ACCA F MCQs Practice Kit. preparetopassacca.com. Financial Management UPDATED FOR EXAMS. By: Sumbal Asif. Page 1

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1 ACCA F9 Financial Management MCQs Practice Kit By: Sumbal Asif UPDATED FOR COPYRIGHT 2011 ACCA LIVE Most affordable online classes for CAT and ACCA EXAMS Page 1

2 ACCA F9 Kit Practice Financial Management By: Sumbal Asif COPYRIGHT 2011 ACCA LIVE Most affordable online classes for CAT and ACCA Page 2

3 ACCA F9 Practice Questions Kit TABLE OF CONTENTS Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Interest Rate Risk Foreign Currency Risk Introduction to Financial Management Introduction to Working Capital Management Managing Working Capital Working Capital Finance Investment Decisions Investment Appraisal Using DCF Method Investment Appraisal: Taxation and Inflation Investment Appraisal: Managing Risk Specific Investment Decisions The economic Environment for Business Financial Markets and Institutions Sources of Finance Dividend Policy Gearing and Capital Structure Cost of Capital Capital Structure Business Valuation Market Efficiency Page 3

4 ABOUT THE AUTHOR Sumbal Asif, an ACCA affiliate herself, is busy developing study material and related resources to different professional qualifications including ACCA. She invites feedback from students, visitors and teachers to help make this publication and others even better. About the book Although this publication has been written keeping the students studying paper 9 of ACCA course, however, the students of other professional qualifications like CA, CIMA and ACCA etc. who want to test their financial management basics can also consult this Practice Questions Kit. This book is divided in different chapters according to ACCA F9 syllabus so that students can practice the questions pertaining to specific topic easily. Page 4

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6 1 Interest Rate Risk Q1 Interest rate risk relates to: A) Sensitivity of profits and cash flows to interest rate fluctuations. B) Sensitivity of capital assets and expenditures to change in interest rate fluctuation. C) Sensitivity of demand and supply of companies D) None of the above Q2 ABC co. operating in UK faces a negative gap situation because of: Q3 1. Rise in interest rates by the time of maturity 2. Fall in interest rate by the time of maturity A) 1and2 B) 1 only C) 2 only D) None of the above. Which of the following is not the cause of interest rate fluctuation? A) Inflation B) Balance of payment C) Liquidity preference of investors D) None of the above Page 6

7 1 Interest Rate Risk Q4 Levanto co. wants to borrow $ after 2 months for a period of 6 months to invest in a project Interest rates are anticipated to increase. Assuming interest rate after 2 months is 14%. What will be the result if Levanto Co. plans to undertake FRA with the given information? 2v8 FRA 8%-10% 2v6 FRA 9.25% to 10.25% Q5 A. Bank will pay L co. $ B. Bank will receive $20000 C. L co. will pay $20000 D. None of the above Which of the following is limitation of future contracts: Q6 A) Standardized nature, not tailor made B) Certainty for speculators. C) It can t be use for hedging D) Both A and B above. The shape of the yield curve depends much upon the expectation about the futures level of short term interest rate; A) True B) False Page 7

8 1 Interest Rate Risk Q7 Which of the following statement best describes the features of interest rate options? A) It is a right not the obligation to deal at an agreed future interest rate and pre decided date. B) It is where liabilities and assets with common interest rate are matched C) It is where company balance out its fixed and floating interest rate borrowings D) It is where a company fixes its interest rate for future borrowings. Q8 The reason for an upward sloping yield curve could be: Q9 A) Taxation policies B) Economic crisis C) Liquidity preferences D) Import restrictions. A theory which suggests that the slope of yield curve will reflect the different market with different conditions is known as: A) Expectation theory B) Liquidity preference C) Market segment theory D) None of the above. Q10 While choosing for hedging instrument which of the following factors are necessary to be considered: A) Cost B) Flexibility C) Ability to benefit D) All of the above Page 8

9 1 Interest Rate Risk Q11 Encircle which of the following is a valid statement: A) Borrower is always to buy cap B) Borrower is always to sell Floor C) Lender is always to buy cap D) A and b above. Q12 Interest rate swaps help us to: A) Secure better deposit rates B) Raise cheap loans C) Minimize transaction risk D) A and B above Q13 Borrower faces risk of decrease in interest under fixed rate system and increase in interest rate under floating rate system: A) True B) False Q14 ABC co. has borrowed a $ loan on fixed interest rate of 4.5% and wants to hedge it s position from fixed to floating rate, which hedging strategy will be suitable.; A) Currency swaps B) Interest rate swaps C) Currency options D) FRA s Page 9

10 1 Interest Rate Risk Q 15 Which of the following is not a correct statement about FRA s 1. They are available for fixed interest rate determined by bank 2. They are available for smaller amounts 3. They are difficult to obtain for period over one year A) 2 only B) 1 and 2 C) 3 only D) All of the above Q16 It grants right to buyer rather than forming an obligation at agreed interest rate and decide maturity date A) Interest rate swap B) Interest rate options C) Interest rate futures D) Currency options Q17 Basis risk is a risk associated with imperfect hedging: A) True B) False For more FREE resources on ACCA CA CFA CIA CIMA visit: Video Lectures Notes Mock Exams Practice Questions KIT EXAM TIPS ASK TUTOR Page 10

11 1 Interest Rate Risk Answers Q1. A Q2. B Q3. D Q4. A. Q5. A Q6. A Q7. A Q8. C Q9.C Q10. D Q11. D Q12.D Q13.A Q14.B Q15. A Q16.B Q17. A Page 11

