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FIN3701: Financial Management
May/June 2025 & May/June 2024 — Comprehensive Exam Revision
⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆
[BOOK] Finance, Risk Management & Banking [BOOK]
Exam Revision Guide
FIN3701
Module Code:
Financial Management
Module Name:
May/June 2025 & May/June 2024
Papers:
100 marks per paper
Total Marks:
Section A (MCQ) + Section B (Long Qs)
Sections:
Study for understanding, not memorisation. Show all workings.
Exam Revision Notes | FIN3701 | 2025
,FIN3701 | Exam Revision Financial Management
PAPER 1: MAY/JUNE 2024
FIN3701 — Financial Management
Total: 100 Marks Duration: 2 Hours
SECTION A — Multiple Choice Questions [30 marks]
Question: Answer ALL 30 multiple-choice questions. Each question carries 1.5 marks.
Select the BEST answer.
Questions 1–5: Capital Budgeting
1. Which capital budgeting technique explicitly considers the time value of money?
(1) Payback period (2) Net present value (3) Accounting rate of return (4) Both
(1) and (3)
2. A project has an NPV of R0. This means the project:
(1) Should be rejected (2) Earns exactly the required return (3) Is marginally prof-
itable (4) Both (2) and (3)
3. The internal rate of return (IRR) is best defined as:
(1) The discount rate that maximises NPV (2) The discount rate that sets NPV to
zero
(3) The firm’s weighted average cost of capital (4) The minimum acceptable rate of
return
4. When two mutually exclusive projects have conflicting NPV and IRR rankings, the
correct decision rule is:
(1) Choose the project with the higher IRR (2) Choose the project with the higher
NPV
(3) Average both methods (4) Choose neither project
5. Conventional cash flows are characterised by:
(1) Multiple sign changes (2) An initial outflow followed by inflows (3) Equal
inflows each period (4) No initial investment
Questions 6–10: Cost of Capital & Capital Structure
6. The component cost of retained earnings is determined using:
(1) The after-tax cost of debt (2) CAPM or the Gordon Growth Model (3) Book
value of equity (4) The dividend paid last year
7. The optimal capital structure minimises:
Page 2 of 35
,FIN3701 | Exam Revision Financial Management
(1) The cost of equity (2) The firm’s WACC and maximises firm value (3) The
cost of debt (4) Total assets
8. Financial leverage refers to:
(1) Operating fixed costs relative to variable costs (2) The use of debt in the capital
structure
(3) The ratio of current to non-current assets (4) None of the above
9. The MM Proposition I (with taxes) states that firm value:
(1) Is unaffected by capital structure (2) Increases with leverage due to the tax shield
(3) Decreases with leverage (4) Depends only on asset risk
10. The break-even EBIT is the level of EBIT at which:
(1) EPS is maximised (2) EPS under two financing alternatives is equal
(3) Interest payments are zero (4) Operating income equals zero
Questions 11–15: Working Capital Management
11. The cash conversion cycle (CCC) is calculated as:
(1) AAI + ACP – APP (2) AAI – ACP + APP (3) ACP + APP – AAI (4)
AAI + APP – ACP
12. A liberal credit policy generally results in:
(1) Higher sales and lower bad debts (2) Higher sales and higher bad debts (3)
Lower investment in debtors (4) Shorter collection period
13. The permanent portion of current assets should be financed by:
(1) Short-term debt only (2) Long-term debt or equity (conservative approach)
