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Section A : Basic
Concepts (40 Points) |
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· This section consists of questions with serial number 1 - 40. · Answer all questions. · Each question carries one point. |
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How can a company
lower its debt-to-total assets ratio in its capital
structure? a.
Borrowing
more funds from the market by issuing
debentures b.
Using
short-term funds against the fixed assets of longer
life c.
Using
long-term funds against the current assets of the
company d. Planning for a rights issue e. Borrowing more funds from the financial institutions. |
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The reserves and surplus at the base year is set at 100 percent whereas for the subsequent years, it may be less than or more than 100 percent. Which types of analysis is supposed to be carried out? a. Cross-sectional analysis b. Year-to-year change analysis c. Index number trend analysis d. Common size analysis e. Expected annual income analysis |
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Which of the following results in a public limited company to have a significant advantage over a proprietorship firm? a. Limited liability b. Difficulty of transfer of ownership interest c. Limited life d. Inability to mobilize a lot of funds e. None of the above. |
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A cement manufacturing company has
a debt-to-equity ratio of 1.6 compared with the industry average of 1.4.
This means that the company: a. Will never experience any difficulty with its creditors b. Has more borrowing capacity than the other companies in the industry c. Will be viewed as having high creditworthiness d. Has greater than average financial risk when compared to companies in the same industry e. Has a better ability to meet its financial commitments towards its stakeholders. |
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Which
of the following is an example of non-systematic risk to a
firm? a. Volatility of interest rates b. Sudden increase in the rate of inflation c. The possibility of the imposition of surcharges by the government to reduce fiscal deficit d. Sudden scarcity of cement in the market e. Non-availability of sufficient power supply to overall business sector. |
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Which
of the following is not a marketable
instrument? a. Commercial Paper b. Certificate of Deposit c. Inter Corporate Deposit d. Preference Shares e. Treasury Bills. |
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If
the return on a security lies below the security market line,
then a. The security is conservative security b. The security is aggressive security c. The risk free rate of return is more than the expected return from that security d. The security is over priced e. The security is under priced. |
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Which
of the following relationships is represented by the characteristic
regression line (CRL)? a. The return from an equity share and the variance of its returns b. The return from an equity share and the return from the market index c. The return from an equity share and its beta d. The return from an equity share and the risk free rate of return e. The return from an equity share and the market risk premium. |
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What
is the significance of the beta coefficient with respect to the risk of a
security? a. It indicates the unsystematic risk of the security b. It indicates the systematic risk of the security c. It indicates the total risk of the security d. It indicates the operating risk of the company that has issued the security e. It indicates the financial risk of the company that has issued the security. |
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High
asset turnover ratio indicates a. Large amount of investment in the fixed assets b. Large amount of investment in the current assets c. Large amount of sales value in comparison to total assets d. Inefficient utilization of the assets e. High debt-equity ratio. |
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Which of the following is/are subjective method(s) of sales forecasting? a. Jury of executive opinion b. Sales force estimate c. Regression Method d. Time Series Projection Method e. Both (a) and (b) above. |
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Which of the following results from the early repayment of the debenture capital by a firm? a. The degree of operating leverage increases b. The degree of operating leverage decreases c. The degree of financial leverage increases d. The degree of financial leverage decreases e. The degree of total leverage remains unchanged. |
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Which of the following functions is/are served by the primary capital market of an economy? a. It allows the corporate houses to raise the long term capital by issuing new securities b. It offers a market to trade for the outstanding long term securities c. It offers a market to trade for the outstanding short term securities d. It offers an excellent exit route for the venture capital funding companies e. Both (c) and (d) above. |
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Which of the following is not a source of fund in a funds flow statement on cash basis? a. A gross decrease in fixed assets b. A gross increase in fixed assets c. A net increase in current liabilities d. Sale of any fixed asset e. Funds from the operations. |
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Which of the following factors, other things remaining the same, will decrease the bond value? a. Increase in coupon rate b. Decrease in the yield of the bond c. Increase in maturity premium d. Increasing the term of the bond e. Increase in the yield of the bond. |
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The amount that a company may realize if it sells its business after having terminated the same is called a. Going concern value b. Book value c. Market value d. Liquidation value e. Replacement value. |
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Which of the following statements is true, if the required rate of return from a bond is more than the coupon rate? a. The intrinsic value of the bond is more than the par value of the bond b. The intrinsic value of the bond is less than the par value of the bond c. The discount on the bond increases as the maturity approaches d. The discount on the bond decreases as the term to maturity increases e. The premium on the bond decreases as the maturity approaches. |
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If the degree of total leverage of a firm is zero, then which of the following statements will always be valid? a. The firm does not produce and sale any output b. The firm does not have any interest burden in a strict sense c. The firm has never issued any preference share d. The firm does not bear any fixed cost burden e. Either the contribution or EBIT is zero. |
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Which of the following is true with respect to the degree of operating leverage (DOL)? a. DOL is same for any level of output of the firm b. DOL is well defined at the operating break-even point c. DOL measures the business risk of a company d. DOL assesses the impact on the profitability of the company against the changes in the interest rate e. Using the concept of DOL, one may judge the possibility of committing default by a company with respect to the payment of interest. |
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If a company appoints a number of skilled managers with a very high amount of compensation package, which of the following conditions may occur immediately after the appointment? a. The operating break-even point of the company will come down b. The company will be able to reach the financial break-even point easily c. The degree of operating leverage will be zero d. The degree of total leverage will reduce to zero e. The degree of total leverage will increase. |
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Which of the following ratios measures the liquidity of a company? a. Debt-equity ratio b. Interest coverage ratio c. Net profit margin d. Acid-test ratio e. Return on equity. |
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Which of the following may be considered as the correct reason for money having time value? a. It is the legal tender for carrying out any type of transaction b. In India, it is guaranteed by the union government c. Its purchasing power increases with the passage of time due to inflation d. Money can be productively invested to generate real returns over a period of time e. None of the above. |
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Which of the following is a function of the finance manager? a. Mobilizing funds b. Risk return trade off c. Deployment of funds d. Control over the uses of funds e. All of the above. |
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Which of the following functions of the financial system channelises the savings from the savers to the producers in the economy? a. Savings function b. Liquidity function c. Payment function d. Risk function e. Policy function. |
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In which of the following markets, are the outstanding long-term financial instruments traded? a. Money market b. Forex market c. Primary capital market d. Secondary capital market e.
