1

Question Paper
Financial Management - I (MB211): 1anuary 2008
Answer all 74 questions.
Marks are indicated against each question.

Total Marks : 100
1. The minimum number oI directors in a public company and a private company are
(a) 2 and 3
(b) 2 and 7
(c) 5 and 2
(d) 3 and 2
(e) 2 and 5.
( 1 mark)
<Answer>
2. Since commencement oI business the statutory meeting is to be held by a public company within a period oI
(a) 1 month
(b) 6 months
(c) 1 year
(d) 3 years
(e) 5 years.
( 1 mark)
<Answer>
3. Which oI the Iollowing statements is/are false about a Public Limited Company?
I. It can issue share warrants.
II. It can make right issue.
III. A listed public limited company cannot pass resolution.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) All (I). (II) and (III) above.
( 1 mark)
<Answer>
4. Which oI the Iollowing is a part oI the control Iunction oI the Iinance manager?
(a) Negotiating with the banks and Iinancial institutions Ior loans
(b) Negotiating with the merchant banks Ior issue oI shares and debentures
(c) Reporting on the perIormance oI individual departments within the organization
(d) Appraisal oI investment proposals given by various departments
(e) Deciding on the manner oI deployment oI Iunds in various assets.
( 1 mark)
<Answer>
5. Which oI the Iollowing statements is/are true with respect to provisions oI revised Industrial Licensing Policy?
I. Government continues to have the authority to order investigation into the working oI industrial
undertaking. and iI necessary takeover the management.
II. Government is empowered to control and regulate the prices. methods oI production. volume oI production
and the mode oI distribution with respect to any oI the essential commodities.
III. Existing units will be permitted to manuIacture any article without any additional investment.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) All (I). (II) and (III) above.
( 1 mark)
<Answer>
6. When Iinancial claims are issued in the money and capital markets which promise Iuture income Ilows. which
Iunction is perIormed by the Iinancial system?
(a) Savings Iunction
(b) Liquidity Iunction ( 1 mark)
<Answer>

2
(c) Payment Iunction
(d) Risk Iunction
(e) Policy Iunction.

7. Which oI the Iollowing statements is/are not true about the call money?
I. It is a component oI money market.
II. It is the money that is lent Ior 2 to 15 days.
III. In this market. any amount could be lent or borrowed at interest rate acceptable to both the borrower and
lender.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.
( 1 mark)
<Answer>
8. Which oI the Iollowing statements is/are true about the CertiIicate oI Deposits (CDs)?
I. All banks and Iinancial institutions can issue CDs Ior a minimum period oI 15 days to a maximum oI 1year.
II. CD should be issued in the denomination oI Rs.5 lakh.
III. CDs are beneIicial Ior both issuers and investors.
(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.
( 1 mark)
<Answer>
9. Which oI the Iollowing statements is/are false regarding Bought-out deals?
I. In these deals the company places its equity shares. which are to be oIIered to the public at a later date. with
a sponsor/merchant banker.
II. This method oI marketing oI shares is used in case oI small proiects costing around Rs.5-6 crore.
III. Sponsors must use only the OTCEI route Ior oIIloading the shares.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (II) and (III) above
(e) All (I). (II) and (III) above.
( 1 mark)
<Answer>
10. Which oI the Iollowing are attributed to cause volatility oI the call rates in money market?
I. Large borrowings by banks to meet the CRR requirements.
II. The over-extension oI loans by banks. in excess oI their own resources.
III. The withdrawal oI Iunds to meet business requirements by institutional lenders and to pay advance tax by
the corporate sector.
IV. Large investment oI Iunds by banks in government securities. units oI UTI. public sector bonds etc.
(a) Both (I) and (III) above
(b) Both (II) and (IV) above
(c) (I). (II) and (III) above
(d) (II). (III) and (IV) above
(e) All (I). (II). (III) and (IV) above.
( 1 mark)
<Answer>
11. II the Iace value oI a 364 days T-bill is Rs.100 and the bid received by the RBI is Rs.90. the yield on the bill is
(a) 9.00
(b) 10.60
(c) 11.14
(d) 12.18
(e) 13.00.
( 1 mark)
<Answer>


3
(e) 13.00.

12. The system under which the value oI goods and services purchased are to be liquidated in stages through a
contractual obligations is called
(a) Venture capital Iunding
(b) Lease Iinancing
(c) Hire purchase Iinance
(d) Commercial lending
(e) Factoring.
( 1 mark)
<Answer>
13. Which oI the Iollowing are US dollar denominated bonds issued by Ioreign borrowers in the US bond markets?
(a) Samurai Bonds
(b) Yankee Bonds
(c) Bulldog Bonds
(d) Shibosai Bonds
(e) Matador Bonds.
( 1 mark)
<Answer>
14. Which oI the Iollowing euro instruments is a short term unsecured promissory note under which a Iixed amount
is repaid on a certain Iuture date?
(a) Note Issuance Facilities (NIFs)
(b) Commercial paper
(c) Straight debt bonds
(d) Floating Rate Notes (FRNs)
(e) Medium-term notes.
( 1 mark)
<Answer>
15. In which oI the Iollowing types oI issues. new securities are oIIered to the existing shareholders oI the company
on a pro-rata basis resulting in an increase in the networth oI the company?
(a) Public issue
(b) Rights issue
(c) Bonus issue
(d) Private placement
(e) Bought-out deal.
( 1 mark)
<Answer>
16. II the cash Ilow oI Rs.10.000 is to be received at the end oI Iour years. the present value oI this cash Ilow when
the discount rate is 12 and discounting is done semi-annually will be
(a) Rs.6.274
(b) Rs.6.355
(c) Rs.7.462
(d) Rs.7.516
(e) Rs.7.714.
( 2 marks)
<Answer>
17. How much a person should save annually to accumulate Rs.1.00.000 by the end oI 5 years. iI the rate oI interest
is 10 p.a compounded quarterly?
(a) Rs.16.256
(b) Rs.16.379
(c) Rs.16.420
(d) Rs.16.500
(e) Rs.16.625.
( 2 marks)
<Answer>
18. Which oI the Iollowing statements is/are true regarding Present Value oI Interest Factor Annuity (PVIFA)?
I. It helps us to determine the capital recovery Iactor.
II. It is the inverse oI Iuture value oI interest Iactor annuity.
III. It is also used in sinking Iund determination.
(a) Only (I) above
(b) Only (II) above
( 1 mark)
<Answer>

4
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.

