ACCA FM Trial Exam AS 2023

QUIZ 2_FM_23.1.24

Section A
Chapter 1
1. Which of the following statements is correct?

A Profit maximisation results in shareholder wealth maximisation

B Separation of ownership and control can lead to agency costs
C Maximising earnings per share results in shareholder wealth maximisation
D Increasing market share will lead to increased shareholder wealth

Answer B
Profit maximisation does not maximise shareholder wealth. Like option C EPS is based on profit so also
wrong.
B Separate between owner and manager, shareholder own the business, manager run the business. If
managers (agent) follow personal objectives which conflict with those of their shareholders, this leads
to agency costs (i.e. lost potential returns for shareholders). Aka agency problem.
Example The managers may make decisions not consistent with the maximisation of shareholder
wealth and can lead to loss in potential shareholder return. This loss is agency costs.

2. Which of the following best describes commercial paper?

A Unsecured long-term loan notes issued by companies

B Unsecured short-term loan notes issued by companies
C Secured long-term loan notes issued by companies
D Secured short-term loan notes issued by companies

Answer B
Commercial paper is an unsecured, short-term corporate debt instrument issued by a corporation that
have very good credit rating. It is used for the financing of accounts receivable, inventories and other
short-term liabilities. Maturities on commercial paper usually up to 270 days.

Chapter 2
3. The government adopts an expansionary fiscal policy and ABC Co is considering how this will
affect its future plans.

How would an expansionary fiscal policy affect ABC Co?

(1) Lower interest rates on company debts
(2) Higher demand for its product
(3) Higher taxation rates on company income

A 1 and 2
B 3 only
ACCA FM Trial Exam AS 2023

C 2 and 3
D 2 only

Answer: D
Expansionary means increasing aggregate demand or encouraging demand.
Fiscal Policy is using taxation and government spending.
Option (2) is correct as an increase in demand would come from reducing taxes and increasing
government spending, an expansionary policy.
Option (1) refers to interest rate and interest is monetary policy.
Option (3) would be contractionary fiscal policy.

Chapter 3
4. Which TWO of the following are features of overtrading?

A Producing less than demand

B Suffering greater risk due to frequent trading in stocks and shares
C Suffering liquidity problems due to growing too rapidly
D Producing more than demand
E A rapid increase in current assets mostly financed by credit

Answer: C and E
Overtrading occurs when a company tries to support a large volume of trade from a small working
capital base. It also can be referred to as undercapitalisation and often occurs when a business grows
very rapidly without increasing its level of long-term finance.
It arises when a company has small amount of capital base to support its level of business activity
which is rapidly increasing . This can lead to liquidity problems.
The company may see growing inventories and receivables due to higher business levels, but not the
cash to back up this level of investment.
ACCA FM Trial Exam AS 2023

5. During a particular year, a company’s current assets increased by $100,000 and at the same time
its current liabilities decreased by $35,000.
What was the effect on net working capital?

A Increased by $135,000
B Increased by $65,000
C Decreased by $65,000
D Decreased by $135,000

Answer A
Net working capital (NWC) = CA-CL → Increase in CA by $x = NWC would increase by $x
Whereas any increase in CL results decrease of NWC, so decrease in CL= INCREASE in NWC

NWC Example
CA Increase +100k Increase + CA 1000
CL decrease -35k Increase + CL 500 NWC 500
CA decrease - Decrease – CA + 100 NWC 1100 – 500 = 600
CL increase - Decrease - Or NWC Inc by100
If CL -200, CA +100 NWC 1100 – 300 = 800
NWC inc by 300

6. A business wishes to keep a minimum cash balance of $12,000 to ensure its daily cash needs are
covered. Every time it transfers money to and from its short-term investments there is a fixed
fee of $25. The standard deviation of its cash flows is $5,000 per day and the interest rate is
3.65% per annum.
What is the maximum cash balance that should be held by the business using Miller Orr
Model?

