Analysis of Changes in Wage Rates in India

Analysis of Changes in Wage Rates in India CACP – The data source which is an important source for wages in rural India unfortunately does not publish the wage data from these studies. The cost of cultivation scheme collects data from the selected household at regular intervals on all aspects of farm business. The valuation of human labor has always been a problematic issue for the CACP. There is however a number of limitations associated with this data such as lack of data for many crops, problem in aggregating the data from the state level, unavailability of data at the state level etc. The four reference points have been used to look at a change in the wage rate. However, the choice of reference points in the study have been limited to the years 1983 and 1987-88 in the 80’s and 1993-94 in the 90’s. AWI Wage Rate: It is the most widely used source for analyzing trends in wage rate for rural India. However, one given problem noticed by the researcher with respect to AWI is the time lag in the data and the method of aggregating all the data for th states and all India level. There were many studies performed to check the average wage rate of labourer in different parts of India by many previous researchers. However in all these studies used simple average of wage rates in different months to arrive at the annual figures. Also, all these studies used population of agricultural labourers’ from the census as weights to arrive at the wage rate. The average AWI wage rate is 30-40 percent higher as compared to the RLE/NSS estimates of wage rates. It was also studied that the AWI wage rates were found to be marginally upwards biased as compared to the FMS estimates of wages. A look at the wage trends from AWI since 1980-81 suggests that the wage rates have generally been higher in Punjab, Haryana, and Kerala as compared to the other states in the 80’s. However, by the end of 1990, Gujarat and West Bengal have seen to have made a significant contribution and is closer to the traditional high wage rates. Rajasthan, on the other hand which was closer to the traditional high wage rates has fallen behind and is considerably lower than Kerala, Punjab and Haryana. The states on the lower ends of the wage rate are Orissa, Bihar, Madhya Pradesh, Maharashtra, and Andhra Pradesh. Kerala’s wage rate is found to be three times those in Orissa and in Punjab and Haryana they are twice the wage rate in Orissa. Wages have continued to grow in all three time periods but there was a significant slowdown in the wage rate during the period 1987-88 and 93-94. For the period 1987-88 to 1993-94, which also included the year of the financial crisis and the conseque nt economic reforms, wage rates show a deceleration in almost all the states as well as the all India level. This decline in the growth of wages is sharper for Andhra Pradesh, Assam, Bihar, Gujarat, and Karnataka. Wage trends from CACP – In the study it was found out that this wage rate had been created by aggregating over crops using crop specific weights for individual states. Wage rates from CACP are generally found to correlate well with the AWI series in spite of the differences in methodology of collection of data. In fact, for both 1983 and 1987-88, wage rates from CACP show a very high correlation coefficient of 0.95 with the AWI wage rates. It was also analyzed in the study that wage rates from CACP show better growth rates in 1987-88 and 1993-94 as compared to the AWI series. Rajasthan turns out to be an exception which showed markedly improved wage rates as showed by AWI wage series. Even for other states, CACP does not show as sharp a deceleration as AWI. Maharashtra on the other hand shows sharp deceleration in the wage rate during 1987-88 and 1993-94. NSS – These wage rates were found to be statistically more significant and reliable than that of AWI or CACP because of their consistent and superior sampling framework but they also allow for a much higher level of disaggregation. The wage rates reported by NSS for males for agricultural occupations are considerably lower than the wage rates reported by AWI. It was further studied that the NSS rates were very well correlated with the rates of AWI series with a correlation coefficient of around 0.9 in the 1980’s, 0.87 in 1993-94 and 0.95 in 1999-00. However, again for most states there was a deceleration in the growth rate during the next sub period that is, between 1987-88 and 1993-94. Except for the state of Gujarat, deceleration was seen for almost all states. Gaps between agricultural and non agricultural wages narrowed down considerably in Punjab and Rajasthan. West Bengal and Karnataka were found to be the states having the lowest divergence between agricultural a nd non agricultural activities. Comparison between agricultural and non agricultural activities gender wise was also performed. It was analyzed that the growth rates in these activities in males suggested that in 1983-84 and 87-88 agricultural wages grew faster than non agricultural wages. For females, however non agricultural wages grew faster than agricultural wages. RLE/ALE wage trends – RLE uses a subset of households from the NSS employment and unemployment quinquennial surveys. The household types are either self employed in agriculture, non agriculture, agriculture labour, other labour and others. A comparison of the wage rate from the NSS and the RLE reveal that there is a high degree of correlation between them especially in the 1990. This is true not only at the all India level but also at the state level. For the period from 1983-1987, growth rates from RLE were shown to be 70-80 percent higher than the ones shown by the NSS series in the study. The growth rate of the NS were similar to those studied by AWI or CACP for many states, however the RLE suggests growth rates higher than any of these. Further it was also studied that the growth rate of wages in agriculture are much higher than those suggested by NSS or CACP or AWI. There was also an inter range comparison done in this study to check the difference in wages under the RLE scheme. It was analyzed that comparing the 1977 RLE scheme to that of 1983, real wage rates declined by almost 10 percent for the latter. Such a decline in wage rate is not accompanied by any other wage estimates including those from NSS. WRRI Wage rates from eleven agricultural operations and seven non agricultural operations. For wage rates for agricultural operations, simple average of sowing, transplanting, weeding, harvesting, winnowing and threshing was taken as the representative wages. The analysis in the study was based for the years 1990-2000 and 2002-03. It was studied that the wage rates from WRRI for agriculture than those reported by NSS and RLE for males and almost 60 percent higher for females. WRRI estimates of wage rates are found to be closer to the CACP or AWI estimates because of similarity in methodology and sources. WRRI is the only estimate that is available after 1999-00. It was further analyzed in the study that the wage rates between male and female for agricultural occupations as well as non agricultural occupations have grown in real terms. Coming to the state wise analysis, Bihar and Orissa are the states that saw the highest growth rates of wages for both males and females. The other st ate that achieved close to 10 percent per annum growth rate of wages is Kerala. Apart from Kerala, the other two states – Andhra Pradesh and Tamil Nadu saw slower growth rates of wages. Uttar Pradesh having a large concentration of poor and rural labourers witnessed growth rates of less than two percent in both agricultural and non agricultural operations.

