FSM MCQ Marathon Notes

CS Executive – FSM CA CS Pushpam Chourasia
1: Capital Budgeting
1 What is the difference between economic profit and accounting profit?
(A) Economic profit includes a charge for all providers of capital while accounting profit
includes only a charge for debt.
(B) Economic profit covers the profit over the life of the firm, while accounting profit only
covers the most recent accounting period.
(C) Accounting profit is based on current accepted accounting rules while economic profit is
based on cash flows.
(D) All of the above are correct.
2 Situation in which firm limits expenditures on capital is classified as
(A) optimal rationing
(B) capital rationing
(C) marginal rationing
(D) transaction rationing
3 Which of the following is demerit of accounting rate of return (ARR) method?
(A) It does not take into accounting time value of money.
(B) It fails to measure properly the rates of return on a project even if the cash flows are even
over the project life.
(C) It is biased against short-term projects in the same way that payback is biased against
longer-term ones.
(D) All of the above
4 Payback period in which an expected cash flows are discounted with help of project cost of
capital is classified as
(A) discounted payback period
(B) discounted rate of return
(C) discounted cash flows
(D) discounted project cost
5 Which of the following statistical or mathematical technique of risk evaluation is used in
capital budgeting?
(1) Certainty Equivalent Approach
(2) Standard Deviation
(3) Sensitivity Analysis
(4) Probability Distribution Approach Select the correct answer from the options given below
(A) 1 only
(B) 1 and 2 only
(C) 1, 2, and 3.
(D) 1, 2, 3 and 4
6 In mutually exclusive projects, project which is selected for comparison with others must
have
(A) higher net present value
(B) lower net present value
(C) zero net present value
(D) all of the above
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“The Only Thing Worse Than Being Blind Is Having Sight But No Vision”
7 The process of planning expenditures that will influence the operation of a firm over a
number of years is called.
(A) Investment
(B) Capital budgeting
(C) Net present valuation
(D) Dividend valuation
8 Which of the following statements is true about mutually exclusive projects?
(A) They are not in direct competition with each other.
(B) They are in direct competition with each other.
(C) They are not evaluated based on shareholder wealth.
(D) They are never evaluated
9 The concept which explains that a money received in present time is more valuable than
money received in future is classified as.
(A) Lead value of money
(B) Storage value of money
(C) Time value of money
(D) Cash value of money
10 The XYZ purchases anew equipment. The selected data is given below.
Cost of equipment: $25,000
Useful life of equipment: 5 years
Tax rate: 30%
If equipment is depreciated using straight line method, what is the depreciation tax shield
associated with the new equipment?
(A) $5,000
(B) $35,000
(C) $1.500
(D) $7,500
11 The investment proposal with the greatest relative risk would have:
(A) Highest standard deviation of net present value.
(B) Highest coefficient of variation of net present value.
(C) Highest expected value of net present value.
(D) Lowest opportunity loss.
12 An increase in the discount rate will:
(A) reduce the present value of future cash flows
(B) increase the present value of future cash flows
(C) have no impact on the present value of future cash flows
(D) None of the above
13 In Certainty Equivalent Approach, the first step is to Convert uncertain cash flows to certain
cash flows by multiplying it with the CE Factor and step two is
(A) Discount the certain cash flows at the IRR to arrive at NP
(B) Discount the certain cash flows at WACC rate to arrive at NP.
(C) Discount the certain cash flows at the risk free rate to arrive at NP.
(D) Discount the certain cash tows at the market rate of return to arrive at NP.
14 If present value of total cash outflow is equal to present value of total cash inflow, then the
net present value of the project will be
(A) Positive
(B) Negative
(C) Zero
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(D) Infinite
15 Which of the following relate to finance leases as opposed to operating leases?
1. At the inception of the lease the present value of the minimum lease payments amounts to
at least
Substantially allow the fair value of the leased asset.
2 Ownership of the asset remains with the lessor for the entire lease period.
3. Asset acquired under finance lease is shown as asset in the balance sheet of lessee.
Select the correct answer from the options given below
(A) 2 only
(B) 1 and 3 only
(C) 1 and 2 only
(D) 2 and 3 only
16 ………………..helps in assessing information as to how sensitive are the estimated
parameters of the project such as cash flows, discount rate, and the project life to the
estimation errors.
(A) Certainty Equivalent Approach
(B) Risk Adjusted Discount Rate Method
(C) Sensitivity Analysis
(D) Decision Tree Analysis
17 You are considering two projects namely Project X and Project Y.
Project X has low standard deviation but high coefficient of variation as compared to Project
Y
Project Y has high standard deviation but low coefficient of variation as compared to Project
X
Which project will you select?
(A) Project X only
(B) Both Project X & Project Y
(C) Neither Project nor & Project Y
(D) Project Y only
18 A firm with………………..constraint attempts to select the combination of investment projects
that will be within the specified limits of investments to be made during a given period of time
and at the same time provide greatest profitability.
(A) Capital Budgeting
(B) Capital structure
(C) Capital rationing
19 Which of the following is not applied in capital budgeting?
(A) Cash flows be calculated in incremental terms
(B) All costs and benefits are measured on cash basis
(C) All accrued costs and revenues be incorporated
(D) All benefits are measured on alter tax basis.
20 Profitability Index is expressed as:
(A) Profitability Index = Present Value of future cash flows / Initial cash investment
(B) Profitability Index Total of future cash flows / Initial cash investment
(C) Profitability Index = Present Value of future cash flows of first e /Initial cash investment
(D) Profitability Index = Initial cash investment / Present Value of future cash flow
21 In mutually exclusive projects, project which is elected for comparison with others must have
(A) Higher net present value
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(B) Lower net present value

(C) Zero net present value
22 Which of the following is the disadvantage of Net Present Value Method?
(A) Income over the entire life of the project is not considered
(B) The method does not take into account time value of money
(C) It is difficult to determine the firm cost of capital or appropriate rate of discount
23 A single, overall cost of capital is often used to evaluate projects because:
A) it avoids the problem of computing the required rate of return for each investment
proposal
(B) it is the only way to measure a firm's required return
(C) it acknowledges that most new investment projects have about the same degree of risk.
(D) it acknowledges that most new investment projects offer about the same expected return.
24 ……………technique estimates the time required by the project to recover, through cash
inflows, the firms initial outlay.
(A) Net Present Value (NPV) Method
(B) Internal Rate of Return (IRR) Method
(C) Average Rate of Return(ARR) Method
(D) Pay back Method
25 Which of the following is demerit of payback period
(A) It is difficult to calculate as well as understand it as compared to accounting rate of return
method
(B) This method discards the initial investment involved.
(C) It fails to take into account the timing of returns and the cost of capital.
26 Which of the following statement is not correct?
(A) Capital budgeting decision is surrounded by great number of
(B) Capital budgeting decisions in most of the cases are irreversible. uncertainties
(C) Capital budgeting decision making is an easy exercise
(D) Capital budgeting decisions need substantial amount of capital outlay.
27 When operating under a single-period capital, rationing constraint, you may first want to try
selecting projects by descending order of their……………….. in order to give yourself the
best chance to select the mix of projects that adds most to firm value.
(A) Profitability Index (PI)
(B) Net Present Value (NPV)
(C) Internal Rate of Return (IRR)
(D) Payback Period (PBP)
28 ………………..is concerned with the allocation of the firms source financial resources among
the available opportunities
(A) Capital budgeting
(B) Working Capital
(C) Capital Structure
29 Which of the following is not a potential for a ranking problem between two mutually
exclusive projects?
(A) The projects have unequal lives that differ several years.
(B) The costs of the two projects differ by nearly 30%
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(C) The two projects have cash How patterns that differ dramatically.
(D) One of the mutually exclusive projects involves replacement while the other involves
expansion
30 ………………refers to the value after a certain period of time at the given rate of interest.
(A) Present value
(B) Future Value
(C) Annuity
(D) Infinite Value
31 ……………..is the discount rate which should be used in capital budgeting.
(A) Cost of capital
(B) Risk free rate
(C) Risk premium
(D) Beta rate
32 A capital budgeting decision has its effect over a long time span and inevitably affects the
company's future cost structure and growth.
(A) True
(B) False
(C) Partly True & Partly False
(D) Data Incomplete
33 The decision to accept or reject a capital budgeting project depends on
(A) an analysis of the cash flows generated by the
(B) cost of capital that are invested in business/project.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
34 Payback period method may be successfully applied in which of the following circumstance:
(A) where the firms suffer from liquidity problem and is interested in quick recovery of fund
than profitability.
(B) high external financing cost of the project.
(C) for projects involving very uncertain return; and
35 Incorporating flotation costs into the analysis of a project will:
(A) have no effect on the present value of the project.
(B) increase the NPV of the project.
(C) increase the project's rate of return.
(D) increase the initial cash outflow of the project.
36 …………..refers to the rate which equates the present value of cash inflows and present
value of cash outflows
(A) Net Present Value
(B) Internal Rate of Return
(C) Profitability Index
(D) Pay back period
37 Capital budgeting decisions are analysed with help of weighted average and for this purpose
(A) Component cost is used
(B) Common stock value is used
(C) Cost of capital is used
(D) Asset valuation is used
(A) Under the net present value method rate of interest is assumed as the known factor
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whereas it is unknown in case of internal rate of return method.

