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Hi Sir,
BPP Kit Mock1(Sep16CBE), please help as below. Thank you very much.
Q12. How to calculate country X’s interest rate? why it’s 1.04*1.05/ 1.02? Which formula is used?
(I’m confused with Fisher formula and the Interest rate formula for this Q)Q15. why we calculate by the amount 5M of shares? (in Q, it says $5m of with $0.5 nominal value ordinary shares, I’ve been confused and felt the amount of shares should be $5m/$0.5=10m. What’s wrong is it?)
Q19. Why the 2nd statement (dollar nominal interest rate is less than the euro interest rate) supports “the Euro will depreciate against the dollar”?
Q27. Why is the average of investment (3900+100)/2? Why do we add the scrap value 100 to the investment amount?
Q28. Why is 2nd Statement wrong? How to correct it?
Q29. Why are 2nd & 3rd Statement also True? (Why is it an example of dysfunctional behaviour and why the directors are not acting to maxmise the wealth of the shareholders)
country X’s interest by IRPT = spot now X interest abroad/interest home.
not the fisher formula, that is related to inflation, real discount rate and nominal.and yes ROCE = operating profit – (total deprecation / number of year )/ (capex+scrap/2)
i honestly did not do sep16 cbe however i prefer you to do the latest one.
Ritik: Please do not answer questions in this forum – it is the Ask the Tutor Forum and you are not the tutor (although please do help people in the other Paper FM forum).
Q12. It is the Fisher formula. We know the nominal rate and the inflation rate for country Y, so we can calculate the real rate. We then use this real rate together with the inflation rate in country X to get the nominal rate in country X. Using the formula is all explained with examples in my free lectures.
Q15. BPP’s answer is confusing, because you are correct – there are 10M shares in issue. However it is of no relevance at all – you do not need to know how many shares there are in issue in order to calculate the value of the rights. Again, I show the best way of doing the calculation in my free lectures.
Q19. Nominal interest rates will increase and decrease in line with inflation rates. Looking at the purchasing power parity formula indicates that the value of the Euro will fall.
Q27 We always add the scrap value. The average is the value at the start plus the value at the end, divided by 2.
Q28 The return on capital employed is a profit measure and is not comparable therefore with the cost of money. The cost of capital is not just the cost of equity anyway, it includes also the cost of debt.
Q29. Again, return on capital employed is a profit measure – (2) encourages managers to manipulate profits and also to consider only short-term, not long-term. (3) it is not profits that maximise shareholders wealth (i.e. share price).
Every one of your questions is dealt with in detail in my free lectures. The lectures are a complete free course and cover everything needed to be able to pass the exam well. You cannot expect me to type out all my lectures here 🙂
(Ignore what Ritik wrote about ‘prefer you to do the latest one’. It is vital to practice every question in your Revision Kit, and the September 2016 CBE exam is just as relevant now as it was then 🙂 )
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