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ACCA F9 Workbook
Lecture 1
Financial Strategy
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ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com
EPS - Illustration 2
2010 2011
$‘000 $‘000
1. The 3 main areas of the business that Finance Managers plan are:
6. ABC Co. Paid out a dividend of 35c last year and 42c this year per share. Their share
price has increased from $4.33 to $5.24 in that time. What is the percentage shareholder
return in the current year.
A. 20.00%
B. 21.10%
C. 30.72%
D. 24.39%
1 $4.50 82c
2 $4.71 84c
3 $3.85 86c
8. In order for dividends to be paid a company must have made profits in the current year.
Answer FALSE
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9. Miller and Modigliani stated in their theory that dividends were ..........................
10. If a company does not pay dividends then the result will be
12. The ‘Bird in the hand’ argument refers to the fact that
A. Investors prefer a dividend now rather than later as there is a risk that the company
could not pay a dividend at all.
B. Managers prefer not to pay a dividend as they can re-invest the cash saved into new
investments.
C. The government want the company to pay their tax on time.
D. The company has an ethical policy to look after any injured birds they might find.
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14. A company can reward investors through script dividends without paying out any cash.
16. A ‘share buy back scheme’ refers to a situation where a company buys back it’s own
shares from shareholders and then cancels those shares.
18. A company may decide not to pay a dividend for which of the following reasons
19. Investors would like to see a company pay a steadily rising dividend growing at a rate
in excess of inflation.
20. Which of the following is an assumption of Miller and Modigliani’s dividend irrelevancy
theory?
8. Why did Miller & Modigliani say that dividends were irrelevant?
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!
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Lecture 2
Performance
Measurement
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X1 X2 X3
Tax 120 90 50
Using the information on the previous page calculate and comment on the following
Ratios:
1. In the ROCE calculation what are the 3 ways of calculating Capital Employed?
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Lecture 3
Finance Sources
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The share price is currently $5.50 and ABC intends to raise $5m.
There are currently 6.25m shares in issue and ABC is offering a 1 for 5 rights issue.
1. Which of the following is NOT something a company will consider when choosing a
source of finance?
3. Which of the following are advantages to a company of being listed on the stock
exchange?
A. 1 and 2
B. 2 and 3
C. 2 and 4
D. 1 and 3
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4. Which of the following are disadvantages to a company of being listed on the stock
exchange?
A. 1 and 2
B. 2 and 4
C. 3 and 4
D. 1 and 4
5. A company has 10m shares in issue at a share price of $7 and undertakes a rights issue
of 1 for 5 to raise $12m. What is the Theoretical ex-rights price?
A. $6.17
B. $6.83
C. $6.00
D. $6.44
A. All of the new Shares being issued to one large institutional investor.
B. An offering of new shares to all investors in the market to enable them to purchase
them if they wish.
C. Offering shares to current shareholders in the same proportion as they currently own
them.
D. An issue to current shareholders of shares instead of dividends.
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A. All of the new Shares being issued to one large institutional investor.
B. An offering of new shares to all investors in the market to enable them to purchase
them if they wish.
C. Offering shares to current shareholders in the same proportion as they currently own
them.
D. An issue to current shareholders of shares instead of dividends.
A. Shareholders
B. Banks
C. The market
D. The government
10. Which of the following is NOT a function of the treasury department in a company?
5. A company has 10m shares in issue at a share price of $7 and undertakes a rights issue
of 1 for 5 to raise $12m. What is the Theoretical ex-rights price?
6. What is an IPO?
8. What is a placing?
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Lecture 4
Economic
Environment
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A. Full employment.
B. Price stability.
C. High, stable growth.
D. Low consumer prices.
1. Wage increases.
2. Rising cost of commodities.
3. Sales tax decreases.
4. High demand in the economy
A. 1 and 2
B. 2 and 4
C. 3 and 4
D. 1 and 4
3. Fiscal policy can be described as tax revenues raised by the government and spent on
services and subsidies for the public.
Is this statement
A. TRUE
B. FALSE
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A. 1 and 2
B. 2 and 4
C. 3 and 4
D. 1 and 4
5. Which of the following might cause policy makers to decide to decrease interest rates?
A. 1 and 2
B. 2 and 3
C. 3 and 4
D. 1 and 4
7. How can financial intermediaries help to make the market more efficient?
A. By buying commodities from sellers and trading them on the commodities exchange.
B. By providing insurance on transactions for buyers and sellers.
C. By providing finance to enable transactions to take place.
D. By selling foreign currency on the currencies exchange.
7. How can financial intermediaries help to make the market more efficient?
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Lecture 5
Working Capital
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Balance Sheet
$‘000
ASSETS
Inventory 300
Receivables 200
Cash 300
1800
LIABILITIES
Reserves 200
Payables 100
Overdraft -
1800
Income Statement
$‘000
Revenue 1000
COS 800
Other Information:
Required:
Show the journal entries and calculate the Revised Balance sheet if the operating cycle
changes to:
Item Days
Less:
Payables Period 30
270
Show the journal entries and calculate the Revised Balance sheet if the operating cycle
changes to:
Item Days
Inventory Period 90
Collection Period 30
Less:
Payables Period 60
60
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1. Which of the following are components of working capital within the financial
statements:
A. 1 and 2
B. 2 and 3
C. 3 and 4
D. 2 and 4
A 103 days
B 131 days
C 235 days
D 31 days
4. If inventory days go up from 100 to 150 the company will need to invest more cash in
the business.
