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ACCA F9 - Financial Management

Multiple Choice Questions for June 2015 Exam


F9 test 1 Introduction to financial management and governance
Q1. What is the role of financial management?
A

To prepare financial statements for internal use by management

To prepare financial statements for external use by shareholders

C
To manage the link between the company and the external environment to do with
financial decisions?
D

To manage the internal operations of the business

Q2. When considering financial management would it normally be considered as which of the
following categories?
A

An operational function

A tactical function

A strategic function

An institutional function

Q3. When considering a financial investment over the short-term which order would best
describe the priorities of the investor highest first?
A

Return, Risk, Liquidity

Return, Liquidity, Risk

Liquidity, Return, Risk

Risk, Liquidity, Return


1

Q4. When considering the dividend to pay out which of the following should be considered?
1

Shareholder expectations

Investment opportunities

Current profitability

past dividends paid

1,2 and 3

1,3 and 4

2,3 and 4

All of the above

Q5. When considering the permanent financing of the business, what should debt and equity
cover in balance sheet terms?
A

Current assets

Total assets

Total assets less current liabilities

Net current assets

Q6. What is considered the primary aim in financial management?


A

Maximising profit

Maximising shareholders wealth

Satisficing

Corporate social responsibility

Q7. As an employee how would you best assess your return from the organisation?
A

Return on capital employed

Salary

Payment terms

Service

Q8. What theory best describes the relationship between senior management and
shareholders?
A

Tenancy theory

Expectancy theory

Portfolio theory

Agency theory

Q9. Which of the following may be considered areas of conflict between shareholders and
directors?
1

Executive pay

Takeover strategy

Prestige projects

Risk assessment

1, 2 and 3

2, 3 and 4

1, 2 and 4

All of the above


3

Q10. What are the three fundamental decisions in financial management?


A.
B.
C.
D.

Investment, Financing and Dividend


Management, Investment and Financing
Management, Investment and Dividend
Management, Financing and Dividend

F9 Test 2 Cost of capital and WACC


Q1. When calculating the cost of equity using the dividend valuation model which time value of
money concept is most likely to be used?
A

Annuity

Compounding

Present values

Perpetuities

Q2. Given a share price of $10 and a dividend per annum of $0.5 what would be the cost of
equity if there is no expected growth in the dividend?
A

4%

5%

6%

10%

Q3. If we are calculating the growth rate for dividends using the average method what would
the growth rate be using the following information to 2 decimal places?
Current dividend

5c

Dividend 3 years ago

4c

7.72%

25%

7.49%

8.33%

Q4. Using Gordons Growth Model what would be the estimated growth rate of the dividends
given the following information?
Profit after tax

20%

Dividend payout ratio

60%

8%

10%

12%

14%

Q5. If a loan note (par value = $100) is irredeemable what would be the cost of debt given that
the current market value is $105 and the coupon rate is 8%. The debt is tax deductible and the
current corporation tax rate is 25%. (Calculations to 2 decimal places)
A

5.00%

5.71%

8.00%

8.71%

Q6. If we have a redeemable loan note repayable at par ($100) in one year with a coupon rate of
6% which is currently trading at $95. What is the cost of debt if the tax rate is 30% (to 2 decimal
places).
A

9.68%

4.20%

5.00%

10.00%

Q7. Given that we expect the growth rate of dividends to be 5% and the current market value of
the share is $4.5 ex div. What is the cost of equity if the dividend paid this year is 55c?
A

5.00%

10.83%

12.83%

17.83%

Q8. What is the cost of capital of a bank loan with an interest charge of 10% per annum. Tax is
payable at 35%
A

5.0%

6.5%

10.0%

Unable to be calculated

Q9. Given the following information what is the WACC to 2 decimal places?
Market Value

Return

Debt

$4m

6%

Equity

$40m

12%

9%

10.5%

11.0%

11.45%

Q10. Given the following information relating to a convertible debt would the debtholder elect
to convert or redeem the debt in year 4?
The current market value of a share is $4 and the share is expected to rise by 6% per annum.
The debt is convertible into 20 shares in three years or alternatively redeemable at par ($100).
A

Convert

Redeem

Either

Unable to make a decision

Test 3 Paper F9 Financial Management NPV, IRR and investment appraisal methods
Q1. Why is investment appraisal considered such a critical decision for the organisation?
1

