Fundamntals Lvl Skills Modul Financial Managmnt Sptmbr/Dcmbr 217 Sampl Qustions 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. Papr F9 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 Th following statmnt of financial position information rlats to Tufa Co, a company listd on a larg stock markt which pays corporation tax at a rat of 3%. $m $m Equity and liabilitis Shar capital 17 Rtaind arnings 15 Total quity 32 Non-currnt liabilitis Long-trm borrowings 13 Currnt liabilitis 21 Total liabilitis 34 Total quity and liabilitis 66 Th shar capital of Tufa Co consists of $12m of ordinary shars and $5m of irrdmabl prfrnc shars. Th ordinary shars of Tufa Co hav a nominal valu of $ 5 pr shar, an x dividnd markt pric of $7 7 pr shar and a cum dividnd markt pric of $7 52 pr shar. Th dividnd for 2X7 will b paid in th nar futur. Dividnds paid in rcnt yars hav bn as follows: Yar 2X6 2X5 2X4 2X3 Dividnd ($/shar) 43 41 39 37 Th 5% prfrnc shars of Tufa Co hav a nominal valu of $ 5 pr shar and an x dividnd markt pric of $ 31 pr shar. Th long-trm borrowings of Tufa Co consist of $1m of loan nots and a $3m bank loan. Th bank loan has a variabl intrst rat. Th 7% loan nots hav a nominal valu of $1 pr loan not and a markt pric of $12 34 pr loan not. Annual intrst has just bn paid and th loan nots ar rdmabl in four yars tim at a 5% prmium to nominal valu. Rquird: (a) Calculat th aftr-tax wightd avrag cost of capital of Tufa Co on a markt valu basis. (11 marks) (b) Discuss th circumstancs undr which it is appropriat to us th currnt WACC of Tufa Co in appraising an invstmnt projct. (3 marks) (c) Discuss THREE advantags to Tufa Co of using convrtibl loan nots as a sourc of long-trm financ. (6 marks) (2 marks) 2
32 Th dirctors of Plta Co ar considring a plannd invstmnt projct costing $25m, payabl at th start of th first yar of opration. Th following information rlats to th invstmnt projct: Yar 1 Yar 2 Yar 3 Yar 4 Sals volum (units/yar) 52, 624, 717, 788, Slling pric ($/unit) 3 3 3 3 Variabl costs ($/unit) 1 1 2 1 61 1 93 Fixd costs ($/yar) 7, 735, 779, 841, This information nds adjusting to tak account of slling pric inflation of 4% pr yar and variabl cost inflation of 3% pr yar. Th fixd costs, which ar incrmntal and rlatd to th invstmnt projct, ar in nominal trms. Th yar 4 sals volum is xpctd to continu for th forsabl futur. Plta Co pays corporation tax of 3% on yar in arrars. Th company can claim tax-allowabl dprciation on a 25% rducing balanc basis. Th viws of th dirctors of Plta Co ar that all invstmnt projcts must b valuatd ovr four yars of oprations, with an assumd trminal valu at th nd of th fourth yar of 5% of th initial invstmnt cost. Both nt prsnt valu and discountd payback must b usd, with a maximum discountd payback priod of two yars. Th ral aftr-tax cost of capital of Plta Co is 7% and its nominal aftr-tax cost of capital is 12%. Rquird: (a) (i) Calculat th nt prsnt valu of th plannd invstmnt projct. (9 marks) (ii) Calculat th discountd payback priod of th plannd invstmnt projct. (b) Discuss th financial accptability of th invstmnt projct. (c) Critically discuss th viws of th dirctors on Plta Co s invstmnt appraisal. (2 marks) (3 marks) (6 marks) (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