Applied Skills

Financial
Management
Mock Exam 1 – Questions

Time allowed: 3 hours

This examination is divided into three sections:
Section A
 15 objective test (OT) questions, each worth 2 marks
 30 marks in total
Section B
 Three OT cases, containing a scenario which relates to five OT
questions, each worth 2 marks
 30 marks in total
Section C
 Two constructed response questions, each containing a
scenario which relates to one or more requirement(s)
 Each constructed response question is worth 20 marks in total
 40 marks in total
Formulae Sheet, Present Value and Annuity Tables are on
pages 11–13.

©2022 ACCA All rights reserved

Section A
This section of the exam contains 15 objective test (OT) questions.
Each question is worth 2 marks and is compulsory.
This exam section is worth 30 marks in total.
1 Which TWO of the following money market instruments would usually be issued
at a discount to nominal value?

Certificates of deposit

Treasury bills

Commercial paper

Repurchase agreements

2 Indicate, by clicking on the relevant boxes in the table below, whether each of
the following is permitted under Islamic financing principles.

The receipt or payment of interest PERMITTED NOT PERMITTED

The issue of debt PERMITTED NOT PERMITTED
Using derivatives for speculation PERMITTED NOT PERMITTED
Selling something that is not owned PERMITTED NOT PERMITTED

3 The target capital structure of Traggle Co is 50% debt, 10% preference shares and 40%
ordinary shares. The interest rate on the debt is 6%, the dividend yield on the preference
shares is 7%, the cost of ordinary shares is 11.5% and the tax rate is 40%.
What is Traggle Co’s weighted average cost of capital?
 6.5%
 6.8%
 7.1%
 8.3%

4 Which of the following actions would be MOST likely to cause agency costs to
fall?
 Removing independent non-executives from the board of directors
 Introducing long-term incentive plans for the executives
 Reducing the level of internal controls
 Granting executive share options exercisable within one year

5 The following information relates to the 31 December replacement of a machine:

$
Tax written down value of old machine 20,000
Cost of new machine 180,000
Sale proceeds of old machine 30,000

Tax rate (tax is paid without delay) 30%

What is the net relevant cost of replacing the machine on 31 December?

 2022 ACCA FM-Mock 1-Questions 2

6 Quick Grow Co uses its bank to factor the company’s trade receivables. Annual sales are
$1,200,000 and the receivables collection period is 30 days. The bank immediately
advances Quick Grow 90% of the receivables at an annual interest rate of 18%, and
charges a fee of 1% on sales. As a result of the factoring arrangement, Quick Grow is able
to save $10,000 per year in administration costs.
Assuming a 360-day year, what is the net annual cost of factoring?
 $20,000
 $19,000
 $18,200
 $18,000

7 Which of the following would NOT usually be considered within corporate

financial management?

Select… 
Hedging foreign currency risk
Following “pecking order theory”
Setting the firm’s mission statement
Achieving value for money

8 If a profitable company increases the proportion of debt in its capital structure,

which of the following would definitely increase?
 The volatility of net income
 The risk of default
 The level of operating gearing
 The level of business risk

9 Under frost-free conditions, Sweet Co expects its strawberry crop to have a $60,000
market value. An unprotected crop damaged by frost has an expected market value of
$40,000. If Sweet Co protects the strawberries against frost, the market value of the crop
is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost.
What must be the probability of a frost for Sweet to be indifferent to spending
$10,000 for frost protection?
 0.167
 0.200
 0.250
 0.333

10 A retailing company has annual sales of $36m and a gross profit margin of 20%. All sales
and purchases are on credit. The following balances are maintained throughout the 365-
day year:
Inventory $6m
Trade receivables $8m
Trade payables $3m

What is the company’s operating cycle (to the nearest day)?

days

 2022 ACCA FM-Mock 1-Questions 3

11 Match the level of capital market efficiency to each of the following statements.

Efficiency Statement

Not efficient at all No gain can be made by using inside information

Weak form efficient Share price movements can be predicted by analysing

financial statements

Semi-strong form efficient Share price movements can be predicted by analysing

historic price charts

Strong form efficient Share prices quickly respond to new publicly available
information

12 Identify, by clicking on the relevant box, whether each of the following

statements concerning the traditional view of capital structure is true or false.

