ACCA Financial Management
A Financial Management Function
1. Last year ABC Co made profits before tax of $2,628,000. Tax amounted to $788,000.
ABC Co’s share capital was $2,000,000 (2,000,000 shares of $1) and $4,000,000 6% preference shares.
What was the earnings per share (EPS) for the year (insert your answer to two decimal places)?
$______
The correct answer is: $0.80
| Profit before tax |
2,628,000 |
| Less tax |
788,000 |
| Profit after tax |
1,840,000 |
| Less preference dividend 6%*4,000,000 |
240,000 |
| Earnings attributable to ordinary shareholders |
1,600,000 |
| Number of ordinary shares |
2,000,000 |
| EPS = $1,600,000/2,000,000= |
$0.80 |
2. Which of the following statements describe the main objective of financial management?
A. Efficient acquisition and deployment of financial resources to ensure achievement of objectives
B. Providing information to management for day to day functions of control and decision making
C. Providing information to external users about the historical results of the organisation
D.Maximisation of shareholder wealth
The correct answer is: Efficient acquisition and deployment financial resources ensure achievement of objectives
Notes on incorrect answers:
The second is a definition of management accounting.
The third is a definition of financial accounting .
The fourth is true for a profit seeking organisation but would not be relevant to a not for profit organisation. However, financial management is also relevant to a not for profit orgonisation.
3. A company has recently declared a dividend of 12c per share. The share price is $3.72 cum div and earnings for the most recent year were 60c per share.
What is the P/E ratio?
3. The correct answer is : 6
P/E ratio = share price/EPS = 3.60/0.6=6
Share price ex div = 3.72-0.12=3.60.
The ex div price is used because it reflects the underlying value of the share after the dividend has been paid.
4. The following information relates to a company:
year 0 1 2 3
Earnings per share (cents) 30.0 31.8 33.9 35.7
Dividends per share (cents) 13.0 13.2 13.3 15.0
Share price at start of year ($)1.95 1.98 2.01 2.25
Which of the following statements is correct?
A. The dividend payout ratio is greater than 40% in every year in the period
B. Mean growth in dividends per share over the period is 4%
C. Total shareholder return for the third year is 26%
D. Mean growth in earnings per share over the period is 6% per year
4. The correct answer is: Mean growth in earnings per shore over the period is 6% per year
Mean growth in earnings per share =(35.7/30.0)^(1/3)-1=6%
Notes on incorrect answer:
Dividend payout =dividend/earnings, this does not deliver the value of 40%.
Mean growth in dividends per share= (15/13)^(1/3)=5%
Total shareholder return =(P1-Po+D1)/Po
Po=2.25, P1 is unknown, so TSR cannot be calculated.
5. Which of the following is LEAST likely to fall within financial management?
A. The dividend payment to shareholders is increased.
B. Funds are raised to finance an investment project.
C.Surplus assets sold
D. Non executive directors are appointed to the remuneration committee.
5. The correct answer is: executive directors are appointed to the remuneration committee.
Financial management decisions typically cover dividend decisions (first statement), investment decisions and financing decisions (second and third statements).
6. PT Co has just paid a dividend of 15 cents per share and its share price one year ago was $3.00 per share. The total shareholder return for the year was 25%. What is the current share price (to two decimal places)?
6. The correct answer : $3.60
Shareholder return = (P1-Po+D1)/Po
0.25 = (P1-3.00+0.15) / 3.00
P1=3.60
7. Which of t he following does NOT form part of the objectives of a corporate governance best practice framework?
A. Separation of chair person and CEO roles
B. Establishment of audit nomination and remuneration committees
C. Minimization of risk
D. Employment of non-executive directors
7. The correct answer is: Minimisation risk.
Corporate governance best practice aims to manage risk to desired and controlled levels, not to minimise Running a business implies taking calculated risks in anticipation of a commensurate return.
8. Are the following statements true or false?
1. Maximizing market share is an example of a financial objective.
2 Shareholder wealth maximization is the primary financial objective for a company listed on a stock exchange.
3 Financial objectives should be quantitative so that their achievement can be measured.
8. The correct answers are:
Statement 1 is false. Maximising market share is not a financial objective.
