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3UNDAMENTALS 5EVEL a 9KILLS 6ODULE

Time allowed: 3 hours 15 minutes

This question paper is divided into three sections: Section A - ALL 15 questions are compulsory and MUST be attempted Section B - ALL 15 questions are compulsory and MUST be attempted Section C - BOTH questions are compulsory and MUST be attempted Formulae Sheet, Present Value and Annuity Tables are on pages 13-15. Do NOT open this question paper until instructed by the supervisor. Do NOT record any of your answers on the question paper. This question paper must not be removed from the examination hall.

8APER 3.

3INANCIAL 6ANAFEMENT

3RIDAW . 9EPTEMBER )"(-

The Association of

Chartered Certified

Accountants

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issued share capital of $1m of $0·50 nominal value ordinary shares. The owners have made the following valuations

of the company"s assets and liabilities.

Non-current assets (book value)$30m

Current assets$18m

Non-current liabilities$12m

Current liabilities$10m

The net realisable value of the non-current assets exceeds their book value by $4m. The current assets include $2m

of accounts receivable which are thought to be irrecoverable. y1-= 2< =1. 62726>6 9;2,. 9.; <1-;. @12,1 =1. 8@7.;< <18>5- -,,.9= /8; =1. ,869-7BU a$14 b$25 c$28 d$13 Cy12 ,1 8/ =1. /8558@270 /27-7,2-5 27<=;>6.7=< @255 not +. =;--.- 87 - 687.B 6-;4.=U aCommercial paper bConvertible loan notes cTreasury bills dCertificates of deposit

FAndrew Co is a large listed company financed by both equity and debt.i7 @12,1 8/ =1. /8558@270 -;.-< 8/ /27-7,2-5 6-7-0.6.7= @255 =1. 269-,= 8/ @8;4270 ,-92=-5 6-7-0.6.7= +.<6-55.<=UaLiquidity management

bInterest rate management cManagement of relationship with the bank dDividend policy Hy12 ,1 8/ =1. /8558@270 -;. -.<,;29=287< 8/ +-<2< ;2<4U (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 a1 only b1 and 3 c2 and 4 only d2, 3 and 4 4

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10Which of the following would you expect to be the responsibility of financial management?

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Section B - ALL 15 questions are compulsory and MUST be attempted7MEATEVTEUIEHSKDQSPWKDEDPOQAHEUaPPFUIE3AODKDAUE1OTaES2PPLMEUUPSECPSDcPVSAOTaESTUPEACINVMUKQMECIPKCERVETUKPO"4POPUaSKUEPVUUIEAOTaESTUPUIE638TPOUIEMKOEDQAHETPFUIEAOTaESBPPLMEU"5ACIRVETUKPOKTaPSUI,NASLT"9IEFPMMPaKOHTCEOASKPSEMAUETUPRVETUKPOT)0UP,("Herd Co is based in a country whose currency is the dollar ($). The company expects to receive €1,500,000 in six

months" time from Find Co, a foreign customer. The finance director of Herd Co is concerned that the euro (€) may

depreciate against the dollar before the foreign customer makes payment and she is looking at hedging the receipt.

Herd Co has in issue loan notes with a total nominal value of $4 million which can be redeemed in 10 years" time. The

interest paid on the loan notes is at a variable rate linked to LIBOR. The finance director of Herd Co believes that interest

rates may increase in the near future.

The spot exchange rate is €1·543 per $1. The domestic short-term interest rate is 2% per year, while the foreign

short-term interest rate is 5% per year. BMy1-= 2< =1. <2A6687=1 /8;@-;- .A,1-70. ;-=. 9;.-2,=.- +B 27=.;.<= ;-=. 9-;2=BU a€1·499 per $1 b€1·520 per $1 c€1·566 per $1 d€1·588 per $1 BOa< ; .0-;-< =1. .>;8 ;.,.29=5 @1-= 2< =1. 9;26-;B 7-=>;. 8/ =1. ;2<4 /-,.- +B h.;- c8U aTransaction risk bEconomic risk cTranslation risk dBusiness risk BPy12,1 8/ =1. /8558@270 1.-0270 6.=18-< @255 not +. <>2=-+5. /8; 1.-0270 =1. .>;8 ;.,.29=U aForward exchange contract bMoney market hedge cCurrency futures dCurrency swap

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-855-;U (1)The do llar inflation rate is greater than the euro inflation rate (2)The do llar nominal interest rate is less than the euro nominal interest rate a1 only b2 only cBoth 1 and 2 dNeither 1 nor 2 8

20As r egards the interest rate risk faced by Herd Co, which of the following statements is correct?

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