19. A loan oI Rs.5.00.000 is to be repaid in 10 equal annual installments. II the loan carries an interest rate oI
11p.a.. compounded monthly. the equated annual installment is
(a) Rs. 86.946
(b) Rs. 88.495
(c) Rs. 94.148
(d) Rs. 98.742
(e) Rs.1.01.264.
( 2 marks)
<Answer>
20. Mr.Srikanth plans to buy a house Ior a price oI Rs.5 lakh. Good People Bank oIIers 80 oI the purchase price oI
the house as loan at an interest rate oI 9 p.a. quarterly compounded. Mr.Srikanth plans to repay loan with
interest in the next ten years. What will be the equated monthly installments?
(a) Rs.5.041
(b) Rs.5.142
(c) Rs.5.242
(d) Rs.5.342
(e) Rs.5.442.
( 2 marks)
<Answer>
21. Which oI the Iollowing is true with regard to the Degree oI Operating Leverage (DOL) Ior a company?
(a) Irrespective oI the level oI output. DOL oI a company remains same
(b) DOL oI a company is positive above the operating break-even point
(c) DOL oI a company is positive below the operating break-even point
(d) DOL oI a company is negative above the operating break-even point
(e) DOL is zero at the operating break-even point.
( 1 mark)
<Answer>
22. Which oI the Iollowing may be considered as the reason(s) Ior money having time value?
I. It is the legal tender Ior carrying out any type oI transaction.
II. Its purchasing power decreases with the passage oI time.
III. Money can be productively invested to generate real returns over a period oI time.
IV. Since Iuture is characterized by uncertainty individuals preIer current consumptions to Iuture
consumptions.
(a) Only (I) above
(b) Both (I) and (II) above
(c) (I). (II) and (III) above
(d) (II). (III) and (IV) above
(e) All (I). (II). (III) and (IV) above.
( 1 mark)
<Answer>
23. Mr. Mathur has a 10-year old daughter. preety. who will be entering college aIter 8 years Irom now. Mr. Mathur
estimates her college educations expenses to be Rs.16.000. Rs.17.000. Rs.18.000 and Rs.19.000 payable at the
beginning oI every year in her Iour years oI study. How much must Mr. Mathur save each year (assume end oI
year) in the next 8 years to have enough savings to pay Ior preety`s education? Assume Mr. Mathur can earn 9
p.a. on his savings.
(a) Rs.5.108
(b) Rs.5.569
(c) Rs.6.569
(d) Rs.7.677
(e) Rs.7.720.
( 2 marks)
<Answer>
24. Which oI the Iollowing statements is/are false regarding the non-diversiIiable risk?
I. It is speciIic to a particular industry/Iirm.
II. It may be due to industrial recession.
III. It may be due to change in tax structure.
( 1 mark)
<Answer>


5
(a) Only (I) above
(b) Only (III) above
(c) Both (I) and (III) above
(d) Both (II) and (III) above
(e) All (I). (II) and (III) above.

25. Which oI the Iollowing statements is not true with respect to the Security Market Line (SML)?
(a) The SML intersects the vertical axis at the risk-Iree rate oI return
(b) Slope oI the SML is the market risk premium
(c) The x-axis Ior the SML represents the expected returns oI a particular security
(d) It establishes a linear relationship between the required rate oI return and its systematic risk
(e) Alpha indicates the amount oI return on a security or a portIolio when the market return is zero.
( 1 mark)
<Answer>
26. Which oI the Iollowing are not the applications oI ex-post SML?
I. Testing oI market eIIiciency.
II. IdentiIying undervalued securities.
III. Evaluating the perIormance oI a portIolio manager.
IV. Testing oI asset-pricing theories.
V. Determining the market price oI risk Ior a particular security.
(a) Both (I) and (II) above
(b) Both (II) and (III) above
(c) Both (III) and (IV) above
(d) Both (I) and (V) above
(e) Both (II) and (V) above.
( 1 mark)
<Answer>
27. Consider the Iollowing data:
Security Beta Expected return
X 1.05 ?
Y 1.20 13
II the return on the market index is 12. the expected return on the stock X is
(a) 11.65
(b) 12.25
(c) 13.62
(d) 14.25
(e) 15.61.
( 2 marks)
<Answer>
28. Which oI the Iollowing advantages make standard deviation preIerable to range?
I. Standard deviation considers every possible event and assigns each event a weight equal to its probability.
II. Standard deviation is a measure oI dispersion around the expected value.
III. Standard deviation is obtained as the square root oI the sum oI squared diIIerences multiplied by their
probabilities.
IV. Standard deviation oIIers a high uniIormity oI the observations.
(a) Both (I) and (III) above
(b) Both (I) and (IV) above
(c) (I). (II) and (III) above
(d) (II). (III) and (IV) above
(e) All (I). (II). (III) and (IV) above.
( 1 mark)
<Answer>
29. The risk associated with the secondary market in which the particular security is traded is known as
(a) Market risk
(b) InIlation risk
(c) Business risk
(d) Liquidity risk
(e) Interest rate risk.
( 1 mark)
<Answer>

6
(e) Interest rate risk.

30. The standard deviation oI Greaves Ltd. stock is 24 and it correlation coeIIicient with the market portIolio is
0.5. The expected return on the market is 16 with a standard deviation oI 20. II the risk-Iree return is 6. the
required rate oI return on Greaves Ltd. scrip is
(a) 11.0
(b) 11.5
(c) 12.0
(d) 12.5
(e) 13.0.
( 2 marks)
<Answer>
31. The expected return on the market portIolio and the risk-Iree rate oI return are estimated to be 15 and 11
respectively. Malavika Ltd. has iust paid a dividend oI Rs.3 per share with annual growth rate oI 9. The
sensitivity index beta oI Malavika Ltd.. has been Iound to be 1.2. The equilibrium price Ior the shares oI
Malavika Ltd. is approximately
(a) Rs.26
(b) Rs.31
(c) Rs.35
(d) Rs.40
(e) Rs.48.
( 2 marks)
<Answer>
32. The Iollowing inIormation oI Ram and Co. Ltd.. is available in respect oI the return Irom security X under
diIIerent economic conditions:
Economic conditions Returns () Probability
Good 18 0.1
Average 15 0.4
Bad 12 0.3
Poor 5 0.2
The risk associated with the security is
(a) 8.5
(b) 7.4
(c) 6.3
(d) 5.2
(e) 4.1.
( 2 marks)
<Answer>
33. India Investment Fund holds the Iollowing portIolio:
Stock Investment (Rs. crore) Beta
A 200 0.5
B 200 2
C 100 4
The required rate oI return on the market is 14 and that oI the above portIolio according to CAPM is 20.4
The Iund manager has proposed to sell C Ior Rs.100 crores and use the proceeds to purchase stock D which has a
beta oI 3. The required rate oI return oI the new portIolio according to CAPM is
(a) 12.8
(b) 16.1
(c) 18.8
(d) 20.2
(e) 22.3.
( 2 marks)
<Answer>
34. Which oI the Iollowing is not an assumption oI Capital Asset Pricing Model (CAPM)?
(a) Investors are risk-averse
(b) Investors make their investment decisions based on holding the security inIinitely
(c) Transaction costs are negligible
(d) Taxes do not aIIect the choice oI buying assets
(e) All individuals assume that they can buy assets at the going market price and they all agree on ( 1 mark)
<Answer>


7
the nature oI the return and risk associated with each investment.

