Financial Management

PART A (Descriptive Type) = 32 PART B (Case Study) = 4 PART C (Multiple Choice) = 160
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PART A Descriptive Type Question

Question 1a: Should the titles of controller and treasurer be adopted under Indian context? Would you like to modify their functions in view of the company practice in India? Justify your opinion? Question 1b: firm purchases a machinery for Rs. 8, 00,000 by making a down payment of Rs.1,50,000 and remainder in equal installments of Rs. 1,50,000 for six years. What is the rate of interest to the firm? Question 2a: Explain the mechanism of calculating the present value of cash flows. What is annuity due? How can you calculate the present and future values of an annuity due? Illustrate Question 2b: "The increase in the risk-premium of all stocks, irrespective of their beta is the same when risk aversion increases" Comment with practical examples Question 3a: How leverage is linked with capital structure? Take example of a MNC and analyze. Question 3b: The following figures relate to two companies (10) P LTD. Q LTD (In Rs. Lakhs) 500 1,000 200 300 -----------300 700 150 400 -----------150 400 50 100 -----------100 200

Sales

Variable costs Contribution Fixed costs Fixed Cost Interest Profit before tax

You are required to: Calculate the operating, financial and combined leverages for the two companies; and Comment on the relative risk position of them Question 4a: Define various concepts of cost of capital. Explain the procedure of calculating weighted average cost of capital. Question 4b: The following items have been extracted from the liabilities side of the balance sheet of XYZ Company as on 31st December 2005. Paid up capital: 4,00,000 equity shares of Rs each 40,00,000 Loans: 16% non-convertible debentures 20,00,000 12% institutional loans 60,00,000 Other information about the company as relevant is given below: 31st dec Dividend Earning average market price 2005 Per share per share per share 7.2 10.50 65 You are required to calculate the weighted average cost of capital, using book values as weights and earnings/price ratio as the basis of cost of equity. Assume 19.2% tax rate

Question 5a: A company has issued debentures of Rs. 50 Lakhs to be repaid after 7 years. How much should the company invest in a sinking fund earning 12% in order to be able to repay debentures? Show the procedure of loan amortization and capital recovery through an example. Question 5b: A bank has offered to you an annuity of Rs. 1,800 for 10 years if you invest Rs. 12,000 today. What is the rate of return you would earn? .

Question 6:

The proforma of cost-sheet of HLL provides the following data: Rs. 52.0 19.5 39.0 110.5

Cost (per unit): Raw materials Direct labour Overheads Total cost (per unit):

Profit Selling price

19.5 130.0

The following is the additional information available: Average raw material in stock: one month; Average materials in process: half month; Credit allowed by suppliers: one month; Credit allowed to debtors: two months; Time lag in payment of wages: one and half weeks; Overheads: one month. One-fourth of sales are on cash basis. Cash balance expected to be Rs. 12,000. You are required to prepare a statement showing the working capital needed o finance a level of activity of 70,000 units of output. You may assume that production is carried on evenly throughout the year and wages and overheads accrue similarly. Question 7a: Through quantitative analysis prove that PI is a better technique than NPV in Capital Budgeting. Question 7b: A company is considering the following investment projects: Projects Cash Flows (Rs.) Co A B C D - 10,000 -10,000 - 10,000 -10,000 C1 + 10,000 + 7,500 + 2,000 + 10,000 C2 ----+ 7,500 + 4,000 + 3,000 C3 --------+ 12,000 + 3,000

I. according to each of the following methods: (1.) Payback, (2.) ARR, (3.) IRR, (4.) NPV assuming discount rates of 10 and 30 percent. II. Assuming the project is independent, which one should be accepted? If the projects are mutually exclusive, which project is the best?

Question 8a: "Firm should follow a policy of very high dividend pay-out Taking example of two organization comment on this statement"

Question 8b: An investor gains nothing from bonus share "Critically analyse the statement through some real life situation of recent past. Question 9: What is stock split, What are its advantages Question 10: Discuss the techniques of inventory control.
Question 11: Examine risk adjusted discount rate as a technique of incorporating

risk factor in capital budgeting. Question 12: Critically examine the pay back period as a technique of approval of projects Question 13: Examine the relationship of financial management with other functional areas of finance. Question 14: What are the assumptions of MM (Modigliani Miller) approach? Question 15: Summaries the features of DCF(Discounted cash flow) technique. Question 16: Examine the type and sources of risk in capital budgeting. Question 17: At the end of five years, how much is the initial deposit of Rs 25,000 worth if the compounding annual rate is 10%. Also compute the worth of the initial deposit if the interest is compounded semiannually and quarterly. Question 18: Ramesh requires Rs 100,000 at the end of 5 years so he decides to keep certain equal amount out of his income at the end of each year in his bank account. The bank pays an interest of 8% per annum. How much should Ramesh save each year? Question 19: Star hotels ltd have two investment proposals that are as follows: Project A Period Cost Net Cash Flow Rs 0 Rs 1,000 Rs 1,000 Rs 1,000 Project Period 0 1 2 3 Cost Rs 12,000 Net Cash Flow Rs 0 Rs 5,000 Rs 5,000 Rs8,000 B

0 1 2 3

Rs 9,000

Compare both the projects on the basis of its payback period, Net present value and its profitability index using discount rate of 15%.

Question 20: A company is planning to buy a new machine for Rs 2, 00,000 with life for 2 yrs. The cost of capital is 12 %. The cash flow after tax generated from the machine for 2 yrs are: Year Cash flow after tax Rs 1,00,000 Rs 1,20,000 Rs 80,000 Rs 1,20,000 Probability

1 1 2 2

0.4 0.6 0.5 0.5

The cost of capital is 12% and risk free rate is 5%. Using the decision tree approach find out whether the investment should be made or not? Question 21: Answer any three questions out of the following: a) What is operating cycle? How important is it for the management of working capital? b) Distinguish between ( i) Gross and net working capital ii) Permanent and temporary working capital c) How do working capital management policies impact a firms risk and profitability? d) The balance sheet of X ltd as on 31 March 2010 is Liabilities ( Rs) Current Liabilities Long Term Liabilities 1,00,000 2,50,000 Assets (Rs) Current assets Fixed assts 1,50,000 2,00,000

Total

3,50,000

Total

3,50,000

Calculate the current ratio for the firm.

e) From the data provided below calculate the operating cycle.

