Quiznetik

Financial Management | Set 4

1. Risk-Return trade off implies

A. Minimization of Risk,

B. Maximization of Risk,

C. Ignorance of Risk

D. Optimization of Risk

Correct : D. Optimization of Risk

2. Basic objective of diversification is

A. Increasing Return,

B. Maximising Return,

C. Decreasing Risk,

D. Maximizing Risk.

Correct : C. Decreasing Risk,

3. Risk-aversion of an investor can be measured by

A. Market Rate of Return

B. Risk-free Rate of Return,

C. Portfolio Return,

D. None of the above.

Correct : D. None of the above.

4. If the intrinsic value of a share is less than the market price, which of the most reasonable?

A. That shares have lesser degree of risk

B. That market is over valuing the shares

C. That the company is high dividend paying,

D. That market is undervaluing the share

Correct : B. That market is over valuing the shares

5. According to traditional approach, the average cost of capital

A. Remains constant up to a degree of leverage and rises sharply thereafter with every increase in leverage.

B. Rises constantly with increase in leverage.

C. Deceases up to a certain point, remains unchanged for moderate increase in leverage and rises beyond a certain point.

D. Decreases at an increasing rate with increase in leverage.

Correct : C. Deceases up to a certain point, remains unchanged for moderate increase in leverage and rises beyond a certain point.

6. Equity shares of phonex Ltd are quoted in the market at Rs17. The dividend expected a year hence is Rs1.50. 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%

Correct : D. 16.82%

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

A. Profitability

B. Safety

C. Flexibility

D. Control

Correct : B. Safety

8. The cost of debt capital if interest rate is 15% and tax rate is 40% is

A. 6%

B. 8.5%

C. 9%

D. 10.5%

Correct : C. 9%

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 condition

C. The company should aim at not using excessive debt in its capital structure

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

Correct : D. The company should make minimum use of leverage at a minimum cost.

10. Which of the following is not an assumption of Miller and Modigliani approach?

A. There are no corporate or personal income tax

B. Investors are assumed to be rational and behave accordingly

C. There is no corporate tax though there are personal income tax

D. Capital markets are perfect

Correct : C. There is no corporate tax though there are personal income tax

11. The bond yield plus risk premium approach is a method of finding out the cost of

A. Preference capital

B. Equity capital

C. Debenture capital

D. Term loans

Correct : B. Equity capital

12. According to net operating income approach

A. The equity capitalization rate remains constant with any increase or decrease in the degree of leverage

B. The overall capitalization rate of the firm remains constant

C. The cost of debt remains constant

D. Both b and c

Correct : D. Both b and c

13. While calculating the weighted average cost of capital, market value weights are preferred because

A. Book value weights are historical in nature

B. It is vary difficult to estimate book value weights at the time of calculating the weighted average cost

C. This is in conformity with the definition of cost of capital as the investor’s minimum required rate of return

D. Book value weights fluctuate violently.

Correct : C. This is in conformity with the definition of cost of capital as the investor’s minimum required rate of return

14. Which profit is considered for calculating Average Rate of Return?

A. Earnings before interest, depreciation and tax

B. Average profit after tax and depreciation

C. Average profit after depreciation but before tax

D. Average profit after depreciation but before tax

Correct : B. Average profit after tax and depreciation

15. A project costs Rs50,000 and will yield annual cash inflows of Rs20,000 for 5years. Calculate its payback period.

A. 2 years

B. 5 years

C. 2.5 years

D. 3 years

Correct : C. 2.5 years

16. Capital structure decisions should always aim at having debt component in order to

A. Gain tax savings

B. Gain control over the company

C. Balance the capital structure

D. Increase the earnings available for shareholders.

Correct : D. Increase the earnings available for shareholders.

17. ------ refers to a situation where a firm is not in a position to invest in all profitable projects due to the constraints on availability of funds

A. Capital budgeting

B. Over capitalization

C. Capital expenditure control

D. Capital rationing

Correct : D. Capital rationing

18. ------ refers to the minimum return expected by its suppliers

A. Trading on equity

B. Time value of money

C. Cost of capital

D. Capital gearing

Correct : C. Cost of capital

19. The ratio which is obtained by dividing the present value of future cash inflows by the present value of cash out flows is called

A. Net Present Value

B. IRR

C. Profitability Index

D. Average rate of return

Correct : C. Profitability Index

20. Capital structure is the proportion of

A. Long term funds and short term funds

B. Debt and equity

C. Current assets and fixed assets

D. Equity and retained earnings

Correct : B. Debt and equity

21. A company has earnings before interest and taxes of Rs1,00,000. It expects a return on investment at a rate of 12.5%. What is the total value of the firm according to MM Theory?

