Assignment  A
Question 1a: Should the titles of controller and treasurer be adopted under
Indian context? Would you like to modify their functions in view of the
company practice in India? Justify your opinion?
Answer to 1a:
Controller & Treasurer are independent & they have their own Perspectives & Drivers as detailed below:
Controller
Responsibilities
include,
Double
entry
accounting, financial reporting, Fraud measure,
detective controls, Financial restatement,
Compliance with statutory requirements like
Rules, Accounting standards, GAAP, IFRS etc.,
Controller works & forecasts the events for a
long term. Main focus income statement
Ex: Cash involved event
Controller looks from compliance angle (how to
record, what GAAP provides etc.,)
Treasurer
Responsible for Liquidity management (very
important function), Risk Management, More
focus on financial statements, follows leading
practices & responsible for the future
performance of company (projects cash flows)
Treasurer works/ forecasts the events regularly
(daily / weekly) focus Balance sheet & future
capital structure, capital expenditure etc.,
Treasurer concentrates more on cash availability
focus i.e. how to bring in the required cash etc,
Therefore, from the above it is clear that, controller & treasurer have different roles to play. However,
majority of the Indian companies works with Financial Controller who himself takes care of the treasury
department / Portfolio.
Therefore, as far as from Indian context, it can be concluded that, controller is also responsible for treasury
jobs & there is no separate treasurer / treasury department exists
Question 1b: firm purchases a machinery for Rs. 8, 00,000 by making a down payment of Rs.1,50,000
and remainder in equal installments of Rs. 1,50,000 for six years. What is the rate of interest to the firm?
Answer to Q1b:
Particulars
Cost of Machinery
Down Payment
made by firm
Financed through
borrowings
Ref
Year 0
(a)
800,000
(b)
c = (ab)
150,000
650,000
d=6*15
0,000
900,000
e=dc
250,000
Rate of Interest
= total interest
/ total
borrowings
f=e/c
38.46%
Repayment in equal
instalments every
year
(maximum of six
years)
Year 1
Year 2
Year 3
Rs.
Year 4
Year 5
Year 6
150,000
150,000
150,000
150,000
150,000
150,000
Rate of interet
per annum
g=f/6
yrs
6.41%
6:5:4:3:
2:1
21
Break of interest
cost / principal
repayment:
1) interest cost (can
be apportioned in
the ratio of
no of years
repayment  i.e.
earlier the years
more
the interest cost &
vice versa)
2) Principal
Outstanding
adjustment
Yearwise Interest
rates:
 Principal
Outstanding at year
end
(prinicpal o/s at
year beginning Principal
repayment)
RATE OF
INTEREST
EVERY YEAR
(ratio)
(6+5+4+3+2
+1)
250000
71429
(250,000
*6/21)
59524
(250,000
*5/21)
47619
(250,00
0*4/21)
35714
(250,00
0*3/21)
23810
(250,000*
2/21)
11905
(250,00
0*1/21)
i=dh
650000
78571
90476
102381
114286
126190
138095
650000
571429
480952
378571
264286
138095
(480952
 i)
(378571
 i)
(650000i)
h/
princip
al o/s
at year
beginni
ng)
11.0%
(h /
650000)
(571429i)
10.4%
(h /
571429)
9.9%
9.4%
(h /
480952)
(h /
378571)
(264286i)
9.0%
(h /
264286)
(138095
 i)
8.6%
(h /
138095)
Question 3a: How leverage is linked with capital structure? Take example of
a MNC and analyze.
Answer to 3a:
Leverage: It is an advantage gained (it may be anything)
Leverage is linked with Capital Structure, since an organization having a optimum capital structure (where
WACC (weighted average cost of capital) is minimum) is a great leverage/ advantage both to the company
as well for the investors.
Organizations, generally have two types of risks; operating risks impact of fixed costs & variability of
EBIT & Financial risks impact of interest cost/financial charges & variability of EBT.
Example:
XYZ ltd has the following nos:
Contribution Rs.100 lacs, fixed cost Rs.25 lacs, Financial Charges/debt cost Rs.40 lacs.