Credit sales Cost of goods sold Purchases Average raw material stock Average work in progress Average finished goods stock Average creditors Average debtors

Rs 5,00,000 Rs 2,50,000 Rs 1,20,000 Rs 60,000 Rs 55,000 Rs 92,000 Rs 60,000 Rs 1,50,000

Question 23: Calculate the weighted average cost of capital from the following information provided
Source Equity Preference shares Debentures Retained earnings Rs Rs Rs Rs Rs 4,50,000 1,00,000 3,00,000 1,50,000 10,00,000 Cost 18% 11% 8% 18%

Question 24: From the data given below find out the price of the share according to the Gordons model when dividend payout is 25% and 50%. Earnings per share = Rs 8 Rate of return on investment = 16% Return expected by shareholders = 12%

Question 25: Examine the annual report of a well known co. of your choice, particularly the Chairmans report and/or Directors report. Are the corporate goals clearly specified? What specific references are made to the financial management? Question 26: What are the major functions performed by the capital markets? Explain the importance of each function for corporate financial management. How does the existence of a well-functioning capital market assist the financial management function? Discuss with reference to recent changes that have taken place in the area of finance. Question 27: Mr. Shyam deposits Rs. 1,00,000 in a bank which pays 10% interest. How much can he withdraw annually for a period of 30 years? Assume that at the end of 30 years the amount will whittle down to zero. Question 28: Explain why the degrees of Operating leverage affects the beta of the firm (and, in turn, the reqd rate of return on equity). Illustrate with the help of examples and figures. Question 29: Explain why the IRR and NVP decision rules for 2 mutually exclusive projects may sometimes recommend the project and sometimes recommend different projects. Question 30: Many firms have considered whether or not to implement just-in-time inventory procedures. Explain how a company that would need to purchase additional computer equipment to implement such an inventory procedure and for whom both revenues and operating expenses would be largely unchanged might benefit from just-in-time. Question 31: Explain how credit analysis can result in customer paying a lower interest on purchases. Question 32: Hiralal company requires 10,000 units of a certain item per year. The purchase price per unit is Rs. 25; the carrying cost per year is 25% of the inventory value and the fixed cost per order is Rs. 300. (a) Determine the economic order quantity (b) How many times per year will inventory be ordered, if the size is equal to the EOQ? (c) What will be the total cost of carrying and ordering inventories when 10 orders are placed per year?

PART B Case Study 1

ASHA TOOLS COMPANY (Policy on Accounts Receivables) In March 1999, Ms. Kumar was reviewing the credit policy of Asha Tools Company (ATC herea fter). She was concerned about the increased cost of servicing the debtors. The Prime Lending Rate had been recently been hiked by the banks and it was at 16%. She noticed that the collection of company's receivables had slowed down and it resulted into a need to increase the short-term borrowings. ATC manufactures a diverse line of all tools, including screwdrivers, pliers, hacksaws and blades, and wrenches. Its product lines were marketed through an established distribution system of over 4,000 retail hardware stores located throughout India. Its headquarters and manufacturing facilities were located along a river in the northern hills. The company's sales in 1998 were approximately Rs. 150 millions. Its annual sales growth of 8% exceeded the industry growth of 6% per year, and profit margins were nearly double other hand tool manufacturers. The company offered credit terms of 'net to its customers, a common practice in the industry. Even though many of its customers were small, thinly capitalised hardware stores, ATC's credit standards and collection policy were somewhat liberal. Despite this, its average collection period (ACP) I been about 40 days and its bad debt losses were low (2% of annual sales). During the past yea r, there had been a significant slowdown in the company's receivables collection. ACP had gone up to 60 days. A recent ageing of the receivables, shown in table 1. Due to this trend and high cost of servicing receivables Ms. Kumar s wondering about the ways to reduce the firm's investment in receivables. She particularly wondered if the company could begin offering cash discount for prompt payment. She recognised that the management of accounts receivables involved a trade between costs and benefits and these should be weighed before changes are contemplated. She, therefore, decided to evaluate the effects of offering a cash discount payment within a 10-day discount period. She was unsure of the most appropriate discount percentage; however, 2% was an industry practice. She was also unsure of the number of customers that would avail the discount. Given the nature of the customers, did not believe that more than 50% would be able to take advantage of such discount. She decided to assume that remaining customers would continue to stretch their credit. Thus, the ACP from these customers would continue at the current level of 60 days' sales. She did not believe that the change in credit terms would have a noticeable effect on company's sales. Because of the adverse economic environment, however, she estimated that the company's bad debt losses would increase to 3% of sales. ATC's variable expenses, including direct labour, materials, supplies, packaging, freight, and sales commissions, were approximately 75% of sales. The company's other expenses including indirect labour, overhead, salaries, rent, depreciation, property taxes, and insurance were expected to remain fixed during the foreseeable future. The company's short-term bank borrowing requirements were met through an unsecured line of credit with its bank. The interest rate charged on borrowings under the line of credit floated with the bank's prime lending rate. The company was charged prime plus 2%. The average prime interest rate was forecast to be 15% during the next one year. Company sold almost entirely on credit. The total sales during 1999 were forecast to be Rs.160 million. Asha Tool Company Receivables Ageing Schedule (February 1999)

Amount 0-30 30-60 60-90 Over 90 Rs.10,235,140 7,352,710 4,833,020 3.027.651 Rs.25.448.521

Percent 40.2% 28.9 19.0 11.9 100%

Question 1. Help Ms. Kumar in evaluating the marginal costs and benefits of offering a cash discount as a means of speeding up the company's receivables' collection. What are your recommendations? Question 2. What if interest rates decline in future years? How would this affect your recommendations? Question 3. Why will some customers continue to "stretch" their trade credit? Are their incentives that ATC might offer to prevent this practice? If so, what might they be? Question 4. What if interest rates rise further? What would be the probable effect upon the decision?