Kaplan P4 Mock Exam

ACCA REVISION MOCK June 2010 Question paper Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A TWO compulsory questions Section B TWO questions ONLY to be attempted Formulae Sheet and Mathematical Tables are on pages 3, 4, 5, 6 and 7 Do NOT open this paper until instructed by the supervisor This question paper must not be removed from the examination hall Kaplan Publishing/Kaplan Financial KAPLAN PUBLISHING Page 1 of 14 Paper P4 Advanced Financial Management ACCA P4 Advanced Financial Management  © Kaplan Financial Limited, 2010 All rights reserved.No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary.Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Page 2 of 14 KAPLAN PUBLISHING Revision Mock Questions FORMULAE SHEET Modigliani and Miller proposition 2 (with tax) ke = kie + (1 ? T)(kie ? kd) Vd Ve Two asset portfolio sp = 2 2 w a s a + w 2 s 2 + 2w a w b rab s a s b b b The capital asset pricing model E(ri) = Rf + ? i(E(rm) ? Rf) The asset beta formula ? ? ? Vd (1 ? T ) ? Ve ? a = ? ?e ? + ? ?d ? ? (Ve + Vd (1 ?T )) ? ? Ve + Vd (1 ? T )) ? The growth model Po = D o (1 + g ) (re ? g) Gordon’s growth approxi mation g = bre The weighted average cost of capital ? Ve ? ? Vd ? WACC = ? ?k e + ? ? k d (1 ? T ) ? Ve + Vd ? ? Ve + Vd ? The Fisher formula (1+i) = (1+r)(1+h) Purchasing power parity and interest rate parity s1 = S o x (1 + h c ) (1 + h b ) f0 = so x (1 + i c ) (1 + i b ) KAPLAN PUBLISHING Page 3 of 14 ACCA P4 Advanced Financial Management The Black-Scholes option pricing model c = PaN(d1) – PeN(d2)e? rt Where: The forex modified Black-Scholes option pricing model c = e? rt [F0N(d1) ? XN(d2)] Or d1 = In(Pa / Pe ) + (r + 0. 5s ) t s t p = e–rt [XN(? d2) ? F0N(? d1)] Where: d 2 = d1 ? s t d1 = and 1n (F0 / X) + s T / 2 s T 2 d 2 = d1 ? s T The put call parity relationship p = c ? Pa + Pee? rt Modified Internal Rate of Return ? PV ? n MIRR = ? R ? (1 + re) – 1 ? PV1 ? 1 Page 4 of 14 KAPLAN PUBLISHING Revision Mock Questions MATHEMATICAL TABLES Standard normal distribution table 0. 00 . 0000 . 0398 . 0793 . 1179 . 1554 . 1915 . 2257 . 2580 . 2881 . 3159 . 3413 . 3 643 . 3849 . 4032 . 4192 . 4332 . 4452 . 4554 . 4641 . 4713 . 4772 . 4821 . 4861 . 4893 . 4918 . 4938 . 4953 . 4965 . 4974 . 4981 . 4987 0. 01 . 0040 . 0438 . 0832 . 1217 . 1591 . 1950 . 2291 . 2611 . 910 . 3186 . 3438 . 3665 . 3869 . 4049 . 4207 . 4345 . 4463 . 4564 . 4649 . 4719 . 4778 . 4826 . 4865 . 4896 . 4920 . 4940 . 4955 . 4966 . 4975 . 4982 . 4987 0. 02 . 0080 . 0478 . 0871 . 1255 . 1628 . 1985 . 2324 . 2642 . 2939 . 3212 . 3461 . 3686 . 3888 . 4066 . 4222 . 4357 . 4474 . 4573 . 4656 . 4726 . 4783 . 4830 . 4868 . 4898 . 4922 . 4941 . 4956 . 4967 . 4976 . 4983 . 4987 0. 03 . 0120 . 0517 . 0910 .1293 . 1664 . 2019 . 2357 . 2673 . 2967 . 3238 . 3485 . 3708 . 3907 . 4082 . 4236 . 4370 . 4485 . 4582 . 4664 . 4732 . 4788 . 4834 . 4871 . 4901 . 4925 . 4943 . 4957 . 4968 . 4977 . 4983 . 4988 0. 04 . 0159 . 0557 . 0948 . 331 . 1700 . 2054 . 2389 . 2704 . 2995 . 3264 . 3508 . 3729 . 3925 . 4099 . 4251 . 4382 . 4495 . 4591 . 4671 . 4738 . 4793 . 4838 . 4875 . 4904 . 4927 . 4945 . 4959 . 4969 . 4977 . 4984 . 4988 0. 05 . 0199 . 0596 . 0987 . 1368 . 1736 . 2088 . 2422 . 2734 . 3023 . 3289 . 3531 . 3749 . 3944 . 4115 . 4265 . 4394 . 4505 . 4599 . 4678 . 4744 . 4798 . 4842 . 4878 . 4906 . 4929 . 4946 . 4960 . 4970 . 4978 . 4984 . 4989 0. 06 . 0239 . 0636 . 1026 . 1406 . 1772 . 2123 . 2454 . 2764 . 3051 . 3315 . 3554 . 3770 . 3962 . 4131 . 4279 . 4406 . 4515 . 4608 . 4686 . 4750 . 4803 . 4846 . 4881 . 4909 . 4931 . 4948 . 4961 . 4971 . 4979 . 4985 . 989 0. 07 . 0279 . 0675 . 1064 . 1443 . 1808 . 2157 . 2486 . 2794 . 3078 . 3340 . 3577 . 3790 . 3980 . 4147 . 4292 . 4418 . 4525 . 4616 . 4693 . 4756 . 4808 . 4850 . 4884 . 4911 . 4932 . 4949 . 4962 . 4972 . 4980 . 4985 . 4989 0. 08 . 0319 . 0714 . 1103 . 1480 . 1844 . 2190 . 2518 . 2823 . 3106 . 3365 . 3599 . 3810 . 3997 . 4162 . 4306 . 4430 . 4535 . 4625 . 4699 . 4762 . 4812 . 4854 . 4887 . 4913 . 4934 . 4951 . 4963 . 4973 . 4980 . 4986 . 4990 0. 09 . 0359 . 0753 . 1141 . 1517 . 1879 . 2224 . 2549 . 2852 . 3133 . 3389 . 3621 . 3830 . 4015 . 4177 . 4319 . 4441 . 4545 . 4633 . 4706 . 4767 . 4817 . 4857 . 4890 . 4916 . 4936 . 952 . 4964 . 4974 . 4981 . 4986 . 4990 0. 0 0. 1 0. 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 0. 9 1. 0 1. 1 1. 2 1. 3 1. 4 1. 5 1. 6 1. 7 1. 8 1. 9 2. 0 2. 1 2. 2 2. 3 2. 4 2. 5 2. 6 2. 7 2. 8 2. 9 3. 0 This table can be used to calculate N (d1), the cumulative normal distribution function needed for the Black-Scholes model of option pricing. If d1 > 0, add 0. 5 to the relevant number above. If d1 < 0, subtract the relevant number above from 0. 5. KAPLAN PUBLISHING Page 5 of 14 ACCA P4 Advanced Financial Management Present value table Present value of ? 1, i. e. (1 + r)-n where r = discount rate n = number of periods until paymentPeriods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0. 990 0. 980 0. 971 0. 961 0. 951 0. 942 0. 933 0. 923 0. 914 0. 905 0. 896 0. 887 0. 879 0. 870 0. 861 2% 0. 980 0. 961 0. 942 0. 924 0. 906 0. 888 0. 871 0. 853 0. 837 0. 820 0. 804 0. 788 0. 773 0. 758 0. 743 3% 0. 971 0. 943 0. 915 0. 888 0. 863 0. 837 0. 813 0. 789 0. 766 0. 744 0. 722 0. 701 0. 681 0. 661 0. 642 4% 0. 962 0. 925 0. 889 0. 855 0. 822 0. 790 0. 760 0. 731 0. 703 0. 676 0. 650 0. 625 0. 601 0. 577 0. 555 5% 0. 952 0. 907 0. 864 0. 823 0. 784 0. 746 0. 711 0. 677 0. 645 0. 614 0. 585 0. 557 0. 530 0. 505 0. 481 6% 0. 43 0. 890 0. 840 0. 792 0. 747 0. 705 0. 665 0. 627 0. 592 0. 558 0. 527 0. 497 0. 469 0. 442 0. 417 7% 0. 935 0. 873 0. 816 0. 763 0. 713 0. 666 0. 623 0. 582 0. 544 0. 508 0. 475 0. 444 0. 415 0. 388 0. 362 8% 0. 926 0. 857 0. 794 0. 735 0. 681 0. 630 0. 583 0. 540 0. 500 0. 463 0. 429 0. 397 0. 368 0. 340 0. 315 9% 0. 917 0. 842 0. 772 0. 708 0. 650 0. 596 0. 547 0. 502 0. 460 0. 422 0. 388 0. 356 0. 326 0. 299 0. 275 10% 0. 909 0. 826 0. 751 0. 683 0. 621 0. 564 0. 513 0. 467 0. 424 0. 386 0. 350 0. 319 0. 290 0. 263 0. 239 11% 0. 901 0. 812 0. 731 0. 659 0. 593 0. 535 0. 482 0. 434 0. 391 0. 352 0. 317 0. 286 0. 258 0. 232 0. 209 2% 0. 893 0. 797 0. 712 0. 636 0. 567 0. 507 0. 452 0. 404 0. 361 0. 322 0. 287 0. 257 0. 229 0. 205 0. 183 13% 0. 885 0. 783 0. 693 0. 613 0. 543 0. 480 0. 425 0. 376 0. 333 0. 295 0. 261 0. 231 0. 204 0. 181 0. 160 14% 0. 877 0. 769 0. 675 0. 592 0. 519 0. 456 0. 400 0. 351 0. 308 0. 270 0. 237 0. 208 0. 182 0. 160 0. 140 15% 0. 870 0. 756 0. 658 0. 572 0. 497 0. 432 0. 376 0. 327 0. 284 0. 247 0. 215 0. 187 0. 163 0. 141 0. 123 16% 0. 862 0. 743 0. 641 0. 552 0. 476 0. 410 0. 354 0. 305 0. 263 0. 227 0. 195 0. 168 0. 145 0. 125 0. 108 17% 0. 855 0. 731 0. 624 0. 534 0. 456 0. 390 0. 333 0. 285 0. 243 0. 208 0. 178 0. 152 0. 130 0. 11 0. 095 18% 0. 847 0. 718 0. 609 0. 516 0. 437 0. 370 0. 314 0. 266 0. 225 0. 191 0. 162 0. 137 0. 116 0. 099 0. 084 19% 0. 840 0. 706 0. 593 0. 499 0. 419 0. 352 0. 296 0. 249 0. 206 0. 176 0. 148 0. 124 0. 104 0. 088 0. 074 20% 0. 833 0. 694 0. 579 0. 482 0. 402 0. 335 0. 279 0. 233 0. 194 0. 162 0. 135 0. 112 0. 933 0. 078 0. 065 Page 6 of 14 KAPLAN PUBLISHING Revision Mock Questions Annuity table 1- (1+ r) -n r Present value of an annuity of ? 1, i. e. where r = interest rate n = number of periods Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0. 990 1. 970 2. 941 3. 902 4. 853 5. 795 6. 728 7. 652 8. 566 9. 471 10. 37 11. 6 12. 13 13. 00 13. 87 2% 0. 980 1. 942 2. 884 3. 808 4. 713 5. 601 6. 472 7. 325 8. 162 8. 893 9. 787 10. 58 11. 35 12. 11 12. 85 3% 0. 971 1. 913 2. 829 3. 717 4. 580 5. 417 6. 230 7. 020 7. 786 8. 530 9. 253 9. 954 10. 63 11. 30 11. 94 4% 0. 962 1. 886 2. 775 3. 630 4. 452 5. 242 6. 002 6. 733 7. 435 8. 111 8. 760 9. 385 9. 986 10. 56 11. 12 5% 0. 952 1. 859 2. 723 3. 546 4. 329 5. 076 5. 786 6. 463 7. 108 7. 722 8. 306 8. 863 9. 394 9. 899 10. 38 6% 0. 943 1. 833 2. 673 3. 465 4. 212 4. 917 5. 582 6. 210 6. 802 7. 360 7. 887 8. 384 8. 853 9. 295 9. 