Is this statement:
A. TRUE
B. FALSE
5. Which of the following statements concerning working capital management are correct?
1 The twin objectives of working capital management are profitability and liquidity
2 A conservative approach to working capital investment will increase profitability
3 Working capital management is a key factor in a company’s long-term success
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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6. Which of the following statements concerning working capital management are correct?
1 The twin objectives of working capital management are profitability and liquidity
2 A aggressive approach to working capital investment will increase profitability
3 Working capital management is not a key factor in a company’s long-term success
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 concerning working capital management are correct?
1 The twin objectives of working capital management are profitability and liquidity
2 A moderate approach to working capital investment will increase profitability
3 An aggressive approach to working capital investment uses more long term finance than
short term.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
8. Which of the following statements concerning working capital management are correct?
1 A conservative approach to working capital investment employs uses long term finance
to finance some fluctuating current assets.
2 An aggressive approach to working capital investment will increase profitability
3 Working capital management has no effect on profitability of the company.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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5. If my inventory days go up from 100 to 150 will I need to invest more or less cash in the
business?
10. What are the advantages of a conservative working capital financing policy?
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Lecture 6
Managing
Receivables
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Receivables - Illustration 1
New Policy
Receivables - Illustration 2
A factor has offered to take over the administration of trade receivables on a non-recourse
basis for an annual fee of 3% of credit sales. The factor will maintain a trade receivables
collection period of 30 days and Gorwa Co will save $100,000 per year in administration
costs and $350,000 per year in bad debts. A condition of the factoring agreement is that
the factor would advance 80% of the face value of receivables at an annual interest rate of
7%. The current overdraft rate is 5%
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A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
2. Which of the following are benefits of a company offering a discount to customers for
early payment of invoices?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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3. The management of XYZ Co has annual credit sales of $20 million and accounts
receivable of $4 million. Working capital is financed by an overdraft at 12% interest per
year. Assume 365 days in a year.
What is the annual finance cost saving if the management reduces the collection period to
60 days?
A $85,479
B $394,521
C $78,904
D $68,384
1. It can be expensive.
2. It creates a bad impression with customers because the debt is collected by the factor.
3. It can increase the liquidity of the company.
4. It can lose the goodwill of customers.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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8. How can a company seek to ensure that foreign receivables are collected?
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Lecture 7
Inventory
Management
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EOQ - Illustration 1
Holding cost per year of 10% of the purchase price of the goods.
The current policy is to order 100,000 units when the inventory level falls to 35,000 units.
Forecast demand to meet production requirements during the next year is 625,000 units.
The cost of placing and processing an order is €250, while the cost of holding a unit in
stores is €0·50 per unit per year. Both costs are expected to be constant during the next
year. Orders are received two weeks after being placed with the supplier. You should
assume a 50-week year and that demand is constant throughout the year.
Required
Calculate the minimum total cost with a discount of 1% given on orders of 1500 and over
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1. Which of the following types of cost we are seeking to minimise by using the Economic
Order Quantity?
2. If a company uses the Economic Order Quantity as the level at which to order, how will
they calculate total ordering costs for the year?
3. ABC Co. sells widgets and expects annual demand of 3.4m units. The cost of making
an order is $49.71 and the cost of holding one unit for one year is $0.50.
A. $5,687.34
B. $6,413.81
C. $6,500.54
D. $6,430.32
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3. ABC Co. sells widgets and expects annual demand of 1.2m units. The cost of making
an order is $25.21 and the cost of holding one unit for one year is $0.50.
A. $2,850
B. $3,750
C. $2,450
D. $2,750
4. Layla Co. sells 200m wigs in a year with each order taking 15 days to be delivered once
made. They make an order every time their stock levels reach 10m wigs.
A. 1,780,822
B. 6,666,666
C. 9,333,333
D. 2,345,632
5. Which of the following are drawbacks of a company using the Economic Order Quantity
method of stock management?
A 1, 2 and 4 only
B 1 and 3 only
C All of the above
D 1, 2 and 3
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6. Stavros Co’s current inventory policy is to order 60,000 units when the inventory level
falls to 55,000 units. Forecast demand to meet production requirements during the next
year is 800,000 units. The cost of placing and processing an order is $90, while the cost
of holding a unit in stores is $1 per unit per year. Both costs are expected to be constant
during the next year. Orders are received three weeks after being placed with the
supplier. You should assume a 50-week year and that demand is constant throughout
the year.
A. $12,000
B. $6,000
C. $7,000
D. $19,000
6. What are the steps in calculating the total costs when there is a buffer stock?
8. Why might we not use the EOQ when there are bulk discounts available?
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Lecture 8
Cash Management
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A business expects to move 500,000 from it’s interest bearing account into cash over the
course of one year.
How much should the business transfer into cash each time it makes a transfer?
Using the information in illustration 1 calculate the total cost to the business each year of
their cash management policy.
The fixed cost of converting securities into cash is $264.50 per conversion.
If a company must maintain a minimum cash balance of £8,000, and the variance of its
daily cash flows is £4m (ie std deviation £2,000). The cost of buying/ selling securities is
£50 & the daily interest rate is 0.025 %.