(3) Accounts payable (4) Overdrafts
14. A firm’s operating cycle is the sum of:
(1) ACP and APP (2) AAI and ACP (3) AAI and APP (4) ACP minus AAI
15. Which of the following will SHORTEN the cash conversion cycle?
(1) Collecting receivables faster (2) Paying creditors faster (3) Holding more in-
ventory (4) Increasing the operating cycle
Questions 16–20: Dividend Policy
16. The residual dividend model implies:
(1) A fixed payout ratio (2) Dividends are paid from earnings left after funding prof-
itable investments
(3) Dividends are always stable (4) Stock dividends are preferred
17. A stock split of 2-for-1 will:
(1) Double the share price (2) Halve the share price and double shares outstanding
Page 3 of 35
, FIN3701 | Exam Revision Financial Management
(3) Increase retained earnings (4) Increase the book value per share
18. Share repurchases are generally preferred over cash dividends when:
(1) The firm wants to signal poor future prospects (2) The firm believes shares are
undervalued and wants tax efficiency
(3) The firm wants to increase EPS by issuing shares (4) Dividends are tax-free
19. The dividend irrelevance theory (Miller and Modigliani) argues that:
(1) Dividends should always be maximised (2) In perfect markets, dividend policy
does not affect firm value
(3) High dividends always increase firm value (4) Dividends are more valuable than
capital gains
20. A scrip dividend is:
(1) A cash dividend funded by borrowing (2) A dividend paid in additional shares
instead of cash
(3) A dividend paid to preference shareholders only (4) A reduction in share capital
Questions 21–25: Mergers, Acquisitions & Valuation
21. A horizontal merger occurs when:
(1) Two firms in different industries merge (2) A firm merges with a supplier or
customer
(3) Two firms in the same industry merge (4) A firm acquires a foreign company
22. Synergy in a merger means:
(1) The combined firm is worth less than the sum of the parts (2) The combined firm
creates more value than the two separate firms
(3) Management fees are reduced (4) Leverage automatically increases
23. The free cash flow valuation model values a firm by:
(1) Book value of assets minus liabilities (2) Discounting expected future free cash
flows at the WACC
(3) Multiplying EPS by the P/E ratio (4) Adding dividends to the share price
24. A leveraged buyout (LBO) is characterised by:
(1) An acquisition funded mainly with equity (2) An acquisition funded primarily
with debt, using the target’s assets as collateral
(3) A merger between equals (4) A government acquisition of a private firm
25. Goodwill arising from an acquisition is:
(1) The fair value of tangible assets acquired (2) The excess of purchase price over
the fair value of net identifiable assets
Page 4 of 35
ˆ
]]
FIN3701: Financial Management
May/June 2025 & May/June 2024 — Comprehensive Exam Revision
⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆
[BOOK] Finance, Risk Management & Banking [BOOK]
Exam Revision Guide
FIN3701
Module Code:
Financial Management
Module Name:
May/June 2025 & May/June 2024
Papers:
100 marks per paper
Total Marks:
Section A (MCQ) + Section B (Long Qs)
Sections:
Study for understanding, not memorisation. Show all workings.
Exam Revision Notes | FIN3701 | 2025
,FIN3701 | Exam Revision Financial Management
PAPER 1: MAY/JUNE 2024
FIN3701 — Financial Management
Total: 100 Marks Duration: 2 Hours
SECTION A — Multiple Choice Questions [30 marks]
Question: Answer ALL 30 multiple-choice questions. Each question carries 1.5 marks.
Select the BEST answer.
