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Section A : Basic
Concepts (40 Marks) |
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· This section consists of questions with serial number 1 - 40. · Answer all questions. · Each question carries one mark. |
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Time value of money considers a. The preference of the individuals for future consumption to present consumption b. Increase in purchasing power of rupee with the passage of time c. The uncertainty of the future d. The productivity of money to earn real returns over time e. Both (c) and (d) above. |
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The maximum number of persons in a private limited company is a. 1 b. 2 c. 3 d. 7 e. 50. |
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Which of the following is an example of systematic risk? a. Risk of non-availability of a major raw material to a company making aluminium bars b. Death of the finance manager of a company providing financial services c. Unexpected entry of a multi-national company in the tea industry d. Reduction of tax rate by the government e. Sudden strike called by the workers of a
jute manufacturing company demanding for the wage revision. |
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The service of which of the following entities is generally not useful to the retail investors? a. Merchant Banks b. Commercial banks c. Hire purchase finance companies d. Housing finance companies e. Nidhis. |
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Which of the following statements represents the financing decision of a company? a. Procuring new machineries for the R & D activities b. Spending heavily for the advertisement of the product of the company c. Adopting state of the art technology to reduce the cost of production d. Purchasing a new building at Delhi to open a regional office e. Designing an optimal capital structure by using suitable financial instruments. |
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Which of the following statements does not involve risk-return trade-off decision? a. To increase the sales revenue through an aggressive advertisement campaign b. To improve the paying habit of the customers by framing an attractive credit terms c. To maximize profits by ensuring the maximum usage of the production facilities d. To maximize the profit by resorting to debt financing e. None of the above. |
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Which of the following may be termed as “Limited Discretionary Order”? a. An order limited by a fixed price as decided solely by the customer b. An order limited by a fixed price as decided solely by the broker c. An order to be executed by a broker at a price that is very near to the price set by the customer d. An order that is to be executed by the broker any time at the discretion of the customer e. An order that is
to be executed by the broker any time at his discretion. |
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Which of the following is not an assumption for estimating the sustainable growth rate? a. The assets of the firm will increase proportionately with the increase in sales b. The company will maintain the same capital structure c. The profitability of the company will remain same d. The company will pay the same amount of dividend e. None of the above. |
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Which of the following is not traded in the money market? a. Commercial papers b. Certificate of deposits c. Treasury bills d. 6 months term deposits e. None of the above. |
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If a security’s return is plotted above the security market line, then a. The risk free rate is equal to the required rate of return on the security b. The security’s rate of return is more than the return on the market portfolio c. The security’s beta is less than one and hence a conservative security d. The security is said to be overvalued e. The security is to be bought immediately. |
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Which of the following is a function of the primary capital market? a. To allow the foreign institutional investors (FIIs) to invest in the Indian capital markets b. To allow the companies to raise funds to meet their short term funds requirements through new securities c. To provide a market for trading with the
outstanding long term securities d. To provide a market for trading with the
existing short term securities e. None of the
above. |
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Other things being equal, which of the following will cause an increase in the value of a bond? a. Decrease in the term to maturity b. Increase in the required rate of return on maturity c. Decrease in the discount on the bond on issue d. Increase in the premium on maturity of the bond e. Decrease in the coupon rate of the bond. |
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The amount that can be realized by a company if it sells its business as an operating one is termed as a. Going concern
value b. Market value c. Book value d. Replacement value e. Liquidation value. |
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Which of the following is/are false when the required rate of return on a bond is more than the coupon rate? I. The
discount on the bond decreases as the maturity approaches II.
The market value of the bond is less than its par value III. The premium on the bond decreases as the maturity approaches. a. Only (I) above b. Only (II) above c. Only (III) above d. Both (I) and (II) above e. Both (II) and (III) above. |
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Which of the following is true with regard to the degree of operating leverage (DOL) for a company? a. Irrespective of the level of output, DOL of a company remains same b. DOL of a company is positive above the operating break-even point c. DOL of a company is positive below the operating break-even point d. DOL of a company is negative above the operating break-even point e. DOL is zero at the operating break-even point. |
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Which of the following is a liquidity ratio? a. Return on equity b. Return on investment c. Acid-test ratio d. Debt-equity ratio e. Debt-asset ratio. |
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Which of the following functions of the financial system facilitates conversion of investments in stocks, bonds, debentures etc into money? a. Savings function b. Liquidity function c. Payment function d. Risk function e. Policy function. |
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The objective of financial management to increase the wealth of the shareholders means to a. Increase the physical assets owned by the firm b. Increase the market value of the shares of the firm c. Increase the current assets of the firm d. Increase
the cash balance of the company e. Increase the total number of outstanding shares of the company. |
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Which of the following is/are an assumption(s) of CAPM? a. Investors use the expected return and standard deviation of returns as the appropriate measures of return and risk of the portfolios b. Investors are risk averse c. Investors agree with each other on the nature of return and the risk associated with each instrument where investment may be made d. The assets can be bought and sold in any unit as desired by the investors e. All of the above. |
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In which of the following types of issue, new securities are offered to the existing shareholders of the company on a pro rata basis? a. Public issue b. Rights issue c. Bonus issue d. Private placement e. Both (b) and (c) above. |
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In common size analysis the items in the income statement are expressed as percentage of a. Total assets b. Net sales c. Total expenses d. Gross sales e. Total fixed assets. |
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Which of the following ratios indicates the capital structure? a. Debt-assets ratio b.
