ACA Financial Management

Question 1

A UK company is evaluating a project with an initial investment of £100,000 and expected net cash flows of £30,000 per year for 5 years. If the cost of capital is 10%, what is the approximate net present value (NPV)?

Accepted Answer

£13,724

Answer

NPV = PV of cash inflows − Initial investment. Using the annuity factor for 5 years at 10% (3.7908): PV = £30,000 × 3.7908 = £113,724. NPV = £113,724 − £100,000 = £13,724. A positive NPV indicates the project adds value.

Question 2

Which of the following sources of finance would typically have the lowest cost to a UK company?

Accepted Answer

Secured bank loan

Answer

A secured bank loan typically has the lowest cost because the lender's risk is reduced by the security (collateral), and interest payments are tax-deductible in the UK (reducing the effective cost). Equity is more expensive because shareholders bear the highest risk and require a higher return.

Question 3

What does the weighted average cost of capital (WACC) represent?

Accepted Answer

The average return required by all of the company's investors, weighted by market value

Answer

WACC is calculated by weighting the cost of each source of finance (equity, debt, preference shares) by its proportion in the company's capital structure at market values. It represents the minimum return a project must generate to satisfy all providers of capital.

Question 4

Under the UK Corporate Governance Code, what is the primary role of the audit committee?

Accepted Answer

Overseeing the integrity of financial reporting and the effectiveness of internal and external audit

Answer

The UK Corporate Governance Code requires listed companies to establish an audit committee responsible for monitoring the integrity of financial statements, reviewing internal controls, overseeing the relationship with the external auditor, and reviewing the effectiveness of internal audit.

Question 5

A company has earnings before interest and tax (EBIT) of £200,000 and interest charges of £50,000. What is the interest cover ratio?

Accepted Answer

4 times

Answer

Interest cover = EBIT ÷ Interest charges = £200,000 ÷ £50,000 = 4 times. This ratio measures how many times over the company can cover its interest payments from operating profits. A higher ratio indicates lower financial risk.

ACA ICAEW Practice Test

ACA ICAEW Practice Test

ACA Financial Management