ACCA F9 Financial Management Revision Kit 2016-2017 PDF

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Paper F9 Financial Management This Kit provides material specifically for the One of a suite of products supporting Paper F9 practice and revision stage of your studies for Financial Management, for use independently or Paper F9 Financial Management that has been as part of a package, this Kit is targeted at ACCA’s Practice & Revision Kit comprehensively reviewed by the ACCA examining exams in September 2016, December 2016, March team. This unique review ensures that the questions, 2017 and June 2017 and contains: solutions and guidance provide the best and most Banks of questions on every syllabus area effective resource for practising and revising for the Answers with detailed guidance on approaching exam. questions Three mock exams with full answers and guidance ACCA Approved Valid for both Practice & Revision Kit paper and Paper F9 computer based 2016, March 2017 and June 2017 For exams in September 2016, December exams Contact us Financial Management For exams in September 2016, December BPP House 142-144 Uxbridge Road 2016, March 2017 and June 2017 London W12 8AA United Kingdom T 0845 075 1100 (UK) T +44 (0)20 8740 2211 (Overseas) E [email protected] bpp.com/learningmedia February 2016 £18.00 ACF9RK16 (POL).indd 1-3 19/02/2016 15:54  ACCA APPROVED CONTENT PROVIDER As the first accredited publisher of ACCA materials, BPP Learning Media has set the benchmark for producing exceptional study materials for students and tutors alike. 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Once you have received your code, please follow the instructions below: To access the BPP ACCA Exam Success site for this material please go to: www.bpp.com/ExamSuccessSite n Create a user account if you don’t already have one. Make sure you reply to the confirmation email. n Log in using your registered username and password. Select the paper you wish to access. n Enter the code you received when prompted. You will only have to do this once for each paper you are studying.  P R A C T I C PAPER F9 E FINANCIAL MANAGEMENT & R E V BPP Learning Media is an ACCA Approved Content Provider for the ACCA qualification. This means we work closely with ACCA to ensure our products fully prepare you for your I ACCA exams. S In this Practice & Revision Kit, which has been reviewed by the ACCA examination team, we: I  Discuss the best strategies for revising and taking your ACCA exams O  Ensure you are well prepared for your exam  Provide you with lots of great guidance on tackling questions N  Provide you with three mock exams  Provide ACCA exam answers as well as our own for selected questions Our Passcards also support this paper. K I T FOR EXAMS IN SEPTEMBER 2016, DECEMBER 2016, MARCH 2017 AND JUNE 2017  First edition 2008 A note about copyright Ninth edition February 2016 Dear Customer What does the little © mean and why does it matter? ISBN 9781 4727 4441 8 (previous ISBN ) 9781 4727 2691 9 Your market-leading BPP books, course materials and e-learning e-ISBN 9781 4727 4656 6 materials do not write and update themselves. People write them on their own behalf or as employees of an organisation that invests in British Library Cataloguing-in-Publication Data this activity. 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The suggested solutions in the Practice & Revision Kit have been prepared by BPP Learning Media Ltd, except where otherwise stated. © BPP Learning Media Ltd 2016 ii About this Practice & Revision Kit ACCA will start to transfer F5–F9 to computer-based examination (CBE), beginning with a pilot in limited markets in September 2016. Students will initially have the choice of CBE or paper exams and as a result, changes will be made to BPP’s learning materials to ensure that we fully support students through this transition. This Practice & Revision Kit is valid for exams from the September 2016 sitting through to the June 2017 sitting and in this Practice & Revision Kit you will find questions in both multiple choice question (MCQ) and objective testing question (OTQ) format. OTQs include a wider variety of questions types including MCQ as well as number entry, multiple response and drag and drop. More information on these question types will be available on the ACCA website. OTQs will only appear in computer-based exams but these questions will still provide valuable practice for all students whichever version of the exam is taken. These are clearly marked on the contents page as either CBE style OTQ bank or CBE style OT case. In addition please note that the specimen paper-based exam paper has been included as Mock Exam 3 in this Practice & Revision Kit. The questions in Sections A and B are MCQ only whereas in the computer-based exam these sections will contain OTQs. More information on the exam formats and can be found on page xviii. At the time of going to print, ACCA had not yet announced the proposed duration of the computer-based exam and so all timings given throughout this Practice & Revision Kit are based on the paper-based exam which is 3 hours and 15 minutes long. Time management is a key skill for success in this exam and so we recommend you use these indicative timings when attempting questions. ACCA are recommending that all students consult the ACCA website on a regular basis for updates on the launch of the new CBEs. About this Practice & Revision Kit iii  Contents Page Finding questions Question index..................................................................................................................................................................v Topic index.....................................................................................................................................................................viii Helping you with your revision......................................................................................................................ix Revising F9 Topics to revise.................................................................................................................................................................x Question practice...............................................................................................................................................................x Passing the F9 exam........................................................................................................................................................xi Exam formulae................................................................................................................................................................. xv Exam information.......................................................................................................................................................... xvii Useful websites........................................................................................................................................................... xviii Questions and