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Exam Summary

Time allowed: This specimen exam is not timed.

This exam is divided into three sections:
Section A - Question Number 1 to 10
• 10 objective test (OT) questions, each worth 2 marks.
• 20 marks in total.
Section B Question Number 16-20
• One OT cases, each containing a scenario which relates to five OT questions, each wor
• 10 marks in total.
Section C Question Number 31 and 32
• Two constructed response questions, each containing a scenario which relates to one o
• Each constructed response question is worth 20 marks in total.
• 40 marks in total.

All questions are compulsory.

Section A

This section of the exam contains 15 objective test (OT) questions.

Each question is worth 2 marks and is compulsory.

This exam section is worth 30 marks in total.

LuckbyChance Plc’s cash budget highlights a short-term surplus in the near future.

Which of the following actions would be appropriate to make use of the surplus?

A Pay suppliers earlier to take advantage of any prompt payment discounts

B Buy back the company’s shares
C Increase payables by delaying payment to suppliers
D Invest in a long term deposit bank account

Answer
he surplus?

###
###

A
B
C
D
 Indicate whether the following statements are true or false

A Tax allowable depreciation is a relevant cash flow when evaluating borrowing to buy compared to le
financing choice
B Asset replacement decisions require relevant cash flows to be discounted by the after-tax cost of de
C If capital is rationed, divisible investment projects can be ranked by the profitability index when deter
optimum investment schedule
D Government restrictions on bank lending are associated with soft capital rationing
E Expectations theory states that future interest rates reflect expectations of future inflation rate movem

Answer
A True/False TRUE
B True/False FALSE
C True/False
D True/False
E True/False
wing to buy compared to leasing as a

d by the after-tax cost of debt

rofitability index when determining the

f future inflation rate movements

 Which of the below statements are least likely to be correct.

A When determining the appropriate level of working capital there is a trade-off between solvency and pr
B Overtrading involves an excessive level of working capital, leading to inefficiency. The indicators are lo
and quick ratios
C Return on capital employed is a primary ratio. This can also be calculated by multipling some seconda
secondary ratios are net profit marign ratio and net asset turnover ratio.
D A major restaurant which is selling mandazi has decieded to rapidly increase production by investing in
equipment which will reduce dough making process time and will also significantly reduce slag a bypro
of mandazi has gone southwards. The restaurant has achieved better economy and effectiveness but

Answer
ff between solvency and profitability
iency. The indicators are low and falling current

y multipling some secondary ratios. These

e production by investing in modern kitchen

ficantly reduce slag a byproduct. However the taste ###
omy and effectiveness but has sufferred on efficiency.###
A
B
C
D
Toggle Co has in issue 6% loan notes which are redeemable at discount of 10%
in three years’ time. Alternatively, each loan may be converted on that date into
30 ordinary shares of the company.

The current ordinary cum share price of Toggle Co is $3.50 and this is expected to grow at
4% per year for the foreseeable future.

Toggle Co has a pre-tax cost of debt of 5% per year. The corporate tax rate on debt is 30%.
Toggle board or directors has declared a dividend yield at 10%.

What is the current market value of each $100 convertible loan note?
What is the before tax cost of capital for convertible loan note if each $100 convertible loan note is cur
discount?

Current Market value IRR

A $118.37 12.03%
B $108.17 12.03%
C $115.74 11.03%
D $92.94 11.03%

Answer
ected to grow at

on debt is 30%.

###
###

convertible loan note is currently trading at 10%

A
B
C
D
 Which of the below statements are correct or incorrect?

A Demand-pull inflation might occur when excess aggregate monetary demand in the economy and hen
particular goods and services enable companies to raise prices and expand profit margins
B A government may intervene to weaken its country’s exchange rate in order to eliminate a balance of
payments deficit
C A prospective merger would need to result in a company having a market share greater than absolute
before it can be described as a monopoly
D Financial accounting is concerned with providing information for the more day-to-day functions of
control and decision making.

Answer
A Correct/Incorrect
B Correct/Incorrect
C Correct/Incorrect
D Correct/Incorrect
nd in the economy and hence demand for
d profit margins
r to eliminate a balance of

hare greater than absolute majority % ie 75%

ay-to-day functions of

Correct
Incorrect
The following options are held by Frances plc at their expiry date:

(1) A call option on £500,000 in exchange for US$ at an exercise price of £1 = $1.90.
The exchange rate at the expiry date is £1 = $1.95.
(2) A put option on £400,000 in exchange for Singapore $ at an exercise price of £1 =
$2.90.

The exchange rate at the expiry date is £1 = $2.95.

