ACCA SP Advanced Financial Management

Question 1

The Modigliani-Miller proposition WITH corporate tax suggests that:

Accepted Answer

Firm value is maximised by 100% debt due to the tax shield on interest

Answer

Capital structure is irrelevant to firm value

Answer

Equity is always cheaper than debt

Answer

The optimal gearing is 50% debt and 50% equity

Question 2

Which of the following describes the 'adjusted present value' (APV) method?

Accepted Answer

Valuing a project as if all-equity financed, then adding the present value of financing side effects (e.g., tax shield)

Answer

Discounting all cash flows at the WACC

Answer

Using beta to adjust the cost of equity

Answer

Calculating the IRR of the project's equity cash flows

Question 3

In the context of options, a 'call option' gives the holder:

Accepted Answer

The right, but not the obligation, to buy an asset at the exercise price

Answer

The obligation to sell an asset at the exercise price

Answer

The obligation to buy an asset at the exercise price

Answer

The right to both buy and sell an asset

Question 4

The Black-Scholes model is used to price:

Accepted Answer

European call and put options on non-dividend-paying stocks

Answer

Bond yields

Answer

Forward currency contracts

Answer

Interest rate swaps

Question 5

Which of the following is a method of hedging foreign currency transaction risk?

Accepted Answer

Entering into a forward exchange contract

Answer

Investing in index-linked gilts

Answer

Increasing trade receivables days

Answer

Issuing additional equity shares

Question 6

Duration (Macaulay duration) in bond analysis measures:

Accepted Answer

The weighted average time to receive the bond's cash flows, used as a measure of interest rate sensitivity

Answer

The time to the next coupon payment

Answer

The default probability of the bond

Answer

The spread over the risk-free rate