ACCA

Financial Management (FM)

PYQ COMPILATION
2018 – MJ 2023
FM ACCA PYQ Compilation Jan-Dec 2023

TABLE OF CONTENTS
Table of Contents ..................................................................................................................................... i
Examiners’ Comment ............................................................................................................................... i
SECTION A: 15 MCQs ....................................................................................................................... i
SECTION B: OT CASES (3 CASES WITH 5 MCQS) .............................................................................. ii
SECTION C: LONG CASES (2 CASES WITH MULTIPLE WRITTEN Q&AS) .......................................... iii
SECTION A (MCQs) .................................................................................................................................. 1
MJ 2023........................................................................................................................................... 1
SD 2022 ........................................................................................................................................... 2
MJ 2022........................................................................................................................................... 3
SD 2021 ........................................................................................................................................... 4
MJ 2021........................................................................................................................................... 5
SD 2020 ........................................................................................................................................... 7
MJ 2020........................................................................................................................................... 8
DEC 2019 ......................................................................................................................................... 9
SEP 2019 ......................................................................................................................................... 9
JUN 2019 ....................................................................................................................................... 10
MAR 2019 ..................................................................................................................................... 10
DEC 2018 ....................................................................................................................................... 11
SEP 2018 ....................................................................................................................................... 11
JUN 2018 ....................................................................................................................................... 12
MAR 2018 ..................................................................................................................................... 12
SECTION A (MCQs) Published ............................................................................................................... 13
SEP 2016 ....................................................................................................................................... 13
JUN 2015 ....................................................................................................................................... 17
DEC 2014 ....................................................................................................................................... 22
SECTION B (Case with OTQ) Published ................................................................................................. 28
PART C: Working Capital ....................................................................................................................... 28
MJ 2022: Amax Co ........................................................................................................................ 28
PYQ: Cat Co ................................................................................................................................... 29
PYQ: PTY Co................................................................................................................................... 30
PART D: Investment Appraisal............................................................................................................... 32
Sep 2016: Fence Co ....................................................................................................................... 32
PYQ: Betle Co ................................................................................................................................ 33
PYQ: DEF Co .................................................................................................................................. 35
PART E: Source of Finance..................................................................................................................... 36
MJ 2021: Nolciln Co ...................................................................................................................... 36
MJ 2019: Tulip Co .......................................................................................................................... 37
PART F: Business Valuation ................................................................................................................... 39
SD 2022: Light Co .......................................................................................................................... 39
SD 2021: Dazvin Co ....................................................................................................................... 41
MJ 2019: Bluebell Co .................................................................................................................... 43
Sep 2016: Ring Co ......................................................................................................................... 45

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PART G (COMPULSORY): Risk Management ......................................................................................... 47

SD 2022: Wren Co ......................................................................................................................... 47
SD 2020: Marigold Co ................................................................................................................... 48
MJ 2019: Peony Co........................................................................................................................ 50
Dec 2016: Park Co ......................................................................................................................... 51
Sep 2016: Herd Co ........................................................................................................................ 53
SECTION C (Long Question) Published .................................................................................................. 55
PART C: Working Capital ....................................................................................................................... 55
SD 2022: Purdy Co ........................................................................................................................ 55
SD 2021: Kandy Co ........................................................................................................................ 56
MJ 2020: Pumice Co...................................................................................................................... 57
SD 2019: Dusty Co ......................................................................................................................... 59
SD 2018: Oscar Co ......................................................................................................................... 60
MJ 2017: Pangli Co ........................................................................................................................ 61
SD 2016: Nesud Co........................................................................................................................ 62
MJ 2016: Crago Co ........................................................................................................................ 63
SD 2015: ZXC Co ............................................................................................................................ 64
Jun 2015: Widnor Co..................................................................................................................... 64
Dec 2014: FLIT Co.......................................................................................................................... 65
Jun 2014: CSZ Co ........................................................................................................................... 66
PART D (COMPULSORY): Investment Appraisal .................................................................................... 67
MJ 2023: Gini Co ........................................................................................................................... 67
SD 2022: Clover Co........................................................................................................................ 68
MJ 2022: Melplash Co................................................................................................................... 69
SD 2021: Hawker Co...................................................................................................................... 70
MJ 2021: Cabreras Co ................................................................................................................... 71
SD 2020: Crocket Co ...................................................................................................................... 72
SD 2019: Dink Co........................................................................................................................... 73
MJ 2019: Pinks Co ......................................................................................................................... 74
SD 2018: Melanie Co ..................................................................................................................... 75
MJ 2018: Copper Co ...................................................................................................................... 76
SD 2017: Pelta Co .......................................................................................................................... 77
MJ 2017: Vyxyn Co ........................................................................................................................ 78
MJ 2016: Degnis Co....................................................................................................................... 79
Sep 2016: Hebac Co ...................................................................................................................... 80
SD 2015: Argnil Co ........................................................................................................................ 81
Jun 2015: Hraxin Co ...................................................................................................................... 82
Jun 2014: OAP Co .......................................................................................................................... 83
PART E: Business Finance ...................................................................................................................... 84
MJ 2023: Graffham Co .................................................................................................................. 84
MJ 2022: Tanza Co ........................................................................................................................ 85
MJ 2021: Zeddemore Co ............................................................................................................... 86
SD 2020: Spine Co ......................................................................................................................... 87
MJ 2020: LaForge Co ..................................................................................................................... 88

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MJ 2019: Corfe Co ......................................................................................................................... 89

SD 2016: Gardner Co..................................................................................................................... 90
MJ 2018: Tin Co............................................................................................................................. 91
SD 2017: Tufa Co ........................................................................................................................... 92
MJ 2016: Dinla Co ......................................................................................................................... 93
SD 2015: KQK Co ........................................................................................................................... 94
Dec 2014: Tinep Co ....................................................................................................................... 95
Jun 2014: MFZ Co.......................................................................................................................... 96
Dec 2013: Card Co......................................................................................................................... 97
PART F: Business Valuation ................................................................................................................... 98
SD 2015: Gemlo Co ....................................................................................................................... 98
Jun 2015: Chad Co ........................................................................................................................ 99
Dec 2014: Par Co ......................................................................................................................... 100
Jun 2014: MFZ Co (Part E + F) ..................................................................................................... 101
Jun 2014: Fence Co (Part E + F) ................................................................................................... 102
Jun 2013: GXG Co ........................................................................................................................ 103
PART G: Risk Management.................................................................................................................. 104
MJ 2016: Plam Co ....................................................................................................................... 104
SD 2015: GXJ Co .......................................................................................................................... 105
Jun 2015: Rose Co ....................................................................................................................... 106
Dec 2014: PZK Co ........................................................................................................................ 106

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EXAMINERS’ COMMENT
SECTION A: 15 MCQs
The objective test questions in Section A ensure a broad coverage of the syllabus, and so all areas of
the syllabus need to be carefully studied, as all learning outcomes can be tested in this part of the
examination. Candidates preparing for the examination are therefore advised to work through as
many objective test questions as possible, reviewing carefully to see how correct answers are derived
in areas where they experience difficulty.
Part A Part B Part C Part D Part E Part F Part G
MJ 2023 X X X X
SD 2022 X X X X
MJ 2022 X X X
SD 2021 X X X X
MJ 2021 X X X X

Candidates should read the question carefully and follow the instructions on how to answer the
question.
For example, if a question asks the candidate to select two correct statements, then marks can only
be awarded if two statements have been selected. There is no partial marking, so an answer which
only selects one statement will be awarded no marks. A candidate who selects three statements will
also receive no marks.
In addition, when answering a number entry question, candidates must ensure they are entering their
answer in the correct format as stated in the requirement. If a number is being requested in millions,
there will be an ‘m’ after the number entry box. If a candidate puts a full answer of say 13000000 in
the box rather than 13, this will be marked as incorrect.
If there is no format specified, answers may be given as an integer or to one or two decimal places.
The exam system is configured to allow any correct answer, under these formats, to be awarded the
available marks.

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SECTION B: OT CASES (3 CASES WITH 5 MCQS)

Tests candidates’ knowledge on a number of topics in more detail than section A, with three case
questions containing five two-mark objective test questions.

FM Part G (compulsory) Part C Part E Part F

Exam Risk management Working capital Business finance Business valuations

MJ-23 Light Co
SD-22 Wren Co
MJ-22 Amax Co
SD-21 Dazvin Co
MJ-21 Nolciln Co
SD-20 Marigold Co
Forex risk - derivatives Asset-based valuation
(future contracts, forward AR factoring AR on replacement cost,
contracts) on receipt/pmt Dilution of EPS
MJ-20 early settlement earnings yield Impact of
Int rate risk - FRA financed by RI
discount valuation of shares to
company
Forex risk – derivatives
JIT Financing for EMH
(future contracts, forward
Dec-19 4-way equivalence model
EOQ ordering SME Cost of equity using
cost Compute DGM DCF & P/E ratio
Asset liability hedging
Forex risk – Different method
AR factoring
esp Derivatives (option vs WACC with tax DGM, earnings yield
AR early
Sep-19 futures contracts) DGM calculation
settlement
Int rate risk – FRA vs forward computation EMH
discount
exchange contracts
ACTION Attempt ALL PYQ - Sect B
and C

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SECTION C: LONG CASES (2 CASES WITH MULTIPLE WRITTEN Q&AS)

TWO constructed response questions from different syllabus areas.
PYQ reference /
Exam Part Specific
Technical article
Raising equity finance, including RI. Spine Co (SD 2020)
Assess financial position, financial risk and LaForge Co (MJ 2020)
shareholder wealth using appropriate ratios. Tin Co (MJ 2018)
E Business finance
Raising short- and long-term Islamic finance, Analysing the
suitability of financing
including Islamic financial instruments.
MJ 2023

alternatives
Identify and calculate relevant cash flows
including tax effects - tax-allowable depn The effect of inflation
Investment and the tax liabilities of taxable profit. on cash flows
D
Appraisal Calculate and discuss usefulness of NPV.
Discuss the limitations of probability
analysis in assisting investment decisions.
Specific investment decision- asset Cabreras Co (MJ 2021)
Investment replacement and EAC. Crockett Co (SD 2020)
D Melanie Co (SD 2018)
Appraisal Superiority of discounted cash flow (DCF)
methods over non-DCF.
SD 2022

Managing inventory - EOQ and bulk Kandy Co (SD 2021)

purchase discount. Dusty Co (SD 2019)
Working capital management objectives -
C Working Capital
liquidity and profitability.
Cash operating cycle and the level of
investment in working capital.
Specific investment decision- asset
Investment replacement and EAC.
D
Appraisal Superiority of discounted cash flow (DCF)
MJ 2022

methods over non-DCF.

Compute WACC using market value. Optimum Capital
Sources of Theory on relevant in Part E Structure
E Cost of Capital,
finance Factors to consider in raising Debt vs Equity
financing Gearing and CAPM
Specific investment decision - lease vs Dink Co (SD 2019)
Investment borrow including discussion on the tax Melanie Co (SD 2018)
D
Appraisal effect.
SD 2021

Merits of NPV and IRR.

Bulk discount vs early settlement discount.
Working capital objectives of liquidity and
C Working capital profitability.
Cash operating cycle relationship with
investment level.

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PYQ reference /
Exam Part Specific
Technical article
Asset replacement decision using EAC & its
Investment
D rationale.
Appraisal
MJ 2021

DCF vs non-DCF method of appraisal

Project specific CoC and CAPM application
High gearing issues
E Business finance
Risk-return relationship effect on finance
cost
Calculate NPV
Investment Capital constraint and optimum investment
D Pinks Co (MJ 2019)
Appraisal combination.
SD 2020

Approach use for replacement asset

Evaluate expansion using debt or equity
Explain and discuss systematic and
E Business finance Tin Co MJ 2018
unsystematic risk.
Discuss assumptions of CAPM
NPV and project acceptability - Inflation, tax Pinks Co (MJ 2019)
and cashflow timing Degnis Co (MJ 2016)
Real terms vs nominal terms Pelta Co (SD 2017)
Investment Vyxyn Co (MJ 2017)
D Risk and uncertainty - sensitivity analysis,
appraisal
probability analysis
Dink Co (SD 2019)
Specific investment decision – lease vs
Melanie Co (SD 2018)
borrow
JUN 2020

Financial effect of using factoring Dusty Co (SD 2019)

Working capital policy Oscar (SD 2018)
C Working capital Techniques for managing AR - discounting
Cash operating cycle /cash management Pangli (MJ 2017)
Techniques for managing AR
Risk-return relationship Dinla Co (MJ 2016)
E Source of finance Relative costs of Ke and Kd, WACC Tufa Co (SD 2017)
Islamic finance
NPV include inflation and tax, sensitivity Pinks Co (MJ 2019)
Investment analysis, make or buy and ENPV. Melanie Co (SD 2018)
D
appraisal Single capital rationing
Compare NPV vs IRR or ROCE vs IRR
Investment policy vs financing policy using Oscar Co (SD 2018)
appropriate terms and concepts like 'cash
MAR 2020

pooling', forex risk, liquidity mgmt.

Cash management models
C Working capital
Financial effect on early settlement and
using factoring.
Forecast statement of financial position
planning for expansion - appropriate ratios
WACC - using MV, CAPM vs DGM Corfe Co (MJ2019)
E Source of Finance Tin Co (MJ2018)
Evaluate impact on business expansion

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PYQ reference /
Exam Part Specific
Technical article
NPV with inflation and tax Pinks Co (MJ 2019)
Real-term vs nominal-term. Pelta Co (SD 2017)
Investment Vyxyn Co (MJ 2017)
D IRR vs NPV
appraisal OAP Co (J 2014)
Real terms vs nominal terms Tax cash flows
Hebac Co (a) (S 2016)
DEC 2019

and impact on discount rates

C Working capital Cash operating cycle /cash management Pangli Co (MJ 2017)
Techniques for managing AR Consider
overtrading ratio and discuss what it meant. Crago Co (MJ 2016)
WACC - using MV/Book value, CAPM vs DGM Corfe Co MJ 2019
E Source of finance Evaluate impact on business expansion Tin Co MJ 2018
Estimate cost of debt and WACC Tufa Co SD 2017
NPV with tax, ROCE; Adjust for risk and Pinks Co MJ 2019
uncertainty. Pelta Co SD 2017
Investment Vyxyn Co (b MJ 2017)
D
appraisal Specific investment decisions - buy vs lease, Hebac Co (a S 2016)
OAP Co (J2014)
EAC vs EAB
Melanie Co (SD2018)
EOQ with discount
SEP 2019

funding strategies - permanent vs fluctuating

CA Nesud Co (S 016)
C Working capital
ST vs LT finance, matching principles, cost and ZXC Co (SD 015)
benefit, conservative and matching funding,
mgt attitude to risk
Source of finance - dividend theory, M&M
Irrelevancy, Clientele theory
E Source of finance Corfe Co (MJ 2019)
Cost of getting finance - ROE, gearing, int
coverage ratio

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SECTION A (MCQS)
MJ 2023
1. Directive Co finances its working capital with an overdraft at a cost of 7% per year. Its major supplier
offers a discount of 0.5% for settlement of invoices after 10 days rather than the usual 30 days.
Assume 365 days in a year.
Which statement correctly explains what Directive Co should do?

A Pay in 10 days because at 9.5% per year the benefit of the discount exceeds the cost of the overdraft
B Pay in 30 days because at 9.5% per year the discount is more expensive than the overdraft
C Pay in 30 days because at 6.3% per year the benefit of the discount is less than the cost of the overdraft
D Pay in 10 days because at 6.3% per year the discount is cheaper than the overdraft

2. Which TWO of the following hedging techniques can be used by an investor to protect against a fall
in interest rates?

A Money market hedge

B Interest rate collar
C Interest rate cap
D Interest rate floor

3. Togue Co is investigating how often it should replace its company car fleet. It is considering replacement
every two, three, four or five years. Cash flow estimates have been compiled and the following negative
NPVs have been obtained, based on Togue Co's cost of capital of 11%:

Using the annuity tables provided, if Togue Co adopts the optimal replacement cycle, what will be the
equivalent annual cost (to the nearest dollar)?