Inventory turnover ratio c. Total asset turnover ratio d. Return on equity e. Return on
assets. |
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Which of the following is not true with regard to the warrants issued by a company? a. It is a call option to buy certain number of shares of the company that issued the same b. The warrant holder is entitled to receive dividends c. At the time of issue, the exercise price of the warrants is always greater than the current market price d. The warrant holder may sell the warrant at any point of time prior to the exercise date e. Warrants are generally issued with an objective to sweeten the public offer. |
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Which of the following is a disadvantage of bought-out-deals? a. It is difficult to convince a wholesale investor b. The promoters of the company do not get the funds immediately c. It is a very time consuming procedure d. The issue expenses are more than that of a public issue e. Sponsor may exploit the situation. |
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Which of the following is true with regard to the degree of financial leverage (DFL)? a. DFL helps to measure the business risk of any corporate entity b. DFL can be used to analyze the implications of retiring debts by using the proceeds of preference capital c. DFL is applied by a corporate house for its production and sales planning d. DFL is used to estimate the revised EPS following a change in sales volume e. DFL is used assess the change in EBIT owing to any change in sales volume. |
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At operating break-even point, which of the following is true? a. Sales revenue just covers the fixed cost b. Sales revenue is just equal to the variable cost c. Fixed cost is same as that of the variable cost d. EBIT is zero e. EBIT is positive. |
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Which of the following is not shown by a funds flow statement on cash basis? a. The sources of cash b. The uses of cash c. Decrease in cash d. The net change in working capital e. Increase in cash. |
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Which of the following companies generally provide risk capital to the technology oriented and high-risk business entities? a. Lease finance companies b. Venture capital funding companies c. Commercial banks d. Hire purchase finance companies e. Insurance companies. |
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Which of the following is not true with regard to the multi period valuation model of equity shares? a. There is a pre-specified maturity period b. The value of an equity share is equal to
the present value of its entire dividend stream c.
The model can be applied to the instances of constant dividends and
constant growth in dividends d. The model can also be applied in case of
variable growth in dividends e. The cost of equity of the company can vary from time to time. |
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Which of the following is/are the characteristics of the money market instruments? a. Long term maturity b. High liquidity c. Highly secured d. Issued by the Governments only e. Both (b) and (d)
above. |
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Which of the following situations lead to the increase in volatility in the call money market? a. Reduction in cash reserve ratio b. Prepayment of term loans by a large number of borrowers c. Entry of the financial institutions (FIs) into the market d. Payment of large amount of advance taxes by the banks and FIs e. Decrease in the
demand for loanable funds in the economy. |
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Which of the following statements is/are true with respect to present value interest factor of annuity (PVIFA)? I. The cash flow is assumed to occur at the end of the period under consideration II. The cash flow is assumed to occur at the start of the period under consideration III. It is reciprocal to capital recovery factor. a. Only (I) above b. Only (II) above c. Only (III) above d. Both (II) and (III) above e. Both (I) and (III) above. |
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Which of the following is/are correct with respect to the act(s) of the arbitrageurs in the derivatives market? a. To protect one’s position in the spot by taking suitable instrument(s) in the derivatives market b. To protect one’s anticipated position in the spot by taking suitable instrument(s) in the derivatives market c. To make profit from the subsequent price movements of any particular instrument in the derivatives market d. To make risk free profits by simultaneously buying and selling different instruments in different markets e. Both (a) and (b)
above. |
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If the rates of return from a security move perfectly in tandem with respect to the market returns, then the beta for that security will be a. Equal to 1 b.
0 c. Between 0 and 1 d. Greater than 1 e. Less than
–1. |
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Which of the following ratios indicates the ability of a firm to service the financial charges? a. Dividend pay-out ratio b. Fixed charges coverage ratio c. Net profit margin ratio d. Inventory turnover ratio e. Acid test ratio. |
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Which of the following is true with respect to funds flow statement of a company? a. It helps to judge the quality of management b. It shows whether the ownership pattern of the business entity has been changed c. It cannot be manipulated by the unscrupulous promoters d. It fails to identify the operational ineffectiveness in a business entity e. It identifies whether short-term fund is used for the procurement of long-term asset. |
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In which of the following situations, price earnings ratio is applied? a. To determine the financial risk of a business entity b. To determine the expected market value of the shares of a company c. To assess the earning potential of a company in the near future d. To examine the operational efficiency of a company e. To check how
efficiently the assets are utilized by a firm. |
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Which of the following statements shows the source of funds while making funds flow analysis on total resources basis? a. Retirement of high cost debt b. Installation of a capital asset c. Conversion of debentures into equity shares d. Selling an old car today in order to buy a new one after three months e. Buying back the equity shares. |
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Other things remain the same, what will be the impact on the degree of operating leverage (DOL) of a firm, if it issues equity shares in lieu of debentures? a. DOL will increase b. DOL will decrease c. DOL will remain the same d. DOL will become zero e. Cannot be
predicted. |
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While preparing proforma financial statement by using budgeted expense method, a. The method of extrapolation is applied to assess the total expenses of the company in proportion to increase in sales b. The items related to various expenses are projected on the basis of the anticipated changes c. The future cost-sales ratio is assumed to be prevailed as per historical relationship d. A regression equation may be framed to project the costs during the future years e. All the expenses
are increased by a fixed percentage. |
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END OF SECTION A |
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Section B : Problems (60
Marks) |
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· This section consists of questions with serial number 41 - 73. · Answer all questions. · Marks are indicated against each question. |
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The following information is given with respect to Foren Kapital Services Ltd. Current dividend = Rs.2.00 per share Constant rate of growth in dividends = 5 percent Expected return from the market index = 12 percent Beta of the stock = 1.50 Risk free rate of return = 6 percent The present market price per share will be approximately equal to a. Rs.14 b. Rs.16 c. Rs.20 d. Rs.21 e. Rs.30. (2 marks) |
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The total debt-equity ratio of Indian Online Corp Ltd. is 4:3. Its total asset is Rs.3500 lakh and its short-term debt is Rs.500 lakh. If total debt consists of long-term debt as well as short-term debt, the amount of long-term debt is a. Rs. 500 lakh b. Rs. 700 lakh c. Rs.1000 lakh d. Rs.1500 lakh e. Rs.1600 lakh. (1 mark) |
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For Sandal Ltd., net profit margin is 7.50 percent while total assets turnover ratio is 1.20. If return on equity for the company is worked out as 12 percent, then the debt-asset ratio is a. 0.25 b. 0.33 c. 0.75 d. 1.33 e. 1.75. (2 marks) |
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The salient features of the bonds of Saranya Capital Services Ltd. are as follows: Face value Rs.100 Current market price Rs.114 Coupon rate 12 percent Maturity period 5 years The current yield of the bonds is a. 10.53 percent b. 10.83 percent c. 11.33 percent d. 13.68 percent e. 12.00 percent. (1 mark) |
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An investor is supposed to get Rs.40,000 as maturity proceeds after nine years from now against an investment of Rs.20,000 made today. What is the effective annual interest yield? a. 5.00 percent b. 6.00 percent c. 7.00 percent d. 8.00 percent e. 9.00 percent. (1 mark) |
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If the dividend payout ratio is 0.30 and capitalization rate is 8.00 percent, then the dividend yield is a. 2.40 percent b.
