These are ACCA F9 (FM) Financial Management MCQs for Part-E of the Syllabus “Business finance”.

These multiple-choice questions (MCQs) are designed to help ACCA F9 students to better understand the exam format. We aim to instill in students the habit of practicing online for their CBE exams. By doing so, students can reduce exam stress and prepare more effectively.

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Students should not attempt these MCQs until they have finished the entire chapter.
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We hope that these MCQs will be a valuable resource for students preparing for the ACCA F9 (FM) exam.

INFORMATION ABOUT THESE CBE MCQs Test/Quiz

Course:	ACCE – Association of Chartered Certified Accountants
Fundamental Level:	Applied Skills
Subject:	Financial Management
Paper:	F9 – FR
Chapter and Topic	Sources of, and raising, business finance, Estimating the cost of capital, Sources of finance and their relative costs, Capital structure theories and practical considerations, Finance for small- and medium-sized entities (SMEs)
Syllabus Area:	E – “Business finance”
Questions Type:	CBE MCQs
Exam Section:	Section A

Syllabus Area

These Multiple Choice Questions (MCQs) cover the Syllabus Area Part E of the Syllabus; “Business finance” of ACCA F9 (FM) Financial Management Module.

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F9 (FM) - Part E - MCQs - Business finance

Course: ACCA - Association of Chartered Certified Accountants
Subject: F9 (FM) - Financial Management
Syllabus Area: E - Business Finance
Chapter: 12 Sources of finance, 13 Dividend policy, 14 The cost of capital, 15 Gearing and capital structure, 16 Capital structure
Exam Section: Section A
Questions type: MCQs
Time: No Time Limit

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1 / 39

Leah Co is an all-equity financed company which wishes to appraise a project in a new area of business. Its existing equity beta is 1.2. The average equity beta for the new business area is 2.0, with an average debt/debt plus equity ratio of 25%. The risk-free rate of return is 5% and the market risk premium is 4%.

Ignoring taxation and using the capital asset pricing model, what is the risk-adjusted cost of equity for the new project?

13.0%

8.6%

9.8%

11.0%

2 / 39

When should a project-specific cost of capital be used for investment appraisal?

If the project is small

If the project is the same as current operations

If the project is different from current operations

If new finance is required before the project can go ahead

3 / 39

Leah Co is an all equity financed company which wishes to appraise a project in a new area of activity. Its existing equity beta is 1.2. The industry average equity beta for the new business area is 2.0, with an average debt/debt + equity ratio of 25%. The risk-free rate of return is 5% and the market risk premium is 4%.

Ignoring tax and using the capital asset pricing model, calculate a suitable risk-adjusted cost of equity for the new project. (to one decimal place)

4 / 39

TR Co has a gearing level of 1:3 debt:equity. TR is considering diversifying into a new market without changing its existing gearing. B Co is already operating in the new market. B Co has an equity beta of 1.05 and a gearing level of 1:4 debt:equity. Both companies pay 30% corporation tax.

The risk-free rate is 4% and the market premium is 4%.

What is TR Co's cost of equity for assessing the decision to diversify into the new market? (to one decimal place)

_____%

5 / 39

What is the asset beta relevant to TR for the new market? (to 2 decimal places)

6 / 39

Shyma Co is a company that manufactures It has an equity beta of 1.6 and a debt:equity ratio of 1:3. It is considering a new project to manufacture farm vehicles. Trant Co is a manufacturer of farm vehicles and has an asset beta of 1.1 and a debt:equity ratio of 2:3. The risk free rate of return is 5%, the market risk premium is 3% and the corporation tax rate is 40%.

Using CAPM, what would be the suitable cost of equity for Shyma to use in its appraisal of the farm machinery project? (to one decimal place)

7 / 39

Director A believes there is an optimal balance of debt:equity whereas Director B does not believe that the gearing decision affects the value of the business.

What capital structure theory best reflects each of directors' beliefs?

Director A: Traditional view, Director B: M&M (no tax)

Director A: M&M (with tax), Director B: M&M (no tax)

Director A: M&M (no tax), Director B: Traditional view

Director A: Traditional view, Director B: Pecking order

8 / 39

Which of the following statement is True?

Total risk is the sum of systematic risk and unsystematic risk

The asset beta reflects both business risk and financial risk

Assuming that the beta of debt is zero will understate financial risk when ungearing an equity beta

9 / 39

Why do Modigliani and Miller (with tax) assume increased gearing will reduce the weighted average cost of capital (WACC)?

Interest payments are tax deductible

Financial risk is not pronounced at moderate borrowing levels

Reduced levels of expensive equity capital will reduce the WACC

Debt is cheaper than equity

10 / 39

Alf Co's gearing is 1:1 debt:equity. The industry average is 1:5. Alf Co is looking to raise finance for investment in a new project and it is wondering whether to raise debt or equity.

Applying the traditional view, which of the following is true?