Calculate the spread, the upper limit & the return point
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1. Which of the following are the reasons for a company to hold cash?
1. Speculation
2. Persuasion
3. Transaction
4. Reaction
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
2. Revaile Co. has annual transactions of $30 million. The fixed cost of converting
securities into cash is $500 per conversion. The annual opportunity cost of funds is 6%.
What is the optimal deposit size?
A. $21,213
B. $42,426
C. $707,107
D. $42.43
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. If a company must maintain a minimum cash balance of £20,000, and the variance of its
daily cash flows is £6.25m (ie std deviation £2,500). The cost of buying/ selling
securities is £80 & the daily interest rate is 0.035 %.
7. Why does the Miller-Orr model tell us to buy securities with extra cash?
9. If the interest rate is 8% what figure should be included in the Miller-Orr model for i?
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Lecture 9
Investment
Appraisal I
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ARR - Illustration 1
ABC Ltd are considering expanding their internet cafe business by buying a business
which will cost $275,000 to buy and a further $175,000 to refurbish.
1 45,000
2 75,000
3 80,000
4 50,000
5 50,000
6 60,000
The equipment will be depreciated to a zero resale value over the same period and,
after the sixth year, they can sell the business for $200,000
A business is considering investing in a new project. They have already spent $20,000 on
a feasibility study which suggests that the project will be profitable.
The headquarters of the company has spare floor space which will be allocated to the
project with $7,000 of the current monthly rent allocated to the project.
New equipment costing $2.5m will have to be bought and will be depreciated on a straight
line basis over 10 years.
A manager who earns $30,000 per year and currently runs a similar project will also
manage the new project taking up 25% of his time.
State whether each of the following items are relevant cash flows and explain your answer.
Year 1: ! $1,200,000
Year Cash-Flows
1 5,000
2 7,000
3 8,000
4 10,000
5 11,000
6 9,000
Calculate the present value of the cash flows for each of the six years and in total.
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Year Cash-Flows
1 5,000
2 5,000
3 5,000
4 5,000
5 5,000
6 5,000
Calculate the present value of the total cash flows for the six years
1. JoJo Ltd are considering investing in a new project which will cost an initial $375,000
and they expect the following cash to come in:
The investment will be depreciated to a scrap value of $175,000 over the period of the
project.
What is the Accounting Rate of Return (Return on Capital Employed) of the project?
A. 6%
B. 3%
C. 18%
D. 12%
2. Which of the following are weaknesses of the Accounting Rate of Return (Return on
Capital Employed)?
A 1, 2 and 4
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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3. Aldios Co. intends to make an investment of $4.5m in a project lasting 5 years. The
project cashflows are forecast to be as follows:
The investment will be depreciated to a scrap value of $1.5m over the period of the
project.
A. 3 Years 4 months
B. 2 Years 6 months
C. 4 Years 2 months
D. 2 Years 4 months
4. Jpeg Co. uses a real discount rate of 8%. They are carrying out an investment appraisal
using an inflation rate of 5%.
What discount rate should be used to discount the cash flows for the project:
A. 8%
B. 5%
C. 13%
D. 11%
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9. If the real discount rate is 7% and inflation is running at 3% what is the nominal/money
discount rate?
10. If I am going to receive $8,000 per year for 6 years and my cost of capital (discount
rate) is 8% what is the present value of the total of these cash-flows?
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Lecture 10
Investment
Appraisal II
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WDA - Illustration 1
After the 4 year project the equipment can be sold for $25.
A business requires the following working capital investment into a four year project:
NPV - Illustration 3
I. Sales will be $100,000 in the first year and are expected to increase by 5% per year.
II. Costs will be $50,000 and are expected to increase by 7% per year.
III. Capital investment will be $200,000 and attracts tax allowable depreciation of the full
value of the investment over the 5 year length of the project.
IV. The tax rate is 30% and tax is payable in the following year.
V. Working Capital invested will be 20% of projected sales for the following year.
VI. General inflation is expected to be 3% over the course of the project and the business
uses a real discount rate of 9%.
1. Asfor Co. plans to undertake a project with an initial investment of $5m. The inflation
adjusted cash flows expected from the project are as follows:
Year $
1 $1.2m
2 $1.8m
3 $2.1m
4 $2.2m
5 $2.5m
Asfor Co. uses a real discount rate of 6% and general inflation is expected to be 5% per
year for the duration of the project.
A. $8,178
B. $8,108
C. $2,010
D. $7,010
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2. Asfor Co. plans to undertake a project with an initial investment of $16m. The cash flows
(profit) before inflation expected from the project are as follows:
Year $
1 $4.2m
2 $4.9m
3 $5.5m
4 $5.8m
5 $6.1m
Asfor Co. uses a real discount rate of 10% and general inflation is expected to be 3% per
year for the duration of the project.
A. $417
B. $2,048
C. -$298
D. $2,233
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3. Asfor Co. plans to undertake a project with an initial investment of $16m and a scrap
value of $3m at the end of the project. The cash flows after inflation expected from the
project are as follows:
Year $
1 $4.2m
2 $4.9m
3 $5.5m
4 $5.8m
5 $6.1m
Asfor Co. uses a nominal discount rate of 10%. Inflation is expected to be 3% per year.
The tax rate on profits is 30% payable the following year. Tax allowable depreciation is
available at 25% reducing balance.
