ACCA paper p4 advanced financial management examkit

Professional Examinations Paper P4 Advanced Financial Management EXAM KIT P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by: Kaplan Publishing UK Unit The Business Centre Molly Millar’s Lane Wokingham Berkshire RG41 2QZ ISBN: 978-1-78415-235-2 © Kaplan Financial Limited, 2015 Printed and bound in Great Britain 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 Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials All rights reserved 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 Acknowledgements The past ACCA examination questions are the copyright of the Association of Chartered Certified Accountants The original answers to the questions from June 1994 onwards were produced by the examiners themselves and have been adapted by Kaplan Publishing We are grateful to the Chartered Institute of Management Accountants and the Institute of Chartered Accountants in England and Wales for permission to reproduce past examination questions The answers have been prepared by Kaplan Publishing ii K A P LA N P UB L I S H I N G CONTENTS Page Index to questions and answers v Analysis of past papers xi Exam technique xiii Paper specific information xv Kaplan’s recommended revision approach xix Kaplan’s detailed revision plan xxi Mathematical tables and formulae sheet xxvii Section Practice Questions – Section A Practice Questions – Section B 53 Answers to Practice Questions – Section A 121 Answers to Practice Questions – Section B 235 Key features in this edition In addition to providing a wide ranging bank of real past exam questions, we have also included in this edition: • An analysis of all of the recent examination papers • Paper specific information and advice on exam technique • Our recommended approach to make your revision for this particular subject as effective as possible This includes step by step guidance on how best to use our Kaplan material (Complete text, pocket notes and exam kit) at this stage in your studies • Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes and exam technique tips from our experienced tutors • Complementary online resources including full tutor debriefs and question assistance to point you in the right direction when you get stuck K APLAN P UBLI S H I N G iii P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T You will find a wealth of other resources to help you with your studies on the following sites: www.mykaplan.co.uk www.accaglobal.com/students/ Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions iv K A P LA N P UB L I S H I N G INDEX TO QUESTIONS AND ANSWERS INTRODUCTION The majority of the questions within this kit are past ACCA exam questions The index identifies which sitting the questions were from An ‘A’ next to the question in the index means that the past exam question has been adapted in some way, for example some of the past exam questions have been modified to reflect the current format of the exam KEY TO THE INDEX PAPER ENHANCEMENTS We have added the following enhancements to the answers in this exam kit: Key answer tips All answers include key answer tips to help your understanding of each question Tutorial note All answers include more tutorial notes to explain some of the technical points in more detail Top tutor tips For selected questions, we “walk through the answer” giving guidance on how to approach the questions with helpful ‘tips from a top tutor’, together with technical tutor notes These answers are indicated with the “footsteps” icon