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· Answer all questions. · Marks are indicated against each question. |
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ABU Ltd. has earned Rs.1,00,000 as after-tax profits. The applicable tax rate is 30%. ABU Ltd. has 2,00,000 common shares outstanding and Rs.1.2 million as retained earnings in its balance sheet. The earnings per share for ABU Ltd. is (a) Rs.10 (b) Rs.6.50 (c) Rs.6.00 (d) Rs.0.50 (e) Rs.0.25. (1 mark) |
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The market price
of a share of common stock is determined by (a) The board of directors of the firm (b) The stock exchange on which the stock is
listed (c) The president of the company (d) Individuals buying and selling the stock (e) The Securities
and Exchange Board of (1 mark) |
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Which of the following is related to the control function of the financial manager? (a) Interaction with the bankers for arranging a short-term loan (b) Comparing the costs and benefits of different sources of finance (c) Analysis of variance between the targeted costs and actual costs incurred and reporting on the same (d) Assessing the costs and benefits of a project under consideration (e) Deciding the optimum quantity of raw materials to be ordered for procurement. (1 mark) |
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Which of the
following does not act as a tool for
RBI to maintain liquidity of the banking system? (a) Prime Lending Rate (b) Statutory Liquidity Ratio (c) Cash Reserve Ratio (d) Bank Rate (e) Open Market Operations. (1 mark) |
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Through which of
the following RBI exercises the selective credit control? I. Bank rate. II. Open market operations. III. Variable
reserve requirements. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) All (I), (II) and (III) above. (1 mark) |
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Which of the
following in the international capital markets bear interest rate/market
risks moving against them before they place Bonds or Depository Receipts? (a) Depositories (b) Underwriters (c) Custodians (d) Investors (e) Issuers. (1 mark) |
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Mr.Saha wishes to purchase a 91 day T-bill of face
value Rs.100, maturing after 60 days.
If, on maturity, he wishes to earn a yield of 11.5%, the purchase
price for Mr.Saha should be approximately (a) Rs.88.50 (b) Rs.92.21 (c) Rs.97.22 (d) Rs.98.15 (e) Rs.98.95. (1 mark) |
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Which of the
following situations lead to an 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. (1 mark) |
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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. (1 mark) |
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Which of the
following is not a feature of Certificate
of Deposit issued by a bank? (a) It is a document of title to a time
deposit (b) There is no lock-in period for
transferring it to others (c) It is not subject to the reserve
requirement of the bank (d) It is transferable by endorsement and delivery (e) The maximum maturity period is one year. (1 mark) |
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If the nominal
rate of interest is 10% p.a. and compounding is done four times in a year,
then the effective rate of interest per annum is (a) 10.25% (b) 10.38% (c) 11.20% (d) 10.50% (e) 11.60%. (1 mark) |
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If the interest
rate is 10.63% per annum, how much should Mr. David invest today in a bank scheme
that would fetch him an annuity of Rs.5,000 for a period of 7 years commencing from the beginning of
fifth year? (a) Rs.12,352.18 (b) Rs.14,389.27 (c) Rs.17,611.02 (d) Rs.18,232.32 (e) Rs.33,042.05. (2 marks) |
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Bank of Andaman pays interest at 10 percent p.a. compounded semi-annually. Bank of Bangalore compounds interest on monthly basis. If Bank of Bangalore wishes to pay the same effective rate of interest as that of bank of Andaman, the approximate annual rate of interest it should quote is (a) 9.80% (b) 10.00% (c) 10.25% (d) 10.75% (e) 11.00%. (1 mark) |
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Mr. Prashant Shah wants to buy a car on January 1, 2009. It is presently available at a price of Rs.7,50,000 on January 1, 2006. He plans to start to deposit his money in the monthly recurring deposit scheme of a bank from January 31, 2006. 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 he deposit every month in that scheme? (round off your answer to the nearest integer) (a) Rs.15,828 (b) Rs.16,178 (c) Rs.19,584 (d) Rs.23,670 (e) Rs.27,028. (2 marks) |
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The growth rate of sales that can be sustained by a firm without raising external equity, increases with I. An increase in the assets to
sales ratio. II. An increase in net profit margin. III. A decrease in the retention ratio. IV. A decrease in the debt to equity
ratio. (a) Only (I) above (b) Only (II) above (c) Both (I) and (III) above (d) Both (I) and (II) above (e) Both (I) and (IV) above. (1 mark) |
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Which of the following is not an application of SML? (a) Evaluating the performance of portfolio manager (b) Tests of asset pricing theories (c) Tests of market efficiency (d) Identifying mispriced securities (e) Identifying the factors of pricing of an asset. (1 mark) |
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You are required to contribute Rs.2000 per year in a pension plan for 10 years from the end of the current year. The plan will pay pension annually for a period of 20 years and the first payment will start after 16 years from now. If this plan is arranged through a savings bank that pays interest @ 7% per annum on the deposited funds, what is the size of the yearly pension? (a) Rs.2578 (b) Rs.2945 (c) Rs.3456 (d) Rs.3570 (e) Rs.3659. (2 marks) |
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Your company is planning to borrow Rs.500,000 on a 5-year, 7 percent, annual payment, fully amortized term loan. What fraction of the equal payment made at the end of the second year will represent repayment of principal? (a) 76.29% (b) 60.27%. (c) 50.28% (d) 49.72% (e) 42.82%. (2 marks) |
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Other things remaining the same, if the risk-free rate of return decreases, what will be the effect on the security market line (SML)? (a) The SML will shift down vertically (b) The SML will shift up vertically (c) The SML will remain unchanged (d) The slope of the SML will increase (e) The slope of the SML will decrease. (1 mark) |
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Which of the
following statements is/are true? I. The diversifying effect of each
additional stock increases with an increase in the number of stocks in the
