PAPER F9 P R A C T I C E R E V I S I O N K I T FINANCIAL MANAGEMENT FOR EXAMS IN In this January 2010 edition

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2 PAPER F9 FINANCIAL MANAGEMENT In this January 2010 edition We discuss the best strategies for revising and taking your ACCA exams We show you how to be well prepared for your exam We give you lots of great guidance on tackling questions We show you how you can build your own exams We provide you with three mock exams including the December 2009 exam We provide the ACCA examiner's answers as well as our own to the June and December 2009 exams as an additional revision aid Our i-pass product also supports this paper. P R A C T I C E & R E V I S I O N K I T FOR EXAMS IN 2010

3 First edition 2007 Fourth edition January 2010 ISBN (previous ISBN ) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA Printed in the United Kingdom All our rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd. We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions. The answers to past examination questions have been prepared by BPP Learning Media Ltd. Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests. BPP Learning Media Ltd 2010 ii

4 Contents Finding questions Question index... iv Topic index... vii Page Using your BPP Learning Media Practice and Revision Kit... viii Revising F9 General exam support from BPP Learning Media... ix Topics to revise... ix Question practice... ix Passing the F9 exam... ix Exam formulae... xi Formulae to learn... xii Exam information... xiv Useful websites... xvii Planning your question practice BPP Learning Media's question plan... xviii Build your own exams... xxii Questions and answers Questions...3 Answers...57 Exam practice Mock exam 1 Questions Plan of attack Answers Mock exam 2 Questions Plan of attack Answers Mock exam 3 (December 2009) Questions Plan of attack Answers ACCA examiner's answers June December Mathematical tables Review form & free prize draw iii

5 Question index The headings in this checklist/index indicate the main topics of questions, but questions often cover several different topics. Questions set under the old syllabus Financial Management and Control (FMC) are included because their style and content are similar to those that appear in the Paper F9 exam. Marks Time Page number allocation Mins Question Answer Part A: Financial management function 1 ABC Co RZP Co (FMC, 6/05) Part B: Financial management environment 3 Tagna (FMC, 6/03, amended) Phoenix Part C: Working capital management 5 East Meets West Co JIT and EOQ TNG Co (FMC, 6/05) PNP Co (FMC, 6/07) Thorne Co (FMC, 12/05) Velm Co (FMC, 6/03) PCB Co Special Gift Suppliers (FMC, 12/01) Ulnad Co (Pilot paper) PKA Co (12/07) FLG Co (6/08) HGR Co (6/09) Part D: Investment appraisal 17 Preparation question: Investment appraisal n/a n/a Chromex Co Preparation question: NPV with inflation and tax n/a n/a Charm Co (FMC, 6/06) Trecor Co (Pilot paper) Preparation question: Sensitivity analysis n/a n/a Umunat Co (FMC, 12/04) Duo Co (12/07) SC Co (6/08) Rupab Co (12/08) PV Co (6/09) AGD Co (FMC, 12/05) Leaminger Co (FMC, 12/02) Preparation question: Bread Products Co n/a n/a iv Finding questions

6 Marks Time Page number allocation Mins Question Answer 31 Filtrex Co Basril Co (FMC, 12/03) Part E: Business finance 33 Tirwen Co (FMC, 12/04) PG Newsam Co Arwin (FMC, 6/04) Food retailers CF Co TFR Co (FMC, 6/07) Echo Co (12/07) JJG Co (6/09) Part F: Cost of capital 42 XYZ Co D Co IML Co KJI WEB Co CAP Co FAQ Droxfol Co (Pilot paper) Burse Co (6/08) Part G: Business valuations 51 MC BST Phobis Co (12/07) THP Co (6/08) Dartig Co (12/08) KFP Co (6/09) Part H: Risk management 57 Marton Co SDT BS Nedwen Co (Pilot paper) Boluje Co (12/08) Preparation question: Interest rates n/a n/a Preparation question: QW n/a n/a Gorwa Co (12/08) Finding questions v

7 Mock exam 1 Questions 65 to 68 Mock exam 2 Questions 69 to 72 Mock exam 3 (December 2009) Questions 73 to 76 Planning your question practice Our guidance from page xviii shows you how to organise your question practice, either by attempting questions from each syllabus area or by building your own exams tackling questions as a series of practice exams. ACCA examiner s answers The ACCA examiner s answers to questions marked Pilot paper, 12/07, 6/08 or 12/08 can be found on the BPP website at the following link: Additional question guidance Additional guidance to certain questions can be found on the BPP website at the following link: Using your BPP Learning Media products This Kit gives you the question practice and guidance you need in the exam. Our other products can also help you pass: Learning to Learn Accountancy gives further valuable advice on revision Passcards provide you with clear topic summaries and exam tips Success CDs help you revise on the move i-pass CDs offer tests of knowledge against the clock You can purchase these products by visiting You can view demonstrations of i-learn and i-pass products by visiting materials. Scroll down the page until you find the sections for i-learn and i-pass and click on the appropriate 'View demo' button. vi Finding questions

