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Objective Questions and Answers of Financial Management
1. State whether each of the following statements is True (T) or False(F) (i) Financial statements are an important source of information to shareholders and stakeholders. (ii) Both the BS and the IS shows the financial position of fen at the end of the year. (ii) BS of a company must be prepared in the horizontal format only. (iv) Preparation of Profit & Loss Appropriation A/c is a requirement under the Companies Act, 1956. (v) Ratio Analysis is the only technique of analysis of financial statements. (vi) Methodical presentation of financial statements helps in Nation of various ratios. (vii) In Common Size Statements, each item is expressed as a percentage of some common items (total). (viii) Trend Percentage Analysis helps in Dynamic Analysis. (ix) Liquidity Ratios help in analysing the cash position of the firm. (x) In calculation of Acid Test Ratio, Inventory is included in current assets. (xi) Working Capital Turnover Ratio may be classified as an Activity Ratio. (xii) Debt-Equity Ratio is a measure of long-term solvency of a firm. (xiii) GP Ratio and NP Ratio give the profitability of the firm from the point of view of the shareholders. (xiv) Return on Equity and Earnings per Share are one and the same thing. (xv) DU PONT Analysis looks into the elements of profits. (xvi) Ratio Analysis provides the solution to the financial problems. Answers: (i) T, (ii) F, (iii) F, (iv) F, (v) F, (vi) T, (vii) T, (viii) T, (ix) F, (x) F, (xi) T, (xii) T, (xiii) F, (xiv) F, (xv) T, (xvi) F.] 2. Multiple Choice Questions: 1. Accounting Ratios are important tools used by (a) Managers, (b) Researchers,(c)Investors, (d) All of the above 2. Net Profit Ratio Signifies:(a) Operational Profitability, (b) Liquidity Position,(c) Big-term Solvency,(d)Profit for Lenders. 3. Working Capital Turnover measures the relationship of Working Capital with: (a)Fixed Assets,(b)Sales,(c)Purchases,(d)Stock. 4. In Ratio Analysis, the term Capital Employed refers to: (a)Equity Share Capital,(b)Net worth,(c)Shareholders' Funds,(d)None of the above. 5. Dividend Payout Ratio is: (a)PAT Capital, (b)DPS ÷ EPS,(c) Pref. Dividend ÷ PAT, (d) Pref. Dividend ÷ Equity Dividend. 6. DU PONT Analysis deals with: (a) Analysis of Current Assets, (b)Analysis of Profit, (c)Capital Budgeting, (d) Analysis of Fixed Assets. 7. In Net Profit Ratio, the denominator is:(a)Net Purchases,(b)Net Sales, (c) Credit Sales, (d) Cost of goods sold. 8. Inventory Turnover measures the relationship of inventory with: (a) Average Sales, (b)Cost of Goods Sold, (c)Total Purchases, (d) Total Assets. 9. The term 'EVA' is used for: (a)Extra Value Analysis, (b)Economic Value Added,(c)Expected Value Analysis,(d)Engineering Value Analysis. 10. Return on Investment may be improved by: (a)Increasing Turnover,(b) Reducing Expenses,(c)Increasing Capital Utilization,(d)All of the above. 11. In Current Ratio, Current Assets are compared with: (a)Current Profit, (b)Current Liabilities,(c)Fixed Assets, (d)Equity Share Capital. 12. ABC Ltd. has a Current Ratio of 1.5: 1 and Net Current Assets of Rs. 5,00,000. What are the Current Assets? (a)Rs. 5,00,000, (b)Rs. 10,00,000, (c)Rs. 15,00,000, (d) Rs. 25,00,000 13. 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. 14. Which of the following does not help to increase Current Ratio? (a)Issue of Debentures to buy Stock, (b)Issue of Debentures to pay Creditors,(c)Sale of Investment to pay Creditors,(d)Avail Bank Overdraft to buy Machine. 75. Debt to Total Assets Ratio can be improved by: (a)Borrowing More,(b)Issue of Debentures,(c)Issue of Equity Shares,(d)Redemption of Debt. 16. Ratio of Net Income to Number of Equity Shares known as: (a)Price Earnings Ratio, (b) Net Profit Ratio,(c)Earnings per Share, (d) Dividend per Share. 17. Trend Analysis helps comparing performance of a firm (a)With other firms,(b)Over a period of firm,(c)With other industries,(d) None of the above. 18. A Current Ratio of Less than One means: (a)Current Liabilities < Current Assets,(b)Fixed Assets > Current Assets,(c)Current Assets < Current Liabilities, (d) Share Capital > Current Assets. 19. A firm has Capital of Rs. 10,00,000; Sales of Rs. 5,00,000; Gross Profit of Rs. 2,00,000 and Expenses of Rs. 1,00,000. What is the Net Profit Ratio? (a)20%, (b) 50%, (c)10%, (d)40%. 20. XYZ Ltd. has earned 8% Return on Total Assests of Rs. 50,00,000 and has a Net Profit Ratio of 5%. Find out the Sales of the firm. (a) Rs. 4,00,000, (b)Rs. 2,50,000,(c)Rs. 80,00,000,(d)Rs. 83,33,333. 21. Suppliers and Creditors of a firm are interested in(a)Profitability Position,(b)Liquidity Position,(c)Market Share Position, (d) Debt Position. 22. Which of the following is a measure of Debt Service capacity of a firm? (a)Current Ratio, (b)Acid Test Ratio,(c) Interest Coverage Ratio,(d) Debtors Turnover. 23. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason for such behavior could be: (a) Increase in Costs of Goods Sold, (b)If Increase in Expense,(c) Increase in Dividend,(d)Decrease in Sales. 24. Which of the following statements is correct? (a) A Higher Receivable Turnover is not desirable, (b) Interest Coverage Ratio depends upon Tax Rate, (c)Increase in Net Profit Ratio means increase in Sales, (d) Lower Debt-Equity Ratio means lower Financial Risk.

(vi)Cash budget is also known as Master Budget. 3. Ratio Analysis can be used to study liquidity. (d)Return on Investment. 5. 13. 13. 29. (b) % of Cost of goods Sold. (c).(d) Depreciation. Which of the following is not shown in Cash Budget? (a)Proposed Issue of Capital.00. (vi) F. has a Debt Equity Ratio of 1. 4. (a). various items of balance sheet are estimated on the basis of. Which of the following helps analysing return to equity Shareholders? (a) Return on Assets.(c) Balance Sheet.(d) Projected Balance Sheet. (d). (ii)Capital budgeting decisions are long term decisions.5 as compared to 1. (xiv) T] 4.26. 27. The Debt to Equity boo would be: (a) 0.(d) Any of (a) or (&). It means that the firm has: (a) Higher Liquidity. Debt to Total Assets of a firm is . 13.30. State whether each of the following statements is True (T) or False (F): (i)Investment decisions and capital budgeting are same.(b) Preparation of Actual Statements. (c).23.(c) Interest on loan. what is taken in the numerator? (a) Sales. 5. (c).25. In 'Percentage of Sales' method of preparation of Projected Financial Statements.(b) Rs. Procedure for preparation of 'Projected Financial Statements' should start from: (a) Projection of Fixed Assets. The Cost of goods sold for next year would be: (a) Rs.000.(d) Closing Stock. (ix) Cash budget is an important element of profit planning. (b). (d). (iv) Capital budgeting decisions do not affect the future Stability of the firm. In Projected Balance Sheet. (d) All of the above. (c) Net Profit Ratio. [Answers : 1. (d). 12. 14. (d).(c) Projection of Sales. (a) % of Share Capital. (b).(c) Would never appear. (iv) Budgeting helps in establishing the responsibilities at different levels. (c). 8.000 and Rs.25. (xii) T. (iii) T. 7. 29. 2. 6.000. 7. XYZ Ltd. 10. (v) T. (xii) Projected Financial Statements can be prepared only if several other budgets are available. 12.(c) Comparison of Actual with Projected.(b) Projection of Capital. State whether each of the following statements is True (T) or False(F) (i)Financial Planning deals with the preparation of financial statements.(c) Projected Cash Flow Statement. (d). 6. 4. Which of the following may not be apart of projected Financial Statements? (a) Projected Income Statement. 17.22.(d)Higher Capital Employed.(b) May appear on Liabilities Side. (b). (b). budget for every month is prepared.(d) Turnover. In'% of Sales' method. 28.(d)Turnover. (c) Only revenue nature cash flows are shown. (b). the firm can accept all feasible proposals. (b). 30. (b). [Answers: (i) F. [Answers: 1.(d) % of Sales in preceding year. 5.(b) All inflows would arise before outflows for those periods. 3. 11. 27. (b) Loan Repayment. 30.(c) Rs. (vii) F. (d)All of the above. (xiv) Percentage of Sales method can be used to prepare both the PIS and PBS.(c)Profitability. 4.(c)Operating Budgets. the sales are expected to increase by 10%. etc. (c).24. 3.19.90. the Operating Expenses should be projected on the basis of: (a) % of Profit before tax. 8. (ix) F. (b)Higher Financial Risk. (a). (ii)Cash planning is a part of long-term financial planning. Which of the following is not a part of Master Budget? (a)Projected Balance Sheet.73. Financial Planning deals with: (a) Preparation of Financial Statements. (b) Earnings Per Share. (iv) T. In Inventory Turnover calculation. (d). (b)].(b)Liquidity. (c) 1. 4.30. turnover. (d)0. (d). (xi) Projected Financial Statements are prepared on the basis of opening financial statements. 4. of a firm. (c). (vii)Sales and Production Budgets are Capital Budgets. 12. Which of the following is not considered which preparing cash budget? (a) Accrual Principle. 16. (c).-225. (d). 6. During year 1. 2.(c)Opening Stock. (d). 9.21. (a). (b). (c).000 respectively. 4. (b). (v)There is a time element involved in capital budgeting. (x) T. 2. 7. (ii) F.(d) Proposed issue of share capital in shown as an inflow. (c)] 5. 15. (x) Financial planning is incomplete without cash budget. (c).000. 11.3 Industry average. (xiii) F. 11.2. (d).75 26. 4. Financial planning starts with the preparation of:(a) Master Budget.(b) Difference in Capital. (b)Planning for a Capital Issue.00.(b)Profitability Ratios.(c)Solvency Ratios.(b) Projected Trial Balance. (d) % of Sales.(b) Cash Budget. Which of the following is not true for cash Budge? (a) That shortage or excess of cash would appear in a particular period. (b). and Revenue items. (b). Next year. (c) Conservation Principle. (iii)Capital budgeting decisions are reversible in nature. (c) Preparing Budgets. (b).(d) Rs.Multiple choice questions 1. (b). a balancing figure: (a) May appear on Assets Side. (b)0. profitability. Process of Financial Planning ends with: (a) Preparation of Projected Statements. (vi)An expansion decision is not a capital budgeting decision (vii)In mutually exclusive decision situation. (d). (a) 3. (iii) Financial forecasting is followed by financial planning. (c) % of Gross Profit.40. 9. (d)None of the above. (viii) Rolling Budget System. the sales and Cost of goods sold were Rs. 8 (d). . (v)A budget is a collation of forecasts and plans expressed in financial terms. 10.80. 18. (viii) F.(d) Ordering the employees that projected figures m come true. 9. (c). 28. (xiii) There is no assumption required for the preparation of projected financial statements. Return on Assets and Return on Investment Ratios belong to: (a) Liquidity Ratios.(d) Projection of Profit. (d).000. 10. 20. What does Debt-Equity Ratio help to study? (a)Solvency. (d) Budget Manual.(b)Cost of Goods Sold.(b) Capital Expenditure Budget. 4. (c) % of Fixed Assets. (xi) F. (b). 6.(c)Higher Profitability. (b) % of Sales in current year.

