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Question 1

How to Calculate discount rate into perpetuity

Answer 1

1/Discount rate set

Question 2

What is a money market used for?

Answer 2

Short term finance

Question 3

How to calculate delayed annuity discount rate?

Answer 3

Use discount rate for how many year of cash flows there are you are trying to calculate and then discount by the amount of year between T0 and the year before cashflow starts

Question 4

What is the london stock exchange an example of?

Answer 4

Capital Market

Question 5

How to calculate an appropriate beta for cost of equity for our company?

Answer 5

. Degear of Proxy Compnay (Formula on Sheet) equals teh proxy companies assest beta
. Regear - we use the formula to work out our own equity beta by doing assest beta divoded by function with equity beta
. Then we calculate the Equity Beta of our company by using the proxy assest beta*our equity beta

Question 6

What is forward rate agreements used for?

Answer 6

Interest rate hedging

Question 7

What two methods are for hedging against foreign currency hedging

Answer 7

Leading and lagging
Matching

Question 8

What methods can be used to calculate cost of equity?

Answer 8

Dividend valuation model (Fomrula on sheet - Right hand side under the growth model
CAPM

Question 9

How to calculate the cost of a bond?
How to calculate if it was pre tax cost of a bond?

Answer 9

Kd = I*(1-T)/Po
Kd = cost
I = Interest of bond e.g 8% bond = 8
T = Tax rate
Po = ex interest market value

Question 10

what is a Scrip Issue?

Answer 10

It is Bonus shares given to everyone at the same proportion as before the cost is from retained earnings

Question 11

Who gets paid first out of:
Preference shareholders
Sercured Creditors
Unsercured Creditors
Ordinary Shareholders

Answer 11

1st = Sercured Creditors
2nd =Unsercured Creditors
3rd = Preference shareholders
4th = Ordinary Shareholders

Question 12

How to calculate the annual percentage benefit/cost of a discount?

Answer 12

Annual % Benefit = (1+(Discount/Amount left to pay))^Number of periods

. Amount left to pay = remaining percentage balance e.g 5% discount = 95% left to pay
. Number of period = 365/number of days early compared to standard

Question 13

How to Calculate equivalent annual cost?

Answer 13

Years to replacement * NPV = EAC

Question 14

What is Capital Rationing and what are the differences between Hard and Soft Capital Rationing

Answer 14

Capital Rationing is the management of distrubuting resources to different projects to maximise Shareholder wealth.
Soft Capital rationing is the internal reason why capital may be restricted e.g only going for projects with the required rate or return
Hard Capital Rationing is when external reason restrict the capital available to projects e.g not being accepted for a loan so cant do the project.

Question 15

What are the ways to assess the risk of a project?

Answer 15

Probability analysis - put a percentage chance of certain outcome occuring and base NPV on the probability
CAPM (Capital Asset pricing model) - Assess a proxy companies risk and adjust it to suit your own companies risk

Question 16

If a lease payment is paid at the start of each year and corporation tax is paid 1 year in arrears what period do they arise?

Answer 16

Lease Payment = T0
Corporation Tax = T2

Question 17

What are the reason to lease instead of buy?

Answer 17

More flexible - The lease can be for less than the assets useful life
Updated tecnology - If a more advanced assets becoem available then the lessee doesnt have to keep using outdated assets
Cashflow - Company may nopt have the finance to buy an asset
Residual Value worry - At the end of the assets useful life buyer have to deal with selling the asset at value, lessee just send it back

Question 18

in working capital management how do you work out the:
1.) annual discount cost?
2.) Net Benefit?

Answer 18

1.) (1+(Discount in £/Amount left to pay)^Number of periods)-1
Number of periods = 365/ number of days paid early
2.) Step 1 - Current Policy = Average receivables * Interest Rate
Step 2 - New Policy = (Average receivables (at new rate) * Interest) + Cost of discount (Sales *discount rate)
Step 3 Compare step 1 and 2

Question 19

1.) How to calculate average Receivable/Payable Balance?
2.) How to calculate Finance cost of Recievables/Payables

Answer 19

1.) Total credit Sales * (recievables days/365)
2.) Receivables/Payables balance * Interest rate