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· Answer all questions. · Marks are indicated against each question. |
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Which of the following statements is/are not true? I. Effective rate of interest is usually greater than the nominal interest rate. II. The effective rate of interest increases with an increase in the frequency of compounding. III. The effective and nominal interest rates are equal if the frequency of compounding is more than 2 in a year. (a) Only (II) above (b) Only (III) above (c) Both (I) and (II) above (d) Both (I) and (III) above (e) Both (II) and (III) above. (1 mark) |
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Which of the following statements is true regarding the Du Pont equation for Return on Equity (ROE), other things remaining constant? (a) An increase in the net profit margin will decrease the ROE (b) A decrease in debt to assets ratio will increase the ROE (c) A decrease in return on assets will increase the ROE (d) An increase in the average asset turnover will increase the ROE (e) An increase in financial expense will increase the ROE. (1 mark) |
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Which of the following statements is true? (a) An increase in fixed costs will lower the degree of operating leverage (DOL) (b) An increase in interest on long-term debt will decrease the degree of financial leverage (DFL) (c) An increase in the contribution per unit will decrease the level of output at the overall break-even point (d) An increase in fixed costs will decrease the degree of total leverage (DTL) (e) A decrease in preference dividend will increase the degree of financial leverage (DFL). (1 mark) |
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Which of the following statements is not an objective of the Companies Act? (a) To ensure minimum standard of business integrity and conduct in the promotion and management of companies (b) To elicit full and fair disclosure of all reasonable information relating to the affairs of the company (c) To protect legitimate interests of the shareholders (d) To control monopolies and to regulate monopolistic trade practices (e) To enforce proper performance of duties by the company’s management. (1 mark) |
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Which of the following functions of the Indian financial system influences the growth of investment and living standards in the society? (a) Risk function (b) Liquidity function (c) Payment function (d) Savings function (e) Policy function. (1 mark) |
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Which of the following can only lend but not borrow from the call money market? (a) RBI (b) DFHI (c) STCI (d) SBI (e) UTI. (1 mark) |
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Which of the following statement(s) is/are not true regarding Certificate of Deposit (CD)? I. CDs can only be subscribed by corporations and companies. II. CDs are issued at a discount to face value. III. CDs are freely transferable by endorsement and delivery. IV. CDs are associated with high amount of default risk. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (IV) above (e) Both (III) and (IV) above. (1 mark) |
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Which of the following is not a money market instrument? (a) Call money (b) Treasury bills (c) Commercial paper (d) Debentures (e) Certificate of deposits. (1 mark) |
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Which of the following orders is limited by a fixed price? (a) Limited Discretionary Order (b) Cancel Order (c) Limit Order (d) Stop Loss Order (e) Open Order. (1 mark) |
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Consider the following data regarding the bonds of Ruby Industries and Duby Industries:
Which of the following statements is/are not true? I. The market value of both the bonds is equal to their face value when their YTMs are equal to their coupon rates. II. The market value of the bond of Ruby Industries drops by lesser value compared with that of the bond of Duby Industries, when the YTM exceeds the coupon rate. III. Percentage change in the price of Duby industries is more than that of Ruby Industries when the YTM increases. (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 not a banking asset? (a) Cash in hand and balances with the RBI (b) Assets with the banking system (c) Investments in government and other approved securities (d) Demand deposits (e) Hire purchase credit. (1 mark) |
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If the risk free rate of return is expected to increase in future and the investors become more risk averse, the security market line (SML) will (a) Shift up and the slope will increase (b) Shift up and the slope will decrease (c) Shift down and the slope will increase (d) Shift down and the slope will decrease (e) Remain unchanged. (1 mark) |
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M/S Daivik Fertilizers Ltd., has Rs.5 crore bonds outstanding. Bank deposits earn 8 percent per annum. The bonds are to be redeemed after 12 years for which purpose the company wishes to create a sinking fund. How much amount should be deposited to the sinking fund each year so that the company would have Rs.5 crore in the sinking fund to retire the entire issue of bonds? (a) Rs.2,434,754.40 (b) Rs.2,534,754.40 (c) Rs.2,574,654.42 (d) Rs.2,634,768.40 (e) Rs.2,734,954.42. (1 mark) |
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Which of the following is true? (a) Product of PVIF, FVIF, FVIFA, and capital recovery factor is PVIF (b) Product of PVIF, FVIF, PVIFA, and sinking fund factor is PVIF (c) Product of nominal interest rate, FVIF and PVIFA is PVIF (d) Product of PVIF and FVIFA is sinking fund factor (e) (1 mark) |
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Which of the following statements is true? (a) The interest that is annualized using compound interest is termed as real interest rate (b) Sinking fund factor is the reciprocal of PVIFA (c) Capital recovery factor is the reciprocal of FVIFA (d) Capital recovery factor is used to determine the amount that must be deposited periodically to accumulate a specified sum at the end of a given period at a given rate of interest (e) The nominal rate of interest is equal to the effective rate of interest when the interest is compounded annually. (1 mark) |
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Oakfield Industries is expanding its operations
throughout (a) Rs.100,000 decrease (b) Rs.40,000 decrease (c) Rs.60,000 increase (d) Rs.100,000 increase (e) Rs.180,000 increase. (1 mark) |
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A firm has sales of Rs.20,00,000, variable cost of Rs.14,00,000 and fixed cost of Rs.4,00,000 and debt of Rs.10,00,000 at 10% rate of interest. How much rise in sales would be needed if the firm wants to double its Earnings before interest and tax? (a) Rs.5,66,500 (b) Rs.6,66,600 (c) Rs.6,99,600 (d) Rs.7,33,600 (e) Rs.7,66,600. (1 mark) |
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Which of the following statements is true? (a) Realized return is ex-ante return (b) Expected return is ex-post return (c) Rate of return comprises of capital appreciation/depreciation and dividends (d) Returns are perfectly negatively correlated if they move together in the same direction and in the same manner (e) Returns are perfectly positively correlated if they move in opposite directions in exactly the same manner. (1 mark) |
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Which of the following is not a diversifiable risk factor? (a) Company strike (b) Industrial recession (c) Bankruptcy of a major supplier (d) Death of a key company officer (e) Unexpected entry of a new competitor into the market. (1 mark) |
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Genco Ltd. recently reported that its earnings per share were Rs.3.00. The company has 400,000 shares of stock outstanding. The company’s interest expense was Rs.5,00,000. The corporate tax rate is 40 percent. What was the company’s operating income (EBIT)? (a) Rs. 9,80,000 (b) Rs.12,20,000 (c) Rs.20,00,000 (d) Rs.25,00,000 (e) Rs.35,00,000. (1 mark) |
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Which of the following statements is not true? (a) When the required rate of return is equal to the coupon rate, the value of the bond is equal to its par value (b) When the required rate of return is greater than the coupon rate, the value of the bond is greater than its par value (c) A bond’s price moves inversely proportional to its yield to maturity (d) When the required rate of return is less than the coupon rate, the premium on the bond declines as maturity approaches (e) A change in interest rate affects the bonds with a higher YTM more than it does bonds with a lower YTM. (1 mark) |
