Mock exams

Question 1

Depreciation should be removed in NPV. Yes or No?

Answer 1

Yes they are not a cash flow

Question 2

If there are 4 years of depreciation, make sure you do what?

Answer 2

4 years of depreciation and then do the balancing charge on the balance in the final year.

Question 3

If talking about NPV what do you have to consider?

Answer 3

Everything is an assumption so it is only as reliable as the assumption

Question 4

Advantages of simulations

Answer 4

Consider changes to more than one variable
Take into account the probability of variables changing

Question 5

Disadvantages of simulations

Answer 5

Not optimising techniques and do not point to a correct decision
Can be expensive and time consuming to create
The information provided on probabilities may be unreliable

Question 6

What is a systematic risk?

Answer 6

Systematic risk is the type of risk that companies are exposed to no matter what market sector they operate in.
Systematic risk cannot be eliminated through diversification

Question 7

What is unsystematic risk?

Answer 7

Unsystematic risk is risk tat affects a particular market sector or individual company.
Most risks can be eliminated by having a diversified portfolio.

Question 8

When doing a money market hedge you must make sure you?

Answer 8

State the rates you are using

Question 9

When doing money market hedge you need to do what to the interest rate?

Answer 9

Divide by 3/12 because they are always in three month batches

Question 10

When working out the premium in over the counter options what must you remember?

Answer 10

If there is interest to pay

Question 11

What are the three factors that will affect the time value of the interest rate options?

Answer 11

Volatility - Higher volatility of interest rates will increase the option value as this will increase the chance of the options being in the money at expiry
Time to maturity - The longer the time to maturity the more chance there is that the option will be in the money at expiry. There will also be a greater interest element in the option.
The risk-free rate - The higher the risk free rate the higher the interest element will be in the option.

Question 12

What does real cost of capital mean?

Answer 12

It excludes inflation

Question 13

When something say paid on same dividend ratio it means what?

Answer 13

The amount of dividend paid per £ of profit

Question 14

If doing a report on two sources of finance what do you talk about?

Answer 14

Gearing
EPS
Interest cover
Cost of capital

Advantages and disadvantages of both

Question 15

If a question asks why is a froward rate a discount what do you do?

Answer 15

Interest rate parity
Work out average spot
Then do interest rates of each over the correct period eg 3 months
Then complete interest parity formula to get what forward rate should be
See that the rate goes up so discount

Question 16

If a question asks why is a froward rate a discount what do you do?

Answer 16

Interest rate parity
Work out average spot
Then do interest rates of each over the correct period eg 3 months
Then complete interest parity formula to get what forward rate should be
See that the rate goes up so discount

Question 17

What do you do for premiums when doing options on receipts?

Answer 17

Deduct them!!

It is a cost so remove from income

Question 18

When doing advantages and disadvantages of hedging what must you do?

Answer 18

Make sure you say what would have happened if you hadn’t of hedged

Question 19

Assumptions made to use WACC as a discount factor

Answer 19

Historical proportions of debt and equity are to remain unchanged
Business risk is to remain unchanged
The finance raised is not project specific
The project is small in size relative to the size of the company

Question 20

What do you need to consider when saying if WACC is suitable for discounting? Not assumptions

Answer 20

Is dividend growth rate sustainable
Are there any other sources of finance
Tax rate changes will affect cost of debt

Question 21

What are key assumptions when using cost of capital when ungeared and regeared for new industry?

Answer 21

The objective of the company is to maximise the wealth of the shareholders
All shareholders hold the market portfolio (they are fully diverted)
Shareholders are the only participants in the firm

Question 22

What do you have to do when you do a perpetuity in SVA?

Answer 22

Discount the perp back to To

1/1.rate^n

Question 23

To do sensitivity work out

Answer 23

The NPV of the part being looked at
Then divide that by the total NPV + perp NPV + Investment

Question 24

Perp without growth formula

Answer 24

PV=Cashflow/ Rate

Question 25

When doing historic cost do you take the figure in the accounts or the actual historic cost?

Answer 25

Figure in the accounts

Question 26

What must you remember when doing valuations?

Answer 26

Do the marketability mark down when using other company data

Question 27

How do you do a valuation of present value of future cash flows?

Answer 27

Do an NPV with a perpetuity