8 Topic index Listed below are the key Paper F9 syllabus topics and the numbers of the questions in this Kit covering those topics. If you need to concentrate your practice and revision on certain topics or if you want to attempt all available questions that refer to a particular subject, you will find this index useful. Syllabus topic Question numbers Asset replacement decisions 30 Betas 44, 45, 46 Business valuation 51, 52, 53, 54, 55, 56, 61 Capital rationing 29, 31, 32 CAPM 26, 43, 44, 47, 48, 42 Cash management 9, 11, 13, 16, 38 Cash operating cycle 5, 8, 15 Competition policy 3, 18 Convertible loan notes 34, 35, 46, 53 Cost of capital 42, 43, 46, 50, 56 Corporate governance 1 Dividend policy 37, 40 EOQ 6, 7, 14, 15 Exchange rate risk 8, 14, 57, 58, 59, 60, 61 Financial intermediaries 4 Gearing 35, 36, 43, 49, 56 Inflation 5, 19, 60 Interest rate risk 62, 63 Interest rates 3, 62, 64 Inventory management 6, 7, 14 Investment appraisal 17, 18, 19, 20, 21, 22, 23, 26, 27 IRR 17, 20, 21, 24, 25, 27 Leasing 28, 40 Managerial reward schemes 2, 55 NPV 17, Objectives 1, 14, 41 Overtrading 11, 64 Payback 17, 18, 23, 27 Pecking order 48, 56, 61 Project-specific discount rate 48 Ratio analysis 1, 2, 4, 15, 18, 33, 34, 35, 36, 37, 41, 45, 49 Receivables management 8, 10, 12, 14, 15,16, 57, 64 Rights issue 33, 34, 40, 41, 54, 55 Risk and uncertainty 24 Risk/return trade-off 4 Sensitivity analysis 22, 23 Shareholder wealth maximisation 1, 3, 25, 41 SME's 38, 39 Sources of finance 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 46, 54, 61 Stock market efficiency 44, 53, 54 Total shareholder return 1, 2 Value for money 3 Venture capital 38 WACC 26, 42, 43, 45, 46, 47, 48, 49, 50, 56 Working capital financing 5, 9, 10, 11, 12, 13, 15, 16, 29 Working capital management 5-16 Finding questions vii

9 Using your BPP Learning Media Practice and Revision Kit Tackling revision and the exam You can significantly improve your chances of passing by tackling revision and the exam in the right ways. Our advice is based on feedback from ACCA examiners. We look at the dos and don ts of revising for, and taking, ACCA exams We focus on Paper F9; we discuss revising the syllabus, what to do (and what not to do) in the exam, how to approach different types of question and ways of obtaining easy marks Selecting questions We provide signposts to help you plan your revision. A full question index A topic index listing all the questions that cover key topics, so that you can locate the questions that provide practice on these topics, and see the different ways in which they might be examined BPP's question plan highlighting the most important questions and explaining why you should attempt them Build your own exams, showing how you can practise questions in a series of exams Making the most of question practice At BPP Learning Media we realise that you need more than just questions and model answers to get the most from your question practice. Our Top tips included for certain questions provide essential advice on tackling questions, presenting answers and the key points that answers need to include We show you how you can pick up Easy marks on some questions, as we know that picking up all readily available marks often can make the difference between passing and failing We include marking guides to show you what the examiner rewards We include examiners comments to show you where students struggled or performed well in the actual exam We refer to the 2009 BPP Study Text (for exams in December 2009 and June 2010) for detailed coverage of the topics covered in questions In a bank at the end of this Kit we include the examiner's answers to the June and December 2009 papers. Used in conjunction with our answers they provide an indication of all possible points that could be made, issues that could be covered and approaches to adopt. Attempting mock exams There are three mock exams that provide practice at coping with the pressures of the exam day. We strongly recommend that you attempt them under exam conditions. Mock exams 1 and 2 reflect the question styles and syllabus coverage of the exam; Mock exam 3 is the December 2009 paper. viii Using your BPP Learning Media Practice and Revision Kit

10 Revising F9 General exam support from BPP Learning Media BPP Learning Media is committed to giving you the best possible support in your quest for exam success. With this in mind, we have produced guidance on how to revise and techniques you can apply to improve your chances of passing the exam. This guidance can be found on the BPP Learning Media web site at the following link: A paper copy of this guidance is available by ing learningmedia@bpp.com As well as written guidance, an excellent presentation entitled Exam technique advice from the experts at BPP Learning Media is available at the following link: Topics to revise The exam consists of four questions, all of which are compulsory. No one section in the syllabus is more important than another so there are no short-cuts. You will have to be able to answer questions on the entire syllabus. Question practice You need to practise exam standard and exam style questions on a regular basis. As you get closer to the exam, try to do complete questions in 45 minutes so that you are able to work at an appropriate speed. Make sure you practise written sections as well as the calculations. Passing the F9 exam Displaying the right qualities The aim of Paper F9 is to develop the knowledge and skills expected of a finance manager in relation to investment, financing and dividend decisions. You need to be able to communicate your understanding clearly in an exam context. Calculations and discussions are equally important so do not concentrate on the numbers and ignore the written parts. You need to be able to: Discuss the role and purpose of the financial management function Assess and discuss the impact of the economic environment on financial management Discuss and apply working capital management techniques Carry out effective investment appraisal Identify and evaluate alternative sources of business finance Explain and calculate cost of capital and the factors that affect it Explain and apply risk management techniques in business Avoiding weaknesses Do not avoid any syllabus areas, they are all equally examinable. Make sure you can discuss techniques as well as apply them, you will not pass this exam with calculations alone. Plan your answers to ensure you do not run out of time and miss out on easy marks. Revisung F9 ix

