1.Which of the following has the highest cost of capital?

(a) Equity shares,

(b) Loans,

(c) Bonds,

(d) Preference shares

2.Firm's Cost of Capital is the average cost of:

(a) All sources,

(b) All borrowings,

(c) Share capital,

(d) Share Bonds & Debentures

3.Which of the following is true?

(a) Retained earnings are cost free,

(b) External Equity is cheaper than Internal Equity,

(c) Retained Earnings are cheaper than External Equity,

(d) Retained Earnings are costlier than External Equity.

4.Cost of capital may be defined as:

(a) Weighted Average cost of all debts,

(b) Rate of Return expected by Equity Shareholders,

(c) Average IRR of the Projects of the firm,

(d) Minimum Rate of Return that the firm should earn.

5.In order to calculate the proportion of equity financing used by the company, the following should be
used:

(a) Authorised Share Capital,

(b) Equity Share Capital plus Reserves and Surplus,

(c) Equity Share Capital plus Preference Share Capital,

(d) Equity Share Capital plus Long-term Debt.

6.Debt Financing is a cheaper source of finance because of:

(a) Time Value of Money,

(b) Rate of Interest,

(c) Tax-deductibility of Interest,

(d) Dividends not Payable to lenders

7.Cost of issuing new shares to the public is known as:

(a) Cost of Equity,

(b) Cost of Capital,

(c) Flotation Cost,

(d) Marginal Cost of Capital.

8.The term capital structure denotes:

(a) Total of Liability side of Balance Sheet,

(b) Equity Funds, Preference Capital and Long term Debt,

(c) Total Shareholders Equity,

(d) Types of Capital Issued by a Company.

9.Operating leverage helps in analysis of:

(a) Business Risk,

(b) Financing Risk,

(c) Production Risk,

(d) Credit Risk

10.Which of the following is studied with the help of financial leverage?

(a) Marketing Risk,

(b) Interest Rate Risk,

(c) Foreign Exchange Risk,

(d) Financing risk

11.High degree of financial leverage means:

(a) High debt proportion,

(b) Lower debt proportion,

(c) Equal debt and equity,

(d) No debt

12.Operating Leverage is calculated as:

(a) Contribution ÷ EBIT,

(b) EBIT÷PBT,
(c) EBIT ÷Interest,

(d) EBIT ÷Tax

13.Financial Leverage is calculated as:

(a) EBIT÷ Contribution,

(b) EBIT÷ PBT,

(c) EBIT÷ Sales,

(d) EBIT ÷ Variable Cost

14.Combined leverage can be used to measure the relationship between:

(a) EBIT and EPS,

(b) PAT and EPS,

(c) Sales and EPS,

(d) Sales and EBIT

15.Financial Leverage measures relationship between

(a) EBIT and PBT,

(b) EBIT and EPS,

(c) Sales and PBT,

(d) Sales and EPS

16.Higher OL is related to the use of higher:

(a) Debt,

(b) Equity,

(c) Fixed Cost,

(d) Variable Cost

17.At Indifference level of EBIT, different capital have:

(a) Same EBIT,

(b) Same EPS,

(c) Same PAT,

(d) Same PBT

18.The change in the shareholder’s return caused by the change in the profit is called

(a) Operating leverage

(b) Financial leverage

(c) Risk –return trade off

(d) Profit planning

19.Determining optimum capital structure is-

(a) An investment decision

(b) A financing decision

(c) A dividend decision

(d) A liquidity decision

20.Select the incorrect statement -

(a) Dividends rate for ordinary shareholders is not fixed

(b) The payment of dividends to shareholders is a legal obligation

(c) Ordinary shareholders are generally called owners of residue

(d) Preference shareholders receive dividend at fixed rate

21.The change in profit due to the change in sales is referred to as ,

(a) Financial leverage

(b) Operating leverage

(c) Profit planning

(d) Dividend-payout ratio

22.Hurdle rate is also known as –

(a) Cost of capital

(b) Compound rate

(c) Net present value

(d) Time value of money

23.The cost of capital of an all-equity financed firm is equal to the -

(a) Preference shareholders required rate of return

(b) Ordinary shareholders required rate of return

(c) Creditors required rate of return

(d) Debtors required rate of return

24.The cost of preference shares is computed on –

(a) Before-tax basis

(b) After-tax basis

(c) Coupon-rate basis

(d) Floatation cost

25.The use of the fixed – charges sources of funds, such as debt and preference, capital

along with owners equity in the capital structure , is called –

(a) Operating leverage

(b) Combined leverage

(c) Trading on equity

(d) Income coverage

26.The formula for calculating EPS is ,

(a) EPS = PAT * Numbers of shares

(b) EPS = PAT/ Numbers of shares

(c) EPS = PAT + Numbers of shares

(d) EPS = PAT - Numbers of shares

27.. The percentage change in the earnings before interest and taxes relative to a given

percentage change in sales, is called degree of –

(a) Operating leverage

(b) Combined leverage

(c) Financial leverage

(d) None of the above

28.The variability of EBIT is called,

(a) Unique risk

(b) Market risk

(c) Operating risk

(d) Financial risk

29. The percentage change in EPS due to a given percentage change in EBIT, is called,

(a) Degree of Operating leverage

(b) Degree of Combined leverage

(c) Degree of Financial leverage

(d) None of the above

30.Shares of face value of Rs. 10 are 80% paid up. The company declares a dividend of 50%. Amount of
dividend per share is

(a) Rs. 5,

(b) Rs.4,

(c) Rs. 80,

(d) Rs. 50

31.A (n) __________ occurs when there is an increase in the number of shares outstanding by reducing
the par value of stock.