portfolio. II. The higher the degree of positive
correlation between the stocks, the greater is the amount of risk reduction
that is possible. III. The portfolio risk will be minimum, if the
stocks are perfectly negatively correlated. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) Both (I) and (III) above. (1 mark) |
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Which of the
following is/are true according to
CAPM if investors become more risk averse due to changing economic
conditions? I. Risk premium increases. II. Required rate of return on all
securities increases. III. Slope of SML decreases. (a) Only (I) above (b) Only (II) above (c) Both (I) and (II) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above. (1 mark) |
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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. (1 mark) |
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According to
CAPM, a security’s required return is equal to risk free rate of return plus
a premium which will be (a) Equal to security’s beta (b) Based on total risk of the security (c) Based on unsystematic risk of the
security (d) Based on systematic risk of the security (e) Based on security’s market value. (1 mark) |
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The risk-free rate
is 6% p.a., the risk premium of a stock is 9% p.a. and the beta of stock B is
1.5. According to the CAPM, the required rate of return on stock B is (a) 6.0% (b) 9.0% (c) 13.5% (d) 15.0% (e) 19.5%. (1 mark) |
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The face value
of the equity share of Green Water Ltd. is Rs.100 and the current market
price of the share is Rs.80. The company is expected to declare a dividend of
20% during the current year. If the dividends are expected to decline at the rate
of 10% p.a. then, the expected rate of return on the shares is (a) 8.0% (b) 12.5% (c) 17.5% (d) 32.0% (e) 37.5%. (1 mark) |
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Consider the
following information: Expected return on
market 12% Beta of Stock B 1.5 Required rate of
return on stock B 15% Which of the
following statements is/are true
about stock B, according to the single-index model? I. It will earn a negative return of 3%,
when the market return is zero. II. It is an aggressive stock as its beta is
more than 1. III. If return on market decreases by 10%,
return on stock B decreases by 15%. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above. (1 mark) |
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Earnings per share of Piston Ltd. expected at the end of the year 2006-2007 is Rs.18.00. The earnings per share in the year 2005-2006 is Rs.16.00. The required rate of return is 25% p.a. and the dividend payout ratio is 30% which is expected to remain constant. If the earnings are expected to grow at the historical growth rate, the value of the share of the company at the beginning of 2006-2007 is (a) Rs.72.00 (b) Rs.43.20 (c) Rs.38.40 (d) Rs.21.60 (e) Cannot be determined as the growth rate is higher than the required rate of return. (2 marks) |
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The probability distributions
of returns of Somi Ltd. and the market returns are
given below:
The covariance of
market returns and returns from Somi Ltd. is
0.4625(%)2. According to
the Single Index Model, if the market return is zero, the return earned by Somi Ltd. will be (a) 1.595% (b) 1.900% (c) 2.103% (d) 5.695% (e) 6.598%. (2 marks) |
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Ms.Smitha is considering investing in the equity
shares of Pepsi Tooth Paste Limited. She gathers the following information on
the equity shares of the company:
Ms. Smitha expects the earnings of the company to grow at a
constant rate and the pay-out ratio to remain constant. If the equity share is in market equilibrium according to the Single-index model, the expected price of the share at the end of five years will be (a) Rs.72.50 (b) Rs.65.30 (c) Rs.58.30 (d) Rs.45.75 (e) Rs.35.25. (2 marks) |
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The expected
returns for the next one year from the shares of Balaji
Sugars Ltd. (BSL) vis-a-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 BSL? (a) 0.875 (b) 1.000 (c) 1.125 (d) 1.250 (e) 1.375. (2 marks) |
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Which of the
following is not true with respect to valuation of
bonds? (a) An increase in the redemption value of
the bond, other things remaining the same, will increase the bond value (b) For a given difference between YTM and
coupon rate, the longer the term to maturity of the bonds, the greater will
be the change in price with a change in YTM (c) For a given maturity, the change in the
bond’s price will be lesser with a decrease in the bond’s YTM than the change in bond price
with an equal increase in the bond’s YTM (d) For a given change in YTM, the percentage
price change in case of bonds with high coupon rate will be smaller than in
case of bonds with low coupon rate, other things remaining the same (e) An increase in the required rate of return, other things remaining the same, will decrease the bond value. (1 mark) |
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Which of the
following statements is/are true? I. Current yield increases with an
increase in the current market price. II. Current yield increases with an increase
in the coupon payment. III. Current yield decreases with an increase
in the face value of the bond. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) Both (II) and (III) above. (1 mark) |
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Which of the
following is/are true regarding
price-earnings ratio (P/E)? I. It reveals how earnings affect the
market price of the firm’s stock. II. It is the most popular financial ratio
in the stock market for secondary market investors. III. It is used to calculate the rate of return
investors expect before they purchase the stock. (a) Only (I) above (b) Both (I) and (II) above (c) Both (I) and (III) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above. (1 mark) |
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The par value of
a bond of M/s VB Ltd. is Rs.1,000. The coupon rate on the bond is 13% and the
required rate of return on the bond is 8%. If X is the value of bond when 6 years
are left to maturity, Y is the value of the bond when 3 years are left to
maturity and Z is the value of the bond at maturity, which of the following
statements is/are true? I. X < Y. II. Y < Z. III. X > Y. IV. Z = Rs.1,000. (a) Only (I) above (b) Only (III) above (c) Both (I) and (IV) above (d) Both (II) and (IV) above (e) Both (III) and (IV) above. (1 mark) |
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Three bonds A, B
and C with same coupon rate, par value and maturity have yields to maturity (YTMs) of 10%, 8%and 12% respectively. Then which of the
following expressions is/are true
regarding the value of bonds A, B and C?