A. $1,477
B. $6,945
C. $17,477
D. $3,340
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4. Asfor Co. plans to undertake a project with an initial investment of $10m. The cash flows
(profit) after inflation expected from the project are as follows:
Year $
1 $4.2m
2 $4.9m
3 $5.5m
4 $5.8m
5 $6.1m
The working capital requirement will initially be $1m rising by 5% each year before being
returned at the end of the project.
A. $4,605
B. $9.566
C. $4,097
D. $4,293
Answer D
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5. Asfor Co. plans to undertake a project with an initial investment of $6m and scrap value
of $1m. The sales price per unit in real terms is $30 with cost per unit of $15.
Year Units
1 200,000
2 300,000
3 350,000
4 400,000
5 320,000
The sales are expected to be subject to inflation of 5% with the costs subject to inflation of
3%.
A. $11,079
B. $5,912
C. $4,097
D. $8,111
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6. Asfor Co. plans to undertake a project with an initial investment of $600,000 and scrap
value of $100,000. The sales and costs in real terms are forecast to be
1 200,000 100,000
2 300,000 125,000
3 350,000 155,000
4 400,000 160,000
5 320,000 145,000
The sales are expected to be subject to inflation of 5% with the costs subject to inflation of
3%.
A. -$33,000
B. -$2,000
C. $72,000
D. $107,000
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4. If I have profits in period 2 of $4,000 and a tax rate of 30% how much tax will I pay and
when?
5. If I receive 25% capital allowances and have a tax rate of 20% what will my tax saving
be in each year over a 5 year project if the capital investment is $7,500 with a residual
value of $1,500?
8. If my cash flows in my NPV analysis are inflated should I use the real or the nominal
discount rate?
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Lecture 11
Investment
Appraisal III
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IRR - Illustration 1
1. Which of the following best describes the result of calculating the Internal Rate of Return
of a prospective project?
2. If a project has cash inflows of $5,000 per year for 5 years and had an initial investment
of $17,000 what is the IRR?
A. 14.5%
B. 11.5%
C. 10.0%
D. 15.0%
3. If a project has cash inflows of $6,000 per year for 5 years and had an initial investment
of $23,000 what is the IRR?
A. 11.05%
B. 10.07%
C. 12.07%
D. 9.23%
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4. Which of the following are advantages of using the Internal Rate of Return (IRR) as an
investment appraisal technique?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1 and 4 only
5. Which of the following are disadvantages of using the Internal Rate of Return (IRR) as
an investment appraisal technique?
A 1, 2 and 4
B 2, 3 and 4
C 2 and 3 only
D 1 and 3 only
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3. If a project has cash inflows of $5,000 per year for 5 years and had an initial investment
of $17,000 what is the IRR?
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Lecture 12
Further Appraisal
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A business is considering 2 different projects. The likely profit made from each project is
outlined below:
Project A Project B
The Machine has a useful economic life of 5 years with no scrap value
Finance choices
If the machine is purchased then maintenance costs of $100 per year will be incurred.
Running costs
1. A business is considering 2 different projects. The likely profit made from each project is
outlined below:
Project 1 Project 2
Project 3 Project 4
Which of the projects should be chosen on the basis of the Expected Values?
A Project 1
B Project 2
C Project 3
D Project 4
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2. A company is considering investing in a project with an expected life of four years. The
project has a positive net present value of $280,000 when cash flows are discounted at
12% per annum. The project’s estimated cash flows include net cash inflows of $320,000
for each of the four years. No tax is payable on projects of this type.
A 87.5%
B 21.9%
C 3.5%
D 28.8%
3. A five year investment project has a positive net present value of $320,000 when
discounted at the cost of capital of 10% per annum. The project includes annual net cash
inflows of $100,000 which occur at the end of each of the five years.
A 31.25%
B 118.5%
C 84.4%
D 18.5%
4. Davos Co. intends to lease a machine on a 5 year operating lease for a payment of
$3,500 payable in advance. The tax rate is 30%. The pre-tax cost of borrowing is
15.71%.
What is the present value cost to the business of leasing the machine?
A. $9,440
B. $10,480
C. $10,864
D. $10,974
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5. Davos Co. intends to buy a machine a payment of $2m. Tax allowable depreciation is
allowable over 5 years at 25% reducing balance. The tax rate is 30%. The pre-tax cost
of borrowing is 17.14%. Maintenance costs of $65,000 are payable each year.
What is the present value cost to the business of buying the machine?
A. -$1,786
B. -$1,615
C. -$1,849
D. -$2,172
6. Kevlar Co. has a piece of machinery which cost $40,000 and is trying to decide how
often to replace it based on the Equivalent Annual Cost (EAQ). The following
information relates to the machine.
Running costs
2. How can we deal with each of risk and uncertainty in investment appraisal?
4. Why might a company want to lease an item rather than buy it?
7. If I have a pre-tax borrowing rate of 13% and the tax rate is 25% what is the post-tax
borrowing rate?
10. I have an item of plant costing $30,000 new and $5,000 to maintain each year. The
residual value after 3 years is $7,000 and after 4 years is $5,000. If I have a cost of
capital of 10% after how long should I replace the asset?
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Lecture 13
Further Appraisal II
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A business has identified the following projects. They have $200,000 to invest and the
projects are divisible.
