ACCA F9 Revision Download F9 Question Paper
ACCA F9 September 2016 Exam Section A Questions 6-10
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Hi,
In Q7- When moving from Long-term finance to Short-term finance.
Option C is said to be incorrect, “Interest rate risk will decrease.” I don’t quite understand why.
Wouldn’t interest rate reduce while moving from long term to short term as it’s a cheaper source of finance?
Thanks for the explanation 🙂
The statement is not referring to the rate of interest. It is referring to the risk, and variable rate interest is more risky because of the rate changing.
So does interest rate risk always increase in general while moving from Long-term to short-term funding? or is it just in this particular scenario since they specifically mention that Short term is Variable rate hence riskier.
It is because the interest rate is variable.
Dear sir,
In question # 9 of MCQs we have:
”A company has annual after-tax operating cash flows of $2 million per year which are expected to continue in perpetuity.
The company has a cost of equity of 10%, a before-tax cost of debt of 5% and an after-tax WACC of 8% per year.
Corporation tax is 20%.
What is the theoretical value of the company?”
I could not find this method of whole company valuation in lectures and notes.
Other methods that we studied: Net assets based, income based and dividend valuation model.
We also studied the valuation of only shares and debts individually, which helps in calculating the WACC.
Your comment needed. Thanks,
You are correct that there is no specific lecture on this, but it doesn’t really need one (and of course it is explained anyway in this lecture working through the exam questions!)
Just as the value of a projects inflows is the PV of the cash flows discounted at the WACC, it is exactly the same logic in arriving at the theoretical value of a company.
Bear in mind that we do not claim anywhere to cover every single point that can appear in the exam (for that you would need to buy a complete Study Text and study every page in detail). What we do claim is to cover more than enough to be able to pass the exam well, and that we certainly do. This question is just 2 marks, and should have been straight forward enough anyway because of what I have written above (coupled with the choices of answers available) 🙂