Case Study 2
Brown Metals Ltd. Brown Metals Ltd. is considering the replacement of its existing machine which is obsolete and unable to meet the rapidly rising demand for its product. The company is faced with two alternatives: (a) to buy machine A which is similar to the existing machine or (b) To go in for machine B which is more expensive and has much greater capacity. The cash flows at the present level of operations under the two alternatives are as follows: Cash flow (Rs in lakhs) at the end of year Yrs. Machine 0 A 1 -25 2 -5 3 20 4 14 5 14

Machine B -40 10 14 16 17 15 The Company's cost of capital is 10%. The Finance Manager tries to evaluate the machines by calculating the follow-ings for both the machines: 1. Net Present Value 2. Profitability Index 3. Pay Back Period 4. Discounted Payback Period. At the end of his calculations, howev er, the finance manager is unable to make up his mind as to which machine to recommend. Question 1: Give your recommendations about the proposed investment.

Question 2: You are required to make these calculations and in the light thereof, advise the finance manager about the suitability, or otherwise, of machine A or machine B.

Case Study 3
Mergers and acquisitions in banking sector have become familiar in the majority of all the countries in the world. A large number of international and domestic banks all over the world are engaged in merger and acquisition activities. One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to a considerable extent. Another important advantage behind this kind of merger is that in this process, competition is reduced because merger eliminates competitors from the banking industry. Mergers and acquisitions in banking sector are forms of horizontal merger because the merging entities are involved in the same kind of business or commercial activities. Sometimes, non-banking financial institutions are also merged with other banks if they provide similar type of services. Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the banking sector. They also try to enhance their customer base. In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does matter and growth in size can be achieved through mergers and acquisitions quite easily. Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may be described as inorganic growth. Both government banks and private sector banks are adopting policies for mergers and acquisitions. In many countries, global or multinational banks are extending their operations through mergers and acquisitions with the regional banks in those countries. These mergers and acquisitions are named as cross-border mergers and acquisitions in the banking sector or international mergers and acquisitions in the banking sector. By doing this, global banking corporations are able to place themselves into a dominant position in the banking sector, achieve economies of scale, as well as garner market share. Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability and synergy. They also help to form and grow shareholder value. In some cases, financially distressed banks are also subject to takeovers or mergers in the banking sector and this kind of merger may result in monopoly and job cuts. Deregulation in the financial market, market liberalization, economic reforms, and a number of other factors have played an important function behind the growth of mergers and acquisitions in the banking sector. Nevertheless, there are many challenges that are still to be overcome through appropriate measures.

Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authority of a particular country. For example, the mergers and acquisitions in the banking sector of India are overseen by the Reserve Bank of India (RBI).Indian competition law grants a maximum time period of 210 days for the determination of the combination, which comprises acquisitions, mergers, amalgamations and the like. One needs to take note of the fact that this stated time frame is clearly distinct from the minimum compulsory wait period for applicants. As per the law, the compulsory period of waiting for applicants can either be 210 days starting from the day of notice filing or receipt of the Commission's order, whichever occurs earlier. The threshold limits for firms entering business combinations are substantially high under the Indian law. The threshold limits are set either in terms of the asset value or in terms the firm's turnover. Indian threshold limits are greater than those for the EU. They are twice as high when compared with UK. The Indian law also provides for the modern day phenomenon of merger and acquisitions, which are cross border in nature. As per the law domestic nexus is a prerequisite for notification on this type of combinations. It can be noted that Competition Act, 2002 has undergone a recent amendment. This has replaced the voluntary notification regime with a mandatory regime. Of the total number of 106 countries, which possess competition laws only 9 are thought to be credited with a voluntary notification regime. Voluntary notification regimes are generally associated with business uncertainties. Post-combination, if firms are seen to be involved in anti-competitive practices de-merger shows the way out. Indian Income Tax Act has provision for tax concessions for mergers/demergers between two Indian companies. These mergers/demergers need to satisfy the conditions pertaining to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as per the applicable situation. In case of an Indian merger when transfer of shares occurs for a company they are entitled to a specific exemption from the capital gains tax under the Indian I -T tax Act. These companies can either be of Indian origin or foreign ones. A different set of rules is however applicable for the 'foreign company mergers'. It is a situation where an Indian company owns the new company formed out of the merger of two foreign companies. It can be noted that for foreign company mergers the share allotment in the merged foreign company in place of shares surrendered by the amalgamating foreign company would be termed as a transfer, which would be taxable under the Indian tax law.

Also as per conditions set under section 5(1), the 'Indian I-T Act' states that, global income accruing to an Indian company would also be included under the head of 'scope of income' for the Indian company. Questions A) Discuss the reasons they encourage mergers in the banking sector? B) Discuss the legal implications of merger in India?

Case Study 4
[a] Deepak steel has issued non convertible debentures for Rs.5 Cr. Each debenture is of par value of Rs.100, carrying a coupon rate of 14%, interest is payable annually and they are redeemable after 7yrs at a premium of 5 %. The company issued the Non convertible debentures at a discount of 3 %. What is the cost of debenture to the company? Tax rate is 40%. [b] Supersonic Industries Ltd. has entered into an agreement with Indian Overseas bank for a loan of Rs.lOCr. with an interest rate of 10%. What is the cost of loan if the tax rate is 45%?