in the index KAPLAN P UBLI S H I N G v P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T ONLINE ENHANCEMENTS Timed question with Online tutor debrief For selected questions, we recommend that they are to be completed in full exam conditions (i.e properly timed in a closed book environment) In addition to the examiner’s technical answer, enhanced with key answer tips and tutorial notes in this exam kit, online you can find an answer debrief by a top tutor that: • works through the question in full • points out how to approach the question • how to ensure that the easy marks are obtained as quickly as possible, and • emphasises how to tackle exam questions and exam technique These questions are indicated with the “clock” icon in the index Online question assistance Have you ever looked at a question and not known where to start, or got stuck part way through? For selected questions, we have produced “Online question assistance” offering different levels of guidance, such as: • ensuring that you understand the question requirements fully, highlighting key terms and the meaning of the verbs used • how to read the question proactively, with knowledge of the requirements, to identify the topic areas covered • assessing the detail content of the question body, pointing out key information and explaining why it is important • help in devising a plan of attack With this assistance, you should then be able to attempt your answer confident that you know what is expected of you These questions are indicated with the “signpost” icon in the index Online question enhancements and answer debriefs will be available on MyKaplan at: www.mykaplan.co.uk vi K A P LA N P UB L I S H I N G INDEX TO QUES TIO NS AND ANSWE RS SECTION A-TYPE QUESTIONS Page number Answer Past exam A=adapted 121 Jun 06(A) Question Role and responsibility towards stakeholders Vadener plc Advanced investment appraisal Wurrall Inc 124 Jun 04(A) Daron 129 Dec 95(A) Sleepon Hotels Inc 135 Dec 05(A) Partsea plc 10 140 Jun 07 Blipton International 12 143 Dec 08 Semer 13 147 Dec 05 Tramont Co 15 149 Pilot 2012 Chmura Co 17 155 Dec 13 Acquisitions and mergers 10 Stanzial Inc 19 161 Dec 06(A) 11 Burcolene 21 165 Dec 07(A) 12 Anchorage Retail Company 23 170 Dec 09 13 Pursuit Co 26 176 Jun 11 14 Nente Co 28 180 Jun 12 15 Mlima Co 30 184 Jun 13 16 Nahara Co and Fugae Co 32 190 Dec 14 Corporate reconstruction and reorganisation 17 BBS Stores 35 195 Jun 09 18 Coeden Co 37 201 Dec 12 Treasury and advanced risk management techniques 19 Somax plc 39 204 Jun 96 20 Lammer plc 41 208 Jun 06(A) 21 Casasophia Co 42 212 Jun 11 22 CMC Co 44 216 Jun 14 Economic environment for multinationals 23 AVTO 46 222 Dec 03 24 Oberberg AG 48 227 Dec 02 KAPLAN P UBLI S H I N G vii P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T SECTION B-TYPE QUESTIONS Question Answer Past exam A=adapted Role and responsibility towards stakeholders 25 TYR Inc 53 235 Jun 03(A) 26 Forthmate Inc and Herander Inc 54 238 Dec 06(A) 27 Saturn Systems 55 240 Jun 08 28 Solar Supermarkets 56 243 Dec 08 29 International Enterprises 57 245 Dec 07(A) 30 Kengai Co 59 247 Dec 11 31 Ennea Co 59 249 Jun 12 32 Limni Co 61 253 Jun 13 33 Kamala Co 62 256 Dec 14 Advanced investment appraisal 34 Strayer Inc 65 260 Jun 02(A) 35 Tampem Inc 65 263 Dec 06(A) 36 Digunder 66 266 Dec 07(A) 37 Kenand Co 67 268 – 38 Fubuki Co 68 273 Dec 10 39 Investment Project Review 69 277 Jun 09(A) 40 MMC 70 281 Jun 11 41 Tisa Co 71 282 Jun 12 42 Arbore Co 72 284 Dec 12 43 Burung Co 74 