12 2 Foreign Currency Risk Page 12

13 2 Foreign Currency Risk Q1 Abc co. operating in USA, possess a subsidiary in Bangladesh whose currency is constantly depreciating. In few years time that subsidiary co. value decreases drastically in ABC co. financials. Which risk the company faced? A) Translation risk B) Transaction risk C) Economic risk D) Interest rate risk. Q2 XYZ co. Having as home currency has exports of $200,000 and imports of $80,000 after one month. Its spot rate is $\, whereas its one month forward rate is $/. What is the expected amount of net receipt in if forward hedge is taken? Q3 A) B) C) D) A legally binding contract between Abc co. and XYZ co. to buy or sell currency at pre specified date and predetermined rate will be known as : A) Forward contract B) Currency SWAPS C) Money market hedge D) Currency options. Page 13

14 2 Foreign Currency Risk Q4 A Uk based co. holds following subsidiary in two countries: B co. in UAE Z co. in USA B owes Z 100,000 and Z owes B both intercompany balances are set against to reach a net debt owed by B to Z of Which of the following principle is applied: Q5 A) Netting B) Matching C) Leading D) Logging XYZ co. operating in UK exports $ 300,000 goods to a USA based co.what is the expected amount if receipt in after 3 minths time if miney market hedge is taken. Borrowing rate lending rate $. 5 %. 4% 8%. 7% Spot rate given is $\ Q6 A) B) C) D) A standardized contract available in only major currencies which are quoted against $ accompanied by no default risk best describes: A) Currency options B) Forward contracts C) Money market hedge D) Futures contract Page 14

15 2 Foreign Currency Risk Q7 Which of the following is the least likely to be characteristic of currency futures: A) They offers lower transaction cost comparatively. B) Pricing transparency due to tradable nature C) The exact date of transaction is not necessary to be known. D) They are tailored made contracts. Q8 Which of the following defines currency options: Q9 A) A right to holder to call or put foreign currency at a specific rate and future date. B) An agreement where two organization agree to exchange their payments threaded with different terms and conditions. C) An obligation upon holder to buy or sell foreign currency at a specified rate and future date. D) These are least flexible financial instruments to be used for hedging. Risk of Adverse movement of exchange rate between contract date and settlement date is known as: A) Translation risk B) Economic risk C) Transaction risk D) Interest rate risk. Q10 Assuming AB co. operates in USA wishes to exchange its $ loan in order to hedge against fluctuating exchange rates in long term. Which of the following will be more appropriate: A) Currency Option B) Currency Swaps C) Currency Futures. D) Leading. Page 15

16 2 Foreign Currency Risk Q11 Supply and demand of currency is least likely to be influenced by : A) Government policy B) Balance of payments C) Rate of inflation. D) Increase in population. Q12 L co. manufactures vehicles in France which they sell within European Union to countries which use Euro. It s competitor is based in USA and $ is slowly depreciating against.recently L co. has faced declining sales revenue due to strengthening of Euro.Which of the following risk L co. is facing : A) Economic risk B) Interest rate risk C) Business risk D) Security risk. Q13 If real interest rate between two economies are same and fisher effect holds the Forward rate and Future rate will be equal assuming tgere are no other factors effecting: A) True B) False Page 16

17 2 Foreign Currency Risk Q14 GHI co. is a Japanese exporter who receives a payment from USA customer of $ How much yen GHI co. will receive if spot rate is $\. A) B) C) D) None of the above Q15 Which of the following is the advantage of fixed exchange rate system: A) Low monitoring cost B) Offers flexibility as per market conditions. C) It gives certainty to business environment. D) Depletion of foreign exchange reserves Q16 Which of the following best describes exchange rate: A) A rate upon which one country's currency is traded with another country's currency. B) A rate offered by bank to borrow a large sum of money. C) Both A and B above D) none of the above Page 17

18 2 Foreign Currency Risk Q17 A hedging process under which credit balances are off set against debit balances so that only reduced amount is to be exchanged in the end is known as: A) Netting B) Matching C) both A and B above D) none of the above Q18 A company operating in UK imports $ goods. Spot rate is assumed to be $\.What will be the expected amount of payment in 4 months time if money market hedge is taken. Borrowing rare. Lending rate $. 6% 5%. 8%. 7% A) B) C) D) Q19 Giant co. Operating in Germany imports $ goods after two months. How will company open the future contract? 1. sell futures 2. buy futures 3. sell $ futures. A) 2 only B) 1 only C) all 3 of the above D) none of the above Page 18

19 2 Foreign Currency Risk Q20 Purchasing power parity revolves around: A) Inflation rate B) Spot rate C) Future rate D) All 3 of the above. Page 19

20 2 Foreign Currency Risk Answers Q1. A Q2. B Q3. A Q4. A Q5. B Q6. D Q7. D Q8. A Q9. C Q10. B Q11. D Q12. A Q13. A Q14. A Q15. C Q16. A Q17. A Q18. D Q19. B Q20. D Page 20

21 3 Introduction to Financial Management Page 21

22 3 Introduction to Financial Management Q1 Financial manager of private company majorly aims to: A) Maximize earning per share. B) Maximize shareholder wealth C) Maximize market share D) Maximize expenses Q2 Mr.Luice is working upon the profits of his company to decide how much profit should be distributed among the shareholder. This decision refers to: Q3 A) Investment Decision B) Dividend decision C) Financing decision D) Risk taking decision Startegy is best described as: A) The fundamental purpose of an organization B) The beliefs that are shared among the stake holders C) The course of action to achieve objective D) None of the above Page 22

