1968 Democratic Convention Research Paper Example | Topics and Well Written Essays - 1500 words

1968 Democratic Convention - Research Paper Example Despite of its rich legacy, there have been some events related to the history of this party, which still haunt the stakeholders (Campbell, 2008). One of these events is the â€Å"Democratic National Convention of 1968 at the International Amphitheatre in Chicago, Illinois† (Campbell, 2008). This paper is an attempt to present a brief account of the events that led to this convention, the happenings during the convention and events that took place in the aftermath. Discussion Before light is shed on the convention, it is important to draw a rough and succinct sketch of the events leading to Democratic Convention of 1968 that would help in better understanding of the entire event and its happenings. Events leading to 1968 Democratic Convention Assassination of Martin Luther King, Jr. Without any doubts, the man who saw the dream, Martin Luther King, Jr. remains as one of the most influential personalities in the American history (Hoffman, Leary & Mailer, 2008). During the late 1950s and 1960s, he had become the icon of American liberalism, anti Vietnam War advocate, civil right activist and leader of the peace movement (Dautrich & Yalof, 2009). It was on April 4, 1968 when he was assassinated at the Lorraine Motel in Memphis, Tennessee. This created widespread anger, frustration and rage in the public and riots spread in major United States, such as â€Å"Washington D.C., Kansas City, Baltimore, Louisville, Chicago, and various 100 other major cities causing damage of more than 50 million US dollars† (Farber, 1988). In fact, Chicago has not witnessed such magnitude of riots since 1968. During these disturbances, â€Å"11 citizens lost their lives, 48 injured, 90 police officers were wounded, and more than 2156 were taken into police custody† (Kusch, 2004). Despite the fact that the city appeared to be getting back to the normal after a week or so but this event installed the first wave of anger and frustration within the hearts of minds, par ts of which became evident during the convention as well (Edy, 2006). Assassination of Robert F. Kennedy After the death of Luther King, Jr. Robert F. Kennedy was the first political leader, who was also running for the Democratic Party nomination for President. Kennedy had lost his brother John F. Kennedy earlier in the decade (Farber, 1988). Shortly after addressing his supporters at midnight in a ballroom at The Ambassador Hotel in Los Angeles, he left for addressing a press conference (Kusch, 2004). On his way to the conference, he took the route that went through the kitchen and a Palestinian immigrant, Sirhan Bishara Sirhan, who shoot Kennedy in the chest three times. He died after 26 hours, thus depriving the democratic party of a charismatic and influential leader who would have gone on to win the Democratic convention (Campbell, 2008; Hoffman, Leary & Mailer, 2008). Decision of Lyndon B. Johnson not to contest for the second term Lyndon B. Johnson, one of the four political personalities in the history of United States to serve as the President, Vice President, Representative, and Senator during his career, was the 36th president of the United States who served during the 1963-1969 era. He served as the vice president during the Kennedy era and took over the job as the president of the country after his assassination. He ran for the office after completing that term and won with an overwhelming majority. Johnson is still praised by critics and observers for his domestic policies such as â€Å"Great Society legislations† (McGowen, 2003). However, he paid the price for increasing American involvement in Vietnam War in form of his sharply declining popularity, both in the American

