Business management ACCA

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Business management ACCA

© All Rights Reserved

- Cost
- Case Questions
- Chapter 9 the Cost of Capital
- Daimler AG Research Report
- WACC
- Jntuh Mba Ccc Syllabus 2013-14
- UVA F 1356 Euroland
- Caso
- Km b Solution 14
- bd_ppt19
- CAPITAL BUDGETING Q&A.pdf
- Adl 13-financial-management.pdf
- Company Valuation 2009
- pbv
- The Weighted Average Cost of Capital
- CH19
- Petrobras Case
- may 16
- Cost of Capital slides.pdf
- BF Outline

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(a) Discuss the key factors which determine the level of investment in current assets. (6 marks)

(b) Discuss the ways in which factoring and invoice discounting can assist in the management of

accounts receivable. (6 marks)

(c) Calculate the size of the overdraft of FLG Co, the net working capital of the company and the total

cost of financing its current assets. (6 marks)

(d) FLG Co wishes to minimise its inventory costs. Annual demand for a raw material costing $12 per

unit is 60,000

Required:

(i) Calculate the total cost of inventory for the raw material when using the economic order quantity.

(ii) Determine whether accepting the discount offered by the supplier will minimise the total cost of

Required:3 PILOT

(a) Evaluate whether the proposed changes in credit policy will increase the profitability of Ulnad Co.

(b) Renpec Co, a subsidiary of Ulnad Co, has set a minimum cash account balance of $7,500. The

average cost to the company of making deposits or selling investments is $18 per transaction and the

standard deviation of its cash flows was $1,000 per day during the last year. The average interest rate on

investments is 5.11%.

Determine the spread, the upper limit and the return point for the cash account of Renpec Co using the

Miller-Orr model and explain the relevance of these values for the cash management of the company. (6

marks)

(c) Identify and explain the key areas of accounts receivable management. (6 marks)

(d) Discuss the key factors to be considered when formulating a working capital funding policy

(a) Advise whether the factor’s offer is financially acceptable to Widnor Co. (7 marks)

(b) Briefly discuss how the creditworthiness of potential customers can be assessed

(a) Calculate the costs and beneits of each of Option 1 and Option 2 and comment on your indings

(b) Discuss reasons (other than costs and beneits already calculated) why Oscar Co may beneit from the

services offered by the factoring company. (6 marks)

(c) Discuss THREE factors which determine the level of a company’s investment in working capital.

(a) Discuss the role of financial intermediaries in providing short-term finance for use by business

organisations.

(b) Prepare the following forecast financial statements for APX Co using the information provided:

(ii) a statement of financial position at the end of the next year. (9 marks)

(c) Analyse and discuss the working capital financing policy of APX Co. (6 marks)

(d) Analyse and discuss the forecast financial performance of APX Co in terms of working capital

management.

(a) (i) Calculate the cash operating cycle of Pangli Co at the start of January 20X7. (2 marks)

(ii) Calculate the overdraft expected at the end of January 20X7. (4 marks)

(iii) Calculate the current ratios at the start and end of January 20X7. (4 marks)

(b) Discuss FIVE techniques that Pangli Co could use in managing trade receivables

(a) For the change in working capital policy, calculate the change in the operating cycle, the effect on the

current ratio and the finance cost saving. Comment on your findings. (8 marks)

(b) Discuss the key elements of a trade receivables management policy. (7 marks)

(c) Explain the different types of foreign currency risk faced by a multinational company. (6 marks)

(d) TGA Co expects to receive €500,000 from export sales at the end of three months. A forward rate of

€1·687 per $1 has been offered by the company’s bank and the spot rate is €1·675 per $1. TGA Co can

borrow short term in the euro at 9% per year.

Required:

Calculate the dollar income from a forward market hedge and a money market hedge, and indicate which

(a) Using suitable working capital ratios and analysis of the financial information provided, evaluate

whether Wobnig Co can be described as overtrading (undercapitalised). (12 marks)

(b) Critically discuss the similarities and differences between working capital policies in the following

areas:

(c) Wobnig Co is considering using the Miller-Orr model to manage its cash flows. The minimum cash

balance would be $200,000 and the spread is expected to be $75,000.

Required:

Calculate the Miller-Orr model upper limit and return point, and explain how these would be used to

manage the cash balances of Wobnig Co.

(a) Calculate the net benefit or cost of the proposed changes in trade receivables policy and comment on

your findings. (6 marks)

(b) Calculate whether the bulk purchase discount offered by the supplier is financially acceptable and

comment on the assumptions made by your calculation. (6 marks)

(c) Identify and discuss the factors to be considered in determining the optimum level of cash to be held

by a company. (5 marks)

(d) Discuss the factors to be considered in formulating a trade receivables management policy.

