FIN002 13.7.

24

1. A firm earned revenue of Rs 500000 and its variable operating cost is 30% and fixed
operating cost is 100000. If the firm has 8% debt of Rs, 500000 and its tax rate is
25%. Calculate the degree of financial leverage?
Option:
a.1.4 (1.19)
b. 1.67
c. 2.22
d. 1.59

4. Latcher’s is a relatively new firm that is still in a period of rapid development. The
company plans on retaining all of its earning for next six years. Seven years from now, the
company projects paying an annual dividend of $25 a share and then increasing that amount
by 3 percent annually thereafter. To value this stock as of today, you would most likely
determine the value of the stock ……. Years from today before determining today’s value.
Option:

a. 4
b. 5
c. 6
d. 7

5. Which of the method is based on discounted cash flow

Option:
a. All of these
b. Profitability index
c. NPV
D. IRR

7. In which of the cash forecasts method the objective is to sum the cashflows from operating,
investing and financing for a predetermined period of time.
Option:

a. Adjustment method
b. Economic order quantity
c. Receipt and disbursement method
d. All of these

8. Which of the following are the factors affecting working capital of a firm?
Option:

a. Nature of business
b. Business cycle
c. Operating efficiency
d. All of these

9. It a stock pays a constant annual dividend then the stock can be valued using the:
Option:
a. Fixed coupon bond present value formula
b. present value of an annuity due formula
c. perpetuity present value formula
d. present value of an ordinary annuity formula

11. CAPM approach is used in calculating

a. Cost of dept
b. Cost of equity
c. cost of preference share
d. Cost of retained earning

12. Cost of capital refers to

options:
a. flotation cost
b. Dividend rate
c. Minimum rate of return
d. none of above

13. Use of fixed cost debt in capital structure of firm leads to .....of return on equity.

a. Low Riskiness
b. NO Effect
c. Less than proportionate
d. Magnification

14. Initial cash outflows followed by cash inflows as well as cash outflows after few years are
categorised ..... cash flow.
a. Traditional
b. conventional
c. non-conventional
d. cervical

15. Future value in case of Continuous Compounding can be found by

options
a. P*r*t
b. p*ert
c. P*e^rt
d. P*(1+r)^n

12. leverage is caused by existence of ....cost in the cost structure of a firm.

options
a. depreciation
b. fixed
c variable
d. high
16. For a firm to create value it must:
a. Have a greater cash inflow from its stockholders than its outflow
b. creates more cashflow than it uses
c. Reduce its investment in fixed assets since fixed assets require the uses of cash
d. Avoid payments to the

17. As per Gordon's model, if r<k and the dividend payout ratio incraese, then the market
price of share will:
a. Any of these
b. Remains unchanged
c. Decreases
d. Increases

18. ……… is the fund created to meet future liabilities.

a. Perpetuity
b. Sinking Fund
c. Corpus fund
d. Finds of Funds

19. Zet Ltd has 8% perpetual debt of Rs 1000000 and its corporate tax is 25%. A similar firm
with all equity funding has the valuation of 50 lacs. As per MM hypothesis with taxes, what
will be the value of Zet Ltd,?
A. 5000000
B. 5250000
C. 6000000
D. 5020000

20. Capital budgeting decisions are of

a. short term nature

b. Long term nature

c. no nature

d. Both a&b

21. Effective rate is always higher than nominal rate if,

a. Compounding is more than 1 in a year

b. Compounding is 1 in a year

c. Compounding is less than 1

d. None of these
22. which one of the following actions by a financial manager creates an agency problem?
a. Refusing to borrow money when doing so will create losses for the firm
b. Refusing to lower selling prices if doing so will reduce the net profits
c. Agreeing to expend the company at the expense of stockholder’s value

23. Financial managers primarily create firm value by

a. Maximizing current dividends

b. Investing in asset that generate cash in excess of their cost
c. Lowering the earnings per share
d. Increasing the firm’s market share

24. If a significant change is noted in the yield of a T-bill, the change is most likely
attributable to:
a. A downturn in the economy
b. A static economy
c. A change in the expected rate of inflation.
d. A change in the real rate of interest.

25. Which one of these best fits the description of an agency cost?
a. increasing the dividend payments per share
b. The benefits received from reducing production costs per unit
c. The payment of corporate income taxes
d. The payment required for an outside audit of the firm

26. The project is accepted if

a. Benefit cost ratio is greater than 2

b. Benefit cost ratio is greater than 0
c. Benefit cost ratio is greater than 1
d. Benefit cost ratio is less than 1

28. Which of the following is an effect of Bonus shares on a company?

a. Number of outstanding shares decreases.
b. cash inflow takes place for the firm
c. Price of the share increase proportionately
d. capital base of a firm increases.

29. 40. XML Ltd. Carry raw material usually for 60 days, it receives credit from supplier for
20 days, manufacturing procedure needs 15 days, finished products are kept 30 days and 30
days is the receivables collection period. Compute the cash conversion cycle.
a. 135 days
b. 60 days
c. 145 days
d. 115 days

30. The variable growth model of equity valuation:

a. Makes allowance for one change in the discount rate.
b. uses DivT+1 as the dividend amount throughout the formula.
c. Requires stable phase growth rate to be less than the discount
d. Assumes the second growth rate will be zero

31. If a student is awarded scholarship receivable over next 12 months, what calculation he
should use to find out the worth of scholarship today?
a. Present value of an amount
b. Future value of an amount
c. Present value of an annuity
d. Future value of an annuity

32. If the intrinsic value of a stock is greater than its market value, which of the following is a
reasonable conclusion?
a. The stock has low level of risk
b. The stock offers a high dividend payout ratio
c. The market is undervaluing the stock
d. The market is overvaluing the stock

33. Jen Ltd. Raised 10% dept of Rs 800000. Calculate interest tax shield for next year of the
firm has corporate tax rate of 30%?
a. 80000
b. 240000
c. 24000
d. 8000

34. Release of working capital is an example of … cashflows.

a. Initial
b. Operating
c. Terminal
d. Recurring

35. Which of the following is not the source of working capital?

a. Trade credit
b. Factoring
c. Bank finance
d. Long term loan

he acquisition of inventory (raw material, components and spares) immediately before it is

required for use in production is known as …………
a. Economic order quantity
b. First in First out
c. Just in time
d. Both a and c