Long-term implications to the business

The uncertainty associated with the inflows generated from the investment

The size of the potential investment relative to the size of the business

1 and 2

1 and 3

2 and 3

All of the above

Q2. Which investment appraisal methods primarily assesses the risk of the project?
A

Payback

ROCE

NPV

IRR

Q3. Which investment appraisal method considers the impact of the investment on accounting
profit?
A

Payback

ROCE

NPV

IRR

Q4. Which are the fundamental reason(s) for time value of money?
1. Inflation
2. Opportunity cost of capital
3 Risk
A

1 and 2

2 only

2 and 3

All of the above

Q5. Calculate the IRR from the following information


Discount Rate

5%

12%

NPV

+400

-200

9.66%

8%

10.66%

7.33%

Q6. What is the present value of an annuity of $500 payable over 4 years at 10% commencing in
year 2?
A

$1,309`

$1,441

$1,585

$1,703

10

Q7. Calculate the present value of a perpetuity of $750 at a cost of capital of 8%


A

$6,000

$7,434

$9,375

$10,500

Q8. Calculate the value of $1,250 today in 4 years time at a cost of capital of 9%
A

$1,460

$1,700

$1,764

$1,840

Q9. If the cash inflow per annum are $40,000 and the investment is $110,000 what will the
payback period be?
A

2.0 years

2.5 years

2.7 years

3.0 years

Q10. What is the assumed relationship between net cash inflow per annum and profit?
A

Net cash flow minus depreciation equals profit

Net cash flow plus depreciation equals profit

There is no relationship between the two

11

F9 Test 3 Time value of money, inflation and discounting


Q1. If the question has more than one inflation rate illustrated in the question which combination of
cash flows and rate must be used in the analysis?
A

Real cash flows and real rate

Real cash flows and money rate

Money cash flow and real rate

Money cash flows and money rate

Q2. Which eminent economist provided the formula to convert real to money rate and vice
versa?
A

Keynes

Smith

Fisher

Friedman

Q3. Which specific investment appraisal technique may be only concerned with the present
value of the costs?
A

Capital rationing decision

Asset replacement decision

Sensitivity analysis

Lease or buy decision

12

Q4. If a project has a revenue per annum of $100,000 and a contribution per annum of $25,000
for 4 years and a NPV of $10,000 and the cost of capital is 8%, what is the amount by which the
sales volume may change before the NPV drops to zero?
A

3%

6%

9%

12%

Q5. If a project has a revenue per annum of $100,000 and a contribution per annum of $25,000
for 4 years and a NPV of $10,000 and the cost of capital is 8%, what is the amount by which the
sales price may change before the NPV drops to zero?
A

3%

6%

9%

12%

Q6. Using asset replacement theory which replacement strategy would be selected from the
following at a discount rate of 10%
Project
PV of cost

1
$8,000

Asset life (yrs) 1 year

$13,000

$18,000

2 years

3 years

Project 1

Project 2

Project 3

Cannot be calculated from the above information


13

Q7. In capital rationing if the project can be taken in part and the return is proportionate to the
part undertaken which of the following describes that situation?
A

Non divisible projects

Divisible projects

Mutually exclusive projects

None of the above

Q8. In capital rationing which reasons are there for hard capital rationing?
1. Economy wide factors
2. Company specific factors
3. Internal decisions
A

1 only

1 and 2

2 and 3

All of the above

Q9. If inflation is evident in the question, what is the inflated value of labour in year 4 if we
know that inflation is at 3.5% and the cash flow in real terms is $30,500?
A

$35,000

$34,770

$33,816

$33,703

14

Q10. How is tax relief calculated on a finance lease?


A

25% WDA on the underlying asset

Full relief on the lease payments

100% first year allowance

there is no tax relief on an operating lease

15

F9 Test 5 Ratio analysis and issues of equity


This data relates to question 1-4
A company is investing $70m in a new project and will be funding part of the investment by debt
and the remainder by equity through a rights issue. The current share price is $4 and the market
capitalisation is $200m. The rights issue price will be at a discount of 20% to the current share
price. The rights issue will be on a 1 for 5 basis
Issue costs are expected to be $2m. Current equity gearing (debt/equity) is 40%
Q1 How many new shares will be issued?
A

5 million

10 million

50 million

60 million

Q2 How much gross funding is raised by the rights issue?