(i) Discuss the factors that influence the formulation of working capital policy; (7 marks)

(ii) Calculate if ZPS Co will benefit financially by accepting the offer of:

(a) Explain the meaning of the term ‘cash operating cycle’ and discuss the relationship between the cash

operating cycle and the level of investment in working capital. Your answer should include a discussion

of relevant working capital policy and the nature of business operations. (7 marks)

(b) Calculate the cash operating cycle of Bold Co. (Ignore the factor’s offer in this part of the question).

(d) Comment on the financial acceptability of the factor’s offer and discuss the possible benefits to Bold

Co of factoring its trade receivables

(iii) the probability of a negative cash balance at the end of period 2;

(iv) the probability of exceeding the overdraft limit at the end of period 2.

Discuss whether the above analysis can assist the company in managing its cash ﬂ ows. (b)

Identify and discuss the factors to be considered in formulating a trade receivables management policy for

(c) Discuss whether proﬁ tability or liquidity is the primary objective of working capital

management.

(a) Calculate the cost of the current ordering policy and the change in the costs of inventory management

that will arise if the economic order quantity is used to determine the optimum order size for Product

KN5.

(b) Briefly describe the benefits of a just-in-time (JIT) procurement policy. (5 marks)

(c) Calculate and comment on whether the proposed changes in receivables management will be

acceptable. Assuming that only 25% of customers take the early settlement discount, what is the

maximum early settlement discount that could be offered? (6 marks)

(d) Discuss the factors that should be considered in formulating working capital policy on the

management of trade receivables

(a) Identify the objectives of working capital management and discuss the conflict that may arise

between them.

(b) Calculate the cost of the current ordering policy and determine the saving that could be made by

using the economic order quantity model. (7 marks)

(c) Discuss ways in which PKA Co could improve the management of domestic accounts receivable.

(d) Evaluate whether a money market hedge, a forward market hedge or a lead payment should be used

to hedge the foreign account payable.

(a) Calculate:

(ii) the total annual cost of purchasing, ordering and holding stocks of raw material Y. (4 marks)

The supplier has offered Point Ltd a discount of 1% on the purchase price if each order placed is for 2,000

units.

(b) Calculate the total annual saving to Point Ltd of accepting this offer. (3 marks)

Required:32 DECEMBER 2018

(a) Calculate the costs and beneits of each of Option 1 and Option 2 and comment on your indings

(b) Discuss reasons (other than costs and beneits already calculated) why Oscar Co may beneit from

the services offered by the factoring company.

(c) Discuss THREE factors which determine the level of a company’s investment in working capital.

(a) Evaluate whether ZXC Co should introduce the early settlement discount.

(b) Discuss TWO ways in which a company could reduce the risk associated with foreign accounts

receivable

(a) For the change in working capital policy, calculate the change in the operating cycle, the effect on the

current ratio and the finance cost saving. Comment on your findings.

(c) Explain the different types of foreign currency risk faced by a multinational company. (6 marks)

(d) TGA Co expects to receive €500,000 from export sales at the end of three months. A forward rate of

€1·687per $1 has been offered by the company’s bank and the spot rate is €1·675 per $1. TGA Co can

borrow short term in the euro at 9% per year.

(ii) The total cost of an ordering policy using the economic order quantity; (3 marks)

(iii) The net cost or saving of introducing an ordering policy using the economic order quantity. (1 mark)

(b) Calculate the net value in dollars to Plot Co of accepting the early settlement discount for Product Q.

(c) Discuss how invoice discounting and factoring can aid the management of trade receivables.

(d) Identify the objectives of working capital management and discuss the central role of

working capital management in financial manageme

(a) Calculate the working capital cycle (cash collection cycle) of CSZ Co at the end of March 2014 and

discuss whether a working capital cycle should be positive or negative. (6 marks)

(b) Calculate the target quick ratio (acid test ratio) and the target ratio of sales to net working capital of

CSZ Co at the end of March 2015.

(c) Analyse and compare the current asset and current liability positions for March 2014 and March

2015, and discuss how the working capital financing policy of CSZ Co would have changed. (8 marks)

(d) Briefly discuss THREE internal methods which could be used by CSZ Co to manage foreign

currency transaction risk arising from its continuing business activities

Prepare a report for the management of Kate Limited that sets out the financial performance of the

company over the last year and assesses the financial position of the company as at 31 July 2011.

Prepare a briefing note for the management of Jimmy Limited. The note should:

a) calculate the working capital cycle for Jimmy Limited for the year ended 31st August 2009. (6 Marks)

c) determine the maximum amount that should be spent on the credit control team for the year ended 31st

August 2010 if the proposal is intended to be cost neutral. (Assume that Jimmy PLC’s sales for y/e

31/8/2010 will be as per the year ended 31/8/2009.