2.67 percent c. 3.75 percent d. 5.00 percent e. 26.67 percent. (1 mark) |
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Mr. Prakash deposits Rs.100 at the beginning of every month in the recurring deposit scheme of Hyderabad Bank for five years. If the bank offers an interest rate of 12 percent per annum compounded monthly, the amount accumulated by the end of five years is (round off your answer to the nearest integer) a. Rs.7624 b. Rs.6121 c. Rs.8167 d. Rs.8249 e. Rs.8538. (2 marks) |
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Tuff Cement finances its assets by taking debt as high as 66.67 percent of the value of the assets. If the company plans to acquire a machine at a cost price of Rs.69 lakh, then the minimum amount of retained earnings that can be used for this procurement is a. Rs.69 lakh b. Rs.46 lakh c. Rs.23 lakh d. Rs.13 lakh e. Data insufficient. (1 mark) |
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In order to buy a car woth Rs.5,00,000, you are planning to take loan of Rs.400,000 from a Commercial Bank. The loan is to be repaid along with interest in equated monthly installments of Rs.9,000 within a period of 5 years, payable at the end of every month. However, the margin money of Rs.100,000 is to be borrowed from a local money lender that is to be repaid with interest at a rate of 20 percent by the end of the year. What is the implicit cost of your borrowed funds? a. 12.41 percent b. 12.91 percent c. 13.31 percent d. 13.71 percent e. 14.11 percent. (3 marks) |
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The following information is related to Padmaja Industries Ltd.
What is the amount of cash and bank balance? (Assume 360 days in a year) a. Rs. 8 lakh b. Rs.10 lakh c. Rs.12 lakh d. Rs.15 lakh e. Rs.17 lakh. (3 marks) |
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The money invested in Kisan Vikas Patra today doubles in eight years and six months. What is the approximate rate of interest per annum as per the Rule of 69? a. 8.08 percent b. 8.23 percent c. 8.47 percent d. 8.53 percent e. 8.68 percent. (1 mark) |
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The net worth and total debt (carrying an average interest rate of 8 percent) of Subsonic Industries Ltd. amount to Rs.150 lakh and Rs.250 lakh respectively. The net profit of the company after deducting a marginal tax rate of 20 percent is 24 lakh. The return on investment of Subsonic Industries is a. 3.00 percent b. 5.00 percent c. 12.50 percent d. 20.00 percent e. 33.33 percent. (2 marks) |
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Garodia Textiles Ltd. sells its goods on credit only. The average collection period of the company is 30 days. Its balance sheet shows debtors balances of Rs.20 lakh as on 01.04.2002 and of Rs.30 lakh as on 31.03.2003. What was its annual sales turnover for the year 2002-03? (Assume 360 days in a year.) a. Rs.250 lakh b. Rs.300 lakh c. Rs.360 lakh d. Rs.450 lakh e. Rs.750 lakh. (2 marks) |
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Consider the following data for the deep discount bonds issued by a financial institution: Face value and maturity value = Rs.1,00,000 Maturity Period = 20 years The approximate yield to maturity = 8 percent. The issue price of the bond is a. Rs.21,455 b.
Rs.22,565 c. Rs.23,675 d. Rs.24,785 e. Rs.25,945. (1 mark) |
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If the degree of operating leverage of a company is increased by 30 percent while the degree of financial leverage is decreased by 20 percent. What will be the change in the degree of total leverage? a. 2 percent increase b. 3 percent increase c. 4 percent increase d. 2 percent decrease e. 4 percent decrease. (1 mark) |
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Superlative Industries Ltd. has made the following projections:
The amount of external funds required by the firm is a. Rs.200 lakh b. Rs. 400 lakh c. Rs.500 lakh d. Rs.1200 lakh e. Data insufficient. (2 marks) |
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If 91-day T-bills (Face value Rs.100) are issued at a price of Rs.98.48, then the percentage yield is a. 5.2 percent b. 5.6 percent c. 6.0 percent d. 6.2 percent e. 6.5 percent. (1 mark) |
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The stocks of Suburban Travellers’ Ltd. are currently trading at Rs.50 per share and are expected to pay a dividend of Rs.2.00 per share in this year. The stock price expected one year hence has the following probability distribution:
Ignoring the time value of the dividend income, the expected return from that stock for a holding period of one year is (round off your answer to the nearest integer) a. 12 percent b. 13 percent c. 14 percent d. 15 percent e. 16 percent. (2 marks) |
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The data on the current assets and current liabilities of Best Flavur Ltd. for the financial year 2002-03 are given below (in terms of Rs. lakh):
The change in
net working capital of the company is a. Rs.15 lakh b. Rs.20 lakh c. Rs.25 lakh d. Rs.30 lakh e. Rs.50 lakh. (2 marks) |
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Current assets and current liabilities of Metals and Steel Ltd. are Rs.36 lakh and Rs.23 lakh respectively. If the company purchased raw materials worth of Rs.2.00 lakh on credit, took a long-term loan of Rs.25 lakh from a financial institution and purchased capital equipment, and converted preferential shares (having face value of Rs.7 lakh) into equity, what would be the new net working capital (NWC)? a. Rs.13 lakh b.
Rs.15 lakh c. Rs.11 lakh d. Rs.
9 lakh e. Rs.
