[FM/F9: Tài liệu ôn thi] Part D + E: Business Valuation & Risk Management

Part D+E sẽ ôn lại 4 dạng bài tập quan trọng môn Financial Management (F9) với hai chủ đề Business Valuation và Risk Managament.

I. Tổng quan:

 

Topic	Question types	Question index
		MCQ
Business Valuation	1. General MCQ	Câu 1-9
	2. Market efficiency theories	Câu 10, 11
Risk Management	1. Foreign exchange risks	Câu 1 - 5
	2. Interest rate risk	Câu 6, 7
Reference: BPP ACCA F9 - Financial Management StudyText

II. Dạng bài tập chi tiết

1. Business Valuation

Ref: Tóm tắt kiến thức Dạng 1: Business Valuation

1.1. Dạng 1:

Câu 1: Basic

EPS	Earning per share
PPS	Price per share
VPS	Value per share
EY	Earnings yield
TE	Total earnings

What is the best expression for the value of the company?

A. TE x (1/EY)

B. EPS x (1/EY)

C. EPS/PPS

D. PPS/EPS

Answer A

Because: B = value per share; C = earning yeild, D = price earning ratio

Câu 2: Intermediate

Gele Co has in issue 6% loan notes which are redeemable at their nominal value of $100
in three years’ time. Alternatively, each loan may be converted on that date into
30 ordinary shares of the company.
The current ordinary share price of Gele Co is $3.50 and this is expected to grow at
4% per year for the foreseeable future. Gele Co has a pre-tax cost of debt of 5% per year.
What is the current market value of each $100 convertible loan note?

Guidance: 

Step 1: Choose the higher between conversion value or redemption value as the option deferred

Step 2: Calculate the market value

Answer: D

Step 1: Decide the option preferred

Expected share price in three years’ time = $3.50 × (1.04)3 = $3.94
Conversion value = $3.94 × 30 = $118.20
Compared with redemption at a par value of $100, the conversion will be preferred.

Step 2: Calculate the market value

The current market value will be the present value of future interest payments, plus the present value of the conversion value, discounted at the cost of debt of 5% per year.

Market value of each convertible loan note 

= [($100 × 6%) × 3yr 5% AF] + ($118.20 × 3yr 5%DF) 

= ($6 × 2.723) + ($118.20 × 0.864)
= $118.46

Câu 3: Intermediate

Supa plc has 50 million shares in issue, and its capital structure has been unchanged for
many years. 

Its dividend payments in the years 20X1 to 20X5 were as follows. 

End of year	Dividends $’000
20X1	2,200
20X2	2,578
20X3	3,108
20X4	3,560
20X5	4,236

Dividends are expected to grow at the same average rate into the future.
What should be the market price per share at the start of 20X6 if the required return on the shares is 25% per annum? 

Guidance: The question relates to sharing – a source of equity with dividend payments throughout a number of recent years.

The following formula could be used:

Step 1: Calculate g using the formula above

Step 2:

Note: Price per share = Total value (P in step 2) / Number of shares

Answer: $1.39

Step 1: Calculate g

The period 20X1 to 20X5 covers four years of growth, and the average growth rate ‘g’ can
be calculated as follows:

(1+g)4 = 4,236/2,200 => 1+g = 1.178 => b = 17.8%

Step 2: Calculate total share value

There are 50m shares => price per share = 69,306,000/50,000,000 = $1.39

Câu 4: Intermedia

Mr. Mays has been left $30,000 which he plans to invest on the Stock Exchange in order to
have a source of capital should be decide to start his own business in a few years’ time.
A friend of his who works in the City of London has told him that the London Stock
Exchange shows strong form market efficiency. If this is the case, which of the following investment strategies should Mr. Mays follow?

A. Study the company reports in the press and try to spot under-valued shares in which to invest

B. Invest in two or three blue-chip companies and hold the shares for as long as possible

C. Build up a good spread of shares in different industry sectors

D. Study the company reports in the press and try to spot strongly growing companies in which to invest

Guidance: Apply knowledge from market efficiency

Answer: C

The preferred approach is a good spread of shares, as this minimises the risk in the portfolio and should ensure Mr. Mays does achieve something approaching the average return for the market.

 Strong form efficiency means that Mr. Mays cannot do anything to guarantee to beat the market – even by insider trading, so options A and D are a waste of
time.

Câu 5: Basic

A company has 7% loan notes in issue which are redeemable in seven years’ time at a 5%
premium to their nominal value of $100 per loan note. The before-tax cost of debt of the
company is 9% and the after-tax cost of debt of the company is 6%.
What is the current market value of each loan note (to two decimal places)?

Answer:

MV = (7*5.033) + (105*0.547) = $92.67

Câu 6:

The investor believes that they can make abnormal returns by studying past share price
movements.
In terms of capital market efficiency, to which of the following does the investor’s belief
relate?

