ACCA AS Financial Management (FM) 2

Question 1

A company has earnings per share (EPS) of £0.50 and the industry average P/E ratio is 12. Using the P/E ratio method, what is the estimated value per share?

Accepted Answer

£6.00

Answer

£0.50

Answer

£12.00

Answer

£24.00

Question 2

A UK company expects to receive $500,000 in three months. The current spot rate is $1.25/£. To hedge using a forward contract, the three-month forward rate is $1.23/£. What sterling amount will the company receive?

Accepted Answer

£406,504

Answer

£400,000

Answer

£615,000

Answer

£625,000

Question 3

According to the Gordon Growth Model (dividend valuation model), what is the share price if the dividend just paid is £0.30, the cost of equity is 10%, and dividends are expected to grow at 4% per year?

Accepted Answer

£5.20

Answer

£3.00

Answer

£5.00

Answer

£7.50

Question 4

Which of the following is a money market hedge for a future foreign currency receipt?

Accepted Answer

Borrowing the foreign currency now, converting to domestic currency at spot, and investing domestically

Answer

Buying a call option on the foreign currency

Answer

Entering into a forward contract to sell the foreign currency

Answer

Buying the foreign currency forward

Question 5

A company can either lease or buy a machine costing £50,000. The lease requires annual payments of £12,000 for 5 years. The company's borrowing rate is 8% and the tax rate is 25%. In a lease-versus-buy decision, which discount rate should typically be used?

Accepted Answer

The after-tax cost of borrowing

Answer

The company's WACC

Answer

The company's cost of equity

Answer

The risk-free rate

Question 6

What is the primary objective of working capital management?

Accepted Answer

To ensure the company has sufficient liquidity to meet short-term obligations while minimising the cost of holding current assets

Answer

To maximise the level of current assets held

Answer

To minimise the level of current liabilities

Answer

To eliminate all trade payables