answers Questions..........................................................................................................................................................................3 Answers...........................................................................................................................................................................73 Exam practice Mock exam 1  Questions.............................................................................................................................................................173  Plan of attack.......................................................................................................................................................185  Answers...............................................................................................................................................................186 Mock exam 2 (CBE style)  Questions.............................................................................................................................................................199  Plan of attack.......................................................................................................................................................211  Answers...............................................................................................................................................................212 Mock exam 3 (Specimen exam)  Questions.............................................................................................................................................................225  Answers...............................................................................................................................................................237 Mathematical tables and formulae............................................................................................................245 Review form iv Contents Question index The headings in this checklist/index indicate the main topics of questions, but questions often cover several different topics. Questions set under the old syllabus and exam format are included because their style and content are similar to those which appear in the F9 exam. The questions have been amended to reflect the current exam format. Time Page number allocation Marks Mins Question Answer Part A: Financial management function Section A Questions 1-5 MCQ bank – Financial management and financial objectives 10 20 3 73 6-15 CBE style OTQ bank – Financial management and financial 20 39 4 73 objectives Section B Questions 16-20 ABC Co 10 20 6 75 Part B: Financial management environment Section A Questions 21-25 MCQ bank – Financial management environment 10 20 8 75 26-30 MCQ bank – Financial management environment 10 20 9 76 31-35 MCQ bank – Financial management environment 10 20 9 76 36-40 CBE style OTQ bank – Financial management environment 10 20 10 77 Part C: Working capital management Section A Questions 41-45 MCQ bank – Working capital 10 20 12 77 46-55 CBE style OTQ bank – Managing working capital 20 39 13 78 56-60 CBE style OTQ bank – Working capital finance 10 20 14 80 Section B Questions 61-65 PKA Co (12/07, amended) 10 20 16 81 66-70 CBE style OT case Gorwa Co (12/08, amended) 10 20 17 81 71-75 CBE style OT case Cat Co 10 20 18 82 Section C Questions 76 APX Co (12/09, amended) 20 39 19 83 77 ZSE Co (6/10, amended) 20 39 20 85 78 WQZ Co (12/10, amended) 20 39 20 87 79 Bold Co (12/11, amended) 20 39 21 90 Question index v  80 Wobnig Co (6/12, amended) 20 39 22 92 81 KXP Co (12/12, amended) 20 39 23 94 82 CSZ Co (6/14, amended) 20 39 24 97 83 Flit Co (12/14, amended) 20 39 24 99 84 Widnor Co (6/15, amended) 20 39 25 102 Part D: Investment appraisal Section A Questions 85-94 MCQ bank – Investment decisions 20 39 26 103 95-104 MCQ bank – Investment appraisal using DCF 20 39 28 105 105-114 MCQ bank – Allowing for tax and inflation 20 39 30 107 115-119 CBE style OTQ bank – Project appraisal and risk 10 20 32 109 120-129 CBE style OTQ bank – Specific investment decisions 20 39 33 110 Section B Questions 130-134 Sensitivity analysis 10 20 35 112 135-139 CBE style OT case Trecor Co (Specimen paper 2007, 10 20 36 113 amended) 140-144 CBE style OT case BRT Co (6/11, amended) 10 20 37 113 Section C Questions 145 Calvic Co 20 39 39 114 146 Project E (6/14, amended) 20 39 39 116 147 AGD Co (FMC, 12/05, amended) 20 39 40 118 148 Basril Co (FMC, 12/03, amended) 20 39 40 121 149 Filtrex Co 20 39 41 122 150 Warden Co (12/11, amended) 20 39 41 124 151 BQK Co (12/12, amended) 20 39 42 126 152 Uftin Co (12/14, amended) 20 39 43 128 153 Hraxin Co (6/15, amended) 20 39 44 131 Part E: Business finance Section A Questions 154-158 MCQ bank – Sources of finance 10 20 45 133 159-163 MCQ bank – Dividend policy 10 20 46 134 164-173 MCQ bank – Gearing and capital structure 20 39 47 135 174 -183 CBE style OTQ bank – The cost of capital 20 39 49 136 184- 193 CBE style OTQ bank – Capital structure 20 39 51 138 vi Question index Section B Questions 194-198 CBE style OT case IML Co 10 20 52 140 Section C Questions 199 Bar Co (12/11, amended) 20 39 53 141 200 YGV Co (6/10, amended) 20 39 54 143 201 NN Co (12/10, amended) 20 39 55 146 202 AQR Co (6/11, amended) 20 39 56 148 203 BKB Co (12/12, amended) 20 39 56 150 204 Fence Co (6/14, amended) 20 39 57 153 205 Tinep Co (12/14, amended) 20 39 57 155 206 Grenarp Co (6/15, amended) 20 39 58 157 Part F: Business valuations Section A Questions 207-216 MCQ bank – Business valuations 20 39 59 160 217-221 CBE style OTQ bank – Market efficiency 10 20 61 161 Section B Questions 222-226 Phobis Co (12/07, amended) 10 20 62 162 227-231 CBE style OT case Corhig Co (6/12, amended) 10 20 63 163 232-236 CBE style OT case Close Co (12/11, amended) 10 20 64 164 Part G: Risk management Section A Questions 237-246 MCQ bank – Foreign currency risk 20 39 66 164 247-251MCQ bank – Interest rate risk 10 20 67 166 Section B Questions 252-256 Rose Co (6/15, amended) 10 20 68 166 257-261 CBE style OT case Zigto Co (6/12, amended) 10 20 69 167 Mock exam 1 Mock exam 2 (CBE style) Mock exam 3 (Specimen exam) Question index vii  Topic index Listed below are the key Paper F9 syllabus topics and the numbers of the questions in this Kit covering those topics. If you need to concentrate your practice and revision on certain topics or if you want to attempt all available questions that refer to a particular subject, you will find this index useful. Syllabus topic Question numbers Asset replacement decisions 165,127,128,145,149 Business valuation 207-216, 222-225, 227-228, 232-236 Capital rationing 123, 124, 125, 129, 145, 148 Capital structure 184-193 Cash management 56, 57, 58, 77, 81c, 83 Cash operating cycle 41, 42, 79, 82a Cost of capital 174-183, 194, 196-198, 200, 201 Dividend policy 159-163, 201c, 205c Environment/economics 21-23, 25, 31-40, 84c, 151b Financial intermediaries 26, 76c Financial management 2, 6, 15 Foreign currency risk 237-246, 252-256, 257-261 Gearing 164-168, 199d, 200b Interest rate risk 247-251 