A. Fundamental analysis

B. Operational efficiency

C. Technical analysis

D. Semi strong form efficiency

Answer: C. Technical analysis is where investors study past share price movements in
order to try and predict future ones.

Câu 7: 

The owners of a private company wishing to dispose of their entire investment in the
company. The company has an issued share capital of $1m of $0.50 nominal value ordinary
shares. The owners have made the following valuations of the company’s assets and
liabilities.

NCA (book value)	$30m
CA	$18m
NCL	$12m
CL	$10m

The net realizable value of the non-current assets exceeds their book value by $4m. The
current assets include $2m of accounts receivable which are thought to be irrecoverable.
What is the minimum price per share which the owners should accept for the company?

Guidance: They should not accept less than NRV.

Answer: $14

NRV = (30m + 18m + 4m – 2m – 12m – 10m)/2m = $14 per share

Câu 8:

A company has annual after-tax operating cash flows of $2 million per year which are
expected to continue in perpetuity. The company has a cost of equity of 10%, a before-tax
cost of debt of 5% and an after-tax weighted average cost of capital of 8% per year.
Corporation tax is 20%? What is the theoretical value of the company?

Answer: Theoretical value = 2m/0.08 = $25m.

Câu 9:

Lane Co has in issue 3% convertible loan notes which are redeemable in five years’ time at
their nominal value of $100 per loan note. Alternatively, each loan note can be converted in
five years’ time into 25 Lane Co ordinary shares.
The current share price of Lane Co is $3.60 per share and future share price growth is
expected to be 5% per year. The before-tax cost of debt of these loan notes is 10% and
corporation tax is 30%.
What is the current market value of a Lane Co convertible loan note?

Guidance: Same approach as a question 

Answer: A

Conversion value = $3.60 × 1.055 × 25 = $114.87
This is higher than the cash redemption value so should be used in the MV calculation.
MV of loan note is the value that would bring the purchase of the loan note and the receipt
of interest and the redemption value to an NPV of $0 when discounted at the investors’
discount rate (the pre-tax cost of the note) of 10%. In other words, the MV of the loan note
will be equal to the PV of the interest receipts and redemption value.
Discounting at 10%, loan note value = ($3 × 3.791) + ($114.87 × 0.621) = $82.71

1.2. Dạng 2: Market efficiency theories

Trắc nghiệm

Câu 10:

Alex plots the historic movements of share prices and uses this analysis to make her investment decisions while Lana believes that share prices reflect all relevant information at all times.

What level of capital markets efficiency that best reflects each of their beliefs?

Guidance and Answer:

Alex => base investment decision on technical analysis (uses patterns in market data to identify trends and make predictions) => the stock market is not efficient at all

Lana => share price reflects all relevant info at all time => Strong form efficient

Câu 11: June 15 MCQ 18

Which of the following statements are correct?

(1) If a capital market is weak-form efficient, an investor cannot make abnormal returns by using technical analysis

(2) Operational efficiency means that efficient capital markets direct funds to their most productive use

(3) Tests for semi-strong form efficiency focus on the speed and accuracy of share price responses to the arrival of new information

Guidance & Answer:

(1).  is true. Weak form efficiency - share prices fully and fairly reflect all past information => NOT possible to make abnormal gains by studying past share price movements
(2).  is false. Operational efficiency is where financial markets having the transaction costs kept as low as possible

Ref: BPP Textbook, Chap 18, Section 1.1b

(3).  Is true. These tests focus on the speed and accuracy of share price responses to & ability to anticipate share price changes.

Ref: BPP Textbook, Chap 18, Section 1.2.2

2. Risk Management

2.1. Dạng 1: Foreign exchange risks 

Ref: Tóm tắt kiến thức Dạng 1: Foreign exchange risk - Phần 1

Foreign exchange risk - Phần 2

Trắc nghiệm

Câu 1: (money market hedge) – tham khảo TA

A company whose home currency is the dollar ($) expects to receive 500,000 pesos in six
months’ time from a customer in a foreign country. The following interest rates and exchange rates are available to the company:

Spot rate	15 pesos per $
Six-month forward rate	15.3 pesos per $

 

	Home country	Foreign country
Borrowing interest rate	4% per year	8% per year
Deposit interest rate	3% per year	6% per year

Working to the nearest $100, what is the six-month dollar value of the expected receipt using a money-market hedge?

Guidance: The flow could be presented as following:

Idea: Create a loan in foreign currency to net off with receipt in foreign currency in ‘x' months, exchange rate eliminated.

• How much home-currency money to borrow now to get a liability equal to the receipt in “x” months?

Step 1: Calculate the borrowings in foreign currency at present.

Step 2: Use the current spot rate to convert into home currency.

Step 3: Calculate the equivalent expected receipt in the home currency in ‘x’ month if deposited.