Which of the following combinations (exercise/lapse) should be undertaken by the

company?
Option
Call Put
A Exercise Lapse
B Exercise Exercise
C Lapse Exercise
D Lapse Lapse

Answer
1 = $1.90.

ice of £1 =

taken by the ###

###

A
B
C
D
 Great Lakes Plc is a startup SME which is in the business of holiday tours. It has in the past relied on
venture capital financing for its working capital and long term financing.
It is not considering major expansion which would involve construction of a hotel at the shores of a
prestine water body. It is however concerned about interest rate risk which can adversly impact its pro

Which of the below statements are correct or incorrect?

A Borrowers will wish to hedge against an interest rate rise by selling futures now and buying futures on
interest rate is fixed
B Buying a futures creates the obligation to borrow money and the right to receive interest.
C A Lender entering into an interest rate collar will Buy a Cap and Sell Floor
D Zero cost collar is wherein the exercise price for call option is same as that of put option, therefore it en
E Smoothing is where a company keeps a balance between its fixed rate and floating rate borrowings, th
interest cost

Answer
A Correct/Incorrect
B Correct/Incorrect
C Correct/Incorrect
D Correct/Incorrect
E Correct/Incorrect
It has in the past relied on

hotel at the shores of a

can adversly impact its project

now and buying futures on the date that the

eive interest.

of put option, therefore it entails zero cost.

floating rate borrowings, thereby optimising its

Correct
Incorrect
Baba Co has a quick ratio of 2 and current ratio of 3. Recievables are $4m and current liabilities are $2

What are net working capital days in terms of sales if Cost of sales is $20m per annum and GP
Assume that number of days in a year is 360 days.

Answer
days
and current liabilities are $2m.

$20m per annum and GP Margin is 10%.

 LetusDoit Co has provided following information in relation to its inventories

Reorder size 250

Minimum stock 100
Fixed order costs per order 10% of Order purchase cost
Cost of carrying for 10 units pa $20 pa
Annual demand 10,000
Purchase price $3 per item

What are the total inventory related costs for a year?

Answer
$
Spicy Co is considering investing in a new industrial sauce machine for use on a new contract. It will cost $
and will last 2 years. Spicy Co pays corporation tax at 30% (as the cash flows occur) and, due to the health
benefits of junk food, the machine attracts 100% tax-allowable depreciation immediately.

Given a cost of capital of 10%, what is the minimum value of the pre-tax contract revenue receivable in two
years which would be required to recover the net cost of the sauce machine?

A $ 150,000
B $ 105,000
C $ 127,050
D $ 181,500

Answer
 contract. It will cost $150,000
and, due to the health

nue receivable in two

A
B
C
D
 Which of the followig correctly describes the relevant Islamic finance products/contracts?

A A popular type of financing for major purchases such as housing. In it, the bank and purchaser (customer) have
purchased asset with the customer also leasing the asset. As the customer gradually paying off the cost the ban
diminishes from all but the customer percentage of downpayment to nothing. If the customer defaults and the a
and the customer split the proceeds according to each party's current equity.

B Literally "bargaining" contract is used if the exact cost of the item(s) sold to the bank/financier either cannot be o
differs from other contracts in that the "seller is not under the obligation to reveal his cost or purchase price".It is
type of "trading negotiation" seen in Islamic commerce.

C A profit sharing partnership in a commercial enterprise. One partner, rabb-ul-mal, is a silent or sleeping partner
The other partner, provides expertise and management. The arrangement is similar to venture capital in conven
which a venture capitalist finances an entrepreneur, who provides management and labor.

D Literally "turns into silver", or "monetization" contract/product where the client/customer can raise cash to be rep
and selling some readily saleable asset. An example of this would be a customer wishing to borrow $1000 in ca
buy $1,100 worth of a commodity such as iron from a supplier, buying the iron from the bank on credit with 12 m
$1100 back, immediately selling the metal back to the bank for $1000 cash to be paid on the spot. The bank res
supplier. (This would be the equivalent of borrowing $1000 for a year at an interest rate of 11 per cent.)

Answer
Musawamah
Tawarruq
Mudarabah
Musharaka al-Mutanaqisa
products/contracts?

nd purchaser (customer) have joint ownership of a

ally paying off the cost the bank's equity share
e customer defaults and the asset is sold, the bank

nk/financier either cannot be or is not ascertained. It

is cost or purchase price".It is the "most common"

s a silent or sleeping partner who provides money.

ar to venture capital in conventional finance, in
nd labor.

omer can raise cash to be repaid later by buying

wishing to borrow $1000 in cash having their bank
m the bank on credit with 12 months to pay the
paid on the spot. The bank resells the iron to the
t rate of 11 per cent.)

A
B
C
D
JustDoIt Co is about to pay a $0.50 dividend on each ordinary share. Its earnings per share was $1.50
Net assets per share is $6. Current share price is $4.50 per share.
What is the cost of equity (to the nearest whole percentage)?

Answer
%
arnings per share was $1.50.
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
rate is 4% per year and the current spot exchange rate between the two countries is 1·5000 dinar per

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

Answer
 r in country Y. Country Y’s nominal interest
untries is 1·5000 dinar per $1.

statements is/are true?

A
B
C
D
In relation to the yield curve, which of the following statements is correct?

A Expectations theory suggests that deferred consumption requires increased compensation as matur
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 segm
D Basis risk can cause the corporate yield curve to rise more steeply than the government yield curve

Answer
 ed compensation as maturity increases
its long-term borrowing
ds in different market segments
he government yield curve A
B
C
D
 Bata and Matata Co is concerned that the cash received from overseas customers will not be as forec
budgeting division due to FX rate movements

Chata and Pataka Co is concerned that there is a risk that the value of its foreign currency-denominat
will change when they prepare its accounts

Lambata and Kalata Co is concerned that continued BOP deficit measures introduced by competetitor
would result in depreciation of those currencies and thereby adversely impact international competitive
in long term

Identify which type of risk are these?

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

Answer

Bata and Matata

Chata and Pataka
Lambata and Kalata
 tomers will not be as forecasted by its

oreign currency-denominated assets and liabilities

introduced by competetitor country governments

act international competitiveness of its products

A
B
C
D
Section B

This section of the exam contains one OT cases.

Each OT case contains a scenario which relates to five OT questions.

Each question is worth 2 marks and is compulsory.

This exam section is worth 30 marks in total.

 Each question is worth 2 marks.
The following scenario relates to questions 16–20

MagicPa Co in engaged in business of growing organic patatoes. It has recently done a breakthrough in growing patatoes by
the founder of MagicPa who specialises in patatoes and other veggies. He has grown the company to an annual turnover of $
of turnover.

Mr. Pa appointed his son-in-law Mr. Chu as head of working capital management. Under Mr. Chu's guidance MagaicPa Co
days to all its customers. However to utter surprise of Chu Receivables days are currently at 90. Mr. Chu also engaged in rec
given credit sales to customers who were already broke. On an average bad debts are currently at 5% of credit turnover. Ma
using short term loans which has an annual interest cost of Libor + 10%.

SuperPu dauther of Mr. Pa has recently completed her ACCA studies and is simply baffled by the mess up in business. She
services of a factor - Don D. Don D would charge 5% of turnover for a non‑recourse agreement and would expect to reduce
debts to 2%. Don D would lend Magic Pa 60% of the outstanding receivables and would charge MagicPa Libor + 12% borro
using Don D would reduce administration costs by $10,000 per annum.
Libor is at 3%. Number of days in a year are 360 days.

What is the current cost of working capital management at MagicPa under Mr. Chu's guidance incurred on investm
recievables and bad debts?

Answer
$
h in growing patatoes by remote technology. Mr. Pa is
o an annual turnover of $800,000, credit sales are at 80%

guidance MagaicPa Co offerred a credit period of 60

Chu also engaged in reckless credit process and started
% of credit turnover. MagicPa finances its working capital

ess up in business. She immeditaly suggested using

would expect to reduce receivable days to 30 and bad
gicPa Libor + 12% borrowing cost. It is anticipated that

e incurred on investment in
 Each question is worth 2 marks.
The following scenario relates to questions 16–20

MagicPa Co in engaged in business of growing organic patatoes. It has recently done a breakthrough in growing patatoes by
the founder of MagicPa who specialises in patatoes and other veggies. He has grown the company to an annual turnover of $
of turnover.

Mr. Pa appointed his son-in-law Mr. Chu as head of working capital management. Under Mr. Chu's guidance MagaicPa Co
days to all its customers. However to utter surprise of Chu Receivables days are currently at 90. Mr. Chu also engaged in rec
given credit sales to customers who were already broke. On an average bad debts are currently at 5% of credit turnover. Ma
using short term loans which has an annual interest cost of Libor + 10%.

SuperPu dauther of Mr. Pa has recently completed her ACCA studies and is simply baffled by the mess up in business. She
services of a factor - Don D. Don D would charge 5% of turnover for a non‑recourse agreement and would expect to reduce
debts to 2%. Don D would lend Magic Pa 60% of the outstanding receivables and would charge MagicPa Libor + 12% borro
using Don D would reduce administration costs by $10,000 per annum.
Libor is at 3%. Number of days in a year are 360 days.

What is the Total cost of financing for all recievables under factoring arrangement.

Answer
$
h in growing patatoes by remote technology. Mr. Pa is
o an annual turnover of $800,000, credit sales are at 80%

guidance MagaicPa Co offerred a credit period of 60

Chu also engaged in reckless credit process and started
% of credit turnover. MagicPa finances its working capital

ess up in business. She immeditaly suggested using

would expect to reduce receivable days to 30 and bad
gicPa Libor + 12% borrowing cost. It is anticipated that
 Each question is worth 2 marks.
The following scenario relates to questions 16–20

MagicPa Co in engaged in business of growing organic patatoes. It has recently done a breakthrough in growing patatoes by
the founder of MagicPa who specialises in patatoes and other veggies. He has grown the company to an annual turnover of $
of turnover.