Call money market. |
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In which of the following issues, can a company increase its paid-up share capital without receiving any money from the shareholders? a. Public issue b. Rights issue c. Bonus issue d. Private placement e. Bought-out deals. |
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Which of the following entities issues the “Gilt edged” securities? a. Multinational companies b. Reputed domestic companies c. Private sector enterprises d. Small scale companies e. Central and state governments. |
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Long dated government securities have maturities ranging from a. Up to 1 year b. 1 to 5 years c. 5 to 8 years d. 8 to 10 years e. 10 to 30 years. |
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Which of the following is not a use of funds flow analysis for an organization? a. Planning for the future financing strategy b. Identification of imbalances with respect to the sources and uses of funds c. Divisional performance appraisal d. Assessment of the firm’s financing e. Assessment of the market leadership for the products of the company. |
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Which of the following methods of financial statement analysis is based on the inter-relationships among various components of the financial statements? a. Common size analysis b. Time series analysis c. Index analysis d. Du Pont analysis e. Cross-sectional analysis. |
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Which of the following points can be considered as the starting point of financial forecasting? a. Forecasting material requirements b. Forecasting man power requirements c. Forecasting financial requirements d. Forecasting sales volume e. Forecasting assets requirements. |
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What is the maximum limit on the number of members in a private limited company? a. 5 b. 8 c. 15 d. 50 e. Unlimited. |
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Which of the following is an assumption of CAPM? a. The investors are risk lovers b. The assets can be sold or bought in the lots of 100 units c. Transaction costs and taxes are of a significant amount d. Expectations of one investor is not same as that of the another in relation to the expected returns from a security and the risks associated with it e. The investors considers the expected return and the standard deviation of returns as the criteria for making investment. |
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Which of the following statements is/are true with respect to funds flow statement? a. It shows the changes in the ownership patterns of the company b. It shows the sources and uses of funds at any particular date in a year c. It can be considered as a snapshot picture for the operations of the business d. It cannot be manipulated by means of window dressing e. It indicates how the business financed its fixed assets. |
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What will be impact on the operating leverage of a firm, if it proceeds for additional borrowings? a. It will increase b. It will decrease c. It will remain unchanged d. It will increase or decrease depends on the cost of borrowings e. Cannot be analyzed. |
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In which of the following methods of financial statement analysis, the items in the income statement are expressed as percentages of total sales? a. Common size analysis b. Time series analysis c. Index number trend analysis d. Du Pont analysis e. Cross-sectional analysis. |
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In relation to the preparation of the proforma income statement by using budgeted expense method, a. The future relationship between various costs to sales is assumed to follow historical relationship b. The estimation of the various items are made on the basis of the expected developments c. A extrapolation using trend analysis is always made to assess the total expenses of the company d. A regression equation is always modeled to project the amount of future expenses e. None of the above. |
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A funds flow statement is also known as a. Balance sheet b. Profit and loss statement c. Income statement d. Proforma statement e. Statement for the changes in financial position. |
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Which of the following factors are to be considered in the valuation of the equity shares of a company through price-earning ratio approach? a. Book value of the assets of the company b. Liquidation value of the assets of the company c. Growth rate of the earnings d. Number of equity shareholders e. Whether preference shares have been issued by the company. |
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Which of the following regulations no more relevant in today’s business environment? a. Foreign Exchange Regulation Act, 1973 b. Monopolies and Restrictive Trade Practices Act, 1969 c. Companies Act, 1956 d. Income Tax Act, 1961 e. SEBI Act, 1992. |
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END OF SECTION A |
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Section B : Problems
(60 Points) |
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· This section consists of questions with serial number 41 - 76. · Answer all questions. · Points are indicated against each question. |
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If the rate of return from a security is 6 percent per annum, what is the doubling period under the rule of 72? a. 11.85 years b. 11.87 years c. 12 years d. 13 years e. 15 years. (1 point) |
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If the risk-free rate of return is 6 percent, the beta of a share is 1.25 and the difference between the return on market portfolio and the risk free rate is 8 percent, then according to the CAPM approach, the required rate of return on the share is a. 8 percent b. 10 percent c. 15 percent d. 16 percent e. 20 percent. (1 point) |
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For a company, the net profit margin is 12 percent, debt-equity ratio is 2.00 and the total asset turnover is 1.67. What is the return on equity for that company? a. 3.34 percent b. 20 percent c. 24 percent d. 30 percent e. 60 percent. (1 point) |
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If the retention ratio is 40 percent and the P/E ratio is 10, the dividend yield for the company is a. 4 percent b. 6 percent c. 10 percent d. 12 percent e. 15 percent. (1 point) |
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The issue price of the savings bonds of a bank, is Rs.5000 and the maturity value is Rs.7,000 after a period of 5 years and 4 months. What is the effective yield from those bonds? a. 6.01 percent b. 6.31 percent c. 6.51 percent d. 6.71 percent e. 6.91 percent. (1 point) |
