FCCA Strategic Financial Management 2

Question 1

When evaluating a foreign direct investment, which method is generally preferred for handling foreign currency cash flows?

Accepted Answer

Discount foreign currency cash flows at the foreign cost of capital, then convert at the current spot rate

Answer

Convert all cash flows at the spot rate on the decision date

Answer

Discount foreign currency cash flows at the domestic WACC

Answer

Ignore exchange rate risk and use domestic cash flows only

Question 2

Which of the following is a systematic (non-diversifiable) risk?

Accepted Answer

A rise in interest rates across the economy

Answer

A key employee leaving the firm

Answer

A product recall affecting a single company

Answer

A fire destroying a company's warehouse

Question 3

In a leveraged buyout (LBO), how is the acquisition primarily financed?

Accepted Answer

Predominantly with debt secured against the target company's assets and cash flows

Answer

Entirely with equity from the acquiring firm's retained earnings

Answer

Entirely with newly issued common shares

Answer

Through government grants and subsidies

Question 4

What is the primary purpose of a currency swap in strategic financial management?

Accepted Answer

To exchange principal and interest payments in one currency for those in another to manage long-term currency exposure

Answer

To speculate on future exchange rate movements for profit

Answer

To set a fixed exchange rate for a single upcoming transaction

Answer

To eliminate all financial risk from a firm's operations

Question 5

The Adjusted Present Value (APV) method separates a project's value into which two components?

Accepted Answer

Base-case NPV (all-equity financed) and the present value of financing side effects

Answer

Operating cash flows and terminal value

Answer

Book value of assets and market value of liabilities

Answer

Free cash flow to equity and free cash flow to the firm

Question 6

Which hedging instrument gives the holder the right, but not the obligation, to buy or sell a currency at a pre-agreed rate?

Accepted Answer

Currency option

Answer

Forward contract

Answer

Currency future

Answer

Interest rate swap

Question 7

Under real options analysis, what does an 'option to abandon' a project represent?

Accepted Answer

The right to sell the project's assets and cease operations if performance is poor

Answer

The right to delay starting the project until market conditions improve

Answer

The right to expand production capacity if demand increases

Answer

The right to switch between different production inputs