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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 241
In the context of business valuation, what is 'goodwill'?
Select an option first.
Correct answer: B — The value attributed to intangible factors (brand, customer relationships, management quality, intellectual property) that cause a business to be worth more than the fair value of its individual net assets
Explanation: Goodwill = Purchase price paid for a business − Fair value of net assets acquired. It represents the 'premium' for intangibles (brand, customer base, workforce, know-how). A is net assets; C is profit; D is partly right but D only applies to listed companies.
Question 242
What is the 'dividend valuation model' (DVM) for a company with no dividend growth?
Select an option first.
Correct answer: B — P = D / ke (the share price equals the perpetuity value of the constant dividend)
Explanation: For a no-growth dividend: P₀ = D₀ / ke (constant perpetuity). A inverts; C uses EPS not dividend; D is the growth model formula.
Question 243
A company estimates that a project's annual cash inflows could be $80,000 (pessimistic), $100,000 (most likely), or $130,000 (optimistic). This is an example of:
Select an option first.
Correct answer: B — Scenario analysis (three scenarios: pessimistic, base, optimistic)
Explanation: This is scenario analysis — evaluating the project under three different scenarios. Sensitivity analysis (A) changes one variable at a time. Monte Carlo simulation (C, D) runs thousands of iterations. B correctly identifies the three-scenario approach.
Question 244
Which of the following is the CORRECT formula for the 'adjusted present value' (APV)?
Select an option first.
Correct answer: B — APV = Base-case NPV (discounted at Keu, the ungeared cost of equity) + PV of financing side effects (primarily the debt tax shield)
Explanation: APV separates investment and financing decisions: Base NPV (as if all-equity) + PV of tax shields (and other financing benefits like issue costs, subsidised debt). A, C and D are wrong formulas.
Question 245
What is 'inflation risk' in the context of bonds and long-term investments?
Select an option first.
Correct answer: B — The risk that unexpected increases in inflation erode the real (purchasing power adjusted) value of future cash flows, reducing the real return on fixed-income investments
Explanation: Inflation risk: fixed coupon payments and principal repayments on bonds are eroded in real terms if inflation rises unexpectedly. Index-linked bonds mitigate this. A is credit risk; C is interest rate risk; D is FX risk.
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Question 246
In NPV analysis, what is the correct treatment of 'residual value' (scrap value) at the end of a project?
Select an option first.
Correct answer: B — Include it as a cash inflow in the final year of the project and discount it back to present value
Explanation: Residual/scrap value is a real cash inflow when the asset is sold at project end. It is included as a Year N cash flow and discounted. If there are tax implications (balancing allowance or charge), these must also be accounted for. A loses real value; C and D are incorrect.
Question 247
Which of the following is an example of a 'real option' embedded in an investment project?
Select an option first.
Correct answer: B — The managerial flexibility to expand the project if early results are favourable, abandon it if results are poor, or delay the start — value not captured by standard NPV
Explanation: Real options: abandonment option, expansion option, timing/delay option. Standard NPV ignores managerial flexibility. The value of these options adds to NPV, especially for uncertain projects. A is a financial option; C and D are derivatives.
Question 248
What does 'enterprise value to EBITDA' (EV/EBITDA) measure?
Select an option first.
Correct answer: B — The total value of the business (equity + debt) relative to its operating cash flow proxy (EBITDA) — a capital structure-neutral valuation multiple widely used in M&A
Explanation: EV/EBITDA is a valuation multiple comparing total business value to operating earnings before non-cash charges and capital structure effects. It is capital structure neutral (unlike P/E) and is widely used in M&A comparisons. A uses net profit; C and D are wrong.
Question 249
What is the 'cost of retained earnings' for a company?
Select an option first.
Correct answer: B — The opportunity cost to shareholders of not receiving dividends — equal to the cost of equity (ke), since shareholders could have invested those funds elsewhere
Explanation: Retained earnings are not free: they represent funds that shareholders could have received as dividends and invested elsewhere. The cost = ke (the shareholder's required return). If the company reinvests at less than ke, value is destroyed. A is the most common misconception; C and D are wrong.
Question 250
In a DCF valuation, what is the most common reason that a company's intrinsic value (from DCF) differs from its market value?
Select an option first.