Questions 1–5: Capital Budgeting
1. Which capital budgeting technique explicitly considers the time value of money?
(1) Payback period (2) Net present value (3) Accounting rate of return (4) Both
(1) and (3)
2. A project has an NPV of R0. This means the project:
(1) Should be rejected (2) Earns exactly the required return (3) Is marginally prof-
itable (4) Both (2) and (3)
3. The internal rate of return (IRR) is best defined as:
(1) The discount rate that maximises NPV (2) The discount rate that sets NPV to
zero
(3) The firm’s weighted average cost of capital (4) The minimum acceptable rate of
return
4. When two mutually exclusive projects have conflicting NPV and IRR rankings, the
correct decision rule is:
(1) Choose the project with the higher IRR (2) Choose the project with the higher
NPV
(3) Average both methods (4) Choose neither project
5. Conventional cash flows are characterised by:
(1) Multiple sign changes (2) An initial outflow followed by inflows (3) Equal
inflows each period (4) No initial investment
Questions 6–10: Cost of Capital & Capital Structure
6. The component cost of retained earnings is determined using:
(1) The after-tax cost of debt (2) CAPM or the Gordon Growth Model (3) Book
value of equity (4) The dividend paid last year
7. The optimal capital structure minimises:
Page 2 of 35
,FIN3701 | Exam Revision Financial Management
(1) The cost of equity (2) The firm’s WACC and maximises firm value (3) The
cost of debt (4) Total assets
8. Financial leverage refers to:
(1) Operating fixed costs relative to variable costs (2) The use of debt in the capital
structure
(3) The ratio of current to non-current assets (4) None of the above
9. The MM Proposition I (with taxes) states that firm value:
(1) Is unaffected by capital structure (2) Increases with leverage due to the tax shield
(3) Decreases with leverage (4) Depends only on asset risk
10. The break-even EBIT is the level of EBIT at which:
(1) EPS is maximised (2) EPS under two financing alternatives is equal
(3) Interest payments are zero (4) Operating income equals zero
Questions 11–15: Working Capital Management
11. The cash conversion cycle (CCC) is calculated as:
(1) AAI + ACP – APP (2) AAI – ACP + APP (3) ACP + APP – AAI (4)
AAI + APP – ACP
12. A liberal credit policy generally results in:
(1) Higher sales and lower bad debts (2) Higher sales and higher bad debts (3)
Lower investment in debtors (4) Shorter collection period
13. The permanent portion of current assets should be financed by:
(1) Short-term debt only (2) Long-term debt or equity (conservative approach)
(3) Accounts payable (4) Overdrafts
14. A firm’s operating cycle is the sum of:
(1) ACP and APP (2) AAI and ACP (3) AAI and APP (4) ACP minus AAI
15. Which of the following will SHORTEN the cash conversion cycle?
(1) Collecting receivables faster (2) Paying creditors faster (3) Holding more in-
ventory (4) Increasing the operating cycle
Questions 16–20: Dividend Policy
16. The residual dividend model implies:
(1) A fixed payout ratio (2) Dividends are paid from earnings left after funding prof-
itable investments
(3) Dividends are always stable (4) Stock dividends are preferred
17. A stock split of 2-for-1 will:
(1) Double the share price (2) Halve the share price and double shares outstanding
Page 3 of 35
, FIN3701 | Exam Revision Financial Management
(3) Increase retained earnings (4) Increase the book value per share
18. Share repurchases are generally preferred over cash dividends when:
(1) The firm wants to signal poor future prospects (2) The firm believes shares are
undervalued and wants tax efficiency
(3) The firm wants to increase EPS by issuing shares (4) Dividends are tax-free
19. The dividend irrelevance theory (Miller and Modigliani) argues that:
(1) Dividends should always be maximised (2) In perfect markets, dividend policy
does not affect firm value
(3) High dividends always increase firm value (4) Dividends are more valuable than
capital gains
20. A scrip dividend is:
(1) A cash dividend funded by borrowing (2) A dividend paid in additional shares
instead of cash
(3) A dividend paid to preference shareholders only (4) A reduction in share capital
Questions 21–25: Mergers, Acquisitions & Valuation
21. A horizontal merger occurs when:
(1) Two firms in different industries merge (2) A firm merges with a supplier or
customer
(3) Two firms in the same industry merge (4) A firm acquires a foreign company
22. Synergy in a merger means:
(1) The combined firm is worth less than the sum of the parts (2) The combined firm
creates more value than the two separate firms
(3) Management fees are reduced (4) Leverage automatically increases
23. The free cash flow valuation model values a firm by:
(1) Book value of assets minus liabilities (2) Discounting expected future free cash
flows at the WACC
(3) Multiplying EPS by the P/E ratio (4) Adding dividends to the share price
24. A leveraged buyout (LBO) is characterised by:
(1) An acquisition funded mainly with equity (2) An acquisition funded primarily
with debt, using the target’s assets as collateral
(3) A merger between equals (4) A government acquisition of a private firm
25. Goodwill arising from an acquisition is:
(1) The fair value of tangible assets acquired (2) The excess of purchase price over
the fair value of net identifiable assets
Page 4 of 35
