F9 Financial Management - DEC 2007 Past Year Paper
Financial
Management
Thursday 6 December 2007
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FOUR questions are compulsory and MUST be attempted.
Formulae Sheet, Present Value and Annuity Tables are on pages 6, 7 and 8.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Paper F9
Fundamentals Level – Skills Module
ALL FOUR questions are compulsory and MUST be attempted
1
(a) Phobis Co is considering a bid for Danoca Co. Both companies are stock-market listed and are in the same business sector. Financial information on Danoca Co, which is shortly to pay its annual dividend, is as follows:
Number of ordinary shares
Ordinary share price (ex div basis)
Earnings per share
Proposed payout ratio
Dividend per share one year ago
Dividend per share two years ago
Equity beta
5 million
$3·30
40·0c
60%
23·3c
22·0c
1·4
Other relevant financial information
Average sector price/earnings ratio
Risk-free rate of return
Return on the market
10
4·6%
10·6%
Required:
Calculate the value of Danoca Co using the following methods:
(i) price/earnings ratio method;
(ii) dividend growth model; and discuss the significance, to Phobis Co, of the values you have calculated, in comparison to the current market value of Danoca Co.
(11 marks)
(b) Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in five years’ time.
Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The current ordinary share price of Phobis Co is $4·45 and this is expected to grow at a rate of 6·5% per year for the foreseeable future. Phobis Co has a cost of debt of 7% per year.
Management
Thursday 6 December 2007
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FOUR questions are compulsory and MUST be attempted.
Formulae Sheet, Present Value and Annuity Tables are on pages 6, 7 and 8.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Paper F9
Fundamentals Level – Skills Module
ALL FOUR questions are compulsory and MUST be attempted
1
(a) Phobis Co is considering a bid for Danoca Co. Both companies are stock-market listed and are in the same business sector. Financial information on Danoca Co, which is shortly to pay its annual dividend, is as follows:
Number of ordinary shares
Ordinary share price (ex div basis)
Earnings per share
Proposed payout ratio
Dividend per share one year ago
Dividend per share two years ago
Equity beta
5 million
$3·30
40·0c
60%
23·3c
22·0c
1·4
Other relevant financial information
Average sector price/earnings ratio
Risk-free rate of return
Return on the market
10
4·6%
10·6%
Required:
Calculate the value of Danoca Co using the following methods:
(i) price/earnings ratio method;
(ii) dividend growth model; and discuss the significance, to Phobis Co, of the values you have calculated, in comparison to the current market value of Danoca Co.
(11 marks)
(b) Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in five years’ time.
Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The current ordinary share price of Phobis Co is $4·45 and this is expected to grow at a rate of 6·5% per year for the foreseeable future. Phobis Co has a cost of debt of 7% per year.