Particulars
Contribution
Fixed cost
EBIT
Interest cost
EBT
XYZ Ltd. has following:
Operating leverage
Financial leverage
It is always preferable to have low operating risk & high financial risk (subject to Return on capital
employed (ROCE) > Interest cost on debt funds)
We can conclude that, XYZ ltd (MNC) is having a optimum capital structure & manageable risk.
500
200
300
150
150
50
100
Interest
Profit before tax
Q LTD.
(In Rs. Lakhs)
1,000
300
700
400
400
100
200
Answer 3b:
P ltd
Particulars
Sales
Variable costs
Contibution
Fixed cost
PBIT / EBIT
Interest
Profit before Tax / EBT
Q ltd
(in Rs. Lacs)
500
200
300
150
150
50
100
1000
300
700
400
300
100
200
a) Opearting leverage:
= Contribution / EBIT
2.0
2.3
b) Financial leverage:
= EBIT / EBT
1.5
1.5
Computation:
c) Combined leverage:
= Contirbution / EBT
Comments:
3.0
3.5
Question 4b: The following items have been extracted from the liabilities
side of the balance sheet of XYZ Company as on 31st December 2005.
Paid up capital:
4, 00,000 equity shares of Rs each
40,00,000
Loans:
16% nonconvertible debentures
12% institutional loans
20,00,000
60,00,000
Dividend
Earning
average market price
Per share
per share
per share
7.2
10.50
65
You are required to calculate the weighted average cost of capital, using book values as weights and
earnings/price ratio as the basis of cost of equity. Assume 9.2% tax rate
Answer 4b:
Computation of Weighted Average Cost of Capital (WACC):
Nature of Capital
Value
a) Equity Capital
4,000,000
Weights
(basis of
bookvalues
O/S.)
Cost of capital
33%
Weights * Cost of
Capital
16.15
5.38
(refer W.No.1)
b) 16% nonconvertible debentures
2,000,000
17%
14.53
Interest (1taxrate) =
16% (100%9.2%)
2.42
6,000,000
50%
10.90
Interest (1taxrate) =
12% (100%9.2%)
5.45
Total
12,000,000
100%
13.25
Working Note: 1
Cost of equity:
Earnings per
share /
Market price per
share
10.50 / 65 =
16.15%
5,000,000
12%
0.452
2,261,746
Loan Amortization
A loan amortization schedule is a repayment plan that
is calculated before repayment of a loan begins.
Capital Recovery
The reciprocal of Present value annuity factor
(PVAF) is the capital recovery.
Annuity
Question 5b: A bank has offered to you an annuity of Rs. 1,800 for 10 years
if you invest Rs. 12,000 today. What is the rate of return you would earn? .
Answer 5b:
Particulars
Rs.
1800
10
18000
12000
6000
50%
5%
Assignment  C
Rs.
Raw materials
52.0
Direct labour
19.5
Overheads
39.0
110.5
Profit
19.5
Selling price
130.0
Answer 1:
Particulars
Raw Material
Direct Labour
Prime cost
Overheads
Total cost
Profit
Sales
Cost/unit
52
19.5
3640000
1365000
5005000
2730000
7735000
1365000
9100000
39
110.5
19.5
130
Statement of Working Capital for HLL  70,000 units production per year:
Particulars
No of
months
Computation
Rs.
1
0.5
2
36,40,000/12*1month
50,05,000/12*0.5 months
91,00,000*3/4 (credit sales)/12*2
303333
208542
1137500
12000
1661375
Creditors  suppliers
1
36,40,000/12*1month
1.5 weeks
or
13,65,000/12*0.34
0.34
month
1
27,30,000/12*1
Wages Outstanding
Overheads outstanding
303333
38675
227500
569508
1091867
Quantitative analysis:
Present value of inflows = Rs. 200,000
Present value of outflows = Rs. 100,000
PI = 2
NPV = Rs.100,000
NPV technique is better than PI technique for capital budgeting decisions. NPV shows wealth at the end in
absolute amount, which will be helpful to make decisions clearly, whereas the same advantage is not
available with PI technique.
However, PI shows return over investment in times, which will be very useful for immediate decision
making.
Generally, over the years, organizations prefer NPV technique for capital budgeting decisions than PI
technique.