11 Using the reading time You will have 15 minutes reading time for Paper F9. Here are some helpful tips on how best to utilise this time. Speed read through the question paper, jotting down any ideas that come to you about any of the questions. Decide the order which you're likely to tackle the questions (probably easiest questions first, most difficult questions last). Spend the remainder of the reading time reading the question(s) you will do first in detail, jotting down proformas and plans (any proformas or plans written on the question paper should be reproduced in the answer booklet). When you can start writing, get straight on with the question(s) you have planned in detail. If you have looked at all the questions during the reading time, this should hopefully mean that you will find it easier to answer the more difficult questions when you come to them, as you will have been generating ideas and remembering facts while answering the easier questions. Choosing which questions to answer first You can use the planning time in the exam to choose the order in which to attempt the questions. You may prefer to attempt the questions that you are more confident about first. However, make sure you watch the time carefully and do not spend too long on any one question. Alternatively, you could answer the questions in strict order. This will force you to spend an equal time on each question but make sure you leave plenty of space if you decide to move on and finish a question later. Tackling questions Write a short plan for each question containing bullet points per mark and use it to write your answer when the writing time begins. If you get stuck, make an assumption, write it down and move on. Make sure your answers are focused and specific to the organisation in the question. Show clear workings for your calculations and write full sentences in your explanations. Never overrun on any question and once the 45 minutes is up, move on to the next. Gaining the easy marks Easy marks in this paper tend to fall into two categories. Calculations The calculations within a question will get progressively harder and easy marks will be available in the easy stages. Set our your calculations clearly and show all your workings in a clear format. Use a proforma, for example in complex NPV questions and slot the simpler figures into the proforma straight away before you concentrate on the figures that need a lot of adjustment. Discussions Discussions that are focused on the specific organisation in the question will gain more marks than regurgitation of knowledge. Read the question carefully and more than once, to ensure you are actually answering the specific requirements. Pick out key words such as 'describe', 'evaluate' and 'discuss'. These all mean something specific: 'Describe' means to communicate the key features of; 'Evaluate' means to assess the value of; 'Discuss' means to examine in detail by argument. Clearly label the points you make in discussions so that the marker can identify them all rather than getting lost in the detail. Provide answers in the form requested, particularly using report format if asked for and giving recommendations if required. x Revising F9

12 Exam formulae Set out below are the formulae which you will be given in the exam, and formulae which you should learn. If you are not sure what the symbols mean, or how the formulae are used, you should refer to the appropriate chapter in this Study Text Exam formulae Chapter in Study Text Economic Order Quantity 5 = 2C0D CH Miller-Orr Model 6 Return point = Lower limit + (1/3 spread) Spread = transaction cost variance of cash flows 4 interest rate The Capital Asset Pricing Model 15 E(r i ) = R f + ß i (E (r m ) R f ) The Asset Beta Formula 16 ß a = Ve e (Ve V d(1t)) V(1 + d T) d (Ve V d(1t)) The Growth Model 17 D(1 P 0 = 0 g) (Ke g) D(1 or P 0 = 0 g) (re g) Gordon s Growth Approximation 17 g = br e The weighted average cost of capital 15 WACC = Ve Ve Vd k e + Vd Ve Vd k d (1 T) The Fisher formula 19 (1 + i) = (1 + r)(1 + h) Purchasing Power Parity and Interest Rate Parity (1 h S 1 = S 0 c) (1 h b) (1 i F 0 = S 0 c) (1 i b) Revisung F9 xi

13 Formulae to learn Profitability ratios include: ROCE = Profit from operations % Capital employed ROCE = Profit from operations Revenue Revenue Capital employed Debt ratios include: Profit margin Asset turnover Gearing = Book value of debt Book value of equity Interest coverage = Liquidity ratios include: Profit from operations Interest Current ratio = Current assets : Current liabilities Acid Test ratio = Current assets : Current liabilities (less inventory) Shareholder investor ratios include: Dividend per share Dividend yield = 100 Market price per share Earnings per share = Price-earnings ratio = Profits distributable to ordinary shareholders Number of ordinary shares issued Market price per share EPS Av. collection period Inventory days Receivables (credit) sales 365 days (a) Finished goods: Finishedgoods Cost of sales 365 days (b) WIP: WIP Cost of production 365 days (c) Raw material: Raw material Raw materialpurchases 365 days Av. payables period Payables (credit)purchases 365 days IRR = a + NPV a NPV - NPV a b (b a) Equivalent annual cost = NPV of costs Annuity factor for the life of the project xii Revising F9

14 Cost of equity = K e Cost of debt = K d = D 1 g P 0 i( 1 T) P 0 Cost of preference shares = K pref = Preference Dividend Market Value (ex div) = d P 0 Profitability index = NPV of cashinflows Cash outflow Revisung F9 xiii