38. If a firm earnings per share of Rs.9 The rate of capitalization is 10%. Internal rate of
return is 13% compute the market price per share if the payout is 0%.
options
a. rs 100
b. rs 125
c. rs 117
d. rs 0

39. How much is weighted cost of debt in a firm’s weighted average cost of capital for 50%
debt financing with a required rate of return of 12% and a tax rate of 35%?
a. 3.9%
b. 4.2%
c. 6%
d. 7.8%

40. XML Ltd. Carry raw material usually for 60 days, it receives credit from supplier for 20
days, manufacturing procedure needs 15 days, finished products are kept 30 days and 30 days
is the receivables collection period. Compute the cash conversion cycle.
a. 135 days
b. 60 days
c. 145 days
d. 115 days

41, As per Modigliani & miller dividend irrelevance model what affects the value of a firm:
a. Cost of capital
b. Dividend policy
c. Investment policy
d. Both 2 and 3

42. The ability to sebi an asset quickly at a fair price is associated with
options
a. Business risk
b. Financial risk
c. Exchange rate
d. Liquidity risk

43. cost of equity capital is

a. Equal to the last dividend paid to the equity shareholders
b. Equal to the dividend expectations of equity shareholders for the coming year
c. Equal to the discounting factor which equates the net amount realized from the issue
to the future dividend payments
d. None of these

45. The process of planning and managing a firm’s long-term assets is called:
a. working capital management
b. financial depreciation
c. agency cost analysis
d. capital budgeting

46. The ….. the variance of returns, everything else remaining constant, the … dispersion of
returns and … the risk.
a. larger, greater, lower
b. larger, smaller, higher
c. Larger, greater, higher
d. Smaller, greater, lower

47. cash management means:

a. Cash inflows and outflows of the firm
b. Cash flows within the firm
c. Cash balances kept by a firm at a point of time by funding the shortfall and investing the
excess cash
d. All of these

49. In the formula, P3=Div/R-g, the dividend is for period

option
a. 2
b. 5
c. 4
d. 3

50. Which of the following is NOT true for Modigliani & miller dividend theory?
a. It is based majority on arbitrage argument
b. The dividend decision is irrelevant for maximization of firm value
c. If a firm pay dividend, then investor can sell some shares and can create homemade
dividend
d. If a firm pay dividend, investor does not want that, he can reinvest the same to buy
firm’s stock

51. Which of the statement is not TRUE for the working capital?
a. In peak season, more working capital is required to fulfil the high production requirements
b. In the lean period, the working capital requirement is high
c. Seasonal fluctuations trouble the firms it will be expensive during lean period to maintain
its working capital
d. All of these are true

52. which of the following is/are the method of share repurchase?

a. Fixed price offer
b. Open market share repurchase
c. None of these
d. Both of these

53. which form of business structure faces the greatest agency problems?
a. Sole proprietorship
b. General partnership
c. Limited partnership
d. Corporation

54. In calculation of operating cashflows, depreciation is added back to ……

a. Gross profit
b. EBITA
c. Operation Profit
d. Net Prof

55. Which one of these statements is correct?

a. All overseas operations present the same amount of risk
b. The value of an investment by a firm depends on the size, the timing, and the risk of the
investment’s cash flow
c. When selecting one of two projects, managers should only consider the total cash flow
from each.
d.

56. XYZ Ltd. Has taken a term, loan of Rs. 12 lakhs at an interest rate of 15% p.a. if the tax
rate applicable to the company is 40% the cost of the term loan is
a. 4%
b. 5.6%
c. 9%
d. 6.5%

57. Compute the interest yield on commercial paper if a firm sells 90-day commercial paper
@ face value of Rs. 100 for Rs. 95.
a. 12%
b. 16.67%
c. 22.75%
d. 15.52

8. When the market’s required rate of return for a particular bond is much less than its coupon
rate, the bond is selling at
a. A premium
b. A discount
c. Face value
d. can not be calculated

59. The existence of ………………. Cost leads to more than proportionate change in EPS
FOR A GIVEN CHANGE IN EBIT
a. Variable operating
b. Fixed operating
c. High operating
d. Fixed financial

60. The existence of ……cost leads to more than proportionate

change in EBITfor a given change in sales
Option:
a. Variable operating
b. Fixed operating
c. High operating
d. Fixed financial
61. The coefficient of variation is a measure of.

a. Relative variability
b. Absolute dispersion
c. Absolute variability
d. Central tendency

62. If due to a replacement cape decision, overhead allocation to a division is changing

without any changing in total overhead cost. This reduction in overhead allocation to division
should be considered as……
a. Cash inflow
b. Cash outflow
c. No change in cashflow
d. Cost Reduction

63. Which of the following is not an assumption for Walter’s model?

a. Firm has an finite life.
b. Retained earning are the only source of finance.
c. Internal rate of return (r) and capitalization rate (ke) remain constant
d. The DPS and EPS remain constant

64. Shareholder have the …….claims on the income and assests of the firm.
a. Priority
b. Secondary
c. Residual
d. Variable

65. Purchase of machinery is an example of ….. cashflows.

a. Initial
b. Operating
c. Terminal
d. Recurring

66. NPV follows …. Principle which states that the sum of NPVs of all projects is equal to
the NPVs of the total NPV of A*NPV of B = NPV(A+B) which increases the total value of
the firm
a. Discounting
b. Value addictivity
c. Compounding
d. Any of these
67.1.989
68. 68600
69. 2697
70. 250000
Finance management Notes -7-7

1. Computation of future value involves:

a. Simple interest rate formula b. Compound interest rate formula c. The average of both d. None of
these

2. The Interest Tax Shield is worthless to a company if:

I. The Tax Rate Is Equal to Zero.

II. the firm is unlevered
iii. a firm elects 100% equity as
its capital structure
3. Matt invested in Dynamo stock when the firm was unlevered. Since then, Dynamo has become
levered. To unlever his position, Matt needs to:

a. borrow some money and purchase additional shares of Dynamo stock.

b. maintain his current position as the debt of the firm did not affect his personal leverage

c. position.

d. sell some shares of Dynamo stock and hold the proceeds in cash.

e. sell some shares of Dynamo stock and loan out the sale proceeds.

f. create a personal debt-equity ratio that is equal to exactly 50 percent of the debt-equity ratio of
the

firm.