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Consider the following information: Expected return on market 18% Required rate of return as per CAPM 15.2% Beta of Brown & Company stock 0.9 Expected rate of return on stock of Brown & Company 18% Which of the following statements is/are not true regarding stock of Brown & Company? I. It is correctly priced, as its expected return is equal to that of market return. II. It is a stock of below average risk as its beta is less than 1. III. It is an under valued security as its expected rate of return is more than its required rate of return. IV. It will lie below the SML as its beta is less than 1. (a) Only (I) above (b) Only (II) above (c) Both (II) and (III) above (d) Both (I) and (IV) above (e) (II), (III) and (IV) above. (1 mark) |
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If the expected price-earning ratio E(P/E) exceeds the actual P/E, which of the following is true? (a) The stock is correctly priced and neither buying nor selling is desirable (b) The stock is under priced and it is the time to sell the stock (c) The stock is under priced and it is the time to buy the stock (d) The stock is overpriced and it is the time to buy the stock (e) The stock is overpriced and it is the time to sell the stock. (1 mark) |
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Current liabilities are Rs.20,000 and current assets are Rs.30,000. If debtors realized amount to Rs.6,000, raw materials purchased on credit amount to Rs.3,000 and Rs.6,000 worth of preference shares are converted into equity, the impact on the net working capital (NWC) would be (a) No change in NWC (b) Increase of Rs.3,000 in NWC (c) Decrease of Rs.3,000 in NWC (d) Increase of Rs.9,000 in NWC (e) Decrease of
Rs.9,000 in NWC. (1 mark) |
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Which of the following analyses divides a particular ratio into components and studies the effect of each and every component of the ratio? (a) Cross-sectional analysis (b) Time-series analysis (c) Common-size analysis (d) Dupont analysis (e) Comparative analysis. (1 mark) |
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Which of the following profitability ratios gives a measure of operating profitability of a firm? (a) Gross profit margin (b) Net profit margin (c) Asset turnover ratio (d) Return on equity (e) Earning power. (1 mark) |
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Which of the following ratios is not an ownership ratio? (a) Earning per share (b) P/E ratio (c) Debt-equity ratio (d) Quick ratio (e) Dividend pay-out ratio. (1 mark) |
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Considering each action independently and holding other things constant, which of the following actions would reduce a firm's need for additional capital? (a) An increase in the dividend payout ratio (b) A decrease in the profit margin (c) A decrease in the days sales outstanding (d) An increase in expected sales growth (e) A decrease in the accrual accounts (accrued wages and taxes). (1 mark) |
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Which of the following statements regarding the equity capitalization rate is/are not true? I. Capitalization rate is the reciprocal of the P/E ratio. II. If the required return is more than the expected return, the capitalization rate would drop. III. Capitalization rate signifies the amount of return that the investors expect on the common stock. IV. Capitalization rate is same as the ROE. (a) Only (I) above (b) Only (III) above (c) Both (I) and (II) above (d) Both (II) and (IV) above (e) Both (III) and (IV) above. (1 mark) |
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Which of the following is not a benefit of funds flow analysis to an organization? (a) Detection of imbalances and appropriate action (b) Divisional performance appraisal (c) Evaluation of firm’s financing (d) Planning for future financing (e) Evaluation of the quality of the top management of the organization. (1 mark) |
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Which of the following statements is/are not true? I. Beta of a security decreases with an increase in the variance of market returns. II. Beta greater than 1 indicates an asset of average risk. III. Beta of a security increases with an increase in the value of the correlation coefficient between the security’s return and market return. IV. Beta of a security increases with a decrease in standard deviation of the security’s return. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (III) above (e) Both (II) and (IV) above. (1 mark) |
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Which of the following is not a source of funds in the funds flow statement constructed on the Total Resources Basis? (a) Net profit after tax (b) Issue of equity capita l (c) Increase in liabilities (d) Decrease in assets (e) Decrease in liabilities. (1 mark) |
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Which of the following results in an increase in working capital? (a) Increase in Accounts Receivable (b) Decrease in Cash in hand (c) Increase in Bills payables (d) Decrease in Inventory (e) Decrease in debtors. (1 mark) |
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Which of the following statements is true? (a) Funds from operations (FFO) is same as Net income after taxes (b) Depreciation and other non-cash expenses should be added to profit before taxes to get FFO (c) Depreciation and other non-cash expenses should be added to profit after taxes to get FFO (d) FFO is a use of funds (e) Gross change in fixed assets is always a source of funds. (1 mark) |
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Which of the following is not true regarding Degree of Financial Leverage? (a) Each level of EBIT has a distinct DFL (b) DFL is a measure of financial leverage, which aids in understanding the impact of a change in EBIT on the EPS of the company (c) DFL can be defined precisely at the financial break-even point (d) DFL is negative if the EBIT level is below the financial break-even point (e) DFL is positive for all values of EBIT that are above the financial break-even point. (1 mark) |
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If the DOL of a firm is 3, which of the following is true? (a) A 1% increase in the level of output will increase the operating income by 30% (b) A 1% increase in the level of output will increase the operating income by 3% (c) A 1% increase in the level of output will decrease the operating income by 30% (d) A 1% increase in the level of output will decrease the operating income by 3% (e) A 3% increase in the level of output will increase the operating income by 1%. (1 mark) |
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Which of the following methods is/are objective method(s) for sales forecasting? I. Jury of executive opinion. II. Sales force estimates. III. Regression analysis. IV. Trend analysis. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (II) and (III) above (e) Both (III) and (IV) above. (1 mark) |
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Raju & Sons recently reported sales of Rs.100 lakh, and net income equal to Rs.5 lakh. The company has Rs.70 lakh in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales increase 20 percent, spontaneous liabilities will increase by Rs.2 lakh. If the company’s sales increase, its profit margin will remain at its current level. The company’s dividend payout ratio is 40 percent. How much additional capital must the company raise in order to support the 20 percent increase in sales? (a) Rs.2 lakh (b) Rs. 6 lakh (c) Rs. 8.4 lakh (d) Rs. 9.6 lakh (e) Rs. 14 lakh. (1 mark) |
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Which of the following are prepared for specific divisions such as sales, production, etc.? (a) Proforma income statement (b) Proforma balance sheet (c) Proforma funds flow statement (d) Cash budgets (e) Operating budgets. (1 mark) |
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Mr. Raghunath plans to save Rs.2,500 at the end of each year for 12 years starting from this year. Such a saving would provide him with a retirement annuity, which begins 18 years from now (i.e. the first payment is to be received at the end of year 18) and continue to provide an annuity for 20 years. Mr. Raghunath plans this through a savings bank that pays interest @ 7% p.a. Which of the following indicates the amount of retirement annuity that Mr. Raghunath would receive? (a) Rs.5,422 (b) Rs.5,622 (c) Rs.5,822 (d) Rs.5,922 (e) Rs.5,942. (2 marks) |
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A company is offered a contract according to which it has to make an immediate cash outlay of Rs.25,000. The company would receive Rs.47,900 after 5 years. Which of the following indicates the rate of return earned by the company? (a) 11.39% (b) 12.88% (c) 13.89% (d) 14.88% (e) 15.88%. (1 mark) |
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Consider the following data extracted from the financial statements of M/S Indhra Pvt. Ltd.,
Which of the following represents the P/E ratio of the company? (a) 25.5 (b) 29.00 (c) 39.12 (d) 42.56 (e) 48.56. (2 marks) |