Mr. Pa appointed his son-in-law Mr. Chu as head of working capital management. Under Mr. Chu's guidance MagaicPa Co
days to all its customers. However to utter surprise of Chu Receivables days are currently at 90. Mr. Chu also engaged in rec
given credit sales to customers who were already broke. On an average bad debts are currently at 5% of credit turnover. Ma
using short term loans which has an annual interest cost of Libor + 10%.

SuperPu dauther of Mr. Pa has recently completed her ACCA studies and is simply baffled by the mess up in business. She
services of a factor - Don D. Don D would charge 5% of turnover for a non‑recourse agreement and would expect to reduce
debts to 2%. Don D would lend Magic Pa 60% of the outstanding receivables and would charge MagicPa Libor + 12% borro
using Don D would reduce administration costs by $10,000 per annum.
Libor is at 3%. Number of days in a year are 360 days.

What is the Net benefit Or Net cost of using the services of Factor Don D?

Answer
$
Benefit/Cost
h in growing patatoes by remote technology. Mr. Pa is
o an annual turnover of $800,000, credit sales are at 80%

guidance MagaicPa Co offerred a credit period of 60

Chu also engaged in reckless credit process and started
% of credit turnover. MagicPa finances its working capital

ess up in business. She immeditaly suggested using

would expect to reduce receivable days to 30 and bad
gicPa Libor + 12% borrowing cost. It is anticipated that
Each question is worth 2 marks.
The following scenario relates to questions 16–20

MagicPa Co in engaged in business of growing organic patatoes. It has recently done a breakthrough in growing patatoes by
the founder of MagicPa who specialises in patatoes and other veggies. He has grown the company to an annual turnover of $
of turnover.

Mr. Pa appointed his son-in-law Mr. Chu as head of working capital management. Under Mr. Chu's guidance MagaicPa Co
days to all its customers. However to utter surprise of Chu Receivables days are currently at 90. Mr. Chu also engaged in rec
given credit sales to customers who were already broke. On an average bad debts are currently at 5% of credit turnover. Ma
using short term loans which has an annual interest cost of Libor + 10%.

SuperPu dauther of Mr. Pa has recently completed her ACCA studies and is simply baffled by the mess up in business. She
services of a factor - Don D. Don D would charge 5% of turnover for a non‑recourse agreement and would expect to reduce
debts to 2%. Don D would lend Magic Pa 60% of the outstanding receivables and would charge MagicPa Libor + 12% borro
using Don D would reduce administration costs by $10,000 per annum.
Libor is at 3%. Number of days in a year are 360 days.

Which of the following statements is/are NOT 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

Answer
h in growing patatoes by remote technology. Mr. Pa is
o an annual turnover of $800,000, credit sales are at 80%

guidance MagaicPa Co offerred a credit period of 60

Chu also engaged in reckless credit process and started
% of credit turnover. MagicPa finances its working capital

ess up in business. She immeditaly suggested using

would expect to reduce receivable days to 30 and bad
gicPa Libor + 12% borrowing cost. It is anticipated that
Each question is worth 2 marks.
The following scenario relates to questions 16–20

MagicPa Co in engaged in business of growing organic patatoes. It has recently done a breakthrough in growing patatoes by
the founder of MagicPa who specialises in patatoes and other veggies. He has grown the company to an annual turnover of $
of turnover.

Mr. Pa appointed his son-in-law Mr. Chu as head of working capital management. Under Mr. Chu's guidance MagaicPa Co
days to all its customers. However to utter surprise of Chu Receivables days are currently at 90. Mr. Chu also engaged in rec
given credit sales to customers who were already broke. On an average bad debts are currently at 5% of credit turnover. Ma
using short term loans which has an annual interest cost of Libor + 10%.

SuperPu dauther of Mr. Pa has recently completed her ACCA studies and is simply baffled by the mess up in business. She
services of a factor - Don D. Don D would charge 5% of turnover for a non‑recourse agreement and would expect to reduce
debts to 2%. Don D would lend Magic Pa 60% of the outstanding receivables and would charge MagicPa Libor + 12% borro
using Don D would reduce administration costs by $10,000 per annum.
Libor is at 3%. Number of days in a year are 360 days.

Which of the following is LEAST likely to be used in the management of foreign accounts recievables?

A Confirmed Letter of credit issued by a reputed issuing bank through an advising bank
B Credit insurance combined with Open credit and Credit rating
C Miller-Orr model for mangement of optimal recievable levels
D Without recourse Forfaiting which can be sold in money market as a debt instrument

Answer
h in growing patatoes by remote technology. Mr. Pa is
o an annual turnover of $800,000, credit sales are at 80%

guidance MagaicPa Co offerred a credit period of 60

Chu also engaged in reckless credit process and started
% of credit turnover. MagicPa finances its working capital

ess up in business. She immeditaly suggested using

would expect to reduce receivable days to 30 and bad
gicPa Libor + 12% borrowing cost. It is anticipated that
 Each question is worth 2 marks.
The following scenario relates to questions 21–25

Currently MonkeyGod Co is headquartered in a remote country whose currency is the PaySasa (PS).
imports goods denominated in TaiSasa (TS) and regularly sells goods denominated in SaiSasa (SS).