23 3 Introduction to Financial Management Q4 ABC co. has in issue $2000 share capital of 25 cents each. Its financial statement shows: $ PBIT 1302 Interest (280) PBT 1022 Tax (307) PAT 715 What is the EPS for ABC co.? Q5 A) 8.9 cents B) cents C) 35.7 cents D) cents Which of the following is a correct statement? Q6 A) Management accounting function is responsible to work upon internally used information of an organization. B) Financial accounting function is responsible to work upon externally gathered information of an organization C) Financial management relates to management of finance D) All of the above The wealth maximization to the shareholders will be delivered by: A) Dividend payments B) Increase in market value of shares C) Both of the above D) None of the above Page 23

24 3 Introduction to Financial Management Q7 Which one of the following is not an internal stakeholder group? A) Management B) Employees C) Pensioners D) Suppliers Q8 The directors appointed by shareholders to run the company best explained by: Q9 A) Business relation B) Agency relation C) Both of the above D) None of the above Calculate dividend yield for ABC co. Profit after tax $ Dividend cover 3 times No. of shares of $ Market price per share $4 A) 8% B) 24% C) 26% D) 34% Q10 Current ratio is the most suitable ratio to measure company s short term liquidity: A) True B) False Page 24

25 3 Introduction to Financial Management Q11 Following information of XYZ co. is available. $ $1 ordinary share 50 $1 preference shares 25 Net profit (before dividends) 20 Ordinary dividend 7 Preference dividend 3 Market price per ordinary share 5 Calculate price earnings ratio A) 12.5 times B) times C) 14.7 times D) 19.3 times Q12 Investment decision, risk management decisions and financial decisions are often called as the decision triangle of financial management? A) True B) False Q13 Bravado co. earnings per share are $ 0.67 and half of the earnings are paid out as dividends. Dividend yield of the co. is given as 7%.What is the share price per share? A) $4.79 B) $9.57 C) $ D) None of the above Page 25

26 3 Introduction to Financial Management Q14 Retained earnings are the same as cash in bank: A) True B) False Q15 Which of the following best describes Efficiency; A) The extent to which declared objectives are met B) Relationship between input and output C) Acquiring reasonable quality and quantity of inputs to achieve given level of output D) All of the above Q16 A yardstick which is used to measure the achievement of objectives using least possible resources is best described by: A) Value for money B) Corporate governance C) Internal controls D) None of the above Q17 Corporate governance revolves around: A) Risk management B) Internal controls C) Accountability D) Al l of the above Page 26

27 3 Introduction to Financial Management Q18 The debt and equity relationship in the capital structure will be measured using: A) Financial gearing B) Dividend yield C) Interest cover D) All of the above Q19 Cattle co. is willing to evaluate its short term liquidity. Which of the following will be mist helpful ratio: A) Current ratio B) Cash ratio C) Debt to asset ratio D) Gross profit margin Q20 Which of the following is the reason for government stake in companies; A) Taxation B) Encouraging infant industries C) Positive balance of payments account D) All of the above Q21 Return on equity display the earning power of shareholders investment but it cannot be used to compare two firms in same industry; A) True B) False Page 27

28 3 Introduction to Financial Management Q22 WSH co. has in issue ordinary share s of$0.50 each. It has paid a dividend of $ 9600 where as its current market price is assumed to be $3.20.Calculate its dividend yield. A) 1.25% B) 2% C) 4% D) 8% Page 28

29 3 Introduction to Financial Management Answers 1. B 2. B 3. C 4. A 5. D 6. C 7. D 8. B 9. A MV=EPS * P/E No. of shares= 2000/0.25=8000 Eps = 715/8000=0.089 Dividend cover=pat/ordinary dividend 3 times=$240000/od OD=$80000 Dividend yield= Dividend per share/market price per share *100 = (80000/250000)/$4 *100 =8% 10. A 11. CP/E = Market Price per share /Earning per Share = $5/ {($20-$3)/50)] =14.7 times 12. B 13. A 14. B 15. B 16. A 17. D 18. A 19. B 20. D Dividend yield=dividend per share/market price per share 7%=0.67*0.5/market price per share Market price per share= $4.79 Page 29

30 3 Introduction to Financial Management 21. B 22. A Dividend yield=dividend per share/market price per share = ($9600/240000)/$3.20 *100 = 1.25% Page 30

31 4 Introduction to Working Capital Management Page 31

32 4 Introduction to Working Capital Management Q1 Which of the following will help ABC co. to increase its current ratio: A) Increase in inventory B) Increase in trade receivables C) Increase in trade payables D) None of the above Q2 Abc co. has recently hired a new trainee accountant who is confused about the calculation of working capital. Tell him which one of the following is a correct formula to get right working capital: Q3 A) Current assets less long term liabilities B) Net assets less current assets C) Current assets less current liabilities D) All of the above. At the year ended 30 June 2014 ABC ltd made sales of almost $ , of which 25% were for cash. The trade receivables at 30 June 2013 were$ and at 30 June 2012 were $36000.Calulate Trade receivables collection period using average receivables. Q4 A) 20 Days B) 29 days C) 12 days D) 16 days Assuming Buffalo co. current ratio is 2.5:1 whereas at the same time its acid test ratio is supposed to be 1.4:1.Provided current liabilities are $ Calculate its inventory? A) $66000 B) $54545 C) $ D) None of the above Page 32

33 4 Introduction to Working Capital Management Q5 Green co. acid test ratio has fallen whereas turnover has remained constant. Which of the following could be a reason? A) Increase in cash B) Decrease in trade payable C) Decrease in inventory D) Increase in trade payables Q6 Company has recently purchased new inventory on credit. Choose the true effect upon; Q7 Current ratio Acid test ratio A) Decrease Decrease B) Increase Increase C) Unchanged Decrease D) Unchanged Increase In order to avoid liquidity problems which of the following is true? A) Working capital must decreases as sales increases B) Working capital must increases as sales increase C) Working capital remain unchanged as sales increases D) None of the above Q8 Extron plc accounts for year ended 31 Dec 2013 shows increase in sales revenue by 50% but increase in cost of sales by 60%.Whuich of the given reason for change in profit margins is valid. A) Increase in sales prices B) Increase in supplier prices C) None of the above D) All of the above Page 33

