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Welcome to the amazing world of finance.................................

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CHAPTER 1: SCOPE AND OBJECTIVES OF FINANCIAL MANAGEMENT

1.Management of all matters related to an organisation's finances is called

(a) Cash inflows and outflows (b) Allocation of resources
(c) Financial management (d) Finance

2.Shareholders Wealth" in a firm is reflected by

(a) the number of people employed in the firm
(b)the book value of the firmas assets less the book value of its liabilities
(c) the amount of salary paid to its employees
(d) the market price per share of the firm

3.The main objective of financial management is to

(a)Secure profitability (b)Maximise shareholder wealth
(c) Enhancing the cost of debt (d) None of above

4.Wealth maximisation approach is based on the concept of

(a)Cost benefit analysis (b)Cash flow approach (c) Time value of money (d)All of the above

5.Focus of financial management is mainly concerned with the decision related to

(a) Financing (b)Investing (c) Dividend (d)All of above

6.The shareholder value maximisation model holds that the primary goal of the firm is to maximise its
(a) Accounting profit (b)Liquidity (c)Market value (d)Working capital

7.Decision about mergers, takeovers, expansion, liquidiation were covered in financial management under
Management phase of Financial
(a)Traditional (b)Transitional (c)Modern (d)None

8.Which of the following activities are performed by CFOs now in addition to those performed by past CFOs
(a)Budgeting (b)Forecasting (c)Risk Management (d)Treasury management

9.Financial Management is mainly concerned with the

(a)Acquiring and developing assets to forfeit its overall benefit
(b)Acquiring, financing and managing assets to accomplish the overall goal of a business enterprise
(c) Efficient management of the business
(d)Sole objective of profit maximisation

10.Which of following activities will not lead to increase in shareholders wealth?

(a)Investing in projects with high cash flows (b)Raising funds through sources which have low cost
(c) Regular growth in dividends (d)Maintaining high levels of cash at bank

11.Which of the following is the disadvantage of having shareholders wealth maximisation goals
(a)Emphasizes the short-term gains
(b)Ignores the timing of returns
(c)Requires immediate resources
(d)Offers no clear relationship between financial decisions and share price

12.which of the following is the common connection in financing, investing decisions

(a)Investment instruments type should be same as financing instrument type
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(b)Investments will definitely grow in line with financing

(c)Debt Equity ratio should be same for investments and financing actions
(d)Risk Return Trade off

13.is the main goal of financial management.

(a)profit maximization (b)fund transfer (c)A maximum returns (d)wealth maximization

14.Reserves & Surplus are which form of financing

(a)Security Financing (b)Internal Financing (c)Loans Financing (d)International Financing

15.Which of the following are microeconomic variables that help define and explain the discipline of finance
(a)Risk and return (b)Capital structure (c)Inflation (d)All of the above

16.A principal agent relationship between and Agency Problem which is known as
(a)Managers & Owner (b) Executive & Proprietor
(c) both (a) & (b) (d)Managers & secretary the business

17.Which of the following need not be followed by the finance manager for measuring and maximising share-
holders' wealth
(a)Accounting profit analysis (b)Cash Flow approach
(c)Cost benefit analysis (d)Application of time value of money

Answer:-1.(c) 2.(d) 3.(b) 4.(d) 5.(d) 6.(c) 7.(a) 8.(c) 9.(b) 10.(d) 11.(d) 12.(d) 13.(d) 14.(b) 15.(d) 16.(c) 17.(a)

CHAPTER 2: TYPES OF FINANCING

1.Equity shares
(a)Have an unlimited life, and voting rights and receive dividends
(b)Have a limited life, with no voting rights but receive dividends
(c)Have a limited life, and voting rights and receive dividends
(d)Have an unlimited life, and voting rights but receive no dividends

2.External sources of finance do not include

(a)Debentures (b)Retained earnings (c)Overdrafts (d)Leasing

3.The most popular source of short-term funding is

(a)Factoring (b)Trade credit (c)Family and friends (d)Commercial banks

4.Marketable securities are primarily

(a)short-term debt instruments (b)short-term equity securities
(c)long-term debt instruments (d)long-term equity securities

5.In preference shares

(a)Dividends are not available (b)Limited voting rights are available
(c)Are not part of a companyås share capital (d)Interest can be received

6.Marketable securities are primarily

(a)short-term debt instruments (b)short-term equity securities
(c)long-term debt instruments (d)long-term equity securities
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7.Debt capital refers to:

(a)Money raised through the sale of shares. (b)Funds raised by borrowing that must be repaid
(c) Factoring accounts receivable (d) Inventory loans

8.Internal sources of finance do not include

(a)Better management of working capital (b)Ordinary shares
(c) Retained earnings (d) Reserve and Surplus

9.A debenture
(a)Is a long-term loan (b)Does not require security
(c) Is a short-term loan (d)Receives dividend payments

10.Reserves & Surplus are which form of financing

(a)Security Financing (b)Internal Financing (c) Loans Financing (d)International Financing

11.________bonds give the investor an option back to the company before maturity.
(a)Callable (b)Puttable (c)Both (d)Foreign

12.Commercial paper is a by linked to issued interest rate of which is

(a)Debenture, Corporates, 1 Yr Gov Securities Yield
(b)Promissory Note, Corporates, 1 Yr Gov Securities Yield
(c)Promissory Note, Banks, 1 Yr Gov Securities Yield
(d)Promissory Note, Banks, RBI Repo rate

13.The venture capital financing is a financing of new high risky venture promoted by skilled entrepreneurs
who lack and funds but have
(a)Debt, Experience, Skill (b)Equity, Experience, Idea (c)Debt, Experience, Idea (d)Equity, Skill, Idea

14.External Commercial Borrowings can be accessed through

(a)only automatic route (b)only approval route
(c)both automatic and approval route (d)neither automatic nor approval route

15.Which of the following is a correct type of Debentures

(a)Bearer (b) Mortgage (c)Fully convertible (d)All of the above

16.Which of the following marketable securities is the obligation of a commercial bank

(a)Commercial paper (b)Negotiable certificate of deposit (c)Repurchase agreement (d)T-bills

17.A company has an existing EPS of Rs. 7.5; it makes an FPO of 15000 shares issued at a price of Rs. 25 per
share. The funds thus raised are expected to earn a post- tax return of 28%. What will be the expected impact
on EPS?
(a)EPS will remain 7.5 (b)EPS will be greater than 7.5
(c)EPS will be below 7.5 (d)Information not sufficient for calculation

18.With reference to `IFC Masala Bonds', which of the statements given below is/are correct
1. The International Finance Corporation, which offered these bonds, is an arm of the World Bank.
2. They are rupee- denominated bonds and are a source of debt financing for the public and private sector.
(a)1 only (b) 2 only (c)Both 1 and 2 (d)Neither 1 nor 2

Answer:-1.(a) 2.(b) 3.(b) 4.(a) 5.(b) 6.(a) 7.(b) 8.(b) 9.(a) 10.(b) 11.(b) 12.(b) 13.(b) 14.(c) 15.(d) 16.(b) 17.(c)
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18.(c)

CHAPTER 3: FINANCIAL ANALYSIS AND PLANNING-RATIO ANALYSIS

1.Long-term solvency is indicated by

(a)Debt/equity ratio (b)Current Ratio (c)Operating ratio (d)Net profit ratio

2.Which of the following is not a part of Quick Assets

(a)Disposable investments (b)Receivables (c)Cash and Cash equivalents (d)Prepaid expenses

3.The Receivable-Turnover ratio helps management to

(a)Managing resources (b)Managing inventory
(c)Managing customer relationship (d)Managing working capital

4.Ratio of net profit before interest and tax to sales is

(a)Gross profit ratio (b)Net profit ratio (c)Operating profit ratio (d)Interest coverage ratio

5.Given data:- Gross Profit= ax160,000, GP Ratio=20%, Stock Velocity=6 times then find out what is avaerage
stock?
(a)40,000 (b)300,000 (c)240,000 (d) 37,500

6.Which of the following is not true about ratio analysis

(a)It is affected by price level changes
(b)It is difficult to evolve a standard ratio
(c)It can give false and misleading results
(d) It is not useful in inter-firm and intra firm comparison

7.Inventory ratio is a relationship between

(a)Cost of goods purchased and cost of average inventory
(b)Cost of goods sold and cost of average inventory, and cost of goods purchased and cost of average inventory
(c)Cost of goods sold and cost of average inventory
(d)None of the options is correct

8.Same As Q.6

9.Capital Gearing ratio is the fraction of

(a)Preference Share Capital and Debentures to Equity Share Capital and Reserve & Surplus.
(b)Equity Share Capital and Reserve & Surplus to Preference Share Capital and Debentures.
(c)Equity Share Capital to Total Assets.
(d)Total Assets to Equity Share Capital

10.Which ratio not include fictitious assets and losses

(a)Cost of goods purchased and cost of average inventory
(b)Cost of goods sold and cost of average inventory, and cost of goods purchased and cost of average inventor
(c)Cost of goods sold and cost of average inventory
(d)None of the options is correct

11.Which of the following is a liquidity ratio

(a)Equity ratio (b)Proprietary ratio (c)Net Working Capital (d)Capital Gearing ratio
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12.Observing changes in the financial variables across the years is

(a)Vertical analysis (b)Horizontal Analysis (c) Peer-firm Analysis (d)Industry Analysis

13.If Gross Profit=54000, GP Ratio=20%, Average collection period is 18 days (360 Days year), then find out
Average Debtors considering that credit sales are 20% of total sales?
(a)13500 (b)10800 (c)12000 (d)14000

14.The is useful in evaluating credit and collection policies.

(a)Average payment period (b)Current ratio (c)Average collection period (d)Inventory turnover ratio

15.A company has average accounts receivable of 10,00,000 and annual credit sales of 60,00,000. Its average
collection period would be
(a)60.83 days (b)6.00 days (c)1.67 days (d) 0.67 days

16.If Working capital of company is a 1,35,000, Current ratio=2.5, Liquid ratio=1.5, reserve & surplus is=a
190,000 then what are the Quick assets of the company?
(a)90,000 (b)1,35,000 (c)1,45,000 (d)60,000

17.Total sales=3000000, Cash sales 25% of credit sales, Debtors Turnover is 8times then what are the average
debtors?
(a)2400000 (b)300000 (c)600000 (d)900000

18.From the following information,calculate P/E ratio:

Equity share capital of 10 each ‘8,00,000; 9% Preference share capital of 10 each 3,00,000;Profit (after 35%
tax)2,67,000;Depreciation;67,000;Market price of equity share 48
(a)15 times (b)16 times (c)17 times (d)18 times

19.Calculate operating expenses from the information given below

Sales 75,00,000
Rate of income tax 50%
Net profit to sales 5%
Cost of goods sold 32,90,000
Interest on debentures 60,000
(a)41,00,000 (b)8,10,000 (c)34,00,000 (d)33,90,000

20.Current Ratio is 2.5:1 and Liquid Ratio is 1.5:1. If inventory is a 9,60,000, then the amount of current assets
will be:
(a) 9.6 Lakh (b)14.40 Lakh (c)24 Lakh (d)38.40 Lakh

Answer:-1.(a) 2.(d) 3.(d) 4.(c) 5.(a) 6.(d) 7.(c) 8.(d) 9.(a) 10.(a) 11.(c) 12.(b) 13.(b) 14.(c) 15.(a) 16.(b) 17.(b)
18.(b) 19.(c) 20.(c)

CHAPTER 4: COST OF CAPITAL

1.Which of the following has an implicit cost of capital

(a) Equity Shares (b)Preference Shares (c)Retained Earnings (d)Debentures

2.Cost of capital is that minimum which a firm must and is expected to earn on its so as to maintain the market
value of its shares
(a)investments, rate of return (b)rate of return, investments
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(c)expenditure, rate of return (d) rate of return, expenditure

3.An organization can affect its WACC through changing

(a)Capital Structure (b)Dividend Policy (c)Investment Policy (d)All of these

4.Cost of Capital refers to

(a)Floatation Costs (b)Dividend (c)Minimum Required Rate of Return (d)Opportunity cost

5.Interest on government bonds is also known as

(a)Beta of the security (b)Market Rate of Return
(c)Market Price of the Security (d)Risk Free Rate of Return

6.Which of the following statement is false

(a) Retained earnings do not involve any cost
(b) Weightage average cost of capital is sum total of cost of debt and equity
(c)Cost of equity is impacted by tax effects
(d)All of the above

7.Capital Structure weights can be based on

(a)Market Values of Debt & Equity (b)Market Value of Equity & Face value of Debt
(c)Initial Issue Price of Debt & Equity (d)Book Value of Assets

8.In order to find cost of equity under CAPM, which of these is not required
(a)Risk free rate (b)Beta (c)Market Price of the Security (d)Market Rate of Return

9.Cost of capital is lowest in case of debt because of

(a)Tax Deductibility (b)Lower Stated rate (c)Time Value of Money. (d)All of the above

10.Equity financing may be considered better than debt financing because of the fact that
(a)Issuance cost of equity is lesser than that of debt
(b)It is more attractive for Investors because of potential for higher returns
(c)Dividend is tax deductible
(d)It is less expensive than debt.