15 Exam information The exam is a three-hour paper containing four compulsory 25 mark questions. There will be a mixture of calculations and discussion and the examiner's aim is to cover as much of the syllabus as possible. Additional information The Study Guide provides more detailed guidance on the syllabus. December Lease or buy; NPV; investment decisions 2 Cost of debt; CAPM; WACC; dividend growth model; dividend policy 3 Ex rights price; EPS; transaction and translation risk; exchange rate hedging 4 Role financial intermediaries; forecast financial statements; working capital policy and management This paper is Mock Exam 3 this Kit June 2009 Questions in this Kit 1 Weighted average cost of capital; business valuation; capital structure and the WACC 56 2 Capital investment decision making process: investment appraisal 27 3 Working capital financing strategy; forecast cash flow; foreign receivables management 16 4 Financial performance analysis; rights issue; sources of finance 41 Examiner's comments. This examination paper covered many syllabus areas and candidates who had omitted some parts of the syllabus from their study may have found it difficult as a consequence. December 2008 Questions in this Kit 1 Rights issues; business valuation; agency problem 55 2 Interest rate risk; overtrading; factoring 64 3 WACC; investment appraisal; CAPM 26 4 Debt finance; debt valuation; exchange rate risk 61 Examiner's comments. The examination paper was seen to have a good balance between calculation and discussion, as well as a good coverage of the syllabus. Unsuccessful candidates may have prepared poorly for the examination. This examination paper covered many areas of the syllabus and tended to be difficult for candidates who had omitted some sections of the syllabus from their study. Most answers were reasonably well presented, with very few scripts being drawn to the examiner s attention as difficult to read or difficult to follow. xiv Revising F9

16 June Weighted average cost of capital: Calculation; discussion; comparison of CAPM with divided growth model 2 Business valuation: Dividend growth model calculation; rights issue pricing; P/E ratio method; EMH; debt v equity finance 3 Working capital: Discussion of level of investment; accounts receivable management; calculation using ratios; EOQ 4 Investment appraisal: Calculations of NPV and IRR; discussion of acceptability and limitations; shareholder wealth maximisation Questions in this Kit Examiner's comments. Where candidates did not reach a pass standard, the main reason was a lack of preparation or a lack of understanding. Students should remember that all parts of the syllabus are examinable and producing answers with very little discussion is unwise. It is good exam practice to present answers clearly as this helps the marker. December 2007 Questions in this Kit 1 Business valuation; convertible bond valuation; efficient market hypothesis 53 2 Investment appraisal: Calculations of NPV and IRR; risk and uncertainty 24 3 Sources of finance: Dividend policy; debt finance; rights issue; operating lease 40 4 Working capital management: Objectives; EOQ; accounts receivable; hedging payables 14 Examiner's comments. There was little evidence of any time pressure and some candidates scored very high marks. Failure to pass the exam appeared generally to be associated with a lack of preparation and revision, with some candidates producing very short answers, or answers with some calculations but with very little discussion. It was good to see many candidates providing clearly labelled workings and well laid-out calculations in their answers. Pilot paper Questions in this Kit 1 Weighted average cost of capital: Calculation; discussion; ratio analysis 49 2 Foreign currency: Risk; forecasts; forward market; money market hedge; futures contract 3 Working capital: Evaluation of credit policy; Miller-Orr; accounts receivable management; funding policy 4 Investment appraisal: Calculations of NPV and ROCE; strengths and weaknesses of IRR Revisung F9 xv

17 Analysis of past papers The table below provides details of when each element of the syllabus has been examined and the question number and section in which each element appeared Covered in Text chapter FINANCIAL MANAGEMENT FUNCTION 1 Nature & purpose Dec 2009 June Objectives 3a,b 4a 1 Stakeholders 1e FINANCIAL MANAGEMENT ENVIRONMENT 2 Economic environment 3 Financial markets and institutions 4a WORKING CAPITAL MANAGEMENT Dec 2008 June , 5 Management 4b,d 3c 2b,c 3a,b, c,d Dec Funding strategies 4c 3a,b 3d INVESTMENT APPRAISAL 7 Non-discounted cash flow techniques 2a,b 4b 8, 9 Discounted cash flow techniques 1a, b 2b,c 3b 1b, 4a,b, c, d 10 Risk and uncertainty 2c 11 Specific investment decisions 1d,2b BUSINESS FINANCE 12 Sources of short-term finance 4a 3d 12 Sources of long term-finance 4b,c 1a,4a 2b,e 3b,c 13 Dividend policy 2d 3a 14 Finance for SMEs COST OF CAPITAL 15 Calculation 2a,b,c 1a 3a 1a,c 1a 16 Gearing (capital structure) 1c 3c 1b,c BUSINESS VALUATIONS 17 Valuation of shares 1b 1b,c,d 2a,c 1a 17 Valuation of debt 4b 1b 18 Efficient market hypothesis / practical considerations 2d 1c RISK MANAGEMENT 19 Causes of interest rate / exchange rate fluctuations 3c 19 Hedging foreign currency risk 3d 4c,d 2b 4a,b,c 2a,b Pilot Paper 20 Hedging interest rate risk 2a 4d 2a,c,d 3a,b,c 4a,c xvi Revising F9

18 Useful websites The websites below provide additional sources of information of relevance to your studies for Financial Management. ACCA's website. Includes student section. Our website provides information about BPP products and services, with a link to the ACCA website. This website provides information about current international business. You can search for information and articles on specific industry groups as well as individual companies. Here you can search for business information on a week-by-week basis, search articles by business subject and use the resources of the Economist Intelligence Unit to research sectors, companies or countries. This site carries business news and articles on markets from Investment Week and International Investment. The PricewaterhouseCoopers website includes UK Economic Outlook The website of the BBC carries general business information as well as programme-related content. Revisung F9 xvii