A. Rs6,00,000

B. Rs7,00,000

C. Rs8,00,000

D. Rs9,00,000

Correct : C. Rs8,00,000

22. Optimum capital structure is obtained when

A. Firm earns maximum profits

B. Firm declares reasonable dividend

C. Market value per equity share is the maximum

D. The debt increases

Correct : C. Market value per equity share is the maximum

23. Axis Ltd is issuing 15% debentures ( face value Rs60). The net amount realized per debenture is Rs54 and they are redeemable at par after 6 years. At a corporate tax rate of 40%, what is the cost of debt?

A. 16.54%

B. 17.54%

C. 10%

D. 14.74%

Correct : C. 10%

24. Which of the following statement is true according to traditional approach of capital structure?

A. Cost of capital increases with the use of debt after a certain amount of debt and later falls

B. Cost of equity and debt more or less remains constant with the use of debt up to a certain amount of debt

C. Cost of declines and cost of debt remains constant with increase in debt.

D. Cost of equity declines and cost of debt increases with increase in debt

Correct : B. Cost of equity and debt more or less remains constant with the use of debt up to a certain amount of debt

25. Which of the following is true regarding the measurement of cash inflows and out flows 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. Both a and b above

Correct : B. Depreciation amount should be added to PAT

26. According to rate or return is the ratio of average values of

A. Profit before tax to book value o the investment

B. Profit after tax to salvage value of the investment

C. Profit before tax to present value of the investment

D. Profit after tax to the book value of the investment

Correct : D. Profit after tax to the book value of the investment

27. Which of the following is/ are the drawbacks of Accounting Rate of Return criterion

A. It gives equal weightage to near flows and distant flows

B. It is calculated using the accounting income and not cash flows

C. The cut off of ARR is arbitrarily fixed

D. All of the above

Correct : D. All of the above

28. Which of the following is true about NPV?

A. It considers all the cash flows

B. It gives more weightage to distant flows than to near term flows

C. It considers time value of money

D. Both a and c above

Correct : D. Both a and c above

29. In IRR , the cash inflows are assumed to be reinvested in the project at

A. Internal rate of return

B. Cost of capital

C. Risk free rate

D. Risk adjusted rate

Correct : A. Internal rate of return

30. For a project, benefit cost ratio is equal to one, then

A. IRR will be greater than one

B. IRR will be greater than discount rate

C. IRR will be less than discount rate

D. IRR will be equal to discount rate

Correct : D. IRR will be equal to discount rate

31. Which of the following is a non discounting technique for appraising a project?

A. Net present value

B. Pay back period

C. Internal rate of return

D. Cost benefit ratio

Correct : B. Pay back period

32. If the present value of cash in flows from a project is Rs4.50 crore, initial outlay is Rs3.75 crore then the net benefit cost ratio is

A. 0.17

B. 0.20

C. 0.75

D. 0.83

Correct : B. 0.20

33. Which of the following is not considered for cost benefit analysis of capital decisions

A. Opportunity cost

B. Incremental cost

C. Sunk cost

D. All of these

Correct : C. Sunk cost

34. If NPV for a project is negative, then

A. IRR = Cost of capital

B. IRR > Cost of capital

C. BCR = 1

D. IRR < Cost of capital

Correct : D. IRR < Cost of capital

35. The net cash flows of the project and their present values are as follows Year 1 2 3 4 Net cash flow (Rs) 5100 5100 5100 7100 PVIF @12% 0.893 0.797 0.712 0.636 Present Value (Rs) 4554 4065 3631 4516 The initial investment in the project is Rs12500, What is the NPV of the project?