Prepare a briefing note for the management team of M Limited. This note should:

(a) Calculate the working capital cycle for year ended 31st March 2011. (4 Marks)

(c) Suggest four actions that M Limited could take to improve its liquidity position for the forthcoming

year ended 31st

March 2012

Prepare a report for the Managing Director, assessing the working capital management, liquidity and

profitability of Horse Limited for the most recent financial year.

assesses Bell PLCʼs working capital management over the two years ended 31st December 2007.

reviews the performance of Bell PLC relative to industry competitors from an investorʼs perspective for

the year ended 31st December 2007. (10 Marks)

DIVIDEND DECISION/POLICY

Required:4 DEC 2012

(iii) price/earnings ratio method using the business sector average price/earnings ratio;

The total marks will be split equally between each part. (10 marks)

(b) Discuss the relative merits of the valuation methods in part (a) above in determining a purchase price

for GWW Co. (8 marks)

Discuss the usefulness of the debt/equity ratio in assessing the financial risk of GWW Co

(a) Analyse and discuss the recent financial performance and the current financial position of YNM Co,

commenting on:

(iii) the proposal to raise $50 million of new debt finance. (13 marks)

(b) Discuss the following sources of finance that could be suitable for YNM Co, in its current position, to

meet its need for $50m to support existing business operations:

(c) Explain the nature of a scrip (share) dividend and discuss the advantages and disadvantages to a

company of using scrip dividends to reward shareholders.

(a) Calculate the dividend yield, capital gain and total shareholder return for 2008 and 2009, and

brieﬂ y discuss your ﬁ ndings with respect to:

(i) the returns predicted by the capital asset pricing model (CAPM);

(b) Calculate and comment on the share price of QSX Co using the dividend growth model in the

following circumstances:

(c) Discuss the relationship between investment decisions, dividend decisions and ﬁ nancing decisions

in the context of ﬁ nancial management, illustrating your discussion with examples where appropriate.

(a) Calculate the equity value of NN Co using the following business valuation methods:

(c) Calculate the weighted average after-tax cost of capital of NN Co. (6 marks)

(d) Discuss the factors to be considered in formulating the dividend policy of a stock-exchange listed

company

(a) Calculate the current ex dividend share price of THP Co and the current market capitalisation of THP

Co using the dividend growth model. (4 marks)

(b) Assuming the rights issue takes place and ignoring the proposed use of the funds raised, calculate:

(c) Using the price/earnings ratio method, calculate the share price and market capitalisation of CRX Co

before the acquisition. (3 marks)

(d) Assuming a semi-strong form efficient capital market, calculate and comment on the post acquisition

market capitalisation of THP Co in the following circumstances:

(i) THP Co does not announce the expected annual after-tax savings; and

(e) Discuss the factors that THP Co should consider, in its circumstances, in choosing between equity

finance and debt finance as a source of finance from which to make a cash offer for CRX Co

(a) Calculate the theoretical ex rights price per share prior to investing in the proposed business

expansion.

(b) Calculate the expected share price following the proposed business expansion using the

price/earnings ratio method.

(c) Discuss whether the proposed business expansion is an acceptable use of the finance raised by the

rights issue, and evaluate the expected effect on the wealth of the shareholders of Dartig Co. (5 marks)

(d) Using the information provided, calculate the ex div share price predicted by the dividend growth

model and discuss briefly why this share price differs from the current market price of Dartig Co.

and discuss the significance, to Phobis Co, of the values you have calculated, in comparison to the current

(b) Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in five years’ time.

Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The

current ordinary share price of Phobis Co is $4·45 and this is expected to grow at a rate of 6·5% per year

for the foreseeable future. Phobis Co has a cost of debt of 7% per year.

Calculate the following current values for each $100 convertible bond:

(c) Distinguish between weak form, semi-strong form and strong form stock market efficiency, and

discuss the significance to a listed company if the stock market on which its shares are traded is shown to

be semi-strong form efficient. (8 marks)

(a) Analyse and contrast the dividend polices of Forthmate plc and Herander plc. Include in your analysis

estimates of dividends as a percentage of free cash flow, and any other relevant calculations.

Discuss possible reasons why the companies’ dividend policies differ. (8 marks)

(b) Discuss whether or not a company should pay dividends that are equal to the free cash flow to equity.

(c) In both of the last two years Herander plc has had more potential investments with positive NPV than

it actually undertook.

Required:

Discuss the implications of your findings in (a) above for the financial strategy of Herander plc.

(a) Using the dividend valuation model, calculate the value of GXG Co under option 1, and advise

whether option 1 will be acceptable to shareholders. (6 marks)

(b) Calculate the effect on earnings per share of the proposal to raise finance by a stock market listing

(option 2), and comment on the acceptability of the proposal to existing shareholders. (5 marks)

(c) Calculate the effect on earnings per share and interest cover of the proposal to raise finance by issuing

new debt (option 3), and comment on your findings. (5 marks)

(d) Discuss the factors to be considered in choosing between traded bonds, new equity issued via a

placing and venture capital as sources of finance

(a) Calculate the market value weighted average cost of capital of AMH Co. (12 marks)

(b) Discuss how the capital asset pricing model can be used to calculate a project-specific cost of capital

for AMH Co, referring in your discussion to the key concepts of systematic risk, business risk and

financial risk.

(c) Discuss why the cost of equity is greater than the cost of debt.