(B) The net present value method took to ascertain the amount which can be invested in a
project so that its expected yields will exactly match to repay this amount with interest at the
market rate.
(C) Net Present value attempts to find out the rate of interest which is maximum to repay the
invested fund out of the cash inflows.
(D) Net present value method is more reliable than internal rate of return method for ranking
two or more projects.
39 Which of the following method of capital budgeting ignores the time value of money?
(A) Discounted payback period
(B) Net present value
(C) Internal rate of return
40 Risk adjusted discount rates method is used in investment and budgeting decisions to cover:
(A) Time value of money
(B) Risk.
(C) Both(A) and (B)
41 An increase in the discount rate will:
(A) Reduce the present value of future cash flows.
(B) Increase the present value of future cash flows.
(C) Have no effect on net present value.
(D) Compensate for reduced risk.
42 Generally, a project is considered acceptable if its net present value s:
(A) Negative or Zero
(B) Negative or Positive
(C) Positive or Zero
(D) Negative
43 Which method provides more confidence, the payback method or the net present value
method? (A) Payback because it provides a good timetable.
(B) Payback because it tells you when you break even.
(C) Net present value because it considers all inflows and outflows and the time value of
money.
(D) Net present value because it does not need to use cost of capital.
44 If the profitability index of a project is 0.75, it means
(A) the NPV of the project is greater than zero
(B) the project's cost is less than the present value of its cash flows
(C) the NPV of the project is greater than 1
(D) the project returns 75 cents in present value for each dollar invested in it
45 The method which calculates the time to recoup initial investment of project in form of
expected cash flows is classified as
(A) Net value cash flow method
(B) Payback method
(C) Single cash flow method
(D) Lean cash flow method
46 It interest expense of a company is $300,000 and tax rate is 40%, the after-tax cost of
interest is:
(A) $1,20,000
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(B) $3,00.000
(C) $1,80,000
(D) $75,000
47 Which of the following is correct or Risk Adjusted Discount Rate (RADR)?
(A) Accept a project if NPV at RADR is negative
(B) Accept a project if IRR is more than RADR
(C) RADR is overall cost of capital plus risk premium
48 What is a way to operationalize shareholder wealth maximization?
(A) identity and select projects that are expected to have negative net future values.
(B) identity and select projects that are expected to have positive net future values.
(C) identity and select projects that are expected to have positive net present values.
(D) Identity and select projects that are not expected to have positive
net present values
49 Concept of joint probability is used in case of
(A) Independent cash flows
(B) Uncertain cash flows
(C) Dependent cash flows
(D) Certain cash flows
50 Number of years forecasted to recover an original investment is classified as
(A) payback period
(B) forecasted period
(C) original period
(D) investment period
51 Real interest rate and real cash flows do not include.
(A) Equity effects
(B) Debt effects
(C) Inflation effects
(D) Opportunity effects
52 A type of project whose cash flows would not depend on each other is classified as
(A) project net gain
(B) independent projects
(C) dependent projects
(D) net value projects
53 The term mutually exclusive investments mean:
(A) Choose only the best investments
(B) Selection of one investment precludes the selection of an alternative
(C) The elite investment opportunities will get chosen.
(D) There are no investment options available.
54 A project whose acceptance requires the acceptance of another project is known as:
(A) dependent project
(B) an independent project
(C) a mutually exclusive project
(D) a rational project
55 Using profitability index, the preference rule for ranking projects is:
(A) the lower the profitability index, the more desirable the project.
(B) the higher the profitability index, the more desirable the project.
(C) the lower the sunk cost, the more desirable the project.
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(D) the higher the sunk cost, the more desirable the project.
56 The Net Present Value method of evaluating projects is consistent with:
(A) the maximization of earnings per share
(B) the maximization of shareholder wealth
(C) the maximization of net income
57 Lotus Corporation is trying to determine how to assign discount rates to the various projects
proposed by its numerous international divisions. The company should put the greatest
emphasis on which one of the bowing when assigning the discount rates?
(A) the geographic location where the project will be undertaken
(B) the currency exchange rate that will apply to the project
(C) the various types of risk associated with the project
(D) the experience o the managers of the division which is proposing the project
58 Present value of future cash flows is divided by an initial cost of project to calculate
(A) negative index
(B) exchange index
(C) project index
(D) profitability index
59 The project's expected monetary loss or monetary gain by discounting all cash outflows and
inflows un required rate of return is closeted as
(A) Net present value
(B) Net future value
(C) Net discounted value
(D) Net recorded cash value
60 What is the net present value?
(A) the future value of a project's cash flows plus its initial cost
(B) the present value of a project's cash flows plus its initial cost
(C) the future value of a project's cash flows minus its initial cost
(D) the present value of a project's cash flows minus its initial cost
61 Risk of a capital budgeting can be incorporated:
(A) Adjusting the Cash flows
(B) Adjusting the Discount Rate
(C) Adjusting the life
62 The span of time within which the investment made for the project will be recovered by the
net returns of the project is known as
(A) Period of return
(B) Payback period
(C) Span of return
63 Probability- tree analysis is best used when cash flows are expected to be:
(A) Independent over time.
(B) Risk-free.
(C) Related to the cash flows in previous periods.
(D) Known with certainty.
64 If the profitability index is >1, then:
(A) Accept the project
(B) Reject the project
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(C) Profitability index method does not determine the feasibility of project
65 Which one of the following projects- A, B. C or D. should be accepted? The expected return
on the market is 16% and the risk-free rate is 6%
(A) Project A, which has a beta of 0.50 and expected return of 11.2%
(B) Project B, which has a beta of 2.50 and expected return of 25.4%
(C) Project C, which has a beta of 1.25 and expected return of 18.2%
(D) Project D, which has a beta of 100 and expected return of 15.8%
66 Capital budgeting process includes:
(A) identification of investment opportunities
(B) Decision making
(C) Implementation and controlling of projects
67 Which of the following is an example of a capital 2 investment project?
(A) Replacement of worn out equipment
(B) Expansion of production facilities
(C) Development of employee training programs
(D) All of the above are examples of capital investment projects.
68 …………………is the difference between the sum total of present values of all the future
cash inflows and outflows
(A) Net Present Value
(B) Internal Rate of Return
(C) Profitability Index
69 The coefficient of variation of net present value measures the
(A) Total risk of the project
(B) Relative risk of the project
(C) Highest expected value of net present value
(D) Market risk of the project
70 Which of the following is modern/discounted cash flow technique?
(A) Net Present Value (NPV) Method
(B) Internal Rate of Return (IRR) Method
(C) Profitability Index (PI)
(D) Average Rate of Return (ARR) Method
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2: Cost of Capital
1 Floatation costs are those expenses which are incurred while.
(A) Issuing securities
(B) Repayment of debts
(C) Negotiations for business deal
(D) Repayment of equity and debts
2 Which of the following is floatation cost?
(A) Commission of underwriters
(B) Brokerage paid on issue of securities
(C) Stationery expenses on issue of securities
3 Flower Inc. is issuing preferred shares to raise capital. Each preferred share will be issued
with a par value of $200 and a cumulative dividend I of $18. The preferred shares will result
in after-tax underwriting expenses of S3 per share. What is the cost of issuing the preferred
shares?
(A) 9.14%
(B) 9.00%
(C) 7.50%
(D) 10.50%
4 Market values are often used in computing the weighted average cost of capital because
(A) This is the simplest way to do the calculation.
(B) This is consistent with the goal of maximizing shareholder value.
(C) This is required by the Securities & Exchange Board of India.
(D) This is a very common mistake.
5 A firm's overall cost of equity is
(A) is generally less that the firm's WACC given a leveraged firm
(B) unaffected by changes in the market risk premium.
(C) highly dependent upon the growth rate and risk level of the firm.
(D) generally, less than the firm's after-tax cost of debt.
6 Jain & Co sells a new issue of 6% irredeemable debentures to raise 100,000 and realizes
the full face value of 100. The company falls in 40% tax bracket. Debts are issued at par.
Find Cost of Capital
(A) 4%
(B) 6%
(C) 2.4%
(D) 3.6%
7 Classic Industries sells a new issue of 8%, 1000 irredeemable debentures of 100 each @ 20
% premium. The company falls in 20% tax bracket. Find Cost of Capital
(A) 8%
(B) 6%
(C) 5.33%
(D) 1.6%
8 The cost of retained earnings are often taken as equal to the
(A) Cost of debt
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(B) Cost of preference share

