Advance Corporate Finance [FIBA 301]

Section A (30 Marks) [10 questions]

Q1. According to which theory of dividend, dividend policy is irrelevant to the value of the
firm and shareholder’s wealth?
a) Walter’s Model
b) Gordon’s Model
c) Bird in hand argument
d) Modigliani and Miller approach

Answer- d)

Q2. Companies go public to

(A) avoid taxes
(B) reduce management cost
(C) raise more cash
(D) get merge
Answer- (C)
Q3. Shareholders wealth increases with the increase in ___
a) EPS
b) Market value of the firm
c) Dividend & market value of the firm
d) Market price of the equity share

Answer- (C)

Q4. Rights issues are for

(A) managers
(B) existing shareholders
(C) directors
(D) new shareholders
Answer- (B)
Q5. The sale of financial assets is also referred to as the
(A) Capital decision
(B) CFO decision
(C) Financing decision
(D) Investment decision
Answer- (C)
Q6. We say about a particular investment that it is risky, because
(A) it is dangerous
(B) it has low returns
(C) its raw material is unavailable
(D) its returns are uncertain
Answer- (D)
Q7. Conflicts between shareholders and managers’ interest is called
(A) Agency problem
(B) area of the board of directors
(C) risk
(D) Management problem
Answer- (A)
Q8. Shareholders wealth increases with the increase in ______
a) EPS
b) Market value of the firm
c) Dividend & market value of the firm
d) Market price of the equity share
Answer- (B)
Q9. Promotion of welfare of human by corporate is called as_______
a) Social service
b) Philosophy
c) NGO work
d) Corporate philanthropy

Answer- (D)

Q10. The term _____ can be used in a broad sense to describe all the policies, procedures,
relationships, and systems in place to oversee the successful and legal operation of the
enterprise.
a) corporate governance
b) corporate policy
c) corporate oversight
d) corporate strategy

Answer- (A)

Q11. APV stands for _____

a) Adjusted Proprietary Value
b) Adjusted Present Value
c) Advance Proprietary Value
d) Advance Present Value

Answer- (B)
Q12. The two important valuation models are ______
a) Economic Value Added & Adjusted Present Value
b) Adjusted Present Value & Market Value Added
c) Economic Value Added & Market Value Added
d) Net Present Value & Adjusted Present Value
Answer- c)

Q13. Operating synergy is associated with ________.

a) Dividend decisions
b) Mergers & Acquisitions
c) Artificial Intelligence
d) Management Compensation
Answer- b)

Q14. _______ is the method of measuring company’s workers performance.

a) Balance Score Card
b) Debt restructuring
c) Rolling Forecasts
d) All of the above
Answer- a)

Q15. MM Proposition I (without taxes) for capital structure assumes that-

a) VU > VL
b) VU < VL
c) VU = VL
d) None of the above
Answer- c)

Q16. _______ is a method of budgeting in which all expenses must be justified for each new
period.
a) Expense based budgeting
b) Uniform budgeting
c) Periodic Budgeting
d) Zero based budgeting
Answer- d)

Q17. Net Income (NI) and Net Operating Income (NOI) approaches were given by-
a) Shiller
b) Durand
c) Modigliani & Miller
d) Grinblatt
Answer- b)
Q18. In the beginning, some companies receive equity investment from wealthy individuals.
The wealthy individuals are called
(A) angel investors
(B) corporate investors
(C) venture capitalists
(D) venture capital firms
Answer- (A)
Q19. Corporate finance is the area of finance dealing with the:
a) Sources of funding
b) Capital Structure
c) Dividend policy
d) Value of the firm to shareholders
e) All of the above
Answer- e)

Q20. The primary goal of any firm is

a) Minimize wastage and increase productivity
b) Building shareholder’s trust
c) Profit maximization & wealth maximization
d) Reduce cost and increase customer retention
Answer- c)

Section B (20 Marks) [10 questions]

Q21. Assume that Company XYZ has the following components: -
NOPAT= ₹33,80,000, Capital Investment = ₹13,00,000, WACC = .056 or 5.60%. By
applying the EVA formula, the value is _____.
a) ₹24,80,400
b) ₹16,53,600
c) ₹45,36,250
d) ₹33,07,200
e) ₹8,26,800
Answer d) ₹33,07,200 (100% correct)
a) ₹24,80,400 (75% correct)
b) ₹16,53,600 (50% correct) &
e) ₹8,26,800 (25% correct)

Q22. Following components of the company are given r= 0.10 k= 0.10, EPS= ₹10, and DPS=
40%. By applying Walter’s model, analyse the market price per share?
a) ₹0
b) ₹25
c) ₹50
d) ₹75
e) ₹100
Answer e) ₹100 (100% correct)
d) ₹75 (75% correct)
c) ₹50 (50% correct) &
b) ₹25 (25% correct)

Q23. Following components of the company are given r= 0.15, k= 0.10, EPS= Rs.10, and b =
60%
By applying Gordon’s model, analyse the market price per share?
a) ₹0
b) ₹400
c) ₹100
d) ₹200
e) ₹300
Answer b) ₹400 (100% correct)
e) ₹300 (75% correct)
d) ₹200 (50% correct) &
c) ₹100 (25% correct)

Q24. Which of the following option will not be considered as business ethics?
a) Expanding business operations
b) Transparent payroll system
c) Obeying parents
d) Fair policies
e) All of the above
Answer c) Obeying parents (100% correct)
b) Transparent payroll system (75% correct)
a) Expanding business operations (50% correct) &
d) Fair policies (25% correct)