(a) A>B>C (b) A>C>B (c) B>A>C (d) C>A>B (e) C>B>A. (1 mark) |
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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. (1 mark) |
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As maturity
approaches, premium or discount on bonds (a) Will converge to par (b) Will remain near their purchase prices (c) Will drift further apart in price (d) Will command a liquidity premium (e) Will be high in demand. (1 mark) |
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The following regression equation reflects the relationship of Blue moon stock’s return with the market return rBM = 0.40 + 0.75rm If the market index rises by 12.5% and Blue moon’s stock price rises by 8.45%, the abnormal change in Blue moon’s stock price is (a) – 0.925% (b)
– 1.25% (c) + 0.925% (d)
– 1.75% (e) + 1.85%. (1 mark) |
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If the dividend
payout is 40% and capitalization rate is 12.5 percent, then the dividend
yield is (a) 4% (b) 5% (c) 6% (d) 7% (e) 8%. (1 mark) |
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Consider the
following information regarding the bond issued by XL Pharma
Ltd: Face value of the
bond Rs.1,000 Coupon per annum 10% Issued at a
discount of 10% If the current yield of the bond is 8.33%, the bond is trading at a (a) Discount of 12% (b) Discount of 16.67% (c) Premium of 20% (d) Premium of 16.67% (e) Premium of 30%. (1 mark) |
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Consider the following
data regarding the bonds issued by Banjara Ltd. on
January 15, 2004 to be redeemed on January 15, 2011:
The yield to maturity of the bond to a prospective investor is (a) 9.27% (b) 10.90% (c) 12.24% (d) 12.66% (e) 13.55%. (2 marks) |
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Chandra Textiles
presently pays a dividend of Rs.3 per share. The dividend is expected to grow
at the rate of 4% for the next four
years then at 3% for next three years, after that it is expected to grow at a
rate of 1% forever. If the required rate is 10% the value one can pay now, if
the holding period is (a) infinite and (b) 3 years respectively is (a) Rs.22.01, Rs.32.93 (b) Rs.38.74, Rs.40.98 (c) Rs.42.91, Rs.32.93 (d) Rs.38.74, Rs.32.93 (e) Rs.42.91, Rs.40.98. (2 marks) |
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The following
information is given with respect to HFCC Services Ltd.
The present
market price per share will be approximately equal to (a) Rs.14 (b) Rs.16 (c) Rs.19 (d) Rs.21 (e) Rs.30. (2 marks) |
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It is now
January 1, 2006. Suns Engineering has just developed the most efficient solar
battery. As a result, the firm is expected to pay dividends of Rs.6 per share
at the end of 2006 and Rs.8 per share at the end of 2007, respectively. Then,
other firms will catch up, and Suns' growth rate will become 5% per year
indefinitely. The required rate of return on the firm's stock is 15%.
Determine the company's current stock price. (a) Rs.68.73 (b) Rs.70.21 (c) Rs.74.78 (d) Rs.84.05 (e) Rs.89.25. (1 mark) |
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A bond with par
value of Rs.1000 is presently trading in the market at Rs.847.88. The coupon rate is 8 percent, payable
annually, and annual interest rate on new issues of the same degree of risk is
10 percent. The number of years
remaining to maturity is (a) 14 (b) 15 (c) 12 (d) 20 (e) 10. (2 marks) |
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Assume that you
are considering the purchase of a Rs.1,000 par value bond that pays interest
of Rs.70 each six months and has 10 years to go before it matures. If you buy this bond, you expect to hold it
for 5 years and then to sell it in the market. You (and other investors) currently require
a nominal annual rate of 16 percent, but you expect the market to require a
nominal rate of only 12 percent when you sell the bond due to a general
decline in interest rates. How much
should you be willing to pay for this bond? (a) Rs.842.00 (b) Rs.1,115.81 (c) Rs.1,359.26 (d) Rs.967.00 (e) Rs.731.85. (2 marks) |
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Recently,
Healthy Hospitals Inc. filed for bankruptcy.
The firm was reorganized as Indian Hospitals Inc., and the court permitted
a new indenture on an outstanding bond issue of face value of Rs.1000 to be
put into effect. The issue has 10
years to maturity and a coupon rate of 10 percent, paid annually. The new
agreement allows the firm to pay no interest for 5 years. Then, interest
payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the
principal plus the interest that was not paid during the first 5 years will
be paid. However, no interest will be
paid on the deferred interest. If the
required annual return is 20 percent, what should the bonds sell for in the
market today? (a) Rs.242.26 (b) Rs.281.69 (c) Rs.362.44 (d) Rs.578.31 (e) Rs.813.69. (2 marks) |
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For a firm, if the
current ratio remains constant and the quick ratio decreases during the same
period, then, which of the following is indicated for the firm? (a) The proportion of total debt relative to
total assets is decreasing (b) The proportion of total debt relative to
net worth is decreasing (c) The proportion of net worth relative to
total assets is increasing (d) The liquidity is decreasing (e) The profitability is increasing. (1 mark) |
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Which of the following
statements is/are true regarding
inventory turnover ratio? I. If the inventory turnover ratio has
decreased from past, it means that either inventory is decreasing or cost of
goods sold is increasing. II. If a firm has an inventory turnover that
is slower than for its industry, then the inventory stocks may be low. III. Low inventory turnover has impact on the
liquidity of the business. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (III) above (e) All (I), (II) and (III) above. (1 mark) |
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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 type 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. (1 mark) |
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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. (1 mark) |
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If net profit
margin is 12.50%, asset turnover ratio is 0.85 and return on networth is 24%, then the debt-asset ratio is (a) 0.37 (b) 0.44 (c) 0.56 (d) 0.63 (e) 0.97. (2 marks) |
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The debt-equity
ratio of ABC Ltd. is 2 and its annual report indicates that the earnings per
share and book value per share are Rs.5 and Rs.20 respectively. What is its
return on equity? (a) 5% (b) 15% (c) 20% (d) 25% (e) Data is insufficient. (1 mark) |
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Consider the following data of M/s. Super Colors Ltd. for the year 2005–06:
Debt-service coverage ratio of the company is (a) 1.59 (b) 1.76 (c) 1.84 (d) 2.24 (e) 2.70. (2 marks) |
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Consider the following data regarding the companies M/s. X Ltd. and M/s. Y Ltd.
