Kaplan P4 Mock Exam

ACCA REVISION MOCK June 2010 Question study Time eitherowed indicant and planning Writing 15 minutes 3 hours This paper is sh atomic piece 18d out into dickens sections Section A TWO compulsory questions Section B TWO questions ONLY to be attempted Formulae Sheet and Mathematical Tables argon on pages 3, 4, 5, 6 and 7 Do NOT open this paper until instructed by the supervisor This question paper must non be removed from the examination hall Kaplan Publishing/Kaplan mo lollyary KAPLAN issue summon 1 of 14 Paper P4 good pecuniary oversight ACCA P4 sophisticated fiscal Management Kaplan Financial especial(a), 2010 all rights reserved.No part of this examination whitethorn be reproduced or resolveable in both form or by every means, electronic or mechanical, including photocopying, drop offing, or by whatsoever information storage and recovery system, without prior permission from Kaplan Publishing. The text in this material and all approximately opposites pudd le available by every Kaplan sort come with does non essence to advice on a particular subject atomic number 18a and should non be interpreted as such. No reliance should be placed on the confine as the stem for any coronation or other finale or in connection with any advice given to third parties. enliven consult your hold professional adviser as necessary.Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in shelter of any passinges or other claims, whether direct, indirect, incidental, consequential or several(prenominal)(predicate)ly arising in relation to the pulmonary tuberculosis of such materials. rogue 2 of 14 KAPLAN print rewrite sneer Questions FORMULAE SHEET Modigliani and Miller pro adjust 2 (with tax) ke = kie + (1 ? T)(kie ? kd) Vd Ve Two plus portfolio sp = 2 2 w a s a + w 2 s 2 + 2w a w b rab s a s b b b The outstanding asset price theoretical account E(ri) = Rf + ? i(E(rm) ? Rf ) The asset beta reflexion ? ? ? Vd (1 ? T ) ? Ve ? a = ? ?e ? + ? ?d ? ? (Ve + Vd (1 ?T )) ? ? Ve + Vd (1 ? T )) ? The growth dumbfound Po = D o (1 + g ) (re ? g) Gordons growth approximation g = bre The weighted average live of bully ? Ve ? ? Vd ? WACC = ? ?k e + ? ? k d (1 ? T ) ? Ve + Vd ? ? Ve + Vd ? The Fisher formula (1+i) = (1+r)(1+h) Purchasing power parity and interest appraise parity s1 = S o x (1 + h c ) (1 + h b ) f0 = so x (1 + i c ) (1 + i b ) KAPLAN print scalawag 3 of 14 ACCA P4 good Financial Management The Black-Scholes woof pricing model c = PaN(d1) PeN(d2)e? rt Where The forex modified Black-Scholes option pricing model c = e? rt F0N(d1) ? XN(d2) Or d1 = In(Pa / Pe ) + (r + 0. 5s ) t s t p = ert XN(? d2) ? F0N(? d1) Where d 2 = d1 ? s t d1 = and 1n (F0 / X) + s T / 2 s T 2 d 2 = d1 ? s T The put call parity relationship p = c ? Pa + Pee? rt Modified Internal Rate of Return ? PV ? n MIRR = ? R ? (1 + re) 1 ? PV1 ? 1 scalawag 4 of 14 KAPLAN publish m odification scoff Questions MATHEMATICAL TABLES Standard normal distribution table 0. 00 . 0000 . 0398 . 0793 . 1179 . 1554 . 1915 . 2257 . 2580 . 2881 . 3159 . 3413 . 3643 . 3849 . 4032 . 4192 . 4332 . 4452 . 4554 . 4641 . 4713 . 4772 . 4821 . 4861 . 4893 . 4918 . 4938 . 4953 . 4965 . 4974 . 4981 . 4987 0. 01 . 0040 . 0438 . 0832 . 1217 . 1591 . 1950 . 2291 . 2611 . 910 . 3186 . 3438 . 3665 . 3869 . 4049 . 4207 . 4345 . 4463 . 4564 . 4649 . 4719 . 4778 . 4826 . 4865 . 4896 . 4920 . 4940 . 4955 . 4966 . 4975 . 4982 . 4987 0. 02 . 0080 . 0478 . 0871 . 1255 . 1628 . 1985 . 2324 . 2642 . 2939 . 3212 . 3461 . 3686 . 3888 . 4066 . 4222 . 4357 . 4474 . 4573 . 4656 . 4726 . 4783 . 4830 . 4868 . 4898 . 4922 . 4941 . 4956 . 4967 . 4976 . 4983 . 4987 0. 03 . 0120 . 0517 . 0910 .1293 . 1664 . 2019 . 2357 . 2673 . 2967 . 3238 . 3485 . 3708 . 3907 . 4082 . 4236 . 4370 . 4485 . 4582 . 4664 . 4732 . 4788 . 4834 . 4871 . 4901 . 4925 . 4943 . 4957 . 4968 . 4977 . 4983 . 4988 0. 04 . 0159 . 0557 . 0 948 . 331 . 1700 . 2054 . 2389 . 2704 . 2995 . 3264 . 3508 . 3729 . 3925 . 4099 . 4251 . 4382 . 4495 . 4591 . 4671 . 4738 . 4793 . 4838 . 4875 . 4904 . 4927 . 4945 . 4959 . 4969 . 4977 . 4984 . 4988 0. 05 . 0199 . 0596 . 0987 . 1368 . 1736 . 2088 . 2422 . 2734 . 3023 . 3289 . 3531 . 3749 . 3944 . 4115 . 4265 . 4394 . 4505 . 4599 . 4678 . 4744 . 4798 . 4842 . 4878 . 4906 . 4929 . 4946 . 4960 . 4970 . 4978 . 4984 . 4989 0. 06 . 0239 . 0636 . 1026 . one hundred forty6 . 1772 . 2123 . 2454 . 2764 . 3051 . 3315 . 3554 . 3770 . 3962 . 4131 . 4279 . 4406 . 4515 . 4608 . 4686 . 4750 . 4803 . 4846 . 4881 . 4909 . 4931 . 4948 . 4961 . 4971 . 4979 . 4985 . 989 0. 07 . 0279 . 0675 . 1064 . 1443 . 1808 . 2157 . 2486 . 2794 . 3078 . 3340 . 3577 . 3790 . 3980 . 4147 . 4292 . 4418 . 4525 . 4616 . 4693 . 4756 . 4808 . 4850 . 4884 . 4911 . 4932 . 4949 . 4962 . 4972 . 4980 . 4985 . 4989 0. 08 . 0319 . 0714 . 1103 . 1480 . 1844 . 2190 . 2518 . 2823 . 3106 . 3365 . 3599 . 3810 . 3997 . 4162 . 4306 . 443 0 . 4535 . 4625 . 4699 . 4762 . 4812 . 4854 . 4887 . 4913 . 4934 . 4951 . 4963 . 4973 . 4980 . 4986 . 4990 0. 09 . 0359 . 0753 . 1141 . 1517 . 1879 . 2224 . 2549 . 2852 . 3133 . 3389 . 3621 . 3830 . 4015 . 4177 . 4319 . 4441 . 4545 . 4633 . 4706 . 4767 . 4817 . 4857 . 4890 . 4916 . 4936 . 952 . 4964 . 4974 . 4981 . 4986 . 4990 0. 0 0. 1 0. 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 0. 9 1. 0 1. 1 1. 2 1. 3 1. 4 1. 5 1. 6 1. 7 1. 8 1. 9 2. 0 2. 1 2. 2 2. 3 2. 4 2. 5 2. 6 2. 7 2. 8 2. 9 3. 0 This table can be intentd to report N (d1), the cumulative normal distribution function requiremented for the Black-Scholes model of option pricing. If d1 0, add 0. 5 to the pertinent number above. If d1 0, subtract the relevant number above from 0. 5. KAPLAN publishing page 5 of 14 ACCA P4 ripe(p) Financial Management Present come in table Present prize of ? 