$ ______________________

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4. Select the type of financial market appropriate to each of the company's needs.

SD 2022

1. Abrar Co has 6% convertible loan notes in issue with a floor value of $106.20 per $100 loan note. Each
loan note can be converted into 15 ordinary shares at any time or redeemed in five years' time at
nominal value.
What is the minimum share price at which investors would convert their loan notes (to two decimal
places)?

$ __________________

2. A state funded hospital has the objective of providing value for money. It measures the achievement
of this objective using the three E's (economy, effectiveness and efficiency).
Which of the following performance indicators measures the hospital's economy?

A Number of patients admitted per year

B Total medical staff salary cost
C Cost per successfully treated patient
D Average waiting time for patient admission to hospital

3. A machine costing $450,000 has a useful life of six years, after which time itsestimated present value
of resale will be $25,800. The present value of the total running costs over the next six years is $82,280.
The company's cost of capital is 10%.
What is the equivalent annual cost of using the machine if it were bought and replaced every six
years in perpetuity (to the nearest dollar)?

$ __________________

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4. A financial manager believes that if information regarding his organisation is made public, it will not
affect the share price as this information is already reflected in the current share price.
In terms of capital market efficiency, to which of the following does the financial manager's belief
relate?

A Weak form efficiency

B No efficiency
C Strong form efficiency
D Semi-strong form efficiency

MJ 2022
1. Tryde Co is a listed company which has 800 million ordinary shares in issue.
Yesterday the ordinary share price closed at $6.00. Two days earlier, the board of directors approved
the launch of two new innovative products, but this has not been publicly announced.
Product A has an NPV of $40m. The decision to launch product A will be announced publicly tomorrow.
Product B has an NPV of $160m. The decision to launch product B will be announced publicly this
morning.
Assume all other things are equal and that the capital markets believe the projected NPVs. Both
products will be financed using internally generated funds.
What will the ordinary share price be at the end of today if the capital market is (1) semi-strong form
efficient and (2) strong form efficient?

2. Which of the following statements about an over-the-counter interest rate option are correct?
(1) It is an agreement with a financial institution
(2) It can be traded
(3) An immediate premium is payable
(4) It must be exercised

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

3. Which FOUR of the following descriptions relate to the main macroeconomic policy objectives?

A Ensuring minimum amounts of price increases

B Increasing national income and living standards
C Ensuring a balanced ratio of imports to exports
D Maintaining interest rates at minimum levels
E Balancing government spending with tax receipts
F Ensuring a stable and fully employed labour force

4. Beaver Co has 100 million equity shares in issue and has just reported a profit, after tax, of $55m.
A new issue of 50 million equity shares at an issue price of $1.50 is being considered. All proceeds
would be used to redeem a bank loan with an annual cost of 8%.
Beaver Co pays corporation tax at a rate of 20%.
Assume that operating profit (profit before interest and tax) remains constant.
If the equity issue goes ahead and the bank loan is redeemed, what will be the new earnings per share
figure?

A $0.399
B $0.367
C $0.598
D $0.388

SD 2021
1. In relation to the return on capital employed (ROCE) investment appraisal method, which of the
following statements is correct?

A. ROCE leads to better investment decisions since it uses accounting profit rather than estimated cash
flows
B. Investment projects with a ROCE greater than the weighted average cost of capital should be accepted
C. Investment projects with a ROCE less than the current ROCE of an organisation should be rejected
D. ROCE takes into account all years of operation of an investment project

2. A large, listed company is to issue 90-day commercial paper with a nominal value of $10m. Each paper
will have a nominal value of $100,000.
The annual required rate of return is 4% assuming a 365-day year.
What will be the issue price of each paper?

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A $99,023
B $96,154
C $99,014
D $96,000

3. Match the characteristic below with the appropriate working capital strategy.

4. A company has announced that it will pay an annual dividend equal to 55% of earnings. Its earnings per
share is $0.80 and it has ten million shares in issue. The return on equity is 20% and the current cum div
share price is $4.60.
What is the cost of equity?

A 19.4%
B 20.5%
C 28.0%
D 22.7%

MJ 2021
1. The expected future spot rate in one year is 1.4505 euro per $1. The predicted inflation rates for the year
ahead are:
Eurozone 2% per year
Dollar 3.5% per year
What is the current spot rate (to four decimal places)?

____________ euro per $1

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2. Which of the following statements relating to money market instruments is/are correct?
1) Discounted instruments do not pay coupon interest
2) Commercial paper is secured on assets of the issuing company

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

3. Two companies, Acacia and Birch, have the following average levels of working capital:
Working capital level ($m) Acacia Birch
Maximum 10 12
Minimum 6 9

Acacia's working capital is financed with $4m of long-term debt and Birch's working capital is financed
with $9m of long-term debt.
The balance of finance is from short-term sources.

Identify, by clicking on the relevant boxes in the table, which type of working capital funding strategy
each company is employing.

4. Bilbo Co is an unlisted company with 800,000 issued shares. Seema is one of the founders and owns 20%
of the issued shares.
Bilbo Co has just paid its annual dividend of $0.30 per share. It is expected that next year's dividend will
be $0.32 per share. After that it is expected that dividends will grow indefinitely at 2% per year.
Shareholders expect a 12% return from their investment.
Using the dividend valuation model, calculate the value of Seema's shareholding.

A $512,000
B $522,240
C $489,600
D $480,000

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SD 2020
1. A company is appraising a three-year project which requires an initial outlay on 1 January 20X4 of
$30,000. The project is expected to give the following cash inflows on 31 December of each year:
20X4 $10,000
20X5 $20,000
20X6 $25,000

All of the above cash flows are before taking account of specific annual inflation of 5% per year. The real
cost of capital is 4% and the nominal cost of capital is 14%.
Using a nominal approach and the discount tables provided, what is the NPV of the project on 1
January 20X4 (to the nearest dollar)?

2. Which of the following is/are true?

(1) A conservative working capital investment policy implies a higher proportion of permanent current
assets to fluctuating current assets
(2) Long-term finance is generally cheaper than short-term finance

A 1 only is correct
B 2 only is correct
C 1 and 2 are correct
D 1 and 2 are incorrect

3. Simon Co is planning a 1 for 4 rights issue. The value of rights has been calculated as $0.40 per existing
share. Simon Co's market price is currently $7.00 per share.

What is the theoretical ex rights price (TERP) per share and the rights issue price per share?

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4. Which TWO of the following statements concerning the interest rate risk management method of
smoothing are true?
A The debt portfolio will consist of a mixture of fixed and floating rate debt
B Interest payments will still increase if the interest rate rises
C Investments with a fixed cash flow will be financed with fixed rate debt
D Full benefit will be obtained from a fall in interest rates
E The net effect will be an interest payment which is fixed overall

MJ 2020
1. A company that has a $14m loan, with a variable rate of interest, has acquired a forward rate agreement
(FRA) with a financial institution that offered a 4-11, 2.85% - 2.35% spread.

What would be the amount received from the financial institution, under the terms of the FRA, if the
actual rate of interest was 3.75% (to the nearest dollar)?

$ __________________________

2. Small and medium sized entities (SMEs) often face a funding gap problem.
Indicate, whether the following statements about SMEs are TRUE or FALSE, by selecting the correct
answer next to the relevant statement.

TRUE FALSE
SMEs will often experience a funding gap, due to them being seen as a higher
risk investment than a larger company
Founding shareholders of an SME will often have to sacrifice limited liability in
order to obtain bank finance
A lack of suitable, sufficient, non-current assets increases the funding gap
problem for an SME

3. The inventory ordering policy of ZAR Co is to order 100,000 units when the inventory level falls to 20,000
units. The cost of placing and processing an order is $200, while the cost of holding inventory is $0.50
per unit per year. Orders are received one week after being placed with the supplier. The production
requirement for the next year (50 weeks) is 600,000 units.

What is the cost of ZAR Co's inventory ordering policy?

$ __________________________

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4. Which TWO of the following derivative instruments are characterised by a standard contract size?

A Forward contract
B Forward rate agreement
C Futures contract
D Swap
E Over-the-counter option
F Exchange tradable option

DEC 2019
1. For the coming year, a company has budgeted sales of $2m per month, 80% of which will be on credit. It
expects its accounts receivable payment period to be three months.
Forecast average inventory and average accounts payable for the coming year are $10m and $4m
respectively.
What is the company's working capital requirement for the coming year (to one decimal place)?

$ __________________

2. Which TWO of the following are true for a weak-form efficient market?
A. Share prices fully and fairly represent past information
B. Share prices fully and fairly represent private information
C. Share prices appear to follow a 'random walk'
D. The market does not provide enough information to make good buying and selling decisions

SEP 2019
3. The following information is available for a listed company:
Dividend recently paid $0.10 per share
Dividends cover 4 times
Price earnings ratio 5 times
Estimated future growth in dividends 8%

Using the dividend growth model, what is the cost of equity for this company (to one decimal place)?

_________________________ %

4. Which of the following is a description of gap exposure?

A The difference between short-term and long-term interest rates

B The difference between the amounts of interest-sensitive assets and liabilities
C The difference between spot interest rates and futures interest rates
D The difference between fixed and floating interest rates

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JUN 2019
5. A listed company is to enter into a sale and repurchase agreement on the money market. The company
has agreed to sell $10m of treasury bills for $9.6m and will buy them back in 50 days' time for $9.65m.
Assume a 365-day year.

What is the implicit annual interest rate in this transaction (to the nearest 0.01%)?

___________________ %

6. Increasing which TWO of the following would be associated with the financial objective of shareholder
wealth maximisation?

A Share price
B Dividend payment
C Reported profit
D Earnings per share
E Weighted average cost of capital

MAR 2019
7. A project has average estimated cash flows of $3,000 per year with an initial investment of $9,000.
Depreciation is straight-line with no residual value and the project has a five-year life span. The company
has a target return on capital employed (ROCE) of 15% and a target payback period of 2.5 years. ROCE is
based on initial investment.

Under which investment appraisal method(s), using the company's targets, will the project be
accepted?
(1) ROCE
(2) Payback basis

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

8. Which TWO of the following are correct descriptions of net working capital?

A. Current asset – current liabilities

B. Inventory days + accounts receivable days – accounts payable days
C. Current assets / current liabilities
D. The long-term capital invested in net current assets

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DEC 2018
9. Black Co has in issue 5% irredeemable loan notes, nominal value of $100 per loan note, on which interest
is shortly to be paid. Black Co has a before-tax cost of debt of 10% and corporation tax is 30%.
What is the current market value of one loan note?

A $55
B $50
C $76
D $40

10. ARP is a charity providing transport for people visiting hospitals.

Which of the following performance measures would BEST fit with efficiency in a value for money
review?

A. Percentage of members who re-use the service

B. Cost per journey to hospital
C. A comparison of actual operating expenses against the budget
D. Number of communities served

SEP 2018
11. A company has calculated the NPV of a new project as follows:
Present Values $'000
Sales revenue 4,000
Variable costs (2,000)
Fixed costs (500)
Taxation at 20% (300)
Initial outlay (1,000)
NPV 200

What is the sensitivity of the project decision to a change in sales volume (to the nearest 0.1%)?

________________ %

12. Which TWO of the following would be evidence of strong form market efficiency?

A The lack of regulation on use of private information (insider dealing)

B Inability to consistently outperform the market and make abnormal gains
C Immediate share price reaction to company announcements to the market
D Regulation to ensure quick and timely public announcement of information

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JUN 2018
13. A company that has a $10m loan with a variable rate of interest, has acquired a forward rate agreement
(FRA) with a financial institution that offered a 3-6, 3.2% - 2.7% spread.

What would be the payment made to the financial institution under the terms of the FRA if the actual
rate of interest was 3% (to the nearest dollar)?

$ _________________

14. Which TWO of the following statements about overcapitalisation and overtrading are correct?

A Overtrading often arises from a rapid increase in sales revenue

B Overcapitalisation results in a relatively low current ratio
C Overtrading may result in a relatively high accounts payable turnover period
D Overcapitalisation is the result of too much short-term capital

MAR 2018
15. Leah Co is an all equity financed company which wishes to appraise a project in a new area of activity.
Its existing equity beta is 1.2. The industry average equity beta for the new business area is 2.0, with an
average debt / debt + equity ratio of 25%. The risk-free rate of return is 5% and the market risk premium
is 4%.

Ignoring tax and using the capital asset pricing model, calculate a suitable risk-adjusted cost of equity
for the new project.

__________________ %

16. Alpha Co and Beta Co are two companies in different industries who are both evaluating the acquisition
of the same target company called Gamma Co.
Gamma Co is in the same industry as Alpha Co.
Alpha Co has valued Gamma Co at $100m but Beta Co has only valued Gamma Co at $90m.
Which of following statements would explain why Alpha Co's value of Gamma Co is higher?

A Alpha Co has used more prudent growth estimates

B Beta Co could achieve more synergy
C Beta Co is a better negotiator than Alpha Co
D Gamma Co is a direct competitor of Alpha Co

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SECTION A (MCQS) PUBLISHED

SEP 2016
1. The owners of a private company wish to dispose of their entire investment in the company. The
company has an issued share capital of $1m of $0·50 nominal value ordinary shares. The owners have
made the following valuations of the company’s assets and liabilities.

Non-current assets (book value) $30m

Current assets $18m
Non-current liabilities $12m
Current liabilities $10m

The net realisable value of the non-current assets exceeds their book value by $4m. The current assets
include $2m of accounts receivable which are thought to be irrecoverable.
What is the minimum price per share which the owners should accept for the company?

A $14
B $25
C $28
D $13

2. Which of the following financial instruments will NOT be traded on a money market?

A Commercial paper
B Convertible loan notes
C Treasury bills
D Certificates of deposit

3. Andrew Co is a large listed company financed by both equity and debt.

In which of the following areas of financial management will the impact of working capital
management be smallest?

A Liquidity management
B Interest rate management
C Management of relationship with the bank
D Dividend policy

4. Which of the following are descriptions of basis risk?

(1) It is the difference between the spot exchange rate and currency futures exchange rate
(2) It is the possibility that the movements in the currency futures price and spot price will be different
(3) It is the difference between fixed and floating interest rates
(4) It is one of the reasons for an imperfect currency futures hedge

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

5. Crag Co has sales of $200m per year and the gross profit margin is 40%. Finished goods inventory days
vary throughout the year within the following range:
Maximum Minimum
Inventory (days) 120 90

All purchases and sales are made on a cash basis and no inventory of raw materials or work in progress
is carried. Crag Co intends to finance permanent current assets with equity and fluctuating current assets
with its overdraft.

In relation to finished goods inventory and assuming a 360-day year, how much finance will be needed
from the overdraft?
A $10m
B $17m
C $30m
D $40m

6. In relation to an irredeemable security paying a fixed rate of interest, which of the following statements
is correct?
A As risk rises, the market value of the security will fall to ensure that investors receive an increased
yield
B As risk rises, the market value of the security will fall to ensure that investors receive a reduced yield
C As risk rises, the market value of the security will rise to ensure that investors receive an increased
yield
D As risk rises, the market value of the security will rise to ensure that investors receive a reduced yield

7. Pop Co is switching from using mainly long-term fixed rate finance to fund its working capital to using
mainly short-term variable rate finance.
Which of the following statements about the change in Pop Co’s working capital financing policy is
true?

A Finance costs will increase

B Re-financing risk will increase
C Interest rate risk will decrease
D Overcapitalisation risk will decrease

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8. In relation to an operating lease, which of the following statements is correct?

A All the risks and rewards of ownership transfer to the lessee

B The asset and lease obligation will be recorded in the statement of financial position
C The lease period will cover almost all of the leased asset’s useful economic life
D The lessor will be responsible for repairs and maintenance of the leased asset

9. A company has annual after-tax operating cash flows of $2 million per year which are expected to
continue in perpetuity. The company has a cost of equity of 10%, a before-tax cost of debt of 5% and an
after-tax weighted average cost of capital of 8% per year. Corporation tax is 20%.
What is the theoretical value of the company?