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Round Table Ltd. recently paid a dividend of Rs.2.50 per share that is expected to grow by a constant rate of 8 percent in each year. If the investor needs a return of 16 percent, what is the intrinsic value of the equity share? a. Rs.15.63 b. Rs.31.25 c. Rs.33.75 d. Rs.40.00 e. Data Insufficient. (1 point) |
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Super Cement Ltd. issued debentures at a coupon rate of 12 percent per annum that are presently selling at 8 percent premium on the face value. What is the current yield of these debentures? a. 8.00 percent b. 11.11 percent c. 12.00 percent d. 13.34 percent e. 15.00 percent. (1 point) |
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The nominal rate of interest is 6 percent per annum. What is the effective rate of interest, if it is compounded quarterly? a. 6.00 percent b. 6.06 percent c. 6.14 percent d. 6.24 percent e. 6.36 percent. (1 point) |
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The price of the equity shares of Nectar Systems is expected to appreciate from Rs.25 to Rs.28 during the coming year. The dividend expected by the end of the year is Rs.3 per share. The expected return from that stock is: a. 12.00 percent b. 15.00 percent c. 20.00 percent d. 24.00 percent e. 28.00 percent. (1 point) |
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For Signus Jute, the current ratio is 2.75 while the acid test ratio is 2.00. What is the percentage of inventories with respect to the current liabilities? a. 20.00 percent b. 27.50 percent c. 40.00 percent d. 55.00 percent e. 75.00 percent. (1 point) |
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If long term rate of interest offered by a bank is 6.19 percent per annum. What is the doubling period under the “rule of 69”? a. 11.15 years b. 11.50 years c. 11.85 years d. 12.15 years e. 12.50 years. (1 point) |
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The degree of operating leverage (DOL) for the specific level of operations of a firm is 2.25. If the sales turnover increases by 6 percent, what is the percentage change in EBIT? a. 4.50 percent increase b. 9.00 percent decrease c. 13.50 percent increase d. 18.00 percent decrease e. Cannot be determined. (1 point) |
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For ABC Corporation, the degree of operating leverage (DOL) is 3 and the degree of financial leverage is 1.67. If the management targets to increase the EPS by 10 percent, by how much percentage should the sales volume be increased? (Round off your answer to the nearest value) a. 1.67 percent b. 2.00 percent c. 3.00 percent d. 5.00 percent e. 10.00 percent. (1 point) |
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Hyderabad Chemicals has never issued any preference share since its incorporation. Its contribution margin is 20 percent against a selling price of Rs.500 per unit. The fixed expenses for its operations is Rs.90,000 and the interest on term loan is Rs.75,000. What is its overall break-even point? a. 500 units b. 750 units c. 1250 units d. 1400 units e. 1650 units. (1 point) |
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RBI sold a 91day T-bill of face value Rs.100 at a yield of 6 percent. What was the issue price? a. Rs.94.34 b. Rs.96.15 c. Rs.97.46 d. Rs.98.53 e. Rs.100.00. (1 point) |
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If the beta of a stock is 1.50 while the standard deviation of the return on the market index is 12 percent, then the covariance of returns of the stock and the returns on the market index is a.
144%2 b. 180 %2 c. 216 %2 d. 252 %2 e. 288 %2. (1 point) |
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For Mumbai Automobiles Ltd. (MAL), the total assets turnover ratio is 2 and the spontaneous liabilities amount to 20 percent of total sales. MAL wants to maintain 100 percent dividend pay-out ratio on its net profit. If it targets to increase the sales volumes by Rs.70 lakh, what will be the amount of external funds requirements? a. Rs.14 lakh b. Rs.21 lakh c. Rs.35 lakh d. Rs.49 lakh e. Rs.56 lakh. (1 point) |
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For Chennai Automobiles Ltd. (CAL), the total assets turnover ratio is 2 and the debt-equity ratio is 0.5. CAL uses to maintain 100 percent retention ratio. If its net profit margin is 8 percent, what is its sustainable growth rate without using any external funds? a. 22.58 percent b. 25.58 percent c. 28.58
percent d. 31.58 percent e. 34.58 percent. (1 point) |
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For Khazana Infocomm Ltd.(KIL), the net fixed assets
at the end of the years 1 and 2 are a. Rs.161 crore b. – Rs.161 crore c. No Change d. Rs. 1285 crore e. – Rs.1285 crore. (1 point) |
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For M/s Tubes and Cap Ltd., the total current assets is Rs.6 lakh and the current ratio is 1.5. The company repaid its outstanding debentures worth of Rs.30 lakh prematurely after making a rights issue and sold its products on credit for an amount of Rs.2.50 lakh. What is the impact on its net working capital? a. Rs.2.00 lakh b. Rs.2.50 lakh c. Rs.5.00 lakh d. Rs.6.00 lakh e. No Change. (1 point) |
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You are planning to buy a car after 5 years that is presently available at a price of Rs.2,50,000. If the price is expected to go up by 20 percent by that time, how much amount should you deposit at the beginning of every year at a rate of 6 percent per annum in order to make your plan a success? a. Rs.71,225 b. Rs.67,193 c. Rs.53,220 d. Rs.50,207 e. Rs.45,038. (2 points) |
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The shares of SMS Ltd. are presently trading at a price of Rs.20 per share. The expected dividend by the end of the year is Rs.1.00 per share while the price appreciation is projected by the analysts as follows:
What is the expected return from the shares of SMS Ltd.? a. 10 percent b. 15 percent c. 20 percent d. 25 percent e. 30 percent. (2 points) |
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The perpetual preference shares of Magnum Ltd. were issued at a coupon rate of 10 percent that is presently selling at 25 percent premium to the face value. If the required yield increases by one percent, at what premium or discount to the face value will the preference shares be traded? (Round off your answer) a. Premium of 43 percent b. Premium of 25 percent c. Premium of 11 percent d. Discount of 5 percent e. Discount of 11 percent. (1 point) |
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The sales turnover of a company is Rs.120 lakh while the amount of credit sales is 80 percent of total sales. If the amount of receivables increases from Rs.8.50 lakh and Rs.11.50 lakh during the year, what is its average collection period from its debtors? a. 22.5 days b. 27.5 days c. 32.5 days d. 37.5 days e. 42.5 days. (1 point) |
