ACCA Advanced Financial Management

Question 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?

Accepted Answer

$22,600

Answer

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

Question 2

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

Accepted Answer

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

Answer

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

Question 3

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

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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.

Question 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?

Accepted Answer

1.40

Answer

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

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA Advanced Financial Management