ACCA SP Advanced Financial Management (AFM)

Question 1

A UK company is evaluating a project with the following data: equity beta 1.2, risk-free rate 3%, equity risk premium 6%, cost of debt (pre-tax) 5%, tax rate 25%, gearing (debt to total capital) 30%.
What is the WACC?

Accepted Answer

8.27%

Answer

9.00%

Answer

7.95%

Answer

10.20%

Question 2

A company is considering using a currency swap to manage its foreign exchange exposure on a USD-denominated loan. Which of the following BEST describes the primary advantage of a currency swap over a forward contract?

Accepted Answer

Currency swaps can hedge both the principal and periodic interest payments over the loan term

Answer

Currency swaps are always cheaper than forward contracts

Answer

Currency swaps eliminate all foreign exchange risk with no residual exposure

Answer

Currency swaps do not require an initial exchange of principal

Question 3

In the context of business valuations, what is the main limitation of using the price/earnings (P/E) ratio method to value an unlisted company?

Accepted Answer

It is difficult to find a truly comparable listed company, and a discount for lack of marketability must be applied

Answer

P/E ratios cannot be calculated for profitable companies

Answer

The P/E ratio ignores the company's dividend policy entirely

Answer

P/E ratios are only valid for companies in the technology sector

Question 4

A company can issue a convertible bond or a bond with warrants. Which of the following statements about warrants is CORRECT?

Accepted Answer

Warrants are detachable and can be traded separately from the host bond

Answer

Warrants are exercised by surrendering the bond in exchange for shares

Answer

Warrants must be exercised on a single fixed date

Answer

Warrants always have a lower value than an equivalent conversion right

Question 5

An investor holds a portfolio of UK equities and is concerned about a market downturn. To hedge using FTSE 100 index futures, the investor should:

Accepted Answer

Sell FTSE 100 futures to offset losses if the market falls

Answer

Buy FTSE 100 futures to profit if the market rises

Answer

Buy put options on individual stocks in the portfolio

Answer

Enter into an interest rate swap to convert equity returns to fixed income

Question 6

Under the adjusted present value (APV) method, the base case NPV is calculated by discounting project cash flows at:

Accepted Answer

The ungeared cost of equity (Ke ungeared)

Answer

The WACC of the company

Answer

The cost of debt

Answer

The risk-free rate