A $15,633
B $50,207
C $28,735
D $62,507

Answer D

Upper limit = spread + lower limit

Spread = 3* [(0.75*X 25X 25,000,000/0.0001)^(1/3)]= 50,207
Upper limit = 50,207+12,000= 62,207
ACCA FM Trial Exam AS 2023

Chapter 7 Capital appraisal & risk Joint probability

7. The annual sales volume and the contribution per unit of a new product are uncertain. They are
assumed to be independent. Estimate for these two variables are as follows:
Sales units Probability Contribution/unit Probability
40,000 0.2 $3.00 0.5
38,000 0.6 $2.00 0.5
28,000 0.2

The annual fixed costs are estimated to be $100,000.

What is the percentage probability of making a loss?

A 100%
B 60%
C 50%
D 40%

Answer B
Sales cont T. Cont Profit Joint Prob
unit (TC – FC)
1st 40 3 120 20 0.2*0.5 = 0.1
2nd 40 2 80 (20) 0.2*0.5 = 0.1

3rd 38 3 114 14 0.6*0.5 = 0.3 Profit 40%

4th 38 2 76 (24) 0.6*0.5 = 0.3 Loss 60%

5th 28 3 84 (16) 0.2*0.5 = 0.1

6th 28 2 56 (44) 0.2*0.5 = 0.1

Probability loss = 1- profit = 100% - 40% = 60%

Alternatively, add those with losses: 0.2x0.5 + 0.6x0.5 + 0.2x0.1 = 60%

Chapter 8
8. A company has agreed to lease a machine for a period of seven years, with equal annual
payments payable at the start of each year. The NPV of the agreement, at a discount rate of
10%, is $52,000. Ignore taxation.
What is the annual lease payment (to the nearest $)?

A $8,861
B $9,710
C $10,682
D $11,940

Answer B
In this scenario, payments are made at the start of the year. This is called advanced annuity.
Pay now, x and 6 payments one year after another.
Let lease payment be x. x is the annuity that we will pay in advance.
ACCA FM Trial Exam AS 2023

CF Df PV
Today x 1.00 1x
Year 1-6 x 4.355 4.355x
Total PV 52000
52,000 = 5.355 x
x = 52,000/5.355 = $9,710

9. When issuing new loan notes, what would be the primary reason for a debt covenant limiting
the company’s future level of debt?

A To cause the company’s share price to rise

B To lower the company’s credit rating
C To reduce issue costs
D To reduce the annual interest rate

Answer D
A debt covenant is a provision in a loan note (contract between the loan note issuer and the loan note
holders) that the loan note issuer will either do (positive /affirmative covenants) or not do (negative
covenants) certain things.
In this question, the co(issuer) would not issue more debt in the future beyond a certain level of debt.
This is because such a provision is meant to protect the potential loan noteholders and would probably
reduce the interest rate on the loan notes being issued.

10. A company is facing capital rationing and is in the process of making investment decision for the
coming year. It has only $460,000 to invest and is considering the following projects:
Initial cost PV
Project A $200,000 $255,000
Project B $300,000 $375,000
Project C $150,000 $190,000
Project D $250,000 $315,000
Project E $160,000 $210,000

The projects are non-divisible, and none can be delayed.

Project C and E are mutually exclusive.

What is the maximum NPV that can be generated (to the nearest $)?

$ ________________

Answer: $125,000
IO PV NPV PI
A 200,000 255,000 55,000
B 300,000 375,000 75,000
D 250,000 315,000 65,000
E 160,000 210,000 50,000 1.31
ACCA FM Trial Exam AS 2023

C 150,000 190,000 40,000 1.27 exclude C

Combination Capital NPV

A+D 200 + 250 = 450 55K + 65k = 120k
B+E 300 + 160 = 460 75k + 50k =125k -- highest

Chapter 10
11. Which of the following is/are TRUE regarding dividend irrelevance theory?
1) The value of a company is determined solely by the earnings of its investment decisions.
2) A company cannot reduce dividend payments to finance investments.
3) No transaction costs are incurred in selling shares.

A 1 only
B 1 and 2
C 1 and 3
D 1, 2 and 3

Answer: C 1 and 3
Statement 1 true. Dividend irrelevance is Modigliani and Miller’s dividend theory,
According to MM shareholders are indifferent between dividends and capital gains in a tax-free world
and with no transaction costs. The value of a company is therefore determined by its investment
decisions, not its dividend and financing decisions.
Statement 2 is opposite of MM theory, so is false. A company could cut dividends to finance
investments because shareholders can create their own dividends (at no cost).
Statement 3 refer to assumption in MM where it is tax free and there is NO transaction cost.This is
why investor is not concerned with dividend decision of company.

