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Advanced Financial Management Flashcards

7 cards from real ACCA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A company invests $500,000 in a project generating annual cash flows of $120,000 for 6 years. Using a cost of capital of 10% and an annuity factor of 4.355, what is the approximate NPV?

    Answer: $22,600

    NPV = $120,000 × 4.355 − $500,000 = $522,600 − $500,000 = $22,600, indicating the project adds value.

  2. Which statement best describes the Modified Internal Rate of Return (MIRR)?

    Answer: The rate equating the terminal value of cash flows reinvested at the cost of capital to the initial investment

    MIRR assumes cash inflows are reinvested at the cost of capital rather than the IRR, providing a more realistic measure of return.

  3. The Adjusted Present Value (APV) method of project appraisal differs from NPV because it:

    Answer: Separates the base-case NPV (all-equity financed) from the present value of financing side-effects

    APV splits the valuation into a base-case NPV (as if unlevered) plus the PV of financing benefits such as the tax shield on debt.

  4. When using CAPM to derive a project-specific discount rate using a proxy company's beta, which procedure is correct?

    Answer: Ungear the proxy company's equity beta, then regear it using the investing company's capital structure

    The proxy's equity beta reflects its own gearing, so it must be ungeared to isolate business risk, then regeared to the investing firm's gearing before use in CAPM.

  5. A firm has asset beta (ungeared) of 0.80, a debt-to-equity ratio of 1:1 by market values, and a tax rate of 25%. What is the equity beta?

    Answer: 1.40

    Using the gearing formula: βe = βa × (Ve + Vd(1−t)) / Ve = 0.80 × (1 + 0.75) / 1 = 1.40.

  6. In real options analysis, a 'growth option' is best described as:

    Answer: The right to expand operations if early results prove favorable

    A growth option gives management the flexibility to invest further and scale up operations if an initial project succeeds, creating additional value beyond the base NPV.

  7. Which of the following is the most significant limitation of the payback period as an investment appraisal technique?

    Answer: It ignores the time value of money and disregards cash flows occurring after the payback date

    The payback period ignores both the timing of cash flows (no discounting) and all cash flows beyond the payback point, meaning profitable long-term projects can be rejected.