B1 Review Qtns

FINANCIAL MANAGEMENT (F9) – REVISION QUESTION BANK
Question 1 COMPANY OBJECTIVES
Justify and criticise the usual assumption made in financial management literature that the
objective of a company is to maximise the wealth of the shareholders. (Do not consider how this
wealth is to be measured).
Outline other goals that companies claim to follow, and explain why these might be adopted in
preference to the maximisation of shareholder wealth.
(10 marks)
Question 2 THE FINANCIAL MANAGEMENT FUNCTION
(a) Discuss the main decisions within the scope of financial management. (5 marks)
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(b) Explain how management accounting information may assist the financial manager.
(5 marks)
(10 marks)
appropriate.
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Question 3 FINANCIAL MANAGEMENT DECISIONS
Discuss the relationship between investment decisions, dividend decisions and financing decisions
in the context of financial management, illustrating your discussion with examples where
Question 4 VALUE FOR MONEY

(10 marks)
Explain and compare the public sector objective of “value for money” and the private sector
objective of “maximisation of shareholder wealth”.
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(6 marks)
Question 5 NON-FOR-PROFIT
Compare and contrast the financial objectives of a stock exchange listed company and the
financial objectives of a not-for-profit organisation such as a large charity.
(10 marks)
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Question 6 QSX CO
A shareholder of QSX Co is concerned about the recent performance of the company and has collected
the following financial information.
Year to 31 May 2015 2014 2013

Revenue $6·8m $6·8m $6·6m
Earnings per share 58·9c 64·2c 61·7c
Dividend per share 40·0c 38·5c 37·0c
Closing ex-dividend share price $6·48 $8·35 $7·40
Return on equity predicted by CAPM 8% 12%
The current cost of equity of QSX Co is 10% per year.
Assume that dividends are paid at the end of each year.
32 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

REVISION QUESTION BANK – FINANCIAL MANAGEMENT (F9)
Required:
Calculate the dividend yield, capital gain and total shareholder return for 2014 and 2015, and
briefly discuss your findings with respect to:
(i) the returns predicted by the capital asset pricing model (CAPM);
(ii) the other financial information provided.
(10 marks)
Question 7 AGENCY PROBLEM
At a recent board meeting of Dartig Co, a non-executive director suggested that the company’s
remuneration committee should consider scrapping the company’s current share option scheme, since
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executive directors could be rewarded by the scheme even when they did not perform well. A second
non-executive director disagreed, saying the problem was that even when directors acted in ways which
decreased the agency problem, they might not be rewarded by the share option scheme if the stock
market were in decline.
Required:
PL
Explain the nature of the agency problem and discuss the use of share option schemes and
performance-related pay as methods of reducing the agency problem in a stock-market listed
company such as Dartig Co.
Question 8 LISTED COMPANY OBJECTIVES

(10 marks)
Identify TWO financial objectives of a listed company and discuss how each of these financial
objectives may be supported by investment in new projects.
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(6 marks)
Question 9 GOAL CONGRUENCE
Explain ways in which the directors of a listed company can be encouraged to achieve the
objective of maximisation of shareholder wealth.
(6 marks)
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Question 10 MONEY MARKETS
Explain the role of the money markets and give four examples of money market instruments.
(6 marks)
©2015 DeVry/Becker Educational Development Corp. All rights reserved. 33

Question 11 TAGNA
Tagna is a medium-sized company that manufactures luxury goods for several well-known chain stores.
In real terms, the company has experienced only a small growth in revenue in recent years, but it has
managed to maintain a constant, if low, level of reported profits by careful control of costs. It has paid
a constant nominal (money terms) dividend for several years and its managing director has publicly
stated that the primary objective of the company is to increase the wealth of shareholders. Tagna is
financed as follows:
$m
Overdraft 1·0
10 year fixed interest bank loan 2·0
Share capital and reserves 4·5
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–––
7·5
–––
The financial press has reported that it expects the Central Bank to make a substantial increase in
interest rate in the near future in response to rapidly increasing consumer demand and a sharp rise in
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inflation. The financial press has also reported that the rapid increase in consumer demand has been
associated with an increase in consumer credit to record levels.
Required:
On the assumption that the Central Bank makes a substantial interest rate increase, discuss the
possible consequences for Tagna in the following areas:
(i)
(ii)
sales;
operating costs; and
(iii) earnings (profit after tax).
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(10 marks)
Question 12 FINANCIAL INTERMEDIARIES
Discuss the role of financial intermediaries in providing short-term finance for use by business
organisations.
(5 marks)
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Question 13 PAYBACK AND ROCE
Backpay Co is considering investing $50,000 in a new machine. The machine will have scrap value of
$10,000 at the end its five year life. It is expected that 20,000 units will be sold each year at a selling
price of $3·00 per unit. Variable production costs are expected to be $1·65 per unit, while incremental
fixed costs, mainly the wages of a maintenance engineer, are expected to be $10,000 per year. The
directors expect investment projects to recover their initial investment within two years and achieve a
return on capital employed (accounting rate of return) of 25% based on average investment.
Required:
(a) Calculate and comment on the project’s payback period. (5 marks)
(b) Calculate and comment on the project’s return on capital employed based on average
investment. (5 marks)
(10 marks)

Question 14 DIRECTORS’ VIEWS
The directors of a company require that all investment projects should be evaluated using either
payback period or return on capital employed (accounting rate of return). The target payback period of
the company is two years and the target return on capital employed is 20%, which is the firm’s current
return on capital employed. A project is accepted if it satisfies either of these investment criteria.
In addition the directors also require all investment projects to be evaluated using net present value
calculated over a four-year planning period, ignoring inflation, any scrap value or working capital
recovery, with a balancing allowance being claimed at the end of the fourth year of operation.
Required:
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Critically discuss the directors’ views on investment appraisal.
(10 marks)
Question 15 OKM CO
The following draft appraisal of a proposed investment project has been prepared for the finance
operations of OKM Co.
Year PL
director of OKM Co by a trainee accountant. The project is consistent with the current business
Contribution
Fixed costs
Depreciation
1,330
1
Annual sales (units) 250,000
$000
(530)
(438)
2
400,000
$000
2,128
(562)
(438)
2,660
3
500,000
$000
(596)
(437)
$000
4
250,000
1,330
(631)
(437)
$000
5
Interest payments (200) (200) (200) (200)

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–––––– –––––– –––––– ––––––
Taxable profit 162 928 1,427 62
Taxation (49) (278) (428) (19)
–––––– –––––– –––––– –––––– ––––––
Profit after tax 162 879 1,149 (366) (19)
Scrap value 250
–––––– –––––– –––––– ––––––
After-tax cash flows 162 879 1,149 (116) (19)
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Discount at 10% 0·909 0·826 0·751 0·683 0·621

–––––– –––––– –––––– –––––– ––––––
Present values 147 726 863 (79) (12)
–––––– –––––– –––––– –––––– ––––––
Net present value = 1,645,000 – 2,000,000 = ($355,000) so reject the project.
The following information was included with the draft investment appraisal:
1. The initial investment is $2 million, payable at the start of the first year
2. Selling price: $12/unit (current price terms), selling price inflation is 5% per year
3. Variable cost: $7/unit (current price terms), variable cost inflation is 4% per year
4. Fixed overhead costs: $500,000/year (current price terms), fixed cost inflation is 6% per year

5. $200,000/year of the fixed costs are development costs that have already been incurred and
are being recovered by an annual charge to the project
6. Investment financing is by a $2 million loan at a fixed interest rate of 10% per year
7. OKM Co can claim 25% tax-allowable depreciation on a reducing balance basis on this
investment and pays taxation one year in arrears at a rate of 30% per year
8. The scrap value of machinery at the end of the four-year project is $250,000
9. The real weighted average cost of capital of OKM Co is 7% per year
10. The general rate of inflation is expected to be 4·7% per year
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Required:
(a) Identify and comment on any errors in the investment appraisal prepared by the trainee
accountant. (5 marks)
(b)
PL
Prepare a revised calculation of the net present value of the proposed investment project
and comment on the project’s acceptability.
Question 16 LIMITATIONS OF NPV

(10 marks)
Identify the limitations of Net Present Value techniques when applied generally to investment
appraisal.
(10 marks)
(15 marks)
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Question 17 RIDAG CO
Ridag Co is evaluating two investment projects, as follows.
Project 1
This is an investment in new machinery to produce a recently-developed product. The cost of the
machinery, which is payable immediately, is $1·5 million, and the scrap value of the machinery at the
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end of four years is expected to be $100,000. Tax-allowable depreciation can be claimed on this
investment on a 25% reducing balance basis. Information on future returns from the investment has
been forecast to be as follows:
Year 1 2 3 4
Sales volume (units/year) 50,000 95,000 140,000 75,000
Selling price ($/unit) 25·00 24·00 23·00 23·00
Variable cost ($/unit) 10·00 11·00 12·00 12·50
Fixed costs ($/year) 105,000 115,000 125,000 125,000
This information must be adjusted to allow for selling price inflation of 4% per year and variable cost
inflation of 2·5% per year. Fixed costs, which are wholly attributable to the project, have already been
adjusted for inflation. Ridag Co pays profit tax of 30% per year one year in arrears.

