Name ID

Birla Institute of Technology & Science, Pilani

ECON F315 / FIN F315 Financial Management

Quiz II – 04 Apr 2018

I. There are 30 True/False Questions, each question carries 1.5 marks. There is NO negative
marking. Write the answer in the table given below. Answers written elsewhere will NOT be
evaluated.

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

21 22 23 24 25 26 27 28 29 30

1. If the debt-to-equity ratio of a firm is 75%, it suggests that the weight of equity in the capital
structure will be 57.14%. True

2. A person who saves more resources for tomorrow will generally receive a higher utility compared
to the one who spends in the current period. False

3. The slope of the individual's indifference curve is called Marginal Rate of Technical Substitution.
False

4. One can estimate the value of a firm by calculating the present value of free cash flows using the
WACC (weighted average cost of capital) for the discount rate. True

5. The primary reason the annual report is important in finance is that it is used by investors when
they form expectations about the firm's future earnings and dividends, and the riskiness of those cash
flows. True

6. The net-worth of a company equals the difference between what the firm owns and what the firm
owes. True

7. Assets other than cash are expected to produce cash over time, but the amount of cash they
eventually produce could be higher or lower than the values at which these assets are carried on the
books. True

8. It is possible that - in an accounting period, the net income earned by a firm is negative yet the cash
flows provided by operating activities are positive. True

9. Total net operating capital equals net fixed assets. False

10. Net operating profit after taxes (NOPAT) is the amount of net income a company would generate
from its operations if it had no interest income or interest expense. True
11. The fact that 40% of the interest income received by a corporation is excluded from its taxable
income encourages firms to use more debt financing than they would in the absence of this tax law
provision. False

12. The balance sheet is a financial statement that measures the flow of funds into and out of various
accounts over time, while the income statement measures the firm's financial position at a point in
time. False

13. If a firm experiences a 5% decrease in the retained earnings from the last balance sheet date this
implies that the firm might have earned zero Net Income during the period. True

14. The current cash flow from existing assets is highly relevant to the investor. However, since the
value of the firm depends primarily upon its growth opportunities, profit projections from those
opportunities are the only relevant future flows with which investors are concerned. False

15. The time dimension is important in financial statement analysis. The balance sheet shows the
firm's financial position at a given point in time, the income statement shows results over a period of
time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.
True

16. The four most important financial statements provided in the annual report are the balance sheet,
income statement, cash budget, and the statement of stockholders' equity. False

17. One of the ways by which a firm can use its free cash flows is purchase of marketable securities.
True

18. The free cash flow to equity is used by the firm for paying interest expenses. False

19. If a firm's accounts payables increase it implies an increase in debt-to-equity ratio. False

20. The indifference curves are always downward sloping. False

21. Changes in working capital have no effect on firm's free cash flow. False

22. If the value of gross assets between two balance sheets dates increase by Rs 500 mn and the
depreciation expense for the corresponding period is Rs 150 mn, then the cash outflow on purchase of
fixed assets during this period will be equal to Rs 500 million. False / True

23. If investors can earn 12% p.a. by investing Rs 1500 elsewhere (assume same risk on all
investments), then, the economic profit for the investors will be zero if the accounting income from
the project equals Rs 60. True

24. If corporate profits are taxed as per slabs of pre-tax income earned during an accounting period,
then, for calculating the tax shield on additional debt it will be more appropriate to use marginal tax
rate. True

25. DSS Ltd. last year had (1) a negative net cash flow from operations, (2) a negative free cash flow,
and (3) an increase in cash as reported on its balance sheet. This suggests that the company sold a new
issue of common stock. True
26. If a firm pays its electricity bill then this transaction will always have a negative impact on the
firm's free cash flow, ceteris paribus. True

27. If the Net Income is Rs 800 and the net operating profit after tax (NOPAT) is Rs 700, this implies
the firm's pays corporate taxes at 12.5% rate. False

28. The firm can use free-cash flow to firm for making dividend payments. True

29. The free cash flow to equity is always less than the free cash flow to firm. False

30. The present value of free cash flows minus market value of debt equals total value of equity. True