7 lakh. (1 mark) |
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The net profit margin for CompuSys is 10 percent at a sales level of Rs.120 lakh. It paid Rs.7.20 lakh as dividend. Both its total assets turnover ratio and debt-equity ratio are 1.5. The sustainable growth rate by using internal equity will be (round off your answer to the nearest integer) a. 4 percent b. 18 percent c. 29 percent d. 33 percent e. 61 percent. (2 marks) |
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The projected returns from the equity shares of Suburban Traders Ltd. for the next one year are as follows:
What is the expected risk (in terms of standard of deviation) for the equity shares of Suburban Traders Ltd.? a. 3.16 percent b. 3.36 percent c. 3.56 percent d. 3.76 percent e. 3.96 percent. (2 marks) |
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Setwin Corp Ltd. has taken a loan of Rs.5 lakh from Sec’bad Bank at 12 percent per annum compounded annually. If the loan is to be repaid along with interest in 5 equated annual installments (where the first installment is to be paid after one year from today and the interest is calculated on the diminishing balances), what should be the amount of installment? (Round off your answer to the nearest Rs.100). a. Rs.1,47,400 b. Rs.1,38,700 c. Rs.1,55,300 d. Rs.1,23,800 e. Rs.1,25,300. (2 marks) |
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Bright Metals Ltd. issued fully convertible debentures with a face value of Rs.100 each. The coupon rate is 9 percent and the interest is payable half yearly over a period of three years. After three years, each bond will be converted into 10 equity shares of face value Rs.10 per share which is expected to fetch a dividend of Rs.1.00 per share every year. Presently, the yield on the risk-free securities is 5 percent per annum. The bondholders of the company need 3 percent more as the risk premium while the expected return to the equity shareholders will go up by an additional risk premium of 4 percent. The intrinsic value of these fully convertible debentures is: (Round off your answer to the nearest integer). a. Rs. 83 b. Rs. 98 c. Rs.118 d. Rs.129 e. Rs.136. (2 marks) |
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The bonds of Charity Company are presently selling at a premium of 8 percent against its face value as well as the maturity value of Rs.100. The current yield on these bonds is 8.33 percent. The coupons are paid yearly. If the bonds are to mature 3 years hence, what should be the annualized yield to an investor of today by the approximation method? a. 5.58 percent b. 5.88 percent c. 6.18 percent d. 6.48 percent e. 6.78 percent. (2 marks) |
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AG Corporation recently paid a dividend of Rs.2.00 per share that is expected to grow at a rate of 15 percent per annum for the next three years and thereafter, the dividend amount is expected to remain constant. If your expected rate of return is 10 percent, how much amount are you ready to pay to buy a share of this company? (Round off your answer to the nearest integer) a. Rs.17 b. Rs.22 c. Rs.26 d. Rs.29 e. Rs.35. (2 marks) |
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In order to buy a car, presently available at a price of Rs.250,000, on January 1, 2007, you started to deposit your money in the monthly recurring deposit scheme of a bank from January 31, 2004. The bank offers a rate of interest of 12 percent per annum compounded monthly. If the car price is expected to go up by 4 percent per annum, how much amount should you deposit every month in that scheme? (round off your answer to the nearest integer) a. Rs.5,828 b.
Rs.6,178 c. Rs.6,528 d.
Rs.6,670 e. Rs.7,028. (2 marks) |
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The following figures are collected from the annual report of Mardin Clothes Ltd.: Return on investment = 12 percent Number of outstanding equity shares = 1,00,000 Net worth = Rs.25 lakh Total debt = Rs.40 lakh Average cost of debt = 9 percent Applicable tax rate = 40 percent The earning per share for Mardin Cloths Ltd. is a. Rs.2.00 b. Rs.2.26 c. Rs.2.52 d. Rs.2.73 e. Rs.2.99. (2 marks) |
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The following information have been collected from the Annual Report of Garden Restaurant, selling biriyanis in parcel packets: Total sales = Rs.1400,000 Contribution ratio = 25 percent Fixed expenses = Rs.150,000 Outstanding bank loan = Rs.400,000 @ 12.50 percent Preference Share Capital = Rs.200,000 @ 15.00 percent Applicable Tax rate = 40 percent The degree of financial leverage (DFL) for
Garden Restaurant? a. 1.33 b. 1.50 c. 1.67 d. 2.00 e. 2.33. (2 marks) |
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The correlation coefficient between the returns on the equity shares of Surya Rashmi Ltd. and the market return is 0.90. The variance of return on equity shares of the company is 49%2 and the same for the market is 36%2. Presently the government securities are traded at a return of 5.5 percent while the market return is 12 percent. What is required rate of return from the equity shares of the above company? a. 5.50 percent b. 6.50 percent c. 6.83 percent d. 12.00 percent e. 12.33 percent. (2 marks) |
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The expected returns for the next one year from the shares of Eastern Sugars Ltd. (ESL) vis-ŕ-vis the returns from the market portfolio under different situations are projected as follows:
What should be the Beta coefficient for the equity shares of ESL? a. 0.875 b. 1.000 c. 1.125 d. 1.250 e. 1.375. (3 marks) |
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For the year 2003-04, Bagaria Industrial Corporation Ltd. targeted to increase its sales turnover to Rs.1560 lakh which is 30 percent more than the year 2002 – 03. The fixed assets as well as the spontaneous liabilities of the company are expected to increase proportionately with the increase in sales. The fixed assets are 66.67 percent of the total assets and 40 percent of the current assets are financed by spontaneous liabilities. The annual report for the year 2002-03 indicates that the company maintained a total assets turnover ratio of 1.6 and recorded a net profit margin of 8 percent while retained 40 percent of its total earnings. How much amount of external funds should be required by the company in order to achieve the targeted growth rate? (Round off your answer to the nearest integer.) a. Rs.145 lakh b. Rs.165 lakh c. Rs.180 lakh d. Rs.200 lakh e. Rs.225 lakh. (3 marks) |
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Madhav Organics Ltd. raised money from the debt market at a rate of 8 percent per annum to achieve a total debt-equity ratio of 0.5. In the last year, if its return on investment (ROI) is 14 percent, what will be its return on equity? (Assume the applicable tax rate as 40 percent) a. 9.20 percent b. 10.20 percent c. 11.20 percent d. 12.20 percent e. 14.00 percent. (2 marks) |
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Suggested Answers
Financial
Management-I (141) – January 04
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Answer : (e) |
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Answer : (e) Reason : The maximum number of persons can form a private limited company are 50. |
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Answer : (d) Reason : Reduction of tax rate by the government will affect all the companies in the market and so can be considered as a systematic risk. While the factors mentioned in the other options will affect a particular company or the companies belonging to a particular industry. Hence, these factors may be termed as non-systematic risk. |
