FLIP Finance & Banking Fundame

Practice Test 2 - Solutio

www.learnwithflip.com

Please click on the particular cell to see the calculation

Krishna owns 200 shares of XYZ technologies, which he decides to sell, at the market price, i.e. the best p
1 he can get at that time in the market. Following were the five best quotes in the market, all in INR (part-
allowed).
Price Quantity
51.50 105.00
51.45 45.00
51.40 90.00
51.30 50.00
51.20 300.00
What is the total sale amount that Krishna will take home, after paying a 1% commission to the broker?
a) INR 10107.9
b) INR 10,189.8
c) INR 10,206.9
d) INR 10,263.0

Solution As part-fill is allowed, Krishna can sell

Quantity Price
105 shares at 51.50
45 shares at 51.45
50 shares at 51.40

2 The ABC Company has the following capital structure:

Capital Component Cost
Common Shares 12%
Preference Shares 10%
Debentures 14%
What is the average cost of capital?
a) 11.72
b) 12.25
c) 5.86
d) 2.72
Solution Capital Component Cost of Capital

Common Shares 0.12

Preference Shares 0.10
Debentures 0.14
Average cost of capital (Sum of Cost of
Capital*Weightage)

A company Mirza & Daughters, is 5 years old with a turnover of INR 10 lakh. It has only equity
3 capital, and 3 equal shareholders – Mr. Mirza and his two daughters. They now need INR 10 lakh
more for expansion. Which would be the wisest choice to raise capital?

a.   INR 5 lakh for a quarter share of the company; INR 5

lakh bank loan @ 14 %
b.   INR 10 lakh for 2/3 share of the company
c.   INR 10 lakh bank loan @16%
d.   INR 2.5 lakh for 1/5th share of the company; INR 7.5
lakh loan @16%

Option a - Will be the wisest option, as it’s the most

Solution
balanced one
Option b - Will lead to a change in the ownership
Option c – There is a high chance of default, as
company's turnover is only INR 10 lakh
Option d - The cost of debt (at 16%) is higher than the
cost of debt available incase of option a.

If the 91-day T-bill auction in India had a cut off yield of

4.25%, for a face value of INR 100, what price bids
4 would have been accepted by RBI? Note: T-bills are
issued at a discount to face value and redeemed at face
value
a) 98.94
b) 98.95
c) 98.93
d) None of the above
 The yield is given as 4.25% p.a. We need to find the
Solution
price for 91 days.
Price for T-bills (91-days) =
100/(1+0.0425*91/365)=98.95

You bought units in a mutual fund at INR 12.25 per unit,

one year ago. The mutual fund quotes its latest
5 repurchase price and sale price as INR 15 and INR 15.50
respectively. What is the rate of return on your
investment?
a) 26.53%
b) 22.45%
c) 18.33%
d) Depends on the entry and exit load

You will be able to sell the fund, at the repurchase price

Solution
quoted by the mutual fund.
Hence, your rate of return ((15 - 12.25)/12.25) 22.45%
Please note that the purchase and sale price quoted by
mutual fund will include the entry and exit load, if
applicable

A fund has a NAV of INR 10 per unit. It has an entry load

6 of 2% and an exit load of 1%. What is the price at which,
you can sell the units?
a) INR 10
b) INR 10.20
c) INR 9.90
d) INR 10.10

Solution NAV = INR 10/unit

If you sell the unit, you will get NAV less exit load
charged.
Price at which you can sell the units = 10*(1-0.01) INR 9.90/unit
 Which of the following is false regarding open ended
7
mutual funds?
a) The number of units and corpus can vary daily

b) The funds have a pre-defined investment objective

c) The funds offer a guaranteed rate of return

d) Both b & c

In case of an open-ended fund, investors can purchase

the units of the fund from the fund company, and sell it
back to the company, at any time. Hence, total corpus
Solution
and units varies daily. Also, the fund can have a pre-
defined investment objective. However, it doesn't offer
any guaranteed rate of return. Hence, option c is correct.

Catalyst Corporation has a capital of INR 100 Million, with

a Debt-Equity ratio of 1:1. The interest rate on Debt
8 Capital is 5% p.a. and the return on investment is 8%
p.a. Assume a tax rate of 20%. What is the company’s
return on equity?

a) 11%
b) 8.8%
c) 5.5%
d) 4.4%

Return on Investment (ROI) which includes both equity

Solution
and debt, is 8%.
In million
EBIT (100*0.08) 8.0
Less Interest ((100/2)*0.05) 2.5
EBT 5.5
Less Tax (20% of EBT) 1.1
PAT 4.4

Return on Equity (PAT/Equity Capital Employed) 8.80%

 What is the price of a 5 year 6% annual coupon bond (FV
9
100), if the yield is 7.5%?
a) 130.00
b) 90.55
c) 93.93
d) 106.32

Solution Face Value 100

Yield 0.075
Coupon 0.060

Year Inflows
1 6
2 6
3 6
4 6
5 106
Bond Price (Sum of the present value of all inflows)

Which of the following ratios best describes the capital

10
structure of a company?
a) EBIT/Debt
b) PAT/Total Debt
c) Debt/ Equity
d) PAT/Total number of paid-up shares

Option c is correct. This ratio indicate the proportion in

Solution which the company is using equity and debt tto finance
its assets.

