Monitoring Test 2C
Financial
Management
F9FM-MT2C-X15-Q
Time allowed
1½ hours
ALL 25 questions are compulsory and MUST be attempted
Formulae Sheet, Present Value and Annuity Tables are on
pages 10 – 12.
Do NOT open this paper until instructed by the supervisor.
You must NOT write in your answer booklet until instructed
by the supervisor.
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ANSWER SHEET
Name ……………………………..................
Firm ………………………. Date …………..
Candidates: Put ONE answer (A, B, C or D) only in the answer column for each item.
Question
Answer
Mark
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
TOTAL
×2=
%
Marker: Cross out each INCORRECT answer. Sum the number of CORRECT answers. Multiply
total by 2 to obtain % based on total marks available of 50.
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2
ALL 25 questions are compulsory and MUST be attempted
1
The following items have been extracted from a company’s budget for next month:
$
240,000
180,000
15,000
20,000
12,000
Sales revenue
Cost of sales
Expected decrease in trade payables
Expected increase in inventory
Expected decrease in trade receivables
What is the budgeted receipt from customers next month?
A
B
C
D
2
$228,000
$232,000
$252,000
$272,000
(2 marks)
A company has a positive level of working capital but has an overdraft. The following
transactions are planned:
Transaction 1:
Cash is received from credit customers and is then used to reduce the overdraft.
Transaction 2:
A non-current asset is sold for cash and this is used to reduce the overdraft.
What will be the impact each transaction on the current ratio?
A
B
C
D
3
Transaction 1
Increase
Increase
Decrease
Decrease
Transaction 2
Increase
Decrease
Increase
Decrease
(2 marks)
Which of the following would be LEAST LIKELY to arise from the introduction of a
just-in-time inventory ordering system?
A
B
C
D
Lower stockholding costs
Less risk of inventory shortages
More frequent deliveries
Increased dependence on suppliers
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3
(2 marks)
4
Consider the following statements about the cost of capital:
Statement 1
The cost of equity is generally lower than the cost of debt as dividend payouts are lower than
interest rates.
Statement 2
As financial gearing rises, the cost of equity and the cost of debt both increase, thus the
weighted average cost of capital always rises with an increase in gearing.
What is the validity of the each statement?
Statement 1
True
False
True
False
A
B
C
D
5
Statement 2
True
True
False
False
(2 marks)
A company is considering a two-year project. Machine set-up costs will be $150,000 payable
immediately. Working capital of $4,000 is required at the beginning of the project and will be
released at the end. All net revenues from the project will be received at the end of the twoyear period.
Given a cost of capital of 10%, what is the minimum acceptable net revenue from the
project to the nearest $1,000?
A
B
C
D
6
$151,000
$154,000
$182,000
$186,000
The internal rate of return is the discount rate that equates the present value of
operating cash flows to which ONE of the following?
A
B
C
D
7
(2 marks)
the present value of investing cash flows
the net book value of the investment
zero
the firm’s weighted average cost of capital
(2 marks)
A firm undertakes the following project.
Cost of equipment
Life of equipment
Scrap value
$15,000
4 years
$1,000
Expected operating cash flows
Year 1
Year 2
Year 3
Year 4
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$6,000
$5,000
$6,000
$2,000
4
What is the return on capital employed, calculated on the average investment?
A
B
C
D
8
6.6%
8.3%
12.5%
15.6%
(2 marks)
The following information relates to an asset which a company is considering leasing or
buying.
Life of asset
Cost if purchased
Residual value
Lease details:
10 years
$28,000
$3,000
Ten annual payments of $3,800 to be made at the start of each year
The firm uses a 10% discount rate to evaluate lease versus buy decisions.
Ignoring taxation, what (to the nearest $100) is the net benefit (in present value terms)
of leasing the asset as opposed to purchasing it?
A
B
C
D
9
$1,200
$2,300
$3,500
$4,700
(2 marks)
A project has a life of three years. In the first year it is expected to generate sales of
$200,000, increasing by 10% compound per annum over the remaining two years. At the
start of each year working capital is required equal to 10% of the sales revenue for that year.