5. Capital Budgeting Decisions are: (a) Reversible. Which of the following is not true for capital budgeting? (a) Sunk costs are ignored.(d)All of the above. (vi) F. 12(c). (xiv) T.(d) Timing of cash flows is relevant.(b) Merger. 14(c). 7(a). 3(c). (ii) T.(d) Last Dividend Paid.(b) An Outflow. A proposal is not a Capital Budgeting proposal if it: (a) is related to Fixed Assets.(c) Required Rate of Return.(d) Method of Project Financing.(c) Tax Rate Change. Which of the following is not included in incremental A flows? (a) Opportunity Costs. (ii) Capital Rationing as a situation when the Government has imposed a ceiling on investment by a firm. (d) None of the above. Multiple choice questions 1. (x) F. 7. (xii) F. 9. (ix) F.(d) Both (a) and (b). Capital Budgeting Decisions are based on: (a) Incremental Profit. Which of the following is not followed in capital budgeting? (a) Cash flows Principle. 4. (b)Opportunity costs are excluded.(d) Incremental Capital. 20. Which of the following does not effect cash flows proposal? (a) Salvage Value. [Answers : l(a). (c)Incremental cash flows are considered. (xv) T. 5(d). 12. (xi) T.(b) Depreciation Amount. (b)Sunk Costs. 13 (c). in capital budgeting. (c) Replacement of an Asset. Depreciation is incorporated in cash flows because it: (a) Is unavoidable cost. (xi) There is no need to defer a positive NPV proposal. the basic techniques can be used in all cases.(c) Allocated Overheads. A sound Capital Budgeting technique is based on: (a) Cash Flows. (iii) A firm should always implement a positive NPV props irrespective of fund requirement. 15. (xv) Cash flows and accounting profits are different. (xii) Sunk cost is a relevant cost in capital budgeting.(c) Nil. Savings in respect of a cost is treated in capital budgeting as: (a) An Inflow. 19(c). (xiii) The opportunity cost of an input is always considered. (v) Real cash flows should be discounted at normal discount rate. (xvi)F. (xvii) Net cash flow is on after tax basis. 14. (iii) F. 20(b).(c) Unimportant. (d) Relevant cash flows are considered. (xiv) Allocated overhead costs are not relevant for capital budgeting.(b) not incremental.(b) Irreversible. Which of the following is not a relevant cost in Capital Budgeting? (a) Sunk Cost. 17(c). 10. (vii) EAM should be used in accept-reject decision situation.(b) Cost of capital is equal to minimum required return.(c) Incremental Assets.(b) Incremental Cash Flows. (c) Net Assets Method.(c) Marketing Management. 18.(d) Both (a) and (c) above.(d) has very large investment.(b) Short-term Decisions.(c) Raising of Funds. Which of the following is not a capital budgeting decision? (a) Expansion Programme. 13. Capital Budgeting deals with:(a) Long-term Decisions.(d) Neither (a) nor (b).(d) Cash Flows. 8. (xii) Multi-period and Multi-constraints are one and the same thing. 16. Sunk cost is excluded because it is: (a) of small amount. (d) None of the above. (iv) Money cash flows should be discounted at nominal discount rate. Which of the following is not applied in capital budgeting? (a) Cash flows be calculated in incremental terms. In Capital Budgeting. 17.(b) Time Value of Money. 21(a)] 7. Which of the following is not incorporated in Capital Budgeting? (a) Tax-Effect.(d) Post-tax Principle. (xiii) F. Evaluation of Capital Budgeting Proposals is based on Cash Flows because: (a) Cash Flows are easy to calculate. 2(a). (x) Future expected profits from an investments are taken as returns from the investment for capital budgeting.(b)Accounting Profit. (c) Cash is more important than profit. (vii) F. 9(b).(c) Interest Rate on Borrowings.(b) All costs and benefits are measured on cash basis.(d) Involves an outflow.(d) Rate of Cash Discount.(d) Capital Structure. Cash Inflows from a project include: (a) Tax Shield of Depreciation. 21. (iv) F.(c) Reduces Tax liability. (viii) Feasibility Set Approach is based on the NPV method of capital budgeting. 3.(d) Inflation effect. (x) A firm should ignore the replacement timing of an asset. (xvi) Cash flows are same as profit before tax. in a way.(c) Existing investment in a project is not treated as sunk cost. (b)Cash Flows are suggested by SEBI. 19.-3(viii) Capital budgeting and capital rationing are alternative to each other. 16(c). 8(d). (d) All benefits are measured on after-tax basis.(b) Interest Exclusion Principle. 6.(b) brings long-term benefits.(b) Is a cash flow. (xvii) T 6. 11. (vi) EAM is. (c) All accrued costs and revenues be incorporated.(d) All of the above. (ix) Correct capital budgeting decisions can be taken by comparing the cost with future benefits. State whether each of the following statement is True (T) or False (F): (i) Irrespective of the issue involved in a capital budgeting anon.(c) Change in Working Capital. 10(d). an extension of NPV method. Capital Budgeting is a part of: (a)Investment Decision. (ix) Selection based on PI method gives optimum decision making in case of indivisible projects.(c) not reversible.(c) brings short-term benefits only. (viii) F. (v) T.(d) Inventory Level.(c) Accrual Principle.(b) Opportunity Cost. 18(b). . 15(b).(b) After-tax Operating Profits. 6(d). (xi) Cash flows are the appropriate measure of costs and benefits from an investment proposal. 4(b).(b) Working Capital Management.(c) Both (a) and (b). 2. 11(d). (b) Sensitivity Analysis. Which of the following is not true with reference capital budgeting? (a) Capital budgeting is related to asset replacement decisions. [Answers : (i) F. Which of the following is not used in Capital Budgeting? (a) Time Value of Money.

(v) T. Rate)-1. [Answers: (i) F. NPV-PVAF(r. (d) Indivisible Projects 16.(b) Profitability Index. If the Money Discount Rate is 19% and Inflation Rate is 12%.(d) Variability of Cash flows 4. (ii) In capital budgeting proposals. (xi) F. (d) (1 + Money D Rate) . the risk is measured with reference to joint probabilities.(d) 14% 10.(c) 25%. the term Capital Rationing implies: (a) That no retained earnings available.(b) NPV is linearly proportionate to part of the project taken up. (d) Real Cashflow . Write her each of the following statement is True (T) or False (F) (i) A risky situation is one in which the probability for the occurrence or non-occurrence of an event cannot be assigned.(c) Real Discount Rate. Rate)-1 13. 7.(d) Any of the above 4. the discount rate is not known with certainty.(c) Certainty.(b) Real Dis.(viii) F. 6. (ix) F. Risk in Capital budgeting implies that the decision-maker knows___________of the cash flows. when applied to Divisible Projects.(c) Profitability Index Approach.n)(d).(c) Feasibility Set Approach. 3. (a) Variability. (v) In Payback Period method. Answers: (i) F.(d) Risk free rate of interest 8.(c) That no external funds can be raised. (xi) F. (d). (xi) In case of capital budgeting.(d) All of the above 5.(c) Hurdle Rate.70%. (b) Nominal Rate ÷ Inflation Rate. (xiii) Coefficient of variation is as good a measure of risk as the standard deviation. Two mutually exclusive projects with different economic lives can be compared on the basis of (a) Internal Rate of Return. (b) (1 + Money D Rate) + (1 + Inf. (c) One-off Investments . (xiii) T 8. (b) NPV + PVAF(r. (x) Expected value of cash flows is equal to the arithmetic average of the cash flows. impliedly assumes that: (a) Project cannot be taken in parts. (a). Which of the following is a risk factor in capital budgeting? (a) Industry specific risk factors. Rate (c) Inflation Rate < Real Dis. 15.(b) That limited funds are available for investment. In case of the indivisible projects. (b). 13. (vi) T.n) . In case of divisible projects. (vii F. Risk in Capital budgeting is same as: (a) Uncertainty of Cash flows.(1 + Inf.(b) Profitability Index. (xii) F.25% 11. (d) (1 + Real Rate) + (1 + Inflation Rate)-1 12.(c) Real Cashflow + Present Value . 5.(b) Competition risk factors. (xiv) T.(b) Divisible Projects. (xii) In case of dependent cash flows. the risk of the proposal is incorporated by lessening the target payback period. (c). (viii) In Sensitivity Analysis. Rate < Money Dis. higher the standard deviation better the project is. (vii) In Sensitivity Analysis.(c) NPV is additive in nature.(d) Any of the above 18. (ix) F. Which of the following cannot be true? (a) Inflation Rate > Money Dis. which of the following can be used to attain maximum NPV? (a) Feasibility Set Approach.(c) None of (a) and (b). 9. adjusted cash flows are discounted at: (a) Accounting Rate of Return. its EAV is (a) Equal to NPV. (iii) F. Multiple Choice Questions 1. then the Real Discount Rate is: (a) 7%. In capital budgeting. (c). then the Money Cashflow would be equal to: (a) Present Value. EAV should be used in case of: (a) Divisible Projects. Rate 14. (xv) Abandonment evaluation of a project is ma the implementation of a capital budgeting proposal. If there is no inflation during a period. (c). risk may arise due to different factors. (vi) F. (b).Inflation Rate. the NPV of the proposal is adjusted. (iii) F. (b).n) 17. which of the following may not give the optimum result? (a) Internal Rate of Return. Feasibility Set Approach to Capital Rationing can be applied in: (a) Accept-Reject Situations. (iii) In risky capital budgeting proposals. 14. (d). (b).(c) Mutually Exclusive Projects. 2. (xv) F] 20. (v) T.(1 + Real Rate)-1.ll. Real Discount Rate is equal to: (a) (1 + Inf. (xiv) Decision Tree Approach is suitable to analyse a multistage decision situation. Real rate of return is equal to: (a) Nominal Rate × Inflation Rate. 17. (x) F. (iv) F. (d) Inflation Rate = Real Dis.16.(d) That no fresh investment is required in current year 2. Rate)-1. Money Discount Rate if equal to: (a) (1 + Inflation Rate) (1 + Real Rate)-1. In Certainty-equivalent approach.(c) Nominal Rate . (c).(b) Internal Rate of Return.(d) Both of (a) and (b) 15. (b) (1 + Inflation Rate) 4.n).(b) Real Cashflow. (a).(b) Repetitive Projects. 8. (c) (1 + Money D Rate) 4. 12.(b)Probability. Rate) (1 + Money D Rate)-1.(c) Certainty of Cash flows. (xiii) F. (c) (1 + Real Rate) 4.(b) Probability of Cash flows. (ii) T. If the Real rate of return is 10% and Inflation s Money Discount Rate is: (a) 14. Rate. one variable is adjusted at a time to see its effect on the NPV.-4(xiii) Inflation affects not only the cash flows but also the discount rate.(1 + Inf.(d) All of the above . (b) Only Time Value of Money. The Real Cashflows must be discounted to get the present value at a rate equal to: (a) Money Discount Rate.(d) None of the above 3.(d) Equivalent Annuity Value [Answers: 1.(c) Less than NPV.(d) Risk-free Rate 3. (c) NPV ÷ PVAF(r.Present Value 7. (c). (b)More than NPV.(d) None of the above 2. Rate. (c). (d)] 19. (xii) T. (ii) F.(c) Net Present Value.(c) Project specific risk factors.4%. (c).(d) Both (b) and (c) 6. (iv) Risk Adjusted Discount Rate and Certainty Equivalents are on based statistical measures. (a).(b) 5%.(b) Inflation Rate. EAV is Equal to: (a) NPV × PVAF(r. If a project has positive NPV. (c) 5. Money Cash flows should be adjusted for: (a) Only Inflation Effect. (b) 2. Profitability Index. Multiple Choice Questions: 1.(b) Internal Rate of Return. (x) F. (a). (iv) T. 18.(1 + Inflation Rate)-1. 4. (ix) Sensitivity Analysis helps in calculation of NPV of the proposal. both the cashflows and the discount rate are adjusted. (vii) F (viii) T.(d) Nominal Rate + Inflation Rate 9. 10.(d) 6.5%. (vi) In Certainty Equivalents method.

