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< Answer
1. Which of the following statements represents the financing decision of a company? >
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)
< Answer
5. The objective of financial management to increase the wealth of the shareholders means to >
I. It may allot shares without issuing any prospectus or a statement to the Registrar
II. It can do with only two directors
III. It can have only two members.
(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)
< Answer
15. Which of the following may be considered as the correct reason for money having time value? >
(a) It is the legal tender for carrying out any type of transaction
(b) In India, it is guaranteed by the union government
(c) Its purchasing power increases with the passage of time due to inflation
(d) Money can be productively invested to generate real returns over a period of time
(e) None of the above.
(1 mark)
< Answer
16. The intervention of the government in the financial system to influence macro economic variables >
like interest rates or inflation is an example of which function of the financial system?
(a) Savings Function (b) Liquidity Function
(c) Payment Function (d) Risk Function
(e) Policy Function.
(1 mark)
< Answer
17. The financial leverage of a firm is an indicator of the >
(a) Discount and Finance House of India (b) SBI Mutual Fund
(c) State Bank of India (d) Securities Trading Corporation of India
(e) Reserve Bank of India.
(1 mark)
< Answer
20. If the rates of return from a security are not at all related to the market returns, the beta for that >
security will be
(a) –1 (b) 0 (c) Between 0 and 1 (d) Greater than 1 (e) Less than –
1.
(1 mark)
< Answer
21. Which of the following entities is/are not eligible to issue CDs? >
(a) An increase in the required rate of return, other things remaining the same, will decrease the
bond value
(b) An increase in the number of years to maturity, other things remaining the same, will increase
the present value of the face value of the bond payable at maturity
(c) An increase in the coupon rate, other things remaining the same, will increase the bond value
(d) An increase in the face value of the bond payable at maturity, other things remaining the same,
will increase the bond value
(e) An increase in yield to maturity will occur, if the amount payable at maturity increases, other
things remaining the same.
(1 mark)
< Answer
25. Which of the following is/are correct with respect to the act(s) of the arbitrageurs in the derivatives >
market?
(a) To protect one’s position in the spot by taking suitable instrument(s) in the derivatives market
(b) To protect one’s anticipated position in the spot by taking suitable instrument(s) in the
derivatives market
(c) To make profit from the subsequent price movements of any particular instrument in the
derivatives market
(d) To make risk free profits by simultaneously buying and selling different instruments in different
markets
(e) Both (a) and (b) above.
(1 mark)
< Answer
26. Which of the following ratios indicates the efficiency of utilization of assets by a firm? >
(a) It specifies that the owner is a registered holder in the book of the Public Debt Office (PDO)
(b) It indicates the interest rate, interest due dates and face value of the stock
(c) It is transferable by endorsement
(d) The transfer deed required for transferring stock certificate requires stamp duty
(e) Both (c) and (d) above.
(1 mark)
< Answer
36. Which of the following will lead to an increase in the expected Price-Earning ratio? >
I. Increase in the expected dividend payout ratio
II. Increase in the cost of equity capital
III. Increase in the growth rate.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (III) above
(e) Both (II) and (III) above.
(1 mark)
< Answer
37. Sustainable growth rate increases with a decrease in >
(a) Pre-tax earnings being same, higher the tax rate, lower the earnings power
(b) Debt-equity ratio and pre-tax earnings being same, higher the interest rate, lower the earnings
power
(c) Total assets being same, higher the debt-equity ratio, higher the earnings power
(d) Pre-tax earnings being the same, greater the total assets, higher the earnings power
(e) Sales and pre-tax earnings being the same, greater the total assets turnover ratio, higher the
earnings power.
(1 mark)
< Answer
40. Which of the following is considered while preparing funds flow statement on working capital basis? >
In arriving at the net profit, preliminary expenses written off, transfer to reserve, loss on sale of
fixed assets, proposed dividends have been deducted. Hence, to arrive at the funds from operations
all the above have to be added. Hence, (a),(b), (c ) and (e) are not the answers.
19 Answer : (b) < TOP
>
. Reason : All the participants in the call money market are split into two categories. The first comprises of
the entities who can borrow as well as lend in the market and the second comprises of only lenders
i.e. the participants in the second category cannot borrow in the call money market. RBI, DFHI,
STCIL and commercial banks belong to the first category and all the financial institutions and
mutual funds belong to the second. Hence, (b) cannot borrow in the call money market.
20 Answer : (b) < TOP
>
. Reason : Beta = cov(ri, rm) / σ When the returns from the security are not at all related to the market
m
2
returns cov(ri, rm) is equal to zero. Hence in such a case the beta of the security will be zero.
21 Answer : (d) < TOP
>
. Reason : All scheduled banks other than Regional Rural Banks and Scheduled Cooperative Banks are
eligible to issue CDs.
< TOP
22 Answer : (d) >
. Reason : The yield on government securities is quoted on semi-annual basis.
< TOP
23 Answer : (c) >
. Reason : ADR Level-III is used for raising fresh capital through public offering in the US Capital Markets.
The company has to be registered with the SEC and comply with the listing requirements of
AMEX/NYSE while following the US-GAAP.
24 Answer : (b) < TOP
>
. Reason : In the intrinsic value formula the face value of the bond is multiplied with the factor PVIF(r,n).
The factor PVIF(r,n) decreases as the number of years to maturity increases, other things
remaining the same. Hence, other things remaining the same, the present value of the face value of
the bond decreases as the number of years to maturity increases. Therefore alternative (b) is not
true. All other alternatives are true.
25 Answer : (d) < TOP
>
. Reason : The options (a) and (b) represent the acts of hedgers who are interested to minimize their risk in a
volatile market. The option (c) represents the act of the speculators who wants to make profits
from the price movements in a volatile market through speculation. The option (d) represents the
act of the arbitrageurs who take the opportunity of improper pricing in different markets and
imparts a better efficiency in the system.
26 Answer : (d) < TOP
>
. Reason : Assets turnover ratio is the ratio of sales value to total assets. For a company, generally, the sales
value can be improved in a very short term and the higher the sales value at a certain level of asset
size, more will be assets turnover ratio that implies a better utilization of the assets the company.
27 Answer : (e) < TOP
>
. Reason : Appointment of the managers at a very high compensation package will increase the fixed cost of
the company thereby decreasing the denominator of the DOL, DFL and DTL. As a result of this,
these leverages will go up. So, the operating break-even point and the financial break-even point
will increase. So, the option (e) is correct
28 Answer : (d) < TOP
>
.
1
i
Reason : Present value factor for a perpetual annuity = .
Hence it decreases with an increase in the interest rate. Hence (d) is the correct option.
(1 + i) n
Future Value Interest Factor = .
Hence it increases with increase in the interest rate.
(1 + i) n − 1
i
Future Value Interest Factor For Annuity (FVIFA) = . FVIFA also increases with
increase in the interest rate.
i(1 + i)n
(1 + i) n − 1
Capital Recovery Factor = . It is the inverse of PVIFA, which decreases with increase in
interest rate. Therefore, Capital Recovery Factor increases with increase in the interest rate.
Inverse of PVIFA is capital recovery factor, which increases with increase in the interest rate.
Hence, options (a), (b), (c) and (e) are incorrect.
29 Answer : (d) < TOP
>
. Reason : The US dollar denominated issues by foreign borrowers in the US bond markets are referred to as
Yankee Bonds. The bonds issued by non-Japanese borrowers in the domestic Japanese markets are
referred to as Samurai Bonds. The privately placed bonds issued in the Japanese markets are
referred to as Shibosai Bonds.
The sterling denominated foreign bonds which are raised in the UK domestic securities market are
Bulldog Bonds.
30 Answer : (e) < TOP
>
. Reason : The risk arising due to the debt financing is called financial risk.
31 Answer : (c) < TOP
>
. Reason : Except (c) all the others are subjective methods of sales forecasting.
32 Answer : (a) < TOP
>
. Reason : For any investment, the investor is required to bear two types of risks – Diversifiable and non-
diversifiable. Changes in the Government policy, war, inflation (due to high level of fiscal deficit),
drought, etc are the examples of non-diversifiable risk as these will affect the entire market. But
the change in the Government policy on the entertainment industry will affect the instruments for
that sector only that may be easily diversifiable.
33 Answer : (b) < TOP
>
. Reason : Book Value is an accounting concept. Assets are recorded at historical costs and they are
depreciated over years. Book value may include intangible assets at acquisition cost minus
amortized value.
Replacement Value is the amount that a company would be required to spend if it were to replace
its existing assets in the current condition.
Liquidation Value is the amount that a company could realize if it sold its assets after having
terminated its business.
Going Concern Value is the amount that a company could realize if it sold its business as an
operating one.
Market Value of an asset or security is the current price at which the asset or the security is being
sold or bought in the market.
34 Answer : (c) < TOP
>
. Reason : When the required rate of return is greater than the coupon rate, the discount on the bond declines
as maturity approaches.
< TOP
35 Answer : (e) >
. Reason : When public debt is issued in the form of stock, the owner gets a certificate specifying that he is a
registered holder in the book of the Public Debt Office (PDO). The Certificate indicates the
interest rate, interest due dates and face value of the stock. A stock certificate is not transferable by
endorsement. Transfer can take place only by means of a transfer deed upon the execution of
which the transferee’s name is substituted in the place of the transferor in the books of the PDO.
Such transfer deed requires no stamp duty.
36 Answer : (d) < TOP
. >
Expected Dividend payout ratio
Cost of capital − growth rate
Reason : Expected Price-earning ratio is computed as
From the above equation, we can conclude that increase in the expected dividend payout ratio and
increase in the growth rate will lead to increase in Expected Price-earning ratio. Hence statements
I and III are correct. Therefore, option (d) is the answer.
Increase in the cost of capital will decrease the Expected Price-earning ratio.
100 − P 0.095 × 50
P 365
=
100 − P
P
= 0.013
100
1.013
1.013 P = 100 ⇒ P =
P = Rs.98.72.
42 Answer : (b) < TOP
>
. Reason : Beta is measured by covariance of returns on stock and market divided by variance of the market
returns. In the given case,
324
Variancem
0.5 =
324
0.5
⇒ Variance of the market returns = = 648
∴
648
Standard deviation of market returns = = 25.46%.
43 Answer : (a) < TOP
>
. Reason : Let the approximate maturity period for the bonds be n years and the face value of the bonds be
Rs.100.
The yield to maturity of the bonds is defined as, through approximation method
I + ( F − P) / n
( F + P) / 2
YTM =
Here, we have, I = Rs.6.00, P = Rs.100 F = Rs.120 and YTM =10 percent.
6 + ( 120 −100 ) / n
⇒ 0.10 =
( 120 +100 ) / 2
6 + 20 / n 20
⇒ 0.10 =
110 n
or 11 – 6 =
20
=4
5
or, n = years
44 Answer : (d) < TOP
>
.
Re ceivables balance
Average daily credit sales
Reason : Average collection period =
Sales
365
Average daily credit sales =
Re ceivables balance
x 365
Credit sales
∴ Average collection period =
Average collection period = 40 days (given)
50 + 30
2
Average Receivables balance = = Rs.40 lakhs
40
x 365
Credit sales
∴ 40=
40 x 365
40
Or Credit sales = = Rs.365 lakhs.
365
0.75
∴ Total sales = = Rs.486.66. say 487 lakhs
45 Answer : (e) < TOP
>
. Reason : Change in EBIT with change in sales is reflected by DOL, change in EPS with change in EBIT is
measured by DFL and change in EPS with change in sales is measured by DTL.
Contribution
EBIT
DOL =
Sales Sales
Total assets 56,00,000
Total assets turnover = i.e. 2 =
Hence, sales = Rs. 1,12,00,000.
(in Rs.)
Sales 1,12,00,000
Less: Variable costs (60% of sales) 67,20,000
Contribution 44,80,000
Less fixed costs 24,00,000
Earnings Before Interest and Taxes 20,80,000
Contribution
EBIT
Degree of Operating Leverage=
44, 80, 000
2.15
20, 80, 000
=
DOL=2.15 indicates that if the sales increase or decrease by 1%, then EBIT will increase or
decrease by 2.15%.
Hence, (b) is correct and (d) is incorrect.
EBIT
DFL
Pd
EBIT - I -
1- t
DFL of 1.45 indicates if EBIT increase/decrease by 1%, EPS will increase/decrease by 1.45%
Hence, (c) is incorrect.
DTL = DOL x DFL = 2.15 x 1.45 = 3.12
46 Answer : (a) < TOP
>
. Reason : Discount rate before conversion = 4 + 2 = 6 percent and the same after conversion will be = 6 + 3
= 9 percent.
The expected cash flows from that instrument will be as follows:
Year 1 2 3 4 5 6
Cash flows 8 8 8 10 10 10
Here, the cash flows for the first three years will occur half-yearly where each installment is of
Rs.4 and it has been assumed that the holder of the instrument will hold all the shares and will get
the dividends. The intrinsic value of the debentures is = Present value of all the above cash flows =
Rs.4 × PVIFA (3%,6) +10 × {PVIF (9%,4) + PVIF (9%,5) + PVIF (9%,6) + ….}
10 1
×
( 1.09 ) 4 1 − 1
10
×
1
( 1.09 )
3
1.09 0.09
= Rs.4 × 5.4172 + = Rs.4 × 5.42 +
Hence, the required intrinsic value = Rs.107.47 = Rs.107 (approximately).
47 Answer : (d) < TOP
>
. Reason : FVIFA (annuity due) = FVIFA (1 + interest rate)
(1.005)60 − 1
0.005
FVIFA (0.5%, 60) = (1.005)
= 70.12
∴ Amount receivable in future =70.12 × 3000 = Rs.2,10,360
(Note that 6% compounded monthly means 0.5% interest for each month for 12 x 5 = 60 months).
k A = ∑k A P k m = ∑k m P 8.1025
= 10.15 =8.65
4, 00, 000
PVIFA (8%, 6)
or A = = 86,523.9
∴ The amount of each equated annual installment is Rs.86,524 (approximately).
4, 67, 390.225
FVIFA (8%,15 years)
So the required amount of annual installment will be =
4, 67, 390.225
27.152
=
= 17,213.84
= Rs.17,214
1.2 (x +105+220.5)
x ≤
Rs.42 lakhs
i.e. x Rs. 42 lakhs
≤
Hence, maximum short-term bank borrowing that can be made is Rs. 42 lakhs.
Therefore minimum equity to be raised = External funds requirement – New short-term bank
borrowing
= 117.14 lakhs – 42 lakhs = Rs. 75.14 lakhs.
62 Answer : (b) < TOP
>
.
Reason : Required rate of return on stock A = Rf + (Rm – Rf) = 5 + 1.75(10 – 5) = 13.75%
Required rate of return on stock B = 5 + 0.85 (10 – 5) = 9.25
Excess return = 4.5%
63 Answer : (d) < TOP
>
. Reason : Equated annual withdrawal × PVIFA(8%,10) = Rs.1,00,000
CIF × 6.71 = 1,00,000
CIF = 1,00,000/6.71 = Rs.14,903.13 say 14,903
64 Answer : (b) < TOP
>
. Reason : Cost of goods sold = Rs. 39,00,000.
Gross profit margin is given to be 25%. In other words gross profit is 25% of sales.
Let Sales be x.
Therefore, Cost of goods sold + 0.25 x = x
39,00,000 + 0.25x = x
Hence x (i.e. Sales) = Rs. 52,00,000.
Average receivables turnover ratio is given to be 52:15
Net credit sales 52
Average accounts receivables 15
i.e. = (assume that the entire sales are on a credit basis)
52,00,000 52
Average accounts receivables 15
=
Therefore, Debtors (or average account receivables) = Rs. 15,00,000.
Cash and Bank = Quick assets – debtors = 18,00,000 – 15,00,000 = Rs.3,00,000.
65 Answer : (c) < TOP
. >
Coupon interest
Market Price
Reason : Current yield = = 8.25%.
Coupon Interest 0.10 ×1000
0.0825 0.0825
∴ Market Price = = = Rs.1,212 (approx.)
Hence, the bond is trading at a premium of Rs.212 i.e., 21.20%. Hence, answer is (c).
3.473 −1.260
= Rs.0.630 lakhs
3.506
x=
67 Answer : (a) < TOP
>
.
Earning Per Share
Market Price of the share
Reason : Capitalization rate =
Earning Per Share = (4,80,000 – 60,000) / 60,000 = Rs. 7.
Hence, capitalization rate = 7/100 = 7%.
68 Answer : (c) < TOP
>
. Reason : Efficiency in the utilization of assets is measured by asset turnover ratio.
Asset turnover ratio = sales/total assets
Asset turnover ratio (company A)=Rs.32, 00, 000/Rs.24, 74, 000 = 1.29 times
Asset turnover ratio (company B)=Rs.30, 00, 000/Rs.28, 51, 000 = 1.05 times
So asset utilization of company A is greater than company B.
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
(Amount in Rs.)
A B
Dividends declared 0.06 × 10 × 1,00,000 0.08 × 10 × 80,000
= Rs.60,000 = Rs.64,000
Net profit Rs.1,23,000 Rs.1,58,000
Retained earnings Rs.63,000 Rs.94,000
R E as % of N P 51.2% 59.5%
Hence company B retains larger proportion of its income & statement II is also true.
Utilization of shareholders money is determined by return on net worth.
(Amount in Rs.)
A B
Net worth 12,32,000 14,42,000
Net profit 1,23,000 1,58,000
RONW 9.98% 10.96%
Hence, company B utilizes shareholders funds more profitably than company A.
Hence, statement III is not true and the answer is (c).
69 Answer : (e) < TOP
>
. Reason : Let the cost of funds be k.
( 1 + k ) −1 Rs.1, 20, 000
60
+
k (1 + k ) (1 + k )
60 12
(77 + 2) − 60
× 100
60
Expected return = = 31.67%.
75 Answer : (b) < TOP
>
. Reason : According to the given information subscribers will deposit Rs.25000 at the beginning of every
year for 20 years and after 20 years scheme will pay Rs.75,000 at the end of every year for 25
years plus Rs.x at the end of 20 years from now.
The discount rate is 7%.
Therefore the data can be fit into a equation as
(1.07)25,000 × FVIFA(7%,20) = X + 75,000 PVIFA(7%,25)
(1.07)25,000 × 40.9955= X + 75,000(11.6536)
1096629.625 = X + 874020
X = The amount which will be returned = Rs. 222609.625 Rs.222610