712 7% 0. 935 1. 808 2. 624 3. 387 4. 100 4. 767 5. 389 5. 971 6. 515 7. 024 7. 499 7. 43 8. 358 8. 745 9. 108 8% 0. 926 . 178 3 2. 577 3. 312 3. 993 4. 623 5. 206 5. 747 6. 247 6. 710 7. 139 7. 536 7. 904 8. 244 8. 559 9% 0. 917 1. 759 2. 531 3. 240 3. 890 4. 486 5. 033 5. 535 5. 995 6. 418 6. 805 7. 161 7. 487 7. 786 8. 061 10% 0. 909 1. 736 2. 487 3. 170 3. 791 4. 355 4. 868 5. 335 5. 759 6. 145 6. 495 6. 814 7. 103 7. 367 7. 606 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 11% 0. 901 1. 713 2. 444 3. 102 3. 696 4. 231 4. 712 5. 146 5. 537 5. 889 6. 207 6. 492 6. 750 6. 982 7. 191 12% 0. 893 1. 690 2. 402 3. 037 3. 605 4. 111 4. 564 4. 968 5. 328 5. 650 5. 938 6. 194 6. 424 6. 628 6. 811 13% 0. 885 1. 668 2. 361 2. 74 3. 517 3. 998 4. 423 4. 799 5. 132 5. 426 5. 687 5. 918 6. 122 6. 302 6. 462 14% 0. 877 1. 647 2. 322 2. 914 3. 433 3. 889 4. 288 4. 639 4. 946 5. 216 5. 453 5. 660 5. 842 6. 002 6. 142 15% 0. 870 1. 626 2. 283 2. 855 3. 352 3. 784 4. 160 4. 487 4. 772 5. 019 5. 234 5. 421 5. 583 5. 724 5. 847 16% 0. 862 1. 605 2. 246 2. 798 3. 274 3. 685 4. 039 4. 344 4. 607 4. 833 5. 029 5. 197 5. 342 5. 468 5. 575 17% 0. 855 1. 585 2. 210 2. 743 3. 199 3. 589 3. 922 4. 207 4. 451 4. 659 4. 836 4. 988 5. 118 5. 229 5. 324 18% 0. 847 1. 566 2. 174 2. 690 3. 127 3. 496 3. 812 4. 078 4. 303 4. 494 4. 656 4. 793 4. 910 5. 008 5. 092 19% 0. 840 1. 47 2. 140 2. 639 3. 058 3. 410 3. 706 3. 954 4. 163 4. 339 4. 586 4. 611 4. 715 4. 802 4. 876 20% 0. 833 1. 528 2. 106 2. 589 2. 991 3. 326 3. 605 3. 837 4. 031 4. 192 4. 327 4. 439 4. 533 4. 611 4. 675 KAPLAN PUBLISHING Page 7 of 14 ACCA P4 Advanced Financial Management SECTION A TWO COMPULSORY QUESTIONS QUESTION 1 (a) Hunt plc is a medium sized UK company that trades with companies in several European countries. Trade deals over the next three months are shown below. Assume that it is now 20 April. Two months’ time Receipts Payments ? â‚ ¬393,265 ? ? ? ? Three months’ time Receipts Payments â‚ ¬491,011 â‚ ¬60,505 â‚ ¬890,217 â‚ ¬1,997,651 Kr 8. m ? France Germany Denmark Foreign exchange rates Spot Two months f orward Three months forward Dkroner (Kr)/? 10. 68 – 10. 71 10. 74 – 10. 77 10. 78 – 10. 83 Euro (â‚ ¬)/? 1. 439 – 1. 465 1. 433 – 1. 459 1. 431 – 1. 456 Annual interest rates (valid for two months or three months) Borrowing (%) United Kingdom 7. 50 France 5. 75 Germany 5. 75 Denmark 8. 00 Investing (%) 5. 50 3. 50 3. 50 6. 00 Futures market rates Three month Euro contracts (125,000 Euro contract size). Contracts are for buying or selling Euros. Futures prices are in ? per Euro. Current 20 April June September December 0. 6964 0. 6983 0. 013 Page 8 of 14 KAPLAN PUBLISHING Revision Mock Questions Required: (i) Using the forward market, money market and currency futures market as appropriate, devise a foreign exchange hedging strategy that is expected to maximise the cash flows of Hunt plc at the end of the three month period. (Note: Denmark is not a member of the Euro block. ) Transaction costs and margin requirements may be ignored for thi s part of the question. The basis may be assumed to reduce to zero in a linear manner over the period to expiry of the futures contracts. Futures contracts may be assumed to mature at the month end. 15 marks) (ii) Successive daily prices on the futures market for a June contract which Hunt plc has sold are: Selling price Day 1 Day 2 Day 3 0. 6916 0. 6930 0. 6944 0. 6940 Initial margins are ? 1,000 per contract. Variation margin is 100% of the initial margin. Spot exchange rates may be assumed to not change significantly during these three days. For each of the three days, show the effect on your cash flow of the price changes of the contract. (4 marks) (b) Discuss the advantages and disadvantages of forward contracts and currency futures for hedging against foreign exchange risk. 6 marks) (Total: 25 marks) KAPLAN PUBLISHING Page 9 of 14 ACCA P4 Advanced Financial Management QUESTION 2 Brookday plc is considering whether to establish a subsidiary in the USA. The subsidiary would cost a total of $20 million, including $4 million for working capital. A suitable existing factory and machinery have been located and production could commence quickly. A payment of $19 million would be required immediately, with the remainder required at the end of year 1. Production and sales are forecast at 50,000 units in the first year and 100,000 units per year thereafter.The unit sales price, unit variable cost and total fixed costs in year 1 are expected to be $100, $40 and $1 million respectively. After year 1 prices and costs are expected to rise at the same rate as the previous year’s level of inflation in the USA; this is forecast to be 5% per year for the next five years. In addition, a fixed royalty of ? 5 per unit will be payable to the parent company, payment to be made at the end of each year. Brookday has a four year planning horizon and estimates that the realisable value of the fixed assets in four years’ time will be $20 million.It is the company†™s policy to remit the maximum funds possible to the parent company at the end of each year. Assume that there are no legal complications to prevent this. Brookday currently exports to the USA yielding an after-tax net cash flow of ? 100,000. No production will be exported to the USA if the subsidiary is established. It is expected that new export markets of a similar worth in Southern Europe could replace exports to the USA. United Kingdom production is at full capacity and there are no plans for further expansion in capacity. Tax on the company’s profits is at a rate of 50% in both countries, payable one year in arrears.A double taxation treaty exists between the UK and USA and no double taxation is expected to arise. No withholding tax is levied on royalties payable from the USA to the UK. Tax allowable depreciation is at a rate of 25% on a straight line basis on all fixed assets. Brookday believes that the appropriate beta for this investment is 1. 2. The market rate of return is 12%, and the risk-free rate is 7%. The current spot exchange rate is US $1. 300/? 1, and the pound is expected to fall in value by approximately 5% per year relative to the US dollar.Required: (a) Evaluate the proposed investment from the viewpoint of Brookday plc. State clearly any assumptions that you make. (20 marks) (b) What further information and analysis might be useful in the evaluation of this project? (10 marks) Briefly discuss ethical issues that might need to be considered as part of a multinational company’s investment decision process (5 marks) (Total: 35 marks) (c) Page 10 of 14 KAPLAN PUBLISHING Revision Mock Questions SECTION B TWO QUESTIONS ONLY TO BE ATTEMPTED QUESTION 3 The following data relates to a large company operating in the electronics industry. 0X3 After tax earnings (? million) Dividend per share (pence) Number of ordinary shares (million) Average share price (pence) Net capital investment (? million) Annual increase in inflation (%) 1 30 9. 75 508 740 210 4 20X4 195 11. 0 600 875 270 4 20X5 255 12. 75 650 690 340 3 20X6 295 14. 0 695 20X7 472 15. 5 930 820 1,012 410 520 3 3 A major institutional shareholder has criticised the level of dividend payment of the company suggesting that it should be substantially increased. Required: (a) Briefly discuss the factors that are likely to influence the company's dividend policy. 