It doesn't matter, as it won't affect the returns the projects generate

It should take on equity finance, as their gearing is probably beyond optimal

It should take on debt finance, as to do so will save tax

More information is needed before a decision can be made

11 / 39

An 8% irredeemable $0.50 preference share is being traded for $0.30 cum-div currently in a company that pays corporation tax at a rate of 30%.

What is the cost of capital for these preference shares? (to one decimal place)

12 / 39

IPA Co is about to pay a $0.50 dividend on each ordinary Its earnings per share was $1.50.

Net assets per share is $6. Current share price is $4.50 per share.

What is the cost of equity? (to the nearest whole percentage)

13 / 39

On a market value basis, GFV Co is financed 70% by equity and 30% by debt. The company has an after-tax cost of debt of 6% and an equity beta of 1.2. The risk-free rate of return is 4% and the equity risk premium is 5%.

What is the after-tax weighted average cost of capital of GFV Co? (to one decimal place)

14 / 39

Which of the following are assumed if a company's current WACC is to be used to appraise a potential project?

Capital structure will remain unchanged for the duration of the project.

The project is relatively small in size.

The business risk of the project is the same as the current business operations.

15 / 39

IDO Co has a capital structure as follows.

	$m
10m $0.50 ordinary shares	5
Reserves	20
13% irredeemable loan notes	7
	32

The ordinary shares are currently quoted at $3.00, and the loan notes at $90. IDO Co has a cost of equity of 12% and pays corporation tax at a rate of 30%.

What is IDO Co's weighted average cost of capital (WACC)?

_______%

16 / 39

BRW Co has 10% redeemable loan notes in issue trading at $90. The loan notes are redeemable at a 10% premium in 5 years' time, or convertible at that point into 20 ordinary The current share price is $2.50 and is expected to grow at 10% per year for the foreseeable future. BRW Co pays 30% corporation tax.

What is the best estimate of the cost of these loan notes? (to one decimal place)

______%

17 / 39

Which of the following statements are True? (select all those which are true)

The cost of debt is usually lower than the cost of preference shares.

Investors faced with increased risk will expect increased return as compensation.

An increase in the cost of equity leads to a fall in share price.

18 / 39

A share in MS Co has an equity beta of 1.3. MS Co's debt beta is 0.1. It has a gearing ratio of 20% (debt:equity). The market premium is 8% and the risk-free rate is 3%. MS Co pays 30% corporation tax.

What is the cost of equity for MS Co?

19 / 39

Which of the following best describes systematic risk?

The residual risk associated with investing in a well-diversified portfolio

The risk associated with investing in equity

The chance that automated processes may fail

The diversifiable risk associated with investing in equity

20 / 39

GG Co has a cost of equity of 25%. It has 4 million shares in issue, and has done for many years.

Its dividend payments in the years 20X9 to 20Y3 were as follows.

End of year	Dividends
	$'000
20X9	220
20Y0	257
20Y1	310
20Y2	356
20Y3	423

Dividends are expected to continue to grow at the same average rate into the future.

According to the dividend valuation model, what should be the share price at the start of 20Y4? (to two decimal places)

$_______

21 / 39

Which of the following statements, relating to supply chain finance (SCF), is/are True?

Statement 1 is false and Statement 2 is true.

Statement 1 is true and Statement 2 is false.

Statement 1 is true only.

Statement 2 is true only.

22 / 39

Private individuals or groups of individuals can invest directly into a small business.

What is this known as?

Venture capital

Business angel financing

Supply chain finance

Reverse factoring

23 / 39

Which of the following statements, relating to small and medium-sized enterprises (SMEs), are True?

Medium-term loans are harder to obtain than longer-term loans for SMEs.
SMEs are prone to funding gaps.

Statement 2 is true only.

Statement 1 is true, Statement 2 is false.

Statement 1 is true only.

Both statements are true.

24 / 39

Which of the following are handicaps that young SMEs face in accessing funds?

Uncertainty and risk for lenders
Financial statements are not sufficiently detailed
Shares cannot be placed privately

2 and 3 only

1, 2 and 3

1 and 3 only

1 and 2 only

25 / 39

All else being equal, a poor set of results and lower dividends that aren't as bad as shareholders were expecting would probably have the following impact:

P/E ratio: Increase, Dividend yield: Decrease

P/E ratio: Decrease, Dividend yield: Decrease

P/E ratio: Increase, Dividend yield: Increase

P/E ratio: Decrease, Dividend yield: Increase

26 / 39

AB Co has an interest cover greater than one and gearing (debt/debt + equity) of 50%.

What will be the impact on interest cover and gearing of issuing shares to repay half the debt?