11.Cost of capital is highest in case of

(a)Debt (b)Equity (c)Loans (d)Bonds

12 While issuing new equity shares,the cost of issue is known as

(a)WACC (b)Cost of Equity (c)Cost of Debt (d)Floatation Cost

13.The average collection period is used as an accounting measure to symbolize the avg. No. of days among a
credit score sale date and the date whilst the customer remits payment. An entity's average collection period
indicates the effectiveness of its Accounts Receivable (or Trade Receivables) Management.
(a)EPS (b)DPS (c)PE Ratio (d)Credit Rating

14.A company is considering a project with an initial cost of Rs.1 million. The project is expected to generate
cash flows of Rs.500,000 per year for 5 years. The company's cost of capital is 12%. What is the project's net
present value?
(a)7,99,610,00 (b)10,24,323.00 (c)10,93,515.00 (d)11,68,916.00
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15.With retention ratio of 60% and return on equity of 15.5%, the growth rate shall be
(a)14.90% (b)9.30% (c)25.84% (d)16.10%

16.A company recently issued 9% preferred shares. The preferred shares sold for Rs. 40 a share with a par of
Rs. 20. The cost of issuing the stock was Rs. 5 a share. What is the company's cost of preferred share
(a)9% (b)4.5% (c)5.1% (d)10.3%

17.A company's equity share is currently selling for Rs. 50 per share. Current year's dividend was Rs. 2 per
share and the earnings of the company is expected to increase by 5%. What is the firm's cost of existing equity
(a)9.2% (b)4.2% (c)14% (d)9%

18.Increase in which of the following would not increase cost of equity calculated on the basis of capital asset
pricing model?
(a)Market Risk premium (b)Expected market rate of interest (c)Beta (d) Effective tax rate

19.The cost of equity capital is all of the following except

(a)The minimum rate that a firm should earn on the equity-financed part of an investment
(b)A return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock
unchanged
(c)By far, the most difficult component cost to estimate
(d) Generally, lower than the before-tax cost of debt

20.A company's debt equity ratio is 3:5. Pretax cost of debt and equity are 7% and 10% respectively. What is
the weighted average cost of capital if the tax rate is 30%?
(a)12.21% (b)17% (c)14.9% (d)8.09%

21.Same As Q.17

Answer:-1.(c) 2.(b) 3.(d) 4.(c) 5.(d) 6.(d) 7.(a) 8.(c) 9.(a) 10.(b) 11.(b) 12.(d) 13.(d) 14.(a) 15.(b) 16.(b) 17.(a)
18.(d) 19.(d) 20.(d) 21.(a)

Chapter 5: Financing Decisions Capital Structure

1.Financial Structure refers to

(a)All financial resources (b)Short-term funds (c)Long-term funds (d)None of these

2.An EBIT-EPS indifference analysis chart is used for

(a)Evaluating the effects of business risk on EPS
(b)Examining EPS results for alternative financial plans at varying EBIT levels
(c)Determining the impact of a change in sales on EBIT
(d)Showing the changes in EPS quality over time

3.To have optimal capital structure the firm must have fulfill the following condition -
(a)Return on investment should be greater than cost of investment.
(b)There should be minimum financial risk.
(c)Cost of investment should be greater than return of investment.
(d)All the above.

4.Which of the following is irrelevant for optimal capital structure

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(a)Flexibility (b)Solvency (c)Liquidity (d)Control

5.The assumptions of MM hypothesis of capital structure do not include the following

(a)Capital markets are imperfect
(b)Investors have homogeneous expectations
(c)All firms can be classified into homogeneous risk classes
(d)The dividend-payout ratio is cent percent, and there is no corporate tax

6.Which one of the following approaches of the capital structure pleads that debt financing initially increases
the value of the firm; however excess debt financing beyond a particular point reduces the value of the firm?
(a)Net income approach (b)Net operating income approach (c)Traditional approach (d)M&M Approach

7.The term "capital structure" means

(a)Long-term debt, preferred stock, and equity shares (b)Current assets and current liabilities
(c)Net working capital (d) Shareholderås equity

8.A firm's optimal capital structure

(a)Is the debt-equity ratio that results in the minimum possible weighted average cost of capital
(b) 40 percent debt and 60 percent equity
(c)When the debt-equity ratio is 0.50
(d)When Cost of equity is minimum

9.Statement 1: If our corporate tax rate increases from 25% to 30%, our weighted average cost of capital is likely
to decline.
Statement 2: What is happening in the stock or bond markets is irrelevant to our decisions for how to raise
capital. We should always seek to raise capital in the exact proportions called for by our optimal capital structure
Which of the Statements 1 and 2, correct or incorrect?
(a)Correct, Correct (b)Incorrect, correct (c)Incorrect, Incorrect (d)Correct, Incorrect

10.Mr. Dashan recently came back from a conference titled Capital Structure Theory and was extremely ex-
cited about what he learned concerning Modigliani and Miller's capital structure propositions. He has been
trying to choose between three potential capital structures for his firm, Dashmart Corporation, and believes
that Modigliani and Miller's work may guide him in the right direction. The capital structures Munn is consid-
ering are:
CSI: 100% equity. CS II: 50% equity and 50% debt.CS III: 100% debt.If he uses Modigliani and Miller's proposi-
tions and includes all of their assumptions including the assumption of no taxes, which capital structure is he
most likely to choose? Which capital struture would be choosen in case of tax regime?
(a)CS I and CS II (b)CSI and CS III (c)CS II and CS III (d)Any CS and CS III

11.Which of the following statements regarding Modigliani and Miller's propositions (assuming perfect capi-
tal markets and homogenous expectations) is most accurate?
(a)Firm value is maximized with a capital structure consisting of 100% equity.
(b)The cost of equity increases as the firm increases its financial leverage
(c)The use of debt financing Increases the firmals weighted average cost of capital
(d)None of the above.

12.Assertion(A)Risk principle of capital structure is one that minimize cost of capital structure. Reason
(R)According to this principle, reliance is placed more on equity for financial purpose.
(a)Both A & R are true, and R is correct explanation of A
(b)Both A & R are true, but R is not correct explanation of A
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(c)A is true, but R is false

(d)A is false, but R is true

13.If the debt component in the capital structure is predominant

(a)The fixed interest cost of the firm will be minimum thereby decreasing its risk.
(b)Earning per share (EPS)will be very low.
(c)Dividend expectation of the equity shareholders are also & PE ratio may decrease.
(d) The fixed interest cost of the firm increases thereby increasing its risk.

14.The cost of monitoring management is considered to be a (an)

(a)Bankruptcy cost (b)Transaction cost (c)Agency cost (d) Institutional cost

15.A critical assumption of the Net Operating Income (NOI) approach to valuation is
(a)That debt and equity levels remain unchanged
(b)That dividends increase at a constant rate
(c)That ko remains constant regardless of changes in leverage
(d) That interest expense and taxes are included in the calculation

16.Ram Verse Ltd is an all equity financed company. It is considering replacing Rs. 275 lakhs equity shares with
15% debentures of the same amount. Current Market value of the company is 1750 lakhs with cost of capital
at 20%. Future EBITs are going to be constant and entire earnings are going to be distributed. Corporate Tax
Rate can be assumed to be 30%. What will be the new market value of the firm?
(a)Rs.1832.5 lakhs (b)Rs.82.50 lakhs (c)Rs.1750 lakhs (d)Rs.1732.50 lakhs

17.Assertion(A)Risk principle of capital structure is one that minimize cost of capital structure.Reason(R)According
to this principle, reliance is placed more on equity for financial purpose.
(a)Both A & R are true and Ris correct explanation of A
(b)Both A & R are true but R is not correct explanation of A
(c)A is true but R is false
(d)A is false, but R is true

18.The number of indifference points possible between 5 financial plans are

(a)5 (b)8 (c)3 (d)10

19.Consider the below mentioned statements

1. A company is considered to be over-capitalised when its actual capitalisation is lower than the proper
capitalisation as warranted by the earning capacity.
2.Both over-capitalisation and under-capitalisation are detrimental to the interests of the society.
State True or False:
(a)1-True, 2-True (b)1-False, 2-True (c)1-Faise, 2-taise (d)1-True, 2-False

20.Which of the following steps may be adopted to avoid the negative consequences of over-capitalisation
(a)The shares of the company should be split up. This will reduce dividend per share, though EPS shall remain
unchanged
(b)Issue of Bonus Shares
(c)Revising upward the par value of shares in exchange of the existing shares held by them
(d)Reduction in claims of debenture-holders and creditors.

Answer:-1.(a) 2.(b) 3.(d) 4.(b) 5.(a) 6.(c) 7.(a) 8.(a) 9.(d) 10.(d) 11.(b) 12.(d) 13.(d) 14.(c) 15.(c) 16.(a) 17.(d)
18.(d) 19.(b) 20.(d)
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Chapter 6: Financing Decisions Leverages

1.Operating Leverage is calculated as

(a)ContributionEBIT (b)EBIT PBT (c) EBIT Interest (d)EBITTax

2.Which of the following is correct

(a) CL = OL + FL (b)CL=OL- FL (c)CL = OL FL (d) OL=OL FL

3.There is no operating leverage if there is no

(a) Profit (b)Sales (c)Fixed cost (d)EPS

4.The cash required during a specific period to meet interest expenses and principal payments is referred to as
the:
(a) Debt capacity (b)Debt-service burden (c)Adequacy capacity (d)Fixed-charge burden

5.Same As Q.3

6.Financial leverage may be defined as

(a)Use of funds with a product cost in order to increase earnings per share
(b)Use of funds with a contribution cost in order to increase earnings before interest and taxes
(c)Use of funds with a fixed cost in order to increase earnings per share
(d)Use of funds with a fixed cost in order to increase earnings before interest and taxes

7.If DOL is 1.24 and DFL is 1.99, DCL would be

(a)2.14 (b)2.18 (c)2.31 (d)2.47

8.Financial Leverage is calculated as

(a)EBIT Contribution (b)EBIT  PBT (c) EBIT  Sales (d)EBIT Variables Cost

9.A firm has sales of a 75,00,000, variable cost of a 42,00,000 and fixed cost of a 6,00,000. It has a debt of a
45,00,000 at 9% and equity of a 55,00,000. Does it have favourable financial leverage?
(a)ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(b)ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(c)ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(d)ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.

10.Degree of combined leverage is the fraction of

(a)Degree of combined leverage is the fraction of
(b)Percentage change in EPS on Percentage change in Sales
(c)Percentage change in Sales on Percentage change in EPS
(d)Percentage change in EPS on Percentage change in EBIT

11................is the ratio of net operating income before fixed charges to net operating income after fixed
charges.
(a)Financial Leverage (b)Operating Leverage (c)Operation Leverage (d)Combined Leverage

12.If EBIT is 15,00,000, interest is 2,50,000, corporate tax is 40%, degree of financial leverage is;
(a)1.11 (b)1.20 (c)1.31 (d)1.41

13.Which of the following indicates business risk

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(a)Operating leverage (b)Financial leverage (c)Combined leverage (d)Total leverage

14.A firm has a DOL of 4.5 at Q units.What does this tell us about the firm?
(a)If sales rise by 4.5%, then EBIT will rise by 1% (b)If EBIT rises by 4.5%, then EPS will rise by 1%.
(c) If EBIT rises by 1%, then EPS will rise by 4.5% (d) If sales rise by 1%, then EBIT will rise by 4.5%

15.Given,Operating fixed costs 20,000;Sales 1,00,000;P/V ratio 40%.The operating leverage is:
(a)2.00 (b)2.50 (c)2.67 (d) 2.47

16.Operating leverage is 7 and financial leverage is 2.2858. How much change in sales will be required to bring
70% change in EBIT?
(a)10% (b)70% (c)11.429% (d) 30%

17.A firm with high operating leverage is characterized by...... while one with high financial leverage is charac-
terized by
(a)Low fixed cost of production; low fixed financial costs
(b)High variable cost of production; high variable financial costs.
(c)High fixed costs of production; high fixed financial costs
(d) Low costs of production; high fixed financial costs

18.Total assets of Alpha Company are â¹ 3,00,000. The company's total assets turnover ratio is 3, its fixed
operating cost is â 1,50,000 and its variable operating cost ratio is 50%. The income-tax rate is 50%. It also has
long term debts of a 1,20,000 on which interest @ 10% is payable. Operating, Financial & Combined Leverages
of the company are -
(a)1.5; 1.042; 1.563 respectively (b)1.05; 1.42; 1.05625 respectively
(c) 1.50; 1.42; 2.13 respectively (d) 1.55; 1.042; 1.6151 respectively

19.Output (units) = 3,00,000 Fixed cost = â¹ 3,50,000 Unit variable cost = 1.00 Interest expenses = â¹ 25,000 Unit
selling price = â¹ 3.00 Applicable tax rate is 35% Calculate Financial Leverage.
(a)1.11 (b)2.40 (c) 2.67 (d)1.07

20.If degree of financial leverage is 3 and there is 15% increase in Earning per share (EPS), then EBIT will be
(a)Decrease by 15% (b) Increase by 45% (c) Decrease by 45% (d)Increase by 5%

21.From the following information, calculate combined leverage:

Sales 20,00,000; Variable Cost 40%; Fixed Cost 10,00,000;Borrowings 10,00,000@ 8% p.a.
(a)10 times (b)6 times (c)1.667 times (d)0.10 times

