An swersFundamentals Level - Skills Module, Paper F9December 2014 AnswersFinancial ManagementSection A1 AMonetary value of return = $310 x 1 197 = $3 71Current share price = $371 -$0 21 = $3 502 B3 C4 AThe hedge needs to create a peso liability to match the 500,000 peso future income.6-month peso borrowing rate = 8/2 = 4%6-month dollar deposit rate = 3/2 = 15%-Dollar value of money market hedge = 500,000 x 1015/(1 - 04 x 15) = $32,532 or $32,5005B6C7CTotal cash flowJoint probabilityEV of cash flow($)($)36,0000 11254,05014,0000 037552532,0000 450014,40010,0000 15001,50016,0000 18753,000(6,000)0 0625(375)23,100Less initial investment(12,000)EV of the NPV11,1008 B9 AMV = (7 x 5 033) + (105 x 0547) = $92 6710 D11 D12 A13 BInventory = 15,000,000 x 60/360 = $2,500,000Trade receivables = 27,000,000 x 50/360 = $3,750,000Trade payables = 15,000,000 x 45/360 = $1,875,000Net investment required = 2,500,000 + 3,750,000-1,875,000 = $4,375,00014 C15 D16 C17Gearing = (4,000 x 105) + 6,200 + (2,000 x 08)/(8,000 x 2 x 5) = 12,000/80,000 = 15%18 B19 DDividend growth rate = 100 x (336/32) - -1) = 5%MV = 33 -6/(0 13 -0 05) = $4 2020 DSection B1(a) Cash balances at the end of each month:DecemberJanuaryFebruaryMarchAprilSales (units)1,2001,2501,3001,4001,500Selling price ($/unit)800800840840Sales ($000)9601,0001,0921,176Month receivedJanuaryFebruaryMarchAprilDecemberJanuaryFebruaryMarchProduction (units)1,2501,3001,4001,500Raw materials (units)2,5002,6002,8003,000Raw materials ($000)500520560600Month payableJanuaryFebruaryMarchAprilDecemberJanuaryFebruaryMarchProduction (units)1,2501,3001,4001,500Variable costs ($000)125130140150Month payableDecemberJanuaryFebruaryMarchMonthly cash balances:January $000February$000March$000Receivables9601,0001,092Loan300Income:9601,0001,392Raw materials500520560Variable costs130140150Machine400Expenditure:6306601,110Opening balance40370710Net cash flow330340282Closing balance370710992(b) Calculation of current ratioInventory at the end of the three-month period:This will be the finished goods for April sales of 1,500 units, which can be assumed to be valued at the cost of production of $400 per unit for materials and $100 per unit for variable overheads and wages. The value of the inventory is therefore 1,500 x 500 = $750,000.Trade receivables at the end of the three-month period:These will be March sales of 1,400 x 800 x 105 = $1,176,000.Cash balance at the end of the three-month period:This was forecast to be $992,000.Trade payables at the end of the three-month period:This will be the cash owed for March raw materials of $600,000.Forecast current ratioAssuming that current liabilities consists of trade payables alone:Current ratio = (750,000 + 1,176,000 + 992,000)/600,000 = 49 times (c) If Flit Co generates a short-term cash surplus, the cash may be needed again in the near future. In order to increase profitability, the short-term cash surplus could be invested, for example, in a bank deposit, however, the investment selected would normally not be expected to carry any risk of capital loss. Shares traded on a large stock market carry a significant risk of capital loss, and hence are rarely suitable for investing short-term cash surpluses.(a)2Average historical share price growth = 100 x (1090/9 15) 1/3 -1) = 6% per yearFuture share price after 7 years = 1090 x 1 067 = $16 39 per shareConversion value of each loan note = 1639 x 8 = $13112The investor is faced with the choice of redeeming the loan notes at their nominal value of $100 or converting them into shares worth $13112. The rational choice is to maximise wealth by taking the conversion option.Market value of each loan note = (8 x 5033) + (131 12 x 0 547) = 40 26 + 71 72 = $111 98(b) The average price/earnings ratio (P/E ratio) of listed companies similar to Par Co has been recently reported to be 12 timesand the most recent earnings per share (EPS) of Par Co is 62 cents per share. The share price calculated using the P/E ratio method is therefore $744 (12 x 62/100).One problem with using the P/E ratio valuation method relates to the selection of a suitable P/E ratio. The P/E ratio used here is an average P/E ratio of similar companies and Par Co is clearly not an average company, as evidenced by its year-end share price being $1090 per share, some 47% more than the calculated value of $744. The business risk and financial risk ofPar Co will not be exactly the same as the business risk and financial risk of the similar companies, for example