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

MM with tax (1963): interest payments attract a tax shield (tax saving = tax rate × debt). This implies firm value rises as debt increases, theoretically favouring full debt financing.

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

APV = Base-case NPV (all-equity) + PV of financing side effects (mainly tax shield on debt). It is particularly useful for projects with changing capital structures.

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

A call option gives the holder the right (not obligation) to buy the underlying asset at the strike (exercise) price on or before the expiry date. If the market price exceeds the strike, it is exercised.

Question 4

The Black-Scholes model is used to price:

Accepted Answer

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

Answer

The Black-Scholes model derives the theoretical fair price of a European-style option using five inputs: current asset price, strike price, risk-free rate, time to expiry and volatility.

Question 5

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

Accepted Answer

Entering into a forward exchange contract

Answer

A forward exchange contract locks in the exchange rate for a future transaction, eliminating the uncertainty of currency movements and hedging the transaction risk.

ACCA Strategic Professional Practice Test

ACCA Strategic Professional Practice Test

ACCA SP Advanced Financial Management