June 2013

Q#1
Calculate the net present value of the planned purchase of the new machinery using a nominal (money
terms) approach and comment on its financial acceptability. (14 marks)
(b) Discuss the difference between a nominal (money terms) approach and a real terms approach to
calculatingnet present value. (5 marks)
(c) Identify TWO financial objectives of a listed company such as HDW Co and discuss how each of these
financial objectives is supported by the planned investment in new machinery. (6 marks)
Q#2
(a) Calculate the market value weighted average cost of capital of AMH Co. (12 marks)
(b) Discuss how the capital asset pricing model can be used to calculate a project-specific cost of capital
for AMH Co, referring in your discussion to the key concepts of systematic risk, business risk and financial
risk. (8 marks)
(c) Discuss why the cost of equity is greater than the cost of debt. (5 marks)
Q#3
(a) For the change in working capital policy, calculate the change in the operating cycle, the effect on the
current ratio and the finance cost saving. Comment on your findings. (8 marks)
(b) Discuss the key elements of a trade receivables management policy. (7 marks)
(c) Explain the different types of foreign currency risk faced by a multinational company.
(6 marks)
(d) TGA Co expects to receive 500,000 from export sales at the end of three months. A forward rate of
1687 per $1 has been offered by the companys bank and the spot rate is 1675 per $1. TGA Co can
borrow short term in the euro at 9% per year.
Calculate the dollar income from a forward market hedge and a money market hedge, and indicate which
hedge would be financially preferred by TGA Co. (4 marks)
Q#4
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)
Dec 2012
Q#1
(a) Calculate the net present value of the proposed investment and comment on its financial acceptability.
Work to the nearest $1,000. (13 marks)
(b) Calculate the before-tax return on capital employed (accounting rate of return) of the proposed
investment on an average investment basis and discuss briefly its financial acceptability. (5 marks)
(c) Discuss the effect of a substantial rise in interest rates on the financing cost of BQK Co and its
customers, and on the capital investment appraisal decision-making process of BQK Co. (7 marks)
Q#2
(a) Calculate the net benefit or cost of the proposed changes in trade receivables policy and comment on
your findings. (6 marks)
(b) Calculate whether the bulk purchase discount offered by the supplier is financially acceptable and
comment on the assumptions made by your calculation. (6 marks)
(c) Identify and discuss the factors to be considered in determining the optimum level of cash to be held by
a company. (5 marks)
(d) Discuss the factors to be considered in formulating a trade receivables management policy. (8 marks)
Q#3
a) Calculate the market value after-tax weighted average cost of capital of BKB Co, explaining clearly any
assumptions you make. (12 marks)
(b) Discuss why market value weighted average cost of capital is preferred to book value weighted
average cost of capital when making investment decisions. (4 marks)
(c) Comment on the interest rate risk faced by BKB Co and discuss briefly how this risk can be managed. (5
marks)

(d) Discuss the attractions to a company of convertible debt compared to a bank loan of a similar maturity
as a source of finance. (4 marks)
Q#4
(a) Calculate the value of GWW Co using the following methods:
(i) market capitalisation (equity market value);
(ii) net asset value (liquidation basis);
(iii) price/earnings ratio method using the business sector average price/earnings ratio;
(iv) dividend growth model using:
(1) the average historic dividend growth rate;
(2) Gordons growth model (the bre model).
The total marks will be split equally between each part. (10 marks)
(b) Discuss the relative merits of the valuation methods in part (a) above in determining a purchase price
forGWW Co. (8 marks)
(c) Calculate the following values for GWW Co:
(i) the before-tax market value of the bonds of GWW Co;
(ii) debt/equity ratio (book value basis);
(iii) debt/equity ratio (market value basis).
Discuss the usefulness of the debt/equity ratio in assessing the financial risk of GWW Co.
June 2012
Q#1
(a) Calculate the net present value of Project 1 and comment on whether this project is financially
acceptable to Ridag Co. (12 marks)
(b) Calculate the equivalent annual costs of Machine 1 and Machine 2, and discuss which machine should
be purchased. (6 marks)
(c) Critically discuss the use of sensitivity analysis and probability analysis as ways of including risk in the
investment appraisal process, referring in your answer to the relative effectiveness of each method. (7
marks)
Q#2
Using suitable working capital ratios and analysis of the financial information provided, evaluate whether
Wobnig Co can be described as overtrading (undercapitalised). (12 marks)
(b) Critically discuss the similarities and differences between working capital policies in the following areas:
(i) Working capital investment;
(ii) Working capital financing. (9 marks)
(c) Wobnig Co is considering using the Miller-Orr model to manage its cash flows. The minimum cash
balance would
be $200,000 and the spread is expected to be $75,000.
Calculate the Miller-Orr model upper limit and return point, and explain how these would be used to
manage the cash balances of Wobnig Co. (4 marks)
Q#3
(a) Discuss the reasons why small and medium-sized entities (SMEs) might experience less conflict
between the objectives of shareholders and directors than large listed companies. (4 marks)
(b) Discuss the factors that Zigto Co should consider when choosing a source of debt finance and the
factors that may be considered by providers of finance in deciding how much to lend to the company. (8
marks)
(c) Explain the nature of a mudaraba contract and discuss briefly how this form of Islamic finance could be
used to finance the planned business expansion. (5 marks)
(d) Calculate whether a forward exchange contract or a money market hedge would be financially
preferred by Zigto Co to hedge its future euro receipt. (5 marks)
(e) Calculate the one-year expected (future) spot rate predicted by purchasing power parity theory and
explain briefly the relationship between the expected (future) spot rate and the current forward exchange
rate. (3 marks)
Q#4
a) Estimate the value of Corhig Co using the price/earnings ratio method and discuss the usefulness of the
variables that you have used. (4 marks)
(b) Calculate the current cost of equity of Corhig Co and, using this value, calculate the value of the
company using the dividend valuation model. (6 marks)
(c) Calculate the current weighted average after-tax cost of capital of Corhig Co and the weighted average
after-tax cost of capital following the new debt issue, and comment on the difference between the two
values. (6 marks)

(d) Discuss how the shareholders of Corhig Co can assess the extent to which they face the following risks,
explaining in each case the nature of the risk being assessed:
(i) Business risk;
(ii) Financial risk;
(iii) Systematic risk. (9 marks)