Paper P4 Advanced Financial Management EXAM KIT - … · PAPER P4 : ADVANCED FINANCIAL MANAGEMENT ... Exam technique xiii ... 84 JJJ Co 117 397 – 85 Strom Co 118 400 Dec 12(A)

Professional Examinations Paper P4

Advanced Financial Management

EXAM KIT

PAPER P4 : ADVANCED F INANCIAL MANAGEMENT

i i KAPLAN PUBLISHING

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

Published by:

Kaplan Publishing UK

Unit 2 The Business Centre

Molly Millar’s Lane

Wokingham

Berkshire

RG41 2QZ

ISBN: 978-1-78415-235-2

© Kaplan Financial Limited, 2015

Printed and bound in Great Britain

The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.

All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

Acknowledgements

The past ACCA examination questions are the copyright of the Association of Chartered Certified Accountants. The original answers to the questions from June 1994 onwards were produced by the examiners themselves and have been adapted by Kaplan Publishing.

We are grateful to the Chartered Institute of Management Accountants and the Institute of Chartered Accountants in England and Wales for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing.

KAPLAN PUBLISHING i i i

CONTENTS Page

Index to questions and answers v

Analysis of past papers xi

Exam technique xiii

Paper specific information xv

Kaplan’s recommended revision approach xix

Kaplan’s detailed revision plan xxi

Mathematical tables and formulae sheet xxvii

Section

1 Practice Questions – Section A 1

2 Practice Questions – Section B 53

3 Answers to Practice Questions – Section A 121

4 Answers to Practice Questions – Section B 235

Key features in this edition

In addition to providing a wide ranging bank of real past exam questions, we have also included in this edition:

• An analysis of all of the recent examination papers.

• Paper specific information and advice on exam technique.

• Our recommended approach to make your revision for this particular subject as effective as possible. This includes step by step guidance on how best to use our Kaplan material (Complete text, pocket notes and exam kit) at this stage in your studies.

• Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes and exam technique tips from our experienced tutors.

• Complementary online resources including full tutor debriefs and question assistance to point you in the right direction when you get stuck.


iv KAPLAN PUBLISHING

You will find a wealth of other resources to help you with your studies on the following sites:

www.mykaplan.co.uk

www.accaglobal.com/students/

Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details.

Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions.

KAPLAN PUBLISHING v

INDEX TO QUESTIONS AND ANSWERS

INTRODUCTION The majority of the questions within this kit are past ACCA exam questions. The index identifies which sitting the questions were from. An ‘A’ next to the question in the index means that the past exam question has been adapted in some way, for example some of the past exam questions have been modified to reflect the current format of the exam.

KEY TO THE INDEX

PAPER ENHANCEMENTS We have added the following enhancements to the answers in this exam kit:

Key answer tips

All answers include key answer tips to help your understanding of each question.

Tutorial note

All answers include more tutorial notes to explain some of the technical points in more detail.

Top tutor tips

For selected questions, we “walk through the answer” giving guidance on how to approach the questions with helpful ‘tips from a top tutor’, together with technical tutor notes.

These answers are indicated with the “footsteps” icon in the index.


vi KAPLAN PUBLISHING

ONLINE ENHANCEMENTS

Timed question with Online tutor debrief

For selected questions, we recommend that they are to be completed in full exam conditions (i.e. properly timed in a closed book environment).

In addition to the examiner’s technical answer, enhanced with key answer tips and tutorial notes in this exam kit, online you can find an answer debrief by a top tutor that:

• works through the question in full

• points out how to approach the question

• how to ensure that the easy marks are obtained as quickly as possible, and

• emphasises how to tackle exam questions and exam technique.

These questions are indicated with the “clock” icon in the index.

Online question assistance

Have you ever looked at a question and not known where to start, or got stuck part way through?

For selected questions, we have produced “Online question assistance” offering different levels of guidance, such as:

• ensuring that you understand the question requirements fully, highlighting key terms and the meaning of the verbs used

• how to read the question proactively, with knowledge of the requirements, to identify the topic areas covered

• assessing the detail content of the question body, pointing out key information and explaining why it is important

• help in devising a plan of attack

With this assistance, you should then be able to attempt your answer confident that you know what is expected of you.

