ACCA

Paper F9 Financial Managel11ent
Mock Examination June and December 2009
Question Paper
SECTIONA - Answer ALL twenty sub-question SECTION B - Answer ALL six sub-question SECTIONC - Answer ONE of the two questions

Time Allowed

20 minutes 3 hours

Reading Writing

Get into good exam habits now!
Take a moment to focus on the right approach for this exam.

Effective time management
• • Watch the clock; allow 1.8 minutes per mark. Work out how long you can spend on each question and do not exceed that time. Take a few moments to think what the requirements are asking for and how you are going to answer them.

Effective planning
• This paper is in exactly the same 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 and take time to choose the questions you will answer in sections with choice. Read the requirements carefully: focus on mark allocation, question words (see below) and potential overlap between requirements. Identify and make sure you pick up the easy marks available in each question.

• •

Effective layout
• • • • Present your numerical solutions using the standard layouts you have seen. Show and reference you r workings clearly. With written elements try and make a 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
Analyse Calculate/co m pute Compare and contrast Define Describe Discuss Distinguish Evaluate Explain Identify Interpret Justify List Prepare Recommend Examine in detail the structure of Ascertain or reckon mathematically Show the similarities and/or differences Give the exact meaning of Commu nicate the key features of Examine in detail by argument Highlight the differences between Appraise or assess the value of Make clear or intelligible/state the meaning of Recognise, establish or select after consideration Process information to explain its meaning Produce reasons in support of State short pieces of information on separate lines Make or get ready for use Advise on a course of action

2

Formulae sheet
Present value table
Present value of 1 ie (1 +r)-n where r discount rate n number of periods until payment

= =

Discount rates (r)
Periods
(n)

1 2 3 4 5 6 7 8 9 10 11 12 13 15

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 0.861

1%

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 0.743

2%

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 0.642

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 0.555

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 0.481

6%

0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.527 0.497 0.469 0.417

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 0.362

8%

0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 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 0.275

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 0.239

10%

11%
2

12%
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 0.145 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 0.111 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 0.209 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 0.093 0.078 0.065

1

3 4 5 6 7 8 9 10 11 12 13 14 15

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

3

Annuity Table
P If' resent va ue
0

an annuity

0

f l'

te

1- (1 +r)-n

r

where r = discount rate n = number of periods Interest rates (r)
(n) 1 2 4 5 6 7 8 9 10 11 12 13 14 15 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

0.990 1.970 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865
11%

0.980 1.942 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849
12%

0.971 1.913 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938
13%

0.962 1.886 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118
14%

0.952 1.859 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380
15%

0.943 1.833 3.465 4.212 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712
16%

0.935 1.808 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108
17%

0.926 1.783 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559
18%

0.917 1.759 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061
19%

0.909 1.736 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606
20%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

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

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

0.885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462

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

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

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

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

0.847 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 4.793 4.910 5.008 5.092

0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.486 4.611 4.715 4.802 4.876

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

4

Economic Order Quantity

=

t~:D
= Lower
limit + (Ys x spread) cost x variance of cash flows Interest rate

Miller - Orr Model
Retu rn point

Spread =3

[
~i

% x transaction

1X

The Capital Asset Pricing Model
E(n)= Rf+ (E (rm) - Rf)

The Asset Beta Formula Vd(1- T)

----=-----~d (Ve

+ Vd(1 - T))

The Growth Model

Po =

_o=----_

D (1 + g)
(Ke -g)

Gordon's Growth Approximation 9 = br The Weighted Average Cost of Capital WACC = [
Ve Ve + Vd

1

k, + [

Vd Ve + Vd

1

kd(1 - T)

The Fisher Formula
(1 + i)

= (1 + r)( 1 + h)
Fo So x __

Purchasing Power Parity and Interest Rate Parity

=

(1 + i ) (1 + ib)

c_ Sf

5

1

Katie
Katie is a med ium sized enterprise that manufactures high quality kitchen utensils. Katie was established five years ago when the founder started selling a revolutionary product called the spife (a cross between a spoon and a knife which can be used to cut fruit and then scoop out the flesh). The company has grown rapidly. It now sells a wide range of products both in its domestic market and throughout the world, The following information shows the recent performance of the organisation. It is now December 20X8. Balance sheet

30 Nov 20X8
$'000 Assets Non-current assets Current assets Inventory Receivables Bank 740

30 Nov 20X7
$'000 634

528 504 0 1,772

228 259 5 1,126

Equity and Liabilities Shareholders' funds Non cu rrent liabilities Bank Payables Other information

900

828

680 192 1,772

100 198 1,126

Sales for 20X8 were $4 million ($3 million in 20X7) and net profit was $197,000 ($175,000 in 20X7) 2 The inventory value for 20X8 (and 20X7) are split as follows: Finished goods WIP Raw materials 3 4 30% 50% 20%

Material costs represent 50% of the total costs of sales. Gross profit margin on sales remained at a constant 25% over the two years.