(a) Calculate the market value after-tax weighted average cost of capital of BKB Co, explaining clearly

any assumptions you make. (12 marks)

(b) Discuss why market value weighted average cost of capital is preferred to book value weighted

average cost of capital when making investment decisions. (4 marks)

(c) Comment on the interest rate risk faced by BKB Co and discuss briefly how this risk can be managed.

(d) Discuss the attractions to a company of convertible debt compared to a bank loan of a similar

maturity as a source of finance

(a) Calculate the market value after-tax weighted average cost of capital of AQR Co in the following

circumstances:

(i) before the new issue of bonds takes place;

(b) Identify and discuss briefly the factors that influence the market value of traded bonds. (5 marks)

(c) Discuss the director’s view that issuing traded bonds will decrease the weighted average cost of

capital of AQR Co and thereby increase the market value of the company

(b) Calculate and comment on the effect of the bond issue on the weighted average cost of capital of

YGV Co, clearly stating any assumptions that you make. (5 marks)

(c) Calculate the effect of using the bond issue to ﬁ nance the reduction in the overdraft on:

(d) Evaluate the proposal to use the bond issue to ﬁ nance the reduction in the overdraft and discuss

alternative sources of ﬁ nance that could be considered by YGV Co, given its current ﬁ nancial position.

(a) Evaluate suitable methods of raising the $200 million required by Nugfer Co, supporting your

evaluation with both analysis and critical discussion. (15 marks)

(b) Briefly explain the factors that will influence the rate of interest charged on a new issue of bonds.

(c) Identify and describe the three forms of efficiency that may be found in a capital market.

(b) Discuss the reasons why different bonds of the same company might have different costs of debt.

(i) cost of equity, using the capital asset pricing model; (2 marks)

(ii) ex dividend share price, using the dividend growth model; (3 marks)

(iii) capital gearing (debt divided by debt plus equity) using market values; and (2 marks)

(d) Discuss whether a change in dividend policy will affect the share price of DD Co.

(a) Calculate the market value weighted average cost of capital of Burse Co. State clearly any

assumptions that you make. (12 marks)

(b) Discuss the circumstances under which the weighted average cost of capital can be used in

investment appraisal. (6 marks)

(c) Discuss whether the dividend growth model or the capital asset pricing model offers the better

estimate of the cost of equity of a company

(a) Briefly explain the reasons why a company may choose to finance a new investment by an issue of

debt finance. (7 marks)

(b) Calculate the current total market value (in pesos) of the foreign bonds used to finance the building of

the new factory. (4 marks)

(c) Assume that Boluje Co has no surplus cash at the present time:

(i) Explain and illustrate how a money market hedge could protect Boluje Co against exchange rate risk

in relation to the dollar cost of the interest payment to be made in one year’s time on its foreign bonds.

(ii) Compare the relative costs of a money market hedge and a forward market hedge. (2 marks)

(d) Describe other methods, including derivatives, that Boluje Co could use to hedge against exchange

rate risk.

(a) Calculate the after-tax weighted average cost of capital of Rupab Co. (6 marks)

(b) Prepare a forecast of the annual after-tax cash flows of the investment in nominal terms, and calculate

and comment on its net present value. (8 marks)

(c) Explain how the capital asset pricing model can be used to calculate a project-specific discount rate

and discuss the limitations of using the capital asset pricing model in investment appraisal.

(a) (i) Calculate the theoretical ex rights price per share. (2 marks)

(ii) Assuming equity inance is used, calculate the revised earnings per share after the business expansion.

(iii) Assuming debt inance is used, calculate the revised earnings per share after the business expansion.

(iv) Calculate the revised share prices under both inancing methods after the business expansion.

(v) Use calculations to evaluate whether equity inance or debt inance should be used for the planned

business expansion. (4 marks)

(b) Discuss TWO Islamic inance sources which Tin Co could consider as alternatives to a rights issue or

a loan note issu

(a) Calculate the market price of the convertible loan notes of Par Co, commenting on whether

conversion is likely.

(b) Calculate the share price of Par Co using the price/earnings ratio method and discuss the problems in

using this method of valuing the shares of a company

(a) Assess the impact of financing the business expansion by the loan note issue on financial position,

financial risk and shareholder wealth after one year, using appropriate measures. (10 marks)

(b) Discuss the circumstances under which the current weighted average cost of capital of a company

could be used in investment appraisal and indicate briefly how its limitations as a discount rate could be

overcome

(a) Calculate the market value weighted average cost of capital of AMH Co. (12 marks)

(b) Discuss how the capital asset pricing model can be used to calculate a project-specific cost of capital

for AMH Co, referring in your discussion to the key concepts of systematic risk, business risk and

financial risk.

(c) Discuss why the cost of equity is greater than the cost of debt

(a) Calculate the cost of equity of Card Co using the dividend growth model. (3 marks)

(b) Discuss whether the dividend growth model or the capital asset pricing model should be used to

calculate the cost of equity.