C1
C2
C3
 10,000
+ 10,000


10,000
+ 7,500
+ 7,500

 10,000
+ 2,000
+ 4,000
+ 12,000
10,000
+ 10,000
+ 3,000
+ 3,000
I. according to each of the following methods: (1.) Payback, (2.) ARR, (3.) IRR, (4.) NPV assuming
discount rates of 10 and 30 percent.
II. Assuming the project is independent, which one should be accepted? If the projects are mutually
exclusive, which project is the best?
Answer 2b:
I)
Methods
(1) Payback
@10% discount rate
@30% discount rate
(2) Accounting rate of
return (ARR)
(3) NPV
@10% discount rate
@30% discount rate
Project A
Project B
Project C
Project D
1 + years
1 + years
100%
1.13 years
1.25 years
150%
2.14 years
3 + years
180%
1.7 years
2.8 years
160%
(909)
(2308)
3017
207
4140
(633)
3824
833
0%
32%
26%
38%
(4) IRR
Independent project: Project with higher NPV needs to be selected, which shows wealth in absolute
value at the end of the project
Therefore, Project C needs to be accepted.
II) In case projects are mutually exclusive:
First disparity between projects needs to be resolved. NPV selects Project C whereas IRR selects Project
D, therefore, disparity exists. Since cash outflows (Rs.10, 000/) are same for both the projects, the
disparity arisen is called as Cash flow disparity.
It can be resolved by using Incremental cash flow technique. After resolving, the right project can be
accepted.
Workings are as follows:
PROJECT A:
The following has been calculated assuming discount rates of 10%
& 30% separately:
1) Payback period: time period to recover initial investment
a) Discounted @10%
Years
Cash
flows
b) Discounted @30%
Unrecover
ed
Discount Discounted
discounte
rate *
cash flows
d cash
flows
Years
Cash
flows
@ 10%
(1)
(2)
(10,000)
(3)
1.000
(4) =
(2) * (3)
(10,000)
(5)
(10,000)
(1)
1
10,000
0.909 9,091
(909)
1
* disocunt rate computed using formule = 1 / (1+r) to the power n;
where r = disocunt rate
& n = year
(2)
Unrecove
red
Discou
Discounted
discounte
nt rate
cashflows
d cash
*
flows
@
30%
(3)
(4) = (2)
* (3)
(5)
(10,000)
1.000 (10,000)
(10,000)
10,000
0.769 7,692
(2,308)
Payback period = Base year + [(unrecovered disocunted cash flow of base year /
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounte
d
cashflows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
Discoun
t rate *
Discounte
d
cashflows
@ 30%
(4) =
(2) * (3)
(1)
(2)
(3)
(4) =
(2) * (3)
(10,000
)
1.000
(10,000)
(10,000)
1.000
(10,000)
10,000
0.909
9,091
10,000
0.769
7,692
(909)
NPV
NPV
(2,308)
PROJECT B:
The following has been calculated assuming discount rates of 10% &
30% separately:
1) Payback period: time period to recover initial investment
a) Discounted @10%
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounte
d
cashflows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
(2)
(3)
Unrecove
red
Discounted
discounte
cashflows
d cash
flows
@
30%
@ 10%
(1)
Discou
nt rate
*
(4) =
(2) * (3)
(5)
(1)
(2)
(3)
(4) =
(2) * (3)
(5)
(10,000)
1.000
(10,000)
(10,000)
(10,000)
1.000
(10,000)
(10,000)
7,500
0.909
6,818
(3,182)
7,500
0.769
5,769
(4,231)
7,500
0.826
6,198
3,017
7,500
0.592
4,438
207
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounte
d
cashflows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
Discoun
t rate *
Discounted
cashflows
@ 30%
(4) =
(2) * (3)
(1)
(2)
(3)
(4) = (2)
* (3)
(10,000)
1.000
(10,000)
(10,0
00)
1.000
(10,000)
7,500
0.909
6,818
7,500
0.769
5,769
7,500
0.826
6,198
7,500
0.592
4,438
3,017
NPV
NPV
NPV falls
NPV goes
up
Cash
flows
Discoun
t rate *
Discounte
d
207
cashflows
@ 32%
(1)
(2)
(3)
(4) =
(2) * (3)
(10,000)
1.000
(10,000)
7,500
0.758
5,682
7,500
0.574
