CPA Advanced Level

Advanced Financial Management flashcards

Read the question, say the answer to yourself, then turn the card to check. The first 10 of 50 cards are free; the rest come with the subject.

Card 1 of 50

Jump to a card

Complete Flashcard Reference

Review every card in this deck. Open any card to reveal its answer. The first 10 are free; the other 40 come with the subject.

How do the risk-adjusted discount rate and certainty equivalent methods each allow for risk?

Risk-adjusted discount rate: keep the risky cash flows and raise the discount rate, a higher rate for higher risk. Certainty equivalent: cut the risky cash flows to their risk-free equivalent values, then discount at the risk-free rate. One adjusts the denominator, the other the numerator.

What is the CAPM formula for required return, and what is it for a beta of 1.2, a risk-free rate of 8% and a market return of 14%?

Required return = risk-free rate + beta x (market return - risk-free rate). 8% + 1.2 x (14% - 8%) = 8% + 7.2% = 15.2%. Plotted against beta, this is the Security Market Line.

In what order do the main capital structure theories build on each other?

MM without taxes: capital structure is irrelevant to firm value. MM with corporation taxes: debt adds value through the tax shield, implying all debt. Trade-off theory: the tax shield is balanced against rising financial distress costs, so a genuine optimum exists. Pecking order: a behavioural alternative, internal funds first, then debt, then equity.

How do you work out post-deal EPS in a share-for-share acquisition, and judge accretion or dilution?

New shares issued = target shares x exchange ratio. Post-deal EPS = (acquirer earnings + target earnings) / (acquirer shares + new shares). Above the acquirer's pre-deal EPS the deal is accretive; below it, dilutive.

What are the three forms of financial distress, and the solution matched to each?

Economic failure: revenue does not cover economic costs. Operational restructuring. Insolvency in cash flow terms: obligations cannot be met as they fall due. Debt restructuring or fresh financing. Insolvency in bankruptcy terms: liabilities exceed assets. Possibly formal insolvency proceedings.

What are the four main types of derivative?

Futures: standardised, exchange-traded contracts to buy or sell an asset at a future date at an agreed price. Forwards: the customised, OTC equivalent of a future. Options: the right, but not the obligation, to buy (call) or sell (put) at a set price. Swaps: agreements to exchange cash flows, such as fixed for floating interest.

What do the three international parity conditions say?

Interest rate parity: interest rate differentials should equal the forward/spot exchange rate differential. Purchasing power parity: exchange rates should adjust to equalise purchasing power across countries. International Fisher Effect: nominal interest rate differentials should predict future exchange rate movements. If all three hold, forward rates are unbiased predictors of future spot rates.

What are the three approaches to valuing real estate, and when does each fit best?

Income: present value of the expected rent. Best for income-generating property. Cost: replacement cost less depreciation, plus land value. Best for special-purpose property with few comparables. Sales comparison: recent sale prices of comparable properties. Best for standard homes in an active market.

What distinguishes Islamic finance, and how is it reaching mainstream capital markets?

It uses Sharia-compliant structures that avoid interest (riba). It is increasingly integrated into mainstream international capital markets through instruments such as sukuk.

Name the four real options a project may carry.

Strategic (expansionary): expand the project if it succeeds. Timing: delay until conditions are more favourable. Abandonment: withdraw if the project underperforms. Redeploy: switch the project's resources to another use. Each adds flexibility value that a static NPV misses.

How does sensitivity analysis differ from scenario analysis?