ACCA F9 Workbook Questions 1.1 PDF

ACCA F9 Financial Management Full Course Workbook Questions!
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ACCA F9 Workbook Lecture 1 Financial Strategy

Shareholder Wealth - Illustration 1
Year 2007 2008 2009 2010 2011
Share Price 3.30 3.56 3.47 3.75 3.99
Dividend Paid 40c 42c 44c 46c 48c
There are 2 million shares in issue. ! ! ! ! ! ! ! ! ! ! Calculate the increase in shareholder wealth for each year: II. Per share III. As a percentage IV. For the business as a whole
EPS - Illustration 2
2010 $000 PBIT Interest Tax Prot After Tax Preference Dividend Dividend Retained Earnings 2000 200 300 1500 300 800 400
2011 $000 2100 300 400 1400 400 900 100
Share Capital (50c) Reserves
5000 3000
5000 3100
Share Price
$2.50
$2.80
Calculate the EPS for 2010 and 2011.
Test Your Knowledge

If you cant answer all of the questions below without looking at the answer then you need to do some more work on this area!
1. What are the 3 things that financial managers need to plan? 2. What is Corporate Strategy? 3. Describe the Agency Problem. 4. What are the 3 main financial objectives of the financial manager? 5. How do you calculate the increase in shareholder wealth? 6. How do you calculate EPS? 7. Outline 2 potential dividend payment strategies. 8. Why did Miller & Modigliani say that dividends were irrelevant? 9. Outline the Clientele Effect. 10. What is a script dividend?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2010 Q4 Part (d) June 2010 Q4 Part (c)
Now do it!
!
Lecture 2 Performance Measurement

Performance Analysis Illustration X1 X2 X3
Non Current Assets Current Assets
500 150 650
700 200 900
1000 300 1300
Ordinary Shares ($1) Reserves Loan Notes Payables
300 100 150 100 650
300 280 200 120 900
300 430 300 270 1300
Revenue COS Gross Prot Admin Costs Distribution Costs PBIT Interest Tax Prot After Tax Dividends Retained Earnings
3000 2000 1000 300 200 500 100 120 280 100 180
3500 2400 1100 350 250 500 150 90 260 110 150
4200 3200 1000 400 300 300 220 50 30 30 0
Share Price
$3.30
$4.00
$2.20
Using the information on the previous page calculate and comment on the following Ratios: I. Return on Capital Employed II. Return on Equity III. Gross Margin IV. Net Margin V. Operating Margin VI. Revenue Growth VII. Gearing VIII. Interest Cover IX. Dividend Cover X. Dividend Yield XI. P/E Ratio
Test Your Knowledge

1. In the ROCE calculation what are the 3 ways of calculating Capital Employed? 2. What is the top line of the ROE calculation? 3. Why do we use PAT - Pref DIvs in the ROE calculation? 4. What should we compare the ratios we calculate with? 5. What does gearing tell us? 6. How do you calculate interest cover? 7. How do you calculate EPS? 8. What does the P/E Ratio tell us? 9. How do you calculate dividend cover? 10. What does dividend yield tell us?
If youve successfully answered all of the above questions then youre ready to do the exam question below: June 2009 Q4 (a)
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Lecture 3 Finance Sources

Rights Issue - Illustration 1 XYZ Ltd. intends to raise capital via a rights issue. The current share price is $8. They are offering a 1 for 4 issue at a price of $6. Calculate the Theoretical Ex-rights Price.
Rights Issue - Illustration 2 ABC Ltd. has decided to raise capital via a rights issue. 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. Calculate the Theoretical Ex-Rights Price.
Test Your Knowledge

1. What 5 things will a company consider when choosing a source of finance? 2. What is the primary function of the stock market? 3. What are the advantages to the company of being listed? 4. Are there any disadvantages of being listed? 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? 7. What are the disadvantages of an IPO? 8. What is a placing? 9. Who demands covenants to be placed on debt? 10. What is the function of the treasury department in a company?
If youve successfully answered all of the above questions then youre ready to do the exam question below: June 2009 Q4 (b) & (c)
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Lecture 4 Economic Environment