(d) Certain Cashflows 17. In CE Approach.(d) None of the above 11.(b) Preference Share Capital.(b) Numerator. An implicit cost of increasing proportion of debt is: (a) Tax should would not be available on new debt. Concept of joint probability is used in case of: (a) Independent Cashflows. 7. (b). (b) Cost of Preference Shares. (d) 3. Firm's Cost of Capital is the average cost of: (a) All sources. Cost of Capital refers to: (a) Flotation Cost. (xvi) F.(b) Uncertain Cashflows. (d)None of (a) and (b) 14. (d) kc. (c) 7.(d) None of the above. (d) All of the above 9. NPV of a proposal. Which is the most expensive source of funds? (a) New Equity Shares. Which of the following sources of funds has an Implicit Cost of Capital? (a) Equity Share Capital.(d) None of the above 15. (c) Share capital. Expected Value of Cashflow. (b) 14.(c) Required Rate of Return. In case of partially debt-financed firm. (a) 6.(c) Neither (a) nor (b).(c) Generally same. (vi) F. (ix) Every source of fund has an explicit cost of capital. Which of the following cost of capital require tax adjustment? (a) Cost of Equity Shares.(b) Loans. (b) Net Present Value. (iii) F. Decision-tree approach is used in: (a) Proposals with longer life. (b) Accept a project if IRR is more than RADR (c) RADR is overall cost of capital plus risk-premium . WACC would be equal to:(a) Cost of Debt. 13. (viii) Cost of debt and Cost of Pref. 11. require tax adjustment. which one is adjusted? (a) Cash flows.(b) Ke. (xii) Cost of Pref.(b) Sequential decisions. as calculated by RADR real CE Approach will be: (a) Same. Weighted Average Cost of Capital is generally denoted by: (a) kA.(b) Dividend. (v) F. 15. (b) 2.(c) Rate of Interest on Fixed Deposits. Which of the following is correct for RADR? (a) Accept a project if NPV at RADR is negative. (vii) F. 12. In Risk-Adjusted Discount Rate method. (xvi) WACC is always calculated with reference to book value of different sources of funds.(c) Bonds. (c) 15.(b) Additional Funds.(c) Rate of discount. 8. (d) None of the above. Cost of Capital for Government securities is also known as: (a) Risk-free Rate of Interest. (c) Discount Rate that equates PV of inflows and outflows relating to capital. 6.(b) Life of the proposal. (c) Both (a) and (b).(c) Arithmetic Average Cashflow. (xiv)Cost of existing share capital and fresh issue of capital are same.(d) Retained Earnings.(c) Cost of Debentures.E.(c) Adjusting the life. In Risk-Adjusted Discount Rate method.(b) Most likely Cashflows. (b) 8. (c) 12. (xi)F(xii) T. (iv) T. 4. (iii) Cost of capital does not comprise any risk premium. (b)Adjusted upward. Risk of a Capital budgeting can be incorporated (a) Adjusting the Cash flows. 3.(d) None 10. (d) 4. In case the firm is all-equity financed. (d) 9. (xviii) F] 22. Which of the following has the highest cost of capital? (a) Equity shares. (vii) Tax liability of the firm is relevant for cost of capital of all the sources of funds. (xi) Cost of debt is the same as the rate of interest.(d) Preference shares. (b) All borrowings. (c) 13. (c) k0.(c) Book Values.(c) Both (a) and (b). (xiv) F. (b) P. (xvii) Book Value & Market Value weights are always different. In Sensitivity Analysis. (iv) Cost of capital is basic data for NPV technique. the CE Factors for different years are: (a) Generally increasing.(d) Retained earnings. (d) (b) or c 13. (vi) Different sources have same cost of capital.-55. Most Sensitive variable as given by the Sensitivity Analysis should be: (a) Ignored. 9.(b) Maximum Rate of Return. (v) Risk free interest rate and cost of capital are same things.(b) Generally decreasing. (x) T. (b)] 21. (c) 17. (b) kw.(d) None of the above 6. (a) 10.(d) Geometric Average Cashflow 16. Which element of the basic NPV equation is adjusted by the RADR? (a) Denominator. Marginal cost of capital is the cost of: (a) Additional Sales.(d) None of the above.(d) Cost of Retained Earnings.(b) After Tax Rate of Dividend. (b) Target Values. Ratio would increase. 5. 10. (b) Given Least important.(d) Salvage value 7. (xv) T. (xiii) Cost of Equity share capital depends upon the market price of the share. (x) WACC is the overall cost of capital of the firm.(c) Both. Cost of Capital for Bonds and Debentures is calculated on: (a) Before Tax basis. (viii) F.(d) None of the above.(b) Unequal. k0 is less (a) Kd . (xviii) Retained earnings have no market value.(c) Additional Interests.(b) New Preference Shares. share capital is determined by the rate of fixed dividend.(b) After Tax basis.(d) None of the above. (ix) F.(c) Unchanged. so these are not included in WACC (based on market value) [Answer : (i) T. (ii) Different sources of funds have a specific cost of capital related to that source only. (ii) T. (c) Both (a) and (b). 2. (b) 16. . Multiple Choice Questions 1. (d) Share Bonds & Debentures. State whether each of the following statements is True (T) or False (F): (i) The cost of capital is the required rate of return to certain the value of the firm. (d) All of the above. (xv) Retained earnings have implicit cost only. (c) Equity shareholders would demand higher return.(d) None of (a) and (b) 8. (xiii) T. both.(c) Riskfree Rate of Interest basis. (d) Both (a) and (b).(c) New Debts. is: (a) Certain to occur. (c) Adjusted downward . (c) Given the maximum importance. the normal rate of discount is: (a) Increased.(d) None of the above.(b) Adjusting the Discount Rate.(c) Debentures. 11.(c) Dependent Cashflows. (d) 5. share capital. (d) All of the above.(xvii) F.(c) Independent Cashflows.(d) Accept-Reject Proposal [Answers : 1.(b) Cost of Equity. Cost of Redeemable Preference Share Capital is: (a) Rate of Dividend. EVCF. In Playback Period approach to risk the target payback period is (a)Not adjusted. (d) Rate of Return of the company would decrease. 14. In order to calculate Weighted Average Cost of weights may be based on: (a) Market Values. the emphasis is on assessment of sensitivity of (a) Net Economic Life. (b) Decreased. 12.

(b) Increases FL.(d) (a) and (b) above. 7(c).(c) Rate of Pref. (iv) Operating leverage may be defined as Contribution ÷ EPS.(b) Fixed Interest Cost. (d)Minimum Rate of Return that the firm should earn. (ii) Financial leverage depends upon the operating leverage.(d) All of the three above. Operating leverage helps in analysis of: (a) Business Risk. Which of the following is not a generally accepted approach for Calculation of Cost of Equity? (a) CAPM. 27(b). 18.(c) Multiplication.(c) EBIT ÷Interest. In order to find out cost of equity capital under CAPM. 26. (vi) Favourable financial leverage and trading on equity are same. 16(c). (d) Equity Share Capital plus Long-term Debt. 18(b).(b) Rate of Interest.(c) Total Shareholders Equity.Market Price is more than Issue Price. (iv) F. Use of Preference Share Capital in Capital structure (a) Increases OL. Relationship between change in sales and change m is measured by: . (viii) Financial leverage is always beneficial to the firm. 11 (b).(c) EBIT = Fixed Cost. Operating leverage arises because of: (a) Fixed Cost of Production. Business risk can be measured by: (a) Financial leverage.(b) Operating leverage. Financial Leverage is calculated as: (a) EBIT÷ Contribution. 25.(b) Equity shares have higher risk than debt. is also known as: (a) Average Return on Investment. Cost of issuing new shares to the public is known as: (a) Cost of Equity. Financial Leverage measures relationship between (a) EBIT and PBT.(d) EBIT ÷Tax 8. FL is zero if: (a) EBIT = Interest. 21 (b). 23.(d) AC of the three above. Tax-rate is relevant and important for calculation of specific cost of capital of: (a) Equity Share Capital. 27.(d) Credit Risk 2. State whether each of the following statements is True (T) or False (F) (i) Operating leverage analyses the relationship between sales level and EPS. (iii) F. (b) Market Rate of Return. 23. 23(c). In order to calculate the proportion of equity financing used by the company.(b)Equity Share Capital plus Reserves and Surplus.(d) Any of these 4. Cost of Equity Share Capital is more than cost of debt because: (a) Face value of debentures is more than face value of shares. (b)Weighted Average Cost of Capital.(d) Dividends not Payable to lenders.(d) All of the above. (vii) F. 17(d).(b) Lower debt proportion.(d) Sales and EPS 14. shares is a factor of operating leverage.(c) Sales and EPS. (ix) T. 19. 5(b). 2(d). 26(c).(d) None of the above 6. (v) Financial leverage depends upon the fixed financial charges. (d) Retained Earnings are costlier than External Equity. Which combination is generally good for firms (a) High OL. 22(c). (vi) T. (b) External Equity is cheaper than Internal Equity.(c)Equity Share Capital plus Preference Share Capital. (iii) Dividend on Pref. Dividend 12.(d) No debt 5. (c) Average IRR of the Projects of the firm. Combined Leverage is obtained from OL and FL by their: (a) Addition. Combined leverage can be used to measure the relationship between: (a) EBIT and EPS.(d) Risk-free Rate of Interest.(d) Price-Earnings Ratio. 19(d).(d) None of these 10. (x) T] 24. [Answers : l(c).(viii) F. (b) EBIT÷ PBT. High degree of financial leverage means: (a) High debt proportion. High FL (b) Low OL. (c). Which of the following is studied with the help of financial leverage? (a) Marketing Risk. 9(b). 25(d).(c) Combined leverage.(b) Dividend Discount Model.(b) EBIT = Zero. Preference Capital and Long term Debt.(d) Decreases FL 15. The term capital structure denotes: (a) Total of Liability side of Balance Sheet. (d) Average Cost of borrowing. Dividend Plus Risk. 20. 8(a). Multiple Choice Questions 1. Low FL. 24(c).(c) Variable Cost.(c) EBIT÷ Sales.(d) None of the above 13.(b) It reduces WACC. Cost Capital for Equity Share Capital does not imply that: (a)Market Price is equal to Book Value of share. (ix) Total risk of a firm is determined by the combined effect of operating and financial leverages.(b)Shareholders are ready to subscribe to right issue. (c) Net Profit Ratio.(b) Variable Cost. [Answers :(i) F. 15(c).(d) Financing risk 3. 6(c). (c) Equity shares are easily saleable. which of the following is not required: (a) Beta Factor.(b) Subtraction. 4(a). 10(b). 17. 20(b).(c) Equal debt and equity. 14(c). (c) High OL.(b) Cost of Capital. Debt Financing is a cheaper source of finance because of: (a) Time Value of Money.(d) Sales and EBIT 11. 28(c)].(b) EBIT and EPS.(b) PAT and EPS.(c) Sales and PBT.(c) Does not dilute owners control.-616. 22.(c) Production Risk. (v) T.(d) EBIT = Pref. 24.(d) None of the above 7.(b) EBIT÷PBT.(d) Types of Capital Issued by a Company. Cost of capital may be defined as: (a)Weighted Average cost of all debts.(c) Foreign Exchange Risk.(b) Financing Risk. Operating Leverage is calculated as: (a) Contribution ÷ EBIT. (b)Equity Funds.(c) Debentures. the following should be used: (a) Authorised Share Capital. Advantage of Debt financing is:(a) Interest is tax-deductible.(b) Preference Share Capital. 21.(c) Tax-deductibility of Interest. 12(d). (c) Market Price of Equity Share. (c) Retained Earnings are cheaper than External Equity. 28. 3(a). 13(a).(b) Interest Rate Risk.(d) Marginal Cost of Capital. Minimum Rate of Return that a firm must earn in order to satisfy its investors.(c) Flotation Cost. Low FL. (d) EBIT ÷ Variable Cost 9. Financial Leverage arises because of: (a) Fixed cost of production.(c) Interest Cost. (ii) F. (vii) Combined leverage establishes the relationship between operating leverage and financial leverage.(c) Decreases OL. (x) Combined leverage helps in analysing the effect of change in sales level on the EPS of the firm. Which of the following is true? (a) Retained earnings are cost free. (b) Rate of Return expected by Equity Shareholders.