Inventory management 43, 47, 48, 53, 55, 62, 63, 78a, 81b IRR 98, 100, 101, 103, 132, 134, 139, 150b Leasing 102, 121, 122, 126, 147 Market efficiency 217-221, 226 NPV 88-90, 94-97, 99, 101-119, 134, 137, 146, 147, 150- 153 Objectives 5, 7, 9, 12, 13, 20 Overtrading 44, 69, 80 Payables management 54 Payback 86, 91, 131, 138, 146b Ratio analysis 1, 3, 4, 8, 14, 16, 17, 19, 45, 66, 67, 80, 82b Receivables management 49, 50, 51, 52, 64, 65, 77b, 78b, 79c, 81a, 81d, 84 ROCE 85, 87, 93, 135, 136 Risk and uncertainty 115-119, 147c, 152, 153, 199c, 231 Sensitivity analysis 130, 133, 150c Sources of finance 28, 29, 30, 154-158, 169-173, 199, 200c, 203c, 205b, 206 Total shareholder return 10, 18, 195 WACC 201-205, 230 Working capital financing 59, 60, 76b, 80, 82c Working capital management 45, 61, 68, 70, 76, 78c, 79 viii Topic index Helping you with your revision BPP Learning Media – ACCA Approved Content Provider As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use revision materials reviewed by the ACCA examination team. By incorporating the ACCA examination team’s comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Practice & Revision Kit provides excellent, ACCA-approved support for your revision. Tackling revision and the exam Using feedback obtained from the ACCA examination team review:  We look at the dos and don’ts of revising for, and taking, ACCA exams  We focus on Paper F9; we discuss revising the syllabus, what to do (and what not to do) in the exam, how to approach different types of question and ways of obtaining easy marks Selecting questions We provide signposts to help you plan your revision.  A full question index  A topic index listing all the questions that cover key topics, so that you can locate the questions that provide practice on these topics, and see the different ways in which they might be examined Making the most of question practice At BPP Learning Media we realise that you need more than just questions and model answers to get the most from your question practice.  Our top tips included for certain questions provide essential advice on tackling questions, presenting answers and the key points that answers need to include.  We show you how you can pick up easy marks on some questions, as we know that picking up all readily available marks often can make the difference between passing and failing.  We include marking guides to show you what the examination team rewards.  We include comments from the examination team to show you where students struggled or performed well in the actual exam.  We refer to the BPP Study Text for exams in September 2016, December 2016, March 2017 and June 2017 for detailed coverage of the topics covered in questions. Attempting mock exams There are three mock exams that provide practice at coping with the pressures of the exam day. We strongly recommend that you attempt them under exam conditions. Mock exams 1 and 2 reflect the question styles and syllabus coverage of the paper-based and computer-based exams respectively; Mock exam 3 is the Specimen exam paper. Helping you with your revision ix  Revising F9 Topics to revise The exam consists of 15 objective test questions, 3 objective test cases and 2 longer form questions, all of which are compulsory. No one section in the syllabus is more important than another so there are no short-cuts. You will have to be able to answer questions on the entire syllabus. Question practice Practising as many exam-style questions as possible will be the key to passing this exam. You must do questions under timed conditions and ensure you write full answers to the discussion parts as well as doing the calculations. Make sure you practise written sections as well as the calculations. x Revising F9 Passing the F9 exam Displaying the right qualities The aim of Paper F9 is to develop the knowledge and skills expected of a finance manager in relation to investment, financing and dividend decisions. You need to be able to communicate your understanding clearly in an exam context. Calculations and discussions are equally important so do not concentrate on the numbers and ignore the written parts. You need to be able to:  Understand the role and purpose of the financial management function  Assess and understand the impact of the economic environment on financial management  Discuss and apply working capital management techniques  Carry out effective investment appraisal  Identify and evaluate alternative sources of business finance  Explain and calculate cost of capital and the factors that affect it  Understand and apply risk management techniques in business Avoiding weaknesses  There is no choice in this paper, all questions have to be answered. You must therefore study the entire syllabus, there are no short-cuts.  Ability to answer multiple choice questions and cases improves with practice. Try to get as much practice with these questions as you can.  The longer questions will be based on simple scenarios and answers must be focused and specific to the organisation.  Answer plans for the longer questions will help you to focus on the requirements of the question and enable you to manage your time effectively – but there will not be much time.  Answer all parts of the longer questions. Even if you cannot do all the calculation elements, you will still be able to gain marks in the discussion parts. Revising F9 xi  Gaining the easy marks Easy marks in this paper tend to fall into three categories. Multiple choice questions Some MCQs are easier than others. Answer those that you feel fairly confident about as quickly as you can. Come back later to those you find more difficult. This could be a way of making use of the time in the examination most efficiently and effectively. Many MCQs will not involve calculations. Make sure that you understand the wording of 'written' MCQs before selecting your answer. Calculations in Section C questions The calculations within a question will get progressively harder and easy marks will be available in the easy stages. Set our your calculations clearly and show all your workings in a clear format. Use a proforma, for example in complex NPV questions and slot the simpler figures into the proforma straight away before you concentrate on the figures that need a lot of adjustment. Discussions in Section C questions A Section C question may separate discussion requirements from calculations, so that you do not need to do the calculations first in order to answer the discussion part. This means that you should be able to gain marks from making sensible, practical comments without having to complete the calculations. Discussions that are focused on the specific organisation in the question will gain more marks than regurgitation of knowledge. Read the question carefully and more than once, to ensure you are actually answering the specific requirements. Pick out key words such as 'describe', 'evaluate' and 'discuss'. These all mean something specific.  