35. The stock oI Silver Technologies Ltd. is currently quoting at Rs.60 per share in the market and it is expected to
pay a dividend oI Rs.2 per share in the current year. The stock price expected one year hence has the Iollowing
probability distribution:
Probability 0.30 0.50 0.20
Price (Rs.) 70 80 90
The expected return Irom investing in the stock is approximately
(a) 15
(b) 25
(c) 35
(d) 45
(e) 55.
( 2 marks)
<Answer>
36. Consider the inIormation given below:
Total sales 1.45.000 units
Selling price Rs.23
Variable cost Rs.17
Fixed cost Rs.2.80.000
Debt Rs.10.00.000 (11interest rate
Tax rate 45
The combined leverage is
(a) 1.814
(b) 1.119
(c) 2.098
(d) 1.475
(e) 0.097.
( 2 marks)
<Answer>
37. The degree oI operating leverage is 1.2 and sales revenue is Rs.144 lakh oI a company. The annual interest
burden is Rs.10 lakh and preIerence dividend payable is Rs.4.2 lakh. The total variable costs to sales ratio is
60. The Iixed expenses oI the company is
(a) Rs. 0.09 lakh
(b) Rs. 0.96 lakh
(c) Rs. 9.60 lakh
(d) Rs. 1.96 lakh
(e) Rs.96.00 lakh.
( 2 marks)
<Answer>
38. Which oI the Iollowing statements is/are true?
I. Combined leverage shows the eIIect oI percentage change in Earnings beIore interest and Tax on Earnings
per share.
II. A highly leveraged Iirm is less risky than its peers.
III. When operating leverage is used. the Iirm magniIies its business risk.
(a) Only (I) above
(b) Only (III) above
(c) Both (I) and (III) above
(d) Both (II) and (III) above
(e) All (I). (II) and (III) above.
( 1 mark)
<Answer>
39. Which oI the Iollowing statements is/are false regarding operating leverage oI a Iirm?
I. Higher the operating proIit. higher the operating leverage.
II. Greater the contribution margin. higher the operating leverage.
III. II the contribution exceeds the Iixed cost. the operating leverage will be termed as Iavorable.
( 1 mark)
<Answer>

8
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I). (II) and (III) above.

40. The Supreme & Co. Ltd.. has given the Iollowing inIormation:
Equity earnings 2.30.000
Quantity produced 7500 units
Variable cost per unit Rs.300
Selling price per unit Rs.600
Number oI equity shareholders 7.00.000
Fixed expenses Rs.10.00.000
Interest Rs.95.000
PreIerence dividend Rs.35.000
Corporate tax 40
The Degree oI Total Leverage (DTL) is
(a) 1.09
(b) 1.22
(c) 1.45
(d) 1.75
(e) 2.05.
( 2 marks)
<Answer>
41. The XYZ Ltd.. provided Iollowing inIormation:
Output (units) 30.000
Fixed costs 28.000
Selling price per unit (Rs.) 7.00
Variable cost per unit (Rs.) 2.50
Interest on borrowed Iunds(Rs.) 16.000
Tax rate 40
The Degree oI Financial Leverage (DFL) oI the Iirm is
(a) 0.895
(b) 1.055
(c) 1.145
(d) 1.175
(e) 1.959.
( 2 marks)
<Answer>
42. From the given Iormula. which oI the Iollowing statements is/are true Ior

u
i
?


K
i
u
i

i
K
m
e
i
I. Intercept oI Iitted line.
II. Indicates return oI security/portIolio when the market return is zero.
III. It has only positive values.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above. ( 1 mark)
<Answer>
43. Which oI the Iollowing is true regarding the going concern value oI a business?
(a) It is the amount that is required to be spent iI it were to replace its existing assets in the current
condition
(b) It is generally the minimum value that a company might accept iI it wishes to sells its business
(c) It is the price that is prevailing in the market at which the assets are being sold or bought
(d) It is always higher than the liquidation value. the diIIerence accounting Ior the useIulness oI
assets and value oI intangibles
(e) It is similar to the book value oI the assets. ( 1 mark)
<Answer>


9

44. Which oI the Iollowing statements is/are true regarding a warrant?
I. The actual value oI warrant will be equal to the theoretical value on the expiry date.
II. The premium associated with a warrant increases as the expiry date approaches.
III. When a warrant is issued. the exercise price is always greater than the current market price.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (III) above
(e) Both (II) and (III) above.
( 1 mark)
<Answer>
45. II the dividend Ior the year is Rs.2.00. growth rate oI dividends is 12 and the present market price oI the stock
is Rs.52.50. the required rate oI return on the stock will be
(a) 15.00
(b) 15.81
(c) 16.27
(d) 16.49
(e) 17.53.
( 2 marks)
<Answer>
46. Which oI the Iollowing statements is /are true regarding the value oI a bond when the required rate oI return is
greater than coupon rate?
I. The value oI the bond will decrease with the passage oI time.
II. The value oI the bond is less than the par value.
III. The discount on the bond declines as maturity approaches.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (III) above
(e) Both (II) and (III) above.
( 1 mark)
<Answer>
47. The Iollowing inIormation is given by Forum Capital Services Ltd.
Current dividend Rs.2.00 per share
Constant rate oI growth in dividends 5 percent
Expected return Irom the market index 12 percent
Beta oI the stock 1.50
Risk Iree rate oI return 6 percent
The present market price per share will be approximately
(a) Rs. 7
(b) Rs.14
(c) Rs.21
(d) Rs.28
(e) Rs.35.
( 2 marks)
<Answer>
48. A Iirm expects to pay dividends oI Rs.1.00. Rs.1.40. Rs.2.00. and Rs. 3.00 at the end oI each oI the next Iour
years respectively. II growth is then expected to level oII at 9 percent. and iI you require a 13 percent rate oI
return. how much should you be willing to pay Ior this stock?
(a) Rs.55.35
(b) Rs.62.86
(c) Rs.81.75
(d) Rs.24.83
(e) Rs.50.22. ( 2 marks)
<Answer>