Project 2
Ridag Co plans to replace an existing machine and must choose between two machines. Machine 1 has
an initial cost of $200,000 and will have a scrap value of $25,000 after four years. Machine 2 has an
initial cost of $225,000 and will have a scrap value of $50,000 after three years. Annual maintenance
costs of the two machines are as follows:
Year 1 2 3 4
Machine 1 ($/year) 25,000 29,000 32,000 35,000
Machine 2 ($/year) 15,000 20,000 25,000
Where relevant, all information relating to Project 2 has already been adjusted to include expected
future inflation. Taxation and tax-allowable depreciation must be ignored in relation to Machine 1 and
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Machine 2.
Other information
Ridag Co has a nominal before-tax weighted average cost of capital of 12% and a nominal after-tax
weighted average cost of capital of 7%.
Required:
(a)
(b)
PL
Calculate the net present value of Project 1 and comment on whether this project is
financially acceptable to Ridag Co. (10 marks)
Calculate the equivalent annual costs of Machine 1 and Machine 2, and discuss which
machine should be purchased. (5 marks)
(15 marks)
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Question 18 BQK CO
BQK Co, a house-building company, plans to build 100 houses on a development site over the next four
years. The purchase cost of the development site is $4,000,000, payable at the start of the first year of
construction. Two types of house will be built, with annual sales of each house expected to be as
follows:
Year 1 2 3 4
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Number of small houses sold: 15 20 15 5

Number of large houses sold: 7 8 15 15
Houses are built in the year of sale. Financial information relating to each type of house is as follows:
Small house Large house

Selling price: $200,000 $350,000
Variable cost of construction: $100,000 $200,000
Selling prices and variable cost of construction are in current price terms, before allowing for selling
price inflation of 3% per year and variable cost of construction inflation of 4·5% per year.
Fixed infrastructure costs of $1,500,000 per year in current price terms would be incurred. These
would not relate to any specific house, but would be for the provision of new roads, gardens, drainage
and utilities. Infrastructure cost inflation is expected to be 2% per year.

BQK Co pays profit tax one year in arrears at an annual rate of 30%. The company can claim tax-
allowable depreciation on the purchase cost of the development site on a straight-line basis over the
four years of construction.
BQK Co has a real after-tax cost of capital of 9% per year and a nominal after-tax cost of capital of
12% per year.
New investments are required by the company to have a before-tax return on capital employed
(accounting rate of return) on an average investment basis of 20% per year.
Required:
(a) Calculate the net present value of the proposed investment and comment on its financial
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acceptability. Work to the nearest $1,000. (11 marks)
(b) Calculate the before-tax return on capital employed (accounting rate of return) of the
proposed investment on an average investment basis and discuss briefly its financial
acceptability. (4 marks)
PL
Question 19 HDW CO
HDW Co is a listed company which plans to meet increased demand for its products by buying new
machinery costing $5 million. The machinery would last for four years, at the end of which it would be
replaced. The scrap value of the machinery is expected to be 5% of the initial cost. Tax-allowable
depreciation would be available on the cost of the machinery on a 25% reducing balance basis, with a
balancing allowance or charge claimed in the final year of operation.
(15 marks)
This investment will increase production capacity by 9,000 units per year and all of these units are
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expected to be sold as they are produced. Relevant financial information in current price terms is as
follows:
Forecast inflation
Selling price $650 per unit 4·0% per year
Variable cost $250 per unit 5·5% per year
Incremental fixed costs $250,000 per year 5·0% per year
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In addition to the initial cost of the new machinery, initial investment in working capital of $500,000
will be required. Investment in working capital will be subject to the general rate of inflation, which is
expected to be 4·7% per year.
HDW Co pays tax on profits at the rate of 20% per year, one year in arrears. The company has a
nominal (money terms) after-tax cost of capital of 12% per year.
Required:
(a) Calculate the net present value of the planned purchase of the new machinery using a
nominal (money terms) approach and comment on its financial acceptability. (11 marks)
(b) Discuss the difference between a nominal (money terms) approach and a real terms
approach to calculating net present value. (4 marks)
(15 marks)

Question 20 DARN CO
Darn Co has undertaken market research at a cost of $200,000 in order to forecast the future cash flows
of an investment project with an expected life of four years, as follows:
Year 1 2 3 4
Sales revenue ($000) 1,250 2,570 6,890 4,530
Costs ($000) 500 1,000 2,500 1,750
These forecast cash flows are before taking account of general inflation of 4·7% per year. The capital
cost of the investment project, payable at the start of the first year, will be $2,000,000. The investment
project will have zero scrap value at the end of the fourth year. The level of working capital investment
at the start of each year is expected to be 10% of the sales revenue in that year.
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Tax-allowable depreciation would be available on the capital cost of the investment project on a 25%
reducing balance basis. Darn Co pays tax on profits at an annual rate of 30% per year, with tax being
paid one year in arrears. Darn Co has a nominal (money terms) after-tax cost of capital of 12% per
year.
Required:
(a)
(b)
PL
Calculate the net present value of the investment project in nominal terms and comment
on its financial acceptability. (10 marks)
Calculate the net present value of the investment project in real terms and comment on
its financial acceptability. (5 marks)
(15 marks)
Question 21 REPLACEMENT CYCLES

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(a) Discuss the problems faced when undertaking investment appraisal in the following
areas and comment on how these problems can be overcome:
(i) assets with replacement cycles of different lengths;
(ii) an investment project has several internal rates of return;

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(iii) the business risk of an investment project is significantly different from the
business risk of current operations. (8 marks)
(b) A company with a cost of capital of 14% is trying to determine the optimal replacement cycle
for the notebook computers used by its sales team. The following information is relevant to
the decision:
The cost of each notebook is $2,400. Maintenance costs are payable at the end of each full
year of ownership, but not in the year of replacement (e.g. if the notebook is owned for three
years, then the maintenance cost is payable at the end of year 1 and at the end of year 2).
Interval between Trade-in Value ($) Maintenance cost ($)

Replacement (years)
1 1200 Zero
2 800 75 (payable at end of Year 1)
3 300 150 (payable at end of Year 2)

Answer 1 COMPANY OBJECTIVES
Financial management is concerned with making decisions about the provision and use of a firm’s
finances. A rational approach to decision-making requires a clear idea of the objectives of the decision
maker or, more importantly, the objectives of those on behalf of whom the decisions are being made.
There is little agreement in the literature as to what objectives of firms are or even what they ought to
be. However, most financial management textbooks make the assumption that the objective of a
limited company is to maximise the wealth of its shareholders. This assumption is normally justified in
terms of classical economic theory. In a market economy firms that achieve the highest returns for their
investors will be the firms that are providing customers with what they require. In turn these
companies, because they provide high returns to investors, will also find it easiest to raise new finance.
Hence the so called “invisible hand” theory will ensure optimal resource allocation and this should
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automatically maximise the overall economic welfare of the nation.
This argument can be criticised on several grounds. Firstly it ignores market imperfections. For
example it might not be in the public interest to allow monopolies to maximise profits. Secondly it
ignores social needs like health, police, defence etc.
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From a more practical point of view directors have a legal duty to run the company on behalf of their
shareholders. This however begs the question as to what do shareholders actually require from firms.
Another justification from the individual firm’s point of view is to argue that it is in competition with
other firms for further capital and it therefore needs to provide returns at least as good as the
competition. If it does not it will lose the support of existing shareholders and will find it difficult to
raise funds in the future, as well as being vulnerable to potential take-over bids.
Against the traditional and “legal” view that the firm is run in order to maximise the wealth of ordinary
shareholders, there is an alternative view that the firm is a coalition of different groups: equity
shareholders, preference shareholders and lenders, employees, customers and suppliers. Each of these
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groups must be paid a minimum “return” to encourage them to participate in the firm. Any excess
wealth created by the firm should be and is the subject of bargaining between these groups.
At first sight this seems an easy way out of the “objectives” problem. The directors of a company could
say “Let’s just make the profits first, then we’ll argue about who gets them at a later stage”. In other
words, maximising profits leads to the largest pool of benefits to be distributed among the participants
in the bargaining process. However, it does imply that all such participants must value profits in the
same way and that they are all willing to take the same risks.
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In fact the real risk position and the attitude to risk of ordinary shareholders, loan payables and
employees are likely to be very different. For instance, a shareholder who has a diversified portfolio is
likely not to be as worried by the bankruptcy of one of his companies as will an employee of that
company, or a supplier whose main customer is that company. The problem of risk is one major reason
why there cannot be a single simple objective which is common to all companies.
Separate from the problem of which goal a company ought to pursue are the questions of which goals
companies claim to pursue and which goals they actually pursue.
Many objectives are quoted by large companies and sometimes are included in their annual accounts.

Examples are:
(a) to produce an adequate return for shareholders;

(b) to grow and survive autonomously;
(c) to improve productivity;
(d) to give the highest quality service to customers;
(e) to maintain a contented workforce;
(f) to be technical leaders in their field;
(g) to be market leaders;
(h) to acknowledge their social responsibilities.
Some of these stated objectives are probably a form of public relations exercise. At any rate, it is
possible to classify most of them into four categories which are related to profitability:
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(a) Pure profitability goals (e.g. adequate return for shareholders).
(b) “Surrogate” goals of profitability (e.g. improving productivity, happy workforce).
(c) Constraints on profitability (e.g. acknowledging social responsibilities, no pollution, etc.).
(d) “Dysfunctional” goals.
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The last category are goals which should not be followed because they do not create benefit in the long
run. Examples here include the pursuit of market leadership at any cost, even profitability. This may
arise because management assumes that high sales equal high profits which is not necessarily so.
In practice the goals which a company actually pursues are affected to a large extent by the
management. As a last resort, the directors may always be removed by the shareholders or the
shareholders could vote for a take-over bid, but in large companies individual shareholders lack voting
power and information. These companies can, therefore, be dominated by the management.
There are two levels of argument here. Firstly, if the management do attempt to maximise profits, then
they are in a much more powerful position to decide how the profits are “carved up” than are the
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shareholders.
Secondly, the management may actually be seeking “prestige” goals rather than profit maximisation:
Such goals might include growth for its own sake, including empire building or maximising revenue for
its own sake, or becoming leaders in the technical field for no reason other than general prestige. Such
goals are usually dysfunctional.
The dominance of management depends on individual shareholders having no real voting power, and in
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this respect institutions have usually preferred to sell their shares rather than interfere with the
management of companies. There is some evidence, however, that they are now taking a more active
role in major company decisions.
From all that has been said above, it appears that each company should have its own unique decision
model. For example, it is possible to construct models where the objective is to maximise profit subject
to first fulfilling the target levels of other goals. However, it is not possible to develop the general
theory of financial management very far without making an initial simplifying assumption about
objectives. The objective of maximising the wealth of equity shareholders seems the least
objectionable.

Answer 2 THE FINANCIAL MANAGEMENT FUNCTION
(a) Decisions that are within the scope of financial management include:
 How should the business be financed? The main choices here are internal finance
(reinvestment of surplus cash from operations) or external finance (issuing equity or
debt).
 On which proposed investments should the funds be spent? This requires evaluation
of potential projects to establish which would have the greatest impact on
shareholder wealth.
 How much dividend should be paid to the shareholders? The dividend decision is
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closely linked to financing and investing decisions as a rise in dividend reduces the
amount of internal finance available for reinvestment.
 How much working capital should the organisation have and how should it be
financed? In this context working capital refers to net operating current assets (i.e.
inventory plus receivables less payables).
(b)


PLShould risk be managed and, if so, how? Key risks may include foreign exchange
risk (e.g. the risk that an appreciating home currency damages the value of export
earnings) and interest rate risk (e.g. the risk that interest rates will rise and increase
the firm’s cost of debt finance).
How management accounting information can assist the financial manager
The budgeting process may identify potential cash deficits/surpluses which the
financial manager must plan to finance/invest. Advance warning is particularly
important in the case of potential deficits, giving the financial manager time to
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arrange bridging loans, for example.
 Analysis of costs into fixed and variable elements may assist financial management
decisions. Some costs may be semi-variable in nature and splitting them into fixed
and variable elements (e.g. using linear regression) will be critical for decision such
as business expansion,
 Variance analysis may help to control the costs of new projects. At the planning
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stage the project committee should set budgets for both capital expenditure and
project operating costs and the management accountant should check for overspends
during the implementation stage.
Answer 3 FINANCIAL MANAGEMENT DECISIONS
Investment decisions, dividend decisions and financing decisions have often been called the decision
triangle of financial management. The study of financial management is often divided up in accordance
with these three decision areas. However, they are not independent decisions, but closely connected.
For example, a decision to increase dividends might lead to a reduction in retained earnings and hence a
greater need for external finance in order to meet the requirements of proposed capital investment
projects. Similarly, a decision to increase capital investment spending will increase the need for
financing, which could be met in part by reducing dividends.

The question of the relationship between the three decision areas was investigated by Miller and
Modigliani. They showed that, if a perfect capital market was assumed, the market value of a company
and its weighted average cost of capital (WACC) were independent of its capital structure. The market
value therefore depended on the business risk of the company and not on its financial risk. The
investment decision, which determined the operating income of a company, was therefore shown to be
important in determining its market value, while the financing decision, given their assumptions, was
shown to be not relevant in this context. In practice, it is recognised that capital structure can affect
WACC and hence the market value of the company.
Miller and Modigliani also investigated the relationship between dividend policy and the share price of
a company (i.e. the market value of a company). They showed that, if a perfect capital market was
assumed, the share price of a company did not depend on its dividend policy (i.e. the dividend decision
was irrelevant to value of the share). The market value of the company and therefore the wealth of
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shareholders were shown to be maximised when the company implemented its optimum investment
policy, which was to invest in all projects with a positive NPV. The investment decision was therefore
shown to be theoretically important with respect to the market value of the company, while the dividend
decision was not relevant.
In practice, capital markets are not perfect and a number of other factors become important in
discussing the relationship between the three decision areas. Pecking order theory, for example,
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suggests that managers do not in practice make financing decisions with the objective of obtaining an
optimal capital structure, but on the basis of the convenience and relative cost of different sources of
finance. Retained earnings are the preferred source of finance from this perspective, with a resulting
pressure for annual dividends to be lower rather than higher.
Answer 4 VALUE FOR MONEY
The objectives of public sector organisations are often difficult to define. Even though the cost of
resources used can be measured, the benefits gained from the consumption of those resources can be
difficult, if not impossible, to quantify. Because of this difficulty, public sector organisations often
have financial targets imposed on them, such as a target rate of return on capital employed.
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Furthermore, they will tend to focus on maximising the return on resources consumed by producing the
best possible combination of services for the lowest possible cost. This is the meaning of “value for
money”, often referred to as the pursuit of economy, efficiency and effectiveness.
Economy refers to seeking the lowest level of input costs for a given level of output. Efficiency refers
to seeking the highest level of output for a given level of input resources. Effectiveness refers to the
extent to which output produced meets the specified objectives (e.g. in terms of provision of a required
range of services).
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In contrast, private sector organisations have to compete for funds in the capital markets and must offer
an adequate return to investors. The objective of maximisation of shareholder wealth equates to the
view that the primary financial objective of companies is to reward their owners. If this objective is not
followed, the directors may be replaced or a company may find it difficult to obtain funds in the market,
since investors will prefer companies that increase their wealth. However, shareholder wealth cannot
be maximised if companies do not seek both economy and efficiency in their business operations.
Answer 5 NON-FOR-PROFIT
A key financial objective for a stock exchange listed company is to maximise the wealth of
shareholders. This objective is usually replaced by the objective of maximising the company’s share
price, since maximising the market value of the company represents the maximum capital gain over a
given period. The need for dividends can be met by recognising that share prices can be seen as the
sum of the present values of future dividends.

Maximising the company’s share price is the same as maximising the equity market value of the
company, since equity market value (market capitalisation) is equal to number of issued shares
multiplied by share price. Maximising equity market value can be achieved by maximising net
corporate cash income and the expected growth in that income, while minimising the corporate cost of
capital. Listed companies therefore have maximising net cash income as a key financial objective.
Not-for-profit (NFP) organisations seek to provide services to the public and this requires cash income.
Maximising net cash income is therefore a key financial objective for NFP organisations as well as
listed companies. A large charity seeks to raise as much funds as possible in order to achieve its
charitable objectives, which are non-financial in nature.
Both listed companies and NFP organisations need to control the use of cash within a given financial
period, and both types of organisations therefore use budgets. Another key financial objective for both
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organisations is therefore to keep spending within budget.
The objective of value for money (VFM) is often identified in connection with NFP organisations. This
objective refers to a focus on economy, efficiency and effectiveness. These three terms can be linked to
input (economy refers to securing resources as economically as possible), process (resources need to be
employed efficiently within the organisation) and output (the effective use of resources in achieving the
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organisation’s objectives).
Described in these terms, it is clear that a listed company also seeks to achieve value for money in its
business operations. There is a difference in emphasis, however, which merits careful consideration. A
listed company has a profit motive, and so VFM for a listed company can be related to performance
measures linked to output (e.g. maximising the equity market value of the company). An NFP
organisation has service-related outputs that are difficult to measure in quantitative terms and so it
focuses on performance measures linked to input (e.g. minimising the input cost for a given level of
output).
Both listed companies and NFP organisations can use a variety of accounting ratios in the context of
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financial objectives. For example, both types of organisation may use a target return on capital
employed, or a target level of income per employee, or a target current ratio.
Comparing and contrasting the financial objectives of a stock exchange listed company and a not-for-
profit organisation, therefore, shows that while significant differences can be found, there is a
considerable amount of common ground in terms of financial objectives.
Answer 6 QSX CO
SA
Dividend yield is calculated as the dividend divided by the share price at the start of the year.
2014: Dividend yield = 100 × 38·5/740 = 5·2%

2015: Dividend yield = 100 × 40·0/835 = 4·8%
The capital gain is the difference between the opening and closing share prices, and may be expressed
as a monetary amount or as a percentage of the opening share price.
2014: Capital gain = 835 – 740 = 95c or 12·8% (100 × 95/740)

2015: Capital gain = 648 – 835 = (187c) or (22·4%) (100 × –187/835)
The total shareholder return is the sum of the percentage capital gain and the dividend yield, or the sum
of the dividend paid and the monetary capital gain, expressed as a percentage of the opening share
price.
2014: Total shareholder return = 100 × (95 + 38·5)/740 = 18·0% (5·2% + 12·8%)
2015: Total shareholder return = 100 × (–187 + 40)/835 = –17·6% (4·8% – 22·4%)

(i) The return on equity predicted by the CAPM
The actual return for a shareholder of QSX Co, calculated as total shareholder return, is very
different from the return on equity predicted by the CAPM. In 2014 the company provided a
better return than predicted and in 2015 the company gave a negative return while the CAPM
predicted a positive return.
Year 2014 2014

