Quiznetik

Financial Management | Set 2

1. Profitability Index, when applied to Divisible Projects, impliedly assumes that:

Correct : D. Both (b) and (c)

2. If there is no inflation during a period, then the Money Cashflow would be equal to:

Correct : B. Real Cash flow

3. The Real Cashflows must be discounted to get the present value at a rate equal to:

Correct : C. Real Discount Rate

4. Real rate of return is equal to:

Correct : B. Nominal Rate ÷ Inflation Rate

5. If the Real rate of return is 10% and Inflation s Money Discount Rate is:

Correct : A. 14.4%

6. If the Money Discount Rate is 19% and Inflation Rate is 12%, then the Real Discount Rate is:

Correct : D. 6.25%

7. Money Discount Rate if equal to:

Correct : A. (1 + Inflation Rate) (1 + Real Rate)-1

8. Real Discount Rate is equal to:

Correct : C. (1 + Money D Rate) 4- (1 + Inf. Rate)-1

9. Two mutually exclusive projects with different economic lives can be compared on the basis of

Correct : D. Equivalent Annuity Value

10. Risk in Capital budgeting implies that the decision-maker knows___________of the cash flows.

Correct : B. Probability

11. In Certainty-equivalent approach, adjusted cash flows are discounted at:

Correct : D. Risk-free Rate

12. Risk in Capital budgeting is same as:

Correct : D. Variability of Cash flows

13. Which of the following is a risk factor in capital budgeting?

Correct : D. All of the above

14. In Risk-Adjusted Discount Rate method, the normal rate of discount is:

Correct : A. Increased

15. In Risk-Adjusted Discount Rate method, which one is adjusted?

Correct : C. Rate of discount

16. NPV of a proposal, as calculated by RADR real CE Approach will be:

Correct : B. Unequal

17. Risk of a Capital budgeting can be incorporated

Correct : D. All of the above

18. Which element of the basic NPV equation is adjusted by the RADR?

Correct : A. Denominator

19. Cost of Capital refers to:

Correct : B. Dividend

20. Which of the following sources of funds has an Implicit Cost of Capital?

Correct : D. Retained earnings

21. Which of the following has the highest cost of capital?

Correct : A. Equity shares

22. Cost of Capital for Government securities is also known as:

Correct : A. Risk-free Rate of Interest

23. Cost of Capital for Bonds and Debentures is calculated on:

Correct : B. After Tax basis

24. Weighted Average Cost of Capital is generally denoted by:

Correct : C. k0

25. Which of the following cost of capital require tax adjustment?

Correct : C. Cost of Debentures

26. Which is the most expensive source of funds?

Correct : A. New Equity Shares

27. Marginal cost of capital is the cost of:

Correct : B. Additional Funds

28. In case the firm is all-equity financed, WACC would be equal to

Correct : B. Cost of Equity

29. In case of partially debt-financed firm, k0 is less

Correct : B. Ke

30. In order to calculate Weighted Average Cost of weights may be based on:

Correct : D. All of the above

31. Firm's Cost of Capital is the average cost of:

Correct : A. All sources

32. An implicit cost of increasing proportion of debt is:

Correct : C. Equity shareholders would demand higher return

33. Cost of Redeemable Preference Share Capital is:

Correct : C. Discount Rate that equates PV of inflows and out-flows relating to capital

34. Which of the following is true?

Correct : C. Retained Earnings are cheaper than External Equity

35. Cost of capital may be defined as:

Correct : D. Minimum Rate of Return that the firm should earn

36. Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known as:

Correct : B. Weighted Average Cost of Capital

37. Cost Capital for Equity Share Capital does not imply that:

Correct : D. AC of the three above.

38. In order to calculate the proportion of equity financing used by the company, the following should be used:

Correct : B. Equity Share Capital plus Reserves and Surplus,

39. The term capital structure denotes:

Correct : B. Equity Funds, Preference Capital and Long term Debt

40. Debt Financing is a cheaper source of finance because of:

Correct : C. Tax-deductibility of Interest

41. In order to find out cost of equity capital under CAPM, which of the following is not required:

Correct : C. Market Price of Equity Share

42. Tax-rate is relevant and important for calculation of specific cost of capital of:

Correct : C. Debentures

43. Advantage of Debt financing is

Correct : D. All of the above.