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For Phonetic Ltd., the selling price of the sandals is Rs.40 and contribution to sales ratio is 25 percent. Its income statement reveals its fixed costs as Rs.80 lakh, interest payment as Rs.30 lakh and preference dividend payment as Rs.12 lakh. If the applicable tax rate is 40 percent, what is the output level at its overall break even point? a. 9 lakh b. 10 lakh c. 11 lakh d. 12 lakh e. 13 lakh. (2 points) |
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On September 30, 2003, the BSE sensex was at 3700 points. With the expectation of a bullish trend in the near future, an analyst projected the expected value of sensex by the end of next six months as:
What is the expected annualized return from the market? (Round off your answer) a. 15 percent b. 20 percent c. 25 percent d. 30 percent e. 35 percent. (2 points) |
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Supersonic Industries Ltd. recently paid Rs.4.00 per share as dividend for the last year. Its dividend is expected to grow by 15 percent every year for the next three years, thereafter it will continue a normal growth rate of 6 percent per annum. If the required rate of return is 16 percent, what is the intrinsic value of the equity share of Supersonic Industries Ltd.? a. Rs.35 b. Rs.41 c. Rs.47 d. Rs.53 e. Rs.59. (2 points) |
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The sales turnover of M/s Garodia Rubber is Rs.500
lakh. They are planning to increase it by 20 percent by the next
year. Total assets of the
company are Rs.320 lakh out of which a. Rs.5.00 lakh b. Rs.7.00 lakh c. Rs.9.00 lakh d. Rs.11.00 lakh e. Rs.13.00 lakh. (2 points) |
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Following figures are taken from the annual report of M/s TDG Ltd.:
What is the fixed charges coverage ratio for TDG
Ltd.? a. 1.534 b. 2.534 c. 3.534 d. 4.534 e. 5.534. (3 points) |
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The shares of Saboo Ltd. are presently trading at a price of Rs.30 per share. The expected dividend by the end of the year is Rs.1.00 per share while the price appreciation is projected by the analysts as follows:
What is the standard deviation of return from the shares of Saboo Ltd.? a. 5.75 percent b. 7.75 percent c. 9.75 percent d. 11.75 percent e. 13.75 percent. (3 points) |
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Hyderabad Finance Ltd. offers a deposit scheme where the investor is required to deposit Rs.100 at the end of every month for a period of 4 years 2 months in order to get an amount of Rs.7500 at the end of 5 years. What is the effective rate of interest? a. 11.30 percent b. 12.30 percent c. 13.30 percent d. 14.30 percent e. 15.30 percent. (3 points) |
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The bonds of Supreme Industries Ltd. (issued at a coupon rate of 10 percent) are presently selling at 5 percent discount on the face value. These bonds will be redeemed after a period of five years and six years in two equal installments. SIL has an effective tax rate of 40 percent. What is the realized yield to an investor as of now? a. 10.73 percent b. 11.00 percent c. 11.28 percent d. 11.54 percent e. 11.81 percent. (3 points) |
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Mr. Sadhu plans to buy a house for a price of Rs.5 lakh. State Bank of India offers loan at a rate of 9 percent per annum quarterly compounded for 80 percent of the purchase price of the house. How much will be the equated monthly installments, if Mr.Sadhu plans to repay the loan with interest in the next ten years? a. Rs.5041 b. Rs.5142 c. Rs.5242 d. Rs.5342 e. Rs.5442. (4 points) |
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The shares of SMS Ltd. is presently trading at a price of Rs.10 per share. The expected dividend by the end of the year is Rs.1.00 per share while the appreciations of the share price of SMS vis-à-vis the BSE sensex (Presently at 3800) are projected by the analysts as follows:
What is the beta value for the shares of SMS Ltd.? a. 0.50 b. 1.00 c. 1.25 d. 1.50 e. 1.75. (4 points) |
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The following information is related to Fast Track Hotels Ltd.:
What is outstanding amount of term loan in its balance sheet? (Assume term loan is the only interest bearing borrowings made by the company) a. Rs.22 lakh b. Rs.25 lakh c. Rs.28 lakh d. Rs.31 lakh e. Rs.34 lakh. (4 points) |
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Khadi Group issued bonds having a maturity premium of 10 percent and a coupon rate of 9 percent. The bonds are presently trading at par. The yield to maturity of the bond to an investor as of now, by approximation method, is 12 percent, what will be the approximate maturity period for the bonds? a. 2.78 years b. 3.78 years c. 4.78 years d. 5.78 years e. Data insufficient. (2 points) |
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Suggested
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Section A : Basic Concepts 1. Answer : (d) < TOP > Reason : If the company resorts to external borrowings by issuing debentures or from the financial institutions, the debt-to-total assets will go up. Using short-term funds for the long-term purposes and vice-versa does not serve the purpose and may lead to the liquidity mismatch. However, further issue of the equity shares through rights issue will increase the share capital that may be used to retire the old debt – partially or wholly - thereby reducing the debt-equity ratio. 2. Answer : (c) < TOP > Reason : In index number trend analysis, every figure for the first year is considered as 100 percent while the corresponding figures for the subsequent years are mentioned as a percentage of the first year figure. In cross-sectional analysis, the relevant figures are presented for more than one companies while in year-to-year change analysis, the respective ratios or data as required, are presented without making any change. In common size analysis, every element in the balance sheet is presented as a percentage of the total asset or total liabilities whereas the figures of the income statement are presented as a percentage of the sales value. There is no analysis called as expected annual income analysis. 3. Answer : (a) < TOP > Reason : A public limited company is said to be in a significant advantage owing to its limited liability. If the company turned to an insolvent one, the members don’t have any further liability to bail out whereas in a proprietorship firm, the liability of the owner is unlimited. However, for a public limited company, the ownership can be easily transferred and resources can be mobilized with a unlimited life. But for a proprietorship company, these advantages are not available to a proprietorship company 4. Answer : (d) < TOP >