Total shareholder return (17·6%) 18·0%
Return on equity predicted by CAPM 8% 12%
Because the risk-free rate of return is positive and the equity risk premium is either zero or
positive, and because negative equity betas are very rare, the return on equity predicted by the
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CAPM is invariably positive. This reflects the reality that shareholders will always want a
return to compensate for taking on risk. In practice, companies sometimes give negative
returns, as is the case here. The return in 2014 was greater than the cost of equity, but the
figure of 10% quoted here is the current cost of equity; the cost of equity may have been
different in 2014.
(ii)
PL
Other comments
QSX Co had revenue growth of 3% in 2014, but did not generate any growth in revenue in
2015. Earnings per share grew by 4·1% in 2014, but fell by 8·3% in 2015. Dividends per
share also grew by 4·1% in 2014, but unlike earnings per share, dividend per share growth
was maintained in 2015. It is common for dividends to be maintained when a company
suffers a setback, often in an attempt to give reassurance to shareholders.
There are other negative signs apart from stagnant revenue and falling earnings per share.
The shareholder will be concerned about experiencing a capital loss in 2015. He will also be
concerned that the decline in the price/earnings ratio in 2015 might be a sign that the market
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is losing confidence in the future of QSX Co. If the shareholder was aware of the proposal by
the finance director to suspend dividends, he would be even more concerned. It might be
argued that, in a semi-strong form-efficient market, the information would remain private. If
QSX Co desires to conserve cash because the company is experiencing liquidity problems,
however, these problems are likely to become public knowledge fairly quickly, for example
through the investigations of capital market analysts.
Tutorial note: It would be useful to benchmark the firm’s performance to its peers and to
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compare its shareholders’ returns to those on the relevant stock market index.
WORKINGS
Year 2015 2014 2013

Closing share price $6·48 $8·35
Price/earnings ratio 11 times 13 times
Year 2015 2014 2013

Dividend per share 40·0c 38·5c 37·0c
Dividend cover 1·5 times 1·7 times 1·7 times
Earnings per share growth (8·3%) 4·1%
Dividend per share growth 3·9% 4·1%
Revenue growth nil 3%

Answer 7 AGENCY PROBLEM
Tutorial note: The agency problem refers to the fact that, in practice, actual total shareholder returns
(TSR) are usually below the theoretically possible TSR. The resulting loss in shareholder wealth is
known as “agency costs” and is caused by sub-optimal performance by management and the costs
incurred in controlling the management.
The primary financial management objective of a company is usually taken to be the maximisation of
shareholder wealth. In practice, the managers of a company acting as agents for the principals (the
shareholders) may act in ways which do not lead to shareholder wealth maximisation. The failure of
managers to maximise shareholder wealth is referred to as the agency problem.
Shareholder wealth increases through payment of dividends and through appreciation of share prices.
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Since share prices reflect the value placed by buyers on the right to receive future dividends, analysis of
changes in shareholder wealth focuses on changes in share prices. The objective of maximising share
prices is commonly used as a substitute objective for that of maximising shareholder wealth.
The agency problem arises because the objectives of managers differ from those of shareholders:
because there is a divorce or separation of ownership from control in modern companies; and because
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there is an asymmetry of information between shareholders and managers which prevents shareholders
being aware of most managerial decisions.
One way to encourage managers to act in ways that increase shareholder wealth is to offer them share
options. These are rights to buy shares on a future date at a price which is fixed when the share options
are issued. Share options will encourage managers to make decisions that are likely to lead to share
price increases (such as investing in projects with positive net present values), since this will increase
the rewards they receive from share options. The higher the share price in the market when the share
options are exercised, the greater will be the capital gain that could be made by managers owning the
options.
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Share options therefore go some way towards reducing the differences between the objectives of
shareholders and managers. However, it is possible that managers may be rewarded for poor
performance if share prices in general are increasing. It is also possible that managers may not be
rewarded for good performance if share prices in general are falling. It is difficult to decide on a share
option exercise price and a share option exercise date that will encourage managers to focus on
increasing shareholder wealth while still remaining challenging, rather than being easily achievable.
Due to the potential problems with share option schemes it may be advisable to consider performance-
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related pay as an alternative method of managing the agency problem. Performance-related pay is a
financial reward system for managers where some, or all, of their compensation is related to how their
performance is assessed relative to stated criteria. The criteria may include profitability targets and
whilst profit maximisation is not necessarily consistent with shareholder wealth maximisation at least
management should feel a direct link between their performance and profits, whereas the firm’s share
price may be influenced more by overall stock market conditions.
Answer 8 LISTED COMPANY OBJECTIVES
A listed company is likely to have a range of financial objectives. Maximisation of shareholder wealth
is often suggested to be the primary financial objective, and this can be substituted by the objective of
maximising the company’s share price. Other financial objectives could relate to earnings per share
(for example, a target EPS value for a given period), operating profit (for example, a target level of
profit before tax or PBIT), revenue (for example, a desired increase in revenue or sales) and so on.
These examples of financial objectives can all be quantified, so that progress towards meeting them can
be measured over time.

New investments should lead to increased revenue and operating profit (profit before interest and tax),
so financial objectives relating to these accounting figures will be supported.
Whether a financial objective relating to increasing earnings per share (EPS) will be supported will
depend on how the investment is financed. For example, raising equity finance by issuing new shares
will dilute (decrease) EPS, while raising debt finance will increase interest payments, which will also
dilute EPS.
An investment with a positive net present value (NPV) should increase the market value of the
company by the amount of the NPV. This increases the wealth of shareholders irrespective of how the
investment is financed, since financing costs were accounted for by the discount rate (whether nominal
or real). The investment would therefore support the objective of shareholder wealth maximisation.
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Answer 9 GOAL CONGRUENCE
The company directors can be encouraged to achieve the objective of maximising shareholder wealth
through managerial reward schemes and through regulatory requirements.
Managerial reward schemes
PL
As agents of the company’s shareholders, directors may not always act in ways which increase the
wealth of shareholders, a phenomenon called the agency problem. They can be encouraged to increase
or maximise shareholder wealth by managerial reward schemes such as performance-related pay and
share option schemes. Through these methods, the goals of shareholders and directors may increase in
congruence.
Performance-related pay links part of the remuneration of directors to some aspect of corporate
performance, such as levels of profit or earnings per share. One problem here is that it is difficult to
choose an aspect of corporate performance which is not influenced by the actions of the directors,
leading to the possibility of managers influencing corporate affairs for their own benefit rather than the
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benefit of shareholders, for example, focusing on short-term performance while neglecting the longer
term.
Share option schemes bring the goals of shareholders and directors closer together to the extent that
directors become shareholders themselves. Share options allow directors to purchase shares at a
specified price on a specified future date, encouraging them to make decisions which exert an upward
pressure on share prices. Unfortunately, a general increase in share prices can lead to directors being
rewarded for poor performance, while a general decrease in share prices can lead to managers not being
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rewarded for good performance. However, share option schemes can lead to a culture of performance
improvement and so can bring continuing benefit to stakeholders.
Regulatory requirements
Regulatory requirements can be imposed through corporate governance codes of best practice and stock
market listing regulations. Corporate governance codes of best practice, such as the UK Corporate
Governance Code, seek to reduce corporate risk and increase corporate accountability. Responsibility
is placed on directors to identify, assess and manage risk within an organisation. An independent
perspective is brought to directors’ decisions by appointing non-executive directors to create a balanced
board of directors, and by appointing non-executive directors to remuneration committees and audit
committees.
Stock exchange listing regulations can place obligations on directors to manage companies in ways
which support the achievement of objectives such as the maximisation of shareholder wealth. For
example, listing regulations may require companies to publish regular financial reports, to provide
detailed information on directorial rewards and to publish detailed reports on corporate governance and
corporate social responsibility.

Answer 10 MONEY MARKETS
The principal roles of the money markets are to:
 transfer money from parties with surplus funds to parties with a deficit;
 allow governments and businesses to raise short-term funds;
 help governments to implement monetary policy;
 determine short-term interest rates.
Common money market instruments include:
 Certificate of Deposit (CD) – a savings certificate issued by a commercial bank entitling the
holder to receive interest. A CD bears a maturity date, a specified fixed interest rate and can
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be issued in any denomination. CDs are generally issued for terms from one month to five
years. The holder can either keep the CD until its maturity date or resell it on the secondary
market.
 Bills of exchange – a short-term financial instrument consisting of a written order addressed

by the seller of goods to the buyer requiring the latter to pay a certain sum of money on

PL
demand or at a future time. Bills of exchange are often used in international transactions, and
the holder of such a bill may convert it immediately into cash by selling it to a bank at a
discount.
Repurchase agreements – short-term loans-normally for less than two weeks and frequently
for one day-arranged by selling securities to an investor with an agreement to repurchase them
at a fixed price on a fixed date.
Commercial paper – unsecured but high quality corporate debt with a fixed maturity of one to
270 days; usually sold at a discount to face value and carrying a zero coupon interest rate.

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Municipal notes – short-term notes issued by municipalities in anticipation of tax receipts or
other revenues.
 Treasury bills – short-term debt obligations of a national government that are issued to mature
in three to twelve months. Usually issued at a discount to face value and carry zero coupon.
Tutorial note: Only four examples were required

SA
Answer 11 TAGNA
Consequence of a substantial interest rate increase
(i) Sales
As a manufacturer and supplier of luxury goods, it is likely that Tagna will experience a sharp
decrease in sales as a result of the increase in interest rates. One reason for this is that sales of
luxury goods will be more sensitive to changes in disposable income than sales of basic
necessities, and disposable income is likely to fall as a result of the interest rate increase.
Another reason is the likely effect of the interest rate increase on consumer demand. If the
increase in demand has been supported, even in part, by the increase in consumer credit, the
substantial interest rate increase will have a negative effect on demand as the cost of
consumer credit increases. It is also likely that many chain store customers will buy Tagna’s
goods by using credit.