Role of Consumer Expectations in Economic Policy

Role of Consumer Expectations in Economic Policy BU/12C/BS/0403 Introduction A theme that dominates modern discussions of macro policy is the importance of expectations, and economists have devoted a great deal of thought to expectations and the economy. Change in expectations can shift the aggregate demand (AD) curve; expectations of inflation can cause inflation. For this reason expectations are central to all policy discussions, and what people believe policy will be significantly influences the effectiveness of the policy. Expectations complicate models and policymaking enormously; they change the focus of discussions from a response that can be captured by simple models to much more complicated discussions. The adaptive expectations theory assumes people form their expectations on future inflation on the basis of previous and present inflation rates and only gradually change their expectations as experience unfolds. In this theory, there is a short-run tradeoff between inflation and unemployment which does not exist in the long-run. Any attempt to reduce the unemployment rate blow the natural rate sets in motion forces which destabilize the Phillips Curve and shift it rightward. Under adaptive expectations, forecasts of the future rate of inflation may be right on the money, but they may also exhibit systematic error. When inflation is accelerating, forecasts will tend to be too low. And when inflation is decelerating (that is, disinflation is taking place), then forecasts will tend to be too high. The Rational expectations model was developed by Robert Lucas, rational economic agents are assumed to make the best of all possible use of all publicly available information. Before reaching a conclusion, people are assumed to consider all available information before them, then make informed, rational judgments on what the future holds. This does not mean that every individual’s expectations or predictions about the future will be correct. Those errors that do occur will be randomly distributed, such that the expectations of large numbers of people will average out to be correct. To illustrate, assume the economy has been in an equilibrium state for several years with low inflation and low unemployment. In such a stable environment, the average person would expect the inflation rate to stay where it is indefinitely. But now assume the Central Bank announces it is going to significantly increase the rate of growth of the money supply. Basic economic theory tells us an increase in the money supply will translate into higher prices, such that increasing the annual rate of growth of the money supply should bring about higher inflation rates. Knowing this, consumers will revise their inflationary expectations upward. As this simple example shows, people do not rely only on past experiences to formulate their expectations of the future, as adaptive expectations theory suggests. Rather people use all information available to them in judging what the future will hold. This information can include past data, but it will also include current policy announcements and all other information that give them reason to believe that the future might hold certain changes. If the adaptive expectations are backward looking the rational expectations are forward looking , in that they assume people will use all of the information available to them. Expectations of inflation Some workers may feel cheated by inflation. They might believe that without it, they would experience real-wage increases because their nominal wages are rising 5% a year. Unfortunately, they are wrong. They suffer what some economists call money illusion, a confusion of real and nominal weight. The source of the illusion is as thus; considering real wages are constant, the rise of their nominal wages by 5% is only as a result of the general 5% inflation. Assuming no inflation took place, there will be no increase in their nominal wages. After a time, everyone in the economy will begin to expect that the 5% annual inflation that ensued in the past would continue in the future. Economists refer to this as expectations of inflation. People’s expectations of inflation influences all facets of economic life. For example, in the steady-state economy described previously, textile producers will look forward to increasing the price of their products by 5% for the coming years. They will also expect their costs of steel and labor, for example, to increase the same way. Workers will begin to believe that the increase in their wages will be matched by the same increase in the prices of goods they buy. Also, wages are influenced by expectations. Suppose, for example, that both employers and employees expect 4% inflation in the year coming. Workers will start negotiations from a base of a 4% increase in money wages, which would hold their real wages constant. Firms also may be inclined to begin bargaining by yielding to increase at least 4% in money wages relative to productivity, because they expect that the prices at which they sell their products will rise by 4%. Starting from that base, workers will attempt to obtain some desired increase in their real wages. At this point, such factors as profits and bargaining power become important. The general expectation of some specific inflation rate creates pressure for wages to rise by that rate relative to productivity and, thus, the rise of unit cost at that rate. Inflation expectations and Interest rates When the public expects inflation, real and nominal rates of interest will differ because inflation needs to be accounted for in calculating the real return from lending and borrowing. Have in mind that the nominal interest rate is equal to the real interest rate plus expected inflation rate. If real rate of interest is 2% and inflation is 5% a year, the nominal rate is 7%. Although lenders receive 7% a year on their loans, their real return after inflation rate is just 2%. We know that in the long run the real interest rate does not bank on monetary policy because money is neutral; i.e. the price level is affected by the money supply. However, the nominal rates of interest do bank on monetary policy because the policy influences the rate of inflation, which