These questions are indicated with the “signpost” icon in the index.

Online question enhancements and answer debriefs will be available on MyKaplan at:

www.mykaplan.co.uk


KAPLAN PUBLISHING vi i

SECTION A-TYPE QUESTIONS Page number Past exam

A=adapted Question Answer

Role and responsibility towards stakeholders 1 Vadener plc 1 121 Jun 06(A)

Advanced investment appraisal 2 Wurrall Inc 3 124 Jun 04(A)

3 Daron 6 129 Dec 95(A)

4 Sleepon Hotels Inc 8 135 Dec 05(A)

5 Partsea plc 10 140 Jun 07

6 Blipton International 12 143 Dec 08

7 Semer 13 147 Dec 05

8 Tramont Co 15 149 Pilot 2012

9 Chmura Co 17 155 Dec 13

Acquisitions and mergers 10 Stanzial Inc 19 161 Dec 06(A)

11 Burcolene 21 165 Dec 07(A)

12 Anchorage Retail Company 23 170 Dec 09

13 Pursuit Co 26 176 Jun 11

14 Nente Co 28 180 Jun 12

15 Mlima Co 30 184 Jun 13

16 Nahara Co and Fugae Co 32 190 Dec 14

Corporate reconstruction and reorganisation 17 BBS Stores 35 195 Jun 09

18 Coeden Co 37 201 Dec 12

Treasury and advanced risk management techniques 19 Somax plc 39 204 Jun 96

20 Lammer plc 41 208 Jun 06(A)

21 Casasophia Co 42 212 Jun 11

22 CMC Co 44 216 Jun 14

Economic environment for multinationals 23 AVTO 46 222 Dec 03

24 Oberberg AG 48 227 Dec 02


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SECTION B-TYPE QUESTIONS

Question Answer Past exam A=adapted

Role and responsibility towards stakeholders

25 TYR Inc 53 235 Jun 03(A)

26 Forthmate Inc and Herander Inc 54 238 Dec 06(A)

27 Saturn Systems 55 240 Jun 08

28 Solar Supermarkets 56 243 Dec 08

29 International Enterprises 57 245 Dec 07(A)

30 Kengai Co 59 247 Dec 11

31 Ennea Co 59 249 Jun 12

32 Limni Co 61 253 Jun 13

33 Kamala Co 62 256 Dec 14

Advanced investment appraisal 34 Strayer Inc 65 260 Jun 02(A)

35 Tampem Inc 65 263 Dec 06(A)

36 Digunder 66 266 Dec 07(A)

37 Kenand Co 67 268 –

38 Fubuki Co 68 273 Dec 10

39 Investment Project Review 69 277 Jun 09(A)

40 MMC 70 281 Jun 11

41 Tisa Co 71 282 Jun 12

42 Arbore Co 72 284 Dec 12

43 Burung Co 74 287 Jun 14

44 Riviere Co 75 290 Dec 14

Acquisitions and mergers 45 Doubler Inc 76 294 Jun 07(A)

46 Mercury Training 78 297 Jun 08(A)

47 Kodiak Company 79 299 Dec 09(A)

48 Kilenc Co 80 302 Jun 12

49 Sigra Co 81 305 Dec 12(A)

50 Hav Co 83 307 Jun 13

51 Makonis Co 84 311 Dec 13

52 Vogel Co 85 313 Jun 14


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Corporate reconstruction and reorganisation 53 Reflator Inc 87 316 Dec 05(A)

54 Alaska Salvage 88 319 Dec 09

55 Proteus Co 88 321 Dec 11

56 Doric Co 89 324 Pilot 2012

57 Nubo Co 91 326 Dec 13

Treasury and advanced risk management techniques 58 Black-Scholes (AVT) 92 329 Dec 01(A)