287 Jun 14 44 Riviere Co 75 290 Dec 14 Acquisitions and mergers 45 Doubler Inc 76 294 Jun 07(A) 46 Mercury Training 78 297 Jun 08(A) 47 Kodiak Company 79 299 Dec 09(A) 48 Kilenc Co 80 302 Jun 12 49 Sigra Co 81 305 Dec 12(A) 50 Hav Co 83 307 Jun 13 51 Makonis Co 84 311 Dec 13 52 Vogel Co 85 313 Jun 14 v i ii K A P LA N P UB L I S H I N G INDEX TO QUES TIO NS AND ANSWE RS Corporate reconstruction and reorganisation 53 Reflator Inc 87 316 Dec 05(A) 54 Alaska Salvage 88 319 Dec 09 55 Proteus Co 88 321 Dec 11 56 Doric Co 89 324 Pilot 2012 57 Nubo Co 91 326 Dec 13 Treasury and advanced risk management techniques 58 Black-Scholes (AVT) 92 329 Dec 01(A) 59 Uniglow 93 331 Jun 02(A) 60 MJY plc 93 333 Dec 05(A) 61 Collar Hedge 94 335 Jun 03(A) 62 Interest Rate Hedges 95 337 Jun 05 63 Polytot plc 96 340 Jun 04(A) 64 Arnbrook plc 97 342 Jun 06(A) 65 Asteroid Systems 97 344 Jun 08 66 Phobos Co 98 348 Dec 08 67 Multidrop 99 351 Jun 10(A) 68 Pondhills 100 356 Jun 01(A) 69 Currency Swaps 102 358 Dec 04(A) 70 FNDC plc 103 360 Dec 06(A) 71 Levante Co 104 363 Dec 11 72 Sembilan Co 105 366 Jun 12 73 Lignum Co 105 368 Dec 12(A) 74 Alecto Co 107 371 Pilot 2012 75 GNT CO 108 375 Pilot 2012 76 Kenduri Co 109 377 Jun 13 77 Awan Co 110 379 Dec 13 78 Faoilean Co 111 382 Jun 14 79 Keshi Co 112 385 Dec 14 Economic environment for multinationals 80 Deputy Chief Financial Officer 113 389 Jun 09 81 Moose Co 114 391 Dec 09 82 Lamri Co 115 392 Dec 10 KAPLAN P UBLI S H I N G ix P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T Emerging issues in finance and financial management 83 GoSlo Motor Corporation 116 395 Jun 10 84 JJJ Co 117 397 – 85 Strom Co 118 400 Dec 12(A) 86 Integrated Reporting 119 403 - x K A P LA N P UB L I S H I N G THE KAPLAN PAPER P4 REVISION PLAN Stage 1: Assess areas of strengths and weaknesses Review the topic listings in the revision table plan below Determine whether or not the area is one with which you are comfortable Comfortable with the technical content Not comfortable with the technical content Read the relevant chapter(s) in Kaplan’s Complete Text Attempt the Test your understanding examples if unsure of an area Attempt appropriate Online Fixed Tests Review the pocket notes on this area Stage 2: Practise questions Follow the order of revision of topics as recommended in the revision table plan below and attempt the questions in the order suggested Try to avoid referring to text books and notes and the model answer until you have completed your attempt Try to answer the question in the allotted time Review your attempt with the model answer and assess how much of the answer you achieved in the allocated exam time KAPLAN P UBLI S H I N G xx i PAPER P4: ADVANCED FINANCIAL MANAGEMENT Fill in the self-assessment box below and decide on your best course of action Comfortable with question attempt Only revisit when comfortable with questions on all topic areas Not comfortable with question attempts Focus on these areas by: • Reworking test your understanding examples in Kaplan’s Complete Text • Revisiting the technical content from Kaplan’s pocket notes • Working any remaining questions on that area in the exam kit • Reattempting an exam standard question in that area, on a timed, closed book basis Note that : The “footsteps questions” give guidance on exam techniques and how you should have approached the question The “clock questions” have an online debrief where a tutor talks you through the exam technique and approach to that question and works the question in full