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 241
What are non-controlling interests (NCI) in consolidated accounts?
Select an option first.
Correct answer: B — The proportion of a subsidiary's equity not owned by the parent — shown in consolidated statements within equity (separately from parent shareholders' equity). The NCI's share of the subsidiary's profit is presented separately in the consolidated income statement
Explanation: B is correct. NCI: parent owns < 100% of subsidiary. Consolidated accounts include 100% of subsidiary assets/liabilities; equity and profit split between parent and NCI. IFRS 3: NCI measured at fair value (full goodwill) or proportionate share of net assets (partial goodwill). A is interest expense. C is interest income. D is inter-company loans.
Question 242
What is a hurdle rate in capital budgeting and PE?
Select an option first.
Correct answer: B — In capital budgeting: the minimum required rate of return (usually WACC or WACC + risk premium). In private equity: the minimum return to LPs (typically 8% IRR — the preferred return) before the GP earns any carried interest
Explanation: B is correct. Hurdle rate: in capex budgeting, projects with returns below WACC are rejected. In PE, the 8% preferred return must be delivered before the GP's carried interest kicks in. Higher hurdle for riskier projects. A (risk-free) ignores risk premium. C is arbitrary. D is backward-looking.
Question 243
What is debt capacity and how is it typically measured?
Select an option first.
Correct answer: B — The maximum sustainable debt a company can carry — determined by stable free cash flows (debt service), asset base (collateral), and credit rating maintenance. Typically measured as Net Debt / EBITDA (e.g., 3–4× for investment-grade companies, 5–7× for LBOs)
Explanation: B is correct. Debt capacity: FCF-based (interest coverage) and asset-based (collateral). Credit agencies impose effective limits via rating guidelines. PE buyouts push capacity to the limit by using the target's projected FCF to support maximum debt. A is historical borrowing. C is market-wide debt. D is single-lender capacity.
Question 244
What is spin-off value creation and its main drivers?
Select an option first.
Correct answer: B — Spin-offs often create value by: eliminating the conglomerate discount (sum-of-parts > conglomerate value), enabling focused management and strategy, allowing different capital structures for each business, and giving investors clean comparable exposure to each business
Explanation: B is correct. Spin-off value creation: market evidence shows both parent and spin-off typically outperform the market in the 2–3 years after a spin-off. Conglomerate discount eliminated. Focus effect: dedicated management, clearer incentives, tailored capital structure. A is too pessimistic. C is wrong. D is wrong.
Question 245
What is book-building in an IPO?
Select an option first.
Correct answer: B — The process by which an investment bank gauges investor demand for shares in an IPO — institutional investors submit bids (price and quantity) during the roadshow, and the bank uses this information to set the final offer price and allocate shares
Explanation: B is correct. Book-building: demand-driven pricing. Lead manager collects indications of interest from institutional investors, identifies the range where demand meets supply, and sets the final offer price. Reduces risk of under/over-pricing vs fixed-price offers. A is an accounting method. 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 246
What is EPS accretion dilution analysis and its key limitation?
Select an option first.
Correct answer: B — An analysis comparing the acquirer's standalone EPS to the combined entity's EPS post-acquisition — used to assess the short-term earnings impact. Key limitation: EPS accretion does not equate to value creation. A deal can be accretive but destroy shareholder value if the price paid exceeded the true value of the synergies
Explanation: B is correct. EPS accretion/dilution: widely used in M&A analysis. Limitation: accounting earnings can be affected by purchase price allocation, amortisation of intangibles, and different accounting policies. NPV analysis better captures true value creation. A is tax analysis. C is synergy modelling. D is wrong.
Question 247
What is corporate restructuring and what are the main forms?
Select an option first.
Correct answer: B — Reorganising a company's operations, financial structure, or ownership to improve value — forms include: divestitures (selling business units for cash), spin-offs (distributing subsidiary shares to existing shareholders), MBOs, financial restructuring (changing capital structure), and operational restructuring (cost reduction, workforce changes)
Explanation: B is correct. Corporate restructuring: strategic (portfolio reshaping), financial (capital structure), and operational (efficiency). Spin-off: no cash, shareholders get shares in new company. Divestiture: cash proceeds to parent. MBO: management acquires division. Financial: rights issues, debt restructuring. A is too narrow. C is rebranding. D is too narrow.