1, i. e. (1 + r)-n where r = discount rate n = number of stoppages until retributionPeriods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Perio ds (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0. 990 0. 980 0. 971 0. 961 0. 951 0. 942 0. 933 0. 923 0. 914 0. 905 0. 896 0. 887 0. 879 0. 870 0. 861 2% 0. 980 0. 961 0. 942 0. 924 0. 906 0. 888 0. 871 0. 853 0. 837 0. 820 0. 804 0. 788 0. 773 0. 758 0. 743 3% 0. 971 0. 943 0. 915 0. 888 0. 863 0. 837 0. 813 0. 789 0. 766 0. 744 0. 722 0. 701 0. 681 0. 661 0. 642 4% 0. 962 0. 925 0. 889 0. 855 0. 822 0. 790 0. 760 0. 731 0. 703 0. 676 0. 650 0. 625 0. 601 0. 577 0. 555 5% 0. 952 0. 907 0. 864 0. 823 0. 784 0. 746 0. 711 0. 677 0. 645 0. 614 0. 585 0. 557 0. 530 0. 505 0. 481 6% 0. 43 0. 890 0. 840 0. 792 0. 747 0. 705 0. 665 0. 627 0. 592 0. 558 0. 527 0. 497 0. 469 0. 442 0. 417 7% 0. 935 0. 873 0. 816 0. 763 0. 713 0. 666 0. 623 0. 582 0. 544 0. 508 0. 475 0. 444 0. 415 0. 388 0. 362 8% 0. 926 0. 857 0. 794 0. 735 0. 681 0. 630 0. 583 0. 540 0. euchre 0. 463 0. 429 0. 397 0. 368 0. 340 0. 315 9% 0. 917 0. 842 0. 772 0. 708 0. 650 0. 596 0. 547 0. 502 0. 460 0. 422 0. 388 0. 356 0. 326 0. 299 0. 275 10% 0. 909 0. 826 0. 751 0. 683 0. 621 0. 564 0. 513 0. 467 0. 424 0. 386 0. 350 0. 319 0. 290 0. 263 0. 239 11% 0. 901 0. 812 0. 731 0. 659 0. 593 0. 535 0. 482 0. 434 0. 391 0. 352 0. 317 0. 286 0. 258 0. 232 0. 209 2% 0. 893 0. 797 0. 712 0. 636 0. 567 0. 507 0. 452 0. 404 0. 361 0. 322 0. 287 0. 257 0. 229 0. 205 0. 183 13% 0. 885 0. 783 0. 693 0. 613 0. 543 0. 480 0. 425 0. 376 0. 333 0. 295 0. 261 0. 231 0. 204 0. 181 0. 160 14% 0. 877 0. 769 0. 675 0. 592 0. 519 0. 456 0. 400 0. 351 0. 308 0. 270 0. 237 0. 208 0. 182 0. 160 0. 140 15% 0. 870 0. 756 0. 658 0. 572 0. 497 0. 432 0. 376 0. 327 0. 284 0. 247 0. 215 0. 187 0. 163 0. 141 0. 123 16% 0. 862 0. 743 0. 641 0. 552 0. 476 0. 410 0. 354 0. 305 0. 263 0. 227 0. 195 0. 168 0. cxlv 0. 125 0. 108 17% 0. 855 0. 731 0. 624 0. 534 0. 456 0. 390 0. 333 0. 285 0. 243 0. 208 0. 178 0. 152 0. 130 0. 11 0. 095 18% 0. 847 0. 718 0. 609 0. 516 0. 437 0. 370 0. 314 0. 266 0. 225 0. 191 0. 162 0. 137 0. 116 0. 099 0. 084 19% 0. 840 0. 706 0. 593 0. 499 0. 419 0. 352 0. 296 0. 249 0. 206 0. 176 0. 148 0. 124 0. 104 0. 088 0. 074 20% 0. 833 0. 694 0. 579 0. 482 0. 402 0. 335 0. 279 0. 233 0. 194 0. 162 0. 135 0. 112 0. 933 0. 078 0. 065 page 6 of 14 KAPLAN PUBLISHING change scoff Questions Annuity table 1- (1+ r) -n r Present note judge of an annuity of ? 1, i. e. where r = interest rate n = number of extents Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0. 990 1. 970 2. 941 3. 902 4. 853 5. 795 6. 728 7. 652 8. 566 9. 471 10. 37 11. 6 12. 13 13. 00 13. 87 2% 0. 980 1. 942 2. 884 3. 808 4. 713 5. 601 6. 472 7. 325 8. 162 8. 893 9. 787 10. 58 11. 35 12. 11 12. 85 3% 0. 971 1. 913 2. 829 3. 717 4. 580 5. 417 6. 230 7. 020 7. 786 8. 530 9. 253 9. 954 10. 63 11. 30 11. 94 4% 0. 962 1. 886 2. 775 3. 630 4. 452 5. 242 6. 002 6. 733 7. 435 8. 111 8. 760 9. 385 9. 986 10. 56 11. 12 5% 0. 952 1. 859 2. 723 3. 546 4. 329 5. 076 5. 786 6. 463 7. 108 7. 722 8. 306 8. 863 9. 394 9. 899 10. 38 6% 0. 943 1. 833 2. 673 3. 465 4. 212 4. 917 5. 582 6. 210 6. 802 7. 360 7. 887 8. 384 8. 853 9. 295 9. 712 7% 0. 935 1. 808 2. 624 3. 387 4. 100 4. 767 5. 389 5. 971 6. 515 7. 024 7. 499 7. 43 8. 358 8. 745 9. 108 8% 0. 926 . 1783 2. 577 3. 312 3. 993 4. 623 5. 206 5. 747 6. 247 6. 710 7. 139 7. 536 7. 904 8. 244 8. 559 9% 0. 917 1. 759 2. 531 3. 240 3. 890 4. 486 5. 033 5. 535 5. 995 6. 418 6. 805 7. 161 7. 487 7. 786 8. 061 10% 0. 909 1. 736 2. 487 3. 170 3. 791 4. 355 4. 868 5. 335 5. 759 6. 145 6. 495 6. 814 7. 103 7. 367 7. 606 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 11% 0. 901 1. 713 2. 444 3. 102 3. 696 4. 231 4. 712 5. 146 5. 537 5. 889 6. 207 6. 492 6. 750 6. 982 7. 191 12% 0. 893 1. 690 2. 402 3. 037 3. 605 4. 111 4. 564 4. 968 5. 328 5. 650 5. 938 6. 194 6. 424 6. 628 6. 811 13% 0. 885 1. 668 2. 361 2. 74 3. 517 3. 998 4. 423 4. 799 5. 132 5. 426 5. 687 5. 918 6. 122 6. 302 6. 462 14% 0. 877 1. 647 2. 322 2. 914 3. 433 3. 889 4. 288 4. 639 4. 946 5. 216 5. 453 5. 660 5 . 842 6. 002 6. 142 15% 0. 870 1. 626 2. 283 2. 855 3. 352 3. 784 4. 160 4. 487 4. 772 5. 019 5. 234 5. 421 5. 583 5. 724 5. 847 16% 0. 862 1. 605 2. 246 2. 798 3. 274 3. 685 4. 039 4. 344 4. 607 4. 833 5. 029 5. 197 5. 342 5. 468 5. 575 17% 0. 855 1. 585 2. 210 2. 743 3. 199 3. 589 3. 922 4. 207 4. 451 4. 659 4. 836 4. 988 5. 118 5. 229 5. 324 18% 0. 847 1. 566 2. 174 2. 690 3. 127 3. 496 3. 812 4. 078 4. 303 4. 494 4. 656 4. 793 4. 910 5. 008 5. 092 19% 0. 840 1. 47 2. 140 2. 639 3. 058 3. 410 3. 706 3. 954 4. 163 4. 339 4. 586 4. 611 4. 715 4. 802 4. 876 20% 0. 833 1. 528 2. 106 2. 589 2. 991 3. 326 3. 605 3. 837 4. 031 4. 192 4. 327 4. 439 4. 533 4. 611 4. 675 KAPLAN PUBLISHING Page 7 of 14 ACCA P4 Advanced Financial Management SECTION A TWO COMPULSORY QUESTIONS QUESTION 1 (a) Hunt plc is a medium sized UK phoner that trades with companies in several(prenominal) European countries. Trade take a shit a go at its oer the next three calendar months are shown below. put up that it is now 20 April. Two months conviction Receipts Payments ? 393,265 ? ? ? ? 3 months time Receipts Payments 491,011 60,505 890,217 1,997,651 Kr 8. m ? France Germany Den crown of thorns Foreign win over pass judgment contend Two months forward threesome months forward Dkroner (Kr)/? 10. 68 10. 71 10. 74 10. 77 10. 78 10. 83 Euro ()/? 1. 439 1. 465 1. 433 1. 459 1. 431 1. 456 Annual interest rates (valid for deuce months or three months) Borrowing (%) United Kingdom 7. 50 France 5. 75 Germany 5. 75 Denmark 8. 00 Investing (%) 5. 50 3. 50 3. 50 6. 00 Futures merchandise rates Three month Euro bring downs (125,000 Euro contract size). Contracts are for buying or change Euros. Futures prices are in ? per Euro. Current 20 April June folk December 0. 6964 0. 6983 0. 