Interest cover: Fall, Gearing: Fall

Interest cover: Rise, Gearing: Rise

Interest cover: Fall, Gearing: Rise

Interest cover: Rise, Gearing: Fall

27 / 39

The following are extracts from the statement of financial position of a company:

	$'000	$'000
Equity
Ordinary shares	8,000
Reserves	20,000
		28,000
Non-current liabilities
Bonds	4,000
Bank loans	6,200
Preference shares	2,000
		12,200
Current liabilities
Overdraft	1,000
Trade payables	1,500
		2,500
Total equity and liabilities		42,700

The ordinary shares have a nominal value of 50 cents per share and are trading at $5.00 per share. The preference shares have a nominal value of $1.00 per share and are trading at 80 cents per share. The bonds have a nominal value of $100 and are trading at $105 per bond.

What is the market value-based gearing of the company, defined as prior charge capital/equity?

11.8%

7.3%

15.0%

13.0%

28 / 39

The following is an extract of ELW's statement of financial position.

	$'m	$'m
Total assets		1,000

$1 ordinary share capital	100
Retained earnings	400
Total equity	500

Loan notes	500
		1,000

The ordinary shares are currently quoted at $5.50, and loan notes are trading at $125 per $100 nominal.

What is ELW's financial gearing ratio (debt/debt + equity) using market values? (to the nearest %)

______ %

29 / 39

A summary of HM Co's recent statement of profit or loss is given below:

	$'000
Revenue	10,123
Cost of sales	(7,222)
Gross profit	2,901
Expenses	(999)
Profit before interest and tax	1,902
Interest	(1,000)
Tax	(271)
Profit after interest and tax	631

70% of cost of sales and 10% of expenses are variable costs.

What is HM Co's operational gearing? (as a number to two decimal places)

30 / 39

Three companies (Sun Co, Moon Co and Nite Co) have the following dividend payments history:

Company	20X1	20X2	20X3
Sun Co – Dividend	100	110	121
Sun Co – Earnings	200	200	201
Moon Co – Dividend	50	150	25
Moon Co – Earnings	100	300	50
Nite Co – Dividend	nil	300	nil
Nite Co – Earnings	400	350	500

Which best describes their apparent dividend policies?

Sun Co: Constant growth, Moon Co: Constant payout, Nite Co: Residual

Sun Co: Constant growth, Moon Co: Residual, Nite Co: Constant payout

Sun Co: High payout, Moon Co: Residual, Nite Co: Constant payout

Sun Co: Constant payout, Moon Co: Constant growth, Nite Co: Residual

31 / 39

Which of the following statements is CORRECT?

A bonus issue can be used to raise new equity finance.

A share repurchase scheme can increase both earnings per share and gearing.

Miller and Modigliani argued that the financing decision is more important than the dividend decision.

Shareholders usually have the power to increase dividends at annual general meetings of a company.

32 / 39

In Modigliani and Miller's dividend irrelevance theory, the process of 'manufacturing dividends' refers to which of the following?

Dividends from manufacturing businesses

Investors selling some shares to realise some capital gain

Creative accounting to allow dividends to be paid

Investing plans designed to create regular returns to shareholders

33 / 39

In which of the following situations is a residual dividend most likely to be appropriate?

In a tax regime where individuals pay less tax on dividend income than on capital gains

A small family-owned private company where the majority of the shareholders use dividend income to pay their living costs

A small listed company owned by investors seeking maximum capital growth on their investment

A large publicly listed company

34 / 39

Which TWO of the following are assumptions for Modigliani and Miller's dividend irrelevance theory?

No inflation

No transaction costs

Imperfect capital markets

No taxes or tax preferences

35 / 39

Which of the following describes a sukuk?

Trade credit in Islamic finance where a pre-agreed mark-up is agreed in advance for the convenience of paying later

A bond in Islamic finance where the lender owns the underlying asset and shares in the risks and rewards of ownership

A lease in Islamic finance where the lessor retains ownership and the risk and rewards of ownership of the underlying asset

Equity in Islamic finance where profits are shared according to a pre-agreed contract – dividends are not paid as such

36 / 39

Which of the following best describes the term 'coupon rate' as it applies to bonds?

Annual interest received as a percentage of the nominal value of the bond

Return received taking into account capital repayment as well as interest payments

Annual interest received as a percentage of the cum-interest market price of the bond

Annual interest received as a percentage of the ex interest market price of the bond

37 / 39

Alpha is a listed company with a share price of $2 per It announces a 1 for 4 rights issue at $1.60 per share.

What is the theoretical ex-rights price? (to two decimal places)

38 / 39

According to the creditor hierarchy, what should be the Order of the Risk of the following list - from high risk to low risk?

Preference share capital
Trade payables
Bank loan with fixed and floating charges
Ordinary share capital

2, 4, 1, 3

2, 3, 4, 1

3, 2, 4, 1

4, 3, 1, 2

39 / 39

Which of the following statement about bonds is False?

Unsecured bonds are likely to require a higher yield to maturity than equivalent secured bonds.

A Eurobond is a bond that is denominated in a currency which is not native to where the bond itself is issued.

Convertible bonds give the borrower the right but not the obligation to turn the bond into a predetermined number of ordinary shares.

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