If a company’s capital structure is below the optimal level of TRUE FALSE

gearing, then an increase in equity will, all other things being
equal, increase the weighted average cost of capital
The same optimal capital structure exists for every company TRUE FALSE
There is a linear relationship between financial risk and the cost of TRUE FALSE
equity

13 Which of the following is MOST likely to increase shareholder wealth?

 Redemption of all corporate debt

 Paying a large dividend
 Using discounted payback period for project selection
 Shortening the operating cycle

14 The following data relates to a company:

Total dividend (just paid) $180,000
Payout ratio 60%
Expected return on reinvested profits 20%
Cost of equity 15%

What is the total market value of the company’s equity (to the nearest $000)?
 $1,200,000
 $2,120,000
 $2,777,000
 $6,720,000

15 A company plans to issue a 10-year 7% redeemable loan note at its nominal value.
Investors expect an annual return of 10% on loan notes of this level of risk.
What is the minimum redemption premium (to the nearest $) that the company
must offer on each $100 nominal value loan note?
 $25
 $48
 $50
 $96

 2022 ACCA FM-Mock 1-Questions 4

Section B
This section of the exam contains three OT cases.
Each OT case contains a scenario which relates to five OT questions.
Each question is worth 2 marks and is compulsory.
This exam section is worth 30 marks in total.

The following scenario relates to questions 16–20.

AQR Co has 100 million ordinary shares in issue and the current ex-div market price per share is
$2.50.
The recent dividends per share of the company are as follows.
Year 20X2 20X3 20X4 20X5 20X6
Dividend per share $0.1938 $0.2020 $0.2041 $0.2102 $0.2180

To finance an expansion of existing operations AQR Co plans to issue $40m of loan notes at their
nominal value of $100 per loan note. These loan notes would pay annual interest of 8% and would
be redeemed at a 5% premium to nominal value after 10 years. The tax rate is 30%.
16 What is AQR Co’s existing cost of equity?
 11.7%
 8.7%
 12.0%
 12.1%

17 Which of the following statements about the impact of the proposed loan note
issue on the cost of equity is correct?

Select… 
The cost of equity will rise due to default risk
The cost of equity will remain unchanged as there will be no change in business risk
The cost of equity will fall as the share price will rise
The cost of equity will rise due to an increase in financial risk

18 What is the after-tax cost of debt of the loan notes?

 6.0%
 5.6%
 8.0%
 11.2%

19 AQR Co’s bankers advise that, for the loan note issue to be fully subscribed, the company’s
quick ratio needs to be at least 1. AQR Co’s existing quick ratio is 0.8.
Which of the following actions would increase AQR Co’s quick ratio?
 Purchasing inventory through the issuance of a long-term loan note
 Implementing procedures to collect trade receivables at a faster rate
 Paying an existing trade payable
 Selling obsolete inventory at a loss

20 AQR Co’s finance director is considering the use of peer-to-peer (P2P) lending as an
alternative to the planed loan note issue.
Identify, by clicking on the relevant box, whether each of the following
statements concerning peer-to-peer lending is true or false.

It is an example of financial disintermediation TRUE FALSE

It represents debt-based crowdfunding TRUE FALSE
The amounts loaned are usually insured by the government TRUE FALSE
The interest rate for borrowers is usually higher than on bank loans TRUE FALSE

 2022 ACCA FM-Mock 1-Questions 5

The following scenario relates to questions 21–25.
GBP Co, whose home currency is sterling (£), has a fixed-interest peso bank loan and must pay
interest of 2 million pesos in six months’ time. The following information is available:
Pesos per £1
Spot rate: 22.500 – 22.582
Six-month forward rate: 22.805 – 22.889

Annual interest rates available to GBP Co:

Borrowing Deposit
Peso 10.0% 7.5%
Sterling 4.5% 3.5%

21 Which TWO of the following statements relating to interest rate parity theory are
correct?

It prevents gains from covered interest rate arbitrage

It operates using nominal interest rates rather than real interest rates

It is reliable for forecasting the long-term exchange rate trend

It suggests that an increase in interest rate will lead to an increase in the value of
the currency

22 What is the cost in six months’ time of using a forward contract to buy the 2
million pesos (to the nearest £)?

23 What are the appropriate six-month interest rates for GBP Co to use if the
company hedges the peso payment using a money market hedge?