(C) Cost of equity
9 The weights are said to be book value weights if the proportion of different sources are
ascertained on the basis of the
(A) Face value
(B) Market value
10 ABC Ltd. has expected earnings at 30 per share which is growing at 8% annually. Company
follows fixed pay-out ratio of 50%. The market price of its share is 300. Find the Cost of new
equity if the firm issues fresh shares at current market price but with floatation cost of 5%
(A) 13.68%
(B) 11%
(C) 12%
(D) 13%
11 Suraiya Limited issued 4,000 12% preference shares of 100 each at a discount of 5%. Costs
of raising capital are 8,000. Compute the cost of preference capital.
a) 12%
(B) 12.1%
(C) 12.9%
(D) 12.8%
12 In calculating the costs of the individual components of a firm's financing, the corporate tax
rate is important to which of the following component cost formulas?
(A) Equity share capital
(B) Debt
(C) Preference shares
13 Calculate the WACC for the Zodiac Company given the following information about its capital
structure.
Capital Component Value Cost
Debt 60,000 9%
Preferred stock 50,000 11%
Common stock 90,000 14%
2,00,000
You are required to compute the weighted average cost of capital
(A) 10%
(B) 11%
(C) 12%
(D) 11.75%
14 A company issues 90 days commercial papers of the face value of 1,000 at 980. The credit
rating expenses are 0.6% of the size of issue, issuing and paying agent charges are 0.25%
and stamp duty is to be paid @ 0.20%. You are required to calculate cost of issuing
commercial papers
(A) 10.89%
(B) 12.56%
(C) 15.14%
(D) 14.73%
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15 Periwinkle Inc. paid a dividend of $1.65 last year and its stock is currently selling for $33.60 a
share. The company is expected to grow at 7.5% indefinitely. Estimate the firm's cost of
retained earnings.
(A) 10%
(B) 12.8%
(C) 13.8%
(D) 12%
16 The cost of equity capital is all of the following except:
(A) the minimum rate that a firm should earn on the equity-financed part of an investment.
(B) a return on the equity-financed portion of an investment that, at worst, leaves the market
price of the stock unchanged.
(C) by far the most difficult component cost to estimate.
(D) generally lower than the before-tax cost of debt
17 The Mountaineer Airline Company has consulted with its investment bankers and determined
t' at they could issue new debt with a yield of 8%. It Mountaineer ' marginal tax rate is 39%,
what is the after-tax cost of debt to Mountaineer?
(A) 8%
(B) 6%
(C) 4.88%
(D) 6.88%
18 To compute the required rate of return for equity in a company using the CAPM, it is
necessary to know all of the following except:
(A) The Risk free rate
(B) The Beta for the firm
(C) The earnings for the next time period
(D) The market return expected for the time period
19 Weighted average cost of capital represents an averaging of all risks of the company and
can be used to evaluate investments
(A) True
(B) False
(D) Data Incomplete
20 The weighted average cost of capital (WACC) is the of the costs of different components of
the capital structure of a firm.
(A) Weighted average
(B) Simple average
(C) Timely average
(D) Quarterly average
21 ………………. is the minimum rate of return that a company must earn on the equity
financed portion of its investments in order to maintain the
market price of the equity share at the current level.
(A) Cost of equity capital
(B) Cost of preference share capital
(C) Cost of debentures
(D) Cost of retained earnings
22 A company issues 10,000, 8% preference shares of 100 each redeemable after 20 years at
face value. The floatation costs are 3 per share find case of capital.
(A) 8%
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(B) 6%
(C) 8.27%
(D) 7.84%
23 Given, the yield on debt is 10% and the risk premium as 5%, calculate the cost of equity.
(A) 10%
(B) 5%
(C) 15%
(D) 20%
24 ……………………...is calculated after assigning different weights to the components
according to the proportion of that component in the capital structure
(A) Cost of equity
(B) Cost of debt
(C) Weighted Average cost of capital
(D) Simple Average cost of capital
25 Given, the yield on debt is 12% and the risk premium as 2%, calculate the cost of equity.
(A) 10%
(B) 12%
(C) 8%
(D) 14%
26 …………………. can be defined as the cost of additional capital introduced in the capital
structure
(A) Weighted average cost of capital
(B) Simple Average cost of capital
(C) Marginal Cost of capital
(D) Liquid cost of capital
27 A company has issued 5,000 equity shares of 100 each. Its current market price is 95 per
share and the current dividend is 4.5 per share. The dividends are expected to grow at the
rate of 6%. Compute the cost of equity capital
(A) 10%
(B) 11%
(C) 12%
(D) 9%
28 A firm issues debentures worth 1,00,000 and realizes 98,000 after allowing 2% commission
to brokers. They carry an interest rate of 10% and are due for maturity at the end of 10th
year. The company has 40% tax bracket. Calculate cost of debt after tax.
(A) 10%
(B) 6%
(C) 6.18%
(D) 4%
29 Factors affecting cost of capital can be:
(A) Controllable factors
(B) Uncontrollable factors
30 Tax rates and interest rates prevailing in economy are non-controllable factor that affects the
cost of capital of company
(A) True
(B) False
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(D) Data Incomplete
31 If the cost of debt for Cowboy Energy Services is 10% (effective rate) and its tax rate is 40%
then Kd is:
(A) 10%
(B) 5%
(C) 6%
(D) 4%
32 refers to the cost of long term debentures/bond
(A) Cost of retained earning
(B) Cost of debt
(C) Cost of company
(D) Cost of short-term debt
33 Kritika Limited is currently financed with 1, 000,000 of 7% bonds, and 2, 000,000 of common
stock. The stock has a beta of 1.5, and the risk tree rate is 4%, and the market risk premium
is 3.5%. The marginal tax rate for a corporation of AKL's size is 35%, What is Kritika Limited
WACC?
(A) 5.68%
(B) 6.68%
(C) 7.68%
(D) 8.68%
34 Cost of Debt is calculated
(A) Before Tax
(B) After tax
35 Jain & Co sells a new issue of 6%, 1000 irredeemable debentures of 100 each @ 10%
discount. The company falls in 40% tax bracket. Find Cost of Capital
(A) 4%
(B) 6%
(C) 2.4%
(D) 3.27%
36 X Limited issues its Bond at par @ 1,000 per bond. These bonds will mature after 20 years
at par and bears coupon rate of 10%, Coupons are annual. The bond will sell for par but
flotation costs amount to 50 per bond. What is the after-tax cost of debt for X Limited?
(A) 10%
(B) 6%
(C) 8%
(D) 7%
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3: Leverage
1 Measure of business risk is
(A) Operating leverage
(B) Financial leverage
(C) Combines leverage
(D) Working capital leverage
2 ……………..depends upon fixed cost and variable cost
(A) Operating Leverage
(B) Financial Leverage
(C) Combined Leverage
3 …………. expresses the relationship between the revenue in the account of sales and the
taxable income
4 Output (units) = 3,00,000
Fixed cost = 3,50,000
Unit variable cost = 1.00
Interest expenses = 25,000
Unit selling price= 3.00
Applicable tax rate is 35%
Calculate Financial Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
5 The traditional approach towards the valuation of a company assumes:
(A) that the overall capitalization rate holds constant with changes in financial leverage.
(B) that there is an optimum capital structure.
(C) that total risk is not altered by changes in the capital structure.
(D) that markets are perfect
6 If there is a 10% increase in sale, EBIT increase by 35% and if sales increase by 6%, taxable
income will increase by 24%. Operating leverage must be
(A) 1.15
(B) 3.50
(C) 4.00
(D) 2.67
7 Combined Leverage is obtained from Operating Leverage and Financial Leverage by their:
(A) Addition
(B) Subtraction
(C) Multiplication
(D) Any of these
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8 High financial leverage is not good as it indicates the large content of

(A) Fixed cost
(B) Fixed interest charges
(C) Variable cost charges
(D) Contribution
9 Operating Leverage is calculated as:
(A) Contribution/ EBIT
(B) EBIT/IPBT
(C) EBIT /Interest
(D) EBIT /Tax
10 Business risk can be measured by:
(A) Financial leverage
(B) Operating leverage
(C) Combined leverage
11 Use of Preference Share Capital in Capital structure
(A) Increases Operating Leverage
(B) Increases Financial Leverage
(C) Decreases Operating Leverage
(D) Decreases Financial Leverage
12 It a firm has no debt, which one is correct?
(A) Operating Leverage is one,
(B) Financial Leverage is one,
(C) Operating Leverage is zero,
(D) Financial Leverage is zero
13 Trout Ltd. produces a single product that has a contribution margin of 60% per unit and sold
500,000 units last year. Trout has a degree of operating leverage of 1.60 and a degree of
financial leverage of 1.20 tor the current year. It the sales volume were to increase by 10%
this coming year, what would be the expected percentage increase in earnings per share
(rounded to the nearest percent)?
(A) 16%
(B) 12%
(C) 6%
(D) 19%
14 Which combination is generally good for firms
(A) High Operating Leverage, High Financial Leverage
(B) Low Operating Leverage, Low Financial Leverage
(C) High Operating Leverage, Low Financial Leverage
(D) None of these
15 Financial Leverage is zero if:
(A) EBIT = Interest
(B) EBIT = Zero
(C) EBIT = Fixed Cost
(D) EBIT =Pref. Dividend
16 Which of the following is correct?
(A) Combined Leverage- Operating Leverage + Financial Leverage
(B) Combined Leverage-Operating Leverage-Financial Leverage
(C) Combined Leverage= Operating Leverage x Financial Leverage
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(D) Combined Leverage-Operating Leverage-Financial Leverage

17 High degree of financial leverage means:
(A) High debt proportion
(B) Lower debt proportion
(C) Equal debt and equity
(D) No debt
18 Details of S Ltd. are given below:
Particulars Rs. In lakh
Fixed Cost (excluding interest) 2.04
Sales 30.00
12% Debentures (100 each) 21.25
Equity share capital (10 each) 17.00
Operating & Combined Leverage are 1.4 & 2.8 respectively. Income Tax Rate is 30%,
Calculate EPS.
(A) 1.50
(B) 1.55
(C) 1.05
(D) 1.00
19 Operating leverage is 4. This means 10% change in sales will cause
(A) 4% change in variable cost
(B) 40% change in EPS
(C) 4% change in EBIT
(D) 40% change in EBIT
20 EBIT = 4,00,000
Interest = 80,000
Combined leverage =?
(A) Sufficient data is not given
(B) 3.12
(C) 3.215
(D) 3.125
21 Which of the following figure is not required to calculate financial leverage?
(A) EBT
(B) Contribution
(C) Sales
(D) Market price
22 ……………. depends upon the operating profits
(C) Both(A) and (B)
23 In which of the following case it can be said that the firm has favourable financial leverage?
(A) When interest on loan funds is greater than internal rate of return (IRR),
(B) When interest on loan funds is less than return on investment (RO1)
(C) When return on investment (ROD) is equal to than internal rate of return (IRR).
(D) When return on investment (ROD) is greater than interest on loan funds.
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24 Output (units) = 3,00,000

Interest expenses = 25,000
Unit selling price = 3.00
Calculate Operating Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
25 Combined leverage is 3.125. This means 10% change in Sales will cause
(A) 31.25% change in PAT
(B) 31.25% change in EPS
(C) 31.25% change in capital employed
(D) Both (A) and (B)
26 Which of the following is correct formula to calculate Operating Leverage?
(A) Operating Leverage=
(B) Operating Leverage=
(C) Operating Leverage=
(D) Operating Leverage=
27 Operating leverage analyses the relationship between sales level and EPS.
(A) True
(B) False
(D) Data Incomplete
28 If operating leverage is 4, this means that
(A) 4% change in sales will cause 1% change in EBIT.
(B) 1% change in sales will cause 4% change in EBIT.
(C) 1% change in sales will cause 4% change in EPS.
(D) 4% change in sales will cause 1% change in EPS.
29 ………….measures the sensitivity of return in investment of charges in the level of current
assets.
(D) Working Capital Leverage
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30 If three Options are available to the company and operating leverage is same in all the three
options however, financial leverage is increasing then combined leverage will be
(A) Same in all the three options
(B) Increasing in all the three options
(C) Dressing in all the three options
(D) Not possible to tell without figures.
31 The term Leverage in general refers to a-