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You are willing to pay Rs.15,625 to purchase a perpetuity which will pay you Rs.1,250 each year, forever. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity instead of a perpetuity? (a) Rs.10,342 (b) Rs.11,931 (c) Rs.12,273 (d) Rs.13,922 (e) Rs.17,157. (1 mark) |
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Mr. Joseph has taken a loan of Rs.10,00,000 to be repaid in 120 equal monthly installments (interest + principle). The rate of interest is 14% p.a. What is the amount of each payment? (a) Rs.14,764 (b) Rs.15,531 (c) Rs.15,721 (d) Rs.15,985 (e) Rs.16,237. (1 mark) |
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You hold a diversified portfolio consisting of a
Rs.10,000 investment in each of 20 different common stocks (i.e., your total
investment is Rs.200,000). The
portfolio beta is equal to 1.2. You
have decided to sell one of your stocks which has a beta equal to 0.7 for
Rs.10,000. You plan to use the
proceeds to purchase another stock which has a beta equal to 1.4. What will be the beta of the new portfolio? (a) 1.165 (b) 1.235 (c) 1.250 (d) 1.284 (e) 1.333. (2 marks) |
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Khyathi Laboratories Ltd. is expected to declare a dividend of Rs.4.00 next year and reach a price of Rs.56.00 after one year. What is the price at which the share would be bought by an investor now if the required rate of return is 12%? (a) Rs.43.33 (b) Rs.50.68 (c) Rs.51.27 (d) Rs.53.57 (e) Rs.55.68. (1 mark) |
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M/S Rajan & Co. has issued fully convertible debentures at a face value of Rs.1000 with a coupon rate of 14% p.a., which can be converted into 5 equity shares of Rs.75 each at the end of 5 years. If you want to purchase these debentures in the secondary market, after an year of issue, what price you need to pay for these debentures, if your required rate of return is 20% and the price of the share is expected to be Rs.90 at the end of five years? (a) Rs.509.44 (b) Rs.529.44 (c) Rs.549.44 (d) Rs.579.44 (e) Rs.599.54. (1 mark) |
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The bond of Karuna Industries Ltd., with a face value of Rs.1000 is currently traded at Rs.970. The coupon rate on the bond is 12.5%. It has a maturity of 5 years and would be redeemed at a premium of 10%. Which of the following represents the YTM of the bond? (a) 11.33% (b) 12.33% (c) 14.13% (d) 15.20% (e) 15.65%. (1 mark) |
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Mr. Mayur has invested his savings in a company. The dividends of the company are expected to grow @ 18% for 15 years and thereafter @ 5% forever. It is given that the current dividend per share is Rs.2.50 and the required rate of return by Mr. Mayur is 11%. What is the value of the equity share of the company? (a) Rs.170.89 (b) Rs.172.81 (c) Rs.180.79 (d) Rs.185.89 (e) Rs.190.89. (2 marks) |
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Shakti Gas Works has 10% bonds with face value of Rs.1,000 maturing in 10 years. The coupon on the bond is paid on quarterly basis. The bonds may be called in five years. The bonds have a yield to maturity of 8% and a yield to call of 7.5%. What is the call price of the bond? (a) Rs.379.27 (b) Rs.1,015.00 (c) Rs.1,048.31 (d) Rs.1,096.77 (e) Rs.1,136.78. (2 marks) |
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The following information is available in respect of the return from security X under different economic conditions:
What is the risk associated with this security? (a) 4.80% (b) 4.92% (c) 5.08% (d) 5.18% (e) 5.22%. (2 marks) |
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The following data is available for the security of Pradyumna solutions Ltd. Expected return = 18%
Risk free rate of return = 8% Market return = 20% Is the security correctly priced? Where does it lie on the SML? (a) Undervalued, below SML (b) Overvalued, below SML (c) Overvalued, above SML (d) Undervalued, above SML (e) Correctly valued, lies on the SML. (2 marks) |
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Garuda Travels Ltd., has 10,00,000 shares of Rs.10 each with market price of Rs.50 per share. It has also issued bonds for Rs.4 crore @ 12% per annum. It is considering an expansion plan and needs to mobilize Rs.5 crore. The company is considering to 1. Issue equity @ Rs.40 per share. 2. Issue straight bonds @ 10% per annum. 3. Finance 50% with equity @ Rs.40 per share and 50% with bonds @ 10% per annum. The company is in the tax bracket of 35%. If the company is hopeful of generating an EBIT of Rs.2.5 crore after expansion, which of the following statements is true? (a) The EPS is maximum when only equity is issued (b) The equity holders earn more when only bonds are issued (c) The equity holders can maximize their earnings when both equity and debt are issued in equal proportion (d) The EPS is independent of leverage (e) The bondholders do not contribute to owners’ earnings. (2 marks) |
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As on 31st March, 2006 the net worth of Govinda Enterprises was Rs.1,00,00,000. The ratios as on that date were as under: Current debt to total debt 0.4 Total debt to equity 0.6 Fixed assets to equity 0.6 Total Assets turnover (based on sales) 2 times Inventory turnover (based on sales) 8 times Which of the following represents the total capital and the quantity of sales for the company? (a) Rs.1,40,00,000; Rs.3,00,00,000 (b) Rs.1,60,00,000; Rs.3,10,00,000 (c) Rs.1,60,00,000; Rs.3,20,00,000 (d) Rs.1,80,00,000; Rs.3,20,00,000 (e) Rs.1,80,00,000. Rs.3,30,00,000. (2 marks) |
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Consider the following figures extracted from the Balance sheet of Raj Ltd.: (Rs.)
(1)Depreciation
of Rs.10,000 and Rs.20,000 have been charged on Plant and Land &
Buildings respectively in 2005. (2) An interim dividend of Rs.20,000 has been
paid during the year. (3) Income tax of Rs.35,000 has been paid during the
year 2005. What are the funds generated from operations in the year 2005 if
the dividends for the year 2004 were paid accordingly? (a) Rs. 3,27,000 (b) Rs. 2,18,000 (c) Rs. 4,05,000 (d) Rs. 1,78,000 (e) Rs. 5,38,000. (1 mark) |
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The Net Sales of Purush Laboratories are Rs.30 crores. The EBIT of the company as a percentage of sales is 14%. The capital employed by the company comprises of Rs.10 crore of equity, Rs.2 crores of 12% preference shares, and Rs.6 crores of 12.5% debt capital. The company is in the tax bracket of 50%. What is the Return on Equity for the company? (a) 14.00% (b) 14.25% (c) 14.50% (d) 14.75% (e) 14.85%. (2 marks) |
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The following data is extracted from the financial statements of Harsha Ltd. for the year ended June 30, 2006:
What was the net increase in
working capital for the year ended June 30, 2006? (a) Rs.30,88,700 (b) Rs.66,16,100 (c) Rs.97,04,800 (d) Rs.29,87,000 (e) Rs. 83,26,600. (2 marks) |
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Sonex Ltd. common stock is currently selling for Rs.20 per share. Security analysts at Karvy have assigned the following probability distribution to the price of (and rate of return on) Sonex Ltd. stock one year from now:
Assuming that Sonex is not expected to pay any dividends during the coming year, determine the coefficient of variation for the rate of return on the stock of Sonex Ltd. (a) 0 (b) 2.68 (c) 2.88 (d) 1.75 (e) 0.275. (2 marks) |
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The following information is available for Amrut Foods Ltd.,
What is the percentage change in EPS, if sales are expected to increase by 5%? (a) 25.45% (b) 26.45% (c) 27.45% (d) 28.45% (e) 29.45%. (2 marks) |
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Consider the following data for Xavier Engineers Ltd., Quantity produced = 10,000 Variable cost per unit = Rs.400 Selling piece per unit = Rs.1000 Fixed costs = Rs.18,00,000 What is the operating breakeven point for the company? (a) 1,000 units (b) 2,000 units (c) 3,000 units (d) 4,000 units (e) 5,000 units. (1 mark) |
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The following data pertains to M/S Softech Technologies:
How much external funds are required by the firm to maintain expected growth rate in sales and what is the required growth rate in sales so that external finance is not required? (a) Rs.1,64,000; 28.0% (b) Rs.1,74,000; 29.5% (c) Rs.1,74,215; 29.5% (d) Rs.1,74,215; 30.5% (e) Rs.1,74,315; 30.0%. (2 marks) |
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Mr. Anand plans to purchase a 91-day Treasury Bill of face value Rs.100, maturing after 65 days. If on maturity he wants an-yield of 14%, what is the purchase price of the T-Bill? (a) Rs.95.00 (b) Rs.96.50 (c) Rs.97.27 (d) Rs.97.57 (e) Rs.97.90. (1 mark) |
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A stock is not