19 Planning your question practice We have already stressed that question practice should be right at the centre of your revision. Whilst you will spend some time looking at your notes and Paper F9 Passcards, you should spend the majority of your revision time practising questions. We recommend two ways in which you can practise questions. Use BPP's question plan to work systematically through the syllabus and attempt key and other questions on a section-by-section basis Build your own exams attempt questions as a series of practice exams These ways are suggestions and simply following them is no guarantee of success. You or your college may prefer an alternative but equally valid approach. BPP's question plan The BPP plan below requires you to devote a minimum of 40 hours to revision of Paper F9. Any time you can spend over and above this should only increase your chances of success. Step 1 Step 2 Step 3 Step 4 Review your notes and the chapter summaries in the Paper F9 Passcards for each section of the syllabus. Answer the key questions for that section. These questions have boxes round the question number in the table below and you should answer them in full. Even if you are short of time you must attempt these questions if you want to pass the exam. You should complete your answers without referring to our solutions. Attempt the other questions in that section. For some questions we have suggested that you prepare answer plans or do the calculations rather than full solutions. Planning an answer means that you should spend about 30% of the time allowance for the questions brainstorming the question and drawing up a list of points to be included in the answer. Attempt Mock exams 1, 2 and 3 under strict exam conditions. xviii Planning your question practice

20 Syllabus section Revision period 1 Financial management Revision period 2 Working capital management Inventory management 2009 Passcards chapters Questions in this Kit Comments Answer in full. This straightforward question shows how ratio calculations can be combined with discussion. 2 Answer in full. More valuable practice at combining ratios with discussion. 3 Prepare an answer plan as this question covers a number of important areas. 4 5 Do the calculations and prepare an answer plan for the discussion parts. 5 7 Do the calculations and prepare an answer plan for the discussion parts. 8 Do the calculations and prepare an answer plan for the discussion parts. Revision period 3 Cash management 6 13 Answer in full. This is the working capital management question from the Pilot Paper. 15 Answer in full. This is the working capital management question from December Answer in full. This is the working capital management question from June Answer in full. This is the working capital management question from June Revision period 4 Investment appraisal Do this question if you feel you need practice at basic investment appraisal techniques. 19 Do this question if you feel you need practice at NPV techniques. 23 Answer in full. This question tests your knowledge of risk appraisal. 24 Answer in full. The investment appraisal question from December Answer in full. The investment appraisal question from June Answer in full. The investment appraisal question from December Done Planning your question practice xix

21 Syllabus section Revision period 5 Specific investment decisions 2009 Passcards chapters Questions in this Kit Comments Answer in full. A classic lease v buy question. 29 Answer in full. Another leasing question to practise which also covers capital rationing. 30 Answer in full. This question provides practice at asset replacement calculations and also a detailed discussion on the limitations of NPV. 32 Answer in full. A good test of your knowledge of capital rationing combing calculations and discussion. Revision period 6 Sources of finance Answer this Paper 2.4 question in full. It provides good practice of some important calculations. 34 Answer in full. This question covers a wide range of calculations from this area of the syllabus. 36 Answer in full. This question gives you valuable practice at doing ratio calculations and understanding their meaning. Revision period 7 Sources of finance Do the calculations and prepare answer plans for the written sections of this wide ranging sources of finance question. 35 Answer in full. The question covers a range of syllabus areas and would be very useful to do under timed conditions. 40 Answer in full. The sources of finance question from December Answer in full. The sources of finance question from June Done xx Planning your question practice

22 Syllabus section 2009 Passcards chapters Questions in this Kit Comments Done Revision period 8 Cost of capital Do the calculations in parts (a) and (b) as they are essential techniques. Prepare answer plans for parts (c) and (d). 43 Answer in full. This question gives you practice at these essential calculations as well as 13 marks for explanations. 44 Do the CAPM calculations in parts (a) and (b). 46 Answer in full. This question provides practice in a number of areas of the syllabus and shows they can be linked into one question. Revision period 9 Cost of capital Answer in full. A good test of various aspects of CAPM. 48 Answer in full. A good test of your understanding of CAPM and projectspecific discount rates. 49 Answer in full. This is the cost of capital question from the Pilot Paper. 50 Answer in full. The cost of capital question from June Revision period 10 Business valuations Answer in full. This is a classic business valuation question which is combined with sources of finance. 52 Do the calculations in part (a), prepare brief notes on parts (b) and prepare a full answer for part (c) on how share markets work. Revision period 11 Business valuations Answer in full. The business valuation question from December Answer in full. The business valuation question from June Answer in full. The business valuation question from December Answer in full. The business valuation question from June Planning your question practice xxi

23 Syllabus section 2009 Passcards chapters Questions in this Kit Comments Done Revision period 12 Exchange rate risk management Answer in full. This question tests your knowledge of foreign currency risk as well as working capital management. 58 Answer in full. An excellent test of various aspects of foreign currency risk management. 59 Do the calculations in parts (a) and prepare answer plans for the written parts of the question. 60 This is the risk management question from the Pilot Paper. 61 Answer in full. A wide ranging question from December Revision period 13 Interest rates Answer in full. This question gives you practice at explaining various aspects of interest rates. 563 Answer in full. A discussion question covering a range of interest rate topics. 564 Answer in full. A wide ranging question from December Build your own exams Having revised your notes and the BPP Passcards, you can attempt the questions in the Kit as a series of practice exams. Practice exams Whichever practice exams you use, you must attempt Mock exams 1, 2 and 3 at the end of your revision. xxii Planning your question practice

