The correct answer is that Company X converts its investments in inventory and receivables into cash more rapidly than Company Y. The Cash Conversion Cycle (CCC) measures the number of days it takes for a company to convert its investments in inventory and other resources into cash flows from sales. It is calculated as: Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding. A shorter CCC indicates greater operational efficiency, as the company needs less time to finance its inventory and receivables, freeing up cash for other purposes. Company X’s 40-day cycle is significantly shorter than Company Y’s 95-day cycle, indicating superior working capital management. The other options are incorrect interpretations. Suggesting Company Y has stronger negotiating power with suppliers focuses on only one component (payables) while ignoring the much larger negative impact of slow-moving inventory and receivables that contribute to its long CCC. The idea that Company X must be sacrificing profitability for speed is a common misconception; rapid inventory turnover can equally be a sign of high demand and efficient operations, not necessarily deep discounting. Finally, framing Company Y’s long cycle as a sign of market leadership due to better credit terms misrepresents a significant operational inefficiency (slow collection of receivables) as a strategic strength; while it could be a deliberate strategy, it primarily signifies a less efficient conversion of sales to cash.

The correct answer is that re-pricing options disconnects executive compensation from the company’s actual performance. The fundamental purpose of granting stock options to executives is to align their interests with those of shareholders; both parties benefit from a rising share price. When a company’s share price falls significantly, these options become ‘out-of-the-money’ and lose their immediate value, reflecting the poor performance and the loss suffered by shareholders. By lowering the exercise price (re-pricing), the company effectively removes the negative consequence for executives, insulating them from the poor performance that shareholders have experienced. This action undermines the core principle of pay-for-performance and can be seen as a transfer of wealth from shareholders, who are not offered a similar recovery mechanism for their losses. While re-pricing does have accounting implications, the primary issue is one of corporate governance and incentive alignment, not just the technical accounting treatment. The action may require shareholder approval under the HKEX Listing Rules, but the fundamental criticism is about the governance principle, not just the procedural requirement. Finally, while it might create internal morale issues between different employee groups, the most significant governance concern is the relationship between management and the company’s owners (shareholders).

This question assesses the understanding of appropriate financing strategies for a capital-intensive, high-growth company in a volatile industry like telecommunications. Statement I is correct because a telecommunications operator has significant and continuous working capital needs for operations, network maintenance, and marketing initiatives like customer subsidies. A permanent revolving credit facility provides the necessary flexibility to manage these fluctuating cash flow requirements. Statement II is also correct. Given the rapid pace of technological obsolescence in the telecom sector, leasing new equipment is a prudent strategy. It allows the company to avoid being burdened with outdated assets and can be structured to optimize tax benefits by transferring depreciation to the lessor, which is particularly useful depending on the company’s tax position. Statement IV describes a valid and sophisticated risk management technique. If the company borrows in a foreign currency to take advantage of lower interest rates, it exposes itself to foreign exchange (FX) risk. Acquiring a business that generates revenue in that same foreign currency creates a ‘natural hedge,’ as the foreign currency revenue can be used to service the foreign currency debt, mitigating the impact of adverse exchange rate movements. Statement III is incorrect. While the company needs to be ready for opportunistic acquisitions, executing an immediate follow-on public offering (FPO) to hold cash is generally an inefficient use of capital. Equity is the most expensive form of capital, and raising it without a specific, imminent use can dilute existing shareholders and depress return on equity. A more common strategy would be to arrange a dedicated acquisition credit line or use existing debt capacity, which can be drawn down quickly when an opportunity arises. Therefore, statements I, II and IV are correct.

Statement I is correct. An Initial Public Offering (IPO) represents a major liquidity event and is a common exit strategy for early-stage investors, such as angel investors and venture capitalists, allowing them to sell their shares to the public and realize a return on their investment.

Statement II is correct. A defining characteristic of a Leveraged Buy-Out (LBO) is the use of a significant amount of borrowed money (debt) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, alongside the assets of the acquiring company. The equity contribution is typically small in comparison to the debt raised.

Statement III is correct. The primary objective of venture capital investors is capital appreciation. They invest in high-growth potential companies with the expectation of selling their equity stake at a much higher valuation in the future (typically 3-7 years), rather than seeking a steady stream of income through dividends or interest payments.