expected to pay a dividend over the next four years. Five years from now, the
company anticipates that it will establish a dividend of Rs.1.00 per share
(i.e., D5 = Rs.1.00). Once
the dividend is established, the market expects that the dividend will grow
at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the beta
of company’s stock is 1.2, and the market risk premium is 5 percent. The required rate of return on the
company’s stock is expected to remain constant. What is the current stock price? (a) Rs.7.36 (b) Rs.8.62 (c) Rs.9.89 (d) Rs.10.98 (e) Rs.11.53. (1 mark) |
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Consider the following data for M/S. Alpine Hotels and Resorts Ltd., Average collection period = 60 days Average account receivables = Rs.1,45,000 What are the annual sales for the company? (Assume 360 days in a year). (a) Rs.8,00,000 (b) Rs.8,45,000 (c) Rs.8,50,000 (d) Rs.8,65,000 (e) Rs.8,70,000. (1 mark) |
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The Balance Sheet of Jasmine Motors Ltd., as on March 31, 2006 is as follows:
The company’s Total Assets turnover ratio is 3. Its fixed operating costs are Rs.2,00,000 and its variable operating ratio is 40%. The income tax rate is 50%. What is the EPS of the firm and the combined leverage for the company if the face value of each share is Rs.10? (a) Rs.18.00; 1.03 (b) Rs.18.00; 1.48 (c) Rs.19.67; 1.23 (d) Rs.20.93; 1.03 (e) Rs.20.93; 1.43. (2 marks) |
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Following information is regarding M/S Excel Computers Ltd.,
What is the amount of sales for the company? (a) Rs.4,50,000 (b) Rs.5,60,000 (c) Rs.6,00,000 (d) Rs.6,60,000 (e) Rs.7,20,000. (2 marks) |
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Given below is the information regarding the returns from the shares of Celine Technologies Ltd., (CTL) and the market portfolio, under various conditions of the economy:
What is the beta associated with the company’s stock? (a) 0.876 (b) 0.987 (c) 1.005 (d) 1.072 (e) 1.120. (2 marks) |
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Mr. Sukesh has borrowed Rs.50,000 from the ICICI Bank to be repaid in five equal installments at the end of each year. The interest rate is 15% per annum. What is the amount of loan outstanding at the end of year 4? (a) Rs.11,277 (b) Rs.11,977 (c) Rs.12,355 (d) Rs.12,967 (e) Rs.13,255. (2 marks) |
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Emerald Industries Ltd., has developed a financing plan for the next year based on the following estimates: Sales (Rs. in lakhs) 1200 Fixed Assets (Rs. in lakhs) 600 The following assumptions have been made for the purpose of planning: Gross Profit Margin 30% Return on Sales (net of taxes) 10% Dividend-payout ratio 50% Ratios based on year-end figures: Cash and Debtors to Sales 25% Inventory to Cost of Goods Sold 25% Required current ratio 2:1 Required Long-term Debt-Equity ratio 1:2 Calculate the amount of equity capital, the firm should have, based on the above ratios and assumptions? (a) Rs.420 lakhs (b) Rs.480 lakhs (c) Rs.510 lakhs (d) Rs.560 lakhs (e) Rs.600 lakhs. (2 marks) |
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Given the following information, calculate the expected capital gains yield for Deccan Bearings Ltd.: beta = 0.6; rM = 15%; rRF = 8%; D1 = Rs.2.00; P0 = Rs.25.00. Assume the stock is in equilibrium and exhibits constant growth. (a) 0% (b) 2.5% (c) 3.8% (d) 4.2% (e) 8.0%. (2 marks) |
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M/S Ruby Petrochemicals Ltd., paid a dividend of Rs.1.50 last year. The dividends are expected to grow at the rate of 8%. The risk-free rate is 9% and the market rate of return is 12%. Presently the firm is having a beta factor of 1.5. However due to a new regulation being introduced by the government, the beta factor is likely to increase to 1.75. What is the change in the price of the company’s share in percentage terms due to the change in the beta factor? (a) –10.99% (b) –11.99% (c) –12.09% (d) 11.99% (e) 12.19%. (2 marks) |
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Given below is the data relating to M/S Garnet Shoe Company Ltd.:
What is the value of the share of M/S Garnet Shoe Company Ltd.? (a) Rs.92.34 (b) Rs.97.56 (c) Rs.101.56 (d) Rs.111.65 (e) Rs.123.56. (2 marks) |
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Mr.Samant is planning to purchase a house which costs Rs.12,00,000. Komal Housing Finance Limited (KHFL) has offered for 100% financing for a period of twelve and half years. Mr.Samant has agreed to repay the loan along with interest in equated monthly installments of Rs.12,750 each, payable at the end of every month. What is the effective rate of interest to Mr.Samant? (a) 14.5% p.a. (b) 15.7% p.a. (c) 16.3% p.a. (d) 17.6% p.a. (e) 18.2% p.a. (2 marks) |
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Hyderabad Machining Tools Ltd., (HMTL) manufactures ancillary units for heavy industries. The variable cost per unit is Rs.60 and selling price per unit is Rs.100. The long term capital structure of HMTL is as follows: Networth Rs.300 lakh Term loan @ 13% interest Rs.200 lakh Preference shares @ 12% Rs.150 lakh. The operating break-even point of HMTL is 30 lakh units. The tax rate applicable to the company is 40%. What are the operating profits at the financial break-even point; how many units are to be sold to attain the overall break-even point? (a) Rs.48 lakhs; 29.4 lakh units (b) Rs.51 lakhs; 31.4 lakh units (c) Rs.56 lakhs; 31.4 lakh units (d) Rs.56 lakhs; 34.6 lakh units (e) Rs.60 lakhs; 36.0 lakh units. (2 marks) |
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Following details relating to the stock of Kanta & Kanta Textiles Ltd., and the market index are furnished: Variance of the stock = 0.7225(%)2 Variance of the market index = 1.21(%)2 Correlation co-efficient = 0.9 The risk free rate of return is 7%, and the market risk premium is 6%. If the current purchase price of the security is Rs.180, the last paid dividend is Rs.6 and the growth rate of dividends is 8%, then what should be the increase in the price of the security such that it is at equilibrium? (a) Rs.12.12 (b) Rs.15.02 (c) Rs.21.02 (d) Rs.24.42 (e) Rs.44.02. (2 marks) |
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Suggested Answers
Financial Management - I (141) : July 2006
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Answer : (b) Reason : The interest rate is usually specified on an annual basis in a loan agreement or security and it is known as the nominal rate of interest. If compounding is done more than once a year, the actual rate of interest paid (or received) is called effective interest rate. Effective rate of interest is computed as follows:
r = effective rate of interest k = nominal rate of interest m = frequency of compounding per year. Thus the effective rate of interest will be always higher than the nominal interest rate. Statement I is true. The effective rate of interest increases with increase in the frequency of compounding, For example, the effective rate of interest under quarterly compounding will be more than the effective rate of interest under semi-annual compounding. Statement II is true. The effective and nominal interest rates are equal if the frequency of compounding is equal to 1. Statement III is not true. Hence option (b) is the answer. |
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Answer : (d) Reason : According to Du-Pont equation: Return On Equity (ROE) = Net Profit Margin x Average Asset Turnover x Equity Multiplier Where, Equity Multiplier = When net profit margin and /or average asset turnover ratio increases ROE will increase. ROE will increase when the equity multiplier increases or in other words when the debt to assets ratio increases. Hence, option (b) is not true. ROE can also be written as Return On Equity (ROE)= Return on assets x Equity Multiplier. Hence, Decrease in Return On Assets decreases the ROE. So option (c) is not true. An increase in financial expense decreases the Net profit margin, which in turn decreases the ROE. Hence (e) is not true. Hence (d) is the answer. |
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Answer : (c) Reason :
Therefore statement (b) and (e) are not true. Level of output at the overall break-even point =
Hence (c) is the answer. |
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Answer : (d) Reason : The major objectives of the Companies Act, 1956 are: · To ensure minimum standard of business integrity and conduct in the promotion and management of companies. · To elicit full and fair disclosure of all reasonable information relating to the affairs of the company. · To promote effective preparation and control by shareholders and protect their legitimate interests. · To enforce proper performance of duties by the company’s management. · To investigate into and intervene in the affairs of the companies which are managed in a manner prejudicial to the interests of the shareholders or the public at large. Therefore statement (d) is not an objective of the Companies Act, 1956. The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) controls monopolies and regulates monopolistic trade practices. Lately, MRTP Act is substituted by the Competition Act. Thus (d) is the answer. |