22.If Margin of Safety is 0.25 and there is 8% increase in output, then EBIT will be:
(a)Decrease by 2% (b)Increase by 32% (c)Increase by 2% (d)Decrease by 32%

Answer:-1.(a) 2.(c) 3.(c) 4.(b) 5.(c) 6.(c) 7.(d) 8.(b) 9.(c) 10.(b) 11.(b) 12.(b) 13.(a) 14.(d) 15.(b) 16.(a) 17.(c)
18.(a) 19.(a) 20.(d) 21.(a) 22.(b)

Chapter 7: Investment Decisions

1.Which of the following statement is not true for capital budgeting
(a)Irreversible decisions (b) Sunk Cost is Relevant cost
(c)Affect future stability of firm (d)Can relate to Business Expansion

2.Which of these methods of capital budgeting are based on cash flows

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(a)Payback Method (b) NPV (c)Profitability Index (d)All of the above

3.Which of the following is one of the steps in capital budgeting process

(a)Controlling Selling Expenses (b)Determination of Price
(c)Deciding the capital structure (d)Estimation of Project cash flows

4.Same As Q.2

5.Capital Budgeting is important for the below reasons except

(a)They are irreversible (b)They involve substantial investment
(c)They are for short period of time (d) They are complex & futuristic

6.Which of the following is not a capital budgeting decision

(a)Inventory Control (b)Business Expansion
(c)Acquisition of Long Term Asset (d) Replacement of Existing Asset

7.Depreciation is taken into consideration in capital budgeting because

(a)It reduces Tax liability (b)It is unavoidable (c)It is a cash outflow (d) It is a cash inflow

8.A project whose useful life is 4 years has IRR of 15% and will save cost of a 1,60,000 annually. What is the
project cost i.e. initial investment?
(a)10,66,667 (b)4,60,000 (c)5,32,800 (d)4,56,800

9.The best methods to evaluate the projects with unequal lives can be
(a)ARR or Payback Period (b)Replacement Chain or Equivalent Annualized Criteria
(c) NPV or Discounted Payback (d)None of these

10.With limited capital & number of available projects, one should select the project with
(a)IRR less than Cost of Capital (b)Profitability Index less than 1
(c)Lowest Internal Rate of Return (d) Highest Net Present Value

11.Which of the following is not followed in discounting techniques of capital budgeting

(a)Cash Flow Principal (b)Accrual Principal (c) Interest Exclusion (d)Post Tax Principal

12.With IRR criteria and no limitation on funds, one can accept projects which have
(a)IRR more than cost of capital (b)IRR less than cost of capital
(c)IRR being equal to borrowing rate (d) All of the above

13.Discounted payback period for a project shall be the payback period of the same project.
(a)Equal to (b)More Than (c)Less Than (d)Half

14.Using capital budgeting techniques, A project is accepted when

(a)Net Present Value is positive (b)Profitability Index is more than 1
(c)Its IRR is greater than Cost of Capital (d)Any or me above

15.The Reinvestment assumption under NPV method assumes that the cash flows are reinvested at the
(a)Marginal Cost of Capital (b)Internal Rate of Return
(c)Discount rate used to calculate NPV (d)Bank Borrowing rate

16.Bhaskar Ltd. estimated that a proposed projectâis 8-year net cash benefit will be a 4,000 per year for years
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1 to 8, with an additional terminal benefit of a 8,000 at the end of the eighth year. Assuming that these cash
inflows satisfy exactly the required rate of return of 8 percent, the projectâs initial cash outflow is closest to
which of the following four possible answers?
(a)27,308 (b)25,149 (c)14,851 (d) 40,000

17.A project's net present value, ignoring income tax considerations, is normally affected by the
(a)Proceeds from the sale of the asset to be replaced
(b)Carrying amount of the asset to be replaced by the project.
(c)Amount of annual depreciation on the asset to be replaced
(d)Amount of annual depreciation on fixed assets used directly on the project

18.Which of the following events would decrease the internal rate of return of a proposed asset purchase?
(a)Decrease related working capital requirements (b)Shorten the payback period
(c)Decrease tax credits on the asset (d)Use accelerated, instead of straight-line depreciation

19.In considering the payback period for three projects, Sun Corp. gathered the following data about cash
flows:
Year 1 Year 2 Year 3 Year 4
Project X (20,000) 6,000 6,000 6,000
Project Y (50,000) 30,000 30,000 10,000
Project Z (20,000) 10,000 10,000 5,000
(a)Projects X, Y and Z. (b)Projects Y and Z. (c)Project Y only. (d)Projects X and

20.With initial investment of al 100,000 and yearly cash inflows of âm 27,000 for 5 years, the NPV of the
project with cost of capital of 10% shall be approximately
(a)35,000 (b)-2,357 (c)2,357 (d)-35,000

Answer:-1.(b) 2.(d) 3.(d) 4.(d) 5.(c) 6.(a) 7.(a) 8.(d) 9.(d) 10.(d) 11.(b) 12.(a) 13.(b) 14.(d) 15.(c) 16.(a) 17.(a)
18.(c) 19.(b) 20.(c)

Chapter 8: Dividend Decisions

1.Which one of the following is the assumption of Gordon's Model
(a)Ke > g (b)Retention ratio, (b), once decide upon, is constant (c)Firm is an all equity firm (d)All of the above

2.If the shareholders prefer regular income, how does this affect the dividend decision
(a)It will lead to payment of dividend (b)It is the indicator to retain more earnings
(c) It has no impact on dividend decision (d)Cannot say

3.What are the different options other than cash used for distributing profits to shareholders
(a)Bonus shares (b)Stock split (c) Both (a) and (b) (d)None of the above

4.Which of the following is the limitation of Linter's model

(a)This model does not offer a market price for the shares
(b)The adjustment factor is an arbitrary number and not based on any scientific criterion or methods
(c)Both (a) & (b)
(d)None of the above

5.The 'Dividend-Payout Ratio' is equal to

(a)The Dividend yield plus the capital gains yield
(b)Dividends per share divided by Earning per Equity Share
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(c)Dividends per share divided by par value per share

(d)Dividends per share divided by current price per share

6.According to the residual dividend theory dividend payment is determined based on

(a)The availability of excess fund after all investment opportunities with positive net present value are under-
taken
(b)The preference of shareholder for a consistent dividend payout ratio
(c)The desire to maintain a stable dividend payout ratio regardless of investment opportunity.
(d)The goal of maximizing shareholder wealth by paying out all available earning as dividend

7.Which of the following is the irrelevance theory?

(a)Walter model (b)Gordon model (c)M.M. hypothesis (d)Linteras model

8.Mature companies having few investment opportunities will show high payout ratios, this statement is
(a)False (b)True (c) Partial true (d)None of these

9.If the company's D/P ratio is 60% & ROI is 16%, what should be the growth rate
(a)5% (b)7% (c)6.4% (d)9.6%

10.All of the following are true of stock splits except:

(a)More Dividend (b)Less dividend (c)No Dividend (d)None of the above

11.Same As Q.4

12.Which of the following is the limitation of Linter's model?

(a)Market price per share is reduced after the split. (b)the number of outstanding shares is increased.
(c)Retained earnings are changed. (d)Proportional ownership is unchanged.

13.If the financing requirements are to be executed through debt (relatively cheaper source of finance), then
it would be preferable to distribute..........
(a)More Dividend (b)Less dividend (c) No Dividend (d)None of the above

14.Which of the following statement is correct with respect to Gordon's model

(a)When IRR is greater than cost of capital, the price per share increases and dividend pay-out decreases.
(b)When IRR is greater than cost of capital, the price per share decreases and dividend pay-out increase
(c) When IRR is equal to cost of capital, the price per share increases and dividend pay-out decreases
(d)When IRR is lower than cost of capital, the price per share increases and dividend pay-out decreases

15.What should be the optimum Dividend pay- out ratio, when r = 15% & K = 12%:
(a)100% (b)50% (c)Zero (d)None of the above

16.The cost of capital of a firm is 12% & its expected earning per share at the end of the year is Rs 20. its
existing payout ratio is 25%. the company is planning to increase its payout ratio to 50% what will be the effect
of this change on the market price of equity share (MPS) of the company as per Gordon model, If the reinvest-
ment rate of the company is 15%
(a)lt will increase by Rs 444.45 (b)It will decrease by Rs 444.45
(c)lt will increase by Rs 222.22 (d)It will decrease by Rs 222.22

17.If a firm declared 25% dividend on share of face value of Rs 10 its growth rate is 5%& its rate of capitaliation
is 12% its expected price would be Rs...
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(a)31.2 (b)33.50 (c)36 (d)37.50

18.Compute EPS according to Graham & Dodd approach from the given information:
Market price Rs.56;Dividend pay-out ratio 60%; Multiplier 2
(a)Rs 30 (b)Rs 56 (c)Rs 28 (d)Rs 84

19.Determine the market price of share of XYZ Itd as per gordon's model, given equity capitalisation rate =11%
expected earning =Rs. 20 rate of return on investement =10% & retention ratio =30%
(a)165 (b)175 (c)185 (d)195

Answer:-1.(d) 2.(a) 3.(a) 4.(c) 5.(b) 6.(a) 7.(c) 8.(b) 9.(c) 10.(a) 11.(c) 12.(c) 13.(a) 14.(a) 15.(c) 16.(b) 17.(d)
18.(a) 19.(b)
Chapter 9: Management Of Working Capital
1.An organization carrying higher levels of inventory is most probably following which policy of working capi-
tal management
(a) Conservative (b)Aggressive (c)Moderate (d)Opportunistic

2.Which of the following is not a determinant of working capital

(a)Nature of Business (b)Target Profit (c)Type of Product (d)Credit Policy

3.Same As Q.2

4.Which of the following is not an example of current assets

(a)Accrued Income (b)Cash & Bank (c)Short term advances to creditors (d)Bank Overdraft

5.Strict credit policy with customers may not result in

(a)Faster Collections (b)Decline in Sales (c)Increase in Sales (d)Lower Collection Period

6.Increase in which of the following shall reduce the net operating cycle
(a)Work in Process holding period (b)Raw Material Storage period
(c)Receivables collection period (d) Credit period allowed by Suppliers

7.Gross Working Capital refers to

(a)Current Assets - Current Liabilities (b)Current Liabilities - Current Assets
(c)Current Assets (d)Current Liabilities

8.Same As Q.5

9.As per Miller-Orr cash management model, when cash balance reaches lower limit then
(a)It may be invested in securities (b)Loan may be taken
(c)Some marketable securities may be liquidated (d)Creditor payments should be put on hold

10.Current Liabilities can be settled by

(a)Creation of a new current liability (b)Use of Non-current assets
(c)Creation of Non-Current Liability (d)Proceeds of Long-Term Investments

11.How can a company improve its accounts receivable turnover?

(a)Extend payment terms for customers (b)Increase credit limits for customers
(c)Offer discounts for early payment (d)All of the above
12.Need for cash can be categorized as any of these except
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(a)Transaction (b)Entertainment (c)Speculative (d)Precautionary

13.Which of these components of Working Capital require consideration of Cash Cost

(a)Raw Material Inventory (b)Receivables (c)Work in Progress Inventory (d)Trade Payable

14.An organization carrying higher levels of inventory is most probably following which policy of working
capital management
(a)Conservative (b)Aggressive (c)Moderate (d)Opportunistic

15.How is the quick ratio different from the current ratio?

(a)The quick ratio includes Inventory in its calculation, while the current ratio does not.
(b)The quick ratio excludes Inventory from its calculation, while the current ratio includes it.
(c)The quick ratio measures a companys ability to pay long-term debts, while the current ratio measures its
ability to pay short-term debts,
(d)The quick ratio measures a companys profitability, while the current ratio measures its liquidity.

16.All of these are methods of cash budgeting except

(a)Adjusted Balance Sheet Method (b)Adjusted Income Method
(c)Receipts & Payment Method (d)Taxable Income Method

17.Electronic funds transfer may eliminate most types of floats except

(a)Billing Float (b) Mail Float (c)Cheque Processing Float (d)Bank Processing Float

18.Increase in which of the following shall reduce the net operating cycle
(a)Work in Process holding period. (b)Raw Material Storage period
(c)Receivables collection period. (d)Credit period allowed by Suppliers

19.Which of these ratios could be a better indicator of Working Capital

(a)Current Assets to Fixed Assets (b)Interest Coverage Ratio (c)Debt Equity Ratio (d)Financial Leverage
20.If a company has profits with a certain cash conversion or net operating cycle, considering reducing cash
conversion cycle further, with other things remaining the same, would
(a)Increase the profits which might not be in the same proportion as the number of days reduced in cash conver-
sion cycle.
(b)Reduce the profits in the same proportion as the number of days reduced in cash conversion cycle.
(c)Convert profits to losses which might not be in the same proportion as the number of days reduced in cash
conversion cycle
(d)ncrease profits in the same proportion as the number of days reduced in cash conversion cycle

21.What is the relationship between the allowance for doubtful accounts and working capital
(a) When bad debts expense is recorded for the period, working capital decreases.
(b)When bad debts expense is recorded for the period, cash increases
(c)When an account is written off against the allowance, working capital decreases
(d)When an account is written off against the allowance, cash decreases

22.Operating in double shifts may not impact which of the below (in terms of units at least)
(a)Work in Process Inventory (b)Raw Material Inventory (c)Finished Goods Inventory (d)Receivables

Answer:-1.(a) 2.(b) 3.(b) 4.(d) 5.(c) 6.(d) 7.(c) 8.(c) 9.(c) 10.(a) 11.(c) 12.(b) 13.(b) 14.(a) 15.(b) 16.(d) 17.(a)
18.(d) 19.(a) 20.(a) 21.(a) 22.(a)
CASE SCENARIO BASED MCQ
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CASE 1.XYZ Ltd.is a company involved in manufacturing of toys and it is presently all equity financed. The direc-
tors of th company have been evaluating investment in a project which will require 400 lakhs capital expenditure
on new machinery. They expect the capital investment to provide annual cash flows of 60 lakhs indefinitely
which is net of all tax adjustments. The discount rate which it applies to such investment decisions is 12% net.The
directors of the company believe that the current capital structure fails to take advantage of tax benefits o debt
and propose to finance the new project with undate perpetual debt secured on the company's assets. The
company intends to issue sufficient debt to cover the cos of capital expenditure and the after tax cost of issue.The
current annual gross rate of interest required by the market on corporate undated debt of similar risk is 9%. The
after tax costs of issue are expected to be 5% of the investment amount required. Company's tax rate is 30%.?