Test Your Knowledge

1. What are the 4 targets of economic policy? 2. Name 2 examples of cost-push inflation. 3. What is fiscal policy? 4. How is an increase in interest rates likely to effect the economy? 5. When might policy makers decide to decrease interest rates? 6. What are the money markets? 7. How can financial intermediaries help to make the market more efficient? 8. Name 5 types of securities?
If youve successfully answered all of the above questions then youre ready to do the exam question below:
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Lecture 5 Working Capital

Working Capital Illustration Balance Sheet $000 ASSETS Non Current Assets Inventory Receivables Cash 1000 300 200 300 1800 LIABILITIES Ordinary Shares Reserves Long term Liabilities Payables Overdraft 800 200 700 100 1800 Income Statement $000 Revenue COS Gross Prot Other Costs Net Prot Other Information: All sales are made on credit. Required: Calculate the Cash Operating Cycle for Inter Ltd. 1000 800 200 100 100
Working Capital Illustration Part II Show the journal entries and calculate the Revised Balance sheet if the operating cycle changes to:
Item Inventory Period Collection Period Less: Payables Period
Days 200 100
30 270
Working Capital Illustration Part III Show the journal entries and calculate the Revised Balance sheet if the operating cycle changes to:
Item Inventory Period Collection Period Less: Payables Period
Days 90 30
60 60
Test Your Knowledge

1. What are the components of working capital? 2. State 6 indicators of overtrading. 3. What is the Quick Ratio and what does it tell us? 4. How do we calculate the cash operating cycle? 5. If my inventory days go up from 100 to 150 will I need to invest more or less cash in the business? 6. What are permanent current assets? 7. What are fluctuating current assets? 8. What is the matching principle? 9. What are the advantages of an aggressive working capital financing policy? 10. What are the advantages of a conservative working capital financing policy?
If youve successfully answered all of the above questions then youre ready to do the exam question below: June 2009 Q3 (a) & (b)
Now do it!
Lecture 6 Managing Receivables

Receivables - Illustration 1 Credit sales: 1200 3 month credit terms Overdraft rate = 10% New Policy 2% discount if paid in less than 10 days 2 month terms for everyone else. 20% will take the discount
Receivables - Illustration 2
Receivables are currently $4,600,000. Sales are $37,400,000 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%
Test Your Knowledge

1. How can a company assess the credit worthiness of their customers? 2. Outline 3 ways of maintaining good credit control. 3. What are the benefits of offering a discount to customers? 4. How do you decide whether to offer a discount or not? 5. What is debt factoring? 6. What are the disadvantages of factoring for a company? 7. What is invoice discounting? 8. How can a company seek to ensure that foreign receivables are collected?
If youve successfully answered all of the above questions then youre ready to do the exam question below:
Now do it!
Lecture 7 Inventory Management

EOQ - Illustration 1 Demand of 1200 units per month. Cost of making an order of $12. Cost of one unit $10. Holding cost per year of 10% of the purchase price of the goods. Calculate the EOQ & check that it is correct.
Buffer Stock - Illustration 2
Company orders when the level of stock reaches 50,000 It takes 4 weeks to receive new stock from the time of ordering. The company uses 7,500 units on average per week. Calculate the buffer stock.
EOQ With Buffer Stock - Illustration 3
Dec 07 Exam Question 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 050 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. Calculate EOQ with buffer stock
EOQ with discounts - Illustration 4
Demand is 1000 units per month. Purchase cost per unit 11. Order cost 30 Holding cost 10% p.a. of stock value. Required Calculate the minimum total cost with a discount of 1% given on orders of 1500 and over
Test Your Knowledge

1. What are the two types of cost we are seeking to minimise? 2. How do we calculate total ordering costs for the year? 3. How do we calculate total holding costs for the year? 4. How do we calculate the buffer stock? 5. What are the problems with the EOQ method? 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?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: June 2009 Q3 (d) December 2010 Q3 (a)
Now do it!
Lecture 8 Cash Management

