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FM E Business finance

Written by Mahnoor Sheikh (ACCA)

ACCA · Financial Management · 10 questions

Name: ____________________   Date: ____________

  1. A risk-free rate of 4 percent, a market return of 9 percent and a beta of 1.2. What is the cost of equity using CAPM?

    • A 10%
    • B 9%
    • C 13.8%
    • D 6%

  2. The last dividend is $0.50, growth is 4 percent and the cost of equity is 10 percent. What is the share price using the dividend valuation model?

    • A $8.67
    • B $5.20
    • C $5.00
    • D $8.33

  3. Equity is 60 percent of the finance at a cost of 10 percent, and debt is 40 percent at an after-tax cost of 5 percent. What is the WACC?

    • A 8%
    • B 7.5%
    • C 6%
    • D 15%

  4. Irredeemable debt pays 6 percent interest on $100 nominal and trades at $80. The tax rate is 25 percent. What is the after-tax cost?

    • A 7.5%
    • B 6%
    • C 5.625%
    • D 4.5%

  5. Why is debt usually cheaper than equity?

    • A It is paid last
    • B It has no interest
    • C It ranks higher for repayment and interest is normally tax deductible
    • D It has no risk

  6. Which of these is prohibited in Islamic finance?

    • A Profit sharing
    • B Trade credit
    • C Riba (interest)
    • D Leasing

  7. Which Islamic finance instrument is a form of lease finance?

    • A Mudaraba
    • B Murabaha
    • C Ijara
    • D Sukuk

  8. Which Islamic finance instrument is a debt-like security backed by assets?

    • A Ijara
    • B Sukuk
    • C Musharaka
    • D Mudaraba

  9. According to Modigliani and Miller with tax, what happens to company value as gearing rises?

    • A It rises because of the tax shield on debt
    • B It stays the same
    • C It is not affected by tax
    • D It falls

  10. What does beta measure?

    • A The company's dividend
    • B The company's gearing
    • C A share's sensitivity to market movements
    • D The company's profit

Answer key

1. A, 2. A, 3. A, 4. C, 5. C, 6. C, 7. C, 8. B, 9. A, 10. C

  1. 4% + 1.2 x (9% - 4%) = 10%.

  2. 0.50 x 1.04 / (0.10 - 0.04) = 8.67.

  3. 0.6 x 10% + 0.4 x 5% = 8%.

  4. 6 x 0.75 / 80 = 5.625%.

  5. Lenders have a prior claim, so they accept lower returns.

  6. Returns come from trade, leasing or sharing profit and loss.

  7. Murabaha is trade credit and mudaraba is equity finance.

  8. Sukuk give investors a share of the returns on assets.

  9. Without tax, value is not affected by gearing.

  10. It measures systematic risk.