Stage 3: Final pre-exam revision We recommend that you attempt at least one three hour mock examination containing a set of previously unseen exam standard questions It is important that you get a feel for the breadth of coverage of a real exam without advanced knowledge of the topic areas covered – just as you will expect to see on the real exam day Ideally this mock should be sat in timed, closed book, real exam conditions and could be a mock examination offered by your tuition provider xx ii K A P LA N P UB L I S H I N G 9 Foreign investment appraisal Risk adjusted WACC APV KA P LAN PUBL I SH ING Module Revision Test Complete Text Chapter Investment appraisal WACC Topic 9 Pocket note Chapter 4, 38, 43 41 - Questions to attempt – Module 1: Investment appraisal and WACC KAPLAN’S DETAILED REVISION PLAN Before you can start appraising projects, it is vital to understand how the WACC can be calculated Notice that several formulae used to derive WACC appear on the formula sheet Make sure you identify which need to be learned and which are given Investment appraisal is very commonly tested Make sure you understand NPV and MIRR in particular Foreign NPV is very similar to “normal” NPV The parity theories are frequently tested, so learn how to apply the formulae Degearing and regearing betas is one of the examiner’s favourite topics The formula is given in the exam, but learn how to apply it APV questions are very common The key is to remember to discount the investment cash flows at an ungeared cost of equity and the financing cash flows using the risk free rate Attempt these questions to check your understanding of Module topics Tutor guidance Date attempted Self assessment xx i ii xx iv 15 Business valuation Module Revision Test 15 Complete Text Chapter 14 Free cash flow analysis Strategic aspects of acquisitions Topic 15 15 Pocket note Chapter 14 16, 50, 51 10 12, 13 Questions to attempt 48 Module 2: Acquisitions and business valuation PAPER P4: ADVANCED FINANCIAL MANAGEMENT Valuation questions tend to contain calculations and discussion This chapter covers the key discursive aspects The examiner’s favourite method of business valuation is the discounted free cash flow approach, so revise the method from Chapter 15 Now cover the other valuation methods Questions will tend to mix discursive and computational elements, so focus on both aspects Attempt these questions to check your understanding of Module and topics Tutor guidance Date attempted K A PLA N PUB L I SH ING Self assessment 1 Roles / responsibilities of the financial manager Module Revision Test KA P LAN PUBL I SH ING 10 Pocket note Chapter 10 Complete Text Chapter Corporate failure / reconstruction Option pricing Topic 9, 18, 27, 78 Attempt these questions to check your understanding of Module 1, and topics Tutor guidance Questions to attempt 58, 36, 40 The Black Scholes formulae are given on the formula sheet, but make sure you can apply them in various circumstances 56 Following the recent global recession, this is a very topical area, so highly examinable Learn the indicators of financial distress and the calculation of ratios 28 Date attempted Module 3: Option pricing, corporate failure and roles / responsibilities of the financial manager Self assessment xx v KA PLAN’ S DE TA ILE D REV IS ION PLAN xx vi 12, 13 13 12 Pocket note Chapter 11 63, 66, 77, 79 64 62, 74 20, 21 Questions to attempt – Chapter 11 gives a good introduction to risk management topics Learn the different methods of hedging The key here