6 marks) Discuss whether or not the institutional shareholder's criticism is likely to be valid. (6 marks) Hiome plc has experienced a period of above average growth for its industry, but is now growing at a normal rate of about 10% per annum. The company’s directors are reviewing the current dividend policy. One director has suggested that, as the company no longer needs as much internally generated funds to finance new investment, a higher proportion of earnings should be paid out as dividends in order to benefit the company’s shareholders.Another director has read that two eminent economists, Miller and Modigliani, have stated that the pattern of dividend payouts is irrelevant, and therefore shareholders will experience no gain from a higher level of dividends. Discuss whether or not an increase in dividends is likely to benefit the shareholders of Hiome plc. (8 marks) (Total: 20 marks) (b) (c) KAPLAN PUBLISHING Page 11 of 14 ACCA P4 Advanced Financial Management QUESTION 4 (a) One of the most important elements of any decision is the specification of goals or objectives which the decision maker seeks to achieve.The literature on capital budgeting, or investment appraisal, generally assumes the goal of a company is the maximisation of shareholder wealth. Required: Discuss the rationale for this assumption. Include in your discussion an explanation of alternative goals available to companies. (12 marks) (b) XYZ plc is a medium-sized company operating in the chemical industry. It is a profitable business, currently producing at below maximum capacity. It has on e large factory located on the outskirts of a small industrial town. It is the region’s main employer. The company is evaluating a project which has substantial environmental implications.Required: Discuss the inclusion of environmental costs and benefits into the investment appraisal process, and explain how this might be done. (8 marks) (Total: 20 marks) QUESTION 5 Island Energy Ltd is a small private company on the Island of Senyeh ? a small island whose company law and accountancy practices are based on those of the UK. The company is the monopoly provider of all domestic fuels (electricity, gas and heating oil). The company imports oils and gas and generates and distributes its own electricity. The company currently has 20 staff working on engineering and electrical work at varying level of skills and three clerk/typists.The company at present does not have any management staff: the previous Managing Director (an engineer) resigned at the end of 2006 and has not been rep laced; the Chairman (a retired engineer) has taken over the dayto-day management. The remaining board members are also all retired and comprise two lawyers, a teacher, a politician, an engineer and an operations director for a shipping company. Their role is simply to rubber-stamp the Chairman’s decisions – none of them takes an active role in the company and there have been board meetings where it has been difficult to obtain a quorum.Recently the island’s press has started to express concern about the way the company is being run – partly in reaction to public dismay at the resignation of the MD who was felt to be more approachable than the Chairman, and partly because the company is seen to be spending vast sums of money on capital equipment and worries have started to emerge about how this will impact on the price of fuel. Fuel prices on Senyeh are currently 20% above those on other islands in the region. Page 12 of 14 KAPLAN PUBLISHING Revision Mock QuestionsPengers, a member of the government of Senyeh has recently read an article about corporate failure and thinks that Island Energy Ltd may fit some of the criteria; Lakes, another government member, disagrees – arguing that the Chairman has been in place for several years ? and has asked you, a newly qualified ACCA accountant, to apply the model to show that there is no reason for concern. N. B. Accounting data for the company is presented in the Appendix to this question. You find that the model that Pengers read about was Altman’s Z score model applied to private manufacturing companies and that: Z score = 0. 17X1+ 0. 847X2 + 3. 107X3 + 0. 420X4 + 0. 998X5 where: X1 = working capital/total assets X2 = retained earnings/total assets X3 = earnings before interest and tax/total assets X4 = market value of equity/total liabilities X5 = sales/total assets Further research shows that companies with a score less than 1. 23 have a 95% chance of bankruptcy, those with a score greater than 2. 90 are unlikely to become bankrupt and those in between the two figures require additional scrutiny. (a) Calculate the Z score for Island Energy Ltd and comment upon your findings. 12 marks) (b) List any further concerns you may have about the company and any concerns you may have about the use of the model. (8 marks) (Total: 20 marks) Appendix: Island Energy Ltd Income Statement for the year ended 31 December 20X7 TURNOVER Less: Cost of sales GROSS PROFIT Less: Administrative costs OPERATING PROFIT/(LOSS) Bank charges and interest payable PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Tax on profit on ordinary activities PROFIT/(LOSS) FOR THE FINANCIAL YEAR NET DIVIDEND PAID (NON-EQUITY) TRANSFER TO/(FROM) RESERVES ? 2,374,087 ? 1,923,872 450,215 ? 381,592 68,623 ? 3,999 64,624 ? 8,753 55,871 ? ,120 54,751 KAPLAN PUBLISHING Page 13 of 14 ACCA P4 Advanced Financial Management Island Energy Ltd Statement of Financial Position as at 31 December 20X7 ? NON CURREN T ASSETS Tangible assets CURRENT ASSETS Inventory Receivables Cash at bank and in hand ? 1,622,009 213,979 275,522 487,953 ––––––––– 977,454 ––––––––– TOTAL ASSETS 2,599,463 ––––––––– CAPITAL AND LIABILITIES CURRENT LIABILITIES – TRADE PAYABLES LONG-TERM LOAN CAPITAL AND RESERVES CALLED-UP SHARE CAPITAL RESERVES General reserve Profit and loss reserve 586,117 400,000 64,405 1,129,584 419,357 ––––––––– 1,548,941 ––––––––– TOTAL CAPITAL AND LIABILITIES 2,599,463 –––––––– Page 14 of 14 KAPLAN PUBLISHING ACCA Paper P4 Advanced Financial Management June 2010 Revision Mock – Answers To gain maximum benefit, do not refer to these answers until you have completed the revision mock questions and submitted them for marking. KAPLAN PUBLISHING Page 1 of 17 ACCA P4 Advanced Financial Management  © Kaplan Financial Limited, 2010 All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.Page 2 of 17 KAPLAN PUBLISHING Revision Mock Answers ANSWER 1 (a) (i) Any hedging should be based upon expected net receipts and payments. Net receipts/payments Receipts Two months Three months Three months Forward market hedge 393,265 1. 433 676,928 1. 431 Kr8. 6m 10. 83 Payments â‚ ¬393,265 â‚ ¬676,928 Kr 8. 6m Two months = (? 274,435) Three months = (? 473,045) Three months = ?794,090 Money market hedge (i) Now Payment Euro deposit rate (1. 005833) 2 months (â‚ ¬393,265) Buy Deposit â‚ ¬390,984 (â‚ ¬393,265) 0 Buy at spot (Immediate payment in ? s) 1. 439 (? 271,705) (1. 0125) UK borrowing rate (? 275,101) Forward market The forward market is cheaper.Payment (? 274,435) KAPLAN PUBLISHING Page 3 of 17 ACCA P4 Advanced Financial Management Now Payment Euro deposit rate (1. 00875) 3 months (â‚ ¬676,928) Buy Deposit â‚ ¬671 ,056 (â‚ ¬676,928) 0 Buy at spot (Immediate payment in ? s) 1. 439 (? 466,335) (1. 01875) UK borrowing rate (? 475,079) Forward market The forward market is cheaper. Now Receipt Danish borrowing rate (1. 02) Payment (? 473,045) 3 months Kr8,600,000 Sell Loan Kr8,431,373 (Kr8,600,000) 0 Sell at spot (Immediate receipt in ? s) 10. 71 ? 787,243 (1. 01375) UK deposit rate ? 798,068 Forward market The money market offers the better alternative in this case.Futures hedge – The currency of the contract is Euros Payment of â‚ ¬393,265 1 Set up the hedge: Payment in Euros Buying Euros Buy E contracts Receipt ? 794,090 Number of contracts: = â‚ ¬393,265 ? â‚ ¬125,000 = 3. 15 contracts say 3 contracts Buy 3 â‚ ¬ June future contracts at a current price of ? 0. 6964 Page 4 of 17 KAPLAN PUBLISHING Revision Mock Answers 2 The play off: Now 20 April Spot market ? /Euro (1/1. 439) Futures market ? /Euro ? 0. 6964 Basis 0. 0015 ? 0. 6980 (BAL) 0. 0002 10 days of 71 left BASIS N IL Conversion date 20 June Expiry date 30/6 ?0. 6949 Fwd rate 1/1. 433, i. e ? 0. 6978 3 Profit on the futures: Profit on futures: ? 0. 6980-0. 6964) ? (125,000 ? 3) = ? 600. In sterling, therefore no need to convert. 4 The cash flows: Actual payment: Profit on futures Net payment â‚ ¬393,265 ? 0. 6978 = (? 274,420) ? 600 –––––––– (? 