(ii) Operating costs
Tagna may experience an increase in operating costs as a result of the substantial interest rate
increase, although this is likely to be a smaller effect and one that occurs more slowly than a
decrease in sales. As the higher cost of borrowing moves through the various supply chains
in the economy, producer prices may increase and material and other input costs for Tagna
may rise by more than the current rate of inflation. Labour costs may also increase sharply if
the recent sharp rise in inflation leads to high inflationary expectations being built into wage
demands. Acting against this will be the deflationary effect on consumer demand of the
interest rate increase. If the Central Bank has made an accurate assessment of the economic
situation when determining the interest rate increase, both the growth in consumer demand
and the rate of inflation may fall to more acceptable levels, leading to a lower increase in
operating costs.
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(iii) Earnings
The earnings (profit after tax) of Tagna are likely to fall as a result of the interest rate
increase. In addition to the decrease in sales and the possible increase in operating costs
discussed above, Tagna will experience an increase in interest costs arising from its overdraft.
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The combination of these effects is likely to result in a sharp fall in earnings. The level of
reported profits has been low in recent years and so Tagna may be faced with insufficient
profits to maintain its dividend, or even a reported loss.
Answer 12 FINANCIAL INTERMEDIARIES
The role of financial intermediaries in providing short-term finance for use by business organisations is
to provide a link between investors who have surplus cash and borrowers who have financing needs.
The amounts of cash provided by individual investors may be small, whereas borrowers need large
amounts of cash: one of the functions of financial intermediaries is therefore to aggregate invested
funds in order to meet the needs of borrowers. In so doing, they provide a convenient and readily
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accessible route for business organisations to obtain necessary funds.
Small investors are likely to be averse to losing any capital value, so financial intermediaries will
assume the risk of loss on short-term funds borrowed by business organisations, either individually or
by pooling risks between financial intermediaries. This aspect of the role of financial intermediaries is
referred to as risk transformation. Financial intermediaries also offer maturity transformation, in that
investors can deposit funds for a long period of time while borrowers may require funds on a short-term
basis only, and vice versa. In this way the needs of both borrowers and lenders can be satisfied.
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Answer 13 PAYBACK AND ROCE
(a) Payback
Contribution per unit = 3·00 – 1·65 = $1·35 per unit

Total annual contribution = 20,000 × 1·35 = $27,000 per year
Annual cash flow after fixed costs = 27,000 – 10,000 = $17,000 per year
Payback period = 50,000/17,000 = 2·9 years
(assuming that cash flows occur evenly throughout the year)
The payback period calculated is greater than the maximum payback period used by Umunat
of two years and on this basis should be rejected. Use of payback period as an investment
appraisal method cannot be recommended, however, because payback period does not
consider all the cash flows arising from an investment project, as it ignores cash flows outside
of the payback period. Furthermore, payback period ignores the time value of money.

The fact that the payback period is 2·9 years should not therefore be a reason for rejecting the project.
The project should be assessed using the net present value method as this would indicate the potential
dollar increase (or fall) in shareholder wealth due to the project.
(b) ROCE
Annual cash flow after fixed costs = $17,000 (from above)

Annual depreciation = (50,000 – 10,000)/5 = $8,000
Annual operating profit = 17,000 - 8,000 = $9,000
Average investment = (50,000 + 10,000)/2 = $30,000
ROCE = 9,000/30,000 = 30%
Although the project’s ROCE of 30% exceeds the directors’ target of 25% it does not
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guarantee that the project would increase the wealth of shareholders. Although ROCE does
consider the whole life of the project it ignores the time value of money. Furthermore the
directors’ target return of 25% may be connected more with personal objectives (such as
receiving a bonus) then with the required return of shareholders. The final decision as to
whether to accept the project should be based upon a net present value appraisal.
PL
Answer 14 DIRECTORS’ VIEWS
Evaluation using either payback or return on capital employed
Both payback period and return on capital employed (ROCE) are inferior to discounted cash flow
(DCF) methods such as net present value (NPV) and internal rate of return (IRR). Payback ignores the
time value of money and cash flows outside of the payback period. ROCE uses profit instead of cash
flow. Both payback and ROCE have difficulty in justifying the target value used to determine
acceptability. Why, for example, use a maximum payback period of two years? DCF methods use the
weighted average cost of capital of an investing company as the basis of evaluation, or a project-
specific cost of capital, and both can be justified on academic grounds.
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The company should also clarify why either method can be used, since they assess different aspects of
an investment project.
Regarding the directors’ policies on net present value (NPV) calculations the following comments can
be made:
Evaluation over a four-year planning period

SA
Using a planning period or a specified investment appraisal time horizon is a way of reducing the
uncertainty associated with investment appraisal, since this increases with project life. However, it is
important to determine the expected life of an investment project if at all possible, since evaluation over
the whole life of a project may help a company avoid sub-optimal investment decisions.
Inflation is ignored
If selling prices and costs have different inflation rates then the only way to accurately calculate NPV is
to forecast each cash flow in nominal terms (incorporating the specific inflation rate affecting that cash
flow) and discount the total nominal cash flow at the firm’s nominal cost of capital (incorporating the
general inflation rate in the economy).
The only situation where ignoring inflation will lead to the correct NPV figure is when revenues and
costs all increase at the general inflation rate - in which case uninflated cash flows can be discounted at
the firm’s real cost of capital.

Scrap value is ignored
Scrap value, salvage value or terminal value must be included in the evaluation of a project since it is a
cash inflow. Ignoring scrap value will reduce the NPV and may lead to rejection of an otherwise
acceptable investment project.
Working capital recovery is ignored
If an investment project ends, then working capital can be recovered and it must be included in the
evaluation of an investment project, since it is a cash inflow.
A balancing allowance is claimed at the end of the fourth year of operation
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Introducing a balancing allowance which can only be claimed when allowed by the taxation authorities
will distort the taxation aspects of the investment appraisal. If it is anticipated that a project will
continue beyond the fourth year, including a balancing allowance in the evaluation will overstate cash
inflows and hence the NPV, potentially leading to incorrect investment decisions being made.
Answer 15 OKM CO
(a)
PL
Errors in the original investment appraisal
Inflation was incorrectly applied to selling prices and variable costs in calculating
contribution, since only one year’s inflation was allowed for in each year of operation.
The fixed costs were correctly inflated, but included $200,000 per year of sunk costs which
are not relevant for decision making.
Depreciation is not a cash cost and therefore not relevant.
Straight-line accounting depreciation had been used in the tax calculation, but this
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depreciation method is not acceptable to the tax authorities. The approved method using 25%
reducing balance tax-allowable depreciation should be used.
Interest payments have been shown as a project cash flow whereas finance costs are already
implied by the discounting process.
The interest rate on the debt finance has been used as the discount rate whereas surplus cash
from the project will accrue to the firm’s shareholders. The discount rate should therefore
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reflect both the cost of debt and the cost of equity (i.e. weighted average cost of capital).

(b) Revised NPV
Tutorial note: As the cash flows will be forecast in nominal terms the WACC also needs to be
restated as nominal. Rather than simply adding the general inflation rate to the real WACC
the Fisher formula should be used.
Nominal weighted average cost of capital = (1·07 × 1·047) - 1 = 0·12 (i.e. 12% per year).
NPV calculation
Year 1 2 3 4 5
$000 $000 $000 $000 $000
Contribution 1,330 2,264 3,010 1,600
Fixed costs (318) (337) (357)
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(379)
–––––– –––––– –––––– ––––––
Taxable cash flow 1,012 1,927 2,653 1,221
Taxation (304) (578) (796) (366)
Allowable depreciation
tax benefits 150 112 84 178
–––––– –––––– –––––– –––––– ––––––
PL
After-tax cash flow
Scrap value
After-tax cash flows

Discount at 12%
Present values
1,012
––––––
1,012
0·893
––––––
904
––––––
1,773
––––––
1,773
0·797
––––––
1,413
––––––
2,187
––––––
2,187
0·712
––––––
1,557
––––––
509
250
––––––
759
0·635
––––––
482
––––––
(188)
––––––
(188)
0·567
––––––
(107)
––––––
$000
Present value of future cash flows 4,249
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Initial investment 2,000
––––––
Net present value 2,249
––––––
The net present value is positive and so the investment is financially acceptable.
SA

Alternative NPV calculation using taxable profit calculation
Year 1 2 3 4 5
$000 $000 $000 $000 $000
Contribution 1,330 2,264 3,010 1,600
Fixed costs (318) (337) (357) (379)
–––––– –––––– –––––– ––––––
Taxable cash flow 1,012 1,927 2,653 1,221
Tax-allowable depreciation (500) (375) (281) (594)
–––––– –––––– –––––– ––––––
Taxable profit 512 1,552 2,372 627
Taxation (154) (466) (712) (188)
–––––– –––––– –––––– –––––– ––––––
E
Profit after tax 512 1,398 1,906 (85) (188)
Tax-allowable depreciation 500 375 281 594
–––––– –––––– –––––– –––––– ––––––
After-tax cash flow 1,012 1,773 2,187 509 (188)
Scrap value 250
–––––– –––––– –––––– –––––– ––––––
PL
After-tax cash flows
Discount at 12%
Present values
Present value of future cash flows

