F9 September 2016 MCQs

Dear Mr John Moffat,

Would you be able to de-brief below MCQ’s in F9 September 2016 exam please? I could not understand and work out how those are below answers for those questions. Any help will be appreciated.

4 Which of the following are descriptions of basis risk?
(1) It is the difference between the spot exchange rate and currency futures exchange rate
(2) It is the possibility that the movements in the currency futures price and spot price will be different
(3) It is the difference between fixed and floating interest rates
(4) It is one of the reasons for an imperfect currency futures hedge

A 1 only
B 1 and 3
C 2 and 4 only (this is the correct answer)
D 2, 3 and 4

5 Crag Co has sales of $200m per year and the gross profit margin is 40%. Finished goods inventory days vary throughout the year within the following range: Maximum Minimum Inventory (days) 120 90 All purchases and sales are made on a cash basis and no inventory of raw materials or work in progress is carried. Crag Co intends to finance permanent current assets with equity and fluctuating current assets with its overdraft.
In relation to finished goods inventory and assuming a 360-day year, how much finance will be needed from the overdraft?
A $10m – this is the correct answer
B $17m
C $30m
D $40m

6 In relation to an irredeemable security paying a fixed rate of interest, which of the following statements is correct?
A As risk rises, the market value of the security will fall to ensure that investors receive an increased yield – this is the correct answer
B As risk rises, the market value of the security will fall to ensure that investors receive a reduced yield
C As risk rises, the market value of the security will rise to ensure that investors receive an increased yield
D As risk rises, the market value of the security will rise to ensure that investors receive a reduced yield

11 Lane Co has in issue 3% convertible loan notes which are redeemable in five years’ time at their nominal value of $100 per loan note. Alternatively, each loan note can be converted in five years’ time into 25 Lane Co ordinary shares. The current share price of Lane Co is $3·60 per share and future share price growth is expected to be 5% per year. The before-tax cost of debt of these loan notes is 10% and corporation tax is 30%.
What is the current market value of a Lane Co convertible loan note?
A $82·71 – this is the correct answer
B $73·47
C $67·26
D $94·20

12 Country X uses the dollar as its currency and country Y uses the dinar. Country X’s expected inflation rate is 5% per year, compared to 2% per year in country Y. Country Y’s nominal interest rate is 4% per year and the current spot exchange rate between the two countries is 1·5000 dinar per $1.
According to the four-way equivalence model, which of the following statements is/are true?
(1) Country X’s nominal interest rate should be 7·06% per year
(2) The future (expected) spot rate after one year should be 1·4571 dinar per $1
(3) Country X’s real interest rate should be higher than that of country Y

A 1 only
B 1 and 2 only – this is the correct answer
C 2 and 3 only
D 1, 2 and 3

14 Peach Co’s latest results are as follows:
$000 Profit before interest and taxation 2,500 Profit before taxation 2,250 Profit after tax 1,400 In addition, extracts from its latest statement of financial position are as follows: $000 Equity 10,000 Non-current liabilities 2,500
What is Peach Co’s return on capital employed (ROCE)?
A 14%
B 18%
C 20% -this is the correct answer
D 25%

15 Drumlin Co has $5m of $0·50 nominal value ordinary shares in issue. It recently announced a 1 for 4 rights issue at $6 per share. Its share price on the announcement of the rights issue was $8 per share.
What is the theoretical value of a right per existing share?
A $1·60
B $0·40 – this is the correct answer
C $0·50
D $1·50

19 Which of the following statements support the finance director’s belief that the euro will depreciate against the dollar?
(1) The dollar inflation rate is greater than the euro inflation rate
(2) The dollar nominal interest rate is less than the euro nominal interest rate
A 1 only
B 2 only – this is the correct answer
C Both 1 and 2
D Neither 1 nor 2

23 The finance director of Ring Co has been advised to calculate the net asset value (NAV) of the company.
Which of the following formulae calculates correctly the NAV of Ring Co?
A Total assets less current liabilities
B Non-current assets plus net current assets –
C Non-current assets plus current assets less total liabilities – this is the correct answer
D Non-current assets less net current assets less non-current liabilities

24 Which of the following statements about valuation methods is true?
A The earnings yield method multiplies earnings by the earnings yield
B The equity market value is number of shares multiplied by share price, plus the market value of debt
C The dividend valuation model makes the unreasonable assumption that average dividend growth is constant – this is the correct answer
D The price/earnings ratio method divides earnings by the price/earnings ratio

25 Which of the following statements about capital market efficiency is/are correct?
(1) Insider information cannot be used to make abnormal gains in a strong form efficient capital market
(2) In a weak form efficient capital market, Ring Co’s share price reacts to new information the day after it is announced
(3) Ring Co’s share price reacts quickly and accurately to newly-released information in a semi-strong form efficient capital market
A 1 and 2 only
B 1 and 3 only – this is the correct answer
C 3 only
D 1, 2 and 3

27 Based on the average investment method, what is the return on capital employed of the investment project?
A 13·3%
B 26·0% – this is the correct answer
C 52·0%
D 73·5%

28 Which of the following statements about investment appraisal methods is correct?
A The return on capital employed method considers the time value of money
B Return on capital employed must be greater than the cost of equity if a project is to be accepted
C Riskier projects should be evaluated with longer payback periods
D Payback period ignores the timing of cash flows within the payback period- this is the correct answer

29 Which of the following statements about Fence Co is/are correct?
(1) Managerial reward schemes of listed companies should encourage the achievement of stakeholder objectives
(2) Requiring investment projects to be evaluated with return on capital employed is an example of dysfunctional behaviour encouraged by performance-related pay
(3) Fence Co has an agency problem as the directors are not acting to maximise the wealth of shareholders
A 1 and 2 only
B 1 only
C 2 and 3 only
D 1, 2 and 3 – this is the correct answer

Thanks

Kind Regards,

Monica17