You’re on a roll
Create a free account to save your ACCA progress, track your accuracy by topic, and pick up right where you left off.
Free Questions › ACCA › Advanced Financial Management
Free ACCA Advanced Financial Management Practice Questions & Answers
400 exam-style Advanced Financial Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 61
What is a 'net present value profile'?
Select an option first.
Correct answer: B — A graph plotting a project's NPV on the y-axis against different discount rates on the x-axis — it shows how the NPV falls as the discount rate increases and crosses zero at the IRR
Explanation: B is correct. NPV profile: the curve starts at the total undiscounted cash inflows (at r=0) and declines as r increases, crossing the x-axis at the IRR. For two projects, where the profiles cross is the 'cross-over rate' — beyond which project rankings reverse. A is a share price chart. C is a payback chart. D is from simulation analysis.
Question 62
What is a 'cross-over rate' in NPV analysis?
Select an option first.
Correct answer: B — The discount rate at which two mutually exclusive projects have equal NPVs — below the cross-over rate, one project has the higher NPV; above it, the other does
Explanation: B is correct. Cross-over rate: the discount rate where NPV_A = NPV_B for two mutually exclusive projects. The NPV method should be preferred at the actual cost of capital — if the cost of capital is below the cross-over rate, prefer the project with the higher NPV (even if it has the lower IRR). A is wrong. C is the IRR. D is wrong.
Question 63
When appraising a project in a foreign currency, what is the correct approach?
Select an option first.
Correct answer: B — Either: (1) forecast foreign currency cash flows and discount at the foreign currency discount rate, then convert to domestic at the current spot rate; or (2) convert forecast foreign currency cash flows to domestic at forecast exchange rates and discount at the domestic rate — both give the same NPV
Explanation: B is correct. Both approaches are equivalent in theory (IRP ensures consistency). In practice, method (1) is cleaner. A uses the current spot rate for all future flows (ignores future exchange rate changes). C and D are wrong.
Question 64
What is 'political risk' in international investment appraisal and how can it be managed?
Select an option first.
Correct answer: B — The risk that a foreign government's actions (nationalisation, expropriation, tax changes, capital controls) will adversely affect the investment — managed by: negotiating with the host government, seeking political risk insurance (MIGA, ECDs), using joint ventures with local partners, or structuring projects through international entities
Explanation: B is correct. Political risk: government interference risk. Mitigation: host government agreements, political risk insurance (Multilateral Investment Guarantee Agency, export credit agencies), local partner joint ventures, structuring to reduce asset exposure, and using international arbitration clauses. A is management risk. C is interest rate risk. D is investment risk.
Question 65
What is a 'discount factor' and how is it calculated?
Select an option first.
Correct answer: B — The present value of £1 received at a future point in time, calculated as 1 / (1 + r)^n where r is the discount rate and n is the number of periods
Explanation: B is correct. Discount factor (DF) = 1/(1+r)^n. To find the PV of a cash flow: PV = CF × DF. For an annuity, the annuity factor = sum of discount factors for each period. A is a policy rate. C is wrong. D is the inverse of the discount factor.
Get the full ACCA question bank — free
Drop your email and we'll send you fresh ACCA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 66
What is an 'annuity' and what is the formula for its present value?
Select an option first.
Correct answer: B — A series of equal cash flows paid at regular intervals for a fixed number of periods. PV of annuity = A × [(1 − (1+r)^(-n)) / r], where A is the annual payment, r is the discount rate, and n is the number of periods
Explanation: B is correct. Annuity: equal regular cash flows for n periods. Annuity factor = [1 − (1+r)^(-n)] / r. Multiply annual cash flow by the annuity factor. A is a lump sum. C is a growing perpetuity (Gordon Growth Model). D is a terminal cash flow.
Question 67
What is a 'perpetuity' and what is its present value formula?
Select an option first.
Correct answer: B — A stream of equal cash flows that continues forever. PV of perpetuity = C / r, where C is the annual cash flow and r is the discount rate
Explanation: B is correct. Perpetuity: never-ending equal cash flows. PV = C/r. Growing perpetuity (Gordon Growth): PV = C/(r−g). A perpetuity with g=0 gives PV = C/r. A describes a long-dated bond. C is a growing perpetuity (different formula). D is an annuity.
Question 68
What is a 'cost of equity' and how does it differ from the 'cost of debt'?
Select an option first.
Correct answer: B — Cost of equity (Ke) is the return required by shareholders, typically estimated using CAPM or the dividend growth model; cost of debt (Kd) is the return required by lenders. Ke > Kd because equity is riskier (debt holders have priority in liquidation and benefit from fixed interest)
Explanation: B is correct. Ke > Kd because equity carries more risk — no guaranteed return, subordinate in insolvency. Tax deductibility of interest reduces the effective after-tax cost of debt further. A is wrong. C reverses the relationship. D is only one component of Ke.
Question 69
What does NOPAT stand for and how is it calculated?
Select an option first.
Correct answer: B — Net Operating Profit After Tax: EBIT × (1 − tax rate) — represents operating profit on a tax-adjusted basis, excluding the effects of financing (no interest deduction)
Explanation: B is correct. NOPAT = EBIT × (1−t). It removes the financing effect of interest by starting with EBIT and applying the tax rate. Used in EVA calculations and free cash flow analysis. A uses revenue (wrong base). C adds back interest to net income (gives NOPAT if t=0, but not the standard formula). D describes free cash flow.
Question 70
What is the 'total shareholder return' (TSR)?
Select an option first.
Correct answer: B — The combination of capital gain and dividend income earned on a share over a period: TSR = (P₁ − P₀ + D₁) / P₀, expressed as a percentage
Explanation: B is correct. TSR: the true return to shareholders includes both price appreciation and dividend income. It is the most comprehensive measure of shareholder value creation. A counts only dividends. C is an EV/EBITDA variant. D describes economic profit per equity unit.
Question 71
What is 'intrinsic value' of a share versus its 'market value'?
Select an option first.
Correct answer: B — Intrinsic value is the theoretically 'true' value based on the present value of expected future cash flows — it may differ from market value due to investor sentiment, information asymmetry, or market inefficiency. In a perfectly efficient market, they are equal
Explanation: B is correct. Intrinsic value: DCF-based fundamental value. Market value: what investors currently pay. In efficient markets, market ≈ intrinsic. In inefficient markets or with information asymmetry, differences can arise. A is only true in perfect efficiency. C is book value (not intrinsic). D is wrong — market may be below intrinsic if undervalued.
Question 72
What is a 'terminal growth rate' in DCF valuation and what constrains it?
Select an option first.
Correct answer: B — The long-run perpetual growth rate applied in the terminal value calculation — it must be a sustainable long-run rate, typically no higher than the long-run growth rate of the economy (often proxied by GDP growth or inflation) to avoid implying the company eventually becomes larger than the economy
Explanation: B is correct. Terminal growth rate (g): used in TV = FCF/(WACC−g). If g approaches WACC, TV approaches infinity — unrealistic. Constraint: g ≤ long-run nominal GDP growth (typically 2–4%). A is early-stage growth. C is dividend growth. D is the path of discount rates.
Question 73
What is a 'sensitivity table' (data table) in valuation?
Select an option first.
Correct answer: B — A two-dimensional table showing how a valuation metric (e.g., NPV, share price) changes across a range of two key assumptions simultaneously — commonly used to show NPV or EV across combinations of WACC and terminal growth rate
Explanation: B is correct. Sensitivity tables in valuation typically show the central case and a range of outcomes for two key variables (most commonly: WACC vs terminal growth rate for DCF; EV/EBITDA exit multiple vs growth rate for LBO). They help assess valuation uncertainty and communicate a range of fair values. A is unrelated. C is a yield curve. D is a schedule.
Question 74
What is a 'leverage buyout' (LBO) and how is value created?
Select an option first.
Correct answer: B — A company acquisition funded primarily with debt — value is created through: (1) debt tax shield; (2) improved operational efficiency under new ownership; (3) financial discipline from high leverage forcing cash generation; (4) multiple expansion (buying at lower EV/EBITDA than eventual exit multiple)
Explanation: B is correct. LBO: typically 60–90% debt, 10–40% equity. Financial sponsors (PE firms) use debt to amplify equity returns (leverage effect). Value drivers: tax shield, operational improvements, debt repayment (equity value growth), and arbitrage on multiples. A ignores debt. C ignores debt. D is a subset (MBO is a type of LBO).
Question 75
What is a 'holding period return' and how is it calculated?
Select an option first.