All working capital will be released at the end of the project.
The firm uses a 20% discount rate.
What is the net present value (to the nearest $000) of the working capital cash flows of
the project?
A
B
C
D
10
Nil
$(9,000)
$(17,000)
$(55,000)
(2 marks)
A company has just paid a dividend of 39.25 cents per share. Previous dividends have been
as follows.
Four years ago
Three years ago
Two years ago
One year ago
30.00 cents
32.40 cents
34.50 cents
36.50 cents
The current ex-dividend market price per share is $8.31
What is the firm’s cost of equity?
A
B
C
D
12.0%
11.8%
11.7%
11.5%
©2015 DeVry/Becker Educational Development Corp. All rights reserved.
(2 marks)
5
Monitoring Test 2C
Financial
Management
F9FM-MT2C-X15-A
Answers & Marking Scheme
©2015 DeVry/Becker Educational Development Corp. ®
Question
Answer
Mark
1
C
2
2
A
2
3
B
2
4
D
2
5
C
2
6
A
2
7
D
2
8
A
2
9
B
2
10
A
2
11
B
2
12
B
2
13
C
2
14
C
2
15
A
2
16
B
2
17
D
2
18
C
2
19
B
2
20
C
2
21
A
2
22
A
2
23
A
2
24
B
2
25
B
2
TOTAL
%
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2
Item Answer
Justification
1
C
$240,000 + $12,000 = $252,000
2
A
Positive level of working capital means that current assets exceed current liabilities.
Suppose current assets = $150,000 and current liabilities = $100,000 (including
overdraft). Existing current ratio = 1.50
Suppose a credit customer pays $10,000. Receivables fall and overdraft falls. New
current ratio = $140,000/$90,000 = 1.56
Sale of non-current asset does not affect current assets but the fall in overdraft
reduces current liabilities and increases the current ratio.
3
B
JIT minimises inventory levels and therefore exposes the firm to a higher risk of
stock-outs
4
D
The cost of equity is higher than the cost of debt as equity investors face higher
risks and demand higher returns (through a combination of dividends and growth).
An increase in financial gearing will increase the cost of equity (due to higher
financial risk) but, as debt is a legally binding contract for fixed returns, the cost of
debt will not rise (until credit risk becomes significant).
5
C
Present value of investment cost = $(150,000 + 4,000) – ($4,000 × 0.826)
= $150,696
Minimum acceptable present value of revenues = $150,696
Future value of revenues = $150,696/0.826 = $182,000 (approx)
6
A
IRR is the discount rate at which NPV equals zero (i.e. where the present value of
the cost of investments equals the present value of the project’s returns)
7
D
ROCE
=
Average cash flow
=
Average depreciation
=
Average operating profit
= $(4,750 – 3,500)
= $1,250
Average investment
= $(15,000 + 1,000)/2
= $8,000
ROCE
=
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Average operating profit
Average investment
$19,000
4
= $4,750
$15,000 - $1,000
4
= $3,500
1,250
8,000
= 15.6%
3
8
A
PV of lease payments
= $3,800 × (1 + 5.759)
= $25,684
Tutorial note: as the lease payments will be made at the start of each year they are
from time 0 – 9. Hence a nine-year annuity factor of 5.759 has been used, then the
factor 1 added for the first payment at time 0.
PV of buy option
= $28,000 – ($3,000 × 0.386)
= $26,842
Net benefit of leasing
= $(26,842 – 25,684)
= $1,158
≈ $1,200 rounded
9
B
t0
$000
Sales
Working capital
WC cash flow
20
(20)
Discount factor
1
Present value
NPV
10
A
g
t1
$000
200
22.0
(2.0)
0.833
(20)
(1.7)
= ($9,200)
≈ ($9,000) rounded
=
4
39.25  30.00 – 1
 6.95%
ke
=
=
D 0 (1  g)
+g
P0
39.25  1.0695
831
+ 0.0695
= 12%
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4
t2
$000
220.0
24.2
(2.2)
0.694
(1.5)
t3
$000
242.0
24.2
0.579
14.0