The management of
company X declared a dividend of 6% and company Y declared a dividend of 8%
for the current year. Which of the following statements is/are false? I. Asset utilization of company X is more
than that of company Y. II. Company Y retains larger proportion of
its income in the business than Company X. III. Company X is using the shareholders money
more profitable than Company Y. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) All (I), (II) and (III) above. (2 marks) |
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The following information is related to Great Eastern 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. (2 marks) |
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The following
figures are collected from the annual report of Kalanjali
Clothes Ltd.:
The earning per
share for Kalanjali 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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On the basis of
historical relationships between its balance sheet items and its sales,
profit margin, and dividend policy, Thode
Corporation’s analysts have graphed the relationship of additional funds
needed (on the Y-axis) to possible growth rates in sales (on the
X-axis). If Thode
decides to increase the percentage of earnings paid out as dividends, which
of the following changes would occur in the graph? (a) The line would shift to the right (b) The line would pass through the origin (c) The line would shift to the left (d) The slope coefficient would fall (e) The slope coefficient would increase. (1 mark) |
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Which of the following
is considered while preparing funds flow statement on working capital basis? (a) Increase in pre-paid expenses (b) Payment of dividend (c) Decrease in sundry creditors (d) Decrease in provision for tax (e) Purchase of raw materials. (1 mark) |
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Consider the
following:
After
considering the above changes, the new net working capital will be (a) –Rs.50,000 (b) Rs.9,50,000 (c) Rs.19,70,000 (d) Rs.39,70,000 (e) Rs.49,50,000. (1 mark) |
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|
Consider the
following data regarding M/s. Amar Labs Ltd. for
the year 2005-2006: (Rs. in lakhs)
Funds from operations of M/s. Amar Labs Ltd. during the year were (a) Rs.50 lakh (b) Rs.41 lakh (c) Rs.38 lakh (d) Rs.21 lakh (e) Rs.20 lakh. (1 mark) |
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The following data is related to Pain Ltd. and Fever Ltd.
Pain Ltd (Rs.) Fever Ltd (Rs.)
Each division earns a net profit of Rs.60,000 after taxation. Which of the
following statements is/are false
regarding the results of the funds flow analysis of the above firms? I. Both have invested funds in fixed assets. II. Pain Ltd has procured Rs.3,75,000 from long term sources. III. Fever Ltd has procured funds of Rs.1,25,000 from long term sources. IV. The working capital of Fever Ltd has decreased during the year by Rs.1,25,000. (a) Only (I) above (b) Both (I) and (II) above (c) Both (I) and (IV) above (d) Both (II) and (III) above (e) Both (III) and (IV) above. (2 marks) |
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The non-current
assets and equities of Air Deccan Aviation Ltd. are
given at the beginning and the end of the current year as below:
You are unable to obtain complete balance sheet data or income statement for the year, but you have obtained the following information Dividends paid Rs.75,000. A gain on the sale of equipment of Rs.26,000 has been included in the net income. The gross plant assets increased by Rs.1,86,000 even though equipment costing Rs.58,000 with a net book value of Rs.38,000 was sold. The amount of funds generated from the operations and from the equipment respectively are (a) Rs.3,94,000 and Rs.64,000 (b) Rs.4,20,000 and Rs.56,000 (c) Rs.3,45,000 and Rs.26,000 (d) Rs.3,94,000 and Rs.26,000 (e) Rs.3,45,000 and Rs.56,000. (2 marks) |
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Which of the
following transactions does not
result in a flow of funds (WC)? I. Commission paid. II. Amount transferred to capital redemption reserve. III. Commission outstanding. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) Both (II) and (III) above. (1 mark) |
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Which of the
following will be deducted from net profit in the calculation of funds from
operations? (a) Amortization of goodwill (b) Amortization of discount on debentures (c) Amortization of extraordinary loss occurred in previous year (d) Amortization of premium received on debentures (e) Amortization of public offer expenses. (1 mark) |
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Which of the following can represent the funds from operations? I. Net profit + patents written off. II. Net profit + discount on issue of shares. III. Net profit + profit on sale of investments. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) All (I), (II) and (III) above. (1 mark) |
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Assume that a
firm has a degree of financial leverage of 1.25. If sales increase by 20 percent, the firm
will experience a 60 percent increase in EPS, and it will have an EBIT of
Rs.1,00,000. What will be the EBIT for
this firm if sales do not increase? (a) Rs.1,13,412 (b) Rs.1,00,000 (c) Rs.84,375 (d) Rs.67,568 (e) Rs.42,115. (2 marks) |
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Fusion
Technologies has sales of Rs.30,00,000.
The company’s fixed operating costs total Rs.5,00,000 and its variable
costs equal 60 percent of sales, so the company’s current operating income is
Rs.7,00,000. The company’s interest
expense is Rs.5,00,000. What is the
company’s degree of total leverage (DTL)? (a) 1.714 (b) 3.100 (c) 3.250 (d) 3.500 (e) 6.000. (1 mark) |
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An EBIT - EPS
Indifference Point analysis chart is used for (a) Evaluating the effect of business risk on EPS (b) Determining the impact of a change in sales on EBIT (c) Showing the changes in EPS over time (d) Determining EPS results for alternative financing plans at varying levels of EBIT (e) Indicating the break-even point of operations. (1 mark) |
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Operating leverage of a firm is a function of which of the following factors? I. The amount of fixed costs. II. The contribution margin. III. The volume of sales. (a) Only (I) above (b) Only (II) above (c) Both (I) and (II) above (d) Both (I) and (III) above (e) All (I), (II) and (III) above. (1 mark) |
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The income statement of Padmaja Tyre Company Ltd. is given below:
25% of the cost of goods sold and
20% of the selling expenses are fixed costs. Administrative expenses are
entirely fixed in nature. The paid up equity share capital of the company
consists of 100 lakh equity shares of Rs.10 each.