Required
(a) Explain the significance of the cash operating cycle in the management of profitability and liquidity. (6 marks) Calculate, to the nearest day, the cash operating cycle for Katie for 20X7 and 20X8. (7 marks)

(b)
(c) (d)

Using your answer to (b) explain why it is not unusual for a manufactu ring company to face cash shortages when sales are expand ing very qu ickly, despite being profitable (6 marks) Sales are forecast to grow by 40% in 20X9. Calculate the sales I net working capital ratio in 20X8 (net working capital = inventory + receivables - payables) and forecast the financing needs of the business in 20X9. (6 marks) (Total: 25 marks)

6

2

Oscar
Oscar pic is a manufacturing company that has made low technology products for the agricultural sector for many years. Oscar's research and development department has just developed a new product which is an automatic feeder for chickens. This will allow smallholders to leave chickens for up to two days. Initial market research, which cost Oscar $100,000 and has not yet been paid for, suggests that demand will be high. The cost structure of a feeder at current prices is as follows:

$
Costs per unit of output Direct labour cost per unit Material cost per unit Variable overhead cost per unit Fixed overhead cost per unit Additional notes

2
15

2
16 35

The fixed overhead represents an apportionment of central administrative and marketing costs. These are expected to rise in total by $50,000 pa (at today's prices) as a result of undertaking this project. 2 New machinery will have to be bought. It will cost $5m and is expected to operate for five years. This figure includes $250,000 of materials stocks. The machinery will have a residual value of $2m. The company is moving towards a JIT stock management policy; it is expected that this project will involve steadily reducing working capital needs, expected to decline at about 3% pa by volume. The machinery will be accommodated in a presently empty building for which an offer of $2m has recently been received from another company. If the building is retained, it is expected that property price inflation will increase its value to $3m after five years. Oscar operates in a country where there is uncertainty over the precise rates of price and cost inflation. Oscar has made the following forecasts for the average annual rates of inflation relevant to the project: Chicken feeder prices Material prices Direct la bou r wage rates Variable overhead costs Other overhead costs Retail Price Index 6 7 pa pa pa pa 4% pa 9% pa 5% 3% 8% 6%

3

4

5

Market research suggests that at a price today of $60 Oscar will sell 100,000 units a year. Corporation tax of 30% is payable. Tax payments occur in the year following the transactions. new machine attracts writing down allowances of 25% on the reducing balance basis. The

Required
(a) (b) (c) Assess the financial viability of this proposal, given that Oscar's shareholders of 5.5% for projects of this degree of risk. requ ire a real return (13 marks)

Identify the limitations of NPV analysis for Oscar's decision and discuss which other investment appraisal techniques could be used to assist in this decision. (8 marks) Discuss whether inflation could have been ignored in the above analysis. (4 marks) (Total: 25 marks)

7

3

Celia
Celia is a listed for-profits private sector organisation. An investment of $100 million is being considered to finance a major new expansion of existing activities and is expected to last for five years. The company's existing capital structu re is:

$ Million
Med ium-term floating rate loans 11 % debentures redeemable in 3 years Issued ordinary shares ( 50 cents par value) Reserves Notes (i) (ii) (iii) (iv) (v) (vi) Celia wishes to maintain its current capital structure (i.e. gearing). The corporate tax rate is 30%. The risk free rate is 3.5% per year and the market return is 11% per year. The equity beta of Celia is 1.15. The company's current share price ex-dividend is 478 cents, and debenture price ex-interest is $107.80. Each debenture is redeemable at its par value of $100. Issue costs are expected to add 0.38 percentage points to the cost of equity. 85 140 37.5 205

Required
(a) Estimate the cost of capital of the new investment under each of the following scenarios: (i) If internal sources of equity are used the shareholders' expected retu rn (the cost of equity) will remain at its existing levels. Debt finance will be raised by a 7.5% floating rate bank loan with negligible issue costs. If external sources of debt (new debentures issued at par of $100) and equity are used. Comment upon your findings and state clearly any assumptions that you make. (13 marks)

(ii) (b) (c)

State the underlying assumptions when using the Weighted Average Cost of Capital (WACC) in investment appraisal (5 marks) Explain the argu ments against using the WACC as the cost of capital for investment appraisal. (7 marks) (Total: 25 marks)

8

4

Whaka
Whaka Ltd is located in New Zealand. The finance manager has collected the following information: Whaka has these money market rates available to it: 3 Months NZ$ 3 Months Kr 3 Months A$ Other information Spot rate (CNY to NZ$) Spot rate (A$ to NZ$) Spot rate (Kr to NZ$) Three month forward rate (CNY to NZ$) Where: NZ$ New Zealand Dollars A$ Australian Dollars Kr = Swedish Kronors CNY Chinese Yuan 2.1610 2.2504 7.55285 2.2145 +/- 0.0050 +/- 0.0006 +/- 0.00195 +/- 0.0075 Borrowing 8.60 Deposit 8.00 10.00 6.50

