Professional Documents
Culture Documents
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EXAMINATION
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INSTRUCTIONS TO THE CANDIDATE
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1.
Enter all the candidate and examination details as requested on the front of your answer
booklet.
2.
You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
3.
4.
Attempt all 20 questions. Answers to questions 110 should be indicated on the Multiple
Choice Answer Sheet included in your booklet. From question 11 onwards begin your
answer to each question on a new page.
5.
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AT THE END OF THE EXAMINATION
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Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.
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CT2 A2016
Why might an overdraft be the cheapest way to fund working capital requirements?
A
B
C
D
CT2 A20162
A companys share price has a beta of close to zero. How should that be interpreted?
A
B
C
D
A companys beta coefficient is 1.6 and it has a 30% gearing ratio. How would beta
change if the corporation tax rate increased?
A
B
C
D
An oil company has used a probability tree to evaluate the risks and benefits
associated with drilling for oil at each of four potential locations. The probability tree
shows that drilling on site Y has a positive expected net present value of $100m,
which is greater than those for sites W, X or Z. How should this be interpreted?
A
B
C
D
Drilling at site Y will definitely generate future net cash inflows of $100m.
The oil company should definitely drill at site Y.
The probability tree outcomes should be considered before making a decision.
The probability tree provides an objective basis for reaching a final decision.
[2]
Risk averse individuals often buy lottery tickets despite the fact that the expected
value of doing so is negative. What does this reveal?
A
The certainty equivalent of a slim chance of winning a major prize exceeds the
cost of a lottery ticket.
CT2 A20163
10
Which of the following reflects the relationship between a parent and an associate
company?
A
B
C
D
The parent and the associate are linked through a joint venture.
The parent and the associate trade with one another.
The parent can control the associate.
The parent can influence the management of the associate.
[2]
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[5]
[5]
A family company has grown to the point where it might be considered for a stock
market quotation.
Describe the advantages and disadvantages to the present shareholders of seeking a
quotation.
[5]
14
Suggest possible reasons why acceptable gearing ratios often vary between countries.
[5]
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16
[5]
[5]
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[5]
CT2 A20164
19
The directors of Gryffe have been approached by Subb, a potential customer who
wishes to seek a substantial trade credit facility. Subb is a small company, but it is a
member of the Parrent Group, a major corporation.
Gryffes accountant has ascertained the following:
x
Subb was founded seven years ago. It has grown slowly but steadily ever since.
Parrent purchased its 40% holding of Subbs equity two years ago. The terms of
the agreement reached with Subbs existing shareholders are that Parrent will
have the right to appoint a number of directors to Subbs board.
Subbs chief buyer has submitted the latest financial statements of both Subb and the
Parrent Group. Subbs financial position appears to be rather weak, but the Parrent
Group is large, profitable and liquid. The chief buyers covering letter indicates that
Gryffe should evaluate the application for trade credit on the basis of Parrents
consolidated financial statements. Subbs chief buyer also asks that attention be paid
to the external auditors report in both sets of financial statements because the auditor
has issued an unmodified report in both cases.
Gryffes directors have asked for an explanation as to why Subb can claim to be part
of the Parrent Group when Parrent is a minority shareholder.
(i)
Describe the factors that would indicate whether Subb is, indeed, a member of
the Parrent Group.
[5]
(ii)
(iii)
(iv)
CT2 A20165
20
Jute is an actuarial consultancy that has three departments: Pensions, Insurance and
Risk.
The following figures have been prepared for the year ended 31 March 2016.
Statements of Profit or Loss
For the year ended 31 March 2016
Fees
Salaries
Depreciation computers
Depreciation premises
Other expenses
Interest
Profit
Pensions
000
Insurance
000
Risk
000
TOTAL
000
11,000
(7,700)
(667)
(36)
(104)
(288)
2,205
9,000
(5,400)
(467)
(36)
(104)
(288)
2,705
3,600
(1,440)
(200)
(18)
(52)
(144)
1,746
23,600
(14,540)
(1,334)
(90)
(260)
(720)
6,656
Pensions
000
Insurance
000
Risk
000
TOTAL
000
1,800
2,000
3,800
1,800
1,400
3,200
900
600
1,500
4,500
4,000
8,500
1,467
642
250
2,359
6,159
1,725
675
175
2,575
5,775
480
150
65
695
2,195
3,672
1,467
490
5,629
14,129
Non-current assets
Office
Computers
Current assets
Unbilled hours
Trade receivables
Bank
Total assets
Equity
Share capital
Retained earnings
Non-current liabilities
Mortgage on office
Current liabilities
Accrued salaries
Other creditors
Total of equity + liabilities
CT2 A20166
800
3,061
3,861
800
2,863
3,663
400
848
1,248
2,000
6,772
8,772
1,600
1,600
800
4,000
642
56
698
6,159
450
62
512
5,775
120
27
147
2,195
1,212
145
1,357
14,129
All staff time is billed to clients. Members of staff update a daily electronic
timesheet. Their employment costs for that day are charged to the client or clients for
whom they were working that day. Jutes directors invoice clients for the time
charged to their accounts as and when they deem appropriate. The invoices are
charged at cost plus a markup to cover other expenses and profit.
Staff time is the only expense which is charged directly to contracts. All other
expenses are treated as overheads.
The company is based in a large office block which it owns. Pensions and Insurance
each occupy 40% of the floor space and Risk occupies 20%. Share capital and long
term loans are apportioned to the departments on the basis of these proportions.
Jutes shares are all owned by the companys founders, all of whom are directors.
The directors are concerned about the profit statement and statement of financial
position for the following reasons:
x
Risks revenue and profit were much smaller than those of the other departments.
Jutes directors are concerned that the Risk department could be undermining the
profitability of the company as a whole.
Despite making substantial profits, Jute has very little cash available from which
to pay dividends or even to meet short term commitments. The company has not
been investing heavily in new fixed assets and has not made any loan repayments.
(i)
(ii)
Calculate:
(a)
(b)
(iii)
(iv)
END OF PAPER
CT2 A20167
[4]
[4]
[Total 20]