013 Page 8 of 14 KAPLAN PUBLISHING Revision Mock Questions Required (i) utilize the forward merchandise, funds grocery and currency coming(prenominal)s securities industry as hold, elevate a foreig n exchange hedging strategy that is anticipate to maximise the specie returns of Hunt plc at the end of the three month close. (Note Denmark is non a member of the Euro block. ) Transaction address and margin requirements whitethorn be ignored for this part of the question. The basis may be assumed to constrict to zero in a linear manner over the period to expiry of the get downings contracts. Futures contracts may be assumed to mature at the month end. 15 attach) (ii) Successive daily prices on the in store(predicate)s market for a June contract which Hunt plc has sold are Selling price solar day 1 Day 2 Day 3 0. 6916 0. 6930 0. 6944 0. 6940 Initial margins are ? 1,000 per contract. transformation margin is 100% of the initial margin. Spot exchange rates may be assumed to not change significantly during these three days. For severally of the three days, show the effect on your cash rate of flow of the price changes of the contract. (4 marks) (b) Discuss the pr oceedss and disadvantages of forward contracts and currency futures for hedging against foreign exchange risk. 6 marks) ( sum up 25 marks) KAPLAN PUBLISHING Page 9 of 14 ACCA P4 Advanced Financial Management QUESTION 2 Brookday plc is considering whether to establish a auxiliary in the ground forces. The subsidiary would cost a marrow of $20 trillion, including $4 million for track downing expectant. A suitable going particularory and machinery have been primed(p) and employment could commence quickly. A allowance of $19 million would be required immediately, with the re chief(prenominal)der required at the end of stratum 1. output and sales are forecast at 50,000 units in the first year and 100,000 units per year thitherafter.The unit sales price, unit variable cost and intact intractable costs in year 1 are expected to be $100, $40 and $1 million respectively. After year 1 prices and costs are expected to rise at the same rate as the antecedent years take of infla tion in the USA this is forecast to be 5% per year for the next quintuple years. In addition, a laid royalty of ? 5 per unit testament be payable to the parent conjunction, defrayment to be made at the end of each year. Brookday has a four year planning thought and estimates that the genuinelyisable set of the fixed assets in four years time go forth be $20 million.It is the companys policy to acquit the utter nearly funds accomplishable to the parent company at the end of each year. Assume that in that location are no legal complications to prevent this. Brookday shortly exports to the USA yielding an after-tax net cash flow of ? 100,000. No production ordain be exported to the USA if the subsidiary is established. It is expected that new export markets of a similar worth in Southern Europe could transpose exports to the USA. United Kingdom production is at full capacity and at that place are no plans for but expansion in capacity. appraise on the companys cl ears is at a rate of 50% in both countries, payable one year in arrears.A multiply recognises treaty make ups between the UK and USA and no double gross is expected to arise. No withholding tax is levied on royalties payable from the USA to the UK. Tax allowable depreciation is at a rate of 25% on a straight line basis on all fixed assets. Brookday believes that the appropriate beta for this posting is 1. 2. The market rate of pay back is 12%, and the risk-free rate is 7%. The deceaserent spot exchange rate is US $1. 300/? 1, and the pound is expected to fall in value by approximately 5% per year relative to the US dollar.Required (a) Evaluate the proposed investment from the view berth of Brookday plc. State clearly any assumptions that you make. (20 marks) (b) What advertize information and abridgment dexterity be useful in the military rating of this device? (10 marks) Briefly talk somewhat ethical issues that might fill to be considered as part of a multinationa l companys investment decision process (5 marks) (Total 35 marks) (c) Page 10 of 14 KAPLAN PUBLISHING Revision Mock Questions SECTION B TWO QUESTIONS ONLY TO BE ATTEMPTED QUESTION 3 The following selective information relates to a queen-sized company operating in the electronics industry. 0X3 After tax earnings (? million) Dividend per touch (pence) Number of mean(a) shares (million) Average share price (pence) Net jacket investment (? million) Annual increase in inflation (%) 130 9. 75 508 740 210 4 20X4 195 11. 0 600 875 270 4 20X5 255 12. 75 650 690 340 3 20X6 295 14. 0 695 20X7 472 15. 5 930 820 1,012 410 520 3 3 A major institutional stockholder has criticised the level of dividend honorarium of the company suggesting that it should be substantially increased. Required (a) Briefly discuss the factors that are likely to enchant the companys dividend policy. 