(c) Calculate the weighted average after-tax cost of capital of Card Co using a cost of equity of 12%.

(d) Calculate a project-specific cost of equity for Card Co for the planned joint venture. (4 marks)

(e) Discuss whether changing the capital structure of a company can lead to a reduction in its cost of

capital and hence to an increase in the value of the company

(a) Calculate the current weighted average cost of capital of Fence Co. (7 marks)

(b) Calculate a cost of equity which could be used in appraising the new project. (4 marks)

(c) Explain the difference between systematic and unsystematic risk in relation to portfolio theory and the

capital asset pricing model. (6 marks)

(d) Discuss the differences between weak form, semi-strong form and strong form capital market

efficiency, and discuss the significance of the efficient market hypothesis (EMH) for the financial

manager

(a) Analyse and discuss the extent to which MFZ Co has achieved each of its stated objectives. (7 marks)

(b) Calculate the total equity market value of MFZ Co for 2014 using the dividend growth

model and briefly discuss why the dividend growth model value may differ from the current equity

market value

(c) Calculate the theoretical ex rights price per share for the proposed rights issue. (5 marks)

(d) Discuss the sources and characteristics of long-term debt finance which may be available to MFZ Co.

(a) Calculate the equity market value of Chad Co using the dividend growth model. (3 marks)

(b) Calculate the equity market value of Chad Co using the earnings yield method. (2 marks)

(c) Discuss the relative merits of the dividend growth model and the earnings yield method as a way of

valuing Chad Co.

(a) Evaluate the effect on the wealth of the shareholders of Grenarp Co of using the net rights issue funds

to redeem the loan notes. (8 marks)

(b) Discuss whether Grenarp Co might achieve its optimal capital structure following the rights issue.

(a) Calculate the after-tax weighted average cost of capital of Tufa Co on a market value basis (b)

Discuss the circumstances under which it is appropriate to use the current WACC of Tufa Co in

appraising an investment project. (3 marks)

(c) Discuss THREE advantages to Tufa Co of using convertible loan notes as a source of long-term

inance.

(a) Calculates the company’s present weighted average cost of capital. (5 Marks)

(b) Calculates the company’s revised weighted average cost of capital if the €5 million irredeemable loan

stock is used to finance the proposed investment. (4 Marks)

(c) Advises on the cost of funds to be used to appraise the proposed investment in the advanced

manufacturing technology

(a) Determine J PLC’s Weighted Average Cost of Capital based on market values at 31st March 2010.

(b) (i) Detail three reasons why it is essential that J PLC’s Board understand the company’s Weighted

Average Cost of Capital; and

(ii) What are the implications for J PLC’s WACC arising from the funding options identified by the

Finance Director?

ii) Advise (without calculations) on whether or not the proposed debenture issue is advisable and realistic.

a) Explains the term Weighted Average Cost of Capital (WACC) and how it is calculated. (7 Marks)

b) Explains the significance of the WACC for Cork PLC as it considers the manner in which it will raise

new funds. (10 Marks)

(a) Provide the Senior Management Team of R PLC, in the context of the potential purchase of S PLC,

(b) Discuss three matters to be reviewed in detail during the forthcoming due diligence audit.

a) Calculate the retained profit for the year ended 31/3/2009. (3 Marks)

b) Calculate Big Limited’s Weighted Average Cost of Capital and list two reasons why it is important for

company’s to understand their WACC

a) Advises whether or not to invest in the project, if TTʼs investment criteria require:

b) Identifies the reduction in contribution per shirt paid to schools, that would be required to make the

project viable at the stated required rate of return (assuming that the schools are willing to accept a

reduction in their contribution in order to acquire the shirts and that such a reduction can be

implemented).

B Provide an indication of the per share valuation of Sunny PLC that would be arrived at by Rainy PLC

using the following valuation bases:

Asset basis

Earnings basis

Prepare a briefing note for the Board of Laddoo Limited which determines an indicative price per Laddoo

Limited share using the following separate valuation bases.

INVESTMENT APPRAISAL

(a) Discuss the difference between risk and uncertainty in relation to investment appraisal. (3 marks)

(b) Calculate the expected net present value of the investment project and comment on its financial

acceptability

(c) Critically discuss how risk can be considered in the investment appraisal process.

(a) Calculate the net present value of the planned purchase of the new machinery using a nominal

(money

(b) Discuss the difference between a nominal (money terms) approach and a real terms approach to

calculating net present value. (5 marks)

(c) Identify TWO financial objectives of a listed company such as HDW Co and discuss how each of

these financial objectives is supported by the planned investment in new machinery.

(a) Calculate the net present value of Project 1 and comment on whether this project is financially

acceptable to Ridag Co. (12 marks)

(b) Calculate the equivalent annual costs of Machine 1 and Machine 2, and discuss which machine

should be purchased. (6 marks)

(c) Critically discuss the use of sensitivity analysis and probability analysis as ways of including risk in

theinvestment appraisal process, referring in your answer to the relative effectiveness of each method.