A

$16m

$20m

$32m

$40m

Q3 What is the theoretical ex rights price?


A

$3.87

$4.00

$4.64

$5.00

16

Q4 What is the revised equity gearing of the company?


A

40.0%

42.9%

40.7%

41.5%

The following information relates to questions 5 - 10


A company has the following data for the past three years
3

Turnover ($m)

28.0

24.0

22.0

PBIT ($m)

10.0

8.8

7.5

Earnings ($m)

5.4

4.0

3.8

Dividends ($m)

2.3

2.1

2.0

Ordinary shares ($m) (par value 50c)

4.0

4.0

4.0

Reserves ($m)

12.0

10.1

8.3

Long-term debt ($m)

15.0

15.0

15.0

Share price ($)

7.65

4.95

4.08

Q5 What is the ROCE for year 2?


A

14.89%

28.36%

30.24%

82.47%

17

Q6 What is the ROE for year 2?


A

14.89%

28.36%

30.24%

82.47%

Q7 What is the dividend payout ratio for year 1?


A

52.63%

42.59%

52.50%

50.00%

Q8 What is the dividend yield in year 3?


A

7.52%

3.76%

4.23%

6.41%

Q9 What is the total shareholder return for year 2?


A

21.32%

18.36%

27.76%

6.43%
18

Q10 What is the earnings per share in year 3?


A

50c

67.5c

72c

81.5c

19

F9 Test 6 Cost of capital


Q1. Which of the following are necessary pre-requisites for using the WACC measure for
investment appraisal purposes?
1. Similar risk profile
2. Relatively small size of investment
3. Capital structure is unchanged
A

1 and 2

1 and 3

2 and 3

all of the above

Q2. When considering the traditional theory of capital structure which of the following best
describes the impact on the WACC?
A

The WACC is not affected by the Capital Structure

WACC falls as the level of debt finance rises

There is an optimum capital structure at which the WACC is minimised

There is no relationship between Capital structure and the WACC

Q3. Given that a proxy company from the appropriate industry has an equity beta of 1.70 and
currently has a capital structure (debt:equity) of 30:70 what is the industry sector asset beta (tax
rate = 30%)?
A

1.19

1.31

2.21

2.43

20

Q4. What is the risk associated with the asset beta?


A

The risk relating to the systematic or business risk of the industry

The risk of both the financial risk and the systematic risk of the business

The overall risk of the industry including both systematic and unsystematic risk

The quantified risk of the investment returns not being achieved

Q5. If the asset beta for the industry is the 1.6 and the company is financing the project wholly
by equity what will be the equity beta applying to the project?
A

1.0

1.6

2.0

Cannot be determined from the information provided

Q6. What is the WACC given the following information?


Capital structure

(d/e)

Ke

12%

Kd

6%

6%

7.2%

10.8%

12%

20/80

21

Q7. What is the cost of equity if we are given the following information?
Beta

1.1

Rf

4%

Risk premium

5%

9.5%

9.9%

5.1%

4.8%

Q8. Which of the following are assumptions relating to the use of project specific discount
rates?
1

Investors hold a portfolio of shares in proportion to the market portfolio

A risk free return may be earned by investing solely in short-dated government bonds

The risk is calculated in relation to the existing risk suffered by the company

The project is considered as another investment from the investors perspective

1 and 2

1, 2 and 3

2, 3 and 4

1, 2 and 4

22

Q9. In what circumstance is it necessary to use project specific discount rates rather than the
WACC to appraise investments?
A

Different industry sector

New investment

Financial gearing remains unchanged

New technology

Q10. If we know the risk free rate of return is 4% and the return on the investment is 10%. If the
beta of the investment is 0.6 what is the market rate of return?
A

6%

10%

14%

23.3%

23

F9 Test 7 Business finance


Q1. Which profitability measure shows the underlying profitability of the business before
financing?
A

Gross profit margin

Net profit margin

ROCE

ROE

Q2. If you are asked to calculate the financial gearing measure by dividing the debt by equity
what would this be best called?
A

Operational gearing

Capital gearing

Total gearing

Equity gearing

Q3. What does a P/E ratio assess?


