ACCA Financial Management (FM)

Course Exam 1
Questions

Questions

Time allowed: 1 hour and 38 minutes

(indicative timing based on paper based exam time)
Please allow 1 hour 30 minutes if sitting the computer based exam

ALL questions are compulsory and MUST be attempted

ACCA Financial Management – Course Exam 1

SEP19/DEC19/MAR20/JUN20 EDITION
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 1.95 minutes to each mark and move on if you get behind.
• Take a few moments to think what the requirements are asking for and how you are going to
answer them.
• Remember one mark is usually allocated for each valid point you give in a discursive question.

Effective planning
• This exam is 80% of the real exam.
• 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
your 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
examining team to mark.

Common terminology
Advise To counsel, inform or notify
Analyse Examine in detail the structure of
Calculate/compute To ascertain or reckon mathematically
Compare and contrast Show the similarities and/or differences
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 intelligible/state the meaning of
Identify Recognise, establish or select after consideration
Interpret Process information to explain its meaning
Justify To produce reasons in support of
List State short pieces of information on separate lines
Prepare To make or get ready for use
Recommend To advise on a course of action
Summarise To express the most important facts of

2
ALL questions are compulsory and MUST be attempted
Section A
(1) DONA Co has just paid a dividend of 25c per share for the year just ended out of earnings per
share of 41c. Its share price is $3.80 per share. One year ago DONA Co made earnings per share of
33c and the price/earnings ratio was 10.
What is the total shareholder return over the period just ended?
A 15.2%
B 13.2%
C 22.7%
D 19.7%
(2) The government of a modern industrialised economy has adopted the following measures.
1 Increased government spending
2 Reduced interest rates
3 Increased taxation for companies
Which of these policies would be part of an expansionary economic policy?
A 1 only
B 1 and 2 only
C 2 and 3 only
D 3 only
(3) The currency of Rhodovia is the dollar ($). The $ has recently weakened against all other foreign
currencies. The following statements have been made in connection with exchange rate policy.
1 The weakening of the $ will make imports from overseas suppliers cheaper
2 The weakening of the $ will make exports more attractive to overseas buyers
3 Weakening the $ could be part of an expansionary economic policy adopted by the
Rhodovian government.
Which of these statements is/are correct?
A 1 only
B 1 and 2 only
C 2 and 3 only
D 3 only
(4) FADO Co has issued some commercial paper in order to raise some funds to support its working
capital.
Which of the following statements best describes the issue?
A A transaction on the primary money markets
B A transaction on the primary capital markets
C A transaction on the secondary money markets
D A transaction on the secondary capital markets
(5) Which of the following money market instruments are interest bearing (as opposed to
discount instruments)?
1 Certificates of deposit
2 Repurchase agreements
3 Treasury bills
A 1 only
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only

3
Section B
1 Philips
(a) Philips Co has $2,500,000 of ordinary 50c shares in issue. Its results for the year ended
31 December 20X5 are as follows:
$
Profit before taxation 750,000
Taxation 150,000
600,000
Ordinary dividend 150,000
Retained profit 450,000

The market price per share is currently 80 cents ex div. Comments in the financial press have been
made in relation to the falling price-earnings ratio of Philips Co.
(1) What is the price-earnings (P/E) ratio of Philips Co?
A 24.0
B 12.0
C 6.7
D 3.3
(2) What is the dividend yield?
A 3.75%
B 11.25%
C 7.50%
D 15.0%
(3) What is the dividend cover?
A 3
B 4
C 1.33
D 0.67
(4) Which of the following explanations are plausible explanations for a fall in Philips Co's
price-earnings ratio?
1 Philips Co has become viewed as lower risk than previously thought
2 Philips Co's growth prospects are viewed as less impressive than before
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
(5) If Philips Co issued new ordinary shares as part of a rights issue on 1 January 20X6 which
of the following effects would be seen on 1 January 20X6 (ie immediately)?
1 Financial gearing would fall
2 Cash balance would go up
3 Return on capital employed would be lower
A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D 1 only
(Total = 10 marks)