in the long run is bent on the growth of the money supply. It has been pointed out that countries with greater money growth naturally have higher nominal interest rates than countries with lower money growth rates because they have higher inflation. What this means is that country A and B have the same real rate of interest, but country A has a higher inflation rate, it will also have a higher nominal interest rate. Inflation expectations and money demand The amount of money people want to hold will also be affected by expectations about inflation. If the public expects a 5% inflation a year, then its demand for money will also increase by 5% a year. This is because people know everything will cost 5% more, so they’ll need more money in their possession to pay for the same goods and services. This is an example of the real-nominal principle: As long as the government allows the increase in the supply of money by 5% , the same amount as inflation, the demand for money and supply are both growing at the same rate, real and nominal interest rates will not change. Effects of expectations on changes in future income Todays consumption decisions may depend not only on current income, but also  on the income that one expects to earn in the future. For example, an individual  who is currently not employed but who has a contract to begin a high-paying job  in three months will probably consume more today than another unemployed  individual with no job prospects. To illustrate the effect of changes in expected future income, suppose that  instead of receiving the $6000 bonus during the current year, a consumer learns that  she will receive a $6000 bonus (after taxes) next year. The promise of the bonus is  legally binding, and said consumer has no doubt that extra income will be received  next year. How will this information affect the consumer’s consumption and saving in  the current year? Because current income is unaffected, the consumer could leave her current  consumption and saving unchanged, waiting until the bonus is actually received  to increase her consumption. If her decisions are guided by a consumption-smoothing motive, however, she will prefer to use the bonus to increase her current consumption  as well as her future consumption. She can increase her current consumption, despite the fact that her current income remains unchanged, by reducing her current saving (she could even dissave, or have negative cu rrent saving, with current consumption exceeding current income, by using her accumulated assets or by borrowing). Suppose, for example, that consumer decides to consume $1000 more this year. Because current income is unchanged, the $1000 increase in current consumption is equivalent to a $1000 reduction in current saving. The $ 1000 reduction in current saving will reduce the available resources in the next year, relative to the situation in which her saving is unchanged, by $ 1000 X (1 + r) . For example, if the real interest rate is 0.05, cutting current saving by $1000 reduces the available resources next year by $1000 X 1 .05 == $1050. Overall, her available resources next year will increase by $6000 because of the bonus but will decrease by $1050 because of reduced current saving, giving a net increase in resources of $6000 $1050 == $4950, which can be used to increase consumption next year or in the following years. Effectively, the consumer can use the increase in her expec ted future income to increase consumption both in the present and in the future. To summarize, an increase in an individuals expected future income is likely to lead that person to increase current consumption and decrease current saving. The same result applies at the macroeconomic level: If people expect that aggregate output and income, Y, will be higher in the future, current desired consumption, cd, should increase and current desired national saving, sd, should decrease. Economists cant measure expected future income directly, so how do they  take this variable into account when predicting consumption and saving behavior? One approach is to survey consumers and ask them about their expectations. Their  answers can be useful for assessing developments in the macroeconomy.   In conclusion, The central role of expectations means that there is a great deal of uncertainty in the economy. Put simply: What people believe plays a central role in how they react to policy. Expectations can change the effect of a policy. Most discussion of policy today assumes that people are forward looking, that they think strategically, and that they base their actions on expected policy actions. Thus in some way their expectations are rational. But modern policy discussion is also built on the belief that the economy is complicated and that many possible expectations are rational. This includes adaptive expectations and combinations of expectations strategies. What the above assumptions mean in terms of policy is that depending on the beliefs that individuals hold, monetary and fiscal policy will work in different ways. People aren’t stupid and they aren’t super intelligent; they are people. If the government uses an activist monetary and fiscal policy in a predictable way, people will eventually come to build that expectation into their behavior. If the government bases its prediction of the effect of policy on past experience, that prediction will likely be wrong. But government never knows when expectations will change. Let’s consider an example. Say that everyone expects government to run expansionary fiscal policy if the economy is in recession. In the absence of any expected policy response from the government, people will lower their prices when they see a recession coming. Expecting government expansionary policy, however they won’t lower their price. Thus, the expectation of policy can create its own problems. References: Advanced Macro Economics, Romer, 2011; Slavin S., Macro Economics, 2009; A Century of Economic Theory. Mankiw, Mcroeconomics, Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment: Business Cycle Theory: The Economy in the Short Run   Rittenberg Tregarthen Micheal Rousakis, uni of warwick, economics and fluctuations: the role of monetary policy, 2012 Froyen, Macroeconomics Weil, Economic Growth