Interest rate options Interest rate to be used for

2.25% 1.75 % Borrowing rate Deposit rate

3.5% 3.75%

4.5% 7.5%

5.0% 10.0%

24 Which of the following derivatives would be MOST appropriate for hedging

currency economic risk?
 Forward rate agreements
 Currency options
 Currency futures
 Currency swaps

25 GBP Co’s finance director is considering an issue of new debt and has analysed the term
structure of interest rates to assist in the decision.
Which of the following would best explain an inverted yield curve?
 Investors “preferred habitat” is in long-dated loan notes
 Inflation is expected to rise in future
 Investors have a preference for liquidity
 The central bank has lowered short-term interest rates on a temporary basis to
stimulate the economy

 2022 ACCA FM-Mock 1-Questions 6

The following scenario relates to questions 26–30.
Terrier Co makes annual purchases of $342,000 for a key component. It places one order per
month for 5,000 components. The current terms are payment in full within 90 days, which Terrier
Co meets, and the cost per component is $5.70. The cost of ordering is $100 per order, while the
cost of holding components in inventory is $0.50 per component per year. Terrier Co does not use
the Economic Order Quantity (EOQ) model for inventory.
The supplier has offered either a discount of 0.8% for payment in full within 30 days, or a discount
of 3% on orders of 15,000 or more components. If the bulk purchase discount is taken, the cost of
holding components in inventory would increase to $1 per component per year due to a scarcity of
warehousing space in the city.
Assume that there are 365 days in the year and that Terrier Co finances working capital using an
overdraft costing 4.5% per year.
26 Which of the following factors influence the formulation of a company’s working
capital policy?
(1) The operating cycle
(2) The terms of trade
(3) Management’s attitude to risk

 3 only
 1 and 3 only
 1 and 2 only
 1, 2 and 3

27 What is the net benefit per year if Terrier Co accepts the early settlement
discount?
 $206
 $1,471
 $2,713
 $2,736

28 Identify, by clicking on the relevant box, the effect on Terrier Co’s operating cycle
and the current ratio if it accepts the early settlement discount.

Operating cycle LONGER SHORTER NO CHANGE

Current ratio RISE FALL NO CHANGE

29 What is the net benefit per year if Terrier Co accepts the bulk purchase discount?
 $10,260
 $8,560
 $1,440
 $4,810

30 Terrier Co is considering a rights issue to finance working capital and business expansion.
Is each of the following statements about the effect of a rights issue true or
false?

Following a rights issue, a company’s share price is likely to fall TRUE FALSE
Following a rights issue, the total value of the company’s TRUE FALSE
ordinary shares is likely to fall
A rights issue cannot affect the company’s control structure TRUE FALSE

 2022 ACCA FM-Mock 1-Questions 7

Section C
This section of the exam contains two constructed response questions.
Each question contains a scenario which relates to one or more requirement(s).
Each question is worth 20 marks and is compulsory.
This exam section is worth 40 marks in total.
31 This scenario relates to two requirements.
BRT Co has developed a new confectionery line that can be sold for $5.00 per box (in current price
terms). The finance director has proposed that investment in the new product should be evaluated
over a four-year time-horizon. The variable and fixed costs (both in current price terms) will
depend on sales volume, as follows.
Sales volume (boxes) less than 1m 1–1.9m 2–2.9m 3–3.9m
Variable cost ($ per box) 2.80 3.00 3.00 3.05
Total fixed costs ($) 1m 1.8m 2.8m 3.8m

Forecast sales volumes are as follows:

Year 1 2 3 4
Demand (boxes) 0.7m 1.6m 2.1m 3.0m

The production equipment for the new confectionery line would cost $2m (payable immediately) and
an initial investment of $750,000 would be required for working capital. The equipment would have
no scrap value. Tax-allowable depreciation is available on a 25% reducing balance basis. Profit tax
of 30% per year will be payable one year in arrears. A balancing allowance would be claimed in the
fourth year of operation.
The general level of inflation is expected to be 3% per year and the selling price, variable cost per
box, total fixed costs and the level of working capital would all experience inflation of this level. BRT
Co uses a nominal after-tax discount rate of 12% to appraise new investment projects.
Required:
(a) Using a nominal terms approach, calculate the net present value of investing in
the new product and advise on its financial acceptability (work to the nearest
$1,000). (15 marks)
(b) Explain the link between net present value and the assumed key financial
objective of maximising shareholder wealth. (5 marks)
(20 marks)

