Question 1

Z wishes to borrow at a floating rate and has been told that it can use swaps to reduce the effective interest rate

it pays. Z can borrow floating at Libor ' 1, and fixed at 10%.

Which of the following companies would be the most appropriate for Z to enter into a swap with?

Options :

A : Company A - it can borrow floating L +1 ½ and fixed at 9.5%

B : Company D - it can borrow at L +1 ½ and fixed at 10.5%

C : Company C - it can borrow at L +1 ½ and fixed at 9%

D : Company E - it can borrow floating at L +1 ½ and fixed at 12%

Answer: C

Question 2

Company X is based in Country A, whose currency is the A$.

It trades with customers in Country B, whose currency is the B$.

Company X aims to maintain its revenue from exports to Country B at 25% of total revenue.

Company A has the following forecast revenue:

The forecast revenue from Country B has assumed an exchange rate of A$1/B$2, that is A$1 = B$2.

If the B$ depreciates against the A$ by 10%, the ratio of revenue generated from Country B as a percentage of

total revenue will:

Options :

A : fall to 23.3%.

B : rise to 27.0%.

C : rise to 30.3%.

D : fall to 22.7%.

Answer: A

Question 3

M is an accountant who wishes to take out a forward rate agreement as a hedging instrument but the company treasurer has advised that a short-term interest rate future would be a better option. Which of the following is true of a short-term interest rate future?

Options :

A : It can be tailored to the exact reeds of the company.

B : It interest rates have gone down the price of the future will have fallen.

C : It must be kept for ne whole duration of the contract

D : The date is flexible and the position can be closed quickly and easily.

Answer: C

Question 4

A company has:

• 10 million $1 ordinary shares in issue

• A current share price of $5.00 a share

• A WACC of 15%

The company holds $10 million in cash. No interest is earned on this cash.

It will invest this in a project with an expected NPV of $4 million.

In a semi-strong efficient stock market, which of the following is the most likely share price immediately after

the announcement of the new investment?

Options :

A : $5.40

B : $6.40

C : $6.80

D : $5.30

Answer: A

Question 5

A company based in Country D, whose currency is the D$, has an objective of maintaining an operating profit

margin of at least 10?ch year.

Relevant data:

• The company makes sales to Country E whose currency is the E$. It also makes sales to Country F whose

currency is the F$.

• All purchases are from Country G whose currency is the G$.

• The settlement of all transactions is in the currency of the customer or supplier.

Which of the following changes would be most likely to help the company achieve its objective?

Options :

A : The D$ strengthens against the E$ over time.

B : The F$ weakens against the D$ over time.

C : The D$ strengthens against the G$ over time.

D : The D$ weakens against the G$ over time.

Answer: C