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Answer : (a) Reason : Merchant banks are generally engaged in several services like, management, underwriting and marketing of new issues; project promotion services and project finance; syndication of credit and other facilities; leasing including project leasing; corporate advisory services; etc. These services are generally not useful for the retail investors. While the other entities as mentioned in the other alternatives generally deal with the retail investors for raising funds from them as well as for lending to them. |
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Answer : (e) Reason : An optimal capital structure can satisfy the return expectations of the stakeholders at a lower cost that will result in share price of the company to a healthier one. It is a financing decision. While the cases mentioned in the other alternatives are the investment decisions as these may bring return to the company over a period of time. |
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Answer : (c) Reason : A finance manager is required to examine whether the opportunity is worth more than the cost thereafter he must take a decision by duly balancing the risk and return associated with that decision. An aggressive advertisement campaign may increase the sales revenue but improper appeal may cost a company too for the advertisement cost. An attractive credit term may improve the sales turnover but may inability to implement the same may cost the company in some other way. A borrowing firm enjoys tax shield against the payment of interest to its lenders but a risk of failure to make such payment may result in the risk of insolvency. But to maximize profit through maximum usage of the production facilities is not a risk, as it leads to the reduction in cost per unit of production, to the finance manager of any manufacturing company. |
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Answer : (c) Reason : In case of limited discretionary order, a broker is given the discretion to execute order at a price that is approximately equal to the price fixed by the client. Hence, the option (c) is the answer. The option (a) represents the limit orders while the option (b) is generally an impossible proposition, except in the case of a best rate order. The option (d) represents the general mode of operations of the stock market while the option (e) occurs rarely. |
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Answer : (d) Reason : The assumptions for the sustainable growth rate are as follows:
Therefore, the alternative (d) is the correct choice. |
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Answer : (d) Reason : A term deposit made by a depositor is held for a specific term or maturity with a bank as mutually agreed by both the parties; it is not marketable. All other instruments as mentioned in the other alternatives are marketable instruments in the money market. |
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Answer : (e) Reason : If a security’s return plots above the security market line (SML) then the return on the security is more than the required rate of return on the security according to the SML. A greater return means a lesser price of the security than its intrinsic value that implies the security is under priced and hence that should be bought immediately to book profit in future as its price increases. |
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Answer : (a) Reason : Primary capital markets help in the creation of new long term securities. These long term securities are issued by the companies to raises funds for meet their long term financing requirements. It neither helps for trading with the outstanding long term as well as the short term securities. But it allows the FII to invest in the Indian capital markets. |
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Answer : (d) Reason : Intrinsic value of bond = C x PVIFA(k,n) + Fx PVIF(k,n) where, C is the coupon payment on the bond, F is the amount payable at maturity, k is the discount rate or the required rate of return and n is the number of years of maturity to the bond. From the above expression of the intrinsic value of a bond, we can see that other things being equal if the amount payable at maturity (F) increases, the value of bond also increases correspondingly. While decreasing the term to maturity and the coupon rate of the bond as well as increasing the required rate of return on the bond will decrease the intrinsic value of the bond. The discount on the bond at the time of issue does not have any role to play in this context. Hence, the alternative (d) is correct. |
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Answer : (a) Reason : The amount that a company can realize if it sells its business as an operating one is called going concern value. Replacement value indicates the value that a company would be required to spend if it were to replace its existing assets in the present situation. Liquidation value is the amount that a company could realize by selling its assets following the termination of its business. Market value of an asset is the current market price at which it may be sold or bought in the market. |
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Answer : (c) Reason : When the required rate of return on a bond is more than the coupon rate the intrinsic value of the bond is less than its par value; hence the bonds are sold at a discounts on its par value. The amount of discount on the bond decreases as the maturity approaches. The question of premium on the bond price does not arise in this case. Hence, the alternative (c) is true. |
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Answer : (b) Reason : The following statements are correct with respect to the degree of operating leverage (DOL) for the operations of a company: · Each level of output has a distinct DOL · DOL is always negative below the operating break even point · DOL is always positive above the operating break even point · DOL is undefined at the operating break even point. Hence, the option (b) is the answer. |
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Answer : (c) Reason : Debt-equity ratio and debt-asset ratio are leverage ratios for a company. Return on equity and return on investment represents the profitability ratios of a business entity. Acid test ratio indicates the liquidity status of a company. |
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Answer : (b) Reason : The liquidity function of the financial system facilitates conversion of investment in stocks, bonds etc. into money. Savings function leads to the flow of savings from the savers to the consumers of an economy while payment function facilitates the payment of dues in an easy and convenient way. Risk function provides the required tools for the protection against life, health and income risks whereas policy function enables the regulating authorities of a country to take suitable policy measures to influence the policy variables in the macro-economy. |
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Answer : (b) Reason : According to the objective of financial management to increase the wealth of the shareholders means to increase in the market value of the shares issued by the firm. Increasing the physical assets or current assets of the company may not provide adequate returns to the shareholders, if it is done through incremental borrowing. Increasing cash balance imparts more liquidity to a company but decreases the returns on investments. Increase in the total number of outstanding shares of the company does not make any impact on the total value of the firm. |
