HKICPA

Qualification Programme

Module B Corporate Financing

Dec 2020

Mock 1
Questions

https://www.kaplan.com.hk/
 Professional Programme Module Examination

Time allowed 3 Hours

Examination Assessment Allocation

Section A Case Questions 50 marks

Section B Essay/Short Questions 50 marks

YOU SHOULD ANSWER ALL THE QUESTIONS IN THIS PAPER

Copyright© Kaplan Financial (HK) Limited 2020

All rights reserved. No part of this examination may be reproduced or transmitted in any
form or by any means, electronic or mechanical, including photocopying, recording, or by
any information storage and retrieval system, without prior permission from the publisher.
SECTION A - CASE QUESTIONS (Total: 50 marks)

Answer ALL of the following questions. Marks will be awarded for logical argumentation and
appropriate presentation of the answers.

Background

Mr. Chan is a qualified accountant and has just been appointed to the position of financial
controller of ABD Holding Group Li , a company listed on the Stock Exchange of
Hong Kong. Mr. Chan had accounting working experience without adequate finance knowledge.
And he would like to consult with Mr. King, the experienced treasurer on Technology used in
Treasury System, Financial Risk Management, Financial performance and Funding management

Question 1 (14 marks approximately 25 minutes)

Mr King has explained the following to Mr Chan-

The treasury function is responsible for the following areas:

-Liquidity (i.e. working capital) management: Measuring, monitoring and managing cash flow to
protect solvency

-Funding (i.e. long-term finance): Creating an optimal mix of equity and debt to meet capital
expenditure and investment requirements

-Financial risk management: Identifying potential risks and their impact and taking action to
mitigate these

Technology used in Risk Management

There is a variety of technological tools available today to improve the efficiency of treasury
operations in such areas as cash management, investment and debt management, and foreign
exchange capabilities. Inefficiencies and weaknesses that may expose the treasury function to
greater risk.

When applied to addressing such difficulties, technology can bring benefits in the many areas in
treasury management.

(a) Please name ONE benefit for each of the following areas :

General Control
Liquidity (Working Capital),
Funding (Long Term Finance)
Financial Risk Management
(8 marks)

(b) For handling foreign exchange risk, the Mr. Tang considers using forward contracts to reduce
the foreign exchange risk for the following situation:

BBQ agreed to sell goods of EUR 5 million and will

What would be the advantages and disadvantages of hedging the exchange rate risk in this
case? Also suggest any two other alternatives to hedge this risk
(6 marks)

Module B (Dec 2020 Session) Mock Page 3 ©Kaplan Financial 2020

Question 2 (18 marks approximately 32 minutes)

For Financial Ratio analysis, Financial performance and Liquidity management, Mr King would
like to help Mr Chan understand more about them by asking some theoretical questions and
using the following questions and examples of other companies.

Required:

(a)
(2 marks)

(b) In order to understand the Cash Conversion Cycle, if a company invests in excessive
inventories, has a large amount of accounts receivable and cash, and very few accounts
payable, there is an over-investment in current assets. Long-term financing in Working
capital will be excessive and the company may be said to be Over-capitalised.

State which of the following may indicate Over-capitalisation:

- Long turnover periods for inventory and accounts receivable

- High Current ratio
- Sales/working capital ratio less than similar companies
(3 marks)

(c) Residual income (RI) can sometimes give results that avoid the behavioural problem of
dysfunctionality, which is normally found when using ROI (Return on Investment).
Explain how Residual Income could avoid the problem.
(4 marks)

For the following company, they are now using Economic Value Added (EVA) for performance
measurement.

Cost of Capital for Yr. 1 to 3 is 14%

HKD (million)
Year 1 2 3
Sales 10.80 8.14 8.13

Net Operating Profit before tax 2.16 2.33 2.44

Tax -0.65 -0.68 -0.62
Net Operating Profit after tax 1.51 1.65 1.82

Net Asset 3.0 4.3 5.8

Assume that the accounting depreciation / profit is same as economic depreciation / profit

Required:

(d) Comment on the performance measurement based on result of EVA from Year 1 to 3.
(5 marks)

(e) Explain how Residual income differs from EVA.

(4 marks)

Module B (Dec 2020 Session) Mock Page 4 ©Kaplan Financial 2020

Question 3 (18 marks approximately 32 minutes)

For Funding, Mr King would like to help Mr Chan understand more about them by asking
some theoretical questions

Required:

When considering the issuance of bonds

(a) Determine one benefit and one disadvantage of obtaining a capital fund by the issuance of

(8 marks)

(b) Financial covenants can place restrictions including minimum ratios the company must
meet during the loan agreement period. List out two financial covenant restrictions.
(4 marks)

(c) Assume today is 1 January 2020, the company is considering issuing a 5-year bond
redeemable on 31 December 2024, with coupon payment of $100 per annum payable in
arrears on 31 December, and par value $1,000. Yield-to-

Calculate the bond price assuming the YTM goes up from 7% on the issue date to 10% on
1 January 2022 and remains at that level for the remaining term.
(6 marks)

***End of Session A***

Module B (Dec 2020 Session) Mock Page 5 ©Kaplan Financial 2020

SECTION B ESSAY / SHORT QUESTIONS (Total: 50 marks)

Answer ALL of the following questions. Marks will be awarded for logical argumentation /
calculation and appropriate presentation of the answers.