is to adapt a systematic approach, laying out your workings carefully so that you don’t get muddled As with currency hedging, learn all the methods, and the advantages and disadvantages of using each of them Swaps are often overlooked by some students who focus mainly on futures and options However, they are quite frequently tested – look at Q65 to see how Attempt these questions to check your understanding of Module 1, 2, and topics Tutor guidance Date attempted Self assessment K A PLA N PUB L I SH ING Note that not all of the questions are referred to in the programme above The remaining questions are available in the kit for extra practice for those who require more questions on some areas Module Revision Test 12, 13 13 Hedging – interest rate risk Swaps 12 Complete Text Chapter 11 Hedging – currency risk Risk management Topic Module 4: Risk management and hedging PAPER P4: ADVANCED FINANCIAL MANAGEMENT MATHEMATICAL TABLES AND FORMULAE SHEET Modigliani and Miller Proposition (with tax) ke = kie + (1 − T)(kie − kd) Vd Ve The Capital Asset Pricing Model E(ri) = Rf + βi(E(rm) − Rf) The asset beta formula    Vd (1 – T)  Ve βe  +  βd  βa =   (Ve + Vd (1 – T))   (Ve + Vd (1 – T))  The Growth Model P0 = D0 (1+ g) (re – g) Gordon’s growth approximation g = bre The weighted average cost of capital  V   V  WACC =  e k e +  d k d (1 – T)  Ve + Vd   Ve + Vd  The Fisher formula (1+i) = (1+r)(1+h) Purchasing power parity and interest rate parity S1 = S0 × KAPLAN P UBLI S H I N G (1+ hc ) (1+ hb ) F0 = S0 × (1+ i c ) (1+ ib ) xx v ii PAPER P4: ADVANCED FINANCIAL MANAGEMENT Modified Internal Rate of Return  PV  n MIRR =  R  (1 + re) –  PVI  The Black-Scholes option pricing model c = PaN(d1) – PeN(d2)e−rt Where: d1 = In(Pa /Pe ) + (r + 0.5s )t s t d2 = d1 – s t The Put Call Parity relationship p = c − Pa + Pee−rt x x v ii i K A P LA N P UB L I S H I N G MA THEMA TICAL TABLES AND FORM ULAE S HEE T MATHEMATICAL TABLES Standard normal distribution table 0.0 0.1 0.2 0.3 0.4 0.00 0000 0398 0793 1179 1554 0.01 0040 0438 0832 1217 1591 0.02 0080 0478 0871 1255 1628 0.03 0120 0517 0910 1293 1664 0.04 0159 0557 0948 1331 1700 0.05 0199 0596 0987 1368 1736 0.06 0239 0636 1026 1406 1772 0.07 0279 0675 1064 1443 1808 0.08 0319 0714 1103 1480 1844 0.09 0359 0753 1141 1517 1879 0.5 0.6 0.7 0.8 0.9 1915 2257 2580 2881 3159 1950 2291 2611 2910 3186 1985 2324 2642 2939 3212 2019 2357 2673 2967 3238 2054 2389 2704 2995 3264 2088 2422 2734 3023 3289 2123 2454 2764 3051 3315 2157 2486 2794 3078 3340 2190 2518 2823 3106 3365 2224 2549 2852 3133 3389 1.0 1.1 1.2 1.3 1.4 3413 3643 3849 4032 4192 3438 3665 3869 4049 4207 3461 3686 3888 4066 4222 3485 3708 3907 4082 4236 3508 3729 3925 4099 4251 3531 3749 3944 4115 4265 3554 3770 3962 4131 4279 3577 3790 3980 4147 4292 3599 3810 3997 4162 4306 3621 3830 4015 4177 4319 1.5 1.6 1.7 1.8 1.9 4332 4452 4554 4641 4713 4345 4463 4564 4649 4719 4357 4474 4573 4656 4726 4370 4485 4582 4664 4732 4382 4495 4591 4671 4738 4394 4505 4599 4678 4744 4406 4515 4608 4686 4750 4418 4525 4616 4693 4756 4430 4535 4625 4699 4762 4441 4545 4633 4706 4767 2.0 2.1 2.2 2.3 2.4 4772 4821 4861 4893 4918 4778 4826 4865 4896 4920 4783 4830 4868 4898 4922 4788 4834 4871 4901 4925 4793 4838 4875 4904 4927 4798 4842 4878 4906 4929 4803 4846 4881 4909 4931 4808 4850 4884 4911 4932 4812 4854 4887 4913 4934 4817 4857 4890 4916 4936 2.5 2.6 2.7 2.8 2.9 4938 4953 4965 4974 4981 4940 4955 4966 4975 4982 4941 4956 4967 4976 4983 4943 4957 4968 4977 4983 4945 4959 4969 4977 4984 4946 4960 