(A) Relationship between fixed cost and profit.
(B) Relationship between sales and fixed cost.
(C) Relationship between two interrelated variables.
(D)Relationship between two unrelated variables.
32 In the context of operating leverage break-even analysis, if selling price per unit rises and all
other variables remain constant, the operating break-even point in units will:
(A) Fall
(B) Rise
(C) Stay the same
(D) Still be indeterminate until interest and preferred dividends paid are known
33 Lower financial leverage is related to the use of do
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
34 Degree of operating leverage can be computed by
(A) %change in Operating Income/% change in sales
(B) %Sales/% Profit
(C) Sales/Cost of Production
(D) Sales/Fixed Cost
35 Output (units)= 3,00,000
Interest expenses= 25,000
Unit selling price = 3.00
Calculate Combined Leverage.
(A) 2.67
(B) 2.30
(C) 2.00
(D) 2.15
36 Financial leverage is 2.5. This means 10% change in EBIT will cause
(A) 2.5% change in EBT
(B) 2.5% change in EPS
(C) 25% change in sales
(D) 25% change in EBT and EPS
37 If EBIT increases by 6%, taxable income increases by 6.9%. If sales increase by 6%, taxable
income will increase by 24%
Financial leverage must be
(A) 1.19
1.19
(B) 1.13
(C) 1.12
(D) 1.15
38 If combined leverage is 2 and financial leverage is 1.25 then operating leverage will be
(A) 0.625
(B) 2.50
(C) 1.60
(D) Data given is not sufficient
39 A high operating leverage indicates
(A) Highly favourable situation as it consists of low fixed costs
B) Highly risky situation as it consists of large interest costs.
(C) Highly favourable situation as it consists of higher
(D) Highly risky situation as it consists of large fixed
40 ……….. is the ratio of net operating income before
(A) Financial Leverage
(B) Operating Leverage
(C) Operation Leverage
(D) Fiscal Leverage
41 A firm's degree of total leverage (DTL) is equal to its degree of operating leverage
……………its degree of financial leverage (DFL.)
(A) Plus
(B) Minus
(C) Divided by
(D) Multiplied by
42 More operating leverage leads to
(A) Less financial risk
(B) More financial risk
(C) More business risk
(D) Less business risk
43 If financial leverage is 2.5, this means that
(A) 2.5% change in EBIT will cause 1% change in EBT
(B) 1% change in sales will cause 2.5% change in EBT
(C) 2.5% change in sales will cause 1% change in EBT
(D) 1% change in EBIT will cause 2.5% change in EBT
44 If sales increase by 6% taxable income i.e. PAT and EPS will increase by 24%.
Combined leverage must be
(A) 3
(B) 4
(C) 5
(D) 6
45 Contribution = 7,00,000
Interest = 3,00,000
Financial leverage =?
(A) 2.0
(B) 1.5
(C) 2.5
(D) 1.0
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46 EBIT= 40,000
Variable cost = 2,40,000
Sales = 4,00,000
Operating leverage=?
(A) 3.5
(B) 4.125
(C) 4.0
(D) 3.125
47 If financial leverage in one then which of following two figures will be the same
(A) Sales; contribution
(B) Contribution: EBIT
(C) EBIT; EBT
48 Financial leverage = 1.5465
EBIT = 1,38,000
Interest = 18,000
Tax rate = 35%
Capital structure of the company consists of equity shares and preference shares.
Amount of Preference Dividend=?
(A) 19,950
(B) 19,898
(C) 20,000
(D) 19,899
49 If combined leverage is 2.2926 and operating leverage is 2.1429 then financial leverage will
be
(A) 1.0699
(B) 0.9347
(C) 49128
(D) Data given is not sufficient
50 Operating leverage indicates the tendency of operating profits (EBI) to vary
disproportionately with-
(A) Profit
(B) Fixed cost
(C) Sales
(D) EPS
51 A firm has a DOL of 4.5 at Q units. What does this tell us about the firm?
(A) If sales rise by 4.5%, then EBIT will rise by 1%
(B) If EBIT rises by 4.5%, then EPS will rise by 1%
(C) If EBIT rises by 1%, then EPS will rise by 4.5%
(D) If sales rise by 1%, then EBIT will rise by 4.5%
52 Where a company has large amount of fixed interest charges, the financial leverage will be
(A) High
(B) Low
(C) Negative
(D) Unreliable
53 There is no operating leverage if there is no
(A) Profit
(B) Sales
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(C) Fixed cost

(D) EPS
54 If the fixed costs are high, the operating leverage will also be
(A) Low
(B) High
(C) Zero
(D) Negative
55 A company has sales of 1 lakh. The variable costs are 40% of the sales while the fixed
operating costs amount to 30,000. The amount of interest on long term debts is 10000. You
are required to calculate the combined leverage.
(A) 4
(B) 2
(C) 3
(D) 5
56 Operating leverage is directly to business risk
(A) Proportional
(B) Not proportional
(C) Unrelated
(D) Not related
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4: Capital Structure
1 As per Traditional approach, debt should exist in the capital structure only up to a specific
point. beyond which, any increase in leverage would result in the
(A) Reduction
(B) Increase
(C) Constant
(D) No change
2 Capital Employed is-
(A) Fixed Assets + Cash + Bank
(B) Shareholders Funds + Long Term Funds
(C) Assets-Net Worth
(D) Long Term Funds + Current Liabilities- Current Assets
3 Which of the following changes in capital structure would you recommend for growth at faster
rate?
(A) Incorporate more retained earnings out of profit and loss account.
(B) In corporate debt in its capital structure to a greater extent.
(C) Merge with other companies.
(D) Pay more dividend to equity shareholders.
4 In horizontal capital structure.
(A) expansion of the firm takes place by issuance of debt securities.
(B) expansion of the firm takes place by issuance of debt securities and preferred stocks.
(C) expansion of the firm takes in a lateral manner, ie. through equity or retained earning
only.
(D) expansion of the firm takes place by issuance of short term and marketable securities.
5 . ……………. To have optimal capital structure the firm must fulfill the following conditions:
1. return on investment should be greater than cost of investment.
2. There should be minimum financial risk.
3. There is absence of equity finance.
4. The capital structure should be flexible
5. Cost of investment should be greater than ROL. Select correct answer from the options
given below.
(A) 3, 5, & 1
(B) 4, 2, & 5
(C) 2, 1, & 4
(D) 2 & 5
6 According Modigliani & Miller Approach
(A) Individuals (arbitragers) through the use of personal leverage can alter corporate
leverage.
(B) Financial risk increases with more debt content in the capital structure.
(C) The total value of a firm is not affected by its capital structure
7 Assertion (A): High capital gearing leads to greater speculation.
Reason (R) Proportion of equity share capital in relation to the total capital comprising the
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other securities is small leading to capitalization being highly geared.

(A) Both A and R are true and R is the correct explanation of A.
(B) Both A and R are true but R is not a correct explanation of A.
(C) A is true but R is false
(D) A is false but R is true
8 EBIT of R Ltd. is 5,00,000. The company has 10% 20,00,000 debentures. The equity
capitalization rate ie. Ke is 16%. Calculate market value of firm as per Net Income (NI)
Approach. Ignore taxation.
(A) 20,00,000
(B) 38,75,000
(C) 38,57,000
(D) 20,75,000
9 Which one of the following is a correct statement regarding a firm's weighted average cost of
capital (WACC)?
(A) The WACC can be used as the required return for all new projects with similar risk to that
of the existing firm.
(B) An increase in the market risk premium will tend to decrease a firm’s WACC.
(C) A reduction in the risk level of a firm will tend to increase the firm's WACC. I
(D) The WACC will decrease when the tax rate decreases for all firms that utilize debt
financing.
10 Two firms that are virtually identical except for their capital structure are selling in the market
at different values. According to M&M:
(A) one will be at greater risk of bankruptcy
(B) the firm with greater financial leverage will have the higher value.
(C) this proves that markets cannot be efficient.
(D) this will not continue because arbitrage will eventually cause the firms to sell at the same
value.
11 Financial BEP is the level of EBIT at which EPS is
(A) Zero
(B) One
(C) Maximum
(D) Minimum
12 In calculating the proportional amount of equity financing employed by a firm, we should use:
(A) The common stock equity account on the firm's balance sheet.
(B) The sum of common stock and preferred stock on the balance sheet.
(C) The book value of the firm.
(D) The current market price per share of common stock times the number of shares
outstanding.
13 EBITDA is used to analyze a company's operating profitability before
(A) non-operating expenses (such as interest )
(B) non-cash charges (depreciation and amortization).
(C) Both(A) and (B)
14 Which is external source of finance?
(A) Letters of Credit
(B) Advance from customers
(C) Finance from Companies
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15 According to…………… approach, there is a relationship between capital structure and the
value of the firm and therefore, the firm can affect its value by increasing or decreasing the
debt proportion in the overall financial mix.
(A) Net Income approach
(B) Net Operating Income approach
(C) Modigliani Miller (MM) approach
(D) Traditional Approach
16 ……………. refers to the mix of a firm’s capitalization and includes long term sources of
funds.
(A) Leverage
(B) Capital structure
(C) Debt mix
(D) Owner's equity
(A) capital structure of the company should generate maximum returns to the shareholders
without adding additional cost to them
(B) The capital structure should be flexible. It should be possible for ai company to adapt its
capital structure with a minimum cost and delay if warranted by a changed situation
(C) The capital structure should be determined without considering the debt capacity of the
company
18 In…………………there is a small component of equity capital, reasonable level of retained
earnings but an ever increasing component of debt.
(A) Horizontal capital structure
(B) Vertical capital structure
(C) Pyramid Shaped capital structure
(D) Inverted Pyramid Shaped capital structure
19 ………is "The mix of a firm's permanent long term financing represented by debt, preferred
stock and common stock equity"
(A) Capital Budgeting
(B) Capital Rationing
(C) Capital Structure
(D) Financial Leverage
20 A…………………. has a large proportion consisting of equity capital and retained earnings
which have been ploughed back into the firm over a considerably large period of time.
(A) Horizontal capital structure
(B) Vertical capital structure
(C) Pyramid Shaped capital structure
(D) Inverted Pyramid Shaped capital structure
21 Which of the following is not the capital structure theories /approach?
(C) Modigliani Miler (MM) approach
(D) Sensitivity Analysis approach
22 The………………….to capital structure advocates that there is a right combination of equity
and debt in the capital structure, at which the market value of a firm is maximum
1.25

(C) Modigliani Miller (MM) approach
23 The cost of preferred stock:
(A) is equal to the dividend yield.
(B) is equal to the yield to maturity.
(C) is highly dependent on the dividend growth rate.
(D) is independent of the stock's price.
24 EBITDA, an acronym for:
(A) Earnings before interest, taxes, depreciation and amortization
(B) Earnings before tax
(C) Earnings before Interest and tax
(D) Earnings before Interest, tax and depreciation
25 Which of the following capital structure consist of zero debt components in the structure mix?
(A) Pyramid Shaped Capital Structure
(B) Inverted Pyramid Shaped Capital Structure
(C) Horizontal Capital Structure
(D) Vertical Capital Structure
26 Which of the following statement is incorrect?
(1) High debt funds in capital structure increases EPS
(2) High debt funds increase the operating or business risk.
(A) Both Statement 1 and Statement 2 are correct
(B) Statement 1 is correct while Statement 2 is incorrect.
(C) Statement 2 is correct while Statement 1 is incorrect.
(D) Both Statement 1 and Statement 2 are incorrect.
27 The Proportion of leverage
(A) Debt to equity
(B) Revenue to Cost
(C) Debt to interest
(D) Revenue to EPS
28 A firm has sales of 75,00,000, variable cost of 42,00,000 and fixed cost of 6,00,000. It has a
debt of 45,00,000 at 9% and equity of 55,00,000. What is the firm's ROI?
(A) 72%
(B) 27%
(C) 32%
(D) 23%
29 The use of EBIT- EPS analysis indicates to management the projected………………..for
different financial plans
(A) Revenue
(B) Cost
(C) EPS
(D) Dividend
30 As per Value of a firm depends solely on its future earnings stream, and hence its value is
unaffected by its debt/equity mix
(B) Net Operating income approach
(C) Modigliani Milier (MM) approach
1.26