Chapter 12: Capital Structure

12. Trill Co has an asset beta factor of 1.2 and an equity beta of 1.5. It does not pay tax on its profits.
Which of the following statements is/are consistent with this data?
1 Trill Co’s shares are not exposed to systematic risk.
2 Trill Co has equity of $100 million and debt of $40 million.

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2

Answer: D
The fact that it has a beta means it is subject to systematic risk.
Ba = Be x (V+D)/E → Be is 25% higher than Ba. So, without tax, D must be 25% of equity.
ACCA FM Trial Exam AS 2023

Chapter 14: Foreign Currency Risk

13. Ehsan Sports imports expensive footwear from Nagaland. It is about to purchase goods with a
value of 1,000,000 Naga Francs (NF) which will be paid for in three months’ time. It has decided
to pay for the items in NF and as a hedge against adverse currency movements has signed a
three-month forward exchange contract for NF.

On the date the contract was signed the following information was available:
Spot NF / $ 10.2750 +/- 0.0100
1 month forward 10.3263 +/- 0.0120
3 month forward 10.4000 +/- 0.0150

What is the cost of the purchase of footwear?

A $96,154
B $96,015
C $96,293
D $97,324

Answer: C
The company will sell $, so receives the lower price of the three month forward
= 1,000,000 NF / (10.4000 – 0.0150) = $96,293

Chapter 14: Foreign Currency Risk

14. Grosser Co must make a payment of €450,000 in six months’ time. Now is June.
Exchange rates to the $
Spot €1.9030 +/- 0.0020
6 months forward €1.8938 +/- 0.0112
Money markets annual interest rates
Borrowing Investing
Europe (€) 6% 5%
US ($) 7% 6%

What would be the cost (in six months’ time) of a money market hedge if Grosser Co
currently has a substantial cash flow surplus in its $ current account?

A $237,872
B $239,027
C $241,226
D $237,373

Answer: A
Step 1; Deposit € now using € investing rate - 5% / 2 = 2.5%.
Amount to deposit now = €450,000 / 1.025 = €439,024
Step 2: Convert at spot rate: €439,024 / 1.901 = $230,944
ACCA FM Trial Exam AS 2023

Step 3: Normally use the borrowing rate to calculate the interest that Prosser would have to pay
on a loan of $230,944. However, in this case, there is a cash flow surplus so we will use
the $ investing rate - 6% / 2 = 3%.
$230,944 1.03% = $237,872

Chapter 15: Interest Rate Risk

15. The exchange rate between the US dollar ($) and the euro (€) is $1.20 = €1. Interest rates in USA
are 4.5% and in Europe they are 6%.
What is the six-month forward exchange rate implicit in this data?

A $1.1915
B $1.2086
C $1.1830
D $1.2172

Answer: A
$1.20 x (1.045/1.06)0.5 = $1.1915.
Alternative calc = $1.20 x [1 + (0.045/2)]/[1 + (0.06/2)] = 1.1913
ACCA FM Trial Exam AS 2023

Section B
Case 1: Klara Co Question 16-20
Klara Co (UK company, currency pound sterling £) is planning to expand business operation with
companies in European countries like France and Spain. The company has been doing very well in its
business transactions in Europe (currency is Euro (€)) at the moment and would like to take advantage
of the huge market in Europe. Klara co will be building a new distribution hub. To do this Klara Co is
planning to borrow £6 million in six months’ time for nine months to fund the expansion. The managing
director is worried as there is a possibility that interest rates will rise in that time.

The finance department is offered by a bank a forward rate agreement (FRA) with an interest rate
spread of 3.2% – 2.9% per annum.

Other information
Business report in news has announced that interest rates in the UK are predicted to be 3.1% over the
coming year and that interest rates in the Eurozone are predicted as 3.9% and he knows that this
information can help in predicting the exchange rate.

The current spot rate of exchange is €1.174 = £1.

The managing director has told you that he has heard of forward exchange and futures contracts but
is not sure about the differences between them.