24 Questions 1

25 ACCA examiner's answers The ACCA examiner's answers to questions marked 'Pilot paper', '12/07', 6/08 or 12/08 or, can be found on the BPP website at the following link: Additional question guidance Additional guidance to certain questions can be found on the BPP website at the following link: 2

26 FINANCIAL MANAGEMENT FUNCTION Questions 1 and 2 cover Financial Management Function, the subject of Part A of the BPP Study Text for Paper F9. 1 ABC Co 45 mins Summary financial information for ABC Co is given below, covering the last two years. Current year Previous year Revenue 74,521 68,000 Cost of sales 28,256 25,772 Salaries and wages 20,027 19,562 Other costs 11,489 9,160 Profit before interest and tax 14,749 13,506 Interest 1,553 1,863 Tax 4,347 3,726 Profit after interest and tax 8,849 7,917 Dividends payable 4,800 3,100 Shareholders funds 39,900 35,087 Long term debt 14,000 17,500 Number of shares in issue ( 000) 14,000 14,000 P/E ratio (average for year) ABC Co Industry Required (a) (b) (c) Using profitability, debt, and shareholders investment ratios, discuss the performance of ABC Co over the last two years. (12 marks) Explain why how accounting profits may not be the best measure of a company s achievements. (5 marks) Discuss how good corporate governance procedures can help to manage under-performance in private sector companies. (8 marks) (Total = 25 marks) Questions 3

27 2 RZP Co (FMC, 6/05) 45 mins As assistant to the Finance Director of RZP Co, a company that has been listed on the London Stock Market for several years, you are reviewing the draft Annual Report of the company, which contains the following statement made by the chairman: 'This company has consistently delivered above-average performance in fulfilment of our declared objective of creating value for our shareholders. Apart from 20X2, when our overall performance was hampered by a general market downturn, this company has delivered growth in dividends, earnings and ordinary share price. Our shareholders can rest assured that my directors and I will continue to deliver this performance in the future'. The five-year summary in the draft Annual Report contains the following information: Year 20X4 20X3 20X2 20X1 20X0 Dividend per share 2.8p 2.3p 2.2p 2.2p 1.7p Earnings per share 19.04p 14.95p 11.22p 15.84p 13.43p Price/earnings ratio General price index A recent article in the financial press reported the following information for the last five years for the business sector within which RZP Co operates: Share price growth average increase per year of 20% Earnings growth average increase per year of 10% Nominal dividend growth average increase per year of 10% Real dividend growth average increase per year of 9% You may assume that the number of shares issued by RZP Co has been constant over the five-year period. All price/earnings ratios are based on end-of-year share prices. Required (a) (b) (c) Analyse the information provided and comment on the views expressed by the chairman in terms of: (i) (ii) (iii) growth in dividends per share; share price growth; growth in earnings per share. Your analysis should consider both arithmetic mean and equivalent annual growth rates. (13 marks) Calculate the total shareholder return (dividend yield plus capital growth) for 20X4 and comment on your findings. (3 marks) Discuss the factors that should be considered when deciding on a management remuneration package that will encourage the directors of RZP Co to maximise the wealth of shareholders, giving examples of management remuneration packages that might be appropriate for RZP Co. (9 marks) (Total = 25 marks) 4 Questions

28 FINANCIAL MANAGEMENT ENVIRONMENT Questions 3 and 4 cover Financial Management Environment, the subject of Part B of the BPP Study Text for Paper F9. 3 Tagna (FMC, 6/03, amended) 45 mins 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 turnover 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 year fixed interest bank loan 2.0 Share capital and reserves Tagna has the agreement of its existing shareholders to make a new issue of shares on the stock market but has been informed by its bank that current circumstances are unsuitable. The bank has stated that if new shares were to be issued now they would be significantly under-priced by the stock market, causing Tagna to issue many more shares than necessary in order to raise the amount of finance it requires. The bank recommends that the company waits for at least six months before issuing new shares, by which time it expects the stock market to have become strong-form efficient. 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 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 (a) (b) (c) On the assumption that the Central Bank makes a substantial interest rate increase, discuss the possible consequences for Tagna in the following areas: (i) sales; (ii) operating costs; and, (iii) earnings (profit after tax). (10 marks) Explain and compare the public sector objective of 'value for money' and the private sector objective of 'maximisation of shareholder wealth'. (6 marks) Outline the economic problems caused by monopoly and explain the role of government in maintaining competition between companies. (9 marks) (Total = 25 marks) Questions 5

29 4 Phoenix 45 mins Phoenix has carried on business for a number of years as a retailer of a wide variety of consumer products and it operates from a number of stores. In recent years the entity has found it necessary to provide credit facilities to its customers in order to maintain growth in revenue. As a result of this decision the liability to its bankers has increased substantially. Extracts from the financial statements for the year are provided below. INCOME STATEMENTS FOR THE YEARS ENDED 30 JUNE 20X7 20X8 20X9 $m $m $m Revenue 1,850 2,200 2,500 Cost of sales (1,250) (1,500) (1,750) Gross profit Other operating costs (550) (640) (700) Profit from operations Interest from credit sales Interest payable (25) (60) (110) Profit before taxation Income tax expense (23) (20) (10) Profit for the year STATEMENTS OF FINANCIAL POSITION AT 30 JUNE 20X7 20X8 20X9 $m $m $m Property, plant and equipment Inventories Trade receivables Cash ,182 1,392 1,590 Share capital Reserves Bank loans Other interest bearing borrowings Trade payables Tax payable ,182 1,392 1,590 Other information Depreciation charged for the three years in question was as follows. Year ended 30 June 20X7 20X8 20X9 $m $m $m The other interest bearing borrowings are secured by a floating charge over the assets of Phoenix. Their repayment is due on 30 June 20Y9. The bank loans are unsecured. The maximum lending facility the bank will provide is $630m. Over the past three years the level of credit sales has been: Year ended 30 June 20X7 20X8 20X9 $m $m $m The entity offers extended credit terms for certain products to maintain market share in a highly competitive environment. 6 Questions