PART C Multiple Choice Question Set 1

1. The Finance Manager is involved in almost all the decisions in any organisation because (a). All managers report to the Finance manager (b). Most decisions taken in an organisation have financial implications (c). The result of most activities in an organisation are reflected in the financial statements in monetary terms (d). (b) and (c) (e). (a), (b) and (c) 2. Earnings per share (a). Refers to the earnings of equity and preference shareholders (b). Refers to the market value per share of the company (c). Refers to the earnings of equity shareholders after all the other obligations of the company have been met (d). Reflects the value of the firm (e). (c) and (d)

3. Risk-return trade off implies (a). Increasing the profits of the firm through increased production (b). Not taking any loans which increase the risk of the firm (c). Taking decisions in a way which optimises the balance between risk and return (d). Not granting credit to risky customers (e). Minimising all risks 4. A Finance Manager's main objective is (a). To act as an interface between finance and other functions (b). Procuring funds for the firm through the loans, issue of shares and debentures etc. (c). Achieving the right balance between risk and return (d). Maximising the wealth of shareholders by increasing earnings per share (e). (b) and (d) 5. A financial system (a). Accelerates economic development (b). Helps companies to mobilise funds (c). Is inclusive of financial markets, financial institutions and financial instruments (d). (b) arid (c) (e). (a), (b) and (c) 6. The difference between a capital market and money market is that , (a). While capital market deals with transactions related to short term debt, money market deals with transaction related to long term debt (b). Capital markets can be classified into primary and secondary markets unlike the money market (c). Capital market provides the resources needed by medium and large scale industries for investment purposes while money market provides resources for working capital needs (d). (a) and (c) (e). (b) and (c) 7. Call money market (a). Trades in surplus funds of the banks (b). Deals in commercial paper (c). Helps in the maintenance of statutory liquidity ratio (d). (a) and (c) (e). (a), (b) and (c) 8. Treasury bills (a). Are risky instruments as their interest rates are widely fluctuating (b). Are also referred to as PSU bonds (c). Are floated through auctions conducted by RBI (d). Cannot be rediscounted with RBI (e). Cannot be held by commercial banks 9. Credit cards (a). Can be issued only by private banks (b). Do not have an overdraft facility (c). Enables a card member to pay just the minimum amount due from him to the bank at any point of time (d). Will not be replaced if lost (e). (b) and (c).

10. Cash credits which are a form of short term bank borrowing, actually end up, becoming long term advances in many cases due to (a). The high liquidity of cash credit (b). The rollover phenomenon (c). Conversion of cash credit into overdraft (d). (a) and (c) (e). None of the above. 11. Money has time value since (a). Money in hand today is more certain than money to be got tomorrow (b). The value of money gets discounted as time goes by (c). The value of money gets compounded as time goes by (d). (a) and (b) (e). (a) and (c) 12. Given an investment of Rs. 1,000 to be invested for 9 months and interests credited annually (a). It is better to invest in a scheme which earns compound interest at 12% (b). It is better to invest in a scheme which earns simple interest at 12% (c). It is better to invest in a scheme which earns simple interest at 15% (d). It is better to invest in a scheme which earns compound interest at 14% (e). The interest rate does not matter. 13. In order to find the value in 2000 of a sum of Rs. 100 invested in 1998 at X% interest rate (a). The FVIF A table should be used (b). The PVIF A table should be used (c). The FVIF table should be used (d). The PVIF table should be used e. (a) or (c) could be used 14. The real rate of interest or return is nothing but (a). Nominal or market interest rate (b). Market interest rate to which expected rate of inflation and risk premium for uncertainty has been added (c). Market interest rate which ahs been adjusted for inflation (d). Nominal interest rate from which expected rate if inflation and risk premium for uncertainty has been deducted (e). None of the above 15. The rule of 72 (a). Is used to find the doubling period (b). Makes use of FYIFA tables (c). Applies the formula 72 divided by interest rate (d). (b) and (c) (e). (a) and (c) 16. Current yield on a bond is a Measured as the rate of return that will be earned on a bond if it is purchased at its current market price and coupon interest is received (b). Coupon interest divided by previous ma rket price (c). Equal to coupon rate if and only if the bond's market price is greater than its face value (d). All of the above e None of the above

17. Which of the following is true? (a). A bond is an instrument of debt issued by a business or Government unit (b). Par value is the value stated on the face of the bond (c). A bond carries a specific interest rate which is called coupon rate (d). All of the above (e). None of the above. 18. With respect to...the effect of the number of years to maturity on bond values, which of the following is true? (a). When the required rate of return is less than the coupon rate, the discount on the bond declines as maturity approaches (b). When the required rate of return is less than the coupon rate, the premium on the bond declines as maturity approaches (c). The shorter-the maturity of a bond, the greater its price change in response to a given change in the required rate of return (d). All of the above (e). None of the above. 19. A Rs. 100 par value bond bearing a coupon rate of 10% will mature after 6 years. If the discount rate is 15%, which of the following is the value of the bond? (a). Rs. 80.42 (b). Rs. 81.04 (c). Rs. 102.57 (d). Rs. 115.64 (e). Rs. 67.89 20. The market value of a Rs. 100 par value bond carrying a coupon rate of 15% and maturing after 5 years is Rs. 110. Which of the following is the yield to maturity on this bond? (a). 13 65 (b). 44.89 (c). 12.38 (d). 10.64 (e). 8.445 21. The equity stock of Rock Ltd. is currently selling at Rs. 20 per share. The dividend expected next year is Rs. 2.00. The investor's required rate of return on this stock is 12%. Which of the following is the expected growth rate if the constant growth model applies to Rock Ltd? (a). 3.25 (b). 2 (c). 4.64 (d). 5.75 (e). None of the above 22. Which of the following is a source of fund? (a). Increase in assets (b). Increase in liabilities (c). Decrease in liabilities (d). Dividends paid (e). All of the above 23. Of which of the following basis can a funds flow statement prepared?

