My courses / Finance and Banking Fundamentals India : Training (Combo) / Course 1 : Key Concepts in Finance / Practice Test 1 : Set 1

Started on Friday, 13 December 2019, 8:51 PM

State Finished
Completed on Friday, 13 December 2019, 9:07 PM
Time taken 16 mins 34 secs
Marks 7.50/12.00
Grade 62.50 out of 100.00

Question 1
Partially correct

Mark 0.50 out of 1.00

Megha has taken an education loan, for which all repayments including interest, will start after 2 years. The Bank has to show the interest
earned yearly in its books. So, which of the following is/are true?(More than one option may be correct)

Select one or more:

a. When Megha pays, the bank will credit 'interest receivables' account and debit cash account.

b. Bank will credit its 'interest income' account and a corresponding debit entry will be made, in the 'interest receivable' account. 

c. The bank will credit its 'interest income' account yearly, and a corresponding debit entry will be made in Megha's loan account. 

d. The bank will not make any accounting entry until Megha actually starts repaying.

Solution :
The bank will debit the interest receivable account till the time Megha starts repaying.

So, in order to show the interest income annually, the bank will credit the interest income account and debit the interest receivables account. 
After Megha starts repaying, the bank will make the nullifying credit entry in interest receivable account and debit the cash account.
The correct answers are: Bank will credit its 'interest income' account and a corresponding debit entry will be made, in the 'interest
receivable' account., When Megha pays, the bank will credit 'interest receivables' account and debit cash account.

Question 2
Correct

Mark 1.00 out of 1.00

Ronak is a wholesaler who stocks goods in his godown. He wants to protect himself from the risk of loss, due to fire or any natural calamity.
So he decided to purchase insurance. What should be the maximum amount he should be willing to pay as annual premium?
It is observed that on an average, he suffers such loss once in 4 years and the average loss amount is INR 1 lakh.

Select one:
a. INR 1 lakh

b. INR 10,000

c. INR 25,000 

d. INR 4 lakhs

Solution :
The probability of loss is once in 4 years i.e. 0.25.
The quantum of loss = INR 1 lakh
Hence, maximum amount of premium he would be willing to pay = INR 1 lakh * 0.25
                                                                                                       = INR 25,000
The correct answer is: INR 25,000
Question 3
Correct

Mark 1.00 out of 1.00

An investment in land requires an initial outlay of INR 2 million. It promises to pay INR 2.18 million in one year. What is the net present value
(NPV) of the investment. Assume a market interest rate of 10%.

Select one:
a. INR 18,181.82

b. INR (361,818.18)

c. INR (18,181.82) 

d. INR 361,818.18

Solution :

Initial outlay (-2,000,000)

After 1 year 2,180,000
Interest Rate 10%
= (2180000/ ((1+0.1) ^1))
Present Value 
= 1981818.18
= (-2000000+1981818.18
NPV (Present Value - Initial Outlay)  = (-18181.82)

The correct answer is: INR (18,181.82)

Question 4
Correct

Mark 1.00 out of 1.00

AXM Ltd., a software company, has bought computers worth INR 20 Lakhs. The payment was made through a cheque. What will be the effect
in the books of AXM Ltd.?

Select one:
a. Bank account- Credited, Fixed Assets - Debited 

b. Bank account- Debited, Fixed Assets - Debited

c. Bank account- Credited, Fixed Assets - Credited

d. Bank account- Debited, Fixed Assets - Credited

Solution :
If there is an increase in assets, it is debited, and when there is a decrease,it is credited.
Here, Bank balance is an asset, so bank account will be credited as the balance is reduced. The fixed asset account will be debited as assets
have increased.
The correct answer is: Bank account- Credited, Fixed Assets - Debited
Question 5
Incorrect

Mark 0.00 out of 1.00

Following are the returns of 4 stocks, for the past five years. Manoj, an investor, wants to invest in a stock which will give him good returns
with minimum risk. Can you suggest in which of the following stocks, should Manoj invest?

Select one:
a. Stock B

b. Stock C 

c. Stock D

d. Stock A

Solution :

  Stock A Stock B Stock C Stock D

Year 1 18% 14% 17% 9%
Year 2 15% 11% 22% 10%
Year 3 16% -5% -9% 8%
Year 4 11% 9% 23% 10%
Year 5 5% 20% 13% 7%
Average (Use AVERAGE function of excel) 13% 10% 13% 9%
Standard Deviation (Use STDEV function of excel) 5% 9% 13% 1%
Return/ Unit of risk (i.e. Average/ Standard Deviation) 2.53 1.06 1.01 7.22
Since return per unit of risk is maximum for stock D. Hence, he should invest in stock D

The correct answer is: Stock D

Question 6
Incorrect

Mark 0.00 out of 1.00

PNG Bank has total assets of INR 20,000 crore reported in the last fiscal year. This year, PNG bank earned a net profit of INR 1000 crores,
while their interest expense was INR 2000 crores. What would be the total assets for this fiscal year for PNG Bank, assuming no other
additions/reductions?

