Revision Course Note [Revision 4]
ACCA F9
Financial Management
Revision Class 3
Session 3
Patrick Lui
Revision 4
Revision 4 – Business Finance
Topic List
1. / Internal Sources of Finance / Exam Question Referencea. Retained earnings
l Advantages and disadvantages
b. Increase working capital management efficiency
2. / Dividend Policy
a. Factors influencing dividend policy / Dec 10 / Q4d
b. Theories of dividend policy
l Residual theory
l Irrelevancy theory by M&M / Dec 07
Dec 09
Pilot 14 / Q3a
Q2d
Q5b
l Bird-in-the-hand / Dec 09
Pilot 14 / Q2d
Q5b
l Signaling effect / Dec 09
Pilot 14 / Q2d
Q5b
l Clientele effect / Dec 09
Pilot 14 / Q2d
Q5b
l Information asymmetry / Dec 09 / Q2d
3. / Alternative to Cash Dividends
a. Scrip dividend / Jun 11 / Q3c
b. Stock spilt
c. Share repurchase
4. / Short-term Finance
a. Overdrafts
b. Short-term loan
c. Trade credit
d. Lease finance / Dec 07
Jun 10
Dec 10
Jun 11 / Q3d
Q2d
Q2a
Q3b
5. / Long-term Finance
a. Reasons for seeking debt finance / Jun 10
Dec 10 / Q2d
Q2a
b. Factors affecting choice of debt finance / Jun 08
Jun 12
Jun 13 / Q2e
Q3b
Q4d
c. Types of bonds / Dec 12
Jun 14 / Q3d
Q4d
6. / Venture Capital (VC)
a. Meaning / Jun 13 / Q4d
b. Interested in the types of business
c. Factors to be considered by management to use VC
d. Factors to be considered by VC when invest
7. / Equity Finance
a. Reasons for equity finance / Jun 11
Jun 13 / Q3b
Q4d
b. Stock exchange listing
c. Placing / Jun 09 / Q4c
d. Rights issue / Dec 07
Jun 08
Dec 08
Jun 09
Dec 09
Jun 11 / Q3c
Q2b
Q1a
Q4b,c
Q3a
Q3b
Dec 11
Jun 14 / Q4a
Q4c
e. Public offer
8. / Islamic Finance
a. General principles
b. Difference between Islamic finance and conventional finance
c. Concept of interest (Riba) / Dec 13 / Q4c
d. Other financial instruments
l Trade credit (Murabaha) / Dec 13 / Q4c
l Lease finance (Ijara) / Dec 13 / Q4c
l Equity finance (Mudaraba) / Jun 12
Dec 13 / Q3c
Q4c
l Debt finance (Sukuk) / Dec 13 / Q4c
l Venture capital (Musharaka) / Dec 13 / Q4c
9. / Gearing and Capital Structure Considerations
a. Problems of high level of gearing
b. Operating gearing / Jun 12 / Q4d(i)
c. Financial gearing / Dec 07
Jun 12
Dec 12
Pilot 14 / Q3b
Q4d(ii)
Q4c
Q5a(ii)
10. / Ratio Analysis
a. Shareholder wealth ratios / Pilot
Dec 08
Jun 09
Dec 09
Jun 11 / Q1c
Q1c
Q4a,b
Q3b
Q3a
Dec 11
Jun 13
Jun 14 / Q4b,c
Q4b,c
Q4a
b. Debt holder ratios / Pilot
Jun 09
Jun 10
Dec 10
Jun 11
Jun 13 / Q1c
Q4a
Q2c
Q2a
Q3a
Q4c
11. / Finance for SMEs
a. Financing problem for small businesses
b. Measures to ease the financing problems
c. Appropriate sources of finance for SMEs
d. Impact of different sources of finance
Chapter 11 Dividend Policy
1. Bellever Engineering plc makes a bonus issue of shares during the year.
Which one of the following will occur as a result of the issue?
