ACCA FM Trial Exam AS 2023

QUIZ 2 _FM_23.01.23

Section A

1. Which of the following statements is correct?

A Profit maximisation results in shareholder wealth maximisation

B Separation of ownership and control can lead to agency costs
C Maximising earnings per share results in shareholder wealth maximisation
D Increasing market share will lead to increased shareholder wealth

2. Which of the following best describes commercial paper?

A Unsecured long-term loan notes issued by companies

B Unsecured short-term loan notes issued by companies
C Secured long-term loan notes issued by companies
D Secured short-term loan notes issued by companies

3. The government adopts an expansionary fiscal policy and ABC Co is considering how this will
affect its future plans.

How would an expansionary fiscal policy affect ABC Co?

(1) Lower interest rates on company debts
(2) Higher demand for its product
(3) Higher taxation rates on company income

A 1 and 2
B 3 only
C 2 and 3
D 2 only

4. Which TWO of the following are features of overtrading?

A Producing less than demand

B Suffering greater risk due to frequent trading in stocks and shares
C Suffering liquidity problems due to growing too rapidly
D Producing more than demand
E A rapid increase in current assets mostly financed by credit

5. During a particular year, a company’s current assets increased by $100,000 and at the same time
its current liabilities decreased by $35,000.
What was the effect on net working capital?
ACCA FM Trial Exam AS 2023

A Increased by $135,000
B Increased by $65,000
C Decreased by $65,000
D Decreased by $135,000

6. A business wishes to keep a minimum cash balance of $12,000 to ensure its daily cash needs are
covered. Every time it transfers money to and from its short-term investments there is a fixed
fee of $25. The standard deviation of its cash flows is $5,000 per day and the interest rate is
3.65% per annum.
What is the maximum cash balance that should be held by the business using Miller Orr
Model?

A $15,633
B $50,207
C $28,735
D $62,507

7. The annual sales volume and the contribution per unit of a new product are uncertain. They are
assumed to be independent. Estimate for these two variables are as follows:
Sales units Probability Contribution/unit Probability
40,000 0.2 $3.00 0.5
38,000 0.6 $2.00 0.5
28,000 0.2

The annual fixed costs are estimated to be $100,000.

What is the percentage probability of making a loss?

A 100%
B 60%
C 50%
D 40%

8. A company has agreed to lease a machine for a period of seven years, with equal annual
payments payable at the start of each year. The NPV of the agreement, at a discount rate of
10%, is $52,000. Ignore taxation.
What is the annual lease payment (to the nearest $)?

A $8,861
B $9,710
C $10,682
D $11,940
ACCA FM Trial Exam AS 2023

9. When issuing new loan notes, what would be the primary reason for a debt covenant limiting
the company’s future level of debt?

A To cause the company’s share price to rise

B To lower the company’s credit rating
C To reduce issue costs
D To reduce the annual interest rate

10. A company is facing capital rationing and is in the process of making investment decision for the
coming year. It has only $460,000 to invest and is considering the following projects:
Initial cost PV
Project A $200,000 $255,000
Project B $300,000 $375,000
Project C $150,000 $190,000
Project D $250,000 $315,000
Project E $160,000 $210,000

The projects are non-divisible, and none can be delayed.

Project C and E are mutually exclusive.

What is the maximum NPV that can be generated (to the nearest $)?

$ ________________

11. Which of the following is/are TRUE regarding dividend irrelevance theory?
1) The value of a company is determined solely by the earnings of its investment decisions.
2) A company cannot reduce dividend payments to finance investments.
3) No transaction costs are incurred in selling shares.

A 1 only
B 1 and 2
C 1 and 3
D 1, 2 and 3

12. Trill Co has an asset beta factor of 1.2 and an equity beta of 1.5. It does not pay tax on its profits.
Which of the following statements is/are consistent with this data?
1 Trill Co’s shares are not exposed to systematic risk.
2 Trill Co has equity of $100 million and debt of $40 million.

A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
ACCA FM Trial Exam AS 2023

13. Ehsan Sports imports expensive footwear from Nagaland. It is about to purchase goods with a
value of 1,000,000 Naga Francs (NF) which will be paid for in three months’ time. It has decided
to pay for the items in NF and as a hedge against adverse currency movements has signed a
three-month forward exchange contract for NF.