4
2 Denton
Denton Co purchases both products R & W, with purchases of both occurring evenly throughout the
year.
Product R
The monthly demand for Product R is 30,000 units and currently inventory is ordered in quantities of
18,000 units. A delivery cost of $300 is charged by the supplier for each delivery regardless of its size.
There are no further administrative costs connected with ordering the product. The cost of holding one
unit of product R is $0.15 per year. A buffer inventory equal to 9,000 units is maintained.
Material W
The annual demand for material W is 500,000 units per year and Denton buys this product for $1.50
per unit on 50 days credit. The supplier has offered a discount of 1% for settlement of invoices within
15 days.
Assume there are 365 days in each year.
(1) What are the CURRENT ordering and holding costs associated with the purchase of Product
R?
A Ordering cost of $6,000 and Holding cost of $6,000
B Ordering cost of $6,000 and Holding cost of $1,350
C Ordering cost of $1,350 and Holding cost of $1,350
D Ordering cost of $6,000 and Holding cost of $2,700
(2) What is the economic order quantity for Product R to the nearest 1,000 units?
A Zero units
B 1,000 units
C 11,000 units
D 38,000 units
(3) Now assume an EOQ of 25,000 (not the real EOQ you calculated for part (2) what is the
impact on annual ordering costs and holding costs compared to the current situation where
the order quantity is 18,000 units?
A Holding costs will go up and ordering costs will go down
B Holding costs will go up and ordering costs will go up
C Holding costs will go down and ordering costs will go up
D Holding costs will go down and ordering costs will go down
(4) If the early settlement discount from the supplier of material W is accepted what will the
impact be on Denton Co's average payables balance to the nearest $,000?
A Increase by $48,000
B Reduce by $48,000
C Increase by $72,000
D Reduce by $72,000
(5) Which of the following scenarios best illustrates an aggressive approach to financing working
capital?
A Long term finance used to fund all working capital
B Long term finance used to fund permanent working capital only
C Short term finance used to fund all working capital
D Short term finance used to fund fluctuating working capital only
(Total = 10 marks)

5
Section C
1 Marshall
Marshall is considering Project A. This involves purchasing a new machine to increase the production
capacity (which is currently at 700,000 units) of its production facilities by an extra 200 units per hour.
The Zoom will cost $1,000,000 to purchase. If installed, three members of staff will have to attend a
training course, which will cost the company a total of $8,000.
The organisation expects the demand for product Z to be 1,152,000 units per annum for the next three
years. After this, the Zoom would be scrapped and sold for $100,000.
The existing machine will have no scrap value. Each unit of product Z earns a contribution of $2.80.
The organisation works a 40-hour week for 48 weeks in the year. Marshall normally expects payback
within two years and its after tax cost of capital is 10% per annum.
The organisation pays tax on profits at 30% one year in arrears, and can claim tax allowable
depreciation of 25% per annum on the reducing balance basis.
The organisation's financial year begins on the same day that the new machines would start operating, if
purchased.
As an alternative to this project the directors of Marshall Co are considering an alternative project,
Project B. It has an NPV of $25,000 and an internal rate of return of 36%. Projects A and B are mutually
exclusive.
Required
(a) Calculate the net present value of the proposed investment, and advise the management of
Marshall Co as to whether it should proceed with Project A. For this part of the requirement ignore
Project B (11 marks)
(b) Calculate the payback period of Project A and explain the limitations and relative merits of payback
when appraising projects. (6 marks)
(c) Assume Project A has an internal rate of return of 30%. Briefly explain whether the IRR results
conflict with those of the NPV analysis. Explain, with reasons, which project (A or B) is better for
shareholder wealth maximisation (3 marks)
(Total = 20 marks)