1.What is the adjusted discount rate?

(a)8.80% (b)7.65% (c)6.32% (d)6.11%

2.What is the adjusted present value of the investment?

(a)Rs. 126 lakhs (b)Rs. 208 lakhs (c)Rs. 206 lakhs (d)Rs. 104 lakhs

3.Annual income required to make NPV to zero?

(a)Rs. 25.68 lakhs (b)Rs. 24.64 lakhs (c)Rs. 28.64 lakhs (d)Rs. 22.52 lakhs

4.What is the value of tax relief on interest payment in perpetuity?

(a)Rs. 12.6 lakhs (b)Rs. 126 lakhs (c)Rs. 10 lakhs (d)Rs. 100 lakhs

5.Circumstances in which ADR may be used to evaluate future investments.i. Business risk of the new venture
is identical to the one being evaluated. ii. The project is to be financed by the same method. iii. The project is
to be financed by the same method on the same terms. iv. Can be used in any situation.
(a)(i) only (b)(1) and (ii) only (c)(i) and (iii) only (d)(i), (ii), (iii) and (iv)
Answer:-1.(d) 2.(c) 3.(a) 4.(b) 5.(c)

CASE 2. M/s ARC Ltd is an established entity in the telecommunication industry with 49.95% market share. Most
of its telecommunication lines are based on 2G, 3G and 4G spectrum. However now the market is foreseeing a
technological disruption in the form of 5G technology. To maintain a competitive advantage, it needs to heavily
invest in 5G equipments and deploy the same for users latest by the end of year 3 from now. The entire project
is going to cost 9,000 crores. The management is wondering how such a huge amount is going to be raised.
A financial consultant has recently been hired by ARC to evaluate the various ways to raise capital. On the basis
of his experience and knowledge, the consultant is of the view that telecom industry should not deploy fixed cost
funds in excess of 40% of total capital. Also, preference share capital should not exceed 10% of total capital. ARC
currently has 2000 crores in the form of reserves represented by short term money market instruments. It can
raise money by way of debentures by issuing them at a premium of 5% with redemption value of Rs. 110 after 5
years. The debentures would require an annual interest payment of Rs. 8 p.a. The preference shares will be
issued at a discount of 10% and redeemed at premium of 10% after 10 years requiring an annual dividend of
10%. The company is sceptical of cash flows in near term after deployment of 5G and therefore would issue the
above stated debentures only to the extent of 50% of total debt funds and balance will be raised by zero coupon
bonds, which will be issued at a discount of 40% and redeemed at par after 5 years. Current price of share od ARC
stands at an average of Rs. 147. The company has recently paid dividend of Rs. 11 per share and considering the
5G deployment and other technological requirements in long run, it is likely to continue retaining 56% of its
earnings. The reinvested retained earnings are likely to offer a return of 15% to the shareholders. It is planning to
raise a part of additional equity by way of rights offering to its shareholders. The rights entitle the existing
shareholders to buy shares at a discount of 15% to current average market price. However only 40% of the
required fresh equity can be raised by way of right issue. The balance equity portion will be raised by way of new
series of equity shares with differential voting rights. They will be promised a dividend of 1.25x of ordinary equity
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shareholder and due to lower voting rights their cost of capital will require a premium of 50% over ordinary
equity shares.
1. What will be the amount (in Rs. Crores )of differential voting rights shares to be issued assuming that
maximum limits are to be adhered to
(a) 2040 (b) 1360 (c) 2000 (d) 900
2.Calculate the cost of debenture using YTM method
(a) 10.76% (b) 8.43% (c) 12.37% (d) 16.51%
3. Calculate the cost of preference shares using YTM method
(a) 10.76% (b) 8.43% (c) 12.37% (d) 16.51%
4. What will be the share price of shares with differential voting rights?
(a) 91.07 (b) 100 (c) 124.95 (d) 147
5. What will be the minimum required return from 5G deployment to breakeven the cost of capital?
(a) 10.76% (b) 8.43% (c)16.11% (d) 16.51%
Solution:
1(a) 2040
Capital Structure Amount (Rs.)
Rights issue 1,360
4:6
DVR Equity Issue 2,040
Retained earnings Fixed 2,000
Preference Shares 10% 900
Debentures 1,350
30% (1:1)
Zero Coupon Bonds 1,350
Total 9,000
2.(b) Calculation of Kd of debentures : Approx Kd= 8.37%
Year Cashflows PVF @ 8% PV @ 8% PVF @ 9% PV @ 9%
1 to 5 8 3.9927 31.94 3.8897 31.12
5 110 0.6806 74.87 0.6499 71.49
cash outflow 106.81 102.61
cash inflow 90 1 105 105
NPV -1.81 2.39
Kd = 8.43%
3.(c)Calculation of Kp of Preference Shares
Approx Kp= 12%
Year Cashflows PVF @ 12% PV @ 12% PVF @ 13% PV @ 13%
1 to 10 10 5.6502 56.5 5.4262 54.26
10 110 0.322 35.42 0.2946 32.4
cash outflow 91.92 86.67
cash inflow 90 1 90 90
NPV -1.92 3.33
Kp=12.37%
4.(a)Calculation of Cost of Equity
Existing Shareholders: Po= 147;Do= 11;b= 56%;r= 15%;Growth rate (g) = bxr = 8.40%;D1= 11x (1+8.4%) = 11.924
Ke= 11.924/147 + 8.4%= 16.51%
Rights Shares:Po= 147 x 85% = 124.95;Do= 11;b= 56%;r= 15%
Growth rate (g) = b xr = 8.40%;D1= 11 x (1+8.4%) = 11.924;Ke= 11.924/124.95 + 8.4% = 17.94%
Differential Voting rights:Ke= 16.51% x1.5 = 24.77%;D1= 11.924 x 1.25 = 14.905;G= 8.40%
Po= 14.905/(24.77%-8.40%);Po= 91.07
5.(c)
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Capital Structure Amount(Rs.) Weight Cost Wx C

Rights issue 1360 0.1511 17.94% 0.0271
4:6
DVR Equity Issue 2040 0.2267 24.77% 0.0561
Retained earnings Fixed 2000 0.2222 16.51% 0.0367
Preference Shares 10% 900 0.1 0 12.37% 0.0124
Debentures 1350 0.15 8.43% 0.0126
30% (1:1)
Zero Coupon Bonds 1350 0.15 10.76% 0.0161
Total 9000 1 16.11%

CASE 3. Tiago Ltd is an all-equity company engaged in manufacturing of batteries for electric vehicles. There has
been a surge in demand for their products due to rising oil prices. The company was established 5 years ago with
an initial capital of Rs. 10,00,000 and since then it has raised funds by IPO taking the total paid up capital to Rs. 1
crore comprising of fully paid-up equity shares of face value Rs. 10 each. The company currently has undistrib-
uted reserves of Rs. 60,00,000. The company has been following constant dividend payout policy of 40% of
earnings. The retained earnings by company are going to provide a return on equity of 20%. The current EPS is
estimated as Rs 20 and prevailing PE ratio on the share of company is 15x. The company wants to expand its
capital base by raising additional funds by way of debt, preference and equity mix. The company requires an
additional fund of Rs. 1,20,00,000. The target ratio of owned to borrowed funds is 4:1 post the fund-raising
activity. Capital gearing is to be kept at 0.4x.
The existing debt markets are under pressure due to ongoing RBI action on NPAs of the commercial bank. Due to
challenges in raising the debt funds, the company will have to offer Rs. 100 face value debentures at an attractive
yield of 9.5% and a coupon rate of 8% to the investors. Issue expenses will amount to 4% of the proceeds.
The preference shares will have a face value of Rs. 1000 each offering a dividend rate of 10%. The preference
shares will be issued at a premium of 5% and redeemed at a premium of 10% after 10 years at the same time at
which debentures will be redeemed.
The CFO of the company is evaluating a new battery technology to invest the above raised money. The technol-
ogy is expected to have a life of 7 years. It will generate a after tax marginal operating cash flow of Rs. 25,00,000
p.a. Assume marginal tax rate to be 27%.
1.Which of the following is best estimate of cost of equity for Tiago Ltd?
(a) 12.99% (b) 11.99% (c) 13.99% (d) 14.99%
2.Which of the following is the most accurate measure of issue price of debentures?
(a) 100 (b) 96 (c) 90.58 (b) 95.88
3.Which of the following is the best estimate of cost of debentures to be issued by the company? (Using
approximation method)
(a) 7.64% (b) 6.74% (c) 4.64% (d) 5.78%
4.Calculate the cost of preference shares using approximation method
(a)10.23% (b) 9.77% (c) 12.12% (d) 12.22%
5. Which of the following best represents the overall cost of marginal capital to be raised?
(a)10.52% (b) 17.16% (c)16.17% (d) 16.71%

Solution:
1.(d)
B = retention ratio=0.6, r=return on equity=20%, DPS=D0=20 x 0.4= 8,
MPS = PO = EPS X PE = 20 x 15=300
G = b.r=0.6 x 20% = 12%
D1= DO(1+g) = 8 (1.12) = 8.96
Ke = D1/PO + g = 8.96/300+ 0.12 = 14.99%
2.(c) Price of debentures= PV of future cash flows for investor discounted at their yield
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= 8 x PVAF(9.5%,10 years) + 100 x PVF(9.5%, 10 years)= 8 x 6.2788 + 100 x 0.4035=50.2304 + 40.35=90.58

3.(a)NP = 90.58 x 96%=86.96, RV= 100, Interest=8, t=0.27, n= 10 Kd= 7.64%
4.(b) Kp = 9.77%
5.(a)
Existing Total Additional
Equity Funds 1,60,00,000 2,00,00,000 40,00,000
Preference Shares 24,00,000 24,00,000
Debt 56,00,000 56,00,000
1,60,00,000 2,80,00,000 1,20,00,000
Capital gearing 0.4
(PSC+ Debt)/Equity = 0.4
(Total Funds Equity)/Equity = 0.4
(2.8crores-Equity)/Equity=0.4
Equity 2 crores
Weighted avg cost of Weights Cost W.C
marginal capital
Equity Funds 40,00,000 0.333333333 14.99% 5.00%
Preference Shares 24,00,000 0.2 9.77% 2.00%
Debt 56,00,000 0.466666667 7.64% 3.565%
Total 1,20,00,000 10.52%

CASE 4. AHF Ltd. is a well-established organization known for its innovative products and services. With a strong
financial standing and a commitment to growth, the company is exploring different financing options to fuel its
expansion strategies. AHF Ltd. is considering issuing debentures to raise funds for expansion and investment
opportunities. The company aims to determine the cost of debt after tax under various scenarios of issuance,
considering factors such as issue price and brokerage expenses. CA Aananda, Chief Financial Officer of AHF Ltd.
plans to issue ?12,00,000, 15% debentures of 100 each, redeemable after a fixed period of 10 years. The com-
pany operates in a 35% tax bracket, which will impact the cost of debentures after tax. The cost of debt after tax
is calculated by adjusting the coupon rate for tax savings on interest payments. Additionally, brokerage expenses,
if applicable, are factored into the analysis to determine the overall cost of debentures.
By analysing the cost of debt under different issuance scenarios, CA Aananda can make informed decisions
regarding its financing strategy. Understanding the impact of issue price and brokerage expenses on the cost of
debentures enables the company to optimize its capital structure and enhance shareholder value. Continuous
evaluation of financing options and market conditions will be essential for AHF Ltd. to maintain financial flexibil-
ity and support its long-term growth objectives. Calculate Cost of Debentures after tax and help CA Aananda,
CFO of AHF Ltd. to understand the various scenarios.
1. What will be the cost of debenture if the debentures are issued at par?
(a) 9.25% (b) 15% (c) 7.80% (d) 9.75%
2. What will be the cost of debenture if the debentures are issued at 10% discount?
(a) 10.95% (b) 11.32% (c) 8.33% (d) 10%
3. What will be the cost of debenture if the debentures are issued at 10% premium?
(a) 8.33% (b) 8.66% (c)10.23% (d) 11.32%
4. What will be the cost of debenture if the brokerage is paid at 2% and issue is at par?
(a) 8.33% (b) 15.35% (c) 10.05% (d) 9.98%
5.What will be the cost of debenture if the debenture's current market price is `120 and are redeemed at par?
(a) 7% (b) 7.05% (c) 7.68% (c) 9.75%
Solution:
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(RV - NP)
I(1 - t) +
n
1.(d) Cost of Debentures ,Kd = (RV + NP)
× 100
2
I = Interest on debentures;t = Tax Rate;RV Redemption Value;NP= Current Market Price or Net Proceed received
n =Period of debenture;Cost of debenture if the debentures are issued at par.
(100 - 100)
15(1 - 0.35) +
Cost of Debentures,Kd = 10 × 100 = 9.75%
(100 + 90)
2
2.(b)Cost of debenture if the debentures are issued at 10% discount.
(100 - 90)
15(1 - 0.35) +
Cost of Debentures,Kd = 10 × 100 = 11.32%
(100 - 90)
2
3.(a)cost of debenture if the debentures are issued at 10% premium.
(100 - 110)
15(1 - 0.35) +
Cost of Debentures,Kd = 10 × 100 = 8.33%
(100 + 110)
2
4.(c)cost of debenture if the brokerage is paid at 2% and issue is at par.
(100 - 98)
15(1 - 0.35) +
Cost of Debentures,Kd = 10 × 100 = 10.05%
(100 + 98)
2
5.(b)cost of debenture if the debenture's current market price is `120 and are redeemed at par.
(100 - 120)
15(1 - 0.35) +
Cost of Debentures ,Kd = 10 × 100 = 7.05%
(100 + 120)
2