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Answer : (e) Reason : The assumptions of CAPM are as follows: ·
Investors use the expected return and standard
deviation of returns as the appropriate measures of return and risk of the
portfolios ·
Investors are risk averse ·
Investors agree with each other on the nature of return and the risk associated
with each instrument where investment may be made ·
The assets can be bought and sold in any unit as
desired by the investors Hence, the option (e) is the correct choice. |
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Answer : (e) Reason : In rights issue as well as bonus issue, new securities are offered to the existing shareholders of the company on the ratio of existing shares held by the investors i.e. on a pro rata basis. But in public issue, the shares are directly issued to the general public while in private placement; the securities are issued to few selected entities as decided by the management of the company. |
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Answer : (b) Reason : In common size analysis the items in the income statement are expressed as percentage of net sales. |
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Answer : (a) Reason : Debt asset ratio indicates the capital structure of a company. Inventory turnover ratio and total asset turnover ratio are the turnover ratios that indicate how efficiently the assets are utilized by a company. While return on equity and return on assets are the profitability ratios of a business entity. |
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Answer : (b) Reason : The warrant holder is not at all entitled to receive any dividend from the company that issued the same. While the features as stated in the other alternatives are the regular features of the warrants generally issued by the companies. Hence, the option (b) is the correct choice. |
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Answer : (e) Reason : Since, in a bought-out-deal, the shares are initially offered to the sponsor and the sponsor has the discretion to offload the shares to the public at an appropriate time in future as per the discretion of the sponsor. The sponsor may exploit the situation where the promoter of the company may be in the dire need for funds by offering a substantially low price and may also misuse its discretion to divest the shares in favor of the public. All these facts may affect the interests of the promoters of the company. The points as stated in the other options are not correct with respect to bought out deals. |
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Answer : (b) Reason : The following points are true with respect to the DFL of a company: ·
DFL helps to measure the financial risk of any
corporate entity · DFL can be used to analyze the implications of retiring debts against the proceeds of the issue of the preference capital. ·
DOL is applied by a corporate entity for its
production and sales planning ·
DFL is used to relate the percentage change in EPS
against every percentage change in EBIT. Hence, the option (b) is the correct choice. |
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Answer : (d) Reason : At the operating break even point, the EBIT is zero i.e. the sales revenue of the company just covers the fixed and variable costs incurred by the company. Hence, the operating break even point can be expressed in quantity of sales or value of sales. |
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Answer : (d) Reason : A funds flow statement on cash basis does not show the net change in working capital. |
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Answer : (b) Reason : Venture capital funding companies generally provide risk capital to the technology oriented and high risk business entities. Lease finance companies allows their customers to use the capital as per the terms of the leases while hire purchase companies allows their clients to procure the capital assets against the payment of the regular hire rentals. Commercial banks are engaged in the business of raising funds mainly through deposits and lending the same while insurance companies undertake the pure risks of their clients against the payment of the upfront premium. |
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Answer : (a) Reason : The salient features of the multi-period valuation model are as follows: · Cash flows to the investors in the form of dividends over an infinite duration are considered. ·
The value of an equity share is equal to the present
value of its entire dividend stream over
an infinite duration ·
The model can be applied to the instances of constant
dividends and constant growth in
dividends ·
The model can also be applied in case of variable
growth in dividends · It assumes that the cost of equity of the company will remain constant. Hence, the option (a) is the answer. |
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Answer : (b) Reason : The characteristics of the money market instruments are the short term maturity and easy liquidity. These are generally issued by the government – union as well as the state, Public sector enterprises, banks and financial institutions, reputed corporate entities from the public sector as well as the private sector, etc. The CPs issued by the private companies are not at all secure one. |
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Answer : (d) Reason : The volatility in the call money market increases with the reduction of the liquidity in the market. It generally comes down with the following reasons: · Increase in cash reserve ratio (CRR) · Larger amount borrowed by several borrowers following an increase in demand for the loanable funds · Withdrawal of funds by the banks and financial institutions suddenly to meet their respective corporate requirements Payment of a large amount of advance taxes by the banks and FIs will lead to the reduction in liquidity in the system thereby increases the volatility in the call money market. Hence, the option (d) is the answer. |
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Answer : (e) Reason : For the calculation of the present value interest factor of an annuity (PVIFA), it is assumed that the cash flow will occur at the end of the period under consideration. PVIFA is also reciprocal to the capital recovery factor. Hence, the option (e) is the correct one. |
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Answer : (d) Reason : The options (a) and (b) represent the acts of hedgers who are interested to minimize their risk in a volatile market. The option (c) represents the act of the speculators who wants to make profits from the price movements in a volatile market through speculation. The option (d) represents the act of the arbitrageurs who take the opportunity of improper pricing in different markets and imparts a better efficiency in the system. |
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Answer : (a) Reason : Beta of security represents the relationship between the rates of return from a security as well as from the market. It shows the responsiveness of the security to the general market and indicates how extensively the return of the security will vary with the changes in the market return. As the rates of return from a security move perfectly in tandem with respect to the market returns, then the beta for that security will be equal to unity. |
