The following scenario relates to questions11 to 15.The following information relates to a
The following scenario relates to questions 11 to 15.
The following information relates to an investment project which is being evaluated by the directors of Fence Co, a listed company. The initial investment, payable at the start of the first year of operation, is $3·9 million.
The directors believe that this investment project will increase shareholder wealth if it achieves a return on capital employed greater than 15%. As a matter of policy, the directors require all investment projects to be evaluated using both the payback and return on capital employed methods. Shareholders have recently criticised the directors for using these investment appraisal methods, claiming that Fence Co ought to be using the academically-preferred net present value method.
The directors have a remuneration package which includes a financial reward for achieving an annual return on capital employed greater than 15%. The remuneration package does not include a share option scheme.
What is the payback period of the investment project？
A.2·75 years
B.1·50 years
C.2·65 years
D.1·55 years
Which of the following statements about investment appraisal methods is correct？A.The return on capital employed method considers the time value of money
B.Return on capital employed must be greater than the cost of equity if a project is to be accepted
C.Riskier projects should be evaluated with longer payback periods
D.Payback period ignores the timing of cash flows within the payback period
Which of the following statements about Fence Co is/are correct？
(1) Managerial reward schemes of listed companies should encourage the achievement of stakeholder objectives
(2) Requiring investment projects to be evaluated with return on capital employed is an example of dysfunctional behaviour encouraged by performance-related pay
(3) Fence Co has an agency problem as the directors are not acting to maximise the wealth of shareholders
A.1 and 2 only
B.1 only
C.2 and 3 only
D.1, 2 and 3
Which of the following statements about Fence Co directors’ remuneration package is/are correct？
(1) Directors’ remuneration should be determined by senior executive directors
(2) Introducing a share option scheme would help bring directors’ objectives in line with shareholders’ objectives
(3) Linking financial rewards to a target return on capital employed will encourage short-term profitability and discourage capital investment
A.2 only
B.1 and 3 only
C.2 and 3 only
D.1, 2 and 3
Based on the average investment method, what is the return on capital employed of the investment project？
A.13·3%
B.26·0%
C.52·0%
D.73·5%
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AI搜題
NEW
搜題
第1題
The following scenario relates to questions 6 to 10.
Ring Co has in issue ordinary shares with a nominal value of $0·25 per share. These shares are traded on an efficient capital market. It is now 20X6 and the company has just paid a dividend of $0·450 per share. Recent dividends of the company are as follows:
Ring Co also has in issue loan notes which are redeemable in seven years’ time at their nominal value of $100 per loan note and which pay interest of 6% per year.
The finance director of Ring Co wishes to determine the value of the company.
Ring Co has a cost of equity of 10% per year and a before-tax cost of debt of 4% per year. The company pays corporation tax of 25% per year.
Using the dividend growth model, what is the market value of each ordinary share?
A.$8·59
B.$9·00
C.$9·45
D.$7·77
What is the market value of each loan note?A.$109·34
B.$112·01
C.$116·57
D.$118·68
The finance director of Ring Co has been advised to calculate the net asset value (NAV) of the company.
Which of the following formulae calculates correctly the NAV of Ring Co?
A.Total assets less current liabilities
B.Non-current assets plus net current assets
C.Non-current assets plus current assets less total liabilities
D.Non-current assets less net current assets less non-current liabilities
Which of the following statements about valuation methods is true?A.The earnings yield method multiplies earnings by the earnings yield
B.The equity market value is number of shares multiplied by share price, plus the market value of debt
C.The dividend valuation model makes the unreasonable assumption that average dividend growth is constant
D.The price/earnings ratio method divides earnings by the price/earnings ratio
Which of the following statements about capital market efficiency is/are correct?
(1) Insider information cannot be used to make abnormal gains in a strong form. efficient capital market
(2) In a weak form. efficient capital market, Ring Co’s share price reacts to new information the day after it is announced
(3) Ring Co’s share price reacts quickly and accurately to newly-released information in a semi-strong form. efficient capital market
A.1 and 2 only
B.1 and 3 only
C.3 only
D.1, 2 and 3
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第2題
The following scenario relates to questions 1 to 5.
Herd Co is based in a country whose currency is the dollar ($). The company expects to receive €1,500,000 in six months’ time from Find Co, a foreign customer. The finance director of Herd Co is concerned that the euro (€) may depreciate against the dollar before the foreign customer makes payment and she is looking at hedging the receipt.
