ACCA AS Financial Management 2

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

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

Accepted Answer

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

Answer

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.

Question 3

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

Accepted Answer

P0 = D1 ÷ (Ke − g)

Answer

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.

Question 4

Which of the following describes a 'factoring' arrangement?

Accepted Answer

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

Answer

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.

Question 5

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

Accepted Answer

Increase working capital requirements

Answer

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.

ACCA Applied Skills Practice Test

ACCA Applied Skills Practice Test

ACCA AS Financial Management 2