Reason :
As
the debt-equity ratio of the company is higher than the other companies in
the same industry, the company can be termed to have a higher than average
financial risk in comparison to the other companies in the same industry
for the higher debt burdens. So, its borrowing capacity is less compared
to its peers. It has the higher probability to experience some
difficulties with its creditors in future. The creditworthiness of the
company is at low level owing to the higher interest burden and also its
ability to meet the financial commitments towards its
stakeholders. 5. Answer : (d) < TOP > Reason : Volatility of interest rates, sudden increase in the rate of inflation, the imposition of surcharge and the non-availability of electricity affect the profitability of all the companies in the market almost in the same manner. But a sudden scarcity of cement affects only those companies, which use cement as one of their inputs like; construction companies, housing sector, etc. 6. Answer : (c) < TOP > Reason : Inter Corporate deposits are not traded in the market. The instruments as mentioned in the other options are traded in the respective financial markets 7. Answer : (d) < TOP > Reason : As the return on a security lies below the security market line, the security is over priced as the expected return is less than the required return. The statements as stated in the options (a), (b) and (c) are not related to the security market line 8. Answer : (b) < TOP >
Reason :
The
equation for the Characteristic Regression Line (CRL) is given as:
The CRL is plotted by plotting Kj along the Y-axis and Km along X-axis 9. Answer : (b) < TOP >
Reason :
The
beta coefficient of a security indicates the systematic risk of a security
while the unsystematic risk is estimated by deducting it from total risk
i.e. variance of returns from that secrity. The total risk and financial
risk of a company, not for a security, is measured by the total leverage
and financial leverage of the company at a certain level of operations.
There is no measurement called the operating risk of a
company. 10. Answer : (c) < TOP > Reason : Asset turnover of a company is defined as the ratio between the sales value and total assets. High asset turnover is possible only when a company can generate a high sales volume in comparison to the amount invested in the fixed assets and current assets. 11. Answer : (e) < TOP >
Reason :
In
Jury of Executive opinion method, the personal judgements of many senior
executives from different fields are taken into account while in sales
force estimates method, the personal judgement of the sales personnel
operating at the ground level are considered. But mathematical tools and
techniques are applied in the methods mentioned in the options (c) and
(d). Hence, the option (e) is answer.
12. Answer : (d) < TOP > Reason : If a firm retires its debentures prematurely, its interest burden will come down that will decrease the financial leverage and total leverage of the company. It does not have any impact on the operating leverage of the company. So, the option (d) is correct 13. Answer : (a) < TOP > Reason : Primary market allows the corporate houses to raise long term funds by issuing new securities like, shares – equity and preference as well as debentures. The venture capital funding companies generally dilute their stakes in a company by selling their holdings in any company to the investors through secondary capital market route 14. Answer : (b) < TOP > Reason : A gross increase in fixed assets is not considered as a source of fund, but as an use of funds while making funds flow analysis on cash basis. The conditions mentioned in the other options increase cash balance of a company and hence can be termed as the source of funds for the company 15. Answer : (e) < TOP > Reason : If the market interest rate increases, the value of the bond will also be adjusting itself in such a way that the yield of the bond matches with the market interest rate. Hence as the interest rate increases, the value of the bond will also decreases correspondingly in order to keep in pace with that of the new rate of interest. The factors as mentioned in the other options increase the value of the bonds 16. Answer : (d) < TOP > Reason : In going concern value, the assets of the company are sold as the operating assets and their values are generally higher than any other criterion of measurement. Book value is an accounting concept that is historical cost minus depreciation. Market value of any asset is the value at which that is generally bought and sold in the market. Replacement value is the amount that a company is required to spend if it decides to replace the existing assets by new one. But liquidation value is the amount that a company may realize by selling the assets on terminating its business. 17. Answer : (b) < TOP > Reason : If the required rate of return from a bond is more than the coupon rate the value of the bond will be less than the par value of the bond as the bond value adjusts itself against the movement of the interest rates. The discount rate on the bond decreases as maturity approaches, if the required rate of return from a bond is more than the coupon rate. The premium on the bond decreases as the maturity approaches, if the required rate of return is less than the coupon rate 18. Answer : (e) < TOP > Reason : As the degree of total leverage for the firm is zero, the contribution received by the firm by selling its product will also be zero or the EBIT for the firm is zero. So the option (e) is the answer. The conditions mentioned in the other options are not true, as any of such conditions cannot make the DTL to zero. 19. Answer : (c) < TOP > Reason : DOL measures the business risk of the company by assessing the change in EBIT owing to a change in the level of production and sales volume. DOL has a distinct value at every level of output of a firm while it is undefined at the operating break-even point. The concept of the degree of financial leverage is used to assess the conditions as mentioned in the option (d) and (e). So, the option (c) is correct. 20. Answer : (e) < TOP > Reason : Appointment of the managers at a very high compensation package will increase the fixed cost of the company thereby decreasing the denominator of the DOL, DFL and DTL. As a result of this, these leverages will go up. So, the operating break-even point and the financial break-even point will increase. So, the option (e) is correct 21. Answer : (d) < TOP > Reason : The liquidity of a company is measured by the acid-test ratio as it is a liquidity ratio. The other ratios, as mentioned in the other options, do not convey anything in relation to the liquidity of a company. 