F2

Question 1

Investment in Associate

Answer 1

+Cost
+Share of Post Aq reserves
-impairments to date

Question 2

Methods an unquoted company can use to get a listing on the stock exchange?

Answer 2

IPO
Placing
Introduction

Question 3

Differences between IPO and Placing?

Answer 3

Placings are cheaper

Placings are quicker

Placings require less disclosure of information

Placings mean more control to institutional investors (as they have more of the shares)

Sometimes there are restrictions on how much can be placed/minimum that must be offered to the public.

Question 4

What is an introduction?

Answer 4

A methods of obtaining a quotation on the stock market, without needing to issue shares.

Question 5

What is a rights issue?

Answer 5

A rights issue is an offer to existing shareholders to buy more shares at a lower price then the current market price, and in proportion to their shareholding.

Question 6

What are primary and secondary markets?

Answer 6

Primary-for organisations to raise Finance.

Secondary-for existing investors to sell investments.

Question 7

Formula for cost of equity with no dividend growth?

Answer 7

Ke = d/P0

Return/investment

d=regular annual dividend
P0=current share price

Question 8

Formula for cost of equity with dividend growth?

Answer 8

Ke=d1/P0 + g

d1 is the next dividend (not this one)
P0 is share price exdiv
g is dividend growth

Question 9

Increasing to decreasing risk type for investors?

Answer 9

-Least
Creditors with fixed charge
Creditors with floating charge
Unsecured creditors
Preference shares
Ordinary shares. 
-Most risk

Question 10

What do we mean by cost of capital?

Answer 10

The cost to the organisation for the capital they are getting.

Question 11

Formula for g (growth in re-investment)?

Answer 11

g=r*b

Growth
Return on investment
Balance of profits reinvested

Question 12

Formula for cost of debt (bank loan)?

Answer 12

Post tax cost of a loan=
Pre-tax cost * (1-tax rate)

E.g
8%= 10%* (1-20%)

Question 13

Cost of debt (irredeemable bonds) (not tax deductible) formula?

Answer 13

Kd= I/P0

I=interest paid
P0=market value of the debt

Question 14

Cost of debt (irredeemable bonds that are tax deductible) formula?

Answer 14

Kd= I(1-t)/P0

I is interest paid
P0 market value of debt ex-interest.

Question 15

Types of Financial assets?

Answer 15

Held to maturity (like bond)
Loans and receivables (AR)
At fair value through profit or loss (Shares)
Available for sale. (As an investment)

Question 16

Properties of a “held to maturity) fa?

Answer 16

Like a bond:

Initial measurement:
At FV (transaction price)+ transaction cost.

Subsequent measurements:
“Amortised cost” method

Question 17

Properties of “loans and receivables” FA?

Answer 17

Like AR

Initial measurement:
At FV (transaction price)+ transaction cost.

Subsequent measurements:
“Amortised cost” method

Question 18

Properties of “Fair Value through profit or loss” FA?

Answer 18

Like short term shares.

Initial measurement:
At FV

Subsequent measurements:
Fair value, (gains and losses go to P&L)

Question 19

Properties of “available for sale” FA?

Answer 19

Like a long term investment.

Initial measurement:
At FV (transaction price)+ transaction cost.

Subsequent measurements:
At FV, gains and losses go to the OCI. (Move to P&L when sold)

Question 20

Amortised cost method, steps?

Answer 20

Given:
Nominal value
Interest rate
Initial cash Payment
Effective interest rate (IRR)

Then:
Year 1
Initial cash cost 
Interest rate (above*effective)
Receive cash (interest*nominal)
End of year sofp: sum above.

Year 2
Start with carrying value SOPF above
Interest 
Receive cash 
End of year sofp:sum above:

Question 21

Types of financial liabilities?

And measurement

Answer 21

Most financial assets
(AP, Loans, bonds)
Initial measurement:
FV - transaction costs.
Subsequent measurements 
Amortised Cost

At fair value through P&L 
(Sell share "short", derivatives.)
Initial measurement:
FV
Subsequent measurements 
FV (gains and losses to P&L)

Question 22

Convertible debt, formulas for equity component and financial liability component?

Answer 22

Equity component=proceeds-FLC

FLC=PV of principal* + PV of interest rate*
*discount using market interest rate of equivalent non convertible debt.

Question 23

What is double entry of convertible debt?

Answer 23

DR Cash
CR FL
CR Equity

Question 24

Cost of Redeemable bond?

Answer 24

Use internal rate of return.

One rate
Second rate

ABAnANaNb

A + (B-A)Na/(Na-Nb)

Question 25

What is a financial instrument?

Answer 25

A contract that gives rise to both a financial asset of one entity and a financial liability / equity instrument of another entity.

Question 26

Derivative-what are the three characteristics?

Answer 26

Value changes in response to an underlying variable

It requires little or no initial net investment.

It is settled at a future date.

Question 27

What is a provision?

Answer 27

A liability of uncertain timing or amount.

Question 28

3 criteria of a provision?

Answer 28

Present obligation from past event

Probable outflow of economic resource.

Reliable estimate can be made

Question 29

Two things a contingent liability can be, and their criteria?

Answer 29

A “possible obligation”, if something needs to happen for it to exist.

A “present obligation” -not recognised because:

• not probably that there is an outflow
• amount cannot reliably be measured.

Question 30

Disclosure of a contingent liability?

Answer 30

For each class:

1. Nature of CL
2. Estimate of amount
3. What the uncertainties about amount/timing are.
4. Possibility of any reimbursements.

Question 31

What is a possible asset?

Answer 31

It’s a contingent asset. Whose existence is confirmed by the occurrence of one or more uncertain future events.