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 121
What is economic value added (EVA) and how does it differ from accounting profit?
Select an option first.
Correct answer: B — EVA = NOPAT − (WACC × Invested capital). It measures whether the firm earns more than its cost of capital — a positive EVA means true economic profit is generated; a firm can show accounting profit but negative EVA if returns don't cover the cost of equity
Explanation: B is correct. EVA: deducts a capital charge for ALL capital (equity and debt). Accounting profit only deducts the explicit cost of debt (interest) — ignores the opportunity cost of equity. A company earning 8% ROE with a 12% Ke is accounting-profitable but has negative EVA. A conflates with EBIT. C describes operating cash flow. D is wrong.
Question 122
What is the net present value (NPV) 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 — shows how NPV declines as the discount rate increases. The curve crosses zero at the IRR. Where two project profiles cross is the 'crossover rate' where their NPVs are equal
Explanation: B is correct. NPV profile: starts at undiscounted net cash flows (r=0) and declines. Crosses x-axis at IRR. The crossover rate between two projects is where NPV_A = NPV_B — below this rate, one project dominates; above it, the other does. A is a stock chart. C is a payback chart. D is from simulation analysis.
Question 123
When appraising a foreign currency project, 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 WACC, then convert at today's spot rate; or (2) convert forecast cash flows to domestic currency using forecast exchange rates and discount at the domestic WACC — both give the same NPV
Explanation: B is correct. Both methods are theoretically equivalent (interest rate parity ensures consistency). Method (1) is cleaner. A uses today's spot for all future flows (wrong — ignores future exchange rate changes). C and D are wrong.
Question 124
What is the Gordon Growth Model used for in practice?
Select an option first.
Correct answer: B — Estimating the cost of equity or the terminal value in a DCF — P₀ = D₁/(Ke−g), rearranged for cost of equity: Ke = D₁/P₀ + g. Also the terminal value formula: TV = FCF×(1+g)/(WACC−g)
Explanation: B is correct. Gordon Growth Model: (1) cost of equity = D₁/P₀ + g (dividend growth model); (2) terminal value in DCF = FCF/(WACC−g). Both require a constant, sustainable growth rate assumption. A is a free cash flow concept. C estimates cost of debt (wrong). D is unrelated.
Question 125
What is the profitability index (PI) and when is it most useful?
Select an option first.
Correct answer: B — The ratio of the present value of cash inflows to the initial investment — most useful when capital is rationed and projects must be ranked to maximise total NPV within a budget constraint
Explanation: B is correct. PI = PV of inflows / Initial investment. PI > 1 → project adds value. Under capital rationing, rank by PI (NPV per £ of capital) to maximise total NPV within the budget. A describes excess return (not PI). C and D are wrong.
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 126
What is political risk and how can it be managed?
Select an option first.
Correct answer: B — The risk that foreign government actions (nationalisation, expropriation, capital controls, tax changes) adversely affect an international investment — managed through: political risk insurance (MIGA, ECAs), joint ventures with local partners, negotiating host government agreements, or structuring via international entities
Explanation: B is correct. Political risk: government interference. Mitigation: MIGA insurance, local partner JVs, HGA with government, international arbitration clauses, and minimising local asset exposure. A is management risk. C is interest rate risk. D is investment risk.
Question 127
What is the adjusted present value (APV) method?
Select an option first.
Correct answer: B — A valuation approach that separates the base-case NPV (as if all-equity financed, discounted at unlevered cost of equity) from the present value of financing side-effects — primarily the tax shield on debt. APV = Base NPV + PV of financing effects
Explanation: B is correct. APV: useful when debt level is changing (LBOs, project finance). Splits value into: what the project is worth unlevered + benefit of debt tax shields (and other financing effects such as subsidised loans). A is not APV. C is risk-adjusted NPV. D ignores financing effects.
Question 128
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 the percentage change in price for a 1% change in yield. Also the weighted average time to receive all the bond's cash flows (Macaulay duration)
Explanation: B is correct. Duration: Macaulay duration = weighted average cash flow timing. Modified duration = sensitivity measure: ΔP/P ≈ −MD × Δy. Longer duration = greater interest rate risk. Used in immunisation and portfolio hedging. A is simply maturity. C is the coupon rate. D is credit quality.
Question 129
What is convexity of a bond?
Select an option first.