16. If the interest rate in six months’ time is 2.6% per annum and Kermeen Co takes out the
necessary planned loan at this rate, what will be the amount paid/received to/from the FRA
bank?

A. £27,000 received from the FRA bank

B. £27,000 paid to the FRA bank
C. £13,500 received from the FRA provider
D. £13.500 paid to the FRA provider

Answer: B. £27,000 paid to the FRA bank

As the money is being borrowed, the FRA guarantees the higher rate of the spread, 3.2%. 2.9% is used
for investment/deposit.
Interest paid on underlying borrowing is 2.6%.
Klara Co therefore must pay the difference over to the FRA provider to bring the total up to 3.2%.
Remember forward fixes the rate £6,000,000 × (3.2% – 2.6%) × 9/12 = £27,000
ACCA FM Trial Exam AS 2023

17. Using the predicted interest rates in the UK and the Eurozone, what is the predicted Euro to
sterling forward exchange rate in 6 months’ time?

A € 1.1695
B € 1.1785
C € 1.1831
D € 1.1922

Answer B
Interest rate parity, Fo = €1.174 X (1.039^0.5/1.031^0.5)
The forward exchange in 6 months’ time will be €1.1785 = £1

Or it can be solved like this workbook shows both the above and below method.
It uses the divide one year rate assume simple interest over 1 year.
3.1 % per annum, 6 months rate = 3.1%/2 = 1.55%,
3.9% per annum, half year rate = 3.9%/2 = 1.95%
1.174 × 1.0195 / 1.0155 = 1.1785

18. Which of the following statements about interest rate risk and currency risk is true?

A An exporter invoicing in the currency of its customers will face economic risk but not
transaction risk.
B A business with minimal foreign currency transactions will not benefit substantially from
hedging against currency risk.
C Interest rate floors are most useful for borrowers to keep the borrowing rate low.
D Interest rate swaps involve swapping interest payments on floating and fixed rate loans but
not swapping the loans themselves.

Answer D
Interest rate swaps involve swapping interest payments on floating and fixed rate loans but not
swapping the loans themselves.
A An exporter will face transaction risk on each currency transaction and economic risk due to the
volume of foreign currency transactions it undertakes.
Note
• Transaction risk. This arises when a company is importing or exporting. If the exchange rate
moves between agreeing the contract in a foreign currency and paying or receiving the cash,
the amount of home currency paid or received will alter, making those future cash flows
uncertain.
• Economic risk. The source of economic risk is the change in the competitive strength of
imports and exports. Even if not exporter importer will feel effect of exchange risk. So even
more so exporter/importer.
Both exporter and importer definitely face economic risk AND transaction risk.
B A business may have few currency transactions but if they are large, it can still benefit from hedging
them. For small transaction not hedging is reasonable but if value large it would be good to hedge as
the benefit is significant.
ACCA FM Trial Exam AS 2023

C Interest rate floors are used by depositors rather than borrowers to stop the interest received from
being too low. NOT BORROWERS!

19. Which TWO of the following statements about the similarities and differences between
forward exchange contracts and futures contracts are true?

A. Both forward exchange contracts and futures contracts fix the rate of exchange on a future
currency transaction.
B. Forward contracts can be traded on the stock market, but futures contracts cannot.
C. Forward contracts are a binding commitment, but futures contracts can be allowed to
lapse.
D. Forward contracts can be for any date, but futures contracts can only be settled on
particular dates.

Answer: A and D
The correct answer is:
• Both forward exchange contracts and futures contracts fix the rate of exchange on a future
currency transaction.
• Forward contracts can be for any date, but futures contracts can only be settled on particular
dates. If at the end of March, it will because following the exchange dates.
• Futures usually March June Sept and December, but for forward can settle at any date fixed
during agreement.
Statement B wrong. Forward cannot trade but futures can be traded in futures exchange market.
Statement C wrong. Futures contracts cannot be allowed to lapse (unlike options).
Both types of contracts fix the rate of exchange although futures contracts may provide an imperfect
hedge meaning that the entire currency exposure is not fully fixed. Futures contracts are settled in
three-monthly cycles.

