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正确答案：
(c) Rights issue price = 2·45 x 0·8 = ￡1·96
Theoretical ex rights price = ((2 x 2·45) + (1 x 1·96))/3 = 6·86/3 = ￡2·29
New shares issued = 20m x 1/2 = 10 million
Funds raised = 1·96 x 10m = ￡19·6 million
After issue costs of ￡300,000 funds raised will be ￡19·3 million
Annual after-tax return generated by these funds = 19·3 x 0·09 = ￡1,737,000
New earnings of Merton plc = 1,737,000 + 4,500,000 = ￡6,237,000
New number of shares = 20m + 10m = 30 million
New earnings per share = 100 x 6,237,000/30,000,000 = 20·79 pence
New share price = 20·79 x 12 = ￡2·49
The weaknesses in this estimate are that the predicted return on investment of 9% may or may not be achieved: the priceearnings
ratio depends on the post investment share price, rather than the post investment share price depending on the
price-earnings ratio; the current earnings seem to be declining and this share price estimate assumes they remain constant;
in fact current earnings are likely to decline because the overdraft and annual interest are increasing but operating profit is
falling.
Expected gearing = 38/(60 + 19·3) = 47·9% compared to current gearing of 63%.
Including the overdraft, expected gearing = 46/(60 + 19·3) = 58% compared to 77%.
The gearing is predictably lower, but if the overdraft is included in the calculation the gearing of the company is still higher
than the sector average. The positive effect on financial risk could have a positive effect on the company’s share price, but
this is by no means certain.

正确答案：
(c) Small businesses face a number of well-documented problems when seeking to raise additional finance. These problems have
been extensively discussed and governments regularly make initiatives seeking to address these problems.
Risk and security
Investors are less willing to offer finance to small companies as they are seen as inherently more risky than large companies.
Small companies obtaining debt finance usually use overdrafts or loans from banks, which require security to reduce the level
of risk associated with the debt finance. Since small companies are likely to possess little by way of assets to offer as security,
banks usually require a personal guarantee instead, and this limits the amount of finance available.
Marketability of ordinary shares
The equity issued by small companies is difficult to buy and sell, and sales are usually on a matched bargain basis, which
means that a shareholder wishing to sell has to wait until an investor wishes to buy. There is no financial intermediary willing
to buy the shares and hold them until a buyer comes along, so selling shares in a small company can potentially take a long
time. This lack of marketability reduces the price that a buyer is willing to pay for the shares. Investors in small company
shares have traditionally looked to a flotation, for example on the UK Alternative Investment Market, as a way of realising their
investment, but this has become increasingly expensive. Small companies are likely to be very limited in their ability to offer
new equity to anyone other than family and friends.
Tax considerations
Individuals with cash to invest may be encouraged by the tax system to invest in large institutional investors rather than small
companies, for example by tax incentives offered on contributions to pension funds. These institutional investors themselves
usually invest in larger companies, such as stock-exchange listed companies, in order to maintain what they see as an
acceptable risk profile, and in order to ensure a steady stream of income to meet ongoing liabilities. This tax effect reduces
the potential flow of funds to small companies.
Cost
Since small companies are seen as riskier than large companies, the cost of the finance they are offered is proportionately
higher. Overdrafts and bank loans will be offered to them on less favourable terms and at more demanding interest rates than
debt offered to larger companies. Equity investors will expect higher returns, if not in the form. of dividends then in the form
of capital appreciation over the life of their investment.

正确答案：

正确答案：
(b) Reward scheme
(i) Matters
■ If the entire year’s revenue ($303m) attracted store points then the cost of the reward scheme in the year is at
most $3·03m. This represents 1% of revenue, which is material to the income statement and very material
(31·9%) to profit before tax (PBT).
■ The proportion of customers who register for loyalty cards and the percentage of revenue (and profit) which they
represent (which may vary from store to store depending on customer profile).
■ In accordance with the assumption of accruals, which underlies the preparation and presentation of financial
statements (The Framework/IAS 1 ‘Presentation of Financial Statements’), the expense and liability should be
recognised as revenue is earned. (It is of the nature of a discount.)
■ Any restrictions on the terms for converting points (e.g. whether they expire if not used within a specified time).
■ To the extent that points have been awarded but not redeemed at 31 March 2005, Volcan will have a liability at
the balance sheet date.
■ Agree the total balance due to customers at the year end under the reward scheme to the sum of the points on
individual customer reward cards.
■ The proportion of reward points awarded which are not expected to be claimed (e.g. the ‘take up’ of points awarded
may be only 80%, say).
■ Whether reward points are valued at selling price or cost. For example, if the average gross profit margin is 20%,
one point is equivalent to 0·8 cents of goods at cost.
(ii) Audit evidence
■ New/updated systems documentation explaining how:
– loyalty cards (and numbers) are issued to customers;
– points earned are recorded at the point of sale; and
– points are later redeemed on subsequent purchases.
■ Walk-through tests (e.g. on registering customer applications and issuing loyalty cards, awarding of points on
special offer items).
■ Tests of controls supporting the extent to which audit reliance is placed on the accounting and internal control
system. In particular, how points are extracted from the electronic tills (cash registers) and summarised into the
weekly/monthly financial data for each store which underlies the financial statements.
■ Analytical procedures on the value of points awarded by store per month with explanations of variations (‘variation
analysis’). For example, similar proportions (not exceeding 1% of revenue) of points in each month might be
expected by store – possibly increasing following any promotion of the ‘loyalty’ scheme.
Tutorial note: Within a close community, for example, a high proportion of customers might be expected to sign
up for the reward scheme. However, in big cities, where a large proportion of the customers might be transitory
(e.g. tourists or other visitors) the proportion may be much lower.
■ Tests of detail on a sample of transactions with customers undertaken at store visits. For example, for a sample of
copy till receipts:
– check the arithmetic accuracy of points awarded (1 per $1 spent + special offers);
– agree points awarded for special offers to that week’s special offers;
– for cash discounts taken confirm the conversion of points is against the opening balance of points awarded
(not against purchases just made).