4970 4978 4984 4948 4961 4971 4979 4985 4949 4962 4972 4980 4985 4951 4963 4973 4980 4986 4952 4964 4974 4981 4986 3.0 4987 4987 4987 4988 4988 4989 4989 4989 4990 4990 This table can be used to calculate N (d1), the cumulative normal distribution function needed for the Black-Scholes model of option pricing If d1 > 0, add 0.5 to the relevant number above If d1 < 0, subtract the relevant number above from 0.5 KAPLAN P UBLI S H I N G xx ix PAPER P4: ADVANCED FINANCIAL MANAGEMENT Present value table Present value of 1, i.e (1 + r)-n where r = discount rate n = number of periods until payment Periods (n) 1% 0.990 0.980 0.971 0.961 0.951 2% 0.980 0.961 0.942 0.924 0.906 3% 0.971 0.943 0.915 0.888 0.863 4% 0.962 0.925 0.889 0.855 0.822 5% 0.952 0.907 0.864 0.823 0.784 6% 0.943 0.890 0.840 0.792 0.747 7% 0.935 0.873 0.816 0.763 0.713 8% 0.926 0.857 0.794 0.735 0.681 9% 0.917 0.842 0.772 0.708 0.650 10% 0.909 0.826 0.751 0.683 0.621 10 0.942 0.933 0.923 0.914 0.905 0.888 0.871 0.853 0.837 0.820 0.837 0.813 0.789 0.766 0.744 0.790 0.760 0.731 0.703 0.676 0.746 0.711 0.677 0.645 0.614 0.705 0.665 0.627 0.592 0.558 0.666 0.623 0.582 0.544 0.508 0.630 0.583 0.540 0.500 0.463 0.596 0.547 0.502 0.460 0.422 0.564 0.513 0.467 0.424 0.386 11 12 13 14 15 0.896 0.887 0.879 0.870 0.861 0.804 0.788 0.773 0.758 0.743 0.722 0.701 0.681 0.661 0.642 0.650 0.625 0.601 0.577 0.555 0.585 0.557 0.530 0.505 0.481 0.527 0.497 0.469 0.442 0.417 0.475 0.444 0.415 0.388 0.362 0.429 0.397 0.368 0.340 0.315 0.388 0.356 0.326 0.299 0.275 0.350 0.319 0.290 0.263 0.239 11% 0.901 0.812 0.731 0.659 0.593 12% 0.893 0.797 0.712 0.636 0.567 13% 0.885 0.783 0.693 0.613 0.543 14% 0.877 0.769 0.675 0.592 0.519 15% 0.870 0.756 0.658 0.572 0.497 16% 0.862 0.743 0.641 0.552 0.476 17% 0.855 0.731 0.624 0.534 0.456 18% 0.847 0.718 0.609 0.516 0.437 19% 0.840 0.706 0.593 0.499 0.419 20% 0.833 0.694 0.579 0.482 0.402 10 0.535 0.482 0.434 0.391 0.352 0.507 0.452 0.404 0.361 0.322 0.480 0.425 0.376 0.333 0.295 0.456 0.400 0.351 0.308 0.270 0.432 0.376 0.327 0.284 0.247 0.410 0.354 0.305 0.263 0.227 0.390 0.333 0.285 0.243 0.208 0.370 0.314 0.266 0.225 0.191 0.352 0.296 0.249 0.206 0.176 0.335 0.279 0.233 0.194 0.162 11 12 13 14 15 0.317 0.286 0.258 0.232 0.209 0.287 0.257 0.229 0.205 0.183 0.261 0.231 0.204 0.181 0.160 0.237 0.208 0.182 0.160 0.140 0.215 0.187 0.163 0.141 0.123 0.195 0.168 0.145 0.125 0.108 0.178 0.152 0.130 0.111 0.095 0.162 0.137 0.116 0.099 0.084 0.148 0.124 0.104 0.088 0.074 0.135 0.112 0.933 0.078 0.065 Periods (n) xx x K A P LA N P UB L I S H I N G MA THEMA TICAL TABLES AND FORM ULAE S HEE T Annuity table Present value of an annuity of 1, i.e where 1- (1 + r) -n r r = interest rate n = number of periods Periods (n) 1% 0.990 1.970 2.941 3.902 4.853 2% 0.980 1.942 2.884 3.808 4.713 3% 0.971 1.913 2.829 3.717 4.580 4% 0.962 1.886 2.775 3.630 4.452 5% 0.952 1.859 2.723 3.546 4.329 6% 0.943 1.833 2.673 3.465 4.212 7% 0.935 1.808 2.624 3.387 4.100 8% 0.926 1783 2.577 3.312 3.993 9% 0.917 1.759 2.531 3.240 3.890 10% 0.909 1.736 2.487 3.170 3.791 10 5.795 6.728 7.652 8.566 9.471 5.601 6.472 7.325 8.162 8.893 5.417 6.230 7.020 7.786 8.530 5.242 6.002 6.733 7.435 8.111 5.076 5.786 6.463 7.108 7.722 4.917 5.582 6.210 6.802 7.360 4.767 5.389 5.971 6.515 7.024 4.623 5.206 5.747 6.247 6.710 4.486 5.033 5.535 5.995 6.418 4.355 4.868 5.335 5.759 6.145 9.787 10.58 11.35 12.11 12.85 9.253 9.954 10.63 11.30 11.94 8.760 9.385 9.986 10.56 11.12 8.306 8.863 9.394 9.899 10.38 7.887 8.384 8.853 9.295 9.712 7.499 7.943 