Financial Management

Test 1

1. Why depreciation has to be added back in the calculation of cash flow as it is a_____?

Ans – Non-cash expense

2. If growth rate of expected earnings goes up than price of stock will_____?

Ans – Increase

3. If proportion of debt is increased in capital structure overall cost of capital will_____?

Ans – Decrease

4. When in the calculation of IRR, intermittent cash flows are reinvested at required rate of return; the
resultant rate is known as_____?

Ans – MIRR - (modified internal rate of return)

5. A liberal working capital policy will lead to

a. Low debtors
b. low inventory
c. low cost
d. high inventory

6. Dividend declared at 12% means that this %age will be applied on ______?
a. Issue price
b. Market price
c. Face value
d. Profits

7. Brexit, Greece Crises, Chinese Crises, Sub -Prime Crises are example of which of the following?
a. Systematic Risk
b. Unsystematic Risk
c. Total Risk
d. Specific Risk

8. Increased financial leverage give rise to _____ volatile EPS?

a. More
b. Less
c. Non
d. None of the above

9. If the cost of capital of a project goes up the NPV Will ______?

a. Decrease
b. Increase
c. Remain same
d. Fluctuate

10.The cash flows invested in a project at t=0 period is known as ____?

a. Initial cash flows
b. Operating cash flows
c. Terminal cash flows
d. Regular cash flows
11.Proportion of profit distributed among share holders is known as _____?
a. Dividend ratio
b. Dividend capitalization ratio
c. Retention ratio
d. Pay-out ratio

12.The internal rate of return generated by an fixed income investment, if held till maturity is known as
a. Current yield
b. YTM
c. Yield curve
d. Coupon rate

13.The rate beyond which the preference between two independent projects reverses is knows as____?
a. IRR
b. Reversal rate
c. Cross over rate
d. Cut off rate

14.Arun buys a stock at Rs 20 and sells at Rs 25 after 10 months. During this period, he receives a
dividend of Rs 5 on his investments. Calculate Holding Period return?
a. 0.25
b. 0.5
c. 0.2
d. 0.4
Holding Period Return is returning an asset after holding in for a period of time. It
is expressed in percentage.

HPR = Selling Price - 25, Cost Price = 20, Dividend = 5,

"

15.If the coupon rate of a debenture is increased then its YTM will ______?
a. Decrease
b. Increase
c. Remain same
d. Fluctuate

16.Preference share is a ______ instrument?

a. Ownership
b. Debt
c. Hybrid
d. None of the above

17.Calculate standard deviation with the help of following data: p=0.3, r=30%, p=0.4, r=16%, p=0.3,
r=18%
a. 74.76
b. 24.92
c. 4.21
d. 8.64

18.If business risk of company goes up than price of stock will _____?
a. Decrease
b. Increase
c. Remain same
d. Fluctuate
 19.Which of the following evaluation techniques for long-term investment decisions doesn’t consider
the time value of money?
a. NPV
b. IRR
c. Pay-back period
d. Profitability index

20.If credit sales 100000, credit period is 30 days, calculate the average receivables
a. 8219
b. 8333
c. 3333
d. 3288

21.For A Ltd. Annual demand is 10000 units, carrying cost is 2 Rs per unit and order cost is Rs 50.
Calculate the EOQ

Ans – 707

EOQ = Sq Root 2 x (10000x50) /2

22.Stream of equal cash flows at regular interval starting at the beginning of the period is known as?
a. Lumpsum cash flows
b. Annuity
c. Conventional cash flows
d. Annuity due

23.Which of the following is an example of unsystematic risk?

a) Interest rate fluctuations
b) Political uncertainty
c) Increased steel prices
d) Global economic Crises

24.Calculate the expected return with the help of following data: p=0.3, r=30%, p=0.4, r=16%, p=0.3,
r=18%
a. 17.8
b. 18
c. 5.8
d. 7.35

25.For daily ltd Beta is 0.8. Nifty returns = 15% and T-Bill rate is 8% what is the cost of equity?
a. 13.56%
b. 15%
c. 5.6%
d. 7%

Answer: The cost of equity works out to 13.6% as per the CAPM. None of the answers given are the
answers to the question. However, the risk premium of Dairy Ltd, works out to 0.056.