(a) Calculate the net present value of the proposed investment and comment on its financial acceptability.

Work to the nearest $1,000. (13 marks)

(b) Calculate the before-tax return on capital employed (accounting rate of return) of the proposed

investment on an average investment basis and discuss briefly its financial acceptability. (5 marks)

(c) Discuss the effect of a substantial rise in interest rates on the financing cost of BQK Co and its

customers, and on the capital investment appraisal decision-making process of BQK Co.

(a) Assuming that production only lasts for four years, calculate the net present value of investing in the

new product using a nominal terms approach and advise on its financial acceptability (work to the nearest

$1,000).

(b) Comment briefly on the proposal to use a four-year time horizon, and calculate and discuss a value

that could be placed on after-tax cash flows arising after the fourth year of operation, using a perpetuity

approach. Assume, for this part of the question only, that before-tax cash flows and profit tax are constant

from year five onwards, and that capital allowances and working capital can be ignored. (5 marks)

(c) Discuss THREE ways of incorporating risk into the investment appraisal process.

(b) Discuss the weaknesses of the dividend growth model as a way of valuing a company and its shares.

(c) Calculate the weighted average after-tax cost of capital of Close Co using market values where

appropriate.

(d) Discuss the circumstances under which the weighted average cost of capital (WACC) can be used as

a discount rate in investment appraisal. Briefly indicate alternative approaches that could be adopted

when using the WACC is not appropriate

(a) Calculate the net present value (NPV) of the Snowballer proposal and recommend whether it should

be undertaken by the directors of ITL. (4 marks)

(b) Using sensitivity analysis, estimate by what percentage each of the under-mentioned items, taken

separately, would need to change before the recommendation in (a) above is varied:

(i) Initial outlay;

(c) Using sensitivity analysis, estimate by what percentage the life cycle of the Snowballer would need to

change before the recommendation in (a) above is varied. (4 marks)

(d) Comment on THREE factors other than NPV that the directors of ITL should consider when deciding

whether to manufacture the Snowballer

(a) Calculate the net present value of investing in the new machine and advise whether the investment is

(b) Calculate the internal rate of return of investing in the new machine and advise whether the

investment is financially acceptable. (4 marks)

(c) (i) Explain briefly the meaning of the term ‘sensitivity analysis’ in the context of investment

appraisal;

(ii) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a

(d) Discuss the nature and causes of the problem of capital rationing in the context of investment

appraisal, and explain how this problem can be overcome in reaching the optimal investment decision for

a company.

(a) Identify and comment on any errors in the investment appraisal prepared by the trainee

accountant.

(b) Prepare a revised calculation of the net present value of the proposed investment project and

comment on the project’s acceptability. (12 marks)

(c) Discuss the problems faced when undertaking investment appraisal in the following areas and

comment on how these problems can be overcome:

(iii) the business risk of an investment project is signiﬁ cantly different from the business risk of

current operations.

(a) Calculate the net present value of Project A and advise on its acceptability if the project were to be

appraised using this method. (12 marks)

(b) Critically discuss the directors’ views on investment appraisal. (7 marks)

(c) Calculate a project-specific cost of equity for Project B and explain the stages of your calculation.

(a) Based on financing cash flows only, calculate and determine whether ASOP Co should lease or buy

the new technology. (11 marks)

(b) Using a nominal terms approach, calculate the net present value of buying the new technology and

advise whether ASOP Co should undertake the proposed investment. (6 marks)

(c) Discuss and illustrate how ASOP Co can use equivalent annual cost or equivalent annual benefit to

choose between new technologies with different expected lives. (3 marks)

(d) Discuss how an optimal investment schedule can be formulated when capital is rationed and

investment projects are either:

(i) divisible; or

(ii) non-divisible

(a) Calculate the net present value of the proposed investment in product P. (12 marks)

(b) Calculate the internal rate of return of the proposed investment in product P. (3 marks)

(c) Advise on the acceptability of the proposed investment in product P and discuss the limitations of the

(d) Discuss how the net present value method of investment appraisal contributes towards the objective

of maximising the wealth of shareholders.

(c) Calculate the theoretical ex rights price per share and the amount of finance that would be raised

under Proposal C. Evaluate and discuss the proposal to use these funds to reduce gearing and financial

risk.

(a) Calculate the net present value of buying the new machine and advise on the acceptability of the

proposed purchase (work to the nearest $1,000). (13 marks)

(b) Calculate the internal rate of return of buying the new machine and advise on the acceptability of the

(c) Explain the difference between risk and uncertainty in the context of investment appraisal, and

describe how sensitivity analysis and probability analysis can be used to incorporate risk into the

investment appraisal process.

(a) Calculate the expected NPV and APV of the proposed investment. (10 marks)

(b) Discuss briefly the validity of the views of the two managers. Use your calculations in (a) to illustrate

and support the discussion.