(c) Lower Debt. (c) Both (a) and (b). Benefit of 'Trading on Equity' is available only if: (a) Rate of Interest < Rate of Return. (d) None of (a) and (b) 17. 7. (iii) There is no difference of opinion on the relationship between capital structure and value of the firm. (c). 9. 9.(d) None of the above 16. (c) One is better than other. If a firm has a DOL of 2.(b) EPS is zero. (xv) In the MM model. (c). 3.(c) Net Profit Ratio. 14. (ix) T. (c).(c) EPS is highest. 11. (c). x.(c) Fixed Cost. Financial Break even level is defined as equal to (a) EBIT. At Indifference level of EBIT. 13. If a firm has no debt. At financial breakeven level of EBIT. the ke is assumed to be same and constant. (v) The NI approach. If EBIT for two firms are same. 11. (vi) The NI approach. State whether each of the following statements is True (T) or False (F). (c)EPS will never increase. [Answers : (i) F.(b) Combined leverage(c) Operating leverage. (d). (d). Indifference level of EBIT is one at which EPS is zero.(d) EPS is Negative.(c) OL will decrease. vii. (xii) In MM model. [Answers: 1. 6. (c). v. different capital have:(a) Same EBIT. (d) None of the above. (b). (ix) The traditional approach says that a firm may attain an optimal capital structure. (b) FL is zero. 7. Higher FL is related the use of: (a) Higher Equity. xi. (c). (Hi) F. (v) T. Financial breakeven level occurs when EBIT is zero. (iv) The ultimate conclusions of NI approach and the NOI approach are same. (c). (b). Preference dividend is not a factor of indifference level of EBIT. (a). which one of the following is correct? (a) OL is zero. EBIT will rise by 2. (b) Sales Decreases. viii. (viii) T. (vii) T. (d) Same PBT. (b). 7. (b). (vii) T. it means: (a) If sales increase by 2.8. (b). 3.(d) None of the above. leverage does not affect the value of the firm. if the debt level is further increased then (a) EPS will always increase. iii.(b) Interest liability. (vii) In NOI approach. EPS would be zero. 22. 8. 12.(b) Rate of Interest > Rate of Return. 12. (iii) T. Multiple Choice Questions 1. 4. (c) OL is zero. 15. [Answers : (i) T.(c) EPS is Infinite. (xi) MM model provides a behavioural justification of NOI approach. 4. (viii) In NOI approach says that there is no optimal capital structure.In order to calculate EPS.(d) None of the above. (ii) The equity Shareholders get the residual profit of the firm. (b). 5.-7(a) Financial leverage. (x) At optimal capital structure. (b)Both plans are good.(c) Slope of EBIT-EPS line (d) None of the above. (b). Relationship between change in Sales and d Operating Profit is known as: (a) Financial Leverage.(d) OL=OL÷FL 18. 5. Profit after Tax and Preference Dividend is divided by: (a) MP of Equity Shares. If a company issues new share capital to redeem debentures. (b). (b). (b) FL is one. (xiii) MM model is difficult to be applied in practice. (iv) F. If a firm has no Preference share capital. then the EPS of these firms would also always be same. EBIT is also known as operating profits. (d). (d) None of the above. personal leverage and corporate leverage are considered as perfect substitute. 8. (b).(c) Never beneficial.(b) Tax Rate. Operating leverage works when: (a) Sales Increases. (b). 19.(b) Higher Debt. (ii) F. 17.(b) EPS is Minimum. the value of the levered firm can be found by first finding out the value of the unlevered firm.(c) Face Value of Equity Shares. (b). i. Which of the following is not a relevant factor m EPS Analysis of capital structure? (a) Rate of Interest on Debt.Trading on Equity is :(a) Always beneficial. (b). (vi) F. (ii) T. For a constant EBIT. All equity plan and Debt-equity plan have no indifference level of EBIT.(b) Number of Equity Shares.8%. (x) F. then (a) Both plans be rejected. the EPS will increase by 1 %.(d) Dividend paid last year. 21. the k0 of the firm is highest. 20. (iv) F. (a).] . Financial break-even level of EBIT is:(a) Intercept at Y-axis. (xi) T. EBIT-EPS Analysis is an extension of financial leverage analysis. (c). 6. Indifference Level of EBIT is one at which: (a) EPS is zero. (b)] 27.(d) FL will decrease 21.(d) Variable Cost 23. 5. Financial Break-even level of EBIT is one at which: (a) EPS is one. then: (a) OL will increase. (xv) T.(c) Equity Dividend. (d) None of the above 22. (viii) F (ix) F. (xiv) T. 18. (xi) F] 26. 4. (c) CL is zero. Which of the following is correct? (a) CL= OL + FL. If the fixed cost of production is zero. 3. ix. (xii) T.(c) OL= OL × FL. ii. Indifference level of EBIT is one at which EPS under two or more financial plans would be same. the k0 falls as the degree of leverage is increased. (c) If sales rise by 1%. 16. (d) None of the above 19.(d) Gross Profit Ratio. vi.(b) CL=OL-FL.(b) EPS may increase.(b) Equity. (x) T. (d) None of these. (c).896. (d). EPS depends upon the composition of capital structure. Which of the following statements is True (T) or False (i) The financing decision affects the total operating profits of the firm.(b) FL will increase. Kd and K0 are taken as constant. 6. (vi) T. Between two capital plans. 11. (d)FL is zero 20.8%. iv. Trading on equity is resorted to with a view to decrease EPS. (b)] 25. 2. 8.(b) Same EPS. (a). (a).(c) Same PAT.(d) None of (d) and (b).(b) If EBIT increase by 2. 23. (xiv) In the basic MM model. (xiii) T. which one is correct?(a) OL is one.(b) Intercept at X-axis.(c) Amount of Preference Share Capital. (a). the EBIT will increase by 1%.(c) Both (a) and (b). (d).(b) May be beneficial. 2. Higher OL is related to the use of higher: (a) Debt. 10. (b). (v) T. 10. if expected EBIT is more than indifference level of EBIT. 12. 2.(b) Operating Leverage.(d) None of the above [Answers: 1. 9. 10.(d) Tax Liability.

(x) In the Walters model. 30.(d) None of the above.(d) Both (a) and (c). (ix) Gordon's model suggests that dividend payment does not affect the market price of the share. (c) Decreasing. Which of the following is incorrect for value of the firm? (a) In the initial preposition. Which of the following is true? (a) Under Traditional Approach. Multiple Choice Questions (i) Walter’s Model suggests for 100% DP Ratio when (a) ke = r. (d)Ke and Kd 6. (xv) T.(c) Traditional Approach. (c) Constant.21(b). (d) None of the above.(b) Cost of Debt. (d) ke = 0 (ii) If a firm has ke > r the Walter's Model suggests for (a) 0% payout.30. Which of the following appearing in the balance! generates tax advantage and hence affects the c.(d) Equity Share Capital.VD. (xii) MM model deals with irrelevance of dividend decision (xiii) MM model is a fool proof model of dividend irrelevance. (c) ke is constant. * 29.'That there is no corporate tax' is assumed by: (a) Net Income Approach.(c) Under NOI Approach. 20. 2(a). 9(d) 10(b). [Answers : l(b).000. 14(d).(c) Preference Share Capital. (iv) Retained earnings are an easily available source of funds at no explicit cost. 14. Which one is true for Net Operating Income Approach? (a) VD = VF . NOI Approach advocates that the degree of debt financing is: (a) Relevant. (b) Increasing.(b) kd is constant. (v) T.(d) Risk of the firm is independent of capital structure 18. which one is correct? (a) ke rises constantly. [Answer (i) F.(d) May be irrelevant. structure decision ? (a) Reserves and Surplus. 5(c). Which of the following is incorrect for NOI? (a) k0 is constant. Multiple Choice Questions 1.(b) Long-term debt. the cost of debt: (a) Increases. 80.(b) Net Operating Income Approach. (xiv) In the arbitrage process of MM model. then present valued shields would be: (a) r×D×t.000.(d) All of the above. (d) All of the above. 2. 2. (b) Total value of levered and unlevered firms is otherwise arbitrage will take place. 3(c). (iv) T.(b) Net Operating Income Approach. Market value of firm under NOI Approach is: (a) Rs.22(c)]. (b) 100% Payout. 21. MM Model argues that value is independent of the financing mix.(d) None of the above. Which of the following is true of Net Income Approach? (a) VF = VE+VD.(c) Debt Ratio is irrelevant. 19. 3. (xii) T.(c) Rs. (c) Total value incorporates borrowings by firm but excludes personal borrowing.(b) May be relevant.(c) D×t. when the debt proportion is increased.(b) MM Model. (b) ke < r. (vi) % rate of dividend is also known as dividend payout ratio. 22. the DP ratio should depend upon the relationship between r and ke (xi) Residual theory says that dividend decision is no decision. (b) r×D.(d) None of the above. (xi) T.(b) VE = VF + VD.(d) MM Model. In MM Model with taxes. 11. 13(d). In Traditional Approach. (c) VD = VF+VE. 10. 17(b). 4.(b) Higher Debt is better.000 and overall capitalization rate is 20%.(b) Under NI Approach. In the Traditional Approach. (viii) Walters model supports the view that dividend is relevant for value of the firm. 16(c).(d) VD = VF + VE. 5. Which of the following assumes constant kd and ke? (a) Net Income Approach.000. (v)Dividend payout ratio refers to that portion of total earnings which is distributed among shareholders.000.(c) Decreasing k0. (xiv)T. Which of the following is true for Net Income Approach? (a) Higher Equity is better.(c) MM Model with taxes. (d) None of the above.70.(c) k0 decreases constantly. 18(b) 19(c). 7. where 'r' is the interest rate. overall cost of capital remains same. 11 (d).(c) Irrelevant.(b) kd decreases constantly.(c) Traditional Approach. A firm has EBIT of Rs. Market value of debt is Rs. (iii) T. overall cost of capital remains same. In case of Net Income Approach. 8(c). 1.VE. (ii)Dividend is compulsorily payable to preference shareholders. 'That personal leverage can replace corporate leverage' is assumed by: (a) Traditional Approach. (d) VF = VE-VE. 16. 15(a).(c) WACC.20(d). (d)25% .(b) Net Operating Income Approach. the dividends paid by a company are replaced by fresh investment. (d) (D× r)/(l-t). Net Operating Income Approach.] 30. which one of the following remains constant? (a) Cost of Equity. 13. 1.(c) WACC & kd. 8. (vi) F.(b) Value can be increased by judicious use of leverage (c) Cost of Capital and Capital structure are m dent. (c) 50% Payout. Which of the following statements is True (T) or False (i) Dividend is a part of retained earnings.(d) kd & k0 are constant. 6(c).(d) Net Operating Income Approach. (d) Total value does not change because underlying does not change with financing mix. (iii) Effective dividend policy is an important tool to achieve the goal of wealth maximization. Which of the following argues that the value of levered firm is higher than that of the unlevered firm? (a) Net Income Approach. 17. (xiii) F. 7(c).(d) Rs. which one of the lowing is constant? (a) Cost of Equity.(c) Net Income Approach.(b) Rs.(c) VE = VF .000. (ix) F. (vii) T. 12(b).-828. (b) Cost of Debt. 9. (c) ke > r.(c) Traditional Approach. (vii) There is a difference of opinion on relationship between dividend payment and value of the firm. ‘D’ is the total debt and 't' is tax rate. In case of Net Income Approach. 15. (b) VE = VF+VD. (viii) T. irrelevance of capital structure is based on: (a) Cost of Debt and Equity. The Traditional Approach to Value of the firm m that: (a) There is no optimal capital structure.(b) Arbitrage Process. In MM-Model. (xv) MM model asserts that value of the firm is not affected whether the firm pays dividend or not. overall cost of capital remains same.(d) None of the above. 50. 'Judicious use of leverage' is suggested by: (a) Net Income Approach. 12. (x) T. the Cost of equity is: (a) Constant. 4(a).50. (b) Decreases. (ii) F.(d) All of these.(b) Net Operating Income Approach.

(c)dividend is payable after deciding the retained earnings. (d) All of the above.(d) None of the above 10.(c)Profit after Tax.(b)Shareholders to Company. there is a restriction on the rate 4 being paid by a company. (vi) F.(d)Preceding year EPS 15. Dividend irrelevance argument of MM Model is based on: (a) Issue of Debentures. State whether each of the following statements is True (T) or False (F). 8(c). (d) Both (b) and (c) 11. Which of the following represents passive dividend policy ? (a)that dividend is paid as a % of EPS. 10 are 80% paid up.(c)4 days. (b)Zero. (b) Decreasing Dividend.(d)Pref. (iii) F. (c)MM Mode. the MP for zero payout is zero. Which of the following stresses on investor's preference reorient dividend than higher future capital gains ? (a)Walter's Model. Dividend Distribution Tax is payable by (a)Shareholders to Government.(b)Current EPS.(c)Bonus Issue. If ke = r. Which of the following is not a type of dividend payment? (a) Bonus Issue. (d) Residuals Theory 5. It means that (a)Shares are not traded. Dividend Payout Ratio is (a) PAT÷ Capital.(c)Debenture. (b) Change in Management.(d) Market price for share decreases 14.(b)the investors buy shares for capital gain. (c) Passive Decision. (iv) F. of the share by (a) Increasing Dividend . If the following is an element of dividend policy? (a) Production capacity.4.(b)3 days. (ii) Right Issue.(b)Preference Share. MM Model argues that dividend is irrelevant as (a)the value of the firm depends upon earning power. (c) Share Split.(d)Fixed Dividend Payment 9.(d) None of the above 14. (d) Hedging 7.(c)Stable Dividend Payment. 13(c). (b) Share price goes down if dividend is not paid. (v) Cash dividend and bonus share issue affect the firm in the same way. (iii) Stability of dividend refers to the fact that the rate of divided must be fixed. (d) None of the above 4. In India. (c) Face value per share decreases. (b) Issue of Bonus Share.(b)Rs. In case of Gordon's Model. In India.(c)Price-Earning Ratio (d) Inverse of Price Earnings Ratio 15. (d) MM Model.-9Payout (iii) Walter’s Model suggests that a firm can always increase i. (b)Paid up capital always increases. T (viii) F.(d)All of the above 6. which of the following is irrelevant? (a)Earnings per share. 6(c). (b) Residuals Theory. Gordon's Model of dividend relevance is same as (a) No-growth Model of equity valuation.(d) Rs.(d)Both (a) and (b) 8. Residuals Theory argues that dividend is a (a) Relevant Decision . The company declares a dividend of 50%.(b) Decreasing Dividend Policy. 5.(d)None of the above 11. (b)Constant growth Model of equity valuation. 15(c)]. (ii) F. than MP by Walter's Model and Gordon's Model for different payout ratios would be (a) Unequal. (d) Irrelevant Decision 6. MM Model of Dividend irrelevance uses arbitrage between (a)Dividend and Bonus. ‘Bird in hand' argument is given by (a) Walker's Model. 4(b). 9(b). Which of the following is not considered in Lintner's Model ? (a) Dividend payout ratio.(c)Speed of Adjustment.(c)Equal. Every company should follow (a)High Dividend Payment. can be paid only out of profits. Dividend Distribution tax is paid on (a)Equity Share.(b)30 days. Dividends are paid out of (a)Accumulated Profits. Dividend ÷ PAT. 80.(c)Rs. (viii) No company in India.(c)Company to Government. vii (F).(b)Gross Profit. 31. (ix) Dividends. (vii) In India. 5(c). (d) Debt service capacity 12. (i) DP ratio of a firm should be directly related to future growth plans of the firm. (iv) While designing a dividend policy.(c)DP Ratio. 'Constant Dividend Per Share' Policy is considered as: (a) Increasing Dividend Policy. 3(d). (c) Constant Dividend. (c)Investors are not ready to offer any price. (c) Arbitrage . (b) DPS ÷ EPS. Dividend declared by a company must be paid in (a)20 days. (b) Gordon's Model. Which of the following is not true for MM Model? (a) Share price goes up if dividend is paid . 7(c). (ix) F. 14(b). 2(a). (d) Dividend in kind 13. 11 (a).(b)Low Dividend Payment. (b)Dividend and Capital Issue. (c)Profit and Investment. (b) Active Decision. (c)that dividend is paid after retaining profits for reinvestment. Multiple Choice Questions 1. (ii) Dividends are paid out of profit and therefore do not affect the liquidity position of the firm. (c)Pref. 12(c). (c) Market value is unaffected by Dividend policy. 8.e. (b)Shares available free of cost. Amount of dividend per share is (a)Rs. in India.(b)Dividend per share. If 'r' = 'ke'. if dividend on equity shares is not paid within 30 days it is transferred to Investors Education Fund in: (a)2 days.(d)None of the above 10. Dividend ÷ Equity Dividend 2. 50 5. (c) Financial restructuring.(d)General Reserve 7. (c) Gordon's Model. can pay final dividend already paid an interim dividend. (d)all of the above 13. 10(c). Which of the following is not relevant for dividend payment for a year ? . Stock split is a form of (a) Dividend Payment.(c)Stable Dividend Policy.(b)Right Issue. In stock dividend: (a)Authorized capital always increases. (d)Holding to Subsidiary Company 4. (d)dividend is a small amount 12. Which of the following generally not result in increase in total dividend liability ? (a)Share-split.(d)42 days 3. (c) Informational content. then under Walter's Model. (b)Bonus Issue. (vi) Capital profits can never be distributed as-4 the shareholders. (b)that dividend is paid as a constant amount. (v) F.(d)Negative [Answers l(c).(c)32 days.(d)7 days 8. the legal provisions may be considered by the firm. 9. [Answers : (i) T. Shares of face value of Rs.] 32.