Stock Dividend

Extra Dividend

Stock Split

Regular Dividend

32.From the following information of ABC Ltd. Calculate the value per share of the firm under Walter’s
dividend model assuming dividend payout ratios of 25%.
Earnings Per Share: Rs.10; Rate of return on Investment: 18%; Cost of capital: 10%

Rs.160

Rs.140

Rs.180

Rs.150

33.Which of the following is incorrect in case of Stock-Split?

Book Value per share, EPS, Market price per share increases

Par value of the share is reduced

No capitalization of reserves

Shareholder’s proportional ownership remains unchanged

34.Retained earnings are

an indication of a company's liquidity.

the same as cash in the bank.

not important when determining dividends.

the cumulative earnings of the company after dividends.

35.The dividend-payout ratio is equal to

the dividend yield plus the capital gains yield.

dividends per share divided by earnings per share.

dividends per share divided by par value per share.

dividends per share divided by current price per share

36.calculate the operating leverage from the following information.

Sales Rs 50,000

Variable costs Rs 25,000

Interest Rs 5000

Fixed costs Rs 15,000

(a) 2.5 times

(b) 3.5 times

(c) 3.9 times

(d)4 times

37.Calculate the Financial leverage from the following information.

Sales Rs 50,000

Variable costs Rs 25,000

Interest Rs 5000

Fixed costs Rs 15,000

(a) 2 Times

(b) 3.5 times

(c) 3.9 times

(d)4 times

38. x LTD issues 5 percent 5000 12 percent debentures of Rs 100 each at par. The Tax rate is 40
percent. Calculate before tax cost of debt.

(a)12 percent
(b) 13 percent

(c) 15 percent

(d) 16 percent

38.Calculate the Combined leverage from the following information.

Sales Rs 50,000

Variable costs Rs 25,000

Interest Rs 5000

Fixed costs Rs 15,000

(a) 10 times

(b) 5 times

(c) 3.9 times

(d)4 times
39. Y LTD issues 5 percent 5000 12 percent debentures of Rs 100 each at par. The Tax rate is 40
percent. Calculate after tax cost of debt.

(a)7.2percent

(b) 5 percent

(c) 15 percent

(d) 16 percent

40. Y ltd issued Rs 60000 10 percent Debentures at a discount of 5 percent. The issue expenses were Rs
2000. Tax Rate is 40 percent . Calculate before tax cost of debt.

a)10percent

(b) 10.91percent

(c) 15 percent

(d) 11 percent

41. The following information relates to X ltd.

Earnings per share Rs 9

Internal rate of return 18 %

Cost of Capital 12%

Pay out Ratio 33.33 %.

Compute the Market price under walters Model

a)Rs 100

(b)RS 110

(c) RS 120

(d) RS 130
42. The Earnings per share of the Company is Rs 12.The Cost of Equity Capital is 10 %.The Rate of
Return on Investment is15%.Compute the market price pershare under walter model if the pay out is
50%.

a)Rs 100

(b)RS 150

(c) RS 140

(d) RS 135

43. The Earnings per share of the Company is Rs 12.The Cost of Equity Capital is 10 %.The Rate of
Return on Investment is15%.Compute the market price pershare under walter model if the pay out is
75%.

a)Rs 145

(b)RS 150

(c) RS 140

(d) RS 135

44. The following information relates to Raja ltd. Earning share Rs 10.Cost of Capital 10 %.Rate of
Return 15%.Determine market price per share under Gordon Model if the Retention Ratio is 60%.

a)Rs 400

(b)RS 450

(c) RS 460

(d) Rs 470
 45.Nelson Enterprises just paid an annual dividend of $1.56 per share. This dividend isexpected to
increase by 3 percent annually and a stock price of $28 a share. What is thecost of equity of Nelson
Enterprise.

a)Rs 18.74 percent

(b)RS 19 percent

(c) RS 20 percent

(d) Rs 21 percent

46. If the weighting of equity in total capitalis 1/3, that of debt is 2/3, the return on equity is 15% that of
debt is 10% and the corporate tax rate is 32%, what is the Weighted Average Cost of Capital (WACC)?

a)10.533%

b)7.533%

c)9.533%

d)11.350%

47. From the following information of ABC Ltd. Calculate the value per share of the firm under
Walter’s dividend model assuming dividend payout ratios of 25%.

Earnings Per Share: Rs.10; Rate of return on Investment: 18%; Cost of capital: 10%

Rs.160

Rs.140

Rs.180

Rs.150

48. PQR Ltd. has 1,00,000 outstanding shares of Rs.10 each. The company earns a rate of24% on its
investments and retains 50% of earnings as a policy. If Cost of Capital is18%, calculate price of the share
according to Gordon’s Model. The company has total investment of Rs. 10,00,000 in assets.

Rs. 25

Rs. 20

Rs. 35
Rs.30

49. Flotation costs should:

Be ignored when analyzing a project because flotation costs are not an actual cost ofthe project.

Be averaged over the life of the project thereby reducing the cash flows for each yearof the project.

Be included in the initial cost of a project before the net present value of the project is computed.

Only be considered when two projects have the same net present value.

50. PQR Ltd. issues 5,000 10% preference shares of Rs. 100 each at Rs.95 per share. The company
proposes to redeem the preference shares at the end of 10th year from the date of issue. Calculate the
cost of preference shares.

10.43 %

10.86 %

10.77 %

None of the above