Further, the company has employed preference share capital, which has a book
value of Rs.150 crore and the dividend rate on the
same is 12%. It is expected that there will be no change in its capital
structure in the near future. If the
company plans to increase its EPS by 25%, the percentage increase in sales
will be (a) 7.9% (b) 11.0% (c) 15.4% (d) 14.0% (e) 17.9%. (2 marks) |
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Consider the following data regarding M/s. Dutta Ltd.:
If EBIT has to increase by 10%, sales have to be increased by (a) 10% (b) 8% (c) 5% (d) 4% (e) 2.5%. (2 marks) |
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Using the Additional Funds Needed (AFN) formula approach, calculate the total assets of Kotak Photo Company given the following information: Sales this year = Rs.3,000 Lac; sales increase projected for next year = 20 percent; net income this year = Rs.250 Lac; dividend payout ratio = 40 percent; projected excess funds required next year = Rs.100 Lac; accounts payable = Rs.600 Lac; notes payable = Rs.100 Lac; and accrued wages and taxes = Rs.200 Lac. Except for the accounts noted, there were no other current liabilities. Assume that the firm’s profit margin remains constant and that the company is operating at full capacity. (a) Rs.3,000 Lac (b) Rs.2,200 Lac (c) Rs.2,000 Lac (d) Rs.1,200 Lac (e) Rs.1,000 Lac. (2 marks) |
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Consider the following information of M/s. SS Ltd for the year 2005-06:
The maximum sales growth that can be achieved without resorting to external financing is (a) 5.63% (b) 8.70% (c) 9.89% (d) 13.64% (e) 16.80%. (2 marks) |
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Suggested Answers
Financial Management-I (141) : April 2006
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Answer : (d) Reason : EPS = Rs.100000/200000 = Rs.0.50 Hence, option (d) is the answer. |
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Answer : (d) Reason : The market price of a share of common stock is determined by individuals buying and selling the stock. Hence, option (d) is the answer. |
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Answer : (c) Reason : Alternative (a) is a part of the ‘mobilization of funds’ / ‘financing’ function of the finance manager. Alternative (b) involves partly the ‘funds mobilization function and partly the ‘risk- return tradeoff’ function. Alternative (c) is the control function. Alternative (d) is a part of the ‘deployment of funds’ function. Alternative (e) is also related with the ‘deployment of funds’ function. Hence, option (c) is the answer. |
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Answer : (a) Reason : Prime
lending rate is the rate fixed by respective commercial banks as bench mark
for lending interest rates. It is not a tool to control liquidity of the
banking system by RBI. RBI controls liquidity of the banking system through
SLR,CRR ,Bank rate and open market operations. Hence, option (a) is the answer. |
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Answer : (e) Reason : The
RBI exercises the selective credit control through the following instruments: – The
bank rate – Open
market operations – Variable reserve requirements. Hence, option (e) is the answer. |
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Answer : (b) Reason : Underwriters
of the issue bear interest rates/market risks moving against them before they
place bonds or Depository Receipts.. Hence, option (b) is the answer. |
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Answer : (d) Reason : Yield is calculated as Where, F is face value P is purchase price d is the duration/maturity period In the given case, yield = If yield = 11.5%, P is calculated as,
or, 1.0189 P = 100 Þ P = Hence, option (d) is the answer. |
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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 : (d) 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. |
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Answer : (c) Reason : Certificate of deposit (CD) is a financial instrument where an investor has to invest a certain sum to get a fixed amount (principal and accrued interest) on maturity at the contracted rate. So it is similar to a time deposit. CDs are transferable simply by endorsement and delivery by the holder without any restriction, whereas its maturity period ranges from 15 days to one year. But as it is a liability to the issuing banks, CDs are also subjected to the reserve requirements of the bank. Hence, option (c) is the answer. |
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Answer : (b) Reason : Effective annual rate of interest = Where, m = no. of times compounding is done in a year r = nominal rate of interest Effective annual
rate = Hence, option (b) is the answer. |
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Answer : (c) Reason : Amount that David should invest= Rs5,000 x PVIFA(10.63%,7 years) x PVIF(10.63%,3 years) = Rs.17,611.02. Hence, option (c) is the answer. |
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Answer : (a) Reason : Effective
rate of interest of Bank of Andaman = Nominal
rate of interest of Bank of Bangalore
= Hence, option (a) is the answer. |
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Answer : (c) Reason : The
maturity value of the deposit should be Rs.7,50,000 ´ (1.04)3
= Rs.843648 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: (b) Reason : Growth rate (g)=(m(1-d)A/E)/A/S0-m(1-d)A/E. When the net profit margin increases, the growth rate also increases. Hence, option (b) is the answer. |
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Answer : (e) Reason : Alternatives
(a), (b) and (c) are applications of ex-post SML. Whereas alternative (d) is an
application of ex-ante SML. Alternative (e) is not an application of SML. Hence, option (e) is the answer. |
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Answer : (e) Reason : Future value of the 10-payments annuity = 2000 ´ FVIFA (7,10) = 2000 ´ 13.816 = Rs.27632. The amount of Rs.27632 is available immediately after the last payment. The future value of this at the end of the 15th year FV = 27632 ´ FVIF (7,5) = 27632 ´ 1.403 = Rs.38768 The annuity
amount of the retirement annuity = |
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Answer : (a) Reason : Beginning Payment of Ending (Rs.)
