P3 – Performance Strategy
Instructions to candidates You are allowed three hours to answer this question paper. You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlight and/or make notes on the question paper. However, you will not be allowed, under any circumstances, to begin using your computer to produce your answer or to use your calculator during the reading time. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or subquestions). ALL answers must be submitted electronically, using the single Word and Excel files provided. Answers written on the question paper and note paper will not be submitted for marking. You should show all workings as marks are available for the method you use. The pre-seen case study material is included in this question paper on pages 2 to 6. The unseen case study material, specific to this examination, is provided on page 8 and 9. Answer the compulsory question in Section A on page 11. This page is detachable for ease of reference Answer TWO of the three questions in Section B on pages 14 to 19. Maths tables and formulae are provided on pages 21 to 24. The list of verbs as published in the syllabus is given for reference on page 27. Your computer will contain two blank files – a Word and an Excel file. Please ensure that you check that the file names for these two documents correspond with your candidate number.
P3 – Performance Strategy
Friday 3 September 2010
The Chartered Institute of Management Accountants 2010
Aybe Pre-seen Case Study Background Aybe, located in Country C, was formed by the merger of two companies in 2001. It is a listed company which manufactures, markets and distributes a large range of components throughout Europe and the United States of America. Aybe employs approximately 700 people at its three factories in Eastern Europe and supplies products to over 0·5 million customers in 20 countries. Aybe holds stocks of about 100,000 different electronic components. Aybe is regarded within its industry as being a well-established business. Company Ay had operated successfully for nearly 17 years before its merger with Company Be. Company Ay can therefore trace its history back for 25 years which is a long time in the fast moving electronic component business. The company is organised into three divisions, the Domestic Electronic Components division (DEC), the Industrial Electronic Components division (IEC) and the Specialist Components division (SC). The Domestic and Industrial Electronic Components divisions supply standard electronic components for domestic and industrial use whereas the Specialist Components division supplies components which are often unique and made to specific customer requirements. Each of the three divisions has its own factory in Country C. Composition of the Board of Directors The Board of Directors has three executive directors, the Company Secretary and five nonexecutive directors. The Chairman is one of the five independent non-executive directors. The executive directors are the Chief Executive, Finance Director and Director of Operations. There is also an Audit Committee, a Remuneration Committee and a Nominations Committee. All three committees are made up entirely of the non-executive directors. Organisational structure Aybe is organised along traditional functional/unitary lines. The Board considers continuity to be a very important value. The present structure was established by Company Ay in 1990 and continued after the merger with Company Be. Many of Aybe’s competitors have carried out structural reorganisations since then. In 2008, Aybe commissioned a review of its organisational structure from a human resource consultancy. The consultants suggested alternative structures which they thought Aybe could employ to its advantage. However, Aybe’s Board felt that continuity was more important and no change to the organisational structure took place. Product and service delivery Customers are increasingly seeking assistance from their component suppliers with the design of their products and the associated manufacturing and assembly processes. Aybe’s Board views this as a growth area. The Board has recognised that Aybe needs to develop web-based services and tools which can be accessed by customers. The traditional method of listing the company’s range of components in a catalogue is becoming less effective because customers are increasingly seeking specially designed custom made components as the electronics industry becomes more sophisticated.
Financial data Aybe’s historical financial record, denominated in C’s currency of C$, over the last five years is shown below.