59 Uniglow 93 331 Jun 02(A)

60 MJY plc 93 333 Dec 05(A)

61 Collar Hedge 94 335 Jun 03(A)

62 Interest Rate Hedges 95 337 Jun 05

63 Polytot plc 96 340 Jun 04(A)

64 Arnbrook plc 97 342 Jun 06(A)

65 Asteroid Systems 97 344 Jun 08

66 Phobos Co 98 348 Dec 08

67 Multidrop 99 351 Jun 10(A)

68 Pondhills 100 356 Jun 01(A)

69 Currency Swaps 102 358 Dec 04(A)

70 FNDC plc 103 360 Dec 06(A)

71 Levante Co 104 363 Dec 11

72 Sembilan Co 105 366 Jun 12

73 Lignum Co 105 368 Dec 12(A)

74 Alecto Co 107 371 Pilot 2012

75 GNT CO 108 375 Pilot 2012

76 Kenduri Co 109 377 Jun 13

77 Awan Co 110 379 Dec 13

78 Faoilean Co 111 382 Jun 14

79 Keshi Co 112 385 Dec 14

Economic environment for multinationals 80 Deputy Chief Financial Officer 113 389 Jun 09

81 Moose Co 114 391 Dec 09

82 Lamri Co 115 392 Dec 10


x KAPLAN PUBLISHING

Emerging issues in finance and financial management 83 GoSlo Motor Corporation 116 395 Jun 10

84 JJJ Co 117 397 –

85 Strom Co 118 400 Dec 12(A)

86 Integrated Reporting 119 403 -

KAPLAN PUBLISHING xi

ANALYSIS OF PAST PAPERS

The table below summarises the key topics that have been tested in recent P4 examinations. The list of topics matches the chapter titles in the Kaplan Complete Text.

Note that the references are to the number of the question in this edition of the exam kit.

TOPIC Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

The role and responsibility of the financial manager Q15 Q9 Q22 Q79

Investment appraisal Q41 Q42 Q43 Q16, Q44

The financing decision Q31, Q72

Q32

The dividend decision Q32

International operations and international investment appraisal

Q48 Q85 Q9

International operations - the financing decision and the dividend decision

Q16,

Q44

Option pricing Q14 Q9 Q78

WACC Q18 Q15 Q22

Risk adjusted WACC and APV Q41 Q18 Q43

Corporate failure / reconstruction Q18 Q15 Q57 Q33

An introduction to risk management Q41 Q42 Q32 Q16,

Q44

Hedging foreign exchange risk Q73 Q76 Q22

Hedging interest rate risk Q72 Q77 Q79

Strategic aspects of acquisitions Q49 Q50 Q51 Q52 Q16

Business valuation Q14 Q49 Q15, Q50

Q51 Q52 Q16

Topical issues in financial management

Q31, Q48

Q85 Q57 Q79

P A PER P4 : AD VA N CE D F IN AN C I A L M AN AG E M EN T

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EXAM TECHNIQUE • Use the allocated 15 minutes reading and planning time at the beginning of the exam:

– read the questions and examination requirements carefully, and – begin planning your answers. See the Paper Specific Information for advice on how to use this time for this paper.

• Divide the time you spend on questions in proportion to the marks on offer: – there are 1.8 minutes available per mark in the examination – within that, try to allow time at the end of each question to review your answer and

address any obvious issues Whatever happens, always keep your eye on the clock and do not over run on any part of any question!

• Spend the last five minutes of the examination: – reading through your answers, and – making any additions or corrections.

• If you get completely stuck with a question: – leave space in your answer book, and – return to it later.

• Stick to the question and tailor your answer to what you are asked. – pay particular attention to the verbs in the question.

• If you do not understand what a question is asking, state your assumptions. Even if you do not answer in precisely the way the examiner hoped, you should be given some credit, if your assumptions are reasonable.

• You should do everything you can to make things easy for the marker. The marker will find it easier to identify the points you have made if your answers are legible.

• Written questions: Your answer should have: – a clear structure – a brief introduction, a main section and a conclusion. Be concise. It is better to write a little about a lot of different points than a great deal about one or two points.

• Computations: It is essential to include all your workings in your answers. Many computational questions require the use of a standard format: e.g. net present value. Be sure you know these formats thoroughly before the exam and use the layouts that you see in the answers given in this book and in model answers.