10

49. A bond has a Iace value oI Rs.1000 and coupon rate oI 8. The maturity oI the bond is 9 years and the required
rate oI return is 7. II it is redeemed Ior Rs.100 more than its Iace value in two equal installments in 8
th
and 9
th

year. what will be the value oI the bond?
(a) Rs.1.097
(b) Rs.1.137
(c) Rs.1.297
(d) Rs.1.337
(e) Rs.1.497.
( 2 marks)
<Answer>
50. The value which a bondholder gets on maturity is called
(a) Face value
(b) Book value
(c) Market value
(d) Redemption value
(e) Liquidation value.
( 1 mark)
<Answer>
51. Jupiter India Ltd. is expected to declare a dividend oI Rs.2.50 and reach a price oI Rs.35 a year hence. What is
the price at which the share would be sold to the investors now iI the required rate oI return is 13 percent?
(a) Rs.30.38
(b) Rs.33.21
(c) Rs.35.36
(d) Rs.42.08
(e) Rs.45.56.
( 1 mark)
<Answer>
52. Which oI the Iollowing is/are true regarding the multi-period valuation model oI equity shares?
I. There is a pre-speciIied maturity period.
II. The value oI an equity share is equal to the present value oI the dividends over an inIinite duration.
III. The model can be applied to the instances oI constant dividends. constant growth in dividends and changing
growth rate oI dividends.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I). (II) and (III) above.
( 1 mark)
<Answer>
53. Which oI the Iollowing statements is/are not true regarding an increase in the Expected Price-Earning ratio? It
will result in an
I. Increase in the expected dividend payout ratio.
II. Increase in the cost oI equity capital.
III. Increase in the growth rate.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (III) above
(e) Both (II) and (III) above.
( 1 mark)
<Answer>
54. Which oI the Iollowing are the advantages oI privately placing the securities?
I. Lower issue cost.
II. Fewer procedural Iormalities.
III. Accessible to only private limited companies.
IV. Access to Iunds is Iaster.
(a) Both (I) and (II) above
(b) Both (II) and (III) above
(c) Both (III) and (IV) above
(d) (I). (II) and (IV) above
( 1 mark)
<Answer>


11
(d) (I). (II) and (IV) above
(e) All (I). (II). (III) and (IV) above.

55. Martin & Co. Ltd.. recently issued 1 right share Ior every 5 shares held. II the price oI the stock at the time oI the
issue was Rs.56 per share and the price aIter the rights issue was Rs.54 per share. the subscription price oI each
right share was
(a) Rs.36
(b) Rs.40
(c) Rs.44
(d) Rs.46
(e) Rs.48.
( 2 marks)
<Answer>
56. Which oI the Iollowing statements is/are false regarding preIerence shares?
I. PreIerence shareholders earn a Iixed rate oI dividend.
II. PreIerence-dividend is tax deductible.
III. PreIerence shareholders have preIerence over equity shareholders to the post-tax earnings in the Iorm oI
dividends. and assets in the event oI liquidation.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I). (II) and (III) above.
( 1 mark)
<Answer>
57. The rights oIIer is kept open Ior a minimum period oI
(a) 10 days
(b) 15 days
(c) 30 days
(d) 60 days
(e) 90 days.
( 1 mark)
<Answer>
58. Which oI the Iollowing statements is true regarding the cost oI capital oI a Iirm?
(a) It is the dividend paid on the equity capital
(b) It is the average oI the dividends paid on the equity capital and the preIerence capital
(c) It is the interest paid on long-term debt
(d) It is the weighted average cost oI various sources oI long-term Iinance used by it
(e) It is the average oI interest payments made on long term and short-term debt.
( 1 mark)
<Answer>
59. Which oI the Iollowing statements is/are not true?
I. Agency costs are costs oI certain restrictions on Iirm imposed by creditors.
II. Monitoring costs entail legal and enIorcement costs. which impair the operating eIIiciency oI the Iirm.
III. Bankruptcy costs are in the Iorm oI some protective covenants in the loan contract.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (III) above
(e) Both (II) and (III) above.
( 1 mark)
<Answer>
60. Lahore Textiles Ltd. iust paid an annual dividend oI Rs.10 per share on its preIerred stock (Iace value Rs.100).
The preIerred stock has a current market price oI Rs.96 a share. The Iirm plans to maintain its current capital
structure. II the cost oI preIerred stock oI the company were 10.42. the preIerred stock would be redeemed
approximately aIter
(a) 12 years
(b) 15 years
(c) 19 years
(d) 21 years
( 2 marks)
<Answer>

12
(d) 21 years
(e) 23 years.

61. The market values oI debt and equity oI Mehta Consumer Goods Ltd. are Rs.160 lakh and Rs.240 lakh
respectively and the costs oI equity and debt are 16 and 14 respectively. The net operating income Ior the
Iirm as per the Net Operating Income approach is
(a) Rs.54.4 lakh
(b) Rs.59.2 lakh
(c) Rs.60.8 lakh
(d) Rs.63.2 lakh
(e) Rs.64.8 lakh.
( 2 marks)
<Answer>
62. Consider the Iollowing data Ior Beta Ltd:
Year 1 2 3 4 5
Earnings Per Share (Rs.) 4.80 4.00 3.00 5.00 4.50
Dividend Per Share (Rs.) 3.00 3.00 2.00 3.00 3.00
Payout () 63 75 67 60 67
Price per share at the end (Rs.) 42.00 45.00 33.00 38.00 36.00
II the price at the beginning oI year 1 is Rs.40. the realized yield over the Iive year period is
(a) 4.75
(b) 5.03
(c) 5.25
(d) 6.25
(e) 7.00.
( 2 marks)
<Answer>
63. Which oI the Iollowing is the assumption oI realized yield approach?
(a) The actual return has been in line with the expected return
(b) The investors will have more expectations Irom the security
(c) The current market price and Iuture stream oI dividend are known
(d) The required return oI the investor is directly based on the risk proIile oI the company
(e) Market price per share will increase in proportion to the book value.
( 1 mark)
<Answer>
64. Which oI the Iollowing approaches is not applicable to measure cost oI equity?
(a) Dividend Iorecast approach
(b) Realized yield approach
(c) Capital asset pricing model approach
(d) Earning price ratio approach
(e) Miller and Modigliani approach.
( 1 mark)
<Answer>


13
65.

The above graph is related to which oI the Iollowing approaches oI cost oI capital?
(a) Net operating income approach
(b) Net income approach
(c) Traditional approach
(d) Modigliani Miller approach
(e) Merton Miller approach.
( 1 mark)
<Answer>
66. Capital structure oI the Iirm may be deIined as
I. The Iirm`s mix oI diIIerent sources oI long term Iinance.
II. The Iirm`s debt-equity ratio.
III. The market imperIection that the Iirm`s manager can exploit.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I). (II) and (III) above.
( 1 mark)
<Answer>
67. Which oI the Iollowing is not an assumption in Gordon`s dividend capitalization model?
(a) The Iirm is an all-equity Iirm
(b) The cost oI equity capital is less than the growth rate
(c) The cost oI equity capital is constant
(d) The return on investment is constant
(e) The Iirm has an inIinite liIe.
( 1 mark)
<Answer>
68. Given the Iollowing inIormation oI Nile Ltd.
Cost oI equity capital 14
Earnings per share 18
Dividend pay-out ratio 40
Retention ratio 60
Return on investment 15
According to Gordon`s dividend capitalization model. the stock value oI Nile Ltd. is
(a) Rs. 54
(b) Rs.100
(c) Rs.121
(d) Rs.144
(e) Rs.168.
( 2 marks)
<Answer>