Herd Co has in issue loan notes with a total nominal value of $4 million which can be redeemed in 10 years’ time. The interest paid on the loan notes is at a variable rate linked to LIBOR. The finance director of Herd Co believes that interest rates may increase in the near future.
The spot exchange rate is €1·543 per $1. The domestic short-term interest rate is 2% per year, while the foreign short-term interest rate is 5% per year.
What is the six-month forward exchange rate predicted by interest rate parity?
A.€1·499 per $1
B.€1·520 per $1
C.€1·566 per $1
D.€1·588 per $1
As regards the interest rate risk faced by Herd Co, which of the following statements is correct?A.In exchange for a premium, Herd Co could hedge its interest rate risk by buying interest rate options
B.Buying a floor will give Herd Co a hedge against interest rate increases
C.Herd Co can hedge its interest rate risk by buying interest rate futures now in order to sell them at a future date
D.Taking out a variable rate overdraft will allow Herd Co to hedge the interest rate risk through matching
Which of the following hedging methods will NOT be suitable for hedging the euro receipt?A.Forward exchange contract
B.Money market hedge
C.Currency futures
D.Currency swap
Which of the following statements support the finance director’s belief that the euro will depreciate against the dollar?
(1) The dollar inflation rate is greater than the euro inflation rate
(2) The dollar nominal interest rate is less than the euro nominal interest rate
A.1 only
B.2 only
C.Both 1 and 2
D.Neither 1 nor 2
As regards the euro receipt, what is the primary nature of the risk faced by Herd Co?A.Transaction risk
B.Economic risk
C.Translation risk
D.Business risk
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第3題
their nominal value of $100 per loan note. Alternatively, each loan note can be converted in five years’ time into 25 Lane Co ordinary shares.
The current share price of Lane Co is $3·60 per share and future share price growth is expected to be 5% per year.
The before-tax cost of debt of these loan notes is 10% and corporation tax is 30%. What is the current market value of a Lane Co convertible loan note?
A.$82·71
B.$73·47
C.$67·26
D.$94·20
第4題
Which of the following government actions would lead to an increase in aggregate demand?
(1) Increasing taxation and keeping government expenditure the same
(2) Decreasing taxation and increasing government expenditure
(3) Decreasing money supply
(4) Decreasing interest rates
A.1 only
B.1 and 3
C.2 and 4 only
D.2, 3 and 4
第5題
a 1 for 4 rights issue at $6 per share. Its share price on the announcement of the rights issue was $8 per share.
What is the theoretical value of a right per existing share?
A.$1·60
B.$0·40
C.$0·50
D.$1·50
第6題
Which of the following would you expect to be the responsibility of financial management?
A.Producing annual accounts
B.Producing monthly management accounts
C.Advising on investment in non-current assets
D.Deciding pay rates for staff
第7題
entory days vary throughout the year within the following range:
All purchases and sales are made on a cash basis and no inventory of raw materials or work in progress is carried. Crag Co intends to finance permanent current assets with equity and fluctuating current assets with its overdraft.
In relation to finished goods inventory and assuming a 360-day year, how much finance will be needed from the overdraft?
A.$10m
B.$17m
C.$30m
D.$40m
第8題
Peach Co’s latest results are as follows:
In addition, extracts from its latest statement of financial position are as follows:
What is Peach Co’s return on capital employed (ROCE)?
A.14%
B.18%
C.20%
D.25%
第9題
Country X uses the dollar as its currency and country Y uses the dinar.
Country X’s expected inflation rate is 5% per year, compared to 2% per year in country Y. Country Y’s nominal interest rate is 4% per year and the current spot exchange rate between the two countries is 1·5000 dinar per $1.
According to the four-way equivalence model, which of the following statements is/are true?
(1) Country X’s nominal interest rate should be 7·06% per year
(2) The future (expected) spot rate after one year should be 1·4571 dinar per $1
(3) Country X’s real interest rate should be higher than that of country Y
A.1 only
B.1 and 2 only
C.2 and 3 only
D.1, 2 and 3
第10題
tinue in perpetuity. The company has a cost of equity of 10%, a before-tax cost of debt of 5% and an after-tax weighted average cost of capital of 8% per year. Corporation tax is 20%.
What is the theoretical value of the company?
A.$20m
B.$40m
C.$50m
D.$25m
