F9 Workbook

251 Pages·2014·0.85 MB·English

ACCA F9 Financial Management Full Course Workbook Solutions!
ACCA F9 Workbook
Lecture 1
Financial Strategy
ACCA F9 Financial Management Full Course Workbook Solutions!
Shareholder Wealth - Illustration 1
Year Share Price Dividend Paid
2007 3.30 40c
2008 3.56 42c
2009 3.47 44c
2010 3.75 46c
2011 3.99 48c
There are 2 million shares in issue.
! ! ! ! ! ! ! ! ! ! ! !
Calculate the increase in shareholder wealth for each year:
II. Per share
III. As a percentage
IV. For the business as a whole
Solution
Year Share Share Price Div Increase As a Total
Price Growth Paid in Percentage Shareholder
S’holder Return
Wealth
2007 3.30 40c
2008 3.56 (3.56 - 3.30) = 26c 42c (26 + 42) = (68 / 330) = 2m x 68c =
68c 20.6% $1.36m
2009 3.47 (3.47 - 3.56) = -9c 44c (-9 + 44) = (35 / 356) = 2m x 35c =
35c 9.8% $0.70m
2010 3.75 (3.75 - 3.47) = 28c 46c (28 + 46) = (74 / 347) = 2m x 74c =
74c 21.3% $1.48m
2011 3.99 (3.99 - 3.75) = 24c 48c (24 + 48) = (72 / 375) = 2m x 72c =
72c 19.2% $1.44m
ACCA F9 Financial Management Full Course Workbook Solutions!
EPS - Illustration 2
2010 2011
$‘000 $‘000
PBIT 2000 2100
Interest 200 300
Tax 300 400
Profit After Tax 1500 1400
Preference Dividend 300 400
Dividend 800 900
Retained Earnings 400 100
Share Capital (50c) 5000 5000
Reserves 3000 3100
Share Price $2.50 $2.80
Calculate the EPS for 2010 and 2011.
Solution
2010 2011
Profit After Tax 1500 1400
Preference Dividend 300 400
Earnings 1200 1000
No. Ordinary Shares (5000 / 0.50) 10,000 10,000
EPS (Earnings / No. Ordinary Shares) 12c 10c
ACCA F9 Financial Management Full Course Workbook Solutions!
Test Your Knowledge
If you can’t answer all of the questions below without
looking at the answer then you need to do some more
work on this area!
Multiple Choice Questions
1. The 3 main areas of the business that Finance Managers plan are:
A. Investments, Financing & Profitability.
B. Dividend Policy, Financing & Investments.
C. Return on Capital, Investments, Profitability.
D. Earnings per share, Profitability, Maximising shareholder wealth.
Answer B
2. Examples of 3 external stakeholders are:
A. Shareholders, Customers & Managers.
B. Banks, Customers & Employees.
C.Suppliers, Government & Customers.
D.Unions, Suppliers & Investors.
Answer C
3. The Agency Relationship exists between:
A. Shareholders and Managers.
B. Auditors and Managers.
C.Shareholders and Stakeholders.
D.Stakeholders and Managers.
Answer A
4. The Agency problem exists because...
A. Managers may be interested in maximising their own earnings.
B. Shareholders have to rely on management to safeguard the assets of the business.
C.Managers may be interested in short term gains over long term stability.
D.All of the above.
Answer D
ACCA F9 Financial Management Full Course Workbook Solutions!
5. In order to maximise the wealth of shareholders, Finance Managers need to increase
shareholder wealth. Shareholder wealth increases are made up of:
A. Profit for the year + Dividends Paid.
B. Earnings per share + Dividends Per Share.
C.Share Price + Dividends Paid.
D.Share Price movement + Dividends Paid.
Answer D
6. ABC Co. Paid out a dividend of 35c last year and 42c this year per share. Their share
price has increased from $4.33 to $5.24 in that time. What is the percentage shareholder
return in the current year.
A. 20.00%
B. 21.10%
C.30.72%
D.24.39%
Answer C
Increase in Share Price (4.33 to 5.24) = 91c
Dividend Paid this year =!42c
Return Per Share! ! ! =!133c
As a % of previous year Share Price (133/433) = 30.72%
7. The following information relates to ABC Co.
Year Share Price Dividend Paid
1 $4.50 82c
2 $4.71 84c
3 $3.85 86c
Which of the following statements is correct?
A. Between Year 1 and Year 2 shareholder wealth decreased.
B. Between Year 2 and Year 3 shareholder wealth decreased.
C.There was no increase in shareholder wealth between Year 2 and Year 3.
D.None of the above.
Answer C
ACCA F9 Financial Management Full Course Workbook Solutions!
8. In order for dividends to be paid a company must have made profits in the current year.
Is this statement TRUE or FALSE?
