1: Which of the following statements concerning working capital are correct?

1 Working capital should increase as sales increase

2 An increase in the cash operating cycle will decrease profitability
3 Overtrading is also known as under-capitalisation
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3

2: The following are extracts from the financial position statement of a company:
$000 $000
Equity
Ordinary shares 8,000
Reserves 20,000
28,000
Non-current liabilities
Bonds 4,000
Bank loans 6,200
Preference shares 2,000
12,200
Current liabilities
Overdraft 1,000
Trade payables 1,500
2,500
42,700
The ordinary shares have a nominal value of 50 cents per share and are trading at $5.00 per
share. The preference shares have a nominal value of $1.00 per share and are trading at 80 cents
per share. The bonds have a nominal value of $100 and are trading at $105 per bond.
What is the market value based gearing of the company, defined as prior charge capital/equity?
A 15.0%
B 13.0%
C 11.8%
D 7.3%

3: Which of the following statements are correct?

1 Interest rate options allow the buyer to take advantage of favourable interest rate movements
2 A forward rate agreement does not allow a borrower to benefit from a decrease in interest
rates
3 Borrowers hedging against an interest rate increase will buy interest rate futures now and sell
them at a future date
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
4: A company needs $150,000 each year for regular payments. Converting the company’s short-
term investments into cash to meet these regular payments incurs a fixed cost of $400 per
transaction.
These short-term investments pay interest of 5% per year, while the company earns interest of
only 1% on cash deposits. According to the Baumol model, what is the optimum amount of short-
term investments to convert into cash in each transaction?
A $38,730
B $48,990
C $54,772
D $63,246

5: Ling Co has annual credit sales of $4,500,000 and on average customers take 60 days to pay,
assuming a 360- day year. As a result, Ling Co has a trade receivables balance of $750,000. Ling
Co relies on an overdraft to finance this at an annual interest rate of 8%.
Ling Co is considering offering an early settlement discount to its customers of 0·5% for payment
in 30 days. It expects that 25% of its customers (representing 35% of the annual credit sales
figure) will pay on 30 days in order to obtain the discount.
If Ling Co introduces the proposed discount, what will be the NET saving?
A $2,625
B $1,875
C $7,500
D $10,500

6: Which of the following statements describes the main objective of financial management?
A Efficient acquisition and deployment of financial resources to ensure achievement of
objectives
B Providing information to management for day-to-day functions of control and decision-making
C Providing information to external users about the historical results of the organization
D Maximization of shareholder wealth

7: Leah Co is an all-equity financed company which wishes to appraise a project in a new area of
business. Its existing equity beta is 1.2. The average equity beta for the new business area is 2.0,
with an average debt/debt plus equity ratio of 25%. The risk-free rate of return is 5% and the
market risk premium is 4%.
Ignoring taxation and using the capital asset pricing model, what is the risk-adjusted cost of
equity for the new project?
A 8.6%
B 9.8%
C 11.0%
D 13.0%
8: Which of the following statements is true?
A The sensitivity of NPV to a change in sales volume can be calculated as NPV divided by the
present value of future sales income
B The certainty equivalent approach converts risky cash flows into riskless equivalent amounts
which are discounted by a CAPM-derived project-specific cost of capital
C Using random numbers to generate possible values of project variables, a simulation model
can generate a standard deviation of expected project outcomes
D The problem with risk and uncertainty in investment appraisal is that neither can be quantified
or measured

9: Cant Co has a cost of equity of 10% and has forecast its future dividends as follows:
Current year: No dividend
Year 1: No dividend
Year 2 $0·25 per share
Year 3: $0·50 per share and increasing by 3% per year in subsequent years
What is the current share price of Cant Co using the dividend valuation model?
A $7·35
B $5·57
C $6·11
D $6·28

10: Which of the following derivative instruments are characterised by a standard contract
size?
(1) Futures contract
(2) Exchange-traded option
(3) Forward rate agreement
(4) Swap
A 1 and 2
B 2 and 3
C 3 and 4
D 1 and 4

11: A company has calculated the NPV of a new project as follows:

Present value ($000)
Sales revenue 4,000
Variable costs (2,000)
Fixed costs (500)
Corporation tax at 20% (300)
Initial outlay (1,000)
NPV 200
What is the sensitivity of the project decision to a change in sales volume?
A 12·5%
B 6·3%
C 10·0%
D 5·0%

12: Which of the following statements concerning the causes of interest rate fluctuations is
correct?
A Liquidity preference theory suggests that investors want more compensation for short-term
lending than for long-term lending
B According to expectations theory, the shape of the yield curve gives information on how
inflation rates are expected to influence interest rates in the future
C An inverted yield curve can arise if government policy is to keep short-term interest rates
high in order to bring down inflation
D Market segmentation theory suggests long-term interest rates depend on how easily
investors can switch between market segments of different maturity