Question 248
What is 'financial engineering' in corporate finance?
Select an option first.
Correct answer: B — The use of mathematical and financial techniques to design new financial instruments or restructure existing ones to achieve a specific financial objective — examples include creating synthetic positions, structured products, securitisation, and using derivatives to achieve a desired risk-return profile
Explanation: B is correct. Financial engineering: legitimate use of financial instruments and structures to achieve objectives (reduce taxes, hedge risks, access new funding, create new products). Examples: convertible bonds (mix debt + option), CDOs (securitisation + tranching), collars (cap + floor), and synthetic positions using derivatives. A is fraud. C is accounting manipulation. D is too narrow.
Question 249
What is a 'special purpose vehicle' (SPV) and what are its uses?
Select an option first.
Correct answer: B — A legally separate entity created for a specific, limited purpose — used in: securitisation (holds the asset pool), project finance (ring-fences the project), off-balance-sheet financing (separates liabilities), and structured finance. The SPV is bankruptcy-remote from its sponsor
Explanation: B is correct. SPV: bankruptcy-remote (insulated from sponsor's insolvency), ring-fenced assets and liabilities, specific limited purpose. Key uses: securitisation (holds mortgages, issues ABS), project finance (holds project assets and contracts), and leveraged finance structures. A is too narrow (securitisation only). C is wrong. D describes a listed company.
Question 250
What is 'EBITDA bridge' analysis in M&A?
Select an option first.
Correct answer: B — An analysis that reconciles the seller's reported EBITDA to the 'normalised' or 'adjusted' EBITDA — adjusting for: one-off items (non-recurring costs/income), management add-backs, run-rate adjustments (annualising partial-year items), and synergies or cost savings. The agreed adjusted EBITDA is the basis for enterprise value
Explanation: B is correct. EBITDA bridge: critical in M&A deal negotiation. Seller wants higher adjusted EBITDA (lower implied multiple); buyer wants lower adjusted EBITDA (avoids overpaying). Common adjustments: exceptional legal costs, personal expenses run through business, COVID-related costs, owner's above-market salary. EV = Adjusted EBITDA × Multiple. A describes accounting reconciliation. C is financial modelling. D is a financing instrument.
Question 251
What is 'price to earnings growth' (PEG ratio) and how is it used?
Select an option first.
Correct answer: B — The P/E ratio divided by the expected earnings growth rate — a PEG of 1.0 is often considered fair value. A PEG < 1 suggests undervaluation (cheap given growth); PEG > 1 suggests overvaluation (expensive given growth)
Explanation: B is correct. PEG = P/E ÷ Earnings growth rate (%). Popularised by Peter Lynch. Adjusts P/E for growth: a high P/E is acceptable if growth is also high. Limitations: sensitive to growth estimate, doesn't account for quality of earnings or capital intensity, growth rates are uncertain. A uses book value growth (wrong). C inverts and uses revenue. D is wrong.
Question 252
What is 'enterprise value to revenue' (EV/Revenue) and when is it most applicable?
Select an option first.
Correct answer: B — Enterprise value divided by total revenue — applied when EBITDA is negative or when comparing early-stage, high-growth companies where margins are not yet meaningful (e.g., technology, SaaS). Lower multiple = cheaper relative to revenues
Explanation: B is correct. EV/Revenue: used when profitability-based multiples (EV/EBITDA, P/E) are meaningless (negative earnings). Common for high-growth tech companies. Limitation: ignores profitability differences between companies. A inverts the ratio (gives a different metric). C is not a standard multiple. D is a productivity metric.
Question 253
What is 'debt service coverage ratio' (DSCR) and why is it used by lenders?
Select an option first.