(a). Total resource basis (b). Working capital basis (c). Cash basis (d). All of the above (e). None of the above 24. Operating leverage measures the sensitivity of the ____________ to changes in quantity. (a). Earnings per share (b). Profit after tax (c). Earnings before interest and tax (d). Earnings before tax but after interest (e). Expenditure 25. Degree of financial leverage is ____________ below the financial brea k even point. (a). Undefined (b). Positive (c). Negative (d). Zero (e). Has no relationship 26. Degree if total leverage (DTL) can be calculated by which of the following formula given Degree of operating leverage (DOL) and Degree of financial leverage (DFL) (a). DOL + DFL (b). DOL divided by DFL (c). DFL - DOL (d). DOL X DFL (e). None of the above 27. The following data are available for a company: Unit selling price (P) = Rs. 150, Unit Variable cost (V) = Rs. 80 and Total Fixed Cost (F) = Rs. 3,00,000. The degree of operating leverage for the company when output (Q) is 5000 units is (a). 3 (b). 4 (c). 5 (d). 6 (e). 7 28. Consider following data for a company: Interest burden {I) = Rs. 1,50,000, Tax Rate (T) = 50%, Preference Dividend (Dp) = Rs. 75,000. When the Earnings before interest and taxes (EBIT) are Rs. 5,00,0.00, the degree of financial leverage is (a). 1.5 (b). 2.5 (c). 3.5 (d). 4.5 (e). 5.5 29. Equity shares of a company are quoted in the market at Rs. 17.00. The dividend expected a year hence is Re. 1.00. The expected rate of dividend growth is 8%. The cost of equity capital to the company will be

(a). 13.88% (b). 12.88% (c). 1.08% (d). 10% (e). 11.97% 30. While calculating average cost of capital (a). Retained earnings are always excluded (b). Bank borrowings for working capital are included (c). Cost of issues are considered (d). Weights are always based on the market value (e). Preference sha res are given more weight 31. Cost of equity capital is (a). Equal to last dividend paid to the equity shareholders (b). Equal to the discounting factor which equates the net amount realised from the issue to the future dividend payment (c). Less than the cost of debt capital (d). Equal to the dividend expectations of the equity shareholders for the coming year (e). All of the above 32. The following is/are some of the factors that influence the capital structure of a firm (a). Bankruptcy costs (b). Agency costs (c). Taxes (d). All of the above (e). None of the above 33. The term net working capital denotes (a). The amount of liquid funds available to a company (b). The amount of long-term funds used to finance current assets (including loans and advances) (c). The difference of current liabilities (including provisions) and the current assets (including loans and advances) (d). The amount of internal accruals 34. Advance received from the customers is (a). An item of current liabilities (b). A current asset item which is highly liquid in character (c). A contingent liability not shown as part of the balance sheet (d). An item of non-cash cost 35. Negative net working capital signifies that (a). The value of current ratio is negative (b). The value of current ration is less than unity (c). Short term funds are diverted for long term purposes (d). Both (b) and (c) are correct 36. The dilemma of 'liquidity' vs. 'profitability' arises in the case of (a). Potentially sick units (b). Any business organisation (c). Only public sector units (d). Purely trading company

37. Under trading means (a). Selling goods at a price less than cost of production (b). Sales are less when compared to the assets employed (c). Assets employed are less when compared to sales (d). None of the above 38. Current ratio indicates (a). Profit earning capacity of the business (b). Ability to pay long term debts (c). Cash inflows of the business (d). Capacity to meet current liabilities 39. Current assets - current liabilities = (a). Gross working capital (b). Net working capital (c). Cash balance (d). Sundry debtors 40. Liquidity ratio computed by eliminating inventories from current assets is (a). Current ratio (b). Inventory turnover ratio (c). Quick ratio (d). Both (a) and (c)

Multiple Choice Question Set 2

1. The main function of a finance manager is (a) capital budgeting (b) capital structuring (c) management of working capital (d) (a),(b)and(c) 2. Earning per share (a) refers to earning of equity and preference shareholders. (b) refers to mark et value per share of the company. (c) reflects the value of the firm. (d) refers to earnings of equity shareholders after all other obligations of the company have been met. 3. If the cut off rate of a project is greater than IRR, we may (a) accept the proposal. (b) reject the proposal. (c) be neutral about it. (d) wait for the IRR to increase and match the cut off rate. 4. Cost of equity share capital is (a) equal to last dividend paid to equity shareholders. (b) equal to rate of discount at which expected dividends are discounted to determine their PV. (c) less than the cost of debt capital. (d) equal to dividend expectations of equity shareholders for coming year. 5. Degree of the total leverage (DTL) can be calculated by the following formula [Given degree of operating leverage (DOL) and degree of financial leverage (DFL)] (a) DOL + DFL (b) DOL /DFL

(c) DFL-DOL (d) DOL x DFL 6. Risk- Return trade off implies (a) increasing the profits of the firm through increased production (b) not taking any loans which increase the risk of the firm (c) taking decisions in a way which optimizes the balance between risk and return (d) not granting credit to risky customers 7. The goal of a firm should be (a) maximization of profit (b) maximization of earning per share (c) maximization of value of the firm (d) maximization of return on equity 8. Current Assets minus current liabilities is equal to (a) Gross working capital (b) Capital employed (c) Net worth (d) Net working capital. 9. The indifference level of EBIT is one at which (a) EPS increases (b) EPS remains the same (c) EPS decreases (d) EBIT=EPS. 10. Money has time value since (a) The value of money gets compounded as time goes by (b) The value of money gets discounted as time goes by (c) Money in hand today is more certain than money in future (d) (b) and (c) 11. Net working capital is (a) excess of gross current assets over current liabilities (b) same as net worth (c) same as capital employed (d) same as total assets employed 12. The internal rate of return of a project is the discount rate at which NPV is (a) positive (b) negative (c) zero (d) negative minus positive 13. Compounding technique is (a) same as discounting technique (b) slightly different from discounting technique (c) ex actly opposite of discounting technique (d) one where interest is compounded more than once in a year. 14. For determining the value of a share on the basis of P/E ratio, information is required regarding: (a) earning per share (b) normal rate of return (c) capital employed in the business (d) contingent liabilities 15. Tandon committee suggested inventory and receivable norms for (a) 15 major industries (b) 20 minor industries

