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Question PaperStrategic Financial Management (MB361F) : January 2006
Section A : Basic Concepts (30 Marks)
•
This section consists of questions with serial number 1 - 30.
•
Answer all questions.
•
Each question carries one mark.
•
Maximum time for answering Section A is 30 Minutes.
1.
Instead of capital gains, if investors show a leaning towards current dividends, then(a) The cost of equity shall remain unaffected by a change in dividend policy(b) The cost of equity will decrease with an increase in the rate of retention(c) The cost of equity will increase with a reduction in the pay-out ratio(d) A change in dividend policy shall not affect the cost of capital of the firm(e) The stock price can be maximized through the residual dividend model.
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2.
According to the Wilcox model, the best indicator of the financial health of an enterprise is/are(a) The profitability ratios(b) The coverage ratios(c) Net liquidation value of the firm(d) Market capitalization of the firm(e) Share price of the firm.
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3.
Which of the following statements is/are
true
?(a) Financial risk can be reduced by replacing common equity with preferred stock (b) If Firm A has a higher degree of business risk than Firm B, Firm A can offset this risk byincreasing its operating leverage(c) A firm exposed to a high business risk should take recourse to a higher-than-average financialleverage(d) A capital structure that minimizes the weighted average cost of capital, in general, does notnecessarily maximize the earnings per share of the firm(e) Both (b) and (c) above.
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4.
When there is a capacity constraint in the transferor division, the transfer pricing can be ideally done by(a) Market price(b) Marginal cost(c) Shadow price(d) Full cost pricing based on actual cost(e) Marginal cost + Lumpsum annual payment.
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5.
Which of the following statements is/are
correct
?(a) Hazard risk refers to natural hazards, accidents, fire etc. that can be insured(b) Strategic risk covers systems, processes and people and includes issues such as successionplanning, human resources, information technology, control systems and compliance withregulations(c) Operational risk covers systems, processes and people and includes issues such as successionplanning, human resources, information technology, control systems and compliance withregulations(d) Both (a) and (b) above(e) Both (a) and (c) above.
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6.
Which of the following statements is/are
not
 
true
with respect to the Baumol Model?I. Cash expenses are incurred evenly over the planning horizon.II. Cash inflows are random and hence the balance in cash movements are random.III. Neither the amount of conversion nor the timing of conversion of securities into cash and viceversa is fixed.(a) Only (I) above (b) Only (II) above
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 2(c) Only (III) above (d) Both (I) and (III) above(e) Both (II) and (III) above.
7.
White Squire strategy, as a defense against takeover threat involves(a) The target firm inviting another firm to make a counter offer to takeover(b) The repurchase of a block of shares from specific shareholder(s) at a substantial premium(c) The target company issuing a large block of shares or convertible preference shares to afriendly party(d) The payment of huge severance package to senior management cadres in case of takeover of thefirm(e) The target firm making a tender offer on the raider as a response to the raider’s tender offer on thetarget.
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8.
Which of the following statements is/are
false
with respect to product liability?I. Product liability arises when a defective product causes injury to persons or damages property.II. Class action suits ensure that many suppliers of the same product can be held liable according totheir market share, if it is difficult to pinpoint the defect on one particular producer.III. In U.S., product liability judgements often favour plaintiffs and include substantial awards foreconomic and non-economic damages.(a) Only (I) above (b) Only (II) above(c) Only (III) above (d) Both (I) and (III) above(e) All (I), (II) and (III) above.
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9.
According to the Pecking order theory of financing, the preferred order of finance for firms is(a) External equity, debt, preference capital, internal equity(b) Internal equity, debt, preference capital, external equity(c) Debt, preference capital, internal equity, external equity(d) Internal equity, external equity, debt, preference capital(e) External equity, internal equity, debt, preference capital.
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10.
For a firm, if the current ratio remains constant and the quick ratio decreases during the same period,then, which of the following is indicated?(a) The proportion of total debt relative to total assets is decreasing(b) The proportion of total debt relative to net worth is decreasing(c) The proportion of net worth relative to total assets is increasing(d) The liquidity is decreasing(e) The profitability is increasing.