Answer: A

Step 1: Calculate “a” the borrowings in foreign currency at present

• a * (1+8%/2) = 500,000 peso => a = 490,196 peso 

Step 2: Use the current spot rate to convert into home currency.

480,769/15 = $32,051.

Step 3: Calculate the equivalent expected receipt in home currency in ‘x’ month

$32,051 * (1+3%/2) = $32,531 ~ $32,500.

Câu 2:

A UK company has just despatched a shipment of goods to Sweden. The sale will be invoiced in Swedish kroner, and payment is to be made in three months’ time. Neither the UK exporter nor the Swedish importer uses the forward foreign exchange market to cover exchange risk.

If the pound sterling were to weaken substantially against the Swedish kroner, what would be the foreign exchange gain or loss effects upon the UK exporter and the Swedish importer? 

Indicate, by clicking in the relevant boxes, which effect would be seen.

	Gain	Loss	No effect
UK exporter
Swedish importer

 Answer: UK exporter gain; Swedish importer: no effect

The Swedish importer is unaffected as he is invoiced in local currency; the UK exporter will
gain as more pounds will be received for the kroner.

Câu 3:

The current spot exchange rate between sterling and the euro is €1.4415/£. The sterling annual interest rate is 5.75% pa and the euro annual interest rate is 4.75% pa.

What should the three-month €/£ forward rate be (to four decimal places)?

Answer: 

Applying interest rate parity:
Invest £1,000 at 5.75% for three months (5.75%/4) = £1,014.375
Convert £1,000 to € at 1.4415 = €1,441.5
Invest that at 4.75% for three months (0.0475/4) = €1,458.62
Implied forward rate is therefore 1,458.62/1,014.375 = 1.4379

Notes: Common mistakes

Incorrect answers – not converting the annual rate to the three monthly one
£1,000 becoming £1,057.50
€1,441.50 becoming €1,509.97
Forward rate = 1.4279

Applying wrong interest rates (£/€ mixed up)
1,000 × (1 + 0.0475/4) = 1,011.88
1,441.50 × (1 + 0.0575/4) = 1,462.22
Forward rate = 1.4451
1,000 × 1.0475 = 1,047.5
1,441.50 × 1.0575 = 1,524.39
Forward rate = 1.4553

Câu 4: D14 Q15

‘There is a risk that the value of our foreign currency-denominated assets and liabilities will change when we prepare our accounts’ refers to:

A. Translation risk            B. Economic risk            C. Transaction risk            D. Interest rate risk

Guidance & Answer: A

This is the straight definition of translation risk.

Câu 5:

A UK company will purchase new machinery in three months' time for $7.5m. The forward
exchange rate is $2.0383 – 2.0390/£. What is the appropriate three-month forward rate at which the company should hedge this transaction (to four decimal places)? $/£

Answer: The company has to change £ to $ to buy the machine, and will be offered the lower rate for this conversion, 2.0383

Câu: S16, q24

ZPS Co, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. ZPS Co does not have any income in pesos. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable.ZPS Co must pay interest on the dates set by the bank. 

Which of the following methods are possible ways for ZPS Co to hedge its existing foreign currency risk?

(1) Matching receipts and payments
(2) Currency swaps
(3) Leading or lagging
(4) Currency futures

A. All 4 options            B. 1 & 3            C. 2 & 4            D. 2, 3 & 4 

Dạng 2: Interest rate risk

Ref: Tóm tắt kiến thức Dạng 2: Interest rate risk

Câu 6:

Which of the following is NOT a limitation of Interest Rate Parity Theory?

A. Government controls on capital markets

B. Controls on currency trading

C. Intervention in foreign exchange markets

D. Future inflation rates are the only estimate 

Answer: D

Inflation rates are not relevant to Interest Rate Parity theory (they are relevant to
Purchasing Power Parity Theory).

Câu 7: D14, Q18

Which of the following statements is correct?

A. Governments may choose to raise interest rates so that the level of general expenditure in the economy will increase
B. The normal yield curve slopes upward to reflect increasing compensation to investors for being unable to use their cash now
C. The yield on long-term loan notes is lower than the yield on short-term loan notes because long-term debt is less risky for a company than short-term debt
D. Expectations theory states that future interest rates reflect expectations of future inflation rate movements

 

Answer: B

A.  Irrelevant
B.  True.

(an upward sloping yield curve)

As the time to maturity increases, so does the associated interest rate. The reason for that is that debt issued for a longer-term generally carries greater risk because of the greater likelihood of inflation or default in the long run. Therefore, investors (debt holders) usually require a higher rate of return (a higher interest rate) for longer-term debt.

C.  False. As the graph above, longer debts could lead to higher yield – higher compensation to investors.
D.  False. Expectation theory relates to the exchange rates, not the interest rate.

(BPP FM Textbook, Chap 19, Section 3.6)

 

Author: Cam Tu