Initial investment
1,012
0·893
––––––
904
––––––
1,773
0·797
––––––
1,413
––––––
$000
4,249
2,000
2,187
0·712
––––––
1,557
––––––
759
0·635
––––––
482
––––––
(188)
0·567
––––––
(107)
––––––
––––––
Net present value 2,249
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––––––
WORKINGS
Annual contribution
Year 1 2 3 4
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––––––––– ––––––––– ––––––––– –––––––––
Contribution ($/unit) 5·32 5·66 6·02 6·40
––––––––– ––––––––– ––––––––– –––––––––
Contribution ($/year) 1,330,000 2,264,000 3,010,000 1,600,000
Tax-allowable depreciation tax benefits

Tutorial note: Assuming that the capital expenditure is made at the start of the first year the
initial tax-allowable depreciation will be claimed at the end of year 1 and the related tax
saving received at the end of year 2.
Year Tax depreciation Tax benefit

$ $
1 500,000 150,000
2 375,000 112,500
3 281,250 84,375
4 Balancing allowance 593,750 178,125
Scrap value 250,000
–––––––––
2,000,000
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–––––––––
Answer 16 LIMITATIONS OF NPV
NPV is a commonly used technique in investment appraisal but is subject to a number of restrictive
assumptions and limitations which call into question its general relevance. Nonetheless, if the

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assumptions and limitations are understood then its application is less likely to be undertaken in error.
Difficulties with NPV
 NPV assumes that firms pursue an objective of maximising the wealth of their shareholders.
This is questionable given the wider range of stakeholders who might have conflicting
interests to those of the shareholders.
NPV is largely redundant if organisations are not wealth maximising. For example, public
sector organisations may wish to invest in capital assets but will use non-profit objectives as
part of their assessment.
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 Estimating the correct discount rate to use. This is particularly so when questions arise as to
the incorporation of risk premiums in the discount rate since an evaluation of the risk of the
business, or of the project in particular, will have to be made and which may be difficult to
discern. Alternative approaches to risk analysis, such as sensitivity and decision trees are
subject to fairly severe limitations.
 NPV assumes that cash surpluses can be reinvested at the discount rate. This is subject to
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other projects being available which produce at least a zero NPV at the chosen discount rate.
 NPV can most easily cope with cash flows arising at period ends and is not a technique that is
used easily when complicated, mid-period cash flows are present.
 NPV is not universally employed, especially in a small business environment. The available
evidence suggests that businesses assess projects in a variety of ways (payback, IRR,
accounting rate of return). The fact that such methods are used calls into question the
practical benefits of NPV and therefore hints at certain practical limitations.
 If reported profits are important to businesses then it is possible that there may be a conflict
between undertaking a positive NPV project and potentially adverse consequences on
reported profits. This will particularly be the case for projects with long horizons, large initial
investment and very delayed cash inflows. In such circumstances, businesses may prefer to
use accounting measures of investment appraisal.

 Managerial incentive schemes may not be consistent with NPV, particularly when long time
horizons are involved. Thus managers may be rewarded on the basis of accounting profits in
the short term and may be encouraged to act in accordance with these objectives and thus
ignore positive NPV projects.
 NPV treats all time periods equally with the exception of discounting far cash flows more
than near cash flows. In other words, NPV only accounts for the time value of money. To
many businesses, distant horizons are less important than near horizons, if only because that
is the environment in which they work. For example, in the long term, nearly all aspects of
the business may change and hence a too-narrow focus on discounting means that NPV is of
limited value and more so the further the time horizon considered.
 NPV does not take account of non-financial information which may even be relevant to
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shareholders who want their wealth maximised. For example, issues of strategic benefit may
arise against which it is difficult to immediately quantify the benefits but for which there are
immediate costs. NPV would treat such a situation as an additional cost since it could not
incorporate the indiscernible benefit.
Answer 17 RIDAG CO
(a)
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Calculation of net present value (NPV)
As nominal after-tax cash flows are to be discounted, the nominal after-tax weighted average
cost of capital of 7% must be used.
Year
Sales revenue
Variable costs
1
$000
1,300
(513)
2
$000
2,466
(1,098)
3
$000
3,622
(1,809)
4
$000
2,018
(1,035)
5
$000
–––––– –––––– –––––– ––––––

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Contribution 787 1,368 1,813 983
Fixed costs (105) (115) (125) (125)
–––––– –––––– –––––– ––––––
Taxable cash flow 682 1,253 1,688 858
Tax liabilities (205) (376) (506) (257)
Tax-allowable depreciation tax benefits 113 84 63 160
–––––– –––––– –––––– –––––– ––––––
After-tax cash flow 682 1,161 1,396 415 (97)
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Scrap value 100

–––––– –––––– –––––– –––––– ––––––
Net cash flow 682 1,161 1,396 515 (97)
Discount at 7% 0·935 0·873 0·816 0·763 0·713
–––––– –––––– –––––– –––––– ––––––
Present values 638 1,014 1,139 393 (69)
–––––– –––––– –––––– –––––– ––––––
$000
Present value of cash inflows 3,115
Cost of machine (1,500)
––––––
NPV 1,615
––––––

Project 1 has a positive NPV of $1,615,000 and so it is financially acceptable to Ridag Co.
However, the discount rate used here is the current weighted average after-tax cost of capital.
As this is a recently-developed product, it may be appropriate to use a project-specific
discount rate that reflects the risk of the new product launch.
WORKINGS
Sales revenue
Year 1 2 3 4
Inflated selling price ($/unit) 26·00 25·96 25·87 26·91
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Sales revenue ($/year) 1,300,000 2,466,200 3,621,800 2,018,250
Variable cost
Year 1 2 3 4
1
2
3
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Inflated variable cost ($/unit)
Sales volume (units/year)
Variable costs ($/year)
Allowable depreciation
10·25
50,000
1,500,000 × 0·25 = $375,000

1,125,000 × 0·25 = $281,250
843,750 × 0·25 = $210,938
11·56
95,000
Tax benefit
12·92
140,000
13·80
75,000
512,500 1,098,200 1,808,800 1,035,000
Tax-allowable depreciation tax benefits
Year
375,000 × 0·3 = $112,500
281,250 × 0·3 = $84,375
210,938 × 0·3 = $63,281
Year benefit received
2
3
4
4 $532,812* 5 32,812 × 0·3 = $159,844 5
M
*843,750 – 210,938 – 100,000 = $532,812
Alternative calculation of net cash flow
Year 1 2 3 4 5
$000 $000 $000 $000 $000
Taxable cash flow 682 1,253 1,688 858
SA
Tax-allowable depreciation (375) (281) (211) (533)

–––––– –––––– –––––– –––––– ––––––
Taxable profit 307 972 1,477 325
Taxation (92) (292) (443) (98)
–––––– –––––– –––––– –––––– ––––––
After-tax profit 307 880 1,185 (118) (98)
Add back allowances 375 281 211 533
–––––– –––––– –––––– –––––– ––––––
After-tax cash flow 682 1,161 1,396 415 (98)
Scrap value 100
–––––– –––––– –––––– –––––– ––––––
Net cash flow 682 1,161 1,396 515 (98)
Discount at 7% 0·935 0·873 0·816 0·763 0·713
–––––– –––––– –––––– –––––– ––––––
Present values 638 1,014 1,139 393 (70)
–––––– –––––– –––––– –––––– ––––––
There are slight differences due to rounding.

(b) Calculation of equivalent annual cost for machine 1
Since taxation and tax-allowable depreciation are to be ignored, and where relevant all
information relating to project 2 has already been adjusted to include future inflation, the
correct discount rate to use here is the nominal before-tax weighted average cost of capital of
12%.
Year 0 1 2 3 4
Maintenance costs ($) (25,000) (29,000) (32,000) (35,000)
Investment and scrap ($) (200,000) 25,000
–––––––– –––––––– –––––––– –––––––– ––––––––
Net cash flow ($) (200,000) (25,000) (29,000) (32,000) (10,000)
Discount at 12% 1·000 0·893 0·797 0·712 0·636
E
–––––––– –––––––– –––––––– –––––––– ––––––––
Present values (200,000) (22,325) (23,113) (22,784) (6,360)
–––––––– –––––––– –––––––– –––––––– ––––––––
Present value of cash flows $274,582
Cumulative present value factor 3·037
Equivalent annual cost = 274,582/3·037 = $90,412
PL
Calculation of equivalent annual cost for machine 2
Year
Maintenance costs ($)
Investment and scrap ($)
Net cash flow ($)

Discount at 12%
(225,000)
0
–––––––– –––––––– ––––––––

(225,000) (15,000) (20,000)
1·000 0·893 0·797
–––––––– –––––––– ––––––––
1
(15,000)
2
(20,000)
3
(25,000)
50,000
––––––––
25,000
0·712
––––––––
Present values (225,000) (13,395) (15,940) 17,800
M
–––––––– –––––––– –––––––– ––––––––
Present value of cash flows $236,535
Cumulative present value factor 2·402
Equivalent annual cost = 236,535/2·402 = $98,474
The machine with the lowest equivalent annual cost should be purchased and calculation
shows this to be Machine 1. If the present value of future cash flows had been considered
SA
alone, Machine 2 (cost of $236,535) would have been preferred to Machine 1 (cost of
$274,582). However, the lives of the two machines are different and the equivalent annual
cost method allows this to be taken into consideration.