• Reports, memos and other documents: Some questions ask you to present your answer in the form of a report, a memo, a letter or other document. Make sure that you use the correct format – there could be easy marks to gain here.


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PAPER SPECIFIC INFORMATION

THE EXAM

FORMAT OF THE EXAM Number of marks Section A: 1 compulsory question worth 50 marks 50 Section B: Choice of 2 from 3 questions (25 marks each) 50 ––– 100

Total time allowed: 3 hours, plus 15 minutes for reading and planning –––

AIM To apply relevant knowledge, skills and exercise professional judgement as expected of a senior financial executive or advisor, in taking or recommending decisions relating to the financial management of an organisation.

OBJECTIVES On successful completion of this paper, candidates should be able to:

• explain the role and responsibility of the senior financial executive or advisor in meeting conflicting needs of stakeholders

• evaluate potential investment decisions and assess their financial and strategic consequences, both domestically and internationally

• assess and plan acquisitions and mergers as an alternative growth strategy

• evaluate and advise on alternative corporate re-organisation strategies

• apply and evaluate alternative advanced treasury and risk management techniques

• evaluate the impact of macro economics and recognise the role of international financial institutions in the financial management of multinationals

• identify and assess the potential impact of emerging issues in finance and financial management.

PASS MARK The pass mark for all ACCA Qualification examination papers is 50%.


xvi KAPLAN PUBLISHING

READING AND PLANNING TIME Remember that all three hour paper based examinations have an additional 15 minutes reading and planning time.

ACCA GUIDANCE

ACCA guidance on the use of this time is as follows:

This additional time is allowed at the beginning of the examination to allow candidates to read the questions and to begin planning their answers before they start to write in their answer books. This time should be used to ensure that all the information and, in particular, the exam requirements are properly read and understood. During this time, candidates may only annotate their question paper. They may not write anything in their answer booklets until told to do so by the invigilator.

KAPLAN GUIDANCE

Since there is a choice of questions in Section B, you must decide which questions to attempt, and in which order.

During the 15 minutes of reading time you should be able to review the questions in Section B and decide which ones are most appealing. All students have different strengths and preferred topics, so it is impossible to give general advice on which questions should be chosen. However, it is worth noting that numerical questions can often be more time consuming than written questions, so you are more likely to over run on numerical questions. Try to choose questions which give a balance between numerical and written elements.

In relation to paper P4, we recommend that you take the following approach with your reading time:

• Skim through Section B, assessing the level of difficulty of each question. Try to decide which question looks least appealing and ignore it.

• Now focus on the other Section B questions (which, by a process of elimination, you have now decided to attempt). Work out how much time you should spend on each part of the requirements (using the measure of 1.8 minutes per mark). Decide which techniques you will need to attack each of the questions.

• Turn to Section A. Skim through the requirements and decide what topics are being tested (e.g. business valuation, NPV).

• Decide the order in which you think you will attempt the questions:

This is a personal choice and you have time on the revision phase to try out different approaches, for example, if you sit mock exams.

A common approach is to tackle the question you think is the easiest and you are most comfortable with first.

Others may prefer to tackle the longest question first, or conversely leave it to the last.

It is usual however that students tackle their least favourite topic and/or the most difficult question in their opinion last. It is sensible to try to attack the preferred questions before attempting the difficult looking ones.

Whatever your approach, you must make sure that you leave enough time to attempt all questions fully and be very strict with yourself in timing each question.

ANALYS IS OF PAST PA PERS

KAPLAN PUBLISHING xvi i

• For each question in turn, read the requirements and then the detail of the question carefully.

Always read the requirement first as this enables you to focus on the detail of the question with the specific task in mind.

For computational questions:

Highlight key numbers / information and key words in the question, scribble notes to yourself on the question paper to remember key points in your answer.

For written questions:

Take notice of the format required (e.g. letter, memo, notes) and identify the recipient of the answer. You need to do this to judge the level of financial sophistication required in your answer and whether the use of a formal reply or informal bullet points would be satisfactory.