Year ended 31 December: 2009 2008 2007 C$m C$m C$m 620 600 475 41 39 35 23 21 16
Revenue Operating profit Profit for the year
Earnings per share (C$) Dividend per share (C$)
2006 C$m 433 20 9
2005 C$m 360 13 5
Extracts from the 2009 financial statements are given at Appendix A. There are currently 180 million ordinary shares in issue with a nominal value of C$0·10 each. The share price at 31 December 2009 was C$0·64. No dividend was paid in the three years 2005 to 2007 due to losses sustained in the first few years after the merger in 2001. Aybe’s bank has imposed an overdraft limit of C$10 million and two covenants: (i) that its interest cover must not fall below 5 and (ii) its ratio of non-current liabilities to equity must not increase beyond 0·75:1. Aybe’s Finance Director is comfortable with this overdraft limit and the two covenants. The ordinary shareholding of Aybe is broken down as follows:
Institutional investors Executive Directors and Company Secretary Employees Individual investors
Percentage of ordinary shares held at 31 December 2009 55 10 5 30
The Executive Directors, Company Secretary and other senior managers are entitled to take part in an Executive Share Option Scheme offered by Aybe. Performance Review Aybe’s three divisions have been profitable throughout the last five years. The revenue and operating profit of the three divisions of Aybe for 2009 were as follows:
Revenue Operating profit
DEC Division C$m 212 14
IEC Division C$m 284 16
SC Division C$m 124 11
Financial objectives of Aybe The Board has generally taken a cautious approach to providing strategic direction for the company. Most board members feel that this has been appropriate because the company was unprofitable for the three year period after the merger and needed to be turned around. Also, most board members think a cautious approach has been justified given the constrained economic circumstances which have affected Aybe’s markets since 2008. While shareholders have been disappointed with Aybe’s performance over the last five years, they have remained loyal and supported the Board in its attempts to move the company into profit. The institutional shareholders however are now looking for increased growth and profitability. TURN OVER Performance Strategy
The Board has set the following financial objectives which it considers reflect the caution for which Aybe is well known: (i) (ii)
Dividend payout to remain at 50% of profit for the year; No further equity shares to be issued over the next five years in order to avoid diluting earnings per share.
Capital budget overspends Aybe has an internal audit department. The Chief Internal Auditor, who leads this department, reports directly to the Finance Director. Investigation by the Internal Audit department has revealed that managers with responsibility for capital expenditure have often paid little attention to expenditure authorisation levels approved by the Board. They have justified overspending on the grounds that the original budgets were inadequate and in order not to jeopardise the capital projects, the overspends were necessary. An example of this was the building of an extension to the main factory at the DEC division that was completed in 2009 at a final cost of nearly C$3 million which was almost 50% over budget. The capital budget for the extension was set at the outset and the capital investment appraisal showed a positive net present value. It subsequently became apparent that the site clearance costs and on-going construction expenditure were under-estimated. These estimates were provided by a qualified quantity surveyor who was a contractor to Aybe. The estimates supplied by the quantity surveyor were accurately included in Aybe’s capital investment appraisal system which was performed on a spreadsheet. However, no regular checks were carried out to compare the phased budgeted expenditure with actual costs incurred. It came as a surprise to the Board when the Finance Director finally produced the capital expenditure project report which showed the cost of the extension was nearly 50% overspent. Strategic development Aybe applies a traditional rational model in carrying out its strategic planning process. This encompasses an annual exercise to review the previous plan, creation of a revenue and capital budget for the next five years and instruction to managers within Aybe to maintain their expenditure within the budget limits approved by the Board. Debates have taken place within the Board regarding the strategic direction in which Aybe should move. Most board members are generally satisfied that Aybe has been turned around over the last five years and were pleased that the company increased its profit in 2009 even though the global economy slowed down. Aybe benefited from a number of long-term contractual arrangements with customers throughout 2009 which were agreed in previous years. However, many of these are not being renewed due to the current economic climate. The Board stated in its annual report, published in March 2010, that the overall strategic aim of the company is to: “Achieve growth and increase shareholder returns by continuing to produce and distribute high quality electronic components and develop our international presence through expansion into new overseas markets.” Aybe’s Chief Executive said in the annual report that the strategic aim is clear and straightforward. He said “Aybe will strive to maintain its share of the electronic development, operational, maintenance and repair markets in which it is engaged. This is despite the global economic difficulties which Aybe, along with its competitors, has faced since 2008. Aybe will continue to apply the highest ethical standards in its business activities.”
In order to facilitate the achievement of the strategic aim, Aybeâ€™s Board has established the following strategic goals: 1. 2. 3. 4.