A Liquidity will be increased
B Total shareholders’ funds will be increased
C Earnings per share will be lowered
D The gearing ratio will be lowered
2. Which one of the following statements concerning financing is correct?
A Warrant holders receive a dividend on the warrants held
B A share repurchase will reduce distributable reserves
C Securitisation involves converting assets that provide a future stream of income into equity
D Preference share capital may be secured on the assets of the company
3. Which of the following are assumptions for Modigliani and Miller’s dividend irrelevance theory?
1 Perfect capital markets
2 No taxes or tax preferences
3 No transaction costs
4 No inflation
A 1,2,3 only
B 1,2,4 only
C 2,3,4 only
D 1,2,3,4
4. Various views have been expressed concerning the most appropriate dividend policy for a company to adopt.
Which one of the following reflects the views expressed by Miller and Modigliani?
A The dividend policy selected by a company should be of no consequence to shareholders.
B Dividends should only be paid to shareholders if a company has no investment opportunities available that have the potential for positive returns.
C A company should seek to maximise dividend payouts in order to maximise shareholder wealth.
D Shareholders should be paid high dividends in order to have funds available to invest outside the company.
5. Consider the following statements concerning dividend policy.
According to the Modigliani and Miller (without taxes) view of dividend policy:
1. dividends should be distributed only when investment opportunities are exhausted.
2. the value of a business is determined by the earning power of its assets rather than by its dividend policy.
Which one of the following combinations (true/false) concerning the above statements is correct?
Statement 1 / Statement 2A / True / True
B / True / False
C / False / True
D / False / False
6. Consider the following statements concerning dividend policy:
1. The traditional view states that dividends should be paid only when investment opportunities are exhausted.
2. The Modigliani and Miller view (without taxes) states that dividend policy is irrelevant to shareholder wealth.
Which one of the following combinations (true/false) concerning the above statements is correct?
Statement 1 / Statement 2A / True / True
B / True / False
C / False / True
D / False / False
7. In Modigliani & Miller’s Dividend Irrelevance theory, the process of ‘manufacturing dividends’ or ‘home made dividend’ refers to which of the following?
A Dividends from manufacturing businesses.
B Investors selling some shares to realise some capital gain.
C Creative accounting to allow dividends to be paid.
D Investing plans designed to create regular returns to shareholders.
8. Which of the below best describes the signalling effect of dividend policy/announcements?
A The current dividend policy signals future dividend patterns.
B A dividend that is different to investor expectations signals information about the business to the investors.
C It flags reported financial results to follow.
D It indicates cash flow health or otherwise.
9. Consider the following statements concerning a stock split:
A stock split will
1. convert reserves into share capital
2. reduce the market price of a listed company’s shares.
Which one of the following combinations (true/false) is correct?
Statement 1 / Statement 2A / True / True
B / True / False
C / False / True
D / False / False
10. A scrip issue with perfect information
A decreases EPS
B decreases the debt/equity ratio of the company
C increases individual shareholder wealth
D increase the market price of the share
11. Aldan Co has 2 million $0·50 ordinary shares in issue and the market capitalisation of the company is $28·0m. The company is about to make a 1-for-4 scrip issue, immediately followed by a 2-for-1 share split.
What will be the theoretical value of a share following the above transactions and the number of shares held by an investor that held 1,000 shares prior to these transactions?
Share value following transactions / No. of shares held following transactionsA / $14.00 / 2,500
B / $5.60 / 2,500
C / $8.75 / 625
D / $1.87 / 7,500
12. Three companies (A, B and C) have the following dividend payments history:
A – Dividend / 100 / 110 / 121
A – Earnings / 200 / 200 / 201
B – Dividend / 50 / 150 / 25
B – Earnings / 100 / 300 / 50
C – Dividend / Nil / 300 / NIL
C – Earnings / 400 / 350 / 500
Which best describes their apparent dividend policies?