Ans: sell some Dynamo stock and use the proceeds from the sale to fund a loan to a
deserving cause

4. Standard deviation is used to measure

Ans. Both of these (Risk of an investment & Return of an investment

1. For Projects with different scales, which of the evaluation techniques should be used?

a. NPV b. IRR c. Payback period d. Probability Index

2. Which of the following evaluation techniques for long-term investment decisions doesn’t consider
the time value of money?

a. NPV b. IRR c. Pay-back period d. Profitability index

3. 7. Current year dividend of Sun Ltd is Rs 5 per share. Expected growth rate is 8% and market
capitalization rate is 10%. Calculate intrinsic value of the stock

a. 5.4 b. 67.5 c. 54 d. 270

Answer Current year dividend,

D0 = Rs 5

Expected growth rate,

g = 8% Market capitalization rate,

ke = 10%

Next year dividend, D1 = D0 × (1 + g) = 5 × (1 + 0.08) = 5.4

Intrinsic value of stock: = D1 ÷ (ke - g) = 5.4 ÷ (0.1 - 0.08) = 5.4 ÷ 0.02 = Rs. 270

4. ______ Method tells the period in which original investment in a project will be recovered?

a. NPV b. IRR c. Pay-back period d. Profitability index

5. Which of the following AAA debentures will have highest price if YTM is _____?

a. 0.07 b. 0.08 c. 0.075 d. 0.085

6.Calculate the expected return with the help of following data: p=0.3, r=30%, p=0.4, r=16%, p=0.3,
r=8%

a. 17.8 b. 18 c. 5.8 d. 7.35

7. If credit sales 100000, credit period is 30 days, calculate the average receivables

a. 8219 b. 8333 c. 3333 d. 3288

8. If business risk of company goes up than price of stock will _____?

a. Decrease b. Increase c. Remain same d. Fluctuate

9. Which of the following will result in shareholders wealth maximization?

a) optimum utilization of resources b) maximum utilization of resources c) leverage minimization d)

Funding maximization

10. Days Inventory + days sales outstanding is known as _____?

a. Operating cycle b. Cash conversion cycle c. Collection period d. Inventory conversion period

11. What will be the price of bond with face value of Rs 1000 carrying a coupon of 10% maturing in 3
years at 10% premium on par value? Present value factor and PVAF at 10% for 3 years is 0.7513 and
2.4869 respectively

a. 1000 b. 826.43 c. 1075.12 d. 1348.69

12. In case of share buyback number of outstanding share will _____?

a. Reduce b. Increase c. Remain same d. Unaffected

13. Market interest rate is 9%. A bond with 10% coupon will sell ____ par value?

a. Above b. below c. at d. none of the above

14. . Increased financial leverage give rise to _____ volatile EPS?

a. More b. Less c. Non d. None of the above

15. 1/10,30 credit term means?

a. 1% discount b. 0.1% discount c. 1% discount for payment within 10 days d. 0.1% discount for
payment within 30 days

16. Growth of the company can be expected to be higher when _____ is high?

a. Pay-out ratio b. Distribution ratio c. Dividend ratio d. Retention ratio

17. If the cost of capital of a project goes up the NPV Will ______?

a. Decrease b. Increase c. Remain same d. Fluctuate

18. Sales of Zing ltd for 2016 was Rs.10000, COGS Rs.6000, Depreciation Rs.1000 interest Rs.800, tax
rate 30%. Calculate the operating cash flows of Zing ltd for 2016

a. Rs.4000 b. Rs.1540 c. Rs.2540 d. Rs.2200

19. A stock’s average return in last 3 years were 12% and standard deviation is 8%. Calculate the
coefficient of variation?

=8/12

a. 1.5 b. 0.33 c. 0.67 d. 9.6

20. Arun buys a stock at Rs 20 and sells at Rs 25 after 10 months. During this period, he receives a
dividend of Rs 5 on his investments. Calculate Holding Period return?

a. 0.25 b. 0.5 c. 0.2 d. 0.4

21. If the credit period is increased for the customers of the company operating cycle will _____?

a. Reduce b. Increase c. Remain same d. Unaffected

22. Discounted payback period is considered an improvement over payback period because it
considers____?

a. all cash flows b. time value of money c. easy to understand, d. all of the above

23. Sheela needs rs 100000 at the end of each year in the next 5 years. How much amount she
should invest now @10% present value of annuity factor at 10% for 5 years is 3.7908

The present value is given by: Let PV represent the present value and X the annuity. The present
value is given by : PV = X × The annuity factor We do this substitution in the question as follows: X =
100000 We work out as follows: 100000 × 3.7908 = 379080 Sheela needs to invest 379080 now in
order to get 100000 at the end of each year.

Ans:379080

24. Stream of equal cash flows at regular interval starting at the beginning of the period is known as?

a. Lumpsum cash flows b. Annuity c. Conventional cash flows d. Annuity due

Stream of equal cash flows at regular interval is known as?

a. Lumpsum cash flows b. Annuity c. Conventional cash flows d. Annuity due

 25. The underlying assumption in irr method is that all the intermittent cash flows are
reinvested at
a)cut off rate b)required rate of return c)cost of capital d)irr

26. Cost of equity is always equal to or _____ than WACC

a. Lower b. Same c. Higher d. Fluctuating
27. .Preference share is a ______ instrument?
a. Ownership b. Debt c. Hybrid d. None of the above

28. The cash flows invested in a project at t=0 period is known as ____?

a. Initial cash flows b. Operating cash flows c. Terminal cash flows

29. The risk which can be reduced by diversification is known as _____? a. Systematic risk b.
Unsystematic risk c. Total risk d. Market Risk

30. . If the annual rent expense goes up the operating leverage will________and will give rise to
more than proportionate change in______?

a. decrease, EPS b. decrease, EBIT c. increase ,EPS d. increase , EBIT

31. Which of the following is the spontaneous source of financing the working capital requirements?
1.commercial paper 2.account payable 3.bank finance 4.all of the above

32. Which of the following are two components of holding period return?

a. Beginning value and ending value b. Periodic return and ending value c. Periodic return and
capital appreciation d. Beginning value and capital appreciation

33. Calculate the standard deviation with the help of following data, p=0.3, r=30%, p=0.4, r=16%,
p=0.3 r=8%

Ans:8.6%

34. For a firm weight of equity and debt is 0.6 and 0.4 respectively and cost of equity is 15%, cost of
debt is 9%, tax rate is 30%. Calculate WACC for the firm?