The fraction that is principal is 93,031.52/121,945.35 = 76.29%. Hence, option (a) is the answer. |
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Answer : (a) Reason : If Risk Free rate(Rf) decreases , the SML will also correspondingly come down, such that the new SML will be parallel to the original position. Hence, option (a) is the answer. |
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Answer : (c) Reason : The amount of risk reduction depends on the degree of correlation between the stocks. The portfolio risk will be minimum if the stocks are perfectly negatively correlated. Hence, statement III is correct. Lower the degree of positive correlation, greater is the amount of risk reduction that is possible. Hence, statement II is incorrect. Statement
I is incorrect as the diversifying effect of each additional stock diminishes
with increase in number of stocks. Hence, (c) is the answer. |
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Answer : (c) Reason : According to CAPM, the required rate of return of a stock is equal to risk-free rate of return + Beta ( Market rate of return – Risk free rate of return), where Market rate of return – Risk free rate of return is the market risk premium. In general, if all the investors become more risk averse i.e. if their risk taking ability has reduced, then the market risk premium and in turn the risk premium of the stock will increase. With increase in the market risk premium the required rate of return on all the stocks will also increase and statement (I) and (II) are correct. Slope of the SML is given by Rm-Rf. Thus when Rm-Rf increases the slope will increase and hence statement (III) is not correct and the answer is (c). |
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Answer : (b) 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. Hence, option (b) is the answer. |
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Answer : (d) Reason : As per CAPM, security’s required rate of return is equal to risk free rate plus a premium based on the systematic risk of the security. Hence, option (d) is the answer. |
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Answer : (d) Reason : According to CAPM, risk premium of a security is the product of beta and difference between risk-free rate and return on market. In the given case, risk premium of stock B = 9%. Thus, the Required rate of Return of Stock B = 6%+9%=15%. Hence, option (d) is the answer. |
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Answer : (b) Reason : We know, P0 = Where, P0 = Current market price ke = Expected rate of return g = Growth rate in dividends D1 = Dividend at the end of one year. The above equation can be rewritten as: ke = Putting the values for the variables we get: ke = = 0.125 i.e., 12.5%. Hence, option (b) is the answer. |
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Answer : (e) Reason : According to single index model, Required rate of return on a stock = aj + bj km; where aj is the intercept of the regression line, bj is the beta of the stock km is the market return, In the given case, 0.15 = aj + 1.5 ´ 0.12 aj = – 0.03 aj indicates the rate of return the stock will earn when the market return is zero. In the given case, a of – 0.03 indicates that the stock will earn a negative return of 3%, when the market return in zero. Hence, statement (I) is true. If beta of a stock is more than the market beta i.e., 1, the stock is referred to as aggressive stock and if the beta of the stock is less than 1, it is referred to as defensive stock. As the beta of the given stock is 1.5, the given stock is a aggressive stock. Hence, (II) is also true. Beta of 1.5 implies that when the market return increases/decreases by 10%, return on the stock increase/decreases by 15%. Hence, statement III is true and (e) is the correct answer. |
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Answer : (b) Reason : Current value of the share = In the given case, dividend a year hence = EPS ´ Dividend payout = 18 ´ 0.3 = Rs.5.4 Required rate of return = 0.25 Growth rate
(as payout ratio remains constant) =
Growth rate in EPS = Value of
the share = Hence, option (b) is the answer. |
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Answer : (c) Reason :
= 0.625 + 0.766 + 0.084 + 0.0125 = 1.4875 The alpha factor helps us in computing the rate of return that the security will earn when market return is zero. Hence, the security will earn a return of 2.1025% when the market return is zero. Hence, option (c) is the answer. |
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Answer : (b) Reason : According to the single-index model, Ri = = 14.8% As the shares are said to be in equilibrium, = 0.045 + g = 0.148 = 0.103 MP at the end of 5 years = = = Rs.65.30. Hence, option (b) is the answer. |
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Answer : (a) Reason : The expected return from the shares of BSL 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 BSL 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. Hence,
option (a) is the answer. |
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Answer : (c) Reason : For equal size increases and decreases in the YTM, price movements are not symmetrical. For a given maturity, the change in bond’s price will be greater with a decrease in the bond’s YTM than the change in bond price with an equal increase in the bond’s YTM. Hence (c) is not true. The intrinsic value of the bond is the present value of coupon payments and the redemption value. Hence, if there is an increase in the redemption value, the value of the bond will increase. Hence, (a) is true. In case of long maturity bonds, a change in YTM is applied to a series of coupon payments which is longer than the shorter maturity bonds and the principal payment is discounted at the new rate for a longer number of years compared to shorter maturity bonds. Hence, the longer the term, to maturity, the greater will be the change in price with a change in YTM. Hence (b) is also true. The percentage price change in case of high coupon bonds will be smaller than the price change in case of smaller coupon bonds with a change in YTM. Hence, (d) is true. In the equation of the intrinsic value of the bonds, if the required rate of return, which is the discounting rate, is increased the value of the bond decreases. Hence, (e) is true. |
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Answer : (b) Reason : Current
yield is computed as Current yield decreases with increase in the market price. Hence statement I is incorrect. Current yield is directly proportional to coupon payment, which is computed as coupon rate x Face value. Hence other things remaining same, the current yield increases with increase in the face value. Hence statement III is incorrect. Therefore option (b) is the answer. Hence, option (b) is the answer. |
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Answer : (e) Reason : The price-earnings ratio (also P/E multiple) is calculated by taking the market price of the stock and dividing it by earnings per share. The ratio gives the relationship between the market price of the stock and its earnings by revealing how earnings affect the market price of the firm’s stock. If a stock has a low P/E multiple, for example 3/1, it may be considered as an undervalued stock. If the ratio is 80/1, it may be viewed as overvalued. Hence, (I) is true. It is the most popular financial ratio in the stock market for secondary market investors. The P/E ratio method is useful as long as the firm is a viable business entity, and its real value is reflected in it’s profits. Hence (II) is true. It helps to determine the expected market value of a stock. Hence (III) is true. The P/E ratio also may be used to calculate the rate of return investors expect before they purchase a stock. Hence, option (e) is the answer. |
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Answer : (e) Reason : When the required rate of return is less than the coupon rate, the premium on the bond will decline as the maturity approaches. It reaches the par value at maturity. Therefore in the above question, X>Y> Z and Z will be equal to the par value i.e. Rs.1,000. Hence, statements (III) and (IV) are correct; statements (I) and (II) are wrong. Therefore option (e) is the answer. |
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Answer : (c) Reason : According to the bond value theorems, price of the security and the yield to maturity are inversely related. As YTM increases, other things remaining constant, the value of the bond decreases. Hence, in the given question the value of bond B will be greater than the value of bond A which is greater than the value of bond C. Hence, the answer is (c). |
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Answer : (d) 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. Hence, option (d) is the answer. |
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Answer : (a) Reason : As maturity approaches, premium and discount bonds will converge to par. Hence, option (a) is the answer. |
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Answer : (a) Reason : rBm = 0.4 + 0.75 rm
(rBm
– = 0.75 ´ 12.5 = 9.375 Abnormal = 8.45 – 9.375 = – 0.925%. Hence, option (a) is the answer. |
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Answer : (b) Reason : Given dividend payout ratio is 0.4 i.e., And the capitalization
rate is 12.5 i.e.,
= 0.4 ´ 0.125 = 0.05 i.e., 5%. Hence, option (b) is the answer. |
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Answer : (c) Reason : Current
yield = \
Market Price = Hence, the bond is trading at a premium of Rs.200 i.e., 20%. Hence, answer is (c). |
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Answer : (b) Reason : The YTM is the value of ‘i’ in the following: 95 = 4PVIFAi,10 + 110PVIFi,10 At i = 5%, RHS = 98.4158 At i = 6%, RHS = 90.8644 i = Hence, the answer is (b). |
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Answer : (b) Reason : (Amount in Rs.)