10040
7.00

=

=

=

Whaka imports products, rebrands them and then resells them. One of its most popular products is disposable barbeques (BBQs) which are manufactured by a third party in China. These are sold by Whaka in both in its domestic market and also exported overseas. It is now 1 April. Whaka has recently taken delivery of a container full of disposable BBQs. The agreed price for the BBQs was 4,000,000 Chinese Yuan. Half of this has already been settled; the balance is payable on the 1 July. Required (a) Compare the cost to Whaka if it buys Yuan at the spot rate or enters into a forward agreement. Briefly comment on your answer and discuss the advantages/d isadvantages of using forward rate agreements. (5 marks) Whaka also imports DVDs from Sweden. Whaka owes a Swedish supplier Kr 1,400,000 payable in three months' time. What is the cost in NZ dollars with a money market hedge and what effective forward rate would this represent? (6 marks) A major export market for Whaka for both BBQs and DVDs is Australia. Whaka is owed 2.5m Australian dollars (A$) in three months' time by an Australian company. What is the receipt in NZ dollars with a money market hedge and what effective forward rate would this represent?

(b)

(c)

(6 marks)
(d) (e) From the perspective of a corporate financial manager, discuss the advantages and potential problems of using currency swaps. (4 marks) You work in the finance department. The Sales Director has recently been on an overseas trip to visit actual and potential customers. One customer suggested that Whaka might use future contracts. Write a memo to the Sales Director which explains what a future contract is and the difference between a forward and a futures contract. (4 marks)

(Total: 25 marks)
Note: Exchange rates used throughout this question do not necessarily represent real world rates that you might be aware of! You should use the rates stated in the question.

9

Student self assessment
Having completed this paper take a few minutes to consider what you did well and what you found difficult. Use this as a basis to focus your future study on effectively improving your performance.

Common problems
Timing and planning
Did you finish too early? Did you overrun?

Future emphasis if you answer Yes

YIN YIN

Focus your planning time on generating more ideas. Use models to help develop width to your thinking. Focus on allocating your time better. Practise questions under strict timed cond itions. If you get behind leave space and move on. Focus your planning time on developing a logical structu re to your answer.

Did you waffle?

YIN

Layout
Was your answer difficult to follow?

YIN

Use headings and subheadings. Use numbering sequences when identifying points. Leave space between each point. Show why the point identified answers the question set. Give yourself time and space to make the marker's job easy.

Did you fail to explain each point? Were some of your workings unclear?

YIN YIN

Content
Did you struggle with: Interpreting the questions?

YIN

Learn the meaning of question words (inside front cover). Learn subject jargon (study text glossary). Read questions carefully, noting all the parts. Practise as many questions as possible. Review your notesltext. Work through easier examples first. Contact a tutor for help. Quiz yourself constantly as you study. You need to develop your memory as well as your understanding of a subject.

Understanding the subject?

YIN

Remembering the notes/text?

YIN

10

School of Busf ness MARKING FRONT SHEET
Attach this sheet to the front of your script

London

&·Finance

InterActive
Name LSBF Ref PaperNo ___

Address

Paper initials

Circle as appropriate

GBR

INT

Postcode

Circle as appropriate Tuition Mock

Revision Mock

Return completed scri~ts to: Marking Co-ordinator (4 h floor), London School of Business & Finance, 8-9 Holborn, London, EC1 N 2LL, UK For office use only RESULTS Question Date received _ Marks available Marks achieved

Marker's initials

Invoice no.

_

Date returned

_

Total

100

Markers feedback

LSBF CAN NOT RESPONSIBILITY FOR SCRIPTS LOST IN THE POST AND THEREFORE ASK THAT STUDENTS TAKE A COPY OF THEIR SCRIPT BEFORE SENDING IT IN FOR MARKING.

Marker's assessment

Question number Need to improve Approach Need to improve

DDDDD

Good
Questions correctly interpreted

Need to improve Technical content Need to improve

DDDDD

Good
Logical coherent answers

DDDDD DDDDD

Good
Understanding of principles

Good
Theories applied well to specific problems

Need to improve Computations
I----

Need to improve

DDDDD

Good
High standard of accuracy

Need to improve Appearance Layout

DDDDD

Good
Workings are easy to follow

I

Need to improve Need to improve Need to improve Need to improve

DDDDD

Good
Text layout is clear and easy to follow

DDDDD DDDDD DDDDD DDDDD

Good
Calculations are easy to follow

Good
Professional style

Written style

Good
Answering the question set

Good
Handwriting clear

Sign up to vote on this title
UsefulNot useful