MA826/20
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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
Rate Taxable Income in
Excess of Personal
Allowance (£)
Earned
Income
Interest Dividends Capital
Gain**
Capital
Gain ***
Basic 0-37,500 20% 20% 7.5% 10% 18%
Higher 37,501-150,000 40% 40% 32.5% 20% 28%
Additional Over 150,000 45% 45% 38.1% 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%


MA826/20
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.
[4 marks]

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.
[4 marks]

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 marks]


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.
[4 marks]

MA826/20
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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?
a) £8.50
b) £8.00
c) £9.00
d) £9.67
[4 marks]

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.
[4 marks]
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. [4 marks]

MA826/20
9. The following figures have been extracted from a company’s accounts for
consecutive years.

2019 2018
Operating profit £700,000 £600,000
Depreciation £55,000 £50,000
Inventory £33,000 £30,000
Trade receivables £45,000 £40,000
Trade payables £38,000 £34,000

Calculate the company’s cash generated from operations during 2019

a) £702,000
b) £751,000
c) £759,000
d) £796,000 [4 marks]

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% [4 marks]

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]



MA826/20
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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.
[2 marks]
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) Calculate the revised return on equity from first principles assuming the return
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]


MA826/20
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 Hurdle Risk Discount Rate of 10% per annum for the
initial evaluation of projects.
a) Calculate the net present value of each project at the Hurdle Rate of 10%.
[5 marks]
b) State whether either project appears viable. [1 mark]
c) Explain why a firm may set a Hurdle Rate 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]


MA826/20
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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]





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MA826/20
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) Prepare the Statement of Financial Position and a Statement of Profit or
Loss for Toptek Ltd for the accounting year ending 1st March 2020.
[14 marks]
[Total 18 marks]