We use the Capital Asset Princing Model or CAPM in order to calculate the cost of equity, required rate of
return on an asset or the discount rate.

The formula for computing the cost of equity is:

In the formula above, the term refers to the risk premium of the given security, and it
represents the rate of return that the security must give over and above the return obtained on T-bills.

Substituting the values in the formula above we get,

26.As per MM proposition with taxes, value of unlevered firm is _____than levered firm?
a. Lower
b. Same
c. Higher
d. Fluctuating

27.The difference between present value of cash inflows and outflows is known as____?
a. NPV
b. IRR
c. Pay Back period
d. Profitability Index

28.Sales proceeds from the asset sold at the end of project forecasting period is treated as ____?
a. Initial cash flows
b. Operating cash flows
c. Terminal cash flows
d. Regular cash flows

29.Which of the following is not the function of investment banking?

a. New issue management
b. Private equity advisory
c. Venture capital fund advisory
d. Working capital management

30.Dividend payment linked to profits left out after meeting the expansion needs is based on ____
theory/policy?

Ans - Residual payout policy

Financial Management

Test 2

1. ______ Method tells the period in which original investment in a project will be recovered?

a. NPV
b. IRR
c. Pay-back period
d. Profitability index

2. In how much time Rs 10 lacs can be approximately doubled, if invested at 8% computed annually?

Ans – 9 years

A=P(1+r)n,or, 2P = P (1 + 0.08)n,
 2000000 = (1000000 + 80000)n

n = 9 years (approximately)

3. Shyam deposits Rs 5000 every year for next 3 years at 6% semiannual compounding.
Calculate the future value if investment? Future value annuity factor at 3% for 3years
and 6 years is 3.0909 & 6.4684 respectively and at 6% for 3years and 6 years is 3.1836
& 6.9753 respectively.
a. 15454.5
b. 16171
c. 15918
d. 17438.25

4. What will be the price of bond with face value of Rs 1000 carrying a coupon of 10% maturing in 3
years at 10% premium on par value? Present value factor and PVAF at 10% for 3 years is 0.7513
and 2.4869 respectively

a. 1000
b. 826.43
c. 1075.12
d. 1348.69

5. The cash flows forecasted during the projection period for capital budgeting decisions are known as
___?

a. initial cash flows

b. operating cash flows
c. terminal cash flows
d. regular cash flows

6. Cost of preference share is _____?

a. Preference dividend rate

b. Pref Dividend / Pref. share market price
c. Both of the above
d. None of the above

7. Current year dividend of Sun Ltd is Rs 5 per share. Expected growth rate is 8% and market
capitalization rate is 10%. Calculate intrinsic value of the stock

a. 5.4
b. 67.5
c. 54
d. 270
Answer

Current year dividend, D0 = Rs 5

Expected growth rate, g = 8%

Market capitalization rate, ke = 10%

Next year dividend, D1 = D0 × (1 + g)

= 5 × (1 + 0.08)
 = 5.4

Intrinsic value of stock:

= D1 ÷ (ke - g)

= 5.4 ÷ (0.1 - 0.08)

= 5.4 ÷ 0.02

= Rs. 270
8. Market interest rate is 9%. A bond with 10% coupon will sell ____ par value?

a. Above
b. below
c. at
d. none of the above

9. Which of the following is ultimate objective of financial management?

a. profit maximization
b. share holder’s wealth maximization
c. leverage minimization
d. funding maximization

10. As per liquidity premium theory, interest rates on long term bonds will be ____ than short term
bonds?

a. lower
b. same
c. higher
d. fluctuating

11. Discounted payback period is considered an improvement over payback period because it
considers____?

a. all cash flows

b. time value of money
c. easy to understand
d. all of the above

12. Moon Ltd invests Rs. 800000 in a paper manufacturing plant. This is expected to generate Rs.
150000 every year for next seven years. Cost of capital for the project is 10%PVAF for 7 years at 10% is
5.3349. Calculate NPV off the project?