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11.
Which of these is/are
not
the stated advantage(s) of a divisional structure?(a) Allows local control of local situations(b) Leads to a competitive climate within a firm(c) Accountability is clear(d) Promotes specialization of labor(e) Both (a) and (c) above.
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12.
Which of the following is/are considered to be a value driver as per the ‘Alcar’ approach to value basedmanagement?(a) Cash flow from operations (b) Long-term capital gains(c) Incremental fixed capital investment (d) Value growth duration(e) Both (c) and (d) above.
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13.
Converting an existing division into a wholly owned subsidiary is called(a) Split-off (b) Split-up (c) Divestiture (d) Equity carveout (e) Spin-off.
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14.
Which of the following is
not
an assumption of Walter model on dividend policy?(a) The firm is a going concern and has a perpetual life(b) The only source of finance available to the firm is debt(c) The cost of capital of the firm remains constant throughout the life of the firm(d) The return on investment remains constant throughout the life of the firm(e) Both (a) and (d) above.
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15.
Which of the following adjustments is recommended by Current Cost Accounting method to determinethe current cost operating profit?(a) Tax-Shield adjustment (b) Cost adjustment(c) Equity value adjustment (d) Monetary Working Capital adjustment(e) Debt value Adjustment.
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16.
Which of the following statements regarding the adjusted book value approach to valuation of companies is/are
true
?(a) The expected future cash flows of the firm are discounted at the weighted average cost of capital(b) Current assets like deposits made are valued at book value(c) The ratio of share price to book value per share is applied to the book value of the assets todetermine their market value(d) Long term debt is valued using the standard equity valuation model(e) Short term debt is valued using the standard bond valuation model .
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17.
Which of the following statements regarding the Current Purchasing Power (CPP) method of accounting for inflation is/are
true
?I. It is aimed at measuring all items in the financial statements in a unit of measurement thatrepresents the same amount of general purchasing power.II. It attempts to measure the gains or losses that arise from holding financial assets.III. The figures given on CPP basis are equivalent to the current replacement values.(a) Only (I) above (b) Only (II) above(c) Only (III) above (d) Both (I) and (II) above(e) Both (I) and (III) above
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18.
Which of the following is
not
an assumption of Modigliani - Miller Approach to capital structure?(a) Information is freely available to investors(b) The capital market transactions are cost-free(c) Investors have homogeneous expectations about future earnings of a company(d) Growth of a firm is entirely financed through retained earnings(e) Securities issued and traded in the market are infinitely divisible.
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19.
The strategy of inviting another friendly firm to make a counter offer to a hostile offer is called(a) Golden parachute (b) Green mail (c) White Knight(d) Poison pill (e) Blue Squire.
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20.
As per SEBI guidelines on take over if the acquirer crosses a certain
x
1
% of voting capital of targetcompany it should inform the concerned stock exchange and at the same time it should offer to othershareholders of the target company through a public announcement, to acquire minimum of 
x
2
% of voting capital of the target company through an offer document.The
x
1
and
x
2
in above paragraph are(a) 5 and 10 respectively (b) 5 and 15 respectively(c) 10 and 15 respectively (d) 10 and 20 respectively(e) 15 and 20 respectively.
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21.
The risk that arises out of the assets of a firm being
not
readily marketable is called(a) Market risk (b) Marketability risk (c) Business risk (d) Financial risk (e) Exchange risk.
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22.
During which of the following stages of the product life cycle the profit margins from a product reachthe peak?(a) Introduction (b) Growth (c) Maturity (d) Saturation (e) Decline.
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23.
Which of the following is/are the assumptions of multiple discriminant analysis?I. There are two discrete groups to be analyzed.II. The independent variables can be combined in a linear manner for discriminating between the twogroups.III. The values of the variables are distributed lognormally.(a) Only (I) above (b) Only (II) above
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