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Answer : (d) Reason : a. Savings function leads to flow of savings from the savers to the consumers of an economy, thereby enhancing the investment opportunities and increasing the society’s living standards. When the savings flows decline, the growth of investment and living standards begins to fall. Therefore savings function influences the growth of investment and living standards in the society. b. Liquidity function facilitates conversion of investment in stocks, bonds, etc., into money. c. Payment function facilitates payment of dues in an easy and convenient way. d. Risk function provides the required tools for the protection against life, health and income risks. e. Policy function enables the regulating authorities of a country to take suitable policy measures to influence the policy variables in the macro economy. Therefore (d) is the answer. |
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Answer : (e) Reason : Participants in the call money market are split into two categories. The first comprises of those who can borrow and lend in this market, such as RBI, intermediaries like DFHI and STCI, and commercial banks like SBI. The second comprises of only lenders like financial institutions and mutual funds like UTI. Alternatives (a), (b), (c) and (d) can both borrow and lend, whereas alternative (e) can only lend but not borrow in the call money market. Therefore (e) is the answer. |
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Answer : (d) Reason : CDs are available for subscription for individuals, corporations, companies, trusts, Funds, Association, etc., Statement (I) is false. CDs are issued at a discount to face value. Statement (II) is true. CDs are freely transferable by endorsement and delivery. Statement (III) is true. CDs are considered as virtually risk less instruments as the default risk is almost nil, and investors are sure of receiving the invested amount with interest. Statement (IV) is false. Therefore (d) is the answer. |
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Answer : (d) Reason : Money market channels savings into short-term productive investments like working capital. Call money market, treasury bills market, and markets for commercial paper and certificate of deposit are some of the examples of a money market. Capital market provides the resources needed by medium and large-scale industries for investment purposes. Companies can raise capital through issue of securities like shares and debentures in the primary market. Therefore (d) is the answer. |
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Answer : (c) Reason : The orders can be classified into: - Limit Orders: Order limited by a fixed price. It may or may not include brokerage. - Best Rate Order: To execute the buy/sell order at the best possible price. - Immediate or Cancel Order: Order shall get cancelled if not executed immediately at the quoted price. - Limited Discretionary Order: To provide discretion to the broker to execute order at a price, which is almost, approximate to the price fixed by client. - Stop Loss Order: A particular limit is given for sustenance of loss. If the price falls below that, the broker is authorized to sell immediately to stop further occurrence of losses. - Open Order: When client does not fix any time or price limit for execution of order. Therefore (c) is the answer. |
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Answer : (c) Reason : The market value of bonds is equal to their face value when the YTM is equal to the coupon rate. Statement (I) is true. For a given difference between YTM and coupon rate of the bonds, the longer the term to maturity, the greater will be the change in price with a change in YTM. Therefore when YTM exceeds the coupon rate, the bond of Ruby Industries with smaller term to maturity drops by lesser value than the bond of Duby Industries with longer maturity. Statement (II) is true. For any given change in YTM, the percentage change in case of bonds of high coupon rate will be smaller than in case of bonds of low coupon rate, other things remaining the same. Percentage change in the price of Duby industries with a higher coupon rate is less than that of Ruby Industries with smaller coupon rate, when the YTM increases. Statement (III) is not true. Hence (c) is the answer. |
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Answer : (d) Reason : Banking Assets: Investments and bank credit are major banking assets. Banks have four categories of assets - Cash in hand and balances with the RBI, assets with the banking system, and investments in government and other approved securities. Banks provide mainly short-term credit for financing working capital needs. They provide various types of advances like loans, cash credit, overdrafts, demand loans, purchase and discounting of commercial bills, and installment or hire purchase credit. Liabilities of banks: Demand deposits, term deposits, and time deposits from other banks, borrowings from other banks, and borrowings from the RBI constitute major liabilities of banks. Therefore (d) is the answer. |
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Answer : (a) Reason : In the security market line (SML) the y-intercept is the risk free rate of return(rf) and the slope is the difference between the rate of return on the market index and the risk free rate of return (rm - rf). If the risk free rate of return increases then the y-intercept increases; so the SML shifts up. If the investors become more risk averse then (rm - rf) increases i.e., the slope of SML increases. Hence alternative (a) is the answer. |
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Answer : (d) Reason : Amount to be deposited in the sinking fund each year: Therefore Rs.2,634,768.40 has to deposited in the sinking fund each year so that the company can retire the bonds at the end of five years. |
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Answer : (b) Reason : a. Therefore (a) is not true. b. Therefore (b) is true. c. Therefore (c) is not true. d. Therefore (d) is not true. e. Therefore (e) is not true. Thus (b) is the answer. |
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Answer : (e) Reason : a. The interest rate that is annualized using compound interest is termed as effective rate of interest. Statement (a) is not true. b. Sinking fund is reciprocal of FVIFA. Statement (b) is not true. c. Capital recovery factor is reciprocal of PVIFA. Statement (c) is not true. d. Sinking fund is used to determine the amount that must be deposited periodically to accumulate a specified sum at the end of a given period at a given rate of interest. Statement (d) is not true. e. When the compounding is done more number of times in a year, the effective rate of interest differs from the nominal interest rate. But when compounded annually, both are same. Statement (e) is true. Thus (e) is the answer. |
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Answer : (c) Reason : Sales Rs.1,000,000 COGS (700,000) Depreciation (50,000) EBIT
Rs. 250,000 Interest (150,000) EBT
Rs. 100,000 Taxes (40,000) Net Income Rs. 60,000 |
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Answer : (b) Reason : Sales Rs.20,00,000 - Variable cost 14,00,000 Contribution 6,00,000 - Fixed cost 4,00,000 EBIT 2,00,000 - Interest (10% on 10,00,000) 1,00,000 PBT 1,00,000 Degree of Operating Leverage
(DOL) = In other words DOL = 3 = Percentage change in sales = 100/3 = 33.33% Therefore the sales have to increase by 33.33% over 20,00,000 = 6,66,600 , so that the EBIT is doubled. Hence (b) is the answer. |
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Answer : (c) Reason : a. Realized return is ex-post, or return that was, or could have been earned. Statement (a) is not true. b. Expected return is the return from an asset that investors anticipate or expect to earn over some future period. Statement (b) is not true. c. The rate of return is the total return the investor receives during the holding period, and is stated as a percentage of the purchase price of the investment at the beginning of the holding period. i.e., Date of return = d. Returns are said to be perfectly negatively correlated if they move in opposite directions in exactly the same manner. . Statement (d) is not true. e. Returns are perfectly positively correlated if they move together in the same direction and in the same manner. Statement (e) is not true. Therefore (c) is the answer. |