14
69. The Iollowing inIormation is Iurnished regarding Charan Technologies Ltd.
Earnings oI the company Rs.5.00.000
Dividend pay-out ratio 60
Number oI shares outstanding 1.00.000
Cost oI equity capital 12.5
Rate oI return on investment 15
The current market value oI the share oI the company as per Walter`s model is
(a) Rs.34.00
(b) Rs.43.20
(c) Rs.48.00
(d) Rs.58.00
(e) Rs.63.20.
( 2 marks)
<Answer>
70. The capitalization rate oI B1 Ltd. is 12. This company has outstanding shares to the extent oI 25.000 shares
selling at the rate oI Rs.100 each. They anticipate a net income oI Rs.3.50.000 Ior the current Iinancial year
which will be Iully retained in the business. The company also has a new proiect. the investment requirement Ior
which is Rs.5.00.000. According to Miller and Modigliani model. the value oI the Iirm is
(a) Rs.10.00.000
(b) Rs.15.00.000
(c) Rs.20.00.000
(d) Rs.25.00.000
(e) Rs.30.00.000.
( 2 marks)
<Answer>
71. According to the Walter Model. iI r` is the internal rate oI return. g` is the growth rate and k
e
` is the cost oI
capital. under which oI the Iollowing conditions the optimal payout ratio is zero?
(a) r k
e

(b) r k
e

(c) r ~ k
e

(d) g ~ k
e

(e) g k
e.

( 1 mark)
<Answer>
72. Which oI the Iollowing approaches to dividend policy assumes that earnings per share will remain constant?
(a) Net income approach
(b) Net operating approach
(c) Walter approach
(d) Gordon approach
(e) Miller & Modigliani approach.
( 1 mark)
<Answer>
73. Supreme Ltd. has recently made an issue oI zero coupon bonds oI Rs.60 lakh at a discount oI 30 on the Iace
value. The Iace value and maturity value oI each bond was Rs.2.500. II the maturity period oI the bonds is 5
years and taxes are ignored. what is the cost oI the bonds to the company?
(a) 05.18
(b) 07.39
(c) 09.00
(d) 21.00
(e) 30.00. ( 1 mark)
<Answer>
74. A person who simultaneously buys and sells similar instruments in diIIerent markets to make riskless proIit is
known as
(a) Hedger
(b) Speculator
(c) Arbitrageur
(d) Broker
(e) Traders. ( 1 mark)
<Answer>


15

END OF QUESTION PAPER
Suggested Answers
Financial Management - I (MB211): 1anuary 2008
ANSWER REASON
1. D A public company should have 3 directors and a private company should have 2 directors. Hence (d) is
the correct answer.
TOP ~
2. B The statutory meeting is held by public company within a period oI not less than one month or more
than six months Irom the date at which the company is entitled to commence business. Hence (b) is the
correct answer.
TOP ~
3. C According to Companies Act.1956 a Public Company can:
Issue share warrants subiect to authorization in the articles oI the company.
Issue Iurther share capital (Rights Issue) subiect to certain exceptions.
It can pass the resolutions iI it is listed Public Company.
Hence (c) is the correct answer.
TOP ~
4. C
The management oI an organization exercises its control on the overall perIormance oI the organization
on the basis oI the reports sent by the Iinance manager on the perIormance oI the individual
departments. Since this Iunction oI the Iinance manager helps the management to exercise control over
the overall perIormance oI the organization it is considered to be a part oI the control Iunction oI the
Iinance manager.
Hence (c) is the correct answer.
TOP ~
5. E According to revised Industrial Licensing Policy:
Government continues to have the authority to order investigation into the working oI industrial
undertaking. and iI necessary takeover the management.
Government is empowered to control and regulate the prices. methods oI production. volume oI
production and the mode oI distribution with respect to any oI the essential commodities.
Existing units will be permitted to manuIacture any article without any additional investment iI the
article is not otherwise subiect to compulsory licensing.
Hence (e) is the correct answer.
TOP ~
6. A Savings function: Financial claims are issued in the money and capital markets which promise Iuture
income Ilows. Hence (a) is the correct answer.
TOP ~
7. B The Iollowing are belongs to Call money market:
It is the component oI money market.
It is the money that is lent Ior one day and the maturity period oI this loans vary Irom 1 to 15 days.
In this market. any amount could be lent or borrowed at a convenient interest rate which is
acceptable to both the borrower and lender.
Hence (b) is the correct answer.
TOP ~
8. C Both banks and Iinancial institutions can issue CDs. however minimum period Ior banks is 15days to a
maximum oI 1year and Ior Iinancial institutions it is 1year (minimum) and 3years (maximum). They are
issued in the denomination oI 1lakh. CDs beneIit both issuers and investors. For the issuers (banks) CDs
help to control over the cost oI Iunds and assured availability oI Iunds Ior speciIic period oI time. For
investors CDs oIIer higher yields and liquidity. Hence (c) is the correct answer.
TOP ~
9. C Sponsors can also use stock exchange route also to oIIload the shares. Hence (c) is the correct answer. TOP ~
10. E
The volatility oI the call rates in money market:
I. Large borrowings by banks to meet the CRR requirements.
II. The overextension oI loans by banks. in excess oI their own resources.
III. The withdrawal oI Iunds to meet business requirements by institutional lenders and to pay advance
tax by the corporate sector.
IV. Large investment oI Iunds by banks in government securities. units oI UTI. public sector bonds
etc.
TOP ~

16

11. C




TOP ~
12. C Hire purchase Iinance companies involves a system under which term loans Ior purchases oI goods and
services are advanced to be liquidated in stages through a contractual obligations. Hence (c) is the
correct answer.
TOP ~
13. B Yankee Bonds: These are US dollar denominated issues by Ioreign borrowers in the US bond markets.
Hence (b) is the correct answer.
TOP ~
14. B Note Issuance Facility (NIF) is a medium-term legally binding commitment under which a borrower can
issue short-term paper. oI up to one year.
Commercial papers are short-term unsecured promissory notes. which pay a Iixed amount. Straight debt
bonds. medium term notes and Iloating rate notes are long-term/ medium term instruments having a
maturity oI over one year. Hence (b) is the correct answer.
TOP ~
15. B Rights issue is the method oI raising additional Iinance Irom existing members by oIIering securities
(shares and debentures) to them on pro-rata basis. A company proposing to issue securities on rights
basis should send a letter oI oIIer` to the shareholders giving adequate disclosure as to how the
additional amount received by the issue is used by the company.
Hence (b) is the correct answer.
TOP ~
16. A


TOP ~


17







17. A




TOP ~
18. A Present value oI annuity Iactor helps us to determine the capital recovery Iactor whereas the Iuture value
annuity Iactor is used in sinking Iund Iactor determination. The present value oI annuity Iactor is not
inverse oI Iuture value annuity Iactor. However present value interest Iactor is inversely proportional to
TOP ~

18
Iuture value interest Iactor. Hence (a) is the correct answer.
19. A The present value oI annuity A receivable at the end oI every year Ior a period oI n years at a rate oI
interest K is equal to
PVA
n
A x PVIFA
k . n

EIIective interest rate P.a.
12
0.11
1 1 11.57
12

+ =





A
(11.57.10)
5. 00. 000 5. 00. 000
Rs.86. 945.93 Rs.86. 946.
PVIFA 5.7507
= =


Hence (a) is the correct answer.


