Ll London School of Business & Finance ACCA Paper F9 Financial Management Mock Examination June 2009 Question Paper Question Paper Time Allowed 20 minutes Reading and Planning 3hours Writing DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS,Get into good exam habits now! Take a moment to focus on the right approach for this exam. Effective time management Watch the clock, allocate 1.8 minutes to each mark and move on If you get behind, Take @ few moments to think what the requirements ere asking for and how you are going to ‘ansiner then. Remember one mark is usually allocated for each valid point you give in2 discursive question. Effective planning ‘This paper isin exaetly the seme format as the real exam. You should read through the paper ‘and plan the order in which you will tackle the questions. Always start with the one you feel most confident about. Read the requirements carefully: focus on mark allocation, question words (see below) and potential overlan between requirements, Identity and make sure you pick up the easy marks available in ezch question, Effective layout Present your numerical solutions using the standard layouts you have seen, Show and Feference your workings cleatly With written elements try and make 2 number of distinct points using headings and short paragraphs. You should aim to make a separate point for each mark Ensure that you explain the points you are making ie why is the point a strength, criticism or opportunity? Give yourself plenty of space to add extra lines as necessary, it will also make it easier for the ‘examiner to mark, Common terminology Advise To counsel, inform or notty Analyse Examine in detall the structure of Calculate/compute To ascertain or reckon mathematically Compare and contrast Show the similarities and/or citferences Define Give the exact meaning of Describe Communicate the key features of Discuss To examine in detail by argument Distinguish Highlight the differences between Evaluate To appraise or assess the value of Explain Make clear or intellgible/state the meaning of Identity Recognise, establish or select after consideration Interpret Process information to explein its meaning Justify To produce reasons in support of List State short pieces of informetion on separate lines Prepare To make or get ready for use Recommend To advise on a course of actionFormulae sheet Present value table Present value of 1 ie (141) where F Discount rates (7) Periods (0) 1% 1 4990 2 0980 3 agrt 4 0961 5 03st 6 age 7 0333 8 0923 8 agi 10 0.905 110.398 12 0387 13 0879 18 aB61 11% 1 ago 2 asta 3 0731 4 0659 5 0593 6 0535 7 0482 8 0434 8 0301 10 0.382 1" 03t7 120288 130258 4 4232 18 0203 iscount rete umber of periods until payment 2% 0.80 0.61 ogee 0.924 0.906 0.88 og7t 0883 0.837 0.820 0.804 0.788 ons 0743 12% 0.893 0.797 one 0.636 0.867 0507 0.482 0.404 0.61 0.222 0.267 0.257 0.229 0.208 0.183 3% ogrt 0943 0315 0.888 08s oss? 0313 a7as 0.786 744 one oat ost oes 19% 0.885, 0.783, 0.693, os13 0543 0.480 0.425 0.376 0.333, 0.295 0.261 0.231 0.204 0.181 0.160 4% 0.962 0.925 0.9889 0.855 0.822 0790 0.760 0731 0.703 0876 0.850 0.625 0.01 0.555 14% oar? 0.769 0675 0592 0519 0.486 0.400 0351 0308 0270 0237 0.208 0.182 9.160 0.140 5% ags2 07 oes 0.823 a7e4 0746 arnt 0677 064s 0614 0.586 0587 0.530 0481 15% a870 0786 ose 0572 0497 0432 0376 0327 0.284 0.247 oats 0.187 0.163 0.141 0.123 6% 0.943 0.890 0.840 0.792 77 0.705 0.685 0.627 0.592 0.568 0827 04g? 0.469 oai7 16% 0.882 0743 ase 0.552 0478 ato 0.354 0.305 0.283 0227 0.195 0.188 0185 0.125 0.108 1% 0.935 0.873, 0816 0.763 ong 0.686 0623 0.82 0544 0.508 0475 o44s 0415 0.362 11% 0.855 0731 0.424 0.534 0.456 0.390 0.33, 0.285 0.243, 0.208 0.78 o82 0.130 oan 0.095 8% 0.926 02s? 0794 0.735 oat 0.830 0.383 asa 0500 0.483, 42g 0397 0368 0318 10% oa? one 0.609 0516 0437 0370 o3i4 0.266 0.225 asgt ot62 0137 0116 098 84 9% ast? 0.842 0772 0.708 0.850 0.596 0547 502 0.480 0.422 0.388 0.356 0.326 0275 10% ato 0.708 0593 0.498 aig 0.352 0.298 0.249 0209 0178 0148 0.124 104 0.088 074 10% os0s 0.826 0751 0.683 0621 0.564 0813 0.467 0.424 0.386 0.260 0219 0.290 0.238 20% 0833 0.4694 0879 0.482 ona 0.336 0278 0233, 0.194 0.162 0.135 one 0.093 0.078 0.065Annuity Table Present value of an annuity of 1 ie where r= discount rate = number of periods Interest rates (1) (n) 1% 3% 4 0890 0980 © agrt 2 1970 19421918 4 3902 3.808 3.717 5 4853-4713 4.580 6 5795 5601417 7 678 6472 6230 8 76527325 «7.020 8 8566 8.162 7.786 10 8471 -8.983B530 11 10968 9.707 9.259 12 11.255 10578 9.954 1312134 11348 10.635 44 13004 12.106 11.286 15 15.865 12.849 11.998 11% 12% «13%, 1 0901 