Statement IV is incorrect. The typical funding progression for a start-up begins with seed capital from founders, family, and friends (Stage 1), followed by angel investors (Stage 2). Institutional venture capital firms usually enter at a later stage (Stage 3 and beyond) once the business has demonstrated some traction and requires more substantial funding for scaling. Therefore, statements I, II and III are correct.

Statement I is correct. Under the Competition Ordinance (Cap. 619), the Competition Commission has the authority to review mergers that have or are likely to have the effect of substantially lessening competition in Hong Kong. A merger between two major licensed corporations would almost certainly be examined on these grounds. Statement II is also correct. A primary driver for mergers is the achievement of cost synergies, which often involves the rationalization of operations. This typically includes eliminating duplicated roles in areas like administration, compliance, and IT, which can lead to significant job losses. This is a widely recognized socio-economic consequence of corporate takeovers. Statement III is correct as well. There is substantial evidence from academic and consulting studies (such as those by McKinsey & Co.) suggesting that a high proportion of mergers and acquisitions fail to create value for the shareholders of the acquiring company, often due to issues like overpaying for the target, cultural clashes during integration, or overestimation of synergies. Statement IV is incorrect. The primary objective of the Codes on Takeovers and Mergers is to ensure fair treatment for all shareholders involved in a takeover, not to prevent job losses. The Codes focus on procedural fairness, information disclosure, and equality of opportunity for shareholders, rather than the commercial or social merits of the transaction itself. Therefore, statements I, II and III are correct.

The correct answer is that the firm’s investment in its production capacity and operational base is growing faster than its ability to generate revenue from those assets. The fixed asset turnover ratio is calculated as Sales divided by Net Fixed Assets. This ratio measures how efficiently a company uses its fixed assets (like property, plant, and equipment) to generate sales. A declining ratio, even when sales are increasing, signifies that the denominator (Net Fixed Assets) is increasing at a faster rate than the numerator (Sales). This suggests that recent capital expenditures are not yet generating a proportional increase in revenue, which could point to underutilization of new assets, operational inefficiencies, or a long lead time before investments become fully productive. This inefficiency can negatively impact future cash flow and returns on investment. The interpretation that the firm is becoming more efficient at collecting payments relates to the accounts receivable turnover ratio, not fixed asset turnover. The idea that the firm is controlling its cost of goods sold relates to profitability ratios, such as the gross profit margin, which is a different area of analysis. The suggestion that the firm is reducing its reliance on fixed assets is the direct opposite of what a declining fixed asset turnover ratio indicates; a rising ratio would suggest such a trend.

The correct answer is that a critical risk is the potential termination of a key business contract due to a change-of-control clause. In many significant commercial agreements, such as exclusive licenses or franchises, the contract may contain a clause that allows one party to terminate the agreement if the other party undergoes a change in ownership or control. For an acquirer, this represents a fundamental risk because the value of the target company could be severely diminished or even eliminated if this key contract is lost post-acquisition. This was highlighted in the well-known case where Caterpillar threatened to withdraw its franchise from a target company, causing the takeover to be abandoned. The other options represent valid but less fundamental risks in this specific context. While tax implications arising from goodwill treatment are an important financial consideration, they do not threaten the target’s entire business model. The challenge of retaining key management personnel is a significant integration risk, but it is a separate issue from the potential loss of the foundational licensing agreement that underpins the company’s value. The discovery of undisclosed financial guarantees is a major due diligence failure, but the scenario specifically asks about the risk to the known primary intangible asset, which is the licensing agreement.

The Dividend Discount Model (DDM) is most appropriate for valuing companies with a stable and predictable dividend policy. It is also best suited for minority shareholders who do not have significant influence over the company’s management or financial decisions. Statement I describes a company that does not pay dividends, making the DDM inapplicable. Statement III describes a situation where the investor aims to exert influence, which violates a key assumption of the DDM; in such cases, a valuation based on projected cash flows under new management (like a DCF model) would be more relevant. Statements II and IV describe companies with established, consistent, and predictable dividend track records (a utility and a consumer staples firm), which are ideal candidates for valuation using the DDM. Therefore, statements II and IV are correct.

