141. Cork Co pays a dividend annually. It has just paid a dividend of $0.40 and has a
policy of increasing the dividend each year. The company is all-equity financed, and
raises new capital for investment from retained earnings. The company retains 50% of
 its earnings and invests these to earn a return on investment of 12% per annum. The
company's cost of capital is 12%.

Using the dividend valuation model, what should be the value of Cork's shares (in $ to
two decimal places)?

7.07
The share price should be $_______.

142. The shares of Crack Tribb Co have a current market price of $0.74 each, ex div. It
is expected that the dividend in one year's time will be $0.08 per share. The required
return from net dividends on these shares is 16% per annum.
According to the dividend valuation model what is the expected annual dividend
growth rate

5.2
_______ % (to one decimal place)

143. Which of the following statements about the strong-form efficient markets
hypothesis are correct?

1. It implies the ability to forecast future share price changes

2. It implies that share prices are valued fairly, and this is evidenced by continual rises
and falls in market prices.

A. Statements 1 and 2 are both correct.

B. Statement 1 only is correct.
C. Statement 2 only is correct.
D. Neither statement is correct

144. Burr Steerdrum Co has been achieving the following annual results.
Profit before interest $1,000,000
Interest on $250,000 12% bonds $300,000
$700,000
Tax at 30% $210,000
Earnings and dividend $490,000

The bonds have a market value at par, and the cost of equity is 19.6%. There are
1,000,000 shares in issue with a current price of $2.50 per share.
The company is now considering a project costing $1,000,000 which would add to
profits by $200,000 per annum in perpetuity before interest and tax. All earnings
would continue to be paid as dividends.
The share price will respond immediately to any change in expected future dividends.
 Tax on profits will remain at 30%.
If the project is undertaken, financed entirely by new equity capital by issuing new
shares (at the current market price), so that the cost of debt remains unchanged and
the cost of equity in the company falls to 17%, the share price will:

A. Fall by 13c.
B. Rise by 15c.
C. Rise by 21c.
D. Rise by 86c.
145. 8% loan notes in Rooney Nose Co are redeemable after 3 more years at 105%.
Interest is paid annually, and the next payment is due after one year. The cost of this
debt capital to the company is 12% net of tax. Tax payments occur in the same year as
the cash flows which give rise to them.
Company taxation is at the rate of 35%.
What is the equilibrium price per $100 of the loan notes?

A. $57.37
B. $61.07

C. $83.53
D. $87.25

146. What is the ex-dividend value of a share that is about to pay a dividend of $1.50
where the shareholder's cost of capital is 10% and the expected annual rate of dividend
growth is 4%?
26
The ex-dividend share value is (to the nearest $) _______.

147. The statement of financial position of Roland Butta Co is as follows.

$
Non-current assets 21,000,000
Net current assets 3,000,000
24,000,000
15% bonds 4,000,000
20,000,000
Ordinary shares of 25c each 10,000,000
Retained profits 10,000,000
20,000,000
The company has paid a consistent dividend of $0.10 each year, and this rate of
 payment is expected into the indefinite future. The price per share is currently $0.50
cum div, with the annual dividend for the previous year about to be paid in four days'
time.
Using the dividend valuation model, what is the cost of capital of Roland Butta Co's:

25
1. Ordinary shares. _______%

25
2. Retained profits. _______%
148. Wharton Fingers Co has just made a public announcement that it plans to launch a
new product on to the market that should reduce the volatility of its reported annual
profits. On the same day Saliva Co, a food products manufacturer, has publicly
announced that it has withdrawn substantial inventories of its product from its retail
customers because of a reported food poisoning incident.

If neither of these items of information had been made public before, what effect
should they now have on the companies' share prices, assuming that the stock market
has semi-strong form efficiency?