34 4 Introduction to Working Capital Management Q9 Allied co. inventory turnover is 5 times years. Average inventory shown in financial accounts is $ Futher to this sale of A co. is made at mark up of one third. Calculate sales value? A) $ B) $ C) $ D) $72000 Q10 Calculate trade payable period if: $ Purchases Cost of sales Trade payables 5600 Accruals 1100 A) 85 days B) 11days C) 16 days D) 60 days Q11 Which of the following is the example of overcapitalization: A) Equal amounts of current assets and current liabilities held by a company B) Excessive inventories accompanied by excessive account payables C) Excessive inventories with few accounts payable D) None of the above Page 34

35 4 Introduction to Working Capital Management Q12 Which of the following is not a symptom of overtrading? A) Rapid increase on turnover B) Rapid increase in volume of current assets C) Inventory turnover slows down D) None of the above Q13 Calculate cash operating cycle if: Trade payable days 56 Trade receivable days 78 Inventory turnover days 18 A) 40 days B) 116 days C) 152 days D) 4 days Q14 Which of the following explicitly expresses the efficiency level of a company to control its overheads? A) Current assets/current liabilities B) Gross profit/sales C) Net profit/ sales D) None of the above Q15 Abc co will be declared to be over trading when it faces: A) Excessive noncurrent assets B) Too much working capital C) Shortage of working capital D) Shortage of noncurrent assets Page 35

36 4 Introduction to Working Capital Management Q16 Which of the following is likely to result in low inventory turnover: A) Accumulation of obsolete inventory B) Successful promotion C) Increase in existing customer orders D) None of the above. Q17 A Company is going to experience high liquidity ratio if it replaces its machinery earlier than planned. A) True B) False Q18 If a company s return on capital employed is said to be 20% and the net profit ratio calculated is 8%.What will be the asset turnover? A) 2.5 times B) 8 times C) 2 times D) 4 times Page 36

37 4 Introduction to Working Capital Management Answers 1) B 2) C 3) A 4) A 5) D 6) A 7) B 8) B 9) A 10) D = {( )/2} / (760000* 0.75) *365 = 19.5 almost 20 days. Current ratio= Current assets / current liabilities = 2.5:1 Acid test ratio= (Current assets stock)/ Current liabilities = (1.4:1) Inventory as a ratio to current liabilities. = 1.1:1 So at current liabilities 1 inventories are 1.1 If current liabilities are $60000 than inventory will be = 60000*1.1 = Cost of sales =5 times *$34000 = $ Sales= (170000* 1/3) = = $ =trade payables/credit purchase =5600/34000 *365 =60 days 11) C 12) D 13) A =Trade receivables + inventory days-trade payables = =40 days 14) C 15) D 16) A 17) A Page 37

38 4 Introduction to Working Capital Management 18) A = ROCE / net asset turnover = net profit ratio =net profit /capital employed / capital employed / sales =net profit /sales =20% / - =8% =20/8 = 2.5 times Page 38

39 5 Managing Working Capital Page 39

40 5 Managing Working Capital Q1 ABC co. found out that it cost $ 30 to place an order and 60c to hold a unit / year. The number of orders placed in a year are 24.Assuming, the demand for the commodity in a year is units. Find the order size, the inventory cycle length and total cost of holding inventory? Q2 A) Quantity 2450 units, Cycle length 2.17 weeks, total cost $1470 B) Quantity 2450 units, Cycle length 15.2 weeks, total cost $1470 C) Quantity 2450 units, Cycle length 2.17 weeks, total cost $2190 D) None of the above Which one of the following is true about inventory? Q3 A) An order which is placed too late will result in loss of sales B) An order which is placed too soon will boost holding costs C) Reorder levels helps minimizing risk by giving reasonable minimum inventory levels. D) All of the above. As the profit margins per unit increase the necessity to hold safety stock increases. Q4 A) True B) False Which one of the following is the least likely to be the benefit of having JIT system. A) Inventory holding costs are minimized B) Low delivery costs of inventory. C) Less tied up working capital D) None of the above Page 40

41 5 Managing Working Capital Q5 Which of the given statement about EOQ is false? A) It assumes steady demand of business product B) It assumes inventory is immediately available C) It accounts for seasonal; and economic fluctuations D) All of the above Q6 A company carries low inventory and at times it has to suffer with no inventory due to delay delivery of supplies. What are the consequences of this? Q7 A) Improved customer satisfaction B) Wastage of labor resource C) Declining sales and demand of finish product D) B and C above Determine the reason and effect of extended credit period allowed to receivable upon the profit. A) Declining profits due to increased interest expenses B) Declining profits due to improving bad debts ratio C) Declining profits due to decreased sales. D) All of the above. Page 41

42 5 Managing Working Capital Q8 The company can easily manage its accounts receivables using: 1) In house credit ratings 2) Customer history analysis 3) Aging debtors analysis 4) Just in time system Q9 A) 1 and 2 above B) All of the above C) 1,2 and 3 above D) 1 and 3 above Just in time system will not be appropriate for: A) Food manufacturer B) Hospitals C) Car manufacturer D) All of the above Q10 Bravado co. has sales of $ 65000/month (one month credit) giving rise to variable costs of $ If Bravado co. extends its credit period from one month to two months its sales would increase by 25%. Given cost of capital is 15%.If all the customers take advantage of this opportunity how much will be the net benefit? A) $45375 B) $57563 C) $ D) $60000 Page 42