Correct answer: B — Cash available for debt service divided by total debt service (principal + interest payments due) — measures a borrower's ability to service its debt from operating cash flows. DSCR > 1.0 means sufficient cash; DSCR < 1.0 means insufficient cash to service debt. Lenders typically require minimum DSCR of 1.20–1.35×
Explanation: B is correct. DSCR = CFADS (cash flow available for debt service) / Debt service. Used by: project finance lenders (key covenant), leveraged lenders, and real estate lenders. Different from interest cover (EBIT/Interest) because DSCR includes principal repayment. Lenders set minimum DSCR covenants (e.g., 1.25×). A uses revenue (wrong). C is interest cover (not DSCR). D is wrong.
Question 254
What is 'recapitalisation' and what are the main forms?
Select an option first.
Correct answer: B — Restructuring a company's capital mix — main forms: leveraged recap (issue debt, buy back equity), equity recap (issue equity, repay debt), debt-to-equity swap (exchange debt for equity — used in distress), and dividend recap (issue debt to fund a large dividend). Each has different impacts on gearing, EPS, and firm value
Explanation: B is correct. Recapitalisation: any change in the debt/equity mix. Leveraged recap: increases gearing, reduces equity cushion, may increase EPS (fewer shares). Equity recap (rights issue): reduces gearing, dilutes EPS. Debt-to-equity: used in distress to reduce debt burden. Dividend recap: PE favourite — returns cash to investors while leaving more debt in the company. A is too narrow. C is a specific case. D is wrong.
Question 255
What is 'pre-money' and 'post-money' valuation in venture capital?
Select an option first.
Correct answer: B — Pre-money valuation: the value of a company before a new investment round. Post-money valuation: the value immediately after the investment (pre-money + new investment). Used to calculate the ownership percentage acquired by new investors: ownership % = investment / post-money valuation
Explanation: B is correct. VC valuation: if pre-money = £5m and investor puts in £1m, post-money = £6m. Investor owns 1/6 = 16.7%. Pre-money valuation is what founders negotiate. Post-money is the total implied value after the round. A restricts to M&A (wrong). C and D are wrong.
Question 256
What is 'dividend yield' and how is it used in valuation?
Select an option first.
Correct answer: B — Annual dividends per share divided by the current share price — indicates the cash return to investors from dividends alone. Used to compare income-generating investments and as an input into the dividend growth model for the cost of equity (Ke = D₁/P₀ + g)
Explanation: B is correct. Dividend yield = DPS / Price × 100%. High yield: high income return but may signal low growth expectations or a large-cap mature company. Low yield: low income but possibly high capital gain expectation (growth company). Used in the DDM for cost of equity estimation. A is earnings yield. C is price-to-sales inverse. D is an FCF yield variant.
Question 257
What is 'financial modelling' in corporate finance and what are the main model types?
Select an option first.
Correct answer: B — The construction of mathematical representations of a company's financial position and performance in a spreadsheet — main types: three-statement model (income statement, balance sheet, cash flow integrated), DCF model, LBO model, M&A model (merger consequences), and budget/forecast models
Explanation: B is correct. Financial models: three-statement model = foundation (IS drives retained earnings → BS; BS drives CF). DCF: derives intrinsic value. LBO: models buyout returns. M&A: merger consequences (EPS accretion, pro-forma balance sheet, credit analysis). Used for: investment decisions, deal analysis, fundraising, and strategic planning. A is accounting software. C and D are wrong.
Question 258
What is 'precedent transaction analysis' in M&A valuation?
Select an option first.
Correct answer: B — A valuation methodology that values a company based on the multiples paid in previous comparable M&A transactions — transaction multiples typically include a control premium (20–40%) above trading multiples, making them generally higher than comparable company multiples
Explanation: B is correct. Precedent transactions: find comparable past M&A deals in the same sector, extract the implied multiples (EV/EBITDA, EV/Revenue, P/E), apply them to the target's financials. Key: transaction multiples reflect the control premium paid in actual deals → higher than trading multiples. Limitations: deals may not be truly comparable (timing, strategic rationale). A is comparable company analysis. C and D are wrong.