Correct answer: B — (Ending value − Beginning value + Income received) / Beginning value — the total return on an investment over the holding period, including both income and capital appreciation
Explanation: B is correct. Holding period return = (P₁ − P₀ + D₁) / P₀. This is the same as TSR when applied to a share. It can be applied to any investment over any time period. A counts only income. C is ROA. D is gross margin.
Question 76
What is the relationship between bond price and yield?
Select an option first.
Correct answer: B — Bond price and yield move in opposite directions — when market interest rates (yields) rise, existing bond prices fall so that their total return equals the new market yield. This is because fixed coupon payments become less attractive relative to new bonds
Explanation: B is correct. Inverse price-yield relationship: if market yield rises above the coupon rate, the bond sells at a discount (below par). If yield falls below the coupon rate, it sells at a premium. Duration measures the sensitivity of price to yield changes. A is wrong. C is true only at issuance (par bonds). D is wrong.
Question 77
What is 'duration' of a bond?
Select an option first.
Correct answer: B — A measure of the price sensitivity of a bond to changes in interest rates, approximately equal to the percentage change in price for a 1% change in yield — also the weighted average time to receive all the bond's cash flows
Explanation: B is correct. Duration (Macaulay duration): weighted average time to receive cash flows. Modified duration = sensitivity measure: ΔP/P ≈ −MD × Δy. Longer duration = greater interest rate risk. Used in immunisation and portfolio risk management. A is simply maturity. C is the coupon rate. D is a credit quality measure.
Question 78
What is 'convexity' of a bond?
Select an option first.
Correct answer: A — The curvature of the price-yield relationship — duration underestimates price rises and overestimates price falls. Convexity is an additional correction term that improves accuracy of duration-based price change estimates for large yield movements
Explanation: A is correct. Convexity captures the non-linear (curved) relationship between bond price and yield. Duration provides a linear approximation; convexity corrects for the curvature. Higher convexity is desirable — bonds gain more when yields fall and lose less when yields rise. B is credit spread. C is coupon frequency. D is credit sensitivity.
Question 79
What is 'immunisation' in bond portfolio management?
Select an option first.
Correct answer: B — Structuring a bond portfolio so that its duration equals the investment horizon — this makes the portfolio immune to interest rate risk because price changes and reinvestment rate changes offset each other
Explanation: B is correct. Immunisation: match duration of assets to the time horizon of liabilities. If rates rise: price falls but reinvestment rate rises, and these offset over the horizon. Duration matching is the basic tool; cash flow matching (dedication) is a more precise alternative. A is credit risk management. C is a strategy but not immunisation. D is wrong.
Question 80
What is the 'yield to maturity' (YTM) of a bond?
Select an option first.
Correct answer: B — The discount rate that equates the present value of all the bond's future cash flows (coupons + par value at maturity) to its current market price — the total annual return if the bond is held to maturity and coupons are reinvested at the same rate
Explanation: B is correct. YTM is the bond's IRR — equates current price to the PV of all future cash flows. It assumes coupons are reinvested at the YTM. A is the coupon rate (not YTM). C is the current yield (only considers annual coupon, not capital gain/loss). D ignores coupon income.
Question 81
What is a 'yield curve' and what are its common shapes?
Select an option first.
Correct answer: B — A graph of the yields on government bonds (risk-free) against their maturities — normal (upward sloping: long rates > short rates), inverted (downward sloping: short rates > long rates — often signals a recession), and flat (roughly equal rates across maturities)
Explanation: B is correct. Yield curve: normal shape = compensation for longer-term risk and inflation expectations. Inverted = market expects future interest rates to fall (often recession signal). Humped = medium-term rates higher than both short and long. A and C are different charts. D is a credit risk curve.
Question 82
What does it mean if the yield curve is 'inverted'?
Select an option first.
Correct answer: B — Short-term interest rates are higher than long-term rates — often interpreted as a signal that financial markets expect a recession or aggressive central bank rate cuts in the future
Explanation: B is correct. Inverted yield curve: short rates > long rates. Historically has preceded recessions because it implies markets expect future economic weakness and rate cuts. Also associated with tight monetary policy squeezing short-term rates above longer-term equilibrium rates. A is a normal yield curve. C is a flat yield curve. D is wrong.
Question 83
What is 'Tobin's Q' ratio?
Select an option first.
