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Financial Management Flashcards

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

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  1. The Modigliani-Miller (MM) proposition (without tax) states that:

    Answer: The value of a geared firm equals the value of an equivalent ungeared firm; capital structure is irrelevant

    MM (1958, no tax) argued that in perfect capital markets, capital structure does not affect firm value; the gain in cheap debt is exactly offset by increased equity risk.

  2. Which of the following is a characteristic of a 'rights issue'?

    Answer: Existing shareholders are offered new shares in proportion to their current holdings at a discount

    A rights issue offers new shares to existing shareholders pro-rata to their holdings, usually at a discount to the market price, to raise additional equity capital.

  3. Which of the following is the formula for the dividend growth model (Gordon Growth Model) for share valuation?

    Answer: P0 = D1 ÷ (Ke − g)

    Gordon Growth Model: P0 = D1 ÷ (Ke − g), where D1 is next year's dividend, Ke is the cost of equity and g is the constant annual dividend growth rate.

  4. Which of the following describes a 'factoring' arrangement?

    Answer: The company sells its trade receivables to a factor (finance house) to improve cash flow

    Factoring involves selling receivables to a factor, which advances a percentage of the invoice value immediately, improving the company's cash flow and removing credit risk.

  5. An increase in the receivables collection period (debtor days) would:

    Answer: Increase working capital requirements

    If receivables take longer to collect, more cash is tied up in working capital. This increases the operating cycle and the company's financing need for working capital.

  6. The capital asset pricing model (CAPM) states that the required return on an equity investment is:

    Answer: The risk-free rate plus a premium for systematic (market) risk, measured by beta

    CAPM: Ke = Rf + β(Rm − Rf). The required return equals the risk-free rate plus beta times the equity risk premium, where beta measures systematic risk.