ACCA

F9 (FM)

Financial Management

QUESTIONS

Mock C

THANKS TO: Mirchawala's Hub Of Accountancy

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FM: Financial Management:

Business Valuation, Investment Appraisal & WACC:
Question#1:
The equity shares of Nice plc have a beta value of 0.70. The risk free rate of return is 8% and the market
risk premium is 5%. Corporation tax is 30%.
What is the required return on the shares of Nice plc_______ (to one decimal place)?
Question#2:
Apple Co latest results are as follows:
$'000
Profit before interest and taxation 2,500
Profit before taxation 2,250
Profit after tax 1,400
In addition, extracts from its latest statement of financial position are as follows:
$'000
Equity 10,000
Non-current liabilities 2,500
What is Apple Co's return on capital employed (ROCE)?
A. 14%
B. 18%
C. 20%
D. 25%
Question#3:
Which of the following is NOT an advantage of withholding a dividend as a source of finance?
Retained profits are a free source of finance.

A. Investment plans need less justification.

B. Issue costs are lower.
C. It is quick.
Question#4:
Which of the following statements about investment appraisal methods is correct?
A. The return on capital employed method considers the time value of money.
B. Return on capital employed must be greater than the cost of equity if a project is to be accepted.
C. Riskier projects should be evaluated with longer payback periods.
D. Payback period ignores the timing of cash flows within the payback period.
Question#5:
Which of the following statements concerning capital structure theory is correct?
A. In the traditional view, there is a linear relationship between the cost of equity and financial risk.
B. Modigliani and Miller said that, in the absence of tax, the cost of equity would remain constant.
C. Pecking order theory indicates that preference shares are preferred to convertible debt as a source
of finance.
D. Business risk is assumed to be constant as the capital structure changes

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Question#6:
SKV Co has paid the following dividends per share in recent years:
Year 20X4 20X3 20X2 20X1
Dividend ($ per share) 0.360 0.338 0.328 0.311
The dividend for 20X4 has just been paid and SKV Co has a cost of equity of 12%.
Using the geometric average historical dividend growth rate and the dividend growth model, what is
the market price of SKV Co shares on an ex dividend basis?
A. $4.67
B. $5.14
C. $5.40
D. $6.97
Question#7:
Carp Co has announced that it will pay an annual dividend equal to 55% of earnings. Its earnings per
share is $0.80, and it has 10 million shares in issue. The return on equity of Carp Co is 20% and its
current cum dividend share price is $4.60.
What is the cost of equity of Carp Co?
A. 19.4%
B. 20.5%
C. 28.0%
D.22.7%
Question#8:
Which of the following is/are relevant costs for investment appraisal of a new machine?
1. Depreciation of the machine
2. Research into different types of machine
3. Annual maintenance costs for the machine
A. 1 and 2 only
B. 2 only
C. 3 only
D.1 and 3 only
Question#9:
Which of the following is/are true of the payback method of investment appraisal?
1. It tends to maximise financial and business risk
2. It's a fairly complex technique and not easy to understand
3. It cannot be used when there is a capital rationing situation
A. None of these
B. All of these
C. 1 only
D. 2 and 3 only

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Question#10:
Using a discount rate of 10% per year the net present value (NPV) of a project has been correctly
calculated as $50. If the discount rate is increased by 1% the NPV of the project falls by $20.
What is the internal rate of return (IRR) of the project?
A. 7.5%
B. 11.7%
C. 12.5%
D. 20.0%
Question#11:
TS operates a fleet of vehicles and is considering whether to replace the vehicles on a 1, 2 or 3 year
cycle. Each vehicle costs $25,000. The operating costs per vehicle for each year and the resale value at
the end of each year are as follows.
Year 1 Year 2 Year 3
$ $ $
Operating costs 5,000 8,000 11,000
Resale value 18,000 15,000 5,000
The cost of capital is 6% per annum.
You should assume that the initial investment is incurred at the beginning of year 1 and that all other
cash flows arise at the end of the year.
What is the equivalent annual cost of replacing the vehicles every two years?
A. $11,743
B. $12,812
C. $13,511
D. $15,666
Question#12:
The following statements relate to dividend policy.
1. According to Modigliani and Miller, in a perfect capital market, shareholders are indifferent between
dividends and capital gains.
2. Residual theory states that dividends should be paid ahead of investing in positive NPV projects.
Are the statements true or false?
A Both statements are true
B Both statements are false
C Statement 1 is true and statement 2 is false
D Statement 2 is true and statement 1 is false
Question#13:
CTF Co has the following information relating to its ordinary shares.
Dividend cover 5
Earnings per share 150
Published dividend yield 3.75%
What is the price of CTF Co's ordinary shares?
A 30c
B 113c
C 563c
D 800c