Answer = 0.1152 Weight Average Cost of Capital (WACC) = {E/V × ke} + [ D/V × Kd × (1-Tc) where : E
= Market value of the firm's equity 0.6 D = Market value of the firm's debt 0.4 V = total market value
of equity & debt (E+D) 0.6+0.4 Ke = Cost of equity 15% Kd = Cost of debt 9% Tc = Corporate tax 30%
WACC = {(0.6/1) × 0.15 } + {(0.4/1 ×0.09×(1-0.3)} WACC = 0.09+0.0252 =0.1152 × 100% WACC the
firm = 11.52

35. Sheela needs rs 100000 at the end of each year in the next 5 years. How much amount she
should invest now @10% present value of annuity factor at 10% for 5 years is 3.7908

The present value is given by: Let PV represent the present value and X the annuity. The present
value is given by : PV = X × The annuity factor We do this substitution in the question as follows: X =
100000 We work out as follows: 100000 × 3.7908 = 379080 Sheela needs to invest 379080 now in
order to get 100000 at the end of each year

36. For dairy Ltd Beta is 0.8, Nifty returns=15% and t-bill rate is 8% what is the cost of equity? B
13.56 C 0.056 D 0.07
As per CAPM ( Capital Asset Pricing Model)

Cost of Equity = Risk Free Rate + Beta ( Return on Market - Risk Free Rate)

T Bill Rate is Risk Free Rate

and Nifty return is Return on Market

so Cost of Equity = 8% + 0.8(15%-8%)

Cost of Equity = 8% + 5.6%

Cost of Equity = 13.6%

37. As per MM Proposition with taxes, value of unlevered firm is ….than levered firm?

Ans: a. Lower b. Same c. Higher d. Fluctuating

38. The cash flows forecasted during the projection period for capital budgeting decisions are known
as ___?

a. initial cash flows b. operating cash flows c. terminal cash flows d. regular cash flow

39. Shyam deposits Rs 5000 every year for next 3 years at 6% semiannual compounding. Calculate
the future value if investment? Future value annuity factor at 3% for 3years and 6 years is 3.0909 &
6.4684 respectively and at 6% for 3years and 6 years is 3.1836 & 6.9753 respectively.

a. 15454.5 b. 16171 c. 15918 d. 17438.25

40. .Dividend payment linked to profits left out after meeting the expansion needs is based on ____
theory/policy? Ans - Residual payout policy

41. Moon Ltd invests Rs. 800000 in a paper manufacturing plant. This is expected to generate Rs.
150000 every year for next seven years. Cost of capital for the project is 10%PVAF for 7 years at 10%
is 5.3349. Calculate NPV off the project?

ANS:235

The computation of the net present value is shown below: Net present value would be = Cash
inflows after considering the discount factor - initial investment where, Cash inflows after
considering the discount factor would be = Cash inflows × PVIFA factor for 7 years at 10% = $150,000
× 5.3349 = $800,235 And, the initial cost of investment is $800,000 So, the net present value equal
to = $800,235 - $800,000 = $235

42.The difference between present value of cash inflows and outflows is known as____?

a. NPV b. IRR c. Pay Back period d. Profitability Index

43. . A tight working capital policy will lead to?

a) Low debtors b) Low inventory c) Low inventory carrying cost d) all of the above

44. Sheela needs Rs 500000 at the end of 5 years. how much amount she should invest right now @
10%? present value of 1 Rs at 10% for 5 years is 0.6209.

Ans. 310450

45. Market interest rate is 9%. A bond with 10% coupon will sell ____ par value?

a. Above b. below c. at d. none of the above

46. Dividend declared at 12% means that this %age will be applied on ______? a. Issue price b.
Market price c. Face value, d profit

47. Which of the following method is considered the best evaluation techniques for long-term
investment decisions? a. NPV b. IRR c. Pay Back Period d. Profitability Index

48. Which of the following cost is important while evaluating the investment decision? 1. sunk cost
2. incremental cost 3. both 4. none of above

49. .For A Ltd. Annual demand is 10000 units, carrying cost is 2 Rs per unit and order cost is Rs 50.
Calculate the EOQ Ans – 707

EOQ = Sq Root 2 x (10000x50) /2

50. For calculation of present value of annuity regular, in excel, the value of type should be? A)1 B)0
C)10 D)0.1

51. . In case of capital budgeting decisions, the projects in which choice of one automatically
excludes the another are known as________?

a) Dependend Projects b) Independent projects c) Mutually Exclusive Projects d) Mutually Inclusive

Projects

52. Brexit, Greece Crises, Chinese Crises, Sub-prime Crises are the examples of which of the
following?

a) Systematic risk b) Unsystematic risk c) Total risk d) Specific risk

53. Which of the following is an example of unsystematic risk? a) Interest rate fluctuations b)
Political uncertainty c) Increased steel prices d) Global economic Crises

54. When in the calculation of IRR, intermittent cash flows are reinvested at required rate of return;
the resultant rate is known as_____?

Ans – MIRR - (modified internal rate of return)(IRR)

55. The cash flows forecasted at the end of projection period for capital budgeting decisions are
known as

Ans: a. Initial cash flows c. Terminal cash flows

56. If the credit period is increased by the suppliers of the company cash conversion cycle will A)
Reduced B) Increase C) Remain same D) Unaffected

57. The rate beyond which the preference between two independent projects reverses is knows
as____? a. IRR b. Reversal rate c. Cross over rate d. Cut off rate
58. Why depreciation has to be added back in the calculation of cash flow as it is a_____?

Ans – Non-cash expense

59. . If growth rate of expected earnings goes up than price of stock will_____?

Ans – Increase

60. If proportion of debt is increased in capital structure overall cost of capital will_____?

Ans – Decrease

61. The internal rate of return generated by a fixed income investment, if held till maturity is known
as a) Current yield b) YTM c) Yield curve d) Coupon rate

62. 37. As per MM Proposition without taxes, value of firm is ….by changing the capital structure?