Select one:
a. INR 23,000 crores

b. INR 20,000 crores 

c. INR 21,000 crores

d. INR 18,000 crores

Solution :

Profit of INR 1000 crore will be added to owner's equity.The total liabilities will therefore increase by INR 1000 crore. On the asset side, this
will reflect either in the cash account or the receivables account. So, total assets will also increase by the same amount,as the balance sheet
has to balance.

Interest expense is a part of Income statement,and has already been considered while calculating the Net profit.
The correct answer is: INR 21,000 crores

Question 7
Incorrect

Mark 0.00 out of 1.00

RM jewelers sold jewelry worth INR 40 lakhs, out of which 50% was sold on credit, in the last quarter. It has reported depreciation of INR 2
lakhs for this quarter. PAT for this period was INR 25 lakhs. Calculate the cash balance of RM jewelers, assuming no other transactions and
zero opening balance. 

Select one:
a. INR 7 lakhs

b. INR 23 lakhs 

c. (-INR 23 lakhs)

d. INR 27 lakhs

Solution :

Cash balance = PAT + Non cash expenses - Non cash income.

                       = (25 + 2 - (50%*40)) lakhs = (27 - 20) lakhs

                       = INR 7 lakhs

The correct answer is: INR 7 lakhs

Question 8
Incorrect

Mark 0.00 out of 1.00

Saurabh has bought a life insurance endowment policy for 15 years. He has to pay an annual premium of INR 60,000 for 15 years. He will
receive INR 15 lakhs on maturity (i.e. one year after all premiums are made). He will also receive INR 20,000 on every 4th year, as 'cash back'
bonus. What returns will he get on this policy? If he is getting an interest of 9% on other investment avenues, will it be advisable for him to go
for this insurance policy? Note: Saurabh wants to use insurance as a pure investment product.

Select one:
a. No, as he will get a return of 6.94% on his insurance policy

b. No, as he will get a return of 7.92% on his insurance policy

c. Yes, as the return he will get, is 9.8% on his insurance policy 

d. Yes, as the return he will get, is 8% on his insurance policy

Solution :

Year Cash Flows

0 -60000
1 -60000
2 -60000
3 -40000
4 -60000
5 -60000
6 -60000
7 -40000
8 -60000
9 -60000
10 -60000
11 -40000
12 -60000
13 -60000
14 -60000
15 150000
IRR (Use IRR function of excel) 6.94%
Since IRR is less than 9%, NPV for this investment at a discount rate of 9% (the alternative investment) would be negative and Saurabh
should not invest in the insurance policy.

The correct answer is: No, as he will get a return of 6.94% on his insurance policy
Question 9
Correct

Mark 1.00 out of 1.00

Sharma traders wants to borrow INR 10 lakhs for 3 years, for his business requirements. He approached 3 banks who quoted him 3 different
rates, with different compounding.

Find out which one would be the best choice for Sharma traders.

Select one:
a. IDNC and AVG will cost same

b. AVG Bank

c. SYM Bank 

d. IDNC Bank

Solution :

Bank Interest Payable CI= [P*(1+r/m)^mt] - P

IDNC Bank 380746.02
AVG Bank 378842.81
SYM Bank 378749.90
The interest is the lowest in case of SYM Bank
 
The correct answer is: SYM Bank
Question 10
Correct

Mark 1.00 out of 1.00

Use the data below to answer the following question:

Particulars All Values in INR millions

Total Revenue 440.00
Direct cost 200.50
Other Income 2.50
Depreciation 7.50
Selling, General and Administrative expenses 67.30
Interest Expenses 3.40
Tax @ 25% of PBT  

How much is the PAT?

Select one:
a. INR 122.85 million 

b. INR 120.13 million

c. INR 120.98 million

d. INR 122.00 million

Solution :

Particulars All values in INR millions

Total Revenue 440
Less Direct cost 200.5
Less Selling, General & administrative expense 67.3
Less Depreciation 7.5
Add Other income 2.5
= 440-200.50-67.3-7.5+2.5
Earnings before interest & tax
= 167.2

Less Interest Expenses 3.4

= 167.2-3.4 
Earning before tax
= 163.8

Less Tax (25% of 163.80) 40.95

= 163.8 - 40.95 
PAT
= 122.85

The correct answer is: INR 122.85 million

Question 11
Correct

Mark 1.00 out of 1.00

Which of the following types of compounding will be most beneficial from a lender's perspective, for a given interest rate?

Select one:
a. Compounded annually

b. Compounded quarterly

c. Compounded semi-annually

d. Compounded daily 

Solution :

Greater the frequency of compounding, greater the effective return or yield. Therefore, daily compounding will yield the highest interest to
the Bank.

The correct answer is: Compounded daily

Question 12
Correct

Mark 1.00 out of 1.00

You have bought shares of Infosys at a price of INR 1200. You are exposed to market risk. Now, what can you infer from this?

Select one:
a. You may incur losses due to change in exchange rates.

b. You may incur losses due to change in market interest rates.

c. You may incur losses due to change in brokerage rates charged by brokers.

d. You may incur losses due to change in share price. 

Solution :

Market risk is the risk of loss due to change in market price of the underlying.

The correct answer is: You may incur losses due to change in share price.