The explanation teaches the concept of directors’ duties during a takeover under the Hong Kong Code on Takeovers and Mergers. The correct answer is that the board’s primary duty is to obtain shareholder approval before taking any action that could frustrate a genuine offer. This is a core principle of the Takeovers Code, specifically Rule 4, which prohibits ‘frustrating actions’ without such approval. The rationale is to ensure that the ultimate decision on a company’s ownership rests with its owners—the shareholders. The board’s role is to advise, not to obstruct. Implementing a ‘poison pill’ is a classic example of a frustrating action that denies shareholders the opportunity to consider the offer on its merits. While directors must act in the company’s best interests, this is interpreted as the interests of the shareholders as a whole. Therefore, actions aimed at protecting the current management team, preserving corporate independence, or unilaterally rejecting an offer to force a higher price are improper if they prevent shareholders from making their own decision. The board must present the offer to the shareholders and allow them to vote on both the offer and any proposed defensive measures.

The correct answer is that commercial paper is a short-term, unsecured promissory note issued by a corporation to finance working capital needs. Commercial paper (CP) is a money market instrument used by large corporations to meet short-term liabilities. In Hong Kong, its maturity is typically less than 365 days. It is issued in bearer form and usually on a discount basis, meaning it is sold for less than its face value and does not pay periodic interest. One of the other statements is incorrect because it describes a long-term, secured debt obligation, which is more characteristic of a corporate bond or a secured loan, not short-term CP. Another option is incorrect as it describes an equity-linked instrument, such as a convertible bond, which gives the holder the right to convert the debt into company shares; CP is a pure debt instrument with no equity features. The final incorrect option describes government debt instruments, such as Exchange Fund Bills, which are issued by the Hong Kong Monetary Authority to manage liquidity in the banking system, not by private corporations to raise working capital.

This question tests the ability to distinguish between balance sheet risks and transaction risks. Balance sheet risks arise from the composition of a company’s assets and liabilities and are often structural and ongoing. Transaction risks are tied to specific, identifiable future events or transactions.

Statement I describes the risk associated with existing long-term debt denominated in a foreign currency. This is a classic balance sheet risk because the liability’s value on the balance sheet is subject to fluctuations in the USD/HKD exchange rate, impacting the company’s net worth and gearing ratios. It is a structural risk.

Statement II describes the risk related to a future payment for a specific acquisition. This is a transaction risk because it is tied to a single, discrete event—the settlement of the acquisition payment. The exposure exists only for the period leading up to that transaction.

Statement III describes the ongoing economic exposure from a structural mismatch between the currency of revenues (USD) and the currency of costs (CNY). This is a form of balance sheet risk as it reflects the fundamental nature of the company’s assets (revenue streams) and liabilities (operational costs) and their sensitivity to exchange rate movements over the long term.

Statement IV describes a risk specific to the acquisition deal itself—an operational or business risk tied to the target company. This is a form of transaction risk, as it directly impacts the value and success of that particular transaction, rather than the inherent structure of the acquirer’s balance sheet. Therefore, statements I and III are correct.

The correct answer is that the most prominent competitive pressure described is the bargaining power of suppliers. In the context of Professor Michael Porter’s model, a ‘supplier’ is any entity that provides a critical input for the business. For an EV charging network, the most critical input is not the charging hardware but the physical location to install it. The scenario explicitly states that major property developers control these desirable locations and can dictate terms (high rental fees, revenue sharing), which directly impacts the company’s cost structure and profitability. This gives them significant power over the EV charging company, making supplier power the most significant force described. The threat of new entrants is incorrect because, while the scenario mentions that government subsidies lower the barrier to entry regarding capital costs, the true and most significant barrier is securing a location, which is an issue of supplier power, not ease of market entry in general. The intensity of rivalry among existing competitors is also not the primary force described; the pressure from property developers affects all competitors in the market and is a fundamental input cost issue, rather than a description of direct competitive actions like price wars or advertising campaigns. The bargaining power of buyers is not the main focus of the scenario; while EV owners (buyers) may have choices, the core challenge highlighted is the company’s relationship with its landlords (suppliers), not its customers.

The correct answer is that the Competition Commission’s primary mandate is to assess whether a proposed merger would have the effect of substantially lessening competition in the relevant market. The Competition Ordinance is designed to protect the competitive process itself, ensuring that markets remain dynamic and that consumers benefit from choice, fair prices, and innovation. A merger that combines two major players could create a dominant entity with the power to raise prices, reduce service quality, or stifle innovation without facing significant competitive pressure. Therefore, the Commission’s core analysis focuses on market concentration, barriers to entry, and the potential for the merged firm to exercise market power to the detriment of consumers and the market as a whole. While job losses are a significant social and economic consequence of mergers, this issue falls under labour policy and is not the primary legal test for the Competition Commission. The risk of destroying shareholder value is a matter of corporate governance and investor concern, regulated more directly by the Securities and Futures Commission (SFC) through disclosure requirements in the Takeovers Code, rather than a competition law issue. The potential for the merged entity to become a less attractive target for future foreign investment is a broader economic consideration, but it is not the specific statutory focus of the Competition Commission’s review, which is centered on the direct impact on competition within Hong Kong.