31 ………………is the level of EBIT which covers all fixed financing costs of the company.
(A) Financial Break Even Point
(B) Operating Break Even-up Point
(C) Combined Break Even Point
32 Retained earnings are
(A) an indication of a company's liquidity.
(B) the same as cash in the bank.
(C) not important when determining dividends
(D) the cumulative earnings of the company after dividends
33 Indifference Point is the point at which different sets of debt ratios i (percentage of debt to
total capital employed in the company) gives the same
(A) EPS
(B) EBIT
(C) Revenue
(D) Cost
34 With the help of Interest Coverage Ratio (ICR) ratio an effort is made to find out
(A) How many times the profit after tax (PAT) is available to the payment of interest.
(B) How many times the net operating profit after tax (NOPAT) is available to the payment of
interest.
(C) How many times the EBIT is available to the payment of interest.
(D) Most suitable bank for negotiation.
35 Capital Structure of a firm
(A) Is a reflection of the overall investment and financing strategy of the firm.
(B) Shows how much reliance is being placed by the firm on external sources of finance and
how much
internal accrual is being used to finance expansions
(C) Means the structure or constitution or break-up of the capital employed by a firm.
36 Business risk is influenced by
(A) Revenue
(B) Variable cost
(C) Fixed assets
37 How the economic value added (EVA) is calculated?
(A) It is the difference between the market value of the firm and the book value of equity.
(B) It is the firm's net operating profit after tax (NOPAT) less cost of capital.
(C) It is the net income of the firm less cost that equals the weighted average cost of capital
multiplied by the book value of liabilities and equities.
(D) None of the above is correct.
38 Capital structure weights are based on the:
(A) market value of a firm’s equity and the face value of its debt.
(B) initial issue values of a firm's debt and equity.
(C) firm's dividend and bond yields.
(D) market values of a firm's debt and equity.
39 Sam Toys is considering developing and distributing anew board game tor children. The
project is similar in risk to the firm’s current operations. The firm maintains a debt-equity ratio
1.27
of 0.40 and retains all profits to fund the firm's rapid growth. How should the firm determine is
cost of equity?
(A) by adding the market risk premium to the alter tax cost of debt
(B) by multiplying the market risk premium by (1- 0.40)
(C) by using the dividend growth model
(D) by using the capital asset pricing model
40 Which of the following is advantage of EVA?
(A) The use of EVA is a substitute for detailed analysis of business drivers.
(B) EVA improves the overall cost of capital.
(C) In some cases, company pay bonuses to the employees on the basis of EVA generated.
Thus it promotes the employees for working hard for generating higher revenue.
(D) EVA improves the skill of financial analyst.
41 Which of the following is not a recognized approach for determining the cost of equity?
(A) Dividend discount model approach
(B) Before-tax cost of preferred stock plus risk premium approach
(C) Capital-asset pricing model approach
(D) Before-tax cost of debt plus risk premium approach
42 Which of the following risk can be eliminated by an investor?
(A) Diversifiable risk
(B) Non-diversifiable risk
43 Consider statements given below:
1. A debt-equity ratio of 2:1 indicates that for every 1 unit of equity, the company can raise
2 units of debt.
2. The cost of floating a debt is greater than the cos of floating an equity issue.
State True or False:
(A) 1-True, 2-True
(B) 1-False, 2-True
(C) 1-False, 2-False
(D) 1-True, 2-False
44 The term EVA' is used for:
(A) Extra Value Analysis
(B) Economic Value Added
(C) Expected Value Analysis
(D) Engineering Value Analysis
45 The rate of return on its existing assets that a firm must earn to maintain the current value of
the firm’s stock is called the:
(A) Rectum on equity
(B) Internal rate of return
(C) Weighted average cost of capital
(D) Current yield
46 All else constant, which one of the following will increase a firm's cost of equity if the firm
computes that cost using the security market line approach? Assume The firm currently pays
an annual dividend of a share and has a beta of 1.2.
(A) a reduction in the dividend amount
(B) an increase in the dividend amount
(C) a reduction in the market rate of return
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(D) a reduction in the risk-free rate

47 As per Net Income approach it capitalization rat increases, market value o firm
(A) Decreases
(B) Increases
(C) Remains constant
(D) Without data it is not possible to tell what full happen
48 represents the economic profits generated a business above and beyond the minimum
return required by all providers of capital.
(A) Shareholder Value Added (SVA)
(B) Economist Value Added (EVA)
(C) Market Makers Value Added (MMVA)
(D) Debt holders Value Added (DVA)
49 Key sources of value (earning an excess return) for a company can be attributed primarily to
(A) competitive advantage and access to capital
(B) quality management and industry attractiveness
(C) access to capital and quality management
(D) industry attractiveness and competitive advantage
50 Economic value-added measures
(A) the excess earning over P/E ratio
(B) the excess returns over cost of capital.
(C) the excess returns over existing EPS
(D) the excess earning over ROE
51 Which of the following action can be taken to improve EVA2
(A) Improve Asset Turnover Ratios
(B) Change the capital structure by substituting lower cost debt for higher cost equity
52 EVA=?
(A) PAT- (Capital Employed × WACC)
(B) NOPAT- (Capital Employed × K)
(C) NOPAT- (Capital Employed × WACC)
(D) NOPAT - (Total Assets X K, ×K)
53 The non-diversifiable risk is attributable to factors that affect
(A) Particular business
(B) All businesses
(C) Particular project
(D) Not to all businesses
54 An increase in market value of preferred stock will ……….the cost of preferred stock.
(A) increase
(B) not affect
(C) either increase or decrease
(D) decrease
55 If a company's EVA is negative.
(A) it is destroying shareholders wealth even though it may be reporting positive and growing
EPS or return on capital employed
(B) it is destroying the overall cost of capital of the firm
(C) it is increasing the overall cost of capital of the firm causing low NPV
(D) it is increasing the overall cost of capital of the firm which can be adjusted by risk
1.29
premium
56 describes the relationship between non diversifiable and return for securities
(A) Risk Reward Model
(B) CAPM Model
(C) MM Model
(D) Stewart Model
57 The New York based financial advisory postulated a concept of economic value added.
(A) Shawn Stewart & Co.
(B) Stern Stewart & Co.
(C) Stern Shawn & Co.
(D) S. S. & Co.
58 Which of the following is vulnerable to hostile takeovers?
(A) Horizontal Capital Structure
(B) Vertical Capital Structure
(C) Pyramid Shaped Capital Structure
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5: Dividend Policy
1 If return on investment(r) > market capitalization rate (k) then firm is referred to as:
(A) Growth firms
(B) Normal firms
(C) Declining firms
2 Consider following two statements:
(1) Buyback can be used by companies to defend against hostile takeovers since they
increase the proportion of debt in a firm's capital structure.
(2) After a 3-for-1 stock split, a company's price per share will fall and its number of shares
outstanding will rise total value remaining the same.
Which of the above statement is correct?
(A) (2) only
(B) Neither (1) nor (2)
(C) (1) only
(D) Both (1) and (2)
3 As per the manner in which earnings are divided into dividends and retained earnings does
not affect this value.
(A) Walter's Model
(B) Gordon's Model
(C) MM. Approach
4 A………… occurs when there is an increase in the number of shares outstanding by
reducing the par value of stock.
(A) Stock split
(B) Stock dividend
(C) Extra dividend
(D) Regular dividend
5 Gordon's Model is also known as:
(A) Dividend capitalization model
(B) Dividend Growth model
(C) Both(A) and (b)
(D) Walter's Model
6 What method of stock repurchase occurs when the buyer seeks bids within a specified price
range and accepts the lowest price that will allow it to acquire the entire block of securities
desired?
(A) Dutch-auction
(B) Fixed-price
(C) Open-market
(D) Fair-warning
7 X Company Ltd., has 1,00,000 shares outstanding the current market i price of the shares 15
each. The company expects the net profit of 2,00,000 during the year and it belongs to a rich
class for which the appropriate capitalization rate has been estimated to be 20%. The
company is considering dividend of 2.50 per share for the current year. What will be the
1.31
price of the share at the end of the year if the dividend is not paid
(A) 10
(B) 15.50
(C) 16
(D) 18
8 The dividend payout ratio describes:
(A) The proportion of earnings paid as dividends
(B) The relationship of dividends per share to market price per share
(C) The percentage change in dividends this year compared to last year
(D) Dividends as a percentage of the price/earnings ratio
9 Which of the following is NOT a cash outflow for the firm?
(A) depreciation.
(B) dividends.
(C) interest payments.
(D) taxes.
10 Some ratios are given below:
1. EPS
2. P/E Ratio
3. Net Profit Ratio
4. DPS
5. Dividend Yield Ratio
Which of the above ratio can be classified as market lest ratio?
(A) Except 5 all other
(B) 2 & 5 only
(C) 1, 3 &
(D) All except 3
11 MM Model argues that dividend is irrelevant as
(A) the value of the firm depends upon earning power
(B) the investors buy shares for capital gain
(C) dividend is payable after deciding the retained earnings
(D) dividend is a small amount
12 Which of the following statements is consistent with dividend irrelevance theory?
(A) Investment decisions are the sole determinant o shareholder wealth
(B) Making homemade dividends causes investors to incur transaction costs
(C) Companies with stable dividend policies build up shareholder clienteles
(D) Investors like to maintain the real value of their dividend payments.
13 Dividend payout ratio is:
(A) the dividend yield plus the capital gains yield
(B) dividends per share divided by earnings per share.
(C) dividends per share divided by par value per share.
(D) dividends per share divided by current price per share
14 As per provisions of the Companies Act, 2013, dividend can be paid
1. Out of current profit
2. Out of revaluation reserve
3. Out of profits of previous financial years
4. Out of money provided by the Central or State Government
5. Out of free reserve
Select the correct answer from the options given below.
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(A) 1 and 5 only