A $20m
B $40m
C $50m
D $25m

10. Which of the following would you expect to be the responsibility of financial management?

A Producing annual account

B Producing monthly management accounts
C Advising on investment in non-current assets
D Deciding pay rates for staff

11. Lane Co has in issue 3% convertible loan notes which are redeemable in five years’ time at their nominal
value of $100 per loan note. Alternatively, each loan note can be converted in five years’ time into 25
Lane Co ordinary shares.
The current share price of Lane Co is $3·60 per share and future share price growth is expected to be 5%
per year.
The before-tax cost of debt of these loan notes is 10% and corporation tax is 30%.
What is the current market value of a Lane Co convertible loan note?

A $82·71
B $73·47
C $67·26
D $94·20

12. Country X uses the dollar as its currency and country Y uses the dinar.
Country X’s expected inflation rate is 5% per year, compared to 2% per year in country Y. Country Y’s
nominal interest rate is 4% per year and the current spot exchange rate between the two countries is
1·5000 dinar per $1.

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According to the four-way equivalence model, which of the following statements is/are true?
(1) Country X’s nominal interest rate should be 7·06% per year
(2) The future (expected) spot rate after one year should be 1·4571 dinar per $1
(3) Country X’s real interest rate should be higher than that of country Y

A 1 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3

13. Which of the following government actions would lead to an increase in aggregate demand?
(1) Increasing taxation and keeping government expenditure the same
(2) Decreasing taxation and increasing government expenditure
(3) Decreasing money supply
(4) Decreasing interest rates

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

14. Peach Co’s 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 Peach Co’s return on capital employed (ROCE)?

A 14%
B 18%
C 20%
D 25%

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15. Drumlin Co has $5m of $0·50 nominal value ordinary shares in issue. It recently announced a 1 for 4
rights issue at $6 per share. Its share price on the announcement of the rights issue was $8 per share.
What is the theoretical value of a right per existing share?

A $1·60
B $0·40
C C $0·50
D D $1·50

JUN 2015
1. Which of the following statements is/are correct?
1) Monetary policy seeks to influence aggregate demand by increasing or decreasing the money raised
through taxation
2) When governments adopt a floating exchange rate system, the exchange rate is an equilibrium
between demand and supply in the foreign exchange market
3) Fiscal policy seeks to influence the economy and economic growth by increasing or decreasing
interest rates

A 2 only
B 1 and 2 only
C 1 and 3 only
D 1, 2 and 3

2. Which of the following statements are correct?

(1) The general level of interest rates is affected by investors’ desire for a real return
(2) Market segmentation theory can explain kinks (discontinuities) in the yield curve
(3) When interest rates are expected to fall, the yield curve could be sloping downwards

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

3. The following information relates to a company:

Year 0 1 2 3
Earnings per share (cents) 30·0 31·8 33·9 35·7
Dividends per share (cents) 13·0 13·2 13·3 15·0
Share price at start of year ($) 1·95 1·98 2·01 2·25

Which of the following statements is correct?

A The dividend payout ratio is greater than 40% in every year in the period
B Mean growth in dividends per share over the period is 4%
C Total shareholder return for the third year is 26%
D Mean growth in earnings per share over the period is 6% per year

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4. Which of the following statements is correct?

A One of the problems with maximising accounting profit as a financial objective is that accounting
profit can be manipulated
B A target for a minimum level of dividend cover is a target for a minimum dividend payout ratio
C The welfare of employees is a financial objective
D One reason shareholders are interested in earnings per share is that accounting profit takes account
of risk

5. Which of the following statements is NOT correct?

A Return on capital employed can be defined as profit before interest and tax divided by the sum of
shareholders’ funds and prior charge capital
B Return on capital employed is the product of net profit margin and net asset turnover
C Dividend yield can be defined as dividend per share divided by the ex dividend share price
D Return on equity can be defined as profit before interest and tax divided by shareholders’ funds

6. Which of the following statements are correct?

(1) The sensitivity of a project variable can be calculated by dividing the project net present value by the
present value of the cash flows relating to that project variable
(2) The expected net present value is the value expected to occur if an investment project with several
possible outcomes is undertaken once
(3) The discounted payback period is the time taken for the cumulative net present value to change from
negative to positive

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

7. Which of the following statements is/are correct?

(1) The asset beta reflects both business risk and financial risk
(2) Total risk is the sum of systematic risk and unsystematic risk
(3) Assuming that the beta of debt is zero will understate financial risk when ungearing an equity beta

A 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

8. Which of the following statements are correct?

(1) Share option schemes always reward good performance by managers
(2) Performance-related pay can encourage dysfunctional behaviour
(3) Value for money as an objective in not-for-profit organisations requires the pursuit of economy,
efficiency and effectiveness

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A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

9. Which of the following are financial intermediaries?

(1) Venture capital organisation
(2) Pension fund
(3) Merchant bank

A 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

10. A company has in issue loan notes with a nominal value of $100 each. Interest on the loan notes is 6%
per year, payable annually. The loan notes will be redeemed in eight years’ time at a 5% premium to
nominal value. The before-tax cost of debt of the company is 7% per year.

What is the ex-interest market value of each loan note?

A $94·03
B $96·94
C $102·91
D $103·10

11. Which of the following statements are correct?

(1) Capital market securities are assets for the seller but liabilities for the buyer
(2) Financial markets can be classified into exchange and over-the-counter markets
(3) A secondary market is where securities are bought and sold by investors

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

12. Which of the following statements are correct?

(1) A certificate of deposit is an example of a money market instrument
(2) Money market deposits are short-term loans between organisations such as banks
(3) Treasury bills are bought and sold on a discount basis

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

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13. A company is evaluating an investment project with the following forecast cash flows:
Year 0 1 2 3 4
Cash flow ($m) (6·5) 2·4 3·1 2·1 1·8

Using discount rates of 15% and 20%, what is the internal rate of return of the investment project?
A 15·8%
B 17·2%
C 17·8%
D 19·4%

14. Which of the following statements are correct?

(1) Interest rate options allow the buyer to take advantage of favourable interest rate movements
(2) A forward rate agreement does not allow a borrower to benefit from a decrease in interest rates (3)
Borrowers hedging against an interest rate increase will buy interest rate futures now and sell them
at a future date

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

15. A company needs $150,000 each year for regular payments. Converting the company’s short-term
investments into cash to meet these regular payments incurs a fixed cost of $400 per transaction. These
short-term investments pay interest of 5% per year, while the company earns interest of only 1% per
year on cash deposits.

According to the Baumol Model, what is the optimum amount of short-term investments to convert
into cash in each transaction?

A $38,730
B $48,990
C $54,772
D $63,246

16. Which of the following statements is/are correct?

(1) Factoring with recourse provides insurance against bad debts
(2) The expertise of a factor can increase the efficiency of trade receivables management for a company

A 2 only
B 1 only
C Neither 1 nor 2
D 1 and 2

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17. An investor plans to exchange $1,000 into euros now, invest the resulting euros for 12 months, and then
exchange the euros back into dollars at the end of the 12-month period. The spot exchange rate is €1·415
per $1 and the euro interest rate is 2% per year. The dollar interest rate is 1·8% per year.
Compared to making a dollar investment for 12 months, at what 12-month forward exchange rate will
the investor make neither a loss nor a gain?

A €1·223 per $1
B €1·412 per $1
C €1·418 per $1
D €1·439 per $1

18. Which of the following statements are correct?

(1) If a capital market is weak form efficient, an investor cannot make abnormal returns by using
technical analysis
(2) Operational efficiency means that efficient capital markets direct funds to their most productive use
(3) Tests for semi-strong form efficiency focus on the speed and accuracy of share price responses to
the arrival of new information

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

19. On a market value basis, GFV Co is financed 70% by equity and 30% by debt. The company has an aftertax
cost of debt of 6% and an equity beta of 1·2. The risk-free rate of return is 4% and the equity risk premium
is 5%.

What is the after-tax weighted average cost of capital of GFV Co?

A 5·4%
B 7·2%
C 8·3%
D 8·8%

20. The following financial information relates to QK Co, whose ordinary shares have a nominal value of
$0·50 per share:

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On an historic basis, what is the net asset value per share of QK Co?
A $2·10 per share
B $2·50 per share
C $2·80 per share
D $4·20 per share

DEC 2014
1. TKQ Co has just paid a dividend of 21 cents per share and its share price one year ago was $3·10 per
share. The total shareholder return for the year was 19·7%.
What is the current share price?

A $3·50
B $3·71
C $3·31
D $3·35

2. Which of the following statements is/are correct?

1 Securitisation is the conversion of illiquid assets into marketable securities
2 The reverse yield gap refers to equity yields being higher than debt yields
3 Disintermediation arises where borrowers deal directly with lending individuals

A 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

3. Which of the following statements are correct?

1 Maximising market share is an example of a financial objective
2 Shareholder wealth maximisation is the primary financial objective for a company listed on a stock
exchange
3 Financial objectives should be quantitative so that their achievement can be measured

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

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4. A company whose home currency is the dollar ($) expects to receive 500,000 pesos in six months’ time
from a customer in a foreign country. The following interest rates and exchange rates are available to the
company:
Spot rate 15·00 peso per $
Six-month forward rate 15·30 peso per $
Home country Foreign country
Borrowing interest rate 4% per year 8% per year
Deposit interest rate 3% per year 6% per year

Working to the nearest $100, what is the six-month dollar value of the expected receipt using a money
market hedge?
A $32,500
B $33,700
C $31,800
D $31,900

5. Which of the following statements is correct?

A A bonus issue can be used to raise new equity finance
B A share repurchase scheme can increase both earnings per share and gearing
C Miller and Modigliani argued that the financing decision is more important than the dividend
decision
D Shareholders usually have the power to increase dividends at annual general meetings of a company

6. Which of the following statements is correct?

A Tax allowable depreciation is a relevant cash flow when evaluating borrowing to buy compared to
leasing as a financing choice
B Asset replacement decisions require relevant cash flows to be discounted by the after-tax cost of
debt
C If capital is rationed, divisible investment projects can be ranked by the profitability index when
determining the optimum investment schedule
D Government restrictions on bank lending are associated with soft capital rationing

7. An investment project has a cost of $12,000, payable at the start of the first year of operation. The
possible future cash flows arising from the investment project have the following present values and
associated probabilities:
PV of PV of
Year 1 cash flow ($) Probability Year 2 cash flow ($) Probability
16,000 0·15 20,000 0·75
12,000 0·60 (2,000) 0·25
(4,000) 0·25
What is the expected value of the net present value of the investment project?
A $11,850
B $28,700
C $11,100
D $76,300

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8. Which of the following statements is correct?

A Once purchased, currency futures have a range of close-out dates

B Currency swaps can be used to hedge exchange rate risk over longer periods than the forward market
C Banks will allow forward exchange contracts to lapse if they are not used by a company
D Currency options are paid for when they are exercised

9. A company has 7% loan notes in issue which are redeemable in seven years’ time at a 5% premium to
their nominal value of $100 per loan note. The before-tax cost of debt of the company is 9% and the
after-tax cost of debt of the company is 6%.

What is the current market value of each loan note?

A $92·67
B $108·90
C $89·93
D $103·14

10. Which of the following statements concerning working capital management are correct?
1 Working capital should increase as sales increase
2 An increase in the cash operating cycle will decrease profitability
3 Overtrading is also known as under-capitalisation

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

11. Which of the following is LEAST likely to fall within financial management?

A The dividend payment to shareholders is increased

B Funds are raised to finance an investment project
C Surplus assets are sold off
D Non-executive directors are appointed to the remuneration committee

12. Which of the following statements concerning profit are correct?

1 Accounting profit is not the same as economic profit
2 Profit takes account of risk
3 Accounting profit can be manipulated by managers

A 1 and 3 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3

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13. A company has annual credit sales of $27 million and related cost of sales of $15 million. The company
has the following targets for the next year:

Trade receivables days 50 days

Inventory days 60 days
Trade payables 45 days
Assume there are 360 days in the year.
What is the net investment in working capital required for the next year?

A $8,125,000
B $4,375,000
C $2,875,000
D $6,375,000

14. An investor believes that they can make abnormal returns by studying past share price movements. In
terms of capital market efficiency, to which of the following does the investor’s belief relate?

A Fundamental analysis
B Operational efficiency
C Technical analysis
D Semi-strong form efficiency

15. Which of the following statements is/are correct?

1 An increase in the cost of equity leads to a fall in share price
2 Investors faced with increased risk will expect increased return as compensation
3 The cost of debt is usually lower than the cost of preference shares

A 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

16. Governments have a number of economic targets as part of their fiscal policy.
Which of the following government actions relate predominantly to fiscal policy?
1 Decreasing interest rates in order to stimulate consumer spending
2 Reducing taxation while maintaining public spending
3 Using official foreign currency reserves to buy the domestic currency
4 Borrowing money from the capital markets and spending it on public works

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

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17. The following are extracts from the statement of financial position of a company:

The ordinary shares have a nominal value of 50 cents per share and are trading at $5·00 per share. The
preference shares have a nominal value of $1·00 per share and are trading at 80 cents per share. The
bonds have a nominal value of $100 and are trading at $105 per bond.

What is the market value-based gearing of the company, defined as prior charge capital/equity?
A 15·0%
B 13·0%
C 11·8%
D 7·3%

18. Which of the following statements is correct?

A Governments may choose to raise interest rates so that the level of general expenditure in the
economy will increase
B The normal yield curve slopes upward to reflect increasing compensation to investors for being
unable to use their cash now
C The yield on long-term loan notes is lower than the yield on short-term loan notes because longterm
debt is less risky for a company than short-term debt
D Expectations theory states that future interest rates reflect expectations of future inflation rate
movements

19. A company has just paid an ordinary share dividend of 32·0 cents and is expected to pay a dividend of
33·6 cents in one year’s time. The company has a cost of equity of 13%.

What is the market price of the company’s shares to the nearest cent on an ex-dividend basis?
A $3·20
B $4·41
C $2·59
D $4·20

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20. Which of the following is/are usually seen as forms of market failure where regulation may be a
solution?
1 Imperfect competition
2 Social costs or externalities
3 Imperfect information

A 1 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3

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SECTION B (CASE WITH OTQ) PUBLISHED

PART C: Working Capital
MJ 2022: Amax Co
Amax Co is a multinational company which has been reviewing its working capital management

Amax Co has received an offer of a discount for bulk purchase from Bard Co, one of its major suppliers. Bard
Co has offered a 0.5% discount on orders of 60,000 units or more of Component X. Amax Co currently
consumes 240,000 units of Component X each year and places orders of 20,000 units at the end of each
month. Holding cost for Component X is $1 per unit per year and ordering costs are $250 per order. Amax Co
does not maintain any buffer inventory of Component X.
Colix Co, a major supplier of Component M to Amax Co, has offered a 1% early settlement discount for
payment within 30 days. Amax Co currently takes 72 days to settle outstanding invoices with Colix Co.
Amax Co has a cost of short-term finance of 6% through an overdraft and no surplus cash. Assume that there
are 360 days in each year.

Amax Co currently has decentralised treasury operations but is considering implementing a centralised
treasury department.

1. Using months as a basis, what is the financial consequence of accepting the bulk purchase discount?

A Benefit of $8,000 per year

B Benefit of $12,000 per year
C Cost of $13,000 per year
D Cost of $8,000 per year

2. Using days as a basis, what is the financial consequence of accepting the early settlement discount?

A Benefit of $48,000 per year

B Cost of $32,000 per year
C Cost of $80,000 per year
D Benefit of $80,000 per year

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3. In relation to managing foreign accounts receivable, which of the following statements is correct?
1. Companies expecting to receive foreign currency from foreign accounts receivable will be
concerned about the risk of the foreign currency appreciating against the domestic currency
2. The safest way to conduct business with foreign accounts receivable is by making a sale where
goods are shipped and delivered before payment is due (open account)
3. There is no need to assess the creditworthiness of foreign customers if a company has export
credit insurance for foreign accounts receivable
4. Discounting bills of exchange can reduce foreign accounts receivable default risk

4. In relation to Amax Co's proposed change to treasury management operations, which of the following
statements is correct?