4,304
(14)
NPV
IRR
30% +
1.873
31.87%
PROJECT C:
The following has been calculated assuming discount rates of 10%
& 30% separately:
1) Payback period: time period to recover initial investment
a) Discounted
@10%
Years
Cash
flows
b) Discounted
@30%
Discoun
t rate *
Discounte
d
cashflows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
Discount
rate *
Disco
unted
cashf
lows
Unrecove
red
discounte
d cash
flows
@ 30%
(4) =
(2) * (3)
(5)
(1)
(2)
(3)
(4) =
(2) *
(3)
(5)
(10,000)
1.000
(10,000)
(10,000)
(10,000)
1.000
(10,0
00)
(10,000)
2,000
0.909
1,818
(8,182)
2,000
0.769
1,538
(8,462)
4,000
0.826
3,306
(4,876)
4,000
0.592
2,367
(6,095)
12,000
0.751
9,016
4,140
12,000
0.455
5,462
(633)
a) Discounted @10%
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounted
cash flows
Years
Cash
flows
(2)
(3)
Discoun
ted
cashflo
ws
@
30%
@ 10%
(1)
Disco
unt
rate *
(4) =
(2) * (3)
(1)
(2)
(3)
(4) =
(2) * (3)
(10,000)
1.000
(10,000)
(10,000)
1.000
(10,000)
2,000
0.909
1,818
2,000
0.769
1,538
4,000
0.826
3,306
4,000
0.592
2,367
12,000
0.751
9,016
12,000
0.455
5,462
4,140
NPV
NPV
(633)
NPV falls
NPV goes
up
Years
Cash
flows
Discoun
t rate *
Discounte
d
cashflows
@ 26%
(1)
(2)
(3)
(4) =
(2) * (3)
(10,000)
1.000
(10,000)
2,000
0.794
1,587
4,000
0.630
2,520
12,000
0.500
5,999
NPV
106
IRR
30% 3.43
26.57
PROJECT D:
The following has been calculated assuming discount rates of 10% &
30% separately:
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounte
d
cashflows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
Discoun
t rate *
Discou
nted
cashflo
ws
Unrecove
red
discounte
d cash
flows
@ 30%
(4) =
(2) * (3)
(5)
(1)
(2)
(3)
(4)
= (2) *
(3)
(5)
(10,000)
1.000
(10,000)
(10,000)
(10,000)
1.000
(10,000) (10,000)
10,000
0.909
9,091
(909)
10,000
0.769
7,692
(2,308)
3,000
0.826
2,479
1,570
3,000
0.592
1,775
(533)
3,000
0.751
2,254
3,824
3,000
0.455
1,365
833
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounte
d cash
flows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
(4) =
(2) * (3)
(1)
Disco
unt
rate *
@
30%
(2)
(3)
Discounted
cashflows
(4) = (2)
* (3)
(10,000)
1.000
(10,000)
(10,000)
1.000
(10,000)
10,000
0.909
9,091
10,000
0.769
7,692
3,000
0.826
2,479
3,000
0.592
1,775
3,000
0.751
2,254
3,000
0.455
1,365
3,824
NPV
NPV
NPV falls
NPV goes
up
833
Discounted @38%
(assumed rate)
Years
Cash
flows
Discoun
t rate *
Discounte
d
cashflows
@ 38%
(1)
(2)
(4) =
(2) * (3)
(3)
(10,000
)
1.000
(10,000)
10,000
0.725
7,246
3,000
0.525
1,575
3,000
0.381
1,142
NPV
(37)
IRR
30% +
7.66
37.66%
Years
Increme
ntal
Cash
flows
(project
C
project
D)
b) Discounted @30%
Discou
nt rate
*
Discounted
cashflows
Years
Cash
flows
@
10%
(1)
(2)
Discou
nt rate
*
Discounte
d
cashflows
@
30%
(4) =
(2) * (3)
(3)
(1)
(2)
(4) =
(2) * (3)
(3)
1.000
1.000
(8,000)
0.909
(7,273)
(8,000)
0.769
(6,154)
1,000
0.826
826
1,000
0.592
592
9,000
0.751
6,762
9,000
0.455
4,096
NPV
316
NPV
(1,466)
NPV falls
NPV goes
up
Years
Cash
flows
Discoun
t rate *
Discounte
d
cashflows
@ 13%
(1)
(2)
(4) =
(2) * (3)
(3)
1.000
(8,000)
0.885
(7,080)
1,000
0.783
783
9,000
0.693
6,237
NPV
(59)
IRR
10% +
2.5
Target return =
10%
IRR for incremental cash
flows = 12.5%
12.50%
Question 3a: "Firm should follow a policy of very high dividend payout
Taking example of two organization comment on this statement"
Answer 3a:
The statement not necessarily be true. Let us take 2 companies;
High dividend pay out company 100% payout
a) Less retained earnings
b) Slower / lower growth rate
c) Lower market price
d) Cost of equity (Ke) > IRR (r = rate of return
earned by company on its investment.