'Describe' means to communicate the key features of  'Evaluate' means to assess the value of  'Discuss' means to examine in detail by argument Clearly label the points you make in discussions so that the marker can identify them all rather than getting lost in the detail. Provide answers in the form requested. Use a report format if asked for and give recommendations if required. xii Revising F9 Tackling objective test case questions First, read the whole case scenario. Make a note of any specific instructions or assumptions, such as ‘ignore inflation’ in a net present value question. Then skim through the requirements of the five questions. The questions are independent of each other and can be answered in any order. Some of the OTs will be easier than others. For example, you may be asked to identify the advantages of the internal rate of return in investment appraisal. Answer these OTs quickly. Other OTs will be more difficult and/or complex. There are two types of OT that may take you longer to answer. The first more time-consuming OT will involve doing a computation. For example, you may be asked to calculate the net present value of a project. You will probably need to jot down a quick proforma to answer a computational question like this. If the OT is a multiple choice question, remember that the wrong answers will usually involve common errors so don’t assume that because you have the same answer as one of the options that your answer is necessarily correct! Double check to make sure you haven’t made any silly mistakes. If you haven’t got the same answer as any of the options, rework your computation, thinking carefully about what errors you could have made. If you still haven’t got one of the options, choose the one which is nearest to your answer. The second more time-consuming OT is one where you are asked to consider a number of statements and identify which one (or more) of them is correct. Make sure that you read each statement at least twice before making your selection. Be careful to follow the requirements of the OT exactly, for example if you are asked to identify two correct statements. Revising F9 xiii  Exam formulae Set out below are the formulae which you will be given in the exam, and formulae which you should learn. If you are not sure what the symbols mean, or how the formulae are used, you should refer to the appropriate chapter in this Study Text Exam formulae Chapter in Study Text Economic Order Quantity 5 = 2C 0 D Ch Miller-Orr Model 6 Return point = Lower limit + (1/3  spread) 1 é3 ù3 ê 4 × transaction cost × variance of cash flows ú Spread = 3 ê ú ê interest rate ú ëê ûú The Capital Asset Pricing Model 15 E(ri) = Rf + ßi (E (rm) – Rf) The Asset Beta Formula 16 é Ve ù é Vd (1- T) ù ßa = ê be ú + ê bd ú ë (Ve + Vd (1- T)) û ë (Ve + Vd (1- T)) û The Growth Model 17 D0 (1+ g) P0 = (re  g) Gordon's Growth Approximation 17 g = bre The weighted average cost of capital 15 é V ù é Vd ù WACC = ê e ú ke + ê ú kd (1–T) ë Ve + Vd û ë Ve + Vd û The Fisher formula 19 (1 + i) = (1 + r)(1 + h) Purchasing Power Parity and Interest Rate Parity (1+hc ) S1 = S0  19 (1+hb ) (1+ic ) F0 = S0  19 (1+ib ) xiv Revising F9 Formulae to learn Profitability ratios include: Profit before interest and tax (PBIT) ROCE = Capital employed PBIT Revenue ROCE =  Revenue Capital employed ROCE = Profit margin  asset turnover Debt ratios include: Debt Debt Gearing = or (and either book values or market values can be used) Equity Debt + Equity Prior charge capital Gearing = Equity capital (including reserves) PBIT Interest coverage = Interest Liquidity ratios include: Current ratio = Current assets : Current liabilities Acid Test ratio = Current assets less inventory : Current liabilities Shareholder investor ratios include: Dividend per share Dividend yield = × 100 Market price per share Profits distributable to ordinary shareholders Earnings per share = Number of ordinary shares issued Market price per share Price earnings (P/E) ratio = EPS Receivables Accounts receivable days =  365 days (credit) sales Inventory days Finished goods (a) Finished goods =  365 days Cost of sales Average WIP (b) WIP =  365 days Cost of sales Average raw material inventory (c) Raw material:  365 days Annual raw material purchases Payables Accounts payable period  365 days Credit purchases (or cost of sales if purchases unavailable) NPVa IRR = a + (b – a) NPVa - NPVb PV of cost over one replacement cycle Equivalent annual cost = Annuity factor for the number of years in the cycle Revising F9 xv  D Cost of equity = Ke  1  g P 0 i(1  T) Cost of debt = Kd = P 0 Preference Dividend d Cost of preference shares = Kpref = = Market Value(ex div) P0 PV of cash flows (not including capital investment) Profitability index = Capital investment xvi Revising F9 Exam information Computer based exams ACCA have announced that they intend to commence the launch of computer based exams (CBEs) for F5-F9. They will be piloting computer based exams in limited markets in September 2016 with the aim of rolling out into all markets internationally over a five year period. Paper based examinations will be run in parallel while the CBEs are phased in and BPP materials have been designed to support you, whichever exam option you choose. Format of the exam The exam format is the same irrespective of the mode of delivery and will comprise three exam sections. Section Style of question type Description Proportion of exam, % A Objective test (OT) 15 questions x 2 marks 30 B Objective test (OT) case 3 questions x 10 marks 30 Each question will contain 5 subparts each worth 2 marks C Constructed Response 2 questions x 20 marks 40 (Long questions) Total 100 Section A and B questions will be selected from the entire syllabus. The paper version of these objective test questions contain multiple choice only and the computer based versions will contain a variety. The responses to each question or subpart in OT cases are marked automatically as either correct or incorrect by computer. Section C questions will mainly focus on the following syllabus areas but a minority of marks can be drawn from any other area of the syllabus  Working capital management (syllabus area C)  Investment appraisal (syllabus area D)  Business finance (syllabus area E) The responses to these questions are human marked. Additional information The Study Guide provides more detailed guidance on the syllabus. Revising F9 xvii  Useful websites The websites below provide additional sources of information of relevance to your studies for Financial Management.  www.accaglobal.com ACCA's website. The students’ section of the website is invaluable for detailed information about the qualification, past issues of Student Accountant (including technical articles) and a free downloadable Student Planner App.  www.bpp.com Our website provides information about BPP products and services, with a link to the ACCA website.  