TOP ~
20. A Cost oI the house Rs.5.00.000 and the amount oI loan Rs.4.00.000
The eIIective rate oI interest per annum
4
9
1 1 9.31
4 100

+ =

And so the eIIective rate oI interest per month is ( )
1
12 1.0931 1 100 0.74

=




120
(0.0074.120)
120
(1.0074) 1
Now. PVIFA 79.348
(0.0074) (1.0074)

= =

The required amount I monthly installment is
4. 00. 000
5041.10 Rs.5. 041(approx).
79.348
=
Hence (a) is the correct answer.
TOP ~
21. B The Iollowing statements are correct with respect to the degree oI operating leverage (DOL) Ior the
operations oI a company:
Each level oI output has a distinct DOL
DOL is always negative below the operating break even point
DOL is always positive above the operating break even point
DOL is undeIined at the operating break even point.
Hence (b) is the correct answer.
TOP ~
22. D Being a legal tender and having the government guarantee do not have any role in relation to the time
value oI money. The purchasing power oI money gradually decreases due to inIlation and so the
individuals preIer to spend money. rather than saving the same without any suitable incentives. But
money may be productively invested to generate higher returns in Iuture. Hence the statement(II) and
(III) is correct. Since Iuture is characterized by uncertainty individuals preIer current consumptions to
Iuture consumptions. Statement (IV) is also correct. Hence (d) is the correct answer.
TOP ~
23. B Amount required at the beginning oI the 9
th
year:
Year Cash Ilows Present value ( 9 Present values
1 16.000 1.000 16.000
2 17.000 0.917 15.589
3 18.000 0.842 15.156
4 19.000 0.772 14.668
61.413
(9.8)
61413 61413
A Rs.5. 568.57 Rs.5. 569.
FVIFA 11.028
= = =


TOP ~


19

Hence (b) is the correct answer.
24. A Non-diversiIiable risk is related to the general economy. DiversiIiable risk It is speciIic to a particular
industry/Iirm. Hence (a) is the correct answer.
TOP ~
25. C The SML intersects the vertical axis at the risk-Iree rate oI return
Slope oI the SML is the market risk premium
The x-axis Ior the SML represents the beta oI a particular security and the y-axis represents the
expected returns oI a particular security
It establishes a linear relationship between the required rate oI return and its systematic risk
Alpha indicates the amount oI return on a security or a portIolio when the market return is zero
Hence (c) is the correct answer.
TOP ~
26. E The ex-post SML is used to evaluate the perIormance oI portIolio manager; tests oI asset pricing
theories such as the CAPM and to conduct tests oI market eIIiciency.
The ex-ante SML is used to identiIy under valued securities and determine the market price oI risk Ior a
particular security.
Hence (e) is the correct answer.
TOP ~
27. B According to the CAPM. Expected return R
I
(R
m
R
I
)
ThereIore. For stock Y. 13 R
I
1.20(12 - R
I
)
R
I
7.
ThereIore expected return on stock X 7 1.05 (12 - 7) 12.25
Hence (b) is the correct answer.
TOP ~
28. E Standard deviation is preIerred to range because oI the Iollowing advantages:
1. Standard deviation considers every possible event and assigns each event a weight equal to its
probability.
2. Standard deviation oIIers a high uniIormity oI the observations.
3. Standard deviation is a measure oI dispersion around the expected value. This is in absolute
consensus with the deIinition oI risk as variability oI returns`.
4. Standard deviation is obtained as the square root oI the sum oI squared diIIerences multiplied by
their probabilities. This Iacilitates comparison oI risk as measured by standard deviation and
expected returns as both are measured in the same costs.
Hence (e) is the correct answer.
TOP ~
29. D Liquidity risk: The risk is associated with the secondary market in which the particular security is
traded. A security which can be bought or sold quickly without signiIicant price concession is
considered liquid. Hence (d) is the correct answer.
TOP ~
30. C CAPM
i I m I
R R (R R ) = +
.
m
im. i
2
m
2 2
0.5. 0.24. 0.2. (0.2) 0.04
m m
im. i
0.5 0.24 0.2
0.6
0.04
r 6. r 16
m
I

=

= = = = =

= =
= =





TOP ~

20
Hence.
i
R 6 0.6(16 - 6) 12.




Hence (c) is the correct answer.
31. E Equilibrium price I shares oI Malavika Ltd.:
The required rate oI return oI Malavika Ltd. may be Iound with the help oI CAPM as Iollows:
CAPM
i I m I
R R (R R ) = +
0.11 1.2 (0.15 - 0.11) 0.158 or 15.8.
Now
e o
K 15.8. D Rs.3. g 9 = = =
Equilibrium price. P
o
1
e
D 3(1.09) 3.27
48.08 Rs.48
K g 0.158 0.09 0.068
= = = =

.
Hence (e) is the correct answer.
TOP ~
32. E
Economic conditions Return (R
i
) Probability (P
i
)
k = R
i
P
i
P
i
(k
i
-
i
k )
2

Good 18 0.1 0.018 0.1(0.18-0.12)
2
0.00036
Average 15 0.4 0.060 0.4(0.15-0.12)
2
0.00036
Bad 12 0.3 0.036 0.3(0.12-0.12)
2
0
Poor 5 0.2 0.010 0.2(0.05-0.12)
2
0.00098
0.0017
1
2
(0.0017) 0.041 or 4.1approx. = =
Hence (e) is the correct answer.
TOP ~
33. C Weighted beta (200 0.5 200 2 100 4)/500 1.8
Required rate oI return according to CAPM R
I
B
p
(R
m
R
I
)
R
I
1.8(14 R
I
) 20.4
R
I
25.2 1.8 R
I
20.4
0.8 R
I
4.8
R
I
6
New weighted Beta (200 0.5 200 2 100 3)/500 1.6
New required rate oI return 6 1.6(14 6) 18.8.
Hence (c) is the correct answer.
TOP ~
34. B Assumptions oI Capital Asset Pricing Model (CAPM):
Investors are risk-averse.
Investors make their investment decisions based on a single-period horizon
Transaction costs are negligible
Taxes do not aIIect the choice buying assets
All individuals assume that they can buy assets at the going market price and they all agree on the
nature oI the return and risk associated with each investment.
Hence (b) is the correct answer.
TOP ~
35. C Expected price
i i
X P
Where.
i
X ` is the price expected and
i
P ` is the probability
Hence. expected price 70 0.3 80 0.5 90 0.2 Rs.79
The expected one year return is calculated as
100
beginning the at Price
beginning the at Price dividend) Expected end the at Price (Expected

