Applid Skills Financial Managmnt (FM) Sptmbr/Dcmbr 218 Sampl Qustions FM ACCA FM Tim allowd: 3 hours 15 minuts This qustion papr is dividd into thr sctions: Sction A ALL 15 qustions ar compulsory and MUST b attmptd Sction B ALL 15 qustions ar compulsory and MUST b attmptd Sction C BOTH qustions ar compulsory and MUST b attmptd Formula Sht, Prsnt Valu and Annuity Tabls ar on pags 4 6. Do NOT opn this qustion papr until instructd by th suprvisor. Do NOT rcord any of your answrs on th qustion papr. This qustion papr must not b rmovd from th xamination hall. Th Association of Chartrd Crtifid Accountants
Sction C BOTH qustions ar compulsory and MUST b attmptd Plas writ your answrs to all parts of ths qustions on th lind pags within th Candidat Answr Booklt. 31 Mlani Co is considring th acquisition of a nw machin with an oprating lif of thr yars. Th nw machin could b lasd for thr paymnts of $55,, payabl annually in advanc. Altrnativly, th machin could b purchasd for $16, using a bank loan at a cost of 8% pr yar. If th machin is purchasd, Mlani Co will incur maintnanc costs of $8, pr yar, payabl at th nd of ach yar of opration. Th machin would hav a rsidual valu of $4, at th nd of its thr-yar lif. Mlani Co s production managr stimats that if maintnanc routins wr upgradd, th nw machin could b opratd for a priod of four yars with maintnanc costs incrasing to $12, pr yar, payabl at th nd of ach yar of opration. If opratd for four yars, th machin s rsidual valu would fall to $11,. Taxation should b ignord. Rquird: (a) (i) Assuming that th nw machin is opratd for a thr-yar priod, valuat whthr Mlani Co should us lasing or borrowing as a sourc of financ. (ii) Using a discount rat of 1%, calculat th quivalnt annual cost of purchasing and oprating th machin for both thr yars and four yars, and rcommnd which rplacmnt intrval should b adoptd. (b) Critically discuss FOUR rasons why NPV is rgardd as suprior to IRR as an invstmnt appraisal tchniqu. (8 marks) (2 marks) 2
32 Oscar Co dsigns and producs tracking dvics. Th company is managd by its four foundrs, who lack businss administration skills. Th company has rvnu of $28m, and all sals ar on 3 days crdit. Its major customrs ar larg multinational car manufacturing companis and ar oftn lat in paying thir invoics. Oscar Co is a rapidly growing company and rvnu has doubld in th last four yars. Oscar Co has focusd in this tim on product dvlopmnt and customr srvic, and managing trad rcivabls has bn nglctd. Oscar Co s avrag trad rcivabls ar currntly $5 37m, and bad dbts ar 2% of crdit sals rvnu. Partly as a rsult of poor crdit control, th company has suffrd a shortag of cash and has rcntly rachd its ovrdraft limit. Th four foundrs hav spnt larg amounts of tim chasing customrs for paymnt. In an attmpt to improv trad rcivabls managmnt, Oscar Co has approachd a factoring company. Th factoring company has offrd two possibl options: Option 1 Administration by th factor of Oscar Co s invoicing, sals accounting and rcivabls collction, on a full rcours basis. Th factor would charg a srvic f of 5% of crdit sals rvnu pr yar. Oscar Co stimats that this would rsult in savings of $3, pr yar in administration costs. Undr this arrangmnt, th avrag trad rcivabls collction priod would b 3 days. Option 2 Administration by th factor of Oscar Co s invoicing, sals accounting and rcivabls collction on a non-rcours basis. Th factor would charg a srvic f of 1 5% of crdit sals rvnu pr yar. Administration cost savings and avrag trad rcivabls collction priod would b as Option 1. Oscar Co would b rquird to accpt an advanc of 8% of crdit sals whn invoics ar raisd at an intrst rat of 9% pr yar. Oscar Co pays intrst on its ovrdraft at a rat of 7% pr yar and th company oprats for 365 days pr yar. Rquird: (a) Calculat th costs and bnfits of ach of Option 1 and Option 2 and commnt on your findings. (8 marks) (b) Discuss rasons (othr than costs and bnfits alrady calculatd) why Oscar Co may bnfit from th srvics offrd by th factoring company. (c) Discuss THREE factors which dtrmin th lvl of a company s invstmnt in working capital. (2 marks) 3 [P.T.O.