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Answer : (b) Reason : Dividend pay out ratio indicates the amount of dividend paid out of net profit earned by the company. Net profit margin represents the amount of profit as a percentage of total sales. Inventory turnover ratio implies how efficiently the inventories are used by a company while acid test ratio shows the liquidity status for a company. But fixed chares coverage ratio represents the ability of a firm to meet its financial obligations to make service the debts as well as to pay the lease rentals. |
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Answer : (e) Reason : Funds flow statements are not helpful for the judgements of the following matters: · The quality of management · The ownership pattern of the company · The operational efficiency of the company It also may be manipulated by the unscrupulous managers of any corporate entity. However, it may be used to detect whether short-term fund is used for the procurement of the long term asset. |
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Answer : (b) Reason : The financial risk of a firm may be estimated by using the leverage and coverage ratios while the earning potential of a company may be evaluated through the profitability ratios. The operational and the level of efficiency in utilizing the assets may measured by using the turnover ratios. But price-earnings ratio is used to determine the expected market price per share of the company. One may project the EPS of a company for the next few years and thereafter by assuming the continuity of the same P/E multiple, the future market price per share may be calculated. |
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Answer : (d) Reason : Retirement of high cost debt, the installation of a capital asset and buy back of the equity shares – are the examples of the uses of funds by a business entity. Conversion of debentures into equity shares is a matter of capital restructuring that does not lead to any financial transaction. But selling an old car today to buy a new one after three months leads to the inflow of cash to a company that may be used for the next quarter which may be considered as a source of funds to the company. |
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Answer : (c) Reason : The DOL of a company depends on the contribution margin, sales quantity and the fixed costs. It is not at all related to the interest expenses of the company. Hence, the issue of equity shares in lieu of debentures will not affect the DOL of a company. |
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Answer : (b) Reason : The trend analysis, through the method of extrapolation and regression analysis are used for the projection of sales volume of the company. 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 is considered on the basis of the expected changes to be happened in the market for the preparation of the proforma income statement. Hence, the option (b) is the answer. |
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Answer : (d) Reason : The required rate of return from that
stock is ke = Rf + The growth rate of dividend is 5% So, the price of the share can be calculated as:
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Answer : (d) Reason : Here, the total debt-equity ratio is = 4:3 and the amount of total assets is Rs.3500 lakh. So, the total amount of debt is
= Rs.3500 lakh But the amount of short term debt is Rs.500 lakh. Hence, the amount of long term debt = 2000 – 500 = Rs.1500 lakh. |
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Answer : (a) Reason : From Du Pont Analysis, Return on Equity = Or, 12 percent = 7.5 percent ´
1.20 ´
Or, 12 percent = 9 percent ´ Or, Hence, the debt-asset ratio for the company is 1 – 0.75 = 0.25. |
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Answer : (a) Reason : The
face value of these bonds is = Rs.100 while the amount of coupon payment is Current
yield of the bond will be = |
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Answer : (d) Reason : Let, the effective annual rate of interest be r. So, Rs. 20,000 × (1 + r)9 = Rs.40,000 Or, (1 + r)9 = 2 Or, r = 8.006 » 8 percent (approximately) Therefore, the effective annual rate of interest will be = 8 percent. |
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Answer : (a) Reason : We know
that dividend yield = = = Dividend pay out ratio ´ capitalization rate = 0.3 ´ 8 = 2.4 percent. |
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Answer : (d) Reason : Monthly rate of interest is 12/12 = 1.0 percent = 0.01 = r (say) Tenure of the scheme = 5 years = 60 months. The maturity value of this
recurring deposit plan will be = Rs.100 ´ =Rs.8248.67 » Rs.8249 (approximately). |
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Answer : (c) Reason : The amount of debt used to finance the
cost of any asset is equal to 66.67 percent of the value of the asset. So, the debt asset ratio is = Hence, the amount of equity
used to procure this asset is Rs.69 ´ |
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Answer : (e) Reason : Let the cost of funds be k. So, from the terms of the
question, we get,Rs.9,000 ´ At, k = 1%, the RHS = Rs.9000 × 44.955 + Rs.1,20,000 × 0.887 = Rs.5,11,035 At, k = 2 percent, the RHS = Rs.9000 ´ 34.761 + Rs.1,20,000 ´ 0.788 = Rs.4,07,409 By interpolation, we get k = 1.106% So, the annualized cost of funds will be = {(1.01106)12 - 1} x 100 = 14.109 = 14.11 percent (approximately) |
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Answer : (c) Reason : Inventory
= Current assets = Current liabilities × current ratio = Rs.70 × 1.4 = Rs.98 lakh. Quick assets = Current assets – Inventories = Rs.98 lakh – Rs.50 lakh = Rs.48 lakh Receivables = Rs.48 lakh ´ 0.75 = Rs.36 lakh So, the amount of cash and bank balance will be = Rs.98 lakh – Rs.50 lakh – Rs.36 lakh = Rs.12 lakh |
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Answer : (c) Reason : Eight years and seven months = 103 months = 8.583 years According to the rule of 69, Doubling period = 0.35 + Or, 8.583 = 0.35 + Or, 8.233 = Or, Interest rate = Therefore, Interest rate = 8.47 percent. |
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Answer : (c) Reason : Total asset of a company is financed by equity capital and total debt. So, the total asset of Subsonic Industries = Rs.150 lakh + Rs.250 lakh = Rs.400 lakh. The return on investment (ROI) of a company is defined as: ROI = = Here, post-tax income = Rs.24 lakh and so the pre-tax earnings = Rs.30 lakh as the tax rate = 20 percent. Interest expenses = Rs.250 lakh ´ 8 percent = Rs.20 lakh. Hence, the amount of earnings before interest and taxes = Rs.30 lakh + Rs.20 lakh = Rs.50 lakh. So, the return on investment for Subsonic Industries Ltd. = 12.50 percent. |
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Answer : (b) Reason : Average
collection period = Let the annual sales of the
company is = S and so the amount of average daily sales = So, the average daily sales = The average amount of account
receivables for the company is : {20 + 30}/ 2 = Rs.25 lakh. Hence,
Or, S = Rs.300 lakh. |
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Answer : (a) Reason : Let the issue price of the bond be P P ´ (1.08)20 = Rs.1,00,000 P = |
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Answer : (c) Reason : The Degree of Total Leverage (DTL) is defined as the product between the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL). The resultant DTL’ will be = 1.3 DOL ´ 0.8 DFL = 1.04 DTL Hence DTL’ = 1.04 DTL Hence the DTL will increase by 4 percent |