Ans: a. affected b. not affected c. increases d. decreases

63. Proportion of profit distributed among shareholders is known as _____?

a. Dividend ratio b. Dividend capitalization ratio c. Retention ratio, d. Pay-out ratio

64.If the coupon rate of a debenture is increased then its YTM will ______? a. Decrease b. Increase
c. Remain same d. Fluctuate

65. Which of the following instrument is riskiest?

Ans. Shares

66. As per matching approach permanent working capital requirements should be funded by ______
? a)long term funds b)short term funds c)medium term funds d)any of the above

67. In which of following frequency of compounding, maturity value of investment will be highest?

A annual B Qualterly C Montly D Daily

68. In which of following frequency of compounding, present value of annuity will be lowest?

A annual B Qualterly C Montly D Daily

69. Which of the following are the two components of Holding Period Return?

a) Beginning Value & Ending Value b) Periodic Return & Ending Value c) Periodic Return & Capital
Appreciation d) Beginning Value & Capital Appreciation

70. Mathematical model for calculating the optimum inventory order quantity is known
as________? a. JIT b. ABC c. EOQ d. All of the above

71. Sales proceeds from the asset sold at the end of project forecasting period is treated as ____? a.
Initial cash flows b. Operating cash flows c. Terminal cash flows d. Regular cash flows

72. Cost of debt is______?

a) Coupon rate b) YTM (1-tax rate) c) YTM d) YTM/Bond Price

 1. . Kanji Company had sales last year of Rs. 265 million, including cash sales of Rs. 25million. If
its average collection period was 36 days, its ending accounts receivable balance is closest to
. (Assume a 365-day year.) a. Rs. 26.1 million b. Rs. 7.4 million c. Rs. 18.7 million d. Rs. 23.7
million

Case study:

Gamma Electronics is considering the purchase of testing equipment that will cost $500,000 to
replace old equipment. Assume the new machine will generate after-taxsavings of $250,000 per year
over the next four years What’s the payback period for the investment? a. 2.8 Years b. 1.8 Years c. 2
years d. 2.5 year

The solution in finding the payback period for the investment is:

Given:
Initital Investment = $ 500,000
Annual expected after-tax net cash flow = $ 250,000

Payback Period = Initital Investment / Annual expected after-tax net cash flow
= $ 500,000 / $ 250,000
Payback Period = 2 years

Q1. NPV = - 2712.09

Q.2 Initial cash outlay = 250000
Q.3. Annual Operating cash flow = 68600
Present value Annual cash flow = 247287.91
Q.4. Profitablity index := 0.9892

Explanation:
1 Net present value

Annual cash flow

Present value Annuity factor for 5 year @12%

Present value Annual cash flow

Initial cash outlay

Net present value

2 Initial cash outlay :-

System cost 200,000

Installation cost 50,000

 Total cash outlay & cost 250,000

3 Annual Operating Cash inflow :-

Saving in Salaries 15000*10

Other savings 8000+12000+3000

Less : salary of 2 computer Specialists 40000*2

Less : Annual Maintenance cost

Less : Annual Depreciation 250000/5

Profit before tax

Less : Tax @ 40% 31000*40%

Profit After tax

Add:- Depreciation

Annual cash flow

4 Profitablity index :-

Present value Annual cash flow / Initial cash outlay

247287.908/250000

0.9892
Exam important question

1)All of the following are external factors that influence the stock prices of the firm except

• B. Capital structure

2) PR company equity share is expected to provide a dividend of Rs. 3 and fetch a price a Rs. 40 a
year hence, what price would it sell for now if investors required rate of return is 15%

• B. Rs.37.39

3) The before tax cost of debt, RD , is the same as the

• Average yield to maturity (YTM) associated with the firm’s bonds

4) The larger the size of the inventory • B. The lower is the ordering cost

5) Cost of carrying inventory applies to • C. Risk of obsolescence & interest

6) Setting up an entirely new business which is not concerned with the existing business is known as
• Diversification

7) The dividend decisions are concerned with • D. All of these

8) The Modigliani miller approach to capital structure theory is based on certain simplified
assumptions. One of the following is not included in such assumptions • Capital Markets are
imperfect

9) A new machinery in place of old machinery due to technological changes is termed as • B.

Modernization

10) Profitability index shows benefits from the proposal in • Relative Terms

11) Firm’s cost of capital is the weighted average cost of • B. All sources

12) Computation of future value involves • B. Compound interest rate formula

13) Theoretically, the optimum capital structure implies a ratio of debt and equity at which
_________ would be at least and the market value of the firm would be highest • B. WACC
(Weighted average cost of capital)

14) The weighted average cost of capital for the firm is the • B. Rate of return a firm must earn on its
existing assets to maintain the current value of its stock

15) What is the effective annual return (ear) for an investment that pays 10 percent compounded
annually? • A. Equal to 10 percent

16) When a manager develops a cost of capital for another firm which has a similar line of business
as the project, the manager is utilizing the __________ approach • B. Pure play

17) The value of a firm is minimized when the • D. Weighted average cost of capital is minimized.

18) A firm’s overall cost of equity is • B. Highly dependent upon the growth rate and risk level of the
firm

19) Increasing the credit period from 30 to 60 days, in response to a similar action taken by all our
competitors, would likely result in • A. An increase in average collection period
20) MM model of dividend relevance uses arbitrage between • D. Dividend & Capital Gain

21) The optimal capital structure • C. Will vary over time as taxes and market condition change

22) An annuity due is a case in which • D. Uniform cash flows at beginning of regular interval

23) An annuity consists of • D. None of these

24) The primary goal of a publicly-owned firm interested in serving its stockholders should be to • D.
Maximized the stock price per share

25) A problem with the payback method is • It assigns a 0% discount rate to cash flows that occur
before the cutoff price

26) Given some amount to be received several years in the future, if the interest rate increases, the
present value of the future amount will • Be Lower

27) Assigning discount rates to individual projects based on the risk level of each project • A. May
cause the firm’s overall weighted average cost of capital to either increase or decrease over time

28) Collection of account receivables results in • D. None of these

29) Economic order quantity represents a point where • D. Ordering Cost = Holding Cost

30) Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required
return on assets is 15%. What is your cost of equity if you ignore taxes? • D. 0.1988 or 0.19875

31) Matching current assets as much as is possible with long term capital and stressing more on
liquidity than on profitability • Conservative approach of financing

32) A group of individuals got together and purchased all of the outstanding shares of commonstock
of DL Smith, Inc. What is the return that these individuals require on this investment called? • Cost
of Equity

33) Taxation effects of a project will have an impact on • D. All of these

34) Cash flow should exclude depreciation because • Depreciation is a non-cash expense

35) With the increase in the frequency of compounding • Annual percentage yield > annual
percentage rate of interest