43 5 Managing Working Capital Q11 Hoboo co. sold goods for $ on cash and also on credit for $ Its Trade receivables are expected to be received every 30 days. What will be the closing trade receivables balance? A) $960 B) $1710 C) $2670 D) $3630 Q12 A company sales are made evenly over a 360 days year.10% of the sales are for cash.the trade receivables are $ and Debtor days are said to be 30 days. Calculate total sales if the company. A) $ B) $ C) $ D) $ Q13 XYZ co. offers 30 days credit period to its customers.it offers 5% discount if payment is made within 15 days of date of invoice. What will be the percentage cost of this discount to XYZ co. A) 71.3% B) 46.4% C) 38.9% D) 25% Page 43

44 5 Managing Working Capital Q14.The procedure through which trade debts are purchased at a discount is known as: A) Credit insurance B) Early settlement discount C) Invoice discounting D) Counter trade Q15 Debt Factoring is best described as: 1. Selling your trade payables to another company in order to remain more liquid 2. Selling your trade receivables to another company to help short term liquidity 3. To buy debts from other companies in return of profit A) 1 and 3 above B) 2 and 3 above C) 1 above D) 2 above Q16 Which of the following is least likely to be the benefit of factoring? A) Bad debt management cost is reduced B) It depicts Negative attitude to customers relation C) Business have enough cash to pay suppliers quickly and avail discounts D) Enjoys credit protection is case creditors fails to pay.se of debt management Q17 How a company can overcomes the risk arising from foreign accounts receivables: A) Advances against collection received by bank B) Documentary credits C) Discounting bills of credit D) All of the above Page 44

45 5 Managing Working Capital Q18 Trade payables effective management includes all except for: A) Satisfactory credit terms B) Minimize credit purchases or even all purchases on cash C) Good supplier relation D) Extended credit periods in times of liquidity crisis Q19 Marvin co. holds policy under which it orders almost units when inventory level falls to units. Expected demand to meet production requirement is units. Orders are received 3 weeks after being placed with the supplier. Assuming 52 weeks a year and constant demand calculate average inventory? A) units B) 1807 units C) units D) units Q20 Which of the following is correct about factoring? A) In case where factor bares the risk of loss of bad debts and provides insurance to the client against loses is known as non recourse service B) In case where payments are made to the client even before debtor pays is known as factor finance. C) In case of non- recourse the firm will decide the action to be taken against bad debts and not the factor D) A and B above Page 45

46 5 Managing Working Capital Answers 1) A EOQ = (2*30*60000)/0.6 =2449 approx Cycle length = 52 weeks/ no. of orders =52/24 = 2.17 weeks Total cost = (60000/2450 * $30) + ((2450/2)* 60 c) = $1470 2) D 3) A 4) B 5) C 6) D 7) A 8) C 9) B 10) A $ Current receivables After implementing proposal- receivables (130000*1.25) Net increase in receivables Finance 15% (14625) Annual contribution from additional sales (20000*12*25%) Net benefit ) C Debtors period = trade receivables/ credit sales * days = Trade receivables/ $32485 * 365 Trade receivables=$ ) B Debtor days = $26700/credit sales * = $26700/ Credit sales * 365 = $ As Credit sales are 90 % of total sales so $320400/90% = $ ) A =1- {100/(100-5)}^-( 365/15) =71.3% Page 46

47 5 Managing Working Capital 14) C 15) D 16) B 17) D 18) B 19) A 20) D Usage of inventory per week= /52= approx units Average lead time= 3 weeks Reorder level= units Buffer safety stock = (6731*3) =1807 units Average inventory=1807+ {35000/2} =19307 units. Page 47

48 6 Working Capital Finance Page 48

49 6 Working Capital Finance Q1 Company holds cash for the following reasons except for: A) To meet regular commitments of paying regular business transactions. B) To meet any sort of emergency cash needs of business C) To gain interest rate benefits in future with the help of speculation D) To show banks of their cash reserves when borrowing long term finance Q2 Abc co. Cash budget shows that it will exceed its overdraft limit. Which of the given item of expenditure should be considered for delaying? Q3 A) Debenture interest B) Dividends C) Rent and rates D) Taxation The bank balance of green co. at 1 March 2014 was $6000. Following information is available: February 2014 ($) March 2014($) Credit sales Credit purchases Wages Drawings Depreciation Trade receivables pay in month following sales whereas trade payables paid in the month following purchases. Calculate bank balance at 31 march? A) $10700 B) $11500 C) $28700 D) $29500 Page 49

50 6 Working Capital Finance Q4 Hobo co. is preparing a cash flow forecast for the upcoming year. Current estimates show that an increase of $50000 will be needed. Which of the following can fulfill the need of Hobo co.? A) A bonus issue of $ shares B) Net proceeds from sale of machinery of $ C) Pay all trade payables valuing $50000 early D) Reduce depreciation charge by $50000 Q5 Following information is available about Levanto co. Estimated sales Months Cash $ Credit $ February March April Trade receivables are expected to pay as: 60% in month following sale 40% in second month following sale How much cash to be received in April from the sales? Q6 A) $21000 B) $25000 C) $31000 D) $45000 Which of the following will not be helpful in easing cash shortages for a company: A) Postponing capital expenditure B) Rescheduling loan payments to delayed dates C) Asking creditors to extent credit periods D) None of the above Page 50

