AFM Role of the senior financial adviser

ACCA · Strategic Professional · 7 questions

Name: ____________________   Date: ____________

1. Using CAPM, a risk free rate of 4 percent, a market return of 10 percent and an equity beta of 1.2 give a cost of equity of:

   • A 7.2%
   • B 12.0%
   • C 10.0%
   • D 11.2%

2. A company has equity of $600m with a cost of 12 percent and debt of $400m with a pre-tax cost of 6 percent. Tax is 25 percent. The WACC is:

   • A 7.5%
   • B 9.0%
   • C 9.6%
   • D 10.2%

3. An equity beta of 1.2 is observed in a firm with equity of $600m and debt of $400m (debt beta zero) and tax of 25 percent. The asset beta is:

   • A 1.2
   • B 0.9
   • C 0.6
   • D 0.8

4. In Modigliani and Miller's theory with corporate tax, the value of a geared company compared with an identical ungeared one is higher by:

   • A The cost of equity
   • B The dividend paid
   • C The present value of the tax shield on debt
   • D Nothing, as the value is the same

5. If a company with perpetual debt of $400m is subject to tax at 25 percent, the value of the tax shield in the M&M model with tax is:

   • A $100m
   • B $400m
   • C $25m
   • D $300m

6. The pecking order theory suggests that a company prefers to finance new investment first from:

   • A New equity
   • B Retained earnings
   • C Convertible debt
   • D Preference shares

7. A policy of paying a constant or steadily rising dividend, even when profit varies, is often chosen because it:

   • A Maximises retained earnings
   • B Signals confidence and reassures shareholders
   • C Raises the cost of capital
   • D Eliminates the need for investment