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Free ACCA Financial Management Practice Questions & Answers
400 exam-style 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 391
What does 'financial synergy' mean in a merger or acquisition?
Select an option first.
Correct answer: B — The financial benefits from combining two companies — e.g., lower cost of capital (diversification reducing default risk), higher debt capacity, or tax losses from one company offsetting profits of another
Explanation: Financial synergy: reduced WACC (e.g., from diversification), increased debt capacity (combined balance sheet supports more debt), or tax benefits (using accumulated tax losses). A is cultural; C is revenue synergy; D is cost synergy.
Question 392
What is the 'cost of preference shares' for a company?
Select an option first.
Correct answer: B — Annual preference dividend ÷ Current market price of preference shares (kp = D_pref / P_pref)
Explanation: For irredeemable preference shares: kp = D_pref / P_pref (similar to a perpetuity, without a tax deduction because preference dividends are not tax-deductible). A is wrong; C applies to equity risk premium logic; D applies to bonds.
Question 393
What is a 'mezzanine finance' arrangement?
Select an option first.
Correct answer: B — A layer of financing sitting between senior debt and equity — typically unsecured subordinated debt or preference shares, often with equity 'kickers' (warrants). Higher risk than senior debt but lower than equity; earns a higher return accordingly
Explanation: Mezzanine fills the gap between senior debt and equity. It carries higher risk (subordinated, often unsecured) and higher return (higher interest, plus potential equity warrants). Used in buyouts and growth financing. A is senior debt; C is equity; D is working capital.
Question 394
What is 'hedging' in risk management?
Select an option first.
Correct answer: B — Taking an offsetting position to reduce or eliminate exposure to a financial risk (e.g., buying a forward contract to lock in an exchange rate, or taking an opposing futures position to offset a physical market exposure)
Explanation: Hedging offsets risk exposure using a financial instrument that gains in value when the hedged position loses (and vice versa). The goal is risk reduction, not profit. A is speculation; C is risk avoidance (impractical); D is unhedged speculation.
Question 395
In treasury management, what is 'cash pooling'?
Select an option first.
Correct answer: B — Consolidating the cash balances of multiple subsidiaries into a single master account, reducing the need for external borrowing by offsetting surpluses against deficits within the group
Explanation: Cash pooling: group cash management technique where subsidiary cash balances (positive and negative) are combined. A subsidiary in overdraft borrows from the pool rather than from a bank; surplus subsidiaries earn interest on the pool. Reduces net external borrowing. A, C and D are wrong.
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Question 396
Which of the following statements about the 'efficient market hypothesis' (EMH) is CORRECT?
Select an option first.
Correct answer: B — In a semi-strong efficient market, share prices reflect all publicly available information, so fundamental analysis (using public data) cannot consistently generate abnormal returns
Explanation: Semi-strong EMH: prices reflect all public information (financial statements, news). Fundamental analysis cannot add value since all public data is already priced in. Weak form: prices reflect historical price data. Strong form: prices reflect all information including insider data. A is strong form; C contradicts EMH; D is too absolute.
Question 397
What is the purpose of a 'credit rating' for a bond, and which agencies provide them?
Select an option first.
Correct answer: B — To provide investors with an independent assessment of the bond issuer's creditworthiness and default risk — major agencies include Moody's, Standard & Poor's, and Fitch
Explanation: Credit ratings (AAA to D) indicate default probability. Higher rated bonds have lower yields (less risk); lower rated bonds (junk/high yield) have higher yields to compensate investors. Ratings agencies: Moody's, S&P, Fitch. A, C and D are wrong.
Question 398
What is 'net present value of growth opportunities' (NPVGO)?
Select an option first.
Correct answer: B — The component of a company's share price attributable to the present value of future growth investments — equal to the difference between the total share price and the no-growth value (P₀ − E/ke)
Explanation: NPVGO = Total share price − Value if no growth (E/ke). It represents the market's expectation of the additional value from future growth opportunities. A company with high NPVGO is typically a growth company (e.g., technology) where most value comes from future projects. A, C and D are wrong.
Question 399
What is the difference between 'diversifiable' and 'non-diversifiable' risk, and why does this distinction matter for required returns?
Select an option first.
Correct answer: B — Diversifiable (unsystematic) risk can be eliminated by holding a diversified portfolio, so the market does not reward investors for bearing it — required returns reflect only non-diversifiable (systematic) risk, measured by beta
Explanation: Portfolio theory: unsystematic risk disappears in a diversified portfolio; systematic risk remains. CAPM only rewards systematic risk. This is why two companies with equal total risk but different betas can have different required returns. A, C and D are wrong.
Question 400
What is an 'interest rate futures' contract used for?
Select an option first.
Correct answer: B — A standardised, exchange-traded contract used to hedge interest rate risk — a company borrowing at a variable rate can sell interest rate futures to protect against rate increases
Explanation: Interest rate futures allow hedgers to lock in an effective borrowing rate. A borrower fearing rate rises sells futures (shorts the market): if rates rise, the fall in futures prices generates a profit that offsets the higher borrowing cost. A, C and D are wrong.
More free ACCA topics
Management Accounting401
Financial Accounting400
Corporate and Business Law400
Performance Management400
Financial Reporting400
Strategic Business Reporting400
Advanced Financial Management400
Advanced Performance Management400
Advanced Taxation400
Business and Technology300
Taxation300
Audit and Assurance300
Strategic Business Leader300
Advanced Audit and Assurance296
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