Tax and allowance information (2019/20):-
Personal Allowance* £12,500 Capital Gains – Annual Exempt Amount £12,000 Interest – Tax free amounts: £1,000 (Basic); £500 (Higher); £0 (Additional). Also:-
For low earners, up to £5,000 of interest may be taxed at 0% before applying the tax free amounts.
Dividends – Tax free amount: £2,000 (Basic, Higher and Additional) Main Rates for Personal Taxation
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Higher Additional
Taxable Income in Earned Interest Excess of Personal Income
Allowance (£)
0-37,500 20% 20%
37,501-150,000 40% 40% Over 150,000 45% 45%
7.5% 32.5% 38.1%
Capital Capital Gain** Gain ***
10% 18% 20% 28% 20% 28%
* Reduced by £1 for each £2 of adjusted net income over £100,000 to minimum of zero.
** Applies to investments, excluding residential property
*** Applies to residential property but main residence is exempt
UK Corporation Tax rate 19%
Questions 1 & 2 require you to identify an incorrect statement
1. Which of these statements is false with respect to a sole trader?
a) They have unlimited liability.
b) They don’t need any specific documentation to legally establish the business.
c) They are subject to income tax not corporation tax.
d) They cannot have more than one employee.
2. Which of the following statements is never true of factoring in the context of a
supplier/customer relationship?
a) The factor will make payment to the customer as soon as the debt is collected.
b) The effective interest rate charged includes an element to cover the default risk of the customer.
c) Factoring is the sale of debts to a factor at a discount.
d) The effective interest rate charged includes an element to cover the default
risk of the supplier.
Questions 3 – 10 require you to identify a correct statement or answer
3. Company A has borrowed on fixed rate terms at 6% per annum. Its normal cost of borrowing on floating rate terms is Libor +2% per annum. Company B has borrowed in the market at a floating rate of Libor +3% per annum and has access to fixed interest borrowing terms of 8% per annum. An intermediary can offer an interest rate swap between the two companies, and charges each a fee of 0.25% per annum. How much could each company benefit from the swap?
a) 0.25% per annum.
b) 0.5% per annum.
c) 0.75% per annum.
d) 1.0% per annum.
4. A company has a £1,000,000 line of credit at 7% per annum with a 0.75% per annum commitment fee on the amount not drawn down. It draws £750,000 for nine months. What is the annual financing cost of this arrangement?
a) 7% per annum.
b) 7.25% per annum.
c) 7.33% per annum.
d) 7.75% per annum.
5. A company’s share price stands at £20. The company has 20m shares in issue and the nominal value per share is £5. The company intends to capitalize £100m of reserves by a scrip issue and then to make a 1 for 2 rights issue at £7 per share. Calculate the theoretical price of the share after both the scrip issue and the rights issue?
6. On the wind-up of a company which one of these statements is true in terms of the order in which the company would prioritise returning the monies/assets to the various lenders/claimants (highest/most secure to lowest/least secure)?
a) Preference shares, Floating-charge debenture stock, Unsecured loan stock, Ordinary shares.
b) Hire purchase, Mortgage debenture stock, Employees pay, Preference shares.
c) Floating-charge debenture stock, Mortgage debenture stock, Subordinated loan stock, Ordinary shares.
d) Mortgage debenture stock, Floating-charge debenture stock, Preference shares, Unsecured loan stock.
7. Which of the following investors in the derivatives market may find that the contract they have entered into is a liability at expiry if the current market price is above the exercise price?
a) Buyer of a call option.
b) Buyer of a put option.
c) Writer of a call option.
d) Writer of a put option. [4 marks]
8. A firm has a trade payables turnover period of 35 days, an inventory turnover period of 14 days and a trade receivables turnover period of 40 days.
How long is the firm’s working capital required to support a newly acquired item of inventory?
a) 89 days.
b) 61 days.
c) 19 days.
d) 9 days.
9. The following figures have been extracted from a company’s accounts for consecutive years.
Operating profit £700,000 Depreciation £55,000 Inventory £33,000 Trade receivables £45,000 Trade payables £38,000
£600,000 £50,000 £30,000 £40,000 £34,000
Calculate the company’s cash generated from operations during 2019
a) £702,000
b) £751,000
c) £759,000
d) £796,000
10. A company has an operating profit of £100,000 and is financed by 100,000 ordinary shares of £1 nominal value, 50,000 preference shares of £1 nominal value paying a 10p dividend, £200,000 in reserves, a £150,000 debenture issue paying a 6% coupon and a £80,000 ULS issue paying a 7% coupon.
Calculate the return on equity.
a) 26.4% b) 26.8% c) 24.4% d) 23.0%
11. The retail bank you are working for is concerned that the emerging coronavirus outbreak could weaken global markets and leave them short of cash and in need of further sources of finance to demonstrate solvency. After some deliberation, the bank has decided to put in place a contingency plan to raise further long term finance through an issue of preference shares.
a) Briefly explain why the bank’s depositors would likely have been against the issue of conventional loan stock in this situation.
b) State two other forms of finance the bank may have considered as an alternative to issuing preference shares.
c) Discuss what the potential advantages are of raising capital preference shares relative to the other two forms of finance the bank would likely have considered. [5 marks]
12. You have recently qualified as an actuary and have increased your annual salary from £40,000 per annum to £80,000 per annum in a very short period. You have also just inherited £800,000 from a great uncle you barely knew. You didn’t previously have any significant savings.
