Problem Class questions Flashcards
PROBLEM CLASS 1
Explain the potential advantages and disadvantages to the actuary of admitting a partner to his business.
[5 marks]
(+) Further long term finance - can fund expansion etc.
(+) New partner = new skills or new client base = growth
(+) Enthusiasm/energy - makes business successful. Also partners have more to gain than employees - incentive
(-) Surrender outright control (have to share)
(-) Owner will be liable for partnership - anything the new partner does is the responsibility of both partners
Which of the following is an Intangible Asset?
A) Computers
B) Intellectual Property
C) Motor Vehicles
D) Buildings
B) Intellectual Property
DEF: non-physical
Which of the following best describes the concerns arising from the agency relationship in companies?
A) Directors may act in their own interests at the expense of those of the shareholders
B) Shareholders may have different interests from one another
C) Directors may be unwilling to consider the company’s duties to society
D) Directors may put the interests of lenders before those of the shareholders
A) Directors may act in their own interests at the expense of those of the shareholders
Which of the following best describes the potential exposure of a member of a limited liability partnership (LLP)?
A) Members of an LLP are not exposed to any risk of loss.
B) The LLP itself could fail, costing each member his or her stake in the business.
C) Each member is personally liable for his or her share of the LLP’s liabilities.
D) Each member is jointly and severally liable for the liabilities of the LLP.
B) The LLP itself could fail, costing each member his or her stake in the business
Which of the following best describes current assets?
A) all of the assets owned as at the balance sheet date
B) physical assets that can be seen and touched
C) non-physical assets
D) cash and items that will be converted into cash in the normal course of business
D) cash and items that will be converted into cash in the normal course of business
Explanation:
B) tangible
C) intangible
Explain why shareholders delegate the management of companies to Directors. (3 marks)
- Commercial environments require the separation of ownership and control - directors run the company, shareholders own it
- Many companies are too large/too complex to be funded and run by the same peobple
- Shares are constantly tradable so shareholders are constantly changing
PROBLEM CLASS 2
Explain why it is difficult for shareholders to be assured that directors are consistently working to serve their interests. (5 marks)
- Agency theory (need to identify for a mark) - principal and an agent, has issues such as agency costs, conflicts of interest and how agents need to be motivated. Principal = shareholders, agent = directors
- Shareholders put the directors in a position of trust, but they might act n their own interest at the expense of the shareholders (e.g. giving themself a high salary and paying lower dividends)
- Principals have to monitor the actions of the agents (and threaten consequences for poor performance)
- The annual report is to allow the agents to demonstrate their stewardship of the principal’s investment.
Which of the following explains why tax law often makes a taxpayer’s main private residence free from capital gains tax?
A) taxpayers would refuse to pay
B) in order to encourage home ownership
C) not all taxpayers are homeowners
D) the tax could easily be avoided by renting
B) in order to encourage home ownership
An arrangement where a company’s shares obtain a quotation and listing on a stock exchange, and most of the shares that are made available are bought by a small number of institutional investors, is known as:
A) A prospectus issue
B) An offer for sale
C) A placing
D) A Stock Exchange introduction
C) A placing
Investors in the ordinary shares of a company have their liability limited to?
A) the market price of the shares
B) the fully paid value of the shares
C) the nominal value of their holding
D) the capital value of their holding, less any dividends due
B) the fully paid value of the shares
If a company has the phrase ‘Public Limited Company’ or the abbreviation ‘plc’ after its name you know:
A) that the company must be large.
B) that the company must be quoted on a stock exchange.
C) that the company must have an established track record.
D) none of the above.
D) none of the above.
Which of the following is not an intangible fixed asset?
A) Trademarks
B) Goodwill
C) Copyrights
D) Property
D) Property
Identify two stakeholders other than the shareholders and briefly explain why their interests might conflict with those of the shareholders.
(4 marks)
Loads of options
Employees
- Good terms and conditions, job security
Loan creditors
- Secure repayment of interest and capital
Government
- Social and economic contribution, tax
Local community
- Clean environment, participation in community
Customers
- Good prices, continuity of supply
Suppliers
- Prompt payment, continuity of custom
Board/management
- To pursue interesting projects, empire building?
Which of the following is a disadvantage for a sole trader business entity:
A) Unlimited liability
B) High set up costs
C) Must prepare statutory annual accounts
D) Retention of full control of the business
A) Unlimited liability
UK rates of income tax are based on the principle of taxing those who have the ability to pay rather than those who don’t. Which of the following describes the three ways this is achieved?
A) Through capital allowances, by progressive rates on un-earned income and by taxing un-earned income.
B) Through personal allowances, by regressive rates on un-earned income and by taxing earned income.
C) Through personal allowances, by progressive rates on earned income and by taxing un-earned income.
D Through capital allowances, by regressive rates on earned income and by not taxing un-earned income.
C) Through personal allowances, by progressive rates on earned income and by taxing un-earned income.
PROBLEM CLASS 3
A sole trader is considering converting to a partnership with one other working partner.
Discuss the issues to be considered by the sole trader.
(4 marks)
- Sharing of control and profits
- New possible conflicts
- May increase liability
- More paperwork (increased costs, accounting/tax considerations)
- Possible new investment of funds
- Increased borrowing capacity (grow business)
- New ideas/skills/experience
Which of the following explains why Project Financing allows off-balance-sheet financing, that is, liabilities not being included?
A) Because the arrangement is described in the Notes to the accounts
B) Because the Government acts as a guarantor
C) Because no repayments are due on the financing until the project starts generating revenues
D) Because the Government grants an exception to the normal accounting rules for companies who invest in major infrastructure projects
C) Because no repayments are due on the financing until the project starts generating revenues
Mr Bryson is employed as an accountant and earned £65,000 in the 2023/24 tax year. His employer provides him with private medical insurance worth £1,000. During the tax year, Mr Bryson also received the bank interest of £800 and dividends of £2,500 in the 2023/24 tax year.