Question 259
What is 'comparable company analysis' (comps) in equity valuation?
Select an option first.
Correct answer: B — A valuation methodology that values a company by applying the trading multiples (EV/EBITDA, P/E, P/Revenue) of comparable publicly listed companies to the target's financial metrics — reflects current market sentiment and provides a market-based benchmark
Explanation: B is correct. Comps (comparable company analysis): identify peer group (same industry, similar size, similar business model), calculate their trading multiples (median/mean), apply to target metrics. Reflects current market conditions. Limitations: no two companies are identical, market sentiment affects multiples. A is financial statement analysis. C is strategic fit analysis. D is benchmarking vs own history.
Question 260
What is the 'control premium' in an acquisition and what drives it?
Select an option first.
Correct answer: B — The additional price paid above the current market price to acquire a controlling stake — typically 20–40% above pre-announcement price. Driven by: expected synergies, value of control (ability to direct strategy), competitive bidding, and strategic importance of the target
Explanation: B is correct. Control premium: acquirer pays more than the market price because: (1) control allows strategy direction and synergy realisation; (2) competitive bids drive up price; (3) options value of the target's assets. The premium represents the portion of synergies captured by the target's shareholders. A is wrong (market price doesn't already include a control premium). C is advisory fees. D is accounting goodwill.
Question 261
What is 'corporate venture capital' (CVC) and how does it differ from independent VC?
Select an option first.
Correct answer: B — Investment by an established corporation in external start-up companies — typically done to: gain access to new technologies, explore strategic partnerships, and potentially acquire the start-up. Different from independent VC: CVC has a strategic objective alongside financial returns, and has permanent capital (not fund-based)
Explanation: B is correct. CVC: strategic investor (e.g., Google Ventures, Intel Capital). Objectives: strategic intelligence, technology access, potential M&A, and financial return. Advantages for start-ups: credibility, strategic guidance, potential customer. Difference from VC: no fund life, strategic alignment required, may have slower decision-making. A is a buyout fund. C describes PE growth equity. D is government venture support.
Question 262
What is 'operating leverage' and how does it affect business risk?
Select an option first.
Correct answer: B — The proportion of fixed costs in a company's total cost structure — high operating leverage means small changes in revenue cause large changes in operating profit, amplifying business risk. Degree of operating leverage (DOL) = % change in EBIT / % change in sales
Explanation: B is correct. Operating leverage: high fixed costs → when sales rise, profit rises faster (leverage effect); when sales fall, profit falls faster. Capital-intensive industries (airlines, manufacturers) have high operating gearing. DOL = Contribution / EBIT. High DOL + high financial leverage = very high total risk. A is financial leverage. C conflates operating and financial leverage. D is interest rate risk.
Question 263
What is 'corporate social responsibility' (CSR) and its relationship to firm value?
Select an option first.
Correct answer: B — Voluntary actions a company takes to address its impact on society, environment, and stakeholders beyond its legal obligations — increasingly linked to firm value through: lower cost of capital for ESG-rated firms, better talent attraction, reduced regulatory risk, and brand value enhancement
Explanation: B is correct. CSR / ESG: growing body of evidence links strong ESG practices to lower cost of capital (investors demand lower premium for well-governed, low-risk firms), better talent retention, brand premium, and reduced regulatory/litigation risk. TCFD, ISSB standards (IFRS S1, S2) are formalising ESG disclosure requirements. A is philanthropy. C is wrong. D is an accounting standard.
Question 264
What is 'intangible asset valuation' in an M&A context?
Select an option first.
Correct answer: B — The process of identifying and measuring the fair value of intangible assets acquired in an M&A transaction — common methods: relief-from-royalty (brands, patents), multi-period excess earnings (customer relationships), cost approach (internally developed technology), and with-and-without method. Required under IFRS 3 purchase price allocation
Explanation: B is correct. Purchase price allocation (PPA) under IFRS 3: all identifiable intangible assets must be separated from goodwill and valued at fair value. Examples: brand (relief-from-royalty), customer relationships (MPEEM), non-compete agreements, technology, and order backlogs. The residual after allocating FV to all net assets = goodwill. A is too broad. C too narrow (goodwill is the residual). D is wrong.