The correct answer is issuing Hong Kong Dollar-denominated corporate bonds under a Medium Term Note (MTN) programme. This approach directly satisfies all the specified requirements. An MTN programme facilitates the issuance of bonds, which are debt instruments that do not cause shareholder dilution. It allows the company to lock in a fixed interest rate for the tenor of the bonds, providing cost certainty for the long-term project. Furthermore, bonds issued under such a programme are typically distributed to a wide array of institutional investors, achieving the goal of broad market access. A floating-rate syndicated loan is unsuitable because it fails to provide a fixed interest rate, exposing the company to interest rate fluctuations. An offering of perpetual convertible securities is inappropriate as the conversion feature would lead to potential equity dilution, which the company explicitly wants to avoid. A Commercial Paper programme is designed for short-term financing needs, not for funding a long-term capital project like a large residential development.

The correct answer is that the Dividend Discount Model’s (DDM) output is extremely sensitive to its key inputs. The DDM calculates a stock’s intrinsic value by discounting all expected future dividends to their present value. The two most critical assumptions in this calculation are the required rate of return (or discount rate) and the long-term dividend growth rate. Even minor adjustments to these estimated rates can lead to substantial changes in the calculated share price, making the valuation highly dependent on the analyst’s subjective forecasts. One of the incorrect statements suggests the model is only applicable if historical dividend growth has been constant. This is false; the model is forward-looking and based on expected future dividends, which analysts must forecast. Past performance informs this forecast but does not need to be perfectly stable. Another incorrect statement claims the model ignores the time value of money. This is fundamentally wrong. The entire basis of the DDM is discounting future cash flows (dividends) to the present, which is the very definition of applying the time value of money principle. Finally, the assertion that the model is more reliable for non-dividend-paying growth companies is the opposite of the truth. The DDM is specifically designed for companies that pay dividends and is most effective for those with stable and predictable dividend policies, such as mature utility firms. It is unsuitable for companies that do not pay dividends.

A multilateral, or syndicated, loan facility is often preferred over a conventional bilateral loan for several key reasons, particularly for large transactions. Statement I is correct because financial institutions, including licensed corporations and banks, are subject to both internal credit policies and regulatory guidelines (such as those from the Hong Kong Monetary Authority for authorized institutions) that cap their exposure to a single borrower or group. A very large loan could easily exceed these limits, making a syndicate necessary to distribute the risk. Statement II is also correct; sophisticated corporate borrowers often seek to diversify their funding sources to avoid becoming dependent on a single financial institution, which could be a risk if that institution’s lending appetite changes. This also broadens their access to capital markets. Statement III is a valid reason as well. For complex projects, such as those involving specialized assets or industries (e.g., aviation, infrastructure, technology), the participation of a lender with recognized expertise can provide significant comfort and validation to other members of the lending group, facilitating the successful syndication of the loan. Statement IV is incorrect. In a multilateral facility, while there is a lead arranger or agent bank that coordinates the process, each participating lender is ultimately responsible for conducting its own independent credit analysis and due diligence on the borrower. The lead arranger cannot transfer or delegate its fundamental credit assessment responsibilities to other participants; each lender makes its own decision to lend. Therefore, statements I, II and III are correct.

A rapidly expanding telecommunications company in a competitive market faces a unique combination of financing needs: continuous, planned capital expenditure (network upgrades), variable operational costs (customer subsidies), and unpredictable, large-scale capital requirements (opportunistic acquisitions). The most effective financing strategy must provide both ongoing flexibility and the ability to access large amounts of capital quickly. The correct answer is that the company should establish a large, committed revolving credit facility for operational flexibility, supplemented by a program for rapid issuance of debt securities for major acquisitions. A revolving credit facility acts like a large corporate overdraft, providing a flexible source of funds for day-to-day and fluctuating needs like marketing subsidies and smaller upgrades. A program for rapid debt issuance, such as a Medium Term Note (MTN) programme, allows the company to tap the capital markets swiftly when a large acquisition opportunity arises, avoiding the lengthy process of arranging a syndicated loan or a new equity issue. A strategy focused solely on medium-term loans tied to specific projects is too rigid and slow for the dynamic needs of acquisitions and variable marketing expenses. Relying on leasing facilities is an incomplete solution, as it only covers asset financing and does not provide the liquid capital needed for acquisitions or subsidies. Committing to a high dividend payout policy is inappropriate for a company in a high-growth phase that needs to reinvest its capital to compete effectively.