The computation of the net present value is shown below:

Net present value would be

= Cash inflows after considering the discount factor - initial investment

where,

Cash inflows after considering the discount factor would be

= Cash inflows × PVIFA factor for 7 years at 10%

= $150,000 × 5.3349

= $800,235

And, the initial cost of investment is $800,000

So, the net present value equal to

= $800,235 - $800,000

= $235
13. When interest rates on long term bonds are higher than short term bonds, yield curve will be
____?

a. upward slopping
b. downward slopping
c.flat
d. none of the above
Financial Management

Test 3

1. The MM Proposition without taxes, Value of firm is _______ by changing its capital structure?

a. Affected
b. Not affected
c. Increases
d. Decreases

2. Which of the following is not the method for calculation of cost of equity?

a. CAPM
b. Dividend discount model
c. YTM + Risk premium
d. YTM

3. For a firm weight of equity and debt is 0.6 and 0.4 respectively and cost of equity is 15%,
cost of debt is 9%, tax rate is 30%. Calculate WACC for the firm?

Answer = 0.1152

Weight Average Cost of Capital (WACC) =

{E/V × ke} + [ D/V × Kd × (1-Tc)

where :

E = Market value of the firm's equity 0.6

D = Market value of the firm's debt 0.4

V = total market value of equity & debt (E+D) 0.6+0.4

Ke = Cost of equity 15%

Kd = Cost of debt 9%

Tc = Corporate tax 30%

WACC = {(0.6/1) × 0.15 } + {(0.4/1 ×0.09×(1-0.3)}

WACC = 0.09+0.0252

=0.1152 × 100%

WACC the firm = 11.52%

4. As per matching approach permanent working capital requirements should be funded by

______ ?

a)long term funds

b)short term funds
c)medium term funds
d)any of the above

5. As per bird in hand theory high dividend payout is ______ to low pay out
A) Preferred
B) not preferred
C) irrelevant for investors
D) none of above

6. For calculation of present value of annuity regular,in excel,the value of type should
be?
A)1
B)0
C)10
D)0.1
7. Which of the following will result in shareholders wealth maximization?
a) optimum utilization of resources
b) maximum utilization of resources
c) leverage minimization
d) Funding maximization

8. Which of the following AAA debentures will have highest price if YTM is _____?
a. 0.07
b. 0.08
c. 0.075
d. 0.085

9. In which of the following frequency of compounding present value of annuity will be

lowest?
a. Daily
b. Quarterly
c. Monthly
d. Annual

10. If the annual rent expense goes up the operating leverage will________and will give rise
to more than proportionate change in______?
a. decrease, EPS
b. decrease, EBIT
 c. increase ,EPS
d. increase , EBIT

11. Which of the following cost is important while evaluating the investment decision?

1. sunk cost
2. incremental cost
3. both
4. none of above

12. The underlying assumption in irr method is that all the intermittent cash flows are
reinvested at
a)cut off rate
b)required rate of return
c)cost of capital
d)irr

Financial Management

Test 4

1. Sheela needs rs 100000 at the end of each year in the next 5 years. How much amount she should
invest now @10% present value of annuity factor at 10% for 5 years is 3.7908

The present value is given by:

Let PV represent the present value and X the annuity.
The present value is given by :
PV = X × The annuity factor
We do this substitution in the question as follows:
X = 100000
We work out as follows:
100000 × 3.7908
= 379080
Sheela needs to invest 379080 now in order to get 100000 at the end of each year.
2. In which of the following frequency of compounding maturity value of investment will be highest?
a. Annual
b. Quarterly
c. Monthly
d. Daily

3. If the face value of a bond is 100 and its redemption value is 110, bond is maturing at ______?
a. 10% discount
b. 10% premium
c. At par
d. None of the above

4. Sales of Zing ltd for 2016 was Rs.10000, COGS Rs.6000, Depreciation Rs.1000 interest Rs.800, tax
rate 30%. Calculate the operating cash flows of Zing ltd for 2016
a. Rs.4000
b. Rs.1540
c. Rs.2540
d. Rs.2200
 5. Arun buys in stock at Rs 20 and sells at Rs 25 after 10 months. During this period, he receives a
dividend of Rs 5 on his investments. Calculate the holding period return?