A. 4066

B. 4166

C. 4266

D. 4566

Correct : C. 4266

36. Higher the risk involved in a firm, ------- is the cost of capital

A. High

B. Low

C. Medium

D. None of these

Correct : A. High

37. The composition of a company’s capitalization is called

A. Capital Structure

B. Financial structure

C. Long term source

D. Short term source

Correct : A. Capital Structure

38. The entire items on the liability side of a balance sheet is called

A. Capital structure

B. Financial structure

C. Long term source

D. Short term source

Correct : B. Financial structure

39. Net operating income approach was suggested by

A. Modigliani and Miller

B. Durand

C. Walter

D. None of these

Correct : B. Durand

40. Overall cost of capital, according to ------ approach, decreases up to a certain point, remains unchanged for moderate increase in debt thereafter, and increase beyond a certain point

A. Net income

B. Net operating income

C. Traditional

D. MM approach

Correct : C. Traditional

41. According to MM approach, two identical firms in all respects except their capital structure can not have different market values or cost of capital because of-----

A. Leverage

B. Trading on equity

C. Arbitrage process

D. None of these

Correct : C. Arbitrage process

42. If funds are required for productive purpose ------- finance is suitable

A. Debt

B. Equity

C. Retained earnings

D. None of these

Correct : A. Debt

43. If funds are required for unproductive purpose or general development on permanent basis ------- finance is suitable

A. Debt

B. Equity

C. Bank overdraft

D. None of these

Correct : B. Equity

44. According to ------ method it is assumed that each of the future cash flows is immediately reinvested in another project at a certain rate of return until the termination of the project

A. NPV

B. IRR

C. Pay back method

D. Terminal value method

Correct : D. Terminal value method

45. When the cost of the project differ significantly which method of capital budgeting is used

A. NPV

B. IRR

C. Pay back method

D. Profitability index

Correct : D. Profitability index

46. To judge the comparative risk of projects having same cost and different NPV which method is used

A. Certainty equivalent method

B. Sensitivity technique

C. Standard deviation method

D. Coefficient of variation method

Correct : D. Coefficient of variation method

47. Under ----- method more than one forecast of the future cash inflows ie. Optimistic, pessimistic and most likely are made

A. Certainty equivalent method

B. Sensitivity technique

C. Standard deviation method

D. Coefficient of variation method

Correct : B. Sensitivity technique

48. ------- is a graphical representation of the relationship between a present decision and future events, future decisions and their consequences.

A. Certainty equivalent method

B. Sensitivity technique

C. Standard deviation method

D. Decision tree analysis

Correct : D. Decision tree analysis

49. The return after the pay off period is not considered in case of

A. Pay back method

B. NPV

C. Present value index

D. IRR

Correct : A. Pay back method

50. The cash inflows on account of operations are presumed to have been reinvested at the cut off rate in case of

A. Pay back method

B. NPV

C. Accounting rate of return

D. IRR

Correct : B. NPV

51. The cost of each component of capital is known as

A. Specific cost

B. Combined cost

C. Average cost

D. Implicit cost

Correct : A. Specific cost

52. ------ refers to that EBIT level at which EPS remains the same irrespective of the debt- equity mix.

A. Profit point

B. Cut off point

C. Point of indifference

D. None of these

Correct : C. Point of indifference

53. The use of long term fixed interest bearing debt and preference share capital along with equity shares is called

A. Operating leverage

B. Financial leverage

C. Trading on equity

D. Both b and c

Correct : D. Both b and c

54. Which of the following factors are considered when a capital structure decision is taken?

A. Cost of capital

B. Dilution of control

C. Floatation cost

D. All of the above

Correct : D. All of the above

55. The combination of debt and equity that leads to the maximum value of the firm is called

A. Financial structure

B. Capital structure

C. Optimal capital structure

D. None of these

Correct : C. Optimal capital structure

56. In optimal capital structure the company’s cost of capital will be

A. Minimum

B. Maximum

C. Medium

D. None of these

Correct : A. Minimum

57. The value of a firm on the basis of net operating income approach can be determined by dividing the earnings before interest and taxes by

A. Cost of equity

B. Cost of debt

C. Overall cost of capital

D. None of the above

Correct : C. Overall cost of capital

58. A company should follow the policy of ----- gear during deflation or depression period

A. High gear

B. Low gear

C. Medium gear

D. Any of the above

Correct : B. Low gear

59. Which of the following is not a disadvantage of rate of return method of capital budgeting?

A. It ignores the time value of money

B. It uses the earnings of a project up to the payback period only

C. It does not take into consideration cash flows

D. This method can not be applied to a situation where investment in a project is to be made in parts.

Correct : B. It uses the earnings of a project up to the payback period only

60. A project having a profitability index of ------ is accepted

A. PI<1

B. PI>1

C. PI=1

D. None of these

Correct : B. PI>1

61. The type of debt whose rate of interest changes according to the changes in the rate of interest payable on gilt edged securities or the prime lending rate of the bank is called