13: Drumlin Co has $5m of $0·50 nominal value ordinary shares in issue. It recently announced
a 1 for
4 rights issue at $6 per share. Its share price on the announcement of the rights issue was $8 per
share.
What is the theoretical value of a right per existing share?
A $1·60
B $0·40
C $0·50
D $1·50

14: In relation to an irredeemable security paying a fixed rate of interest, which of the following
statements is correct?
A As risk rises, the market value of the security will fall to ensure that investors receive an
increased yield
B As risk rises, the market value of the security will fall to ensure that investors receive a
reduced yield
C As risk rises, the market value of the security will rise to ensure that investors receive an
increased yield
D As risk rises, the market value of the security will rise to ensure that investors receive a
reduced yield
15: Swap Co is due to receive goods costing $2,500. The terms of trade state that payment
must be received within three months. However, a discount of 1·5% will be given for payment
within one month.
Which of the following is the annual percentage cost of ignoring the discount and paying in three
months?
A 6·23%
B 9·34%
C 6·14%
D 9·49%

16: Which of the following statements about interest rate risk hedging is correct?
A An interest rate floor can be used to hedge an expected increase in interest rates
B The cost of an interest rate floor is higher than the cost of an interest rate collar
C The premium on an interest rate option is payable when it is exercised
D The standardised nature of interest rate futures means that over- and under-hedging can be
avoided

17: A company’s typical inventory holding period at any time is as follows:

Days
Raw materials 15
Work in progress 35
Finished goods 40
Annual cost of goods sold as per the financial statements is $100m of which the raw material
purchases account for 50% of the total.
The company has implemented plans to reduce the level of inventory held, the effects of which
are expected to be as follows:
(1) Raw material holding time to be reduced by 5 days
(2) Production time to be reduced by 4 days
(3) Finished goods holding time to be reduced by 5 day
Assuming a 365-day year, what will be the reduction in inventory held?
A $2.603m
B $3.836m
C $1.918m
D $3.151m

18: andria is a country that has the peso for its currency and Wengry is a country that has the
dollar ($) for its currency.
The current spot exchange rate is 1.5134 pesos = $1.
Using interest-rate differentials, the one-year forward exchange rate is 1.5346 pesos = $1.
The currency market between the peso and the dollar is assumed perfect and the International
Fisher Effect holds.
Which of the following statements is true?
A Wengry has a higher forecast rate of inflation than Handria
B Handria has a higher nominal rate of interest than Wengry
C Handria has a higher real rate of interest than Wengry
D The forecast future spot rate of exchange will differ from the forward exchange rate

19: Black Co has in issue 5% irredeemable loan notes, nominal value of $100 per loan note, on
which interest is shortly to be paid. Black Co has a before-tax cost of debt of 10% and corporation
tax is 30%.
What is the current market value of one loan note?
A $55
B $50
C $76

20: Which of the following statements relating to money markets is/are true?
(1) Lending is for periods of greater than one year
(2) Lending is securitised
(3) Borrowers are mainly small companies
A 1 and 2
B 2 and 3
C 1 and 3
D 2 only

21: Geeh Co paid an interim dividend of $0.06 per ordinary share on 31 October 20X6 and
declared a final dividend of $0.08 on 31 December 20X6. The ordinary shares in Geeh Co are
trading at a cum-div price of $1.83.
What is the dividend yield (to one decimal place of a percentage point)?
What role would the money market have in a letter of credit arrangement?
A Initial arrangement of the letter of credit
B Acceptance of the letter of credit
C Issuing of a banker's acceptance
D Discounting the banker's acceptance

22: Shyma Co is a company that manufactures ships and has an equity beta of 1.6 and a
debt:equity ratio of 1:3. It is considering a new project to manufacture farm vehicles.
Trant Co is a manufacturer of farm vehicles and has an asset beta of 1.1 and a debt:equity ratio
of 2:3. The risk free rate of return is 5%, the market risk premium is 3% and the corporation tax
rate is 40%.
Using CAPM, what would be the suitable cost of equity for Shyma to use in its appraisal of the
farm machinery project (to one decimal place)?
23: Act Co wishes to hedge interest rate movements on a borrowing it intends to make three
months from now for a further period of six months.
Which TWO of the following will best help Act Co hedge its interest rate risk?
A Enter into a 3 v 6 forward rate agreement
B Enter into a 3 v 9 forward rate agreement
C Sell interest rate futures expiring in three months' time
D Buy interest rate futures expiring in three months' time

24: Leah Co is an all equity financed company which wishes to appraise a project in a new area
of activity. Its existing equity beta is 1.2. The industry average equity beta for the new business
area is 2.0, with an average debt / debt + equity ratio of 25%. The risk-free rate of return is 5%
and the market risk premium is 4%.
Ignoring tax and using the capital asset pricing model, calculate a suitable risk-adjusted
cost of equity for the new project.