Q25. If EBIT = ₹ 50,000, Debentures = 10%, 200,000 and Equity Capitalization Rate = 12.5
%. By applying Net Income approach, what will be the value of WACC?
a) 2.84%
b) 11.36%
c) 5.68%
d) 8.52%
e) None of the above
Answer b) 11.36% (100% correct)
d) 8.25% (75% correct)
c) 5.68% (50% correct) &
a) 2.84% (25% correct)
Q26. The most common stock split is _____, in which each share becomes two shares.
a) 2:1
b) 1:5
c) 1:1
d) 0.5:1
e) None of the above
Answer- a) 2:1 (100% correct)
b) 1:5 (75% correct)
c) 1:1 (50% correct)
d) 0.5:1 (25% correct)

Q27. Assume firm ‘A’ has a pre-merger value of ₹ 320 Lakh and Firm ‘T’ has a pre-merger
value of ₹ 90 Lakh. It is estimated that the merger would yield cost savings with a present
value of ₹40 lakhs. For acquisition of firm T, Firm A will be required to make payment of
₹100 lakhs (consisting of issue of shares worth ₹80 lakh and cash of ₹20 lakh). Besides, it is
to incur acquisition costs of ₹5 lakhs. Determine the value of gain, costs, and net gain from
merger?
a) ₹30, ₹11.25 & ₹18.75 lakhs
b) ₹20, ₹7.5 & ₹12.5 lakhs
c) ₹40, ₹15 & ₹25 lakhs
d) ₹10, ₹3.75 & ₹6.25 lakhs
e) None of the above
Answer- c) 40, 15 & 25 lakhs (100% correct)
a) 30, 11.25 & 18.75 lakhs (75% correct)
b) 20, 7.5 & 12.5 lakhs (50% correct) &
d) 10, 3.75 & 6.25 lakhs (25% correct)

Q28. Following are the details regarding three companies X Ltd., Y Ltd., and Z Ltd.
X Ltd. Y Ltd. Z Ltd.
r = 15% r = 15% r = 10%
Ke = 10% Ke = 10% Ke = 10%
E = ₹8 E = ₹8 E = ₹8
Mark the correct option indicating the value of equity share of each of the company (calculate
by applying Walter’s model) when dividend pay-out ratio is: (i) 75% and (ii) 25%.
a) (i) 67.5, 52.5, 60 b) (i) 45, 35, 40 c) (i) 22.5, 17.5, 20 d) (i) 90, 70, 80 e) (i) 20,
30, 50
(ii) 82.5, 37.5, 60 (ii) 55, 25, 40 (ii) 27.5, 12.5, 20 (ii) 110, 50, 80 (ii) 30,
40, 60

Answer- d) (i) 90, 70, 80 & (ii) 110, 50, 80 (100% correct)
a) (i) 67.5, 52.5, 60 & (ii) 82.5, 37.5, 60 (75% correct)
b) (i) 45, 35, 40 & (ii) 55, 25, 40 (50% correct)
c) (i) 22.5, 17.5, 20 & (ii) 27.5, 12.5, 20 (25% correct)
Q29. D Ltd. belongs to a risk class for which the appropriate capitalisation rate is 10%. It has
25,000 shares outstanding. The current market price of the share is ` 100. The company is
contemplating the declaration of dividend of ₹5 per share at the end of the current year. The
company expects to have a net income of ₹2,50,000 and has a proposal for making new
investments of ₹5,00,000. By applying the Gordon’s model, calculate:
(i) Market price per share when dividend is declared.
(ii) Market price per share when dividend is not declared.

Answer- i) MP/share div. declared=105,

ii) MP/share div. not declared = 110,

Q30. Using information from the above stated question, calculate

(iii) Number of new shares to be issued.
(iv) Show that the payment of dividend does not affect the value of the firm.

Answer- iii) new shares issued = 3571 (div. declared) & 2273 (div. not declared) &
iv) Total shares= 28,571 (div. declared) & 27,273 (div. not declared)

Section C (20 Marks) [8 questions]

Q31. BOOH factor in the implementation of EVA stands for
a) Bridge, Operate, Optimize & Harvest
b) Build, Optimise, Operate & Harvest
c) Bridge, Optimize, Operate & Harmonize
d) Build, Optimise, Operate & Harmonize
Answer- b)

Q32. Ruchi Soya Ltd. is an established company having its shares quoted in the stock market.
The company has distributed dividend at 20% p.a. The paid-up capital of the company was
₹50 lakh shares of ₹10 each. Annual growth rate in dividend expected is 3%. The expected
rate of return on its equity capital is 15%. Calculate the value of shares of Ruchi Soya Ltd.
based on Gordon’s dividend growth model.
a) 11.20
b) 22.41
c) 17.17
d) 15.36
Answer- c)

Q33. The unethical issues which can be controlled by strong corporate governance are:
i Bribery & insider trading ii Unfair discrimination & coercion
iii Conflict of interest & political donations iv Expanding & diversifying the business
a) i, ii & iii
b) i, ii & iv
c) i & iv only
d) iii & iv only
Answer- a)

Q34. Leasing of machinery can be categorized as______

a) Fixed asset
b) Investment decision
c) Financing decision
d) Capital budgeting decision.

Answer-c)

Q35. The mixture of debt and equity, used to finance a corporation is also known as
(A) capital structure
(B) capital budgeting
(C) investing
(D) treasury
Answer-a)

Q36. The top financial manager within a firm is usually the

Chief Field Officer (CFO)
Chief Finance Officer (CFO)
Company Financial Officer (CFO)
Chief Financial Officer (CFO)
Company Finance Officer (CFO)
Answer-d)

Q37. Company’s decisions focusing on long-term investments or projects are known as ____
Dividend
Capital budgeting
Financing
Capital structure
Leasing
Answer- b)

Q38. The process whereby two or more companies combine their business operations with
mutual consent and trust is called
Takeover
Hostile takeover
Merger
Acquisition
Franchising
Answer- c)