Question Three

　　Many students did well on parts （a）and （b）of question 3，while finding part （c）to be more challenging.

　　In part （a），candidates were asked to identify and comment on any errors in an investment appraisal prepared by a trainee accountant. Candidates who did not gain full marks failed to identify clearly the errors they had identified，or did not comment on these errors，or identified errors that did not exist.

　　Part （b）required candidates to prepare a revised calculation of the NPV of an investment project and to comment on its acceptability.

　　Many candidates did well here，using the template of the NPV calculation provided in the question to prepare a corrected calculation. The contribution had to be inflated correctly，the fixed costs had to be calculated correctly， the depreciation and interest payments had to be stripped out，the tax effect of capital allowances needed to be calculated and included，and the correct discount rate had to be used.

　　Candidates who did not amend the provided contribution figures were not aware that inflation must be applied every year and not just in the first year. The development costs had to be excluded from the fixed costs in the investment appraisal because they had already been incurred，i.e. they were not relevant costs. Depreciation had to be stripped out because it is not a cash flow，and NPV is an investment appraisal method that uses cash flows. Interest payments had to be excluded because they would be taken account of by the discount rate.

　　The tax effect of capital allowances （tax allowable depreciation）could be included by any one of three methods：by using the correctly timed tax benefits of each capital allowance；by subtracting the capital allowances from taxable cash flow to give taxable profit and then adding them back after calculating the tax liability；and by carrying out a separate tax calculation.

　　Within the investment appraisal，cash flows had been inflated by specific inflation rates and so the evaluation was a nominal terms （or money terms）evaluation，requiring a nominal discount rate. The real discount rate was provided in the question，together with the general rate of inflation，and the nominal discount rate could be calculated from these two pieces of information using the Fisher equation.

　　Part （c）tested candidates’ understanding of different aspects of investment appraisal by asking what problems were faced，and how these problems could be overcome，in three different investment appraisal areas.

　　The first investment appraisal area related to assets with replacement cycles of different lengths. Many candidates stated correctly that the NPV method may not choose the optimum asset，and that this problem could be overcome by adopting an equivalent annual cost approach.

　　The second investment appraisal area related to multiple internal rates of return，a technical problem associated with non-conventional cash flows that is not experienced by NPV.

　　The third investment appraisal area related to investments with a different level of business risk than the investing company. Many candidates identified correctly here that the capital asset pricing model could be used to calculate a project-specific discount rate that reflected project risk.

　　Question Four

　　Candidates in general tended to find parts of this question heavy going，but well-prepared candidates picked up some straightforward marks in parts （a）and （b）。Many answers to parts （c）did not focus on the question that was asked.

　　In part （a）candidates were required to calculate dividend yield，capital gain and total shareholder wealth， and to discuss their findings with respect to returns predicted by the capital asset pricing model （CAPM），and with respect to other financial information provided.

　　Many candidates were not able to calculate the capital gain （the increase in ordinary share price over a year），and did not know that the sum of the dividend yield and the capital gain is total shareholder return. Shareholder wealth is increased by capital gains and dividends，and this increase is measured by total shareholder return. Here，this was the actual return that shareholders had received （a positive return in the prior year and a negative return in the current year），while the CAPM-predicted returns were given in the question （positive in both years， but higher in the prior year than the current year）.The discussion of the differences between the actual and predicted returns was generally quite weak.

　　The standard of the discussion with respect to the other financial information tended to be stronger. With regards to the negative return in the current year，candidates could have commented on static turnover，falling earnings per share， increasing dividends per share and，in particular，the falling share price. There was general agreement that the company was increasing its dividend per share in a situation where the market had，perhaps，doubts about its future performance.

　　Part （b）required candidates to calculate and comment on the share price using the dividend growth model （DGM），using firstly historical information and，secondly，information relating to a proposed change in dividend payments.

　　Most students calculated the historical dividend growth rate and the current share price using the DGM， although some students used the CAPM-predicted return rather than the cost of equity provided in the question. Comment on why this share price was different to the current market price was not strong. One possible explanation was that the market felt that future dividend growth would be less than historical dividend growth. It is worth remembering that analysing historical dividends is only one of several ways of estimating the future dividend growth rate，and that using this approach to estimating the future dividend growth rate depends on the （questionable） assumption that the future will repeat the past.

　　Fewer candidates were able to apply the DGM in the situation where no dividends would be paid for three years and then a higher dividend would be paid， with a lower expected dividend growth rate than had historically been the case. Some candidates wrongly said that the DGM could not be used if no dividends were paid：the suggested answer shows how to calculate the current share price in this situation. Many candidates calculated the share price in three years' time，but did not discount this share price to give the current share price，thereby weakening any comparative discussion of the two share prices.

　　Part （c）asked for a discussion of the relationship between investment decisions，dividend decisions and financing decisions，with illustrations where appropriate.

　　Many answers did not gain good marks because they did not focus on the key word‘relationship’，and instead discussed at length a range of features of each decision area，with little or no attempt to relate the decision areas to each other.

　　Candidates could have gained higher marks by discussing the many practical ways in which these decision areas interact，or by discussing the theoretical views of Miller and Modigliani on the relationship between investment decisions，financing decisions and dividend decisions.

　　Overall Performance

　　Overall，performance in June 2010 was encouraging. One pleasing development was a decrease in the number of scripts gaining very poor marks，indicating that more students had made appropriate preparation for the examination.

　　ACCA2010年12月考试时间：12月6日-15日

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