Consider the British taxation system, and in particular the system of allowances and tax free transactions, and assume you are willing to invest in a wide range of assets.
Suggest actions you could you take to minimise your overall tax bill.
[10 marks]
13. A private equity specialist owns 100% of the shares of an ungeared water supply company which operates in a small region in the UK. The firm is currently believed to be making a long term return of 6.5% per annum on capital.
The company is currently valued at £10 million and has 1 million issued shares.
The private equity specialist is considering exiting from the investment and wishes to maximise its gain. It is considering the alternatives of a floatation of the company in its current form or a share buyback of the firm’s current equity to create a 1 to 1 debt/equity ratio to be financed by a long term loan at an assumed rate of 2% per annum, followed by a floatation of the firm’s remaining equity.
The current beta of the company’s returns is 0.8 and the current risk free rate is 2% per annum.
a) Calculate the market risk premium using the Capital Asset Pricing Model.
b) Calculate the geared beta of the company if it were to be restructured as the equity specialist is considering, and assuming its profits are subject to corporation tax. [2 marks]
c) Calculatetherevisedreturnonequityfromfirstprinciplesassumingthereturn on assets is unchanged and so is the market value of the firm. [2 marks]
d) Calculate the revised return on equity from the geared beta using the Capital Asset Pricing model. [2 marks]
e) Comment on the difference between answers (c) and (d). [2 marks]
f) Discuss whether, in fact, the market reaction to the proposed restructuring is likely to be in line with the theory’s prediction and whether the restructuring should go ahead. [5 marks]
[Total 15 marks]
14.A company is considering two possible projects. It only has sufficient resources to invest in one of them.
Project A requires an initial investment of £7 million and is expected to return £1 million per year for twelve years in annual lump sums starting in exactly two years’ time.
Project B requires an initial investment of £10 million and has less certain expected returns. It is estimated that there is a 25% chance that it will generate inward cashflows identical to project A, but a 75% chance that it will return additional lump sums of £1.5 million per year for seven years starting in exactly two years’ time.
Your company uses a Discount Rate of 10% per annum for the initial evaluation of projects.
a) Calculate the net present value of each project at the of 10%.
b) State whether either project appears viable. [1 mark]
c) Explain why a firm may set a and the advantages and disadvantages of such an approach. [4 marks]
A colleague has suggested the range of results on the two projects could be estimated using a Monte-Carlo simulation.
d) Discuss the difficulties of using such a technique in practice. [4 marks] [Total 14 marks]
15.The investment bank you’re working for is currently advising three different clients regarding obtaining a listing on the London Stock Exchange.
Client A is a large manufacturing company with an extensive track record and stable profits history in an established industry.
Client B is a recently established biotechnology company with significant potential, but as yet no established trading record. They have significant investment in intellectual property but their area of technology is not yet widely established.
Client C is an established multinational company domiciled outside the UK and listed only on its domestic stock exchange.
Discuss appropriate methods for each client to obtain a listing and which section of the market they should list on. [8 marks]
16. a) Describe the basic purposes and properties of Budgets and Forecasts and explain the differences between the two. [4 marks]
Motorco is a large vehicle manufacturer which has been in operation for over fifty years.
b) Discuss, giving reasons, whether Motorco will is more likely to use a top down budgeting system or a bottom up one. [6 marks] [Total 10 marks]
17.a) Explain how the accruals concept works in IFRS accounting [1 mark] b) Explain how pre-payments can occur in IFRS accounting and how they
would be represented in a company’s financial statements. [3 marks] The following items have been extracted from Toptek Ltd’s financial records
(amounts in £ 000 in the table)
Administrative expenses 50 Administrative staff wages 70 Bank Balance 24 Delivery charges 100 Directors’ remuneration 110 Interest 280 Inventory at 1 March 2019 25 Land cost 4000 Loan Stock 7% 2030 4000 Manufacturing staff wages 250 Ordinary Dividend 35 Ordinary Shares (£1) 1000 Plant & Machinery cost 700 Plant & Machinery depreciation to 1 March 2019 200 Premises cost 1000 Premises depreciation to 1 March 2019 200 Purchases 450 Retained Earnings at 1 March 2019 251 Sales 1450 Trade Payables 57 Trade Receivables 64
Land is not depreciated. Premises is depreciated at 2% per annum on a straight line basis and Plant and machinery is depreciated by 10% per annum on a reducing balance basis.
The floor space and equipment requirements of the Administration and Distribution functions have been deemed immaterial in the context of those of the Manufacturing process.
The inventory at 1st March 2020 was £47,000.
The Corporation Tax due for the year ended 1st March 2020 is £16,000 and has not yet been paid.
c) PreparetheStatementofFinancialPositionandaStatementofProfitor Loss for Toptek Ltd for the accounting year ending 1st March 2020.
[14 marks] [Total 18 marks]
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