0893 0.885 2 1713 1.690 1.668 3 2444 24022361 4 3102-3037 2g74 5 3696 3605 3517 6 4231 4att 3.998 7 4712 4564 4.428 8 516 4968 4.799 9 5897 5328132 10 58885650 «5.426 1 6207 5838 5.687 12 649261945818 13 6750 6424 6.122 14-6982 6628 6.302 16 71916 8t1 6.462 Len) 4% 0.982 1,886 3.630 4.452 5.242 6.002 6733, 7.435; att 8.760 9.385 9.986 10.583 11.418 14% 077 1.647 2.322 214 3.433, 3.889 4,288 4.639 4.916 5216 5.453, 5.660, 5.842 6.002 6.142 5% ag82 1.858 3546 4328 5.076 5786 5.463 7.408 7.722 3.206 3.863 9.394 9.899 10.380 15% 0.870 1626 2283, 2.855 3.982 3784 4.160 4497 4m 5.019 5.234 5.421 5.503 5.724 5887 6% 0.943 1.833, 3.465, 4212 4917 5.582 6210 6.802 7.380 7.987 2.384 8.853 9,295 9712 16% 0.862 1.605 2266 2.798 3274 2.685 4.038 4344 4.07 4833 5.028 5.197 5.342 5.488 5575 ™% 0.935 1,808 3.387 4.100, 4.787 5.289 571 6515 7.024 7499 7943 8.368 8745 9.108 11% 0.855 1.585 2210 2743, 3.199 3.589 3.922 4.207 4451 4.659 4.836 4.988 5.118 5.229 5.324 2% 0.926 4.788 3.312 3.993 4.623 5.206 5.747 6247 6710 7.198 7896 7.904 8244 8559 18% 0847 1.566 2174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 47983 4910 5.008 5.092 9% ast? 4,759 3.240 3.890 4.486 5.033 5.535 5.995, 6418 6.805 7481 7487 7788 8.081 19% 0.840 1547 2.40 2.538 3,058 ato 3.708 3.954 4.163 4339 4.486 4sit 4715 4,802 4.878 10% 0.909 1.738 3.170 3791 4.355 4.368 5.335 5.759 6.1485 6.495 6814 7.103 7.367 7.806 20% 0833 1528 2.1068 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4327 4.439 4533 Agi 4.675Economic Order Quantity = Pee “Fe, Miller ~ Orr Model Return point = Lower limit + (4 x spread) 34> transaction cost x variance of cash flows |] /s Spread =3 Interest rate ‘The Capital Asset Pricing Model E (r= Rit Bi (E ft) - Rr) ‘The Asset Bela Formula fw 1, fae “ware * [aears| ‘The Growth Model p, = Dall+9) *(K-a) Gordon's Growth Approximation g=br ‘The Weighted Average Cost of Capital ke(1-T) ‘The Fisher Formula (aie (tenet eh) Purchasing Power Parity and Interest Rate Parity (+h) pag Mtl) g Si =8ix (+h) (+h) TenaAll FOUR questions are compulsory and MUST be attempted 1AGD AGD Co is aprotitable company which is considering the purchase of a machine costing £320,000. It purchased, AGD Co wauld incur annual maintenance costs of £25,000. The machine would be used for three years and at the end of this period would be sold for £50,000. Alternatively, the machine could be obtained under an operating lease for an annual lease rental of £120,000 per year, payable in advance. AGD Co can claim capital allowances on a 25% reducing balance basis. The cornpany pays tax on profits at an annul rate of 30% and all tax liabilities are pald one year in arrears. AGD Co has an accounting year that ends on 31 December. Ifthe machine is purchased, payment will be made in January ofthe frst year of ‘operation. If leased, annual lease rentals willbe paid in Januaty of ezch year of operation. Required: (2) Using an after-tax borrowing rate of 7%, evaluate whether AGD Co should purchase or leese the new machine. (12 marks) (0) Explain and discuss the key differences between an operating lease and a finance lease. (8 marks) {c) Explain the difference between hard and soft capital rationing, and give reasons why a company may deliberately choose to restrict its capital expeneiture, (5 marks) {Tot marks) 2 Listed companies Given below are extracts from the annual accounts of four listed companies, together with information concerning their stock market performance. Companies A and B ere from the brewing sector and have as ‘heir principal business activites, brewing beer, wholesale and retail selling of beers, wines and spirits end soft drinks and the ownership and management of public houses. The princival activities of companies C and D are the distribution and service of electronic components, microprocessor systems and related equipment. Company D is also involved in the manufacture of steel products such 2s partitions and lintels. Company A Compary 8 Company Company D 20X8: Annual report extracts: Ordinary shareholders’ tunds ($m) 904 65.4 59 333 Long term loans ($m) - on - 03 9% Loan notes ($m) uu Benk overdraft ($n) 17 58 4 07 Net dividend per share (c) 43 a2 24 99 ‘Annual dividend growth since 20x4 12% 10% 19% 22% ‘Stock market details on 31 May 20X9: Equity market value ($m) 68.0 632 688 123.4 Share price ($) 1.64 2.80 3.03 4.70 ‘The pre-tax cost of debt for the companies that have long term loans is 12%. The loan notes for Company A are undated and are currently trading at $60 per $100 nominal. Assume that Company A issued the loan notes one yeer ago to finance 2 new investment.