CASE 5. Ranu & Co. has issued 10% debenture of face value 100 for Rs. 10 lakh. The debenture is expected to be
sold at 5% discount. It will also involve floatation costs of Rs. 10 per debenture. The debentures are redeemable
at a premium of 10% after 10 years. Calculate the cost of debenture if the tax rate is 30%.
1.Calculate the cost of debenture (a) 8.97% (b) 9.56% (c) 8.25% (d) 10.12%
Solution: 1.(a)

CASE 6.A project requires an initial investment of Rs. 20,000 and it would give annual cash inflow of Rs. 4,000.
The useful life of the project is estimated to be 10 years.
1.What is payback reciprocal/Approximated IRR? (a) 20% (b) 15% (c)25% (d) 12%
Solution: 1.(a)

CASE 7.A Ltd. is evaluating a project involving an outlay of Rs. 10,00,000 resulting in an annual cash inflow of Rs.
2,50,000 for 6 years. Assuming salvage value of the project is zero;
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1.DETERMINE the IRR of the project. (a) 12.98% (b) 12.21% (c) 14.98% (d) 10.65%
Solution: (a)
10,00,000
First of all, we shall find an approximation of the payback period = =4
2,50,000
Now, we shall search this figure in the PVAF table corresponding to 6-year row.
The value 4 lies between values 4.111 and 3.998, correspondingly discounting rates are 12% and 13% respec-
tively. NPV @ 12% and 13% is:
NPV12%= (10,00,000) + 4.111 x 2,50,000 = +27,750; NPV13%= (10,00,000) + 3.998 x 2,50,000 = -500
The internal rate of return is, thus, more than 12% but less than 13%. The exact rate can be obtained by interpo-
lation:
IRR= 12.978% or 12.98%

CASE 8. ANP Ltd. is providing the following information:

Annual cost of saving - 48,000;Useful life - 5 years;Salvage value Zero;Internal rate of return - 15%;Profitability
index - 1.05
1.What is projects initial investment?
(a)1,60,900 (b)1,60,896 (c) 1,60,494 (d) 1,60,499
Solution:(b)
Annual cost saving = Cash inflow = 48,000;Useful life = 5 years;IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow @ 15% for 5 years is 3.353= 48,000 x 3.352 = 1,60,896.
Thus, Project cost = 1,60,896

CASE 9. NV Industries Ltd. is a manufacturing industry which manages its accounts receivables internally by its
sales and credit department. It supplies small articles to different industries. The total sales ledger of the com-
pany stands at Rs. 200 lakhs of which 80% is credit sales. The company has a credit policy of 2/40, net 120. Past
experience of the company has been that on average out of the total, 50% of customers avail of discount and the
balance of the receivables are collected on average in 120 days. The finance controller estimated, bad debt
losses are around 1% of credit sales.
With escalating cost associated with the in-house management of the debtors coupled with the need to unbur-
den the management with the task so as to focus on sales promotion, the CFO is examining the possibility of
outsourcing its factoring service for managing its receivables. Currently, the firm spends about Rs. 2,40,000 per
annum to administer its credit sales. These are avoidable as a factoring firm is prepared to buy the firm's receiv-
ables. The main elements of the proposal are: (i) It will charge 2% commission (ii) It will pay advance against
receivables to the firm at an interest rate of 18% after withholding 10% as reserve.
Also, company has option to take long term loan at 15% interest or may take bank finance for working capital at
14% interest.You were also present at the meeting; being a financial consultant, the CFO has asked you to be
ready with the following questions:
Consider year as 360 days.
1.What is average level of receivables of the company?
(a)Rs. 53,33,333 (b) Rs. 35,55,556 (c)Rs. 44,44,444 (d) Rs. 71,11,111
2. How much advance factor will pay against receivables?
(a) Rs. 31,28,889 (b) Rs. 39,11,111 (c) Rs. 30,03,733 (d) Rs. 46,93,333
3.What is the annual cost of factoring to the company?
(a) Rs. 8,83,200 (b) Rs. 4,26,667 (c) Rs. 5,51,823 (d) Rs. 4,00,000
4.What is the net cost to the company on taking factoring service?
(a) Rs. 4,00,000 (b) Rs. 4,26,667 (c) Rs. 3,50,000 (d) Rs. 4,83,200
5.What is the effective cost of factoring on advance received?
(a) 16.09% (b) 13.31% (c) 12.78% (d) 15.89%
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Solution:
1.(b)
Working Note:
Particulars (Rs.)
Total Sales Rs. 200 lakhs
Credit Sales (80%) Rs. 160 lakhs
Receivables for 40 days Rs. 80 lakhs
Receivables for 120 days Rs. 80 lakhs
Average collection period [(40 x 0.5) + (120 x 0.5)] 80 days
Average level of Receivables (Rs. 1,60,00,000 x 80/360) Rs.35,55,556
Factoring Commission (Rs. 35,55,556 x 2/100) Rs. 71,111
Factoring Reserve (Rs. 35,55,556 x 10/100) Rs. 3,55,556
Amount available for advance (Rs. 35,55,556 (3,55,556 + 71,111)} Rs. 31,28,889
2.(c)
Working Note:
Particulars (Rs.)
Total Sales Rs. 200 lakhs
Credit Sales (80%) Rs. 160 lakhs
Receivables for 40 days Rs. 80 lakhs
Receivables for 120 days Rs. 80 lakhs
Average collection period [(40 x 0.5) + (120 x 0.5)] 80 days
Average level of Receivables (Rs. 1,60,00,000 x 80/360) Rs.35,55,556
Factoring Commission (Rs. 35,55,556 x 2/100) Rs. 71,111
Factoring Reserve (Rs. 35,55,556 x 10/100) Rs. 3,55,556
Amount available for advance (Rs. 35,55,556 (3,55,556 + 71,111)} Rs. 31,28,889
Interest Rs. 1,25,156
Advance to be paid (Rs.31,28,889-Rs.1,25,156) Rs. 30,03,733
3.(a)
Working Note:
Particulars (Rs.)
Total Sales Rs. 200 lakhs
Credit Sales (80%) Rs. 160 lakhs
Receivables for 40 days Rs. 80 lakhs
Receivables for 120 days Rs. 80 lakhs
Average collection period [(40 x 0.5) + (120 x 0.5)] 80 days
Average level of Receivables (Rs. 1,60,00,000 x 80/360) Rs.35,55,556
Factoring Commission (Rs. 35,55,556 x 2/100) Rs. 71,111
Factoring Reserve (Rs. 35,55,556 x 10/100) Rs. 3,55,556
Amount available for advance (Rs. 35,55,556 (3,55,556 + 71,111)} Rs. 31,28,889
Interest Rs. 1,25,156
Advance to be paid (Rs.31,28,889-Rs.1,25,156) Rs. 30,03,733
Statement Showing Evaluation of Factoring Proposal
A. Annual Cost of Factoring to the Company: (Rs.)
Factoring commission (Rs. 71,111 x 360/80) 3,20,000
Interest charges (Rs. 1,25,156 x 360/80) 5,63,200
Total 8,83,200
4.(d)
Working Note:
Particulars (Rs.)
Total Sales Rs. 200 lakhs
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Credit Sales (80%) Rs. 160 lakhs

Receivables for 40 days Rs. 80 lakhs
Receivables for 120 days Rs. 80 lakhs
Average collection period [(40 x 0.5) + (120 x 0.5)] 80 days
Average level of Receivables (Rs. 1,60,00,000 x 80/360) Rs.35,55,556
Factoring Commission (Rs. 35,55,556 x 2/100) Rs. 71,111
Factoring Reserve (Rs. 35,55,556 x 10/100) Rs. 3,55,556
Amount available for advance (Rs. 35,55,556 (3,55,556 + 71,111)} Rs. 31,28,889
Interest Rs. 1,25,156
Advance to be paid (Rs.31,28,889-Rs.1,25,156) Rs. 30,03,733
Statement Showing Evaluation of Factoring Proposal
A. Annual Cost of Factoring to the Company: (Rs.)
Factoring commission (Rs. 71,111 x 360/80) 3,20,000
Interest charges (Rs. 1,25,156 x 360/80) 5,63,200
Total 8,83,200
B.Company's Savings on taking Factoring Service: (Rs.)
Cost of credit administration saved 2,40,000
Bad Debts (Rs. 160,00,000 x 1/100) avoided 1,60,000
Total 4,00,000
C.Net Cost to the company (A-B) (Rs. 8,83,200- Rs. 4,83,200=4,00,000)
5.(a)
Working Note:
Particulars (Rs.)
Total Sales Rs. 200 lakhs
Credit Sales (80%) Rs. 160 lakhs
Receivables for 40 days Rs. 80 lakhs
Receivables for 120 days Rs. 80 lakhs
Average collection period [(40 x 0.5) + (120 x 0.5)] 80 days
Average level of Receivables (Rs. 1,60,00,000 x 80/360) Rs.35,55,556
Factoring Commission (Rs. 35,55,556 x 2/100) Rs. 71,111
Factoring Reserve (Rs. 35,55,556 x 10/100) Rs. 3,55,556
Amount available for advance (Rs. 35,55,556 (3,55,556 + 71,111)} Rs. 31,28,889
Interest Rs. 1,25,156
Advance to be paid (Rs.31,28,889-Rs.1,25,156) Rs. 30,03,733
Statement Showing Evaluation of Factoring Proposal
A. Annual Cost of Factoring to the Company: (Rs.)
Factoring commission (Rs. 71,111 x 360/80) 3,20,000
Interest charges (Rs. 1,25,156 x 360/80) 5,63,200
Total 8,83,200
B.Company's Savings on taking Factoring Service: (Rs.)
Cost of credit administration saved 2,40,000
Bad Debts (Rs. 160,00,000 x 1/100) avoided 1,60,000
Total 4,00,000
C.Net Cost to the company (A-B) (Rs. 8,83,200- Rs. 4,83,200=4,00,000)
Effective cost of factoring = 16.09%

CASE 10. ArMore LLP is a newly established startup dealing in manufacture of a revolutionary product HDHMR
which is a substitute to conventional wood and plywood. It is an economical substitute for manufacture of
furniture and home furnishing. It has been asked by a venture capitalist for an estimated amount of funds re-
quired for setting up plant and also the amount of circulating capital required. A consultant hired by the entity
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has advised that the cost of setting up the plant would be Rs. 5 Crores and it will require 1 year to make the plant
operational.The anticipated revenue and associated cost number are as follows:
Units to be sold = 3 lakh sq metres p.a.;Sale Price of each sq mtr = Rs. 1000;Raw Material cost = Rs. 200 per sq mtr
Labour cost = Rs. 50 per hour;Labour hours per sq mtr = 3 hours;Cash Manufacturing Overheads = Rs. 75 per
machine hour;Machine hours per sq mtr = 2 hours;Selling and credit administration Overheads = Rs. 250 per sq
mtr
Being a new product in the industry, the firm will have to give a longer credit period of 3 months to its customers.
It will maintain a stock of raw material equal to 15% of annual consumption. Based on negotiation with the
creditors, the payment period has been agreed to be 1 month from the date of purchase. The entity will hold
finished goods equal to 2 months of units to be sold. All other expenses are to be paid one month in arreaRs.
Cash and Bank balance to the tune of Rs. 25,00,000 is required to be maintained.
The entity is also considering reducing the working capital requirement by either of the two options: a) reducing
the credit period to customers by a month which will lead to reduction in sales by 5%. b) Engaging with a factor
for managing the receivables, who will charge a commission of 2% of invoice value and will also advance 65% of
receivables @ 12% p.a. This will lead to savings in administration and bad debts cost to the extent of Rs. 20 lakhs
and 16 lakhs respectively.
The entity is also considering funding a part of working capital by bank loan. For this purpose, bank has stipu-
lated that it will grant 75% of net current assets as advance against working capital. The bank has quoted 16.5%
rate of interest with a condition of opening a current account with it, which will require 10% of loan amount to
be minimum average balance.You being an finance manager, has been asked the following questions:
1.The anticipated profit before tax per annum after the plant is operational is
(a) 750 Lakhs (b) 570 Lakhs (c) 370 Lakhs (d) 525 Lakhs
2.The estimated current assets requirement in the first year of operation (debtors calculated at cost) is
(a) 9,42,50,000 (b) 2,17,08,333 (c)7,25,41,667 (d) 67,08,333
3.The net working capital requirement for the first year of operation is
(a) 9,42,50,000 (b) 2,17,08,333 (c)7,25,41,667 (d) 67,08,333
4.The annualised % cost of two options for reducing the working capital is
(a) 18.18% and 16.92% (b)18.33% and 16.92% (c) 18.59% and 18.33% (d) 16.92% and 19.05%
5.What will be the Maximum Permissible Bank Finance by the bank and annualised % cost of the same?
(a) 4,55,03,630 and 18.33% (b) 5,44,06,250 and 18.33%
(c) 4,45,86,025 and 18.59% (d) 3,45,89,020 and 19.85%