You are given the following information regarding 2023/24 tax allowances and rates:
Personal allowance: £12,570; Savings allowance: £500; Dividends allowance: £500
Basic rate band: £37,700 of taxable income
Basic rate of tax: 20%: Higher rate of tax: 40%
(i) Calculate how much tax Mr Bryson has already paid through the PAYE system. [4 marks]
(ii) Calculate Mr Bryson’s total tax liability on completion of his self-assessment tax return and any under or overpayment. [6 marks]
(iii) UK rates of income tax are based on the principle of taxing those who have the ability to pay. This is achieved in three ways: 1. Personal allowances 2. progressive rates and 3. taxing un-earned income.
Discuss how these three ways help achieve the above principle. [6 marks]
(i)
Earnings Tax rate Tax
12570 0% 0
37700 20% 7540
15730 40% 6292
TOTAL TAX = 7540 + 6292 = 13832 tax paid through PAYE
(ii)
Gross Allowance Taxable income Tax
Salary and benefits 66,000 — —- 13,832
Bank interest 800 500 300 120
Dividends 2,500 500 2,000 800
Totals 69300 14752
14752 - 13832 (less liability PAYE) = 920 (tax due via self assessment AKA answer)
(iii)
Via the personal allowance the lowest paid do not pay tax
Via the use of progressive rates, the more that is earned, the higher the tax rate. Beginning at zero for the personal allowance and increasing to (currently) 45% for the highest earners.
Via taxing un-earned income, all income is taxed, not just income from employment. Un-earned income includes rental income, investment income, etc.
The published accounts of a UK manufacturing company for a particular year shows:
- Operating profit of £5 million
- 10% depreciation on assets valued at £1.5 million
- interest of 5% on a loan stock with a nominal value of £2 million
- entertainment expenses of £300,000
Assuming
- tax authority calculated the capital allowances for the year came to £400,000
- tax authority judged only half of the entertainment expenses were ‘allowable’
the first 3/4 of the accounting year fell in a financial year where corporation tax = 35%, remainder of the year had corporation tax = 30%
Calculate the company’s total corporation tax bill for that financial year. (6 marks)
Operating profit: 5,000,000
PLUS depreciation: 150,000
PLUS half of entertainment expenses: 150,000
LESS capital allowances: 400,000
LESS 100,000
5,000,000 + 150,000 + 150,000 - 400,000 - 100,000 = 4.8 million.
The company’s corporation tax liability
[ (0.75 x 0.35) + (0.25 x 0.3) ] * 4,800,000 = £1,620,000
The following values are for Pirates R’us plc:
- Number of ordinary shares of £3.00 in issue = 5,000,000
- Profit and Loss account (the reserves) = £2,000,000
- Net assets (book value) = £6,000,000
- Adjusted net assets = £7,000,000
- Current market share price = 425p
- Predicted cash flows for the next four years = £4,250,000 per year
- Cost of capital = 9%
- Expected dividends for the next four years = £3,500,000 per year
- Investors expected rate of return = 7%
Prepare the following valuations:
(a) Market capitalisation
(b) Book value
(c) Adjusted book value
(d) Discounted cash flow valuation
(e) Dividend valuation
(a) Market capitalisation
5,000,000 X 425p = £21.25m
(b) Book value
6,000,000 / 5,000,000 = £1.20 per share
(c) Adjusted book value
7,000,000 / 5,000,000 = £1.40 per share
(d) Discounted cash flow valuation
4,250,000 * (1.09^-1 +…..+1.09^-4)/5,000,000 = £2.75 per share
(e) Dividend valuation
3,500,000 * (1.07^-1 +…..+1.07^-4)/5,000,000 = £2.37 per share
Distinguish between cum-dividend and ex-dividend share prices (3 marks)
Cum-dividend:
- once announced, there is a set period of time where people who buy shared will be entitled to dividend payout.
- during this period, the share price is cum-dividend
- purchaser of share is entitles to the next dividend
Ex-dividend
- once it passes the time, the new buyers are not entitled to the dividend
- share price is known as ex-dividend
Discuss regular increase and fixed % of profit policies for paying cash dividends (4 marks)
- Regular increase -> done when profits are increasing. Need to be sure that higher level of profits can be maintained
- Fixed % of profits -> provides a regular return of investment for the shareholder. Easy to implement, impression of stability
- Both avoid volatility in dividend payments (help maintain a stable share price).
If a company decides to cut payments, it could be seen as a weakness, which would affect shareholders’ confidence and then would put pressure on share price
END OF PROBLEM CLASS 3
Discuss the effectiveness of altering a typical income tax system in order to benefit the poorer in society. [12]
(Include a plan of your answer … main headings/topics)
LECTURE 13
Oak plc’s has 300,000 25p shares in issue which are currently trading at 250 pence per share. In order to raise capital for an upcoming project it has decided to make a 1 for 3 rights issue at 150p. The cost of the rights issue is £10,000. Calculate the share price after the rights issue.
- 300,000 shares in issue
- Market price before rights issue £2.50
- One new share offered for every three held
- New share will cost £1.50
- The expenses of the issue are £10,000
a) calculate market capitalisation
300,000 x 250p = £750,000
b) calculate extra value created b rights issue
((100,000 x 150p) - 10,000 = £140,000
> the 100,000 came from 1/3 x 300,000
c) calculate share price after the rights issue
(750,000 + 140,000) / 400,000 = £2.23