e) Indicates that company is declining.
It must be noted that, dividend is a trade off between retaining money for capital expenditure and issuing
new shares.
Question 3b: An investor gains nothing from bonus share "Critically analyse
the statement through some real life situation of recent past.
Answer 3b:
The statement is false. An investor gains bonus shares at zero cost, However, the market price of the
stock will come down & over the long period, the investor definitely maximizes his wealth due to bonus
shares.
From company angle, bonus issue is only an accounting entry & it doesnt change the wealth/value of the
firm.
Recently, Bharti Airtel have issued bonus share 2:1, due to which, the investors have gained Bonus shares
at zero cost & the market have come down to the extent of bonus issue & immediately went up & investors
have cashed the bonus shares thus maximized their wealth. However, currently it is trading down due to
varied reasons.
CASE STUDY
Ques 1: You are required to make these calculations and in the light thereof,
advise the finance manager about the suitability, or otherwise, of machine A
or machine B.
Solution:
Advise to finance manager of Brown metals ltd, to select the appropriate machine:
Particulars
1) NPV
2) Profitability index
3) Pay Back period
4) Discounted pay back period
It is advised to go in for Machine B with enhanced capacity, which will add more value to the firm.
NPV is higher in respect of Machine B as compared to Machine A & therefore machine with higher
NPV needs to be invested.
Workings are as follows:
(a) to buy machine A which is similar to the existing machine:
Years
Cash
flows
(Rs. In
lacs)
Unrecovered
cash flows
Discount rate
*
Discounted
cashflows
Unrecovered
discounted
cash flows
@10%
(1)
(2)
0
1
(25)
(3)
(4) = (2) *
(3)
(5)
(25)
(25)
1.000
0.909
(25)

(25)
(25)
(20)
0.826
(21)
20
0.751
15
(6)
14
14
0.683
10
5
NPV
14
28
0.621
9
12
12
* disocunt rate computed using formule = 1 / (1+r) to the power n; where r = disocunt rate
& n = year
1) Net Present value = Present value of inflows  Present value of outflows = 12 (as computed above)
2) Profitability Index = Present value of inflows / present value of outflows which should be >1
1.48
37 / 25
3) Payback period = Base year + [(unrecovered cash flow of base year / cash flows of next year) *12]
where base year = year in which unrecovered cash flows turns 0 or +ve
Payback period = 2 + [(20/0)*12]
= 2 years
4) Discounted Payback period = Base year + [(unrecovered disocunted cash flow of base year / disocunted cash
flows of next year) *12]
where base year = year in which unrecovered cash flows turns 0 or +ve
Payback period = 3 + [(6/4)*12]
=3.18 years
(b) to go in for machine B which is more expensive & has much greater capacity:
Years
Cash
flows
(Rs. In
lacs)
Unrecovered
cash flows
Discount rate
*
Discounted
cashflows
Unrecovered
discounted
cash flows
@10%
(1)
(2)
(3)
(4) = (2) *
(3)
(5)
(40)
(40)
1.000
(40)
(40)
10
(30)
0.909
(31)
14
(16)
0.826
12
(19)
16
0.751
12
(7)
17
17
0.683
12
5
NPV
15
32
0.621
9
14
14
* disocunt rate computed using formule = 1 / (1+r) to the power n; where r = disocunt rate
& n = year
1) Net Present value = Present value of inflows  Present value of outflows = 14 (as computed above)
2) Profitability Index = Present value of inflows / present value of outflows which should be
>1
1.35
54 / 40
3) Payback period = Base year + [(unrecovered cash flow of base year / cash flows of next year) *12]
where base year = year in which unrecovered cash flows turns 0 or +ve
Payback period = 3 + [(16/0)*12]
= 3 years
4) Discounted Payback period = Base year + [(unrecovered disocunted cash flow of base year / disocunted cash
flows of next year) *12]
where base year = year in which unrecovered cash flows turns 0 or +ve
Payback period = 3 + [(7/4)*12]
=3.21 years
Assignment  C
1. The main function of a finance manager is
(a) capital budgeting
(b) capital structuring
(c) management of working capital
(d) (a),(b)and(c)
Answer (d)
2. Earning per share
(a) refers to earning of equity and preference shareholders.
