Mock Exam free essay sample

No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. The unit sales price, unit variable cost and total fixed costs in year 1 are expected to be $100, $40 and $1 million respectively. After year 1 prices and costs are expected to rise at the same rate as the previous year’s level of inflation in the USA; this is forecast to be 5% per year for the next five years. We will write a custom essay sample on Mock Exam or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In addition, a fixed royalty of ? 5 per unit will be payable to the parent company, payment to be made at the end of each year. Brookday has a four year planning horizon and estimates that the realisable value of the fixed assets in four years’ time will be $20 million. It is the company’s policy to remit the maximum funds possible to the parent company at the end of each year. Assume that there are no legal complications to prevent this. Brookday currently exports to the USA yielding an after-tax net cash flow of ? 100,000. No production will be exported to the USA if the subsidiary is established. It is expected that new export markets of a similar worth in Southern Europe could replace exports to the USA. United Kingdom production is at full capacity and there are no plans for further expansion in capacity. Tax on the company’s profits is at a rate of 50% in both countries, payable one year in arrears. A double taxation treaty exists between the UK and USA and no double taxation is expected to arise. No withholding tax is levied on royalties payable from the USA to the UK. Tax allowable depreciation is at a rate of 25% on a straight line basis on all fixed assets. Brookday believes that the appropriate beta for this investment is 1. 2. The market rate of return is 12%, and the risk-free rate is 7%. The current spot exchange rate is US $1. 300/? 1, and the pound is expected to fall in value by approximately 5% per year relative to the US dollar. Required: (a) Evaluate the proposed investment from the viewpoint of Brookday plc. State clearly any assumptions that you make. (20 marks) (b) What further information and analysis might be useful in the evaluation of this project? (10 marks) Briefly discuss ethical issues that might need to be considered as part of a multinational company’s investment decision process (5 marks) (Total: 35 marks) (c) Page 10 of 14 KAPLAN PUBLISHING Revision Mock Questions SECTION B TWO QUESTIONS ONLY TO BE ATTEMPTED QUESTION 3 The following data relates to a large company operating in the electronics industry. 0X3 After tax earnings (? million) Dividend per share (pence) Number of ordinary shares (million) Average share price (pence) Net capital investment (? million) Annual increase in inflation (%) 130 9. 75 508 740 210 4 20X4 195 11. 0 600 875 270 4 20X5 255 12. 75 650 690 340 3 20X6 295 14. 0 695 20X7 472 15. 5 930 820 1,012 410 520 3 3 A major institutional shareholder has criticised the level of dividend payment of the company suggesting that it should be substantially increased. Required: (a) Briefly discuss the factors that are likely to influence the companys dividend policy. 6 marks) Discuss whether or not the institutional shareholders criticism is likely to be valid. (6 marks) Hiome plc has experienced a period of above average growth for its industry, but is now growing at a normal rate of about 10% per annum. The company’s directors are reviewing the current dividend policy. One director has suggested that, as the company no longer needs as much internally generated funds to finance new investment, a higher proportion of earnings should be paid out as dividends in order to benefit the company’s shareholders. Another director has read that two eminent economists, Miller and Modigliani, have stated that the pattern of dividend payouts is irrelevant, and therefore shareholders will experience no gain from a higher level of dividends. Discuss whether or not an increase in dividends is likely to benefit the shareholders of Hiome plc. (8 marks) (Total: 20 marks) (b) (c) KAPLAN PUBLISHING Page 11 of 14 ACCA P4 Advanced Financial Management QUESTION 4 (a) One of the most important elements of any decision is the specification of goals or objectives which the decision maker seeks to achieve. The literature on capital budgeting, or investment appraisal, generally assumes the goal of a company is the maximisation of shareholder wealth. Required: Discuss the rationale for this assumption. Include in your discussion an explanation of alternative goals available to companies. (12 marks) (b) XYZ plc is a medium-sized company operating in the chemical industry. It is a profitable business, currently producing at below maximum capacity. It has one large factory located on the outskirts of a small industrial town. It is the region’s main employer. The company is evaluating a project which has substantial environmental implications. Required: Discuss the inclusion of environmental costs and benefits into the investment appraisal process, and explain how this might be done. (8 marks) (Total: 20 marks) QUESTION 5 Island Energy Ltd is a small private company on the Island of Senyeh ? a small island whose company law and accountancy practices are based on those of the UK. The company is the monopoly provider of all domestic fuels (electricity, gas and heating oil). The company imports oils and gas and generates and distributes its own electricity. The company currently has 20 staff working on engineering and electrical work at varying level of skills and three clerk/typists. The company at present does not have any management staff: the previous Managing Director (an engineer) resigned at the end of 2006 and has not been replaced; the Chairman (a retired engineer) has taken over the dayto-day management. The remaining board members are also all retired and comprise two lawyers, a teacher, a politician, an engineer and an operations director for a shipping company. Their role is simply to rubber-stamp the Chairman’s decisions – none of them takes an active role in the company and there have been board meetings where it has been difficult to obtain a quorum. Recently the island’s press has started to express concern about the way the company is being run – partly in reaction to public dismay at the resignation of the MD who was felt to be more approachable than the Chairman, and partly because the company is seen to be spending vast sums of money on capital equipment and worries have started to emerge about how this will impact on the price of fuel. Fuel prices on Senyeh are currently 20% above those on other islands in the region. Page 12 of 14 KAPLAN PUBLISHING Revision Mock Questions Pengers, a member of the government of Senyeh has recently read an article about corporate failure and thinks that Island Energy Ltd may fit some of the criteria; Lakes, another government member, disagrees – arguing that the Chairman has been in place for several years ? and has asked you, a newly qualified ACCA accountant, to apply the model to show that there is no reason for concern. N. B. Accounting data for the company is presented in the Appendix to this question.