Correct answer: A — The curvature of the price-yield relationship — duration provides a linear approximation of price changes; convexity corrects for the curved nature of the relationship, improving accuracy for large yield movements. Higher convexity is desirable
Explanation: A is correct. Convexity captures the non-linear (curved) relationship between bond price and yield. Duration underestimates price rises and overestimates price falls. Convexity correction: ΔP/P ≈ −MD × Δy + ½ × Convexity × (Δy)². B is credit spread. C is coupon frequency. D is credit sensitivity.
Question 130
What is 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 at maturity) to its current market price — the total annual return if held to maturity and coupons reinvested at the same rate
Explanation: B is correct. YTM = the bond's IRR. Assumes coupons reinvested at YTM. A is the coupon rate. C is the current yield (only considers the annual coupon, not capital gain/loss to maturity). D ignores coupon income.
Question 131
What is the yield curve and what does an inverted shape signal?
Select an option first.
Correct answer: B — A graph of government bond yields against their maturities — normal (upward sloping: long rates > short rates), inverted (downward sloping: short rates > long rates, often signals a recession or expected rate cuts), and flat
Explanation: B is correct. Yield curve: normal = compensation for time/inflation risk. Inverted = markets expect future rates to fall (recession signal, tight monetary policy). Humped = medium-term rates highest. A and C are different charts. D is a credit risk curve.
Question 132
What is the 'discount for lack of marketability' (DLOM) in private company valuation?
Select an option first.
Correct answer: B — A valuation discount applied to shares in private companies because they cannot be quickly sold at a known price — unlike publicly listed shares, private equity interests may take months or years to sell. DLOM typically ranges from 15–40% of equivalent public market value
Explanation: B is correct. DLOM: private company shares lack the liquidity of listed shares. Comparable public market values need discounting for illiquidity. Related: DLOC (discount for lack of control) for minority stakes. Appraisers use: restricted stock studies, put option models, QMDM. A is a management discount. C is a control premium (opposite). D is ESG discount.
Question 133
What is a real option to 'abandon' a project?
Select an option first.
Correct answer: B — The right to discontinue a project before its planned completion if it proves unprofitable — equivalent to a put option on the project's value. The abandonment option increases project NPV because it limits downside: management can cut losses early rather than continuing to invest in a loss-making project
Explanation: B is correct. Option to abandon (put option on project): strike price = salvage/abandonment value. If PV of remaining cash flows < abandonment value, the option should be exercised. This floor on losses increases the project's value above its static NPV. A is an asset sale. C is a business sale. D is the option to defer.
Question 134
What is 'scenario analysis' vs 'sensitivity analysis' in investment appraisal?
Select an option first.
Correct answer: B — Sensitivity analysis changes one variable at a time to find its break-even point; scenario analysis changes multiple variables simultaneously to represent coherent scenarios (e.g., optimistic, base, pessimistic) — giving a more realistic view of how combinations of variables affect the project NPV
Explanation: B is correct. Sensitivity: one variable, break-even analysis. Scenario: multiple variables change together consistently (e.g., in a recession: sales fall, costs rise, discount rate rises). Both are deterministic (no probabilities) unlike Monte Carlo simulation. A conflates them. C reverses the complexity. D describes simulation.
Question 135
What is the 'investment decision rule' under NPV?
Select an option first.
Correct answer: B — Accept a project if its NPV > 0 (it adds value above the required rate of return), and reject if NPV < 0. For mutually exclusive projects, choose the one with the highest positive NPV
Explanation: B is correct. NPV decision rule: NPV > 0 → accept (adds value). NPV < 0 → reject (destroys value). NPV = 0 → indifferent (exactly meets the required return). For mutually exclusive: highest NPV. NPV is theoretically superior to IRR, payback, or ARR because it directly measures value added. A uses IRR (without comparison to cost of capital). C and D use arbitrary thresholds.
Question 136
What is the 'overall cost of capital' for a firm and how is it calculated?
Select an option first.
Correct answer: B — The weighted average cost of capital (WACC), which weights the after-tax cost of each capital component (equity, debt, and any other forms) by its proportion of the total firm value: WACC = (E/V)×Ke + (D/V)×Kd×(1−t)
Explanation: B is correct. WACC: market value weights, after-tax cost of debt (interest is tax-deductible), cost of equity from CAPM or DDM. Used as the discount rate for NPV when the project has the same risk as the firm. A is historical cost. C is marginal debt cost. D is unweighted and uses pre-tax cost of debt.
Question 137
What is 'impairment testing' of goodwill and which standard governs it?