+

TOP ~


21
Expected return 100
60
60 ) 2 79 (

+
35.
Hence (c) is the correct answer.
36. A Turnover oI the Iirm 1.45.000 x Rs.23 Rs.33.35.000
Total cost 1.45.000 x Rs.17 Rs. 2.80.000 Rs. 27.45.000
EBIT 33.35.000 27.45.000 Rs.5.90.000
Interest charges Rs.10.00.000 x 0.11 Rs.1.10.000
Degree oI Operating Leverage (DOL)
Q(P V) 1. 45. 000(23 17)
1.475.
Q(P V) F 1. 45. 000(23 17) 2. 80. 000

= =


The Degree oI Financial Leverage (DFL)
EBIT
EBIT I
since preIerred dividend is zero.
Hence. DFL
5. 90. 000
1.23
5. 90. 000 1.10. 000
=

Combined leverage DOL x DFL 1.475 x 1.23 1.814.
Hence (a) is the correct answer.
TOP ~
37. C
Degree oI Operating Leverage (DOL)
Q(P V)
Q(P V) F

1.2
Q(P V) sales (1- variable costs to sales ratio) 144(1-0.60)
Q(P V)
Q(P V) F

144(0.4)
1.2
144(0.4) F
=

57.6 69.12 1.2 F
1.2 F 11.52
F
11.52
1.2
9.6
Fixed expenses oI the company Rs. 9.6 lakh.
Hence (c) is the correct answer.
TOP ~
38. B Combined leverage is the percentage change in relationship between Sales and Earnings per share.
Total leverageChange in EPS/ Change in Sales
A highly leveraged Iirm is more risky than its peers due to higher Iinancial risk. Operating leverage is
the measure oI the Iirm`s business risk. II the operating leverage increases it means that the business
risk oI the Iirm is increased.
Hence (b) is the correct answer.
TOP ~
39. C Operating leveragecontribution/operating proIit
II the operating proIit increases. the operating leverage decreases. (I) is incorrect.
II the contribution margin increases the operating leverages decreases. (II) is incorrect.
II the contribution exceeds the Iixed cost. there is Iavorable operating leverage. (III) is correct.
Hence (c) is the correct answer.
TOP ~
40. E
p
Q(S V)
DTL
D
Q(S V) F I
(1 T)

7. 500(600 300)
35. 000
7. 500(600 300) 10. 00. 000 95. 000
(1 0.4)

22. 50. 000 22. 50. 000
2.05
22. 50. 000 10. 00. 000 95. 000 58. 333.33 10. 96. 666.67
= =

.
TOP ~

22
Hence (e) is the correct answer.
41. D
XYZ Ltd.
Output (units) 30.000
Selling price per unit (Rs.)
Less: Variable cost per unit
7.00
2.50
Contribution per unit (Rs.) 4.50
Total contribution (30.000 * 4.50)
Less: Fixed costs
1.35.000
28.000
EBIT
Less : Interest
1.07.000
16.000
ProIit BeIore Tax (PBT) 91.000
Degree oI Financial Leverage (DFL)
EBIT 1. 07. 000
1.175
PBT 91. 000
= =
Hence (d) is the correct answer.
TOP ~
42. D Intercept oI Iitted line. Statement (I) is correct
Indicates return oI security/portIolio when the market return is zero. Statement (II) is correct
It value can be positive/negative values also. Statements (III) not correct.
Hence (d) is the correct answer.
TOP ~
43. D Going Concern Value is the amount that a company could realize iI it sold its business as an operating
one. Its value would always be higher than the liquidation value. the diIIerence accounting Ior the
useIulness oI assets and value oI intangibles. Hence. (d) is true.
Replacement Value is the amount that a company would be required to spend iI it were to replace its
existing assets in the current condition. Liquidation Value is the amount that a company could realize iI
it sold its assets aIter having terminated its business. It is generally a minimum value which a company
might accept iI it sells its business. Market Value oI an asset or security is the current price at which the
asset or the security is being sold or bought in the market. Book value is an accounting concept and it is
not the same as the going concern value.
Hence (d) is the correct answer.
TOP ~
44. D A warrant is a call option to buy a stated number oI shares. It gives the holder the right to subscribe to
the equity shares oI the company. When a warrant is issued. the exercise price is always greater than the
current market price. This price may be Iixed Ior entire liIe oI warrant or increased periodically. The
existence oI positive premium on a warrant means that it will be more beneIicial Ior the warrant holder
to sell his warrant. thus realizing the theoretical value plus premium when he exercises it. The premium
associated will shrink as the expiry date approaches. The actual value oI the warrant will be equal to the
theoretical value on the expiry date. Higher the volatility oI the underlying stock. larger the premium
Iixed. Hence. statements (I) and (III) are correct and (II) is incorrect.
Hence (d) is the correct answer.
TOP ~
45. C
Required rate oI return on the stock
0 1
0 0
D (1 g) D 2(1.12)
g g 0.12
P P 52.50
+
+ = +
0.1627 i.e. 16.27.
Hence (c) is the correct answer.
TOP ~
46. E According to the bond value theorems. when the required rate oI return is more than the coupon rate. the
value oI the bond will be less than the Iace value i.e. it will be trading at a discount. As time passes the
discount on the bond declines and the value oI the bond reaches the par value on the maturity i.e. as
time passes the value oI the bond increases and on the maturity it will be equal to the par value. Hence.
statements (II) and (III) are true and (I) is not true.
Hence (e) is the correct answer.
TOP ~
47. C The required rate oI return Irom that stock is k
e
R
I
(R
m
R
I
) 6 1.50 (12 6)
15 percent
The growth rate oI dividend is 5
TOP ~


23
So. the price oI the share can be calculated as:
( )
o
e
D 1 g
2 1.05
P
k g 0.15 0.05
+

= =

Rs.21.
Hence (c) is the correct answer.
48. A
Value oI stock
2 3 4
1 1.4 2 3
1.13 (1.13) (1.13) (1.13)
+ + +
4
3(1.09)
(0.13 0.09) (1.13)
Rs.55.35.
Hence (a) is correct answer.
TOP ~
49. A P
0
80(PVIFA
7.8y
) 550(PVIF
7. 8y
) 550 (PVIF
7. 9y
)
P
0
80(5.971) 550(0.582) 550 (0.544)
P
0
477.68 320.1 299.2 Rs.1096.98 - Rs.1097.
Hence (a) is the correct answer.
TOP ~
50. D The value which a bondholder gets on maturity is called redemption value.
Hence (d) is the correct answer.
TOP ~
51. B
The current price
1 1
o
e e
D P
P
(1 K ) (1 K )
= +
+ +


2.50 35.00
(1 0.13) (1 0.13)
+
+ +

2.21 31.00
Rs.33.21.
Hence (b) is the correct answer.
TOP ~
52. D There is no pre-speciIied maturity period in the multi-period valuation model oI equity shares; cash
Ilows over an inIinite duration are considered. Hence (d) is the correct answer.
TOP ~
53. B
Expected Price-earning ratio is computed as
Expected Dividend payout ratio
Cost oI capital growth rate