25: Alpha Co and Beta Co are two companies in different industries who are both evaluating
the acquisition of the same target company called Gamma Co. Gamma Co is in the same industry
as Alpha Co. Alpha Co has valued Gamma Co at $100m but Beta Co has only valued Gamma Co
at $90m.
Which of following statements would explain why Alpha Co's value of Gamma Co is higher?
A Alpha Co has used more prudent growth estimates
B Beta Co could achieve more synergy
C Beta Co is a better negotiator than Alpha Co
D Gamma Co is a direct competitor of Alpha Co

26: A company that has a $10m loan with a variable rate of interest, has acquired a forward rate
agreement (FRA) with a financial institution that offered a 3-6, 3.2% - 2.7% spread.

What would be the payment made to the financial institution under the terms of the FRA if
the actual rate of interest was 3% (to the nearest dollar)?

27: Which TWO of the following statements about overcapitalisation and overtrading are
correct?
A Overtrading often arises from a rapid increase in sales revenue
B Overcapitalisation results in a relatively low current ratio
C Overtrading may result in a relatively high accounts payable turnover period
D Overcapitalisation is the result of too much short-term capital
28: A company has calculated the NPV of a new project as follows:
Present Values $'000
Sales revenue 4,000
Variable costs (2,000)
Fixed costs (500)
Taxation at 20% (300)
Initial outlay (1,000)
NPV 200
What is the sensitivity of the project decision to a change in sales volume (to the nearest 0.1%)?

29: Which TWO of the following would be evidence of strong form market efficiency?
A The lack of regulation on use of private information (insider dealing)
B Inability to consistently outperform the market and make abnormal gains
C Immediate share price reaction to company announcements to the market
D Regulation to ensure quick and timely public announcement of information

30: Black Co has in issue 5% irredeemable loan notes, nominal value of $100 per loan note, on
which
interest is shortly to be paid. Black Co has a before-tax cost of debt of 10% and corporation tax
is 30%.
What is the current market value of one loan note?
A $55
B $50
C $76
D $40

31: ARP is a charity providing transport for people visiting hospitals.

Which of the following performance measures would BEST fit with efficiency in a value for
money review?
A Percentage of members who re-use the service
B Cost per journey to hospital
C A comparison of actual operating expenses against the budget
D Number of communities served

32: A project has average estimated cash flows of $3,000 per year with an initial investment of
$9,000. Depreciation is straight-line with no residual value and the project has a five-year life
span. The company has a target return on capital employed (ROCE) of 15% and a target payback
period of 2.5 years. ROCE is based on initial investment.
Under which investment appraisal method(s), using the company's targets, will the project
be accepted?
(1) ROCE
(2) Payback basis
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

33: Which TWO of the following are correct descriptions of net working capital?
A Current assets – current liabilities
B Inventory days + accounts receivable days – accounts payable days
C Current assets / current liabilities
D The long term capital invested in net current assets

34: A listed company is to enter into a sale and repurchase agreement on the money market.
The company has agreed to sell $10m of treasury bills for $9.6m and will buy them back in 50
days' time for $9.65m.
Assume a 365-day year.
What is the implicit annual interest rate in this transaction (to the nearest 0.01%)?

35: Increasing which TWO of the following would be associated with the financial objective of
shareholder wealth maximisation?
A Share price
B Dividend payment
C Reported profit
D Earnings per share
E Weighted average cost of capital

36: The following information is available for a listed company:

Dividend recently paid $0.10 per share
Dividend cover 4 times
Price earnings ratio 5 times
Estimated future growth in dividends 8%
Using the dividend growth model, what is the cost of equity for this company (to one decimal
place)?

37: Which of the following is a description of gap exposure?

A The difference between short-term and long-term interest rates
B The difference between the amounts of interest-sensitive assets and liabilities
C The difference between spot interest rates and futures interest rates
D The difference between fixed and floating interest rates
39: For the coming year, a company has budgeted sales of $2m per month, 80% of which will
be on credit. It expects its accounts receivable payment period to be three months.
Forecast average inventory and average accounts payable for the coming year are $10m and
$4m respectively.
What is the company's working capital requirement for the coming year (to one decimal
place)?

40: The efficient markets hypothesis refers to the way in which the prices of traded financial
securities reflect relevant information.
Which TWO of the following are true for a weak-form efficient market?
A Share prices fully and fairly represent past information
B Share prices fully and fairly represent private information
C Share prices appear to follow a 'random walk'
D The market does not provide enough information to make good buying and selling
decisions

41: The inventory ordering policy of ZAR Co is to order 100,000 units when the inventory level
falls to 20,000 units. The cost of placing and processing an order is $200, while the cost of holding
inventory is $0.50 per unit per year. Orders are received one week after being placed with the
supplier. The production requirement for the next year (50 weeks) is 600,000 units.
What is the cost of ZAR Co's inventory ordering policy?

42: Which TWO of the following derivative instruments are characterised by a standard contract
size?
A Forward contract
B Forward rate agreement
C Futures contract
D Swap
E Over-the-counter option
F Exchange tradable option