(b) refers to market value per share of the company.
(c) reflects the value of the firm.
(d) refers to earnings of equity shareholders after all other obligations of the company have been met.
Answer (d)
3. 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.
Answer (b)
4. Cost of equity share capital is
(a) equal to last dividend paid to equity shareholders.
(b) equal to rate of discount at which expected dividends are discounted to determine their PV.
(c) less than the cost of debt capital.
(d) equal to dividend expectations of equity shareholders for coming year.
Answer (b)
5. Degree of the total leverage (DTL) can be calculated by the following formula
[Given degree of operating leverage (DOL) and degree of financial leverage (DFL)]
(a) DOL + DFL
(b) DOL /DFL
(c) DFLDOL
(d) DOL x DFL
Answer (d)
6. Risk Return trade off implies
(a) increasing the profits of the firm through increased production
(b) not taking any loans which increase the risk of the firm
(c) taking decisions in a way which optimizes the balance between risk and return
(d) not granting credit to risky customers
Answer (c)
7. The goal of a firm should be
(a) maximization of profit
(b) maximization of earning per share
(c) maximization of value of the firm
(d) maximization of return on equity
Answer (c)
(d) EBIT=EPS.
Answer (d)
10. Money has time value since
(a) The value of money gets compounded as time goes by
(b) The value of money gets discounted as time goes by
(c) Money in hand today is more certain than money in future
(d) (b) and (c)
Answer (b)
11. Net working capital is
(a) excess of gross current assets over current liabilities
(b) same as net worth
(c) same as capital employed
(d) same as total assets employed
Answer (a)
12. The internal rate of return of a project is the discount rate at which NPV is
(a) positive
(b) negative
(c) zero
(d) negative minus positive
Answer (c)
13. Compounding technique is
(a) same as discounting technique
(b) slightly different from discounting technique
(c) exactly opposite of discounting technique
(d) one where interest is compounded more than once in a year.
Answer (c)
14. For determining the value of a share on the basis of P/E ratio, information is required
regarding:
(a) earning per share
(b) normal rate of return
(c) capital employed in the business
(d) contingent liabilities
Answer (a)
15. Tandon committee suggested inventory and receivable norms for
(a) 15 major industries
(b) 20 minor industries
(c) 25 major and minor industries
(d) 30 major and minor industries
Answer (c)
16. Capital structure of ABC Ltd. consists of equity share capital of Rs. 1,00,000 (10,000 share of
Rs. 10 each) and 8% debentures of Rs. 50,000 & earning before interest and tax is Rs. 20,000. The
degree of financial leverage is
(a) 1.00
(b) 1.25
(c) 2.50
(d) 2.00
Answer (b)
17. The following data is given for a company. Unit SP = Rs. 2, Variable cost/unit = Re. 0.70, Total fixed
cost Rs. 1,00,000 Interest Charges Rs. 3,668, Output1,00,000 units. The degree of operating leverage is
(a) 4.00
(b) 4.33
(c) 4.75
(d) 5.33
Answer (b)