From the above equation. we can conclude that increase in the expected dividend payout ratio and
increase in the growth rate will lead to increase in Expected Price-earning ratio. Hence statements I and
III are correct.
Increase in the cost oI capital will decrease the Expected Price-earning ratio. Hence. (II) is incorrect.
Hence (b) is the correct answer.
TOP ~
54. D
The advantages oI privately placing the securities:-
Lower issue cost.
Fewer procedural Iormalities.
Easy accuses to any company.
Access to Iunds is Iaster.
Hence (d) is the correct answer.
TOP ~
55. C
Ex-rights value oI share
1 N
S NP
0
+
+

Where N. P
o
and S have their usual meanings
Given:
N 5
P
o
Rs. 56 per share
Ex-rights price Rs. 54 per share
54
1 5
S ) 56 ( 5
+
+

or S 54 (6) 56 (5)
or S Rs. 44 per share.
TOP ~

24
Hence (c) is the correct answer.
56. B The Iollowing are belongs to PreIerence shares:
PreIerence shareholders earn a Iixed rate oI dividend.
The dividends received by preIerence shareholders are not tax-deductible.
PreIerence shareholders have preIerence over equity shareholders to the post-tax earnings in the Iorm oI
dividends. and assets in the event oI liquidation.
Hence (b) is the correct answer.
TOP ~
57. C A rights oIIer should be kept open Ior a minimum period oI 30 days and maximum oI 60 days.
Hence (c) is the correct answer.
TOP ~
58. D The cost oI capital oI a company is not the cost oI a single speciIic source oI Iinance used by the Iirm.
nor is it measured in terms oI the cash Ilow accruing to any speciIic source oI Iinance. It is the weighted
average cost oI various long-term sources oI Iinance used by the Iirm. Hence (d) is the correct answer.
TOP ~
59. C Agency/monitoring costs are certain restrictions on Iirm imposed by creditors in the Iorm oI some
protective covenants in the loan contract. They entail legal and enIorcement costs. which impair the
operating eIIiciency oI the Iirm. Statements (I) and (II) is true.
Bankruptcy costs are certain restrictions imposed by creditors. A statement (III) is not true.
Hence (c) is the correct answer.
TOP ~
60. C


TOP ~


25
61. C

TOP ~
62. B
Wealth ratio (w
t
)
t t
t 1
D P
P

+

Yield Ior an n-year period is (W
1
W
2
.... W
n
)
1/n
1
The wealth ratios Ior Beta Ltd will be as Iollows:
1 2 3 4 5
Wealth Ratio 1.125 1.143 0.78 1.242 1.026
Yield (1.125 1.143 0.78 1.242 1.026)
1/5
1
1.0503 1
0.0503
5.03.
Hence (b) is the correct answer.
TOP ~
63. A According to this approach. the past return on security is taken as a proxy Ior the return required in the
Iuture by the investors. In other words. the actual return has been in line with the expected return. Hence
(a) is the correct answer.
TOP ~
64. E All the approaches are used to measure the cost oI equity except Miller and Modigliani approach. Hence
(e) is the correct answer.
TOP ~
65. A This diagram relates to Net Operating Income Approach. In this approach it is said that in case a Iirm
increases the debt. it becomes more risky. Hence. equity share holders demand Ior more return. there by
increasing cost oI equity. The advantages oI using cheaper debt Iinancing will be oIIset by higher cost
oI equity due to increase in risk. As a result oI which cost oI capital remains the same at any degree oI
leverage. Hence (a) is the correct answer.
TOP ~
66. C Capital structure oI the Iirm is the combination oI diIIerent sources oI Iinance. It can also be expressed
in terms oI D/E ratio. Hence (c) is the correct answer.
TOP ~
67. B Gordon`s dividend capitalization model has the Iollowing assumptions.
a. The Iirm will be an all-equity Iirm with the new investment proposals being Iinanced solely by the
retained earnings.
b. Return on investment and cost oI capital remain constant.
c. The Iirm has an inIinite liIe.
d. The retention ratio remains constant and hence the growth rate is also constant.
e. Cost oI equity capital is greater than the growth rate.
Hence (b) is the correct answer.
TOP ~
68. D Gordon`s dividend capitalization model:
e
E(1 b) 18(1 0.60)
P Rs.144
K br 0.14 (0.6 0.15)

= = =

.
Hence (d) is the correct answer.
TOP ~
69. B According to Walter`s model. TOP ~

26
e
e
r 0.15
D (E - D) Rs.3 (Rs.5 - Rs.3)
k 0.125
P
k 0.125
Rs.43.20



=
Workings:
k
e
12.5
E EPS Total earnings / Number oI outstanding shares
Rs.5.00.000/1.00.000
Rs.5
D DPS 0.6 x EPS
0.6 x 5
Rs.3
Hence (b) is the correct answer.
70. D
According to Miller and Modigliani model. the value oI the Iirm when dividends are not paid.
1 1
0
(n n )P I E
nP
1.12
+ +
=
0 1 1
e
1
1
1
P (D P )
(1 K )
P
100
1.12
P Rs.112
= +
+
=
=

0
1. 50. 000
(25. 000 )112 5. 00. 000 3. 50. 000
112
nP Rs.25. 00. 000.
1.12
+ +
= =
Hence (d) is correct answer.
TOP ~
71. C According to the Walter model. when the return on investment is more than the cost oI equity capital.
the earnings can be retained by the Iirm since it has better and more proIitable investment opportunities
than the investors. It implies that the returns the investor gets when the company re-invests the earnings
will be greater than what they earn by investing the dividend income. Firms which have their r ~ k
e
are
the growth Iirms and the dividend policy that suits such Iirms is one which has a Zero pay-out ratio
.
Hence (c) is the correct answer.
TOP ~
72. C Net income approach and net operating income approach are concerned with the capital structures oI a
company. While explaining the impact oI dividend policy on value oI the Iirm. Walter model assumes
constant EPS. Gordon model on dividend policy is not based on such assumption. M&M approach does
not assume constant EPS. Hence (c) is correct answer.
TOP ~
73. B Face value Rs. 2.500
Issue price 2.500 (1 0.30) Rs.1.750
II k` is the cost oI the bonds to the company then
1750 (1 k)
5
2.500
k
5 / 1
750 . 1
500 . 2

1 0.0739 i.e. 7.39. Hence (b) is the correct answer.

TOP ~
74. C
A person who simultaneously buys and sells similar instruments in diIIerent markets is known as
Arbitrageur whereas the person/investor who seeks to protect a position or anticipated position in the
spot market by using an opposite position in derivative market is hedger. Speculators enter Iuture or
option market with a view to make proIit Irom subsequent price movements. Hence (c) is the correct
answer.
TOP ~

< T0P 0F TlE 00CuVENT >