The explanation addresses the core difference between the two primary depreciation methods as per Hong Kong Accounting Standard 16 (HKAS 16) ‘Property, Plant and Equipment’. The correct answer is that the reducing balance method results in a higher depreciation expense in the early years of an asset’s life. This is because it is an accelerated depreciation method, where the expense is calculated as a percentage of the asset’s declining net book value. This front-loads the expense, reflecting the view that an asset is more productive and loses more value when it is newer. In contrast, the straight-line method allocates the depreciable amount (cost less residual value) evenly over the asset’s useful life, resulting in a constant, predictable annual expense. Therefore, in the initial years, the charge under the reducing balance method will be greater than the consistent charge under the straight-line method. The idea that the straight-line method would yield a higher expense in the early years is incorrect; it provides the lowest and most consistent charge. The assertion that both methods would result in an identical expense is also false, as their calculation bases are fundamentally different. Finally, the claim that the total depreciation over the asset’s entire life differs between methods is a misunderstanding; both methods will depreciate the same total amount (cost minus residual value) by the end of the asset’s useful life, but the timing of the expense recognition is different.

Statement I is correct. Companies operating in sectors with volatile earnings, such as a technology startup, generally have a lower capacity to reliably service debt. Therefore, they should maintain lower levels of gearing to mitigate financial risk. Conversely, a utility company with stable and predictable cash flows can support a higher level of debt. Statement II is incorrect. A fundamental principle of corporate finance is matching the maturity of assets and liabilities. Significant, long-life fixed assets, such as those owned by a utility, should be financed with long-term funding sources like bonds or long-term loans, not short-term facilities which are typically used for working capital. Statement III is correct. Mature companies like a utility provider are often past their high-growth phase and generate substantial, stable free cash flow. This allows them to comfortably service a higher level of debt. In contrast, rapidly growing startups are typically net consumers of cash to fund their expansion, which constrains their debt service capacity. Statement IV is incorrect. Institutional investors in stable, mature companies prioritize capital preservation and predictable returns, so they would demand strong financial discipline, including robust debt service capacity and stringent covenants. Early-stage investors in a startup might accept a weaker near-term debt service profile in anticipation of high future growth. Therefore, statements I and III are correct.

The correct answer is that the primary benefit of this process, known as securitization, is the conversion of a large pool of relatively illiquid loans into marketable securities that can be traded. Securitization involves pooling various financial assets (in this case, mortgages) and repackaging them into interest-bearing securities for investors. This creates a secondary market for assets that are not typically tradable, thereby providing the originating institution with immediate liquidity and allowing it to free up capital for new lending. While risk transfer is a key component, stating that credit risk is ‘completely eliminated’ is an overstatement; the originating bank may retain some risk, for instance, by holding the most junior tranche of the securities or providing credit enhancements. The process does not grant the bank the right to alter the terms, such as interest rates, of the original underlying mortgages. Furthermore, securitization generally increases administrative complexity due to the creation of a special purpose vehicle (SPV) and the need for ongoing servicing and reporting, rather than simplifying the monitoring and collection process.

This question assesses the ability to apply the Price-to-Earnings Ratio (PER) in stock valuation. Statement I is correct because the current PER is calculated by dividing the current share price by the current earnings per share (EPS): HKD 12.00 / HKD 0.80 = 15. Statement II is also correct. The target share price is estimated by multiplying the forecasted EPS by the industry average PER, which is assumed to be the prospective PER the market will apply: HKD 1.00 × 20 = HKD 20.00. Statement III is incorrect. The forward PER is calculated by dividing the current share price by the forecasted EPS: HKD 12.00 / HKD 1.00 = 12, not 10. Statement IV is incorrect. The potential capital gain is calculated as ((Target Price – Current Price) / Current Price) × 100%: ((HKD 20.00 – HKD 12.00) / HKD 12.00) × 100% = (HKD 8.00 / HKD 12.00) × 100% = 66.7%, not 50%. Therefore, statements I and II are correct.