Formula Sht Economic ordr quantity = 2C D C h Millr Orr Modl Rturn point = Lowr limit + ( 1 3 sprad ) Sprad = 3 3 4 transaction cost varianc of cash flows intrst rat Th Capital Asst Pricing Modl ( ) ( ) = + ( ) Er R β Er R i f i m f 1 3 β a = Th asst bta formula V ( V + V T d( 1 )) β V d ( 1 T + ) ( V + V 1 T d( )) β d Th Growth Modl P ( ( D 1+ g = r g ) ) r ( D 1+ g = P ) + g Gordon s growth approximation g = br Th wightd avrag cost of capital V WACC V V k V d = + V V k 1 d + T d + d Th Fishr formula i ) = r ) h ) ( ) Purchasing powr parity and intrst rat parity S h c ) = S h b ) 1 F ( 1 + i c ) = S i b ) 4
Prsnt Valu Tabl Prsnt valu of 1 i.. (1 + r) n Whr r = discount rat n = numbr of priods until paymnt Discount rat (r) Priods (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% 1 99 98 971 962 952 943 935 926 917 99 1 2 98 961 943 925 97 89 873 857 842 826 2 3 971 942 915 889 864 84 816 794 772 751 3 4 961 924 888 855 823 792 763 735 78 683 4 5 951 96 863 822 784 747 713 681 65 621 5 6 942 888 837 79 746 75 666 63 596 564 6 7 933 871 813 76 711 665 623 583 547 513 7 8 923 853 789 731 677 627 582 54 52 467 8 9 914 837 766 73 645 592 544 5 46 424 9 1 95 82 744 676 614 558 58 463 422 386 1 11 896 84 722 65 585 527 475 429 388 35 11 12 887 788 71 625 557 497 444 397 356 319 12 13 879 773 681 61 53 469 415 368 326 29 13 14 87 758 661 577 55 442 388 34 299 263 14 15 861 743 642 555 481 417 362 315 275 239 15 (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 2% 1 91 893 885 877 87 862 855 847 84 833 1 2 812 797 783 769 756 743 731 718 76 694 2 3 731 712 693 675 658 641 624 69 593 579 3 4 659 636 613 592 572 552 534 516 499 482 4 5 593 567 543 519 497 476 456 437 419 42 5 6 535 57 48 456 432 41 39 37 352 335 6 7 482 452 425 4 376 354 333 314 296 279 7 8 434 44 376 351 327 35 285 266 249 233 8 9 391 361 333 38 284 263 243 225 29 194 9 1 352 322 295 27 247 227 28 191 176 162 1 11 317 287 261 237 215 195 178 162 148 135 11 12 286 257 231 28 187 168 152 137 124 112 12 13 258 229 24 182 163 145 13 116 14 93 13 14 232 25 181 16 141 125 111 99 88 78 14 15 29 183 16 14 123 18 95 84 74 65 15 5 [P.T.O.
Annuity Tabl Prsnt valu of an annuity of 1 i.. 1 (1 + r) n r Whr r = discount rat n = numbr of priods Discount rat (r) Priods (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% 1 99 98 971 962 952 943 935 926 917 99 1 2 1 97 1 942 1 913 1 886 1 859 1 833 1 88 1 783 1 759 1 736 2 3 2 941 2 884 2 829 2 775 2 723 2 673 2 624 2 577 2 531 2 487 3 4 3 92 3 88 3 717 3 63 3 546 3 465 3 387 3 312 3 24 3 17 4 5 4 853 4 713 4 58 4 452 4 329 4 212 4 1 3 993 3 89 3 791 5 6 5 795 5 61 5 417 5 242 5 76 4 917 4 767 4 623 4 486 4 355 6 7 6 728 6 472 6 23 6 2 5 786 5 582 5 389 5 26 5 33 4 868 7 8 7 652 7 325 7 2 6 733 6 463 6 21 5 971 5 747 5 535 5 335 8 9 8 566 8 162 7 786 7 435 7 18 6 82 6 515 6 247 5 995 5 759 9 1 9 471 8 983 8 53 8 111 7 722 7 36 7 24 6 71 6 418 6 145 1 11 1 368 9 787 9 253 8 76 8 36 7 887 7 499 7 139 6 85 6 495 11 12 11 255 1 575 9 954 9 385 8 863 8 384 7 943 7 536 7 161 6 814 12 13 12 134 11 348 1 635 9 986 9 394 8 853 8 358 7 94 7 487 7 13 13 14 13 4 12 16 11 296 1 563 9 899 9 295 8 745 8 244 7 786 7 367 14 15 13 865 12 849 11 938 11 118 1 38 9 712 9 18 8 559 8 61 7 66 15 (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 2% 1 91 893 885 877 87 862 855 847 84 833 1 2 1 713 1 69 1 668 1 647 1 626 1 65 1 585 1 566 1 547 1 528 2 3 2 444 2 42 2 361 2 322 2 283 2 246 2 21 2 174 2 14 2 16 3 4 3 12 3 37 2 974 2 914 2 855 2 798 2 743 2 69 2 639 2 589 4 5 3 696 3 65 3 517 3 433 3 352 3 274 3 199 3 127 3 58 2 991 5 6 4 231 4 111 3 998 3 889 3 784 3 685 3 589 3 498 3 41 3 326 6 7 4 712 4 564 4 423 4 288 4 16 4 39 3 922 3 812 3 76 3 65 7 8 5 146 4 968 4 799 4 639 4 487 4 344 4 27 4 78 3 954 3 837 8 9 5 537 5 328 5 132 4 946 4 772 4 67 4 451 4 33 4 163 4 31 9 1 5 889 5 65 5 426 5 216 5 19 4 833 4 659 4 494 4 339 4 192 1 11 6 27 5 938 5 687 5 453 5 234 5 29 4 836 4 656 4 486 4 327 11 12 6 492 6 194 5 918 5 66 5 421 5 197 4 988 4 793 4 611 4 439 12 13 6 75 6 424 6 122 5 842 5 583 5 342 5 118 4 91 4 715 4 533 13 14 6 982 6 628 6 32 6 2 5 724 5 468 5 229 5 8 4 82 4 611 14 15 7 191 6 811 6 462 6 142 5 847 5 575 5 324 5 92 4 876 4 675 15 End of Qustion Papr 6