ACCA考试《高级财务管理》真题及标准答案Word格式文档下载.docx

1、Section A This ONE question is compulsory and MUST be attemptedLirio Co is an engineering company which is involved in projects around the world. It has been growing steadily for several years and has maintained a stable dividend growth policy for a number of years now. The board of directors （BoD）

2、is considering bidding for a large project which requires a substantial investment of $40 million. It can be assumed that the date today is 1 March 2016.The BoD is proposing that Lirio Co should not raise the finance for the project through additional debt or equity. Instead, it proposes that the re

3、quired finance is obtained from a combination of funds received from the sale of its equity investment in a European company and from cash flows generated from its normal business activity in the coming two years. As a result, Lirio Cos current capital structure of 80 million $1 equity shares and $7

4、0 million 5% bonds is not expected to change in the foreseeable future.The BoD has asked the companys treasury department to prepare a discussion paper on the implications of this proposal. The following information on Lirio Co has been provided to assist in the preparation of the discussion paper.E

5、xpected income and cash flow commitments prior to undertaking the large project for the year to the end of February 2017Lirio Cos sales revenue is forecast to grow by 8% next year from its current level of $300 million, and the operating profit margin on this is expected to be 15%. It is expected th

6、at Lirio Co will have the following capital investment requirements for the coming year, before the impact of the large project is considered:1. A $010 investment in working capital for every $1 increase in sales revenue;2. An investment equivalent to the amount of depreciation to keep its non-curre

7、nt asset base at the present productive capacity. The current depreciation charge already included in the operating profit margin is 25% of the non-current assets of $50 million;3. A $020 investment in additional non-current assets for every $1 increase in sales revenue;4. $8 million additional inve

8、stment in other small projects.In addition to the above sales revenue and profits, Lirio Co has one overseas subsidiary Pontac Co, from which it receives dividends of 80% on profits. Pontac Co produces a specialist tool which it sells locally for $60 each. It is expected that it will produce and sel

9、l 400,000 units of this specialist tool next year. Each tool will incur variable costs of $36 per unit and total annual fixed costs of $4 million to produce and sell.Lirio Co pays corporation tax at 25% and Pontac Co pays corporation tax at 20%. In addition to this, a withholding tax of 8% is deduct

10、ed from any dividends remitted from Pontac Co. A bi-lateral tax treaty exists between the countries where Lirio Co is based and where Pontac Co is based. Therefore corporation tax is payable on profits made by subsidiary companies, but full credit is given for corporation tax already paid.It can be

11、assumed that receipts from Pontac Co are in $ equivalent amounts and exchange rate fluctuations on these can be ignored.Sale of equity investment in the European countryIt is expected that Lirio Co will receive Euro （） 20 million in three months time from the sale of its investment. The has continue

12、d to remain weak, while the $ has continued to remain strong through 2015 and the start of 2016. The financial press has also reported that there may be a permanent shift in the /$ exchange rate, with firms facing economic exposure. Lirio Co has decided to hedge the receipt using one of currency for

13、ward contracts, currency futures contracts or currency options contracts.The following exchange contracts and rates are available to Lirio Co.Required:（分数：50）（1）.With reference to purchasing power parity, explain how exchange rate fluctuations may lead to economic exposure.（分数：6）_正确答案：（Purchasing po

14、wer parity （PPP） predicts that the exchange rates between two currencies depend on the relative differences in the rates of inflation in each country. Therefore, if one country has a higher rate of inflation compared to another, then its currency is expected to depreciate over time. However, accordi

15、ng to PPP the law of one price holds because any weakness in one currency will be compensated by the rate of inflation in the currencys country （or group of countries in the case of the euro）.Economic exposure refers to the degree by which a companys cash flows are affected by fluctuations in exchan

16、ge rates. It may also affect companies which are not exposed to foreign exchange transactions, due to actions by international competitors.If PPP holds, then companies may not be affected by exchange rate fluctuations, as lower currency value can be compensated by the ability to raise prices due to