Plan your beginning, middle and end and the key areas to be addressed and your use of titles and sub-titles to enhance your answer.

For all questions:

Spot the easy marks to be gained in a question and parts which can be performed independently of the rest of the question.

Make sure that you do these parts first when you tackle the question.

Don’t go overboard in terms of planning time on any one question – you need a good measure of the whole paper and a plan for all of the questions at the end of the 20 minutes.

By covering all questions you can often help yourself as you may find that facts in one question may remind you of things you should put into your answer relating to a different question.

• With your plan of attack in mind, start answering your chosen question with your plan to hand, as soon as you are allowed to start.

Always keep your eye on the clock and do not over run on any part of any question!

DETAILED SYLLABUS The detailed syllabus and study guide written by the ACCA can be found at:

www.accaglobal.com/students/


xvi i i KAPLAN PUBLISHING

KAPLAN PUBLISHING x ix

KAPLAN’S RECOMMENDED REVISION APPROACH

QUESTION PRACTICE IS THE KEY TO SUCCESS Success in professional examinations relies upon you acquiring a firm grasp of the required knowledge at the tuition phase. In order to be able to do the questions, knowledge is essential.

However, the difference between success and failure often hinges on your exam technique on the day and making the most of the revision phase of your studies.

The Kaplan complete text is the starting point, designed to provide the underpinning knowledge to tackle all questions. However, in the revision phase, pouring over text books is not the answer.

Kaplan Online fixed tests help you consolidate your knowledge and understanding and are a useful tool to check whether you can remember key topic areas.

Kaplan pocket notes are designed to help you quickly revise a topic area, however you then need to practise questions. There is a need to progress to full exam standard questions as soon as possible, and to tie your exam technique and technical knowledge together.

The importance of question practice cannot be over-emphasised.

The recommended approach below is designed by expert tutors in the field, in conjunction with their knowledge of the examiner and their recent real exams.

The approach taken for the fundamental papers is to revise by topic area. However, with the professional stage papers, a multi topic approach is required to answer the scenario based questions.

You need to practise as many questions as possible in the time you have left.

OUR AIM Our aim is to get you to the stage where you can attempt exam standard questions confidently, to time, in a closed book environment, with no supplementary help (i.e. to simulate the real examination experience).

Practising your exam technique on real past examination questions, in timed conditions, is also vitally important for you to assess your progress and identify areas of weakness that may need more attention in the final run up to the examination.

In order to achieve this we recognise that initially you may feel the need to practise some questions with open book help and exceed the required time.

The approach below shows you which questions you should use to build up to coping with exam standard question practice, and references to the sources of information available should you need to revisit a topic area in more detail.


xx KAPLAN PUBLISHING

Remember that in the real examination, all you have to do is:

• attempt all questions required by the exam

• only spend the allotted time on each question, and

• get them at least 50% right! Try to practise this approach on every question you attempt from now to the real exam.

EXAMINER’S COMMENTS We have included many of the examiner’s comments to the examination questions in this kit for you to see the main pitfalls that students fall into with regard to technical content.

However, too many times in the general section of the report, the examiner comments that students had failed due to:

• “misallocation of time”

• “running out of time” and

• showing signs of “spending too much time on an earlier question and clearly rushing the answer to a subsequent question”.

Good exam technique is vital.

KAPLAN PUBLISHING xx i

THE KAPLAN PAPER P4 REVISION PLAN

Stage 1: Assess areas of strengths and weaknesses

Stage 2: Practise questions Follow the order of revision of topics as recommended in the revision table plan below and attempt the questions in the order suggested.

Try to avoid referring to text books and notes and the model answer until you have completed your attempt.

Try to answer the question in the allotted time.

Review your attempt with the model answer and assess how much of the answer you achieved in the allocated exam time.

Comfortable with the technical content

Not comfortable with the technical content

Read the relevant chapter(s) in Kaplan’s Complete Text

Attempt the Test your understanding

examples if unsure of an area

Attempt appropriate Online Fixed Tests

Review the pocket notes on this area

Determine whether or not the area is one with which you are comfortable

Review the topic listings in the revision table plan below


xxi i KAPLAN PUBLISHING

Fill in the self-assessment box below and decide on your best course of action. Note that :

The “footsteps questions” give guidance on exam techniques and how you should have approached the question.

