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Business Finance Flashcards

6 cards from real ACA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 6 Business Finance flashcards as text

  1. The pecking order theory of capital structure suggests companies prefer:

    Answer: Retained earnings first, then debt, then equity as a last resort

    Pecking order theory (Myers & Majluf) suggests firms prefer internal financing (retained earnings), then external debt, and finally new equity, due to asymmetric information and signalling effects.

  2. A company with a quick ratio of less than 1 indicates:

    Answer: Its current liquid assets cannot cover current liabilities

    A quick ratio below 1 means liquid current assets (excluding inventory) are less than current liabilities, suggesting potential short-term liquidity pressure.

  3. Duration in bond analysis measures:

    Answer: The weighted average time to receive cash flows, reflecting price sensitivity to interest rate changes

    Duration measures the weighted average time to receive a bond's cash flows and also approximates the percentage price change for a given change in interest rates (interest rate sensitivity).

  4. Which of the following is a non-cash item that is added back to profit when calculating operating cash flow?

    Answer: Depreciation

    Depreciation is a non-cash charge that reduces profit but does not involve a cash outflow; it is therefore added back to profit when calculating operating cash flows under the indirect method.

  5. Enterprise value (EV) is typically calculated as:

    Answer: Market capitalisation plus net debt (debt minus cash)

    Enterprise value represents the total value of the business to all capital providers: EV = market capitalisation + total debt − cash and cash equivalents.

  6. The Modigliani-Miller theorem with tax implies:

    Answer: Firm value increases with debt due to the tax shield on interest

    With corporate tax, MM shows that interest tax shields increase firm value; therefore, 100% debt would theoretically maximise value — but in practice, financial distress costs limit optimal gearing.