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18 Assuming the conversion value after seven years is $126-15, what is the current market value of the 8% loan notes of Par Co? $115.20 $109.26 C $94.93 D $69.00 19 Which of the following statements relating to the capital asset pricing model is correct? The equity beta of Par Co considers only business risk The capital asset pricing model considers systematic risk and unsystematic risk C The equity beta of Par Co indicates that the company is more risky than the market as a whole D The debt beta of Par Co is zero 20 Which of the following statements are problems in using the price/earnings ratio method to value a company? (1) It is the reciprocal of the earnings yield (2) It combines stock market information and corporate information (3) It is difficult to select a suitable price/earnings ratio (4) The ratio is more suited to valuing the shares of listed companies A 1 and 2 only B 3 and 4 only C 1, 3 and 4 only D 1, 2, 3 and 4Section B - ALL 15 questions are compulsory and MUST be attempted Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet. Each question is worth 2 marks. The following scenario relates to questions 16-20. Par Co currently has the following long-term capital structure: $m $m Equity finance Ordinary shares 30-0 Reserves 38-4 68-4 Non-current liabilities Bank loans 15-0 8% convertible loan notes 40-0 5% redeemable preference shares 15-0 70-0 Total equity and liabilities 138-4 The 8% loan notes are convertible into eight ordinary shares per loan note in seven years' time. If not converted, the loan notes can be redeemed on the same future date at their nominal value of $100. Par Co has a cost of debt of 9% per year. The ordinary shares of Par Co have a nominal value of $1 per share. The current ex dividend share price of the company is $10-90 per share and share prices are expected to grow by 6% per year for the foreseeable future. The equity beta of Par Co is 1-2. 16 The loan notes are secured on non-current assets of Par Co and the bank loan is secured by a floating charge on the current assets of the company. Which of the following shows the sources of finance of Par Co in order of the risk to the investor with the riskiest first? A Redeemable preference shares, ordinary shares, loan notes, bank loan Ordinary shares, loan notes, redeemable preference shares, bank loan Bank loan, ordinary shares, redeemable preference shares, loan notes Ordinary shares, redeemable preference shares, bank loan, loan notes 17 What is the conversion value of the 8% loan notes of Par Co after seven years? $16-39 $111-98 $131-12 $71-7212 The following information has been calculated for A Co: Trade receivables collection period: 52 days Raw material inventory turnover period: 42 days Work in progress inventory turnover period: 30 days Trade payables payment period: 66 days Finished goods inventory turnover period: 45 days What is the length of the working capital cycle? 103 days 131 days 235 days 31 days 13 Which of the following is/are usually seen as benefits of financial intermediation? (1) Interest rate fixing 2) Risk pooling (3) Maturity transformation A 1 only B 1 and 3 only C 2 and 3 only 1, 2 and 3 14 Which of the following statements concerning working capital management are correct? (1) The twin objectives of working capital management are profitability and liquidity 2) A conservative approach to working capital investment will increase profitability (3) Working capital management is a key factor in a company's long-term success A 1 and 2 only 1 and 3 only C 2 and 3 only D 1, 2 and 3 15 Governments have a number of economic targets as part of their monetary policy. Which of the following targets relate predominantly to monetary policy? (1) Increasing tax revenue 2) Controlling the growth in the size of the money supply (3) Reducing public expenditure (4) Keeping interest rates low A 1 only 1 and 3 C 2 and 4 only D 2, 3 and 48 The management of XYZ Co has annual credit sales of $20 million and accounts receivable of $4 million. Working capital is financed by an overdraft at 12% interest per year. Assume 365 days in a year. What is the annual finance cost saving if the management reduces the collection period to 60 days? A $85,479 $394,521 $78,904 $68,384 9 Which of the following statements concerning financial management are correct? (1) It is concerned with investment decisions, financing decisions and dividend decisions (2) It is concerned with financial planning and financial control (3) It considers the management of risk A 1 and 2 only 1 and 3 only C 2 and 3 only 1, 2 and 3 10 SKV Co has paid the following dividends per share in recent years: Year 20X4 20X3 20X2 20X1 Dividend ($ per share) 0-360 0-338 0-328 0-311 The dividend for 20X4 has just been paid and SKV Co has a cost of equity of 12%. Using the geometric average historical dividend growth rate and the dividend growth model, what is the market price of SKV Co shares on an ex dividend basis? A $4-67 $5-14 C $5-40 $6-97 11 "There is a risk that the value of our foreign currency-denominated assets and liabilities will change when we prepare our accounts' To which risk does the above statement refer? Translation risk Economic risk Transaction risk Interest rate risk4 Which of the following statements concerning capital structure theory is correct? In the traditional view, there is a linear relationship between the cost of equity and financial risk Modigliani and Miller said that, in the absence of tax, the cost of equity would remain constant Pecking order theory indicates that preference shares are preferred to convertible debt as a source of finance Business risk is assumed to be constant as the capital structure changes 5 Which of the following actions is LEAST likely to increase shareholder wealth? The weighted average cost of capital is decreased by a recent financing decision The financial rewards of directors are linked to increasing earnings per share The board of directors decides to invest in a project with a positive NPV The annual report declares full compliance with the corporate governance code 6 Which of the following statements are features of money market instruments? (1) A negotiable security can be sold before maturity (2) The yield on commercial paper is usually lower than that on treasury bills 3) Discount instruments trade at less than face value A 2 only B 1 and 3 only C 2 and 3 only 1, 2 and 3 7 The following are extracts from the statement of profit or loss of CQB Co: $'000 Sales income 60,000 Cost of sales 50,000 Profit before interest and tax 10,000 Interest 4,000 Profit before tax 6,000 Tax 4.500 Profit after tax 1,500 60% of the cost of sales is variables costs. What is the operational gearing of CQB Co? A 5-0 times 2-0 times 0-5 times D 3-0 times1 The home currency of ACB Co is the dollar ($) and it trades with a company in a foreign country whose home currency is the Dinar. The following information is available: Home country Foreign country Spot rate 20-00 Dinar per $ Interest rate 3% per year 7% per year Inflation rate 2% per year 5% per year What is the six-month forward exchange rate? 20-39 Dinar per $ 20-30 Dinar per $ 20-59 Dinar per $ 20-78 Dinar per $ 2 The following financial information relates to an investment project: $'000 Present value of sales revenue 50,025 Present value of variable costs 25,475 Present value of contribution 24,550 Present value of fixed costs 18,250 Present value of operating income 6,300 Initial investment 5,000 Net present value 1,300 What is the sensitivity of the net present value of the investment project to a change in sales volume? A 7-1% B 2-6% 5-1% 5-3% 3 Gurdip plots the historic movements of share prices and uses this analysis to make her investment decisions. Oliver believes that share prices reflect all relevant information at all times. To what extent do Gurdip and Oliver believe capital markets to be efficient? Gurdip Oliver Not efficient at all Strong form efficient Weak form efficient Strong form efficient Not efficient at all Semi-strong form efficient Strong form efficient Not efficient at all 2