20. Which TWO of the following would be appropriate methods of minimising the foreign
exchange risk on the future receipts from French customers if the managing director’s
expectations about the exchange rate are correct?

A. Buy Euro denominated futures up front and sell on close out.

B. Sell Euro denominated futures up front and buy back on close out.
C. A put option on Euros.
D. A call option on Euros.

Answer: B and C
When Klara Co receives the Euros from the Europe customers, it will sell them to buy £.
Selling Euro futures contracts up front on the invoice date of the transaction and buying them back on
close out at (or around) the settlement date of the invoice would effectively fix the Euro sell price
immediately.
ACCA FM Trial Exam AS 2023

The close out of the futures contracts and the actual sale of the Euros received from the French
customer would offset each other, removing the exposure to exchange rate movements between the
invoice date and the settlement date.
Actual receipt euros convert at spot exchange in the future date Klara make.
In future market Klara sell now and at closing future date buy the futures, make
A put option gives the right to sell a currency at a predetermined rate, so an option on Euros would
give the right to sell Euros and would be appropriate here. A call option would give the right to buy
Euros at a predetermined rate, but the Euros are being sold rather than bought so this option would
not be appropriate.

Case 2: Jardin Co Question 21-25

Jardin Co is company in the retail sector. The directors of Jardin Co are considering making an offer to
buy 100% of the shares in Sinergi Co, a competitor company. Extracts from the most recent financial
statements of Sinergi Co are as follows:

Statement of profit or loss for the year ended 31 December 20X2

$m
Profit before tax 2.20
Tax 30% 0.66
Profit after tax 1.54
Dividends 0.25

Statement of financial position as at 31 December 20X2

$m
Land and buildings 8.50
Plant and machinery 5.80
Current assets 4.30
Share capital $0.50 ordinary shares 0.60
Retained earnings 7.80
6% Irredeemable loan stock 8.00
Current liabilities 2.20

Additional information
A recent independent valuation of some of the company’s assets showed that the land and buildings
were worth $9.6m and the plant and machinery $3.2m. The current asset balance includes a receivable
of $0.3m from a company that is going to be liquidated and some inventory worth $0.4m less than its
book value.

Some research into listed companies in the retail industry shows the following:
Average PE ratio 11 times
Average dividends yield 4%
ACCA FM Trial Exam AS 2023

21. Calculate the total equity value of Jardin Co at 31 December 20X2 using the net asset basis.

A $8,400,000
B $6,200,000
C $14,300,000
D $6,800,000
Answer B
$000
Freehold land and buildings 9,600
Plant and machinery 3,200
Current assets (4.3 – 0.3 – 0.4) 3,600
16,400
Less: debt: 6% debentures (8,000)
Current liabilities (2,200)
Total equity value 6,200

22. Calculate the value per share of Jardin Co at 31 December 20X2 using dividend yield method.
Show your answer to the nearest $.

$ ____________________________

Answer: $5.21
In valuation, we may use earnings yield or PE or even dividend yield. These ratios have Po in them. If
you remember EY, DY is similar but refer to DIV.
Dividend yield = Dividend/Po
So, 3% Dividend = 250,000 or 0.25m
Po = Dividend / DY
= 0.25/0.04
Value equity = 6.25m
Value per share = 6.25/1.2 = 5.20833333 = $5.21

23. Which of the following statements is correct?

A A bonus issue can be used to raise new equity finance

B A share repurchase scheme can increase both earnings per share and gearing
C Miller and Modigliani argued that the dividend decision is more important than the
investment decision
D Shareholders usually have the power to increase dividends at annual general meetings of a
company

Answer: B
A - A bonus issue does raise funds, it will merely increase number of shares
ACCA FM Trial Exam AS 2023

B - True that EPS will rise but the gearing as a result of reduced equity can cause gearing to increase
nor reduce. In a share repurchase scheme, a company uses surplus cash to buy-back its own shares
from investors. These shares would then be cancelled, leaving fewer shares in issue and hence EPS
would tend to rise. However, the total value of equity would fall, leading to an increase in financial
gearing.
C - In dividend theory, MM argue shareholders are not concerned with dividend income or capital
gains. Value of co is based on its investment decision.
D - False shareholders may reduce but they cannot increase dividends that recommended by the
directors (Msian Guidelines - Companies Act)