Answer 18 BQK CO
(a) NPV calculation
Year 1 2 3 4 5
$000 $000 $000 $000 $000
Sales revenue 5,614 7,214 9,015 7,034
Variable costs (3,031) (3,931) (5,135) (4,174)
–––––– –––––– –––––– ––––––
Contribution 2,583 3,283 3,880 2,860
Fixed costs (1,530) (1,561) (1,592) (1,624)
–––––– –––––– –––––– ––––––
Before-tax cash flow 1,053 1,722 2,288 1,236
E
Tax liability (316) (517) (686) (371)
Tax-allowable depreciation tax benefits 300 300 300 300
–––––– –––––– –––––– –––––– ––––––
Discount at 12% 0·893 0·797 0·712 0·636 0·567
–––––– –––––– –––––– –––––– ––––––
PL
Present values
PV of future cash flows

Initial investment
$000
940
––––––
4,276
(4,000)
––––––
276
––––––
1,360
––––––
1,475
––––––
541
––––––
(40)
––––––
Comment: Since the proposed investment has a positive net present value of $276,000, it is
financially acceptable.
M
WORKINGS
Sales revenue
Year 1 2 3 4
Sales of small houses (houses/year) 15 20 15 5
Sales of large houses (houses/year) 7 8 15 15
SA
Small house selling price ($000/house) 200 200 200 200

Large house selling price ($000/house) 350 350 350 350
Sales revenue (small houses) ($000/year) 3,000 4,000 3,000 1,000
Sales revenue (large houses) ($000/year) 2,450 2,800 5,250 5,250
–––––– –––––– –––––– ––––––
Total sales revenue ($/year) 5,450 6,800 8,250 6,250
–––––– –––––– –––––– ––––––
Inflated sales revenue ($/year) 5,614 7,214 9,015 7,034

Variable costs of construction
Year 1 2 3 4
Sales of small houses (houses/year) 15 20 15 5
Sales of large houses (houses/year) 7 8 15 15
Small house variable cost ($000/house) 100 100 100 100
Large house variable cost ($000/house) 200 200 200 200
Variable cost (small houses) ($000/year) 1,500 2,000 1,500 500
Variable cost (large houses) ($000/year) 1,400 1,600 3,000 3,000
–––––– –––––– –––––– ––––––
Total variable cost ($/year) 2,900 3,600 4,500 3,500
–––––– –––––– –––––– ––––––
Inflated total variable cost ($/year) 3,031 3,931 5,135 4,174
E
Fixed infrastructure costs
Year 1 2 3 4
Fixed costs ($000/year) 1,500 1,500 1,500 1,500
Inflated fixed costs ($000/year) 1,530 1,561 1,592 1,624
Year
PL
Alternative NPV calculation
Before-tax cash flow

Tax-allowable depreciation
Taxable profit
Taxation
$000
1
1,053
(1,000)
––––––
53
2
$000
1,722
(1,000)
––––––
722
(16)
3
$000
2,288
(1,000)
––––––
1,288
(217)
4
$000
1,236
(1,000)
––––––
236
(386)
5
$000
(71)
–––––– –––––– –––––– –––––– ––––––
M
Profit after tax 53 706 1,071 (150) (71)
Add back allowances 1,000 1,000 1,000 1,000
–––––– –––––– –––––– ––––––
Discount at 12% 0·893 0·797 0·712 0·636 0·567
–––––– –––––– –––––– –––––– ––––––
Present values 940 1,360 1,475 541 (40)
SA
–––––– –––––– –––––– –––––– ––––––

$000
PV of future cash flows 4,276
Initial investment (4,000)
––––––
276
––––––
(b) Calculation of return on capital employed (ROCE)
Total before-tax cash flow $6,299,000

Total depreciation $4,000,000
–––––––––
Total accounting profit $2,299,000
Average annual profit ($000/year) = 2,299,000/4 = $574,750

Average investment ($000) = 4,000,000/2 = $2,000,000
ROCE (ARR) = 100 × 574,750/2,000,000 = 28·7%

Discussion
The ROCE is greater than the 20% target ROCE of the investing company and so the
proposed investment is financially acceptable. However, the investment decision should be
made on the basis of information provided by a discounted cash flow (DCF) method, such as
net present value or internal rate of return.
Answer 19 HDW CO
(a) Net present value of investment in new machinery
Year 1 2 3 4 5
$000 $000 $000 $000 $000
E
Sales income 6,084 6,327 6,580 6,844
Variable cost (2,374) (2,504) (2,642) (2,787)
–––––– –––––– –––––– ––––––
Contribution 3,710 3,823 3,938 4,057
Fixed costs (263) (276) (289) (304)
–––––– –––––– –––––– ––––––
Taxation
PL
Cash flow
tax benefits
After-tax cash flow

Working capital
Scrap value
Net cash flow

3,447
––––––
3,447
(24)
––––––
3,423
3,547
(689)
250
––––––
3,108
(25)
––––––
3,083
3,649
(709)
188
––––––
3,128
(26)
––––––
3,102
3,753
(730)
141
––––––
3,164
(27)
250
––––––
3,387
(751)
372
––––––
(379)
––––––
(379)
Discount at 12% 0·893 0·797 0·712 0·636 0·567
M
–––––– –––––– –––––– –––––– ––––––
Present values 3,057 2,457 2,209 2,154 (215)
–––––– –––––– –––––– –––––– ––––––
$000
PV of future cash flows 9,662
Initial investment (5,000)
Working capital (500)
SA
––––––
NPV 4,162
––––––
As the net present value of $4·161 million is positive, the expansion can be recommended as
financially acceptable.
WORKINGS
Year 1 2 3 4
Sales (units/year) 9,000 9,000 9,000 9,000
Sales income ($000) 6,084 6,327 6,580 6,844
Year 1 2 3 4
Sales (units/year) 9,000 9,000 9,000 9,000
Variable cost ($000) 2,374 2,504 2,642 2,787

Year 1 2 3 4
$000 $000 $000 $000
Tax-allowable depreciation 1,250·0 937·5 703·1 1,859·4
Tax benefit 250 188 141 372
Year 1 2 3 4
$000 $000 $000 $000
Working capital 523·50 548·11 573·87 600·84
Incremental 24 25 26 27
Alternative NPV calculation where tax-allowable depreciation is subtracted and added back
Year 1 2 3 4 5
E
$000 $000 $000 $000 $000
Cash flow 3,447 3,547 3,649 3,753
Tax-allowable depreciation (1,250) (938) (703) (1,859)
–––––– –––––– –––––– ––––––
Taxable profit 2,197 2,609 2,946 1,894
Taxation (439) (522) (589) (379)
PL
After-tax profit
After-tax cash flow

Working capital
Scrap value
Net cash flow

––––––
2,197
1,250
––––––
3,447
(24)
––––––
3,423
––––––
2,170
938
––––––
3,108
(25)
––––––
3,083
––––––
2,424
703
––––––
3,127
(26)
––––––
3,101
––––––
1,305
1,859
––––––
3,164
(27)
250
––––––
3,387
––––––
(379)
––––––
(379)
––––––
(379)
Discount at 12% 0·893 0·797 0·712 0·636 0·567
–––––– –––––– –––––– –––––– ––––––
M
Present values 3,057 2,457 2,208 2,154 (215)
–––––– –––––– –––––– –––––– ––––––
NPV = 9,661 – 5,000 – 500 = $4·161 million
Tutorial note: The model answer ignores the recovery of working capital at the end of the
four year evaluation period on the justification that the machinery will be replaced and hence
SA
the investment in working capital would continue. However, there is a strong argument that
the recovery of working capital should be shown, in which case there would be a cash inflow
at the end of the fourth year of 575 (500 + 25 +26 + 26).
(b) Nominal v real approach
A nominal (money terms) approach to investment appraisal discounts nominal cash flows
with a nominal cost of capital. Nominal cash flows are found by inflating forecast values
from current price estimates, for example, using specific inflation. Applying specific inflation
means that different project cash flows are inflated by different inflation rates in order to
generate nominal project cash flows.
A real terms approach to investment appraisal discounts real cash flows with a real cost of
capital. Real cash flows are found by deflating nominal cash flows by the general rate of
inflation. The real cost of capital is found by deflating the nominal cost of capital by the
general rate of inflation, using the Fisher equation:
(1 + real discount rate) × (1 + inflation rate) = (1 + nominal discount rate)

The net present value for an investment project does not depend on whether a nominal terms
approach or a real terms approach is adopted, since nominal cash flows and the nominal
discount rate are both discounted by the general rate of inflation to give real cash flows and
the real discount rate, respectively. Both approaches give the same net present value.
Tutorial note for illustrative purposes:
The real after-tax cost of capital of HDW Co can be found as follows:
1·12/1·047 = 1·07 (i.e. the real after-tax cost of capital is 7%).
The following illustration deflates nominal net cash flows (NCF) by the general rate of
inflation (4·7%) to give real NCF, which are then discounted by the real cost of capital (7%).
E
Year 1 2 3 4 5
$000 $000 $000 $000 $000
Nominal NCF 3,423 3,083 3,102 3,387 (379)
Real NCF 3,269 2,812 2,703 2,819 (301)
Discount at 7% 0·935 0·873 0·816 0·763 0·713
PL
Present values
––––––
3,057
––––––
––––––
2,455
––––––
––––––
2,206
––––––
––––––
2,151
––––––
Allowing for rounding, the illustration shows that the present values of the real cash flows are
the same as the present values of the nominal cash flows, and that the real terms approach
NPV of $4·154 million is the same as the nominal terms approach NPV of $4·161 million.
The two approaches produce identical NPVs and offer the same investment advice.
Answer 20 DARN CO
––––––
(215)
––––––
M
(a) NPV using nominal method
Calculating the net present value of the investment project using a nominal terms approach
requires the discounting of nominal (money terms) cash flows using a nominal discount rate,
which is given as 12%.
Year 1 2 3 4 5
$000 $000 $000 $000 $000
SA
Sales revenue 1,308·75 2,817·26 7,907·87 5,443·58

