2020 - Class 10 - Revision - Q - For Students

FM101 - FINANCE
Lent Term 2020

Dr Elisabetta Bertero
CLASS 10
For class on Week 1, Summer Term
This classwork provides an opportunity for a test after revision. This is a “mock exam” in the
sense that it has questions covering material from various parts of the Finance course and the
exercises are in the same format as the exam. Section A has longer questions and Section B
has three shorter questions, which, in the exam, you choose out of five. The content of the
longer questions in Section A in the exam could be on any of the numerical
material/lectures/classes in the course.
After you have revised extensively, attempt these questions in normal (as opposed to online)
exam conditions, i.e. in two hours with closed books.
The “instructions to candidates” in the box below are the ones you will find on the FM101
Finance exam paper.
Do attend the first class in the Summer Term (delivered via Zoom meeting) as it is an
opportunity to ask any queries you may have.
FM101 exam - Instructions to candidates
This paper contains two sections:
Answer ALL of Section A [70 marks]
Answer three of the five questions in Section B [30 marks]
You are supplied with: Present Value and Annuity Factors Tables, attached to this paper
SECTION A
Answer ALL of Section A
 Indicate clearly the formulae you use for your calculations.

 If the question asks to explain or discuss, marks will be allocated not only for the
numerical answer but also for the quality and clarity of the explanation.
[Total 70 marks]
A mobile phone company is planning to introduce a new smartphone. The current model is
successful but technology changes rapidly, and the current phone has limited features in
comparison with newer models. The company spent £753,000 to develop a prototype for a
new phone that has all the features of the existing one but adds new features such as
selective call reception, which means that the phone only rings when chosen numbers call.
The company has spent a further £234,000 for a marketing study to determine the
expected sales figures for the new smartphone.
The company estimates that manufacturing the new phone will cost £155 in variable costs
for each unit. Fixed costs for the operation are estimated to be £4.7 million per year. The
estimated sales volumes are 70,000, 90,000, 120,000 per year for the next three years,
respectively. The unit price of the new phone will be £360. The necessary equipment can
be purchased for £21.5 million. It will be entirely depreciated using the straight line method
over the life of the project.
Net working capital for the new phone will be 20 per cent of sales every year. In other
words, there is no initial outlay for NWC in Year 0 and changes in NWC will first occur
every year in the life of the project, starting in Year 1. All working capital will be paid and
recovered at the end of the project.
As previously stated, the company currently manufactures a smartphone. Production of

the existing model is expected to be terminated in two years. If the company does not
introduce the new smartphone, sales will be 80,000 units and 60,000 units for the next two
years, respectively. The price of the existing PDA is £290 per unit, with variable costs of
£120 each and fixed costs of £1,800,000 per year. If the company does introduce the new
phone, sales of the existing phone will fall by 15,000 units per year, and the price of the
existing units will have to be lowered to £255 each.
The company pays a 25 per cent corporate tax rate and requires a 12% return for this
project.
A. What is the NPV of the project?
B. Using the NPV criterion, should the firm undertake the project? Explain.
C. What is the formula to use if the firm wants to calculate the IRR for this project?
D. What is the Payback period of the project?

SECTION B
Answer three questions from this section. Answer all parts of each question.
If the question asks to “explain” or to “discuss”, marks will be allocated for the quality and
clarity of the explanation.
(in the exam you have a choice of five questions, of which you are required to answer three)
1. What are, according to Lord Turner’s views expressed in the 2009 Mansion House speech,
the main contributions to the economy of the City of London? What are his main criticisms?
[10 marks]
2.
A. What are the advantages and disadvantages of sole proprietorship over other
corporate forms?
B. Discuss the difference between a single-tier and a two-tier board of directors and its
relevance for the corporate governance of firms.
[10 marks]
3. Explain what is meant by the Equivalent Annual Cost method and when it is appropriate to
use this method. Illustrate your explanation with an example (no need to do any
calculations).
[10 marks]
Table 1: Present value factors
To determine the present value of a single payment received 'n' years from the
present
Periods 3% 5% 6% 7% 8% 10% 12% 13% 15%