273,820) –––––––– In this case, the futures alternative is cheaper than the forward market. Payment of â‚ ¬676,928 1 Set up the hedge: Payment in Euros Buying Euros Buy E contracts No of contracts = â‚ ¬676,928 ? â‚ ¬125,000 = 5. 42 contracts say 5 contracts Buy 5 E September future contracts at a current price of ? 0. 6983 KAPLAN PUBLISHING Page 5 of 17 ACCA P4 Advanced Financial Management 2 The play off: Now 20 April Spot market ? /Euro (1/1. 39) Futures market ? /Euro ? 0. 6983 Basis 0. 0034 ? 0. 7003 (BAL) 0. 0015 BASIS NIL 72 days of 163 left Conversion date 20 July Expiry date 30/9 ?0. 6949 Fwd rate 1/1. 431 i. e. ?0. 6988 3 Profit on the futures: Profit on futures: ? (0. 7003-0. 6983) ? (125,000 x 5) = ? 1,250. In sterling, therefore no need to convert. 4 The cash flows: Actual payment: Profit on futures Net payment â‚ ¬676,928 ? 0. 6988 = (? 473,037) ? 1,250 –––––––– (? 471,787) –––––––– Again, the futures are cheaper than the forward market. In conclusion, the money market should be used for the Danish Kroner hedge and the futures market for the Euro hedges.Although in reality the outcome of futures hedges is not known with certainty, as the basis will probably not reduce to zero in a linear manner before the expiry dates, i. e. we do not know what the closing futures price will be. (ii) Day one – a movement from 0. 6916 to 0. 6930 would produce a loss of 125,000 (0. 0014) or ? 1 75. You would need to provide an extra ? 175 to maintain the margin at ? 1,000, otherwise the contract will be closed out by the Clearing House. Day two – the price change is the same and a further ? 175 would need to be provided to maintain the required margin. Day three – a profit is made of 125,000 (0. 944 – 0. 6940) or ? 50, which may be taken in cash. Page 6 of 17 KAPLAN PUBLISHING Revision Mock Answers (b) Forward contracts Advantages (i) Forward contracts on the Over The Counter (OTC) market are tailored to the needs of the parties concerned and are flexible in terms of size and maturity. (ii) No payments are required until the contracts are settled. (iii) Contracts are available in a very wide range of currencies. Disadvantages (i) Forward contracts have two prices, a buying and a selling price, which means that companies must bear the cost of the spread between these prices. ii) Prices can vary according to the size of deal and the customer. (iii) Long maturity contracts are rare (normally six months) and some currencies do not have a forward market. Currency futures Advantages (i) There is a single specified price which is transparent. (ii) As the market’s Clearing House is the formal counter party to every transaction. This effectively reduces counter party default risk for those dealing in futures. Disadvantages (i) Futures contracts are not very flexible. Contracts are only of a specified size and maturity and are only available for a very limited number of currencies. ii) The cost of operating the margin system. An initial margin (deposit) is required and further variation margins are necessary on a daily basis. KAPLAN PUBLISHING Page 7 of 17 ACCA P4 Advanced Financial Management ACCA marking scheme (a) (i) Use of net receipts and payments Forward market Money market Futures market Conclusions Maximum (ii) Understanding of variation margin Day 1 and 2 loss Day 3 gain Maximum Marks 1 2 4 6 2 ___ 15 ___ 1 2 1 ___ 4 ___ ( b) Advantages and disadvantages of forward contracts Advantages and disadvantages of futures 3-4 3-4 Max 6 Total ___ 25 ___ Page 8 of 17 KAPLAN PUBLISHING Revision Mock Answers ANSWER 2 a) Brookday’s stated policy is to remit the maximum funds possible to the parent company. The net present value of relevant cash flows to the parent company will be the appropriate decision criterion, and should lead to maximisation of parent shareholder wealth. The dollar profit and relevant cash flow from the subsidiary must be determined first. Projected earnings data of the US subsidiary Year 1 $000 5,000 2,000 1,000 309 4,000 7,309 (2,309) 0 (2,309 Year 2 $000 10,500 4,200 1,050 586 4,000 9,836 664 0 664 Year 3 $000 11,025 4,410 1,102 557 4,000 10,069 956 0 956 Year 4 $000 11,580 4,630 1,158 529 4,000 10,317 1,263 0 1,263 Year 5 $000Sales (Note 1) Variable costs Fixed costs Royalty (Note 2) Depreciation Taxable profit US tax payable (Note 3) Profit after tax (287) (287) Projected cash flo w data of the US subsidiary Year 0 $000 Profit after tax Depreciation Initial investment Additional capital Realisable value of fixed assets (Note 4) Tax on realisable value Working capital available Cash flows available to parent Exchange rate $/? (W2) Year 1 $000 (2,309) 4,000 (19,000) (1,000) Year 2 $000 664 4,000 Year 3 $000 956 4,000 Year 4 $000 1,263 4,000 Year 5 $000 (287) 20,000 (10,000) 4,000 –––––– ––––––– ––––––– ––––––– ––––––– ––––––– (19,000) 1. 300 691 1. 235 4,664 1. 173 4,956 29,263 (10,287) 1. 115 1. 059 1. 006 KAPLAN PUBLISHING Page 9 of 17 ACCA P4 Advanced Financial Management Projected cash flow data for the parent company Year 0 Year 1 Year 2 ? 000 ? 000 ? 000 Available from US s ubsidiary (14,615) 559 3,976 Royalty payment 250 500 UK tax on royalty (Note 5) (125) Net cash flow Discount factors @ 13% (Note 6) Present values (14,615) 1 (14,615) 809 0. 885 716 4,351 0. 783 3,407 Year 3 ? 000 4,445 500 (250) 4,695 0. 693 3,254 Year 4 ? 000 27,633 500 (250) 27,883 0. 13 17,092 Year 5 ? 000 (10,226) (250) (10,476) 0. 543 (5,688) Net present value = ? 4,166,000 The positive NPV means that the project is acceptable. The loss of exports to the USA if the project is undertaken is not a relevant cash flow. Notes: 1 Sales price increases by 5% per year Year 1 Year 2 Year 3 Year 4 Price 100. 00 105. 00 110. 25 115. 80 Units (000) 50 100 100 100 Sales revenue (000) 5,000 10,500 11,025 11,580 Similar calculations are necessary for variable costs, and price adjustments for fixed costs. 2 The royalty is payable in ? s and will depend upon the $/? exchange rate.The ? is expected to fall in value by 5% per year relative to the $. Year 1 Expected exchange rate $/? Royalty (? 0 00) Royalty ($000) 3 4 1. 235 250 309 Year 2 1. 173 500 586 Year 3 1. 115 500 557 Year 4 1. 059 500 529 Year 5 1. 006 5 Losses are assumed to be carried forward and allowed against future profits for taxation purposes. Although the subsidiary will exist for more than four years, the company’s planning horizon is only four years. A value must be placed upon the subsidiary at this time. The only information available is an estimate of realisable value of fixed assets.Tax on this realisable value will be payable as the assets are fully depreciated. Potential working capital available must also be considered. There will be no double taxation on cash flows from the USA. However, the royalty has not been subject to US tax, and will be liable to UK taxation. Page 10 of 17 KAPLAN PUBLISHING Revision Mock Answers 6 Using the capital asset pricing model to determine the discount rate: R project = R project = = RF + (RM ? RF)? project 7% + (12% ? 7%) 1. 