Costs (523·50) (1,096·21) (2,869·33) (2,102·93)
––––––––– ––––––––– ––––––––– –––––––––
Net revenue 785·25 1,721·05 5,038·54 3,340·65
Tax payable (235·58) (516·32) (1,511·56) (1,002·20)
tax benefits 150·00 112·50 84·38 253·13
––––––––– ––––––––– ––––––––– ––––––––– –––––––––
After-tax cash flow 785·25 1,635·47 4,634·72 1,913·47 (749·07)
Working capital (150·86) (509·06) 246·43 544·36
––––––––– ––––––––– ––––––––– ––––––––– –––––––––
Project cash flow 634·39 1,126·41 4,881·15 2,457·83 (749·07)
Discount at 12% 0·893 0·797 0·712 0·636 0·567
––––––––– ––––––––– ––––––––– ––––––––– –––––––––
Present values 566·51 897·75 3,475·38 1,563·18 (424·72)
––––––––– ––––––––– ––––––––– ––––––––– –––––––––

$000
PV of future cash flows 6,078·10
Initial investment (2,000·00)
Working capital (130·88)
–––––––––
NPV 3,947·22
–––––––––
The net present value is $3,947,220 and so the investment project is financially acceptable.
WORKINGS
Year 1 2 3 4
Sales revenue ($000) 1,250 2,570 6,890 4,530
E
Inflated sales revenue ($000) 1,308·75 2,817·26 7,907·87 5,443·58
Year 1 2 3 4
Costs ($000) 500 1,000 2,500 1,750
Inflated costs ($000) 523·50 1,096·21 2,869·33 2,102·93
Year 1 2 3 4
(b)
PL
Inflated sales revenue ($000)
Working capital ($000)
Incremental ($000)
Year
Tax-allowable depreciation ($000)
Tax benefit ($000)
NPV using real method

1,308·75
130·88
(130·88)
1
500·00
150·00
2,817·26 7,907·87 5,443·58
281·73
2
375·00
112·50
790·79
(150·86) (509·06)
3
281·25
84·38
544·36
246·43
Calculating the net present value of the investment project using a real terms approach
4
843·75
253·13
requires discounting real terms cash flows with a real discount rate.
M
Real terms cash flows are found by deflating nominal cash flows by the general rate of
inflation. Since only the general rate of inflation is available, the real terms operating cash
flows are those given in the question.
The nominal discount rate is 12% and the general rate of inflation is 4·7%. The real discount
rate is therefore 7% (1·12/1·047).
SA
Year 1 2 3 4 5
$000 $000 $000 $000 $000
Sales revenue 1,250 2,570 6,890 4,530
Costs (500) (1,000) (2,500) (1,750)
––––––––– ––––––––– ––––––––– –––––––––
Net revenue 750·00 1,570·00 4,390·00 2,780·00
Tax payable (225·00) (471·00) (1,317·00) (834·00)
tax benefits 150·00 112·50 84·38 253·13
––––––––– ––––––––– ––––––––– –––––––––
After-tax cash flow 750·00 1,495·00 4,031·50 1,547·38 (580·87)
Working capital (132·00) (432·00) 236·00 453·00
––––––––– ––––––––– ––––––––– ––––––––– –––––––––
Project cash flow 618·00 1,063·00 4,267·5 2,000·38 (580·87)
Discount at 7% 0·935 0·873 0·816 0·763 0·713
––––––––– ––––––––– ––––––––– ––––––––– –––––––––
Present values 577·83 928·00 3,482·28 1,526·29 (414·16)
––––––––– ––––––––– ––––––––– ––––––––– –––––––––

$000
PV of future cash flows 6,100·24
Initial investment (2,000·00)
Working capital (125·00)
–––––––––
NPV 3,975·24
–––––––––
The net present value is $3,975,240 and so the investment project is financially acceptable.
The difference between the nominal terms NPV ($3,947,220) and the real terms NPV is due
primarily to two factors. First, the tax benefits from tax-allowable depreciation are not
affected by inflation and so will have different present values due to the change in discount
rate. Second, the working capital cash flows are timed differently to the sales income on
E
which they depend, and so their inflation effects are timed differently to the related inflation
effects in the discount rate.
WORKING
Year 1 2 3 4
PL
Sales revenue ($000)
Working capital ($000)
Incremental ($000)
discount rate of 7%.
Year
1,250
125
(125)
1
$000
2,570
2
$000
257
(132)
3
$000
6,890
689
(432)
4
$000
5
$000
4,530
453
236
Examiner’s note: An alternative approach is to deflate the nominal project cash flows from
part (a) by 4.7% per year to give real terms project cash flows, before discounting by the real
Project cash flow 634.39 1,126.41 4,881.15 2,457.83 (749.07)

M
Deflate at 4.7% 605.91 1,027.55 4,252.87 2,045.34 (595.37)
Discount at 7% 0.935 0.873 0.816 0.763 0.713
––––––––– ––––––––– ––––––––– ––––––––– –––––––––
Present values 566.53 897.05 3,470.34 1,560.59 (424.50)
––––––––– ––––––––– ––––––––– ––––––––– –––––––––
$000
SA
PV of future cash flows 6,070.01

Initial investment (2,000.00)
Working capital (130.88)
–––––––––
NPV 3,939.13
–––––––––
Answer 21 REPLACEMENT CYCLES
(a) Problems in investment appraisal
(i) Asset replacement decisions
The problem here is that the net present value investment appraisal method may offer
incorrect advice about when an asset should be replaced. The lowest present value of costs
may not indicate the optimum replacement period.

E
PL
M
SA

E
PL ABOUT BECKER PROFESSIONAL EDUCATION
Becker Professional Education provides a single destination
for candidates and professionals looking to advance their
careers and achieve success in:
• Accounting
M
• International Financial Reporting
• Project Management
• Continuing Professional Education
• Healthcare
For more information on how Becker Professional Education can
SA
support you in your career, visit www.becker.com.
®
E
This ACCA Revision Question Bank has been reviewed
by ACCA's examining team and includes:
• The most recent ACCA examinations with suggested answers

• Past examination questions, updated where relevant
•
•
Model answers and suggested solutions
Tutorial notes
PL
M
SA
www.becker.com/ACCA | acca@becker.com
©2015 DeVry/Becker Educational Development Corp. All rights reserved.

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FINANCIAL MANAGEMENT (F9) – REVISION QUESTION BANK

Question 1 COMPANY OBJECTIVES

Question 2 THE FINANCIAL MANAGEMENT FUNCTION

Question 4 VALUE FOR MONEY

Year to 31 May 2015 2014 2013

The current cost of equity of QSX Co is 10% per year.

Assume that dividends are paid at the end of each year.

32 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

Question 7 AGENCY PROBLEM

Question 8 LISTED COMPANY OBJECTIVES

Question 9 GOAL CONGRUENCE

Question 10 MONEY MARKETS

©2015 DeVry/Becker Educational Development Corp. All rights reserved. 33

Question 12 FINANCIAL INTERMEDIARIES

Question 13 PAYBACK AND ROCE

(a) Calculate and comment on the project’s payback period. (5 marks)

34 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

Question 14 DIRECTORS’ VIEWS

operations of OKM Co.

Interest payments (200) (200) (200) (200)

Discount at 10% 0·909 0·826 0·751 0·683 0·621

Net present value = 1,645,000 – 2,000,000 = ($355,000) so reject the project.

©2015 DeVry/Becker Educational Development Corp. All rights reserved. 35

9. The real weighted average cost of capital of OKM Co is 7% per year

10. The general rate of inflation is expected to be 4·7% per year

Question 16 LIMITATIONS OF NPV

Ridag Co is evaluating two investment projects, as follows.

36 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

Number of small houses sold: 15 20 15 5

Small house Large house

©2015 DeVry/Becker Educational Development Corp. All rights reserved. 37

38 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

Question 21 REPLACEMENT CYCLES

(i) assets with replacement cycles of different lengths;

(ii) an investment project has several internal rates of return;

Interval between Trade-in Value ($) Maintenance cost ($)

©2015 DeVry/Becker Educational Development Corp. All rights reserved. 39

Answer 1 COMPANY OBJECTIVES

1016 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

(a) to produce an adequate return for shareholders;

©2015 DeVry/Becker Educational Development Corp. All rights reserved. 1017

Answer 2 THE FINANCIAL MANAGEMENT FUNCTION

How management accounting information can assist the financial manager

Answer 3 FINANCIAL MANAGEMENT DECISIONS

1018 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

Answer 4 VALUE FOR MONEY

©2015 DeVry/Becker Educational Development Corp. All rights reserved. 1019

2014: Dividend yield = 100 × 38·5/740 = 5·2%

2014: Capital gain = 835 – 740 = 95c or 12·8% (100 × 95/740)

1020 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

(i) The return on equity predicted by the CAPM

Year 2014 2014

Year 2015 2014 2013

Year 2015 2014 2013

©2015 DeVry/Becker Educational Development Corp. All rights reserved. 1021

Answer 7 AGENCY PROBLEM

Answer 8 LISTED COMPANY OBJECTIVES

1022 ©2015 DeVry/Becker Educational Development Corp. All rights reserved.

Managerial reward schemes

©2015 DeVry/Becker Educational Development Corp. All rights reserved. 1023

Answer 10 MONEY MARKETS

The principal roles of the money markets are to:

Common money market instruments include:

 Bills of exchange – a short-term financial instrument consisting of a written order addressed