Enhance the provision of products and services which are demanded by customers; Invest in engineering and web-based support for customers; Maintain the search for environmentally friendly products; Pursue options for expansion into new overseas markets.
The Board has also stated that Aybe is a responsible corporate organisation and recognises the social and environmental effects of its operational activities. Concern over the rate of growth Aybeâ€™s recently appointed Director of Operations and one of its Non-Executive Directors have privately expressed their concern to the Chief Executive at what they perceive to be the very slow growth of the company. While they accept that shareholder expectations should not be raised too high, they feel that the Board is not providing sufficient impetus to move the company forward. They fear that the results for 2010 will be worse than for 2009. They think that Aybe should be much more ambitious and fear that the institutional shareholders in particular, will not remain patient if Aybe does not create stronger earnings growth than has previously been achieved. Development approaches The Board has discussed different ways of expanding overseas in order to meet the overall strategic aim. It has, in the past, been reluctant to move from the current approach of exporting components. However the Director of Operations has now begun preparing a plan for the IEC division to open up a trading company in Asia. The DEC division is also establishing a subsidiary in Africa.
TURN OVER Performance Strategy
APPENDIX A Extracts of Aybeâ€™s Income Statement and Statement of Financial Position Income statement for the year ended 31 December 2009 2009 C$million 620 (579) ( 4) 37 ( 14) 23
Revenue Operating costs Finance costs Profit before tax Income tax expense PROFIT FOR THE YEAR Statement of financial position as at 31 December 2009
2009 C$million ASSETS Non-current assets
Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets
40 81 3 124 235
EQUITY AND LIABILITIES Equity Share capital Share premium Other reserves Retained earnings Total equity
18 9 8 75 110
Non-current liabilities Bank loan (8% interest, repayable 2015)
Current liabilities Trade and other payables Current tax payable Bank overdraft Total current liabilities Total liabilities Total equity and liabilities
73 8 4 85 125 235
End of Pre-seen Material
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SECTION A – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER THIS QUESTION. THE QUESTION REQUIREMENTS ARE ON PAGE 9, WHICH IS DETACHABLE FOR EASE OF REFERENCE
Question One Unseen case material New market opportunity Two years ago IEC, a division of Aybe, established a special parts department (“SPD”) to undertake the manufacture of customised components, such as a microprocessor that has been programmed with a specific set of instructions supplied by the customer. SPD can also make complex parts and assemblies. For example, a customer might require a circuit board for a computer or a control panel. Making such an assembly involves overlaying a plastic sheet with copper tracks to carry electrical current and signals and attaching components and connectors. SPD does not generate a large proportion of Aybe’s revenue, but it has been very profitable since it began 2 years ago because SPD can charge high profit margins. SPD employs 18 highly skilled technicians who work in a sophisticated electronics workshop. Almost all of the work undertaken by SPD is ‘jobbing work’ i.e. for very small quantities, sometimes only a single unit. This is because SPD’s customers often build prototypes of products that they plan to test before committing themselves to full-scale production. If the prototype is successful and the customer then requires larger quantities of the component SPD directs them to Aybe’s IEC division. IEC has a highly automated electronics factory and consequently uses mainly semi-skilled employees. IEC’s equipment can mass-produce almost anything that SPD’s workshop can design. However because of the very high set-up costs associated with each new order, IEC needs the order to be for a significant volume. SPD has been approached by Q, a specialist manufacturer of extremely expensive high performance cars. Q is in the process of developing a new car that will be one of the fastest in the world. The car will be designed to be driven on public roads, but the owners of such cars often take them to private race tracks where they can be driven at very high speeds. Q has designed an electronics system to enable an average driver to drive the car safely at high speed. The system will monitor the engine, brakes and steering and will compensate for errors that could cause a crash. The system will, for example, sense that the car is about to skid and will compensate for that. The electronics system will be based on a circuit board that Q wishes to have built by SPD. Building Q’s circuit board will pose a number of challenges for SPD. The circuit board will be subject to a great deal of vibration when the car is driven at speed. The cars are expected to last for a very long time and so there could be problems if the circuit boards deteriorate with age. The circuit board will be installed in an inaccessible part of the car where it will be difficult to inspect or maintain. Many of the components on the board will be manufactured by SPD, but some crucial components will be supplied by a third party that has already been selected by Q. Q is prepared to order a large number of circuit boards but only if they are hand built by SPD. That is partly because the cars will not be built in sufficient volume to make it possible for IEC to mass-produce the boards and partly because Q wishes to be able to update and modify the design of the circuit boards in response to feedback from owners. SPD’s Production Manager believes that the Q contract will create sufficient work to keep four technicians almost fully occupied. SPD will have to recruit and train additional staff in order to service this contract.
