Advanced Financial Management Flashcards
6 cards from real ACCA SP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Advanced Financial Management flashcards as text
A company wishes to acquire a target firm. Which of the following valuation approaches uses the present value of future free cash flows?
Answer: Discounted cash flow (DCF) valuation
DCF valuation estimates the intrinsic value of a firm by discounting projected free cash flows to equity (or free cash flows to firm) at the appropriate cost of capital (WACC or Ke).
Which of the following best describes an 'interest rate swap'?
Answer: An agreement between two parties to exchange interest payments (fixed for floating) on a notional principal
An interest rate swap is a derivative where two parties exchange interest payment streams — typically one party pays a fixed rate and the other pays a floating rate (e.g., SONIA) on the same notional principal.
The 'weighted average cost of capital' (WACC) should be used as the discount rate when:
Answer: The project maintains the company's existing capital structure and business risk
WACC is appropriate as a discount rate when the proposed project is of similar risk to the company's existing activities and does not change the capital structure materially.
Under pecking order theory, firms prefer to finance new investments using:
Answer: Retained earnings first, then debt, then new equity
Pecking order theory (Myers & Majluf) argues firms prefer internal financing first (retained earnings), then debt, and finally new equity as a last resort, to minimise information asymmetry costs.
A 'credit default swap' (CDS) is best described as:
Answer: A derivative providing insurance against a borrower defaulting on a debt
A CDS is a derivative contract where the protection buyer pays a premium and the protection seller compensates the buyer if a specified credit event (e.g., default) occurs on the reference entity.
Which of the following correctly describes the 'Efficient Market Hypothesis' (EMH) in its semi-strong form?
Answer: Share prices reflect all publicly available information, including published financial data
Semi-strong form EMH states that share prices immediately and fully reflect all publicly available information. Fundamental analysis cannot generate abnormal returns; only insider information could.