(a) (i) 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 inance. (6 marks)

(ii) 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. (6 marks)

(b) Critically discuss FOUR reasons why NPV is regarded as superior to IRR as an investment appraisal

technique

(i) Calculate the mean (expected) NPV of the proposed investment; (8 marks)

(ii) Calculate the probability of the investment having a negative NPV; (1 mark)

(b) Discuss TWO of the following methods of adjusting for risk and uncertainty in investment appraisal:

(i) Simulation;

(a) Calculate the cash balance at the end of each month in the three-month period. (5 marks)

(b) Calculate the forecast current ratio at the end of the three-month period. (2 marks)

(c) Assuming that Flit Co expects to have a short-term cash surplus during the three-month

period, discuss whether this should be invested in shares listed on a large stock market.

(a) Prepare a revised draft evaluation of the investment proposal and comment on its financial

acceptability.

(b) Explain any TWO revisions you have made to the draft evaluation in part (a) above

(a) Using a nominal terms net present value approach, evaluate whether purchasing the new

machine is financially acceptable. (10 marks)

(b) Discuss the reasons why investment finance may be limited, even when a company has attractive

investment opportunities available to it.

(a) Calculate the net present value of the planned purchase of the new machinery using a nominal

(money terms) approach and comment on its financial acceptability. (14 marks)

(b) Discuss the difference between a nominal (money terms) approach and a real terms approach to

calculating net present value. (5 marks)

(c) Identify TWO financial objectives of a listed company such as HDW Co and discuss how each of

these financial objectives is supported by the planned investment in new machinery

(a) Calculate the net present value of the investment project in nominal terms and comment on

its financial acceptability. (12 marks)

(b) Calculate the net present value of the investment project in real terms and comment on its

financial acceptability. (7 marks)

(c) Explain ways in which the directors of Darn Co can be encouraged to achieve the objective of

maximization of shareholder wealth.

(a) Evaluate whether Spot Co should use leasing or borrowing as a source of finance, explaining the

evaluation method which you use. (10 marks)

(b) Discuss the attractions of leasing as a source of both short-term and long-term finance. (5 marks)

(c) In Islamic finance, explain briefly the concept of riba (interest) and how returns are made by Islamic

financial instruments. (5 marks)

(d) Discuss briefly the reasons why interest rates may differ between loans of different maturity.

(a) Calculate the nominal after-tax net present value of Project E and comment on the financial

acceptability of this project. (14 marks)

(b) Calculate the maximum net present value which can be obtained from investing the fund of

$10 million, assuming here that the nominal after-tax NPV of Project E is zero. (5 marks)

(c) Discuss the reasons why the Board of OAP Co may have decided to limit investment funds for the

next yea

(a) Calculate the expected net present value of the investment project and comment on its

financial acceptability. (9 marks)

(b) Critically discuss if sensitivity analysis will assist Hraxin Co in assessing the risk of the investment

project.

(a) (i) Calculate the net present value of the planned investment project. (9 marks)

(ii) Calculate the discounted payback period of the planned investment project. (2 marks)

(c) Critically discuss the views of the directors on Pelta Co’s investment appraisa

(a) Determines on financial grounds, using net Present Value as the sole investment criterion, whether to

accept the Finnish company’s proposal. (Note: Ignore Taxation) (15 Marks)

(b) Discusses five non-financial factors that should be considered by Y PLC when making the decision

whether or not to accept the Finnish company’s proposa

(a) Recommends whether or not to open the restaurant if the proposal must deliver a discounted payback

(at a cost of capital of 10%) over a three year time horizon; (15 Marks)

(b) Explains five non-financial factors to be considered in the decision whether or not to open the

proposed restaurant.

a) recommends whether or not to purchase the franchise agreement solely based on a financial

assessment.

b) considers four qualitative factors to consider prior to making a final decision whether or not to

purchase the franchise.

REQUIRED:AGOST 2008

Prepare a briefing note for Jamie PLC’s Financial Controller which addresses the following issues:

Evaluates the profitability implications of the two related proposals (if taken together); and (9 Marks)

briefly explains debt factoring setting out the benefits and risks associated therewith

Prepare a briefing note for your client which advises on the following:

a) Proposes an optimum capital renewal programme for Ardfield PLC. (10 Marks)

b) If a rival banker approached your client and offered unlimited investment funds at a cost of borrowing

of7% should Ardfield PLC accept this proposal?

REQUIRED: B

Advise Sunnycove Limited’s management on whether they should lease or buy the machine.

a) Propose the optimum investment strategy for Troy PLC for this year. (11 Marks)

b) Propose the optimum investment strategy for Troy PLC if it is not possible to enter shared ownership

arrangements.

recommends whether or not to purchase the licence based on a financial assessment. (15 Marks)

considers five non-financial factors when making the decision whether or not to buy the licence and

(a) Advise R PLC, based on strictly net present value criteria, whether or not it should embark on the

production of the proposed movie. (17 Marks)

(b) Discuss four qualitative factors that should be considered when deciding whether or not to produce the

movie.

a) Determines the maximum amount payable for the Cork Hostel if it must achieve a discounted payback

after three years (ignore taxation). (15 Marks)

b) Consider five qualitative factors that John should consider before deciding whether or not to purchase

the County Cork Hostel.