www.ft.com This website provides information about current international business. You can search for information and articles on specific industry groups as well as individual companies. (Note: Subscription required)  www.economist.com Here you can search for business information on a week-by-week basis, search articles by business subject and use the resources of the Economist Intelligence Unit to research sectors, companies or countries. (Note: Subscription required for some content)  www.investmentweek.co.uk This site carries business news and articles on markets from Investment Week and International Investment.  www.pwc.com The PricewaterhouseCoopers website includes UK Economic Outlook.  www.cfo.com Good website for financial officers.  www.bankofengland.co.uk This website is useful for sourcing Bank of England publications. xviii Revising F9 Questions 1 2 FINANCIAL MANAGEMENT FUNCTION Questions 1 to 20 cover Financial management function, the subject of Part A of the BPP Study Text for Paper F9. MCQ bank – Financial management and financial objectives 20 mins 1 Last year ABC Co made profits before tax of $2,628,000. Tax amounted to $788,000. ABC Co's share capital was $2,000,000 (2,000,000 shares of $1) and $4,000,000 6% preference shares. What was the earnings per share (EPS) for the year? A 31c B 80c C 92c D 119c (2 marks) 2 The following statements relate to various functions within a business. 1 The financial management function makes decisions relating to finance 2 Management accounts incorporate non-monetary measures Are the statements true or false? A Statement 1 is true and statement 2 is false B Both statements are true C Statement 1 is false and statement 2 is true D Both statements are false (2 marks) 3 A company has recently declared a dividend of 12c per share. The share price is $3.72 cum div and earnings for the most recent year were 60c per share. What is the P/E ratio? A 0.17 B 6.00 C 6.20 D 6.60 (2 marks) 4 The following information relates to the ordinary shares of G Co. Earnings per share 60c Dividend cover 2.5 Published dividend yield 4.8% What is the price of G Co’s ordinary shares implied by the data above? A 24c B 115c C 313c D 500c (2 marks) 5 Which of the following is most appropriate as an objective of a not-for-profit organisation? A To achieve long term growth in earnings B To maximise shareholder wealth C To make efficient use of resources D To minimise input costs (2 marks) (Total = 10 marks) Questions 3  CBE style OTQ bank – Financial management and financial objectives 39 mins 6 Which of the following are the THREE key areas covered by financial management decisions? Investment Cash flow Finance Dividend (2 marks) 7 Which of the following does NOT form part of the objectives of a corporate governance best practice framework? Separation of chairperson and CEO roles Establishment of audit, nomination and remuneration committees Minimisation of risk Employment of non-executive directors (2 marks) 8 The following information relates to A Co for the last financial year. Revenue $200 million Asset turnover 10 times Interest payable $1.5 million Interest cover ratio 5 times What is the return on capital employed for A Co for the year? % (2 marks) 9 A school decides to have larger classes, and examination results suffer as a result. In terms of the 'value for money' framework, which one of the following statements is true? Economy has increased but efficiency has decreased Efficiency has increased but effectiveness has decreased Economy has increased but effectiveness has decreased Economy has increased, but efficiency and effectiveness have decreased (2 marks) 10 H Co's share price is $3.50 at the end of 20X1 and this includes a capital gain of $0.75 since the beginning of the period. A dividend of $0.25 has been declared for 20X1. What is the shareholder return (to 1 dp)? % (2 marks) 11 Stakeholders can be classified as internal, connected or external. Which of the following is an external stakeholder? Shareholders Customers Bankers Government (2 marks) 4 Questions 12 A government body uses measures based upon the 'three Es' to measure value for money generated by a publicly funded hospital. Which of the following relates to efficiency? Cost per successfully treated patient Cost per operation Proportion of patients readmitted after unsuccessful treatment Percentage change in doctors’ salaries compared with previous year (2 marks) 13 In not-for-profit businesses and state-run entities, a value-for-money audit can be used to measure performance. It covers three key areas: economy, efficiency and effectiveness. Which of the following could be used to describe effectiveness in this context? Avoiding waste of inputs Achieving agreed targets Achieving a given level of profit Obtaining suitable quality inputs at the lowest price (2 marks) 14 Which of the following statements are valid criticisms of return on capital employed (ROCE) as a performance measure? 1 It is misleading if used to compare departments with different levels of risk 2 It is misleading if used to compare departments with assets of different ages 3 Its use may discourage investment in new or replacement assets 4 The figures needed are not easily available 2 and 3 only 2 and 4 only 1 and 3 only 1, 2 and 3 (2 marks) 15 Are the following statements true or false? True False 1 Cash flow forecasting is primarily the responsibility of financial reporting 2 Whether to undertake a particular new project is a financial management decision (2 marks) (Total = 20 marks) Questions 5  ABC Co 20 mins The following scenario relates to questions 16 – 20. Summary financial information for ABC Co is given below, covering the last two years. 20X8 20X7 STATEMENT OF PROFIT OR LOSS (EXTRACT) $’000 $’000 Revenue 74,521 68,000 Cost of sales 28,256 25,772 Salaries and wages 20,027 19,562 Other costs 11,489 9,160 Profit before interest and tax 14,749 13,506 Interest 1,553 1,863 Tax 4,347 3,726 Profit after interest and tax 8,849 7,917 Dividends payable 4,800 3,100 20X8 20X7 STATEMENT OF FINANCIAL POSITION (EXTRACT) $’000 $’000 Shareholders’ funds 39,900 35,087 Long term debt 14,000 17,500 53,900 52,587 Other information Number of shares in issue (‘000) 14,000 14,000 P/E ratio (average for year) ABC Co 14.0 13.0 Industry 15.2 15.0 Shareholders’ investment EPS $0.63 $0.57 Share price $8.82 $7.41 Dividend per share $0.34 $0.22 16 What is the percentage increase in return on capital (ROCE) for ABC Co between 20X7 and 20X8? A 6.2% B 6.7% C 7.9% D 8.6% (2 marks) 17 What is the net profit margin for 20X8? A 5.05% B 8.42% C 11.9% D 19.8% (2 marks) 18 What is the shareholder return? A 14.4% B 19.0% C 19.8% D 23.6% (2 marks) 6 Questions 19 As well as the information above, the following extra data is available: 20X8 20X7 Gearing (Debt/Equity) 35.1% 49.9% Interest cover (PBIT/Interest) 9.5 7.2 Based on all of the information available, are the following statements true or false? 1 Employees may be unhappy with their wages in 20X8 2 Financial risk for shareholders appears to be a problem area A Statement 1 is true and statement 2 is false B Both statements are true C Statement 1 is false and statement 2 is true D Both statements are false (2 marks) 20 Accounting profits may not be the best measure of a company’s performance. Which of the following statements support this theory? 