The explanation addresses the core concept of managing systematic risk. Systematic risk, or market risk, is the risk inherent to the entire market that cannot be mitigated through simple diversification within that market. An effective hedging strategy against a broad market downturn involves taking a position that will profit if the market falls, thereby offsetting the losses in the primary portfolio. The correct answer is that selling index futures contracts is a standard and appropriate method for this purpose. A short position in index futures gains value as the underlying market index declines. This gain would counteract the loss experienced by the portfolio of stocks that tracks the same index. One of the incorrect options suggests increasing concentration in a single stock, which would actually increase unsystematic (specific) risk rather than hedging systematic risk. Another incorrect option involves buying call options, which is a bullish strategy that profits from a price increase, making it unsuitable for hedging against a market decline. The final incorrect option proposes further diversification within the same market. While diversification is crucial for reducing unsystematic risk (risk specific to individual companies or sectors), it does not protect a portfolio from systematic risk that affects the market as a whole.

The correct answer is that a comprehensive risk analysis must be completed, and responsibility for all identified risks must be allocated among the project participants. In infrastructure finance, projects are structured into distinct, self-contained phases. The initial phase involves project design, planning, and a thorough risk analysis. Lenders and equity investors will not commit to the high-cost construction phase until all foreseeable risks—such as construction delays, cost overruns, geological uncertainties, and regulatory changes—have been identified, quantified, and contractually allocated to the parties best able to manage them. This process is fundamental to making the project bankable and ensuring its self-financing nature. While securing financing is essential, it typically runs in parallel with and is contingent upon the successful completion of the risk allocation framework. Similarly, obtaining government approval for the toll structure is a critical part of the planning phase that determines revenue viability, but it does not replace the internal discipline of completing the risk assessment before commencing construction. Finally, planning for the post-transfer phase is relevant to the end of the project’s concession period and is not the immediate prerequisite for starting the construction work.

The correct answer is that the company is using equity to fund the acquisition of another business while maintaining a balanced capital structure. When a company acquires another business, it requires significant capital. Financing this entirely through debt could increase the company’s gearing (leverage) to risky levels, potentially harming its credit rating and increasing future borrowing costs. By issuing new shares, the company raises the necessary funds while preserving a healthy balance between debt and equity. The other options are incorrect for this specific scenario. Raising start-up capital is a reason for new ventures without an established cash-flow record, which does not apply to a ‘financially sound’ listed company. A scrip dividend scheme is a method for shareholders to reinvest their dividends into new shares, which capitalizes profits but is not a mechanism for raising the large amount of new, external capital needed for a major acquisition. While attaching warrants to an issue can signal confidence in future share performance, it is a feature of the offering, not the primary strategic reason for raising the capital in the first place, which is to pay for the acquisition.

The correct answer is 8.95%. The Weighted Average Cost of Capital (WACC) is calculated by taking the weighted average of the after-tax cost of a company’s sources of capital, primarily debt and equity. The formula is: WACC = (Cost of Equity × % Equity) + (Cost of Debt × % Debt) × (1 – Tax Rate). In this scenario, the equity component is (11% × 70%) = 7.7%. The after-tax debt component is (5% × 30%) × (1 – 16.5%) = 1.5% × 0.835 = 1.2525%. Summing these two components gives the WACC: 7.7% + 1.2525% = 8.9525%, which rounds to 8.95%. A common mistake is to forget the tax-deductibility of interest payments, which would incorrectly calculate the WACC as 9.20% by not applying the (1 – Tax Rate) factor to the cost of debt. Another error is to misapply the tax shield to the equity component instead of the debt, resulting in an incorrect figure of 7.93%; this is wrong because dividends are not tax-deductible for the company. Finally, reversing the weights for equity and debt would also lead to an incorrect calculation of 6.22%.

This question assesses the understanding of two primary depreciation methods as per Hong Kong Accounting Standards. Statement I is correct because the reducing balance method applies a fixed percentage to the declining net book value of an asset, resulting in a larger depreciation charge in the early years which diminishes over time. Statement II is correct as a direct consequence of Statement I; since the straight-line method has a lower, constant depreciation expense in the initial years compared to the front-loaded expense of the reducing balance method, the reported net profit will be higher. Statement III is incorrect because both methods are designed to depreciate the asset down to its estimated residual value over its useful life; the final net book value should be the same under both approaches, assuming the same inputs. Statement IV is incorrect because the total depreciation expense recognized over the entire useful life of an asset is the same regardless of the method used. This total amount is always equal to the asset’s cost minus its estimated residual value. The methods only differ in the timing of when this expense is recognized. Therefore, statements I and II are correct.