(b)Profit position. 2. (a).(b)High Risk. if any. 5Cs of the credit does not include (a) Collateral. (d). a firm should follow a strict and aggressive should follow a strict and aggressive collection procedures.Basic characteristic of short-term marketable* (a)High Return. (v) Delinquency cost refers to bad debt losses to the firm. 4. . (i) Receivables management deals only with the collection of cash from the debtors. (vi) Concentration banking is a method of controlling cash outflows. (v) T. 9(c). (a). (iii) The objective of a credit policy is to curtail the credit period allowed to customers. 12. (b). (xii) F].(c)Liquidity.(c)Purchase of Assets. (b)Minimization of transaction cost. (vi) T.(b)Payment Float.(d)High Safety 16.(b)Character.(b)Inventory Management.. [Answers (i) F. Which of the following should be reduced to minimum by a firm? (a)Receipt Float. (vii) Credit evaluation of a customer is a cost process hence it need not be undertaken by a selling firm (viii) In order to minimize the level of receivables. 10(c). 34.(c)Optimum Receivables. Baumol's Model of Cash Management attempts to: (a) Minimise the holding cost. (x) F] 36.(c)Increasing Creditors. State whether each of the following statements is True (T) or False (F). (d). Concentration Banking helps in (a) Reducing Idle Bank Balance. (x i) Issue of share capital or debentures are taken as inflows in cash budget. (ix) T. (iv) Cash cycle is equal to operating cycle for a firm. (v) F.(d)Sales Price. (c)Cash budget is based on cash flow concept.(c) Net Float.(b)Increasing Collection. Multiple Choice Questions 1. 14.. 4.(d)Zero cash balance.(c)Holding cost. (c)Minimization of total cost. (c) Factoring. (d)Minimization of cash balance 14. 15(d)]. 12. 7. 6. 4(b).(b)Maturity. (c) Conditions. is not considered at all. 12(c). Difference between between the bank balance as per Cash Book and Pass Book may be due to: (a) Overdraft.(d) None of the above. (b. (d)Total Sales Figure.' (b) Preference shares. 5.10 (a)Cash flow position.(c)Paid up capital.(b)Optimum Finished goods. (x) Capital expenditures are not considered in cash budget.(d)Short-term debt investments. Which of the following is not a motive to hold cash? (a) Transactionary Motive. 9.(c)High Marketability. [Answers: (i) F.(b)Minimization of cash balance.(d)All of the above. (viii) F. (vi) F. 7(d). (d)None of the above. 6.(d)Raw Materials Management.(c)Receivables Management. (ii) Cash is the most important but least earning current asset. 2. (iii) Cash management always attempts at minimizing the cash balance. (d)Playing the Float. (b). 5(a).(c). ll(c). (iii) F.Marketable securities are primarily (a) Equity shares. 6(c). (x) Services of a factor are always beneficial. (c). Cash required for meeting specific payments should be invested with an eye on (a) Yield. (x) F.(b)Cost of transaction. (v) Receipts and disbursement method of preparation of cash budget is the most widely used method. 16(d)] 35. (c). (iv) F. 33.(b)Collection Policy.(d)Payment of Dividends. (b)Pre-scautionary Motive.(c)Concentration Banking. (vii) Baumol's model of cash management assumes a constant rate of use of cash. (viii) T. Cash Budget does not include (a) Dividend Payable. 15.(b)Recceipt Float. 2(b). 10. (ii) T. 5. (vii) T. (ix) In cash management. 13. (b). 11.(d) Retained Earnings [Answers l(b).(b)Daily Operations.(d)Reducing Bank Transactions.Float management is related to (a)Cash Management. 2. (d)None of the above. Multiple Choice Questions 1. Which of the following is not an element of credit policy? (a)Credit Terms. (iv) F. Which of the following is not considered by Miller-Orr Model? (a)Variability in cash requirement. 15. 13.(d)Total annual requirement of cash. (c) Issue of Capital. 3. (vii) F.(d)Repayment of principal amount of law is shown in cash budget.(d)All of the above.(c)Fixed deposits with companies. Cheques deposited in bank may not be available for immediate use due to (a) Payment Float. 14(d). (b)Postal Expenditure. (c). 11. (b).(d)All of the above.. [Answers 1. expected surplus cash. 8(c). (ii) T. Miller-Orr Model deals with (a)Optimum Cash Balance. (iii) T. (iv) Credit period allowed to customers must be equal to credit period allowed by the supplier to the firm.(b)Cash budget is based on accrual concept.(ix) F. (ix) Ageing schedule of receivables is one way or monitoring the receivables. (xii) Conversion of debentures into share capital is equal to issue of share capital and hence it is a type of cash inflow. 3. 3(c). (b) Float. " 9. 13(d). The Transaction Motive for holding cash is for (a) Safety Cushion.(c)Cash Discount Terms. 8. State whether each of the following statements is True (T) or False (F) (i) Management of cash means management of cash in flows. (ii) Receivables management involves a trade off between costs and benefits of receivable.Which of the following is not true of cash budget ? (a)Cash budget indicates timings of short-term borrowing. (viii) Baumol's model attempts at optimization of cash balance.(c)Captal Investment. (xi) T.Which of the following is not an objective of cash management ? (a)Maximization of cash balance.(c)Optimization of cash balance. (vi) Liberalizing the discount rate means increasing the discount rate for the same period. 10.

[Answers (i) F. (iv) Carrying cost of inventory includes the carriage in. [Answers 1. If a company sells its receivable to another party to raise funds. hence no stock be maintained.(c)Days sales outstanding.(c)Historical Cost. 9.(d)All of the above.(c)Periodic Inventory system.25. 12. (d). (d)None of the above. Which of the following is not a part of credit policy? (a)Collection Effort. (a). 1.(b)Decrease in Debtors. (c).(c)Factor provides cost free finance to seller. which of the following might not show a change in general? (a)Total Sales. the credit pence r j been increased from 45 days to 60 days. 4. 12. (d)Average Age of All Employees. ABC Analysis is used in (a)Inventory Management. (iii) There is no explicit benefit of keeping inventory. It has a Receivable Turnover of 8. 10. (a). Cash Discount term 3/15. (c)] 37.(c)Creditors Management.(c)Debt collection period. Use of safety stock by a firm would (a)Increase Inventory Cost. 14.(d)All of the above.(d)None of the above. 19.(b) Penalty charge for default. 15.(c)Speculative Motive. 17. This would result in (a)Decrease in Sales. (b)Sale of Receivables to the factor.(c)Collections<Current Purchases. 4. 1. 10. (vii) F. 3. (b). (c)400%. class A items may require (a)Higher Safety Stock. (ii) F. (v) Carrying cost and ordering cost are opposite forces in receivable management. In response to market expectations.25 times 19. (b). 8. (iii) F. If cash discount is offered to customers.(d)Corporate Governance. (ix) T. Which of the following is not a technique of receivables Management? (a)Funds Flow Analysis. (ix) EOQ model assumes a constant usage rate for a particular item. 16(b).(b)Realizable Value.(d)Increase in Average Collection Period.(b)Economic Order Quantity. Payment to creditors is a manifestation of cash held for: (a)Transactionery Motive. If the closing balance of receivables is less than the opening balance for a month then which one is true out of (a)Collections>Current Purchases.(d)0. Receivables Management deals with (a)Receipts of raw materials. (b)Debtors and Days Outstanding. 6.000. 6. otherwise full payment in 40 days. (b) 25%. Ageing schedule incorporates the relationship between (a)Creditors and Days Outstanding.000 of a firm are on credit. (viii) The EOQ model attempts to minimizing the total cost of holding inventory. (a). 21.00. 5.(d)Standard Cost. Whether each of the following statements is True (T) or False (F) (i) Inventory management does not include management work in progress. (d)None of the above.(c)Total Interest Cost. 6.(c)No effect on cost.000 then the receivables turnover is (a) 4 times. (b). 13. If no information is available. (b).(c)Accounting Policies. What is the Average collection period (360 days a year) and Average Debtors of the firm? (a)45 days and Rs. (d) Paying Practices of debtors. (iv) F.00.(c)Investments.(b)Ageing Schedule.000.(c) Sales and Cost of goods sold. 15. 2. If the sales of the firm are Rs. 4.000. (a).000 and the average debtors are Rs. 7. 2. 5. 5.(d)None of the above. (c) 3% Interest if payment made in 40 days and 15%. (d) None of the above. Inventory holding cost may include (a) Material Purchase Cost.(b)Factoring.(d)interest thereafter. (b) Without Recourse Factoring. (vi) Cost of stock out occurs whenever the firm has no stock of a particular item. it is known as (a)Securitization. (d) Collections < Current Sales.(b) Cash Discount. (c) Assuming bad debt losses. 7.(b)Precautionary Motive.000. (c)Average Age of Directors. (v) T.(b)Debtors.00. 8. (d). (ii) Stock of finished goods should be as high as possible so that no customer is denied the sale. 10. (b)Advancing against Credit Sales.(d)Bad Debt loss. (d)None of the above.00. If the average balance of debtors has increased. .(c)45 days and Rs.(c)Credit Standard. 8 (b). 13.(c) Interest on loan. (x) Average inventory in EOQ model is 1/2 of EOQ. 11.(d)Collection Matrix.(b)Decrease Inventory Cost.00. (viii) T. 18. Which is not a service of a factor? (a)Administrating Sales Ledger.(b)Frequent Deliveries. (vii) ABC analysis helps to ascertain the minimum level of stock of raw material. (vi) F. 20. (a). (x) T] 38. 80% of sales of Rs. otherwise full payment 40 days.(b)Collections>Current Sales. Bad debt cost is not borne by factor in case of (a) Pure Factoring.00.(d)Creditors.(b)Receivables Management. Securitization is related to conversion of (a)Receivables.(c)Current Ratio. 9.(b) Profit and Increased Costs of Receivables.(b)360 days and Rs.(b)Debtors collection. then which of the following would increase? (a)Sales. Credit Policy of a firm should involve a trade-off between increased (a) Sales and Increased Profit.(b) 15% Discount if payment in 3 days. 16.(d)None of the above. (d). 3. the General Rule for valuation of stock for balance sheet is (a)Replacement Cost.11 3. EOQ is the quantity that minimizes (a)Total Ordering Cost.(d)Safety Stock Level. what is not true in respect of factoring? (a)Continuous Arrangement between Factor and Seller. 60. (c) With Recourse Factoring.(b)Average Payables. net 40 means (a) 3% Discount if payment in 15 days. (d). 17.(b)Total Inventory Cost. Which of the following is related to Receivables Management? (a) Cash Budget. 1.(d)Updating of inventory records. 15.. 14.(c)Ageing schedule. Multiple Choice Questions 1. In ABC inventory management system. (c).(c)Pledging. (a) 11.(d)Inventory Management 21.(d)All of the above 20.(c)Increase in Bad Debts. 18. Out of the following. (d). (a).(d)360 days and Rs. None of the above.(b)Stock.

