F9 (FM) – PART E – CBE MCQs – ACCA

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.

Please note:

  • Students should not attempt these MCQs until they have finished the entire chapter.
  • All questions are compulsory, so please do not skip any.

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.

Time

These MCQs are not time-bound. Take your time and solve them without stress. Pay proper attention and focus. Do not rush or hesitate

Result

Students will get their F9 CBE MCQs Test results after they finish the entire test. They will also be able to see the correct and incorrect answers, as well as explanations for the incorrect questions.

Types of Questions

MCQs: Choose one from the given options.
Multiple choice: Choose all those answers which seem correct/ or incorrect to you, as per the requirement of the question. Keep your eye on the wording “(select all those which are correct/ or incorrect)“.
Drop-down: Select from the list provided.
Type numbers: Type your answer in numbers as per the requirement of the question.

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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

INSTRUCTIONS

  1. If you are using mobile, turn on the mobile rotation and solve the MCQs on wide screen for better experience.

REQUEST

  1. Please rate the quiz and give us feedback once you completed the quiz.
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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?

2 / 39

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

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

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.

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?

8 / 39

Which of the following statement is True?

9 / 39

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

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?

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?

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)

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?

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?

22 / 39

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

What is this known as?

23 / 39

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

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

24 / 39

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

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

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:

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?

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?

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?

31 / 39

Which of the following statements is CORRECT?

32 / 39

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

33 / 39

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

34 / 39

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

35 / 39

Which of the following describes a sukuk?

36 / 39

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

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?

  1. Preference share capital
  2. Trade payables
  3. Bank loan with fixed and floating charges
  4. Ordinary share capital

39 / 39

Which of the following statement about bonds is False?

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