A 90,000 15,000
B 110,000 25,000
C 50,000 10,000
D 75,000 22,000
E 70,000 -8,000
A business has identified the following projects. They have $200,000 to invest and the
projects are non-divisible.
A 90,000 15,000
B 110,000 25,000
C 50,000 10,000
D 75,000 22,000
! ! ! ! NPV Duration
A 0.38
B 0.54
C 0.28
D 0.26
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2. A company has a maximum of $80 million available for investment and seven
independent projects in which it could invest as follows:
A 10 4.20
B 40 6.10
C 20 8.50
D 40 13.70
E 50 3.80
F 20 4.90
G 20 4.33
None of the projects can be carried out more than once. Each project is divisible therefore
investment in part of a project can be undertaken.
What is the maximum NPV that could be achieved from investing the $80m using the
Profitability Index?
A. $28.85
B. $31.3m
C. $45.53m
D. $26.4m
A. A limited amount of capital is available to the company due to external factors such as
banks unwillingness to lend.
B. A limited amount of capital is available to the company due to internal factors such as
management unwillingness to take more risk.
C. Extra capital is available to the company due to external factors such as banks who are
keen to lend.
D. Extra capital is available to the company due to internal factors such as excess cash
from operations.
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A. A limited amount of capital is available to the company due to external factors such as
banks unwillingness to lend.
B. A limited amount of capital is available to the company due to internal factors such as
management unwillingness to take more risk.
C. Extra capital is available to the company due to external factors such as banks who are
keen to lend.
D. Extra capital is available to the company due to internal factors such as excess cash
from operations.
2. If the projects are divisible,which method should be used to decide which projects to
undertake?
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Lecture 14
Business Valuations
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Reserves 200,000
The Market Value of property in the Non Current Assets is $50,000 more than the book
value.
What is the value of a 70% holding using the net assets valuation basis?
DVM - Illustration 2
DVM - Illustration 3
Calculate the Value of the business using the dividend valuation method.
X1 X2 X3
Tax 120 90 50
Calculate the Value of the Company for each of the 3 years using the P/E Ratio
method.
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X1 X2 X3
Tax 120 90 50
Number of Shares 3m 3m 3m
Calculate the Value of the Company for each of the 3 years using the EPS you
calculate.
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X1 X2 X3
Tax 120 90 50
Number of Shares 4m 4m 4m
Calculate the Earnings Per Share for each of the 3 years and the share price using the
earnings yield.
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They expect this to increase in each of the next 5 years by 5% and after that to increase
by 2% forever.
Calculate the value of the company using the present value of future cash flows method.
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1.
Reserves 300,000
The Market Value of property in the Non Current Assets is $100,000 more than the book
value.
What is the value of a 80% holding using the net assets valuation basis?
A. $730,000
B. $664,000
C. $584,000
D. $444,000
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2. ABC Co. has Share Capital made up of 50c shares of $5 million. They have just
paid a dividend per share of 50c and paid a dividend per share four years ago of 35c.
The cost of capital is 14%.
Calculate the Value of the business using the dividend valuation method.
A. $343.6m
B. $389.3m
C. $109.3m
D. $54.65m
3. SKV Co has paid the following dividends per share in recent years:
The dividend for 2013 has just been paid and SKV Co has a cost of equity of 12%.
Using the geometric average historical dividend growth rate and the dividend growth
model, what is the market price of SKV Co shares to the nearest cent on an ex
dividend basis?
A $4·67
B $5·14
C $5·40
D $6·97
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$‘000
Revenue 3000
COS 2000
Number of Shares 1m
Share Price $5
What is the the Value of the Company Using the P/E ratio calculation?
A. $5m
B. $7.5m
C. $8m
D. $5.5m
They expect this to increase in each of the following 4 years by 8% and after that to
increase by 4% forever.
Calculate the value of the company to the nearest $‘000 using the present value of future
cash flows method.
A. $1,902,000
B. $2,795,000
C. $1,340,000
D. $3,675,000
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They expect this to increase in each of the following 4 years by 7% and after that to
increase by 3% forever.
Calculate the value of the company to the nearest $‘000 using the present value of future
cash flows method.
A. $7,569,000
B. $9,638,000
C. $8,137,000
D. $11,790,000
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2. What are the downsides of using the Net Assets Valuation method?
3. A company pays a constant dividend of 50c and has a cost of capital of 13%. Calculate
the share price using DVM.
4. A company pays a dividend of 50c and paid a dividend of 40c 4 years ago. The
company has a cost of capital of 13%. Calculate the share price using DVM.
6. Why do we use a proxy P/E Ratio when valuing a business with this method?
8. The industry average P/E ratio for the fashion industry is 13. We are valuing an unlisted
fashion business who have an EPS of 22c and 12m shares in issue. What is the value
of the firm?
10. A business is expected to earn $250,000 this year that is expected to grow at 4%
forever. What is the value of the business using the present value of future cash flows
if their cost of capital is 14%?
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Lecture 15
WACC I
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The dividend paid has grown by 4% per year for the past 5 years.
The average return than investors in the market can expect is 15%.
The average return than investors in the market can expect is 12%.