(c) 25 major and minor industries (d) 30 major and minor industries 16. Capital structure of ABC Ltd. consists of equity share capital of Rs. 1,00,000 (10,000 share of Rs. 10 each) and 8% debentures of Rs. 50,000 & earning before interest and tax is Rs. 20,000. The degree of financial leverage is (a) 1.00 (b) 1.25 (c) 2.50 (d) 2.00 17. The following data is given for a company. Unit SP = Rs. 2, Variable cost/unit = Re. 0.70, Total fixed cost- Rs. 1,00,000 Interest Charges Rs. 3,668, Output-1,00,000 units. The degree of operating leverage is (a) 4.00 (b) 4.33 (c) 4.75 (d) 5.33 18. Market price of equity share of a company is Rs. 25 and the dividend expected a year hence is Rs. 10. The expected rate of dividend growth is 5%. The cost of equal capital to company will be (a) 40% (b) 45% (c) 35% (d) 50% 19. The dilemma of "liquidity Vs profitability" arise in case of (a) Potentially sick unit (b) Any business organization (c) Only public sector unites (d) Purely trading companies 20. The present value of Rs. 15000 receivable in 7 years at a discount rate of 15% is (a) 5640 (b) 5500 (c) 5900 (d) 5940 21. A bond of Rs. 1000 bearing coupon rate of 12% is redeemable at par in 10 yrs. If the required rate of return is 10% the value of bond is (a) 1000 (b) 1123 (c) 1140 (d) 1150 22. The EPS of ABC Ltd. is Rs. 10 & cost of capital is 10%.The market price of share at return rate of 15% and dividend pay out ratio of 40% is (a) 100 (b) 120 (c) 130 (d) 150 23. The credit term offered by a supplier is 3/10 net 60.The annualized interest cost of not availing the cash discount is (a) 22.58% (b) 27.45% (c) 37.75% (d) 38.50%

24. The costliest of long term sources of finance is (a) Preference share capital (b) Retained earnings (c) Equity share capital (d) Debentures 25. Which of the following approaches advocates that the cost of equity capital & debit capital remains the degree of leverages varies (a) Net income approach (b) Net operating income approach (c) Traditional approach (d) Modigliani-Miller approach 26. Which of the following is not a feature of an optimal capital structure. (a) Profitability (b) Safety (c) Flexibility (d) Control 27. While calculating weighted average cost of capital (a) Retained earnings are excluded (b) Bank borrowings for working capital are included (c) Cost of issues are included (d) Weights are based on market value or on book value 28. Which of the following factors influence the capital structure of a business entity? (a) Bargaining power with suppliers (b) Demand for product of company (c) Expected income (d) Technology adopted 29. According to the Walters model, a firm should have 100% dividend pay-out ratio when. (a) r = ke (b) r < ke (c) r > ke (d) g > ke 30. Operating cycle can be delayed by (a) Increase in WIP period (b) Decrease in raw material storage period (c) Decrease in credit payment period (d) Both a & c above 31. If net working capital is negative, it signifies that (a) The liquidity position is not comfortable (b) The current ratio is less then 1 (c) Long term uses are met out of short- term sources (d) All of a, b and c above 32. Which of the following models on dividend policy stresses on investors preference for the current dividend (a) Traditional model (b) Walters model (c) Gordon model (d) MM model 33. Which of the following is a technique for monitoring the status of receivables (a) ageing schedule (b) outstanding creditors

(c) selection matrix (d) credit ev aluation 34. Average collection period is equal to (a) 360/ Receivables Turnover Ratio (b) Average Creditors / Sales per day (c) Sales / Debtors (d) Purchases / Debtors 35. In IRR, the cash flows are assumed to be reinvested in the project at (a) Internal rate of return (b) cost of capital (c) Marginal cost of capital (d) risk free rate 36. In a capital budgeting decision, incremental cash flow mean (a) cash flows which are increasing. (b) cash flows occurring over a period of time (c) cash flows directly related to the project (d) difference between cash inflows and outflows for each and every expenditure. 37. The simple EOQ model will not hold good under which of the following conditions (a) Stochastic demand (b) constant unit price (c) Zero lead time (d) Fixed ordering costs 38. The opportunity cost of capital refers to the (a) net present value of the investment. (b) return that is foregone by investing in a project. (c) required investment in a project. (d) future value of the investments cash flows. 39. Which of the following factors does not influence the composition of Working Capital requirements (a) Nature of the business (b) seasonality of operations (c) availability of raw materials (d) amount of fixed assets 40. The capital structure ratio measure the (a) Financial Risk (b) Business Risk (c) Market Risk (d) operating risks