Statement 2 is true. The primary financial objective of any profit-making company is to
maximise shareholder wealth.
Statement 3 is t rue. financial objectives should be quantifiable. These include, for example,
target values for earnings per share, dividend per share and gearing which are all quantifiable measures.
9. ARP is a charity providing transport for people visiting hospitals. Which of the following performance measures would BEST fit with efficiency in a value for money review?
A. Percentage of members who re-use the service
B.Cost per journey to hospital
C. A comparison of actual operating expenses against the budget
D.Number of communities served
9. The correct answer is: per journey to hospital.
Cost per journey to hospital isameasure of efficiency.
Percentage of members who re-use the service same as re of effectiveness.
A comparison of actual operating expenses against the budget is an economy measure.
Number of communities served is an effectiveness measure.
10. H Co’s share price is $3.50αt the end of 20×1 and this includes a capital gαin of $0.75 since the beginning of the period. A dividend of $0.25 has been paid for 20×1.
What is the shareholder return (to 1 decimal place)?
10. The correct answer is: 36.4%
Shareholder return = (P1- Po + D1)/Po.
shareholder return = (0.75 + 0 .25)/(3.50 - 0.75)= 36.4%
11. Are the following statements true or false?
1 Accounting profit is not the same as economic profit.
2 Profit takes account of risk.
3 Accounting profit can be manipulated b y managers.
11. The correct answers are:
Statement 1 is true. The economist’s concept of profits is broadly in terms of cash, whereas
accounting profits may not equate to cash flows.
Statement 2 is false. Profit does not take account of risk.
Statement 3 is true. Accounting profit can be manipulated to some extent by choices of
accounting policies.
12. A government body uses measures based upon the 'three Es' to measure value for money generated by a publicly funded hospital.
Which of the following relates to efficiency?
A. Cost per successfully treated patient
B. Cost per operation
C. Proportion of patients readmitted after unsuccessful treatment
D. Percentage change in doctors' salaries compared with previous year
12. The correct answer is: 'Cost per successfully treated patient' relates to efficiency. Efficiency measures relate the resources used to the output produced (getting as much as possible for what goes in).
'Proportion of patients readmitted after unsuccessful treatment re ates to effectiveness.
Effectiveness means getting done, by means of economy and efficiency, what was supposed to be done.
’Cost per operation' relates to economy (spending money frugall ）, as does 'Percentage change in doctors' salaries compared with previous year'.
13. 3 Which of the following statements is NOT correct?
A. Return on capital employed can be defined as profit before interest and tax divided by the sum of shareholders' funds and prior charge capital
B. Return on capital employed is the oduc of net profit margin and net asset turnover
C. Dividend yield can be defined as dividend per share divided by the ex dividend share price
D. Return on equity can be defined as profit before interest and tax divided by shareholders’ funds
13. The correct answer is:
Return on equity can be defined as profit before interest and tax divided by shareholders’ funds - this is NOT true as return on equity can be defined as profit AFTER interest and tax divided by shareholders’ funds
14. Geeh Co paid an interim dividend of $0.06 per ordinary share on 31 October 20×6 and
declared a final dividend of $0.08 on 31 December 20×6. The ordinary shares in Geeh Co
are trading at a cum” div price of $1.83.
What is the dividend yield (to one decimal place)?
14. The correct answer is: 8.0%
Dividend yield is compares dividend paid over a year to the current ex-div share price.
Dividend for the year is $0.08 + $0.06= $0.14
Ex div share price (representing the amount of money being invested in the share)= $1.83 -
$0.08 = $1 .75.
0.1 4/1.75×100 = 8.0%
15. increasing which TWO of the following would be associated with the financial objective of
shareholder wealth maximization?
A .Share price
B. Dividend payment
C. Reported profit
D. Earnings per share
E. Weighted average cost of capital
15. The correct answer is: Share price and dividend payment
The sources of shareholder wealth are share prices and dividend payments, so increasing
both of these would be associated with the objective of shareholder wealth maximisation.
Profit and EPS are not directly linked to shareholder wealth maximisation.
Increasing the WACC would reduce shareholder wealth.
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