36) In India, commercial papers are issued as per the guidelines issued by • B. Reserve Bank of India

37) If a coupon bond is selling at discount, then which of the following is true? • B. Bo Coupon

38) The term current assets does not include • D. Furniture

39) Which present value tables can be used only when cash flows are uniform to determine net
present value? • A. Annuity

40) A company has an equity rate of return of 12% and a debt rate of return of 6%. Its gearing ratio is
40%. The tax rate is 30%. Interest payments on debt are chargeable for tax. The weighted average
cost of capital of the company is • A. 0.0888

41) For the analysis of prospective investments for capital investments decisions, the only relevant
measure to be considered is • C. Incremental Cash Flows

42) Standard deviation can be used to measure • B. Risk

43) Determination of the reorder point depends upon • Both lead time only and usage rate

44) Dividend irrelevance argument of MM model is based on • C. Arbritage

45) Annual demand for a commodity is 1000 tonnes and the carrying cost is Rs.20 per tonne.
Ordering cost per order is Rs.2, find out the economic order quantity • A. 14.142 tonnes

46) Which one of the following makes the capital structure of a firm irrelevant • A. Homemade
leverage

47) YTM bond is • A. IRR

48) If a firm is operating with the optimal amount of debt, then the • B. Value of the levered firm will
exceed the value of the firm if it were unlevered

49) All else being equal, inverse investors generally require ______ returns to purchase investments
with _______ risks • C. Higher, Higher

50) The dividend policy of the firm and its market price of the share is determined by • B. Dividend
yield

51) In order to calculate weighted average cost of weights may be based on • D. All of these (Market
Value, Target Value, Book Value)

52) Which of the following is not considered a capital component for the purpose of calculating the
weighted average cost of capital as it applies to capital budgeting? • C. Short term Debt

53) An aggressive approach to current asset financing leads to • A. Greater profitability

54) ABC Ltd has a gearing ratio of 30% the cost of equity is computed at 21% and cost of debt is 14%,
the corporate tax rate is 40%. The WACC of the company is • A. 0.1722 or 17.22%

55) Variable current assets/permanent current assets ratio is normally • Very Low

56) Which of the following increases the working capital • D. Issue of Debentures

57) Mutually exclusive proposals are • Those where accepting one means rejecting the other

58) Residuals theory argues that dividend is a • C. Passive decision

59) Share of Moon Ltd is currently quoted at Rs.55. the retained earning per share being 40% is Rs.4
per share. If the investors expect annual growth rate of 10%, what would be the cost of equity of
Moon Ltd? • C. 22% or 0.22

60) The use of personal borrowing to change the overall amount of financial leverage to which an
individual is exposed is called • A. Homemade leverage

61) In which of the following methods of capital budgeting annual returns of the future years are
discounted to their present value • C. NPV

62) A long term bond issued with collateral is called • C. Debenture

63) Perpetual bonds have • D. No maturity

64) Bigelow Inc, has a cost of equity of 13.5% and a pre-tax cost of debt of 7%. The required return
on the assets is 11%. What is the firm’s debt-equity ratio based on mm theory with no taxes? • B.
0.64
65) Vishnu Steel Ltd has issued 30,000 irredeemable 14% debentures of Rs. 150 each. The cost of
floatation of debentures is 5% of the total issued amount. The company taxation rate is 40%. The
cost of debenture is • D. 0.0884 or 8.84%

66) The optimal capital structure has been achieved when the • Debt-equity ratio results in the
lowest possible weighted average cost of capital

67) The shares of company are selling at rupees 30 per share . The company had paid dividend of
rupees 2 per share last year. If the estimated growth of the company isapproximately 8% per year,
the cost of equity capital of the company will be • 0.152 or 15.2%

PASSAGE case study

Dazzling Enterprises Ltd is a manufacturer of high-quality running shoes? Ms. Dazzling, president, is
considering computerizing the company’s ordering, inventory and billing procedures. She estimates
that the annual savings from computerization include a reduction of ten clerical employees with
annual salaries of Rs.15000 each, Rs.8000 from reduced production delays caused by raw materials
inventory problems, Rs. 12000 from lost sales due to inventory stock outs, and Rs.3000 associated
with timely billing procedures. The purchase price of system is Rs.2,00,000 and installation costs are
Rs.50,000. These outlays will be depreciated on straight line basis to a zero-book salvage value which
is also its market value at the end of 5 years. Operation of the new system requires two computer
specialists with annual salaries of Rs.40000 per person. Also annual maintenance and operating cash
expenses of Rs.12000 are estimated to be required. The company’s tax rate is 40% and its required
rate of return for this project is 12%

68) Find the project’s net present value • (2697) (2712)

69) Find the project’s initial cash outlay • 250000

70) Find the project’s operating value cash flows per year over its 5 year life • 68600

71) Calculate the profitability index of the project • B. 1.989

72) ABC technique of inventory control is • Selective control

73) What is the reason that the present value of an amount to be received (paid) in the future less
than the future amount? • Investors have the opportunity to earn positive rates of return, so any
amount invested today should grow to a larger amount in the future (This is google based answer)
74) Walter's model suggests for 100% DP ratio when • Ke > r

75) The interest shield has no value for a form when the tax rate is equal to zero debt equity ratio is
exactly equal to 1 _____________ firm is unlevered _________ firm has no taxable income • i iii & iv
only

76) High degree of financial leverage means • High debt proportion

77) You own 25% of unique vacations, inc. You have decided and want to sell your shares in this
closelyheld, all equity firm. The other shareholders have agreed to have the firm borrow rs.
15,00,000 to purchase your 1000 of stock What is the total value of this firm today if you ignore
taxes? • 60,00,000

78) You have determined the profitability of a planned project by finding the present value of all
thecash flows from that project. Which of the following would cause project to look more appealing
in terms of the present value of those cash flows? • The discount rate decreases
79) A shareholder has received bonus share in the proportion of 1:1 what is his stake holding in
thecompany? • Stake holding remains the same with more shares available for trading

80) The longer the operating cycle • The larger the size of current assets

81) ______is a measure of total risk whereas _______ is a measure of systematic risk • Standard
deviation, Beta

82) A firm buys a bond today and sells after 3 months the rate of return and realised is known as •
Holding period return or realised yield (whichever option is available)

83) The preferred technique for evaluating most capital investment is • Net present value

