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

The recommended approach is to discount the foreign currency cash flows using the foreign discount rate and then convert the resulting NPV to the domestic currency at the spot rate.

Question 2

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

Accepted Answer

A rise in interest rates across the economy

Answer

Systematic risk affects the entire market or economy (e.g., interest rate changes) and cannot be eliminated through portfolio diversification.

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

An LBO uses large amounts of borrowed money, typically secured by the target's assets and future cash flows, to finance the acquisition.

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

A currency swap allows two parties to exchange streams of cash flows in different currencies, effectively hedging long-term foreign currency obligations.

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

APV first calculates the NPV assuming all-equity financing, then adds the present value of financing benefits (such as the tax shield on debt) separately.

FCCA - Fellow of the Association of Chartered Certified Accountants Practice Test

FCCA - Fellow of the Association of Chartered Certified Accountants Practice Test

FCCA Strategic Financial Management 2