 2022 ACCA FM-Mock 1-Questions 8

32 This scenario relates to four requirements.
The following financial information relates to YNM Co, which has a cost of equity of 12%. Assume
that it is now 31 March 20X6 and that the ordinary share price of YNM Co is $4.17 per share. YNM
Co has been experiencing trading difficulties due to a continuing depressed level of economic
activity.
Statement of profit or loss for the three years ending 31 March 20X6
20X4 20X5 20X6
$m $m $m
Profit before interest and tax 29.3 26.6 25.3
Finance charges (interest) 4.8 5.3 5.5
–––––– –––––– ––––––
Profit before tax 24.5 21.3 19.8
Taxation expense 7.3 6.4 5.9
–––––– –––––– ––––––
Profit for the period 17.2 14.9 13.9
–––––– –––––– ––––––
Statement of financial position information as at 31 March 20X6
$m $m
Ordinary shares (nominal value $1 per share) 19.0
Retained earnings 88.5
––––––
Total equity 107.5
8% loan notes, redeemable in two years’ time 50.0
––––––
Total equity and non-current liabilities 157.5
––––––
Note: There has been no change in share capital since 20X3.
Dividend and share price information
20X3 20X4 20X5
Total cash dividend paid ($m) nil 9.5 9.5
Share price at end of year ($ per share) 5.94 5.10 4.59

Average data on companies similar to YNM Co

Interest coverage ratio 10 times
Long-term debt/equity (book value basis) 40%

Financial objective of YNM Co

YNM Co has a declared objective of maximising shareholder wealth.
Dividend decision
YNM Co is considering two alternative dividend choices for the year ending 31 March 20X6:
(1) To pay the same total cash dividend as in 20X5
(2) To pay no dividend at all for the year ending 31 March 20X6
Financing decision
YNM Co is also considering raising $50m of new debt finance to support existing business
operations.

 2022 ACCA FM-Mock 1-Questions 9

Required:
(a) Assess the recent financial performance and current financial position of YNM Co.
(6 marks)
(b) Briefly discuss the achievement of the objective of maximising shareholder
wealth. (2 marks)
(c) Evaluate the two dividend choices. (6 marks)
(d) Discuss the proposal to raise $50m of new debt finance. (6 marks)
(20 marks)

 2022 ACCA FM-Mock 1-Questions 10

 Formula Sheet
Economic order quantity

2Co D
=
Ch
Miller – Orr Model
Return point = Lower limit + (1/3 × spread)
1
3 3
 4  transaction cost  variance of cash flows 
Spread = 3  
 interest rate 
 
The Capital Asset Pricing Model
E(ri) = Rf + βi(E(rm) – Rf)
The asset beta formula

 Ve   Vd 1  T  
βa =  βe  +  βd 
 Ve  Vd 1  T    Ve  Vd 1  T  
The Growth Model

D O 1  g  D 0 1  g 
PO = re = +g
re  g  P0
Gordon’s growth approximation
g = bre
The weighted average cost of capital

 Ve   Vd 
WACC =   ke +   kd 1  T 
 Ve  Vd   Ve  Vd 

The Fisher formula

(1 + i) = (1 + r)(1 + h)
Purchasing power parity and interest rate parity

1  h c  1  i c 
S1 = S0 × F0 = S0 ×
1  h b  1  i b 

 2022 ACCA FM-Mock 1-Questions 11

 Present Value Table

Present value of 1 i.e. (1 + r)–n

where r = discount rate
n = number of periods until payment

Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 2
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 3
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 4
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 5

6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 6
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 7
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 8
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 9
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 10

11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 11
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 12
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 13
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 14
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 2
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 3
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 4
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 5

6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 6
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 7
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 8
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 9
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 10

11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 11
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 12
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 13
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 14
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 15

 2022 ACCA FM-Mock 1-Questions 12

 Annuity Table

1  (1  r )  n
Present value of an annuity of 1 i.e.
r
where r = discount rate
n = number of periods

Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 2
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 3
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 4
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 5

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 6
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 7
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 8
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 9
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 10

11 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 11
12 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 12
13 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.103 13
14 13.00 12.11 11.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367 14
15 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8.559 8.061 7.606 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 2
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 3
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 4
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 5

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 6
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 7
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 8
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 9
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 10

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.586 4.327 11
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 12
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 13
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 14
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 15

End of Question Paper

 2022 ACCA FM-Mock 1-Questions 13