A. Floating rate debt

B. Variable rate debt

C. Fixed rate debt

D. Both a or b

Correct : D. Both a or b

62. .Earnings yield method is applied when the dividend pay out ratio is

A. Zero per cent

B. 100 per cent

C. 50 per cent

D. 20 percent

Correct : B. 100 per cent

63. ----- is the rate of return that the company must earn on the net funds raised, in order to satisfy the equity shareholders’ demand for return

A. Cost of retained earnings

B. Cost of external equity

C. Weighted average cost of capital

D. Marginal cost of capital

Correct : B. Cost of external equity

64. A project requires an investment of Rs500000and has scrape value of Rs.20000 after five years. It is expected to yield profits after depreciation and taxes during the five years amounting to Rs.40000,Rs60000, Rs.50000,Rs70000 and Rs20000.What is the average rate of return on the investment?

A. 10%

B. 11%

C. 12%

D. 13%

Correct : A. 10%

65. Which of the following quantitative aspect of financial planning?

A. Capitalization

B. Capital structure

C. Organization structure

D. None of these

Correct : A. Capitalization

66. Which of the following qualitative aspect of financial planning?

A. Capitalization

B. Capital structure

C. Organization structure

D. None of these

Correct : B. Capital structure

67. Which of the following is/ are the assumptions of net income approach?

A. The cost of debt is less than the cost of equity

B. There are no taxes

C. The risk perception of investors is not changes by the use of the debt.

D. All of these

Correct : D. All of these

68. The overall cost of capital, according to which theory, decreases up to a certain point, remains more or less unchanged for moderate increase in debt thereafter and increases a certain point

A. Net income approach

B. Net operating income approach

C. Traditional theory

D. MM approach

Correct : C. Traditional theory

69. According to which theory two identical firms in all respect except their capital structure can not have different market value or cost of capital because of arbitrage process

A. Net income approach

B. Net operating income approach

C. Traditional theory

D. MM approach

Correct : D. MM approach

70. XLtd has taken a term loan of Rs12 lakhs at an interest rate of 15% p.a. If the tax rate applicable to the company is 40%, the cost of term loan is

A. 4.8%

B. 6%

C. 7.2%

D. 9%

Correct : D. 9%

71. Agency cost arises due to

A. Cost over run in implementing new projects

B. Failure of budget cost

C. Restrictions imposed by the supplier of debt capital

D. Rise in the cost of production

Correct : C. Restrictions imposed by the supplier of debt capital

72. What do you mean by NPV?

A. Excess of cash inflows over cash outflows

B. Excess of cash outflows over cash inflows

C. Excess of the present value of cash out flows over the present value of cash inflows

D. Excess of the present value of cash inflows over the present value of cash outflows

Correct : D. Excess of the present value of cash inflows over the present value of cash outflows

73. Under NPV method, cash flows are assured to be reinvested at

A. Risk free rate of return

B. Cost of debt

C. IRR

D. Discount rate at which NPV is computed

Correct : D. Discount rate at which NPV is computed

74. The pay back period shows

A. Recovery period of original investment outlay

B. The time value of money

C. The cash inflows

D. None of the above

Correct : A. Recovery period of original investment outlay

75. Capital rationing is applied in a situation where

A. It is difficult to bring in required amount of capital

B. Financial institutions are doubtful or not sure of the validity of the project

C. A large number of investment proposals compete for limited funds

D. The dividend is converted into capital for completion of a new project

Correct : C. A large number of investment proposals compete for limited funds

76. If risk free rate of return is 8%, Return on market portfolio is 12%, beta = 1.5, then the expected rate of return according to CAPM is equal to

A. 10%

B. 14%

C. 18%

D. 24%

Correct : B. 14%

77. Net salvage value of a fixed asset is

A. Excess of salvage value over book value

B. Excess of book value over salvage value

C. Scrape value

D. Salvage value of fixed assets less any income tax payable on the excess of salvage value over book value

Correct : D. Salvage value of fixed assets less any income tax payable on the excess of salvage value over book value

78. The discount rate which equates the present value of cash inflows with the present value of cash out flows is called -------

A. Opportunity cost

B. Sunk cost

C. explicit cost

D. Direct cost

Correct : C. explicit cost

79. A company can increase its value and reduce the overall cost of capital by increasing the proportion of debt in its capital structure according to ----- approach

