ACCA Financial Management and Investment 3

Question 1

A company has EBIT of $800,000, interest expense of $100,000, and a tax rate of 30%. What is the interest coverage ratio?

Accepted Answer

8.0x

Answer

Interest coverage = EBIT / Interest = $800,000 / $100,000 = 8.0 times.

Question 2

Which of the following is the main advantage of issuing convertible bonds from the issuer's perspective?

Accepted Answer

Lower coupon rates due to the embedded conversion option

Answer

Convertible bonds carry a lower coupon because investors value the option to convert into equity, reducing the issuer's interest cost.

Question 3

In Modigliani-Miller theory with taxes, what happens to firm value as financial leverage increases?

Accepted Answer

Firm value increases due to the tax shield on debt interest

Answer

MM with taxes shows firm value rises with debt because interest payments are tax-deductible, creating a tax shield that adds value.

Question 4

A portfolio contains two assets. Asset A has a standard deviation of 10% and Asset B has 20%. The correlation between them is 0. What is the portfolio standard deviation if equal weights are used?

Accepted Answer

11.18%

Answer

Portfolio variance = (0.5)²(0.1)² + (0.5)²(0.2)² = 0.0025 + 0.01 = 0.0125; SD = √0.0125 ≈ 11.18%.

Question 5

Which ratio measures how efficiently a company uses its assets to generate sales?

Accepted Answer

Asset turnover ratio

Answer

Asset turnover = Revenue / Total Assets, measuring how much revenue is generated per dollar of assets.

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA Financial Management and Investment 3