ACCA F9 Workbook Lecture 1 Financial Strategy

[Pages:251]ACCA F9 Financial Management Full Course Workbook Solutions!

ACCA F9 Workbook Lecture 1

Financial Strategy

ACCA F9 Financial Management Full Course Workbook Solutions!

Shareholder Wealth - Illustration 1

Year 2007 2008 2009 2010 2011

Share Price 3.30 3.56 3.47 3.75 3.99

Dividend Paid 40c 42c 44c 46c 48c

There are 2 million shares in issue.

!

!

!

!

!

!

!!

!

!

!

!

Calculate the increase in shareholder wealth for each year:

II. Per share

III. As a percentage

IV. For the business as a whole

Solution

Year Share Price

Share Price Growth

Div Paid

Increase in

S'holder Wealth

As a

Total

Percentage Shareholder

Return

2007 3.30

40c

2008

3.56 (3.56 - 3.30) = 26c 42c (26 + 42) = (68 / 330) = 2m x 68c =

68c

20.6%

$1.36m

2009

3.47 (3.47 - 3.56) = -9c 44c (-9 + 44) = (35 / 356) = 2m x 35c =

35c

9.8%

$0.70m

2010

3.75 (3.75 - 3.47) = 28c 46c (28 + 46) = (74 / 347) = 2m x 74c =

74c

21.3%

$1.48m

2011

3.99 (3.99 - 3.75) = 24c 48c (24 + 48) = (72 / 375) = 2m x 72c =

72c

19.2%

$1.44m

ACCA F9 Financial Management Full Course Workbook Solutions!

EPS - Illustration 2

PBIT Interest Tax Profit After Tax Preference Dividend Dividend Retained Earnings

2010 $`000 2000 200 300 1500 300 800 400

2011 $`000 2100 300 400 1400 400 900 100

Share Capital (50c) Reserves

5000 3000

5000 3100

Share Price

$2.50

$2.80

Calculate the EPS for 2010 and 2011.

Solution

Profit After Tax Preference Dividend Earnings

2010 1500 300 1200

No. Ordinary Shares (5000 / 0.50)

10,000

EPS (Earnings / No. Ordinary Shares)

12c

2011 1400 400 1000

10,000

10c

ACCA F9 Financial Management Full Course Workbook Solutions!

Test Your Knowledge

If you can't answer all of the questions below without looking at the answer then you need to do some more work on this area!

Multiple Choice Questions

1. The 3 main areas of the business that Finance Managers plan are:

A. Investments, Financing & Profitability. B. Dividend Policy, Financing & Investments. C. Return on Capital, Investments, Profitability. D. Earnings per share, Profitability, Maximising shareholder wealth.

Answer B

2. Examples of 3 external stakeholders are:

A. Shareholders, Customers & Managers. B. Banks, Customers & Employees. C. Suppliers, Government & Customers. D. Unions, Suppliers & Investors.

Answer C

3. The Agency Relationship exists between:

A. Shareholders and Managers. B. Auditors and Managers. C. Shareholders and Stakeholders. D. Stakeholders and Managers.

Answer A

4. The Agency problem exists because...

A. Managers may be interested in maximising their own earnings. B. Shareholders have to rely on management to safeguard the assets of the business. C. Managers may be interested in short term gains over long term stability. D. All of the above.

Answer D

ACCA F9 Financial Management Full Course Workbook Solutions!

5. In order to maximise the wealth of shareholders, Finance Managers need to increase shareholder wealth. Shareholder wealth increases are made up of:

A. Profit for the year + Dividends Paid. B. Earnings per share + Dividends Per Share. C. Share Price + Dividends Paid. D. Share Price movement + Dividends Paid.

Answer D

6. ABC Co. Paid out a dividend of 35c last year and 42c this year per share. Their share price has increased from $4.33 to $5.24 in that time. What is the percentage shareholder return in the current year.

A. 20.00% B. 21.10% C. 30.72% D. 24.39%

Answer C

Increase in Share Price (4.33 to 5.24) = 91c

Dividend Paid this year

=!42c

Return Per Share! !

!

=!133c

As a % of previous year Share Price (133/433) = 30.72%

7. The following information relates to ABC Co.

Year 1 2 3

Share Price $4.50 $4.71 $3.85

Dividend Paid 82c 84c 86c

Which of the following statements is correct?

A. Between Year 1 and Year 2 shareholder wealth decreased. B. Between Year 2 and Year 3 shareholder wealth decreased. C. There was no increase in shareholder wealth between Year 2 and Year 3. D. None of the above.

Answer C

ACCA F9 Financial Management Full Course Workbook Solutions!

8. In order for dividends to be paid a company must have made profits in the current year. Is this statement TRUE or FALSE? Answer FALSE

9. Miller and Modigliani stated in their theory that dividends were .......................... Answer Irrelevant

10. If a company does not pay dividends then the result will be A. More tax will be paid. B. Less profit will be made. C. More cash is available for investments. D. More debt will be required. Answer C

11. The `signaling effect' refers to A. A signal sent by managers to the auditors to inform them of the dividend. B. A signal sent by Auditors to inform shareholders of the dividend. C. The signal sent to the market by a company announcing their dividend for the year. D. A warning announcement that a firm will make less profit than expected.

Answer C

12. The `Bird in the hand' argument refers to the fact that A. Investors prefer a dividend now rather than later as there is a risk that the company

could not pay a dividend at all. B. Managers prefer not to pay a dividend as they can re-invest the cash saved into new

investments. C. The government want the company to pay their tax on time. D. The company has an ethical policy to look after any injured birds they might find.

Answer A

ACCA F9 Financial Management Full Course Workbook Solutions!

13. Which of the following best explains the `Clientele Effect'? A. The clients of the company want as cheap prices as possible. B. The company should choose a dividend policy and stick to it to attract investors who

want that type of policy. C. The company should have a vote every year to ask investors what their dividend policy

should be for the year. D. The company should not pay a dividend. Answer B 14. A company can reward investors through script dividends without paying out any cash. Is the above statement TRUE or FALSE

Answer TRUE

15. A `script dividend' is where a company: A. Pays no dividend at all. B. Pays a dividend every other year. C. Pays a larger than average dividend. D. Pays a dividend in shares rather than cash.

Answer D

16. A `share buy back scheme' refers to a situation where a company buys back it's own shares from shareholders and then cancels those shares.

Is the above statement TRUE or FALSE?

Answer TRUE

17. A company may decide on a `Share-buy-back Scheme' because A. It doesn't have enough cash to pay a dividend. B. It has large cash reserves and wants to reward shareholders. C. The government tells it that it has too many shares. D. It wants to receive cash to pay off some of it's debt.

Answer B

18. A company may decide not to pay a dividend for which of the following reasons

ACCA F9 Financial Management Full Course Workbook Solutions!

A. It has retained losses rather than profits. B. It has several new investments it would like to make. C. It has low cash reserves. D. All of the above.

Answer D

19. Investors would like to see a company pay a steadily rising dividend growing at a rate in excess of inflation.

Is the above statement TRUE or FALSE?

Answer TRUE

20. Which of the following is an assumption of Miller and Modigliani's dividend irrelevancy theory?

A. A company pays a steadily rising dividend that grows every year. B. Dividends and capital gains are taxed at the same rate. C. Investors are irrational. D. All share dealing transactions incur heavy costs.

Answer B

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download