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Year Month Part Question Notes

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WACC CALCULATION (5marks) 7

Layout the cash flow schedule for this project and calculate
the NPV of the
5
project. Should the company go ahead with the project?
(10 Marks)

For capital budgeting purposes (in general), how are the

following treated in cash
flow analysis?
 Replacement decisions for machines with different lives
5
 Investment inter-relatedness
2011 June 1  Company overheads
 Creditors
(8 Marks)

The APV method is often used as an alternative to NPV.

Explain what you
understand about APV. What are its advantages and 5
disadvantages?
(7 Marks)

What are the main factors that should be considered by

company directors when
8
deciding on company dividend policy?
(6 Marks)
Discuss further the three views that the board have put
forward. What are the
2011 June 2 8
merits or drawbacks of each policy?
(9 Marks)
What can the company’s P/E ratio be used for? What are
the problems with
2
using this ratio?
(5 Marks)
Layout the cash flow schedule for this project, calculate the
cost of capital and then calculate the
5
NPV of the project.
(12 marks)
WACC CALCULATION (INCLUDED IN ABOVE ROW
7
QUESTION)
relevant and irrelevant costs in cash flow (8marks) 5
2010 DEc 1 In general, how is it dealt with, and in this example
describe how would you conduct the analysis to deal with
5 and module 11 partially
inflation?
(5 marks)
Explain in detail why accounting figures are inappropriate
to use to calculate the NPV of a
3
project.
(5 marks)

Explain what you understand by the terms ‘operational

gearing’ and ‘financial gearing’. 7
(5 marks)

What explanation can you give for different levels of

gearing in different industries? Discuss the
7
factors involved.
2010 DEc 2 (7 marks)

You have to advise the company what it should do with the

surplus cash. What are the alternatives?
What effects would your recommendations have on the
9
capital structure? Discuss the
factors have you taken into consideration in your analysis.
(8 marks)

Lay out the cash flows for the project.

5
(8 marks)
WACC CALCULATION 7 LOOK AT REVIEW NOTES OF EBS JUNE 2011

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2010 June 1
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Year Month Part Question Notes

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What is the value of this real option? What impact would
this have on the decision regarding the
12
original project?
(8 marks)
2010 June 1
In evaluating a project, real option analysis is applying new
practices to try and give more flexibility
to managers in running the business. Discuss four of the
traditional capital budgeting 12
evaluation methods and highlight their strengths and
weaknesses.
(8 marks)
EPS CALCULATION (8 marks) 9
If the company is aiming to maximise earnings per share
growth which option should be chosen?
9
(Show all workings.)
(8 marks)

2010 June 2 This company rewards its managers for achieving earnings
per share growth and profitability
targets. What are the advantages and disadvantages of
EPS growth versus Economic Value Added 9
as a reward measure for top managers at this company
and any company? Fully explain what EVA
is and how it works.

Layout the cash flows for the wind farm project and justify
your inclusion or exclusion of the
5
different items.
(10 marks)
WACC CALCULATION 7 LOOK AT REVIEW NOTES OF EBS JUNE 2011
The company may have the opportunity of extending this
project and the firm is able to test and
research new equipment on site. The finance director says
2009 Dec 1 the project NPV is actually higher
because there is a real option attached to the project. 12
Explain what a real option is and how it
works. Give two examples of situations where you could
use real options.
(7 marks)

Explain the concept of investment inter-relatedness and

give a non-textbook example of how it
6
works.
(6 marks)
Explain clearly what is meant by ‘dividend irrelevancy’.
8
(6 marks)
Discuss the ways in which taxation will impact on the
company’s dividend decision. 8
2009 Dec 2 (7 marks)
What are the agency concerns surrounding the dividend
payment and the share repurchase? 9
(7 marks)

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Year Month Part Question Notes

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Calculate the cost of capital for the project.
7
(5 marks)
Lay out the cash flows for the project, with explanations as
to why you have included or excluded
certain cash flows. Calculate the NPV. Should the project 5
be accepted?
(12 marks)
2009 June 1 Explain what biases there might be in a capital budgeting
project and explain how they might be
5
overcome.
(7 marks)
Describe the different methods of depreciation that are
allowed and explain what impact they
6
will have on the NPV of a project.
(6 marks)
Describe and explain when you would be likely to use (i)
options, (ii) forwards, (iii) futures, and
(iv) swaps. Clearly differentiate as to where you would use
12
each particular product and explain
why that product is suited to that situation.
(8 marks)

2009 June 2 Draw and clearly label the payoff diagram for a seller of a
put option. 12
(4 marks)
Identify the five variables that go into the Black-Scholes
option pricing model and explain how
movements in these variables affect the price of a put 12
option.
(8 marks)

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Year Month Part Question Notes

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WACC CALCULATION (5marks) 7
Work out the equivalent annual cost for each machine and
explain which system you would
5
choose.
(7 marks)

Book values or market values? Indicate which one is used

in calculating the WACC and why it is
4
that one and not the other one.
(4 marks)

2008 Dec 1

Describe the impact that inflation has on depreciation,

salvage values, and their tax in capital
6
budgeting.
(6 marks)

Explain what the main differences are between accounting

figures and cash flows for use in capital
budgeting. Describe how you would obtain a figure for free
5 and module 3
cash flows (FCF*) from an income
statement and balance sheet.
(8 marks)
Identify and discuss four key factors in the company
borrowing decision. 9
(8 marks)
Explain why in a company that is in financial distress
managers may favour a riskier project to a
9
safe project?
2008 Dec 2 (6 marks)