Selling price = 25
Cost = 20
Dividend = 5
We need to calculate the holding period return =
Selling price - Cost + Dividend
-------------------------------------------
Cost
= 25-20+5/20 = .5 => 50%
6. In India, dividend is ____ in the hands of investors?
a. Taxable
b. Not-taxable
c. Heavily taxable
d. None of the above

7. A tight working capital policy will lead to?

a) Low debtors
b) Low inventory
c) Low inventory carrying cost
d) all of the above

8. 1/10,30 credit term means?

a. 1% discount
b. 0.1% discount
c. 1% discount for payment within 10 days
d. 0.1% discount for payment within 30 days

9. Which of the following is the spontaneous source of financing the working capital
requirements?
1.commercial paper
2.account payable
3.bank finance
4.all of the above

10.Cost of equity is always equal to or _____ than WACC

a. Lower
b. Same
c. Higher
d. Fluctuating

11.The proportion of reserves is distributed among shareholders as shares is known as____?

a. Bonus Shares
b. Stock dividend
c. Dividend
d. Both 1 & 2
 Financial Management

Test 5

1. After the 2 for 1 share split number of shares will _____ ?

A- Remain same
B-Reduce
C-Be half
d- Double

2. In Excel, in order to calculate the EMI for loan repayment, which function has to be used?

a. PV
b. FV
c. NPV
d. PMT

3. Growth of the company can be expected to be higher when _____ is high?

a. Pay-out ratio
b. Distribution ratio
c. Dividend ratio
d. Retention ratio

4. Mathematical model for calculating the optimum inventory order quantity is known as________?
a. JIT
b. ABC
c. EOQ
d. All of the above

5. If the credit period is increased for the customers of the company operating cycle will _____?
a. Reduce
b. Increase
c. Remain same
d. Unaffected

6. If the credit period is increased by the suppliers of the company cash conversion cycle will
A) Reduced
B) Increase
C) Remain same
D) Unaffected

7. A company replaces old machinery with salvage value of Rs 100000 replaced by machinery costing
Rs 500000. The relevant cash flows for evaluation of this project is _____ ?
a. 100000
b. 500000
c. 400000
d. 600000
 8. In case of share buyback number of outstanding share will _____?
a. Reduce
b. Increase
c. Remain same
d. Unaffected

9. Which of the following are two components of holding period return?

a. Beginning value and ending value
b. Periodic return and ending value
c. Periodic return and capital appreciation
d. Beginning value and capital appreciation

Financial Management

Test 5

1. Which of the following is combined measure of risk & return?

a. Mean
b. HPR
c. Expected return
d. Coefficient of variation

2. In ABC classification of inventory, maximum attention has to be paid on ____ items?

a. A category
b. B category
c. C category
d. All of them

3. A stock’s average return in last 3 years were 12% and standard deviation is 8%. Calculate the
coefficient of variation?
a. 1.5
b. 0.33
c. 0.67
d. 9.6
Step-by-step explanation:

Given:

S.D=8

Mean=12

Coefficient of variaation

=(0.6666)x100
4. In case of capital budgeting decisions, the projects in which choice of one automatically excludes
the other are known as _______?
a. Dependent projects
b. Independent projects
c. Mutually exclusive projects
d. Mutually inclusive projects

5. The rate at which present value of cash inflows becomes equal to present value of cash outflows is
called ____?
a. Cut off rate
b. Required rate of return
c. Cost of capital
d. IRR

6. The risk which can be reduced by diversification is known as _____?

a. Systematic risk
b. Unsystematic risk
c. Total risk
d. Market Risk

7. Interest yields for different maturity periods, plotted on a graph is known as ____?
a. Yield curve
b. Term structure of interest rates
c. Both of the above
d. None of the above

8. Levered equity beta is ______ than unlevered equity beta?

a. Less
b. Equal to
c. More
d. None of the above

9. Which of the following method is considered the best evaluation techniques for long-term
investment decisions?
a. NPV
b. IRR
c. Pay Back Period
d. Profitability Index

10. For accepting the project IRR has to be compared with _____?
a. Cut off rate
b. Required rate of return
c. Cost of capital
d. All of the above

11. The relationship between security return and market return is shown by____?
a. Rf
b. Rm
c. Rm-Rr
d. Beta

12. Increase in the frequency of compounding results into ____ maturity value
a. Higher
 b. Lower
c. Same
d. Fluctuating
13. Days Inventory + days sales outstanding is known as _____?
a. Operating cycle
b. Cash conversion cycle
c. Collection period
d. Inventory conversion period

14. For Projects with different scales, which of the evaluation techniques should be used?
a. NPV
b. IRR
c. Payback period
d. Probability Index

15.