Question 1

Which of the following best describes the goal of WACC as a measure?

Options :

A : To work out the average return that is required by the company on its investments in order to satisfy all shareholders and debt holders.

B : To work out the average return that is required by the company on its investments in order to satisfy all shareholders.

C : To work out the average return that is required by the company on its investments in order to satisfy all debt holders.

D : To work out the minimum return that is required by the company on its investments in order to satisfy all shareholders and debt holders.

Answer: A

Question 2

MNO is listed on its local stock exchange. It has a high level of gearing compared to the industry average as a result of rapid expansion funded by debt. The directors of MNO would like to reduce the level of gearing by raising equity to fund the next expansion project. The directors are considering whether to use a placing of new shares or a rights issue.

Which of the following statementsis true?

Options :

A : A rights issue would not need to be underwritten because the risk of the shares not being taken up is small compared to a placing.

B : The administration costs associated with a placing are usually more expensive than a rights issue because less investors are involved.

C : A placing will increase the proportion of the total number of MNO-s shares held by large investors.

D : The directors must use a placing before offering the rights issue to existing shareholders.

Answer: C

Question 3

LM has made the following share purchases during the year:

* Purchased 55% of the equity share capital of OP.

* Purchased 45% of the equity share capital of QR.LM have the power to appoint the majority of board members on the QR board.

* Purchased 30% of the equity share capital of ST. LM is represented by one director on the main board of ST which has five members in total. The other 70% of ST's equity share capital is owned by a single company, UV.

The Managing Director has told you that OP has performed well, but both QR and ST have not performed as expected. He is therefore pleased thatOP will be included as a subsidiaryand that QR and ST will only be included as investments in the group financial statements.

In accordance with the ethical principle of professional competence and due care how should the investments in OP, QR and ST be treated in the group financial statements?

Options :

A : OP and QR should be consolidated and ST should be equity accounted

B : OP should be consolidated and QR and ST should be equity accounted.

C : OP should be consolidated, QR should be equity accounted and ST should be valued at cost.

D : OP and QR should be equity accounted and ST should be valued at cost.

Answer: A

Question 4

JKL measure gearingas debt:equity, based on book values.At 31 December 20X5the ratio is 2:3 and JKL would like this to be 2:5.

Which of the following transactions individually would achieve this?

Options :

A : Bonus issue from the share premium account.

B : Revaluationof investment propertyto an increased fair value.

C : Repayment of a6 year termloan with the issue of 5 year redeemable debentures.

D : Issue of redeemable preference shares at par.

Answer: B

Question 5

AB's financial information shows that thenon current assets' carrying value is greater than the tax base at the year end.

What is the journal entry to record the movement in the provision for deferred tax resulting from this difference?

Options :

A : Dr Deferred tax provisionCr Tax expense

B : Dr Deferred tax provisionCr Other comprehensive income

C : Dr Tax expenseCr Deferred tax provision

D : Dr Other comprehensive incomeCr Deferred tax provision

Answer: C