it may be considered as a long-term source of funds. [Answers (i) F.50.. (b). State whether each of the following statements is True (T) or False (F): (i) Same considerations are applicable to short-term sources as well as long-term sources of funds.(c)Nayak Committee. (xiii) One of the objective of Tandon Committee m suggest inventory norms for different industries. The type of collateral (security) used for short-term loan is (a) Real estate. (v) F.(d) None of the above. (d)Increase in cost of goods sold.(b)Decrease in inventory by Rs. 7. Which of the following is not applicable to commercial paper (a)Face Value. (viii) T.(b)Issue Price. (b).000. (a)Free on Board (FOB).(b)always Butter Control (ABC). (d) Government Bond 4. (c). Inventory is generally valued as lower of (a)Market Price and Replacement Cost. (ix) Bill Discounting is a good source of short term finance to all firms. (viii) Commercial Papers can be issued only if minimum credit rating is procured by the issuer company.(c)Average Pricing. 11.(d)None of the above.(b)Total Number of order is least. 13. [Answers 1. the inventory turnover is increased to 10. 17.(c)EOQ will decrease if annual usage increases. (ii) F. Which of the following is a liability of a bank? (a)Treasury Bills. Concept of Maximum Permissible Bank finance was introduced by (a)Kannan Committee. 7.(c)Import Duty.(b)Plant & Machinery. 13. (c).(c) Order Quantity is fixed. 18.(d)Junk Bonds. Which of the following is not included in cost of inventory? (a)Purchase cost. In the EOQ Model (a)EOQ will increase if order cost increases.(b)Holding Cost. 14.(c)Forward Market Commission.12 7. (vii) In India. (xiv) T.(c)Provision for dividend.000. (c). 2. 8. (b). (xii) F. (a). 50.(d)Selling Costs.(b)Transport in Cost. (d)2AOC. commercial papers can be issued for any amount and for any duration. (iv)Credit purchase can be a good source of short-term finance. 3. (a). 5. (b)Avoiding lost sales.(c)Cost and Sales Value. 19.(c)Reorder level.(d) Both (a) and (c). 9.(c)Equity share capital. 17. is known as. 14. (b)..(b)EOQ will decrease if holding cost decreases. 9.(b)Accrued expenses. (d). 12. With better inventory management.(d)None of the above.(d)Tandon Committee.000. 18. Cost of not carrying sufficient inventory is known as (a)Carrying Cost. b f _ 9. (d)Avoiding Production Shortages.(b)More than face value.(b)Cost and Net Realizable Value. 15.(b)Order Interval varies. 6. (xv) T] 40. System of procuring goods when required. (xi) T.(d)Economic Order Quantity.Multiple Choice Questions 1. What is Economic Order Quantity? (a)Cost of an Order. (iii) T. (ii) As bank overdraft is availed by business firms on a regular basis. A firm has inventory turnover of 6 and cost of goods sold is Rs. 19. (iii) For availing funds from short-term sources.(d) All of the above.(b)Based on their Usage and value.(b)Commercial papers.. (x) T. O = Order Cost and C = Carrying Cost per unit per annum. 5. (c). (xi) Short-term unsecured debentures are not popular among Indian corporates. 3. 11.(c)Total Cost.(c)Stock of good. 6.(c)Certificate of Deposits. 16.(d)All of the above.(c)Based on Physical Volume. (xv) Kannan Committee suggested for full discretion banks for determining borrowing limits of borrowers.Which of the following is not a spontaneous source of short-term funds ? (a)Trade credit. (v)Cash discount should always be availed by the purchasing firm irrespective of the rate of discount.(b)Standard Cost. Which of the following is true for a company which uses continuous review inventory system (a)Order Interval is fixed.(d)Equal to redemption value 8. (d).(d)Sales Value and Profit. Which of the following is not a standard method of inventory valuation? (a)First in First out. This would result in: (a)Increase in inventory by Rs. (vi)A firm should always arrange the funds by delaying the payment to creditors and payables. ABC Analysis is useful for analyzing the inventories: (a)Based on their Quality. 10. (ix) F. (xix) Tandon Committee has suggested different method for calculation of Maximum Permissible Bank Finance.(c)Coupon Rate. Commercial paper is a type of (a)Fixed coupon Bond. (d)] 39.(c)Total inventory costs are minimum. (d)Equity share capital 2. (vii) F. (c)Reducing carrying cost. credit rating of borrower is generally not required.(b)Unsecured short-term debt. Commercial Papers are issued as per the lines issued by (a) Securities and Exchange Board of India. all types of short-term financing from banks must be secured.(b)Chore Committee.(d) Stock-out Cost 15.(c) Jest in Time (JIT).(d)Realizable Value. (xiii) T. Commercial paper are generally issued at a pries (a)Equal to face value.(c)Decrease in cost of goods sold.(d)Optimum order size.(d)None of the above. (a). The basic objective of Tandon Committee recommendations is that the dependence of industry on bank should gradually . If A = Annual Requirement.(b) 2AO/C (c) 2A÷OC. (x) In India. Which of the following is not a benefit of carrying inventories (a) Reduction in ordering cost. (iv) T. 4. (vi) F. (b)Reserve Bank of India.(b)Cost of Stock. (xii) Reserve Bank of India constituted Tandon Committee to suggest the norms for long-term credit facility from banks to borrowers. 50. then EOQ (a) (2AO/C) 2 . 16(c). (a). (d). 7. In India. EOQ determines the order size when (a)Total Order cost is Minimum. 12.(c)Less than face value. 10.

In lease system.(d). (xvi) A venture capital firm deals with a new.term finance.(d)None of the above 10. 9. (xi) F. State whether each of the following statements is True (T) or False (F) (i) A lease is a temporary transfer of title of an asset in return for a rental income.(b)Financing decision.(iii)F. the credit position of a person. (b)Operating Lease.(c)Dividend decision. Which of the following is not true for a "Lease decision for the lessee? (a) Helps in project selection (b)Helps in project financing (c)Helps in project location (d)All of the above. a lease is a: (a)Working capital decision. 4. (xii) While evaluating lease as a source of long. (xx) Credit rating is an authoritative guarantee regarding. xxii) Securitisation and Factoring are two sides of the same coin. (viii) T. State whether each of the following statements is True (T) or False (F) .(d) A financial lease in generally cancellable by lease.8(c). 2. (b)] 43. (c). State whether each of the following is True (T) or False (F) (i) Financial services refer to facilities relating to capital market. 3.(c)Leverage Lease. (x) A lessee should evaluate the lease options as against the buying option. (xxiii) Securitization in India is regulated by RBI. depreciation on lease asset is allowed to (a) Lessor. (vii)T. (iii) Technically. (x) T. (v) Regulatory framework for NBFCs is provided by RBI. Doubtful and Lost. From the point of view of the lessee.(d Financing bank 6.(d)None of the above 2. (iv) Operating lease and Sale and lease-back are different types of transactions. (xviii) F.(xvi) T.(b)Direct Lease. 10.(iv)F.(b)Net Lease. (ix) T. (ix) NBFCs are not allowed to operate in Insurance sector. 11. 3.(vi) F. (xviii) Portfolio managers are not required to be registered. (xi) All merchant bankers have to be registered with RBI. a lease is a (a)Investment decision. (vi) T. (v) T. (x) A merchant banker helps in procuring overdraft from a commercial bank. Under the provisions of AS-19 'Leases'. (c).(d)None of the above. Cash discount terms offered by trade creditors never be accepted because (a)Benefit in very small. (xv) A mutual fund can operate as a venture capital fund. risky and untested product. (ii) Lease transactions in India are governed by the Lease Act.(d)Investment decision 10. 6. (xii) F. [Answers 1. (c). 11.(d)Leverage Lease 3.(c)Hire purchase price. (c). (c)An operating lease is generally cancelable by lease. (vii) As per AS-19. xxi) RBI has prescribed guidelines for the operations of credit rating agencies in India.(d) Leveraged Lease 8. (iii) NBFCs provide financial services to corporate sector only. 5.(d)None of the above. (d)None of the two 5.(b)Goods on Approval.(d)Direct Lease 4. [Answers (i) F. (d)] 41. (xiii) Merchant bankers should follow the prescribed code or conduct.(c)Operating Lease. (vii) Prudential norms for Assets and Investments by NBFCs were framed on the recommendations of Narasimhan Committee. [Answers (i)F. (in) F. (viii) Lease financing is a type of capital budgeting decision from the point of view of the lessee. Lease which includes a third party (a lender) is known as(a)Sale and leaseback. (xiii) Lease outflows should be discounted at the interest rate to find out the present values. interest is calculated on (a)Cash down payment.(c)Finance Lease. (vi)Any NBFC can borrow funds on mutually agreed terms. (xiii) T.(vii) T. (c)Lessee. For a lessor.(c)No sense to pay earlier. (xiii) F. (a). A short-term lease which is often cancellable is known as (a)Finance Lease.13 (a)Increase. (xiv) A Finance lease has more financial implications mar. 8(d).(b)Financing decision. (ix) F. (xix) T. (xx)F.(b)Remain Stable. (xv) T . (c).(b)There is often a call option in financial lease. (xii) T. (xii) A lead manager has post-issue responsibilities also. (a).(c)Decrease. 7. 10. in Operating lease from the point of view or both . in case of Finance lease. (xxii) F. A lease which is generally not cancellable and covers full economic life of the asset is known as (a) Sale and leaseback. (v) Sale and Lease-back and Leveraged lease are types of finance lease. Multiple Choice Questions 1. (xvii) F.(ii)T. 6.(b)Lessee (c) Any of the two. 5. (ii) F. 2. (xxiii)T] 44. 9(b). (b). (b).(c)Buy or make decision. (c). the lessee becomes the owner of the asset or the lease period. (xi) Net benefit of leasing is the NPV of lease option from the point of view of lessor. (ii) Non-banking finance companies are engaged in financial services.(b)Cash price outstanding. Which of the following is not a usual type of lease arrangement? (a)Sale & leaseback. (b). (iv) All NBFCs operating in India must be registered with SEBI. (viii) F. (x) F (xi) F.(d)Economic Lease 7. the lessee should give more emphasis on AS19. (b). (xix) A portfolio manager has to operate as per the code of conduct prescribed by SEBI. (iv) T.(c)Inverse Lease. (c). (xiv) F. (d). Non-Standard. Under income-tax provisions.he lessor and the lessee. 4. a leased asset is shown is the balance sheet of (a)Manufacturer..(b)Cost is very high. 9. [Answers 1. 7. (xvii) All venture capital funds in India have been promoted by Government. (vi) Treatment of Operating lease in AS-19 is almost same as required by tax laws in India. the asset is shown in the balance sheet of the lessee. (viii) Assets of NBFCs are also classified as Standard.(b)Lessor. (ix) Tax-shield on depreciation and interest is an important variable both for the lessor and the lessee. (xiv) Share capital issued by a company for the first time is known as venture capital. (c).(v)T. (xiv) T] 42. One difference between Operating and Financial lease is: (a)There is often an option to buy in operating lease. (xxi) F.