MonkeyGod Co is adventure tour company engaged in business of trading in extreme sports and craz
experiences. It business model is based on calculated risk and high returns. Offlate it has expanded in
the scale of business has expanded requiring close monitoring of working capital. Also some major inv
are underway which requires application of latest investment appraisal techniques.

Two of the future transactions of the company are as follows:

Three months: Paying TS600,000 for imported goods

Six months: Receiving 10 million SS for exported capital goods

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

Bid Offer
Spot exchange rate (SS per PS1): 57.31 57.52
Six-month forward rate (SS per PS1): 58.41 58.64
Spot exchange rate (TS per PS1): 1.544 1.552
Three-month forward rate (TS per PS1): 1.532 1.54

Six-month interest rates:

Borrow Deposit
SaiSasa 4.00% 2.00%
PaySasa 1.00% 0.50%
TaiSasa 10.00% 9.00%

The Chief Risk Officer of MonkeyGod 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.

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

Statement
A Taking out a forward exchange contract on its future SS receipt
B Buying a tailor-made currency option for its future TS payment
C Leading the TS payment on its imported goods

Basis information given in question which of the above method of hedging is most advantageo
 to hedge payment and what is the total payment expressed in PS after 3 months as per that he

Answer
A Effective/Not effective
B Effective/Not effective
C Effective/Not effective
Method Lead
PS Total payment Option
Forward
ency is the PaySasa (PS). The company regularly
ominated in SaiSasa (SS).

in extreme sports and crazy adventure

. Offlate it has expanded in multiple geograhies
apital. Also some major investment decisions

yield curve reported in the

n the future, and

l find each of the

currency risk

ging is most advantageous

r 3 months as per that heding method.

Effective
Not Effective
Each question is worth 2 marks.
The following scenario relates to questions 21–25

Currently MonkeyGod Co is headquartered in a remote country whose currency is the PaySasa (PS).
imports goods denominated in TaiSasa (TS) and regularly sells goods denominated in SaiSasa (SS).

MonkeyGod Co is adventure tour company engaged in business of trading in extreme sports and craz
experiences. It business model is based on calculated risk and high returns. Offlate it has expanded in
the scale of business has expanded requiring close monitoring of working capital. Also some major inv
are underway which requires application of latest investment appraisal techniques.

Two of the future transactions of the company are as follows:

Three months: Paying TS600,000 for imported goods

Six months: Receiving 10 million SS for exported capital goods

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

Bid Offer
Spot exchange rate (SS per PS1): 57.31 57.52
Six-month forward rate (SS per PS1): 58.41 58.64
Spot exchange rate (TS per PS1): 1.544 1.552
Three-month forward rate (TS per PS1): 1.532 1.54

Six-month interest rates:

Borrow Deposit
SaiSasa 4.00% 2.00%
PaySasa 8.00% 7.50%
TaiSasa 10.00% 9.00%

The Chief Risk Officer of MonkeyGod 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.

What is the future exchange rate for SS per PS1 as per systhetic forward cover. You are require
your understanding of money market hedge to create this exchange position.
 Answer
SS per PS 1
ency is the PaySasa (PS). The company regularly
ominated in SaiSasa (SS).

in extreme sports and crazy adventure

. Offlate it has expanded in multiple geograhies
apital. Also some major investment decisions

yield curve reported in the

n the future, and

ard cover. You are required to use

 Each question is worth 2 marks.
The following scenario relates to questions 21–25

Currently MonkeyGod Co is headquartered in a remote country whose currency is the PaySasa (PS).
imports goods denominated in TaiSasa (TS) and regularly sells goods denominated in SaiSasa (SS).

MonkeyGod Co is adventure tour company engaged in business of trading in extreme sports and craz
experiences. It business model is based on calculated risk and high returns. Offlate it has expanded in
the scale of business has expanded requiring close monitoring of working capital. Also some major inv
are underway which requires application of latest investment appraisal techniques.

Two of the future transactions of the company are as follows:

Three months: Paying TS600,000 for imported goods

Six months: Receiving 10 million SS for exported capital goods

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

Bid Offer
Spot exchange rate (SS per PS1): 57.31 57.52
Six-month forward rate (SS per PS1): 58.41 58.64
Spot exchange rate (TS per PS1): 1.544 1.552
Three-month forward rate (TS per PS1): 1.532 1.54

Six-month interest rates:

Borrow Deposit
SaiSasa 4.00% 2.00%
PaySasa 8.00% 7.50%
TaiSasa 10.00% 9.00%

The Chief Risk Officer of MonkeyGod 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.