A

The cash return from holding a share

The future expected growth in earnings from holding a share

The ability of the company to maintain the dividend

Something else

24

Q4. When raising equity capital as an unlisted company what is the critical initial consideration
that all companies face?
A

The cost of financing the equity

The dilution of existing shareholders wealth

The difficulty attracting new potential shareholders

The transactions cost of raising equity

Q5. When floating (or listing) a company on the stock exchange, which method is associated
with raising no new capital?
A

Bonus issue

Offer for sale

Introduction

Placing

Q6. If the existing share price is $4 and a rights issue is made on a 1 for 4 basis at a discount to
the issue price of 25% what will the theoretical ex-rights price be?
A

$3.0

$3.4

$3.5

$3.8

25

Q7. If a company has an existing share price of $6 and the issue price in a rights issue is $4.5
based on a 1 for 5 issue what is the value of a right per existing share?
A

$0.25

$0.30

$1.23

$1.50

Q8. WhaT factors will affect the dividend cover of a company?


1.
2.
3.
4.
A

Profitability
Cash flow
Dividend Policy
Legal restrictions
1,2 and 4

1,3 and 4

2,3 and 4

All of the above

Q9. If a company is unlisted which of the following are ways that it may raise equity capital?
1

friends and family

venture capital

bonus issue

rights issue

1 and 2

1,2 and 3

1,2 and 4

All of the above

26

Q10. If a company wishes to list by offering shares to the widest range of possible investors
what method of listing would it use?
A

Offer for sale

Placing

Introduction

Rights issue

27

F9 Test 8 Sources of finance and Working capital management


Q1.

What type of finance is described below

The finance has a redemption date when issued. It provides funding for at least one year and it
offers a fixed return and the cash return is tax deductible.
A

Overdraft

Bonds

Preference shares

Equity

Q2.

What type of finance is described below

The investors are part owners in the business and normally enjoy full voting rights. The cash
return from this investment is not tax deductible
A

Overdraft

Bonds

Preference shares

Equity

Q3. What is being described below


An option to buy shares in the future at a pre-determined price and on a fixed date. These may
be linked to bonds to make them more attractive
A

Convertibles

Leases

Ordinary shares

Warrants

28

Q4. As a small unlisted company which of the following are most likely sources of finance
1. Debentures
2. Government grants
3. Retained earnings
4. Convertible debt
A

1, 2 and 3

2 and 3

1, 3 and 4

2 and 4

Q5.

What are the three services provided by a factor

Finance, debt collection and administration and credit assessment

Management of working capital, administration and debt collection and finance

Credt assessment, management of working capital and debt collection

Finance, debt collection and administration and credit insurance

Q6 What are the two conflicting issues when managing working capital
A

Profitability and liquidity

Current assets and current liabilities

Inventory management and payment terms

Receivables and payables

29

Q7 What is the following type of finance?


Finance provided normally relating to a specific asset which allows the use of the asset without
any ownership rights. The term may from a few days up to the effective life of the asset.
A

Hire purchase

Variable rate loan

Finance lease

Operating lease

Q8 What are the specific symptoms of overtrading from the following list
1

Substantial increase in overdraft

Increase in activity with no corresponding increase in permanent funds

Higher levels of inventory

Extended payable days

Extended receivables days

1,2, 3 and 5

1,2 and 4

1,3 and 4

2,3 and 5

30

Q9 What measures could be identified when a company assesses the credit status of a new
customer
1. Trade references
2. Published accounts
3. Credit rating agencies
4. Bank references
A

1, 2 and 4

1, 3 and 4

2 and 3

All of the above

Q10
A company has sales of $75m and its customers take on average 100 days to pay. The overdraft
rate is 7%. By how many days would the company have to decrease the receivables days by to
reduce the cost of receivables to below $1m.
A

30 days

31 days

69 days

71 days

31

F9 test 9 Working Capital Management


Q1. A company has to decide whether to use a factor to collect receivables. It currently collects
the receivables over an average of 80 days and the current sales of the company are $50m.
If the company factors the debt then it is expected that there will be cost saving in the
administration of the credit control of $400,000. The use of a factor is expected to reduce the
receivables collection period by 20 days. The factor charges a fee of 1.2% of sales value for its
services.
The current overdraft rate is 10%
Required: Calculate the net benefit/(cost) of factoring the debts
A

Saving $619,178

Saving $19,178

Cost ($380,822)

Cost ($600,000)

Q2. In the EOQ model which of the following cost is assumed to be zero
A

Ordering costs

Holding costs

Stock-out costs

Purchase costs

32

Q3 A company may either use the EOQ or alternatively it may order 1,000 units per order. If it
orders 1,000 units it will benefit from a trade discount of 2% of sales value.
Ordering cost

$15/ order

Holding cost

$40/ unit per annum

Purchase cost (without discount)

$10/unit

Monthly demand

5,000 units

Required: what is the benefit/(cost)of adopting the trade discount?