Baumol Cash Model - Illustration 1
A business expects to move 500,000 from its interest bearing account into cash over the course of one year. The interest rate is 7% and the cost of making a transfer is $250. 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.
Subsonic Speaker Systems (SSS) has annual transactions of $9 million. The xed cost of converting securities into cash is $264.50 per conversion. The annual opportunity cost of funds is 9%. What is the optimal deposit size?
Miller-Orr Model - Illustration 4
If a company must maintain a minimum cash balance of 8,000, and the variance of its daily cash ows 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
Test Your Knowledge

1. What are the three reasons to hold cash? 2. What does the Baumol Model tell us? 3. Why is there a cost of holding cash? 4. How do we calculate the total trading costs in the year? 5. How do we calculate the total holding costs in the year? 6. What are the problems with the Baumol Model? 7. Why does the Miller-Orr model tell us to buy securities with extra cash? 8. How do we calculate the variance of cash flows? 9. If the interest rate is 8% what figure should be included in the Miller-Orr model for i? 10. How do we calculate the upper limit?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: Pilot Paper Q3 (You now know enough to do this all)
Now do it!
Lecture 9 Investment Appraisal I

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. They expect the following cash to come in: Year Net Cash Prots () 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 Calculate the ARR or ROCE of this investment
Relevant Cash Flow Criteria - Illustration 2 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 protable. The headquarters of the company has spare oor 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 ows and explain your answer. I. II. The cost of the feasibility study. The rent charged to the project.
III. The new equipment. IV. The depreciation on the new equipment. V. The Managers salary.
Payback Period - Illustration 3 Initial Investment of $5.8m. Annual Cash Flows of $400,000. Calculate the Payback Period.
Payback Period - Illustration 4 Initial Investment of $6.2m. Cash Flows of: Year 1: ! Year 2:! Year 3:! Year 4:! $1,200,000 $2,200,000 $2,500,000 $1,700,000
Calculate the Payback Period.
Discounted Cash-ows - Illustration 5 An investor wants a real return of 10%. Ination is 5% What is the MONEY/NOMINAL rate required?
Discounted Cash-ows - Illustration 6 A company undertakes a project with the following cash-ows:
Year 1 2 3 4 5 6
Cash-Flows 5,000 7,000 8,000 10,000 11,000 9,000
The company has a cost of capital of 10%. Calculate the present value of the cash ows for each of the six years and in total.
Discounted Cash-ows - Illustration 7 A company undertakes a project with the following cash-ows:
Year 1 2 3 4 5 6
Cash-Flows 5,000 5,000 5,000 5,000 5,000 5,000
The company has a cost of capital of 10%. Calculate the present value of the total cash ows for the six years
Discounted Cash-ows - Illustration 8 A company expects to receive $100,000 per year forever. Their cost of capital is 10%. Calculate the present value of the perpetuity.
Test Your Knowledge

1. What are the 6 steps in investment appraisal? 2. Why carry out a post-completion audit? 3. What is the calculation for the ARR or ROCE? 4. How do you calculate the average investment? 5. What are the weaknesses of the ARR? 6. What are the 3 relevant criteria for cash-flows in investment appraisal? 7. What are the advantages of using the payback period method? 8. Why do we need to discount cash-flows? 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?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: June 2009 Q2 (a)
Now do it!
Lecture 10 Investment Appraisal II

WDA - Illustration 1 A business buys a piece of equipment for $100. Capital allowances are available at 25% reducing balance. The tax rate is 30% After the 4 year project the equipment can be sold for $25.
Working Capital - Illustration 2 A business requires the following working capital investment into a four year project: Initial Investment:! ! Year 1!! Year 2!! Year 3!! ! ! ! ! ! ! 30,000 35,000 45,000 32,000
Show the working capital line in the NPV calculation.
NPV - Illustration 3 A business is evaluating a project for which the following information is relevant: I. II. Sales will be $100,000 in the rst year and are expected to increase by 5% per year. 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 ination is expected to be 3% over the course of the project and the business uses a real discount rate of 9%. Calculate the NPV for the project.
Test Your Knowledge

1. What are we comparing in NPV analysis? 2. Why do we need a period 0? 3. Why do we assume that cash-flows occur at the end of each period? 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? 6. What makes up working capital? 7. How do we account for working capital in NPV analysis? 8. If my cash flows in my NPV analysis are inflated should I use the real or the nominal discount rate?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: June 2010 Q3 (a) & (b)
Now do it!
Lecture 11 Investment Appraisal III

