Question 1

A company financed by equity and debt can be valued by discounting:

Options :

A : free cash flow before interest at WACC.

B : free cash flow before interest at the cost of equity.

C : free cash flow after interest at WACC.

D : free cash flow after interest at the cost of equity.

Answer: A

Question 2

An entity prepares financial statements to 31 December each year. The following data applies:

1 December 20X0

• The entity purchased some inventory for $400,000.

• In order to protect the inventory against adverse changes in fair value the entity entered into a futures

contract to sell the inventory for a fixed price on 31 January 20X1.

• The entity designated this contract as a fair value hedge of the value of the inventory.

31 December 20X0

• The inventory had a fair value of $480,000 and the futures contract had a fair value of $75,000 (a financial

liability).

What will be the impact on the statement of profit or loss and other comprehensive income for the year ended

31 December 20X0 in respect of the change in the value of the inventory and the futures contract?

Options :

A : A loss of $75,000 will be recognised in profit or loss.

B : A loss of $75,000 will be recognised in other comprehensive income.

C : A net gain of $5,000 will be recognised in profit or loss.

D : A net gain of $5,000 will be recognised in other comprehensive income.

Answer: C

Question 3

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 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

Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is

then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes.

Finished goods are distributed by network of sales agents.The directors of Company A are now considering

acquiring one or more smaller companies by means of vertical integration to improve profit margins.

Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim

of vertical integration?

Options :

A : A company in a similar market to Company A.

B : A pottery factory in the Middle East.

C : A company that produces accessories.

D : A listed international logistics firm.

Answer: D