Correct answer: B — DCF is based on assumptions about future cash flows and discount rates that may differ from market consensus; markets also incorporate sentiment, liquidity, and information not fully captured in DCF models
Explanation: DCF gives an analyst's view based on specific assumptions. Market prices reflect collective investor expectations, which may differ. Neither is definitively 'correct' — they reflect different information and assumptions. A and C are wrong; D overstates the difference.
Question 251
What is the 'equivalent annual annuity' (EAA) formula?
Select an option first.
Correct answer: B — NPV ÷ Annuity factor for the project's life — converts NPV to an annual equivalent for comparing projects of different durations
Explanation: EAA = NPV ÷ Annuity factor (for the project life at the discount rate). By expressing each project's value as an annual equivalent, projects with different lives can be compared on the same basis. A is PI; C and D are wrong.
Question 252
What is the difference between 'accounting profit' and 'cash flow' in the context of a capital project?
Select an option first.
Correct answer: B — Accounting profit deducts depreciation (a non-cash charge) and may include accruals; cash flow reflects actual cash in/out — NPV uses cash flows, not accounting profit, because cash is what creates and reflects value
Explanation: NPV is based on cash flows because: (1) cash flows are real and observable; (2) depreciation is a timing allocation, not a cash payment; (3) value is created by cash generation, not accounting constructs. A and C are wrong; D is debatable but D is not the key point here.
Question 253
Which of the following describes a 'merger' versus an 'acquisition' in corporate finance?
Select an option first.
Correct answer: B — A merger involves two roughly equal companies combining to form a new entity; an acquisition involves one company (the acquirer) buying a controlling interest in another (the target)
Explanation: Merger: two companies combine, typically of similar size, creating a new entity or one absorbs the other by agreement. Acquisition: one company buys the target. A, C and D are oversimplifications or wrong.
Question 254
In sensitivity analysis, a 'sensitivity percentage' of 5% for selling price means:
Select an option first.
Correct answer: B — The project's NPV will become zero if the selling price falls by 5% from its forecast level — a small margin of safety indicating selling price is a critical variable
Explanation: Low sensitivity % = small change needed to turn NPV negative = high risk for that variable = critical to monitor. A 5% margin of safety for price is very small — the variable is highly sensitive. A and C reverse the interpretation; D is wrong.
Question 255
What is the impact on NPV of receiving cash inflows EARLIER rather than later?
Select an option first.
Correct answer: B — Earlier inflows increase NPV because their discount factors are closer to 1 — they are discounted less
Explanation: Earlier cash flows have higher present value (less discounting). Bringing a $100,000 cash flow from Year 3 to Year 1 significantly increases NPV. A reverses the logic; C and D are incorrect.
Question 256
A project requires an initial investment of $1,000,000. Expected annual cash flows after tax are $200,000 for 8 years. Using an 8-year annuity factor at 10% of 5.335, what is the NPV?
Select an option first.
Correct answer: A — $67,000
Explanation: NPV = ($200,000 × 5.335) − $1,000,000 = $1,067,000 − $1,000,000 = $67,000. B ignores discounting; C is the investment only; D is wrong.
Question 257
What is the meaning of a 'positive NPV' of $50,000?
Select an option first.
Correct answer: B — Accepting the project is expected to increase the present value of the company (and thus shareholder wealth) by $50,000, after earning the required rate of return
Explanation: NPV of $50,000: the project creates $50,000 of value above the minimum required return — shareholders are $50,000 better off (in PV terms) by accepting it. A confuses cash and profit; C and D are wrong interpretations.
Question 258
Which of the following BEST describes the term 'capital structure'?
Select an option first.
Correct answer: B — The mix of long-term debt and equity used to finance a company's assets
Explanation: Capital structure refers to how a company finances its long-term assets — the proportions of equity (ordinary shares, retained earnings) and debt (bonds, loans) in its total capital. A, C and D are incorrect definitions.
Question 259
What is the main advantage of debt financing (borrowing) over equity financing?
Select an option first.
Correct answer: B — Interest on debt is tax-deductible, creating a 'tax shield' that reduces the effective cost of debt
Explanation: The key advantage of debt: interest is deductible for tax purposes, reducing the after-tax cost of debt (kd = pre-tax rate × (1−T)). Equity dividends are NOT tax-deductible. A overstates; C is wrong (debt holders have no votes); D is wrong (debt must be repaid regardless of profitability).