E. If a coupon bond is selling at discount. 10. (ix) In Constant Growth model.(d)Discount to Face Value. (xi) F. (c) Current Yield.(c)No relationship.(viii) T. (xxi) T] 45.(d)Internal Rate of Return. (xiii) P factor is a measure of value of share.(b)Maturity Value. then which of the following is true? (a) Po < Par and YTM < coupon.(d)None of the above. (xx) F. it is known as (a)Discount Bond. (xxi) Required rate of return and bond valuation are inversely related. (d)All of the above. (xiv) CAPM helps in determining required rate of return. (vi) T. (xvi) F. They yield on the bond is (a)16%.(d)None of the above 7.(b)Dividend yield. A long-term bond issued with collateral is called (a)Junk Bond. In the formula ke (D1/P0) + g. At time to maturity comes closer.(c)Coupon Rate = Current Yield. Which of the following is a feature of zero-coupon bonds? (a)Sold at Par.(c)Pays no Interest. (xvii) F. 15. YTM of a Bond is not affected by (a) Coupon Rate.Which of the following will cause an increase in bond values? (a)Decrease in Redemption Amount. 18. (xix) Bond valuation depends upon the discounted cash flow technique. (vi) No-growth Dividend model.(c)Remains Constant. (xiv) T. Market interest rate and bond price have (a)Positive relationship. (b)Issue Price. only next years' dividend is capitalised.(b)Issue Price. (xiii) F.(b)Yield to Maturity. 1000. (iii) F.(c)Increase in Redemption Amount. the value of equity share ii sensitive to growth rate.(b)Decreases. (c)Issue Price.(b)Higher than. (c)Market Value < Redemption Value.(c)No relationship.(b)Decrease in Coupon Rate. (d)32% 12.(c)Premium to Face Value. . (c)Redemption Value.(b)Yield to Maturity. 4. If the coupon rate and required rate of return are equal. (x) In Constant Growth model.(d) Interest Amount. Which of the following is always true for Bonds? (a)FV of a Bond = Issue Price. as the maturity approaches the discount on bond (a)Increases. [Answers: (i) F.(c)It is not earning profits. (xii) In Walter's Model.(b)Floating Rate Bonds.14 (i)Valuation of bonds and of equity shares can be made by the same valuation model. . If the required rate of return of a particular bond is less than coupon rate.(c)Par Bond. the value of equity share depends upon the DP ratio. (vii)No-growth dividend model does not involve present value concept.(c)Debenture. (c)Bonds are redeemable at market value.(b) Interest rates have increased.(d) Increase in Redemption Period.(d)Same relationship 5.(d) None of the above. (iv)BV of an equity share is the best measure of valuation. Rate of Interest on convertible debenture is generally________the rate on non-convertible debentures (a)Lower than. (xvii) Basic or Current yield on a bond is calculated with reference to the face value or issue price of a debenture. (d)Zero Value.(c)Same as. (xi) For companies which are not expected to pay dividends equity shares cannot be valued.(b)Redemption Value. 14.(d) Holding Period Return. A 16% bond with a face value of Rs. The rate of interest payable on a bond is also called (a)Effective Rate of Interest.(b)Premium Bond. If Coupon rate is less than Required Rate of Return.(d)Market Price.(c)80%. (c)Redemption Value. D1/P0 refers to (a)Capital gain yield.(d)Junk Bond.(c)Coupon Rate. 17. (ii) Equity shares cannot be valued because equity shares have no redemption. An investor should buy a bond if (a)Intrinsic Value < Market Value. In a 3 years Bond purchased and held till maturity.(c)Remains same. (b)Redemption Value = Amount received by bondholder at maturity.(d) Po > Par and YTM > coupon 6. (ix) T. than market price of a bond approaches (a)Face Value. 20.(b) Po < Par and YTM > coupon (c)Po > Par and YTM < coupon.(c)Par Value. 22. (viii)Gordon's Model and Constant Growth Model are one and same.(d) None of the above.(d)Preference Share.(b)Coupon is paid half yearly. (vii).(b)Positive relationship. (xx) Bond Valuation is sensitive to both the interest rate and the required rate of return of the investor. the value of the bond is equal to (a) Market Value. (iii)Intrinsic value and market price of equity shares are always equal. Issue Price and Market Value of bond must be same. 200 in the market. (x) F. 23.(c)Interest yield. 13. (xii) T. (v) T. (xviii)YTM of a bond is the same as the IRR of the bond investment. (xix) T. 24. 250 is available for Rs.(d)None of the above. the volatility (a) Increases. Principal value of a bond is called the (a)Maturity Value.(b)Sold at premium.(d)Deep Discount Bonds. 9. the rate earned is called (a) Coupon Rate. the value of equity share not sensitive to required rate of return.(b)Treasury Bills.. 8. (ii) F. Bonds that are covered by specific collaterals are called (a)Junk Bond. Market Price of Bond and Market Rate of Interest (a) Inverse relationship.(b)20%. Multiple Choice Questions 1. 21. 19.(b)Inverse relation. Current Market Price of a Bond is equal to its Par Value if (a)Face Value is Rs. the valuation of equity shares is based on expected stream of dividends. 2. (v)In Dividend Discount Model.(b)Decreases.(b)Intrinsic Value > Market Value.(d)Not Redeemable. (d) It is a Government Bond. A company may call the bonds when (a) Interest rates have dropped. (d)Market Value = Redemption Value. (xv) F. 16. 3. (xv) Face Value. (xviii) T. Deep Discount Bonds are issued at (a)Face Value. 11.(b) Par Value. (iv) F.(c)Secured Bonds. (xvi) Market Value of debt instruments depends upon the market value of collateral.(d) None of the above. In case the maturity period of a bond increases.(d)Both (a) and (b).

(x) T. (c). (ix) T. (b). (b)Avoidable. (viii) Systematic risk is diversifiable. 2. (v) Risk refers to possibility of loss from an investment. 4.(b)Diversifiable. (vi) Business risk arises because of competition in the market. (c)] 46.(d)None of the above 19. 24.(b)Surcharge of Income-tax. Which of the following will increase the required rate of return? (a)Increase in Interest Rates. lower the risk. An investor buys a bond today and sells after 3 months the rate of return realised is known as (a)Yield to Maturity. (xiv) Variation in expected return from an investment is known as risk. (c).(c)Interest Rate. (ix) Systematic risk remains fixed irrespective of number of securities in portfolio. 20. (xix) β and σ cannot be used interchangeably. (b). Risk-aversion of an investor can be measured by (a) Market Rate of Return. (b) Maximization of Risk.(d)None of the above 18. hence. 21. (b) Maximising Return.(xvi) T.(b) Risk-free Rate of Return. (d)None of these. Amount of risk-reduction in a portfolio depends upon (a)Market movement. (ii) F. [Answers 1. (c). Basic objective of diversification is (a) Increasing Return. (a). 6.(b)Degree of correlation. 18. (c).(c)Beta.. 16. (xvii) F. of shares.(d)Beta is constant. 14.(c)Diversification does not affect risk. (xiii) Higher risk may be assumed by an investor if the r is lower. 22. 8. (xx) F. (b).(b)Capital Assets Pricing Model. (xxiii)CAPM can be used for risk-return relationship of any type of asset. 75. (a).(c)Systematic.(c)Capital Market Line. then expected return can be ascertained with the help of probabilities. 10.(c)Unavoidable. (c).(c)Both of the above. State whether each of the following statements is True (T) or False (F). of risk-free investment is (a)Zero.(b)Return of an investment. (xvii) Capital Market Line show the MP of shares at the exchanges. 19. [Answers (i) F. Beta. (c)-1. (vi) T. Which of the following is unsystematic risk to a firm? (a)Inflation.(b)Lock-out in a company. 10. (viii) F. (f) Maximizing Risk. Which of the following is true? (a) Higher the Beta. 12.Risk of a portfolio depends on (a) Risk of elements. (iii) Holding period return includes the capital gain as well as revenue return. risk can be ignored by an investor. (b).(d) Capital Market Line .(c)Political Instability.(c)Security Market Line.(d) Required Rate of Return. (iv) T. (xviii) T. (i) Principal objective of making investment is return.(c)Risk is constant. 6. (c) Proportion of elements. (b).(c)No. 7. (b) Increase in Risk-free Rate.(b)Current yield. 9. 14. 5. 17. (b). (xviii)CAPM establishes that the return of a security -m related to risk of that security. Multiple Choice Questions 1. (xv) F. Risk-Return trade off implies (a) Minimization of Risk. Which of the following is true? (a)Risk can never be reduced to zero. (d) None of the above. Which of the following is diversifiable through diversification? (a)Systematic. (c)Increase in Degree of Risk-Aversion (d) All of the above. a new security adds (a) Systematic Risk.(b) Unsystematic Risk. (xii) Standard deviation is better than coefficient of variation as measure of risk. 2. 8.(d) Both (b) and (c).(d)None of the above 22. (iii) T. Which of the following is the variability of the return from a share associated with the market as a whole? (a)Unsystematic. (a). 4. higher the risk. (xv) β is a measure of expected return of a security. (vii) Financial risk of a firm depends upon composition of capital structure. (v) F. (xix) T.(xxiii)T] 47. 3. 23. (iv) If more than one value of return is expected.(d)None of the above 21. (d)All of the above. (c). Systematic risk of a security can be measured by (a)Coefficient of variation. 13. 15. (b)Higher the Beta. (xvi) Efficient Frontier consists of a large number or 23 portfolios. Which of the following describes the relationship between expected rate of return and the standard duration? (a)Characteristic Line. (b). (d) None of the above. (c). 5.(c)Holding Period Return.(b)Interest Rate Risk.(b)Diversification always reduces risk to zero. (xi) F. (xxi) Security Market Line is the graphical presentation of security prices. 25. (c) Decreasing Risk. Return of a portfolio is (a)Total Return of all elements. (xiv) T.(b)1. In a diversified portfolio. (xi) No investor is ready to take risk in whatsoever situation.(c)None of the above.(c)Highest Return (d) Lowest Return 3.(c)Harry Marketing Model. Which of the following describes the relationship between systematic risk and return? (a)Arbitrage Pricing Theory. 11.(b)Unsystematic. 7. (c) Portfolio Return. Which of the following is not a non-diversification (a)Industrial recession.(b)Average Return of all elements.15 25. (xxi) F. (d) All of the above. 12.(d)None of the above 20. Total portfolio risk is equal to systematic plus (a)Non-diversifiable. (b). (xv) HM Model deals with evaluation of portfolios.(b)Capital Market Line. 9. (b) Correlation of return . (vii) T.(d)Both (a) and (c). (xxi) CML and SML have same shape and conveys same ideas. (c). (c)Ignorance of Risk (d) Optimization of Risk 11. (b). (xiii) F. (ii) Return includes only the interest or dividend received from an investment.(d) Scarcity of Raw Material. Standard deviation can be used to measure (a)Risk of an investment.( c) Liquidity Risk. (xii) F. 7. (c). (d).(b)Standard Deviation.(b)characteristic Line. (xxii) F . 13. Which of the following describe the relationship between expected rate of return and the P? (a)Security Market Line.(d)Range. Which of the following is diversifiable risk? (a)Inflation Risk. (x) Degree of risk and risk premium are positively related. (b). (a). β. (c)Both(a)&(b) and (d) None of (a) and (b).(c)Seasonal Risk. 16.

(xi) Options contract is only an extended version of a futures contract.50. (b). 17. 8(b). (c)Less than Zero. (d) Stock Volatility 26. A contract which gives the holder a right to buy a particular asset at a particular rate on or before a specified date is known as (a) European Option. (c). the option writer has a right against the option holder. Return = 11. (xvii) Loss of the call options holder is always limited. (ix) Option premium is the price for getting a right against other party. (b). (iii) Standardised forward contracts may be called futures.(c)Call + Put. 12.(b)Strike Price. 20. (iv) F. (d)Equal to one [Answers 1. (xi) F.(c) Premium. (d) Total Risk 2 7.(c) Systematic Risk.Multiple Choice Questions 1. (xiii) American options can be exercised only on the strike date. 15. (c). (b) Unsystematic Risk. In CAPM.(d)Strike Price . 11. (d). Holder of an American call option can (a)Buy the asset only on expiration.(b) Spot Price. 14. (xix) T.(c) Reserve Bank of India. (xv) T. (xix) Excess of call option market price over the strike price is called intrinsic value. (b) One. (xxiii) T. 19.(b)Strike Price – Premium. Intrinsic Value of a 'out of money' call option is equal to (a)Premium. (x) F. Return = 15. Risk avoidable through proper diversification is known as (a) Portfolio Risk. (c). (xiv) F.(d)Forward contract 2. A Futures contract is standardized version of a (a)Put option.(c)May not affect. (xvi) F.16(d). (a). (viii) Seller of a futures contract incurs a loss when the future price increases.(c)Spot Price – Premium. (d).. (xx) Intrinsic value of an option is non-negative.(d)Strike Price 9.16 23. (xxi) Swap deals with the delivery of a physical asset.25.(c)Premium.(d)None of the above 15.(b)Sell the asset on or before expiration. 7. Maximum gain of a put option holder is restricted to (a)Strike Price. the counterparty guarantee provided by the exchange. 10. State whether each of the following statements is True (T) or False (F) (i) Derivatives are securities similar to shares and debentures.(b)Debt Equity Ratio. The maximum loss of a call option holder is equal to (a) Strike-Spot Price. (xvi) Expiry date of an option contract is mutually decided by the parties. (c). (b). (xxii) F. (d) Strangle 5.(d) Capital investment 24. which of the most reasonable? (a) That shares have lesser degree of risk. 25 (d).Stock beta measures (a) EPS.(b)Decrease the value.(c) Life of an asset. (v) F.(c) American Option.(d)So + Premium 7. [Answers (i) F. (xxi) F. will affect the value of the option? (a)Increase the value. Expected Return on the market in 16% and Risk free rate is 6%. (b) Straddle. (xxiv) Futures and Options are available on the shares in India. 4. 28. (xxii) Swap arrangements are always standardised. Break-even of a Put option occurs when spot price is equal to (a)Strike price + Premium.(b)Strike Price – Premium. (xxiii) All derivatives contracts on NSE are cash settled. b. (vii) T. the time value of a call option is . (b) Risk of an asset. (b) Greater than one. (c)Premium. 26. which of the following projects be accepted. (iv) Forward contracts are traded only at computerised stock exchanges. β (Beta) factor measures (a) Return of an asset.0% 28.(d) d) All of the above 3. (d). (b).(b)Brokers.(c)Buy the asset on or before expiration. (a) A:β = 0. (ii) Underlying assets of a derivative must be a physical asset. (xxiv) 2] 49. An aggressive share would have a beta (a)Equal to Zero. (a). (d) Less than one 25.(d) Ministry of Finance 6. (c)Buyers. (b). 22. (d)Sell the asset only on expiration 10.(c)Spot Price.(b)Sellers of Futures. 29.(d)Both of (a) and (b) 4. (c)Dividend. (d). (d). (xv) Option premium is one time non-refundable amount. (c) Greater than one. (x) In options. 24(a). (xvii) T. 27.(b)Call option.5% (d) D: β = 2. (b). (xviii) Loss of the put option holder is always limited. the margin in payable to the broker by (a)Buyer of Futures. 9.(d)Any of the above 11.(b) Forward Market Commission.Premium 13. (xiv) There is no fixed strike date in European options.0% (c) C: β = 1. (vi) T. (a). 13. (xii) F. (ii) F. (xiii) F. (vii) Futures contracts do have a theoretical price. (v) All futures contract must be settled by delivery of the asset. 2. 3. The maximum loss of a put option writer is equal to (a)Strike Price – Premium. In India. (a). 18. (vi) In case of futures. (xx) T. How the increase in volatility in asset price.(c)Spot Price.(b)That market is over valuing the shares (c)That the company is high dividend paying. In Futures trading. (b).(b)Sell the asset on or after expiry.] 48. (b).(b)Zero.(d)Strike Price plus premium 8. If the intrinsic value of a share is less than the market price. (d)None of the above 14. Before expiry date. 5.(c)None of (a) and (b).5% (b) B: β = 1.(c)Sell the asset on expiry only (d) Sell the asset before expiry only 12. (viii T.(b)Spot Price. (ix) T. Which is the beta for a treasury stock? (a) Zero. Return = 18. 23. Break-even of a call option occurs when spot price is equal to (a)Strike Price + Premium. return = 25. (iii) T. (a). (xviii) T. 6. 21. (b). Holder of European put option can (a) Sell the asset on or before expiry. (xii) Call options and put options are inverse of each other. (d) That market is undervaluing the share 29. (a). Margins are imposed on options sellers to safeguard the interest of (a)Exchange. derivatives in interest rates are regulated by (a) Securities and Exchange Board of India. .