6 marks) Discuss whether or not the institutional shareholders criticism is likely to be valid. (6 marks) Hiome plc h as experienced a period of above average growth for its industry, but is now growing at a normal rate of nearly 10% per annum. The companys directors are reviewing the current dividend policy. One director has suggested that, as the company no longer need as much internally generated funds to finance new investment, a high proportion of earnings should be compensable out as dividends in order to benefit the companys shareholders.Another director has read that two eminent economists, Miller and Modigliani, have state that the pattern of dividend payouts is irrelevant, and therefore shareholders testament experience no gain from a higher level of dividends. Discuss whether or not an increase in dividends is likely to benefit the shareholders of Hiome plc. (8 marks) (Total 20 marks) (b) (c) KAPLAN PUBLISHING Page 11 of 14 ACCA P4 Advanced Financial Management QUESTION 4 (a) One of the nearly important elements of any decision is the specification of destinations or objectives which the decision nobleman seeks to achieve.The literature on chief city budgeting, or investment appraisal, generally assumes the goal of a company is the maximisation of shareholder wealth. Required Discuss the precept for this assumption. Include in your discussion an definition of alternative goals available to companies. (12 marks) (b) XYZ plc is a medium-sized company operating in the chemical industry. It is a meshworkable business, currently producing at below maximum capacity. It has one large factory rigid on the outskirts of a small industrial town. It is the regions main employer. The company is evaluating a project which has substantial environmental implications.Required Discuss the cellular inclusion of environmental costs and benefits into the investment appraisal process, and explain how this might be done. (8 marks) (Total 20 marks) QUESTION 5 Island Energy Ltd is a small secluded company on the Island of Senyeh ? a small island whose company law and accou ntancy practices are based on those of the UK. The company is the monopoly provider of all home(prenominal) fuels (electricity, gas and heating oil). The company imports oils and gas and generates and distributes its own electricity. The company currently has 20 staff working on engineering and electrical work at varying level of skills and three clerk/typists.The company at present does not have any management staff the previous Managing Director (an engineer) resigned at the end of 2006 and has not been replaced the Chairman (a retired engineer) has taken over the dayto-day management. The remaining board members are to a fault all retired and comprise two lawyers, a teacher, a politician, an engineer and an operations director for a conveyance company. Their section is simply to rubber-stamp the Chairmans decisions none of them takes an active role in the company and there have been board meetings where it has been difficult to win a quorum.Recently the islands press has sta rted to express concern about the room the company is being run partly in reaction to globe dismay at the resignation of the MD who was felt to be to a greater extent approachable than the Chairman, and partly because the company is seen to be spending vast sums of gold on capital equipment and worries have started to emerge about how this will jounce on the price of fuel. Fuel prices on Senyeh are currently 20% above those on other islands in the region. Page 12 of 14 KAPLAN PUBLISHING Revision Mock QuestionsPengers, a member of the government of Senyeh has lately read an article about corporate failure and thinks that Island Energy Ltd may fit some of the criteria Lakes, another government member, disagrees arguing that the Chairman has been in place for several years ? and has asked you, a newly qualified ACCA accountant, to turn over the model to show that there is no reason for concern. N. B. Accounting data for the company is presented in the Appendix to this question. You find that the model that Pengers read about was Altmans Z make believe model applied to private manufacturing companies and that Z score = 0. 17X1+ 0. 847X2 + 3. 107X3 + 0. 420X4 + 0. 998X5 where X1 = working capital/ natural assets X2 = retained earnings/total assets X3 = earnings before interest and tax/total assets X4 = market value of equity/total liabilities X5 = sales/total assets gain research shows that companies with a score less than 1. 23 have a 95% observe of bankruptcy, those with a score greater than 2. 90 are unlikely to wrick bankrupt and those in between the two figures require additional scrutiny. (a) deem the Z score for Island Energy Ltd and comment upon your findings. 12 marks) (b) List any foster concerns you may have about the company and any concerns you may have about the use of the model. (8 marks) (Total 20 marks) Appendix Island Energy Ltd Income mastery for the year ended 31 December 20X7 TURNOVER Less salute of sales GROSS PROFIT Less Admini strative costs operate PROFIT/(LOSS) Bank charges and interest payable PROFIT ON public ACTIVITIES BEFORE TAXATION Tax on profit on ordinary activities PROFIT/(LOSS) FOR THE FINANCIAL YEAR NET DIVIDEND PAID (NON-EQUITY) TRANSFER TO/(FROM) militia ? 2,374,087 ? 1,923,872 450,215 ? 381,592 68,623 ? 3,999 64,624 ? 8,753 55,871 ? ,120 54,751 KAPLAN PUBLISHING Page 13 of 14 ACCA P4 Advanced Financial Management Island Energy Ltd Statement of Financial Position as at 31 December 20X7 ? NON CURRENT ASSETS Tangible assets CURRENT ASSETS Inventory Receivables Cash at bank and in hand ? 1,622,009 213,979 275,522 487,953 977,454 TOTAL ASSETS 2,599,463 chief city AND LIABILITIES CURRENT LIABILITIES business PAYABLES LONG-TERM LOAN CAPITAL AND reserves CALLED-UP SHARE CAPITAL RESERVES General reserve boodle and loss reserve 586,117 400,000 64,405 1,129,584 419,357 1,548,941 TOTAL CAPITAL AND LIABILITIES 2,599,463 Page 14 of 14 KAPLAN PUBLISHING ACCA Paper P4 Advanced Financial Manag ement June 2010 Revision Mock Answers To gain maximum benefit, do not refer to these answers until you have completed the revision mock questions and submitted them for scar. KAPLAN PUBLISHING Page 1 of 17 ACCA P4 Advanced Financial Management Kaplan Financial Limited, 2010 All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.Page 2 of 17 KAPLAN PUBLISHING Revision Mock Answers firmness 1 (a) (i) Any hedging should be based upon expected net receipts and hires. Net receipts/payments Receipts Two months Three months Three months forwards market hedge 393,265 1. 433 676,928 1. 431 Kr8. 6m 10. 83 Payments 393,265 676,928 Kr 8. 