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Answer : (b) Reason : Non-diversifiable risk is that part of risk that is related to the general economy or the stock market as a whole and hence cannot be eliminated by diversification. Some of the non-diversifiable risk factors are: - Major changes in tax rates. - War and other calamities - An increase or decrease in inflation rates - A change in economic policy - Industrial recession - An increase in international oil prices, etc., Diversifiable risk is that part of total risk that is specific to the company or industry and hence can be eliminated by diversification. Some of the diversifiable risk factors are: - Company strike - Bankruptcy of a major supplier - Death of a key company officer - Unexpected entry of a new competitor into the market. Therefore (b) is the answer. |
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Answer : (d) Reason : EPS = NI/Shares NI = EPS ´ Shares = Rs.3.00 ´ 4,00,000 = Rs.12,00,000. EBT = NI/(1 - T) = Rs.12,00,000/(1 - 0.4) =
Rs.20,00,000. EBIT = EBT + Interest expense =
Rs.20,00,000 + Rs.5,00,000 = Rs.25,00,000. Hence (d) is the answer. |
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Answer : (b) Reason : a.&b. When the required rate of return is equal to the coupon rate, the value of the bond is equal to its par value. When the required rate of return is greater than the coupon rate, the value of the bond is less than its par value. When the required rate of return is less than the coupon rate, the value of the bond is greater than its par value. Statement (a) is true and (b) is not true. c. A bond’s price moves inversely proportional to its yield to maturity. Statement (c) is true. d. When the required rate of return is less than the coupon rate, the premium on the bond declines as maturity approaches. Statement (d) is true. e. A change in the YTM affects the bonds with a higher YTM more than it does bonds with a lower YTM. Statement (e) is true. Therefore (b) is the answer. |
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Answer : (d) Reason : According to SML, a security is said to be correctly priced, if its required rate of return according to SML is equal to its expected return. As the required rate of return is not equal to the expected return the stock cannot be said to be correctly priced. Hence, statement I is not true. Beta is a measure of the non-diversifiable risk of an asset relative to that of the market portfolio. Beta of the market portfolio is 1 and the securities with beta of less than 1 are classified as securities with below average risk and beta of more than 1 as securities with above average risk. Hence, statement II is true. If the expected rate of return is more than the required rate of return the stock is said to be undervalued and if the expected rate of return is less than the required rate of return it is said to be overvalued. In the given case, as the expected rate of return is more than the required rate of return, the stock is an undervalued security. Hence, statement III is true. When security’s expected return and beta are plotted on a graph with reference to the SML of the security, the security will lie above the SML if it is undervalued and will lie below the SML if it is overvalued. In the given case, as the security is undervalued it will lie above the SML and the beta of the security is immaterial. Hence, statement IV is not true. |
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Answer : (c) Reason : When the stock’s actual P/E is compared with its E(P/E), the following investment decisions rules apply: - If the E(P/E) exceeds the actual P/E, the stock is currently under priced and it is the time to buy the stock. - If the E(P/E) is less than the actual P/E, the stock is currently overpriced and it is the time to sell the stock. If the E(P/E) equals the actual P/E, the stock is correctly priced, neither buying nor selling is desirable. Statement (c) is true and statements (a), (b), (d), and (e) are not true. Therefore (c) is the answer. |
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Answer : (a) Reason : Realization of debtors involves conversion
of receivables to cash. To that extent the current assets remain constant.
Raw materials purchased on credit causes an equal increase in current assets
(inventory) and current liabilities (Sundry creditors). Conversion of
preference shares in to equity involves the conversion of one form of long
term finance to another form of long term finance. Considering the above we
can say that there is no change in the NWC. Therefore (a) is the answer. |
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Answer : (d) Reason : Cross-sectional analysis assesses whether the financial ratios are within the limits and are compared with the industry averages or with a good player in normal business conditions. Statement (a) is not true. Time-series analysis aids in analyzing how all the variables of a particular statement are changing over a longer period of time. Statement (b) is not true. Common-size analysis aids in inter-company comparison. (Statement (c) is not true. Dupont analysis divides a particular ratio into components and studies the effect of each and every component on the ratio. Statement (d) is true. Comparative analysis gives an idea as to where a firm stands across the industry. Statement (e) is not true. Hence (d) is the answer. |
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Answer : (e) Reason : Gross profit margin ratio shows the profits relative to sales after the direct production costs are deducted. It may be used as an indicator of the efficiency of the production costs and selling price. Statement (a) is not true. Net profit margin ratio shows the earnings left for shareholders as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing, and tax management. Statement (b) is not true. Asset turnover ratio highlights the amount of assets that the firm used to generate its total sales. Statement (c) is not true. Return on Equity measures the profitability of equity funds invested in the firm. Statement (d) is not true. Earning power gives a measure of operating profitability of a firm. Statement (e) is true. Hence (e) is the answer. |
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Answer : (d) Reason : Ownership ratios will help the stockholder to analyze his present and future investment in a firm. Ownership ratios are divided into three main groups. They are: 1. Earnings ratios: · Earning per share · P/E ratio · Capitalization rate 2. Coverage ratios: · Capital structure ratios · Debt-equity ratio · Debt-asset ratio · Coverage ratio · Fixed charges coverage ratio · Interest coverage ratio · Debt service coverage ratio 3. Dividend ratios: - Dividend pay-out ratio - Dividend yield (d) is not ownership ratio. Quick ratio is liquidity ratio. Therefore (d) is the answer. |
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Answer : (c) Reason : A decrease in the days sales outstanding will release additional fund for the firm and hence will reduce the firm’s need for additional capital. All other alternatives will increase firm’s need for additional capital. |
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Answer : (d) Reason : Capitalization rate is the reciprocal of P/E ratio and it gives the rate of return investors expect before they purchase a stock. Statements (I) and (III) are true. If the investors’ required return is less than the expected return, the capitalization would drop. Statement (II) is not true. Capitalization rate is not same as ROE. ROE measures the profitability of equity funds invested in the firm. Statement (IV) is not true. Therefore (d) is the answer. |
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Answer : (e) Reason : A funds flow statement explains the various sources from which funds are raised and the uses to which these funds are put. Analysis of the same over a period of time will enable the management to detect the imbalances and take appropriate action, to appraise the performance of divisions, to evaluate the pattern of firm’s financing and to plan for the future financing. The analysis of the funds flow statement will in no way help to evaluate the quality of firm’s top management. Hence (e) is the answer. |
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Answer : (e) Reason : b of the security = b decreases with increase in variance of market returns. Statement I is true. Beta equal to one indicates an asst of average risk. Beta greater than 1 indicates above-average risk stocks, and beta less than 1 indicates below average risk. Statement II is not true. Also Increase in the value of correlation coefficient between security and market returns will increase the value of b. Decrease in standard deviation of the security’s return will decrease the value of b.Hence statement III is correct and statement IV is false. Hence (e) is the answer. |
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Answer : (e) Reason : Under the Total Resources basis, the sources and uses of funds can be summarized as: Sources: 1. Operations - PAT - Depreciation and other non-cash charges 2. Issue of equity capital 3. Increase in liabilities 4. Decrease in assets Uses: 1. Payment of dividends 2. Decrease in liabilities 3. Increase in assets Thus decrease in liabilities is an use of funds. Therefore (e) is the answer. |