51 6 Working Capital Finance Q7 The process of administering financial assets and holdings of a business is best described by: A) Treasury management B) Risk management C) Customer management D) All of the above Q8 Which of the following is not the benefit of having centralized treasury department? Q9 A) Foreign exchange risk management B) Low borrowing cost when fiancé arranged in bulk C) Highly diversified sources of finance D) Experts can be employed at a single area minimizing costs. The cash budget of Coco ltd shows a deficiency of $30000 arising at the end of next six months budget. Which action will be the best possible remedy to this issue? A) $31000 net proceeds from the right issue to existing shareholders. B) Ruling off the depreciation charge of $34000 as planned. C) Delaying bonus issue for a year D) All of the above. Q10 Which of the following statement about Baumol model assumptions is correct: A) The cash is readily consumed with the passage of time B) Business holds marketable securities which can easily be liquidated when needed C) Optimum cash levels can be decided based on optimum inventory levels. D) All of the above Page 51

52 6 Working Capital Finance Q11 Alpha ltd need $ for each of the one year period in future. It has to bare a fix cost of $ 8000 to raise funds at an interest rate of 24% per annum Given the.interest rate which alpha co. earned on its short term securities is 18%. Suggest Alpha co. the amount of funds to raise at the time? Q12 A) $ B) $1265 C) $65320 D) $40000 The Miller Orr model works by setting limits as follows: 1) As cash balance reaches upper limits the firm buys securities 2) As cash balance reaches lower limit the firm sells securities 3) At high interest rates in market the gap between upper and lower limits should be widen up A) 1 and 3 above B) 1 and 2 above C) 2 and 3 above D) All of the above Q13 Bravado co. minimum cash balance is $ 4000 whereas its variance of daily cash flows is equivalent to standard deviation of $ 1000 /day. If the given transaction cost of trading securities is $25 and the interest rate is %/day.Determine upper limit and lower limit. A) Upper limit $19940,lower limit $9313 B) Upper limit $19940, Lower limit $5313 C) Upper limit $15940,Lower limit $9313 D) Upper limit $15940,Lower limit $ 5313 Page 52

53 6 Working Capital Finance Q14 Which of the statement regarding working capital financing are correct? A) Short term sources of funding are riskier, cheaper and flexible B) Long term sources of funding are riskier, cheaper but less flexible comparatively. C) Short term sources of funding are not riskier and cheaper but flexible D) A and B above Q15 Increasing current liabilities, reducing current assets accompanied by reducing long term debts will result in greatest risk of technical insolvency in the company. A) True B) False Q16 Whole of fluctuating current assets and part of permanent assets are financed by short term sources. Which approach does this define? A) Conservative approach B) Moderate approach C) Aggressive Approach D) Risk taking approach Q17 The security issued by the bank assuring for the deposits of specific sum of money and acknowledging its responsibility in financial management terms is known as: A) Treasury bills B) Certificate of deposits C) Deposit agreement D) None of the above. Page 53

54 6 Working Capital Finance Q18 The working capital requirement is best described by: A) Inventories + Receivables-payables +prepayments- accruals B) Inventories+ machinery depreciation-payables + receivables C) Inventories receivable s+ payables-prepayments D) Total assets long term liabilities Q19 The surplus cash is reinvested when following factors are considered: A) Liquidity, profitability and risk B) Interest rates C) Term to maturity D) All of the above. Q20 Which of the models are relevant for calculating optimal cash holding levels; A) Baumol model B) Miller Orr model C) Cash flow model D) A and B above Q21 Permanent working capital is described as the amount of current assets required to meet the firms long term minimum need: A) True B) false Page 54

55 6 Working Capital Finance Q22 Which of the following is correct about working capital? 1) Amount of working capital needed by business for day to day need is investment decision 2) Amount needed is to be raised by which sources is known as financing decision 3) Balancing both financing and investment of working capital is known as conservative approach A) 1 and 2 above B) 2 and 3 above C) 1 and 3 above D) All of the above. Page 55

56 6 Working Capital Finance Answers 1) D 2) B 3) B 4) B 5) C 6) D 7) A 8) C 9) A 10) D 11) A Bank balance at 1march Add cash from February trade receivables Less cash paid for February purchases (56000) Less Wage (18000) Less Drawings (500) Bank balance at 31 march Cash sales $ Collection from last month credit sales ($ %) $15000 Collection from two months earlier credit sales ($15000*40%) $6000 Total cash receipts in April $31000 Cost of holding cash + 24%-18%=6% Reorder quantity = (2*8000*48000) /6%) =$ ) B 13) A Spread = 3 {3/4 *[ (25* )/ ]}^1/3 = $15940 Upper limit = lower limit = = $19940 Lower limit =lower limit + 1/3 * spread = /3* 15940= $ ) A 15) A $ Page 56

57 6 Working Capital Finance 16) C 17) B 18) A 19) D 20) D 21) A 22) A Page 57

58 7 Investment Decisions Page 58

59 7 Investment Decisions Q1 Which of the following expense falls under the category of capital expenditure? A) Expenditures incurred on renewals of patent rights B) Wages paid in return for manufacturing goods C) Cost of air conditioning the office of director D) Legal expenses incurred for debt collection Q2 Which of the following is true: Q3 A) When a second hand asset is purchased than any expenditure incurred on it to put it into working condition is a capital expenditure B) Carriage cost paid on purchase of goods is classified as revenue expenditure. C) Cost of demolishing an old building to replace it with a new one is a capital expenditure. D) All of the above Determine the basic aim of a commercial organization as compare to not for profit organization? Q4 A) They consider maximizing quality to give better product to society. B) They consider maximizing quantity to generate social benefits. C) They consider maximizing customer satisfaction D) They aim for financial considerations only What is the advantage of effective budgetary control system? A) Manager spend a lot of their time on preparing budgets B) The budget may be imposed from top down t senior managers C) The budget figures are not changed once they have been set, despite the happenings within trading year D) Resources of an organization are given the most economical use. Page 59