6m Two months = (? 274,435) Three months = (? 473,045) Three months = ?794,090 gold market hedge (i) Now Payment Euro fasten rate (1. 005833) 2 months (393,265) Buy Deposit 390,984 (393,265) 0 Buy at spot (Immediate payment in ? s) 1. 439 (? 271,705) (1. 0125) UK borrowing rate (? 275,101) Forward market The forward market is cheaper.Payment (? 274,435) KAPLAN PUBLISHING Page 3 of 17 ACCA P4 Advanced Financial Management Now Payment Euro deposit rate (1. 00875) 3 months (676,928) Buy Deposit 671,056 (676,928) 0 Buy at spot (Immediate payment in ? s) 1. 439 (? 466,335) (1. 01875) UK borrowing rate (? 475,079) Forward market The forward market is cheaper. Now Receipt Danish borrowing rate (1. 02) Payment (? 473,045) 3 months Kr8,600,000 Sell Loan Kr8,431,373 (Kr8,600,000) 0 Sell at spot (Immediate receipt in ? s) 10. 71 ? 787,243 (1. 01375) UK deposit rate ? 798,068 Forward market The money market offers the better alternative in this case.Futures hedge The currency of the contract is Euros Payment of 393,265 1 Set up the hedge Payment in Euros Buying Euros Buy E contracts Receipt ? 794,090 Number of contracts = 393,265 ? 125,000 = 3. 15 contracts govern 3 contracts Buy 3 June future contracts at a current price of ? 0. 6964 Page 4 of 17 KAPLAN PUBLISHING Revision Mock Answers 2 The fit off Now 20 April Spot market ? /Euro (1/1. 439) Futures market ? /Euro ? 0. 6964 hindquarters 0. 0015 ? 0. 6980 (BAL) 0. 0002 10 days of 71 left soil NIL Conversion inte rpret 20 June Expiry date 30/6 ?0. 6949 Fwd rate 1/1. 433, i. e ? 0. 6978 3 Profit on the futures Profit on futures ? 0. 6980-0. 6964) ? (125,000 ? 3) = ? 600. In sterling, therefore no need to convert. 4 The cash flows Actual payment Profit on futures Net payment 393,265 ? 0. 6978 = (? 274,420) ? 600 (? 273,820) In this case, the futures alternative is cheaper than the forward market. Payment of 676,928 1 Set up the hedge Payment in Euros Buying Euros Buy E contracts No of contracts = 676,928 ? 125,000 = 5. 42 contracts say 5 contracts Buy 5 E September future contracts at a current price of ? 0. 6983 KAPLAN PUBLISHING Page 5 of 17 ACCA P4 Advanced Financial Management 2 The play off Now 20 April Spot market ? /Euro (1/1. 39) Futures market ? /Euro ? 0. 6983 Basis 0. 0034 ? 0. 7003 (BAL) 0. 0015 BASIS NIL 72 days of 163 left Conversion date 20 July Expiry date 30/9 ?0. 6949 Fwd rate 1/1. 431 i. e. ?0. 6988 3 Profit on the futures Profit on futures ? (0. 7003-0. 6983) ? (125,000 x 5) = ? 1,250. In sterling, therefore no need to convert. 4 The cash flows Actual payment Profit on futures Net payment 676,928 ? 0. 6988 = (? 473,037) ? 1,250 (? 471,787) Again, the futures are cheaper than the forward market. In conclusion, the money market should be used for the Danish Kroner hedge and the futures market for the Euro hedges.Although in reality the outcome of futures hedges is not make outn with certainty, as the basis will probably not reduce to zero in a linear manner before the expiry dates, i. e. we do not know what the closing futures price will be. (ii) Day one a execution from 0. 6916 to 0. 6930 would produce a loss of 125,000 (0. 0014) or ? 175. You would need to provide an particular(a) ? 175 to maintain the margin at ? 1,000, otherwise the contract will be closed out by the illumination House. Day two the price change is the same and a further ? 175 would need to be provided to maintain the required margin. Day three a profit is made of 125,000 (0. 944 0. 6940) or ? 50, which may be taken in cash. Page 6 of 17 KAPLAN PUBLISHING Revision Mock Answers (b) Forward contracts Advantages (i) Forward contracts on the Over The Counter (OTC) market are tailored to the needs of the parties concerned and are flexible in shapes of size and maturity. (ii) No payments are required until the contracts are settled. (iii) Contracts are available in a very wide range of currencies. Disadvantages (i) Forward contracts have two prices, a buying and a selling price, which means that companies must bear the cost of the spread between these prices. ii) footings can vary according to the size of deal and the customer. (iii) Long maturity contracts are rare (normally six months) and some currencies do not have a forward market. Currency futures Advantages (i) There is a single specified price which is transparent. (ii) As the markets Clearing House is the formal counter party to every transaction. This effectively reduces counter party defaul t risk for those dealing in futures. Disadvantages (i) Futures contracts are not very flexible. Contracts are solo of a specified size and maturity and are only available for a very hold number of currencies. ii) The cost of operating the margin system. An initial margin (deposit) is required and further variation margins are necessary on a daily basis. KAPLAN PUBLISHING Page 7 of 17 ACCA P4 Advanced Financial Management ACCA fool proposal (a) (i) Use of net receipts and payments Forward market Money market Futures market Conclusions supreme (ii) Understanding of variation margin Day 1 and 2 loss Day 3 gain soapimum Marks 1 2 4 6 2 ___ 15 ___ 1 2 1 ___ 4 ___ (b) Advantages and disadvantages of forward contracts Advantages and disadvantages of futures 3-4 3-4 Max 6 Total ___ 25 ___ Page 8 of 17 KAPLAN PUBLISHING Revision Mock Answers dissolve 2 a) Brookdays stated policy is to remit the maximum funds possible to the parent company. The net present value of relevant cash flows to the parent company will be the appropriate decision criterion, and should lead to maximisation of parent shareholder wealth. The dollar profit and relevant cash flow from the subsidiary must be unflinching first. Projected earnings data of the US subsidiary course 1 $000 5,000 2,000 1,000 309 4,000 7,309 (2,309) 0 (2,309 Year 2 $000 10, five hundred 4,200 1,050 586 4,000 9,836 664 0 664 Year 3 $000 11,025 4,410 1,102 557 4,000 10,069 956 0 956 Year 4 $000 11,580 4,630 1,158 529 4,000 10,317 1,263 0 1,263 Year 5 $000 gross sales (Note 1) Variable costs indomitable costs Royalty (Note 2) Depreciation Taxable profit US tax payable (Note 3) Profit after tax (287) (287) Projected cash flow data of the US subsidiary Year 0 $000 Profit after tax Depreciation Initial investment Additional capital Realisable value of fixed assets (Note 4) Tax on realisable value Working capital available Cash flows available to parent Exchange rate $/? (W2) Year 1 $000 (2,309) 4,000 (19,000) (1,000) Ye ar 2 $000 664 4,000 Year 3 $000 956 4,000 Year 4 $000 1,263 4,000 Year 5 $000 (287) 20,000 (10,000) 4,000 (19,000) 1. 