(B) 1,2, 3 & 5
(C) 1, 3 and 5 only
(D) 1, 3, 4 and 5
15 Determination of value of shares, given the following data: DP Ratio = 40%
Retention Ratio = 60% Cost of capital = 17% R= 12%
EPS= 20
(A) 80
(B) 81.63
(C) 62.50
(D) 100
16 After declaration of dividend, the company has to pay dividend within………….. of
declaration of dividend. If amount of dividend remains unpaid or unclaimed for 30 days of
declaration of dividend, then in next……………. the company has to transfer the amount
unclaimed to the to a special account in any scheduled bank to be called the "Unpaid
Dividend Account".
(A) 5 days; 5 days
(B) 30 days; 7 days
(C) 30 days; 5 days
(D) 10 days; 7 days
17 Assumptions under M-M hypothesis includes:
(A) Capital markets are perfect- Investors are rational, information is freely available,
transaction cost are nil.
(B) There are no taxes- No difference between tax rates on dividends and capital gains.
(C) The firm has a fixed investment policy which will not change. So if the retained earnings
are reinvested, there will not be any change in the risk of the firm.
18 As per Walter's Model when Ra= Re, market price will remain same when
(A) Retention ratio increases
(B) Retention ratio decreases
(C) Retention ratio increase or decreases
19 A company has the following facts: Cost of capital (ke) = 0.10
Earnings per share(E) = 10
Rate of return on investments ( r) =8%
Dividend payout ratio: 50%
What is the market price of the shares.
(A) 90
(B) 85
(C) 100
(D) 120
20 Market price per share of WX Ltd. is 400 per share at S0% retention ratio as per Gordon's
Model. The firms cost of equity is below required rate of return. If the firm increases retention
ratio
(A) Its price will decrease and will go below 400
(B) Its price will increase and will go above 400
(C) Its price will still remain at 400
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21 Gordon's model suggests that dividend payment does not affect the market price of the
share.
(A) True
(B) False
(D) Data Incomplete
22 As per Walter's Model when Ra>Re increase in dividend pay-out ratio will lead to
(A) Increase in market price
(B) Decrease in market price
(C) No change in market price
23 In Walter model formula D stands for
(A) Dividend per share
(B) Direct Dividend
(C) Dividend Earning
(D) None of these
24 If you are calculating market price by using Gordon's Model increasing payout ratio other
things renaming the same will.
(A) Increase the price per share
(B) Decrease the price per share
(C) Will not have any effect on price of the share
(D) Price will remain constant.
25 Walter's Model suggests that a firm can always increase i.e. of the share by
(A) Increasing Dividend
(B) Decreasing Dividend
(C) Constant Dividend
26 As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the
event of inadequacy absence of profits in any year, a company may declared dividend out of
surplus subject to the fulfilment of the addition the balance of reserves after such withdrawal
hall not fall below……… as appearing in the latest audited financial statement.
(A) 10% of its paid-up share capital
(B) 15% of its paid-up share capital
(C) 15% of its paid-up share capital and free reserve
(D) 10% of its paid-up share capital and free reserve
27 Walter's model is based on the following assumptions:
(A) The firm finances all investment through retained earnings; that is debt or new equity is
not issued
(B) The firm's internal rate of return (r), and its cost of capital (k) are constant
(C) All earnings are either distributed as dividend or reinvested internally immediately.
28 Determine the market price of a share of LMN Ltd. as per Gordon’s Model, given
Ke=11%
E=20
r=12%
b=60%
(A) 100
(B) 1,000
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(C) 160
(D) 200
29 Which of the following statements about the dividend growth model are true?
1. The model prices shares on the basis of the present value of expected future dividends.
2. The model relies on the ability to predict a constant future growth rate for dividend
payments.
3. The dividend growth model can accommodate future changes in shareholder's required
rate of return
(A) Only 1 and 2 are correct
(B) Only 2 and 3 are correct
(C) 1, 2 and 3 are correct
(D) Only 3 is correct
30 According to Gordon, when r > ke the price per share increases as the dividend pay-out ratio
(A) Decreases
(B) Increases
(C) Constant
31 Dividend payout ratio.
(A) expresses the relationship between what is available as earnings per share and what is
actually paid in the form of dividends out of available earning
(B) is a good measure of the dividend policy of the company.
32 X company earns 5 per share, is capitalized at a rate of 10 per can and has a rate of return
on investment of 18 per cent. According to Walter's model, what should be the price per
share at 25 per can dividend pay-out ratio?
(A) 60
(B) 80
(C) 90
(D) 100
33 ………. reflects the market's confidence in the company's equity.
(A) P/E ratio
(B) Net profit ratio
(C) Cash profit ratio
(D) Total assets turnover ratio
34 A company has the following facts:
Cost of capital (ke) = 0.10
Earnings per share (E) = 10
Rate of return on investments (r) =8%
Dividend payout ratio: 25%
What is the market price of the shares?
(A) 90
(B) 85
(C) 100
(D) 120
35 ……………….suggests that the market price of share is the present value of future
dividends.
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(A) Walter’s model

(B) MM Model
(C) Gordon’s model
(D) General knowledge
36 In the above question, what is the optimum pay-out ratio according to Walter?
(A) 0%
(B) 1%
(C) 100%
(D) 50%
37 Which one of the following is a non-cash payment made by a firm to its shareholders that
dilute the value of each share of stock outstanding?
(A) reverse stock split
(B) cash distribution
(C) stock dividend
(D) regular dividend
38 Which approach is based on this formula:
𝑟
𝐷 + (𝐸 − 𝐷)
𝑃= 𝑘
𝐾
(A) Walter's Model
(B) Gordon's Model
(C) M.M. Approach
39 Required return x Retention Ratio =?
(A) Ke (Cost of equity)
(B) WACC
(C) β (Beta)
(D) g (Growth Rate)
40 In………………the investors get dividend at usual rate
(A) Regular dividend policy
(B) Irregular dividend policy
(C) Stable dividend policy
(D) No dividend policy
41 The……………. is the proportion of earnings that are paid to common shareholders in the
form of a cash dividend.
(A) Retention rate
(B) 1 + Retention rate
(C) Growth rate
(D) Dividend payout ratio
42 Stable dividend policy can be:
(A) Constant dividend per share
(B) Constant pay-out ratio
(C) Stable rupee dividend +extra dividend
43 While calculating dividend cover for preference shares numerator should be taken as
(A) EBIT
(B) Profit available for equity shareholder
(C) PAT
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(D) PAT ÷ Depreciation

44 Given that:
r= return on investment is given as 0.12
k market capitalization rate is as 0.10
E= earnings per share is 4/ D= dividend per share is 2/
Then, the market price per share as per Walter's Model would be:
(A) 20
(B) 34
(C) 44
(D) 50
45 As per Section 128 of the Companies Act, 2013, a company may, before the declaration of
any dividend in any financial year, transfer to the reserves of the company.
(A) 25% of its profit
(B) 10% of its profit before tax
(C) such percentage of its profits for that financial year as it may consider appropriate
(D) such percentage of its profits for that financial year as equity shareholder may consider
appropriate
46 Determine the market price of a share of LMN Ltd. as per Gordon's Model, given
ke = 11%
E=20
r= 10%
b= 90%
(A) 100
(B) 1,000
(C) 210.52
(D) 2000
47 If you are calculating market price by using dividend growth method ie. D1 +(Ke - g) increase
in growth rate leads to
(A) Fall in market price of stock
(B) Increase in market price of stock
(C) No change in market price of stock
48 If the dividend is paid in the form of cash to the shareholders, it is called
(A) Cash dividend
(B) Bond dividend
(C) Stock dividend
(D) Property dividend
49 As per MM Model total value of firm remains same whether it declares dividend or not. You
are required to state if dividend is declared the market price per share as per MM Model.
(A) Increase
(B) Decreases
(C) Remain constant
50 Dividend policy determines what portion of earnings will be paid out to stock holders and
what portion will be retained in the business to finance long-term growth
(A) Dividend Policy
(B) Investment Policy
(C)Procurement Policy
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(D) Capital Budgeting Policy

51 Which of the following would ultimately give the greatest benifit to stockholders?
(A) A stock buyback
(B) The issuance of a bond
(C) A stock split
(D) The issuance of new stock
52 Dividend policy is determined by:
(A) Manager
(B) Trade Union
(C) Shareholders
(D) Board of Directors
53 Financial signaling has been raised as an argument in the battle over the relevancy of
dividends. Which of the following statements concerning dividends is most likely to be voiced
by someone using the financial signaling argument?
(A) A dividend decrease should be viewed by investors as good news." The dividend
decrease acts to add conviction to the statement that the firm has better uses for the
earnings of the company than the stockholders.
(B) Reported accounting earnings of a company, not dividends, are a proper reflection or
signal of the company's economic earnings.
(C) The price of a firm's stock should react unfavored ably to an increase in dividends
(D) Cash dividends speak louder than words when in comes to conveying information about
management's expectations of the future
54 lf return on investment (r) market capitalisation rate (k) then firm is referred to as:
(A) Growth firms
(B) Normal firms
(C) Declining firms
55 In the event of inadequacy or absence of profits in any year, a company may declare
dividend out of surplus subject to the fulfillment of the condition that total amount to be draw
in firm such accumulated profits shall not exceed……… appearing in the latest audited
financial statement.
(A) 1/10th of the total assets
(B) 1/5th of the sum of its paid-up share capital
(C) 1/ 10th of the sum of its paid-up share capital and free reserves
(D) 1/5th of the sum of its paid-up share capital and free reserves
ke= 11% , E-Rs 20 , r= 12% , b= 90%
(A) 500
(B) 1,000
(C) 210.52
(D) 2,000
57 As per Walter's Model when Ra<Re decrease in retention ratio will lead to
(A) Increase in market price
(B) Decrease in market price
(C) No change in market price
58 Determination of value of shares, given the following data:
D/P Ratio = 30%
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Retention Ratio = 70%

Cost of capital = 18%
R= 12%
EPS = 20
(A) 80
(B) 81.63
(C) 62.50
(D) 100
59 The date by which a shareholder must be recorded as the share owner in order to receive a
declared dividend is called the:
(A) ex-rights date
(B) ex-dividend date
(C) date of record
(D) date of payment
60 X Company Ltd. has 1,00,000 shares outstanding the current market price of the shares 15
each. The company expects the net profit of 2,00,000 during the year and it belongs to a rich
class for which the appropriate capitalization rate has been estimated to be 20%. The
company is considering dividend of 2.50 per share for the current year. What will be the price
of the share at the end of the year if the dividend is paid
(A) 10
(B) 15.50
(C) 16
(D) 18
61 Consider following two statements:
(1) A company with large portion of inside ownership, all of whom are high-income
individuals.
(2) A growth company with an abundance of good investment opportunities.
For each of the company described above, would you expect it to have a high or low
dividend payout ratio?
(A) low dividend payout ratio for both companies
(B) high dividend payout ratio for both companies
(C) low dividend payout ratio for company mentioned in Statement (1) and high dividend
payout ratio for company mentioned in Statement (2)
(D) high dividend payout ratio for company mentioned in Statement (1) and low dividend
payout ratio for company mentioned in Statement (2)
62 How are earnings per share calculated?
(A) Use the income statement to determine earnings after taxes (net income) and divide by
the previous period's earnings after taxes. Then subtract 1 from the previously calculated
value.
(B) Use the income statement to determine earnings after taxes (net income) and divide by
the number of common shares outstanding.
(C) Use the income statement to determine earnings after taxes (net income) and divide by
the number of common and preferred shares outstanding.
(D) Use the income statement to determine earnings after taxes (net income) and divide by
the estimated period's earnings after taxes. Then subtract 1 from the previously calculated
value
63 When a firm is short of cash yet it wishes to distribute something to shareholders, it should
consider
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(A) Cash dividend.