Select an option first.
Correct answer: B — Under IAS 36, goodwill is tested for impairment at least annually — comparing the carrying amount of the cash-generating unit (including goodwill) to its recoverable amount (higher of value in use and fair value less costs to sell). If carrying amount > recoverable amount, an impairment loss is recognised
Explanation: B is correct. IAS 36: goodwill not amortised under IFRS — tested annually for impairment. IAS 36 impairment loss = carrying amount − recoverable amount. Goodwill impairment is irreversible. Goodwill allocated to CGUs for testing. A describes revaluation (not applicable to goodwill). C describes US GAAP (pre-2016 IFRS for SMEs allows amortisation). D allows skipping annual test (wrong under IFRS 3).
Question 138
What is the 'weighted average number of shares' used in EPS calculation?
Select an option first.
Correct answer: B — The shares in issue weighted by the fraction of the year they were in issue — adjusts for share issues or buybacks during the year. Rights issues require retrospective restatement using the bonus element; bonus issues require full retrospective restatement across all periods presented
Explanation: B is correct. Weighted average shares: e.g., 1m shares for 6 months + 1.5m shares for 6 months = 1.25m weighted average. Rights issues: separate into bonus element (restated retroactively) and new money element (time-weighted from issue date). Bonus issues: all periods restated as if always had those shares. A and C are approximations. D uses maximum (wrong).
Question 139
What are 'deferred tax' and 'temporary differences' in the context of financial reporting?
Select an option first.
Correct answer: B — Timing differences between the recognition of income/expense in financial statements and their recognition for tax purposes — create deferred tax liabilities (accounting profit > tax profit now → more tax later) or deferred tax assets (tax profit > accounting profit now → less tax later). IAS 12 governs
Explanation: B is correct. Temporary differences (IAS 12): differences between the carrying amount of an asset/liability and its tax base. DTL: asset carries at more than tax base → future taxable amount. DTA: asset carries at less → future deductible amount. Recognised in the balance sheet. A is a permanent difference (doesn't create deferred tax). C is a current tax prepayment. D is an IFRS/local GAAP difference.
Question 140
What is 'free cash flow to the firm' (FCFF) formula?
Select an option first.
Correct answer: B — NOPAT (EBIT × (1−t)) + Depreciation − Capital expenditure − Increase in net working capital — the cash generated by operations available to all providers of capital before financing payments
Explanation: B is correct. FCFF: starts with NOPAT (operating profit after tax, ignoring financing), adds back non-cash depreciation, deducts capex (capital maintenance and growth), and adjusts for working capital investment. Discounted at WACC = enterprise value. A describes EBITDA − capex (not quite FCFF). C is revenue − costs (operating income). D is wrong.
Question 141
What is 'free cash flow to equity' (FCFE)?
Select an option first.
Correct answer: B — FCFF minus after-tax interest payments minus net debt repayments (or plus net new borrowing) — the cash available specifically to equity holders after meeting all obligations to debt holders. Discounted at cost of equity (Ke) gives equity value
Explanation: B is correct. FCFE = FCFF − Interest×(1−t) − Net debt repayment. Alternatively: Net income + Depreciation − Capex − ΔNWC − Net debt repayment. Discounted at Ke gives equity value directly. A uses dividends (wrong). C is just dividends. D is FCFF before financing adjustments.
Question 142
What is 'terminal value' in a DCF model and what are the two main approaches?
Select an option first.
Correct answer: B — The present value of all cash flows beyond the explicit forecast period — calculated using either: (1) the Gordon Growth Model (TV = FCF_{n+1}/(WACC−g)) for a going-concern, or (2) an exit multiple (TV = EBITDA_n × EV/EBITDA multiple) for a transaction context
Explanation: B is correct. Terminal value: often 60–80% of total DCF value. Gordon Growth: assumes FCF grows at g forever (requires g < WACC). Exit multiple: applies a comparable companies multiple to the final year EBITDA (reflects transaction-based value). The two approaches should give similar results; differences reveal key assumptions. A is liquidation value. C is accounting profit. D is book value.
Question 143
What is 'enterprise value' and what does it represent?
Select an option first.
Correct answer: B — The total value of a firm to all capital providers: equity market cap + net debt (total debt minus cash). EV = what it would cost to acquire the entire business debt-free. Used with EBITDA and revenue to create valuation multiples that are capital-structure neutral
Explanation: B is correct. EV = Market cap + Total debt − Cash (+ minority interests + preferred equity). EV represents the cost of acquiring the entire business (all claims). EV/EBITDA: capital-structure neutral, enables cross-company comparison. A is only equity value. C is book equity. D is revenue.