Year 8 dividend = Rs.3.824 (1.01) = Rs.3.862 Therefore Market price at the end of
year seven = Present value of Rs.42.91 at 10% discount rate Rs.42.91 × 0.513 = Rs.22.01 Intrinsic value if the holding period is infinite = Rs.22.01 + Rs.16.73 = Rs.38.74 Market value at the end of year 3= PV of MP = 40.87 PVIF(10%,3) = Rs.32.93 PV of dividends to be received at the end of year 1, 2 and 3 is = Rs.(2.84 + 2.68 + 2.53) Rs.8.05 Total value = 32.93 + 8.05 = Rs.40.98. Hence, 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: Hence, option (d) is the answer. |
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Answer : (c) Reason : Price of the Stock = Hence, option (c) is the answer. |
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Answer : (b) Reason : If ‘n’ is the required number of periods:
On solving, n=15 years. Hence, option (b) is the answer. |
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Answer : (d) Reason : Value after 5 years = Present Value ( at time 0) = Hence, option (d) is the answer. |
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Answer : (c) Reason : = Rs.120.19 + Rs.242.25 = Rs.362.44. Hence, option (c) is the answer. |
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Answer : (d) Reason : Current
ratio is defined as the ratio between the current assets and current
liabilities. While Quick Ratio is calculated by dividing current assets minus
inventories by current liabilities. Now, among the components of the current
assets, inventories are the least liquid instruments. So, a decreasing quick
ratio and same value of the current ratio implies the increasing volume of
inventory, thereby indicating the decreasing level of liquidity. Hence, option (d) is the answer. |
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Answer : (c) Reason : If the inventory turnover ratio has decreased from past, it means that either inventory is growing or cost of goods sold sales are dropping. So statement (I) is incorrect. If a firm has an inventory turnover that is slower than for its industry, then there may be obsolete goods on hand, or inventory stocks may be high. So statement (II) is incorrect. Low inventory turnover has impact on the liquidity of the business because most of the current assets are tied up in inventory. So statement (III) is correct. Hence option (c) is the answer. |
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Answer : (c) 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. Hence, option (c) is the answer. |
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Answer : (d) 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. Hence, option (d) is the answer. |
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Answer : (c) Reason : Return on net worth = Net profit margin ´
Asset turnover ´
or 0.24 = 0.125 ´
0.85 ´
or \ 1 – Hence, option
(c) is the answer. |
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Answer : (d) Reason : Return on Equity (ROE) = (by dividing both the numerator and denominator by the number of equity shares) = Hence, option (d) is the answer. |
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Answer : (c) Reason : Debt service coverage ratio = = Hence, option (c) is the answer. |
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Answer : (c) Reason : Efficiency in the utilization of assets is measured by asset turnover ratio. Asset turnover ratio = sales/total assets Asset turnover ratio (company X)=Rs.32, 00, 000/Rs.24, 74, 000 = 1.29 times Asset turnover ratio (company Y)=Rs.30, 00, 000/Rs.28, 51, 000 = 1.05 times So asset utilization of company X is greater than company Y. Hence statement (I) is correct. Payout ratio determines the amount that is paid-out by the company and (1- paid-out) gives the amount retained
Hence company Y retains larger proportion of its income & statement II is also true. Utilization of shareholders money is determined by return on net worth.
