FCCA Strategic Financial Management 1

Question 1

Which capital budgeting technique calculates the discount rate at which the net present value of a project equals zero?

Accepted Answer

Internal Rate of Return (IRR)

Answer

The IRR is defined as the discount rate that makes the NPV of all cash flows from a project equal to zero.

Question 2

Under the Modigliani-Miller theorem (without taxes), what is the effect of changing a firm's capital structure on its overall value?

Accepted Answer

It has no effect on the overall firm value

Answer

Modigliani-Miller (without taxes) states that in perfect capital markets, firm value is independent of its capital structure.

Question 3

Which of the following best describes the Weighted Average Cost of Capital (WACC)?

Accepted Answer

The average return required by all providers of finance, weighted by their proportion of total capital

Answer

WACC blends the required returns of equity holders and debt holders, each weighted by their share of total capital, to reflect the firm's overall financing cost.

Question 4

In the Capital Asset Pricing Model (CAPM), what does a beta (β) greater than 1 indicate?

Accepted Answer

The asset is more volatile than the market

Answer

A beta greater than 1 means the asset amplifies market movements, indicating higher systematic risk than the overall market.

Question 5

Which working capital strategy involves maintaining minimal inventory and tight credit policies to reduce current assets?

Accepted Answer

Aggressive working capital strategy

Answer

An aggressive strategy minimizes current assets (low inventory, tight receivables) to reduce financing costs, accepting higher liquidity risk.

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 1