(B) Liquidating dividend
(C) Stock dividend
ke = 11% , E=20 , r= 12% , b= 60%
(A) 500
(B) 1,000
(C) 210.52
(D) 2,000
65 Which of the following statements lends most support to the theory that dividend payments
are irrelevant to the value of ordinary shares?
(A) Shareholders making homemade dividends face dealing costs
(B) Shareholders are concerned with total earnings rather than with the split between
distributed and retained earnings.
(C) Investors' discount rates increase with time due to uncertainty.
(D) Firms have particular clienteles due to their dividend policy
66 Which of the following approach is not the part of relevant theory of dividend
(A) Walter's Model
(B) Gordon's Model
(C) M.M. Approach
67 Myron Gordon believe that the required return on equity increases as the dividend payout
ratio is decreased. Their argument is based on the assumption that
(A) Investors are indifferent between dividends and capital gains.
(B) Investors require that the dividend yield and capital Rains yield equal a constant.
(C) Capital gains are taxed at a higher rate than dividends.
(D) Investors view dividends as being less risky than potential future capital gains.
68 Type of dividend policy can be:
(A) Regular dividend policy
(B) Irregular dividend policy
(C) Stable dividend policy
69 As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the
event of inadequacy or absence of profits in any year, a company may declare dividend out
of surplus subject to the fulfillment of the condition that rate of dividend declared shall not
exceed the average of the rates at which dividend was declared by it in the immediately
preceding that year.
(A) 5 years
(B) 10 years
(C) 3 years
(D) 4 years
70 Dividend constitutes the cash flow that accrues to
(A) Equity holders
(B) Preference Shareholders
(C) Debentures
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6: Working Capital
1 ………………model is used to judge the relationship of two variables for estimating the
working capital needs for the given amount of working capital needs
(A) Simple Regression
(B) Average Regression
(C) Linear Regression
(D) Multiple Regression
2 For reducing and controlling working capital requirement which of the following step is
required to be taken
(A) Increase in manufacturing cycle
(B) Increase of credit period allowed by creditors to the extent that do not affect the
production.
(C) Increase in credit period given to customers
3 The Chore Committee has, inter alia, recommended:
(A) emphasized need for reducing the dependence of large and medium scale units on bank
finance for working capital
(B) to supplant the cash credit system by loans and bills wherever possible
(C) to follow simplified information system but with penalties when such information is not
coming within the specified limit.
(D) all of the above
4 Aggressive approach covers those policies
(A) where the firm relies heavily on short term bank finance.
(B) seeks to increase dependence on long term finance
5 Working capital management does not include:
(A) Cash Management
(B) Debtors Management
(C) Capital Budgeting
(D) Debtors Management
6 Hard core working capital is also known as
(A) Hard current assets
(B) Core current assets
(C) Core current liabilities
(D) Hard current liabilities
7 The EOQ model is based on the following assumptions except:
(A) The total usage of that particular item tor a given period is known with certainty and the
usage is even throughout the period.
(B) There is time gap between placing an order and receiving supply.
(C) The cost per order of an item is constant and the cost of carrying inventory is also fixed
and is given as percentage of the average value of inventory.
(D) There are only two costs associated with the inventory and these are the cost of ordering
and the
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8 Which of the following would not be financed from working capital?

(A) Cash float.
(B) Accounts receivable.
(C) Credit sales.
(D) A new personal computer for the office
9 A publishing house purchases 72,000 rims of a special type paper pe annum at cost 90 per
rim. Ordering cost per order is 500 and the carrying cost is 5 per cent per year of the
inventory cost. Normal lea time is 20 days and safety stock is Nil. Assume 300 working days
in a year: You are required to calculate the Economic Order Quantity (E.O.Q).
(A) 4000 Rims
(B) 5000 Rims
(C) 6000 Rims
(D) 8000 Rims
10 Working capital is also known as
(A) Current capital or circulating capital
(B) Work-in-progress capital
(C) Day-to-day capital
(D) Trading capital
11 ……………..Is a type of financial service which involves an outright sale of the receivables of
a firm to a financial institution called the factor which specializes in the management of trade
credit
(A) Leasing
(B) Tender
(C) Factoring
12 There is deterioration in the management of working capital of XYZ Ltd. What does it refer
to?
(A) That the Capital Employed has reduced
(B) That the Profitability has gone up
(C) That debtors collection period has increased
(D) That Sales has decreased.
13 Cost of Goods sold / Average Inventory is used to calculate
(A) Current Ratio
(B) Acid Test Ratio
(C) Inventory Turnover Ratio
(D) Receivable Turnover
14 Which of the following is not considered while calculating accounts receivable period?
(A) Bills receivable
(B) Cash sales
(C) Debtors
(D) Credit sales
15 A forfeiter discounts the entire value of the note/bill but the factor finances between 75-85%
and retains a factor reserve which is paid after maturity
(A) True
(B) False
(D) Data Incomplete
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16 Which best describes the gross margin ratio?

(A) Leverage ratio
(B) Liquidity ratio
(C) Coverage ratio
(D) Profitability ratio
17 Based on the above question, calculate the cash conversion period from the financial
variables given above:
(A) 61 days
(B) 31.5 days
(C) 48.7 day
(D) 43.8 days
18 Financial statement of A Ltd. shows the following data:
Opening stock 1,75,000, Total purchase 10,75,000 including cash purchase 1,75,000, total
sales 15,00,000 out of which 20% are on cash basis. Closing stock is 1,50,000. Stock
turnover ratio =?
(A) 7.67
(B) 6.77
(C) 7.76
(D) 7.66
19 Technical tools used in inventory management is:
(A) ABC analysis
(B) Economic Order Quantity (EOQ)
(C) Inventory turnover analysis
20 KT Ltd. opening stock was 2,50,000 and closing stock was t3,75,000. Sales during the year
was 13,00,000 and gross profit ratio was 25% on sales. Average accounts payable are
80,000. Creditors Turnover Ratio =?
(A) 13.75
(B) 14.33
(C) 13.33
(D) 14.44
21 Below is the data:
Normal usage: 100 units per week
Maximum usage: 150 units per week
Minimum usage: 50 units per week
Re-order quantity (EOQ) 500 : units
Lag in time: 5to 7 weeks
Calculate Re-order Level?
(A) 450 units
(B) 1050 units
(C) 875 units
(D) 1300 units
22 Debtors velocity = 3 months
Sales = 25,00,000
Bills receivable & Bills payable were 60,000 and 36,667 respectively.
Sundry debtors = ?
(A) 6,25,000
(B) 5,25,000
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(C) 5,65,000
(D) 6,65,000
23 Firm uses 1,100 units of a raw material per annum, the price of which is 1,500 per unit. The
order cost per order is 150 and the carrying cost of the inventory is 200 per unit. Find the
EOQ
(A) 40 days
(B) 41 days
(C) 42 days
(D) 45 days
24 Risk of non-payment may due to
(A) Insolvency
(B) Liquidity problems
(C) Intention of cheating
25 Total long term debts / Shareholders Funds is used to calculate:
(A) Current Ratio
(B) Acid Test Ratio
(C) Debt- Equity Ratio
26 In………….. type of factoring the bank/factor takes all the risk and bear all the loss in case of
debts becoming bad debts.
(A) Non-Recourse Factoring
(B) Invoice Discounting
(C) Maturity Factoring
(D) Recourse Factoring
27 ………….. loan is simply a loan secured by a firm's accounts receivable by way of
hypothecation or assignment of such receivables with the power to collect the debts under a
power of attorney.
(A) Accounts receivable
(B) Factoring
(C) Bill discounting
(D) Leasing
28 Commercial bills, which have already been discounted given to the company by commercial
banks. In this type of factoring bank/factor does not
(A) Discount & Finance House of India give any advance to the company rather bank
(B) Discount & Finance Home of India factor collects it from customers and pays to the
company either on the date of collection from the
(C) Discount & Factoring House of India customers or on a guaranteed payment date.
(D) Discount & Factoring Home of India
29 Receivables are generally referred to by the name of the books of account
(A) Sundry Debtors
(B) Sundry Creditors
(C) Asset Management
(D) Liability Management
30 Forfaiting is.
(A) either with recourse or without recourse
(B) always without recourse
(C) pure financing agreement
1.44
(D) (B) and (C)