22. Answer : (d) < TOP > Reason : Being a legal tender and having the government guarantee do not have any role in relation to the time value of money. The purchasing power of money gradually decreases due to inflation and so the individuals prefer to spend money, rather than saving the same without any suitable incentives. But money may be productively invested to generate higher returns in future. Hence the option (d) is the correct one. 23. Answer : (e) < TOP > Reason : All the functions as specified in the given options are the salient functions of a finance manager. 24. Answer : (a) < TOP > Reason : Savings function encourages the household sector to save money through the various channels in the financial system like, banks, insurance companies, capital markets, etc. These funds are ultimately channelised to the productive sector that needs money. The other functions do not play any role in this context 25. Answer : (d) < TOP > Reason : The long term financial instruments – equity shares, preference shares and debts - are traded in the secondary market that have been issued earlier. Primary capital market allows the corporate houses to raise the long term capital by issuing new securities. Money market and forex market deal with the short term debt instruments and the transactions related to the foreign exchange respectively. So, the option (d) is the answer. 26. Answer : (c) < TOP > Reason : In a bonus issue, the additional shares are issued to the existing shareholders on pro rata basis without taking any money from them while an equivalent amount of reserves and surpluses are transferred to the capital of the issuing company. In the other issues, money is collected from the investors in order to issue the securities 27. Answer : (e) < TOP > Reason : The word “Gilt edged securities” signifies the government securities that can be issued only by the government – central as well as state. 28. Answer : (e) < TOP > Reason : Long dated government securities have maturities ranging from 10 to 30 years 29. Answer : (e) < TOP > Reason : Funds flow analysis can be studied in order to detect the imbalances in regards to the sources and uses of funds as well as for the planning for the future financing strategies. But the assessment of the market leadership for the products of the company are not reflected in the funds flow statements. 30. Answer : (d) < TOP > Reason : In Du Pont analysis, the return on equity (ROE) is expressed as the product among net profit margin (NPM), total assets turnover ratio (TATR) and the equity multiplier (EM). But in the other cases, the interrelationships among three ratios are not observed. 31. Answer : (d) < TOP > Reason : Forecasting sales volume is the first step in the exercise of financial forecasting. Based on the amount of sales target to be achieved by the company, forecasting for the other requirements are made 32. Answer : (d) < TOP > Reason : In a private limited company, the maximum number of members is limited to 50 only. 33. Answer : (e) < TOP > Reason : The salient features for the assumptions of CAPM are: § The investors are risk avers § The assets can be sold or bought in any small number of units § Transaction costs and taxes are negligible § Expectations of one investor is same as that of the another in relation to the expected returns from a security and the risks associated with that § The investors consider the expected return and the standard deviation of returns as the criteria of investment. Hence, the option (e) is correct. 34. Answer : (e) < TOP > Reason : The features related to the funds flow statements are as follows: § It does not show the changes in the ownership patterns of the company § It does not show the sources and uses of funds at any particular date in a year, that is shown in the balance sheet of the company § It cannot be considered as a snapshot picture for the operations of the business § It can also be manipulated by means of window dressing. Hence, the option (e) is correct. 35. Answer : (c) < TOP > Reason : If a firm goes for additional borrowings, its operating leverage will not be changed as the degree of operating leverage does not depend on interest expenses 36. Answer : (a) < TOP > Reason : In common size analysis, the income statement is expressed as a percentage of total sales. In index number trend analysis, every figure for the first year is considered as 100 percent while the corresponding figures for the subsequent years are mentioned as a percentage of the first year figure. In cross-sectional analysis, the relevant figures are presented for more than one company while in year-to-year change analysis, the respective ratios or data as required, are presented without making any change. In Du Pont analysis, the return on equity of the company is analyzed 37. Answer : (b) < TOP > Reason : The future relationship between various costs to sales is assumed to follow historical relationship in case of percent of sales method. But in budgeted expense method, the estimation of the various items are considered on the basis of the expected developments in the context of the preparation of the proforma income statement. Trend analysis and regression analysis are used for the projection of sales volume of the company. Hence, the option (b) is the answer 38. Answer : (e) < TOP > Reason : A funds flow statement is known through different terms one of them is mentioned in the given option (e). A balance sheet states the financial position of a company as on a particular date while profit and loss statement or income statement shows the financial performance of a company during a year or a particular time period. Proforma statements are prepared to project the financial position (proforma balance sheet) of a company and the financial performance (proforma income statement) of a company in future. 39. Answer : (c) < TOP > Reason : In the valuation of the equity shares of the company through price-earning ratio approach, the growth rate of the company is considered only. Book value and the liquidation value of the company do not have any role in this context. Maturity of the debentures and issue of preference shares do not affect the valuation process for the company under this method 40. Answer : (a) < TOP > Reason : Foreign Exchange Regulation Act, 1973 has been replaced by Foreign Exchange Management Act, 2000 in order to facilitate the external trade and payments as well as to promote an orderly maintenance of the foreign exchange market in India. So, the option (a) is correct. Section B : Problems 41. Answer : (c) < TOP >
Reason :
The doubling period as per the “rule of 72” is 42. Answer : (d) < TOP > Reason : According to the CAPM approach, the required rate of return on a share is
ke=Rf + 43. Answer : (e) < TOP > Reason : The Return on Equity (ROE) for a company may be stated as:
ROE =
= Net profit margin ´
total assets turn over ratio ´
= 12 ´ 1.67 ´ 3 = 60 percent 44. Answer : (b) < TOP > Reason : Retention ratio = 40% so, the dividend payout ratio is 60 percent.