A. Wharton Fingers Co share price: Decrease Saliva Co share price: No change

B. Wharton Fingers Co share price: No change Saliva Co share price: Decrease
C. Wharton Fingers Co share price: Increase Saliva Co share price: No change
D. Wharton Fingers Co share price: Increase Saliva Co share price: Decrease

149. What is the role of the chartist or technical analyst in stock markets?

A. To predict future share price movements from historical patterns and trends.
B. To identify shares that are under- or over-valued from a study of historical
financial information.
C. To identify shares that are under- or over-valued by calculating the present value
of their expected future earnings stream.
D. To compare share prices in international stock markets and make country
comparisons.

150. A company has 12% loan notes in issue which are redeemable in three years’ time
at a premium of 20% to their nominal value of $100 per loan note. The required return
on debt is 10%.
What is the current market value of each loan note?

119.96
$ _________ (Give your answer to two decimal places)
 151. The following data relate to an all-equity financed company, Bruce Chinn Co.
Dividend just paid $180,000
Earnings retained and invested 60%
Return on investments 15%
Cost of equity 20%

According to the dividend valuation model, what is the market value of the company?

A. $900,000
B. $1,363,000
C. $1,636,000
D. $1,784,000

152. Which of the following statements about the efficient markets hypothesis is
FALSE?

A. The strong form of the hypothesis implies that it is possible to predict changes in
share price.
B. The strong form of the hypothesis implies that share prices will reflect all
available information that could possibly affect the share price.
C. The semi-strong form of the hypothesis implies that share prices will reflect
information such as earnings forecasts and announcements of acquisitions.
D. The semi-strong form of the hypothesis implies that it is not worthwhile for an
investor to study company reports and try to achieve superior returns.

153. Raybould Co expects to pay a constant dividend of $0.60 per share at the end of
every year forever.
Assuming that a dividend has just been paid, what should the market price of the
shares be? The nominal value of the shares is $2, and the cost of capital is 12%.

A. $10.00
 B. $5.00
C. $2.50
D. $2.40

154. Which theory of share price behaviour does the following statement describe?
'The analysis of external and internal influences upon the operations of a company
with a view to assisting in investment decisions.'

A. Technical analysis.
B. Random walk theory.
C. Fundamental analysis theory.
D. Chartism.

155. Redeemable bonds have a coupon rate of 7%. They will be redeemed in 20X6 at
nominal value. The yield on similar notes is 5% at the moment (20X3). The interest
has been paid for 20X3.

What is the market price of the bonds?

105.46
Market price of the bonds $________ (to two decimal places)

156. Which is the most realistic basis for valuing an asset that is to continue to be used
in a business?

A. Historical cost basis.

B. Historical cost adjusted for depreciation basis.
C. Replacement basis.
D. Realisable value basis.

157. The following figures are taken from Louie Co's statement of financial position.
$m
Goodwill 60
Non-current tangible assets 200
Net current assets 50
10% bonds 30
Unsecured mezzanine debt 21
Ordinary shares of $1 40
5% $1 preferred shares 10
Reserves 210

Using the net assets basis of valuation, what is the value of an ordinary share?
A. $4.75
B. $5.00
C. $5.25
D. $6.25

158. The following figures are taken from Dewie Co's statement of financial position.
$m
Non-current tangible assets 500
Net current assets 127
10% bond 75
Unsecured mezzanine debt 50
Ordinary shares of $1 125
5% $1 preferred shares 25
Reserves 352

The net current assets includes $100m of receivables, 20% of the value of receivables
relates to a major order where the customer is unhappy and as a goodwill gesture 10%
of this will be written off.

Using the realisable value of net assets basis of valuation, what is the value of an
ordinary share? (give your answer to two decimal places)

3.8
$_______

159. Which of the following is NOT an assumption of the dividend valuation model?

A. Stock markets are efficient in pricing shares.

B. Dividend growth is constant.
C. The company's earnings will increase sufficiently to maintain dividend growth
 levels.
D. The dividend growth rate exceeds the discount rate.