A Local management will be incentivised to maximise profitability

B Amax Co will be more responsive to localised needs for currency hedging
C Amax Co will suffer a loss of autonomy at a local level
D The change should increase the cost of hedging foreign currency risk for Amax Co

5. In relation to working capital funding strategy, which of the following statements is correct?

A An aggressive strategy seeks to maximise liquidity at the expense of profitability.

B Short-term finance has a higher cost than long-term finance
C Fluctuating current assets should be financed from a short-term source
D A moderate or matching strategy finances current assets from a short-term source

PYQ: Cat Co

1. What is the current total annual cost of inventory?

$ ________________

2. What is the total annual inventory cost if Cat Co orders 30,000 components at a time?

$ _________________

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3. Cat Co has an annual credit sale of $25 million and account receivable of $5 million.

$ _____________________

4. Cat Co is reviewing its working capital management.

5. Management at Cat Co are considering an aggressive approach to financing working capital.

PYQ: PTY Co
The information regarding some financial position of PTY Co is given below:
Annual sales $2,500,000
Costs as a percentage of sales:
Raw materials 10%
Direct labour 15%
Production overhead 5%
Working capital statistics:
Average raw materials holding period 4 weeks
Average finished goods holding period 2 weeks
Average receivables collection period 6 weeks
Average payables collection period 8 weeks

All finished goods values include raw materials, direct labour and production overheads.
Assume there are 52 weeks in the year.

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1. How much working capital is required to finance goods inventory, to the nearest $?
A $28,846
B $9,615
C $57,962
D $24,038

2. How much working capital is required to finance receivables?

A $384,615
B $86,538
C $115,385
D $288,462

3. Which of the following best describes overtrading?

A Selling more than you can manufacture and/or you hold in inventory.
B Having too much working capital thus reducing profitability.
C Selling stocks and shares outside the stock exchange opening hours.
D Suffering liquidity issues as a result of growing too quickly.

4. A company sells inventory for cash to a customer, at a selling price which is below the cost of the
inventory items.
How will this transaction affect the current ratio and the quick ratio immediately after the transaction?
Current ratio Quick ratio
A Increase Increase
B Increase Decrease
C Decrease Increase
D Decrease No change

5. The management of PTY Co feels that the company is overcapitalised and have cited the following
statements to support their view.
1. Overcapitalisation is indicated by lower-than-average sales revenue to working capital ratio.
2. Overcapitalisation is indicated by higher-than-average debt to equity ratio.

Which of the following combinations (true/false) concerning the above statements is correct?
Statement 1 Statement 2
A True True
B True False
C False True
D False False

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PART D: INVESTMENT APPRAISAL

Sep 2016: Fence Co
The following information relates to an investment project which is being evaluated by the directors of Fence
Co, a listed company. The initial investment, payable at the start of the first year of operation, is $3·9 million.

Year 1 2 3 4
Net operating cash flow ($000) 1,200 1,500 1,600 1,580
Scrap value ($000) 100

The directors believe that this investment project will increase shareholder wealth if it achieves a return on
capital employed greater than 15%. As a matter of policy, the directors require all investment projects to be
evaluated using both the payback and return on capital employed methods. Shareholders have recently
criticised the directors for using these investment appraisal methods, claiming that Fence Co ought to be using
the academically preferred net present value method.

The directors have a remuneration package which includes a financial reward for achieving an annual return
on capital employed greater than 15%. The remuneration package does not include a share option scheme.

16. What is the payback period of the investment project?

A 2·75 years
B 1·50 years
C 2·65 years
D 1·55 years

17. Based on the average investment method, what is the return on capital employed of the investment
project?

A 13·3%
B 26·0%
C 52·0%
D 73·5%

18. 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

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19. Which of the following statements about Fence Co is/are correct?

(1) Managerial reward schemes of listed companies should encourage the achievement of stakeholder
objectives
(2) Requiring investment projects to be evaluated with return on capital employed is an example of
dysfunctional behaviour encouraged by performance-related pay
(3) Fence Co has an agency problem as the directors are not acting to maximise the wealth of
shareholders

A 1 and 2 only
B 1 only
C 2 and 3 only
D 1, 2 and 3

20. Which of the following statements about Fence Co directors’ remuneration package is/are correct?
(1) Directors’ remuneration should be determined by senior executive directors
(2) Introducing a share option scheme would help bring directors’ objectives in line with shareholders’
objectives
(3) Linking financial rewards to a target return on capital employed will encourage short-term
profitability and discourage capital investment

A 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

PYQ: Betle Co
Beatle Co 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.

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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 – computed internally
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 x
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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PYQ: DEF Co
DEF Co is considering project A that would require 1,000 hours of skilled labour. The current workforce is
already fully employed but more workers can be hired in at a cost of $20 per hour. The current workers are
paid $15 per hour on a project that earns a contribution of $10 per hour.

Project A has an NPV of $5,000 when discounted at 12% and a positive NPV of $3,600 when discounted at
16%. Project B has an NPV of $8,000 when discounted at 12% and a negative NPV of $1,000 when discounted
at 16%.
DEF Co has a weighted average cost of capital of 12%.
The projects are mutually exclusive.

1. What is the relevant cost of labour to be included in the project appraisal?

A. $10,000
B. $15,000
C. $20,000
D. $25,000

2. What is the internal rate of return for projects A and B?

A. Project A has an IRR of 26.3% and B an IRR of 16.5%.
B. Project A has an IRR of 26.3% and B an IRR of 15.6%.
C. Project A has an IRR of 14.3% and B an IRR of 16.5%.
D. Project A has an IRR of 14.3% and B an IRR of 15.6%.

3. Which of the following statements is correct?

A. Both NPV and IRR indicate that Project A is the more financially viable project.
B. In order to maximise shareholder wealth Project A is the better project.
C. Neither Project A nor Project B should be accepted from a financial perspective.
D. Project B will increase shareholder wealth more than Project A at the current cost of capital.

4. In relation to the return on capital employed (ROCE) investment appraisal method, which of the
following statement is correct?
A. ROCE leads to better investment decision since it uses accounting profit rather than estimated cash
flows.
B. Investment projects with a ROCE greater than the weighted average cost of capital should be
accepted.
C. Investment projects with a ROCE less than the current ROCE of an organisation should be rejected.
D. ROCE takes into account all years of operations of an investment project.

5. Which of the following is a drawback of the payback period method of investment appraisal?
A. it is cash flow based
B. it considers the time value of money
C. it doesn’t measure the potential impact on shareholder wealth
D. it is profit based

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PART E: SOURCE OF FINANCE

MJ 2021: Nolciln Co

1. What was Nolciln Co's operational gearing in 20X9 (to one decimal place)?

____________ times

2. What was Nolciln Co's interest cover in 20X9 (to one decimal place)?

____________ times

3. Which TWO of the following are consistent with traditional capital structure theory?

A There is no optimal capital structure

B The value of the company remains unchanged with increased gearing
C The cost of equity is higher when there is a high proportion of debt capital
D There is a point at which the weighted average cost of capital is minimised

4. Responding to the directors' request for advice, which of the following is consistent with Modigliani and
Miller’s with-tax model?

A The value of Nolciln Co decreases with increased gearing

B The weighted average cost of capital remains constant with increased gearing
C The optimal capital structure is made up almost entirely of debt
D The cost of equity remains constant with increased gearing

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5. In relation to capital structure, which TWO of the following are valid statements about market
imperfections?

A Tax exhaustion occurs when there is a very high proportion of equity capital
B Debtholders may impose restrictive covenants in loan agreements
C Agency costs, tax exhaustion and bankruptcy risk encourage very high gearing levels
D When a company’s gearing creates a high risk of bankruptcy the weighted average cost of capital will
be higher

MJ 2019: Tulip Co
Tulip Co is a large company with an equity beta of 1·05. The company plans to expand existing business by
acquiring a new factory at a cost of $20m. The finance for the expansion will be raised from an issue of 3% loan
notes, issued at nominal value of $100 per loan note. These loan notes will be redeemable after five years at
nominal value or convertible at that time into ordinary shares in Tulip Co with a value expected to be $115 per
loan note.

The risk-free rate of return is 2·5% and the equity risk premium is 7·8%. Tulip Co is seeking additional finance
and is considering using Islamic finance and, in particular, would require a form which would be similar to
equity financing.

16. What is the cost of equity of Tulip Co using the capital asset pricing model?

A 13·3%
B 10·7%
C 8·1%
D 10·3%

17. Using estimates of 5% and 6%, what is the cost of debt of the convertible loan notes?

A 3·0%
B 5·2%
C 6·9%
D 5·7%

18. In relation to using the dividend growth model to value Tulip Co, which of the following statements is
correct?

A The model assumes that all shareholders of Tulip Co have the same required rate of return
B The model assumes a constant share price and a constant dividend growth for Tulip Co
C The model assumes that capital markets are semi-strong form efficient
D The model assumes that Tulip Co’s interim dividend is equal to the final dividend

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19. Which of the following statements about equity finance is correct?

A Equity finance reserves represent cash which is available to a company to invest

B Additional equity finance can be raised by rights issues and bonus issues
C Retained earnings are a source of equity finance
D Equity finance includes both ordinary shares and preference shares

20. Regarding Tulip Co’s interest in Islamic finance, which of the following statements is/are correct?
(1) Murabaha could be used to meet Tulip Co’s financing needs
(2) Mudaraba involves an investing partner and a managing or working partner

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

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PART F: BUSINESS VALUATION

SD 2022: Light Co
Light Co has the following capital structure:

The ordinary shares of Light Co have a nominal value of $0.25 per share and a current ex dividend market price
of $6.75 per share. Ordinary share prices are expected to grow by 5%, per year, for the foreseeable future.

The 9% preference shares of Light Co are irredeemable and have a nominal value of $1.00 per share. The cost
of capital of the preference shares is 9.5%.
The 6% loan notes are irredeemable and have a nominal value of $100 per loan note. The before-tax cost of
debt of these loan notes is 7%.

The 8% loan notes are convertible, after seven years, into 15 ordinary shares of Light Co per $100 loan note. If
not converted, the loan notes will be redeemed at nominal value after eight years. The before-tax cost of debt
of these loan notes is 9%.

Light Co pays corporation tax of 25%.

1. What is the total market value of the 6% loan notes (to one decimal place)?

$ ____________ m

2. What is the market value of each 8% loan note?

A $94.48
B $118.20
C $131.87
D $119.38

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3. In relation to valuing preference shares, which of the following statements is correct?

A. The market value, of an irredeemable preference share, is calculated by multiplying the dividend
by one, minus the tax rate and then dividing by the cost of the preference shares
B. Preference shares are a tax-efficient way of raising finance
C. Preference shares can be difficult to value when they pay a variable rate of dividend
D. Redeemable preference shares are classed as equity in the statement of financial position

4. In relation to practical considerations in valuing shares and businesses, which of the following
statements is correct?

A. The share price of a company can rise even when it has cut its dividend
B. The marketability of ordinary shares can be improved with a share buyback scheme
C. Investors will always act rationally in response to good news from a company
D. Random walk theory suggests that share price movements can be forecast in a weak form efficient
market

5. Considering behavioural finance, which of the following statements is correct?

A. Behavioural finance supports the view that stock market bubbles result from rational investment
decisions
B. Noise traders make investment decisions by using software to analyse real-time share price data
C. Share price anomalies do not undermine the perfect capital market theory
D. The momentum effect suggests that investors can buy shares in the belief that a recent rise in share
prices will continue

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SD 2021: Dazvin Co

1. What is the market value of the preference shares of Dazvin Co?

A $7.50m
B $5.25m
C $3.75m
D $10.71m

2. Using the price/earnings ratio method, what is the value of Dazvin Co?

A $48.0m
B $68.4m
C $43.2m
D $40.8m

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3. Based on a current ordinary share price of $2.00 per share, what is the market value of the convertible
debt of Dazvin Co?

A $19.0m
B $19.3m
C $21.0m
D $20.1m

4. In relation to information requirements for valuing shares, which of the following statements is correct?

A. Only information on the market values of tangible assets should be used in valuing shares
B. Shares are likely to be mispriced where managers and investors have different levels of information
(information asymmetry)
C. Details of key personnel are not relevant to the market capitalisation of a listed company
D. Since companies do not release information that undermines their competitive advantage, most of the
published information about a company is not relevant to placing a value on its shares

5. In relation to behavioural finance, which of the following statements is/are correct?

(1) When investors believe that recent share price increases will continue, this can lead to irrational
investment decisions by uninformed investors
(2) Informed investors can contribute to speculative stock market bubbles

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

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MJ 2019: Bluebell Co
Extracts from the financial statements of Bluebell Co, a listed company, are as follows:

A similar size competitor company has a price/earnings ratio of 12·5 times.

This competitor believes that if Bluebell Co were liquidated, property, plant and equipment would only realise
$600m, while 10% of trade receivables would be irrecoverable and inventory would be sold at $30m less than
its book value.

Separately, Bluebell Co is considering the acquisition of Dandelion Co, an unlisted company which is a supplier
of Bluebell Co.

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21. What is the value of Bluebell Co on a net realisable value basis?

A $140·8m
B $470·8m
C $365·8m
D $1,027·8m

22. What is the value of Bluebell Co using the earnings yield method?

A $2,675m
B $1,200m
C $1,875m
D $2,975m 23

23. When valuing Bluebell Co using asset-based valuations, which of the following statements is correct?

A An asset-based valuation would be useful for an asset-stripping acquisition

B Bluebell Co’s workforce can be valued as an intangible asset
C Asset-based valuations consider the present value of Bluebell Co’s future income
D Replacement cost basis provides a deprival value for Bluebell Co

24. Which of the following is/are indicators of market imperfections?

(1) Low volume of trading in shares of smaller companies
(2) Overreaction to unexpected news

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

25. Which of the following statements is correct?

A Dandelion Co is easier to value than Bluebell Co because a small number of shareholders own all
the shares
B Bluebell Co will have to pay a higher price per share to take control of Dandelion Co than if it were
buying a minority holding
C Scrip dividends decrease the liquidity of shares by retaining cash in a company
D Dandelion Co’s shares will trade at a premium to similar listed shares because it will have a lower
cost of equity

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Sep 2016: Ring Co

Ring Co has in issue ordinary shares with a nominal value of $0·25 per share. These shares are traded on an
efficient capital market. It is now 20X6 and the company has just paid a dividend of $0·450 per share. Recent
dividends of the company are as follows:

Year 20X6 20X5 20X4 20X3 20X2

Dividend per share $0·450 $0·428 $0·408 $0·389 $0·370

Ring Co also has in issue loan notes which are redeemable in seven years’ time at their nominal value of $100
per loan note and which pay interest of 6% per year.

The finance director of Ring Co wishes to determine the value of the company.
Ring Co has a cost of equity of 10% per year and a before-tax cost of debt of 4% per year. The company pays
corporation tax of 25% per year.

21. Using the dividend growth model, what is the market value of each ordinary share?

A $8·59
B $9·00
C $9·45
D $7·77

22. What is the market value of each loan note?

A $109·34
B $112·01
C $116·57
D $118·68

23. The finance director of Ring Co has been advised to calculate the net asset value (NAV) of the company.
Which of the following formulae calculates correctly the NAV of Ring Co?

A Total assets less current liabilities

B Non-current assets plus net current assets
C Non-current assets plus current assets less total liabilities
D Non-current assets less net current assets less non-current liabilities

24. Which of the following statements about valuation methods is true?

A The earnings yield method multiplies earnings by the earnings yield

B The equity market value is number of shares multiplied by share price, plus the market value of debt
C The dividend valuation model makes the unreasonable assumption that average dividend growth is
constant
D The price/earnings ratio method divides earnings by the price/earnings ratio

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25. Which of the following statements about capital market efficiency is/are correct?
(1) Insider information cannot be used to make abnormal gains in a strong form efficient capital market
(2) In a weak form efficient capital market, Ring Co’s share price reacts to new information the day after
it is announced
(3) Ring Co’s share price reacts quickly and accurately to newly released information in a semi-strong
form efficient capital market

A 1 and 2 only
B 1 and 3 only
C 3 only
D 1, 2 and 3

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PART G (COMPULSORY): RISK MANAGEMENT

SD 2022: Wren Co
The home currency of Wren Co is the dollar ($) and the company has a supplier in a foreign country whose
currency is the dinar (D). In six months’, time, Wren Co must make a payment to the supplier, of D3 million, and
the company is concerned about exchange rate risk.
Exchange rates:
Spot exchange rate 2.00 dinars per dollar
Six-month forward exchange rate 1.94 dinars per dollar

Wren Co wants to compare making a lead payment of D3 million now, with taking out a forward exchange
contract for D3 million, that can be exercised in six months’ time. As the company is short of cash, it would
need to borrow money for any exchange rate risk hedging.