Now, dividend yield = = 0.06 = 6 percent. 45. Answer : (c) < TOP > Reason : Let, the effective yield from those bonds be r . So, by the condition,
Rs.5,000 ´
Or, Or, r = 6.51 percent (approximately) 46. Answer : (c) < TOP >
Reason :
The intrinsic value of the equity share of the company is =
Po = Here, D1 = Rs.2.50 ´ 1.08 = Rs.2.70 K = 16 percent and g = 8 percent. So, the required intrinsic value is
Po = 47. Answer : (b) < TOP > Reason : Let the face value of the debentures be Rs.100 So, the annual interest from each of these debentures is = Rs.12 Present selling price of these debentures is = Rs.100 ´ (1.08) = Rs.108.
Therefore, the current yield from each of these debentures = 48. Answer : (c) < TOP > Reason : Nominal rate of interest is 6 percent p.a. compounded quarterly. So, the effective rate of interest is:
r = 49. Answer : (d) < TOP >
Reason :
The expected return from the equity shares of Nectar systems is
Ke = Here, D1 = Rs.3.00 P1 = Rs.28.00 P0 = Rs.25.00
Therefore, the expected return on equity Ke = 50. Answer : (e) < TOP > Reason : For any company, current ratio is the ratio between the current assets and current liabilities while the acid test ratio is the ratio between the current assets less inventories and current liabilities. So, if the current ratio is 2.75 and the acid test ratio is 2.00, then it can be said that the inventories constitute for 75 percent of the current liabilities. 51. Answer : (b) < TOP > Reason : Under the ‘rule of 69’, the doubling period is
D = 0.35 +
Hence, the doubling period is D = 0.35 +
52. Answer : (c) < TOP > Reason : According to the concept of the operating leverage, the percentage change in EBIT is equal to the degree of operating leverage multiplied by the percentage increase in sales turnover = 6 ´ 2.25 = 13.50 percent. 53. Answer : (b) < TOP > Reason : The degree of total leverage(DTL) is the product between the degree of operating leverage (DOL) and the degree of financial leverage. So, the DTL = 3 ´ 1.67 = 5.00. Therefore, as per the concept of DTL, in order to increase the EPS by 10 percent, the sales volume should be increased by 10/5 = 2.00 percent. 54. Answer : (e) < TOP > Reason : The overall break-even point for any company is
Q = For Hyderabad chemicals, S–V = Rs.500 ´ 20% = Rs.100, F = Rs.90,000 and I = Rs.75,000 while DP = 0.
Hence, Q = 55. Answer : (d) < TOP > Reason : Let the issue price be x By the terms of the issue of the T-bills,
6 percent =
or,
or, 0.01496 x = 100 – x or, x = = Rs.98.53. 56. Answer : (c) < TOP > Reason : Beta of a stock = Here, the standard deviation of the returns from the market is = 12 percent and so, the variance = 144 percent2 But the beta coefficient is = 1.5 So, the required covariance is = 144 ´ 1.5 = 216 percent2. 57. Answer : (b) < TOP > Reason : The external funds requirements is given by EFR = For MAL, d = 100% and Ds = Rs.70 lakh So, EFR = (0.50 – 0.20 ) ´ Rs.70 lakh = Rs.21 lakh. 58. Answer : (d) < TOP > Reason : Substainable growth rate of = For CAL, m = 8 percent, d = 0, A/E = A/So = 0.5 So, the required sustainable grow the rate of = = = 0.3158 = 31.58 percent Reason: Gross change in fixed assets = Rs.4006 crore + Rs.884 crore – Rs.4729 crore = Rs.161 crore.< TOP > 60. Answer : (e) < TOP > Reason : Here, the repayment of the debentures prematurely by using the proceeds of the rights issue does not make any impact on the net working capital as neither of the facts is related to the working capital. Selling products on credit reduces the amount of inventory in the company but also simultaneously increases the volume of debtors in the balance sheet of the company. Therefore, it makes a resultant impact of zero. 61. Answer : (d) < TOP > Reason : Value of the car by the end of 5 years will be = Rs.2,50,000 ´ 1.20 = Rs.3,00,000 So, the amount to be deposited at the beginning of every year is = = = Rs.50,207 62. Answer : (c) < TOP > Reason : Return from each of the given scenarios may be obtained as
So, the expected return is 10 ´ 0.30 + 20 ´ 0.40 + 30 ´ 0.30 = 3 + 8 + 9=20 percent. 63. Answer : (c) < TOP > Reason : Let the face value be Rs.100 and the amount of dividend per annum = 100 ´ 10% = Rs.10
So, the current yield =
Now, if the required yield increases by one percent, the market
value will be = So, the premium on the price of the preference shares will be = 11.11 percent. 64. Answer : (d) < TOP > Reason : Sales turnover = rs.120 lakh and so credit sales = Rs.120 ´ 0.8 = Rs.96 lakh
So, the average daily credit sales =
And the average account receivables =
So, the required average collection period is =
= 65. Answer : (e) < TOP > Reason : The overall break even point of any company is defined as:
Q*
=
Here, F = Rs.80 lakh, I = Rs.30 lakh, DP = Rs.12 lakh, T = 40 percent and (S–V) = Rs.40 ´ 25% = Rs.10.