Which hedging methods will assist Park Co in reducing its overall foreign currency risk?

1 Taking out a long-term TS denominated loan.

2 Taking out a SS denominated overdraft.

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
Answer
ency is the PaySasa (PS). The company regularly
ominated in SaiSasa (SS).

in extreme sports and crazy adventure

. Offlate it has expanded in multiple geograhies
apital. Also some major investment decisions

yield curve reported in the

n the future, and

eign currency risk?

A
B
C
D
 Each question is worth 2 marks.
The following scenario relates to questions 21–25

Currently MonkeyGod Co is headquartered in a remote country whose currency is the PaySasa (PS).
imports goods denominated in TaiSasa (TS) and regularly sells goods denominated in SaiSasa (SS).

MonkeyGod Co is adventure tour company engaged in business of trading in extreme sports and craz
experiences. It business model is based on calculated risk and high returns. Offlate it has expanded in
the scale of business has expanded requiring close monitoring of working capital. Also some major inv
are underway which requires application of latest investment appraisal techniques.

Two of the future transactions of the company are as follows:

Three months: Paying TS600,000 for imported goods

Six months: Receiving 10 million SS for exported capital goods

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

Bid Offer
Spot exchange rate (SS per PS1): 57.31 57.52
Six-month forward rate (SS per PS1): 58.41 58.64
Spot exchange rate (TS per PS1): 1.544 1.552
Three-month forward rate (TS per PS1): 1.532 1.54

Six-month interest rates:

Borrow Deposit
SaiSasa 4.00% 2.00%
PaySasa 8.00% 7.50%
TaiSasa 10.00% 9.00%

The Chief Risk Officer of MonkeyGod 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.

Indicate, by clicking in the relevant boxes, whether the following statements are correct or inco

Statement
A Purchasing power parity can be used to predict the forward exchange rate
B The international Fisher effect van be used to predict the real interest rate
 Answer
A Correct/Incorrect
B Correct/Incorrect
ency is the PaySasa (PS). The company regularly
ominated in SaiSasa (SS).

in extreme sports and crazy adventure

. Offlate it has expanded in multiple geograhies
apital. Also some major investment decisions

yield curve reported in the

n the future, and

ments are correct or incorrect.

Correct
Incorrect
Each question is worth 2 marks.
The following scenario relates to questions 21–25

Currently MonkeyGod Co is headquartered in a remote country whose currency is the PaySasa (PS).
imports goods denominated in TaiSasa (TS) and regularly sells goods denominated in SaiSasa (SS).

MonkeyGod Co is adventure tour company engaged in business of trading in extreme sports and craz
experiences. It business model is based on calculated risk and high returns. Offlate it has expanded in
the scale of business has expanded requiring close monitoring of working capital. Also some major inv
are underway which requires application of latest investment appraisal techniques.

Two of the future transactions of the company are as follows:

Three months: Paying TS600,000 for imported goods

Six months: Receiving 10 million SS for exported capital goods

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

Bid Offer
Spot exchange rate (SS per PS1): 57.31 57.52
Six-month forward rate (SS per PS1): 58.41 58.64
Spot exchange rate (TS per PS1): 1.544 1.552
Three-month forward rate (TS per PS1): 1.532 1.54

Six-month interest rates:

Borrow Deposit
SaiSasa 4.00% 2.00%
PaySasa 8.00% 7.50%
TaiSasa 10.00% 9.00%

The Chief Risk Officer of MonkeyGod 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.

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.

Answer
ency is the PaySasa (PS). The company regularly
ominated in SaiSasa (SS).

in extreme sports and crazy adventure

. Offlate it has expanded in multiple geograhies
apital. Also some major investment decisions

yield curve reported in the

n the future, and

ng yield curve?
A
B
C
D
Each question is worth 2 marks.
The following scenario relates to questions 26–30

Loki plc is a growing company specialising in making accessories for mobile phones and
tablets. The company is currently all-equity financed with 2 million ordinary shares in issue.
The existing shareholders are mainly family members and friends. The directors of Loki
need to raise finance to fund a new factory and are considering a range of options including
flotation and venture capital. Future growth is anticipated to be the following:

Earnings next year = $0.25m, expected to grow at 7% pa

Dividend next year = $0.14m, expected to grow at 4% pa

Flotation
Q plc, a listed company with similar business activities to Loki has a P/E ratio of 9, an equity
beta of 1.2 and gearing, measured as Debt:Equity of 1:2. Loki is expected to grow faster
than Q plc, at least in the short term.

If flotation is approved, then the issue share price would be set at a 15% discount to fair
value. The directors of Loki do not believe that an asset valuation is of much use here.