Wren Co is considering raising $500,000 in three months’ time in order to ease its cash flow problems. The
company would borrow the money for a period of six months, and it would hedge interest rate risk by using a
forward rate agreement (FRA). Wren Co has been offered two different FRAs by its bank: a 3 v 9 FRA at 10.0 –
8.0 and a 3 v 6 FRA at 9.8 – 7.8, but the company is also considering interest rate derivative hedging.

1. In relation to interest rate derivatives, which of the following statements is correct?

A Interest rate futures hedges can be closed out any time

B Forward rate agreements fix the interest rate on future long-term borrowing
C If interest rate options are allowed to lapse, there is no overall cost to the holder
D Buying both an interest rate cap and an interest rate floor is an example of an interest rate collar

2. Considering future values on the D3 million payment date, and comparing the lead payment with the
forward exchange contract (FEC), which of the following statements is true?

A The FEC costs $46,392 more than the lead payment

B The FEC costs $28,608 more than the lead payment
C The lead payment costs $46,392 more than the FEC
D The lead payment costs $28,608 more than the FEC

3. If Wren Co takes out the relevant FRA and borrows at a base rate of 10.5% per year, in three months'
time, what is the company's net cost of borrowing?

A $20,000
B $25,000
C $24,500
D $27,500

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4. Which of the following statements is correct?

A. If the exchange rate is 2.00 dinars per dollar, a relative increase in dollar interest rates will cause
the dollar to appreciate against the dinar
B. The international Fisher effect states that the expected change in the spot rate is equal to the
expected difference in inflation rates
C. Forward exchange rates reflect interest rate parity
D. Purchasing power parity relates exchange rates and long-term interest rates

5. In relation to foreign currency risk, which of the following statements is/are correct?
(1) Economic risk is exchange rate risk that can be avoided by operating in domestic markets only
(2) Exchange rate risk arises because of changes in exchange rates that have not been anticipated

A. A 1 only
B. B 2 only
C. C Both 1 and 2
D. D Neither 1 nor 2

SD 2020: Marigold Co
Marigold Co is based in a country which uses the dollar ($) as its home currency. Marigold Co has a wholly
subsidiary based in a country which uses the M shilling (MS) as its currency. The subsidiary’s financial
statements are prepared in MS.

Due to economic uncertainty in both countries, an exchange loss of $100,000 is expected to occur after
consolidating the results of the subsidiary into Marigold Co’s group accounts.

Marigold Co is expecting a receipt of MS300,000 from the subsidiary in three months which it wishes to protect
against exchange rate movement. The following information is available:

1. What type of exchange rate risk would Marigold Co experience with the $100,000 loss in its
consolidated financial statements?

A Economic
B Translation
C Transaction
D Political

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2. If Marigold Co uses the forward market to hedge the MS receipt, what amount will be received (to the
nearest $)?

$ _______________________

3. Match the appropriate value to the relevant target in order to reflect what amount Marigold Co will
borrow and deposit if it uses the money market to hedge the MS receipt.

4. Marigold Co is now considering the use of an option to hedge the currency risk on the MS receipt. Its bank
has offered an over-the-counter option with an exercise price of MS1.1250 per $.

Which TWO of the following statements concerning the option are TRUE?
A. The option will be more expensive to set up compared with either the forward contract or money
market hedge
B. An imperfect hedge will result as the option will be for a standard amount of currency and only a
whole number of contracts may be used
C. If the $ was to strengthen against the MS, Marigold Co is likely to be worse off by using the option
compared to either the forward contract or money market hedge
D. Using an option hedge will mean that Marigold Co is obligated to exercise the option in three months
irrespective of the spot rate on the day

5. Marigold Co is unsure whether to use a forward contract or a money market hedge and is comparing the
relative advantages and disadvantages of the two.

Which of the following statements is true?

A. The forward contract has the advantage of being tailored precisely to Marigold Co's requirements,
but the money market hedge will be a standardised instrument resulting in an imperfect hedge
B. The forward contract will result in Marigold Co receiving the dollar equivalent of the MS receipt in
three months' time, whereas the money market hedge will provide Marigold Co with dollar receipts
today
C. The forward contract will result in the effective rate of exchange being fixed whereas the money
market hedge will allow Marigold Co to benefit from favourable movement in the exchange rate
D. Marigold Co will be obligated to fulfil the forward contract in three months' time whereas the money
market hedge could be traded on an exchange to another party before settlement

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MJ 2019: Peony Co
Peony Co’s finance director is concerned about the effect of future interest rates on the company and has been
looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months’ time for
a period of nine months. The company is concerned that interest rates might rise before the loan is taken out
and its bank has offered a 3 v 12 forward rate agreement at 7·10 – 6·85.

The loan will be converted into pesos and invested in a nine-month project which is expected to generate
income of 580m pesos, with 200m pesos being paid in six months’ time (from today) and 380m pesos being
paid in 12 months’ time (from today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6·5% per year
Pesos 10·0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to
manage its interest rate risk, including the use of derivatives.

26. In relation to the yield curve, which of the following statements is correct?

A Expectations theory suggests that deferred consumption requires increased compensation as

maturity increases
B An inverted yield curve can be caused by government action to increase its long-term borrowing
C A kink (discontinuity) in the normal yield curve can be due to differing yields in different market
segments
D Basis risk can cause the corporate yield curve to rise more steeply than the government yield curve

27. If the interest rate on the loan is 6·5% when it is taken out, what is the nature of the compensatory
payment under the forward rate agreement?

A Peony Co pays bank $600,000

B Peony Co pays bank $250,000
C Peony Co pays bank $450,000
D Bank pays Peony Co $600,000

28. Using exchange rates based on interest rate parity, what is the dollar income received from the project?

A $112·3m
B $114·1m
C $116·0m
D $112·9m

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29. In respect of Peony Co managing its interest rate risk, which of the following statements is/are correct?
(1) Smoothing is an interest rate risk hedging technique which involves maintaining a balance between
fixed-rate and floating-rate debt
(2) Asset and liability management can hedge interest rate risk by matching the maturity of assets and
liabilities

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

30. In relation to the use of derivatives by Peony Co, which of the following statements is correct?

A Interest rate options must be exercised on their expiry date, if they have not been exercised before
then
B Peony Co can hedge interest rate risk on borrowing by selling interest rate futures now and buying
them back in the future
C An interest rate swap is an agreement to exchange both principal and interest rate payments
D Peony Co can hedge interest rate risk on borrowing by buying a floor and selling a cap

Dec 2016: Park Co

Park Co is based in a country whose currency is the dollar ($). The company regularly imports goods
denominated in euro (€) and regularly sells goods denominated in dinars. Two of the future transactions of the
company are as follows:

Three months: Paying €650,000 for imported goods

Six months: Receiving 12 million dinars for exported capital goods

Park Co has the following exchange rates and interest rates available to it:

Bid Offer
Spot exchange rate (dinars per $1): 57·31 57·52
Six-month forward rate (dinars per $1): 58·41 58·64
Spot exchange rate (€ per $1): 1·544 1·552
Three-month forward rate (€ per $1): 1·532 1·540

Six-month interest rates:

Borrow Deposit
Dinars 4.00% 2.00%
Dollars 2.00% 0.50%

The finance director of Park Co believes that the upward-sloping yield curve reported in the financial media
means that the general level of interest rates will increase in the future, and therefore expects the reported
six-month interest rates to increase.

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16. What is the future dollar value of the dinar receipt using a money market hedge?

A. $197,752
B. $201,602
C. $208,623
D. $210,629

17. Indicate, by clicking on the relevant boxes, whether Park Co will find each of the following hedges to be
effective or not effective in hedging the foreign currency risk of the two transactions.

Leading the euro payment on its imported goods Effective Not effective
Taking out a forward exchange contract on its future dinar Effective Not effective
receipt
Buying a tailor-made currency option for its future euro Effective Not effective
payment

18. Which hedging methods will assist Park Co in reducing its overall foreign currency risk?
(1) Taking out a long-term euro-denominated loan
(2) Taking out a dinar-denominated overdraft

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

19. Indicate whether the following statements are correct or incorrect?

TRUE FALSE
Purchasing power parity can be used to predict the forward exchange rate
The international Fisher effect can be used to predict the real interest rate

20. Which of the following statements is consistent with an upward-sloping yield curve?

A. The risk of borrowers defaulting on their loans increases with the duration of the lending
B. Liquidity preference theory implies that short-term interest rates contain a premium over long-term
interest rates to compensate for lost liquidity
C. Banks are reluctant to lend short-term, while government debt repayments have significantly
increased the amount of long-term funds available
D. The government has increased short-term interest rates in order to combat rising inflation in the
economy

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Sep 2016: Herd Co

Herd Co is based in a country whose currency is the dollar ($). The company expects to receive €1,500,000 in
six months’ time from Find Co, a foreign customer. The finance director of Herd Co is concerned that the euro
(€) may depreciate against the dollar before the foreign customer makes payment and she is looking at hedging
the receipt.

Herd Co has in issue loan notes with a total nominal value of $4 million which can be redeemed in 10 years’
time. The interest paid on the loan notes is at a variable rate linked to LIBOR. The finance director of Herd Co
believes that interest rates may increase in the near future.

The spot exchange rate is €1·543 per $1. The domestic short-term interest rate is 2% per year, while the foreign
short-term interest rate is 5% per year

26. What is the six-month forward exchange rate predicted by interest rate parity?

A €1·499 per $1
B €1·520 per $1
C €1·566 per $1
D €1·588 per $1

27. As regards the euro receipt, what is the primary nature of the risk faced by Herd Co?

A Transaction risk
B Economic risk
C Translation risk
D Business risk

28. Which of the following hedging methods will NOT be suitable for hedging the euro receipt?

A Forward exchange contracts

B Money market hedge
C Currency futures
D Currency swap

29. Which of the following statements support the finance director’s belief that the euro will depreciate
against the dollar?
(1) The dollar inflation rate is greater than the euro inflation rate
(2) The dollar nominal interest rate is less than the euro nominal interest rate

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

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30. As regards the interest rate risk faced by Herd Co, which of the following statements is correct?

A In exchange for a premium, Herd Co could hedge its interest rate risk by buying interest rate options
B Buying a floor will give Herd Co a hedge against interest rate increases
C Herd Co can hedge its interest rate risk by buying interest rate futures now in order to sell them at a
future date
D Taking out a variable rate overdraft will allow Herd Co to hedge the interest rate risk through matching

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SECTION C (LONG QUESTION) PUBLISHED

PART C: WORKING CAPITAL
SD 2022: Purdy Co

Required:
(a)
(i) Calculate the total annual costs relating to Chemical X for both the current and potential suppliers.
(7 marks)
(ii) Calculate the value of the average investment in Chemical X inventory for both the current and potential
suppliers.
(2 marks)
(iii) Recommend, with justification, whether Purdy Co should change its supplier. (1 mark)

(b) Discuss the conflict that exists between the objectives of liquidity and profitability in the management of
working capital.
(5 marks)

(c) Explain the cash operating cycle and its relationship with the level of investment in working capital.
(5 marks)
(20 marks)

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SD 2021: Kandy Co

Required:
a)
i) The requirement was to calculate the financial effect of accepting bulk purchase discounts.
(6 marks)
ii) The requirement was to calculate the financial effect of offering an early settlement discount.
(4 marks)
iii) Comment on the two options in a(i) and a(ii).
(2 marks)

b) Discuss the working capital objectives of liquidity and profitability and the conflict between these objectives.
(4 marks)

c) Explain the cash operating cycle and discuss its relationship with the level of investment in working capital.
(4 marks)
(20 marks)

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MJ 2020: Pumice Co

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Required:
Using the information provided:
a) (i) prepare a forecast statement of financial position for Pumice Co; and
(6 marks)
(ii) Calculate the effect of the proposed expansion on the working capital ratios listed by the finance
director.
(4 marks)

b) Discuss the ways in which implementing the proposed changes in working capital represent:
(i) Changes in working capital investment policy for Pumice Co; and
(5 marks)
(ii) changes in working capital policy for Pumice Co
(5 marks)
(20 marks)

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SD 2019: Dusty Co

Required:

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SD 2018: Oscar Co
Oscar Co designs and produces tracking devices. The company is managed by its four founders, who lack
business administration skills.

The company has revenue of $28m, and all sales are on 30 days’ credit. Its major customers are large
multinational car manufacturing companies and are often late in paying their invoices. Oscar Co is a rapidly
growing company and revenue has doubled in the last four years. Oscar Co has focused in this time on product
development and customer service and managing trade receivables has been neglected.

Oscar Co’s average trade receivables are currently $5·37m, and bad debts are 2% of credit sales revenue. Partly
as a result of poor credit control, the company has suffered a shortage of cash and has recently reached its
overdraft limit. The four founders have spent large amounts of time chasing customers for payment. In an
attempt to improve trade receivables management, Oscar Co has approached a factoring company.

The factoring company has offered two possible options:

Option 1
Administration by the factor of Oscar Co’s invoicing, sales accounting and receivables collection, on a full
recourse basis. The factor would charge a service fee of 0·5% of credit sales revenue per year. Oscar Co
estimates that this would result in savings of $30,000 per year in administration costs. Under this arrangement,
the average trade receivables collection period would be 30 days.

Option 2
Administration by the factor of Oscar Co’s invoicing, sales accounting and receivables collection on a
nonrecourse basis. The factor would charge a service fee of 1·5% of credit sales revenue per year.
Administration cost savings and average trade receivables collection period would be as Option 1. Oscar Co
would be required to accept an advance of 80% of credit sales when invoices are raised at an interest rate of
9% per year. Oscar Co pays interest on its overdraft at a rate of 7% per year and the company operates for 365
days per year.

Required:
(a) Calculate the costs and benefits of each of Option 1 and Option 2 and comment on your findings.
(8 marks)
(b) Discuss reasons (other than costs and benefits already calculated) why Oscar Co may benefit 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.
(6 marks)
(20 marks)

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MJ 2017: Pangli Co
It is the middle of December 20X6 and Pangli Co is looking at working capital management for January 20X7.
Forecast financial information at the start of January 20X7 is as follows:
Inventory $455,000
Trade receivables $408,350
Trade payables $186,700
Overdraft $240,250

All sales are on credit, and they are expected to be $3·5m for 20X6. Monthly sales are as follows:
November 20X6 (actual) $270,875
December 20X6 (forecast) $300,000
January 20X7 (forecast) $350,000

Pangli Co has a gross profit margin of 40%. Although Pangli Co offers 30 days credit, only 60% of customers pay
in the month following purchase, while the remaining customers take an additional month of credit.

Inventory is expected to increase by $52,250 during January 20X7.

Pangli Co plans to pay 70% of trade payables in January 20X7 and defer paying the remaining 30% until the end
of February 20X7. All suppliers of the company require payment within 30 days. Credit purchases from
suppliers during January 20X7 are expected to be $250,000.

Interest of $70,000 is due to be paid in January 20X7 on fixed rate bank debt. Operating cash outflows are
expected to be $146,500 in January 20X7. Pangli Co has no cash and relies on its overdraft to finance daily
operations. The company has no plans to raise long-term finance during January 20X7.

Assume that each year has 360 days.

Required:
(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.
(10 marks)
(20 marks)

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SD 2016: Nesud Co
Nesud Co has credit sales of $45 million per year and on average settles accounts with trade payables after 60
days. One of its suppliers has offered the company an early settlement discount of 0·5% for payment within 30
days. Administration costs will be increased by $500 per year if the early settlement discount is taken. Nesud
Co buys components worth $1·5 million per year from this supplier.