Post-completion audit The members of Aybe’s Audit Committee are very concerned about the Chief Internal Auditor’s report on the capital budget overspends (see preseen case study page 4). The Audit Committee is keen to introduce a system of post-completion audits as a matter of priority. For the sake of clarity, the Audit Committee wishes to adopt the CIMA definition of postcompletion audits:
Post-completion audit: This is an objective and independent appraisal of the measure of success of a capital expenditure project in progressing the business as planned. It should cover the implementation of the project from authorisation to commissioning and its technical and commercial performance after commissioning. The information provided is also used by management as feedback which aids the implementation and control of future risk projects.
The Head of the Audit Committee has asked the Chief Internal Auditor to consider the matter and to brief the Audit Committee on the following matters: •
The approach that the internal audit department would take to the planning and execution of post-completion audits. For example, how will projects be selected for investigation and what aspects will be examined?
What difficulties does the Chief Internal Auditor envisage in conducting these postcompletion audits?
The Audit Committee has informed the main board of its intention to commission postcompletion audits. The Chief Executive is worried that some managers might be reluctant to propose projects if they know that such actions could be subjected to an audit Copper futures Aybe’s manufacturing processes use a huge amount of copper. The board of Aybe anticipated that the price of copper would rise towards the end of 2010 and it hedged against a significant rise by purchasing 150 copper futures, each of which makes Aybe the purchaser of 25 tonnes of copper at a price of US$7,800 per tonne. An earthquake at a major copper mine has caused a degree of panic in the copper market. The prevailing prices for a future with the same expiry date as those held by Aybe are US$8,300 per tonne (buyer) and US$8,310 (seller). Aybe’s Director of Operations believes that the markets have overreacted to the news of the earthquake and that the company should sell its copper futures before the price falls. Aybe could then protect itself by waiting until the markets have settled down and prices have gone back to their equilibrium levels before purchasing an option to buy the same quantity of copper at the end of 2010.
TURN OVER Performance Strategy
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Required: (a) (i)
Evaluate FOUR significant risks associated with accepting the order from Q. (12 marks)
Recommend, with reasons, an appropriate response to each of the risks identified in (a)(i) above. (12 marks)
Recommend an appropriate approach to the selection and investigation of projects for post-completion audits by the internal audit department. (8 marks)
Discuss the possibility that the introduction of post-completion audits will deter capital investment. (5 marks)
Calculate the gain that Aybe would realise if it sells its copper futures. (3 marks)
Discuss the validity of the Director of Operationâ€™s suggestion. Your answer should focus on the risks associated with the proposal. (6 marks)
Explain whether your answer to (c)(ii) above would be any different if you knew whether or not Aybeâ€™s competitors had hedged against movements in the cost of copper. (4 marks) (Total for Question One = 50 marks)
(Total for Section A = 50 marks)
Section B starts on page 14 TURN OVER
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SECTION B – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO OF THE THREE QUESTIONS Question Two J rents cars and small vans to individual and business customers. The company has twelve branches located in large towns spread across J’s home country. Each of J’s branches has its own computer network which stores details of all vehicles located at the branch, advanced bookings and current rentals. The only paper records held at branches are the signed rental agreements. Everything else is held electronically. Each branch has several PCs that are linked to a branch server where all of the files are stored. The files on each branch server are backed up to the head office computer system after the close of business every evening. Customers can book rentals in advance by telephoning their local branch or by logging onto the branch web page. Customers details are initially collected on the branch network but all details including verification of identity and driver’s licence are checked when the customer collects the car. Details of the vehicle, including any dents or scrapes on the bodywork or minor mechanical defects, are printed on the rental agreement form and the member of staff and the customer check the vehicle together before the customer signs the agreement. The branch network keeps track of all vehicles that are supposed to be returned each day. If a vehicle is overdue without good reason then the police are informed that the vehicle has been stolen. All returned vehicles are checked for damage that was not listed on the rental agreement. Customers have to pay for any damage that occurred while the vehicle was in their possession. The manager in charge of J’s information systems (IS) at the company’s head office has been asked to investigate two potential problems that occurred at the Southtown branch. A member of the IS team visited the branch in order to carry out some routine maintenance and discovered the following: •
The Branch Manager had a notebook computer plugged into the branch network. The manager explained that the notebook computer was his own personal property. He found it useful to copy branch files so that he could work on writing his monthly management reports at home.
