MA826/20 Turn over Tax and allowance information (2019/20):- Personal Allowance* ￡12,500 Capital Gains – Annual Exempt Amount ￡12,000 Interest – Tax free amounts: ￡1,000 (Basic); ￡500 (Higher); ￡0 (Additional). Also:- For low earners, up to ￡5,000 of interest may be taxed at 0% before applying the tax free amounts. Dividends – Tax free amount: ￡2,000 (Basic, Higher and Additional) Main Rates for Personal Taxation Rate Taxable Income in Excess of Personal Allowance (￡) Earned Income Interest Dividends Capital Gain** Capital Gain *** Basic 0-37,500 20% 20% 7.5% 10% 18% Higher 37,501-150,000 40% 40% 32.5% 20% 28% Additional Over 150,000 45% 45% 38.1% 20% 28% * Reduced by ￡1 for each ￡2 of adjusted net income over ￡100,000 to minimum of zero. ** Applies to investments, excluding residential property *** Applies to residential property but main residence is exempt UK Corporation Tax rate 19% MA826/20 Questions 1 & 2 require you to identify an incorrect statement 1. Which of these statements is false with respect to a sole trader a) They have unlimited liability. b) They don’t need any specific documentation to legally establish the business. c) They are subject to income tax not corporation tax. d) They cannot have more than one employee. [4 marks] 2. Which of the following statements is never true of factoring in the context of a supplier/customer relationship a) The factor will make payment to the customer as soon as the debt is collected. b) The effective interest rate charged includes an element to cover the default risk of the customer. c) Factoring is the sale of debts to a factor at a discount. d) The effective interest rate charged includes an element to cover the default risk of the supplier. [4 marks] Questions 3 – 10 require you to identify a correct statement or answer 3. Company A has borrowed on fixed rate terms at 6% per annum. Its normal cost of borrowing on floating rate terms is Libor +2% per annum. Company B has borrowed in the market at a floating rate of Libor +3% per annum and has access to fixed interest borrowing terms of 8% per annum. An intermediary can offer an interest rate swap between the two companies, and charges each a fee of 0.25% per annum. How much could each company benefit from the swap a) 0.25% per annum. b) 0.5% per annum. c) 0.75% per annum. d) 1.0% per annum. [4 marks] 4. A company has a ￡1,000,000 line of credit at 7% per annum with a 0.75% per annum commitment fee on the amount not drawn down. It draws ￡750,000 for nine months. What is the annual financing cost of this arrangement a) 7% per annum. b) 7.25% per annum. c) 7.33% per annum. d) 7.75% per annum. [4 marks] MA826/20 Turn over 5. A company’s share price stands at ￡20. The company has 20m shares in issue and the nominal value per share is ￡5. The company intends to capitalize ￡100m of reserves by a scrip issue and then to make a 1 for 2 rights issue at ￡7 per share. Calculate the theoretical price of the share after both the scrip issue and the rights issue a) ￡8.50 b) ￡8.00 c) ￡9.00 d) ￡9.67 [4 marks] 6. On the wind-up of a company which one of these statements is true in terms of the order in which the company would prioritise returning the monies/assets to the various lenders/claimants (highest/most secure to lowest/least secure) a) Preference shares, Floating-charge debenture stock, Unsecured loan stock, Ordinary shares. b) Hire purchase, Mortgage debenture stock, Employees pay, Preference shares. c) Floating-charge debenture stock, Mortgage debenture stock, Subordinated loan stock, Ordinary shares. d) Mortgage debenture stock, Floating-charge debenture stock, Preference shares, Unsecured loan stock. [4 marks] 7. Which of the following investors in the derivatives market may find that the contract they have entered into is a liability at expiry if the current market price is above the exercise price a) Buyer of a call option. b) Buyer of a put option. c) Writer of a call option. d) Writer of a put option. [4 marks] 8. A firm has a trade payables turnover period of 35 days, an inventory turnover period of 14 days and a trade receivables turnover period of 40 days. How long is the firm’s working capital required to support a newly acquired item of inventory a) 89 days. b) 61 days. c) 19 days. d) 9 days. [4 marks] MA826/20 9. The following figures have been extracted from a company’s accounts for consecutive years. 2019 2018 Operating profit ￡700,000 ￡600,000 Depreciation ￡55,000 ￡50,000 Inventory ￡33,000 ￡30,000 Trade receivables ￡45,000 ￡40,000 Trade payables ￡38,000 ￡34,000 Calculate the company’s cash generated from operations during 2019 a) ￡702,000 b) ￡751,000 c) ￡759,000 d) ￡796,000 [4 marks] 10. A company has an operating profit of ￡100,000 and is financed by 100,000 ordinary shares of ￡1 nominal value, 50,000 preference shares of ￡1 nominal value paying a 10p dividend, ￡200,000 in reserves, a ￡150,000 debenture issue paying a 6% coupon and a ￡80,000 ULS issue paying a 7% coupon. Calculate the return on equity. a) 26.4% b) 26.8% c) 24.4% d) 23.0% [4 marks] 11. The retail bank you are working for is concerned that the emerging coronavirus outbreak could weaken global markets and leave them short of cash and in need of further sources of finance to demonstrate solvency. After some deliberation, the bank has decided to put in place a contingency plan to raise further long term finance through an issue of preference shares. a) Briefly explain why the bank’s depositors would likely have been against the issue of conventional loan stock in this situation. b) State two other forms of finance the bank may have considered as an alternative to issuing preference shares. c) Discuss what the potential advantages are of raising capital preference shares relative to the other two forms of finance the bank would likely have considered.