So, Q*
= 66. Answer : (c) < TOP > Reason : Returns from the market under various scenarios can be estimated as
Hence, the required expected return = 15 ´ 0.3 + 25 ´ 0.4 + 35 ´ 0.3 = 25 percent. 67. Answer : (d) < TOP > Reason : Dividends for the next three years are as follows:
So, the required intrinsic value of the share is
= = 3.97 + 3.93 + 3.90 + 41.32 = 53.12 » Rs.53 (approx.) 68. Answer : (e) < TOP > Reason : External funds requirements (EFR) of any firm is given by
EFR = Here, A= Rs.320 lakhs, L= Rs.120 lakhs, So = Rs.500 lakhs, DS = 500 ´ 20% = Rs.100 lakhs, S, (500+100) = Rs.600 lakhs. The net profit margin of Garodia Rubber is m = 37.50/500 = 7.5 percent = 0.075
The amount of dividend paid was = Rs.3.00 ´
500,000 = Rs.15 lakh. Hence, the dividend pay out ratio was d =
= = Rs.13 lakhs. 69. Answer : (a) < TOP > Reason : Fixed charges coverage ratio =
Here interest on term loan and debentures = 10 ´ 12% + 24 + 14% = Rs.4.56 lakhs.
Loan repayment installments = Preference dividends = 20 ´ 0.15 = Rs.3.00 lakhs. The amount of dividend paid by the company = Rs.1.50 ´ 600,000 = Rs.9.00 lakh and so the net profit of the company is = 9 + 3 = Rs.12 lakh. So, profit before tax = 12/(1 - 0.4 ) = Rs.20 lakh Hence, the profit before interest, depreciation and taxes was = 20 + 5.44 + 4.56 = Rs.30 lakh So, the required fixed charges coverage ratio is
= 70. Answer : (b) < TOP > Reason : Return from each of the given scenarios may be obtained as
So, the expected return is 10 ´ 0.30 + 20 ´ 0.40 + 30 ´ 0.30 = 3 + 8 + 9=20 percent. The expected return from the share of Saboo Ltd. is = 20 percent. So, the standard deviation of returns from the shares of Saboo Ltd
=
= 71. Answer : (e) < TOP > Reason : Let, the required rate of return be r per month The present value of all the payments = Rs.100 ´ PVIFA (r, 50) So, by the condition, 100 ´ PVIFA (r, 50) = 7,500 PVIF (r, 60) or, PVIFA (r, 50) – 75 PVIF (r, 60) = 0 If r = 1.00 percent, left hand side = 39.196 – 75 ´ 0.550 = – 2.054 and at r =2, left hand side = 31.424 – 75 ´ 0.305 = 8.549 By interpolation, we get,
So, the effective annual rate of interest
= 72. Answer : (c) < TOP > Reason : Let the face value of the bond be Rs.100 and the interest on the bond is Rs.10 per annum. The present market price of the bond = Rs.95. Let k be the effective yield on the bond. So, from the condition of the present values of the cash inflows and outflows Rs.95 = Rs.10 ´ PVIFA (k, 5) + Rs.50 PVIF (k, 5) + Rs.55 PVIF (k, 6) At k = 11%, the right hand side = 10 ´ 3.696 + 50 ´ 0.593 + 55 ´ 0.535 = 36.96 + 29.65 + 29.425 = 96.035 and at k = 12%, the right hand side = 10 ´ 3.60 5 + 50 ´ 0.567 + 55 ´ 0.507 = 36.05 + 28.35 + 27.885 = 92.285 By interpolation, we get
or, k
= 11 + or, k = 11.28. So, the required effective yield to the investor = 11.28 percent. 73. Answer : (a) < TOP > Reason : Cost of the house = Rs.5,00,000 and the amount of loan = Rs.4,00,000
The effective rate of interest per annum =
And so the effective rate of interest per month is
=
Now, PVIFA (0.0074%, 120) = Hence, the required amount of monthly installment is
= 74. Answer : (b) < TOP > Reason : Return from each of the given scenarios may be obtained as
So, the expected return is 10 ´ 0.30 + 20 ´ 0.40 + 30 ´ 0.30 = 3 + 8 + 9=20 percent. Expected return from the shares of SMS Ltd is = 20 percent Returns from the market under various scenarios can be estimated as
Hence, the expected return = 15 ´ 0.3 + 25 ´ 0.4 + 35 ´ 0.3 = 25 percent. And the expected return from sensex is = 25 percent
So, the variance on the market return can be calculated as
Now, the covariance between the return from the share and return form the market can be calculated as = 0.30 ´(10-20)(15-25) + 0.4 ´ (20-20)(25-25) + 0.3(25-15)(35-25) = 0.3 ´ 100 + 0.3 ´ 100 = 60 = Hence, the beta value for the shares of SMS Ltd is = = 75. Answer : (d) < TOP > Reason : Gross profit = Rs.45 lakhs and gross profit margin = 0.2 So, the sales turnover = = Rs.225 lakhs Total assets = = = Rs.75 lakhs. But, total assets = Total liabilities = Total Debt + Total equity and the total debt equity ratio = 1.50 So, total debt = 75 ´ = Rs.45 lakhs. and total equity = 75 ´ = Rs.30 lakhs Now, the amount of current liabilities = = = Rs.14 lakhs So, the amount of term loan in its balance sheet = 45 – 14 = Rs.31 lakhs. 76. Answer : (a) < TOP > Reason : Let the approximate maturity period for the bonds be n years and the face value of the bonds be Rs.100. The yield to maturity of the bonds is defined as, through approximation method
YTM = Here, we have, I = Rs.9.00, P = Rs.100 F = Rs.110 and YTM = 12 percent.
or, n =
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
=
=
. 
= (100–x)
8 percent
lakhs
= Rs.10 lakh
.
+ 
= 0.40 or 40 percent. 
= 
= 7.75.
= 15.30 percent.
= 
= 0.74 percent
= Rs.5041.10 or
years