ACA Business Finance

Question 1

The weighted average cost of capital (WACC) is used in capital budgeting to:

Accepted Answer

Discount future cash flows when the project has the same risk as the company

Answer

Maximise the tax shield of debt

Answer

Calculate the payback period

Answer

Measure the return on equity

Question 2

Which of the following is a feature of debt finance compared to equity finance?

Accepted Answer

Interest is tax-deductible

Answer

Dividends are tax-deductible

Answer

Debt holders have voting rights

Answer

Debt does not increase financial risk

Question 3

The internal rate of return (IRR) of a project is the discount rate at which:

Accepted Answer

Net present value equals zero

Answer

Net present value equals the initial investment

Answer

Payback period is shortest

Answer

Return on investment is maximised

Question 4

Which capital structure theory suggests that an optimal capital structure exists that maximises firm value by balancing tax benefits of debt against financial distress costs?

Accepted Answer

Trade-off theory

Answer

Modigliani-Miller (no tax) theorem

Answer

Pecking order theory

Answer

Market timing theory

Question 5

A rights issue involves:

Accepted Answer

Offering existing shareholders the right to buy new shares at a discount

Answer

Issuing new shares to the public at market price

Answer

Repurchasing shares from existing shareholders

Answer

Issuing bonus shares from retained earnings

Question 6

Which of the following best describes working capital management?

Accepted Answer

Managing the company's short-term assets and liabilities to maintain liquidity

Answer

Managing long-term capital investment decisions

Answer

Setting the dividend policy of the company

Answer

Arranging long-term debt financing