24. Which of the following are possible reasons for estimating the market value of a private
company’s shares?

A To comply with International Financial Reporting Standards

B To set a guide price in an initial public offering (IPO)
C To allow the company’s return on equity to be calculated
D To set a guide price for a scrip issue of shares

Answer B
It is usually when private co wanting to go public a valuation is needed as the private co shares are not
listed thus need to make estimate to set a realistic price for the share issue.
Fin Statement records the book value or carrying amount of equity not its market value.
ROE = Net Profit/ Book value of equity
A script (bonus) issue is an issue of new shares to existing shareholders for zero consideration,
shareholders get free shares there is no need for finding out the MV. Market price is irrelevant here.

25. 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 The market does not provide enough information to make good buying and selling
decisions
B Share prices appear to follow a 'random walk'
C Share prices reflect past information
D Share prices reflect private information

Answer: B and C
That share prices fairly represent private information is a description for strongly efficient market.
In the weak form market, yes share prices seem to follow random walk.
Random walk theory is that the fact shares move because of unpredictable info both good and bad.
Shares react to this information in weak market, but it does not react quickly to NEW info. Weak-form
market efficiency reflect PAST info.
The last statement is not true about any form of efficient market.
ACCA FM Trial Exam AS 2023

Case 3: Penton Co Question 26-30

Penton Co purchases both products R and material W, with purchases of both occurring evenly
throughout the year.

Product R
The monthly demand for Product R is 30,000 units and currently inventory is ordered in quantities of
18,000 units. A delivery cost of $300 is charged by the supplier for each delivery regardless of its size.
There are no further administrative costs connected with ordering the product. The cost of holding
one unit of product R is $0.15 per year. A buffer inventory equal to 9,000 units is maintained.

Material W
The annual demand for material W is 500,000 units per year and Penton Co buys this product for $1.50
per unit on 50 days credit. The supplier has offered a discount of 1% for settlement of invoices within
15 days.

Assume there are 365 days in each year.

26. What are the CURRENT ordering and holding costs associated with the purchase of Product
R?

A Ordering cost of $6,000 and Holding cost of $6,000

B Ordering cost of $6,000 and Holding cost of $1,350
C Ordering cost of $1,350 and Holding cost of $1,350
D Ordering cost of $6,000 and Holding cost of $2,700

Answer: D
Current order cost = $300 × 360,000/18,000 = $6,000
Buffer inventory = 360,000/12 × 0.3 = 9,000
Average inventory = Q/2 + Buffer = (18,000/2 + 9,000) = 18,000
Holding cost = $0.15 × 18,000 = $2,700
Total cost = $6,000 + $2,700 = $8,700

27. What is the economic order quantity for Product R to the nearest 1,000 units?

A Zero units
B 1,000 units
C 11,000 units
D 38,000 units

Answer: D
EOQ = √(2 × $300 × 360,000/$0.15) = 37,947
ACCA FM Trial Exam AS 2023

28. Assuming that the EOQ is 25,000, what is the impact on annual ordering costs and holding
costs compared to the current situation where the order quantity is 18,000 units?

A Holding costs will go up and ordering costs will go down

B Holding costs will go up and ordering costs will go up
C Holding costs will go down and ordering costs will go up
D Holding costs will go down and ordering costs will go down

Answer: A
Holding costs go up when the order quantity goes up and ordering costs move in the
opposite direction.

29. If the early settlement discount from the supplier of material W is accepted, what will the
impact be on Penton Co’s average payables balance to the nearest $,000?

A Increase by $48,000
B Reduce by $48,000
C Increase by $72,000
D Reduce by $72,000

Answer: D
AP before discount (500 x $1.50 x 50/365) 102,700
AP after discount (500 x $1.50 x 15/365) 30,800
Fall in AP 71,900

30. Which of the following scenarios best illustrates an aggressive approach to financing working
capital?

A Long term finance used to fund all working capital

B Long term finance used to fund permanent working capital only
C Short term finance used to fund all working capital
D Short term finance used to fund fluctuating working capital only

Answer: C
An aggressive approach involves the use of more short-term capital than a matching approach.
ACCA FM Trial Exam AS 2023