300 691 1. 235 4,664 1. 173 4,956 29,263 (10,287) 1. 115 1. 059 1. 006 KAPLAN PUBLISHING Page 9 of 17 ACCA P4 Advanced Financial Management Projected cash flow data for the parent company Year 0 Year 1 Year 2 ? 000 ? 000 ? 000 Available from US subsidiary (14,615) 559 3,976 Royalty payment 250 500 UK tax on royalty (Note 5) (125) Net cash flow Discount factors 13% (Note 6) Present values (14,615) 1 (14,615) 809 0. 885 716 4,351 0. 783 3,407 Year 3 ? 000 4,445 500 (250) 4,695 0. 693 3,254 Year 4 ? 000 27,633 500 (250) 27,883 0. 13 17,092 Year 5 ? 000 (10,226) (250) (10,476) 0. 543 (5,688) Net present value = ? 4,166,000 The commanding NPV means that the project is acceptable. The loss of exports to the USA if the project is undertaken is not a relevant cash flow. Notes 1 Sales price increases by 5% per year Year 1 Year 2 Year 3 Year 4 Price 100. 00 105. 00 110 . 25 115. 80 Units (000) 50 100 100 100 Sales revenue (000) 5,000 10,500 11,025 11,580 Similar calculations are necessary for variable costs, and price adjustments for fixed costs. 2 The royalty is payable in ? s and will bet upon the $/? exchange rate.The ? is expected to fall in value by 5% per year relative to the $. Year 1 Expected exchange rate $/? Royalty (? 000) Royalty ($000) 3 4 1. 235 250 309 Year 2 1. 173 500 586 Year 3 1. 115 500 557 Year 4 1. 059 500 529 Year 5 1. 006 5 damagees are assumed to be carried forward and allowed against future profits for revenue purposes. Although the subsidiary will exist for more than four years, the companys planning horizon is only four years. A value must be placed upon the subsidiary at this time. The only information available is an estimate of realisable value of fixed assets.Tax on this realisable value will be payable as the assets are fully depreciated. Potential working capital available must also be considered. There will b e no double taxation on cash flows from the USA. However, the royalty has not been subject to US tax, and will be liable to UK taxation. Page 10 of 17 KAPLAN PUBLISHING Revision Mock Answers 6 Using the capital asset pricing model to determine the discount rate R project = R project = = RF + (RM ? RF)? project 7% + (12% ? 7%) 1. 2 13% (b) Further information and analysis might include (i) How accurate are the cash flow forecasts? How have they been established? ii) Why has a four-year planning horizon been chosen? The valuation of the fixed assets at year 4 is extremely significant to the NPV solution. How has this valuation been established? Is this valuation based upon future earnings as a going concern? It would be more suited to evaluate the project over the whole of its projected life. (iii) Risk is taken into account by using a CAPM derived discount rate. How has this rate been derived for a bit involving two countries? Does this fully reflect the risk of the project? Is th e use of CAPM appropriate (as it is a single period model)?Other, theoretically weaker measures of risk might be useful as an aid to decision making, e. g. sensitivity analysis of the key variables or simulation. (iv) Cash flow is usually assumed to occur at the end of each year. Greater accuracy would result if consideration were given to when during the year cash flow arises and these cash flows discounted at the appropriate rate. (v) Political and economic factors. How stable is the US government policy? allow for a change in government lead to changes in taxation policy, exchange controls, restrictions on the remittance of funds, attitudes toward foreign investment? vi) Are there any intangible benefits of establishing a manufacturing plant in the USA, e. g. making the American public more aware of Brookdays product? (vii) Real options analysis. The Black-Scholes option valuation model could be used to place a value on any real options. Thus enabling the calculation of a true NPV of project with options True NPV = Short term NPV + NPV of all real options Multinational companies may engage in activities which, whilst not illegal, are funny ethically, and may have detrimental long-term effects on the companys written report.Ethical considerations include (i) (ii) (iii) (iv) (v) (vi) Would the investment cause pollution or other environmental damage in the country? Does the investment involve experiments on animals, genetic modifications etc? Should the investment be undertaken if the country has a poor record on human rights? If local officials ask for inducements to facilitate the investment process, should these be paid? Would the investment in any way assist work in drugs or arms? Are wages to be paid below subsistence level? Are working conditions of an acceptable standard? c) KAPLAN PUBLISHING Page 11 of 17 ACCA P4 Advanced Financial Management ACCA gull scheme (a) Exchange rates Sales Variable costs Fixed costs Royalty Depreciation US tax payabl e Tax on realisable value Working capital Discount rate Loss on exports not relevant UK tax on royalties NPV and conclusion abide by technique even if calculation errors exist Maximum (b) (c) 1 2 marks for each good point 1 2 marks for each good point Total Marks 2 2 1 1 2 