60 7 Investment Decisions Q5 What is not the purpose of preparing budgets? A) To develop a long term strategy B) To communicate strategies and objectives down to the staff C) To design an action plan to help achieve upcoming year objectives D) To prepare an operational plan for immediate future Q6 Capital budgets are usually prepared for longer time periods as compare to other budgets and then later broken down into pieces to match up other budgets period. Q7 A) True B) False Which of the following best describe the word soft capital rationing? Q8 A) To carry out a qualitative evaluation check upon a project B) The impositions of internal constraints due to limited managerial resources C) The scarcity of resources faced due to setting of external limits resulting in high financing costs and restrictions upon external financing choices. D) None of the above Go/no-go decisions are made depending upon: A) Type of investment B) Amount of investment required C) Risk attached to it D) All of the above. Page 60

61 7 Investment Decisions Q9 Which of the following is less appropriate; A) Ideas related to Increasing capacity and efficiency best comes from the factory managers B) Ideas related to day to day cost minimization best comes from high level management. C) Ideas related to innovations and strategic view best comes from the higher levels of management. D) The proposals best accepted when it s in line with the strategy and objectives of an organization Q10 ABC co. Finance manager is confused while appraising the new project proposal. Which of the following factor he must not consider at analysis and acceptance stage: A) Classifying the project type B) Financial appraisal C) Comparing to capital budget available D) Monitoring the outcomes and evaluating whether it met the purpose. Q11 Which of the given costs are not relevant cost of investment appraisal: A) Opportunity cost B) Marketing research expenditures C) Working capital costs D) Labor training cost Q12 The annual profits from the project appraised can be calculated by; A) Deducting incremental fixed costs from Incremental contribution B) Adding incremental fixed costs to incremental contribution C) Comparing incremental contribution to current profits. D) None of the above. Page 61

62 7 Investment Decisions Q13 Opportunity costs are fundamental costs of forgoing another opportunity and it is used in computing cost benefit analysis while appraising projects. A) True B) False Q14 Alizbeth proposed these two statements to his senior about capital budgeting. 1. Opportunity cost must not be encountered while appraising a project s it is not true cash item. 2. Working capital is to be released at the end of the project 3. Sunk costs are part of project appraisal calculations. Which of the above statement are correct? A) 1 and 3 above B) 1 only C) 1 an d 2 above D) 2 and 3 above Q15 Amy is to appraise a project and she has gathered the data as follows: Sunk cost $4000 Opportunity cost $6000 Now she is confused that which costs are relevant for investment appraisal. Tell Amy about this issue. A) Opportunity cost B) Sunk cost C) None of the above D) Both of the above. Page 62

63 7 Investment Decisions Q16 A company is planning to purchase a machinery costing $500,000 having useful life of 5 years. Its cash flows for the next 5 years will be as follows. Year Cash flows 1 (200,000) 2 300, , , ,000 Calculate the payback period. A) 3 years 2 months B) 4 years 2 months C) 3 years 9 months D) 2 years 8 months Q17 Which of the following is least likely to be the problem associated with payback period? A) It does not consider time value of money B) It does not consider whole project life C) It neglects the cash flows after payback period D) It is difficult to calculate in practical situations Q18 The accounting rate of return is better measured; A) Total annual accounting profit expressed as a percentage of estimated average investment B) Average annual accounting profits expressed as a percentage of Estimated average investment C) Average accounting annual profits expressed as a percentage of total funds invested. D) None of the above. Page 63

64 7 Investment Decisions Q19 ABC co is planning to undertake a project with initial outlay of $ 600,000 and it will yield annual profits (after depreciation) of $40000 per year for next 5 years. The residuals value of projects asset will be $ calculate ARR A) 1.48% B) 7.41% C) 12.12% D) 2.42% Q20 Which of the following is not an advantage of ROCE method: A) It is quick and simple to calculates B) It is a relative measure rather than absolute C) It encounters entire project life D) None of the above. Q21. There are two mutually exclusive proposals available to Smith co.. years Proposal 1 cash flows ($) Proposal 2 cash flows ($) 0 (initial investment.) (1000,000) (1200,000) Residual values Profits after depreciation. 1 (20,000) 40, , , , ,000 10,000 Which proposal to choose on the basis of ARR? A) Proposal 1 as it has higher ARR B) Proposal 2 as it has higher ARR C) Proposal 1 as it has lower ARR D) Proposal 2 as it has lower ARR Page 64

65 7 Investment Decisions Answers 1) C 2) D 3) D 4) D 5) A 6) A 7) B 8) D 9) B 10) D 11) B 12) A 13) A 14) C 15) A 16) A 17) D 18) B 19) C Year Cash flows 0 (500,000) (500,000) 1 (200,000) (700,000) 2 300,000 (400,000) 3 300,000 ( ) 4 500, ,000 Payback period = 3 years and 2.4 months Months= 100/500*12=2.4 Average investment= ($ 600,000+$ 60000)/2=$330,000 ARR= 40000/330,000 *100=12.12% 20) B 21) B Proposal 1: Average profit=( )/5 = $22000 Estimated investment= ( )/2 =$ ARR= 22000/527500*100=4.17% Page 65

66 7 Investment Decisions Proposal 2: Average profit: ( )/5=$36000 Estimated investment= (1200, )/2=$ ARR= 36000/606000*100=5.94% Page 66

