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Advanced Financial Management Flashcards

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

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  1. The Modigliani-Miller proposition WITH corporate tax suggests that:

    Answer: Firm value is maximised by 100% debt due to the tax shield on interest

    MM with tax (1963): interest payments attract a tax shield (tax saving = tax rate × debt). This implies firm value rises as debt increases, theoretically favouring full debt financing.

  2. Which of the following describes the 'adjusted present value' (APV) method?

    Answer: Valuing a project as if all-equity financed, then adding the present value of financing side effects (e.g., tax shield)

    APV = Base-case NPV (all-equity) + PV of financing side effects (mainly tax shield on debt). It is particularly useful for projects with changing capital structures.

  3. In the context of options, a 'call option' gives the holder:

    Answer: The right, but not the obligation, to buy an asset at the exercise price

    A call option gives the holder the right (not obligation) to buy the underlying asset at the strike (exercise) price on or before the expiry date. If the market price exceeds the strike, it is exercised.

  4. The Black-Scholes model is used to price:

    Answer: European call and put options on non-dividend-paying stocks

    The Black-Scholes model derives the theoretical fair price of a European-style option using five inputs: current asset price, strike price, risk-free rate, time to expiry and volatility.

  5. Which of the following is a method of hedging foreign currency transaction risk?

    Answer: Entering into a forward exchange contract

    A forward exchange contract locks in the exchange rate for a future transaction, eliminating the uncertainty of currency movements and hedging the transaction risk.

  6. Duration (Macaulay duration) in bond analysis measures:

    Answer: The weighted average time to receive the bond's cash flows, used as a measure of interest rate sensitivity

    Macaulay duration is the weighted average time to receipt of a bond's cash flows. Modified duration measures the percentage price change for a 1% change in yield, quantifying interest rate risk.