1.

Convertible loan notes

Convertible loan notes are long-term finance and are not traded on a money market.
2. B&D
Second and fourth statements are correct
Basis risk is the possibility that movements in the currency futures price and spot price will be
different. It is one of the reasons for an imperfect currency futures hedge.
3. $10m
$200m  30/360  0.6 = $10m
4. $14
They should not accept less than NRV: (30m + 18m + 4m – 2m – 12m – 10m)/2m = $14 per share
5. 20.39 Dinar per $
20 * (1.035/1.015) = 20.39 Dinar per $
6. $85,479
Finance cost saving = 13/365  $20m  0.12 = $85,479
7. 12 103 days
8. The length of the operating cycle is 52 + 42 + 30 – 66 + 45 = 103 days.
9. A & C
Statements 1 and 3 are correct.
A conservative approach to working capital investment will involve maintaining high levels of working
capital which may well not increase profitability.
The current ratio is a measure of liquidity, not profitability
10. F,F,T,F
11. 1.62
12. D 9.49%
13. D
Increasing credit given to customers. Increasing credit given to customers will increase the level of
receivables and this will lengthen the working capital cycle.
14. C
A decision is about the future, therefore relevant costs are future costs (1). If a cost is unavoidable then
any decision taken about the future will not affect the cost, therefore unavoidable costs are not relevant
costs (2). Incremental costs are extra costs which will be incurred in the future therefore relevant costs
are incremental costs (3). Cash costs are associated with relevant costs, as relevant costs are
cash flows (4).
15. C
Statement (1) is incorrect. The Sukuk manager is responsible for managing the assets on behalf of the
Sukuk holders and the holders have the right to dismiss the manager if they feel it is appropriate. This is
different from the relationship between the holder of conventional bonds and bond issuers. Statements
(2) and (3) are correct.
16. C
17. D
Statement 2 is true and statement 1 is false. The risk that the organisation will make exchange losses
when the accounting results of its foreign branches are shown in the home currency is known as
translation risk (not transaction risk).
MTQ#1:
1. $1.566
Forward rate = 1.543  (1.025/1.01) = €1.566 per $1
2. A Transaction risk
The euro receipt is subject to transaction risk.
3. D Currency swap
A currency swap is not a suitable method for hedging a one-off transaction.
4. If the dollar inflation rate is less than the euro inflation rate, purchasing power parity indicates that
the euro will appreciate against the dollar: Does not support director's belief
If the dollar nominal interest rate is less than the euro nominal interest rate, interest rate parity
indicates that the euro will depreciate against the dollar: Supports director's belief
5. A 'In exchange for a premium, Herd Co could hedge its interest rate risk by buying interest rate
options' is correct. So the first statement is correct.
MTQ#2:
1. D
Market capitalisation = number of shares × market value.
= ($50m / $0.5) × $10.00 = $1,000m
2. B
The net realisable value of assets at liquidation = non-current assets + inventory + trade receivables –
current liabilities – bonds
= $215m + $10m + ($11.3m × 90%) - $17.8m - $62.5m
= $155.37m
3. B
Historic earnings based on 20X4 profit are after tax = $25.3m Average P/E ratio in industry = 16 times
Assuming no adjustment required to P/E ratio (Mathilda is a listed company so no need to
adjust for transferability) and using historic earnings: P/E ratio value = 16 × $25.3m = $404.8m
4. C
5. A
It can be difficult to find a quoted company with a similar range of activities. Quoted companies are
often diversified. A single year's P/E ratio may not be a good basis if earnings are volatile or the quoted
company's share price is at an abnormal level.