18. Market price of equity share of a company is Rs. 25 and the dividend expected a year hence is Rs. 10.
The expected rate of dividend growth is 5%. The cost of equal capital to company will be
(a) 40%
(b) 45%
(c) 35%
(d) 50%
Answer (b)
19. The dilemma of "liquidity Vs profitability" arise in case of
(a) Potentially sick unit
(b) Any business organization
(c) Only public sector unites
(d) Purely trading companies
Answer (b)
20. The present value of Rs. 15000 receivable in 7 years at a discount rate of 15% is
(a) 5640
(b) 5500
(c) 5900
(d) 5940
Answer (a)
21. A bond of Rs. 1000 bearing coupon rate of 12% is redeemable at par in 10 yrs. If the required
rate of return is 10% the value of bond is
(a) 1000
(b) 1123
(c) 1140
(d) 1150
Answer (a)
22. The EPS of ABC Ltd. is Rs. 10 & cost of capital is 10%.The market price of share at return rate
of 15% and dividend pay out ratio of 40% is
(a) 100
(b) 120
(c) 130
(d) 150
Answer (a)
23. The credit term offered by a supplier is 3/10 net 60.The annualized interest cost of not availing
the cash discount is
(a) 22.58%
(b) 27.45%
(c) 37.75%
(d) 38.50%
Answer (a)
24. The costliest of long term sources of finance is
(a) Preference share capital
(b) Retained earnings
(c) Equity share capital
(d) Debentures
Answer (c)
25. Which of the following approaches advocates that the cost of equity capital & debit capital
remains the degree of leverages varies
(a) Net income approach
(b) Net operating income approach
(c) Traditional approach
(d) ModiglianiMiller approach
Answer (b) & (d)
26.
(a)
(b)
(c)
(d) Control
Answer (b)
27. While calculating weighted average cost of capital
(a) Retained earnings are excluded
(b) Bank borrowings for working capital are included
(c) Cost of issues are included
(d) Weights are based on market value or on book value
Answer (a)
28. Which of the following factors influence the capital structure of a business entity?
(a) Bargaining power with suppliers
(b) Demand for product of company
(c) Expected income
(d) Technology adopted
Answer (c)
29. According to the Walters model, a firm should have 100% dividend payout ratio when.
(a) r = ke
(b) r < ke
(c) r > ke
(d) g > ke
Answer (a)
30. Operating cycle can be delayed by
(a) Increase in WIP period
(b) Decrease in raw material storage period
(c) Decrease in credit payment period
(d) Both a & c above
Answer (d)
31. If net working capital is negative, it signifies that
(a) The liquidity position is not comfortable
(b) The current ratio is less then 1
(c) Long term uses are met out of short term sources
(d) All of a, b and c above
Answer (d)
32. Which of the following models on dividend policy stresses on investors preference for the
current dividend
(a) Traditional model
(b) Walters model
(c) Gordon model
(d) MM model
Answer (d)
33. Which of the following is a technique for monitoring the status of receivables
(a) ageing schedule
(b) outstanding creditors
(c) selection matrix
(d) credit evaluation
Answer (a)
34. Average collection period is equal to
(a) 360/ Receivables Turnover Ratio
(b) Average Creditors / Sales per day
(c) Sales / Debtors
(d) Purchases / Debtors
Answer (a)
35.
(a)
(b)
(c)
(d)
Answer (d)
36. In a capital budgeting decision, incremental cash flow mean
(a) cash flows which are increasing.
(b) cash flows occurring over a period of time
(c) cash flows directly related to the project
(d) difference between cash inflows and outflows for each and every expenditure.
Answer (d)
37. The simple EOQ model will not hold good under which of the following conditions
(a) Stochastic demand
(b) constant unit price
(c) Zero lead time
(d) Fixed ordering costs
Answer (a)
38. The opportunity cost of capital refers to the
(a) net present value of the investment.
(b) return that is foregone by investing in a project.
(c) required investment in a project.
(d) future value of the investments cash flows.
Answer (b)
39. Which of the following factors does not influence the composition of Working Capital
requirements
(a) Nature of the business
(b) seasonality of operations
(c) availability of raw materials
(d) amount of fixed assets
Answer (d)
40. The capital structure ratio measure the
(a) Financial Risk
(b) Business Risk
(c) Market Risk
(d) operating risks
Answer (a)