67 8 Investment Appraisal Using DCF Methods Page 67

68 8 Investment Appraisal Using DCF Methods Q1 Discounted cash flow method takes cash flows into account rather than profits because A) Cash flows shows the actual occurrence of costs and benefit B) They show notional costs more accurately C) Time factor is best encountered using cash flows rather than profit. D) A and B above. Q2 Alen is recently employed by a multinational company and he is asked to appraise a project. He has the following two opinions about discounting; Q3 1. Discounting is to use future value and convert it into present value 2. Discounting is to use present value and convert it to future value 3. Discounting tells us how much worth the given project has in today s term 4. Discounting tells us how much worth the given project has in future. A) 1 and 2 above B) 1 and 3 above C) 2 and 4 above D) 1 and 4 above ABC co. is planning to invest assuming to get a compound rate of return of 15% on its investment. How much do it need to invest now to get $25000 in 3 years? (To nearest 100) A) $16400 B) $21700 C) $38000 D) $25600 Page 68

69 8 Investment Appraisal Using DCF Methods Q4 Which of the given statement is not true about NPV? A) It takes into account the concept of time value of money B) It compares PV of cash n flows with PV of all cash outflows C) In case of two mutually exclusive projects one must choose project with lower NPV D) None of the above Q5 Which of the following best describes annuity factor? Q6 1. It is series of cash flows of equal amount after equal intervals for infinite period of time 2. It is series of cash flows of equal; amounts after equal intervals for a limited period of time A) 1 only B) 2 only C) Both of the above D) None of the above Which of the following decisions are true. A) A project with negative NPV must be undertaken B) A project with positive NPV must not be undertaken C) A project with comparatively higher NPV must be rejected D) None of the above Page 69

70 8 Investment Appraisal Using DCF Methods Q7 Calculate NPV for the given project. Assuming discount factor of 10% Year cash flow $ 0 (500,000) 1 200, , , , ,000 Q8 A) $ B) $ C) $ D) None of the above Cost of capital is based on two things 1. Cost of funds that company raises 2. The minimum return a company must generate from its investments A) True B) False Page 70

71 8 Investment Appraisal Using DCF Methods Q9 Bravado ltd has two possible projects but can only raise funds to finance one of them. Investment appraisal techniques produced the following results: Project A Project B Pay back period 3.5 years 3 years NPV $450,000 $250,000 ARR 15% 15% Which project to choose? A) Project A because it has lesser payback period and higher NPV B) Project B because it has lower NPV accompanied by lower pay back period C) Project B because it sounds more feasible D) None of the above Q10 Interest is to be included in NPV Performa as it is not encountered by discount factor? A) True B) False Q11 XYZ ltd has cost of capital of 15%.It is planning to invest $450,000 in a project which will then generate a constant return of $100,000 in year 1 and then $50,000 till perpetuity. Calculate its NPV? A) B) C) D) Page 71

72 8 Investment Appraisal Using DCF Methods Q12 Abc co. using investment appraisal techniques calculated IRR of its project to be 19.33% where as its WACC is 15%. Depending on the information provided suggest whether to undertake project or not? A) It must undertake project as its IRR is greater than WACC B) It must not undertake as its IRR is greater than WACC C) It must undertake as there is WACC is too high. D) It must not undertake as IRR is too high Q13 In case of mutually exclusive projects: A) Must Reject both B) Must Accept both C) Accept either but not both D) All of the above Q14 A project with non-conventional cash flows is likely to have more than one IRR; A) True B) False Q15 Which of the following is not true about IRR; A) It is the minimum %age return a project will generate B) It is a point where cost of capital and NPV is zero C) It is not a relative measure D) All of the above Page 72

73 8 Investment Appraisal Using DCF Methods Q16 Which of the following is not an advantage of DCF method: A) It takes into account time value of money B) They are easy to compare methods in the market C) They don t use all relevant cash flows of a project D) All of the above Q17 A project has NPV of $73000 at a discount factor of 10% and it has NPV of (63000) at a discount rate of 15%.calculate it IRR. A) 12.6% B) 16.2% C) 10% D) 0 Q18 Which is an advantage of NPV and not of IRR: A) It takes into account time value of money B) It is an absolute measure C) It considers whole life of the project D) None of the above Q19 The NPV of the project can be A) Only positive B) only negative C) only Zero D) Both positive and negative Page 73

74 8 Investment Appraisal Using DCF Methods Q20 The basic concept of NPV is: A) The cash today will not be as valuable tomorrow B) The cash today will be of same worth tomorrow C) Cash flows increases with time due to accumulation of profits D) None of the above is correct Q21 What would not be included in a NPV? A) Any Expenditure incurred after the payback period B) Depreciation of capital expenditure C) Incremental revenue expenditure D) Residual value of Cost of capital. Q22 Which investment appraisal technique includes depreciation in calculation? A) IRR B) NPV C) ARR D) Pay back Q23 Which method of investment appraisal use profits rather than cashflows to assess a project/. A) ARR B) IRR C) NPV D) payback Page 74

75 8 Investment Appraisal Using DCF Methods Q24 The cash flow of a given project is: A) total net profit plus total depreciation B) Marginal (additional) net profit plus additional depreciation C) Total cash received minus additional cash paid D) None of the above Q25 Which of the following is not relevant to investment decision? A) Cost of capital B) Timing of future cash flows C) Risk D) Sunk cost Page 75

76 8 Investment Appraisal Using DCF Methods Answers 1. A 2. B 3. A 4. C 5. B 6. D 7. A PV=FV* {1/1.15^3} =25000 * =$16437 approx. $16400 Annuity factor={1-(1+0.10)^-5}/0.10=3.791 Year Cash flow $ Discount factor Discounted cashflow $. 0 (500,000) 1 (500,000) 1 200, , , , ,000 NPV A 9. A 10. B 11. C Years Cash flows $ DF Discounted CF $ 0 500,000 1 (500,000) 1 100, till infinity 50, = (123150) 12. A 13. C 14. A 15. C 16. C 17. A Page 76