de payables after 60 days. One of its suppliers has offered the company an early settlement discount of 0·5% for payment within 30 days. Administration costs will be increased by $500 per year if the early settlement discount is taken. Nesud Co buys components worth $1·5 million per year from this supplier.

From a different supplier, Nesud Co purchases $2·4 million per year of Component K at a price of $5 per component. Consumption of Component K can be assumed to be at a constant rate throughout the year. The company orders components at the start of each month in order to meet demand and the cost of placing each order is $248·44. The holding cost for Component K is $1·06 per unit per year.

The finance director of Nesud Co is concerned that approximately 1% of credit sales turn into irrecoverable debts. In addition, she has been advised that customers of the company take an average of 65 days to settle their accounts, even though Nesud Co requires settlement within 40 days.

Nesud Co finances working capital from an overdraft costing 4% per year. Assume there are 360 days in a year.

Required:

(a) Evaluate whether Nesud Co should accept the early settlement discount offered by its supplier. (4 marks)

(b) Evaluate whether Nesud Co should adopt an economic order quantity approach to ordering Component K. (6 marks)

(c) Critically discuss how Nesud Co could improve the management of its trade receivables. (10 marks)

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%

請幫忙給出每個問題的正確答案和分析，謝謝！

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

請幫忙給出每個問題的正確答案和分析，謝謝！

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

請幫忙給出每個問題的正確答案和分析，謝謝！

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

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

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

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

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

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%