From a different supplier, Nesud Co purchases $2·4 million per year of Component K at a price of $5 per
component. Consumption of Component K can be assumed to be at a constant rate throughout the year. The
company orders components at the start of each month in order to meet demand and the cost of placing each
order is $248·44. The holding cost for Component K is $1·06 per unit per year.

The finance director of Nesud Co is concerned that approximately 1% of credit sales turn into irrecoverable
debts. In addition, she has been advised that customers of the company take an average of 65 days to settle
their accounts, even though Nesud Co requires settlement within 40 days.

Nesud Co finances working capital from an overdraft costing 4% per year.

Assume there are 360 days in a year.

Required:
(a) Evaluate whether Nesud Co should accept the early settlement discount offered by its supplier.
(4 marks)
(b) Evaluate whether Nesud Co should adopt an economic order quantity approach to ordering Component K.
(6 marks)
(c) Critically discuss how Nesud Co could improve the management of its trade receivables.
(10 marks)
(20 marks)

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MJ 2016: Crago Co
Crago Co is concerned that it may be overtrading. Financial information relating to the company is as follows.

Companies which are similar to Crago Co have the following average values for 20X5:

Inventory days 65 days

Trade receivables days 30 days
Trade payables days 50 days
Current ratio 1·7 times
Quick ratio 0·8 times

Assume there are 360 days in each year.

Required:
Evaluate whether Crago can be considered to be overtrading and discuss how overtrading can be overcome.
Note: Up to 4 marks are available for calculations.
(10 marks)

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SD 2015: ZXC Co
ZXC Co currently has income of $30 million per year, of which 80% is from credit sales, and a net profit margin
of 10%. Due to fierce competition, ZXC Co has lost market share and is looking for ways to win back former
customers and to keep the loyalty of existing customers. The sales director has pointed out that a major
competitor of ZXC Co currently offers an early settlement discount of 0·5% for settlement within 30 days, while
ZXC Co itself does not offer an early settlement discount. He suggests that if ZXC Co could match this early
settlement discount, annual income from credit sales would increase by 20%.

Credit customers of ZXC Co take an average of 51 days to settle invoices. Approximately 0·5% of the company’s
credit sales have historically become bad debts each year and written off as irrecoverable. The finance director
has been advised that offering an early settlement discount of 0·5% for payment within 30 days would increase
administration costs by $35,000 per year, while 75% of credit customers would be likely to take the discount.
The credit controller believes that bad debts would fall to 0·375% of credit sales if the early settlement discount
were introduced.

ZXC Co has an average short-term cost of finance of 4% per year.

Assume that there are 360 days in each year.

Required:
(a) Evaluate whether ZXC Co should introduce the early settlement discount.
(6 marks)
(b) Discuss TWO ways in which a company could reduce the risk associated with foreign accounts receivable.
(4 marks)
(10 marks)

Jun 2015: Widnor Co

The finance director of Widnor Co has been looking to improve the company’s working capital management.
Widnor Co has revenue from credit sales of $26,750,000 per year and although its terms of trade require all
credit customers to settle outstanding invoices within 40 days, on average customers have been taking longer.
Approximately 1% of credit sales turn into bad debts which are not recovered.

Trade receivables currently stand at $4,458,000 and Widnor Co has a cost of short-term finance of 5% per year.

The finance director is considering a proposal from a factoring company, Nokfe Co, which was invited to tender
to manage the sales ledger of Widnor Co on a with-recourse basis. Nokfe Co believes that it can use its expertise
to reduce average trade receivables days to 35 days, while cutting bad debts by 70% and reducing
administration costs by $50,000 per year. A condition of the factoring agreement is that the company would
also advance Widnor Co 80% of the value of invoices raised at an interest rate of 7% per year. Nokfe Co would
charge an annual fee of 0·75% of credit sales.

Assume that there are 360 days in each year.

Required:
(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.
(3 marks)

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(10 marks)

Dec 2014: FLIT Co

Flit Co is preparing a cash flow forecast for the three-month period from January to the end of March. The
following sales volumes have been forecast:

Month December January February March April

Sales (units) 1,200 1,250 1,300 1,400 1,500

Notes:
1. The selling price per unit is $800 and a selling price increase of 5% will occur in February. Sales are all on
one month’s credit.
2. Production of goods for sale takes place one month before sales.
3. Each unit produced requires two units of raw materials, costing $200 per unit. No raw materials inventory
is held. Raw material purchases are on one months’ credit.
4. Variable overheads and wages equal to $100 per unit are incurred during production and paid in the
month of production.
5. The opening cash balance at 1 January is expected to be $40,000.
6. A long-term loan of $300,000 will be received at the beginning of March.
7. A machine costing $400,000 will be purchased for cash in March.

Required:
(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.
(3 marks)
(10 marks)

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Jun 2014: CSZ Co

The current assets and current liabilities of CSZ Co at the end of March 2014 are as follows:
$000 $000
Inventory 5,700

Trade receivables 6,575 12,275

Trade payables 2,137

Overdraft 4,682 6,819

Net current assets 5,456

For the year to end of March 2014, CSZ Co had domestic and foreign sales of $40 million, all on credit, while
cost of sales was $26 million. Trade payables related to both domestic and foreign suppliers.

For the year to end of March 2015, CSZ Co has forecast that credit sales will remain at $40 million while cost
of sales will fall to 60% of sales. The company expects current assets to consist of inventory and trade
receivables, and current liabilities to consist of trade payables and the company’s overdraft.
CSZ Co also plans to achieve the following target working capital ratio values for the year to the end of March
2015:
Inventory days: 60 days
Trade receivables days: 75 days
Trade payables days: 55 days
Current ratio: 1·4 times

Required:
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.
(5 marks)

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.
(6 marks)
(25 marks)

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PART D (COMPULSORY): INVESTMENT APPRAISAL

MJ 2023: Gini Co

Required:
(a) Calculate the expected net present value of the LP500 project and comment on its financial
acceptability.
(12 marks)

(b) (i) Briefly discuss how your decision in part (a) will help Gini Co achieve its primary objective.
(2 marks)
(ii) Discuss THREE limitations of using probability analysis in deciding whether or not to proceed with
the LP500. (6 marks)
(20 marks)

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SD 2022: Clover Co

Other information

Required:
(a) (i) Calculate the equivalent annual cost of each machine’s replacement cycle. (10 marks)
(ii) Discuss which machine should be selected by Clover Co. (4 marks)

(b) Discuss why discounted cash flow (DCF) investment appraisal methods are considered to be superior
to non-DCF methods. (6 marks)
(20 marks)

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MJ 2022: Melplash Co

Required:
a) For the proposed investment in the new motorcycle, calculate the following:
(i) Net present value; (5 marks)
(ii) Internal rate of return; (2 marks)
(iii) Payback period; (1 mark)
(iv) Return on capital employed (accounting rate of return) based on average investment
(3 marks)

(b) Discuss the suitability of the techniques used in (a) for determining whether to undertake an investment
and advise whether Melplash Co’s proposed investment is financially acceptable
(9 marks)
(20 marks)

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SD 2021: Hawker Co

Required:
(a) Evaluate whether Hawker Co should use leasing or borrowing as a source of finance for the new vehicle.
(10 marks)

(b) Discuss TWO reasons (other than possible after-tax cost advantages) why Hawker Co may choose to
lease rather than buy the new delivery vehicle. (4 marks)

(c) Discuss THREE advantages of using NPV rather than IRR in investment appraisal.
(6 marks)
(20 marks)

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MJ 2021: Cabreras Co

Required:

(20 marks)

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SD 2020: Crocket Co
Crocket Co is a manufacturing company that has three investment decisions for the coming year.

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Required:
a) For investment decision 1:
(i) Calculate the net present value of Project B; and
(4 marks)
(ii) Given the capital constraint, calculate the optimum investment combination and the resulting net
present value.
(6 marks)
b) For investment decision 2, explain the approach Crocket co should use to determine the optimum
replacement cycle for the company car fleet.
(4 marks)
c) In relation to investment decision 3, describe the two approached for dealing with inflation AND provide
a reasoned recommendation as to which approach Crocket Co’s management should follow.
(6 marks)
(20 marks)

SD 2019: Dink Co

Required:

(20 marks)

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MJ 2019: Pinks Co
Pinks Co is a large company listed on a major stock exchange. In recent years, the board of Pinks Co has been
criticised for weak corporate governance and two of the company’s non-executive directors have just resigned.
A recent story in the financial media has criticised the performance of Pinks Co and claims that the company
is failing to satisfy the objectives of its key stakeholders.

Pinks Co is appraising an investment project which it hopes will boost its performance. The project will cost
$20m, payable in full at the start of the first year of operation. The project life is expected to be four years.
Forecast sales volumes, selling price, variable cost and fixed costs are as follows:

Year 1 2 3 4
Sales (units/year) 300,000 410,000 525,000 220,000
Selling price ($/unit) 125 130 140 120
Variable cost ($/unit) 71 71 71 71
Fixed costs ($’000/year) 3,000 3,100 3,200 3,000

Selling price and cost information are in current price terms, before applying selling price inflation of 5% per
year, variable cost inflation of 3·5% per year and fixed cost inflation of 6% per year.

Pinks Co pays corporation tax of 26%, with the tax liability being settled in the year in which it arises. The
company can claim tax-allowable depreciation on the full initial investment of $20m on a 25% reducing balance
basis. The investment project is expected to have zero residual value at the end of four years.

Pinks Co has a nominal after-tax cost of capital of 12% and a real after-tax cost of capital of 8%. The general
rate of inflation is expected to be 3·7% per year for the foreseeable future.

Required:
(a)
(i) Calculate the nominal net present value of Pinks Co’s investment project.
(8 marks)
(ii) Calculate the real net present value of Pinks Co’s investment project and comment on your findings.
(4 marks)

(b) Discuss FOUR ways to encourage managers to achieve stakeholder objectives.

(8 marks)
(20 marks)

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SD 2018: Melanie Co
Melanie Co is considering the acquisition of a new machine with an operating life of three years. The new
machine could be leased for three payments of $55,000, payable annually in advance.

Alternatively, the machine could be purchased for $160,000 using a bank loan at a cost of 8% per year. If the
machine is purchased, Melanie Co will incur maintenance costs of $8,000 per year, payable at the end of each
year of operation. The machine would have a residual value of $40,000 at the end of its three-year life.

Melanie Co’s production manager estimates that if maintenance routines were upgraded, the new machine
could be operated for a period of four years with maintenance costs increasing to $12,000 per year, payable at
the end of each year of operation. If operated for four years, the machine’s residual value would fall to $11,000.

Taxation should be ignored.

Required:
(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 finance.
(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.
(8 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2018: Copper Co
Copper Co is concerned about the risk associated with a proposed investment and is looking for ways to
incorporate risk into its investment appraisal process. The company has heard that probability analysis may be
useful in this respect and so the following information relating to the proposed investment has been prepared:
Year 1 Year 2
Cash flow ($) Probability Cash flow ($) Probability
1,000,000 0·1 2,000,000 0·3
2,000,000 0·5 3,000,000 0·6
3,000,000 0·4 5,000,000 0·1

However, the company is not sure how to interpret the results of an investment appraisal based on probability
analysis. The proposed investment will cost $3·5m, payable in full at the start of the first year of operation.
Copper Co uses a discount rate of 12% in investment appraisal.

Required:
(a) Using a joint probability table:
(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)
(iii) Calculate the NPV of the most likely outcome; (1 mark)
(iv) Comment on the financial acceptability of the proposed investment. (2 marks)

(b) Discuss TWO of the following methods of adjusting for risk and uncertainty in investment appraisal:
(i) Simulation
(ii) Adjusted payback
(iii) Risk-adjusted discount rates.
(8 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

SD 2017: Pelta Co
The directors of Pelta Co are considering a planned investment project costing $25m, payable at the start of
the first year of operation. The following information relates to the investment project:

Year 1 Year 2 Year 3 Year 4

Sales volume (units/year) 520,000 624,000 717,000 788,000
Selling price ($/unit) 30·00 30·00 30·00 30·00
Variable costs ($/unit) 10·00 10·20 10·61 10·93
Fixed costs ($/year) 700,000 735,000 779,000 841,000

This information needs adjusting to take account of selling price inflation of 4% per year and variable cost
inflation of 3% per year. The fixed costs, which are incremental and related to the investment project, are in
nominal terms. The year 4 sales volume is expected to continue for the foreseeable future.

Pelta Co pays corporation tax of 30% one year in arrears. The company can claim tax-allowable depreciation
on a 25% reducing balance basis.

The views of the directors of Pelta Co are that all investment projects must be evaluated over four years of
operations, with an assumed terminal value at the end of the fourth year of 5% of the initial investment cost.
Both net present value and discounted payback must be used, with a maximum discounted payback period of
two years. The real after-tax cost of capital of Pelta Co is 7% and its nominal after-tax cost of capital is 12%.

Required:
(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)

(b) Discuss the financial acceptability of the investment project.

(3 marks)

(c) Critically discuss the views of the directors on Pelta Co’s investment appraisal.
(6 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2017: Vyxyn Co
Vyxyn Co is evaluating a planned investment in a new product costing $20m, payable at the start of the first
year of operation. The product will be produced for four years, at the end of which production will cease. The
investment project will have a terminal value of zero. Financial information relating to the investment project
is as follows:

Year 1 2 3 4
Sales volume (units/year) 440,000 550,000 720,000 400,000
Selling price ($/unit) 26·50 28·50 30·00 26·00
Fixed cost ($/year) 1,100,000 1,121,000 1,155,000 1,200,000

These selling prices have not yet been adjusted for selling price inflation, which is expected to be 3·5% per year.
The annual fixed costs are given above in nominal terms.

Variable cost per unit depends on whether competition is maintained between suppliers of key components.
The purchasing department has made the following forecast:

Competition Strong Moderate Weak

Probability 45% 35% 20%
Variable cost ($/unit) 10·80 12·00 14·70

The variable costs in this forecast are before taking account of variable cost inflation of 4·0% per year.

Vyxyn Co can claim tax-allowable depreciation on a 25% per year reducing balance basis on the full investment
cost of $20m and pays corporation tax of 28% per year one year in arrears.

It is planned to finance the investment project with an issue of 8% loan notes, redeemable in ten years’ time.
Vyxyn Co has a nominal after-tax weighted average cost of capital of 10%, a real after-tax weighted average
cost of capital of 7% and a cost of equity of 11%.

Required:
(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 and on the risk relating to variable cost.
(9 marks)
(c) Critically discuss how risk can be considered in the investment appraisal process.
(8 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2016: Degnis Co
Degnis Co is a company which installs kitchens and bathrooms to customer specifications. It is planning to
invest $4,000,000 in a new facility to convert vans and trucks into motorhomes. Each motorhome will be
designed and built according to customer requirements. Degnis Co expects motorhome production and sales
in the first four years of operation to be as follows.

Year 1 2 3 4
Motorhomes produced and sold 250 300 450 450

The selling price for a motorhome depends on the van or truck which is converted, the quality of the units
installed, and the extent of conversion work required. Degnis Co has undertaken research into likely sales and
costs of different kinds of motorhomes which could be selected by customers, as follows:

Motorhome type Basic Standard Deluxe

Probability of selection 20% 45% 35%
Selling price ($/unit) 30,000 42,000 72,000
Conversion cost ($/unit) 23,000 29,000 40,000

Fixed costs of the production facility are expected to depend on the volume of motorhome production as
follows:
Production volume (units/year) 200–299 300–399 400–499
Fixed costs ($000/year) 4,000 5,000 5,500

Degnis Co pays corporation tax of 28% per year, with the tax liability being settled in the year in which it arises.
The company can claim tax allowable depreciation on the cost of the investment on a straight-line basis over
ten years. Degnis Co evaluates investment projects using an after-tax discount rate of 11%.