One of the PCs in the branch was not the standard model used throughout J. The branch manager explained that there were never sufficient PCs in the branch and so he had used part of the branch equipment budget to purchase an inexpensive PC from a local computer store. The inexpensive PC came equipped with the latest version of a standard operating system. The PCs communicate with the branch network using a specially written program. The branch staff loaded a copy of that program from a CD that had been left behind by a member of the head office IS team during an earlier visit.
J’s system uses an older version of the standard operating system and the branch network software installed on the PC was not the latest version, although the Branch Manager insisted that the PC worked perfectly. It has also been useful because the other PCs in the branch were not fitted with optical drives (i.e. they cannot read CDs or DVDs) and he has found it useful to be able to use this machine to install software to other machines over the branch network in order to enhance efficiency.
Advise the branch manager on the importance of adequate information systems (IS) for J. Your answer to part (a) should NOT discuss the specific matters identified by the member of the IS team during the branch visit. (10 marks)
Evaluate the control implications of each of the matters discovered by the member of the IS team. (15 marks) (Total for Question Two = 25 marks)
Section B continues on the next page
Question Three M is the leading retailer of mobile telephones in its home country. The company has almost 100 branches, with at least one branch in every major town and city. Some branches are located within walking distance of one another. M has a highly aggressive management team. It views sales growth as the key to the company’s continuing success. It believes that increasing their share of the retail market will enable M to negotiate large discounts from manufacturers and network providers. It also creates economies of scale in the advertising and promotion of the company and its services. Two years ago the directors abandoned traditional budgeting and target setting. They decided that budgets did not necessarily give branch staff a sufficient incentive to maximise sales because they tended to work towards achieving but not surpassing sales targets. They introduced a new management control system with the following features: •
Shop sales are recorded using electronic point of sales (EPOS) cash registers that are linked to head office. Every sale indicates the branch and the member of staff responsible for the sale. These transactions are recorded in real time during the course of the day.
A terminal in every shop lists a running total of that shop’s sales for the day, analysed between each member of sales staff. The terminal also indicates the shop’s ranking for the day relative to all of M’s other shops.
Every shop manager must be at work at least an hour before the shop opens. During that hour the manager receives a telephone call from the regional sales manager to discuss the previous day’s sales and likely sales during the day ahead.
Each shop manager is permitted considerable freedom to introduce special offers and promotions, subject to achieving an acceptable margin on each sale made.
At the end of every week the manager and staff of the ten shops with the highest sales are given a substantial bonus. The manager and staff at the ten shops with the poorest sales are given one week’s notice to improve or they face being moved to other shops or even dismissal.
Sales have grown rapidly since this system was introduced, although the rate of growth has been declining recently.