31 Cost of inventory can be lowered by
(A) Entering into long term arrangements for supply of raw materials at market driven prices.
(B) Arranging for direct supply of raw material at manufacturing locations.
(C) Availing quantity discounts and spot payment discounts it the carrying cost and financing
cost is less than the discounts.
32 A forfeiter purchase of the receivables, the sum of which is typically guaranteed by the.
(A) exporter’s bank
(B) importer's bank
(C) buyer's bank
(D) financer's bank
33 Which of the following is the component of inventory?
(A) Raw Material
(B) Work in Progress
(C) Finished Goods
34 Which of the following statement(s) is/are correct?
(A) Control of bad-debts is an important part of con trolling the working capital or the current
assets of the company
(B) Credit policy should be followed which may not lead to bad debts and expedite
collections
(C) Periodical checks should be maintained by classifying debtors as outstanding form 0-30
days,30-60 days, 60-90 days and 90 and over
35 …………….is the cost associated with placing each individual order for supply of raw
materials, stores, packing materials etc.
(A) Carrying cost
(B) Ordering cost
(C) Stock out cost
36 If you are proposing to introduce relaxed credit policy, you will adopt it if
(A) There is increase in profit
(B) There is reduction in loss
37 …………. is based on the assumption that in view of the scarcity of managerial time and
efforts, more attention should be paid to those items which account for a larger chunk of the
value of consumption rather than the quantity of consumption
(A) Economic Order Quantity
(B) Economic Order Quality
(C) ABC Analysis
38 F Ltd. is examining relaxation of its credit policy. I sells at present 20,000 units at a price of
100 per unit the variable cost per unit is 88 and average cost per unit at the current sales
volume is 92. All the sales are on credit, the average collection period being 36 days, A
relaxed credit policy is expected to increase sales by 10% and the average age of
receivables to b0days. Assuming 5% return, should F Ltd. relax its credit policy?
1.45
Note: 1 Year = 360 days

(A) Yes, F Ltd. can change its policy as it lead to 15.79% increase in profit
(B) No, F Ltd. need not to change its policy as there is no incremental return.
(C) Yes, F Ltd. can change its policy as it lead to incremental return of 2.400
(D) None of the above option is correct.
39 In the above question, calculate the Reorder Inventory Level?
(A) 200 Rims
(B) 240 Rims
(C) 300 Rims
(D) 400 Rims
40 A firm has current sales of 2,56,48,750. It is considering the relaxation in its credit policy. The
proposed terms of credit will be 60 days credit against i the present policy of 45 days. As a
result, the bad debts will increase from 1.5% to 2% of sales. The firm's sales are expected to
increase by 10%. Variable operating costs is 72% of sales. Firm's corporate tax rate is 35%,
and it requires after-tax return of 15%. Should firm change its credit period?
Note: Firm calculate its debtor on sales.
(A) No, the firm should not change its policy as profit will decline by 3,50,177
(B) Yes, the firm should change its policy as profit will increase by 5,39,036
(C) Yes, the firm should change its policy as profit will increase by 5,38,623
(D) Yes, the firm should change its policy as profit will increase by 3,50,105
41 Under a typical factoring arrangement, a accounts on the due dates, effects payments to the
firm on these dates and also assumes the credit risks associated with the collection of the
collects client's bills collects the
(A) Factor
(B) Licensor
(C) Licensee
42 Present credit terms of P Ltd. are 1/10 Net 30. Its annual sales are t80 lakhs, its average
collection period is 20 days. Its variable and average total costs to sales are 0.85 & 0.95 and
its K, is 10%. Proportion of sales on which customers currently take discount is 0.5.
Company is relaxing its discount terms to 2/10 Net 30 which will increase sales by 5 lakh,
reduce average collection period to 14 days and increase the proportion of discount to sales
to 0.8. What will be the effect of on company's profit? Take year as 360 days. Debtors are
calculated on cost.
(A) Profit will increase by 9,900
(B) Profit will increase by 9,986
(C) Profit will increase by 8,986
(D) Profit will decrease by 9,986
43 Current Assets/Current Liabilities is used to calculate:
(A) Current Ratio
(B) Acid Test Ratio
(C) Inventory Turnover Ratio
44 A manufacturing firm has credit sales of r 360 lakh and its average collection period is 30
days. Firm estimates bad debt losses at around 2% of credit sales. Firm spends 1,40,000
annually on debtors' administration.
A factoring firm has offered to buy the firm's receivables. The factor will charge commission
and will pay an advance against receivables on an interest @ 15% p.a. after withholding
1.46
10% as reserve. Net saving/loss to the Firm due to factoring arrangement =?

(A) (99,500)
(B) (8,60,000)
(C) 99,500
(D) 7,60,500
45 Forfeiting Services denotes the purchase of trade bills/promissory notes by a bank financial
institution
(A) With recourse
(B) Without recourse
(C) Either (A) or (B)
46 Amit Gupta, a trader is considering changing its credit policy. The incremental cash flows
associated with this change are as follows:
Increase in sales of 13,100, increase in cost of goods sold of 6,900, increase in bad debts of
1,500, increase in other costs of 2,700 and an increase in taxes of 750. The incremental
initial cash outflow at time zero is 16,450. The applicable discount rate is 9.5%. What is the
net present value (NPV) of this proposed change in the credit policy?
(A) (3,292)
(B) (1,089)
(C) (1,444)
(D) (15,200)
47 Based on the above question, calculate the payables conversion period from the financial
variables given above:
(A) 61 days
(B) 31.5 days
(C) 48.7 days
(D) 43.8 days
48 In year 2018, 7% customer paid the amount due in S days from the date of sale; 54%
customer paid the amount in 30 days and 39% customer paid the amount in 44 days from
the date of sale. in year 2019, 13% customer paid the amount due in 4days from the date of
sale; 64% customer paid the amount in 25 days and 23% customer paid the amount in 58
days from the date of sale.
The average collection periods
(A) in year 2019 increased by 4 days
(B) in year 2019 decreased by 3 days
(C) in year 2019 increased by 3 days
(D) in year 2019 decreased by 4 days
49 Based on the above data, calculate average level?
(A) 450 units
(B) 1050 units
(C) 875 units
(D) 1300 units
50 Debtors velocity= 3 months
Sales = 25,00,000
Bills receivable& Bills payable were 60,000 and 36,667 respectively.
Sundry debtors =?
(A) 6,25,000
(B) 5,25,000
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(C) 5,65,000
(D) 6,65,000
51 Type of factoring can be:
(A) Recourse Factoring
(B) Non-Recourse Factoring
(C) Agency Factoring
(D) All of the above.
52 Forfaiting eliminates.
(A) Risk of the exporter not receiving payment
(B) Credit risk and transfer risk
(C) Risks posed by foreign exchange rate or interest rate changes.
53 Factors determining credit policy includes:
(A) The effect of credit on the volume of sales
(B) Credit terms
(C) Cash discount
54 If credit sales for the year is 540,000 and Debtors at the end of year is 90,000 the Average
Collection Period will be
(A) 30 days
(B) 61 days
(C) 90 days
(D) 120 days
55 ………… is the cost associated with procuring an inventory item, which has gone out of stock
and is needed for immediate supply.
(A) Carrying cost
(B) Ordering cost
(C) Stock out cost
56 ……….refers to the use of a firm’s receivable to secure a short term loan.
(A) Factoring
(B) Pledging
(C) Monitoring
(D) Securitization
57 Cash and bank balances are held by the firms in three major forms
(A) Cash and cheque in hand
(B) Balances with banks
(C) Investment in liquid securities
58 Select the odd one in relation to topic of management of receivables?
(A) Debtors
(B) Factoring
(C) Creditor
(D) Forfaiting
59 Working capital leverage may refer to the way in which a company’s profitability is affected in
part by its……………..
(A) Working capital management
(B) Debt management
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(C) Cash management

(D) Equity management
60 F Ltd. is examining relaxation of its credit policy. It sells at present 20,000 units at a price of
100 per unit. the variable cost per unit is Rs. 88 and average cost per unit at the current
sales volume is 92. All the sales are on credit, the average collection period being 36 days. A
relaxed credit policy is expected to increase sales by 10% and the average age ol
receivables to b0 days. Assuming T5% return. Should F Ltd. relax its credit policy?
Note: 1 Year = 360 days
(A) Yes, F Ltd. can change its policy as it lead to 15.79% increase in profit
(B) No, F Ltd. need not to change its policy as there is no incremental return.
(C) Yes: F Ltd. can change its policy as it lead to incremental return of 2,400.
(D) None of the above option is correct.
61 The position at the end of a day is a static position which is not representative of the entire
year for assessing the working capital
(A) True
(B) False
(D) Data Incomplete
62 …………. refers to the use of a firm's receivable to secure a short term loan.
(A) Factoring
(B) Pledging
(C) Monitoring
(D) Securitization
63 Motive for holding cash includes:
(A) Transactional motive
(B) Speculative motive
(C) Contingency motive
(D) Al of the above
64 When net sales for the year are 2,50,000 and debtors 50000, the average collection period
is:
(A) 60 days
(B) 45 days
(C) 42 days
(D) 73 days
65 Level of cash holdings depend on the following:
(A) Nature of business
(B) Extend and reach of business
66 X Ltd. cash sales and credit sales are 5,67,500 & 87,50,000 respectively. Cost of goods sold
is 61,25,000. Debtors are ?8,20,833 and bills receivable are 2,00,000. Debtors turnover
ratio=?
(A) 6.00
(B) 7.46
(C) 10.66
(D) 5.38
67 The cost of holding inventory has the following elements:
(A) Carrying cost
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b) Ordering cost
(C) Stock out cost
68 Analysis of debtor's collection history of Karina Ltd. shows the following facts.
42% debtors pays the amount due within 4 days of sales: 18% debtors pays within 20 days
and 40% debtors pays within 40 days of sales. What is the average collection period of
Karina Ltd.?
(A) 23 days
(B) 28 days
(C) 21 days
(D) 18 days
69 Inventory level can be managed by adopting the
(A) Economic Order Quantity
(B) Economic Order Quality
(C) Economic Bulk Quantity
1.50

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CS Executive – FSM CA CS Pushpam Chourasia

(B) Lower net present value

whereas it is unknown in case of internal rate of return method.

(B) Cost of preference share

(C) Partly True & Partly False

8 High financial leverage is not good as it indicates the large content of

(D) Combined Leverage-Operating Leverage-Financial Leverage

24 Output (units) = 3,00,000

(B) Operating Leverage=

(C) Operating Leverage=

(D) Operating Leverage=

31 The term Leverage in general refers to a-

(C) Fixed cost

other securities is small leading to capitalization being highly geared.

(B) Net Operating Income approach

(D) Traditional Approach

(D) a reduction in the risk-free rate

(A) 1 and 5 only

(A) Walter’s model

(D) PAT ÷ Depreciation

(D) Capital Budgeting Policy

Retention Ratio = 70%

(A) Cash dividend.

8 Which of the following would not be financed from working capital?

16 Which best describes the gross margin ratio?

(D) (B) and (C)

Note: 1 Year = 360 days

10% as reserve. Net saving/loss to the Firm due to factoring arrangement =?

(C) Cash management

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