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LECTURE 38
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TOPIC
MCQs on Finance
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QUESTION
Q1. The initial cash outlay of the project is 100000. It can generate a
cash inflow of 40000, 30000, 50000 and 20,000 in year 1 to 4. If
present value of Cash Inflows discounted @10% is Rs. 112350, then
find the Profitability Index (PI)?
a. 1.40
b. 1.12
c. 2.15
d. 0.80
e. None of the above
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Profitability Index
Profitability Index is the ratio of the present value of the cash inflows at
the required rate of return to the initial cash outlay of the investment.
Mathematically,
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Solving, Given Problem
The initial cash outlay of the project is 100000. It can generate a cash inflow
of 40000, 30000, 50000 and 20,000 in year 1 to 4. If present value of Cash
Inflows discounted @10% is Rs. 112350, then find the Profitability Index (PI)
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SOLUTION
Q1. The initial cash outlay of the project is 100000. It can generate a
cash inflow of 40000, 30000, 50000 and 20,000 in year 1 to 4. If
present value of Cash Inflows discounted @10% is Rs. 112350, then
find the Profitability Index (PI)?
a. 1.40
b. 1.12
c. 2.15
d. 0.80
e. None of the above
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QUESTION
Q2. Which among these is not a solvency ratio?
a. Debt to Equity Ratio
b. Interest Coverage Ratio
c. Interest Earned Ratio RBI 2017
d. Quick Acid Ratio EXAM
e. Equity Ratio QUESTION
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RATIO ANALYSIS
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TYPES OF RATIOS
Liquidity ratios measure the ability of the firm to meet its current
LIQUIDITY RATIOS obligations (liabilities). In general, the greater the coverage of liquid assets
to short-term liabilities the better.
Activity ratios are employed to evaluate the efficiency with which the firm
ACTIVITY RATIOS manages and utilizes its assets. These ratios are also called turnover ratios
because they indicate speed with which assets are being turned into sales.
They indicate the long-term financial position of the firm. These ratios
SOLVENCY RATIOS indicate mix of funds provided by owners and lenders. As a rule, there
should be an appropriate mix of debt and owners’ equity in financing the
firm’s assets.
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Commonly Used Solvency Ratios
Also Solvency
Ratios
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Understanding through Practical Problem
Calculate Solvency Ratios from the following information:
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Debt-Equity Ratio
Extract of
Relevant
Information
Solution
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Debt to Capital Employed Ratio
Extract of
Relevant
Information
Solution
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Debt to Capital Employed Ratio
Extract of
Relevant
Information
Solution
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Proprietary Ratio
Extract of
Relevant
Information
Solution
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SOLUTION
Q2. Which among these is not a solvency ratio?
a. Debt to Equity Ratio
b. Interest Coverage Ratio
c. Interest Earned Ratio RBI 2017
d. Quick Acid Ratio EXAM
e. Equity Ratio QUESTION
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QUESTION
Q3. How much percent of credit of Small Finance Banks will need to go
to sectors that are considered part of priority sector i.e. agriculture,
small enterprises and low-income earners?
a. 50%
b. 62.5%
c. 75%
d. 90%
e. None of the above
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ABOUT SMALL FINANCE BANKS
• They offer basic banking services, accepting deposits and lending;
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KEY FEATURES OF SMALL FINANCE BANK
• Every bank must have the words -- small finance bank -- in its name.
• They can issue both credit & Debit cards and can have own ATM’s.
• The maximum loan size and investment limit exposure to single and group
obligators cannot be more than 10 per cent and 15 per cent of its capital
funds, respectively
• Small finance banks will be subject to most of the prudential norms
including cash reserve ratio (CRR) and statutory liquidity ratio (SLR).
• 75% of the credit advanced by them will go to Priority Sector Areas.
• They have to ensure that 50% of their loan portfolio constitutes advances
of up to Rs.25 lakh.
• They can undertake financial services like insurance products, pension
products, with prior approval from the RBI.
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SOLUTION
Q3. How much percent of credit of Small Finance Banks will need to go
to sectors that are considered part of priority sector i.e. agriculture,
small enterprises and low-income earners?
a. 50%
b. 62.5%
c. 75%
d. 90%
e. None of the above
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QUESTION
Q4. Company Y issued debentures worth 200000 at a premium of 10%.
The rate of interest is 9%. Compute the cost of debt assuming infinite
period of debt. Ignore taxes.
a. 6.43%
b. 7.52%
c. 8.18%
d. 9.64%
e. None of the above
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IRREDEEMABLE DEBT
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Formula for Cost of Perpetual Debt
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Solving, Given Problem
Company Y issued debentures worth 200000 at a premium of 10%. The
rate of interest is 9%. Compute the cost of debt assuming infinite
period of debt. Ignore taxes.
Kd = 18000/220000 = 8.18%
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SOLUTION
Q4. Company Y issued debentures worth 200000 at a premium of 10%.
The rate of interest is 9%. Compute the cost of debt assuming infinite
period of debt. Ignore taxes.
a. 6.43%
b. 7.52%
c. 8.18%
d. 9.64%
e. None of the above
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QUESTION
Q5. As per latest circular issued by RBI, issuance of which of the
following instruments has been discontinued for Trade Credits for
imports into India by Authorised Dealer Category-I banks?
1. Letter of Undertaking (LoUs)
2. Letter of Credits
3. Letter of Comfort (LoCs)
a. 1 only
b. 1 & 2
c. 1 & 3
d. 2 & 3
e. 1, 2 & 3
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RECENT RBI CIRCULAR
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TRADE CREDIT INSTRUMENTS
Letter of Undertakings
Letter of Credits (LCs)
(LoUs)
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Letter of Undertaking (LOUs)
• Example: If SBI India’s client takes buyers credit from SBI’s overseas
branches, SBI India will give Letter of Comfort, whereas if the
funding is arranged from say Bank of India overseas branches, SBI
India will give LOU.
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Letter of Credit and Bank Guarantees
• A letter of credit is a letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct
amount.
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Why Bank Guarantees and LCs ?
• Bank Guarantees and LCs are considered less risky because receiving
banks have to conduct their own credit appraisal on companies
before accepting them.
• LCs are more secure because they have details of the purchase by the
importer, the date of issue, expiry date, the material purchase and
other transaction details.
• In the case of the now-banned LoUs and LoCs, the receiving banks
were entirely dependent on the bank issuing them at the behest of
the importers.
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SOLUTION
Q5. As per latest circular issued by RBI, issuance of which of the
following instruments has been discontinued for Trade Credits for
imports into India by Authorised Dealer Category-I banks?
1. Letter of Undertaking (LoUs)
2. Letter of Credits
3. Letter of Comfort (LoCs)
a. 1 only
b. 1 & 2
c. 1 & 3
d. 2 & 3
e. 1, 2 & 3
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IMPORTANT MCQs ON FINANCE
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