84) Where the firm has sufficient profits from its existing operations the loss of the new project will
• Reduce the overall taxation liability

85) A sum deposited at a private bank fetches Rs. 16000 after 4 years at 15% simple rate of interest
the principal amount is • 10000

86) The main virtue of the payback method is its • Simplicity

87) Principal value of a bond is called the • Face value or Par value

88) Investment incentives in the form of capital allowance includes • Rent free land and buildings

89) By definition, what type of annuity best describes payment such as rent and magazine
subscriptionassuming the cost do not change over time? • Annuity due

90) If Ke = r , then under Walter's model which of the following is irrelevant? • Dividend Payout Ratio

91) If the calculated NPV is negative, then which of the following must be true? The discount rate
used is • Greater than internal rate of return

92) Which of the following is not true for MM model? • Market value is unaffected by dividend
policy

93) Provision of discount • Lessens the average collection period

94) Matt invested in dynamo stock when the firm was unlevered since then, dynamo has become
delivered to earlier his position mat needs to • Sell some shares of dynamo stock and loan out the
sale proceeds.

95) If a firm has Ke > r the Walter's model suggests for • 100% payout

96) One of the following is not an assumption of capital structure theories • The dividend payout
ratio varies between 0% to 100%

97) Which one of the following statements is correct concerning the relationship between a levered
andan unlevered capital structure? Assume there are no taxes. • When a firm is operating at a point
where the actual earnings before interest and taxes (EBIT) exceed the breakeven point level, then
adding debt to the capital structure will increase the earnings per share (EPS).

98) Stock of semi-finished goods is a • Working capital

99) The interest of Rs. 800 for 5 years at 12% compounded annually is • 610 or 609.8733
100) As the discount rate increases without limit, the present value of the future cash inflows •
Approaches zero

101) Holding cost • Decrease with growing inventory

102) Volatility means • Variation from the mean in both positive and negative means

103) The interest tax shield is a key reason why • The net cost of debt to a firm is generally less than
the cost of equity

104) Which of the following financial statements risk is the risk concerning associated financial with
these are correct? (1) Financial risk is the risk associated with the use of debt financing (2) As
financial risk increases so too does the cost of equity (3) Financial risk is wholly dependent upon the
financial policy of a firm (4) Financial risk is the risk that is inherent in a firm’s operations. • (1), (2),
(3) only

105) The accounting rate of return is calculated as • Net income/Book value of assets

106) Assume that you are comparing two mutually exclusive projects which of the following
statement is most correct? • There will be a meaningful (as opposed to irrelevant) conflict only if the
project’s NPV profiles cross, and even then, only if the cost of capital is to the left of (or lower than)
the discount rate at which the crossover occurs.

107) The basic lesson of M & M theory (without taxes) for capital structure is that the value or firm is
dependent upon the • Total cash flow of the firms

108) With the increase in frequency of compounding • Annual percentage yield > Annual percentage
rate of interest

109) JIT involves • Lower carrying cost

110) In perfect capital markets • None of the above

111) Optimum credit exists when • Average rate of return is more than the required rate of return
112) Which of the following is not a benefit of carrying inventory? • Reducing carrying cost

113) IRR of a project is a rate where NPV tends to be • Zero

114) The weighted average cost of capital for a wholesaler • Is the return investors require on the
total assets of the firm

116. Thompson & Thompson is an all-equity firm that has 5,00,000 shares of stock outstanding. The
company is in the process of borrowing Rs 80,00,000 at 9% interest to repurchase 200,000 shares of
theoutstanding stock. What is the value of this firm if you ignore taxes? • 2 Crores

117. The unlevered cost of capital is • The cost of capital for a firm with no debt obligations 118.
Cost of debt incorporates • Part of floatation cost and part on interest cost

119. ABC Ltd manufactured & sold 20,000 units with a variable cost of Rs. 20 p.u. & Rs. 30 as selling
price. The fixed overheads incurred during the period was Rs. 100000. The operating leverage of
thefirm is: • 2

120. MM Model argues that dividend is irrelevant as • The value of the firm depends upon earning
power 121. Cost of Preference Shares is • Not treated for tax
 Part I (Objective)

Section I – 1 Marks Questions

1. Which of the following is not a function of a finance manager?

a. Mobilization of funds
b. Deployment of funds.
c. Control over use of funds.
d. Manipulate share price of the company
e. Maintain a balance between risk and return.

2. The objective of financial management is to

a. Generate the maximum net profit

b. Generate the maximum retained earnings
c. Generate the maximum wealth for its shareholders
d. Generate maximum funds for the firm at the least cost
e. All of the above

3. If a loan of Rs 300000 is to be repaid in six annual installments with a coupon rate of 12% p.a. then
the equated annual installments will be

a. Rs 71967
b. Rs 72975
c. Rs 74005
d. Rs 75995
e. Rs 76004

4. The nominal rate of interest is equal to

a. Real rate + Risk premium- Inflation

b. Real rate + Risk premium+ Inflation
c. Real rate - Risk premium+ Inflation
d. Real rate - Risk premium- Inflation
e. Real rate

5. Cash flows occurring in different periods should not be compared unless

a. Interest rates are expected to be stable.

b. The flows occur no more then one year from each other.
c. High rate of interest can be earned on the flows
d. The flows have been discounted to a common date.
e. Interest rates are expected to increase over a period of time.

6.

7. Equity shares of phonex limited are quoted in the market at Rs 17. The dividend expected a year hence
is Rs 1.5. The expected rate of dividend growth is 8%. The cost of equity capital to the company is

a. 11.08%
b. 13.88%
c. 15.46%
 d. 16.82%
e. 20%

8. If the last dividend declared is Rs 2 per share, the growth rate in dividend is 12% and the price per share
is Rs 80, the cost of equity capital is

a. 14.8%
b. 16.5%
c. 17.6%
d. 18.5%
e. 19.4%

9. Which of the following is not a feature of an optimal capital structure?

a. The company should make maximum use of leverage at a minimum cost

b. The capital structure should be flexible to be able to meet the changing conditions.
c. Capital structure should involve minimum dilution of control of the company.
d. The company should aim at not using excessive debt in its capital structure.
e. The company should make minimum use of leverage at a minimum cost.