Solution:
1.(a)
Units Per unit (Rs.) Amount(Rs.)
Raw Material consumption 3,50,000 200 7,00,00,000
labour cost 3,50,000 150 5,25,00,000
Production Overheads 3,50,000 150 5,25,00,000
Cost of Production 3,50,000 500 17,50,00,000
Less: Stock of FG 50,000 500 2,50,00,000
COGS 3,00,000 500 15,00,00,000
Selling and admin exp 3,00,000 250 7,50,00,000
Cost of Sales 3,00,000 750 22,50,00,000
Sales 3,00,000 1000 30,00,00,000
Profit 3,00,000 250 7,50,00,000
Stock of FG (sq. mtr.) = 30,00,000x2/12= 50,000
Units sold= 3,00,000
Raw material consumed (sq. mtr.)= 3,50,000
Raw Material Purchases = Consumption + RM stock (15%) = 7,00,00,000+ 1,05,00,000= Rs. 8,05,00,000
2.(a)Stock of Raw Material (15% of 7,00,00,000)= 1,05,00,000
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Stock of finished goods= 2,50,00,000

Debtors (22,50,00,000 x 3/12)= 5,62,50,000
Cash= 25,00,000
Total Current Assets= 9,42,50,000
3.(c) Working Capital Statement
Amount (Rs.)
Stock of Raw Material (15% 7,00,00,000) 1,05,00,000
Stock of finished goods 2,50,00,000
Debtors (22,50,00,000 x 3/12) 5,62,50,000
Cash 25,00,000
Total Current Assets 9,42,50,000
Creditors (8,05,00,000 x 1/12) 67,08,333
O/s Exp (18,00,00,000 x 1/12) 1,50,00,000
Total Current Liabilities 2,17,08,333
Net Working Capital 7,25,41,667
4(a)Cost reducing debtors credit period
Debtors credit period= 2 months
Debtors balance= 21,37,50,000(2,85,000 units) x 2/12 = Rs.3,56,25,000
Debtors credit period= 3 months
Debtors balance= 22,50,00,000 x 3/12= Rs. 5,62,50,000
Amount released from debtors= Rs. 2,06,25,000
reduction in profit (15,000 units x Rs. 250) = Rs. 37,50,000
% p.a. cost (37,50,000/2,06,25,000)=18.18%
Costs of factoring
Commission (2% of 30 crores)=Rs. 60,00,000;Interest (30cr x 65% x 12% x 3/12)=Rs. 58,50,000
savings=Rs. 36,00,000
Net cost of factoring=Rs. 82,50,000
% p.a. cost=16.92%
5.(b)Maximum Permissible Bank Finance = 75% of 7,25,41,667 = Rs. 5,44,06,250
Annualised cost of bank loan = 16.5/90% = 18.33%

CASE 11.Ramu Ltd. wants to implement a project for which Rs. 25 lakhs is required. Following financing op-
tions are at hand:
Option 1:Equity Shares -25,000 @ Rs. 100
Option 2:Equity Shares-10,000@ Rs.100;12% Preference Shares-5,[email protected];10%Debentures-10,000@ Rs. 100
1.What is the indifference point & EPS at that level of EBIT assuming corporate tax to be 35%.
(a) Rs. 2,94,872; Rs 11.80 (b) Rs. 3,20,513; Rs 8.33
(c) Rs. 2,94,872; Rs 7.67 (d) Rs. 3,20,513; Rs 12.82
Solution:1.(b)
x = EBIT = Rs. 3,20,513;At EBIT of Rs. 3,20,513, EPS under both options will be the same i.e., Rs. 8.33 per share

CASE 12.If EBIT increases by 6%, taxable income increases by 6.9%. If sales increase by 6%, taxable income will
increase by 24%. Financial leverage must be
1.Financial leverage must be ............ (a) 1.19 (b) 1.13 (c)1.12 (d)1.15
Solution:1(d)
FL= % change in NP/%change in EBIT=6.9/6=1.15

CASE 13. The following data are available for R Ltd. -

- Earnings per share Rs. 8; - Rate of return on investment 16%; - Rate of return to shareholders 12%
1.What is the inventory turnover ratio in days and whether assertion of CFO is correct?
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(a) 120 days; Assertion of CFO is correct. (b)100 days; Assertion of CFO is incorrect.
(c) 185 days; Assertion of CFO is correct. (d) 150 days; Assertion of CFO is incorrect.
2.What is the receivables turnover and whether assertion of management is correct?
(a)117 days; Assertion of management is correct. (b)100 days; Assertion of management is correct.
(c) 85 days; Assertion of management is correct. (d) 85 days; Assertion of management is not correct.
3. What is the expense company needs to incur for earning Rs. 1 of revenue in the last year?
(a) 0.844 (b) 0.754 (c) 0.962 (d) 0.824
4.What is the projected net working capital of the company?
(a) 42,87,891 (b)40,27,891 (c) 48,27,891 (d) 48,28,891
5.What is the projected Long-Term Debt of the company for the next year?
(a) 60,00,000 (b) 30,00,000 (c) 14,30,000 (d) 28,60,000
Solution:
Inventory 38,60,000× 365
1.(c)Inventory Turnover = × 365 = =184.41 days=185 days (apx)
x)
COGS 76,40,000
Inventory holding period of 185 days is significantly higher as compared to industry standard of 100 days. This
means a significant amount of working capital is tied in inventory, which may be leading to liquidity crunch.
Receivable s 39,97,000× 365
2.(a)Receivables Turnover= × 365 = =116.71=117 days (apx)
x)
Sales 1,25,00,000
Receivables turnover of 117 days as compared to industry standard of 90 days is a further delay of 27 days. This
will lead to good amount of money being tied up in debtors.
3.(a)Operating Ratio is the number which indicates cost incurred by company for earning each rupee of revenue
COGS + Operating Expenses 76,40,000+ 29,10,000
Operating Ratio= × 100 = × 100 =0.844
4
Sales 1,25,00,000
4.(b)Equity to Reserves= 1
Reserves= 1x30,00,000-30,00,000 ; Projected profit= 30,00,000-18,00,000=12,00,000
Net Profit Margin= 15% 12,00,000/ Sales=0.15Sales=80,00,000
Gross Profit= 80,00,000x50%=40,00,000 ; COGS= 80,00,000-40,00,000=40,00,000
Projected Debtors Turnover 100 days= closing Receivables/Sales x 365
100 = Closing Receivables /80,00,000x365 ; Closing Receivables=80,00,000x100/365-21,91,781
Projected Closing Inventory= 70% of opening inventory=70% of 38,60,000=27,02,000
Projected Creditor Turnover 100 days=closing creditors/COGSx365
Closing Creditors=COGSX100/365Closing Creditor=40,00,000x100/365-10,95,890
Net Working Capital= Cash+Debtors+Inventory-creditors=2,30,000+21,91,781+27,02,000-10,95,890
Net Working Capital=40,27,891
5.(b)Equity Share Capital + Reserves=30,00,000+30,00,000=60,00,000
Long Term Debt to Equity=0.5LTD/60,00,000=0.5Long Term Debt=0.5x60,00,000Long Term Debt=30,00,000

CASE 14.KGF Chemicals Ltd., a prominent player in the chemical industry, faces the challenge of determining its
growth trajectory and dividend policy to maximize shareholder value. With expectations of significant growth in
the near term and stabilization in the long run, the company must strategically manage its resources to align with
investor expectations.KGF Chemicals Ltd. is a leading manufacturer and supplier of specialty chemicals catering
to diverse industries such as pharmaceuticals, agriculture, and manufacturing. Established with a commitment
to innovation and quality, the company has garnered a strong market presence over the years.
The company is projected to experience robust growth at a rate of 14% per annum for the next four years.
Subsequently, the growth rate is expected to stabilize at the national economy's rate of 7% indefinitely. This
forecast reflects both the company's expansion plans and the broader economic landscape.
KGF Chemicals Ltd. paid a dividend of 2 per share last year (Do= 2). The management faces the crucial decision of
balancing dividend payouts with reinvestment opportunities to sustain growth and meet shareholders' expecta-
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tions. The dividend policy must strike a delicate balance between rewarding shareholders and retaining earnings
for future investments. The required rate of return on equity shares is 12%, indicating investors' expected return
given the company's risk profile and market conditions. Management must carefully assess investment opportu-
nities to ensure they meet or exceed this threshold, thereby generating value for shareholders over the long
term.
In navigating the dynamic landscape of the chemical industry, KGF Chemicals Ltd. must adopt a proactive ap-
proach to managing growth and dividend policy. By aligning strategic decisions with investor expectations and
market dynamics, the company can position itself for sustainable success while maximizing shareholder value.
Continual evaluation and adaptation will be essential to capitalize on growth opportunities and maintain com-
petitiveness in the evolving marketplace.
You are required to answer the following on the basis of above information:
1.What is the expected dividend at the end of 4th Year?
(a)` 2.1097 (b)`2.1483 (c)`2.9631 (d) `3.3779
2.What is the present value of Expected Dividends to be received in next four years?
(a)`11.2202 (b) `8.3655 (c)` 9.8423 (d)`6.2176
3.Determine the Market Price of shares at the end of 4th Year?
(a)`72.28 (b) `67.55 (c)` 50.67 (d) `77.34
4.Determine the Present Value of Market Price of shares at the end of 4th Year?
(a)`49.18 (b)`32.22 (c)` 45.79 (d)`42.96
5.Calculate today's market price of the share.
(a) `59.03 (b)` 54.33 (c)`57.01 (d) `57.54
Solution: 1(d); 2(b) 3(a); 4(c); 5(b)
Intrinsic Value = Sum of PV of Expected Dividends + PV of Share Price at the end of the period
The following steps are required:
A. Determine PV of expected dividends to be received in the next four years.
B. Determine PV share at the end of 4th Year.
C. Add the values of A and B above.
(A)
Year D1=D0(1+g) PV Discount Fcator@12% PV in `
1 2(1+14%)2.28 0.893 2.0364
2 2.28(1+14%)=2.5992 0.797 2.0715
3 2.5992(1+14%)=2.9631 0.636 2.1097
4 2.9631(1+14)%=3.3779 0.636 2.1483
(A)Total PV of Expected Dividend 8.3655
Ds D4(1 + g) 3.3779(1 + 7%)
P4 = = = =`72.28
Ke - g Ke - g 12% - 7%
(B) PV of share at the end of 4th Year = `72.28 x 0.636 =` 45.97
(C) Market Price of shares = `8.3655 + 45.97=`54.33

ICAI STUDY MATERIAL MCQ

CHAPTER 1-SCOPE AND OBJECTIVES O F FINANCIAL MANAGEMENT
1.Focus of financial management is mainly concerned with the decision related to:
(a)Financing (b)Investing (c)Dividend (d)All of above.

2.The main objective of financial management is to:

(a)Secure profitability (b)Maximise shareholder wealth (c)Enhancing the cost of debt (d)None of above.

3.The shareholder value maximisation model holds that the primary goal of the firm is to maximise its:
(a)Accounting profit (b)Liquidity (c)Market value (d)Working capital.
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4.Wealth maximisation approach is based on the concept of:

(a)Cost benefit analysis (b)Cash flow approach (c)Time value of money (d)All of the above.

5.Management of all matters related to an organisation’s finances is called:

(a)Cash inflows and outflows (b)Allocation of resources (c)Financial management (d)Finance.

6.Which of the following is the disadvantage of having shareholders wealth maximisation goals?
(a) Emphasizes the short-term gains. (b)Ignores the timing of returns.
(c) Requires immediate resources. (d) Offers no clear relationship between financial decisions and share price.

7.The most important goal of financial management is:

(a) Profit maximisation (b) Matching income and expenditure
(c) Using business assets effectively (d) Wealth maximisation.

8.To achieve wealth maximization, the finance manager has to take careful decision in respect of:
(a)Investment (b)Financing (c)Dividend (d)All the above.

9.Early in the history of finance, an important issue was:

(a)Liquidity (b)Technology (c)Capital structure (d)Financing options.

10.Which of the following are microeconomic variables that help define and explain the discipline of finance?
(a)Risk and return (b)Capital structure (c)Inflation (d)All of the above.