The Director of Human Resources has investigated staff absenteeism and turnover and has discovered that many of M’s branch managers and sales staff have been with the company for several years. They seem to thrive in the competitive environment and the company pays staff with good sales records a substantial salary compared with other retailers. M also suffers a high staff turnover every year and some members of staff are frequently absent for health reasons, with their doctors certifying them as ill due to stress-related conditions. M’s Chief Accountant is concerned that the company’s management accounting systems are unethical and she has provided the board with a copy of CIMA’s Code of Professional Ethics.
Discuss the operational risks that could arise as a result of the new management control system. Your discussion should include the potential risks associated with this new system. (15 marks)
Advise Mâ€™s directors on the ethical implications of their approach to personnel management. (10 marks) (Total for Question Three = 25 marks)
TURN OVER Performance Strategy
Question Four N manufactures fire engines. It has a reputation for excellent build quality and has been successful in its home market for many years. N is based in Asia. Five years ago N introduced a new fire engine that is superior to any competing product. The factors that make N’s design superior are protected by patent and are unlikely to be matched by competitors in the foreseeable future. N has had growing interest from overseas customers and it has recently been asked to consider two major contracts, both of which will provide N with a significant increase in revenue and profit. These will be N’s first significant export contracts. South American contract E, a South American country, requires several hundred fire engines in order to re-equip its emergency services. E’s government cannot afford to purchase these fire engines directly from N and has proposed a mutually beneficial agreement. The government of E proposes that N will establish a subsidiary in the South American country that will assemble fire engines using parts imported from N’s Asian factory and local labour. N will buy as many parts and materials as possible locally in E. For example, E has a factory that manufactures diesel engines that are almost identical to those used by N and these would be suitable alternatives to the standard engines. N’s Production Managers have estimated that 50% (by value) of the parts and 60% of the labour could be sourced in E. Complex parts will continue to be sourced from N’s main factory and skilled assembly work will still be undertaken there. N has found a suitable factory in E that can be rented for the duration of the contract. It will take four years to build the entire order. This arrangement will help the economy because parts and labour will be purchased locally. The government of E insists that N must invoice it in the E Peso. This currency is freely exchanged on international currency markets, although it is regarded as rather weak. It is anticipated that N will complete ten fire engines per month and will invoice for deliveries on a monthly basis. All payments will be made to N’s subsidiary in E. The subsidiary will pay for all local wages and purchases and will remit any cash surplus back to N on a monthly basis. The selling price has been fixed in terms of E Pesos for the duration of the contract. European contract S, a European country, also requires several hundred fire engines. The country’s senior firefighters have argued that they should be equipped with N’s fire engine despite the fact that they have always purchased from K, a company located in S that manufactures a range of vehicles including fire engines. The government of S is concerned about the political implications of placing such a large order with a foreign supplier because doing so will risk the loss of jobs at K. The government of S proposes that N should sell K a licence to manufacture its fire engine. Under this arrangement K will provide 100% of the labour and will purchase 90% by value of the parts and materials. Only 10% of the parts will be purchased from N. The part sales form a very minor part of the contract and will not have a material effect on N’s business. Under the licence K will make an annual payment, in Euros, to N. The annual payment will vary in line with the number of fire engines completed during the year and has been negotiated at a sum that is slightly more than the profit that N normally makes on the manufacture and sale of that number of fire engines. It will take K approximately four years to manufacture the order.
Required: (a) (i)
Evaluate the currency transaction risks that will arise under each of these contracts. Your answer should indicate why the nature of the currency risk associated with each of the contracts differs. (6 marks)
Recommend, with reasons, an appropriate strategy for the management of each of the currency transaction risks you have identified.
Recent newspaper reports have documented the high levels of corruption and economic instability in E. Nâ€™s directors are concerned that they will be exposed to significant risks if they establish a subsidiary in E and have identified two possible strategies for managing the risks:
Entering into a joint venture with a company located in E
Borrowing in E Pesos
Discuss the advantages and disadvantages of each of the two strategies for N. (10 marks) (Total for Question Four = 25 marks)
(Total for Section B = 50 marks)
End of question paper Maths tables and formulae are on pages 21 to 24
PRESENT VALUE TABLE
Present value of $1, that is 1+ r payment or receipt.