IRR - Illustration 1 ABC has evaluated a project and come to the following conclusions. At a discount rate of 10% the NPV will be $100,000 At a discount rate of 15% the NPV will be -$75,000 What is the IRR?
Test Your Knowledge

1. What are we trying to find with the Internal Rate of Return? 2. What is the formula for the IRR? 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? 4. What are the advantages of the IRR? 5. What are the disadvantages of the IRR?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: June 2009 Q2 (b) & (c) December 2010 Q1 (a) & (b) December 2007 Q2 (a) & (b) Pilot Paper Q4
Now do it!
Lecture 12 Further Appraisal

Expected Values - Illustration 1
A business is considering 2 different projects. The likely prot made from each project is outlined below: Project A Projected Prot $10,000 $15,000 $20,000 $23,000 Percentage Likely-hood 10% 30% 40% 20% Project B Projected Prot $10,000 $15,000 $20,000 $23,000 Percentage Likely-hood 15% 25% 30% 30%
Calculate the expected value for each of the projects.
Sensitivity Margin - Illustration 2
A business is considering a project which will cost them an initial 20,000 The sales expected for the 2 year duration are 20,000pa. The variable costs are 2,000pa Cost of capital 10% Calculate the sensitivity margin of: I. II. The initial investment. The variable costs of the projects.
III. The sales of the project.
Lease V Buy - Illustration 3
Machine cost $10,000 The Machine has a useful economic life of 5 years with no scrap value Capital allowancesavailable at 25% reducing balance Finance choices 1) 5 year loan 14.28% pre tax cost 2) 5 year Finance Lease @ $2,200 pa in advance If the machine is purchased then maintenance costs of $100 per year will be incurred. The tax rate is 30%. The leasing company will maintain the machine if it is leased. Should the company lease or buy the machine.
Equivalent Annual Cost - Illustration 4
Machine Cost 30,000 Running costs Year 1 10,000 Year 2 11,500 Residual Value (if sold after..) Year 1 19,000 Year 2 16,000 Cost of capital = 10% Is it better to replace the machine every year or to replace it every 2 years?
Test Your Knowledge

1. What is the difference between risk and uncertainty? 2. How can we deal with each of risk and uncertainty in investment appraisal? 3. What is an operating lease? 4. Why might a company want to lease an item rather than buy it? 5. What are the relevant costs of buying the item? 6. What are the relevant costs of leasing the item? 7. If I have a pre-tax borrowing rate of 13% and the tax rate is 25% what is the post-tax borrowing rate? 8. What does the equivalent annual cost method tell us? 9. What is the equation for the EAC? 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?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2009 Q1 (a) & (b) December 2007 Q2 (c)
Now do it!
Lecture 13 Further Appraisal II

Protability Index - Illustration 1
A business has identied the following projects. They have $200,000 to invest and the projects are divisible. Project A B C D E Investment 90,000 110,000 50,000 75,000 70,000 NPV 15,000 25,000 10,000 22,000 -8,000
Which projects should the business undertake?
Investment Choices - Illustration 2
A business has identied the following projects. They have $200,000 to invest and the projects are non-divisible. Project A B C D Investment 90,000 110,000 50,000 75,000 NPV 15,000 25,000 10,000 22,000
Which projects should the business undertake?
Equivalent Annual Annuity - Illustration 3
NPVDuration
Project 13005 yrs Project 22003 yrs Project 33506 yrs Calculate the EEA of each project given a cost of capital of 10%
Test Your Knowledge

1. What is the difference between divisible and non-divisible projects? 2. If the projects are divisible,which method should be used to decide which projects to undertake? 3. How do we calculate the Profitability Index? 4. If projects are non divisible how do we make a decision? 5. What is the equivalent annual benefit? 6. What is capital rationing? 7. What is hard capital rationing? 8. What is soft capital rationing?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2009 Q1 (c) & (d)
Now do it!
Lecture 14 Business Valuations