1. Entrie Company has just paid a dividend of 75c. The dividend paid has grown by 3%
per year for the past 4 years. The current share price is $6.54
A. 12%
B. 15%
C. 7%
D. 11%
2. Company Alpha has a Beta of 1.1.Government bonds are currently trading at 4%.
The average market risk premium is 7%.
What is the cost of equity using the capital assets pricing model?
A. 12.2%
B. 11.7%
C. 7.3%
D. 11.4%
3. Which of the following statements about ‘systematic risk’ are correct when referring
to the capital assets pricing model?
A. Systematic risk affects the overall market, not just a particular stock or industry.
B. Systematic risk is company or industry specific risk.
C. Systematic risk is risk that can be diversified away by investors.
D. Systematic risk is determined by the gearing of the company.
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4. Which of the following statements about ‘unsystematic risk’ are correct when
referring to the capital assets pricing model?
A. Systematic risk affects the overall market, not just a particular stock or industry.
B. Systematic risk is company or industry specific risk.
C. Systematic risk is risk that can be diversified away by investors.
D. Systematic risk is determined by the gearing of the company.
5. Which of the following are assumptions made by the capital asset pricing model
(CAPM) are correct?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1 and 4 only
6. Which of the following are downsides of the capital assets pricing model (CAPM) are
correct?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1 and 4 only
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4. If a company has a dividend of 40c and a share price of $3.45 what is the cost of
equity?
6. What are the two types of risk mentioned in the CAPM lecture?
11. A company has a Beta of 1.3. The market risk premium is 6% and government bonds
are trading at 4%. Calculate the cost of equity using CAPM.
12. Is a company with a Beta of 1.2 a more risky or less risky investment than a company
with a Beta of 1.6?
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Lecture 16
WACC II
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Ignore taxation.
The current share price is $6 and it is expected to grow in value by 4% per year.
WACC - Illustration 7
Debt 15% 7%
WACC - Illustration 8
The cost to the company of each of the above items has been calculated as:
Loan Notes 8%
Bank Loan 5%
WACC - Illustration 9
The company has an equity beta of 1.2. Government bonds are currently trading at 6%
and the average market risk premium is 7%.
The Loan notes are currently trading at $106 and are redeemable at par in 5 years time.
1. Avecas Co. has irredeemable debt in issue that interest at a rate of 12%. The market
value of the debt is $84 and the tax rate is 30%.
A. 14%
B. 12%
C. 10%
D. 11%
2. A company has 10% irredeemable debt in issue at a market value of $97. If the tax rate
is 30% what is the cost of the debt?
A. 7.2%
B. 9.7%
C. 6.5%
D. 8.2%
3. A Company has issued debt which is redeemable in 5 years time. Interest is payable at
12%. The current market value of the debt is $102. Tax is payable at 30%.
What is the cost of debt (kd) using linear extrapolation and discount rates of 5% and 15%
in the calculation?
A. 12.00%
B. 8.47%
C. 9.00%
D. 7.24%
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4. A company has 5 year 8% redeemable debt in issue at a market value of $103. The tax
rate is 25%.
What is the cost of debt (kd) using linear extrapolation and discount rates of 5% and 15%
in the calculation?
A. 6.26%
B. 5.95%
C. 7.19%
D. 5.4%
5. Jeeves Company has issued debt which is convertible in 5 years time. Interest is
payable at 12% and the current market value of the debt is $108.
The current share price is $7 and it is expected to grow in value by 3.5% per year.
A. Based on the information available, investors would be better off choosing to take the
cash option by $6.39.
B. Based on the information available, investors would be better off choosing to take the
conversion option by $6.39.
C. Based on the information available, investors would be indifferent between the cash and
conversion option.
D. Based on the information available, investors would be better of choosing to take the
cash option by $8.94.
6. A company has 8% preference share in issue at a current value of 94c. The tax rate is
30%. What is the cost of the preference shares?
A. 8.5%
B. 6.0%
C. 8.0%
D. 5.6%
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7. A company has a bank loan of $7m at a rate of 6%. The tax rate is 35%. What is the
cost of the bank debt?
A. 6.0%
B. 2.1%
C. 3.9%
D. 4.2%
The cost to the company of each of the above items has been calculated as:
Loan Notes 7%
Bank Loan 6%
A. 11.56%
B. 16.19%
C. 13.34%
D. 17.24%
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4. A company has 10% irredeemable debt in issue at a market value of $97. If the tax rate
is 30% what is the cost of the debt?
5. A company has 5 year 8% redeemable debt in issue at a market value of $103. The tax
rate is 25%. What is the cost of the debt?
6. A company has 10% convertible debt in issue at a market value of $111 that is
redeemable in 5 years at either cash or 5 shares per nominal. The current share price is
$18 and is expected to grow at 2%. The tax rate is 30%. What is the cost of debt?
7. A company has 8% preference share in issue at a current value of 94c. What is the cost
of the preference shares.
8. A company has a bank loan of $7m at a rate of 6%. The tax rate is 35%. What is the
cost of the bank debt?
9. The company has each of the types of debt in questions 4 to 6 on their balance sheet at
a book value of $10m for each of them except for the bank debt which is on the balance
sheet at $7m. If the company has a market value of $110m with a cost of equity of 14%
then what is the company’s weighted average cost of capital?
10. What if the company has each of the types of debt in questions 4 to 6 on their balance
sheet at a book value of $8m for each of them except for the bank debt which is on the
balance sheet at $7m. If the company has a market value of $99m with a cost of equity
of 12% then what is the company’s weighted average cost of capital?