1 0.9709 0.9524 0.9434 0.9346 0.9259 0.9091 0.8929 0.8850 0.8696
2 0.9426 0.9070 0.8900 0.8734 0.8573 0.8264 0.7972 0.7831 0.7561
3 0.9151 0.8638 0.8396 0.8163 0.7938 0.7513 0.7118 0.6931 0.6575
4 0.8885 0.8227 0.7921 0.7629 0.7350 0.6830 0.6355 0.6133 0.5718
5 0.8626 0.7835 0.7473 0.7130 0.6806 0.6209 0.5674 0.5428 0.4972
6 0.8375 0.7462 0.7050 0.6663 0.6302 0.5645 0.5066 0.4803 0.4323
7 0.8131 0.7107 0.6651 0.6227 0.5835 0.5132 0.4523 0.4251 0.3759
8 0.7894 0.6768 0.6274 0.5820 0.5403 0.4665 0.4039 0.3762 0.3269
9 0.7664 0.6446 0.5919 0.5439 0.5002 0.4241 0.3606 0.3329 0.2843
10 0.7441 0.6139 0.5584 0.5083 0.4632 0.3855 0.3220 0.2946 0.2472
11 0.7224 0.5847 0.5268 0.4751 0.4289 0.3505 0.2875 0.2607 0.2149
12 0.7014 0.5568 0.4970 0.4440 0.3971 0.3186 0.2567 0.2307 0.1869
13 0.6810 0.5303 0.4688 0.4150 0.3677 0.2897 0.2292 0.2042 0.1625
14 0.6611 0.5051 0.4423 0.3878 0.3405 0.2633 0.2046 0.1807 0.1413
15 0.6419 0.4810 0.4173 0.3624 0.3152 0.2394 0.1827 0.1599 0.1229
16 0.6232 0.4581 0.3936 0.3387 0.2919 0.2176 0.1631 0.1415 0.1069
17 0.6050 0.4363 0.3714 0.3166 0.2703 0.1978 0.1456 0.1252 0.0929
18 0.5874 0.4155 0.3503 0.2959 0.2502 0.1799 0.1300 0.1108 0.0808
19 0.5703 0.3957 0.3305 0.2765 0.2317 0.1635 0.1161 0.0981 0.0703
20 0.5537 0.3769 0.3118 0.2584 0.2145 0.1486 0.1037 0.0868 0.0611
Table 2: Annuity factors (ordinary annuity) - Cumulative present value factors

The table gives the present value of 'n' annual payments of £1 received for the next 'n' years with
a constant discount of x% per year. For example, with a discount rate of 8% and with 6 annual
payments of £1 the present value is £4.6229
Periods 3% 5% 6% 7% 8% 10% 12% 13% 15%

1 0.9709 0.9524 0.9434 0.9346 0.9259 0.9091 0.8929 0.8850 0.8696
2 1.9135 1.8594 1.8334 1.8080 1.7833 1.7355 1.6901 1.6681 1.6257
3 2.8286 2.7232 2.6730 2.6243 2.5771 2.4869 2.4018 2.3612 2.2832
4 3.7171 3.5460 3.4651 3.3872 3.3121 3.1699 3.0373 2.9745 2.8550
5 4.5797 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.5172 3.3522
6 5.4172 5.0757 4.9173 4.7665 4.6229 4.3553 4.1114 3.9975 3.7845
7 6.2303 5.7864 5.5824 5.3893 5.2064 4.8684 4.5638 4.4226 4.1604
8 7.0197 6.4632 6.2098 5.9713 5.7466 5.3349 4.9676 4.7988 4.4873
9 7.7861 7.1078 6.8017 6.5152 6.2469 5.7590 5.3282 5.1317 4.7716
10 8.5302 7.7217 7.3601 7.0236 6.7101 6.1446 5.6502 5.4262 5.0188
11 9.2526 8.3064 7.8869 7.4987 7.1390 6.4951 5.9377 5.6869 5.2337
12 9.9540 8.8633 8.3838 7.9427 7.5361 6.8137 6.1944 5.9176 5.4206
13 10.6350 9.3936 8.8527 8.3577 7.9038 7.1034 6.4235 6.1218 5.5831
14 11.2961 9.8986 9.2950 8.7455 8.2442 7.3667 6.6282 6.3025 5.7245
15 11.9379 10.3797 9.7122 9.1079 8.5595 7.6061 6.8109 6.4624 5.8474
16 12.5611 10.8378 10.1059 9.4466 8.8514 7.8237 6.9740 6.6039 5.9542
17 13.1661 11.2741 10.4773 9.7632 9.1216 8.0216 7.1196 6.7291 6.0472
18 13.7535 11.6896 10.8276 10.0591 9.3719 8.2014 7.2497 6.8399 6.1280
19 14.3238 12.0853 11.1581 10.3356 9.6036 8.3649 7.3658 6.9380 6.1982
20 14.8775 12.4622 11.4699 10.5940 9.8181 8.5136 7.4694 7.0248 6.2593

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FM101 - FINANCE

Lent Term 2020

FM101 exam - Instructions to candidates

This paper contains two sections:

Answer ALL of Section A [70 marks]

Answer three of the five questions in Section B [30 marks]

Answer ALL of Section A

 Indicate clearly the formulae you use for your calculations.

As previously stated, the company currently manufactures a smartphone. Production of

A. What is the NPV of the project?

D. What is the Payback period of the project?

Periods 3% 5% 6% 7% 8% 10% 12% 13% 15%

Table 2: Annuity factors (ordinary annuity) - Cumulative present value factors

Periods 3% 5% 6% 7% 8% 10% 12% 13% 15%

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