1 2 1 1 2 2 2 1 ___ 20 ___ 10 5 ___ 35 ___ Page 12 of 17 KAPLAN PUBLISHING Revision Mock Answers SECTION B upshot 3 a) There is considerable pass on as to whether dividend policy can influence corporate value. Much of the tilt concerns the question of whether it is the dividend that affects share value, or the information implied by the payment of the dividend. Dividends may provide, in the cheapest and most efficient manner, unambiguous portends about a companys future prospects and management operation. Managers have an incentive to send truthful signals via dividends, as any changes in dividends that are not likely to be accompanied by changes in cash flows will not fool a market that is at least semi- strong form efficient.Dividends therefore may be a valuable communication medium. There are a number of possible practical influences on dividend policy including (i) (ii) (iii) (iv) Dividends are to be discouraged as they may lead to issue costs associated with raising additional foreign finance. Corporate growth. The faster a company is growing the lower the dividend payment is likely to be. Liquidity. Cash is needed to pay dividends. The level of corporate liquid state might influence dividend payouts. The volatility of corporate cash flows.Companies may be reluctant to increase dividends unless they believe that future cash flows will be large enough to sustain the increased dividend payment. Legal restrictions, for example, government constraints, limitations on payments from reserves, and covenants on debt that restrict dividends. The rate of inflation. Many shareholders like dividends to increase by at least as much as inflation. The desires and tax position of the sharehol der clientele. However, most companies have a broad spread of shareholders with different needs and tax positions. (v) (vi) (vii) b) Statistical data Earnings per share (pence) fountainhead-kept earnings (? m) Payout ratio (%) Dividends (? m) Real growth in dividend per share (%) 20X3 25. 6 80 38. 1 49. 5 20X4 32. 5 129 33. 8 66. 0 8. 48 20X5 39. 2 172 32. 5 82. 9 12. 53 20X6 42. 4 198 33. 0 97. 3 6. 60 20X7 50. 8 328 30. 5 144. 1 7. 49 The companys dividend per share has increased, in real terms, by between 6. 6% and 12. 53% per year during the persist five years. Although no comparative industry data is available, this appears to be a good performance. The payout ratio has reduced from 38% in 20X3 to 30. % in 20X7, which may be why the institutional shareholder has KAPLAN PUBLISHING Page 13 of 17 ACCA P4 Advanced Financial Management made the criticism. However, there is atomic point in the company paying out large dividends if it has domineering NPV investments which can be fi nanced partially by dividend retention. Although there is by no means a perfect correlation between NPV and earnings per share, the fact that earnings per share have consistently increased over the period suggests that the companys investments are financially viable.The company has consistently had high net capital expenditure relative to earnings, and in such circumstances it is not singular for dividend payments to be relatively low. The companys share price has not increased by as much as earnings per share but, without information on stock market trends and the relative risk of the company, it is not clear whether or not the companys share price is under performing. Unless the institutional shareholder could invest any dividends received to earn a higher yield (adjusted for any differences in risk) there is little evidence to support the validity of the criticism. c) The lineage by Miller and Modigliani (MM) that dividend policy is irrelevant to the value of company was suppo se under very restrictive perfect market conditions. If such conditions existed because shareholders would not value an increase in dividend payments. However, there are several real world factors that are likely to influence the preference of shareholders towards dividends or retentions (and hence expected capital gains). These include Taxation.In some countries dividends and capital gains are subject to different marginal rates of taxation usually with capital gains being subject to a lower level of taxation than dividends. securities firm fees. MM ignore brokerage fees. However, if shareholders have a preference for some current income and are paid no or low dividends, their wealth will be reduced if they have to sell some of their shares and see brokerage fees in order to create current income.If a company needs to finance more new investment it is usually cheaper to fund investment through retained earnings as most forms of orthogonal finance involve issue costs. Informatio n asymmetry may exist between shareholders and directors. If the market is not strong form efficient, shareholders may have less complete knowledge of the likely future prospects of the company than directors, which may influence the shareholders desire for dividends or capital gains. The implications of an increase in dividends need to be considered by the company.Dividends are oft regarded as an unbiased signal of a companys future prospects, an increase in dividends signalling higher expected earnings. The company should be careful to inform its shareholders of the reason for any increase in dividends. A further factor is the use that the company can make of funds. If the company has a number of possible positive NPV investments, then shareholders will normally favour undertaking these investments (at least on financial grounds), as they will lead to an increase in shareholder wealth.If, however, the company has relatively few projects and can only invest profusion cash at a n expected zero NPV, the arguments for retentions is weakened. For strategic and operational reasons most companies keep some funds in the form of cash or near cash, for transactional and precautionary motives and to be in the position to take advantage of unexpected opportunities that may arise. The need for cash for such purposes may influence the level of dividend payout. Page 14 of 17 KAPLAN PUBLISHING Revision Mock Answers ACCA sign scheme a) (b) (c) One mark for each valid point Two marks for calculations. 