ACA Financial Management 2

Question 1

A company has 1 million ordinary shares in issue with a current market price of £4.00 each and £2 million of debt at market value.
The cost of equity is 12% and the post-tax cost of debt is 5%.
What is the WACC?

Accepted Answer

9.17%

Answer

8.5%

Answer

10.00%

Answer

7.33%

Question 2

What is the primary advantage of using the internal rate of return (IRR) method for project appraisal?

Accepted Answer

It expresses the return as a percentage, making it easy to compare with the cost of capital

Answer

It always gives the same decision as NPV

Answer

It accounts for the reinvestment of cash flows at the cost of capital

Answer

It can handle mutually exclusive projects without issues

Question 3

Under UK corporation tax rules, which of the following is an allowable deduction when calculating taxable trading profits?

Accepted Answer

Interest on a trading loan

Answer

Dividends paid to shareholders

Answer

Entertaining UK customers

Answer

Depreciation of fixed assets

Question 4

A company is considering offering an early settlement discount of 2/10 net 30 to its trade receivables. What is the approximate annualised cost of this discount?

Accepted Answer

36.7%

Answer

24%

Answer

44.6%

Answer

2%

Question 5

Which of the following working capital strategies carries the highest risk but potentially the highest return?

Accepted Answer

Using short-term finance to fund permanent current assets

Answer

Financing all assets with long-term finance

Answer

Maintaining high levels of cash reserves

Answer

Holding excess inventory as a buffer

Question 6

What is the primary purpose of sensitivity analysis in investment appraisal?

Accepted Answer

To determine which variables the project outcome is most sensitive to

Answer

To calculate the exact NPV of a project

Answer

To eliminate all risk from the project

Answer

To calculate the payback period