On the date the contract was signed the following information was available:
Spot NF / $ 10.2750 +/- 0.0100
1 month forward 10.3263 +/- 0.0120
3 month forward 10.4000 +/- 0.0150

What is the cost of the purchase of footwear?

A $96,154
B $96,015
C $96,293
D $97,324

14. Grosser Co must make a payment of €450,000 in six months’ time. Now is June.
Exchange rates to the $
Spot €1.9030 +/- 0.0020
6 months forward €1.8938 +/- 0.0112
Money markets annual interest rates
Borrowing Investing
Europe (€) 6% 5%
US ($) 7% 6%

What would be the cost (in six months’ time) of a money market hedge if Grosser Co
currently has a substantial cash flow surplus in its $ current account?

A $237,872
B $239,027
C $241,226
D $237,373

15. The exchange rate between the US dollar ($) and the euro (€) is $1.20 = €1. Interest rates in USA
are 4.5% and in Europe they are 6%.
What is the six-month forward exchange rate implicit in this data?

A $1.1915
B $1.2086
C $1.1830
D $1.2172
ACCA FM Trial Exam AS 2023

Section B
Klara Co (UK company, currency pound sterling £) is planning to expand business operation with
companies in European countries like France and Spain. The company has been doing very well in its
business transactions in Europe (currency is Euro (€)) at the moment and would like to take advantage
of the huge market in Europe. Klara co will be building a new distribution hub. To do this Klara Co is
planning to borrow £6 million in six months’ time for nine months to fund the expansion. The managing
director is worried as there is a possibility that interest rates will rise in that time.

The finance department is offered by a bank a forward rate agreement (FRA) with an interest rate
spread of 3.2% – 2.9% per annum.

Other information
Business report in news has announced that interest rates in the UK are predicted to be 3.1% over the
coming year and that interest rates in the Eurozone are predicted as 3.9% and he knows that this
information can help in predicting the exchange rate.

The current spot rate of exchange is €1.174 = £1.

The managing director has told you that he has heard of forward exchange and futures contracts but
is not sure about the differences between them.

16. If the interest rate in six months’ time is 2.6% per annum and Kermeen Co takes out the
necessary planned loan at this rate, what will be the amount paid/received to/from the FRA
bank?

A. £27,000 received from the FRA bank

B. £27,000 paid to the FRA bank
C. £13,500 received from the FRA provider
D. £13.500 paid to the FRA provider

17. Using the predicted interest rates in the UK and the Eurozone, what is the predicted Euro to
sterling forward exchange rate in 6 months’ time?

A € 1.1695
B € 1.1785
C € 1.1831
D € 1.1922

18. Which of the following statements about interest rate risk and currency risk is true?
ACCA FM Trial Exam AS 2023

A An exporter invoicing in the currency of its customers will face economic risk but not
transaction risk.
B A business with minimal foreign currency transactions will not benefit substantially from
hedging against currency risk.
C Interest rate floors are most useful for borrowers to keep the borrowing rate low.
D Interest rate swaps involve swapping interest payments on floating and fixed rate loans but
not swapping the loans themselves.

19. Which TWO of the following statements about the similarities and differences between
forward exchange contracts and futures contracts are true?

A. Both forward exchange contracts and futures contracts fix the rate of exchange on a future
currency transaction.
B. Forward contracts can be traded on the stock market, but futures contracts cannot.
C. Forward contracts are a binding commitment, but futures contracts can be allowed to
lapse.
D. Forward contracts can be for any date, but futures contracts can only be settled on
particular dates..

20. Which TWO of the following would be appropriate methods of minimising the foreign
exchange risk on the future receipts from French customers if the managing director’s
expectations about the exchange rate are correct?

A. Buy Euro denominated futures up front and sell on close out.

B. Sell Euro denominated futures up front and buy back on close out.
C. A put option on Euros.
D. A call option on Euros.