Hence, company Y utilizes shareholders funds more profitably than company X. Hence, statement III is not true and the answer is (c). |
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Answer : (d) Reason : Gross profit = Rs.45 lakhs and gross profit margin = 0.2 So, the
sales turnover = Total assets
= But, total assets = Total liabilities = Total Debt + Total equity and the total debt equity ratio = 1.50 So, total
debt = 75 ´
and total
equity = 75 ´
Now, the amount of current liabilities = So, the amount of term loan in its balance sheet = 45 – 14 = Rs.31 lakhs. |
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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. Hence, option (c) is the answer. |
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Answer: (c) Reason : The line would shift to the left. |
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Answer : (b) Reason : All other alternatives except payment of dividends will cause either an equal increase in current assets and current liabilities or an increase in one current asset and decrease in another current asset by the same amount or an equal decrease in current liabilities and current assets or a decrease in one current liability and increase in another current liability by the same amount. These will not cause any change in the working capital position. Hence, these are not considered while preparing funds flow statement on working capital basis. |
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Answer : (a) Reason : Change in WC = (current assets + increase in current assets) – (current liabilities + increase in current liabilities) Increased provision for contingencies (CL) = 30,000 + 20,000 = Rs.50,000 Loans and advances (given)(CA) = 20,00,000 Stipulation for provident fund(CL) = 10,00,000 + 10,00,000 = Rs.20,00,000 Short-term investments(CA) = 30,00,000 – 20,00,000 = Rs,10,00,000 New loans and advances taken (CL) = Rs.10,00,000 New net WC = 20,00,000 + 10,00,000 – 50,000 – 20,00,000 – 10,00,000 = – Rs.50,000. Hence, option (a) is the answer. |
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Answer : (c) Reason : Funds from operations = Retained earnings – interest earned + amortization + depreciation + dividends + P/E W. off = 20 – 6 + 5 + 4 + 10 +5 = Rs.38 lakh. Hence, option (c) is the answer. |
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Answer : (d) Reason : The
funds flow analysis of the given data reveals that Both have invested funds in fixed assets Pain Ltd has procured Rs.3,15,000( 2,50,000
+ 65,0001) from long term sources Fever Ltd has procured funds of Rs.65,0001
from long term sources The WC of Fever Ltd. has decreased during
the year by Rs.1,25,000 and this has been utilized to finance the acquisition
of fixed asset . This is not a good policy. Issue of share capital : Hence,
option (d) is the answer.
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Answer : (a)
Reason : Funds from operations (Rs.) : Increase in Retained Earnings 3,45,000 Add : Dividend Paid 75,000 4,20,000 Less : Gain on 3,94,000 Cost of Assets 58,000 (-) Depreciation 20,000 Book Value 38,000
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Answer : (b) Reason : The
transaction ‘Transferred to capital redemption reserve’ involving both non
current accounts does not result in a flow of funds. Hence, option (b) is the answer. |
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Answer : (d) Reason : Premium
received on debentures should be deducted from net profit other wise it will
over state the profit. Hence, option (d) is the answer. |
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Answer : (e) Reason : Funds
from operations can be obtained as net profit + amortization of intangible
assets(written off) + profit or loss on sale of non-current assets is
adjusted(profit is deducted &loss is added) Hence, option (e) is the answer. |
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Answer: (d) Reason : DTL = %DEPS/%DSales = 60%/20% = 3.0. DOL = DTL/DFL = 3.0/1.25 = 2.40. Old EBIT = Rs.100,000/[1 + (0.20)(2.40)] = Rs.100,000/1.48 = Rs.67,568. Alternate solution: Using DFL expression to calculate change in EBIT and previous EBIT: DFL = 1.25 = %DEPS/%DEBIT 1.25 = 0.60/[DEBIT/(Rs.100,000 - DEBIT)] 1.25 = [0.60(Rs.100,000) - 0.60(DEBIT)]/DEBIT 1.25DEBIT = Rs.60,000 - 0.60(DEBIT) 1.85DEBIT = Rs.60,000 DEBIT = Rs.32,432. Old EBIT = Rs.100,000 - Rs.32,432 = Rs.67,568. |
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Answer: (e) Reason : DTL = (S - VC)/(EBIT - I) = (Rs.3,000,000 - Rs.1,800,000)/(Rs.700,000 - Rs.500,000) = 6. |
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Answer : (d) Reason : EBIT – EPS chart indicates values of EPS for alternative financing plans at varying levels of EBIT. Hence, option (d) is the answer. |
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Reason : Operating leverage of a firm is a function of three factors. They are amount of fixed costs, contribution margin and the volume of sales. So all the statements are true. Hence option (e) is the answer. |
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Answer : (a) Reason : Degree of operating leverage (DOL) =
Sales = Rs.2070 crores (given) \ DOL = Degree of
financial leverage (DFL) = EBIT = Net profit + Taxes + Interest = 196 + 84 + 75 = Rs.355 crores Interest = Rs.75 crores (given) Dividend
on preference shares adjusted for tax = Tax rate,
t = Preference dividend (Dp) = 150 ´ 0.12 = Rs.18 crores. \ \ DFL = Degree of total leverage (DTL) = DOL ´ DFL = 2.268 ´ 1.396 = 3.166 Percentage increase in sales, if EPS increases by 25%= 25/3.1666 = 7.9 % |
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Answer : (c) Reason : Change in EBIT with respect to change in sales is known by Degree of operating leverage. Degree of operating
leverage = DFL = PAT = Rs.50,000 Given tax
rate = 20%, PBT = Given EBIT = Rs.1,00,000, Interest = 1,00,000 – 62,500 = Rs.37,500 DFL = DOL = Hence, if EBIT has to increase by 10%, sales have to be increased by 5%. Hence, the answer is (c). |
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Answer : (b) Reason : Additional funds required =(A*/S0)x(S1-S0) -(L*/S0)x(S1-S0)-M x S1 x Retention ratio 100= =(A*/3000)x(600)
-(800/3000)x(600)-250/3000*3600*0.6 100=A*0.2-160-180 Assets=Rs.2200 Lac. |
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Answer : (b) Reason : The maximum sales growth rate that can be
financed without resorting to external financing can be computed by equating 0.6- 0.15 - 0.45 =
0.036 12.5g = 1+g Hence, g = 1/11.5 = 8.7%. Alternative solution: EFR = 0 0.6 DS – 0.15 DS – 0.06 x 0.6 (S + DS) = 0 0.6 DS – 0.15 DS – 0.036S - 0.036DS = 0 0.414DS = 0.036S |
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= 10.38%.
= Rs.19584 (approximately).
=Rs.3659
= 0.875
. Current yield is directly proportional to the coupon
payment; hence it increases with increase in the coupon payment. Therefore
statement II is correct.
)
= 
= Rs.42.91
(
= Rs.21.
= 0.443
= 
=25 percent.
.
= 
=
= 2.268
= 1.396
= 0