Question 265
What is 'working capital adjustment' (WCA) in an M&A sale and purchase agreement?
Select an option first.
Correct answer: B — A mechanism that adjusts the final purchase price up or down to reflect the difference between the actual working capital delivered at completion and an agreed 'normalised' working capital target — ensures the buyer receives the right amount of working capital to operate the business
Explanation: B is correct. WCA: critical in M&A. Agreed working capital target (NWC) based on historical average. At completion, actual NWC measured. If actual > target → price increases (seller delivered more). If actual < target → price decreases (seller delivered less). Prevents sellers from running down WC before completion. A is wrong. C and D are wrong.
Question 266
What is 'interest coverage ratio' (ICR) and what does it measure?
Select an option first.
Correct answer: B — EBIT (or EBITDA) divided by interest expense — measures how many times a company can cover its interest payments from operating profit. ICR > 1 means the company covers interest; ICR < 1 means it cannot meet interest from operations. Lenders typically require ICR > 2.0–3.0×
Explanation: B is correct. Interest cover = EBIT / Interest expense (or EBITDA / Interest for cash-based version). Higher = more comfortable debt service. EBIT version: conservative. EBITDA version: more common in lending analysis (before non-cash charges). A is Net Debt/EBITDA (a leverage ratio). C uses revenue (wrong). D is a solvency/gearing ratio.
Question 267
What is 'Gamma' of an option and why does it matter for hedging?
Select an option first.
Correct answer: B — The rate of change of an option's delta for a £1 change in the underlying asset price — high gamma means delta changes rapidly as the underlying moves, making the hedge less stable and requiring more frequent rebalancing (more transaction costs for the delta hedger)
Explanation: B is correct. Gamma: delta changes as the underlying moves. High gamma (near-the-money options, near expiry): small moves in underlying → large changes in delta → frequent rebalancing needed. Low gamma (deep ITM or OTM options, long time to expiry): delta changes slowly. Gamma risk: in a delta-hedged portfolio, profits from gamma (volatility) but pays theta (time decay). A is Theta. C is Rho. D is intrinsic value.
Question 268
What is 'price discovery' in financial markets and why does it matter for corporate finance?
Select an option first.
Correct answer: B — The process by which the prices of financial instruments are determined through the interaction of buyers and sellers — efficient price discovery ensures that market prices reflect all available information about the true value of assets, helping companies make better financing and investment decisions
Explanation: B is correct. Price discovery: fundamental function of financial markets. Efficient markets → prices contain useful information about investment opportunities. For corporates: helps assess the cost of capital (share price reflects value), timing of equity/debt issuance, and the fairness of M&A consideration. A is accounting. C is transfer pricing. D is valuation (related but different).
Question 269
What is 'financial risk management' and why is it important for businesses?
Select an option first.
Correct answer: B — The process of identifying, assessing, and managing risks that can adversely affect a company's financial position — including foreign exchange risk, interest rate risk, commodity price risk, and credit risk. Effective risk management stabilises cash flows, reduces the cost of financial distress, and allows firms to focus on their core business
Explanation: B is correct. Financial risk management: protects against unexpected movements in market variables that could harm profitability or cash flow. Hedging reduces cash flow volatility, which can: lower the cost of capital, make investment plans more reliable, and reduce the probability of costly financial distress. A, C and D are other risk types.
Question 270
What is 'foreign exchange risk' and what are the three main types?
Select an option first.
Correct answer: B — The risk that changes in exchange rates will adversely affect the company's financial position — types: (1) transaction risk (on specific foreign currency receivables/payables); (2) translation risk (on financial statements of foreign subsidiaries); (3) economic risk (long-term impact on competitive position and future cash flows)
Explanation: B is correct. FX risk: transaction (known cash flows), translation (accounting, balance sheet consolidation), economic (strategic, long-term competitiveness). A is political/credit risk. C is counterparty credit risk. D is a capital control risk.
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.