Practice Test GeeksACCA - Association of Chartered Certified Accountants Practice Test
← All ACCA Flashcard Decks

Financial Management and Investment Flashcards

7 cards from real ACCA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Financial Management and Investment flashcards as text

  1. A company evaluates a lease-versus-buy decision. Which discount rate should be used to discount the after-tax lease payments?

    Answer: The after-tax cost of borrowing

    Lease payments are similar to debt obligations, so the after-tax cost of borrowing is the appropriate rate to discount them in a lease vs. buy analysis.

  2. Transaction exposure in foreign exchange management refers to:

    Answer: The risk arising from existing contractual obligations in foreign currency

    Transaction exposure arises from already-committed foreign currency transactions such as receivables, payables, and loan repayments.

  3. Which capital budgeting method is most appropriate when comparing projects with unequal useful lives?

    Answer: Equivalent Annual Annuity (EAA) or Equivalent Annual Cost (EAC)

    EAA converts each project's NPV into an equivalent annual figure, enabling fair comparison of projects with different time horizons.

  4. A company's WACC is 10%. A new project has a beta of 1.5, the risk-free rate is 4%, and the market risk premium is 6%. Should the project be evaluated at the WACC?

    Answer: No, use the project's own risk-adjusted rate of 13%

    The project-specific rate = Rf + β(Rm - Rf) = 4% + 1.5 × 6% = 13%; using WACC would understate the required return for this higher-risk project.

  5. Which of the following best explains why dividends may be irrelevant in a perfect capital market (Modigliani-Miller dividend irrelevance theory)?

    Answer: Investors can create homemade dividends by selling shares

    In a perfect market, investors can replicate any desired income stream by selling shares ('homemade dividends'), making the firm's dividend policy irrelevant to its value.

  6. A rights issue is made at a price below the current market price. What is the typical effect on the theoretical ex-rights price?

    Answer: It falls between the issue price and the pre-rights market price

    The theoretical ex-rights price is a weighted average of the pre-rights price and the new issue price, so it falls between the two.

  7. Under interest rate parity (IRP), what condition ensures no arbitrage profit exists between two countries?

    Answer: Forward premium/discount equals the interest rate differential

    Covered Interest Rate Parity states that the forward exchange rate premium or discount must equal the difference in interest rates between the two currencies.