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Answer : (a) Reason : An increase in a current asset results in an increase in working capital. A decrease in a current asset results in a decrease in working capital. An increase in a current liability results in a decrease in working capital. A decrease in a current liability results in an increase in working capital. Thus, increase in Accounts Receivables, which is a current asset results in an increase in working capital. All others result in a decrease in working capital. Therefore (a) is the answer. |
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Answer : (c) Reason : Funds from operations (FFO) is not expressed directly in the income statement. In order to get FFO, depreciation has to be added back to profit after tax. FFO indicates sources of funds. Statement (c) is true and statements (a), (b), (d) are not true. Gross change in fixed assets is got by adding depreciation for the period to net fixed assets at the ending financial statement date. From this figure, the net fixed assets at the beginning financial statement date is deducted. If the figure is positive, it represents a use of funds, if negative, a source. Hence statement (e) is not true. Therefore (c) is the answer. |
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Answer : (c) Reason : Financial leverage as measured by Degree of Financial Leverage (DFL) measures the effect of the change in EBIT on the EPS of the company. Following observations can be made from studying the behaviour of DFL: - Each level of EBIT has a distinct DFL. - DFL is undefined at the financial break-even point. - DFL is negative if the EBIT level is below the financial break-even point. - DFL is positive for all values of EBIT that are above the financial break-even point. Therefore (c) is the answer, as DFL cannot be defined precisely. |
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Answer : (b) Reason : Degree of operating leverage (DOL), helps in ascertaining change in operating income for a given change in output (quantity produced and sold). If the DOL, of a firm is 3, then a 1% increase in the level of output will increase the operating income by 3%. A large DOL indicated that small fluctuations in the level of output will produce large fluctuations in the level of operating income. Therefore answer is (b). |
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Answer : (e) Reason : Sales forecast provides the basis around which the firm’s planning process is centered. Important areas of decision-making such as production and inventory scheduling, investment in machinery and other fixed assets, manpower requirements, raw material purchases, cash flow requirements are all dependent on the sales forecast. However, sales forecasting is a complex subject, which uses a variety of concepts and techniques. These can be broadly classified as being either subjective or objective. Subjective methods use the judgments or opinions of knowledgeable individuals within the company, ranging from sales representatives to executives. Jury of executive opinion and sales force estimated are subjective methods for sales forecast. Objective methods are statistical methods, which range in sophistication from relatively simple trend extrapolations to the use of complicated mathematical models. Trend analysis via extrapolation and regression analysis are examples of objective methods. Therefore (e) is the answer. |
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Answer : (c) Reason : Additional fund needed = = Rs.70/Rs.100(Rs.20) - Rs.2 -
(0.05)(Rs.120)(1 - 0.40) = Rs.14 - Rs.2 - Rs.3.6 = Rs.8.4 lakh. |
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Answer : (e) Reason : The three main techniques of financial projections are pro forma financial statements, cash budgets and operating budgets. Pro forma financial statements are projected future statements of a company based on a set of assumptions about future performance relative to the market conditions. Cash budgets are specific planning tools prepared periodically that give the details of expected cash receipts and cash payments. Operating budgets are prepared for specific divisions such as sales, production, etc., Therefore (e) is the answer. |
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Answer : (d) Reason : Step I: Obtain the compounded amount of the 12-year annuity payment of Rs.2,500. @ 7% FV = Annuity amount ´ = 2,500 ´ = 2,500 ´ 17.888 FV = Rs.44,720 Step II: Rs.44,720 is available immediately after the last payment. To obtain the total cumulative value in the beginning of year 18, compound the amount of Rs.44,720 for 5 years as a single payment at 7%. FV = = 44,720
´
= 44,720 ´ 1.403 = Rs.62,742.16. step III: The amount of retirement annuity can be calculated as follows. Let Rs.62,742.16 be the PV of retirement annuity.
62,742.16 = Annuity ´ (10.594)
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Answer : (c) Reason : The amount of Rs.25,000 cash outflow may be treated as a principal which the company deposits into an account that pays an unknown rate of interest but returns a compounded amount of Rs.47,900 after 5 years.
47,900 = 25,000 1.916 = r = 13.89% Therefore the company earns a return of 13.89%. |
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Answer : (c) Reason :
No of shares = 10,00,000 EPS = P/E = |
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Answer : (c) Reason : Required
return, r = The
value of the annuity using r = 8%, VAnnuity
= 1,250[(1-(1/1.0820)/0.08] = 1,250(9.8181) = 12,272.63 =
Rs.12,273. |
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Answer : (b) Reason : 10,00,000 = A = |
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Answer : (b) Reason : 1.2 =
1/20(0.7) + b(19/20) Where b is average beta for other 19
stocks. 1.165 = (19/20)b. New Beta = 1.165 + 1/20(1.4) = 1.235 |
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Answer : (d) Reason : If an investor holds a share for one year, the price of such share today
= 3.57 + 50 = 53.57
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Answer : (d) Reason : The
value of convertible = C = coupon rate R = required rate of return Pn = expected price of equity share on conversion N = number of years to maturity = 5
= 116.67 + 97.22 + 81.02 + 284.53 = 579.44.
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Answer : (c) Reason : 970 = r can be computed by trial and error. At r = 14 % RHS = 1000.03 At r = 15 % RHS = 965.7 By
interpolation, r = 14% + r = 14.13%. |
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Answer : (b) Reason : The dividends from the company are expected to grow @ 18% p.a. for first 15 years and at 5% thereafter forever. Therefore, the value of the equity share is to be ascertained in two steps as follows: Step : Calculate of P.V. of dividends for 15 years:
The present value of dividends is Rs.63.33. The value of the share at the end of the 15th year depends on the dividend for the 16th year. D16, Ke and g = (5%) D16 = D15 (1+g) = 31.43 P15 = =
= 63.33 + 109.48 = Rs.172.81. |
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Answer : (c) Reason : Price of the bond = 25 PVIFA(2%,40) + 1000 PVIF(2%,40) = Rs.1,136.78 Now suppose call price is X, then 1,136.78 = 25 PVIFA(1.875%,20) + X PVIF(1.875%,20) Or, X = (1,136.78 – 413.76)/0.6897 = Rs.1,048.31. |
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Answer : (d) Reason : Expected
Return = = (0.22 ´ 0.1) + (0.18 ´ 0.4) + (0.12 ´ 0.3) + (0.06 × 0.2) = 0.022 + 0.072 + 0.036 + 0.012 = 0.142 = (approx) 14.2%. The risk can be measured in terms of the standard deviation of the returns:
= 0.0518 = 5.18% |
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Answer : (b) Reason : Required return of the security can be ascertained with the help of CAPM equation :
= = 22.4%. The return of 22.4% is more than the expected return of 18%. Therefore this security is not correctly priced. It is overvalued since it gives a return less than that is required based on the risk, and it lies below SML. |
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Answer : (b) Reason : Evaluation of method of financing from share holder’s view point:
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Answer : (c) Reason : Owner’s equity = 1,00,00,000
= 60,00,000 Total Asset = total debt + total equity = 1,60,00,000. Assets
turnover =
Sales = 3,20,00,000. Hence (c) is the answer |
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Answer : (b) Reason
: Funds from operations
Since tax of Rs.35,000 were paid during 2005, a balance of Rs.5,000 must have remained at the end of the year. As Rs.50,000 is the actual balance at the end of the year, a provision for Rs.45,000 would have been created during the year. |
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Answer : (e) Reason : The EBIT of the firm is 14% of 30 crore and is therefore Rs,4,20,00,000 (4.2crores).
= = 0.1485 = 14.85%. |
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Answer : (a) Reason : Funds from operations = Net income after taxes + depreciation = Rs.83,26,600 +Rs.7,95,200 = Rs .91,21,800 Source from sale of machine = Book value of plant sold + Loss on sale = Rs.4,32,100 - Rs. 1,33,400 =Rs. 2,98,700 (Rs.)
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Answer : (b) Reason : Expected return, R = -20%(0.25) + 0%(0.30) + 20%(0.25) + 40%(0.20) = 8% S.D., s = [(-20% - 8%)2(0.25) + (0% - 8%)2(0.30) + (20% - 8%)2(0.25) + (40% -8%)2(0.20)]0.5 = 21.4% Coefficient of variation = 21.4% / 8% = 2.68. |
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Answer : (d) Reason : In order to find out the % change in EPS as a result of % change in sales, the combined leverage should be calculated as follows: Operating leverage = = = 1.625 Financial leverage = = Combined leverage = Operating leverage ´ Financial leverage = 1.625 ´ 3.5 = 5.69. The combined leverage of 5.69 implies that for 1% change in sales level, the percentage change in EPS would be 5.69%. So if the sales are expected to increase by 5%, then the percentage change in EPS would be 5 ´ 5.69 = 28.45%. |
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Answer : (c) Reason : Operating break-even point : Q = where F = Fixed Costs S = Selling price per unit V = Variable cost per unit. = |
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Answer : (d) Reason : Sales growth rate = 30%
Dividend pay-out ratio = 60% External Fund Requirement
(EFR)= Where
m = net profit margin
d = Dividend pay-out ratio
= 6,30,000 – 4,55,785 EFR = Rs.1,74, 215. Sustainable growth rate (g) is given by,
= = = 0.305
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Answer : (d) Reason : T-Bill
yield = F = Face value p = Purchase price d = maturity period in days. 0.14 = 9.1 p = 36,500 – 365p 374.1p = 36,500 P = Rs.97.57. |
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Answer : (d) Reason : The
required return on the stock is given by: rs
= 5% + (5%)1.2 = 11%. The
stock price is given by: P4
= Thus, the current price is given by
discounting the future price in Year 4 to the present at the required rate of
return:
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Answer : (e) Reason : Average
collection period = Average daily sales = Annual Sales = |
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Answer : (e) Reason : Total Assets Turnover ratio =
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Answer : (c) Reason : Financial
Leverage = Again EBIT – Interest = EBT EBIT – 40,000 = EBT ….. (2) From (1) and (2), 3 x EBT – 40,000 = EBT 2 EBT = 40,000 EBT = Rs.20,000 EBIT = 3EBT = Rs.60,000 Again Operating Leverage = Contribution = 4 EBIT = 4 x 60,000 = Rs.2,40,000 Variable cost = 60% of sales Contribution = 100% - 60% = 40% on sales Sales = Contribution / 40% = 2,40,000/0.4 = Rs.6,00,000 Hence (c) is the answer. |
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Answer : (d) Reason : Beta = Where COVS,M = Covariance between the company’s stock and the market portfolio =
Calculation of the variance of the market portfolio and the covariance:
E(RM) = 0.3 x 0.24 + 0.5 x 0.16 + 0.2 x 0.10 = 0.172 = 17.2% E(RS) = 0.3 x 0.26 + 0.5 x 0.15 + 0.2 x 0.12 = 0.177 = 17.7% Beta = Hence (d) is the answer. |
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Answer : (d) Reason : Amount
of loan installment = A = Amortization Schedule:
* Ideally these two figures should be equal. The difference occurs due to rounding off. The balance of loan outstanding at the end of year 4 is Rs.12,967. Hence (d) is the answer. |
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Answer : (c) Reason :
Rs. lakhs Sales 1200 Gross profit (30%) 360 Cost of Goods Sold 840 Net Profit after tax (10% of sales) 120 Dividend (50%) 60 Retained Earnings
60 Total assets: Fixed assets 600 Cash and Debtors (1200/4) 300 Inventory (840/4) 210 Total assets = Total
liabilities 1,110 Current assets 510 CA/CL = 2/1 CL = CA/2
255 Long-term debt
285 {=1/3 (total assets – current liabilities)} Equity = Total Liabilities - (Retained earnings + long-term debt + current liabilities) = 1,110 – (60 + 285 + 255) = Rs.510 lakhs. |
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Answer : (d) Reason : Required rate of return, rs = 8% + (15% - 8%)0.6 = 12.2%. Dividend yield = Capital gains yield = Total yield - Dividend yield = 12.2% - 8% = 4.2%. |
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Answer : (d) Reason : ke = Rf + b(Rm-Rf) = 0.09 + 1.5(0.12 – 0.09) = 13.5% P = If beta is increased to 1.75, ke = Rf + b(Rm-Rf) = 0.09 + 1.75(0.12 – 0.09) = 14.25% Now. Price of the share,
% increase in the share price
= Hence (d) is the answer. |
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Answer : (c) Reason : Value of the share = EPS x P/E ratio P/E ratio = Value of EPS can be ascertained as follows: (Rs.) Operating profit (EBIT) 50,00,000 Less: Interest: 14% on secured loans 7,00,000 12.5% on unsecured loans 2,50,000 Profit before tax 40,50,000 Tax @ 50% 20,25,000 Profit after tax 20,25,000 Preference dividend 4,00,000 No. of equity shares (1,00,00,000/50) 2,00,000 EPS = ( Now, Value of the company’s share = EPS x P/E ratio = 8.125 x 12.5 = Rs.101.56 Therefore (c) is the answer. |
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Answer : (d) Reason : Cost of house = Rs.12,00,000 Let the interest rate per month = r Number of installments = 12 x 12.5 = 150 Amount payable at the end of every month = Rs.12,750. \12,00,000 = 12,750 x PVIFA(r,150) PVIFA(r,150)
= For r = 0.6%, PVIFA = 98.72 r = 0.7%, PVIFA = 92.68
Effective rate of interest = Hence (d) is the answer. |
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Answer : (c) Reason
: Operating profit at the financial break-even
point = Sales quantity at overall break-even point = The fixed cost (F) can be found out from the operating break-even point. Operating break-even point =
Sales = Therefore 31.4 lakh units should be sold to attain the overall break-even point. |
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Answer : (d) Reason : Required rate of return = Rf + b x Risk premium
Required rate of return = 7% + 0.695 x 6% = 11.17% At equilibrium, expected rate of return and the required rate of return should be equal. Expected rate of return =
Hence the price of the security should increase by Rs.24.42 to be at equilibrium. Hence (d) is the answer. |
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