11.Financial Management is mainly concerned with the-

(a)Acquiring and developing assets to forfeit its overall benefit.
(b)Acquiring, financing and managing assets to accomplish the overall goal of a business enterprise.
(c)Efficient management of the business.
(d)Sole objective of profit maximisation.

12.Which of the following need not be followed by the finance manager for measuring and maximising share-
holders' wealth?
(a) Accounting profit analysis. (b) Cash Flow approach.
(c) Cost benefit analysis. (d) Application of time value of money

Answers:-1. (d) 2. (b) 3. (c) 4. (d) 5. (c) 6. (d) 7. (d) 8. (d) 9. (a) 10. (d) 11. (b) 12. (a)

CHAPTER 2-TYPES O F FINANCING

1.Equity shares:
(a)Have an unlimited life, and voting rights and receive dividends
(b)Have a limited life, with no voting rights but receive dividends
(c)Have a limited life, and voting rights and receive dividends
(d)Have an unlimited life, and voting rights but receive no dividends

2.External sources of finance do not include:

(a)Debentures (b)Retained earnings (c)Overdrafts (d)Leasing

3.Internal sources of finance do not include:

(a)Better management of working capital (b) Ordinary shares
(c)Retained earnings (d) Reserve and Surplus
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4.In preference shares:

(a)Dividends are not available (b)Limited voting rights are available
(c)Are not part of a company’s share capital (d)Interest can be received

5.A debenture:
(a) Is a long-term loan (b)Does not require security
(c) Is a short-term loan (d)Receives dividend payments

6.Debt capital refers to:

(a)Money raised through the sale of shares. (b)Funds raised by borrowing that must be repaid.
(c)Factoring accounts receivable. (d)Inventory loans.

7.The most popular source of short-term funding is:

(a)Factoring. (b)Trade credit. (c)Family and friends. (d)Commercial banks.

8.Marketable securities are primarily:

(a)short-term debt instruments. (b)short-term equity securities.
(c)long-term debt instruments. (d)long-term equity securities

9.Which of the following marketable securities is the obligation of a commercial bank?

(a)Commercial paper (b)Negotiable certificate of deposit
(c)Repurchase agreement (d)T-bills

10.Reserves & Surplus are which form of financing?

(a)Security Financing (b)Internal Financing (c)Loans Financing (d)International Financing

11.With reference to `IFC Masala Bonds’, which of the statements given below is/are correct?
1.The International Finance Corporation, which offered these bonds, is an arm of the World Bank.
2.They are rupee-denominated bonds and are a source of debt financing for the public and private sector.
(a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

12.External Commercial Borrowings can be accessed through ..............

(a)only automatic route (b)only approval route
(c)both automatic and approval route (d)neither automatic nor approval route
Answers:-1. (a) 2. (b) 3. (b) 4. (b) 5. (a) 6. (b) 7. (b) 8. (a) 9. (b) 10. (b) 11. (c) 12. (c)

CHAPTER 3-FINANCIAL ANALYSIS AND PLANNING RATIO ANALYSIS

1.Ratio of Net sales to Net working capital is a:

(a)Profitability ratio (b)Liquidity ratio (c)Current ratio (d)Working capital turnover ratio

2.Long-term solvency is indicated by:

(a)Debt/equity ratio (b)Current Ratio (c)Operating ratio (d)Net profit ratio

3.Ratio of net profit before interest and tax to sales is:

(a)Gross profit ratio (b)Net profit ratio (c)Operating profit ratio (d)Interest coverage ratio.

4.Observing changes in the financial variables across the years is:

(a)Vertical analysis (b)Horizontal Analysis (c)Peer-firm Analysis (d)Industry Analysis.
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5.The Receivable-Turnover ratio helps management to:

(a)Managing resources (b)Managing inventory
(c)Managing customer relationship (d)Managing working capital

6.Which of the following is a liquidity ratio?

(a)Equity ratio (b)Proprietary ratio
(c)Net Working Capital (d)Capital Gearing ratio

7.Which of the following is not a part of Quick Assets?

(a)Disposable investments (b)Receivables
(c)Cash and Cash equivalents (d)Prepaid expenses

8.Capital Gearing ratio is the fraction of:

(a) Preference Share Capital and Debentures to Equity Share Capital and Reserve & Surplus.
(b) Equity Share Capital and Reserve & Surplus to Preference Share Capital and Debentures.
(c) Equity Share Capital to Total Assets.
(d) Total Assets to Equity Share Capital.

9.From the following information, calculate P/E ratio:

Equity share capital of ` 10 each ` 8,00,000
9% Preference share capital of` 10 each ` 3,00,000
Profit (after 35% tax) ` 2,67,000
Depreciation ` 67,000
Market price of equity share ` 48
(a) 15 times (b) 16 times (c) 17 times (d) 18 times

10.Equity multiplier allows the investor to see:

(a) What portion of interest on debt can be covered from earnings available to equity shareholders?
(b) How many times preference share interest be paid from earnings available to equity shareholders?
(c) What portion of return on equity is the result of debt?
(d) How many times equity is multiplied to get the value of debt?

11.A company has average accounts receivable of ` 10,00,000 and annual credit sales of ` 60,00,000. Its aver-
age collection period would be:
(a) 60.83 days (b) 6.00 days (c) 1.67 days (d) 0.67 days

12.A company has net profit margin of 5%, total assets of ` 90,00,000 and return on assets of 9%. Its total asset
turnover ratio would be:
(a)1.6 (b) 1.7 (c) 1.8 (d) 1.9

13.What does Q ratio measures?

(a) Relationship between market value and book value per equity share.
(b) Proportion of profit available per equity share.
(c) Overall earnings on average total assets.
(d) Market value of equity as well as debt in comparison to all assets at their replacement cost.

14.Calculate operating expenses from the information given below:

Sales ` 75,00,000
Rate of income tax 50%
Net profit to sales 5%
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Cost of goods sold ` 32,90,000

Interest on debentures ` 60,000
(a)` 41,00,000 (b)` 8,10,000 (c)` 34,00,000 (d)` 33,90,000

15.Which of the following is not a profitability ratio?

(a) P/E ratio (b) Return on capital employed (ROCE)
(c) Q Ratio (d) Preference Dividend Coverage Ratio

Answers:- 1. (d) 2. (a) 3. (c) 4. (b) 5. (d) 6. (c) 7. (d) 8. (a) 9. (b) 10. (c) 11. (a) 12. (c) 13. (d) 14. (c) 15. (d)

CHAPTER 4-COST OF C APITAL

1.Which of the following is not an assumption of the capital asset pricing model(CAPM)?
(a) The capital market is efficient.
(b) Investors lend or borrow at a risk-free rate of return.
(c) Investors do not have the same expectations about the risk and return.
(d) Investor’s decisions are based on a single-time period.

2.Given: risk-free rate of return = 5 %; market return = 10%; cost of equity =15%; value of beta (ß) is:
(a) 1.9 (b) 1.8 (c) 2.0 (d) 2.2

3. ……………. may be defined as the cost of raising an additional rupee of capital:

(a) Marginal cost of capital (b) Weighted Average cost of capital
(c) Simple Average cost of capital (d) Liquid cost of capital

4.Which of the following cost of capital requires to adjust taxes?

(a) Cost of Equity Share (b) Cost of Preference Shares,
(c) Cost of Debentures (d) Cost of Retained Earnings

5.Marginal Cost of capital is the cost of:

(a) Additional Revenue (b) Additional Funds (c) Additional Interests (d) None of the above

6.In order to calculate Weighted Average Cost of Capital, weights may be based on:
(a) Market Values (b) Target Values (c) Book Values (d) Anyone of the above

7.Firm’s Cost of Capital is the average cost of:

(a) All sources of finance (b) All Borrowings (c) All share capital (d) All Bonds & Debentures

8. A company has a financial structure where equity is 70% of its total debt plus equity. Its cost of equity is 10%
and gross loan interest is 5%. Corporation tax is paid at 30%. What is the company’s weighted average cost of
capital (WACC)?
(a)7.55% (b)7.80% (c)8.70% (d)8.05%

9.The cost of equity capital is all of the following except:

(a) The minimum rate that a firm should earn on the equity-financed part of an investment.
(b) A return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock
unchanged.
(c) By far, the most difficult component cost to estimate.
(d) Generally, lower than the before-tax cost of debt.
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10.What is the overall (weighted average) cost of capital when the firm has` 20crores in long-term debt,` 4
crores in preferred stock, and` 16 crores inequity shares? The before-tax cost for debt, preferred stock, and
equity capitalare 8%, 9%, and 15%, respectively. Assume a 50% tax rate.
(a) 7.60% (b) 6.90% (c) 7.30% (d) 8.90%

Answers:-1. (c) 2. (c) 3. (a) 4. (c) 5. (b) 6. (d) 7. (a) 8. (d) 9. (d) 10. (d)

CHAPTER 5-FINANCING DECISIONS CAPITAL S TRUCTURE

1.The assumptions of MM hypothesis of capital structure do not include the following:

(a) Capital markets are imperfect
(b) Investors have homogeneous expectations
(c) All firms can be classified into homogeneous risk classes
(d) The dividend-payout ratio is cent percent, and there is no corporate tax

2.Which of the following is irrelevant for optimal capital structure?

(a) Flexibility (b) Solvency (c) Liquidity (d) Control

3.Financial Structure refers to:

(a) All financial resource (b) Short-term funds
(c) Long-term funds (d) None of these

4.An EBIT-EPS indifference analysis chart is used for:

(a) Evaluating the effects of business risk on EPS
(b) Examining EPS results for alternative financial plans at varying EBIT levels
(c) Determining the impact of a change in sales on EBIT
(d) Showing the changes in EPS quality over time

5.The term "capital structure" means:

(a) Long-term debt, preferred stock, and equity shares (b) Current assets and current liabilities
(c) Net working capital (d) Shareholder’s equity

6.The cost of monitoring management is considered to be a (an):

(a) Bankruptcy cost (b) Transaction cost (c) Agency cost (d) Institutional cost

7.The traditional approach towards the valuation of a firm assumes:

(a) That the overall capitalization rate changes in financial leverage.
(b) That there is an optimum capital structure.
(c) That the total risk is not changed with the changes in the capital structure.
(d) That the markets are perfect.

8.Market values are often used in computing the weighted average cost of capital because:
(a) This is the simplest way to do the calculation.
(b) This is consistent with the goal of maximizing shareholder value.
(c) This is required by SEBI.
(d) This is a very common mistake.

9.A firm's optimal capital structure:

(a) Is the debt-equity ratio that results in the minimum possible weighted average cost of capital
(b) 40 percent debt and 60 percent equity
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(c) When the debt-equity ratio is 0.50

(d) When Cost of equity is minimum

10.Capital structure of a firm influences the:

(a) Risk (b) Return
(c) Both Risk and Return (d) Return but not Risk

11.Consider the below mentioned statements:

1.A company is considered to be over-capitalised when its actual capitalisation is lower than the proper
capitalisation as warranted by the earning capacity.
2.Both over-capitalisation and under-capitalisation are detrimental to the interests of the society.
State True or False:
(a) 1-True, 2-True (b) 1-False, 2-True (c) 1-False, 2-False (d) 1-True, 2-False

12. A critical assumption of the Net Operating Income (NOI) approach to valuation is:
(a) That debt and equity levels remain unchanged.
(b) That dividends increase at a constant rate.
(c) That k o remains constant regardless of changes in leverage.
(d) That interest expense and taxes are included in the calculation.

13.Which of the following steps may be adopted to avoid the negative consequences of over-capitalisation?
(a) The shares of the company should be split up. This will reduce dividend per share, though EPS shall remain
unchanged.
(b) Issue of Bonus Shares.
(c) Revising upward the par value of shares in exchange of the existing shares held by them.
(d) Reduction in claims of debenture-holders and creditors

Answers:-1. (a) 2. (b) 3. (a) 4. (b) 5. (a) 6. (c) 7. (b) 8. (b) 9. (a) 10. (c) 11. (b) 12. (c) 13. (d)

CHAPTER 6-FINANCING DECISIONS LEVERAGES

1. Given
Operating fixed costs ` 20,000
Sales ` 1,00,000
P/ V ratio 40%
The operating leverage is:
(a) 2.00 (b) 2.50 (c) 2.67 (d) 2.47

2.If EBIT is` 15,00,000, interest is` 2,50,000, corporate tax is 40%, degree of financial leverage is;
(a) 1.11 (b) 1.20 (c) 1.31 (d) 1.41

3.If DOL is 1.24 and DFL is 1.99, DCL would be:

(a)2.14 (b) 2.18 (c) 2.31 (d) 2.47

4.Operating Leverage is calculated as:

(a) Contribution ÷ EBIT (b) EBIT ÷ PBT (c) EBIT ÷ Interest (d) EBIT ÷ Tax

5.Financial Leverage is calculated as:

(a) EBIT ÷ Contribution (b) EBIT ÷ PBT (c) EBIT ÷ Sales (d) EBIT ÷ Variables Cost
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6.Which of the following is correct?

(a) CL = OL + FL (b) CL = OL – FL (c) CL = OL × FL (d) OL = OL ÷ FL

7.Which of the following indicates business risk?