Election results are going to be announced tomorrow.

11 The trader expects a hung parliament. This analysis is
part of :
a) Trading Stage
b) Pre-trade Stage
c) Post trade Stage
d) Asset Servicing Stage
 Option b is correct. At Pre-trade stage, the investor look
Solution for the information related to the instruments and
markets, to take invesment decision

12 Rate scenario:
USD 1 = MYR 3.8700 - 50;
GBP 1 = USD 1.6320 - 30;
A Malaysian importer wants to buy GBP and sell
Malaysian ringgitt. What will be his break-even rate?
a) 3.8750*1.6330 = 6.3279
b) 3.8700*1.6230 = 6.2810
c) 3.8700*1.6330 = 6.3197
d) 3.8750*1.6320 = 6.3240

We will need to calculate the cross rate between GBP and

Solution
MYR.
The offer rate for USD 1 = MYR 3.8750
The offer rate for GBP 1 = USD 1.6330
Therefore, GBP 1 = 1.6330*3.8750 = MYR 6.3279

What is the yield of a 5 year 6% annual coupon bond (FV

13
100), if the market price is 105?
a) 6%
b) 4.85%
c) 7.5%
d) None of the above

We have used hit and trial method to get the answer.

Solution You will find that the bond price is INR 105, when the
yield is 4.85%. You can also use goal-seek function.

Year CashFlow

1 6
2 6
 3 6
4 6
5 106
Bond Price (Summation of all the cash flows)

You are given two-way (bid/offer) prices for various

14 currency pairs against a range of counter-currencies.
Both direct and indirect quotes are included.
Dealers GBP:USD
Dealer A 1.7905/15
Dealer B 1.7907/17
Dealer C 1.7900/10
Dealer D 1.7902/12
To which dealer would you sell GBP?
a) Dealer A
b) Dealer B
c) Dealer D
d) Dealer C

Correct option is Dealer B. Here, the base currency is

Solution GBP. As I have to sell GBP, I will choose the dealer Bid Rate
having the highest bid rate.
Dealer A 1.7905
Dealer B 1.7907
Dealer C 1.79
Dealer D 1.7902
As we see, the bid rate is highest for Dealer B. Hence, I
will sell GBP to Dealer B.

You are given two-way (bid/offer) prices for various

15 currency pairs against a range of counter-currencies.
Both direct and indirect quotes are included.
Dealers USD:CHF
Dealer A 1.2639/44
Dealer B 1.2640/45
Dealer C 1.2638/43
Dealer D 1.2641/46
 From which dealer would you buy USD?
a) Dealer B
b) Dealer C
c) Dealer A
d) Dealer D

Correct option is Dealer C. Here, the base currency is

Solution USD. As I have to buy USD, I will choose the dealer Offer Rate
having the lowest offer rate.

Dealer A 1.2644
Dealer B 1.2645
Dealer C 1.2643
Dealer D 1.2646
As we see, the offer rate is lowest for Dealer C. Hence, I
will buy USD from Dealer C.
nance & Banking Fundamentals - India
Practice Test 2 - Solution
www.learnwithflip.com

sell, at the market price, i.e. the best price that

quotes in the market, all in INR (part-fill is

ing a 1% commission to the broker?

Amount Brokerage Amount Realized

5407.50 54.08 5353.4
2315.25 23.15 2292.1
2570.00 25.70 2544.3
Total amount 10189.8

Amount
3750000
312500
937500
 Cost of Capital *
Amount Weightage
Weightage
3750000 0.75 0.09
312500 0.06 0.00625
937500 0.19 0.02625

5000000 12.25%

10 lakh. It has only equity

. They now need INR 10 lakh
al?
Present Value
5.58
5.19
4.83
4.49
73.84
93.93
 Present Value Present Value Present Value
(Assuming yield as (Assuming yield (Assuming yield as
6%) as 4.85%) 7.5%)
5.660377 5.722461 5.581395
5.339979 5.457759 5.191996
5.037716 5.205302 4.829763
4.752562 4.964523 4.492803
79.209366 83.649566 73.835215
100.00 105.00 93.93