REQUIRED: 2 APRIL 2009

a) Calculate the price that could be paid for this proposed technology investment (ignore taxation). b)

Discuss four strategic factors F PLC should consider in making it’s final decision whether or not to invest

in the proposed technology

Part A

Assesses the Net Present Value (NPV) of the Greek proposal, using a discount rate of 7%.

Considers four non-financial factors to be considered when making the decision whether or not to

Part B

Prepare a briefing note for Sandyford Ltd.’s management explaining the foreign currency translation risk

it would face in relation to the proposed entry to the Swedish market.

POTFOLIO THEORY

IRELAND PORTFOLIO

Prepare a briefing note for your client on the following issues relating to his proposed investment:

i) Which you must calculate the expected return from each share and the proposed portfolio. (3 Marks)

ii) Having used the CAPM formula, advises as to whether the portfolio is efficient or inefficient

Assist Patrick Limitedʼs management by preparing a briefing note which explains the following terms:

Portfolio Theory Systematic Risk and Unsystematic Risk (3 Marks)

Required:4 JUNE 1

(a) Using the dividend valuation model, calculate the value of GXG Co under option 1, and advise

whether option 1 will be acceptable to shareholders. (6 marks)

(b) Calculate the effect on earnings per share of the proposal to raise finance by a stock market listing

(option 2), and comment on the acceptability of the proposal to existing shareholders. (5 marks)

(c) Calculate the effect on earnings per share and interest cover of the proposal to raise finance by issuing

new debt (option 3), and comment on your findings. (5 marks)

(d) Discuss the factors to be considered in choosing between traded bonds, new equity issued via a

placing and venture capital as sources of finance

(a) Estimate the value of Corhig Co using the price/earnings ratio method and discuss the usefulness of

the variables that you have used. (4 marks)

(b) Calculate the current cost of equity of Corhig Co and, using this value, calculate the value of the

company using the dividend valuation model. (6 marks)

(c) Calculate the current weighted average after-tax cost of capital of Corhig Co and the weighted

average after-tax cost of capital following the new debt issue, and comment on the difference between

the two values.

(d) Discuss how the shareholders of Corhig Co can assess the extent to which they face the following

risks, explaining in each case the nature of the risk being assessed:

(a) Calculate the theoretical ex rights price per share of Bar Co following the rights issue. (3 marks)

(b) Calculate and discuss whether using the cash raised by the rights issue to buy back bonds is likely to

be financially acceptable to the shareholders of Bar Co, commenting in your answer on the belief that the

(c) Calculate and discuss the effect of using the cash raised by the rights issue to buy back bonds on the

financial risk of Bar Co, as measured by its interest coverage ratio and its book value debt to equity ratio.

(d) Compare and contrast the financial objectives of a stock exchange listed company such as Bar Co

and the financial objectives of a not-for-profit organisation such as a large charity.

Required:4 de 2009

(a) Discuss the role of financial intermediaries in providing short-term finance for use by business

organisations.

(b) Prepare the following forecast financial statements for APX Co using the information provided:

(ii) a statement of financial position at the end of the next year. (9 marks)

(c) Analyse and discuss the working capital financing policy of APX Co. (6 marks)

(d) Analyse and discuss the forecast financial performance of APX Co in terms of working capital

management

(a) Calculate the theoretical ex rights price per share after the rights issue. (4 marks)

Assume that the current spot rate and earnings from existing operations are both constant. (9 marks)

(c) Explain the difference between transaction risk and translation risk, illustrating your answer using the

(d) The six-month forward rate is 1·2876 €/$ and the twelve-month forward rate is 1·2752 €/$. NG Co

can earn 2·8% per year on short-term euro deposits and can borrow short-term in dollars at 5·3% per year.

Identify and briefly discuss exchange rate hedging methods that could be used by NG Co. Provide

calculations that illustrate TWO of the hedging methods that you have identified.

(ii) PE ratios

Discuss the potential accuracy of each of the methods used and recommend, with reasons, a value, or

range of values that Stanzial might bid for Besserlot.

Approximately 16 marks are available for calculations and 11 marks for discussion. (27 marks)

(b) Discuss how the shareholder mix of Besserlot and type of payment used might influence the success

or failure of the bid. (8 marks)

(c) Assuming that the bid was successful, discuss other factors that might influence the medium term

financial success of the acquisition

(a) Calculate the debt/equity ratio of Gemlo Co based on market values and comment on your findings.

(b) Gemlo Co agrees with a bank that its business expansion will be financed by a new issue of 8% loan

notes. The company then announces to the stock market both this financing decision and the expected

increase in profit before interest and tax arising from the business expansion.

Required:

Assuming the stock market is semi-strong form efficient, analyse and discuss the effect of the financing

and profitability announcement on the financial risk and share price of Gemlo Co.

IRELAND (UNKNOWN)

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