A. Net income approach

B. Net operating income approach

C. Traditional approach

D. None of these

Correct : A. Net income approach

80. Net income approach was suggested by

A. Modigliani and Miller

B. Durand

C. Walter

D. None of these

Correct : B. Durand

81. To judge the comparative risk of projects having same cost and same NPV which method is used

A. Certainty equivalent method

B. Sensitivity technique

C. Standard deviation method

D. Coefficient of variation method

Correct : C. Standard deviation method

82. While evaluating capital investment proposals, the time value of money is considered in case of

A. Pay back method

B. NPV

C. Accounting rate of return

D. None of these

Correct : B. NPV

83. Depreciation is included in cost in case of

A. Pay back method

B. NPV

C. Accounting rate of return

D. Present value index

Correct : C. Accounting rate of return

84. Which of the following is/ are the assumptions of net income approach?

A. The cost of debt is less than the cost of equity

B. There are no taxes

C. The risk perception of investors is not changed by the use of debt

D. All of the above

Correct : D. All of the above

85. Capital gearing refers to the relationship between equity capital and-----

A. Long term debt

B. Short term debt

C. Preference capital

D. None of these

Correct : A. Long term debt

86. A company should follow the policy of ----- gear during inflation or boom period

A. High gear

B. Low gear

C. Medium gear

D. Any of the above

Correct : A. High gear

87. Which of the following factors is/ are considered when a capital structure decision is taken?

A. Cost of capital

B. Dilution control

C. Floatation cost

D. All of the above

Correct : D. All of the above

88. Which of the following is not a source of long term finance?

A. Equity capital

B. Preference capital

C. Commercial paper

D. Debenture capital

Correct : C. Commercial paper

89. A cumulative preference share is one

A. In which all the unpaid dividends are carried forward and payable.

B. Which can be converted into equity shares

C. Which can be redeemed

D. Which entitle the preference shareholders to participate in surplus profits and assets.

Correct : A. In which all the unpaid dividends are carried forward and payable.

90. Which of the following g is a determinant of working capital of a firm?

A. Depreciation policy

B. Taxes payable by the company

C. Production policy

D. All of the above

Correct : D. All of the above

91. Under trading means

A. Having low amount of working capital

B. High turnover of working capital

C. Sales are less compared to assets employed

D. Assets are less compared to sales generated

Correct : C. Sales are less compared to assets employed

92. which of the following was set up based on the recommendations of Vaghul Committee?

A. National Stock Exchange

B. Stock Holding Corporation of India Ltd

C. Discount and Finance House of India Ltd

D. National Securities Depository Ltd

Correct : C. Discount and Finance House of India Ltd

93. Shelf stock refers to

A. Perishable goods

B. Items that are to be packaged and sold

C. Stocks which is to be stored in the shelf

D. Items that are stored by the firm and sold with little or no modification

Correct : D. Items that are stored by the firm and sold with little or no modification

94. Which of the following is not an assumption of EOQ model?

A. Cost of carrying is a fixed proportion of the average value of inventory

B. The demand is even throughout the year

C. The usage for one year can be anticipated

D. Cost per order is proportional to the size of the order

Correct : D. Cost per order is proportional to the size of the order

95. Which of the following costs is not associated with inventories?

A. Material cost

B. Ordering cost

C. Carrying cost

D. Cost of long term debt locked in inventories

Correct : D. Cost of long term debt locked in inventories

96. When a company liberalizes its cash discount policy

A. It increases the cost of discount

B. It leads to an increase in the average collection period

C. The discount period may be lengthened

D. All of the above

Correct : D. All of the above

97. Which of the following is not associated with cash management of a firm?

A. Stretching accounts payable without affecting the credit of the firm

B. Speedy collection of receivables

C. Investing surplus funds in long term securities

D. Maintaining liquidity

Correct : C. Investing surplus funds in long term securities

98. Which of the following is not a motive for holding cash?

A. Transaction purpose

B. Precaution against unexpected expenses

C. Extending loans to group companies

D. Speculation purpose

Correct : C. Extending loans to group companies

99. Cash management does not call for

A. Lengthening creditor’s period

B. Lengthening debtor’s period

C. Investing surplus funds

D. Nullifying idle funds

Correct : B. Lengthening debtor’s period

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

A. Mobilization of funds

B. Manipulate share price of the company

C. Deployment of funds

D. Control over use of funds

Correct : B. Manipulate share price of the company