Multiple Choice Question Set 3

1. Compounding technique shows--a) Present Value b) Future Value c) Both present and future value d) None of the above. 2. An infinite series of periodic cash flows growing at a constant rate is--a) Annuity

b) Perpetuity c) Future value d) compounding 3. Working capital represents--a) the capital raised by the company b) capital required to meet day to day expenses c) Equity capital of the company d) Total capital of the company 4. An example of liquidity ratio is--a) Current ratio b) Debt equity ratio c) Debtors turnover ratio d) Return on equity 5. Discounting techniques in capital budgeting include--a) NPV b) Profitability Index c) Pay back period d) None of the above 6. Net Profit Ratio Signifies--a) Operational Profitability b) Liquidity Position c) Big-term Solvency d) Profit for Lenders. 7. ABC Ltd. has a Current Ratio of 1.5: 1 and Net Current Assets of Rs. 5,00,000. What are the Current Assets? a) Rs. 5,00,000 b) Rs. 10,00,000 c) Rs. 15,00,000 d) Rs. 25,00,000 8. Financial Planning deals with--a) Preparation of Financial Statements b) Planning for a Capital Issue c) Preparing Budgets d) All of the above 9. Capital Budgeting is a part of--a) Investment Decision b) Working Capital Management c) Marketing Management d) Capital Structure 10. A proposal is not a Capital Budgeting proposal if it-a) is related to Fixed Assets b) brings long-term benefits c) brings short-term benefits only d) has very large investment 11. Two mutually exclusive projects with different economic lives can be compared on the basis of--a) Internal Rate of Return b) Profitability Index

c) Net Present Value d) Equivalent Annuity Value 12. Risk in Capital budgeting implies that the decision-maker ___________of the cash flows. a) Variability b) Probability c) Certainty d) None of the above 13. Cost of Capital refers to--a) Flotation Cost b) Dividend c) Required Rate of Return d) None of the above 14. Which of the following cost of capital require tax adjustment? a) Cost of Equity Shares b) Cost of Preference Shares c) Cost of Debentures d) Cost of Retained Earnings 15. Which is the most expensive source of funds? a) New Equity Shares b) New Preference Shares c) New Debts d) Retained Earnings 16. In case the firm is all-equity financed, WACC would be equal to--a) Cost of Debt b) Cost of Equity c) Neither (a) nor (b) d) Both (a) and (b) 17. Which of the following is true? a) Retained earnings are cost free b) External Equity is cheaper than Internal Equity c) Retained Earnings are cheaper than External Equity d) Retained Earnings are costlier than External Equity 18. Advantage of Debt financing is--a) Interest is tax-deductible b) It reduces WACC c) Does not dilute owners control d) All of the above 19. Cost of Equity Share Capital is more than cost of debt because--a) Face value of debentures is more than face value of shares b) Equity shares have higher risk than debt c) Equity shares are easily saleable d) All of the three above 20. Which of the following is true for Net Income Approach? a) Higher Equity is better b) Higher Debt is better c) Debt Ratio is irrelevant d) None of the above

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21. NOI Approach advocates that the degree of debt financing is--a) Relevant b) May be relevant c) Irrelevant d) May be irrelevant 22. Dividend Payout Ratio is--a) PAT Capital b) DPS EPS c) Pref. Dividend PAT d) Pref. Dividend Equity Dividend 23. Which of the following is not the responsibility of financial management? a) allocation of funds to current and capital assets b) obtaining the best mix of financing alternatives c) preparation of the firm's accounting statements d) development of an appropriate dividend policy 24. Which of the following are not among the daily activities of financial management? a) sale of shares and corporate bonds b) credit management c) inventory control d) the receipt and disbursement of funds 25. The mix of debt and equity in a firm is referred to as the firm's--a) primary capital b) capital composition c) cost of capital d) capital structure 26. (1 + i)n stands for--a) PVIF b) FVIF c) PVIFA d) FVIFA 27. Net working capital refers to--a) Total assets minus fixed assets. b) Current assets minus current liabilities. c) current assets minus inventories d) Current assets. 28. Retained earnings are--a) An indication of a company's liquidity. b) The same as cash in the bank. c) Not important when determining dividends. d) The cumulative earnings of the company after dividends. 29. The restructuring of a corporation should be undertaken if--a) The restructuring can prevent an unwanted takeover. b) The restructuring is expected to create value for shareholders. c) The restructuring is expected to increase the firm's revenue. d) The interests of bondholders are not negatively affected. 30. __________ is concerned with the acquisition, financing, and management of assets with some overall goal in mind.

a) Financial Management b) Profit Maximization c) Agency theory d) Social responsibility 31. What is the most appropriate goal of the firm? a) Shareholder wealth maximization. b) Profit maximization. c) Stakeholder maximization. d) EPS maximization. 32. A company can improve (lower) its debt-to-total asset ratio by doing which of the following? a) Borrow more. b) Shift short-term to long-term debt. c) Shift long-term to short-term debt. d) Sell common stock. 33. The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows-ROE = __________. a) Net profit margin Total asset turnover Equity multiplier b) Total asset turnover Gross profit margin Debt ratio c) Total asset turnover Net profit margin d) Total asset turnover Gross profit margin Equity multiplier 34. Which group of ratios measures how effectively the firm is using its assets? a) Liquidity ratios. b) Coverage ratios. c) Profitability ratios. d) Activity ratios. 35. Which of the following is not a cash outflow for the firm? a) Depreciation. b) Dividends. c) Interest payments. d) Taxes. 36. The accounting statement of cash flows reports a firm's cash flows segregated into what categorical order? a) Operating, investing, and financing. b) Investing, operating, and financing. c) Financing, operating and investing. d) Financing, investing, and operating. 37. Which of the following is a basic principle of finance as it relates to the management of working capital? a) Profitability varies inversely with risk. b) Liquidity moves together with risk. c) Profitability moves together with risk. d) Profitability moves together with liquidity. 38. The amount of current assets required to meet a firm's long-term minimum needs is referred to as __________ working capital. a) permanent b) temporary c) net

d) gross 39. The overall (weighted average) cost of capital is composed of a weighted average of __________. a) the cost of common equity and the cost of debt b) the cost of common equity and the cost of preferred stock c) the cost of preferred stock and cost of debt d) the cost of common equity, the cost of preferred stock and cost of debt 40. What is the most likely reason that a firm (who is highly profitable) might consider acquiring a firm that has had large recent losses and will continue to have losses into the near future? a) Hubris b) White knight. c) Tax-loss usage. d) Increase assets