Question 260
What does the 'gearing ratio' measure?
Select an option first.
Correct answer: B — The proportion of a company's capital that is financed by debt relative to equity (or total capital)
Explanation: Gearing (leverage) = Debt ÷ Equity (or Debt ÷ Total capital). High gearing means more fixed-interest debt, amplifying both returns and risk. A, C and D are different measures.
Question 261
What is a 'dividend'?
Select an option first.
Correct answer: B — A cash payment made to shareholders from the company's after-tax profits, representing a return on their investment
Explanation: A dividend is a distribution of after-tax profit to shareholders. A is pre-tax profit; C is interest (a return to debt holders); D is profit retained within the company (not distributed).
Question 262
Which of the following is a source of LONG-TERM finance for a company?
Select an option first.
Correct answer: B — Ordinary share issue
Explanation: Ordinary shares are a permanent (long-term) source of equity finance. A (overdraft) and C (trade credit) are short-term; D (invoice discounting) is short-term working capital finance.
Question 263
What is the main risk to shareholders from HIGH levels of gearing?
Select an option first.
Correct answer: B — In times of poor trading, the fixed interest payments on debt must still be made, increasing the risk of financial distress or insolvency
Explanation: High gearing amplifies financial risk: if profits fall, the fixed interest burden remains, increasing the risk of default. A is wrong; C is incorrect (gearing doesn't affect voting); D is not always true.
Question 264
Which of the following is a characteristic of an 'ordinary share'?
Select an option first.
Correct answer: B — Residual claim on assets, variable dividends at directors' discretion, and full voting rights
Explanation: Ordinary (common) shares: no guaranteed dividend; dividend varies with profits; full voting rights; last claim on assets in liquidation (after debt and preference shares). A and D describe preference shares; C is not a characteristic of any equity share.
Question 265
What is a 'preference share'?
Select an option first.
Correct answer: B — A share that carries a fixed dividend, paid before ordinary dividends, and has priority over ordinary shares in a liquidation
Explanation: Preference shares: fixed dividend (paid first), priority on liquidation over ordinary shares. Usually non-voting or limited voting. A is a 'weighted' voting share; C is a warrant or option; D is an employee share scheme.
Question 266
What is a 'bond' (debenture or loan stock)?
Select an option first.
Correct answer: B — A debt instrument where the company borrows money from investors and pays a fixed interest rate, with the principal repaid at maturity
Explanation: Bonds (debentures/loan notes) are long-term debt instruments: the company pays a coupon (interest) to bondholders and repays principal at maturity. A is equity; C and D are unrelated.
Question 267
What does 'financial risk' mean in the context of gearing?
Select an option first.
Correct answer: B — The additional risk borne by shareholders due to the company's use of debt (fixed interest obligations that must be met before equity holders receive anything)
Explanation: Financial risk arises specifically from gearing — shareholders bear extra risk because debt holders are paid first (interest and capital repayment). A is investment risk; C is control risk; D is currency risk.
Question 268
What is the 'cost of equity' from the perspective of the company?
Select an option first.
Correct answer: B — The minimum return required by shareholders to compensate them for the risk of investing in the company's equity — the opportunity cost of equity capital
Explanation: The cost of equity is the required return demanded by equity investors for the risk taken. It represents an opportunity cost — the return shareholders could earn on investments of equivalent risk. A is not right (shares pay dividends, not interest); C is only part of return (ignores capital gain); D is historical, not forward-looking.
Question 269
Which of the following is NOT a component of the cost of capital?
Select an option first.
Correct answer: D — Book value of assets
Explanation: The cost of capital (WACC) is composed of the costs of each source of long-term finance: equity, preference shares, and debt. Book value of assets (D) is not a cost component. A, B and C are all costs of finance.
Question 270
What does 'WACC' stand for?
Select an option first.
Correct answer: A — Weighted Average Cost of Capital
Explanation: WACC = Weighted Average Cost of Capital — the average cost of all sources of long-term capital (debt and equity), weighted by their proportions in the capital structure. B, C and D are invented terms.
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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