Net Assets Valuation Method Illustration 1
Non Current Assets Current Assets Current Liabilities
550,000 170,000 -80,000
Share Capital Reserves 10% Loan Notes
300,000 200,000 150,000
The Market Value of property in the Non Current Assets is $50,000 more than the book value. The Loan Notes are redeemable at a 5% premium. What is the value of a 70% holding using the net assets valuation basis?
DVM - Illustration 2
ABC pays a constant dividend of 45c. It has 3m ordinary shares. The shareholders require a return of 15%. What is the Value of the business?
DVM - Illustration 3
A business has Share Capital made up of 50c shares of $3 million Dividend per share (just paid) 30c Dividend paid four years ago 22c Required Return = 12% Calculate the Value of the business using the dividend valuation method. P/E Ratio Method - Illustration 4
X1 $000 Revenue COS Gross Prot Admin Costs Distribution Costs PBIT Interest Tax Prot After Tax Dividends Retained Earnings 3000 2000 1000 300 200 500 100 120 280 100 180
X2 $000 3500 2400 1100 350 250 500 150 90 260 110 150
X3 $000 4200 3200 1000 400 300 300 220 50 30 30 0
Industry P/E Average
13
12
14
Calculate the Value of the Company for each of the 3 years using the P/E Ratio method.
P/E Ratio Method - Illustration 5 X1 $000 Revenue COS Gross Prot Admin Costs Distribution Costs PBIT Interest Tax Prot After Tax Dividends Retained Earnings 3200 2000 1200 300 200 700 100 120 480 100 380 X2 $000 3800 2400 1400 350 250 800 150 90 560 110 450 X3 $000 4800 3200 1600 400 300 900 220 50 630 150 480
Industry P/E Average Number of Shares
17 3m
15 3m
18 3m
Calculate the Earnings Per Share for each of the 3 years Calculate the Value of the Company for each of the 3 years using the EPS you calculate.
Earnings Yield - Illustration 6 X1 $000 Revenue COS Gross Prot Admin Costs Distribution Costs PBIT Interest Tax Prot After Tax Dividends Retained Earnings 3100 2000 1100 300 200 600 100 120 380 100 280 X2 $000 3700 2400 1300 350 250 700 150 90 460 110 350 X3 $000 4600 3200 1400 400 300 700 220 50 430 150 280
Earnings Yield Number of Shares
0.15 4m
0.18 4m
0.17 4m
Calculate the Earnings Per Share for each of the 3 years and the share price using the earnings yield.
Present Value of Future Cash Flows - Illustration 7
ABC Company earned $100,000 in cash inows this year. They expect this to increase in each of the next 5 years by 5% and after that to increase by 2% forever. The company uses a cost of capital of 10%. Calculate the value of the company using the present value of future cash ows method.
Test Your Knowledge

1. When is it appropriate to use the Net Assets Valuation method? 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. 5. What are the downsides of using DVM? 6. Why do we use a proxy P/E Ratio when valuing a business with this method? 7. When and how can we adjust the P/E Ratio used? 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? 9. What are the downsides of using the P/E ratio method? 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%?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2007 Q1 (a) June 2008 Q2 (a) & (b) December 2008 Q1
Now do it!
Lecture 15 WACC I
Cost of Equity using DVM - Illustration 1
ABC Company has just paid a dividend of 35c. The current share price is $3.25. Calculate the Cost of Equity (Ke) using DVM.
Cost of Equity using DVM - Illustration 2
ABC Company has just paid a dividend of 35c. The dividend paid has grown by 4% per year for the past 5 years. The current share price is $3.25. Calculate the Cost of Equity (Ke) using DVM.
Cost of Equity using CAPM - Illustration 3
Company A has a Beta of 1.2. Government bonds are currently trading at 4%. The average return than investors in the market can expect is 15%. Calculate the Cost of Equity using CAPM.
Cost of Equity using CAPM - Illustration 4
Company A has a Beta of 1.2. Company B has a Beta of 1. Government bonds are currently trading at 5%. The average return than investors in the market can expect is 12%. Calculate the Cost of Equity using CAPM for each company.
Cost of Equity using CAPM Illustration 5
Company A has a Beta of 1.3. Company B has a Beta of 1.2. Government bonds are currently trading at 5%. The average market risk premium is 6%. Calculate the Cost of Equity using CAPM for each company.
Test Your Knowledge