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Question#14:
The equity shares of HF Co have a beta value of 0.90. This risk-free rate of return is 6% and the market
risk premium is 4%. Tax is 30%.
What is the return on shares of HF Co?
A 6.6%
B 6.7%
C 9.4%
D 9.6%
Question#15:
The following statements relate to capital structure theory.
1. The traditional view is that, in the absence of tax, a company's capital structure would have no impact
on its weighted cost of capital (WACC).
2. The net operating income approach (MM) assumes that debt is risk free.
Are the statements true or false?
A. Both statements are true
B. Both statements are false
C. Statement 1 is true and statement 2 is false
D. Statement 2 is true and statement 1 is false
Question#16:
Sparrow Co has just paid an ordinary dividend of 30c per share. The shares are now trading at 480c.
If dividend growth is expected to be 3% per annum, what is the company's cost of equity to the
nearest whole number?
A. 6%
B. 7%
C. 8%
D. 9%

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MTQ#1:
The finance director of Coral Co has been asked to provide values for the company's equity and loan
notes. Coral Co is a listed company and has the following long-term finance:
$m
Ordinary shares 7.8
7% convertible loan notes 8.0
15.8
The ordinary shares of Coral Co have a nominal value of $0.25 per share and are currently trading on an
ex dividend basis at $7.10 per share. An economic recovery has been forecast and so share prices are
expected to grow by 8% per year for the foreseeable future.
The loan notes are redeemable after 6 years at their nominal value of $100 per loan note, or can be
converted after 6 years into 10 ordinary shares of Coral Co per loan note. The loan notes are traded on
the capital market.
The before-tax cost of debt of Coral Co is 5% and the company pays corporation tax of 20% per year.
1. What is the equity market value of Coral Co $_______m?(to two decimal place)
2. Assuming conversion, what is the market value of each loan note of Coral Co______?
A. $110.13
B. $112.67
C. $119.58
D. $125.70
3. Which of the following statements about the equity market value of Coral Co is/are true?
(1)The equity market value will change frequently due to capital market forces.
(2)If the capital market is semi-strong form efficient, the equity market value will not be affected by the
release to the public of insider information.
(3)Over time, the equity market value of Coral Co will follow a random walk.
A. 1 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3
4. Indicate whether the following are assumptions made by the dividend growth model.
Yes No
1 Investors make rational decisions.
2 Dividends show either constant growth or zero growth.
3 The dividend growth rate is less than the cost of equity.
5. Why might valuations of the equity and loan notes of Coral Co be necessary?
(1) The company is planning to go to the market for additional finance.
(2) The securities need to be valued for corporate taxation purposes.
(3) The company has received a takeover bid from a rival company.
A. 1 and 2 only
B. 1 and 3 only
C. 3 only
D. 1, 2 and 3

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MTQ#2:
A company is considering two capital expenditure proposals. Both proposals are for similar products and
both are expected to operate for four years. Only one proposal can be accepted.
The following information is available.
Profit/(loss)
Proposal A Proposal B
$ $
Initial investment 46,000 46,000
Year 1 6,500 4,500
Year 2 3,500 2,500
Year 3 13,500 4,500
Year 4 (1,500) 14,500
Estimated scrap value at the end of year 4 4,000 4,000
Depreciation is charged on the straight line basis.
1. What is the annual cash flow for year 4 for Proposal A?
A$2,500
B$9,000
C$13,000
D$15,000
2. What is the payback period for Proposal B?
A. 2.6 years
B. 3.1 years
C. 4.0 years
D. It doesn't pay back
3. What is the return on capital employed on average investment for Proposal A?
A. 4.5%
B. 22.0%
C. 26.0%
D. 26.2%
4. Which of the following are true of the payback period?
1. It is a measure used by external analysts
2. It reduces risk
3. It looks at the entire project life
4. It may lead to excessive investment in short-term projects
A. 2 and 4 only
B. 1, 2 and 3 only
C. 1 and 4 only
D. 1, 2, 3 and 4
5. Which of the following are true of ROCE?
1. It can be used to compare two investment options
2. It takes account of the length of a project
3. It ignores the time value of money
4. It is subject to the company's accounting treatment
A. 1 and 2 only
B. 1, 3 and 4 only
C. 2 and 3 only
D. 4 only

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