Required:
(a) Calculate the expected net present value of the planned investment for the first four years of operation.
(7 marks)
(b) After the fourth year of operation, Degnis Co expects to continue to produce and sell 450 motorhomes per
year for the foreseeable future.
Required: Calculate the effect on the expected net present value of the planned investment of continuing to
produce and sell motorhomes beyond the first four years and comment on the financial acceptability
of the planned investment.
(3 marks)
(c) Critically discuss the use of probability analysis in incorporating risk into investment appraisal.
(5 marks)
(15 marks)

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FM ACCA PYQ Compilation JD2021

Sep 2016: Hebac Co

Hebac Co is preparing to launch a new product in a new market which is outside its current business operations.
The company has undertaken market research and test marketing at a cost of $500,000, as a result of which it
expects the new product to be successful. Hebac Co plans to charge a lower selling price initially and then
increase the selling price on the assumption that the new product will establish itself in the new market.
Forecast sales volumes, selling prices and variable costs are as follows:

Year 1 2 3 4
Sales volume (units/year) 200,000 800,000 900,000 400,000
Selling price ($/unit) 15 18 22 22
Variable costs ($/unit) 9 9 9 9

Selling price and variable cost are given here in current price terms before taking account of forecast selling
price inflation of 4% per year and variable cost inflation of 5% per year.

Incremental fixed costs of $500,000 per year in current price terms would arise as a result of producing the
new product. Fixed cost inflation of 8% per year is expected.

The initial investment cost of production equipment for the new product will be $2·5 million, payable at the
start of the first year of operation. Production will cease at the end of four years because the new product is
expected to have become obsolete due to new technology. The production equipment would have a scrap
value at the end of four years of $125,000 in future value terms.

Investment in working capital of $1·5 million will be required at the start of the first year of operation. Working
capital inflation of 6% per year is expected and working capital will be recovered in full at the end of four years.

Hebac Co pays corporation tax of 20% per year, with the tax liability being settled in the year in which it arises.
The company can claim tax-allowable depreciation on a 25% reducing balance basis on the initial investment
cost, adjusted in the final year of operation for a balancing allowance or charge. Hebac Co currently has a
nominal after-tax weighted average cost of capital (WACC) of 12% and a real after-tax WACC of 8·5%. The
company uses its current WACC as the discount rate for all investment projects.

Required:
(a) Calculate the net present value of the investment project in nominal terms and comment on its financial
acceptability.
(12 marks)
(b) Discuss how the capital asset pricing model can assist Hebac Co in making a better investment decision with
respect to its new product launch.
(8 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

SD 2015: Argnil Co
Argnil Co is appraising the purchase of a new machine, costing $1·5 million, to replace an existing machine
which is becoming out of date and which has no resale value. The forecast levels of production and sales for
the goods produced by the new machine, which has a maximum capacity of 400,000 units per year, are as
follows:

Year 1 2 3 4
Sales volume (units/year) 350,000 380,000 400,000 400,000

The new machine will incur fixed annual maintenance costs of $145,000 per year. Variable costs are expected
to be $3·00 per unit and selling price is expected to be $5·65 per unit. These costs and selling price estimates
are in current price terms and do not take account of general inflation, which is forecast to be 4·7% per year.

It is expected that the new machine will need replacing in four years’ time due to advances in technology. The
resale value of the new machine is expected to be $200,000 at that time, in future value terms.

The purchase price of the new machine is payable at the start of the first year of the four-year life of the
machine. Working capital investment of $150,000 will already exist at the start of the four-year period, due to
the operation of the existing machine. This investment in working capital is expected to increase in nominal
terms in line with the general rate of inflation.

Argnil Co pays corporation tax one year in arrears at an annual rate of 27% and can claim 25% reducing balance
tax-allowable depreciation on the purchase price of the new machine. The company has a real after-tax
weighted average cost of capital of 6% and a nominal after-tax weighted average cost of capital of 11%.

Required:
(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.
(5 marks)
(15 marks)

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FM ACCA PYQ Compilation JD2021

Jun 2015: Hraxin Co

Hraxin Co is appraising an investment project which has an expected life of four years and which will not be
repeated. The initial investment, payable at the start of the first year of operation, is $5 million. Scrap value of
$500,000 is expected to arise at the end of four years.
There is some uncertainty about what price can be charged for the units produced by the investment project,
as this is expected to depend on the future state of the economy. The following forecast of selling prices and
their probabilities has been prepared:

Future economic state Weak Medium Strong

Probability of future economic state 35% 50% 15%
Selling price in current price terms $25 per unit $30 per unit $35 per unit

These selling prices are expected to be subject to annual inflation of 4% per year, regardless of which economic
state prevails in the future. Forecast sales and production volumes, and total nominal variable costs, have
already been forecast, as follows:

Year 1 2 3 4
Sales and production (units) 150,000 250,000 400,000 300,000
Nominal variable cost ($000) 2,385 4,200 7,080 5,730

Incremental overheads of $400,000 per year in current price terms will arise as a result of undertaking the
investment project. A large proportion of these overheads relate to energy costs which are expected to
increase sharply in the future because of energy supply shortages, so overhead inflation of 10% per year is
expected.

The initial investment will attract tax-allowable depreciation on a straight-line basis over the four-year project
life. The rate of corporation tax is 30% and tax liabilities are paid in the year in which they arise. Hraxin Co has
traditionally used a nominal after-tax discount rate of 11% per year for investment appraisal.

Required:
(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.
(6 marks)
(15 marks)

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FM ACCA PYQ Compilation JD2021

Jun 2014: OAP Co

The Board of OAP Co has decided to limit investment funds to $10 million for the next year and is preparing its
capital budget. The company is considering five projects, as follows:

Initial investment Net present value

Project A $2,500,000 $1,000,000
Project B $2,200,000 $1,550,000
Project C $2,600,000 $1,350,000
Project D $1,900,000 $1,500,000
Project E $5,000,000 To be calculated

All five projects have a project life of four years. Projects A, B, C and D are divisible, and Projects B and D are
mutually exclusive. All net present values are in nominal, after-tax terms.

Project E
This is a strategically important project which the Board of OAP Co have decided must be undertaken in order
for the company to remain competitive, regardless of its financial acceptability. Information relating to the
future cash flows of this project is as follows:

Year 1 2 3 4
Sales volume (units) 12,000 13,000 10,000 10,000
Selling price ($/unit) 450 475 500 570
Variable cost ($/unit) 260 280 295 320
Fixed costs ($000) 750 750 750 750

These forecasts are before taking account of selling price inflation of 5·0% per year, variable cost inflation of
6·0% per year and fixed cost inflation of 3·5% per year. The fixed costs are incremental fixed costs which are
associated with Project E. At the end of four years, machinery from the project will be sold for scrap with a
value of $400,000. Tax allowable depreciation on the initial investment cost of Project E is available on a 25%
reducing balance basis and OAP Co pays corporation tax of 28% per year, one year in arrears. A balancing
charge or allowance is available at the end of the fourth year of operation.

OAP Co has a nominal after-tax cost of capital of 13% per year.

Required:
(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 year.
(5 marks)
(25 marks)

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FM ACCA PYQ Compilation JD2021

PART E: BUSINESS FINANCE

MJ 2023: Graffham Co

Required:
(a)
(i) Calculate the theoretical ex-rights price per share. (2 marks)
(ii) Calculate the current earnings per share before investment in the project. (2 marks)
(iii) Calculate the revised earnings per share and the share price after investment in the project, assuming the
rights issue is successful. (3 marks)
(iv) Calculate the current gearing and the revised gearing after investment in the project, using market values
and assuming the rights issue is successful. (2 marks)
(v) Discuss the views of the directors, and both the small and large shareholders, in relation to the new project
and its financing. (5 marks)

(b) Discuss the use of a mudaraba or musharaka contract as possible alternative sources of finance for the
project. (6 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2022: Tanza Co

Required:
(a) Calculate the after-tax weighted average cost of capital for Tanza Co, at 31 December 20X6, on a market
value basis.
(10 marks)
(b)
(i) Critically discuss, with reference to the relevant theory, the views of Director A and Director B on raising
new finance.
(6 marks)
(ii) Discuss TWO other factors for Tanza Co to consider in making the decision to raise debt finance or equity
finance.
(4 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2021: Zeddemore Co

Required:

(20 marks)

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FM ACCA PYQ Compilation JD2021

SD 2020: Spine Co

Required:
a) Evaluate whether, on financial grounds, Spine Co should finance the expansion with debt or equity.
(10 marks)
b) Explain and discuss the relationship between systematic and unsystematic risk.
(5 marks)
c) Discuss the assumptions made by the capital asset pricing model.
(5 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2020: LaForge Co

Required:
a) For the rights issue, calculate the following:
i) The theoretical ex-rights price per share (3 marks)
ii) The value of a right per existing share (1 mark)

b) Assume that the investment goes ahead, calculate Laforge Co’s forecast earnings per share, for the
coming year AND the resulting share price, if it finances the investment using each of these alternatives:
i) The right issue (2 marks)
ii) The loan notes (3 marks)

c) Discuss the ways in which a company may issue equity shares. (5 marks)

At a recent board meeting to discuss the financing options, one of the directors suggested reducing the
forthcoming dividend. In the past few years, LaForge Co has consistently paid an annual dividend of $0.08 per
share. Its shareholders include both financial institutions and individuals.

d) Discuss and recommend whether LaForge should raise the finance requires by reducing its annual its
dividend. (6 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2019: Corfe Co
The following information has been taken from the statement of financial position of Corfe Co, a listed
company:

The ordinary shares of Corfe Co have a nominal value of $1 per share and a current ex-dividend market price
of $6·10 per share. A dividend of $0·90 per share has just been paid. The 6% preference shares of Corfe Co
have a nominal value of $0·75 per share and an ex-dividend market price of $0·64 per share.

The 8% loan notes of Corfe Co have a nominal value of $100 per loan note and a market price of $103·50 per
loan note. Annual interest has just been paid and the loan notes are redeemable in five years’ time at a 10%
premium to nominal value.

The bank loan has a variable interest rate. The risk-free rate of return is 3·5% per year and the equity risk
premium are 6·8% per year. Corfe Co has an equity beta of 1·25. Corfe Co pays corporation tax at a rate of 20%.

Investment in facilities
Corfe Co’s board is looking to finance investments in facilities over the next three years, forecast to cost up to
$25m. The board does not wish to obtain further long-term debt finance and is also unwilling to make an equity
issue. This means that investments have to be financed from cash which can be made available internally.
Board members have made a number of suggestions about how this can be done:

Director A has suggested that the company does not have a problem with funding new investments, as it has
cash available in the reserves of $29m. If extra cash is required soon, Corfe Co could reduce its investment in
working capital.

Director B has suggested selling the building which contains the company’s headquarters in the capital city
for $20m. This will raise a large one-off sum and also save on ongoing property management costs. Head
office support functions would be moved to a number of different locations rented outside the capital city.

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Director C has commented that although a high dividend has just been paid, dividends could be reduced over
the next three years, allowing spare cash for investment.

Required:
(a) Calculate the after-tax weighted average cost of capital of Corfe Co on a market value basis.
(11 marks)
(b) Discuss the views expressed by the three directors on how the investment should be financed.
(9 marks)
(20 marks)

SD 2016: Gardner Co
Gadner Co wishes to calculate its weighted average cost of capital. The company has the following sources of
finance:

$'000
Ordinary shares 8,000
10% Preference shares 2,000
8% Loan notes 6,000
Bank loan 2,000
18,000

The ordinary shares have a nominal value of $0·20 per share and are currently trading at $6·35 per share. The
equity beta of Gadner Co is 1·25. The preference shares are irredeemable and have a nominal value of $0·50.
They are currently trading at $0·55 per share.

The 8% loan notes have a nominal value of $100 per loan note and a market value of $108·29 per loan note.
They are redeemable in six years’ time at a 5% premium to nominal value.

The bank loan charges fixed interest of 7% per year.

The yield on short-dated UK treasury bills is 4% and the equity risk premium is 5·6% per year. Gadner Co pays
corporation tax of 20%.

Required:

(b) Explain the meaning of the terms business risk and financial risk.
(4 marks)
c) Discuss the key features of a rights issue as a way of raising equity finance.
(5 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2018: Tin Co
Tin Co is planning an expansion of its business operations which will increase profit before interest and tax by
20%. The company is considering whether to use equity or debt finance to raise the $2m needed by the
business expansion.

If equity finance is used, a 1 for 5 rights issue will be offered to existing shareholders at a 20% discount to the
current ex dividend share price of $5·00 per share. The nominal value of the ordinary shares is $1·00 per share.

If debt finance is used, Tin Co will issue 20,000 8% loan notes with a nominal value of $100 per loan note.
Financial statement information prior to raising new finance:
$’000
Profit before interest and tax 1,597
Finance costs (interest) (315)
Taxation (282)
Profit after tax 1,000
$’000
Equity
Ordinary shares 2,500
Retained earnings 5,488
Long-term liabilities:
7% loan notes 4,500
Total equity and long-term liabilities 12,488

The current price/earnings ratio of Tin Co is 12·5 times. Corporation tax is payable at a rate of 22%.

Companies undertaking the same business as Tin Co have an average debt/equity ratio (book value of debt
divided by book value of equity) of 60·5% and an average interest cover of 9 times.

Required:
(a) (i) Calculate the theoretical ex rights price per share. (2 marks)
(ii) Assuming equity finance is used, calculate the revised earnings per share after the business expansion.
(4 marks)
(iii) Assuming debt finance is used, calculate the revised earnings per share after the business expansion.
(3 marks)
(iv) Calculate the revised share prices under both financing methods after the business expansion.
(1 mark)
(v) Use calculations to evaluate whether equity finance or debt finance should be used for the planned
business expansion. (4 marks)

(b) Discuss TWO Islamic finance sources which Tin Co could consider as alternatives to a rights issue or a loan
note issue.
(6 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

SD 2017: Tufa Co
The following statement of financial position information relates to Tufa Co, a company listed on a large stock
market which pays corporation tax at a rate of 30%.

The share capital of Tufa Co consists of $12m of ordinary shares and $5m of irredeemable preference shares.

The ordinary shares of Tufa Co have a nominal value of $0·50 per share, an ex-dividend market price of $7·07
per share and a cum dividend market price of $7·52 per share. The dividend for 20X7 will be paid in the near
future. Dividends paid in recent years have been as follows:

Year 20X6 20X5 20X4 20X3

Dividend ($/share) 0·43 0·41 0·39 0·37

The 5% preference shares of Tufa Co have a nominal value of $0·50 per share and an ex-dividend market price
of $0·31 per share.

The long-term borrowings of Tufa Co consist of $10m of loan notes and a $3m bank loan. The bank loan has a
variable interest rate.

The 7% loan notes have a nominal value of $100 per loan note and a market price of $102·34 per loan note.
Annual interest has just been paid and the loan notes are redeemable in four years’ time at a 5% premium to
nominal value.

Required:
(a) Calculate the after-tax weighted average cost of capital of Tufa Co on a market value basis.
(11 marks)
(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 finance.
(6 marks)
(20 marks)

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FM ACCA PYQ Compilation JD2021

MJ 2016: Dinla Co
Dinla Co has the following capital structure.

$000 $000
Equity and reserves
Ordinary shares 23,000

Reserves 247,000

270,000
Non-current liabilities
5% Preference shares 5,000

6% Loan notes 11,000

Bank loan 3,000 19,000

289,000

The ordinary shares of Dinla Co are currently trading at $4·26 per share on an ex-dividend basis and have a
nominal value of $0·25 per share. Ordinary dividends are expected to grow in the future by 4% per year and a
dividend of $0·25 per share has just been paid.

The 5% preference shares have an ex-dividend market value of $0·56 per share and a nominal value of $1·00
per share. These shares are irredeemable.
The 6% loan notes of Dinla Co are currently trading at $95·45 per loan note on an ex-interest basis and will be
redeemed at their nominal value of $100 per loan note in five years’ time.

The bank loan has a fixed interest rate of 7% per year.

Dinla Co pays corporation tax at a rate of 25%.