1 Profits are affected by accounting policies 2 Profits take no account of risk 3 Profits take no account of the level of investment made during the year 4 Profits are measures of short-term historic performance A 2 and 4 only B 1, 2, 3 and 4 C 2 and 3 only D 1 only (2 marks) (Total = 10 marks) Questions 7  FINANCIAL MANAGEMENT ENVIRONMENT Questions 21 to 40 cover Financial management environment, the subject of Part B of the BPP Study Text for Paper F9. MCQ bank – Financial management environment 20 mins 21 A government has adopted a contractionary fiscal policy. How would this typically affect businesses? A Higher interest rates and higher inflation B Lower taxes and higher government subsidies C Higher taxes and lower government subsidies D Lower inflation and lower interest rates (2 marks) 22 A government follows an expansionary monetary policy. How would this typically affect businesses? A Higher demand from customers, lower interest rates on loans and increased availability of credit B A contraction in demand from customers, higher interest rates and less available credit C Lower taxes, higher demand from customers but less government subsidies/available contracts D Lower interest rates, lower exchange rates and higher tax rates (2 marks) 23 As the economy booms and approaches the limits of productivity at a point in time, a manufacturing business would typically feel which one of the following effects? A Increased inflation (higher sales prices and higher costs), difficulty in finding suitable candidates to fill roles and higher interest rates B High export demand, increasing growth rates, high inflation and high interest rates C Reducing inflation, falling demand, reducing investment, increasing unemployment D Higher government spending, lower tax rates, high inflation and low unemployment (2 marks) 24 Which one of the following statements is incorrect? A Money markets are markets for long-term capital B Money markets are operated by banks and other financial institutions C Money market instruments include interest-bearing instruments, discount instruments and derivatives D Money market instruments are traded over the counter between institutional investors (2 marks) 25 Which of the following organisations is most likely to benefit from a period of high price inflation? A An organisation which has a large number of long term payables B An exporter of goods to a country with relatively low inflation C A supplier of goods in a market where consumers are highly price sensitive and substitute imported goods are available D A large retailer with a high level of inventory on display and low rate of inventory turnover (2 marks) (Total = 10 marks) 8 Questions MCQ bank – Financial management environment 20 mins 26 Which of the following is NOT a function that financial intermediaries fulfil for customers and borrowers? A Maturity transformation B Fund aggregation C Dividend creation D Pooling of losses (2 marks) 27 Which of the following are money market instruments? 1 Certificate of deposit 2 Corporate bond 3 Commercial paper 4 Treasury bill A 1, 2 and 4 only B 1 and 3 only C 1, 3 and 4 only D 1, 2, 3 and 4 (2 marks) 28 Which of the following statements about obtaining a full stock market listing is NOT correct? A Compliance costs are likely to increase, but better public profile and access to funds benefit the business. B All else being equal the value of the business is likely to be unaffected. C It allows owners to realise their investment. D It increases the liquidity of the shares for shareholders. (2 marks) 29 AB plc, a company listed in UK and Australia, decides to issue unsecured US dollar bonds in Australia. What are these bonds referred to as? A Junk bonds B Commercial paper C Eurobonds D Intercontinental bills (2 marks) 30 Rank the following from highest risk to lowest risk from the investor's perspective. 1 Preference share 2 Treasury bill 3 Corporate bond 4 Ordinary share A 1, 4, 3, 2 B 1, 4, 2, 3 C 4, 2, 1, 3 D 4, 1, 3, 2 (2 marks) (Total = 10 marks) MCQ bank – Financial management environment 20 mins 31 Interest rates in Isopia have recently been reduced. Which of the following is most likely to result from a cut in interest rates? A An increase in savings B An increase in spending C A decrease in borrowing D A decrease in consumption (2 marks) Questions 9  32 Which of the following is most likely to increase aggregate demand in the economy? A Increased saving B Increased spending on imports C Increased taxation D Increased investment (2 marks) 33 Which of the following would be likely to occur if there was an increase in the money supply in the economy? A A rise in the rate of inflation B A rise in interest rates C A rise in exchange rates D A fall in the levels of investment (2 marks) 34 Which of the following is an aspect of fiscal policy measures by the government? A To raise short-term interest rates in the money markets B To support the exchange rate for the country’s currency C To control growth in the money supply D To alter rates of taxation (2 marks) 35 The government of Beeland is operating an expansionary fiscal policy. Which of the following is this most likely to include? A A fall in interest rates B An increase in corporation tax C An increase in government spending D An increase in the money supply (2 marks) (Total = 10 marks) CBE style OTQ bank – Financial management environment 20 mins 36 The following statements relate to fiscal policy and demand management. Are the statements true or false? True False 1 If a government spends more by borrowing more, it will raise demand in the economy 2 If demand in the economy is high then government borrowing will fall (2 marks) 37 If the US dollar weakens against the pound sterling, will UK exporters and importers suffer or benefit? Benefit Suffer UK exporters to US UK importers from US (2 marks) 38 Government macroeconomic objectives typically include which THREE of the following? Economic growth and high employment Low inflation Balance of payments stability A guaranteed minimum income for all (2 marks) 10 Questions 39 Which THREE of the following are among the main goals of macroeconomic policy? Encouraging economic growth Low and stable inflation Achievement of a balance between exports and imports Encouraging an equitable distribution of income (2 marks) 40 If a government has a macro-economic policy objective of expanding the overall level of economic activity, which of the following measures would NOT be consistent with such an objective? Increasing public expenditure Lowering interest rates Increasing the exchange rate Decreasing taxation (2 marks) (Total = 10 marks) Questions 11  WORKING CAPITAL MANAGEMENT Questions 41 to 84 cover Working capital management, the subject of Part C of the BPP Study Text for Paper F9. MCQ bank – Working capital 20 mins 41 The following has been calculated for BB Co: Receivables days: 58 Inventory turnover: 10 times per annum Payables days: 45 Non-current asset days: 36 What is the length of the cash operating cycle? A 23 days B 49.5 