160. A 20-year bond with a nominal value of $100 and a coupon of 6% (annual) is due
for redemption in six years time. The next interest payment is due in one year from
now. The market rate of interest is now 12%. What is the approximate market value of
the bond?

A. $24.67
B. $36.55
C. $50.70
D. $75.37

161. Are the following statements correct or incorrect?

Statement 1: A company is only exposed to currency risk if it exports or imports
goods or services, or borrows or invests in a foreign currency.
Statement 2: When interest rates on the euro are lower than interest rates on
sterling a UK Company with no other cash flows in euros will not save money by
borrowing in euros.

A. Both statements are correct.

B. Statement 1 only is correct.
C. Statement 2 only is correct.
D. Both statements are incorrect.

162. Company A is based in Country X, where the local currency is the X$. Company A
is exporting to Country Y where the currency is the peso. Company A wants to sell its
product in Country Y so that it receives X$8 per unit. The exchange rate is currently
1.50 peso to the X$.

If it is estimated that next year prices will rise 5% in Country X and 4% in Country Y,
what will be the exchange rate in a year's time and the price of a unit in peso in a
year's time?

The exchange rate in a year's time: pesos per X$_______ (to 3 decimal places)
 12.48
The price of a unit in pesos: _______ (to 2 decimal places)

163. Suppose that annual inflation levels are currently at 4% in Japan and 6% in the
United Kingdom.

If the levels of inflation move during the next year to 3% in Japan and 8% in the
United Kingdom, what effect are these changes in inflation likely to have on the
relative value of the yen and the pound by the end of next year, according to the
purchasing power parity theory of long term exchange rates?

Sterling will decline in value against the yen by:

A. 2.8%
B. 3.0%
C. 4.6%
D. 5.0%

164. Inflation rates in two countries are as follows:

US 3%
Switzerland 5%
Current spot rate is SFr2.3175/$1.

Calculate the exchange rate for the next three years to four decimal places.

2.3625
Year 1 _______

2.4084
Year 2 _______

2.4551
Year 3 _______

165. A company might borrow long-term at a fixed rate or at a floating rate of interest.
 Which of the following statements is NOT correct?

A. A fixed rate of interest is rarely obtainable on a medium-term or long-term bank

loan.
B. Most corporate bonds are issued at a fixed rate of interest.
C. Companies will prefer to borrow medium-term or long-term at a fixed rate when
interest rates are expected to fall over the loan period.
D. Borrowing at a fixed rate of interest provides certainty about future interest rate
obligations.

166. A number of factors will be considered by managers responsible for the cash
management of a large company.
Which of the following factors will make managers prefer long-term to short-term
debt?

A. Exposure to interest rate movements.

B. Inaccurate cash flow forecasts.
C. Risk of a deteriorating credit rating.
D. Exposure to exchange rate fluctuations.

167. With respect to the term structure of interest rates, the inverse yield curve is:

A. Upward sloping.
B. Downward sloping.
C. U-shaped.
D. Horizontal.

168. Which of the following theories could not be used to explain the term structure of
interest rates?

A. Expectations theory.
B. Miller-Orr model.
C. Liquidity preference theory.
D. Market segmentation.
169. Examine the validity of the following statements with respect to the yield curve
showing the term structure of interest rates.
 TRUE FALSE
Statement 1 When interest rates are expected to fall consistently, short-
term interest
rates are likely to be higher than long-term interest rates.
Statement 2 When interest rates are expected to fall consistently, a yield
curve
would normally be downward sloping.

170. A US company has made a sale to a customer in France for €1 million, with
payment due in two months.

How could the company hedge its exchange rate exposure during this period using
currency futures or options on currency futures?

A. Buy euro futures or buy call options on euro futures

B. Buy euro futures or buy put options on euro futures
C. Sell euro futures or buy call options on euro futures
D. Sell euro futures or buy put options on euro futures

171. Lanvert Co is due to receive 2.8m Euro for exported goods in 3 months’ time.
Lanvert Co is based in Country A, where the currency is the A$. Lanvert Co is

considering using forward contracts to hedge risk.