30 Given the steady increase in the level of bank loans which has taken place in recent years, the entity has recently written to its bankers to request an increase in the lending facility. The bank is concerned at the steep escalation in the level of the loans and has requested an urgent meeting. Required (a) (b) (c) Using suitable ratios, analyse the information provided and recommend what action should be taken. (12 marks) Explain what is meant by the risk/return trade-off and its relevance to the bank in assessing the request for further loan finance. (5 marks) A bank is an example of a financial intermediary. Explain the role of financial intermediaries and their usefulness to the private investor. (8 marks) (Total = 25 marks) Questions 7

31 WORKING CAPITAL MANAGEMENT Questions 5 to 16 cover Working Capital Management, the subject of Part C of the BPP Study Text for Paper F9. 5 East Meets West Co 45 mins You are an accounting technician working at East Meets West Co, a company that manufactures and distributes clothing. You have estimated the following figures for the coming year: Sales $5,600,000 Average receivables $506,000 Gross profit margin 25% on sales Average inventories Finished goods $350,000 Work in progress $550,000 Raw materials $220,000 Average payables $210,000 Material costs represent 50% of the total cost of sales. East Meets West Co imports most of its materials from overseas countries, especially Pernisia. The high inflation rates in Pernisia have meant that the company's cost of materials has risen rapidly over recent years. This has led to a significant deterioration in the company's margins, which, coupled with its increasing liquidity problems, is making the shareholders nervous. Required (a) Calculate the cash operating cycle, to the nearest day. (6 marks) (b) Suggest four methods of reducing the length of the cash operating cycle. (4 marks) (c) Discuss: (i) The significance of trade payables in a firm's working capital cycle; and (4 marks) (ii) The dangers of over-reliance on trade credit as a source of finance. (4 marks) (d) Explain the general problems associated with inflation. (7 marks) (Total = 25 marks) 6 JIT and EOQ 45 mins PS Co has an opportunity to engage in a just-in-time stock delivery arrangement with its main customer, which normally takes 90 days to settle accounts with PS Co. The customer accounts for 20% of PS Co's annual turnover of $20 million. This involves borrowing $0.5m on overdraft to invest in dedicated handling and transport equipment. This would be depreciated over five years on a straight-line basis. The customer is uninterested in the early payment discount but would be prepared to settle after 60 days and to pay a premium of 5% over the present price in exchange for guarantees regarding product quality and delivery. PS Co judges the probability of failing to meet these guarantees in any one year at 5%. Failure would trigger a penalty payment of 10% of the value of total sales to this customer (including the premium). PS Co borrows from the bank at 13%. Required (a) Calculate the improvement in profits before tax to be expected in the first trading year after entering into the JIT arrangement. Comment on your results. (8 marks) (b) Suggest the benefits PS Co might expect to derive from a JIT agreement in addition to the benefits specified in the question. (6 marks) (c) SP Co purchases many hundreds of components each year from external suppliers for assembling into products. It uses 40,000 units pa of one particular component. It is considering converting its purchasing, delivery and stock control of this item to a just-in-time system. This will raise the number of orders placed 8 Questions

32 but lower the administrative and other costs of placing and receiving orders. If successful, this will provide the model for switching most of its inwards supplies on to this system. Details of actual and expected ordering and carrying costs are given in the table below. Actual Proposed Ordering cost per order (O) $100 $25 Purchase cost per item (P) $2.50 $2.50 Inventory holding cost (as a percentage of the purchase cost) (I) 20% 20% To implement the new arrangements will require 'one-off' reorganisation costs estimated at $4,000 which will be treated as a revenue item for tax purposes. The rate of corporation tax is 30% and SP can obtain finance at 12%. The effective life span of the new system can be assumed to be eight years. Required (i) Determine the effect of the new system on the Economic Order Quantity (EOQ). (ii) Determine whether the new system is worthwhile in financial terms. Note. EOQ is given by EOQ = 2C D 0. (11 marks) C H (Total = 25 marks) 7 TNG Co (FMC, 6/05) 45 mins TNG Co expects annual demand for product X to be 255,380 units. Product X has a selling price of $19 per unit and is purchased for $11 per unit from a supplier, MKR Co. TNG places an order for 50,000 units of product X at regular intervals throughout the year. Because the demand for product X is to some degree uncertain, TNG maintains a safety (buffer) inventory of product X which is sufficient to meet demand for 28 working days. The cost of placing an order is $25 and the storage cost for Product X is 10 cents per unit per year. TNG normally pays trade suppliers after 60 days but MKR has offered a discount of 1% for cash settlement within 20 days. TNG Co has a short-term cost of debt of 8% and uses a working year consisting of 365 days. Required (a) (b) Calculate the annual cost of the current ordering policy. Ignore financing costs in this part of the question. (4 marks) Calculate the annual saving if the economic order quantity model is used to determine an optimal ordering policy. Ignore financing costs in this part of the question. (5 marks) (c) Determine whether the discount offered by the supplier is financially acceptable to TNG Co. (4 marks) (d) (e) Critically discuss the limitations of the Economic Order Quantity model as a way of managing inventory. (4 marks) Discuss the advantages and disadvantages of using just-in-time inventory management methods. (8 marks) (Total = 25 marks) Questions 9