Venture capital
The directors of Loki have been in discussion with 4Ts, a listed venture capital company.
As well as contributing equity, 4Ts would seek to spread the risk of their investment by also
investing in the form of 4–year 5% secured redeemable bonds and also convertible
preference shares. The risk adjusted return on similar bonds has been estimated at 6%.

Corporation tax is currently 30%.

Which of the following statements, concerning the usefulness of asset based

methods of business valuation, is correct?

A Replacement cost normally represents the minimum price which should be

accepted for the sale of a business as a going concern.

B Break-up value should provide a measure of the maximum amount that any
purchaser should pay for the business.

C Book value will normally be a meaningless figure as it will be based on

historical costs.

D Asset based methods give consideration to non statement of financial position

intangible assets such as a highly skilled workforce and a strong management
Answer
e phones and
shares in issue.
ctors of Loki
options including

io of 9, an equity
o grow faster

scount to fair
h use here.

ital company.
estment by also

mated at 6%.

A
B
C
D
Each question is worth 2 marks.
The following scenario relates to questions 26–30

Loki plc is a growing company specialising in making accessories for mobile phones and
tablets. The company is currently all-equity financed with 2 million ordinary shares in issue.
The existing shareholders are mainly family members and friends. The directors of Loki
need to raise finance to fund a new factory and are considering a range of options including
flotation and venture capital. Future growth is anticipated to be the following:

Earnings next year = $0.25m, expected to grow at 7% pa

Dividend next year = $0.14m, expected to grow at 4% pa

Flotation
Q plc, a listed company with similar business activities to Loki has a P/E ratio of 9, an equity
beta of 1.2 and gearing, measured as Debt:Equity of 1:2. Loki is expected to grow faster
than Q plc, at least in the short term.

If flotation is approved, then the issue share price would be set at a 15% discount to fair
value. The directors of Loki do not believe that an asset valuation is of much use here.

Venture capital
The directors of Loki have been in discussion with 4Ts, a listed venture capital company.
As well as contributing equity, 4Ts would seek to spread the risk of their investment by also
investing in the form of 4–year 5% secured redeemable bonds and also convertible
preference shares. The risk adjusted return on similar bonds has been estimated at 6%.

Corporation tax is currently 30%.

Calculate the value of Loki plc’s equity beta to 2 dp

Answer
e phones and
shares in issue.
ctors of Loki
options including

io of 9, an equity
o grow faster

scount to fair
h use here.

ital company.
estment by also

mated at 6%.

A
B
C
D
Each question is worth 2 marks.
The following scenario relates to questions 26–30

Loki plc is a growing company specialising in making accessories for mobile phones and
tablets. The company is currently all-equity financed with 2 million ordinary shares in issue.
The existing shareholders are mainly family members and friends. The directors of Loki
need to raise finance to fund a new factory and are considering a range of options including
flotation and venture capital. Future growth is anticipated to be the following:

Earnings next year = $0.25m, expected to grow at 7% pa

Dividend next year = $0.14m, expected to grow at 4% pa

Flotation
Q plc, a listed company with similar business activities to Loki has a P/E ratio of 9, an equity
beta of 1.2 and gearing, measured as Debt:Equity of 1:2. Loki is expected to grow faster
than Q plc, at least in the short term.

If flotation is approved, then the issue share price would be set at a 15% discount to fair
value. The directors of Loki do not believe that an asset valuation is of much use here.

Venture capital
The directors of Loki have been in discussion with 4Ts, a listed venture capital company.
As well as contributing equity, 4Ts would seek to spread the risk of their investment by also
investing in the form of 4–year 5% secured redeemable bonds and also convertible
preference shares. The risk adjusted return on similar bonds has been estimated at 6%.

Corporation tax is currently 30%.

Calculate the issue price of Loki shares to the nearest cent using the dividend
valuation model with a cost of equity of 14%.

A $0.60
B $0.70
C $1.19
D $1.24

Answer
e phones and
shares in issue.
ctors of Loki
options including

io of 9, an equity
o grow faster

scount to fair
h use here.

ital company.
estment by also

mated at 6%.

A
B
C
D
Each question is worth 2 marks.
The following scenario relates to questions 26–30

Loki plc is a growing company specialising in making accessories for mobile phones and
tablets. The company is currently all-equity financed with 2 million ordinary shares in issue.
The existing shareholders are mainly family members and friends. The directors of Loki
need to raise finance to fund a new factory and are considering a range of options including
flotation and venture capital. Future growth is anticipated to be the following:

Earnings next year = $0.25m, expected to grow at 7% pa

Dividend next year = $0.14m, expected to grow at 4% pa

Flotation
Q plc, a listed company with similar business activities to Loki has a P/E ratio of 9, an equity
beta of 1.2 and gearing, measured as Debt:Equity of 1:2. Loki is expected to grow faster
than Q plc, at least in the short term.