Lecture 17
Capital Structure
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A company has total capital of $1,000 with debt making up $300 and equity making up
$700 of the total. The company’s cost of debt is 5% and cost of equity is 14%.
A. In the traditional view, there is a linear relationship between the cost of equity and
financial risk
B. Modigliani and Miller said that, in the absence of tax, the cost of equity would remain
constant
C. Pecking order theory indicates that preference shares are preferred to convertible debt
as a source of finance
D. Business risk is assumed to be constant
A. The traditional view of capital structure suggests that the company can minimise their
weighted average cost of capital
B. Modigliani and Miller said that, incorporating tax, the weighted average cost of capital
would remain constant
C. Pecking order theory indicates that preference shares are preferred to convertible debt
as a source of finance
D. Modigliani and Miller said that, incorporating tax, as gearing levels increase so the value
of the company will decrease
3. Which of the following are assumptions that Modigliani and Miller made in their ‘no tax’
model?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1 and 4 only
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4. What does the M&M model with tax suggest a company should do with their capital
structure?
A. As there is greater financial risk at high levels of gearing the company should have as
little debt as possible.
B. As the transaction costs will be high the company should retain their current capital
structure for as long as possible.
C. As taking on more debt reduces the weighted average cost of capital the company
should increase their gearing levels.
D. The company should find the optimum capital structure at which it can minimise its
weighted average cost of capital.
2. What does the traditional view suggest you can do with the WACC?
5. What does the M&M model with tax suggest we should do with our capital structure?
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Lecture 18
Financing &
Investment
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Ignore Tax
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Ignore Tax
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1. Company Alpha is financed with $1,000 of equity and $400 of debt and intends to
undertake a project in an unrelated industry. They have identified Horizon Co. as a
company in the new industry with $700 of equity and $300 of debt. Alpha Co. has a Beta
of 1.3 whereas Horizon Co. has a Beta of 1.2. The risk free rate is 4% and the average
return on the market is 12%. The tax rate is 30%.
Which of the following would be the project specific discount rate for Alpha Co. when
entering the new industry?
A. 12.34%
B. 10.25%
C. 11.12%
D. 13.42%
2. Company Alpha is financed with 60% equity and 40% debt and intends to undertake a
project in an unrelated industry. They have identified Horizon Co. as a company in the new
industry with 75% equity and 25% debt. Alpha Co. has a Beta of 1.1 whereas Horizon Co.
has a Beta of 1.4. The risk free rate is 6% and the average return on the market is 14%.
The tax rate is 30%.
Which of the following would be the project specific discount rate for Alpha Co. when
entering the new industry?
A. 19.38%
B. 18.00%
C. 17.20%
D. 16.32%
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3. Company Alpha is financed with debt/equity of 1/4 and intends to undertake a project in
an unrelated industry. They have identified Horizon Co. as a company in the new industry
with debt/equity 1/3. Alpha Co. has a Beta of 1.05 whereas Horizon Co. has a Beta of
1.24. The risk free rate is 6% and the average return on the market is 14%. The tax rate is
30%.
Which of the following would be the project specific discount rate for Alpha Co. when
entering the new industry?
A. 16.23%
B. 15.49%
C. 17.26%
D. 18.28%
1. What are the two types of risk included in a company’s equity Beta?
5. Our business has a Beta of 1.2, debt with a market value of 100 and equity with a
market value of 400. If the proxy has a Beta of 1.4, debt with a market value of 100 and
equity with a market value of 200 calculate a project specific discount rate. The risk free
rate is 4% and the average market risk premium is 7%. Ignore tax.
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Lecture 19
More Debt
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Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in five
years’ time.
Alternatively, each bond may be converted on that date into 20 ordinary shares of the
company. The current ordinary share price of Phobis Co is $4·45 and this is expected to
grow at a rate of 6·5% per year for the foreseeable future. Phobis Co has a cost of debt of
7% per year.
Required:
Calculate the following current values for each $100 convertible bond:
(i) market value;
(ii) floor value;
(iii) conversion premium.
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1. Luke Co has 8% convertible loan notes in issue which are redeemable in five years’
time at their nominal value of $100 per loan note. Alternatively, each loan note could be
converted after five years into 70 equity shares with a nominal value of $1 each.
The equity shares of Luke Co are currently trading at $1·25 per share and this share price
is expected to grow by 4% per year. The before-tax cost of debt of Luke Co is 10% and the
after-tax cost of debt of Luke Co is 7%.
What is the current market value of each loan note to the nearest dollar?
A. $92
B. $96
C. $104
D. $109
2. A bond has a coupon rate of 8.5% per annum. The next interest payment will be made
in one year’s time. The bond will repay the par value of $100 when it matures in seven
years’ time. The before-tax cost of debt is 7% and the after-tax cost of debt is 5%.
What is the the expected current market price of the bond to the nearest dollar?
A. $98
B. $93
C. $108
D. $106
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3. A bond has a coupon rate of 6% per annum and will repay its face value of $100 on its
maturity in four years’ time. The yield to maturity on similar bonds is 4% per annum. The
annual interest has just been paid for the current year.
What is the the expected current market price of the bond to the nearest dollar?