A / B / CA / Constant growth / Constant pay-out / Residual
B / Constant pay-out / Constant growth / Residual
C / High pay-out / Residual / Random
D / Constant growth / Residual / Random
Question 1 – Factors in formulating dividend policy
Discuss the factors to be considered in formulating the dividend policy of a stock-exchange listed company. (10 marks)
(ACCA F9 Financial Management December 2010 Q4(d))
Question 2 – Dividend policy affects share price
Discuss whether a change in dividend policy will affect the share price of DD Co. (7 marks)
(ACCA F9 Financial Management December 2009 Q2(d))
Chapter 12 Sources of Finance
I. Short-term sources of finance
1. Which of the following is not a benefit, to the borrower, of an overdraft as opposed to a short-term loan?
A Flexible repayment schedule
B Only charged for the amount drawn down
C Easy to arrange
D Lower interest rates
II. Debt finance and equity finance
2. The following statements have been made about the benefits of debt finance compared to equity finance:
Statement 1: Interest payments on debt attract tax relief.
Statement 2: Control of the company is diluted.
Which of the above statements is true?
A Both of them
B Statement 1 only
C Statement 2 only
D Neither of them
3. Statement 1: Positive covenants are promises by a borrower to do something.
Statement 2: Quantitative covenants are promises to keep within financial limits set by the lender.
Which of the above statements is true/false?
Statement 1 / Statement 2A / False / True
B / False / False
C / True / False
D / True / True
4. Consider the following two statements concerning the returns to investors from debt capital.
(1) Junk bonds normally offer a higher rate of interest than investment-grade bonds
(2) Convertible bonds normally offer a higher rate of interest than non-convertible bonds
Which one of the following combinations (true/false) concerning the above statements is correct?
Statement 1 / Statement 2A / True / True
B / True / False
C / False / True
D / False / False
5. Which one of the following statements concerning sources of finance is correct?
A Retained earnings represent a free source of finance to the business
B Invoice discounting involves the administration of debtors by the invoice discounter
C A bank overdraft is normally regarded as a long-term source of finance
D Mezzanine finance normally has both a debt and an equity element
6. Consider the following statements.
1. A participating preference share gives the holder the right to participate in voting at the Annual General Meeting.
2. A cumulative preference share gives the holder the right to dividends due but which have not been paid in the past.
Which one of the following combinations (true/false) is correct?
Statement 1 / Statement 2A / True / True
B / True / False
C / False / True
D / False / False
7. Consider the following two statements concerning convertible loan stock.
(i) The conversion value of convertible loan stock is normally below the face value of the loan stock at the time of issue.
(ii) The coupon rate for convertible loan stock is normally lower than the coupon rate for non-convertible loan stock.
Which of the following combinations (true/false) concerning the above statements is correct?
Statement 1 / Statement 2A / True / True
B / True / False
C / False / True
D / False / False
8. Consider the following statements concerning the issue of shares.
1. A bonus issue raises finance through an offer of shares to existing shareholders.
2. A placing of shares makes shares directly available to the general public.
3. An offer for subscription is an invitation to the general public to subscribe for shares not yet in issue.
4. A rights issue raises finance through an offer of shares to existing shareholders.
Which two of the above statements are correct?
A 1 and 2
B 1 and 3
C 2 and 4
D 3 and 4
9. Three important sources of long-term finance are loan capital, ordinary shares and preference shares.
Which one of the following correctly ranks these sources of finance according to their relative cost to the business? (Where 1 represents the source of finance that is normally the most expensive and 3 represents the source that is normally the least expensive.)
Loan capital / Ordinary shares / Preference sharesA / 1 / 2 / 3
B / 2 / 3 / 1
C / 3 / 1 / 2
D / 2 / 1 / 3
10. Consider the following statements.
(1) Both a stock split and a scrip issue convert equity reserves into ordinary share capital.
(2) Both a rights issue and a Stock Exchange placing exclude the general public from subscribing to the issue of new shares.
Which one of the following combinations (true/false) concerning the above statements is correct?
Statement 1 / Statement 2A / True / True
B / True / False
C / False / True
D / False / False
11. Consider the following statements concerning sources of finance.
1. Invoice discounting requires the discounter to invoice the client’s customers for goods or services provided.
2. A bank bill offers a bank customer the opportunity to discount the bill of exchange at the bank.