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Answer : (b) Reason : The amount of external funds required by a company is given by : Expected increase in assets – Expected increase in spontaneous liabilities – Expected retained earnings. Here, the expected retained earnings of the company is Rs.500 lakh ´ 60 percent = Rs.300 lakh. Hence, the required figure is Rs.1200 lakh – Rs.500 lakh – Rs.300 lakh = Rs.400 lakh. |
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Answer : (d) Reason : Yield on the T-bills may be calculated as: k = where, F = Rs.100, P = Rs.98.48 and d = 91 days Hence, k = Or, k = Or, k = 0.0619 (approximately) Hence, the required yield on the T – bills will be = 6.19 percent = 6.2 percent (approximately). |
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Answer : (e) Reason : The expected return from a stock may be calculated as: = Applying the above formulae, the given table can be drawn as:
Hence, the expected return from that stock will be = 0.35 ´ 8 + 0.40 ´ 16 + 0.25 ´ 28 = 2.80 + 6.40 + 7.00 = 16.20 percent = 16 percent (approximately). |
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Answer : (d) Reason : Change is net working capital can be calculated as : (120 + 60 + 45 – 55) –(100 + 70 +30 – 60) = 170 – 140 = Rs.30 lakh. |
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Answer : (a) Reason : In this case, purchase of capital equipment (a long-term asset) by taking loan (a long-term liability) does not have any impact on the net working capital. Purchases of raw materials will increase raw material but simultaneously there is an equal increase in current liability as that was purchased on credit. Hence there is no impact on net working capital. Conversion of preferential shares into equity only changes the capital structure of the company. Therefore, the net working capital of the company will be Rs.36 lakh – Rs.23 lakh = Rs.13 lakh. Hence, the answer is (a). |
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Answer : (b) Reason : Sustainable
growth rate g = Here, net profit = Dividend pay-out ratio d = Debt-equity ratio = 60:40 = 1.50
and so the asset-equity ratio = = Total asset turnover ratio =
So, g = Therefore, the required sustainable growth rate = 17.54 percent = 18 percent (approximately). |
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Answer : (d) Reason : Expected return from that equity share = 0.3 ´ 10 + 0.45 ´ 16 + 0.25 ´ 20 = 3 + 7.20
+ 5.0 = 15.20 percent. Expected risk may be calculated as:
= = = So, the required expected risk = 3.76. |
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Answer : (b) Reason
: The amount of equated half yearly installment will be = |
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Answer : (b) Reason : Discount rate before conversion = 5 + 3 = 8 percent and the same after conversion will be = 8 + 4 = 12 percent. The expected cash flows from that instrument will be as follows:
Here, the cash flows for the first three years will occur half-yearly where each installment is of Rs.4.50 and it has been assumed that the holder of the instrument will hold all the shares and will get the dividends. The intrinsic value of the debentures is = Present value of all the above cash flows = Rs.4.50 × PVIFA (4%,6) +10 × {PVIF (12%,4) + PVIF (12%,5) + PVIF (12%,6) + ….} = Rs.4.50 × 5.242 + Hence, the required intrinsic value = Rs.82.90 = Rs.83 (approximately). |
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Answer : (c) Reason : Present market value of the bond is Rs.108 and the amount of coupon
interest to be received annually = Rs.108 ´ 8.33 percent = Rs.8.9964 = Rs.9 Hence, the amount of coupon payments to be
received half-yearly = Rs.4.50 and the number of coupons n = 2´ 3 = 6. So, the approximate half-yearly realized
yield to an investor will be r =
= 0.03045 = 3.045% So, the approximate annualized yield to an
investor will be = |
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Answer : (d) Reason
: The present value of the dividend stream to an investor is given as: = = Rs.29.41 = Rs.29 (approximately) |
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Answer : (c) Reason
: The maturity value of the deposit should be Rs.250,000 ´ (1.04)3
= Rs.281,216 Here, the installments are
being deposited at the end of every month and the concept of FVIFA may
be applied in this case. Now, the number of installments to be paid
= 3 ´ 12 = 36 and so FVIFA (1 percent, 36) = Hence, the amount of each installment will
be = |
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Answer : (c) Reason: Total assets of the company = Rs.25 lakh + Rs.40 lakh = Rs.65 lakh
and so the amount of EBIT registered by the company = Rs.65 lakh × 12 percent
= Rs.7.80 lakh. Now, interest paid by the company against
the debt capital = Rs.40 lakh × 9 percent = Rs.3.60 lakh. Hence, the earnings
before taxes is = Rs.7.80 lakh – Rs.3.60 lakh = Rs.4.20 lakh and the net
profit for the company = Rs.4.20 lakh × 0.60 = Rs.2.52 lakh. Therefore, the earnings per share will be = Rs.2.52. |
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Answer : (d) Reason : For Garden Restaurant, the amount of contribution = Rs.14,00,000 ´ 25 percent =
Rs.350,000. EBIT = Rs.350,000 – Rs.150,000 = Rs.200,000 Interest on bank loan = Rs.400,000 ´ 12.50 percent
= Rs.50,000 Preference Dividends = Rs.200,000 ´ 15 percent =
Rs.30,000. So, the degree of financial leverage (DFL)
will be: DFL =
The required degree of financial leverage
(DFL) = 2.00 |
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Answer : (e) Reason : The expected rate of return from any security as per the Capital Asset Pricing Model can be computed as: kx=
Rf + Now, the beta of a security may be computed as: Therefore, kx= Rf + |
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Answer : (a) Reason : The expected return from the shares of ESL is kj = 12 ´ 0.20 + 16 ´ 0.50 + 22 ´ 0.30 = 2.40 + 8.00 + 6.60 = 17 percent The expected return from the market portfolio is km = 10 ´ 0.20 + 12 ´ 0.50 + 20 ´ 0.30 = 2.00 + 6.00 + 6.00 = 14 percent. Now, the variance of returns from the market portfolio is :
The covariance of returns between the shares of ESL and the market portfolio is: COV(kj,km) = {0.20(10 – 14)(12 – 17) + 0.50(12 – 14)(16 – 17) +0.30(20 – 14)(22 – 17)} = {0.20 ´ (-4) ´ (-5) + 0.5 ´ (-2) ´ (-1) + 0.30 (20 – 14)(22 – 17)} = (0.20 ´ 20 + 0.50 ´ 2 + 0.30 ´ 30) = 4 + 1 + 9 = 14 Now, beta is defined as the
ratio between Hence, the
required value of beta = 0.875. |
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Answer : (a) Reason : The
amount of sales in the year 2002-03 was Total assets in the last year
was = The amount of spontaneous liabilities = Rs.250 lakh * 40 percent = Rs.100. The amount of external funds requirements (EFR) is given by: EFR = EFR= Here, So, EFR = 225 – 30 – 49.92 = Rs.145.08 lakh = Rs.145 lakh (approximately) Therefore, the required amount of external funds requirements = Rs.145 lakh. |
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Answer : (b) Reason : Let total amount of asset be = Rs.300 lakh where the amount of debt is Rs.100 lakh. The amount of PBIT = Rs.300 ´ 14 percent = Rs.42 lakh Interest expenses = Rs.100 lakh ´ 0.08 = Rs.8 lakh Hence, PBT = Rs.34 lakh and PAT = Rs.34 ´ 0.6 = Rs.20.40 lakh So, the
return on equity = |
(Rm – Rf) = 6 + 1.50 
= 0.75
= 0.10526 = 10.53 percent (approx).
= Rs.23 lakh. (This amount is assumed to be financed by
using retained earnings only.)
10 percent
so 
= 17.54 percent.
=
=
(
(approximately)
= 6.18 percent.
= Rs.6528.24 
= 2.00
=
= 
= 0.875
lakh
A/S = 1/1.6, L/S = 100/1200