days C 85.5 days D 139.5 days (2 marks) 42 D Co decides to offer a 2% early settlement discount that half of all customers take up. They pay in 1 month instead of the usual 2. D Co pays 10% per annum for its overdraft facility. What impact will this have? Cash operating cycle Reported profits A Reduce Increase B Unaffected Increase C Reduce Reduce D Unaffected Reduce (2 marks) 43 WW Co has a current ratio of 2. Receivables are $3 million and current liabilities are $2 million. What are inventory days if cost of sales is $10 million per annum? A 36.5 days B 91.25 days C 14.6 days D 243.3 days (2 marks) 44 Which of the following best describes overtrading? A Selling more than you can manufacture and/or you hold in inventory. B Having too much working capital thus reducing profitability. C Selling stocks and shares outside the stock exchange opening hours. D Suffering liquidity issues as a result of growing too quickly. (2 marks) 45 MM Co sells some inventory on credit for a profit. All else being equal, what will happen to the quick and current ratio after this sale? Quick Current A Increase Decrease B No change Increase C Increase No change D Increase Increase (2 marks) (Total = 10 marks) 12 Questions CBE style OTQ bank – Managing working capital 39 mins 46 TS Co has daily demand for ball bearings of 40 a day for each of the 250 working days (50 weeks) of the year. The ball bearings are purchased from a local supplier for $2 each. The cost of placing an order is $64 per order, regardless of the size of the order. The inventory holding costs, expressed as a percentage of inventory purchase price, is 25% per annum. What is the economic order quantity? ball bearings (2 marks) 47 EE Co has calculated the following in relation to its inventories. Buffer inventory level 50 units Reorder size 250 items Fixed order costs $50 per order Cost of holding onto one item pa $1.25 per year Annual demand 10,000 items Purchase price $2 per item What are the total inventory related costs for a year (to the nearest whole $)? $ (2 marks) 48 Which of the following is NOT generally a benefit of a 'just in time' approach? Lower inventory levels Better product customisation Ease of production scheduling Higher quality (2 marks) 49 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 financial effect if management reduces the collection period to 60 days by offering an early settlement discount of 1% that all customers adopt? $85,479 benefit $114,521 cost $85,479 cost $285,479 benefit (2 marks) 50 Which of the following services may be provided by a debt factor? 1 Bad debt insurance 2 Advancement of credit 3 Receivables ledger management 4 Management of debt collection processes 1, 2 and 4 only 1 and 4 only 1, 2 and 3 only 1, 2, 3 and 4 (2 marks) Questions 13  51 Which of the following is LEAST likely to be used in the management of foreign accounts receivable? Letters of credit Bills of exchange Invoice discounting Commercial paper (2 marks) 52 L Co is considering whether to factor its sales invoices. A factor has offered L Co a non recourse package at a cost of 1.5% of sales and an admin fee of $6,000 per annum. Bad debts are currently 2% of sales per annum and sales are $1.5m per annum. What is the cost of the package of L Co? $ (2 marks) 53 Which of the following is NOT a drawback of the EOQ model? Assumes certain or zero lead times. Assumes certainty in demand. Assumes a small number of close suppliers. Ignores hidden costs such as the risk of obsolescence. (2 marks) 54 Which of the following is NOT a potential hidden cost of increasing credit taken from suppliers? Damage to goodwill Early settlement discounts lost Business disruption Increased risk of bad debts (2 marks) 55 Which of the following would be LEAST likely to arise from the introduction of a just-in-time inventory ordering system? Lower inventory holding costs Less risk of inventory shortages More frequent deliveries Increased dependence on suppliers (2 marks) (Total = 20 marks) CBE style OTQ bank – Working capital finance 20 mins 56 JP Co has budgeted that sales will be $300,100 in January 20X2, $501,500 in February, $150,000 in March and $320,500 in April. Half of sales will be credit sales. 80% of receivables are expected to pay in the month after sale, 15% in the second month after sale, while the remaining 5% are expected to be bad debts. Receivables who pay in the month after sale can claim a 4% early settlement discount. What level of sales receipts should be shown in the cash budget for March 20X2 (to the nearest $)? $ (2 marks) 14 Questions 57 WW Co is a subsidiary of BB Co. WW Co requires $10 million in finance to be easily spread over the coming year, which BB Ltd will supply. Research shows: There is a standing bank fee of $200 for each drawdown. The interest cost of holding cash (ie finance cost less deposit interest) is 6% pa. How much should WW Co draw down at a time (to the nearest $'000)? $ (2 marks) 58 The treasury department in TB Co has calculated, using the Miller-Orr model, that the lowest cash balance they should have is $1m, and the highest is $10m. If the cash balance goes above $10m they transfer the cash into money market securities. Are the following true or false? True False 1 When the balance reaches $10m they would buy $6m of securities 2 When the cash balance falls to $1m they will sell $3m of securities 3 If the variance of daily cash flows increases the spread between upper and lower limit will be increased. (2 marks) 59 Which statement best reflects an aggressive working capital finance policy? More short-term finance is used because it is cheaper although it is risky. Investors are forced to accept lower rates of return. More long-term finance is used as it is less risky. Inventory levels are reduced. (2 marks) 60 What are the TWO key risks for the borrower associated with short-term working capital finance? Rate risk Renewal risk Inflexibility Maturity mismatch (2 marks) (Total = 10 marks) Questions 15  Section B questions PKA Co (12/07, amended) 20 mins The following scenario relates to questions 61 – 65. PKA Co is a European company that sells goods solely within Europe. The recently-appointed financial manager of PKA Co has been investigating working capital management objectives and the working capital management of the company, and has gathered the following information about the inventory policy and accounts receivable. Inventory management 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. Accounts receivable management Customers are allowed 30 days’ credit, but the financial statements of PKA Co show that the average accounts receivable period in the last financial year was 75 days. This is in line with the industry average. The financial manager also noted that bad debts as a percentage of sales, which are all on credit, increased in the last financial year from 5% to 8%. The accounts receivables department is currently short staffed. 