Question 144
What is '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 — the most comprehensive measure of value created for shareholders, capturing both price appreciation and income
Explanation: B is correct. TSR: includes both capital gain (P₁ − P₀) and dividend income (D₁). Normalised by the opening price. Used as the performance hurdle in executive LTIP schemes (relative TSR vs peers). A counts only dividends. C is an EV/EBITDA variant. D describes economic value added.
Question 145
What is 'holding company discount' and why does it arise?
Select an option first.
Correct answer: B — When a holding company trades at a discount to the combined market value of its listed subsidiaries and investments — arises because of: higher management costs (two sets of boards), potential double taxation of dividends, lack of clarity, and investor preference for pure-play exposures
Explanation: B is correct. Holding company discount: common in investment companies, industrial conglomerates, and financial holding companies. Reduces the combined market value of the underlying assets by 10–25% typically. Activist investors push for breaking up or simplifying holding structures to unlock this discount. A is debt pricing. C is DLOM. D is acquisition-related.
Question 146
What is 'private market value' (PMV) in equity analysis?
Select an option first.
Correct answer: B — The estimated price at which a company or its assets would be acquired in a private transaction, used by value investors and activists to identify undervalued listed companies — if market cap < PMV, there is potential value to be unlocked through activism, buyout, or strategic alternatives
Explanation: B is correct. PMV (used by value investors like Gabelli): estimate what a strategic acquirer would pay for the business (using precedent transactions, LBO analysis) and compare to the current stock price. If PMV > stock price, the company is undervalued. A is an IPO concept. C is NAV. D is pre-IPO concept.
Question 147
What is 'capital structure irrelevance' in the Modigliani-Miller framework without taxes?
Select an option first.
Correct answer: B — In a perfect capital market (no taxes, no bankruptcy costs, no information asymmetry, no transaction costs), the value of a firm is independent of its capital structure — investors can create their own leverage (homemade leverage), so they will not pay more for a company just because it uses debt
Explanation: B is correct. MM Proposition I (no taxes): V_L = V_U. Firm value determined by operating cash flows, not by how they are financed. MM Proposition II (no taxes): Ke rises with leverage to exactly offset the benefit of cheaper debt → WACC constant. Real-world violations: taxes, financial distress, information asymmetry. A contradicts the theorem. C and D are wrong.
Question 148
What is the 'debt tax shield' and its present value under Modigliani-Miller with taxes?
Select an option first.
Correct answer: B — The reduction in taxable income from deducting interest on debt — creates a real cash benefit. Under MM with taxes and perpetual debt, PV of tax shield = t × D, where t = tax rate and D = market value of debt. This increases V_L above V_U
Explanation: B is correct. MM with taxes: V_L = V_U + t×D. The tax shield increases firm value linearly with debt. In reality, financial distress costs offset this at high leverage. Tax shield PV = t×D if debt is perpetual and certain. A describes an interest payment (not the tax shield). C is a bond pricing concept. D is dividend taxation.
Question 149
What is 'pecking order theory' and what does it predict about financing decisions?
Select an option first.
Correct answer: B — Firms prefer financing in this order: (1) internal funds (retained earnings — no information cost), (2) debt (lower information asymmetry than equity), (3) equity (last resort — signals undervaluation and triggers share price decline). Developed by Myers and Majluf (1984)
Explanation: B is correct. Pecking order (Myers and Majluf): information asymmetry drives the preference ordering. Equity issuance signals that management believes shares are overvalued → market reacts negatively. Internal funds have no signalling cost. Debt is a credible commitment (less information asymmetry than equity). A reverses the preference. C puts debt before internal (wrong). D is a short-termist objective.
Question 150
What is 'market value added' (MVA)?
Select an option first.
Correct answer: B — The difference between the total market value of the firm (equity + debt) and the total capital invested — equivalent to the present value of all future EVAs. MVA > 0 means the firm has created value above the capital invested
Explanation: B is correct. MVA = Market value of firm − Total capital invested = PV of all future EVAs. MVA > 0: firm has created wealth above invested capital. Consistent with NPV framework (NPV = PV of future EVAs = MVA). A is market-to-book (approximately MVA per share but not the same). C is acquisition premium. D is accounting goodwill.
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.