4 marks for detailed analysis/explanation Two marks for each well-explained point Total Marks Max 6 Max 6 Max 8 ___ 20 ___ ANSWER 4 (a) It is generally assumed that the major objective of decision makers in a company is to maximise the net present value of future cash flows when discounted at a rate which reflects shareholders required rates of return. The principle for this assumption is that of all the stakeholders in a company the demands of the equity investors are par amount.Equity investors are dominant because they own the assets of the company and employ directors and managers (the decision makers) to make the best use of those assets. Ultimately, if the directors do not produce an, at least, suitable return for shareholders they will be out of a job. It is accepted that practically alternative goals govern decision making within a company. In some cultures and political environments, the assumed dominance of shareholder interests is questioned. Why shouldnt the providers of labour, rather than capital, have their rewards maximised?It is important to remember that it is senior management that rattling make the decisions within companies and they will be looking for personal reward. They are likely to be interested in the level of their own salaries and pensions and security. It is often claimed that management seek maximum revenue rather than maximum profit, or, crafty that they may only work for a company for a limited time period, are mo re interested in short-term performance rather than the long-term growth of shareholders wealth. Finally there are other stakeholders in the company to be considered.Most companies will try to balance the tap of shareholder wealth with the motivation of workers and management, the delighting of customers and a good public image. In achieving this balance shareholder wealth will not always be the major objective. (b) In the modern world companies cannot ignore the environmental implications of their actions to do so may destroy the company because of the effect on their reputation in the eyes of customers or suppliers, or the effect of the imposition of fines and penalties if they relegate legislation or regulations designed to protect the environment.Including environmental costs and benefits in investment appraisal will probably require the advice of an environmental specialiser who can calculate for the company such items as (i) (ii) the costs of machinery or changes to processe s to avoid environmental damage the likely costs of penalties, fines or claims for wages if environmental damage occurs KAPLAN PUBLISHING Page 15 of 17 ACCA P4 Advanced Financial Management (iii) (iv) he likely effect on future revenues from any adverse publicity that would be likely to arise from environmental damage the likely effect on future revenues from positive publicity from going beyond statutory requirements to protect the environment. Once costed, these costs and revenues could be included in the net present value calculations undertaken by XYZ plc in its investment appraisal of the chemical project. A more extreme approach would be to place a subjective valuation on the cost of reinstating the environment to its original condition and treating that as a nominal outflow.ACCA marking scheme (a) (b) One mark for each valid point throughout One mark for each valid point throughout Total Marks Max 12 Max 8 ___ 20 ___ ANSWER 5 (a) X1 = working capital/total assets X2 = retain ed earnings/total assets X3 = earnings before interest and tax/total assets X4 = book value of equity/total liabilities X5 = sales/total assets And the Z score = 0. 717X1+ 0. 847X2 + 3. 107X3 + 0. 420X4 + 0. 998X5 X1 = 391,337/2,599,463 X2 = 1,548,941/2,599,463 X3 = 68,623/2,599,463 X4 = 64,405/986,117 X5 = 2,374,087/2,599,463 = 0. 505 = 0. 5959 = 0. 0264 = 0. 0653 = 0. 9133 Z = 0. 11 + 0. 50 + 0. 08 + 0. 03 + 0. 91 = 1. 63 Whilst Island Energy Ltd is not in the immediate danger zone, its score is in the grey area and further analysis is recommended. (b) Further concerns about the company Page 16 of 17 The Chairman is also acting as MD so there is no counter-balance to him and, as such, no watchdog over his activities. The remainder of the carte du jour does not participate in the running of the company. There appears to be a weak finance function.There is a lack of management depth there being no middle management. KAPLAN PUBLISHING Revision Mock Answers Concerns about the mo del General limitations about the Z score (and other expectation models). These accounting based models only focus on the financial aspects of a companys performance. This is only a snapshot of the company maybe the position is improving. Further analysis is required to fully determine what the situation is with Island Energy Ltd. This may only be a predicator for the short term we do not know what the companys future plans are.ACCA marking scheme (a) (b) Calculation of each x or z score = 2 marks , interpretation 2 marks 1 mark for each valid point Total Marks Max 12 Max 8 ___ 20 ___ MARKING SCHEME This marking scheme is given as a guide to markers in the context of the suggested answers. desktop is given to markers to award marks for alternative approaches to a question, including relevant comment, and where well reasoned conclusions are provided. This is particularly the case for essay based questions where there will often be more than one definitive solution. KAPLAN PUB LISHING Page 17 of 17