F9 MCQ question test

No 1: You have calculated the EOQ. The question does not ask for the EOQ it asks at what level a new order should be placed, which is 30/365 x (12 x 7500)

No 2: After 2 years we have got back 100,000. So we need another 60,000, which will take 60/80 of the third year.

No 3: 1 sterling buys 1.44 Euro. 1 sterling also buys 1.71 $. So 1.71$ = 1.44 Euro.
So 1 $ will get 1.44/1.71 = 0.84 euros

No 4. the PE should be the same as the sector. If it is higher than one reason is the share price is too high (PE = share price/EPS). Also, it is standard use of PE that the higher the PE the greater the expected growth (i.e. the more you are prepared to pay for the share, so the higher PE). Watch the lectures for more on this.

No 5: From the CAPM formula, required return = 3% + 0.5×8% = 7%
Then use the dividend growth model formula. Do = 24c; g = 4%

No 6: PE of A = 1.0.125 = 8. It is lower than sector which could be because it is undervalued

vipulv: you are asking about a different question – your question is not the one that Violet asked if you read carefully!!

The question that you are referring to asked how often a new order would be placed.
To do this you need the EOQ, which is 6,000.

The total demand is 12 x 7500 = 90,000 per year

So they need to order 90,000 / 6,000 = 15 times a year.

With 365 days in a year, that means ordering every 365/15 = 24 days.

I have a few questions if you can please help me with:

1, Issue 6% Reedemable bonds quoted at 120 ex int

Which statement is correct? Answer : Interest yield 5% and Redemption Yield 4%. How to get this?

2. Share price $4
Rights issues 1 for 5 at £3.10
What % of rights offered to a shareholder does shareholder need to take up so have no net cash flow resulting from issue?

Answer : 1.948. % How to do this please?

3, Debt: Debt+Equity) = 30%
Tax = 30%
Ungeared beta 1.3
Risk Free: 5%
Market return: 12:

What is cost of equity? (Answer is 16.10%)

I assumed equity and debt be 15% each but I did not get it even using the (1-T) and then using CAPM, could you show me this please?

4, Apple Plc unquoted company orange currently paying Dividend of $0.20 per share, dividend cover is 3.2, quoted company PE ratio is 9.
What price should be sensible for apple for orange. Answer is: $5.76

I believe the dividend cover 1/3.2 =0.3125 I am confused how to use the inverse ratio to go further.

5, Finally:
Beta bout to pay dividend of $0.40 per share. dividend growth is 5% p.a
Shareholders requried return is 20% p.a.
Tax is 25%

What is MV per share: Answer is $3.20
I was using PO = Do (1+g) divide by Ke – g = I got 2.1 not sure what to do with tax? Tax I believe would be tax deductible from dividend?

Please help me 🙂

Thank you for your effort.

Question 2:

If you watch the free lecture you will find I go through an almost identical question.

If there is to be no cash effect, then the total MV of shares held after the rights issue must be equal to the total value of shares held before the rights issue.

If someone owned 1000 share before the issue then they would be worth $4000.
The TERP is $3.85, so to be worth in total 4000 after the issue they must then have 4000/3.85 = 1039 shares.
So the must have taken up 39 shares. They were entitled to take up 1/5 x 1000 = 200
So they took up 39/200 = 19.5%

Question 4

How can dividend cover be 1/3.2 when the question says that dividend cover is 3.2??

If dividend cover is 3.2 then EPS must be 3.2 x dividend = 3.2 x 0.20 = 0.64

If PE is 9, then MV = 9 x 0.64 = $5.76

Hi John,

Thank you so much for your perfect help! 🙂 Sorry to write directly into here first place, I am quite new.

Thank you

(Debt: (Equity+Debt) = 30%
Tax = 25%
Risk Free: 5%
Market return: 12
Beta: 1.2

What is cost of equity? (Answer is 16.10%)

Kindly advise. Thanks.

Hello,

can you please help me. There are 2 questions in MCQ, that I don’t know how the results were got:

1. RI Co has in issue 6% redeemable bonds, quoted at 120% ex int.
Which of the following statements is consistent with the above information:

The correct answer is Interest yield 5%; redemption yield 4%.

How it was calculated?

2. A company has sales of $200M per year.
Currently customers take on average 40 days to pay.
The company is considering offering a discount of 1% for payment within 15 days and expects that 60% of customers will take advantage of the discount.

What is the effective annual cost of offering the discount?

The correct answer is: 15.8%.

I’ve calculated that there is a benefit from decrease in trade receivable days, that brings lower trade receivables by $8 220 and there is an additional cost from 1% discount that is equal to $ 1200. How to calculate the annual cost of offering the discount?

Thank you very much!
Ina.

sorry, I found out the answer to question 1, it was replied above to vipulv.
I have one more question:

3. R plc has in issue $400 000 8% bonds, redeemable in 5 years time at a premium of 10%. Investors require return of 12% p.a.
The rate of corporation tax is 35%.

What is the total market value of the debt in issue?

the correct answer is $364 840.

How was calculated that?

Thank you very much!
Waiting for your reply.

Regards,
Ina.

For question 1, you are not expected to be able to calculate the redemption yield, but you are expected to know what it is.
It is the return taking into account not just the interest but also the gain or loss on redemption.
Since there is a loss on redemption (the market value is currently 120 and they will be repaid at nominal of 100) the redemption yield must be lower than the interest yield.

Only one of the choices has the redemption yield lower than the interest yield of 5%.

and one more question:

3. A company has agreed to lease a machine for a period of 8 years, with equal annual payments payable at start of each year.

The NPV of the agreement at a rate of 10% is $52 000.

What is the annual lease payment (to the nearest $)?

My calculation is: 52 000 / 5.335 (from annuity table the amount from discount rate 10% and period 8) and the result is $9 747, but the correct answer is $8 862. Why?

Thank you very much!
Ina.

Question 2:

For every $100 nominal, the expected receipts are:
1 – 5 $8 p.a.
5 $110

The market value is the PV at 12%, which is $91.21

So the total market value = 400,000 x 91.21/100

(The tax is always irrelevant when calculating market value – the investors receive the full interest. It is only relevant when calculating the cost of debt, because the company gets tax relief on the interest.)