Answer FALSE
9.Miller and Modigliani stated in their theory that dividends were ..........................
Answer Irrelevant
10. If a company does not pay dividends then the result will be
A. More tax will be paid.
B. Less profit will be made.
C.More cash is available for investments.
D.More debt will be required.
Answer C
11. The ‘signaling effect’ refers to
A. A signal sent by managers to the auditors to inform them of the dividend.
B. A signal sent by Auditors to inform shareholders of the dividend.
C.The signal sent to the market by a company announcing their dividend for the year.
D.A warning announcement that a firm will make less profit than expected.
Answer C
12. The ‘Bird in the hand’ argument refers to the fact that
A. Investors prefer a dividend now rather than later as there is a risk that the company
could not pay a dividend at all.
B. Managers prefer not to pay a dividend as they can re-invest the cash saved into new
investments.
C.The government want the company to pay their tax on time.
D.The company has an ethical policy to look after any injured birds they might find.
Answer A
ACCA F9 Financial Management Full Course Workbook Solutions!
13. Which of the following best explains the ‘Clientele Effect’?
A. The clients of the company want as cheap prices as possible.
B. The company should choose a dividend policy and stick to it to attract investors who
want that type of policy.
C.The company should have a vote every year to ask investors what their dividend policy
should be for the year.
D.The company should not pay a dividend.
Answer B
14. A company can reward investors through script dividends without paying out any cash.
Is the above statement TRUE or FALSE
Answer TRUE
15. A ‘script dividend’ is where a company:
A. Pays no dividend at all.
B. Pays a dividend every other year.
C.Pays a larger than average dividend.
D.Pays a dividend in shares rather than cash.
Answer D
16. A ‘share buy back scheme’ refers to a situation where a company buys back it’s own
shares from shareholders and then cancels those shares.
Is the above statement TRUE or FALSE?
Answer TRUE
17. A company may decide on a ‘Share-buy-back Scheme’ because
A. It doesn’t have enough cash to pay a dividend.
B. It has large cash reserves and wants to reward shareholders.
C.The government tells it that it has too many shares.
D.It wants to receive cash to pay off some of it’s debt.
Answer B
18. A company may decide not to pay a dividend for which of the following reasons
ACCA F9 Financial Management Full Course Workbook Solutions!
A. It has retained losses rather than profits.
B. It has several new investments it would like to make.
C.It has low cash reserves.
D.All of the above.
Answer D
19. Investors would like to see a company pay a steadily rising dividend growing at a rate
in excess of inflation.
Is the above statement TRUE or FALSE?
Answer TRUE
20. Which of the following is an assumption of Miller and Modigliani’s dividend irrelevancy
theory?
A. A company pays a steadily rising dividend that grows every year.
B. Dividends and capital gains are taxed at the same rate.
C.Investors are irrational.
D.All share dealing transactions incur heavy costs.
Answer B
ACCA F9 Financial Management Full Course Workbook Solutions!
Short Form Questions
1.What are the 3 things that financial managers need to plan?
Investments
Financing
Dividend Policy
2.What is Corporate Strategy?
Corporate strategy is the overall direction that a firm decides to take and covers
such areas as expansion into new markets, penetration of existing markets or
diversification into different business areas.
3.Describe the Agency Problem.
The managers of a firm act as the agents of the shareholders as they are the owners
of the company.
The managers are interested in maximising their short term interests through pay
and benefits, whereas the shareholders are interested in the long term stability and
success of their investment.
As such, the goals of management are not the same as those of the shareholders,
creating the agency problem.
4.What are the 3 main financial objectives of the financial manager?
Maximisation of shareholder wealth.
Maximisation of profit.
EPS growth.
5.How do you calculate the increase in shareholder wealth?
Share price growth + dividends paid (Learn this now if you didn’t know!).
ACCA F9 Financial Management Full Course Workbook Solutions!
6.How do you calculate EPS?
(Profit after tax - Preference dividends) / Number of ordinary shares.
7.Outline 2 potential dividend payment strategies.
Any 2 of:
Pay a constant dividend.
Pay a constant proportion of earnings.
Pay an inflation linked dividend.
Pay whatever is left after making planned investments.
8.Why did Miller & Modigliani say that dividends were irrelevant?
M & M stated that whether the firm paid a dividend or chose to reinvest the money
into the business the shareholders would get the same return.
This is because if a dividend is paid the shareholders get their return in the form of
revenue. If the money is reinvested in the business this should lead to more profit
and thus an increased share price which increases shareholder wealth by the same
amount.
9.Outline the Clientele Effect.
A firm should choose a consistent dividend policy so that potential investors can
choose their investment based on their preference for a return in the form of
revenue or share price growth.
10. What is a script dividend?
A dividend paid in the form of more shares rather than cash.
If you’ve successfully answered all of the above
questions then you’re ready to do the exam questions
below: