Revision Questions

1
The primary objective of financial management is,.
1. Maximisation of wealth
2. Maximisation of EBIT
3. Maximisation of market price
4. All the above
The primary objective of financial management is,.
1. Maximisation of wealth
2. Maximisation of EBIT
3. Maximisation of market price
4. All the above
2
What is the payback period of the following project?
1. 3 years Project C0 C1 C2 C3 C4
X 6000 3000 2000 3000 2000
2. 2 years
3. 2 years 4 months
4. 2 years 9 months
What is the payback period of the following project?
1. 3 years Project C0 C1 C2 C3 C4
X 6000 3000 2000 3000 2000
2. 2 years
3. 2 years 4 months
4. 2 years 9 months
3
What is the NPV of the following project if the cost of capital is 10%?
1. 2000
2. 3000 Project C0 C1 C2 C3 C4
X 6000 3000 2000 3000 2000
3. 4000
4. 2100
What is the NPV of the following project if the cost of capital is 10%?
1. 2000
Project C0 C1 C2 C3 C4
2. 3000 X 6000 3000 2000 3000 2000
3. 4000
4. 2100
4
If the nominal interest rate is 10% per annum and the frequency of
compounding is 4, what is the effective interest rate?
1. 10.38%
2. 10.28%
3. 9.36%
4. 11.05%
If the nominal interest rate is 10% per annum and the frequency of
compounding is 4, what is the effective interest rate?
1. 10.38%
2. 10.28%
3. 9.36%
4. 11.05%
5
Reason for time value ?
1. Preference towards future consumption
2. Purchasing power declines in future
3. Investment opportunities of money
4. 1 & 3
5. 2 & 3
6. All the above
Reason for time value ?
1. Preference towards future consumption
2. Purchasing power declines in future
3. Investment opportunities of money
4. 1 & 3
5. 2 & 3
6. All the above
6
What is the rate of return at which the net present value is zero?
1. Profitability index
2. IRR
3. Pay back
4. Cost of capital
What is the rate of return at which the net present value is zero?
1. Profitability index
2. IRR
3. Pay back
4. Cost of capital
7
If you invest Rs.20000 today which is compounding at a rate of 10% pa
for 5 years, what amount will you receive at maturity?
1. 31210
2. 33210
3. 35210
4. 32210
If you invest Rs.20000 today which is compounding at a rate of 10% pa
for 5 years, what amount will you receive at maturity?
1. 31210
2. 33210
3. 35210
4. 32210
8
A student takes a loan of Rs.1,00,000/- from HDFC. The rate of interest
being charged is 10 percent per annum. What would be the EMI if he
wishes to pay it back in five installments at the end of every year
( PVIF 10%, 5 Years is 0.621, PVIFA is 3.791, CVIF is 4.321 & CVIFA 3.251
)?
1. 26380
2. 25520
3. 23850
4. 22120
A student takes a loan of Rs.1,00,000/- from HDFC. The rate of interest
being charged is 10 percent per annum. What would be the EMI if he
wishes to pay it back in five installments at the end of every year
( PVIF 10%, 5 Years is 0.621, PVIFA is 3.7908, CVIF is 4.321 & CVIFA
3.251 )?
1. 25520
2. 23850
3. 22120
4. 26380 (annul EMI= P/PVIFA=100000/3.7908=26380
9
Compute cost of equity as per CAPM model, where risk free return is
5%. Beta is 1.80 and the market return is 20% pa
1. 30%
2. 40%
3. 32%
4. 25%
Hint Ra= Rrf+ {Ba*(Rm-Rrf)} Where Ra=Cost of equity ;Rrf= Risk
Free Rate; Ba=Beta ; Rm= Market Rate of return
Hence Ra=5+{1.8*(20-5)}=5+(1.8*15)}=5+27=32
Compute cost of equity as per CAPM model, where risk free return is
5%. Beta is 1.80 and the market return is 20% pa
1. 30%
2. 40%
3. 32%
4. 25%
10
Which of the following is not considered for WACC calculation
1. Common stock
2. Bank loans
3. Bills payable
4. Non of the above
Which of the following is not considered for WACC calculation
1. Common stock
2. Bank loans
3. Bills payable
4. Non of the above
11
ABC ltd issued 10% debentures fro Rs.100 each. What is the after tax
cost of debt if the tax rate is 35%?
1. 6.25
2. 6.50
3. 6.55
4. 7
(Hint : Co. will pay 10 Rs as interest which would be counted as expenses and it
would lower overall income by 10 Rs. So if corp. tax rate is 35 % , it would save tax
outflow by 3.5 Rs. Hence effective rate is 10-3.5=6.5 %
ABC ltd issued 10% debentures fro Rs.100 each. What is the after tax
cost of debt if the tax rate is 35%?
1. 6.25
2. 6.50
3. 6.55
4. 7
12
XYZ ltd issued 12% irredeemable preference shares with face value of
Rs100 at a premium of 10%. Calculate Kp.
1. 10%
2. 10.90%
3. 11.10%
4. 12.10%
(Hint Kp=Cost of preference share= Preference dividend/Market value
of preference share= 12/(100+10)=12/110=10.9%
XYZ ltd issued 12% irredeemable preference shares with face value of
Rs100 at a premium of 10%. Calculate Kp.
1. 10%
2. 10.90%
3. 11.10%
4. 12.10%
13
If Ke is 12% and Kd is 10%. What is the overall cost of capital if the debt
equity ratio is 1.5:1 and the tax rate is 30%?
1. 20%
2. 22%
3. 22.5%
4. 24%
Hint WACC= We*Ke+Wd*Kd+Wp*Kp (W=weightage, K=cost)
= 1*0.12+1.5*0.1*(1-0.3)=0.12+1.5*0.1*0.7=0.12+.105=.225 or
22.5%
Hint 2: Cost of Debt = YTM(1-Tax Rate)
If Ke is 12% and Kd is 10%. What is the overall cost of capital if the debt
equity ratio is 1.5:1 and the tax rate is 30%?
1. 20%
2. 22%
3. 22.5%
4. 24%
14
The future value of regular recurring deposit of Rs.1000 for 10 years at
the rate of 10% is?
1. 15937
2. 16542
3. 12658
4. 15352
The future value of regular recurring deposit of Rs.1000 for 10 years at
the rate of 10% is?
1. 15937
2. 16542
3. 12658
4. 15352
Hint : Use table 2 on book FVIFA= 15.9374 (for 10yr at 10% Int Rate)
15
Money markets are markets for:-
1. Long-term bonds
2. Foreign currency exchange
3. Corporate stocks
4. Short-term debt securities
5. Consumer automobile loans
Money markets are markets for:-
1. Long-term bonds
2. Foreign currency exchange
3. Corporate stocks
4. Short-term debt securities
5. Consumer automobile loans
 16
Alpha company paid a dividend of Rs.4.50/-. The current market price of an
equity share is Rs.90/-. Dividend are expected to grow at the rate of 7%, the
cost of equity capital is:-
1. 16%
2. 12.35%
3. 14.25%
4. 18.5%
Hint Ke=r=D1/P0 + g (P0=Value of share now;D1=Dividend next yr;
g=sustainable growth rate)(D1=D0*(1+g) where D0= Present Dividend)
Hence Ke=4.5*(1+0.07)/90 + 0.07 =4.5*1.07/90 + 0.07=4.815/90 + 0.07
=0.0535+.07=.01235 or 12.35%
Alpha company paid a dividend of Rs.4.50/-. The current market price
of an equity share is Rs.90/-. Dividend are expected to grow at the rate
of 7%, the cost of equity capital is:-
1. 16%
2. 12.35%
3. 14.25%
4. 18.5%
17
Which of the following statements is correct?
1. If a project's Internal Rate of Return (IRR) exceeds the cost of capital
, then the project's Net Present Value (NPV) must be positive
2. If Project A has a higher IRR than Project B, then Project A must also
have a higher NPV
3. The IRR calculation implicitly assumes that all cash flows are reinves
ted at a rate of return equal to the cost of capital
4. Both 1 & 2
Which of the following statements is correct?
1. If a project's Internal Rate of Return (IRR) exceeds the cost of capital
, then the project's Net Present Value (NPV) must be positive
2. If Project A has a higher IRR than Project B, then Project A must also
have a higher NPV
3. The IRR calculation implicitly assumes that all cash flows are reinves
ted at a rate of return equal to the cost of capital
4. Both 1 & 2
18
What is the risk premium of a security, if the market return is 18%, Beta
1.25 and risk-free rate of return is 10.5%?
1. 9.38%
2. 12%
3. 9.62%
4. 10.25%
Hint Rp= {Ba*(Rm-Rrf)} Where Rp=Risk Premium of equity ;Rrf=
Risk Free Rate; Ba=Beta ; Rm= Market Rate of return
Hence Ra=1.25(18-10.5)}={1.25*7.5}=9.375
What is the risk premium of a security, if the market return is 18%, Beta
1.25 and risk-free rate of return is 10.5%?
1. 9.38%
2. 12%
3. 9.62%
4. 10.25%
19
The following data is available for M/s ABC Ltd
Unit selling price = Rs.140/-
Unit variable cost = Rs.95/-
Total fixed costs = Rs.1,50,000/-
When the output is 9000 units, the degree of operating leverage is:-
1. 1.59
2. 1.90
3. 1.80
4. 1.35
Variable Cost of 9000 Unit : 9000*95=855000; SP=140*9000=1260000
DOL=Contribution/ EBIT= (Sales-Variable Cost)/ (Sales-Variable cost-fixed cost)
=(1260000-855000)/(1260000-855000-150000)=405000/255000=1.59
The following data is available for M/s ABC Ltd
Unit selling price = Rs.140/-
Unit variable cost = Rs.95/-
Total fixed costs = Rs.1,50,000/-
When the output is 9000 units, the degree of operating leverage is:-
1. 1.59
2. 1.90
3. 1.80
4. 1.35
20
Which of the following evaluation criteria does not consider the time
value of money?