Discuss the likely capital structure implications of the

following two examples:
a. A company earns very little profits and pays no tax.
9
b. Managers at a company believe the shares to be
undervalued.
(6 marks)
How much should you pay for this option?
12
(6 marks)
If there was a put option available on this project, how
much should it cost? 12
(4 marks)

c. Draw a payoff diagram for the original option strategy in

part (a).
(3 marks)
d. Identify and discuss examples of the main categories of
real options and explain how you would
2008 June 1 use and analyse real options.
(7 marks)
e. It is often said that the equity in a geared company
resembles a call option. Using the Black– 12
Scholes variables discuss how the model works in general.
(6 marks)
f. Your company also uses large amounts of cocoa in
producing chocolate products. Describe how
you could use the futures market to protect yourself as a
buyer of cocoa and draw the payoff
diagram for your futures strategy.
(4 marks)

1. In capital budgeting, describe how the following items

are treated in the project appraisal:
− Product cannibalisation 6
− Depreciation
− Interest charges (9 marks)
2008 June 2
How does capital rationing affect a company and how can
capital budgeting techniques help
6
resolve the problem?
(6 marks)
What is the problem with IRR and mutually exclusive
projects, and how can it be overcome? 6
(5 marks)
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Year Month Part Question Notes

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What is the required rate of return (WACC%) on the
project denominated in US dollars? 7
(7 marks)

Explain the two methods by which foreign projects can be

evaluated. 11
(5 marks)

The spot rate is $1.90/£1. Calculate the forward rates for

the next five years. 3
2007 Dec 1 (4 marks)

The company has estimated that the project incremental

cash flows (FCF*) for the next five years
are $30m, $40m, $60m, $70m, and $30m, respectively.
5
The initial outlay for the project is
$135m. What is the NPV?
(6 marks)

Where do very good projects come from and why is it so

hard to find and maintain them? 6
(8 marks)

A company wishes to use more short term debt rather than

longer term debt because it is
usually cheaper. They also want to maintain a low level of
current assets; current liabilities will
make up a high proportion of total liabilities.
10
Comment on the return and risk to the company from these
actions. And discuss more generally
2007 Dec 2 return and risk with regard to managing a company’s
working capital.
(10 marks)

For each of the main elements of working capital, explain

how companies might exercise better
10
control over these items.
(10 marks)

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Year Month Part Question Notes

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Lay out the relevant cash flows to the project and explain
why you are including or excluding
5
items.
(10 marks)
waac calculation 7
How would you treat the following items in capital
budgeting terms?
− opportunity costs
2007 June 1 − costs associated with a new product launch replacing a 5
previous model
− interest payments
− depreciation

Explain how you would conduct an EVA analysis on a firm

and how you would interpret the
results, and comment on any strengths and weaknesses of 4
the method.
(7 marks)
Discuss the factors that affect the business risk of a
company. Use the example of a software
company or a chemicals company to illustrate your 7
answer.
(6 marks)

2007 June 2 Discuss the factors that a company should consider before
it takes on financial risk. 7
(7 marks)
Discuss the factors that work against companies having
100% debt in their balance sheet as
9
suggested in Modigliani and Miller with taxes.
(7 marks)
If you were advising the family, what would be the
arguments you would put for and against
9
equity or debt issues by this company?
(4 marks)

Calculate the current level of earnings per share at the

company. 9
(4 marks)

You have to present the cases for either a debt funded

issue to finance the growth of the
company or an equity financed issue. You have calculated
that the company needs £20 million of
funding to finance their new growth path in the sector. With
the funding in place, the company
2006 Dec 1 EBIT will increase by £2.5 million a year. If the debt route
was followed, the company would borrow
9 general question
£20 million from the bank at an interest rate of 9.5%. If the
equity route was taken, an extra
20 million £1 shares would be sold at 100p each.
Analyse the earnings per share performance of the two
funding choices. If the management team
was paid on the basis of earnings per share growth, which
route would they take? What advice
would you give to Bill Pitt? (8 marks)

Discuss the suitability of the payback, average return on

investment, and profitability index as 6
methods of project evaluation.(7 marks)
Discuss how you analyse the decision to lease or buy an
asset. 6
(7 marks)

Discuss the effects of diversification in terms of the market

model. 7
(6 marks)

2006 Dec 2 Explain the ideas behind the Capital Asset Pricing Model.
7
(7 marks)

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Year Month Part Question Notes

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Describe how you would estimate the risk of a project
when a company has moved into a new
area for the project, and there is not a company that 7
operates solely in that field.
(7 marks)

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Year Month Part Question Notes

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cash flow 9marks 5

waac calculation 6 marks 7

2006 June 1

capital rationing 6

impact of inflation 6 and module 11

dividends 7marks 8
2006 June 2

PE ratio 6marks 2
PE ratio 7marks 2

cash flow 12marks 5

2005 Dec 1

discuss why cash flow and not accounting profit 9marks 3 repeated question

disadvantage of IRR 6marks 6

IRR mutually exclusive 6

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Year Month Part Question Notes

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the term "duratoins" with regard to interest change 7marks 1

2005 Dec 2

spot rate 7marks 1

YTM 6marks 1

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