1. What is the weighted average cost of capital? 2. Set out the creditors hierarchy. 3. Why is debt cheaper to service than equity (2 reasons!)? 4. If a company has a dividend of 40c and a share price of $3.45 what is the cost of equity? 5. If the dividend in question 4 is growing at a rate of 5% what is the cost of equity? 6. What are the two types of risk mentioned in the CAPM lecture? 7. Why can we ignore unsystematic risk? 8. What type of risk is CAPM a measure of? 9. What does Beta tell us? 10. What are the assumptions of CAPM? 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? 13. How is Beta calculated? 14. What are the downsides of CAPM?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: Youre not Ready Yet - Do the next lecture!
Now do it!
Lecture 16 WACC II
Irredeemable Debt - Illustration 1
A company has issued 10% irredeemable debt. The market value of the debt is $90. The tax rate is 30% Calculate the cost of debt (Kd).
Redeemable Debt - Illustration 2
A Company has issued debt which is redeemable in 5 years time. Interest is payable at 8%. The current market value of the debt is $102. Ignore taxation. Calculate the Cost of Debt (Kd).
Redeemable Debt - Illustration 3
A Company has issued debt which is redeemable in 5 years time. Interest is payable at 10%. The current market value of the debt is $104. Tax is payable at 30%. Calculate the Cost of Debt (Kd).
Convertible Debt - Illustration 4
A Company has issued debt which is convertible in 5 years time. Interest is payable at 10%. The current market value of the debt is $120. On conversion, investors will have a choice of either: I. II. Cash at a 15% premium; or 18 shares per loan note.
The current share price is $6 and it is expected to grow in value by 4% per year. Tax is payable at 30%. Calculate the Cost of Debt (Kd).
Preference Shares - Illustration 5
A company has issued 8% preference shares with a nominal value of $1. The market value of the shares is 80c. The tax rate is 30%. Calculate the cost of the preference shares (Kd).
Bank Debt - Illustration 6
A company has a bank loan of $2m at an interest rate of 10%. The tax rate is 30%. Calculate the cost of debt (Kd).
WACC - Illustration 7
Company A is funded as follows: Item Equity Debt Capital Structure 85% 15% Cost 15% 7%
Calculate the Weighted Average Cost of Capital.
Company A is funded as follows: Balance Sheet Extract
Ordinary Shares (50c) Loan Notes Bank Loan
3000 2000 1000
The cost to the company of each of the above items has been calculated as:
Ordinary Shares Loan Notes Bank Loan
13% 8% 5%
The Loan notes are currently trading at $94. The current share price is $1.50 Calculate the Weighted Average Cost of Capital.
Company A is funded as follows: Balance Sheet Extract
Ordinary Shares (50c) 12% Loan Notes 8% Preference Shares ($1) Bank Loan Details on these are as follows.
2000 1500 500 750
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. The preference shares are trading at 92c. The bank loan has an interest rate of 10%. The current share price is $1.25. The tax rate is 30%. Calculate the Weighted Average Cost of Capital.
Test Your Knowledge

1. What is the nominal value of issued debt? 2. What is convertible debt convertible into? 3. What is the calculation for irredeemable debt? 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 companys 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 companys weighted average cost of capital?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2008 Q3 (a) June 2010 Q2 June 2008 Q1
Now do it!
Lecture 17 Capital Structure

Capital Structure - Illustration 1
A company has total capital of $1,000 with debt making up $300 and equity making up $700 of the total. The companys cost of debt is 5% and cost of equity is 14%. I. II. Calculate the companys current WACC. Calculate the WACC if the company substitutes $200 of equity for $200 of debt causing their cost of equity to rise to 16%. III. Calculate the WACC if the company substitutes $300 of equity for $300 of debt causing their cost of equity to rise to 25%.
Test Your Knowledge

1. What is capital structure? 2. What does the traditional view suggest you can do with the WACC? 3. Why would you want to do this? 4. What other assumptions did M & M make? 5. What does the M&M model with tax suggest we should do with our capital structure?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: Pilot Paper Q1 (b) June 2009 Q1 (c)
Now do it!
Lecture 18 Financing & Investment