)竏地 where r = interest rate; n = number of periods until
Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
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 0.853 0.844 0.836 0.828 0.820
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 0.728 0.714 0.700 0.686 0.673
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 0.623 0.605 0.587 0.570 0.554
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 0.534 0.513 0.494 0.475 0.456
Interest rates (r) 5% 6% 0.952 0.943 0.907 0.890 0.864 0.840 0.823 0.792 0.784 0.747 0.746 0.705 0.711 0.665 0.677 0.627 0.645 0.592 0.614 0.558 0.585 0.527 0.557 0.497 0.530 0.469 0.505 0.442 0.481 0.417 0.458 0.394 0.436 0.371 0.416 0.350 0.396 0.331 0.377 0.312
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 0.339 0.317 0.296 0.277 0.258
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 0.292 0.270 0.250 0.232 0.215
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 0.252 0.231 0.212 0.194 0.178
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 0.218 0.198 0.180 0.164 0.149
Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
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 0.188 0.170 0.153 0.138 0.124
12% 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 0.163 0.146 0.130 0.116 0.104
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 0.141 0.125 0.111 0.098 0.087
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 0.123 0.108 0.095 0.083 0.073
Interest rates (r) 15% 16% 0.870 0.862 0.756 0.743 0.658 0.641 0.572 0.552 0.497 0.476 0.432 0.410 0.376 0.354 0.327 0.305 0.284 0.263 0.247 0.227 0.215 0.195 0.187 0.168 0.163 0.145 0.141 0.125 0.123 0.108 0.107 0.093 0.093 0.080 0.081 0.069 0.070 0.060 0.061 0.051
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 0.111 0.095 0.081 0.069 0.059 0.051 0.043
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 0.071 0.060 0.051 0.043 0.037
19% 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.079 0.062 0.052 0.044 0.037 0.031
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 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026
Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years
1âˆ’ (1+ r ) âˆ’ n r
Periods (n) 1 2 3 4 5
1% 0.990 1.970 2.941 3.902 4.853
2% 0.980 1.942 2.884 3.808 4.713
3% 0.971 1.913 2.829 3.717 4.580
4% 0.962 1.886 2.775 3.630 4.452
Interest rates (r) 5% 6% 0.952 0.943 1.859 1.833 2.723 2.673 3.546 3.465 4.329 4.212
7% 0.935 1.808 2.624 3.387 4.100
8% 0.926 1.783 2.577 3.312 3.993
9% 0.917 1.759 2.531 3.240 3.890
10% 0.909 1.736 2.487 3.170 3.791
6 7 8 9 10
5.795 6.728 7.652 8.566 9.471
5.601 6.472 7.325 8.162 8.983
5.417 6.230 7.020 7.786 8.530
5.242 6.002 6.733 7.435 8.111
5.076 5.786 6.463 7.108 7.722
4.917 5.582 6.210 6.802 7.360
4.767 5.389 5.971 6.515 7.024
4.623 5.206 5.747 6.247 6.710
4.486 5.033 5.535 5.995 6.418
4.355 4.868 5.335 5.759 6.145
11 12 13 14 15
10.368 11.255 12.134 13.004 13.865
9.787 10.575 11.348 12.106 12.849
9.253 9.954 10.635 11.296 11.938
8.760 9.385 9.986 10.563 11.118
8.306 8.863 9.394 9.899 10.380
7.887 8.384 8.853 9.295 9.712
7.499 7.943 8.358 8.745 9.108
7.139 7.536 7.904 8.244 8.559
6.805 7.161 7.487 7.786 8.061
6.495 6.814 7.103 7.367 7.606
16 17 18 19 20
14.718 15.562 16.398 17.226 18.046
13.578 14.292 14.992 15.679 16.351
12.561 13.166 13.754 14.324 14.878
11.652 12.166 12.659 13.134 13.590
10.838 11.274 11.690 12.085 12.462
10.106 10.477 10.828 11.158 11.470
9.447 9.763 10.059 10.336 10.594
8.851 9.122 9.372 9.604 9.818
