ACCA SP Advanced Financial Management (AFM) 2

Question 1

A UK company expects to receive EUR 2 million in 3 months.
The current spot rate is £1 = EUR 1.15.
The 3-month forward rate is £1 = EUR 1.18.
If the company uses the forward contract, what GBP amount will it receive?

Accepted Answer

£1,694,915

Answer

£1,739,130

Answer

£1,724,138

Answer

£2,360,000

Question 2

In the context of real options theory, a company that invests in a pilot project before committing to full-scale production is exercising which type of real option?

Accepted Answer

Option to expand (staging option)

Answer

Option to abandon

Answer

Option to delay

Answer

Option to switch

Question 3

When using the Black-Scholes option pricing model, which of the following inputs has an INVERSE relationship with the value of a European call option?

Accepted Answer

Exercise price

Answer

Current share price

Answer

Time to expiration

Answer

Volatility of the underlying asset

Question 4

A company is considering an acquisition and identifies potential synergies of £5 million per year in perpetuity. The acquiring company's WACC is 10%. The maximum premium the acquirer should pay above the target's standalone value is:

Accepted Answer

£50 million

Answer

£5 million

Answer

£25 million

Answer

Cannot be determined without knowing the target's WACC

Question 5

A company has an asset beta of 0.8 and is considering changing its capital structure to 40% debt and 60% equity (by market value). The corporate tax rate is 25%. Using the Modigliani-Miller formula to regear, what is the approximate new equity beta?

Accepted Answer

1.20

Answer

1.28

Answer

0.96

Answer

1.60

Question 6

In the context of international investment appraisal, which of the following is a reason for using the 'foreign currency' approach rather than converting cash flows to the home currency?

Accepted Answer

It avoids the need to forecast future exchange rates

Answer

It automatically accounts for purchasing power parity

Answer

It eliminates political risk from the analysis

Answer

It always produces a higher NPV than the home currency approach