Project Specic Discount Rate - Illustration 1 Company A intends to undertake a project in an unrelated industry. The following details are relevant: Item Equity Beta (e) Value of Equity Value of Debt The risk free rate is 4%. The average return on the market is 12%. Calculate a project specic discount rate. Ignore Tax Company A 1.2 1000 400 Proxy Company 1.4 800 500
Project Specic Discount Rate - Illustration 2 Company A intends to undertake a project in an unrelated industry. The following details are relevant: Item Equity Beta (e) Value of Equity Value of Debt The risk free rate is 4%. The average return on the market is 12%. The tax rate is 30%. Calculate a project specic discount rate. Ignore Tax Company A 1.1 1200 500 Proxy Company 1.3 900 450
Test Your Knowledge

1. What are the two types of risk included in a companys equity Beta? 2. When do we use the WACC as a discount rate? 3. What is capital structure? 4. What are the steps to calculate a project specific discount rate? 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. 6. What are the 3 types of market efficiency? 7. Describe weak form market efficiency.
If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2008 Q3 (c) June 2010 Q3 (c) (iii) December 2010 Q1 (c)
Now do it!
Lecture 19 More Debt

December 07 Exam Question (6 marks)

Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in ve 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 $445 and this is expected to grow at a rate of 65% 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) oor value; (iii) conversion premium.
Test Your Knowledge

1. How is the market value of convertible debt calculated? 2. What will the capital repaid figure in the IRR calculation be the higher of? 3. What is the floor value of convertible debt? 4. How is the floor value calculated? 5. What is the conversion premium?
If youve successfully answered all of the above questions then youre ready to do the exam questions below:
Now do it!
Lecture 20 Currency Risk I

Buy or Sell Currency - Illustration 1
You have an invoice to pay to a US business of $1250 and you are a UK business. The rate offered by the bank is $: 1.2500 - 1.3500 How many will it take to pay the $125?
Buy or Sell Currency - Illustration 2
You have issued an invoice to a US customer of $2000 and you are a UK business. The rate offered by the bank is $: 1.4500 - 1.5500 How many will you receive for the $2000?
Purchasing Power Parity Theory - Illustration 3
The current exchange rate is 2$ per . Ination in the US is 6%. Ination in the UK is 8%. What will the FX rate be in 1 years time?
Interest Rate Parity Theory - Illustration 4
The current exchange rate is 2$ per . The interest rate in the US is 3%. The interest rate in the UK is 2%. What will the FX rate be in 1 years time?
Forward Rate - Illustration 5
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. A 3 month forward rate is available at $: 1.6000 +/- 0.0500.
Calculate the amount of ABC would receive under the forward contract.
Money Market Hedge - Illustration 6
A UK business needs to pay $350,000 to a US supplier in 3 months time. Exchange rate now: $: 1.6500 - 1.7000 Deposit rates UK 4% annual US 6% annual Borrowing rates UK 5% annual US 6.5% annual How much will the transaction cost using a money market hedge?
Money Market Hedge Illustration 7
A UK business will receive $350,000 from a US supplier in 3 months time. Exchange rate now: $: 1.6500 - 1.7000 Deposit rates UK 4% annual US 6% annual Borrowing rates UK 5% annual US 6.5% annual How much will the business receive using a money market hedge?
Test Your Knowledge

1. $/ 1.35 - 1.45 which currency is the counter currency? 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 years time? 4. What are the internal methods of hedging currency risk? 5. What are the disadvantages of a forward contract? 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? 8. A UK company is going to pay $400,000 to a US supplier in 3 months time. The UK deposit rate is 4.5% and the borrowing rate is 5.5%. The US deposit rate is 5.5% and the borrowing rate is 6.5%. Calculate the cost of the payment if the company uses a money market hedge?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: Pilot Paper Q2 (All except part (a)) December 2008 Q4 (a), (b) & (c)
Now do it!
Lecture 21 Currency Risk II