The “clock questions” have an online debrief where a tutor talks you through the exam technique and approach to that question and works the question in full.

Stage 3: Final pre-exam revision

We recommend that you attempt at least one three hour mock examination containing a set of previously unseen exam standard questions.

It is important that you get a feel for the breadth of coverage of a real exam without advanced knowledge of the topic areas covered – just as you will expect to see on the real exam day.

Ideally this mock should be sat in timed, closed book, real exam conditions and could be a mock examination offered by your tuition provider.

Comfortable with question attempt Not comfortable with question attempts

Only revisit when comfortable with questions on all topic areas

Focus on these areas by: • Reworking test your understanding

examples in Kaplan’s Complete Text • Revisiting the technical content from

Kaplan’s pocket notes • Working any remaining questions on

that area in the exam kit • Reattempting an exam standard

question in that area, on a timed, closed book basis

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xxvi

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KAPLAN PUBLISHING xxvi i

MATHEMATICAL TABLES AND FORMULAE SHEET

Modigliani and Miller Proposition 2 (with tax)

ke = kie + (1 − T)(ki

e − kd) e

d

V

V

The Capital Asset Pricing Model

E(ri) = Rf + βi(E(rm) − Rf)

The asset beta formula

βa =

d

de

de

de

e βT))–(1V+(V

T)–(1V+β

T))–(1V+(VV

The Growth Model

g)–(r

g)+(1D=P

e

00

Gordon’s growth approximation

g = bre

The weighted average cost of capital

)T–(1kV+V

V+k

V+VV

=WACC dde

de

de

e

The Fisher formula

(1+i) = (1+r)(1+h)

Purchasing power parity and interest rate parity

)h(1+

)h(1+×S=S

b

c01

)i(1+

)i(1+×S=F

b

c00


xxvi i i KAPLAN PUBLISHING

Modified Internal Rate of Return

1–)r1(VPVP =MIRR e

n1

I

R +

The Black-Scholes option pricing model

c = PaN(d1) – PeN(d2)e−rt

Where:

ts

)t0.5s+(r+)/PIn(P=d

2ea

1

tsd=d 12 –

The Put Call Parity relationship

p = c − Pa + Pee−rt


KAPLAN PUBLISHING xxix

MATHEMATICAL TABLES

Standard normal distribution table

0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.0 .0000 .0040 .0080 .0120 .0159 .0199 .0239 .0279 .0319 .0359 0.1 .0398 .0438 .0478 .0517 .0557 .0596 .0636 .0675 .0714 .0753 0.2 .0793 .0832 .0871 .0910 .0948 .0987 .1026 .1064 .1103 .1141 0.3 .1179 .1217 .1255 .1293 .1331 .1368 .1406 .1443 .1480 .1517 0.4 .1554 .1591 .1628 .1664 .1700 .1736 .1772 .1808 .1844 .1879

0.5 .1915 .1950 .1985 .2019 .2054 .2088 .2123 .2157 .2190 .2224 0.6 .2257 .2291 .2324 .2357 .2389 .2422 .2454 .2486 .2518 .2549 0.7 .2580 .2611 .2642 .2673 .2704 .2734 .2764 .2794 .2823 .2852 0.8 .2881 .2910 .2939 .2967 .2995 .3023 .3051 .3078 .3106 .3133 0.9 .3159 .3186 .3212 .3238 .3264 .3289 .3315 .3340 .3365 .3389

1.0 .3413 .3438 .3461 .3485 .3508 .3531 .3554 .3577 .3599 .3621 1.1 .3643 .3665 .3686 .3708 .3729 .3749 .3770 .3790 .3810 .3830 1.2 .3849 .3869 .3888 .3907 .3925 .3944 .3962 .3980 .3997 .4015 1.3 .4032 .4049 .4066 .4082 .4099 .4115 .4131 .4147 .4162 .4177 1.4 .4192 .4207 .4222 .4236 .4251 .4265 .4279 .4292 .4306 .4319

