P4: PROGRESS TEST 1
Progress Test 1 A
Multiple choice questions
(8 questions approximate time 40 minutes) 1
Which of the following factors is least likely to explain why the capital asset pricing model may not accurately predict the return expected by investors? A B C D
2
3
No adjustment is made for the extra risk faced when investing a small company Share prices are significantly influenced by behavioural factors such as herding Some investors do not have diversified portfolios Some events (e.g. an earthquake) cannot be predicted (2 marks)
Which of the following is not a feature of the triple bottom line approach? A
Measurement of social objectives eg ethnic/gender diversity
B
Measurement of environmental issues eg CO2 emissions
C
Measurement of economic objectives eg number of jobs created in the local community
D
Measurement of the strength of intangibles associated with brand and reputation (2 marks)
Tryme plc issued its 7% irredeemable debentures at £98. Issue costs are 2% of the nominal value. The company is paying corporation tax at a rate of 28%. The cost of capital to the company of these debentures is A B C D
5.1% 5.0% 7.3% 5.3%
(2 marks)
3
P4: PROGRESS TEST 1
Data for questions 45 The dividends and earnings of Sparsholt plc over the last five years have been as follows: Dividends £ 400,000 416,500 434,500 461,000 479,000
Year 20X1 20X2 20X3 20X4 20X5
Earnings £ 813,000 835,000 864,000 894,000 598,750
The company is all-equity financed and there are 2 million shares in issue, with a market value of £1.78 ex-div.
4
On the assumption that the data for 20X120X5 provides a basis for estimating future trends, what is the cost of equity? A B C D
5
18.7% 17.7% 18.1% 17.2%
(2 marks)
One of the directors has criticised the use of historic data, and has suggested that since the company is now paying out a greater percentage of earnings each year, an estimate of dividend growth based on the current reinvestment level would be more appropriate. Using the current reinvestment level, and assuming a 20% return on equity, what is the cost of equity? A B C D
31.6% 18.0% 29.5% 17.5%
(2 marks)
Data for questions 67 It is now 20X7. Spinethorne plcs equity has a beta factor of 0.9. The company is financed by a mixture of equity, preference shares and redeemable long-term debt capital, as follows. £1 Ordinary shares: 7% Preference shares of £1 each: 20Y2 5% Debt capital
40 million shares, market value £2 per share 20 million shares, market value 100p per share £20,000,000, market value £90, redeemable at par
The market rate of return is 8%, the risk-free rate of return is 5% and the rate of corporation tax 30%.
4
P4: PROGRESS TEST 1
6
What is Spinethornes cost of equity (Ke), cost of debt (Kd, post-tax, to the nearest %) and cost of preference shares (Kp)? A B C D
7
(4 marks)
What is Spinethornes WACC? A B C D
8
Ke = 7.7%, Kd = 6%, Kp = 7% Ke = 12.2%, Kd = 8%, Kp = 7% Ke = 7.7%, Kd = 8%, Kp = 7% Ke = 12.2%, Kd = 6%, Kp = 7% 7.1% 7.3% 9.0% 6.0%
(2 marks)
Cranmoor Limited is about to embark on a project to install eco friendly air-conditioning systems. It involves an initial outlay of £120,000 and cash inflows, at current prices, of £50,000, £60,000, and £40,000 at the end of years 1,2 and 3 respectively. Inflation is expected to be running at 10% p.a. during the life of the project, and the real cost of capital is 10%. What is the net present value of the project? A B C D
£30,000 £6,100 £5,050 (£15,300)
(2 marks)
5
P4: PROGRESS TEST 1
B
Short written questions (4 questions approximate time 20 minutes)
1
Explain the practical implications of behavioural finance
2
Identify four reasons why earnings per share is not sufficient as a financial objective. (4 marks)
3
Identify the main aim of financial strategy and the key decisions necessary to achieve it. (5 marks)
4
Describe the features of a company that should pay high dividends and/or use high levels of gearing. (3 marks)
END OF PROGRESS TEST
6
(7 marks)
