ital to using mainly short-term variable rate finance.

Which of the following statements about the change in Pop Co’s working capital financing policy is true?

A.Finance costs will increase

B.Re-financing risk will increase

C.Interest rate risk will decrease

D.Overcapitalisation risk will decrease

owing statements is correct?

A.As risk rises, the market value of the security will fall to ensure that investors receive an increased yield

B.As risk rises, the market value of the security will fall to ensure that investors receive a reduced yield

C.As risk rises, the market value of the security will rise to ensure that investors receive an increased yield

D.As risk rises, the market value of the security will rise to ensure that investors receive a reduced yield

Andrew Co is a large listed company financed by both equity and debt.

In which of the following areas of financial management will the impact of working capital management be smallest?

A.Liquidity management

B.Interest rate management

C.Management of relationship with the bank

D.Dividend policy

The company has an issued share capital of $1m of $0·50 nominal value ordinary shares. The owners have made the following valuations of the company’s assets and liabilities.

The net realisable value of the non-current assets exceeds their book value by $4m. The current assets include $2m of accounts receivable which are thought to be irrecoverable. What is the minimum price per share which the owners should accept for the company?

A.$14

B.$25

C.$28

D.$13

t is planning to invest $4,000,000 in a new facility to convert vans and trucks into motorhomes. Each motorhome will be designed and built according to customer requirements. Degnis Co expects motorhome production and sales in the first four years of operation to be as follows.

The selling price for a motorhome depends on the van or truck which is converted, the quality of the units installed and the extent of conversion work required. Degnis Co has undertaken research into likely sales and costs of different kinds of motorhomes which could be selected by customers, as follows:

Fixed costs of the production facility are expected to depend on the volume of motorhome production as follows:

Degnis Co pays corporation tax of 28% per year, with the tax liability being settled in the year in which it arises. The company can claim tax allowable depreciation on the cost of the investment on a straight-line basis over ten years. Degnis Co evaluates investment projects using an after-tax discount rate of 11%.

Required:

(a) Calculate the expected net present value of the planned investment for the first four years of operation. (7 marks)

(b) After the fourth year of operation, Degnis Co expects to continue to produce and sell 450 motorhomes per year for the foreseeable future.

Required:

Calculate the effect on the expected net present value of the planned investment of continuing to produce and sell motorhomes beyond the first four years and comment on the financial acceptability of the planned investment. (3 marks)

(c) Critically discuss the use of probability analysis in incorporating risk into investment appraisal. (5 marks)

Dinla Co has the following capital structure.

The ordinary shares of Dinla Co are currently trading at $4·26 per share on an ex dividend basis and have a nominal value of $0·25 per share. Ordinary dividends are expected to grow in the future by 4% per year and a dividend of $0·25 per share has just been paid.

The 5% preference shares have an ex dividend market value of $0·56 per share and a nominal value of $1·00 per share. These shares are irredeemable.

The 6% loan notes of Dinla Co are currently trading at $95·45 per loan note on an ex interest basis and will be redeemed at their nominal value of $100 per loan note in five years’ time.

The bank loan has a fixed interest rate of 7% per year.

Dinla Co pays corporation tax at a rate of 25%.

Required:

(a) Calculate the after-tax weighted average cost of capital of Dinla Co on a market value basis. (8 marks)

(b) Discuss the connection between the relative costs of sources of finance and the creditor hierarchy. (3 marks)

(c) Explain the differences between Islamic finance and other conventional finance. (4 marks)

of $1,000 per loan note in eight years’ time. Alternatively, the loan notes are convertible after seven years into 110 ordinary shares of Darlga Co per loan note. The ordinary shares of Darlga Co are currently trading at $6?50 per share on an ex dividend basis. The current cost of debt of the convertible loan notes is 8%.

Required:

(a) Justifying any assumptions which you make, calculate the current market value of the loan notes of Darlga Co, using future share price increases of:

(i) 4% per year;

(ii) 6% per year. (6 marks)

(b) Discuss the limitations of the dividend growth model as a way of valuing the ordinary shares of a company. (4 marks)

are looking forward to paying less interest on the company’s debt finance. The dollar is the domestic currency of Plam Co. The company has a number of different kinds of debt finance, as follows:

The 7% loan notes were issued domestically while the 10% loan notes were issued in a foreign country.

The interest rate on the long-term bank loan is reset to bank base rate plus a fixed percentage at the end of each year. The annual payment on the bank loan consists of interest on the year-end balance plus a capital repayment.

Relevant exchange rates are as follows:

Plam Co can place pesos on deposit at 3% per year and borrow dollars at 10% per year. The company has no cash available for hedging purposes.

Required:

(a) Evaluate the risk faced by Plam Co on its peso-denominated interest payment in six months’ time and advise how this risk might be hedged. (5 marks)

(b) Identify and discuss the different kinds of interest rate risk faced by Plam Co. (5 marks)

Section A暫缺

Section B – ALL FIVE questions are compulsory and MUST be attempted

Crago Co is concerned that it may be overtrading. Financial information relating to the company is as follows.

Required:

Evaluate whether Crago can be considered to be overtrading and discuss how overtrading can be overcome.

Note: Up to 4 marks are available for calculations.

existing machine which is becoming out of date and which has no resale value. The forecast levels of production and sales for the goods produced by the new machine, which has a maximum capacity of 400,000 units per year, are as follows:

The new machine will incur fixed annual maintenance costs of $145,000 per year. Variable costs are expected to be $3·00 per unit and selling price is expected to be $5·65 per unit. These costs and selling price estimates are in current price terms and do not take account of general inflation, which is forecast to be 4·7% per year.

It is expected that the new machine will need replacing in four years’ time due to advances in technology. The resale value of the new machine is expected to be $200,000 at that time, in future value terms.

The purchase price of the new machine is payable at the start of the first year of the four-year life of the machine. Working capital investment of $150,000 will already exist at the start of the four-year period, due to the operation of the existing machine. This investment in working capital is expected to increase in nominal terms in line with the general rate of inflation.

Argnil Co pays corporation tax one year in arrears at an annual rate of 27% and can claim 25% reducing balance tax-allowable depreciation on the purchase price of the new machine. The company has a real after-tax weighted average cost of capital of 6% and a nominal after-tax weighted average cost of capital of 11%.

Required:

(a) Using a nominal terms net present value approach, evaluate whether purchasing the new machine is financially acceptable. (10 marks)

(b) Discuss the reasons why investment finance may be limited, even when a company has attractive investment opportunities available to it. (5 marks)