1. Benefits cost ratio
2. Pay back method
3. IRR
4. NPV
Which of the following evaluation criteria does not consider the time
value of money?
1. Benefits cost ratio
2. Pay back method
3. IRR
4. NPV
21
If a firm has DOL of 10 at Q units, this means that if:-
1. Sales rise by 1%, EBIT will rise by 10%
2. Sales rise by 10%, EBIT will rise by 10%
3. Sales rise by 1%, EBIT will rise by 10%
4. Sales rise by 10%, EBIT will fall by 5%
If a firm has DOL of 10 at Q units, this means that if:-
1. Sales rise by 1%, EBIT will rise by 10%
2. Sales rise by 10%, EBIT will rise by 10%
3. Sales rise by 1%, EBIT will rise by 10%
4. Sales rise by 10%, EBIT will fall by 5%
22
Which of the following is correct for a firm with EPS of Rs.2/- per share
and a pay out ratio of 25%?
1. Book value per share of equity will decrease by Rs.0.5/-
2. Book value per share of equity will increase by Rs.1.5/-
3. Book value of the shares will remain unchanged
Which of the following is correct for a firm with EPS of Rs.2/- per share
and a pay out ratio of 25%?
1. Book value per share of equity will decrease by Rs.0.5/-
2. Book value per share of equity will increase by Rs.1.5/-
3. Book value of the shares will remain unchanged
23
In an investment if the benefit cost ratio is equal to one, then the:-
1. IRR will be greater than discount rate
2. IRR will be less than discount rate
3. IRR and discount rate are same
4. None of the above
In an investment if the benefit cost ratio is equal to one, then the:-
1. IRR will be greater than discount rate
2. IRR will be less than discount rate
3. IRR and discount rate are same
4. None of the above
24
The following data is available for M/s Reliance Limited
Interest : Rs.1,35,000/-
EBIT : Rs.6,50,000/-
The Degree of Financial leverage for the firm will be:-
1. 1.36
2. 1.26
3. 1.35
4. 1.65
Hint : DOFL=EBIT/EBT=EBIT/(EBIT-Interest)=650000/(650000-135000)
=650000/515000=1.26
The following data is available for M/s Reliance Limited
Interest : Rs.1,35,000/-
EBIT : Rs.6,50,000/-
The Degree of Financial leverage for the firm will be:-
1. 1.36
2. 1.26
3. 1.35
4. 1.65
25
Consider the following data: Source Market Value Cost
Equity 1,00,000/- 10%
Debt 7,00,000/- 8%
If the tax rate is 35%, the weighted average cost of funds taking market value
as weights is:-
1. 8.25%
2. 9.25%
3. 10.50%
4. 5.8%
WACC=We*Ke+Wd*Kd(1-T)=100000/800000*0.1 + 700000/800000*.08(1-.35)
=.0125+.0455=0.058
Consider the following data: Source Market Value Cost
Equity 1,00,000/- 10%
Debt 7,00,000/- 8%

If the tax rate is 35%, the weighted average cost of funds taking market
value as weights is:-
1. 8.25%
2. 9.25%
3. 10.50%
4. 5.8%
26
_________ projects do not compete with each other; the acceptance
of one _________ the others from consideration.
1. Independent; does not eliminate
2. Capital; eliminates
3. Replacement; does not eliminate
4. Mutually exclusive; eliminates
5. None of the above
_________ projects do not compete with each other; the acceptance
of one _________ the others from consideration.
1. Independent; does not eliminate
2. Capital; eliminates
3. Replacement; does not eliminate
4. Mutually exclusive; eliminates
5. None of the above
27
Which of the following would increase the likelihood that a company
would increase its debt ratio in its capital structure?
1. An increase in costs incurred when filing for bankruptcy
2. An increase in the corporate tax rate
3. A decrease in the firm's business risk
4. Both (b) and (c)
27
Which of the following would increase the likelihood that a company
would increase its debt ratio in its capital structure?
1. An increase in costs incurred when filing for bankruptcy
2. An increase in the corporate tax rate
3. A decrease in the firm's business risk
4. Both (b) and (c)
28
Which of the following is not a feature of debt finance?
1. Dilution of control
2. Low cost
3. Financial risk
4. Both (b) and (c)
Which of the following is not a feature of debt finance?
1. Dilution of control
2. Low cost
3. Financial risk
4. Both (b) and (c)
29
Total or Combined leverage measures the relationship between..
1. PAT and sales
2. EBIT and sales
3. EPS and EBIT
4. None of the above
29
Total or Combined leverage measures the relationship between..
1. PAT and sales
2. Sales and EPS
3. EPS and EBIT
4. None of the above
30
The ultimate objective of any company is:-
1. Wealth maximization
2. Profit maximization
3. Both
4. None of the above
30
The ultimate objective of any company is:-
1. Wealth maximization
2. Profit maximization
3. Both
4. None of the above