8.358 8.745 9.108 7.139 7.536 7.904 8.244 8.559 6.805 7.161 7.487 7.786 8.061 6.495 6.814 7.103 7.367 7.606 11% 0.901 1.713 2.444 3.102 3.696 12% 0.893 1.690 2.402 3.037 3.605 13% 0.885 1.668 2.361 2.974 3.517 14% 0.877 1.647 2.322 2.914 3.433 15% 0.870 1.626 2.283 2.855 3.352 16% 0.862 1.605 2.246 2.798 3.274 17% 0.855 1.585 2.210 2.743 3.199 18% 0.847 1.566 2.174 2.690 3.127 19% 0.840 1.547 2.140 2.639 3.058 20% 0.833 1.528 2.106 2.589 2.991 10 4.231 4.712 5.146 5.537 5.889 4.111 4.564 4.968 5.328 5.650 3.998 4.423 4.799 5.132 5.426 3.889 4.288 4.639 4.946 5.216 3.784 4.160 4.487 4.772 5.019 3.685 4.039 4.344 4.607 4.833 3.589 3.922 4.207 4.451 4.659 3.496 3.812 4.078 4.303 4.494 3.410 3.706 3.954 4.163 4.339 3.326 3.605 3.837 4.031 4.192 11 12 13 14 15 6.207 6.492 6.750 6.982 7.191 5.938 6.194 6.424 6.628 6.811 5.687 5.918 6.122 6.302 6.462 5.453 5.660 5.842 6.002 6.142 5.234 5.421 5.583 5.724 5.847 5.029 5.197 5.342 5.468 5.575 4.836 4.988 5.118 5.229 5.324 4.656 4.793 4.910 5.008 5.092 4.586 4.611 4.715 4.802 4.876 4.327 4.439 4.533 4.611 4.675 11 12 13 14 15 Periods (n) 10.37 11.26 12.13 13.00 13.87 KAPLAN P UBLI S H I N G xx xi PAPER P4: ADVANCED FINANCIAL MANAGEMENT xx xii K A P LA N P UB L I S H I N G Section PRACTICE QUESTIONS – SECTION A ROLE AND RESPONSIBILITY TOWARDS STAKEHOLDERS VADENER PLC Vadener plc, a UK company, has instigated a review of the group’s recent performance and potential future strategy The Board of Directors has publicly stated that it is pleased with the group’s performance and proposes to devote resources equally to its three operating divisions Two of the divisions are in the UK, and focus on construction and leisure respectively, and one is in the USA and manufactures pharmaceuticals Recent summarised accounts for the group and data for the individual divisions are shown below: Statements of profit or loss: Revenue Operating costs Operating profit Net interest Profit before tax Tax (30%) Profit after tax Equity dividends Retained earnings KAPLAN PUBLISHING 20X3 1,210 800 Group data £ million 20X4 1,410 870 20X5 1,490 930 –––––– –––––– –––––– 410 40 540 56 560 65 –––––– –––––– –––––– 370 111 484 145 495 149 –––––– –––––– –––––– 259 146 339 170 346 185 –––––– –––––– –––––– 113 169 161 –––––– –––––– –––––– P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T Statements of financial position: Non current assets: Tangible assets Intangible assets Current assets: Inventory Receivables Cash Total assets Shareholders’ equity Long term liabilities Payables falling due within one year: Trade payables Short term loans Taxation Dividends 1,223 100 1,280 250 1,410 250 340 378 10 410 438 15 490 510 15 –––––– –––––– –––––– 2,051 2,393 2,675 –––––– –––––– –––––– 1,086 400 1,255 410 1,406 470 302 135 55 73 401 170 72 85 430 201 75 93 –––––– –––––– –––––– 2,051 2,393 2,675 –––––– –––––– –––––– Note: The 20X5 amount for shareholders’ equity includes a £10 million loss on translation from the US division due to the recent weakness of the $US Other group data at year end: Share price (pence) Number of issued shares (million) Equity beta 20X3 1,220 300 20X4 1,417 300 20X5 1,542 300 1.10 The company’s share price has increased by an average of 12% per year over the last five years Other data at year end: FT 100 index PE ratio of similar companies Risk free rate (%) Market return (%) 20X3 3,700 15:1 20X4 4,600 14:1 20X5 4,960 15:1 12 Divisional data 20X5 Revenue (£m) Operating profit Estimated after tax return (%) Construction 480 160 13 Leisure 560 220 