ACCA Financial Management and Investment 2

Question 1

A company has a debt-to-equity ratio of 0.6, an equity beta of 1.4, and a tax rate of 25%. What is the asset (ungeared) beta?

Accepted Answer

1.05

Answer

Asset beta = equity beta / [1 + (D/E)(1-T)] = 1.4 / [1 + 0.6 × 0.75] = 1.4 / 1.45 ≈ 1.05.

Question 2

Which technique adjusts a project's discount rate upward to account for political and country risk when appraising overseas investments?

Accepted Answer

Risk-adjusted discount rate

Answer

The risk-adjusted discount rate method adds a country risk premium to the base cost of capital to reflect additional sovereign and political risk.

Question 3

A bond with a face value of $1,000 pays a 6% annual coupon and matures in 5 years. If the required yield is 8%, what is its approximate market price?

Accepted Answer

$920.15

Answer

The bond trades at a discount because the coupon rate (6%) is below the required yield (8%), giving a price of approximately $920.

Question 4

Under CAPM, which type of risk is rewarded with higher expected returns?

Accepted Answer

Systematic (market) risk

Answer

Only systematic risk, measured by beta, is rewarded under CAPM because unsystematic risk can be diversified away in a portfolio.

Question 5

A firm's shares trade at $50, expected dividend next year is $2.50, and dividends grow at 4% per year. What is the cost of equity using the Gordon Growth Model?

Accepted Answer

9%

Answer

Cost of equity = D1/P0 + g = $2.50/$50 + 0.04 = 0.05 + 0.04 = 9%.

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA Financial Management and Investment 2