ICAEW - FM EXAM QUESTIONS AND ACCURATE ANSWERS
Accounting Rate of Return - Solution Average Profit/Average investment
Internal Rate of Return - Solution a + NPVa/NPVa-NPVb x (b-a)
Money cost of capital - Solution (1 + money coc) = (1 + real coc%) x (1 + inflation %)
Equivalent annual cost (EAC) - Solution PV of 1 cycle/AF^n of cycle
Profitability index (for divisible projects) - Solution NPV/Investment in yr of rationing
Sensitivity to sales volume - Answer NPV/PV of net contribution (after tax)
Interest Rate Parity - Answer SPOT x (1 + o/seas interest %)/(1+ home interest %). Used
to work out forward rates
Purchasing power parity - Answer SPOT x (1 + o/seas inflation %)/(1 + home inflation %)
TERP - Answer MV shares before + new funds / total number of shares post issue
Dividend yield - Answer Dividend per share/share price
Earnings per share PAT - Answer Earnings/No of shares
PE Ratio - Answer Share price/ EPS or.Mve/earnings
Total shareholder return RARE - Answer Div per share +/- movement in share price /
opening share price
, Gearing - Answer MVd/MVe or.Mvd/Total geared funds
Interest cover - Answer PBIT/interest
Average Growth rate - Answer ^n√recent div/earliest div - 1
Earnings Retention Growth rate - Solution G = b x r. (b = % profit retained, r =
earnings/opening assets)
Cost of preference share - Solution Div/Price
Cost of irredeemable debt - Solution Interest x (1-tax %) / price
Cost of bank loan - Solution Interest % x (1 - Tax %)
WACC - Solution (% equity x ke) + (% debt x kd)
PV of tax benefit - Solution debt x interest % x tax x AF^n
APV - Solution NPV@Keu x PV of tax benefit - issue costs
PE valuation - Solution PE x earnings
Dividend yield valuation - Solution div per share/dividend yield.
Dividend growth valuation - Solution P0 = d0(1+g)/ke-g
Discount a growing perpetuity, starting yr 3 - Solution PV = (CF^3 x 1/(r-g)) x DF^2
Accounting Rate of Return - Solution Average Profit/Average investment
Internal Rate of Return - Solution a + NPVa/NPVa-NPVb x (b-a)
Money cost of capital - Solution (1 + money coc) = (1 + real coc%) x (1 + inflation %)
Equivalent annual cost (EAC) - Solution PV of 1 cycle/AF^n of cycle
Profitability index (for divisible projects) - Solution NPV/Investment in yr of rationing
Sensitivity to sales volume - Answer NPV/PV of net contribution (after tax)
Interest Rate Parity - Answer SPOT x (1 + o/seas interest %)/(1+ home interest %). Used
to work out forward rates
Purchasing power parity - Answer SPOT x (1 + o/seas inflation %)/(1 + home inflation %)
TERP - Answer MV shares before + new funds / total number of shares post issue
Dividend yield - Answer Dividend per share/share price
Earnings per share PAT - Answer Earnings/No of shares
PE Ratio - Answer Share price/ EPS or.Mve/earnings
Total shareholder return RARE - Answer Div per share +/- movement in share price /
opening share price
, Gearing - Answer MVd/MVe or.Mvd/Total geared funds
Interest cover - Answer PBIT/interest
Average Growth rate - Answer ^n√recent div/earliest div - 1
Earnings Retention Growth rate - Solution G = b x r. (b = % profit retained, r =
earnings/opening assets)
Cost of preference share - Solution Div/Price
Cost of irredeemable debt - Solution Interest x (1-tax %) / price
Cost of bank loan - Solution Interest % x (1 - Tax %)
WACC - Solution (% equity x ke) + (% debt x kd)
PV of tax benefit - Solution debt x interest % x tax x AF^n
APV - Solution NPV@Keu x PV of tax benefit - issue costs
PE valuation - Solution PE x earnings
Dividend yield valuation - Solution div per share/dividend yield.
Dividend growth valuation - Solution P0 = d0(1+g)/ke-g
Discount a growing perpetuity, starting yr 3 - Solution PV = (CF^3 x 1/(r-g)) x DF^2