1.5 .4332 .4345 .4357 .4370 .4382 .4394 .4406 .4418 .4430 .4441 1.6 .4452 .4463 .4474 .4485 .4495 .4505 .4515 .4525 .4535 .4545 1.7 .4554 .4564 .4573 .4582 .4591 .4599 .4608 .4616 .4625 .4633 1.8 .4641 .4649 .4656 .4664 .4671 .4678 .4686 .4693 .4699 .4706 1.9 .4713 .4719 .4726 .4732 .4738 .4744 .4750 .4756 .4762 .4767

2.0 .4772 .4778 .4783 .4788 .4793 .4798 .4803 .4808 .4812 .4817 2.1 .4821 .4826 .4830 .4834 .4838 .4842 .4846 .4850 .4854 .4857 2.2 .4861 .4865 .4868 .4871 .4875 .4878 .4881 .4884 .4887 .4890 2.3 .4893 .4896 .4898 .4901 .4904 .4906 .4909 .4911 .4913 .4916 2.4 .4918 .4920 .4922 .4925 .4927 .4929 .4931 .4932 .4934 .4936

2.5 .4938 .4940 .4941 .4943 .4945 .4946 .4948 .4949 .4951 .4952 2.6 .4953 .4955 .4956 .4957 .4959 .4960 .4961 .4962 .4963 .4964 2.7 .4965 .4966 .4967 .4968 .4969 .4970 .4971 .4972 .4973 .4974 2.8 .4974 .4975 .4976 .4977 .4977 .4978 .4979 .4980 .4980 .4981 2.9 .4981 .4982 .4983 .4983 .4984 .4984 .4985 .4985 .4986 .4986

3.0 .4987 .4987 .4987 .4988 .4988 .4989 .4989 .4989 .4990 .4990

This table can be used to calculate N (d1), the cumulative normal distribution function needed for the Black-Scholes model of option pricing. If d1 > 0, add 0.5 to the relevant number above. If d1 < 0, subtract the relevant number above from 0.5.


xxx KAPLAN PUBLISHING

Present value table

Present value of 1, i.e. (1 + r)-n

where r = discount rate

n = number of periods until payment

Periods

(n)

1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386

11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239

Periods (n)

11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.206 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162

11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.933 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065


KAPLAN PUBLISHING xxxi

Annuity table

Present value of an annuity of 1, i.e.

where r = interest rate

n = number of periods

Periods (n)

1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 .1783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.893 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145

11 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.00 12.11 11.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367 15 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8.559 8.061 7.606

Periods

(n)

11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.496 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.586 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675

r

r)(1-1 -n+


xxxi i KAPLAN PUBLISHING

KAPLAN PUBLISHING 1

Section 1

PRACTICE QUESTIONS – SECTION A

ROLE AND RESPONSIBILITY TOWARDS STAKEHOLDERS

1 VADENER PLC

Vadener plc, a UK company, has instigated a review of the group’s recent performance and potential future strategy. The Board of Directors has publicly stated that it is pleased with the group’s performance and proposes to devote resources equally to its three operating divisions. Two of the divisions are in the UK, and focus on construction and leisure respectively, and one is in the USA and manufactures pharmaceuticals.

Recent summarised accounts for the group and data for the individual divisions are shown below:

Statements of profit or loss:

Group data £ million 20X3 20X4 20X5 Revenue 1,210 1,410 1,490 Operating costs 800 870 930 –––––– –––––– –––––– Operating profit 410 540 560 Net interest 40 56 65 –––––– –––––– –––––– Profit before tax 370 484 495 Tax (30%) 111 145 149 –––––– –––––– –––––– Profit after tax 259 339 346 Equity dividends 146 170 185 –––––– –––––– –––––– Retained earnings 113 169 161 –––––– –––––– ––––––


2 KAPLAN PUBLISHING

Statements of financial position:

Non current assets: Tangible assets 1,223 1,280 1,410 Intangible assets 100 250 250 Current assets: Inventory 340 410 490 Receivables 378 438 510 Cash 10 15 15 –––––– –––––– –––––– Total assets 2,051 2,393 2,675 –––––– –––––– –––––– Shareholders’ equity 1,086 1,255 1,406 Long term liabilities 400 410 470 Payables falling due within one year: Trade payables 302 401 430 Short term loans 135 170 201 Taxation 55 72 75 Dividends 73 85 93 –––––– –––––– –––––– 2,051 2,393 2,675 –––––– –––––– ––––––

Note:

The 20X5 amount for shareholders’ equity includes a £10 million loss on translation from the US division due to the recent weakness of the $US.

Other group data at year end: 20X3 20X4 20X5 Share price (pence) 1,220 1,417 1,542 Number of issued shares (million) 300 300 300 Equity beta 1.10

The company’s share price has increased by an average of 12% per year over the last five years.

Other data at year end: 20X3 20X4 20X5 FT 100 index 3,700 4,600 4,960 PE ratio of similar companies 15:1 14:1 15:1 Risk free rate (%) 5 Market return (%) 12 Divisional data 20X5 Construction Leisure Pharmaceuticals Revenue (£m) 480 560 450 Operating profit 160 220 180 Estimated after tax return (%) 13 16 14 Data for the sector: Construction Leisure Pharmaceuticals Average asset beta 20X5 0.75 1.10 1.40

PRACTICE QUESTIONS – SECTION A : SECTION 1

KAPLAN PUBLISHING 3

Required:

(a) Evaluate and comment on the performance of Vadener plc and each of its divisions. Highlight performance that appears favourable, and any areas of potential concern for the managers of Vadener. Comment upon the likely validity of the company’s strategy to devote resources equally to the operating divisions.

All relevant calculations must be shown. Approximately 19 marks are available for calculations, and 9 for discussion. (28 marks)

Professional marks for format, structure and presentation of the report for part (a). (4 marks)

(b) Discuss what additional information would be useful in order to more accurately assess the performance of Vadener plc and its divisions. (7 marks)

(c) Discuss the possible implications for Vadener plc of the £10 million loss on translation, and recommend what action, if any, the company should take as a result of this loss. (7 marks)

(d) The company has been advised that it can increase income by writing (selling) options. Discuss whether or not this is correct, and provide a reasoned recommendation as to whether or not Vadener plc should adopt this strategy. (4 marks)

(Total: 50 marks)

ADVANCED INVESTMENT APPRAISAL

2 WURRALL INC

The board of directors of Wurrall Inc has requested the production of a four-year financial plan. The key assumptions behind the plan are:

(i) Historically, sales growth has been 9% per year. Uncertainty about future economic prospects over the next four years from 20X5–8, however, implies that this growth rate will reduce by 1% per year after the financial year 20X5 (e.g. to 8% in 20X6). After four years, growth is expected to remain constant at the 20X8 rate.

(ii) Cash operating costs are estimated to be approximately 68% of sales.

(iii) Tax allowable depreciation for the past few years has been approximately 15% of the net book value of plant and machinery at year end. This is expected to continue for the next few years.

(iv) Inventories, receivables, cash in hand and ‘other payables’ are assumed to increase in proportion to the increase in sales.

(v) Investment in, and net book value of, plant and machinery is expected to increase in line with sales. No investment is planned in other non-current assets other than a refurbishment of buildings at an estimated cost of $40 million in late 20X7.

(vi) Any change in interest paid as a result of changes in borrowing may be assumed to be effective in the next year. Wurrall plans to meet any changes in financing needs, with the exception of the repayment of the fixed-rate loan, by adjusting its overdraft.

(vii) Wurrall currently pays 7% per annum interest on its short-term borrowing.

(viii) Corporation tax is expected to continue at its present rate over the next four years.

Documents

Paper P4 Advanced Financial Management EXAM KIT - … · PAPER P4 : ADVANCED FINANCIAL MANAGEMENT ... Exam technique xiii ... 84 JJJ Co 117 397 – 85 Strom Co 118 400 Dec 12(A)