Question 4 (22 marks approximately 40 minutes)

Financial Controller and Mr Chan, Finance Manager, discussed a proposal to expand a listed
company of FinTech and Software as a Service (SaaS) Business, a NEW business that the
company has not participated in previously.

There is an article talking about FinTech and Software as a Service (SaaS). Please see the
extract below.

Financial Technology (FinTech) is having a big impact on the wider finance environment that the
treasury function faces. Impacts on the treasury function include: Virtual banks without branches,
call centres or complex systems. And Flexibility to adapt to new developments, such as

In addition to employing technology in-house, there is growing use of software as a service

(SaaS). SaaS solutions employ internet technology and remote servers, enabling users to

They are going to acquire one of the FinTech and Software as a Service (SaaS) Business
company, named

Mr Chan understands that the hurdle rate / wacc / discount rate used in valuation based on Free
Cash Flow Calculation should be based on a lot of research and calculation after considering
numerous internal and external factors.

However, Financial Controller stated that given the current low-interest rate environment, the
expansion could be financed entirely by drawing down banking facilities which charge an
attractive average funding.

Therefore, he forced him to do the valuation based on Free Cash Flow Calculation by using
unexpected low discount rate.

At the same time, Subsequently, Mr Chan found out that Financial Controller had recently
purchased the stock of FinSoft from the stock market.

Required:

(a) Based on PESTEL analysis, describe the most significant factor that supports the acquisition
of FinSoft.
(2 marks)

(b) With reference to the relevant fundamental principles of the HKICPA Code of Ethics, explain
le
low discount rate for the FCFF valuation calculation and (2) buying FinSoft in advance.
(8 marks)

Module B (Dec 2020 Session) Mock Page 6 ©Kaplan Financial 2020

Mr Chan is also assigned some practices about Dividend Valuation Model, Bond Valuation and
Cash Operating Cycle by Financial Controller

(c) For valuation using Dividend Valuation Model

He has seen the following of the target acquisition : The required return on equity starting year
five is expected to be lower by 2% due to paying off the big loan in year four. (Assuming the
original required return on equity is 10%)

As per the above, please state that the revised valuation of the target company (assuming all
other factors without any changes: dividend payment and dividend payment growth rate) would
be most likely higher or lower compared with the DVM model using 10% only before. And give the
reason.

(4 marks)
(d) Bond Valuation

Mr Chan has the following information about a bond:

Bonds outstanding with a face value of $1,000 and coupon rate of 10% per year.

Yield to maturity of this bond is 8% per year and pays interest annually. This bond will be
redeemed at 110 in four years.

As he understands everything about bond valuation, which is not difficult to do, but he has a
-market interest rate.

Required

Bond prices are very much affected by Yield-to-Maturity (YTM). What are the main determinants
of a bond's YTM?

(4 marks)

(e) Cash Operating Cycle

The cash operating cycle is the period of time that elapses between the point when cash starts to
be spent on the production of a product and the collection of cash from a purchaser.

Required

From general points of view, please list out some methods to reduce Cash Operating Cycle from
different perspectives (Accounts Receivable, Inventory and Accounts Payable).

(4 marks)

Module B (Dec 2020 Session) Mock Page 7 ©Kaplan Financial 2020

Question 5 (16 marks approximately 29 minutes)

Mr Chan, Finance Manager, is now working on the below FCFF valuation.

A company's sales in the previous year (just ended) were HK$150 million. It is expected that the
growth rate in sales will be 18% per year for the next four years and from year 5 onwards,
expected sales growth will be 5% per annum in perpetuity.

The pre-tax operating profit margin or EBIT profit margin will be 25%. And the margin can be
maintained at this level in the future.

The following financial information has been obtained:

-Depreciation expenses are calculated as 10% of EBIT.

-The annual capital expenditure requirements are estimated to be 11% of sales for each year.

-The weighted average cost of capital of the company is 11%.

-The tax rate is 16.5% of annual earnings.

-The outstanding debt level is currently at $20 million.

-Assume that there will be no increase in working capital in spite of the increase in sales.

Required:

(a) Assuming that it is now the end of year 0, and that all cash flows take place at the end of the
year that they relate to, calculate the equity value of the company using the discounted cash flow
model.
(Work in HK $million, to 1 decimal place)

(16 marks)

Module B (Dec 2020 Session) Mock Page 8 ©Kaplan Financial 2020

Question 6 (12 marks approximately 22 minutes)

For accounting reporting, ESG and Sustainability becomes a very important topic. There are
financial controllers, board of directors and some operating staff discussing something about the
important topic.

(a) The financial controller mentioned that ESG (Environmental, Social and Governance)
Guide included that issuers are now recommended to state in their annual reports or ESG
reports. Do you agree? Why or why not?

(3 marks)

He has just heard some bad reputation about the company including
1. Forcing staff to do overtime without paying OT compensation.
2. Animal testing allowed
3. Work-life balanced not allowed
4. Temperature of the air-conditioning set to 10 °C
5. Unfair treatment of employees and bad working conditions

And he thinks that it is related to Corporate Social Responsibility and Sustainability.

(b) s value in long run.

(5 marks)

(c) As the Board of Directors would like to understand more on Sustainability. For the two
aspects of Environment and Social areas, please list out TWO examples for EACH area
suggested by the Environmental, Social and Governance Reporting Guide
(4 marks)

***End of Question***

Module B (Dec 2020 Session) Mock Page 9 ©Kaplan Financial 2020