The following scenario relates to questions 16 – 20.
Plot Co sells Product P with sales occurring evenly throughout the year.
Product P
The annual demand for Product P is 300,000 units and an order for new inventory is placed each month.
Each order costs $267 to place. The cost of holding Product P in inventory is 10 cents per unit per year.
Buffer inventory equal to 40% of one month's sales is maintained.
Other information
Plot Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year.
16 What is the total cost of the current ordering policy (to the nearest whole number)?
A $2,250 B $2,517 C $3,204
D $5,454 (2 marks)
17 What is the total cost of an ordering policy using the economic order quantity (EOQ) (to the nearest whole number)?
A $3,001 B $5,004 C $28,302
D $40,025 (2 marks)
18 Plot Co is considering offering a 2% early settlement discount to its customers. Currently sales are $10 million and customers take 60 days to pay. Plot Co estimates half the customers will take up the discount and pay cash. Plot is currently financing working capital using an overdraft on which it pays a 10% charge.
Assume 365 days in a year.
What will be the effect of implementing the policy?
A Benefit of $17,808 B Cost of $17,808 C Benefit of $82,192
D Benefit of $182,192 (2 marks)
19 Plot Co managers are considering the cost of working capital management.
Are the following statements about working capital management true or false?
1 A conservative working capital finance approach is low risk but expensive 2 Good working capital management adds to the wealth of shareholders A Statement 1 is true and statement 2 is false
B Statement 2 is true and statement 1 is false C Both statements are true
D Both statements are false (2 marks)
20 If Plot Co were overtrading, which TWO of the following could be symptoms?
1 Decreasing levels of trade receivables 2 Increasing levels of inventory
3 Increasing levels of long term borrowings 4 Increasing levels of current liabilities A 1 and 3
B 1 and 4 C 2 and 3
D 2 and 4 (2 marks)
(Total = 10 marks) The following scenario relates to questions 21 – 25.
GWW Co is a listed company which is seen as a potential target for acquisition by financial analysts. The value of the company has therefore been a matter of public debate in recent weeks and the following financial information is available:
Year 20Y2 20Y1 20Y0 20X9
Profit after tax ($m) 10.1 9.7 8.9 8.5
Total dividends ($m) 6.0 5.6 5.2 5.0
Statement of financial position information for 20Y2
$m $m
Total liabilities 99.3
The shares of GWW Co have a nominal (par) value of 50c per share and a market value of $4.00 per share.
The business sector of GWW Co has an average price/earnings ratio of 17 times.
The expected net realisable values of the non-current assets and the inventory are $86.0m and $4.2m, respectively. In the event of liquidation, only 80% of the trade receivables are expected to be collectible.
21 What is the value of GWW Co using market capitalisation (equity market value)?
A $20m B $40m C $80m
D $160m (2 marks)
22 What is the value of GWW Co using the net asset value (liquidation basis)?
A $58.9m
B $61.7m
C $62.6m
D $99.3m (2 marks)
23 What is the value of GWW Co using the price/earnings ratio method (business sector average
24 An investor believes that they can make abnormal returns by studying past share price movements.
In terms of capital market efficiency, to which of the following does the investor's belief relate?
A Fundamental analysis B Operational efficiency C Technical analysis
D Semi-strong form efficiency (2 marks)
25 Assume that GWW Co's P/E ratio is 15. Its competitor's earnings yield is 6.25%.
When comparing GWW Co to its competitor, which of the following is correct?
Earnings yield of GWW P/E ratio of GWW
A Higher Higher
B Higher Lower
C Lower Higher
D Lower Lower
(2 marks)
The following scenario relates to questions 26 – 30.
Edwen Co is a UK-based company which has the following expected transactions.
One month: Expected receipt of $240,000 One month: Expected payment of $140,000 Three months: Expected receipts of $300,000
A one month forward rate of $1.7832 per £1 has been offered by the company's bank and the spot rate is
$1.7822 per £1.
Other relevant financial information is as follows:
Short-term dollar borrowing rate 5.4% per year Short-term sterling deposit rate 4.6% per year Assume that it is now 1 April.
26 What are the expected sterling receipts in one month using a forward hedge (to the nearest whole number)?
A £56,079 B £56,110 C £178,220
D £178,330 (2 marks)
27 What are the expected sterling receipts in three months using a money market hedge (to the nearest whole number)?
A £167,999 B £296,004 C £166,089
D £164,201 (2 marks)
28 Edwen Co is expecting a fall in the UK/$ exchange rate.
What is the impact of a fall in a country's exchange rate?
1 Exports will be given a stimulus 2 The rate of domestic inflation will rise
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2 (2 marks)
29 Edwen Co is considering a currency futures contract.
Which of the following statements about currency futures contracts are true?
1 The contracts can be tailored to the user’s exact requirements
2 The exact date of receipt or payment of the currency does not have to be known 3 Transaction costs are generally higher than other hedging methods
A 1 and 2 only B 1 and 3 only
C 2 only
D 3 only (2 marks)
30 Do the following features apply to forward contracts or currency futures?
1 Contract price is in any currency offered by the bank
2 Traded over the counter
A Both features relate to forward contracts B Both features relate to currency futures
C Feature 1 relates to forward contracts and feature 2 relates to currency futures
D Feature 2 relates to forward contracts and feature 1 relates to currency futures (2 marks)