Case 2: Jardin Co Question 21-25

Jardin Co is company in the retail sector. The directors of Jardin Co are considering making an offer to
buy 100% of the shares in Sinergi Co, a competitor company. Extracts from the most recent financial
statements of Sinergi Co are as follows:

Statement of profit or loss for the year ended 31 December 20X2

$m
Profit before tax 2.20
Tax 30% 0.66
Profit after tax 1.54
Dividends 0.25

Statement of financial position as at 31 December 20X2

$m
Land and buildings 8.50
Plant and machinery 5.80
ACCA FM Trial Exam AS 2023

Current assets 4.30

Share capital $0.50 ordinary shares 0.60
Retained earnings 7.80
6% Irredeemable loan stock 8.00
Current liabilities 2.20

Additional information
A recent independent valuation of some of the company’s assets showed that the land and buildings
were worth $9.6m and the plant and machinery $3.2m. The current asset balance includes a receivable
of $0.3m from a company that is going to be liquidated and some inventory worth $0.4m less than its
book value.

Some research into listed companies in the retail industry shows the following:
Average PE ratio 11 times
Average dividends yield 4%

21. Calculate the total equity value of Jardin Co at 31 December 20X2 using the net asset basis.

A $8,400,000
B $6,200,000
C $14,300,000
D $6,800,000

22. Calculate the value per share of Jardin Co at 31 December 20X2 using dividend yield method.
Show your answer to the nearest $.

$ ____________________________

23. Which of the following statements is correct?

A A bonus issue can be used to raise new equity finance

B A share repurchase scheme can increase both earnings per share and gearing
C Miller and Modigliani argued that the dividend decision is more important than the
investment decision
D Shareholders usually have the power to increase dividends at annual general meetings of a
company

24. Which of the following are possible reasons for estimating the market value of a private
company’s shares?

A To comply with International Financial Reporting Standards

B To set a guide price in an initial public offering (IPO)
ACCA FM Trial Exam AS 2023

C To allow the company’s return on equity to be calculated

D To set a guide price for a scrip issue of shares

25. The efficient markets hypothesis refers to the way in which the prices of traded financial
securities reflect relevant information.
Which TWO of the following are true for a weak-form efficient market?

A The market does not provide enough information to make good buying and selling
decisions
B Share prices appear to follow a 'random walk'
C Share prices reflect past information
D Share prices reflect private information

Case 3: Penton Co Question 26-30

Penton Co purchases both products R and material W, with purchases of both occurring evenly
throughout the year.

Product R
The monthly demand for Product R is 30,000 units and currently inventory is ordered in quantities of
18,000 units. A delivery cost of $300 is charged by the supplier for each delivery regardless of its size.
There are no further administrative costs connected with ordering the product. The cost of holding
one unit of product R is $0.15 per year. A buffer inventory equal to 9,000 units is maintained.

Material W
The annual demand for material W is 500,000 units per year and Penton Co buys this product for $1.50
per unit on 50 days credit. The supplier has offered a discount of 1% for settlement of invoices within
15 days.

Assume there are 365 days in each year.

26. What are the CURRENT ordering and holding costs associated with the purchase of Product
R?

A Ordering cost of $6,000 and Holding cost of $6,000

B Ordering cost of $6,000 and Holding cost of $1,350
C Ordering cost of $1,350 and Holding cost of $1,350
D Ordering cost of $6,000 and Holding cost of $2,700

27. What is the economic order quantity for Product R to the nearest 1,000 units?

A Zero units
ACCA FM Trial Exam AS 2023

B 1,000 units
C 11,000 units
D 38,000 units

28. Assuming that the EOQ is 25,000, what is the impact on annual ordering costs and holding
costs compared to the current situation where the order quantity is 18,000 units?

A Holding costs will go up and ordering costs will go down

B Holding costs will go up and ordering costs will go up
C Holding costs will go down and ordering costs will go up
D Holding costs will go down and ordering costs will go down

29. If the early settlement discount from the supplier of material W is accepted, what will the
impact be on Penton Co’s average payables balance to the nearest $,000?

A Increase by $48,000
B Reduce by $48,000
C Increase by $72,000
D Reduce by $72,000

30. Which of the following scenarios best illustrates an aggressive approach to financing working
capital?

A Long term finance used to fund all working capital

B Long term finance used to fund permanent working capital only
C Short term finance used to fund all working capital
D Short term finance used to fund fluctuating working capital only