A

Benefit $12,415

Benefit $415

Cost

($415)

Cost

($12,000)

Q4 Which of the following are not likely to be benefits of adopting just in time purchasing
arrangements with suppliers
A

Reduced inventories of raw materials

Wide range of supplier choice

Increased quality of materials delivered

Closer links between suppliers and customer

33

The following information relates to question 5 to 7.


The minimum cash balance is $30,000. The standard deviation of the daily cash flows is $5,000.
The transaction cost is $50 for en-cashing and investing funds and the annual interest rate is
10.95%
Required

Q5. The spread (to the nearest $)


A

$13,876

$14,620

$25,789

$34,873

Q6. The upper limit (to the nearest $)


A

$34,873

$46,620

$51,962

$69,746

Q7. The return point (to the nearest $)


A

$14,620

$25,789

$46,620

$34,873

34

Q8. A company generates a surplus of $120,000 per annum. The interest rate available to short
term investments is 5% per annum. Transaction costs are $50 for investing in short-term
securities.
Required: using the Baumol model what is the amount that should be invested in short term
securities in each transaction (to the nearest $)
A

$12,000

$15,492

$18,000

$18,342

Q9. When a company is considering whether to finance its working capital it may consider longterm or short-term sources. Which of the following would be considered advantages of using
short-term funding?
1. Cheaper financing cost
2. Relatively easy to arrange
3. Secure over time
4. Matching concept
A

1 and 2

3 and 4

1, 2 and 3

1, 2 and 4

35

Q10. What overall measure of working capital would best illustrate the efficiency of the
organisation?
A

Current ratio

Quick (acid test) ratio

Receivables days

Operating cycle

36

F9 Test 10 Valuation and Risk


Q1 Company A has an earnings yield of 8% and currently generates $20m per annum profit after
tax. It is being considered as a takeover target by another company, B, that believe that they will
be able to generate cash savings of $5m before tax. Corporation tax is at 30%
What is the value of company A to company B using the earning yield method?
A

$200m

$250m

$293.75m

$312.5m

The following information relates to questions 2 5


The information below relates to company C
Current earnings per share

50c

Dividend payout ratio

40%

Dividend 3 years ago

15c

Equity risk premium

6%

Risk free return

6%

Equity beta for C

1.3

Required

Q2 What is the current dividend for company C?


A

20c

15c

30c

50c
37

Q3 What is the expected annual growth rate for dividends given that the average method is
used?
A

7.6%

10.1%

11.1%

13.3%

Q4 What is the current cost of equity for Company C using the CAPM?
A

6%

12%

13.8%

15.6%

Q5 What is the share price valuation of Company C using the dividend valuation model?
A

145c

159c

541c

595c

38

The following information relates to questions 6 9


Z Company, a company that trades in $s, has made a sale in a European country for 300,000
receivable in 3 months time. It has the following information.
Spot rate

$: 1.2505

Three month forward rate

$: 1.2707

Money market rates per annum for Z company are


Borrowing

Deposit

Dollar interest rate

4.8%

4.5%

Euro interest rate

4.1%

3.7%

Q6 What risk is illustrated in this question?


A

Economic risk

Transaction risk

Translation risk

Political risk

Q7 Using the forward market hedge what should the company receive in dollars?
A

$236,090

$239,904

$375,150

$381,210

39

Q8 Using the money market hedge method what should the company receive in dollars?
A

$239,252

$374,131

$371,212

$352,751

Q9 Considering the information in the question which statement is true?


A

Dollar is appreciating against the euro

Both currencies are appreciating

Euro is appreciating against the dollar

It is not possible to tell

Q10 Which of the following hedging techniques will assist in hedging interest rates over the
long-term?
A

Swaps

Forward rate agreement

Interest rate guarantee

Interest rate futures

40