Required:
(a) Calculate the after-tax weighted average cost of capital of Dinla Co on a market value basis.
(8 marks)
(b) Discuss the connection between the relative costs of sources of finance and the creditor hierarchy.
(3 marks)
(c) Explain the differences between Islamic finance and other conventional finance.
(4 marks)
(15 marks)

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SD 2015: KQK Co
KQK Co wants to raise $20 million in order to expand its business and wishes to evaluate one possibility, which
is an issue of 8% loan notes. Extracts from the financial statements of KQK Co are as follows.

$m
Income 140·0
Cost of sales and other expenses 112·0
Profit before interest and tax 28·0
Finance charges (interest) 2·8
Profit before tax 25·2
Taxation 7·6
Profit after tax 17·6

$m $m
Equity finance
Ordinary shares ($1 nominal) 25·0
Reserves 118·5 143·5

Non-current liabilities 36·0

Current liabilities 38·3
Total equity and liabilities 217·8

It is expected that investing $20 million in the business will increase income by 5% over the first year.
Approximately 40% of cost of sales and other expenses are fixed, the remainder of these costs are variable.
Fixed costs will not be affected by the business expansion, while variable costs will increase in line with income.

KQK Co pays corporation tax at a rate of 30%. The company has a policy of paying out 40% of profit after tax as
dividends to shareholders. Current liabilities are expected to increase by 3% by the end of the first year
following the business expansion.

Average values of other companies similar to KQK Co:

Debt/equity ratio (book value basis): 30%
Interest cover: 10 times
Operational gearing (contribution/PBIT): 2 times
Return on equity: 15%

Required:
(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.
(5 marks)
(15 marks)

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FM ACCA PYQ Compilation JD2021

Dec 2014: Tinep Co

Tinep Co is planning to raise funds for an expansion of existing business activities and in preparation for this
the company has decided to calculate its weighted average cost of capital. Tinep Co has the following capital
structure:
$m
Equity
Ordinary shares 200
Reserves 650
850
Non-current liabilities
Loan notes 200
1,050

The ordinary shares of Tinep Co have a nominal value of 50 cents per share and are currently trading on the
stock market on an ex-dividend basis at $5·85 per share. Tinep Co has an equity beta of 1·15.

The loan notes have a nominal value of $100 and are currently trading on the stock market on an ex-interest
basis at $103·50 per loan note. The interest on the loan notes is 6% per year before tax and they will be
redeemed in six years’ time at a 6% premium to their nominal value.

The risk-free rate of return is 4% per year and the equity risk premium is 6% per year. Tinep
Co pays corporation tax at an annual rate of 25% per year.

Required:
(a) Calculate the market value weighted average cost of capital and the book value weighted average cost of
capital of Tinep Co, and comment briefly on any difference between the two values.
(9 marks)
(b) Discuss the factors to be considered by Tinep Co in choosing to raise funds via a rights issue.
(6 marks)
(15 marks)

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FM ACCA PYQ Compilation JD2021

Jun 2014: MFZ Co

The following financial information relates to MFZ Co, a listed company:

Year 2014 2013 2012

Profit before interest and tax ($m) 18·3 17·7 17·1
Profit after tax ($m) 12·8 12·4 12·0
Dividends ($m) 5·1 5·1 4·8
Equity market value ($m) 56·4 55·2 54·0

MFZ Co has 12 million ordinary shares in issue and has not issued any new shares in the period under review.
The company is financed entirely by equity and is considering investing $9·2 million of new finance in order to
expand existing business operations. This new finance could be either long-term debt finance or new equity
via a rights issue. The rights issue price would be at a 20% discount to the current share price. Issue costs of
$200,000 would have to be met from the cash raised, whether the new finance was equity or debt.

The annual report of MFZ Co states that the company has three financial objectives:
Objective 1: To achieve growth in profit before interest and tax of 4% per year
Objective 2: To achieve growth in earnings per share of 3·5% per year
Objective 3: To achieve total shareholder return of 5% per year

MFZ Co has a cost of equity of 12% per year.

Required:
(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.
(5 marks)
(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.
(9 marks)
(25 marks)

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FM ACCA PYQ Compilation JD2021

Dec 2013: Card Co

Card Co has in issue 8 million shares with an ex-dividend market value of $7·16 per share. A dividend of 62
cents per share for 2013 has just been paid. The pattern of recent dividends is as follows:

Year 2010 2011 2012 2013

Dividends per share (cents) 55·1 57·9 59·1 62·0

Card Co also has in issue 8·5% bonds redeemable in five years’ time with a total nominal value of $5 million.
The market value of each $100 bond is $103·42. Redemption will be at nominal value.

Card Co is planning to invest a significant amount of money into a joint venture in a new business area. It has
identified a proxy company with a similar business risk to the joint venture. The proxy company has an equity
beta of 1·038 and is financed 75% by equity and 25% by debt, on a market value basis.

The current risk-free rate of return is 4% and the average equity risk premium is 5%. Card Co pays profit tax at
a rate of 30% per year and has an equity beta of 1·6.

Required:
(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.
(5 marks)
(c) Calculate the weighted average after-tax cost of capital of Card Co using a cost of equity of 12%.
(5 marks)
(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 led to a reduction in its cost of capital
and hence to an increase in the value of the company.
(8 marks)
(25 marks)

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FM ACCA PYQ Compilation JD2021

PART F: BUSINESS VALUATION

SD 2015: Gemlo Co
Gemlo Co is a company listed on a large stock market. Extracts from its current statement of financial position
are as follows:
$m $m
Equity
Ordinary shares ($1 nominal) 15
Reserves 153 168

Non-current liabilities
6% Irredeemable loan notes 10
7% Loan notes 12 22
190

Gemlo Co is planning an expansion of existing business operations costing $10 million in the near future and is
assessing its current financial position as part of preparing a business case in support of seeking new finance.
The business expansion is expected to increase the profit before interest and tax of Gemlo Co by 20% in the
first year.

The planned business expansion by Gemlo Co has already been announced to the stock market. Information
on the expected increase in profit before interest and tax has not yet been announced and the company has
not decided on how the expansion is to be financed.

The ordinary shares of the company are currently trading at $3·75 per share on an ex-dividend basis. The
irredeemable loan notes have a cost of debt of 7%. The 7% loan notes have a cost of debt of 6% and will be
redeemed at a 5% premium to nominal value after seven years. The interest cover of Gemlo Co is 6 times.

Companies operating in the same business sector as Gemlo Co have an average debt/equity ratio of 40% on a
market value basis and an average interest cover of 9 times.

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

(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.
Note: Up to 2 marks for relevant calculations.
(6 marks)
(10 marks)

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FM ACCA PYQ Compilation JD2021

Jun 2015: Chad Co

Chad Co is a stock-market-listed company which has managed to increase earnings over the last year. As a
result, the board of directors has increased the dividend payout ratio from 40·0% for the year to March 2014
to 41·4% for the year to March 2015. Chad Co has a cost of equity of 12·5%.

The following information is also available:

Year to March 2014 2015

$000 $000
Earnings 13,200 13,840
Ordinary shares 8,000 8,000

The nominal value of the ordinary shares of Chad Co is $0·50 per share. Listed
companies similar to Chad Co have an earnings yield of 8·2%.

Required:
(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.
(5 marks)
(10 marks)

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FM ACCA PYQ Compilation JD2021

Dec 2014: Par Co

Recent information on the earnings per share and share price of Par Co is as follows:

Year 2011 2012 2013 2014

Earnings per share (cents) 64 68 70 62
Year-end share price ($) 9·15 9·88 10·49 10·90

Par Co currently has the following long-term capital structure:

$m $m
Equity finance
Ordinary shares 30·0
Reserves 38·4 68·4
Non-current liabilities
Bank loans 15·0
8% convertible loan notes 40·0 55·0
Total equity and liabilities 123·4

The 8% loan notes are convertible into eight ordinary shares per loan note in seven years’ time. If not
converted, the loan notes can be redeemed on the same future date at their nominal value of $100. Par Co
has a cost of debt of 9% per year. The ordinary shares of Par Co have a nominal value of $1 per share and have
been traded on a large stock exchange for many years. Listed companies similar to Par Co have been recently
reported to have an average price/earnings ratio of 12 times.

Required:
(a) Calculate the market price of the convertible loan notes of Par Co, commenting on whether conversion is
likely.
(5 marks)
(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.
(5 marks)
(10 marks)

Compiled by Nooraslinda Abdul Aris FCCA(UK), CA(M) 100 | P a g e

FM ACCA PYQ Compilation JD2021

Jun 2014: MFZ Co (Part E + F)

The following financial information relates to MFZ Co, a listed company:
Year 2014 2013 2012
Profit before interest and tax ($m) 18·3 17·7 17·1
Profit after tax ($m) 12·8 12·4 12·0
Dividends ($m) 5·1 5·1 4·8
Equity market value ($m) 56·4 55·2 54·0

MFZ Co has 12 million ordinary shares in issue and has not issued any new shares in the period under review.
The company is financed entirely by equity and is considering investing $9·2 million of new finance in order to
expand existing business operations. This new finance could be either long-term debt finance or new equity
via a rights issue. The rights issue price would be at a 20% discount to the current share price. Issue costs of
$200,000 would have to be met from the cash raised, whether the new finance was equity or debt.

The annual report of MFZ Co states that the company has three financial objectives:
Objective 1: To achieve growth in profit before interest and tax of 4% per year
Objective 2: To achieve growth in earnings per share of 3·5% per year
Objective 3: To achieve total shareholder return of 5% per year

MFZ Co has a cost of equity of 12% per year.

Required:
(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.
(5 marks)
(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.
(7 marks)
(25 marks)

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FM ACCA PYQ Compilation JD2021

Jun 2014: Fence Co (Part E + F)

The equity beta of Fence Co is 0·9 and the company has issued 10 million ordinary shares. The market value of
each ordinary share is $7·50. The company is also financed by 7% bonds with a nominal value of $100 per
bond, which will be redeemed in seven years’ time at nominal value. The bonds have a total nominal value of
$14 million. Interest on the bonds has just been paid and the current market value of each bond is $107·14.

Fence Co plans to invest in a project which is different to its existing business operations and has identified a
company in the same business area as the project, Hex Co. The equity beta of Hex Co is 1·2 and the company
has an equity market value of $54 million. The market value of the debt of Hex Co is $12 million.

The risk-free rate of return is 4% per year and the average return on the stock market is 11% per year. Both
companies pay corporation tax at a rate of 20% per year.

Required:
(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.
(8 marks)
(25 marks)

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FM ACCA PYQ Compilation JD2021

Jun 2013: GXG Co

GXG Co is an e-business which designs and sells computer applications (apps) for mobile phones. The company
needs to raise $3,200,000 for research and development and is considering three financing options.

Option 1
GXG Co could suspend dividends for two years, and then pay dividends of 25 cents per share from the end of
the third year, increasing dividends annually by 4% per year in subsequent years. Dividends in recent years
have grown by 3% per year.

Option 2
GXG Co could seek a stock market listing, raising $3·2 million after issue costs of $100,000 by issuing new shares
to new shareholders at a price of $2·50 per share.

Option 3
GXG Co could issue $3,200,000 of bonds paying annual interest of 6%, redeemable after ten years at par. Recent
financial information relating to GXG Co is as follows:
$000
Operating profit 3,450
Interest 200
Profit before taxation 3,250
Taxation 650
Profit after taxation 2,600
Dividends 1,600

$000
Ordinary shares (nominal value 50 cents) 5,000

Under options 2 and 3, the funds invested would earn a before-tax return of 18% per year. The profit tax rate
paid by the company is 20% per year. GXG Co has a cost of equity of 9% per year, which is expected to remain
constant.

Required:
(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.
(9 marks)
(25 marks)

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FM ACCA PYQ Compilation JD2021

PART G: RISK MANAGEMENT

MJ 2016: Plam Co
The directors of Plam Co expect that interest rates will fall over the next year and they are looking forward to
paying less interest on the company’s debt finance. The dollar is the domestic currency of Plam Co. The
company has a number of different kinds of debt finance, as follows:

The 7% loan notes were issued domestically while the 10% loan notes were issued in a foreign country. The
interest rate on the long-term bank loan is reset to bank base rate plus a fixed percentage at the end of each
year. The annual payment on the bank loan consists of interest on the year-end balance plus a capital
repayment. Relevant exchange rates are as follows:

Offer Bid
Spot rate (pesos/$) 58·335 58·345
Six-month forward rate (pesos/$) 56·585 56·597

Plam Co can place pesos on deposit at 3% per year and borrow dollars at 10% per year. The company has no
cash available for hedging purposes.

Required:
(a) Evaluate the risk faced by Plam Co on its peso-denominated interest payment in six months’ time and advise
how this risk might be hedged.
(5 marks)

(b) Identify and discuss the different kinds of interest rate risk faced by Plam Co.
(5 marks)
(10 marks)

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FM ACCA PYQ Compilation JD2021

SD 2015: GXJ Co
GXJ Co, whose home currency is the dollar, wishes to borrow €12 million for a period of six months in three
months’ time. The lending bank will fix the interest rate for the loan period at its prevailing lending interest
rate when the loan is taken out. The finance director of GXJ Co believes this lending interest rate could be a
minimum of 3·5% per year or a maximum of 5·5% per year. The uncertainty regarding the future interest rate
is caused by the volatile state of the economy and impending elections which could lead to a change in political
leadership and direction. Interest on the euro loan would be payable at the end of the loan period.

The finance director of GXJ Co would like to hedge the interest rate risk arising from the future loan and the
company’s bank has offered a 3–9, 4·5%–3·5% forward rate agreement.

The finance director is also concerned about the foreign currency risk associated with the euro interest
payment which would be due in nine months’ time.

The following exchange rates are available:

Spot rate (euro per $1) 1·7964–1·8306
Nine-month forward rate (euro per $1) 1·7191–1·7505

Required:
(a) Evaluate the proposed forward rate agreement as a way of managing the interest rate risk anticipated by
GXJ Co.
(3 marks)

(b) Analyse the foreign currency risk associated with the future interest payment of GXJ Co and briefly discuss
ways that this risk might be hedged.
(4 marks)

(c) Explain the nature of four-way equivalence in the relationship between spot exchange rates, forward
exchange rates and future (expected) spot rates.
(3 marks)
(10 marks)

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FM ACCA PYQ Compilation JD2021

Jun 2015: Rose Co

Rose Co expects to receive €750,000 from a credit customer in the European Union in six months’ time. The
spot exchange rate is €2·349 per $1 and the six-month forward rate is €2·412 per $1.
The following commercial interest rates are available to Rose Co:

Deposit rate Borrow rate

Euros 4·0% per year 8·0% per year
Dollars 2·0% per year 3·5% per year

Rose Co does not have any surplus cash to use in hedging the future euro receipt.

Required:
(a) Evaluate whether a money market hedge or a forward market hedge would be preferred on financial
grounds by Rose Co.
(5 marks)

(b) Briefly explain the nature of a forward rate agreement and discuss how a company can use a forward
rate agreement to manage interest rate risk.
(5 marks)
(10 marks)

Dec 2014: PZK Co

PZK Co, whose home currency is the dollar, trades regularly with customers in a number of different countries.
The company expects to receive €1,200,000 in six months’ time from a foreign customer. Current exchange
rates in the home country of PZK Co are as follows:

Spot exchange rate: 4·1780–4·2080 euros per $

Six-month forward exchange rate: 4·2302–4·2606 euros per $
Twelve-month forward exchange rate: 4·2825–4·3132 euros per $

Required:
(a) Calculate the loss or gain compared to its current dollar value which PZK Co will incur by taking out a forward
exchange contract on the future euro receipt and explain why taking out a forward exchange contract may
be preferred by PZK Co to not hedging the future euro receipt.
(4 marks)

(b) If the interest rate in the home country of PZK Co is 4% per year, calculate the annual interest rate in the
foreign customer’s country implied by the spot exchange rate and the twelve-month forward exchange rate.
(2 marks)

(c) Discuss whether PZK Co should avoid exchange rate risk by invoicing foreign customers in dollars.
(4 marks)
(10 marks)

Compiled by Nooraslinda Abdul Aris FCCA(UK), CA(M) 106 | P a g e