2 13% (b) Further information and analysis might include: (i) How accurate are the cash flow forecasts? How have they been established? ii) Why has a four-year planning horizon been chosen? The valuation of the fixed assets at year 4 is highly significant to the NPV solution. How has this valuation been established? Is this valuation based upon future earnings as a going concern? It would be more desirable to evaluate the project over the whole of its projected life. (iii) Risk is taken into account by using a CAPM derived discount rate. How has this rate been derived for a situation involving two countries? Does this fully reflect the risk of the project? Is the use of CAPM appropriate (as it is a single period model)?Other, theoretically weaker measures of risk might be useful as an aid to decision making, e. g. sensitivity analysis of the key variables or simulation. (iv) Cash flow is usually assumed to occur at the end of each year. Greater accuracy would result if consideration were given to when during the ye ar cash flow arises and these cash flows discounted at the appropriate rate. (v) Political and economic factors. How stable is the US government policy? Will a change in government lead to changes in taxation policy, exchange controls, restrictions on the remittance of funds, attitudes toward foreign investment? vi) Are there any intangible benefits of establishing a manufacturing plant in the USA, e. g. making the American public more aware of Brookday’s product? (vii) Real options analysis. The Black-Scholes option valuation model could be used to place a value on any real options. Thus enabling the calculation of a true NPV of project with options: True NPV = Short term NPV + NPV of all real options Multinational companies may engage in activities which, whilst not illegal, are questionable ethically, and may have detrimental long-term effects on the company’s reputation.Ethical considerations include: (i) (ii) (iii) (iv) (v) (vi) Would the investment cause pollutio n or other environmental damage in the country? Does the investment involve experiments on animals, genetic modifications etc? Should the investment be undertaken if the country has a poor record on human rights? If local officials ask for ‘inducements’ to facilitate the investment process, should these be paid? Would the investment in any way assist trading in drugs or arms? Are wages to be paid below subsistence level? Are working conditions of an acceptable standard? c) KAPLAN PUBLISHING Page 11 of 17 ACCA P4 Advanced Financial Management ACCA marking scheme (a) Exchange rates Sales Variable costs Fixed costs Royalty Depreciation US tax payable Tax on realisable value Working capital Discount rate Loss on exports – not relevant UK tax on royalties NPV and conclusion Reward technique even if calculation errors exist Maximum (b) (c) 1 – 2 marks for each good point 1 – 2 marks for each good point Total Marks 2 2 1 1 2 1 2 1 1 2 2 2 1 ___ 20 ___ 10 5 ___ 35 ___ Page 12 of 17 KAPLAN PUBLISHING Revision Mock Answers SECTION B ANSWER 3 a) There is considerable debate as to whether dividend policy can influence corporate value. Much of the debate concerns the question of whether it is the dividend that affects share value, or the information implied by the payment of the dividend. Dividends may provide, in the cheapest and most efficient manner, unambiguous signals about a company's future prospects and management performance. Managers have an incentive to send truthful signals via dividends, as any changes in dividends that are not likely to be accompanied by changes in cash flows will not fool a market that is at least semi-strong form efficient.Dividends therefore may be a valuable communication medium. There are a number of possible practical influences on dividend policy including: (i) (ii) (iii) (iv) Dividends are to be discouraged as they may lead to issue costs associated with raising additional external finance. Corporate growth. The faster a company is growing the lower the dividend payment is likely to be. Liquidity. Cash is needed to pay dividends. The level of corporate liquidity might influence dividend payouts. The volatility of corporate cash flows.Companies may be reluctant to increase dividends unless they believe that future cash flows will be large enough to sustain the increased dividend payment. Legal restrictions, for example, government constraints, limitations on payments from reserves, and covenants on debt that restrict dividends. The rate of inflation. Many shareholders like dividends to increase by at least as much as inflation. The desires and tax position of the shareholder clientele. However, most companies have a broad spread of shareholders with different needs and tax positions. (v) (vi) (vii) b) Statistical data: Earnings per share (pence) Retained earnings (? m) Payout ratio (%) Dividends (? m) Real growth in dividend per share (%) 20X3 25. 6 80 38. 1 49. 5 20X4 32. 5 129 33. 8 66. 0 8. 48 20X5 39. 2 172 32. 5 82. 9 12. 53 20X6 42. 4 198 33. 0 97. 3 6. 60 20X7 50. 8 328 30. 5 144. 1 7. 49 The company's dividend per share has increased, in real terms, by between 6. 6% and 12. 53% per year during the last five years. Although no comparative industry data is available, this appears to be a good performance. The payout ratio has reduced from 38% in 20X3 to 30. % in 20X7, which may be why the institutional shareholder has KAPLAN PUBLISHING Page 13 of 17 ACCA P4 Advanced Financial Management made the criticism. However, there is little point in the company paying out large dividends if it has positive NPV investments which can be financed partially by dividend retention. Although there is by no means a perfect correlation between NPV and earnings per share, the fact that earnings per share have consistently increased over the period suggests that the company's investments are financially viable.The company has consistently had high net capital expenditure relative to earnings, and in such circumstances it is not unusual for dividend payments to be relatively low. The company's share price has not increased by as much as earnings per share but, without information on stock market trends and the relative risk of the company, it is not clear whether or not the company's share price is under performing. Unless the institutional shareholder could invest any dividends received to earn a higher yield (adjusted for any differences in risk) there is little evidence to support the validity of the criticism. c) The argument by Miller and Modigliani (MM) that dividend policy is irrelevant to the value of company was formulated under very restrictive perfect market conditions. If such conditions existed then shareholders would not value an increase in dividend payments. However, there are several real world factors that are likely to influence the preference of shareholders towards dividends or retentions (and hence expected capital gains). These include: †¢ Taxation.In some countries dividends and capital gains are subject to different marginal rates of taxation usually with capital gains being subject to a lower level of taxation than dividends. Brokerage fees. MM ignore brokerage fees. However, if shareholders have a preference for some current income and are paid no or low dividends, their wealth will be reduced if they have to sell some of their shares and incur brokerage fees in order to create current income.If a company needs to finance more new investment it is usually cheaper to fund investment through retained earnings as most forms of external finance involve issue costs. Information asymmetry may exist between shareholders and directors. If the market is not strong form efficient, shareholders may have less complete knowledge of the likely future prospects of the company than directors, which may influence the shareholders’ desire for dividends or capital gains. †¢ †¢ †¢ The implicati ons of an increase in dividends need to be considered by the company.Dividends are often regarded as an unbiased signal of a company’s future prospects, an increase in dividends signalling higher expected earnings. The company should be careful to inform its shareholders of the reason for any increase in dividends. A further factor is the use that the company can make of funds. If the company has a number of possible positive NPV investments, then shareholders will normally favour undertaking these investments (at least on financial grounds), as they will lead to an increase in shareholder wealth.If, however, the company has relatively few projects and can only invest surplus cash at an expected zero NPV, the arguments for retentions is weakened. For strategic and operational reasons most companies keep some funds in the form of cash or near cash, for transactional and precautionary motives and to be in the position to take advantage of unexpected opportunities that may arise . The need for cash for such purposes may influence the level of dividend payout. Page 14 of 17 KAPLAN PUBLISHING Revision Mock Answers ACCA marking scheme a) (b) (c) One mark for each valid point Two marks for calculations. 