8.313 8.544 8.756 8.950 9.129
7.824 8.022 8.201 8.365 8.514
Periods (n) 1 2 3 4 5
11% 0.901 1.713 2.444 3.102 3.696
12% 0.893 1.690 2.402 3.037 3.605
13% 0.885 1.668 2.361 2.974 3.517
14% 0.877 1.647 2.322 2.914 3.433
Interest rates (r) 15% 16% 0.870 0.862 1.626 1.605 2.283 2.246 2.855 2.798 3.352 3.274
17% 0.855 1.585 2.210 2.743 3.199
18% 0.847 1.566 2.174 2.690 3.127
19% 0.840 1.547 2.140 2.639 3.058
20% 0.833 1.528 2.106 2.589 2.991
6 7 8 9 10
4.231 4.712 5.146 5.537 5.889
4.111 4.564 4.968 5.328 5.650
3.998 4.423 4.799 5.132 5.426
3.889 4.288 4.639 4.946 5.216
3.784 4.160 4.487 4.772 5.019
3.685 4.039 4.344 4.607 4.833
3.589 3.922 4.207 4.451 4.659
3.498 3.812 4.078 4.303 4.494
3.410 3.706 3.954 4.163 4.339
3.326 3.605 3.837 4.031 4.192
11 12 13 14 15
6.207 6.492 6.750 6.982 7.191
5.938 6.194 6.424 6.628 6.811
5.687 5.918 6.122 6.302 6.462
5.453 5.660 5.842 6.002 6.142
5.234 5.421 5.583 5.724 5.847
5.029 5.197 5.342 5.468 5.575
4.836 4.988 5.118 5.229 5.324
4.656 7.793 4.910 5.008 5.092
4.486 4.611 4.715 4.802 4.876
4.327 4.439 4.533 4.611 4.675
16 17 18 19 20
7.379 7.549 7.702 7.839 7.963
6.974 7.120 7.250 7.366 7.469
6.604 6.729 6.840 6.938 7.025
6.265 6.373 6.467 6.550 6.623
5.954 6.047 6.128 6.198 6.259
5.668 5.749 5.818 5.877 5.929
5.405 5.475 5.534 5.584 5.628
5.162 5.222 5.273 5.316 5.353
4.938 4.990 5.033 5.070 5.101
4.730 4.775 4.812 4.843 4.870
Formulae Annuity Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one year, discounted at r% per annum: PV =
1 1 1 − r [1 + r ] n
Perpetuity Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per annum: PV =
Growing Perpetuity Present value of £1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a constant rate of g% per annum, discounted at r% per annum: PV =
1 r −g
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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper. It is important that you answer the question according to the definition of the verb. LEARNING OBJECTIVE Level 1 - KNOWLEDGE What you are expected to know.
Level 2 - COMPREHENSION What you are expected to understand.
List State Define
Make a list of Express, fully or clearly, the details/facts of Give the exact meaning of
Describe Distinguish Explain
Communicate the key features Highlight the differences between Make clear or intelligible/State the meaning or purpose of Recognise, establish or select after consideration Use an example to describe or explain something
Identify Illustrate Level 3 - APPLICATION How you are expected to apply your knowledge.
Apply Calculate Demonstrate Prepare Reconcile Solve Tabulate
Level 4 - ANALYSIS How are you expected to analyse the detail of what you have learned.
Level 5 - EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations.
Analyse Categorise Compare and contrast
Put to practical use Ascertain or reckon mathematically Prove with certainty or to exhibit by practical means Make or get ready for use Make or prove consistent/compatible Find an answer to Arrange in a table
Construct Discuss Interpret Prioritise Produce
Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between Build up or compile Examine in detail by argument Translate into intelligible or familiar terms Place in order of priority or sequence for action Create or bring into existence
Advise Evaluate Recommend
Counsel, inform or notify Appraise or assess the value of Advise on a course of action
Strategic Level Paper
P3 â€“ Performance Strategy