17、higher inflation levels. This depends on markets being efficient.However, a permanent shift in exchange rates may occur, not because of relative inflation rate differentials, but because a country （or group of countries） lose their competitive positions. In this case the law of one price will not ho

18、ld, and prices readjust to a new and long-term or even permanent rate. For example, the UK to USA $ rate declined in the 20th century, as the USA grew stronger economically and the UK grew weaker. The rate almost reached parity in 1985 before recovering. Since the financial crisis in 2009, it has fl

19、uctuated between roughly $15 to 1 and $17 to 1.In such cases, where a company receives substantial amounts of revenue from companies based in countries with relatively weak economies, it may find that it is facing economic exposure and its cash flows decline over a long period of time.）（2）.Prepare a

20、 discussion paper, including all relevant calculations, for the board of directors （BoD） of Lirio Co which:（i） Estimates Lirio Cos dividend capacity as at 28 February 2017, prior to investing in the large project; （9 marks）（ii） Advises Lirio Co on, and recommends, an appropriate hedging strategy for

21、 the Euro （） receipt it is due to receive in three months time from the sale of the equity investment; （14 marks）（iii） Using the information on dividends provided in the question, and from （b） （i） and （b） （ii） above, assesses whether or not the project would add value to Lirio Co; （8 marks）（iv） Disc

22、usses the issues of proposed methods of financing the project which need to be considered further. （9 marks）Professional marks will be awarded in part （b） for the format, structure and presentation of the discussion paper. （4 marks）（分数：44）Discussion paper to the board of directors （BoD）, Lirio CoDis

23、cussion paper compiled byDatePurpose of the discussion paperThe purpose of this discussion paper is:（i） To consider the implications of the BoDs proposal to use funds from the sale of its equity investment in the European company and from its cash flows generated from normal business activity over t

24、he next two years to finance a large project, instead of raising funds through equity and/or debt;（ii） To assess whether or not the project adds value for Lirio Co or not.Background informationThe funds needed for the project are estimated at $40,000,000 at the start of the project. $23,118,000 of t

25、his amount is estimated to be received from the sale of the equity investment （appendices 2 and 3）. This leaves a balance of $16,882,000 （appendix 3）, which will be obtained from the free cash flows to equity （the dividend capacity） of $21,642,000 （appendix 1） expected to be generated in the first y

26、ear. However, this would leave only $4,760,000 available for dividend payments in the first year, meaning a cut in expected dividends from $027/share to $00595/share （appendix 3）. The same level of dividends will be paid in the second year as well.Project assessmentBased on the dividend valuation mo

27、del, Lirio Cos market capitalisation, and therefore its value, is expected to increase from approximately $360 million to approximately $403 million, or by just under 12% （appendix 3）. This would suggest that it would be beneficial for the project to be undertaken.Possible issues1. The dividend valu

28、ation model is based on a number of factors such as: an accurate estimation of the dividend growth rate, a non-changing cost of equity and a predictable future dividend stream growing in perpetuity. In addition to this, it is expected that the sale of the investment will yield 20,000,000 but this am

29、ount could increase or reduce in the next three months. The dividend valuation model assumes that dividends and their growth rate are the sole drivers of corporate value, which is probably not accurate.2. Although the dividend irrelevancy theory proposed by Modigliani and Miller suggests that corpor

30、ate value should not be affected by a corporations dividend policy, in practice changes in dividends do matter for two main reasons. First, dividends are used as a signalling device to the markets and unexpected changes in dividends paid and/or dividend growth rates are not generally viewed positive

31、ly by them. Changes in dividends may signal that the company is not doing well and this may affect the share price negatively.3. Second, corporate dividend policy attracts certain groups of shareholders or clientele. In the main this is due to personal tax reasons. For example, higher rate taxpayers may prefer low dividend payouts and lower rate taxpayers may prefer higher dividend payouts. A change in dividends may result in the clientele changing and this changeover may result in excessive and possibly negative share price volatility.4. It is not clear why th