A. $96
B. $92
C. $110
D. $107
4. Angus Co has 8% convertible loan notes in issue which are redeemable in five years’
time at their nominal value of $100 per loan note. Alternatively, each loan note could be
converted after five years into 35 equity shares with a nominal value of $1 each. The tax
rate is 30%
The equity shares of Angus Co are currently trading at $2·25 per share and this share
price is expected to grow by 6% per year. The before-tax cost of debt of Luke Co is 10%
and the after-tax cost of debt of Luke Co is 7%.
What is the current market value of each loan note to the nearest dollar?
A. $87
B. $96
C. $98
D. $108
5. A $100 bond has a coupon rate of 8% per annum and is due to mature in four years
time. The next interest payment is due in one year’s time. Similar bonds have a yield to
maturity of 10%.
What is the the expected current market price of the bond to the nearest dollar?
A. $96
B. $94
C. $110
D. $100
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2. What will the capital repaid figure in the IRR calculation be the higher of?
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Lecture 20
Currency Risk I
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You have an invoice to pay to a US business of $1250 and you are a UK business.
You have issued an invoice to a US customer of $2000 and you are a UK business.
ABC Company has entered into a contract whereby they will receive $500,000 from a
US customer in 3 months.
ABC is a UK company.
Calculate the amount of £ ABC would receive under the forward contract.
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How much £ will the transaction cost using a money market hedge?
How much £ will the business receive using a money market hedge?
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1. The home currency of ACB Co is the dollar ($) and it trades with a company in a foreign
country whose home currency is the Dinar. The following information is available:
A 1 only
B 2 only
C Both1 and 2
D Neither 1 nor 2
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3. The date is 31 January 2014 and Avecas Co. has entered into a contract whereby they
will receive $300,000 from a US customer on 01 April 2014. Avecas Co. is a UK company.
What amount in £ will Avecas Co. receive under the appropriate forward contract to the
nearest £.?
A. £181,818
B. £193,548
C. £206,897
D. £495,000
What will the transaction cost Hilasys Co. to the nearest £ using a money market hedge?
A. £181,818
B. £245,700
C. £148,909
D. £150,026
How much to the nearest £ will the Varys receive using a money market hedge?
A. £256,732
B. £294,846
C. £291,206
D. £495,050
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2. UK company receiving $500. Spot rate is $/£ 1.35 - 1.45. How many £ will the company
receive?
3. UK inflation is 5%, US inflation is 2%. The spot rate is $/£ 1.35. What will the FX rate be
in one year’s time?
6. How many £ will a company receive if they take a forward contract at a rate of $/£ 1.55
+/- 0.05 for an amount of $400,000?
7. How does a money market hedge eliminate the foreign currency risk?
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Lecture 21
Currency Risk II
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1. ‘There is a risk that the value of our foreign currency-denominated assets and liabilities
will change when we prepare our accounts.’
A Translation risk
B Economic risk
C Transaction risk
D Interest rate risk
2. Which of the following are advantages of a using a futures contract to hedge foreign
exchange risk?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1 and 4 only
3. Which of the following are disadvantages of a using a futures contract to hedge foreign
exchange risk?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1 and 4 only
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A 1 and 2 only
B 1 and 3 only
C 3 and 4 only
D 1 and 4 only
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1 and 4 only
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7. What is an option?
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Lecture 22
Interest Rate Risk
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1. In relation to hedging interest rate risk, which of the following statements is correct?
A. The flexible nature of interest rate futures means that they can always be matched with
a specific interest rate exposure
B. Interest rate options carry an obligation to the holder to complete the contract at
maturity
C. Forward rate agreements are the interest rate equivalent of forward exchange contracts
D. Matching is where a balance is maintained between fixed rate and floating rate debt
2. Which of the following are disadvantages of using an interest rate swap to hedge
interest rate risk?
1. There is a risk that one of the parties fails to pay their side of the swap.
2. It is a reversible agreement.
3. The decision to move into the swap may be the wrong decision as interest rates may
change unexpectedly.
4. The transactions costs can be very high.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1 and 4 only
3. Which of the following statements are correct in reference to using an ‘over the counter’
interest rate option to manage interest rate risk?
A. It constitutes an contract with a bank to secure a specific interest rate no matter what
happens.
B. It is an agreement with a bank that ensures that the company can take advantage of
low rates, but secure against high rates.
C. It is an exchange traded contract that can be closed out at any time.
D. It enables the company to swap from a fixed interest rate to a floating rate or vice-versa.
ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com
4. In relation to hedging interest rate risk, which of the following statements is correct?
A. The flexible nature of interest rate futures means that they can always be matched with
a specific interest rate exposure
B. Interest rate options carry an obligation to the holder to complete the contract at
maturity
C. Forward rate agreements are the interest rate equivalent of money market hedging of
foreign exchange risk
D. Smoothing is where a balance is maintained between fixed rate and floating rate debt
A 1, 2 and 3 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 4 only
ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com
1. What internal methods may a firm use to manage interest rate risk?
2. What is an FRA?
3. Why might a firm use an interest rate option to manage interest rate risk?
8. What are the three ways in which theorists have sought to explain the slope of the yield
curve?
Now do it!
ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com
Lecture 23
Islamic Finance
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ACCA F9 Financial Management Full Course Workbook Questions! www.mapitaccountancy.com
Now do it!