16 Pharmaceuticals 450 180 14 Data for the sector: Average asset beta 20X5 Construction 0.75 Leisure 1.10 Pharmaceuticals 1.40 K A P LA N P UB L I S H I N G PRA CTICE QUES TIO NS – SECTION A : S E CTI ON Required: (a) Evaluate and comment on the performance of Vadener plc and each of its divisions Highlight performance that appears favourable, and any areas of potential concern for the managers of Vadener Comment upon the likely validity of the company’s strategy to devote resources equally to the operating divisions All relevant calculations must be shown Approximately 19 marks are available for calculations, and for discussion (28 marks) Professional marks for format, structure and presentation of the report for part (a) (4 marks) (b) Discuss what additional information would be useful in order to more accurately assess the performance of Vadener plc and its divisions (7 marks) (c) Discuss the possible implications for Vadener plc of the £10 million loss on translation, and recommend what action, if any, the company should take as a result of this loss (7 marks) (d) The company has been advised that it can increase income by writing (selling) options Discuss whether or not this is correct, and provide a reasoned recommendation as to whether or not Vadener plc should adopt this strategy (4 marks) (Total: 50 marks) ADVANCED INVESTMENT APPRAISAL WURRALL INC The board of directors of Wurrall Inc has requested the production of a four-year financial plan The key assumptions behind the plan are: (i) Historically, sales growth has been 9% per year Uncertainty about future economic prospects over the next four years from 20X5–8, however, implies that this growth rate will reduce by 1% per year after the financial year 20X5 (e.g to 8% in 20X6) After four years, growth is expected to remain constant at the 20X8 rate (ii) Cash operating costs are estimated to be approximately 68% of sales (iii) Tax allowable depreciation for the past few years has been approximately 15% of the net book value of plant and machinery at year end This is expected to continue for the next few years (iv) Inventories, receivables, cash in hand and ‘other payables’ are assumed to increase in proportion to the increase in sales (v) Investment in, and net book value of, plant and machinery is expected to increase in line with sales No investment is planned in other non-current assets other than a refurbishment of buildings at an estimated cost of $40 million in late 20X7 (vi) Any change in interest paid as a result of changes in borrowing may be assumed to be effective in the next year Wurrall plans to meet any changes in financing needs, with the exception of the repayment of the fixed-rate loan, by adjusting its overdraft (vii) Wurrall currently pays 7% per annum interest on its short-term borrowing (viii) Corporation tax is expected to continue at its present rate over the next four years KAPLAN P UBLI S H I N G ... issues in finance and financial management PASS MARK The pass mark for all ACCA Qualification examination papers is 50% KAPLAN P UBLI S H I N G xv PAPER P4: ADVANCED FINANCIAL MANAGEMENT READING... syllabus and study guide written by the ACCA can be found at: www.accaglobal.com/students/ K APLAN P UBLI S H I N G x vi i PAPER P4: ADVANCED FINANCIAL MANAGEMENT x vi i i K A P LA N P UB L I... Complete Text Chapter 11 Hedging – currency risk Risk management Topic Module 4: Risk management and hedging PAPER P4: ADVANCED FINANCIAL MANAGEMENT MATHEMATICAL TABLES AND FORMULAE SHEET Modigliani