(a) Operating leverage (b) Financial leverage (c) Combined leverage (d) Total leverage

8.Degree of combined leverage is the fraction of:

(a) Percentage change in EBIT on Percentage change in Sales.
(b) Percentage change in EPS on Percentage change in Sales.
(c) Percentage change in Sales on Percentage change in EPS.
(d) Percentage change in EPS on Percentage change in EBIT.

9.From the following information, calculate combined leverage:

Sales ` 20,00,000
Variable Cost 40%
Fixed Cost ` 10,00,000
Borrowings ` 10,00,000 @ 8% p.a.
(a) 10 times (b) 6 times (c) 1.667 times (d) 0.10 times

10Operating leverage is a function of which of the following factors?

(a) Amount of variable cost. (b) Variable contribution margin.
(c) Volume of purchases. (d) Amount of semi-variable cost.

11.Financial leverage may be defined as:

(a) Use of funds with a product cost in order to increase earnings per share.
(b) Use of funds with a contribution cost in order to increase earnings before interest and taxes.
(c) Use of funds with a fixed cost in order to increase earnings per share.
(d) Use of funds with a fixed cost in order to increase earnings before interest and taxes.

12.If Margin of Safety is 0.25 and there is 8% increase in output, then EBIT will be:
(a) Decrease by 2% (b) Increase by 32% (c) Increase by 2% (d) Decrease by 32%

13.If degree of financial leverage is 3 and there is 15% increase in Earning per share (EPS), then EBIT will be:
(a) Decrease by 15% (b) Increase by 45% (c) Decrease by 45% (d) Increase by 5%

14.When EBIT is much higher than Financial break-even point, then degree of financial leverage will be slightly:
(a) Less than 1 (b) Equals to 1 (c) More than 1 (d) Equals to 0

15.Firm with high operating leverage will have:

(a) Higher breakeven point (b) Lower business risk (c) Higher margin of safety (d) All of above

16. When sales are at breakeven point, the degree of operating leverage will be:
(a) Zero (b) Infinite (c) One (d) None of above

17.If degree of combined leverage is 3 and margin of safety is 0.50, then degree of financial leverage is:
(a) 6.00 (b) 3.00 (c) 0.50 (d) 1.50

Answers:-1. (a) 2. (b) 3. (d) 4. (a) 5. (b) 6. (c) 7. (a) 8. (b) 9. (a) 10. (b) 11. (c) 12. (b) 13. (d) 14. (c) 15. (a) 16. (b)
17. (d)
CHAPTER 7-INVESTMENT DECISIONS
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1.A capital budgeting technique which does not require the computation of cost of capital for decision making
purposes is:
(a)Net Present Value method (b) Internal Rate of Return method
(c)Modified Internal Rate of Return method (d)Payback Period method

2.If two alternative proposals are such that the acceptance of one shall exclude the possibility of the accep-
tance of another then such decision making will lead to:
(a) Mutually exclusive decisions (b) Accept reject decisions
(c) Contingent decisions (d) None of the above

3.In case a company considers a discounting factor higher than the cost of capitalfor arriving at present values,
the present values of cash inflows will be :
(a) Less than those computed on the basis of cost of capital
(b) More than those computed on the basis of cost of capital
(c) Equal to those computed on the basis of the cost of capital
(d) None of the above

4.If the cut off rate of a project is greater than IRR, we may:
(a) Accept the proposal (b) Reject the proposal
(c) Be neutral about it (d) Wait for the IRR to increase and match the cut off rate

5.While evaluating capital investment proposals, time value of money is used inwhich of the following tech-
niques:
(a)Payback Period method (b) Accounting rate of return (c) Net present value (d) None of the above

6.IRR would favour project proposals which have:

(a) Heavy cash inflows in the early stages of the project.
(b) Evenly distributed cash inflows throughout the project.
(c) Heavy cash inflows at the later stages of the project.
(d) None of the above.
7.The re-investment assumption in the case of the IRR technique assumes that:
(a) Cash flows can be re-invested at the projects IRR.
(b) Cash flows can be re-invested at the weighted cost of capital.
(c) Cash flows can be re-invested at the marginal cost of capital.
(d) None of the above

8.Multiple IRRs are obtained when:

(a) Cash flows in the early stages of the project exceed cash flows during thelater stages.
(b) Cash flows reverse their signs during the project.
(c) Cash flows are uneven.
(d) None of the above.

9. Depreciation is included as a cost in which of the following techniques:

(a)Accounting rate of return (b) Net present value
(c) Internal rate of return (d) None of the above

10. Management is considering a ` 1,00,000 investment in a project with a 5 year life and no residual value. If
the total income from the project is expected to be ` 60,000 and recognition is given to the effect of straight
line depreciation on the investment, the average rate of return is:
(a) 12% (b) 24% (c) 60% (d) 75%
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11. Assume cash outflow equals ` 1,20,000 followed by cash inflows of ` 25,000 per year for 8 years and a cost
of capital of 11%. What is the Net present value?
(a) (` 38,214) (b)` 9,653 (c)` 8,653 (d)` 38,214

12. What is the Internal rate of return for a project having cash flows of ` 40,000 per year for 10 years and a
cost of` 2,26,009?
(a) 8% (b) 9% (c) 10% (d) 12%

13. While evaluating investments, the release of working capital at the end of the project's life should be
considered as:
(a) Cash inflow (b) Cash outflow
(c) Having no effect upon the capital budgeting decision (d) None of the above

14. Capital rationing refers to a situation where:

(a) Funds are restricted and the management has to choose from amongst available alternative investments.
(b) Funds are unlimited and the management has to decide how to allocate them to suitable projects.
(c) Very few feasible investment proposals are available with the management.
(d) None of the above.

15. Capital budgeting is done for:

(a) Evaluating short term investment decisions. (b) Evaluating medium term investment decisions.
(c) Evaluating long term investment decisions. (d) None of the above

Answers:-1. (d) 2. (a) 3. (a) 4. (b) 5. (c) 6. (a) 7. (a) 8. (b) 9. (a) 10. (b) 11. (c) 12. (d) 13. (a) 14. (a) 15. (c)

CHAPTER 8-LEARNING OUTCOMES DIVIDEND DECISIONS

1. Which one of the following is the assumption of Gordon’s Model:

(a) Ke > g (b) Retention ratio, (b), once decide upon, is constant
(c) Firm is an all equity firm (d) All of the above

2. What should be the optimum Dividend pay-out ratio, when r = 15% & K e = 12%:
(a) 100% (b) 50% (c) Zero (d) None of the above.

3. Which of the following is the irrelevance theory?

(a) Walter model (b) Gordon model (c) M.M. hypothesis (d) Linter’s model

4. If the company’s D/P ratio is 60% & ROI is 16%, what should be the growth rate?
(a) 5% (b) 7% (c) 6.4% (d) 9.6%

5. If the shareholders prefer regular income, how does this affect the dividend decision:
(a) It will lead to payment of dividend (b) It is the indicator to retain more earnings
(c) It has no impact on dividend decision (d) Can’t say

6. Mature companies having few investment opportunities will show high payout ratios, this statement is:
(a) False (b) True (c) Partial true (d) None of these

7. Which of the following is the limitation of Linter’s model?

(a) This model does not offer a market price for the shares.
(b) The adjustment factor is an arbitrary number and not based on any scientific criterion or methods.
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(c) Both (a) & (b)

(d) None of the above.

8. What are the different options other than cash used for distributing profits to shareholders?
(a) Bonus shares (b) Stock split (c) Both (a) and (b) (d) None of the above

9. Which of the following statement is correct with respect to Gordon’s model?

(a) When IRR is greater than cost of capital, the price per share increases and dividend pay-out decreases.
(b) When IRR is greater than cost of capital, the price per share decreases and dividend pay-out increases.
(c) When IRR is equal to cost of capital, the price per share increases and dividend pay-out decreases.
(d) When IRR is lower than cost of capital, the price per share increases and dividend pay-out decreases.

10. Compute EPS according to Graham & Dodd approach from the given information:
Market price ` 56;Dividend pay-out ratio 60%; Multiplier 2
(a)` 30 (b)` 56 (c)` 28 (d)` 84

11. Which among the following is not an assumption of Walter’s Model?

(a) Rate of return and cost of capital are constant (b) Information is freely available to all
(c) There is discrimination in taxes (d) The firm has perpetual life

Answers:-1. (d) 2. (c) 3. (c) 4. (c) 5. (a) 6. (b) 7. (c) 8. (a) 9. (a) 10. (a) 11. (c)

CHAPTER 9-LEARNING OUTCOMES MANAGEMENT OF WORKING C APITAL

1. The credit terms may be expressed as “3/15 net 60”. This means that a 3% discount will be granted if the
customer pays within 15 days, if he does not avail the offer, he must make payment within 60 days.
(a) I agree with the statement (b) I do not agree with the statement (c) I cannot say.
2. The term ‘net 50’ implies that the customer will make payment:
(a) Exactly on 50 th day (b) Before 50 th day (c) Not later than 50 th day (d) None of the above.

3. Trade credit is a source of :

(a) Long-term finance (b) Medium term finance
(c) Spontaneous source of finance (d) None of the above.

4. The term float is used in:

(a) Inventory Management (b) Receivable Management
(c) Cash Management (d) Marketable securities.

5. William J Baumol’s model of Cash Management determines optimum cash level where the carrying cost and
transaction cost are:
(a) Maximum (b) Minimum (c) Medium (d) None of the above.

6. In Miller – ORR Model of Cash Management:

(a) The lower, upper limit, and return point of Cash Balances are set out
(b) Only upper limit and return point are decided
(c) Only lower limit and return point are decided
(d) None of the above are decided.

7. Working Capital is defined as:

(a) Excess of current assets over current liabilities (b) Excess of current liabilities over current assets
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(c) Excess of Fixed Assets over long-term liabilities (d) None of the above.

8. Working Capital is also known as “Circulating Capital, fluctuating Capital and revolving capital”. The afore-
said statement is;
(a) Correct (b) Incorrect (c) Cannot say.

9. The basic objectives of Working Capital Management are:

(a) Optimum utilization of resources for profitability
(b) To meet day-to-day current obligations
(c) Ensuring marginal return on current assets is always more than cost of capital
(d) Select any one of the above statements.

10. The term Gross Working Capital is known as:

(a) The investment in current liabilities (b) The investment in long-term liability
(c) The investment in current assets (d) None of the above.

11. The term net working capital refers to the difference between the current assets minus current liabilities.
(a) The statement is correct (b) The statement is incorrect (c) I cannot say.

12. The term “Core current assets’ was coined by:

(a) Chore Committee (b) Tandon Committee (c) Jilani Committee (d) None of the above.

13. The concept operating cycle refers to the average time which elapses between the acquisition of raw
materials and the final cash realization. This statement is:
(a) Correct (b) Incorrect (c) Partially True (d) I cannot say.

14. As a matter of self-imposed financial discipline can there be a situation of zero working capital now-a-days
in some of the professionally managed organizations.
(a) Yes (b) No (c) Impossible (d) Cannot say.

15. Over trading arises when a business expands beyond the level of funds available.The statement is:
(a) Incorrect (b) Correct (c) Partially correct (d) I cannot say.

16. A Conservative Working Capital strategy calls for high levels of current assets in relation to sales.
(a) I agree (b) Do not agree (c) I cannot say.

17. The term Working Capital leverage refer to the impact of level of working capital on company’s profitabil-
ity. This measures the responsiveness of ROCE for changes in current assets.
(a) I agree (b) Do not agree (c) The statement is partially true.

18. The term spontaneous source of finance refers to the finance which naturally arise in the course of busi-
ness operations. The statement is:
(a) Correct (b) Incorrect (c) Partially Correct (d) I cannot say.

19. Under hedging approach to financing of working capital requirements of a firm,each asset in the balance
sheet assets side would be offset with a financing instrument of the same approximate maturity. This state-
ment is:
(a) Incorrect (b) Correct (c) Partially correct (d) I cannot say.

20. Trade credit is a:

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(a) Negotiated source of finance (b) Hybrid source of finance

(c) Spontaneous source of finance (d) None of the above.

21. Factoring is a method of financing whereby a firm sells its trade debts at a discount to a financial institu-
tion. The statement is:
(a) Correct (b) Incorrect (c) Partially correct (d) I cannot say.

22. A factoring arrangement can be both with recourse as well as without recourse:
(a) True (b) False (c) Partially correct (d) Cannot say.

23. The Bank financing of working capital will generally be in the following form.Cash Credit, Overdraft, bills
discounting, bills acceptance, line of credit; Letter of credit and bank guarantee.
(a) I agree (b) I do not agree (c) I cannot say.

24. When the items of inventory are classified according to value of usage, the technique is known as:
(a) XYZ Analysis (b) ABC Analysis (c) DEF Analysis (d) None of the above.

25. When a firm advises its customers to mail their payments to special Post Office collection centers, the
system is known as.
(a)Concentration banking (b) Lock Box system (c) Playing the float (d) None of the above

Answers:-1. (a) 2. (c) 3. (c) 4. (c) 5. (b) 6. (a) 7. (a) 8. (a) 9. (b) 10. (c) 11. (a) 12. (b) 13. (a) 14. (a) 15. (b) 16. (a) 17.
(a) 18. (a) 19. (b) 20. (c) 21. (a) 22. (a) 23. (a) 24. (b) 25. (b)
"Winning isn't everything, neither is losing,
but the only thing is doing your best."
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