44. Cost of issuing new shares to the public is known as:

Correct : C. Flotation Cost

45. Cost of Equity Share Capital is more than cost of debt because:

Correct : B. Equity shares have higher risk than debt,

46. Which of the following is not a generally accepted approach for Calculation of Cost of Equity?

Correct : C. Rate of Pref. Dividend Plus Risk

47. Operating leverage helps in analysis of:

Correct : A. Business Risk

48. Which of the following is studied with the help of financial leverage?

Correct : D. Financing risk

49. Combined Leverage is obtained from OL and FL by their:

Correct : C. Multiplication

50. High degree of financial leverage means:

Correct : A. High debt proportion

51. Operating leverage arises because of:

Correct : A. Fixed Cost of Production

52. Financial Leverage arises because of:

Correct : C. Interest Cost

53. Operating Leverage is calculated as:

Correct : A. Contribution ÷ EBIT

54. Financial Leverage is calculated as:

Correct : B. EBIT÷ PBT

55. Which combination is generally good for firms

Correct : C. High OL, Low FL

56. Combined leverage can be used to measure the relationship between:

Correct : C. Sales and EPS,

57. FL is zero if:

Correct : B. EBIT = Zero,

58. Business risk can be measured by:

Correct : B. Operating leverage

59. Financial Leverage measures relationship between

Correct : B. EBIT and EPS

60. Use of Preference Share Capital in Capital structure

Correct : B. Increases FL

61. Relationship between change in sales and change m is measured by:

Correct : B. Combined leverage

62. Operating leverage works when:

Correct : C. Both (a) and (b)

63. Which of the following is correct?

Correct : C. OL= OL × FL

64. If the fixed cost of production is zero, which one of the following is correct?

Correct : D. None of the above

65. If a firm has no debt, which one is correct?

Correct : B. FL is one

66. If a company issues new share capital to redeem debentures, then:

Correct : D. FL will decrease

67. If a firm has a DOL of 2.8, it means:

Correct : C. If sales rise by 1%, EBIT will rise by 2.8%,

68. Higher OL is related to the use of higher:

Correct : C. Fixed Cost

69. Higher FL is related the use of:

Correct : B. Higher Debt

70. In order to calculate EPS, Profit after Tax and Preference Dividend is divided by:

Correct : B. Number of Equity Shares

71. Trading on Equity is

Correct : B. May be beneficial

72. Benefit of 'Trading on Equity' is available only if:

Correct : A. Rate of Interest < Rate of Return

73. Indifference Level of EBIT is one at which:

Correct : D. None of these

74. Financial Break-even level of EBIT is one at which:

Correct : B. EPS is zero

75. Relationship between change in Sales and d Operating Profit is known as:

Correct : B. Operating Leverage

76. If a firm has no Preference share capital, Financial Break even level is defined as equal to -

Correct : B. Interest liability

77. At Indifference level of EBIT, different capital have

Correct : B. Same EPS

78. Which of the following is not a relevant factor m EPS Analysis of capital structure?

Correct : D. Dividend paid last year

79. For a constant EBIT, if the debt level is further increased then

Correct : B. EPS may increase

80. Between two capital plans, if expected EBIT is more than indifference level of EBIT, then

Correct : C. One is better than other

81. Financial break-even level of EBIT is:

Correct : B. Intercept at X-axis

82. In case of Net Income Approach, the Cost of equity is:

Correct : A. Constant

83. In case of Net Income Approach, when the debt proportion is increased, the cost of debt:

Correct : C. Constant

84. Which of the following is true of Net Income Approach?

Correct : A. VF = VE+VD

85. Net Operating Income Approach, which one of the lowing is constant?

Correct : C. WACC & kd

86. NOI Approach advocates that the degree of debt financing is:

Correct : C. Irrelevant

87. 'Judicious use of leverage' is suggested by:

Correct : C. Traditional Approach

88. Which one is true for Net Operating Income Approach?

Correct : C. VE = VF - VD

89. In the Traditional Approach, which one of the following remains constant?

Correct : D. None of the above

90. In MM-Model, irrelevance of capital structure is based on:

Correct : B. Arbitrage Process

91. 'That there is no corporate tax' is assumed by:

Correct : D. All of these

92. 'That personal leverage can replace corporate leverage' is assumed by:

Correct : B. MM Model

93. Which of the following argues that the value of levered firm is higher than that of the unlevered firm?

Correct : D. Both (a) and (c)

94. In Traditional Approach, which one is correct?

Correct : D. None of the above

95. Which of the following assumes constant kd and ke?

Correct : A. Net Income Approach

96. Which of the following is true?

Correct : C. Under NOI Approach, overall cost of capital remains same,

97. The Traditional Approach to Value of the firm m that:

Correct : B. Value can be increased by judicious use of leverage

98. A firm has EBIT of . 50,000. Market value of debt is . 80,000 and overall capitalization rate is 20%. Market value of firm under NOI Approach is:

Correct : B. 1,70,000

99. Which of the following is incorrect for NOI?

Correct : C. ke is constant

100. Which of the following is incorrect for value of the firm?

Correct : D. Total value does not change because underlying does not change with financing mix.