61 What are the objectives of working capital management at PKA? 1 To ensure that PKA Co has sufficient liquid resources 2 To increase PKA Co’s profitability 3 To ensure that PKA Co’s assets give the highest possible returns A 1 only B 1 and 2 only C 2 and 3 only D 1, 2 and 3 (2 marks) 62 What is the current minimum inventory level at PKA Co? A 10,000 B 12,500 C 22,500 D 35,000 (2 marks) 63 What is the economic order quantity? A 250 B 3,536 C 17,678 D 25,000 (2 marks) 64 What are the best ways for PKA Co to improve the management of accounts receivable? 1 Assess the creditworthiness of new customers 2 Introduce early settlement discounts 3 Take legal action against the slow payers and non-payers A 1 and 2 only B 2 only C 1 and 3 only D 1, 2 and 3 (2 marks) 16 Questions 65 In order to improve the management of receivables, PKA Co is considering using a factor. Which of the following are benefits of factoring for PKA? 1 Credit customers make payments directly to the factor 2 Accounts receivable will be handled by a dedicated team 3 Optimum levels of inventory can be maintained A 2 only B 1, 2 and 3 C 2 and 3 only D 1 and 3 only (2 marks) (Total = 10 marks) CBE style OT case Gorwa Co (12/08, amended) 20 mins The following scenario relates to questions 66 – 70. The financial manager of Gorwa Co is worried about the level of working capital and that the company may be overtrading. The following extract financial information relates to the last two years: 20X7 20X6 $'000 $'000 Sales (all on credit) 37,400 26,720 Cost of sales 34,408 23,781 Operating profit 2,992 2,939 20X7 20X6 $'000 $'000 $'000 $'000 Current assets Inventory 4,600 2,400 Trade receivables 4,600 2,200 9,200 4,600 Current liabilities 7,975 3,600 66 What is the sales/net working capital ratio for 20X7 (to 2 dp)? 20X7 times (2 marks) 67 By what percentage have inventories increased between 20X6 and 20X7 (to the nearest whole percentage)? % (2 marks) 68 Are the following statements true or false for Gorwa Co? True False Accounts receivable turnover has slowed down Inventory turnover has slowed down (2 marks) Questions 17  69 Gorwa Co is concerned about overtrading. Which TWO of the following are symptoms of overtrading? Rapid reduction in sales revenue Slow down in inventory turnover Shortening of payment period to accounts payables A fall in the current ratio (2 marks) 70 Gorwa Co’s working capital is most likely to increase in which of the following situations? Payments to suppliers are delayed The period of credit extended to customers is reduced Non-current assets are sold Inventory levels are increased (2 marks) (Total = 10 marks) CBE style OT case Cat Co 20 mins The following scenario relates to questions 71 – 75. Cat Co places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which Cat Co meets, and the cost per component is $7.50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1.00 per component per year. The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2.20 per component per year due to the need for a larger storage facility. 71 What is the current total annual cost of inventory? $ (2 marks) 72 What is the total annual inventory cost if Cat Co orders 30,000 components at a time? $ (2 marks) 73 Cat Co has annual credit sales of $25 million and accounts receivable of $5 million. Working capital is financed by an overdraft at 10% interest per year. Assume 365 days in a year. What is the annual finance cost saving if Cat Co reduces the collection period to 60 days (to the nearest whole number)? $ (2 marks) 74 Cat Co is reviewing its working capital management. Which TWO of the following statements concerning working capital management are correct? The twin objectives of working capital management are profitability and liquidity A conservative approach to working capital investment will increase profitability Working capital management is a key factor in a company's long-term success Liquid assets give the highest returns leading to conflicts of objectives (2 marks) 18 Questions 75 Management at Cat Co are considering an aggressive approach to financing working capital. Which of the following statements relate to an aggressive approach to financing working capital management? 1 All non-current assets, permanent current assets and part of fluctuating current assets are financed by long-term funding 2 There is an increased risk of liquidity and cash flow problems Both statements relate to an aggressive approach Neither statement relates to an aggressive approach Statement 1 only relates to an aggressive approach Statement 2 only relates to an aggressive approach (2 marks) (Total = 10 marks) Section C questions 76 APX Co (12/09, amended) 39 mins APX Co achieved a revenue of $16 million in the year that has just ended and expects revenue growth of 8.4% in the next year. The financial statements of APX Co for the year that has just ended contain the following statement of financial position: $m $m Non-current assets 22.0 Current assets Inventory 2.4 Trade receivables 2.2 4.6 Total assets 26.6 Equity finance: $m $m Ordinary shares 5.0 Reserves 7.5 12.5 Long-term bank loan 10.0 22.5 Current liabilities Trade payables 1.9 Overdraft 2.2 4.1 Total equity and liabilities 26.6 The long-term bank loan has a fixed annual interest rate of 8% per year. APX Co pays taxation at an annual rate of 30% per year. The following accounting ratios have been forecast for the next year: Gross profit margin: 30% Operating profit margin: 20% Dividend payout ratio: 50% Inventory turnover period: 110 days Trade receivables period: 65 days Trade payables period: 75 days Overdraft interest in the next year is forecast to be $140,000. No change is expected in the level of non-current assets and depreciation should be ignored. Questions 19  Required (a) Prepare the following forecast financial statements for APX Co using the information provided: (i) A statement of profit or loss for the next year (ii) A statement of financial position at the end of the next year (9 marks) (b) Analyse and discuss the working capital financing policy of APX Co. (6 marks) (c) Discuss the role of financial intermediaries in providing short-term finance for use by business organisations. (5 marks) (Total = 20 marks) 77 ZSE Co (6/10, amended) 39 mins ZSE Co is concerned about exceeding its overdraft limit of $2 million in the next two periods. It has been experiencing considerable volatility in cash flows in recent periods because of trading difficulties experienced by its customers, who have often settled their accounts after the agreed credit period of 60 days. ZSE has also experiences an increase in bad debts due to a small number of customers going into liquidation. The company has prepared the following forecasts of net cash flows for the next two periods, together with their associated probabilities, in an attempt to anticipate liquidity and financing problems. These probabilities have been produced by a computer model which simulates a number of possible future economic scenarios. The computer model has been built with the aid of a firm of financial consultants. Period 1 cash flow Probability Period 2 cash flow Probability $'000 $'000 8,000 10% 7,000 30% 4,000 60% 3,000 50% (2,000)