Multiple Choice Question Set 4

1. We all live under conditions of__________ and____________ . a) Risk, return b) Risk, uncertainty c) Return, premium d) Uncertainty, premium 2. Find the present value of Rs.1,00,000 receivable after 10 yrs.if 10% is time preference for money, a) 38400 b) 38500 c) 38600 d) 38700 3 What is the future value of a regular annuity of Re. 1 earning a rate of 12% interest p.a. for 5 Years? a) 5.353 b) 6.353 c) 7.353 d) 7.153 4.1f a borrower promises to pay Rs.20000 eight years from now in return for a loan of Rs.12550 today, what is the annual interest being offered? a) 6% approx b) 7% approx c) 8% approx d) 9% approx 5. Aloan of Rs.5,00,000 is to be repaid in 10 equal instalments. If the loan carries 12% interest p.a.. What is the value of one installment? a) 68492 b) 78492 c) 88492 d) 98492

6 If you deposite Rs.10,000 today in a bank that offers 8% interest, in how many years will this amount double by 72 rule? a) 9 b) 8 c) 7 d) 6 7 An employee of a bank deposits Rs.30,000 into his FD A/c at the end of each year for 20 yrs. What is the amount he will accumulate in his FD at the end of 20 years, if the rate of interest is 9%. a) 1534800 b) 1535000 c) 1535200

d) 1535400 8 _________ decisions could be grouped into two categories. a) Make or buy b) Capital budgeting c) Fixed capital d) Working capital 9._________ and revenue generation are the two important categories of capital budgeting. a) Cost reduction b) Production c) Investment d) dividend 10.______ appraisal examines the project from the social point of view. a) Financial b) Cost c) Economic d) Technical 11.A11 technical aspects of the implementation of the project are considered in_______ appraisal. a) Financial b) Cost c) Economic d) Technical 12._______ of a project is examined by financial appraisal. a) Financial viability b) Cost viability c) Economic viability d) Technical viability 13.Among the elements that are to be examined under commercial appraisal, the most crucial one is the a) Supply of the product b) Demand for the product c) Cost of the product d) Elements of cost 14. Formulating is the third step in the evaluation of investment proposal, a) No b)Yes 15. A_______ is not a relevant cost for the project decision. a) Sunk cost b) Direct cost

c) Indirect cost d) Works cost 16. Effect of a project on the working of other parts of a firm is known as__________ . a) Separation principal b) Formulation c) Externalities d) After effects 17.The essence of separation principal is the necessity to treat___________ elements of a project separately from that of________ elements. a) Production, operations b) Financing, production c) Investment, financing d) Investment, production 18. Payback period____________ time vlue of money. a)Ignores b) Considers c) None of the above 19. IRR gives a rate of return that reflects the____________ of the project. a) Cost b) Profitability c) Cash inflows d) Cash outflows 20. The methods of appraising an investment proposal can be grouped into________ methods and_________ methods. a) Traditional, modern b) Primary, secondary c) First, second d) old, new 21.The time gap between acquisition of resources from suppliers and collection of cash from customers is known as_______ . a) Financial year b) Calendar year c) Operating cycle d) Current cycle 22._______ is the average length of time required to produce and sell the product. a) Inventory period b) Stock cycle c) Inventory conversion period d) None of the above 23._______ is the average length of time required to convert the firm's receivables into cash. a) Receivables period b) Receivables cycle c) Receivables conversion period d) None of the above 24.__________ is length of time between firm's actual cash expenditure and its own receipt. a) Cash conversion period b) Cash cycle c) Cash period d) Cash and bank cycle

25. Capital intensive industries require___________ amount of working capital. a) Lower b) Medium c) Higher d) None of the above 26. There is a___________ between volume of sales and the size of working capital of a firm. a) Positive direct correlation b) Negative direct correlation c) Negative indirect correlation d) Positive indirect correlation 27.Under inflationing conditions same level of inventory will require____________ investment in working capital. a) Decreased b)Increased c) Same d) zero 28. Longer the manufacturing cycle______ the investment in working capital. a) Larger b) smaller 29._________ is used to estimate working capital requirement of a firm. a) Trend analysis b) Risk analysis c) Capital rationing d) Operating cycle 30. Operating cycle approach is based on the assumption that production and sales occur on______________ a) Continuous basis b) Alternate basis c) Alternate & Continuous basis d) None of the above 31._________ is considered to be superior to RADR. a)IRR b)NPV c) CE D)PI 32._________ analyse the changes in the project NPV on account of a given change in one of the input variables of the project. a) Sensitivity analysis b) Profitability Index c) Project evaluation d) Risk analysis 3 3.Examining and defining the mathematical relation between the variable of the NPV is one of the steps of_________ . a) Sensitivity analysis b) Profitability Index c) Project evaluation d) Risk analysis 34.Forecasts under Sensitivity analysis are made under different_____________ . a) Political conditions b) Economic conditions

c) Industry conditions d) Regional conditions 35. Receiving a required inventory item at the exact time needed, a) ABC b)JIT c)FOB d) PERT 36. Post completion audit is__________ in the phases of capital budgeting decisions. a) First Step b) Last step c) Middle step d) None of the above 37. Why is a discount rate used to calculate net present value? a) Money has value b) Money has enhancing value c) Money has diminishing value d) Money has constant value 38. What does net present value give? a) future values of present cash flows b) present value of present cash flow c) present value of future cash flows d) future values of future cash flows 39.Of what is sinking fund an example of ? a) Perpetuity b) Annuity c) Gratuity d) None of the above 40. What stream of cash flows continues indefinitely? a) Perpetuity b) Annuity c) Futurity d) None of the above Instant Downloadable Solution from AiDLo.com