4 marks for detailed analysis/explanation Two marks for each well-explained point Total Marks Max 6 Max 6 Max 8 ___ 20 ___ ANSWER 4 (a) It is generally assumed that the major objective of decision makers in a company is to maximise the net present value of future cash flows when discounted at a rate which reflects shareholders’ required rates of return. The rationale for this assumption is that of all the stakeholders in a company the demands of the equity investors are paramount.Equity investors are dominant because they own the assets of the company and employ directors and managers (the decision makers) to make the best use of those assets. Ultimately, if the directors do not produce an, at least, adequate return for shareholders they will be out of a job. It is accepted that often alternative goals govern decision making within a company. In some cultures and political environments, the assumed dominance of shareholder interests is questioned. Why shouldn’t the providers of labour, rather than capital, have their rewards maximised?It is important to remember that it is senior management that actually make the decisions within companies and they will be looking for personal reward. They are likely to be interested in the level of their own salaries and pensions and security. It is often claimed that management seek maximum revenue rather than maximum profit, or, knowing that they may only work for a company for a limited time period, are more interested in short-term performance rather than the long-term growth of shareholders’ wealth. Finally there are other stakeholders in the company to be considered.Most companies will try to ‘balance’ the maximising of shareholder wealth with the motivation of work ers and management, the delighting of customers and a good public image. In achieving this balance shareholder wealth will not always be the major objective. (b) In the modern world companies cannot ignore the environmental implications of their actions; to do so may destroy the company because of the effect on their reputation in the eyes of customers or suppliers, or the effect of the imposition of fines and penalties if they break legislation or regulations designed to protect the environment.Including environmental costs and benefits in investment appraisal will probably require the advice of an environmental specialist who can calculate for the company such items as: (i) (ii) the costs of machinery or changes to processes to avoid environmental damage the likely costs of penalties, fines or claims for compensation if environmental damage occurs KAPLAN PUBLISHING Page 15 of 17 ACCA P4 Advanced Financial Management (iii) (iv) he likely effect on future revenues from any adverse p ublicity that would be likely to arise from environmental damage the likely effect on future revenues from positive publicity from going beyond statutory requirements to protect the environment. Once costed, these costs and revenues could be included in the net present value calculations undertaken by XYZ plc in its investment appraisal of the chemical project. A more extreme approach would be to place a subjective valuation on the cost of reinstating the environment to its original condition and treating that as a nominal outflow.ACCA marking scheme (a) (b) One mark for each valid point throughout One mark for each valid point throughout Total Marks Max 12 Max 8 ___ 20 ___ ANSWER 5 (a) X1 = working capital/total assets X2 = retained earnings/total assets X3 = earnings before interest and tax/total assets X4 = book value of equity/total liabilities X5 = sales/total assets And the Z score = 0. 717X1+ 0. 847X2 + 3. 107X3 + 0. 420X4 + 0. 998X5 X1 = 391,337/2,599,463 X2 = 1,548,941/2,59 9,463 X3 = 68,623/2,599,463 X4 = 64,405/986,117 X5 = 2,374,087/2,599,463 = 0. 505 = 0. 5959 = 0. 0264 = 0. 0653 = 0. 9133 Z = 0. 11 + 0. 50 + 0. 08 + 0. 03 + 0. 91 = 1. 63 Whilst Island Energy Ltd is not in the immediate danger zone, its score is in the ‘grey area’ and further analysis is recommended. (b) Further concerns about the company: †¢ †¢ †¢ †¢ Page 16 of 17 The Chairman is also acting as MD so there is no counter-balance to him and, as such, no ‘watchdog’ over his activities. The remainder of the Board does not participate in the running of the company. There appears to be a weak finance function.There is a lack of management depth – there being no middle management. KAPLAN PUBLISHING Revision Mock Answers Concerns about the model: †¢ General limitations about the Z score (and other prediction models). These accounting based models only focus on the financial aspects of a company’s performance. This is only a snapshot of the company – maybe the position is improving. Further analysis is required to fully determine what the situation is with Island Energy Ltd. This may only be a predicator for the short term; we do not know what the company’s future plans are.ACCA marking scheme (a) (b) Calculation of each x or z score = 2 marks , interpretation 2 marks 1 mark for each valid point Total Marks Max 12 Max 8 ___ 20 ___ †¢ †¢ †¢ MARKING SCHEME This marking scheme is given as a guide to markers in the context of the suggested answers. Scope is given to markers to award marks for alternative approaches to a question, including relevant comment, and where well reasoned conclusions are provided. This is particularly the case for essay based questions where there will often be more than one definitive solution. KAPLAN PUBLISHING Page 17 of 17

Characteristics Of Oedipus - 1043 Words

Oedipus Rex Oedipus Rex is a book about a man named Oedipus, who before he was born had a prophecy to fulfill. The prophecy stated that Oedipus would kill his Father and marry his mother. Oedipus had many flaws, with one being inner blindness. Oedipus’s flaws and inner blindness played part in him being a static character because he was oblivious to the clues all around them, if he had caught the clues in time he could have saved his family of embarrassment. His pride and self absorption cause him and his family to have the most embarrassing and destructive downfall. Oedipus was a great leader, but he was also a man consumed in his flaws. He was very temperamental, Oedipus was never able to control†¦show more content†¦There were many people even telling him to open his eyes and see the clues, yet he still couldn’t see them. The first clue should have been when Jocasta states that she was told that her son would kill her husband and marry her. How common could a prophecy be that it is told exactly the same to two people. Another clue would have to been when he is informed that his â€Å"father† has died of an illness, yet the curse on the city of Thebes has yet to be lifted. I think personally that Oedipus is in a bit of denial, that is why he refuses to believe the truth. I think he is absolutely terrified of the fact that what Creon and Teiresias are saying in possible true. From the moment that Creon came to speak to him, it should have been like puzzle pieces coming together. Oedipus was terribly naive when it cam e to the situation. When Jocasta starts to come terms that Oedipus is her son, he just thinks that Jocasta believes he is the son of slaves. Oedipus was not only blind to the fact that he killed his father and married his own mother, but he was also blind to the fact that he had many flaws. When Oedipus and Jocasta finally came to terms that the prophecy was real, Jocasta commits suicide and Oedipus physically stabbed his eyes out. Jocasta sorta took the cowards way out, because she didn’t face her people to admit her crimes, she just upped and killed herself. She was more in the wrong because of theShow MoreRelatedCharacteristics Of Oedipus1406 