10. Which of the following is not an advantage of using book value weights for computing the costof
capital?

a. The calculation of weights is very simple.

b. Book value weights are likely to fluctuate less over a period as these are not affected by the
fluctuation sin market price.
c. Book value weights are the only usable basis when market values are not obtainable or reliable.
d. Book value weights are consistent with the concept of cost of capital.
e. None of the above.

11.

12.

13. If the earnings per share is Rs 4, dividend pay out ratio is 40%, cost of equity capital is 20% and growth
rate in the rate of return on investment is 5%, then the value of stock according to the Gordon’s
dividend capitalization model is

a. Rs 16
b. Rs 24
c. Rs 32
d. Rs 40
e. Rs 60.

14. Which of the following is / are true regarding the measurement of cash inflows and outflows of a
project

a. Depreciation amount should be added to PBT.

b. Depreciation amount should be added to PAT
c. Depreciation should neither be added nor be subtracted from PAT.
d. Working capital requirement in the first year should be treated as CAPEX.
e. Both c & d above.
15. Incremental cash flows in relation to capital budgeting decisions refer to the

a. Cash flows which are increasing over a period of time.

b. Incremental change in cash flows if the project is extended one year beyond its life period
c. Cash flows which are directly attributable to the investment.
d. Difference between cash and flows streams an initial outflow.
e. Difference between any two cash outflows in a project’s life period.

16. The time gap between placing of the order and procuring the material is referred to as lead

time………………….

17. If the annual demand is 10Lakh units, fixed cost per order is Rs 5000 and cost of carrying per unit per
annum is Rs 25, then economic order quantity is 20000……………… units.

18. Consider the following figures

Opening balance of book debts – Rs 100000, ending balance of book debt – Rs 150000, annual sales Rs
4500000. the average collection period, considering 360 days year is 10…………….. days

19. Cheques that have been deposited may not be immediately available for use due to

collection…………………. Float.

20. Safety stock……………… is equal to the difference between the reorder level and the level of normal
consumption

21. The cost of retained earnings is lower than the cost of eternal equity in the presence of floatation cost

a. True
b. False

22. Cost of capital is equal to the internal rate of return of a project if the project’s net present value is
zero

a. True
b. False

23. According to Modigliani & Miller theory on dividends “irrespective of nature of firm, as

dividend increases the value of share increases”.

a. True.
b. False.

24. NPV method gives more weightage to distant flows than to near term flows.

a. True
 b. False

25. A company following a conservative working capital policy will finance its current assets more from
long term sources

a. True
b. False

Section II –3 Marks Questions

(Tick the appropriate answer with reasons)

Q1. If the revenues and cost of sale are Rs. 50,000 and Rs. 40,000 and the probability that a customer would
pay is 75%, the expected profit/loss from extending credit to the customer is

a. Gain of Rs. 7,500

b. Gain of Rs. 2,500
c. No profit and no loss
d. Loss of Rs. 2,500
e. Loss of Rs. 7,500

Q2. Which of the following is true when the level of inventory is increased?

a. Ordering costs decreases but carrying costs increases.

b. Carrying costs increases but ordering costs remain same.
c. Both ordering and carrying cost increases.
d. Both ordering can carrying cost decreases.
e. Carrying costs decreases but ordering costs increases.

Q3. Which of the following is not true if the credit terms are liberalized by increasing the discount?

a. It may increases sales.

b. It may increase the bad debts losses.
c. It may reduce the average collection period.
d. It may increase the cost of discount.
e. Both (b) and (d) above.

Q4. Fill in the blanks with most appropriate combination. Compared to the management of fixed assets, in
the management of current assets the consideration of time of money is …. Important, liquidity is…….
Important and profitability is …….. important.

a. Less, less, equally

b. Less, more, equally
c. More, less, equally
d. More, more, equally
e. More, more, less.
Q5. For an initial outlay of Rs. 10,000 a machine generates the following cash inflows:

Year 1 2 3

Inflows Rs. 5000 Rs. 5000 Rs. 5000

If the required rate of return is 10%, the NPV of the project is:

a. Rs. 12,435
b. Rs. 10,435
c. Rs. 8,435
d. Rs. 2,435
e. Rs. (2,435)

Q 6. If the cost of equity is 18%, and the cost of debt is 15% what would be the cost of capital, at a tax rate
of 35% and a debt-equity ratio of 2:1?

a. 13.50%
b. 13.25%
c. 12.50%
d. 16.0%
e. 9.5%

Q 7. Mr. Dhanasekhar borrows from Sind Bank Limited Rs. 5,00,000 to be repaid within five years at an
interest rate of 15% per annum on the opening balances of every year. The equated annual payment
to be made by him, so that by the end of five years the entire amount of principal and interest would
be repaid, is

a. Rs. 1,25,000
b. Rs. 1,75,000
c. Rs. 1,49,165
d. Rs. 1,00,000
e. Rs. 2,48,633

Q 8. What is the total cost of maintaining an inventory of 100 units if the carrying cost per unit is Rs. 3, the
cost per order is rs. 14 and there are 5 orders per year?

a. Rs. 150.
b. Rs. 220
c. Rs. 300
d. Rs. 370.
e. Rs. 400
Q 9. The overall capitalization rates for two firms A and B are 20% each and their net operating incomes are
Rs. 7,00,000 each. For firm A, the market value of debt and equity are in the ratio of 50:50 while for
 that of B, it is 40:60. Both firms have to pay tax at the rate of 50%, and they borrow debt at the rate of
15%. Calculate the rates of return on equity for these two firms. (ROE A = 12.5%, B = 11.67%)

Q 10. Micro Ltd. is considering to invest in a plant requiring outflow of Rs.250 lakh. The plant has an
economic life of 5 years. The financial analyst of the company has projected the following cash flows
for the project:

(Rs. Lakh)

Year Cash Flow Ans

0 (250) (250)

1 50 57.50

2 65 69.5

3 80 82.10

4 90 90.20

5 125 123.68

But he later realized that depreciation was erroneously taken as 10% on original cost instead of 20%
on book value.

The cost of capital for the company is 16% and the applicable tax rate is 30%.

You are required to compute the

i. Revised cash flows

ii. Discounted pay-back period ( Ans. 5 Yrs)

Q 11. Ganesh Trading Company requires 75,000 units of a certain item per annum. The cost per unit of the
item is rs. 25. The ordering cost is Rs. 250 per order and the inventory carrying cost is Rs. 10 per unit
per year.

You are required to calculate the EOQ. (1936 units)

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