Exchange rates Euro per A$

Spot 1.0610-1.0661
3 months forward 1.0650-1.0715
6 months forward 1.0683-1.0740

Given the following figures, what is the amount that can be guaranteed to be received
in 3 months’ time?

2613159
$__________

172. Sally Sitter Co has to pay a French supplier 100,000 euros in 3 months time. The
company's financial director wishes to avoid exchange rate exposure, and is looking at
four options:
 1. Do nothing for three months, then buy the euros at the spot rate.
2. 'Lead' with the payment, and pay in full now, buying the euros at today's spot
rate.
3. Buy euros now, put them on deposit for three months, and pay the debt with
these euros plus accumulated interest.
4. Arrange a forward exchange contract to buy the euros in three months time.

Which of these options would provide cover against exchange rate exposure?

A. Options 1, 2, 3 and 4.
B. Options 2, 3 and 4.
C. Options 3 and 4.
D. Options 4 only.

173. Which of the following instruments is most similar to a forward rate agreement
(FRA)?

A. An interest rate guarantee

B. An interest rate swap
C. An interest rate option
D. An interest rate future

174. The spot rate for the peso (the currency of Country P) against the $ (the currency
of country D) is 1.5000 peso to $1.
The annual nominal interest rate in Country P is 6% and the annual interest rate in
Country D is 4%.
The annual inflation rate in Country P is 4% and the annual inflation rate in Country
D is 2%.

Using this information, what will the six month forward rate be?

A. 1.5294
B. 1.5149
C. 1.5289
D. 1.5147

175. In which THREE of the following circumstances does an interest rate exposure
arise?
 A. A company borrows at a fixed rate of interest.
B. A company sells the money market investments it has been holding.
C. A company holds a quantity of government bonds as a short-term investment.
D. A company holds shares in other quoted companies as a short-term investment.
E. A company borrows at a variable rate of interest.

176. A yield curve shows the relationship between the yield and term to maturity for a
number of financial assets, eg government stock. In theory, the yield curve will
normally be upward sloping so that long-term financial assets offer a higher yield than
short-term financial assets.

Which of TWO the following best explains the reason for this?

A. Interest rates are expected to fall in the future.

B. High demand for long-term financial assets.
C. The investor must be compensated for the time value of money.
D. Lower prices being paid for long-term government bonds compared to short-term
Treasury Bills.

177. Which TWO of the following are disadvantages of using interest rate futures?

A. Contracts are subject to basis risk

B. Contracts are limited to a set amount of borrowing by fixed contract values
C. Contracts are closed out on a specified date
D. Contracts are only available for borrowing in a limited number of currencies

178. The issuer of a eurobond to finance capital expenditure may face an exchange rate
risk because:

A. The interest is payable in a different currency to the loan.

B. The revenue earned from the capital expenditure is different to the currency of the
loan.
C. The interest rate is always fixed.
 D. It is a small company and therefore much more open to currency changes.

179. Lytham Co trade in south-east Asia and remit profits to the UK.
They are considering methods that they can use to minimise their exposure to foreign
exchange risk.

Which of the following will not protect them from exchange risks?

A. Leading and lagging.

B. Matching.
C. Forward contracts.
D. Invoicing in local currency.

180. Easter Inc, whose curreny is the B$, buy some of their goods from Australia priced
in A$. The most recent invoice is for A$1,300,000 which is due in 2 months' time. The
current exchange rate is A$2.80 per B$. They have been offered a forward contract to
buy Australian dollars at A $2.90 per B$ in two months' time. The exchange rate is not
expected to go above A$3.00 per B$.

What is the maximum loss, in B$, that the company could make by hedging using the
forward contract? (give your answer to the nearest B$)

14943
B$____________
​