Correct answer: B — The ratio of a firm's market value (equity + debt) to the replacement cost of its assets — a Q > 1 implies the market values the firm above what it would cost to recreate its assets, suggesting the firm earns above-normal returns and should invest more
Explanation: B is correct. Tobin's Q = Market value / Replacement cost of assets. Q > 1: invest more (value created exceeds cost of creating it). Q < 1: don't invest (market values assets below replacement cost). A is the earnings yield. C is EVA/equity. D is the inverse of P/B.
Question 84
What is the 'rule of 72' and how is it used?
Select an option first.
Correct answer: B — A quick approximation: the number of years for an investment to double = 72 divided by the annual return percentage — e.g., at 8% p.a., money doubles in about 9 years
Explanation: B is correct. Rule of 72: doubling time ≈ 72/r%. At 6%: 12 years. At 12%: 6 years. Useful quick comparison tool. A is not the rule of 72. C and D are invented.
Question 85
What is the difference between nominal and real cash flows in project appraisal?
Select an option first.
Correct answer: B — Nominal cash flows include the effect of inflation (actual money amounts); real cash flows are in today's purchasing power (inflation-stripped). Both give the same NPV: use nominal with nominal rate or real with real rate
Explanation: B is correct. Consistency rule: nominal with nominal discount rate, or real with real rate — both give the same NPV. Fisher equation: (1+nominal) = (1+real)(1+inflation). A conflates them. C is wrong. D: nominal is higher than real in inflation environments.
Question 86
What is the Fisher equation relating nominal and real interest rates?
Select an option first.
Correct answer: B — (1 + Nominal) = (1 + Real) × (1 + Inflation) — the precise relationship. The approximation Nominal ≈ Real + Inflation is acceptable for small rates
Explanation: B is correct. Fisher: (1+n) = (1+r)(1+i). Expanding: n ≈ r + i for small rates. Example: real 3%, inflation 5% → nominal ≈ 8.15% precise, ≈ 8% approximate. C and D are wrong.
Question 87
What is a 'capital allowance' (tax depreciation) and how does it affect NPV?
Select an option first.
Correct answer: B — A tax deduction allowed by tax authorities on capital expenditure — the tax saved on capital allowances is a real cash inflow (tax shield) that improves NPV. Accounting depreciation is NOT a cash flow, but the tax saving from capital allowances IS
Explanation: B is correct. Capital allowances differ from accounting depreciation. The tax saving = allowance × tax rate is an actual cash inflow included in NPV. A says accounting depreciation reduces NPV (wrong — it is not a cash flow). C and D are unrelated.
Question 88
What is 'asset replacement' analysis?
Select an option first.
Correct answer: B — A decision on when to replace an existing asset — using equivalent annual cost (EAC) to compare the annual cost of continuing to use the old asset versus the EAC of a new replacement. Replace when annual cost of old > EAC of new
Explanation: B is correct. Asset replacement: EAC method applied to find the optimal replacement cycle. Old asset annual cost = operating cost + opportunity cost of foregone disposal value. Compare to EAC of new asset. A is a divestiture decision. C is financing. D is part of the input.
Question 89
What is net working capital (NWC) in project appraisal and how does it affect cash flows?
Select an option first.
Correct answer: B — The incremental investment in current assets minus current liabilities required by a new project — an increase in NWC is a cash outflow at the start (investment in inventory, receivables less payables), recovered as a cash inflow at project end when operations cease
Explanation: B is correct. NWC in projects: cash invested = increased current assets − increased current liabilities. Recovered at end when stock sold, customers pay up, payables settled. A is wrong. C describes depreciation. D is wrong.
Question 90
What is bootstrapping in the context of yield curve construction?
Select an option first.
Correct answer: B — A method of deriving zero-coupon (spot) rates from the prices of coupon-bearing bonds by stripping out each coupon sequentially — used to construct a zero-coupon yield curve for accurate discounting
Explanation: B is correct. Bootstrapping (yield curve): derives longer-maturity spot rates from shorter ones using coupon bond prices. Zero-coupon yield curve: theoretically correct as each cash flow is discounted at its own maturity rate. A is cost strategy. C and D are different uses of the word.
More free ACCA topics
Management Accounting401
Financial Accounting400
Corporate and Business Law400
Performance Management400
Financial Reporting400
Financial Management400
Strategic Business Reporting400
Advanced Performance Management400
Advanced Taxation400
Business and Technology300
Taxation300
Audit and Assurance300
Strategic Business Leader300
Advanced Audit and Assurance296
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.