Test Your Knowledge

1. What are the 3 types of FX risk? 2. Explain each of the 3. 3. What is a futures contract? 4. What are the advantages of a future? 5. What are the disadvantages of a future? 6. How do you undertake a future contract? 7. What is an option? 8. What is the main advantage of an option? 9. Are there any downsides to an option? 10.What type of risk will an option hedge?
If youve successfully answered all of the above questions then youre ready to do the exam questions below: Pilot Paper Q2 (a) December 2008 Q4 (d)
Now do it!
Lecture 22 Interest Rate Risk

Test Your Knowledge

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? 4. What is an Interest Rate Swap? 5. What are the disadvantages of an interest rate swap? 6. What does a Yield Curve plot? 7. In what way does a Yield Curve slope? 8. What are the three ways in which theorists have sought to explain the slope of the yield curve?
Now do it!
Lecture 23 Islamic Finance

Test Your Knowledge

1. What is the main principle behind islamic finance? 2. What should money only be generated by? 3. What are the Islamic terms for forbidden and permitted? 4. How will a mortgage work under islamic financial principles? 5. What is the islamic term for a bank loan? 6. How will lease finance (ijara) work under islamic finance? 7. What must debt finance relate to under islamic finance principles? 8. What is the islamic finance term for a joint venture?
Now do it!

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ACCA F9 Financial Management Full Course Workbook Questions!

ACCA F9 Workbook Lecture 1 Financial Strategy

ACCA F9 Financial Management Full Course Workbook Questions!

Shareholder Wealth - Illustration 1

Year 2007 2008 2009 2010 2011

Share Price 3.30 3.56 3.47 3.75 3.99

Dividend Paid 40c 42c 44c 46c 48c

ACCA F9 Financial Management Full Course Workbook Questions!

2011 $000 2100 300 400 1400 400 900 100

Share Capital (50c) Reserves

Calculate the EPS for 2010 and 2011.

ACCA F9 Financial Management Full Course Workbook Questions!

Test Your Knowledge

ACCA F9 Financial Management Full Course Workbook Questions!

Lecture 2 Performance Measurement

ACCA F9 Financial Management Full Course Workbook Questions!

Performance Analysis Illustration X1 X2 X3

Non Current Assets Current Assets

500 150 650

700 200 900

1000 300 1300

Ordinary Shares ($1) Reserves Loan Notes Payables

300 100 150 100 650

300 280 200 120 900

300 430 300 270 1300

4200 3200 1000 400 300 300 220 50 30 30 0

ACCA F9 Financial Management Full Course Workbook Questions!

ACCA F9 Financial Management Full Course Workbook Questions!

Test Your Knowledge

ACCA F9 Financial Management Full Course Workbook Questions!

Lecture 3 Finance Sources

ACCA F9 Financial Management Full Course Workbook Questions!

ACCA F9 Financial Management Full Course Workbook Questions!

Test Your Knowledge

ACCA F9 Financial Management Full Course Workbook Questions!

Lecture 4 Economic Environment

ACCA F9 Financial Management Full Course Workbook Questions!

Test Your Knowledge

ACCA F9 Financial Management Full Course Workbook Questions!

Lecture 5 Working Capital

ACCA F9 Financial Management Full Course Workbook Questions!

ACCA F9 Financial Management Full Course Workbook Questions!

Item Inventory Period Collection Period Less: Payables Period

Days 200 100

Item Inventory Period Collection Period Less: Payables Period

ACCA F9 Financial Management Full Course Workbook Questions!

Test Your Knowledge

ACCA F9 Financial Management Full Course Workbook Questions!

Lecture 6 Managing Receivables

ACCA F9 Financial Management Full Course Workbook Questions!

ACCA F9 Financial Management Full Course Workbook Questions!

Test Your Knowledge

ACCA F9 Financial Management Full Course Workbook Questions!

Lecture 7 Inventory Management

ACCA F9 Financial Management Full Course Workbook Questions!

Buffer Stock - Illustration 2

ACCA F9 Financial Management Full Course Workbook Questions!

EOQ With Buffer Stock - Illustration 3

EOQ with discounts - Illustration 4

ACCA F9 Financial Management Full Course Workbook Questions!

Test Your Knowledge

ACCA F9 Financial Management Full Course Workbook Questions!

Lecture 8 Cash Management