If flotation is approved, then the issue share price would be set at a 15% discount to fair
value. The directors of Loki do not believe that an asset valuation is of much use here.

Venture capital
The directors of Loki have been in discussion with 4Ts, a listed venture capital company.
As well as contributing equity, 4Ts would seek to spread the risk of their investment by also
investing in the form of 4–year 5% secured redeemable bonds and also convertible
preference shares. The risk adjusted return on similar bonds has been estimated at 6%.

Corporation tax is currently 30%.

What is the market value of the redeemable bonds?

A $68.15
B $91.91
C $96.53
D $100.00

Answer
e phones and
shares in issue.
ctors of Loki
options including

io of 9, an equity
o grow faster

scount to fair
h use here.

ital company.
estment by also

mated at 6%.

A
B
C
D
Each question is worth 2 marks.
The following scenario relates to questions 26–30

Loki plc is a growing company specialising in making accessories for mobile phones and
tablets. The company is currently all-equity financed with 2 million ordinary shares in issue.
The existing shareholders are mainly family members and friends. The directors of Loki
need to raise finance to fund a new factory and are considering a range of options including
flotation and venture capital. Future growth is anticipated to be the following:

Earnings next year = $0.25m, expected to grow at 7% pa

Dividend next year = $0.14m, expected to grow at 4% pa

Flotation
Q plc, a listed company with similar business activities to Loki has a P/E ratio of 9, an equity
beta of 1.2 and gearing, measured as Debt:Equity of 1:2. Loki is expected to grow faster
than Q plc, at least in the short term.

If flotation is approved, then the issue share price would be set at a 15% discount to fair
value. The directors of Loki do not believe that an asset valuation is of much use here.

Venture capital
The directors of Loki have been in discussion with 4Ts, a listed venture capital company.
As well as contributing equity, 4Ts would seek to spread the risk of their investment by also
investing in the form of 4–year 5% secured redeemable bonds and also convertible
preference shares. The risk adjusted return on similar bonds has been estimated at 6%.

Corporation tax is currently 30%.

Which TWO of the following statements concerning 4Ts’ perspective are true?

A 4Ts’ investment in the preference shares will have the lowest risk out of the
three methods of finance offered due to the option to convert
B 4Ts will accept a lower level of dividends on the convertible preference shares
compared to normal preference shares
C 4Ts are likely to prefer to use CAPM in valuing Loki shares
D The current shareholders of Loki would be willing to sell a majority equity stake
to 4Ts

Answer
e phones and
shares in issue.
ctors of Loki
options including

io of 9, an equity
o grow faster

scount to fair
h use here.

ital company.
estment by also

mated at 6%.

A
B
C
D
Section C

This section of the exam contains two constructed response questions.

Each question contains a scenario which relates to one or more requirement(s) which may be split over mu

Each question is worth 20 marks and is compulsory.

This exam section is worth 40 marks in total.

Important:

In your live exam you must:

(1) Enter your answer for each question in the response area provided for that question. Any answers ente
question will not be marked.

(2) Show all notes/workings that you want the marker to see within the response area provided for the que
Scratch Pad or on your workings paper will not be marked.

Select Next to continue.

Required:

(a) Identify and comment on any errors in the investment appraisal prepared by the
trainee accountant. (5 marks)

Provide your response in the space highlighted on the right pane

sal prepared by the
Required:

(b) Prepare a revised calculation of the net present value of the proposed investment
project and comment on the project’s acceptability.  (10 marks)

Provide your response in the space highlighted on the right pane

proposed investment
Required:

(c) Discuss the problems faced when undertaking investment appraisal in the
following areas and comment on how these problems can be overcome:
(i) an investment project has several internal rates of return
(ii) the business risk of an investment project is significantly different from the
business risk of current operations.  (5 marks)

Provide your response in the space highlighted on the right pane

ppraisal in the

ferent from the

Provide your response in the space highlighted on the right pane
Required:
(a) Evaluate suitable methods of raising the $200 million required by Nugfer Co,
supporting your evaluation with both analysis and critical discussion. 
(16 marks)
(b) Briefly explain the factors that will influence the rate of interest charged on a new
issue of bonds.  (4 marks)
Answer Sheet

Name TYPE YOUR NAME HERE

Qno Answer Answer Answer Answer Marks

1 0
2 0 0 0 0 0
3 0
4 0
5 0 0 0 0
6 0
7 0 0 0 0 0
8 0
9 0
10 0
11 0 0 0 0
12 0
13 0
14 0
15 0 0 0
16 0
17 0
18 0 0
19 0
20 0
21 0 0 0 0 0
22 0
23 0
24 0 0
25 0
26 0
27 0
28 0
29 0
30 0
31
32
Total Marks
Max Marks
%

Examiner Comments
Student
A. What Feedback
went well, I will continue doing this

B. What did not go well, I will improve on this

C. Comments and suggestions for improvement

Teacher improvement

Institute improvement

Any other area