The correct answer is that the decision is likely driven by managerial hubris and the pursuit of personal prestige. In corporate finance, ‘hubris’ refers to situations where the ego, fame, and self-esteem of senior executives, particularly the CEO, become the dominant drivers of an M&A transaction, often overshadowing sound economic or strategic rationale. The scenario provides several indicators of this: the CEO’s high public profile, the acquisition of a ‘glamorous’ company in an unrelated industry, the lack of obvious operational synergies, and the willingness to pay a high premium. These factors suggest the decision is based on the CEO’s personal gratification rather than a calculated move to maximize shareholder value. The explanation that this is a strategic acquisition of an undervalued asset is less likely, as the scenario explicitly states a ‘high premium’ is being offered, which contradicts the idea of buying an asset for less than its intrinsic worth. The concept of a defensive takeover is incorrect because the scenario provides no information to suggest that the acquiring property firm is itself under threat of being taken over. Finally, vertical integration is not a plausible motive, as there is no logical supply chain relationship between a property development company and a luxury fashion brand that would be integrated through such a transaction.

This question tests the ability to differentiate between various types of corporate acquisition structures, specifically Management Buy-Outs (MBOs), Management Buy-Ins (MBIs), and Leveraged Buy-Outs (LBOs).

Statement I is correct. A Management Buy-Out (MBO) occurs when the incumbent management team of a company or one of its divisions acquires it. When this acquisition is financed predominantly with debt, it is also a form of Leveraged Buy-Out (LBO). The key feature is the acquirer being the existing management.

Statement II is correct. A Management Buy-In (MBI) involves an external management team, not currently working for the target company, raising finance to acquire the company and then installing themselves to run it. The distinction from an MBO is the origin of the management team.

Statement III is incorrect. The defining characteristic of a Leveraged Buy-Out (LBO) is the significant use of borrowed funds (leverage) to meet the cost of acquisition. While management may contribute some equity (a ‘management equity roll-over’), the majority of the funding is debt, not their personal equity.

Statement IV is incorrect. The funding for MBOs and MBIs is typically sourced privately, through a combination of senior debt from banks, mezzanine financing, and equity from private equity firms or the management team themselves. An Initial Public Offering (IPO) is a method for a company to raise capital from the public market and is generally an exit strategy for the private equity investors at a later stage, not the initial funding mechanism for the buy-out itself. Therefore, statements I and II are correct.

Statement I is incorrect. To maximize reported profits in the early years of an asset’s life, a company would choose the straight-line depreciation method. The reducing-balance method results in a higher ‘front-end’ depreciation expense, which would reduce reported profits more significantly in the initial period. Statement II is correct. This is the fundamental distinction between the two primary financial statements: the income statement measures performance over a period (e.g., a quarter or a year), while the balance sheet provides a snapshot of the company’s financial position (assets, liabilities, equity) at a single point in time. Statement III is incorrect. ‘Cosmetic accounting’ often involves exploiting the flexibility and judgement permitted within accounting standards to present a misleadingly favourable view of performance or position. While it can involve illegal acts, it is not limited to them and frequently operates in the ‘grey areas’ of accounting rules. Statement IV is correct. A large and persistent gap between accrual-based profit (net income) and actual cash generated from operations is a classic red flag for analysts. It can indicate aggressive revenue recognition policies or other earnings management techniques where profits are booked but not supported by cash inflows. Therefore, statements II and IV are correct.

The correct answer is Commercial Paper. Commercial Paper (CP) is a short-term, unsecured promissory note issued by corporations with high credit ratings to finance short-term needs like accounts payable or inventories. It is typically issued at a discount to its face value and matures at par, with maturities in Hong Kong usually being less than 365 days. This perfectly matches the company’s requirement for a 9-month, unsecured financing instrument for working capital. A Syndicated Loan is incorrect because it is a much larger, more complex form of financing provided by a group of lenders, typically for long-term capital-intensive projects, not for short-term working capital needs. A Floating Rate Note is unsuitable as it is a debt instrument that pays a variable interest coupon, whereas the scenario describes an instrument issued at a discount with a single repayment at maturity. A Convertible Bond is also inappropriate as it is a long-term debt instrument that can be converted into equity, making it unsuitable for financing short-term operational cash flow.