The V-chip :: essays research papers

The V-Chip What is a V-chip? This term has become a buzz word for any discussion evolving telecommunications regulation and television ratings, but not too many reports define the new technology in its fullest form. A basic definition of the V-chip; is a microprocessor that can decipher information sent in the vertical blanking of the NTSC signal, purposefully for the control of violent or controversial subject matter. Yet, the span of the new chip is much greater than any working definition can encompass. A discussion of the V-chip must include a consideration of the technical and ethical issues, in addition to examining the constitutionally of any law that might concern standards set by the US government. Yet in the space provided for this essay, the focus will be the technical aspects and costs of the new chip. It is impossible to generally assume that the V-chip will solve the violence problem of broadcast television or that adding this little device to every set will be a first amendment infringement. We can, however, find clues through examining the cold facts of broadcast television and the impact of a mandatory regulation on that free broadcast. "Utilizing the EIA's Recommended Practice for Line 21 Data Service(EIA-608) specification, these chips decode EDS (Extended Data Services)program ratings, compare these ratings to viewer standards, and can be programmed to take a variety of actions, including complete blanking of programs." Is one definition of the V-chip from Al Marquis of Zilog Technology. The FCC or Capitol Hill has not set any standards for V-chip technology; this has allowed many different companies to construct chips that are similar yet not exact or possibly not compatible. Each chip has advantages and disadvantages for the rating's system, soon to be developed. For example, some units use onscreen programming such as VCR's and the Zilog product do, while others are considering set top options. Also, different companies are using different methods of parental control over the chip. Another problem that these new devices may incur when included in every television is a space. The NTSC signal includes extra information space known as the subcarrier and Vertical blanking interval. As explained in the quotation from Mr. Marquis, the V-chips will use a certain section of this space to send simple rating numbers and points that will be compared to the personality settings in the chip. Many new technologies are being developed for smart-TV or data broadcast on this part of the NTSC signal. Basically the V-chip will severely limit the bandwidth for high performance transmission of data on the NTSC signal. There is also to be cost to this new technology, which will be

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

Importance of Sex Education Essay

As younger generations mature into teens, they will be exposed to all sorts of materials in their daily lives. Sex education is of great importance when it comes to teenagers. This is because as individuals grow into teenagers, they observe changes to their bodies particularly in their sex organs and also their hormones. With the raging hormones present in their bodies and unnecessary exposure to materials from the TV and now the internet, teenagers will be curious and would definitely want to experiment on the new things that they discover. This is why sexual education is important. Most teens are immature and curious individuals who lack self-control. This explains the high number of teenage pregnancies. When it comes to teen pregnancy, most teenagers are not ready to have a child. In many cases, teenage girls who decide to raise the baby end up being single mothers as their partners are not committed enough to raise the child as both of them are too young and not equipped well enough to raise a child. Thanks to the introduction of sex education in the recent years, the numbers of teen pregnancies have been decreasing gradually. Another importance of sex education is to lower the rate of abortion. Pregnant teens are one of the main causes of abortion. This happens when teens get pregnant and they do not want to conceive their babies. There are many factors that contribute to this final decision to abort the pregnancy. Usually, the main factor that causes abortion in teen parents is the fact that they are not ready to make the big commitment to have a baby. Aside to that, another factor that contributes to abortion is teenagers getting raped. Furthermore, by educating teens on sex, rape cases can be prevented. There are certain male individuals that are aroused by how an individual of the opposite sex dresses. With the psychological aspects of sex education, teenagers can be taught to manage their sexual stimulation and control their raging hormones when they are faced with situations like this. In sex education, teens will be educated on how to suppress their hormones by doing physical activities like exercising. In females, this inhibits the production of sex steroid hormones like estrogen. As for males, testosterone levels are reduced. Hence, the urge to satisfy one’s sexual needs is greatly reduced. Besides that, sex education is also important to encourage and educate teens on the use of contraceptive methods to further prevent any unwanted pregnancies. For example, using a condom during sexual intercourse not only prevents unwanted pregnancy, it can also prevent sexually transmitted diseases such as HIV. Another good contraceptive method that can be exposed to teens during sex education is the birth control pill. This pill, which has to be taken regularly, contains two female hormones which prevents ovulation.