Finance v6.0 (FIN)

The following statements concerning market efficiency have been made:
1. Only markets which are strong-form efficient will not be affected by creative accounting or window dressing of accounts.
2. When a market is weak-form efficient, it is possible to predict future share price movements based on past trends of share price movements.
Which of the following combinations (true/false) is correct?

Better Inc, a US-based company, expects to receive 800,000 in two months time for consultancy services provided to the Austrian government. It wishes to be certain of the amount to be received and will use the derivatives market to achieve this.
Which one of the following actions should the company take NOW to hedge the risk?

Rehan Gates has in issue 10% debentures of a nominal value of $100. The market price is
$90 ex interest.
Ignoring taxation, calculate the cost of this capital if the debenture is redeemable at par after 10 years.

The following exchange rates of UK sterling () against the Australian dollar (A$) have been quoted:

Spot 1 = A$1.7574 -
Six months forward, 1 = A$1.7245
The interest rate in Australia is 5% per year for a six-month deposit or borrowing.
What is the annual interest rate for a six-month deposit or borrowing in the UK?

A business is considering various investment projects, with each expected to have an initial cash outflow followed by positive cash inflows over the rest of its life. The operations director has stated that the net present value and internal rate of return methods will, if correctly applied to each individual project, always give projects with the same characteristics:
1. Accept or reject decision for individual projects
2. Priority ranking for those projects that are acceptable
Which of the following combinations (true/false) is correct?

Companies often invest temporary surplus cash to earn income. Consider the following statements:
1) The main advantage of short-term deposits with finance houses is that they are easily transferable to another investor should the company require cash sooner than previously thought.
2) Treasury bills are short-term instruments issued by government when they need money.
They pay a small amount of cash interest on the sum invested.
Which ONE of the following combinations (true/false) is correct?

A company has loan notes in issue paying interest at the rate of 6% per year. Interest has just been paid on the loan notes, which are due for repayment in exactly one years time.
The loan notes will be redeemed at $109 per $100 nominal value. A yield of 9% per year is required by investors from the loan notes.
What is the predicted current market value of the loan notes? (To the nearest $ and ignoring taxation)

An analysis of the financial statements of a business reveals the following financial ratios:
1. A higher than average inventory holding period
2. A higher than average payment period for trade payables
3. A lower than average current ratio
4. A lower than average sales to working capital ratio
Which TWO of the above is consistent with a business being over-capitalized?

The following statements concerning sources of finance have recently been made:
1) Under a finance lease arrangement, thelesseris responsible for servicing and maintaining the leased equipment.
2) Under an invoice discounting arrangement, the invoice discounter undertakes responsibility for collecting the debts.
Which ONE of the following combinations (true/false) is correct?

Aryal plc, a listed public company, received news on 1 June 2004, in the form of a confidential letter, that it had won a contract from the UK government. The new contract is expected to increase profits significantly from 2006 onwards.The news of the contract was not made publicly available until 5 June 2004.
Which one of the following combinations of possible share price reactions would you expect on 5 June 2004 under the semi-strong and strong forms of market efficiency?

Share price reaction -

Semi-strongStrong form -

A UK company has just provided a service to a US company for $750,000. Settlement is due in two months time and the UK company wants to hedge the risk of a fall in the value of the US dollar over the next two months. The following methods of hedging this risk have been suggested:
1.Buy sterling put options now
2.Buy sterling futures now
3.Buy sterling call options now
4.Sell sterling futures now
Which two of the above suggestions would provide a hedge against the exchange rate risk?

A business holds an inventory item with an economic order quantity of 800 units. Supply lead times and usage rates for the item are as follows:

MaximumAverageMinimum -
Supply lead time20 days12 days6 days
Daily usage25 units20 units10 units
The business wishes to avoid any risk of running out of this inventory item.
What is the size of the buffer inventory (using average figures) and the maximum level of inventory?

The shares of Derwent Co and Plym Co have beta values of 05 and 12 respectively. The expected rate of return for Derwent Co investors is 9% and the expected return to the market is 12%. Using the Capital Asset Pricing Model, what is the expected rate of return for investors in Plym Co?

Consider the following statements concerning forward rate agreements (FRAs):
1. They can be tailored to the specific requirements of a customer.
2. They can be resold in the secondary market.
Which of the following combinations (true/false) is correct?

Com Ltd has multiple operations around the world. Com Ltd consider following hedging methods in its operation:
1. International diversification of operations
2. Matching assets and liabilities
3. Leading and lagging
4. Money market hedge
Which TWO of the hedging methods are suitable forminimizingeconomic exposure of Com
Ltd?