33 8 PNP Co (FMC, 6/07) 45 mins The following financial information relates to PNP Co for the year just ended: 000 Turnover 5,242.0 Variable cost of sales 3,145 0 Inventory Receivables Payables Segmental analysis of receivables Balance Average payment period Discount Bad debts Class 1 200, days 1 0% none Class 2 252, days nil 12,600 Class 3 110, days nil 11,000 Overseas receivables 182, days nil 21, ,500 45,500 The receivable balances given are before taking account of bad debts. All sales are on credit. Production and sales take place evenly throughout the year. Current sales for each class of receivables are in proportion to their relative year-end balances before bad debts. The overseas receivables arise from regular export sales by PNP to the USA. The current spot rate is $1 7348/ and the three-month forward rate is $1 7367/. It has been proposed that the discount for early payment be increased from 1 0% to 1 5% for settlement within 30 days. It is expected that this will lead to 50% of existing Class 2 receivables becoming Class 1 receivables, as well as attracting new business worth 500,000 in turnover. The new business would be divided equally between Class 1 and Class 2 receivables. Fixed costs would not increase as a result of introducing the discount or by attracting new business. PNP finances receivables from an overdraft at an annual interest rate of 8%. Required (a) (b) (c) (d) Calculate the net benefit or cost of increasing the discount for early payment and comment on the acceptability of the proposal. (9 marks) Calculate the current cash operating cycle and the revised cash operating cycle caused by increasing the discount for early payment. (4 marks) Determine the effect of using a forward market hedge to manage the exchange rate risk of the outstanding overseas receivables. (2 marks) Identify and explain the key elements of a receivables management system suitable for PNP Co. (10 marks) (Total = 25 marks) 9 Thorne Co (FMC, 12/05) 45 mins Thorne Co values, advertises and sells residential property on behalf of its customers. The company has been in business for only a short time and is preparing a cash budget for the first four months of 20X6. Expected sales of residential properties are as follows. 20X5 20X6 20X6 20X6 20X6 Month December January February March April Units sold The average price of each property is $180,000 and Thorne Co charges a fee of 3% of the value of each property sold. Thorne Co receives 1% in the month of sale and the remaining 2% in the month after sale. The company has nine employees who are paid on a monthly basis. The average salary per employee is $35,000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of $140 for each additional property sold. 10 Questions

34 Variable expenses are incurred at the rate of 0.5% of the value of each property sold and these expenses are paid in the month of sale. Fixed overheads of $4,300 per month are paid in the month in which they arise. Thorne Co pays interest every three months on a loan of $200,000 at a rate of 6% per year. The last interest payment in each year is paid in December. An outstanding tax liability of $95,800 is due to be paid in April. In the same month Thorne Co intends to dispose of surplus vehicles, with a net book value of $15,000, for $20,000. The cash balance at the start of January 20X6 is expected to be a deficit of $40,000. Required (a) (b) (c) (d) Prepare a monthly cash budget for the period from January to April 20X6. Your budget must clearly indicate each item of income and expenditure, and the opening and closing monthly cash balances. (10 marks) Discuss the factors to be considered by Thorne Co when planning ways to invest any cash surplus forecast by its cash budgets. (5 marks) Discuss the advantages and disadvantages to Thorne Co of using overdraft finance to fund any cash shortages forecast by its cash budgets. (5 marks) Explain how the Baumol model can be employed to reduce the costs of cash management and discuss whether the Baumol cash management model may be of assistance to Thorne Co for this purpose. (5 marks) (Total = 25 marks) 10 Velm Co (FMC, 6/03) 45 mins Velm Co sells stationery and office supplies on a wholesale basis and has an annual turnover of $4,000,000. The company employs four people in its sales ledger and credit control department at an annual salary of $12,000 each. All sales are on 40 days' credit with no discount for early payment. Bad debts represent 3% of turnover and Velm Co pays annual interest of 9% on its overdraft. The most recent accounts of the company offer the following financial information: Velm Co: Statement of Financial Position as at 31 December 20X2 $'000 $'000 Non-current assets 17,500 Current assets Inventory of goods for resale 900 Receivables 550 Cash 120 1,570 19,070 Equity and liabilities Ordinary shares 3,500 Reserves 11,640 15,140 Non-current liabilities 12% Debenture due 20Y0 2,400 Current liabilities Trade payables 330 Overdraft 1,200 1,530 19,070 Velm Co is considering offering a discount of 1% to customers paying within 14 days, which it believes will reduce bad debts to 2.4% of turnover. The company also expects that offering a discount for early payment will reduce the average credit period taken by its customers to 26 days. The consequent reduction in the time spent chasing customers where payments are overdue will allow one member of the credit control team to take early retirement. Two-thirds of customers are expected to take advantage of the discount. Questions 11