Words   |  6 Pagesthe first great play-writes. One of his greatest characters is no-doubt Oedipus the king. Oedipus is one of the most complex and interesting characters ever put to paper. Oedipus’ actions are very unique and human, in the context of books. Oedipus has many different character traits, such as his hubris, determination, and knowledge, however all of them blend seamlessly together in a very believable and human way. When Oedipus first introduces himself to us he already displays one of his greatest traitsRead MoreCharacteristics Of Oedipus The King928 Words   |  4 PagesConstitution on, like in the US. In Sophocles’ play Oedipus Rex the king, Oedipus, was very well liked because of his heroic act of solving the Sphinxs riddle, ridding the city of the monster, which led him to become the king of Thebes. During his rule, a plague spreads throughout the city, killing many people, forcing the people go to their king to plead for the help of their heroic king to once again save the city. A prophecy from Apollo was given to Oedipus which said, in order to save the city, theRead MoreCharacteristics of a Tragic Hero in Oedipus the King by Sophocles1238 Words   |  5 Pagesof a tragic hero, it can be concluded that Oedipus is a tragic hero. Oedipus The King was written by a well-known tragic dramatist named Sophocles. This story is considered to be one of the greatest tragedies of all time. In fact, the Marjorie Barstow of the Classical Weekly says that it â€Å"fulfills the function of a tragedy, and arouses fear and pity in the highest degree† (Barstow). It is also very controversial because of the relationship that Oedipus has with his mother, although it was unknownRead MoreEssay about Tragedy in Sophocles Oedipus The King and Antigone 1403 Words   |  6 PagesTragedy in Sophocles Oedipus The King and Antigone The Greeks considered tragedy the greatest form for literature.   However, the tragic ends for the characters were not ordained or set by fate, but rather caused by certain characteristics belonging to that person.   Such is the case with the characters of Sophocles plays Oedipus the King and Antigone.   Oedipus from King Oedipus, and Antigone and Creon from Antigone posses characteristics, especially pride, that caused their tragic ends.   AsRead MoreOedipus Rex970 Words   |  4 PagesOedipus: An Exceptional Man In all the passages that have been written through history on how an excellent man should behave, one writing stands out from all of them. Aristotle’s, The High-Minded Man. This manuscript explains that for any play to be truly considered a tragedy, its hero must meet Aristotle’s standards for a high-minded man. In the tragedy of Oedipus Rex, by Sophacles, Oedipus clearly meets the requirements to be called a high-minded man. Oedipus is expressive about his thoughtsRead MoreThe Characters Of Hubris In Oedipus The King1032 Words   |  5 PagesHubris is one characteristic of humans that leads to people committing evil deeds. In the play Oedipus the King, Oedipus struggles with facing the truth about his fate. His hubris leads him to be an arrogant and ignorant person throughout the play. Hubris also leads Oedipus to lose control over his emotions on multiple occasions in the story. In Sophocles’ play, Oedipus the King, Oedipus’ character flaws clearly ou tweigh his positive qualities. Oedipus’ rage, pride, and ignorance are the main characterRead MoreOedipus The King : A Tragic Hero987 Words   |  4 PagesLike most greek tragedies, Oedipus the King had a tragic hero whose downfall was the result of a tragic flaw. Oedipus, like other greek characters, did not see his errors until his reign was coming to an end. Oedipus, the man who saved Thebes did not understand that every good thing must come to an end. A tragic hero defined by Aristotle has five characteristics that lead to their downfall and their understanding of why the situation happened. Oedipus is the ideal tragic hero because his downfallRead MoreOedipus The King : A Classical Tragedy1272 Words   |  6 PagesSophocles’ Oedipus the King is a classical tragedy that derives its meaning through the experiences of its tragic hero, Oedipus. Throughout the play, the eminent characteristic of Oedipus is his ignorance of the truth that inevitably leads to his down fall. This ignorance of truth is a characteristic found within the Aristotelian definition of a tragedy. Tragedy, as defined by Aristotle in his Poetics, are imitations of actions and are not narrative. This means that tragedies are often demonstratedRead MoreDiscuss The Importance Of Oracles To Oedipus Rex1620 Words   |  7 Pages1. Discuss the importance of oracles to the ancient Greeks and specifically, to Oedipus Rex. Include a consideration about whether human actions are the result of predestination (Fate/Destiny) or free will. What does Sophocles seem to believe on this issue? After reading the passage throughly, I feel that for the ancient Greeks fate was an important aspect to their daily lives it shaped and formed human life. Fate has evolved during the years mainly because for the Greeks it was seen somethingRead MoreOedipus Rex And The Downfall Of Oedipus951 Words   |  4 PagesA man has many defining characteristics. Some characteristics are positive, and others negative. There are times a potentially positive characteristic may cause his eventual downfall. This concept could be directly related to the story Oedipus Rex. Aristotle once said something to the effect that the tragic hero falls into bad fortune because of some flaw in his character. Essentially, he is telling us those characters, like Oedipus, have flaws that, under normal circumstances, would be a beneficial

Animal Experimentation And The Human Body And Other...

A lot has been discovered by experimenting on animals in order to find ways humans to fight against various diseases and other medical problems. The earliest writings on animal experimentation have been found as early as 500 B.C in Greece; where animals have been operated on to determine the anatomy of the human body and other medical reasons. It is estimated that 26 million animals are used for animal testing every year in the U. S alone in order for to conduct research. The need of further suffering of animals is now unnecessary because of our understanding of sciences and technology is far more advanced to allow the use of alternative ways to accomplish similar if not better results in medical research. People would say that†¦show more content†¦The Food and Drug Administration (FDA) estimated that 92% of drugs that were tested on animals and proved to be safe, failed in human trials because of reasons such as being too dangerous or leading to different side effects that were not present during the test that were performed on animals. A lot of tested and approved drugs that were released to the public have been taken down because of the drug being harmful to their consumers. It is estimated that prescription drugs that are tested safe on animals kill about 100,000 people each year. What is the point of killing thousands if not millions of animals for tests on drugs, if they don t prove to be effective on humans and lead to negative results? In the British Medical Journal titled â€Å"Where Is the Evidence That Animal Research Benefits Humans?†, the researchers examined animal studies and concluded that there is little evidence that exists to support the idea that animal experimentation has benefited humans. People are misled to the fact that animal experiments are only meant to be used for medical research, but in reality a lot of animals are used in experiment to fulfill the curiosity of the researchers. Research on animals also misleads th e results of potential cures that are effective on humans. For example, billions of dollars have been spent on cancer research by the government and funding to find the cure for various types of cancer with the use of animals. Most of the