ABC Ltd.e. (c). If a swap ratio is calculated on the basis of EPS. 2. (xi)In case the swap ratio is calculated on the basis of EPS.(d) 25% or more 5. the terms and conditions are standards with reference to (a)Rate and Date only. which is a loss company. (vi)Forward Rate is not the same as would prevail on the fixed date in future.(b) 100%. (ix) F. (c). An acquirer offer to buy shares directly from the share holders is known as (a)Poison Rell. (ii)Value of a currency in terms of another currency remains same. (xvii) F. 10.(d). the market value of holding of equity shareholders would be protected.(b)Acquisition.(d)Takeover 4. 16(d). It is absorbed into another group company XYZ Ltd. (viii) T. the swap ratio should be based on EPS. (d). (c). (b) Purchasing shares of Target. (v) (F). 6.(c)Tender offer. 15 (c). In call options. (xii) In order to protect the earnings available to shareholders.(d) (i). 5. (a). (ii).(b)Spot Price . (xiv) F.(c)Place of delivery only. (b)Quantity only. Out of 4 factors i. (d). (ix) Forward rates are quoted only as outright rates.(c).(b)Earnings and Assets. [Answers (i) F. State whether each of the following statement is True (T) or False (F) (i) The terms mergers and takeovers refer to same type of situation. (xvi) Offer once made to acquire shares cannot be revoked.Multiple choice questions 1.(b)A division converted into a company. (b). (x) Swap Ratio and Share Exchange Ratio are one and the same thing.(b)European Option. (d)Spot Price 19. (iii) F. (iv)Ask Price and Bid Price are quoted by a dealer in the market. and amalgamation in the nature of merger is a case where________of shareholders of transferor company have agreed to become shareholders of transferee company. (iii) A conglomerate merger is a situation when all firms of a group are amalgamated into one.. 11.(b)Market Turnover. PQR Ltd. (vi) T. the price of the merger depends upon the mutual consent. (c). State whether each of the following statements is True (T) or False (F) (i)Exchange rate refers to value of one currency in terms of $.(c)Out of Money Option. (d).(c)Holding-subsidiary relationship.(d)All of the above 10. (xviii) T ] 51. (b)Vertical Merger. 3. If Strike price is more than the spot price of the asset. (xiii) F.(c)Paid-up Capital and Earnings. Under AS 14. ABC Ltd acquires substantial number of equity shares in XYZ Ltd. 17. 14. (xvii) No competitive bid can be made for takeover of shares of other company (xviii) Can a merger proposal be evaluated as a capital budgeting decision. (b). (d) Arranged Merger 6. Which of the following is a case of 'Spin off? (a)Assets sold in the market. A firm can acquire target firm by (a) Purchasing assets of Target.(c)Strike Price.(i) Dividend Yield. . (vii) Assets and Earnings of the target firm can be used for evaluation of that firm. the call option is known as (a)American Option.(iii)and (iv). (b) Negotiated Merger.(d)All of the above 18. (b).(b)White Knight. (vii) Forward transactions generally give gain or loss to the parties. 19.(c) Assets transferred to lenders (d) None of the above [Answers 1. 9.(b)Total Earnings. (x) A 'plus' sign denotes a premium and a 'minus’ signs denotes a discount in the forward exchange market. 100 and Rs. (c). (c).(c)Reverse Merger. (d). (b). (d)Takeover 8.17 (a)Strike Price . which of the following has an m relation with its value? (a)Volatility. Rates.. 12. 6.(c)Amalgamation.(d)All of the above 7. (xiii) In hostile Takeover bid. and (iv) Price volatility. (c). 4. (v)Difference between Ask and Bid price gives rise to arbitrage in foreign exchange. (v) Increasing profit and lessening competition are the only objectives of mergers. If the Price-Earnings Ratio of two companies are same and they merge on the basis of share swap ratio (EPS based). (c). (ix) Economic Value Added (EVA) of a firm is always positive. (iv)'Poisson Pill' and 'White knight' are types of mergers. (xvi) F. and (iv).(c)Total Assets. 4. (c)] 50. (b).(c)Market Premium . (iii) and (iv) 17.00. (iii) Time to Expiry. 3.Strike Price. (c). (iv) F. (iii)Direct Quote and Indirect Quote are inversely related. This is a case of (a)Hostile takeover bid. (xv) The aim of the new Takeover Code announced by SEBI is to make the process of takeover more transparent.] 52.(d)In the Money Option [Answers l. (d).(c)Economic Value Added. (a) More than 50%. 18. 12. Which of the following is not a usual method of calculation of Share Swap Ratio? (a)Profit before Tax. (vi) Financial evaluation of the target firm is a compulsory step in the merger process. (xv) T. 13. 5. and T Ltd.(b)Horizontal Merger. 11.50. (viii) Operating Cash flows to Firm (OCFF) are always more than Operating Cash Flows to Equity (OCFE). which affect the premium of an option?(a) (i). (ii).(b)2. then which of the following would be protected for two groups of shareholders? (a)Total Market Value. (c). (xi) F. 25 respectively. (x) T. (c).(d)No relationship 12. is a profit making company. (xii) T. 8(b). (viii) Forward rates are quoted at premium or discount to the spot rate.(d)Absorption 3.(b)Time to Expiry.80 9. Shares of A Ltd. . The share swap ratio based on Market Price would be (a)1. every shareholder has to sell his shares to the acquiring firm.(b). 7. (ii) Market Interest. Merger of two companies under BIFR supervision is known as (a) Reverse Merger. (d). (a).40.Intrinsic Value. 2.(c) (ii) and (iv). In Futures.(c) At least 90%.Spot Price. It is a case of (a)Merger. which of the following will be protected for two groups of shareholders? (a)Market Value and Earnings.(d) Intrinsic Value 16. 7(a). 8. (ii) Accounting Standard 14 (AS -14) classifies mergers as Vertical and Horizontal. acquires 100% of Preference Share Capital of PQR Ltd.(d)Paid-up Capital and Market Values 11. It would result in (a) Hostile Takeover bid. (c) Offer for Sale. (xiv) In tender offer method. (a). (vii) T. (c)Purchasing Assets or Shares(d)None of the above 2. 10. 9. (ii) F. are currently traded at Rs.(d).

6.(b)Interest Rate Parity. (xxi) Interest Rate Parity Theorem deals with the money supply and foreign exchange rates. (ix) National Stock Exchange has been established by SEBI. State whether each of the following statement is True (T) or s(F) (i) Capital market includes money market and foreign exchange market.(d)Any of the above 3. Annual nominal Interest rates in country X and country Y are 6% and 12% respectively. (b)There is a relationship between spot and forward rates. . (xxi) F. 5.(a)Interest rates across countries will eventually be same. (x) F. (viii) T. X has to pay $ 5. An Indian exporter has despatched goods worth $ 1. (xv) T. (c).(b)That $ is at discount.(b)Cross-Rate. [Answer (i) F. (xx) International Fisher Effect contends that currency with higher interest depreciates.(d)None of the above 5. (xvii) National Stock Exchange of India is a Public Sector Organisation.(c)Buy a $ Put Option. 2.(d)One-price rule 11. (c)Goods should sell at the same price across countries after exchange rate considered.(d)None of the above 2. (xiv) Purchasing Power Parity Theorem and Interest Rite Parity Theorem are inverse of each other.(c)Buying a $ Put Option. Price of one currency in terms of another currency is knows as (a)Exchange Rate.(d)Exchange Power Parity 12.(c)$ is at premium.(d)None of the above [Answers 1.000 receivable in 2 months time. (vii) Book-building system cannot be used for issue of shares. (xiv) SEBI regulates the operations in both the primary and the secondary market. 11. (vi) T. He can hedge exchange rate risk by: (a)Buying a $ Call Option. (ix) F. 3 months forward rate would be (a)4. (xi) At the Stock Exchange. (xvii) T.(d)None of the above 7.(b)Sell a $ Call Option. (o. If the Spot Rate of $ in Mumbai is Rs. direct ask price is_________ than the direct bid price.(c)Exchange Power Parity. (xviii) T. (a). If the spot rate of $ in Mumbai is Rs. (viii) Operations of stock exchanges are directly controlled by Government. Mr. Spot exchange rate is the rate of exchange between two currencies (a) for immediate delivery. (iv) T.(c)Ask Price. (d).00.(d)None of the above 6. 12. the badla system has been formalised. Forward exchange rate is the rate of exchange between two currencies (a) prevailing today for future delivery. (vi) Badla system is prevailing in India. (xvi) Individual investors can deal with only in secondary market. 3.(c)for delivery at a particular spot in future. (c).(b)4. (v) F. 14. (xii) T. (b). (xi) F. (iii) Securities are issued in the secondary market segment. is denoted as the strength of the market. (d)5.(b)Futures Market. of units of domestic currency required to buy one unit of a foreign currency is known as (a)Indirect Route. (xix) T. (xxiv) Expropriation refers to the risk arising out of change in rates. (x) OTCEI is a subsidiary of National Stock Exchange. (xiv) F.18 (xi) A cross rate is the average of spot and forward rates (xii) Inconsistency in the cross rates gives rise to arbitrage..(d) All of the above 8. 46. (xvi) Relative PPP deals with the changes in exchange rates. (v) Primary objectives of SEBI include Investors' Protection and Regulation of capital market in India. (ii) Stock exchanges are a part of primary market segment.45. (xx) T. (a). (xxii) T.756. No. (d)None of the above 14. (xix) Fisher Effect deals with the interplay of interest rates and inflation rates.(b)Selling a $ Call Option.50 and 1 month forward rate is ? 45. Adjustment in Exchange Rates due to different inflation rates in two countries is known as (a)On Price Rate. (xxiv) F]. (c).927.(b)Direct Route.(d)Spot Rate 4. (iv)SEBI is an association of stock exchanges in India. (xviii) Currency which has higher inflation rate devalues relative to the currencies having lower rates of inflation. (xvi) T. Foreign Currency Exchange Rate risk can be hedged in (a)Options Market. Normally.00. (xiii) Arbitrage in foreign exchange market arises due to inefficiencies of the market. (xviii) In the on-line trading system at the National Stock Exchange. 13. (xiii) The efficiency with which the information is reflected in the market prices of securities. (xv) PPP contends that the exchange rates between two currencies adjust till the purchasing power parity is achieved.(d)Selling a $ Put Option 9. 45.085 13. 8. (xxii) IRP helps understanding the determination of forward exchange rates.(c)5.(b) would prevail at a future date.65. then which is correct for the forward market? (a)That Rupee is at premium. (d).295. (ii) F. (a)] 54. 4.(c)Purchasing Power Parity. (xxiii) Several types of tools of foreign exchange risk management are available to importers and exporters. (xv) New Issue Market is an element of primary market. (c)Direct Route. (iii) T. 53. Purchasing Power Parity refers to that .. 10. (a). 9. 7. then which is correct for forward market? (a)That $ is at premium.(b)That Rupee is at discount.000 in three months time for the imports made by him. Correct hedging policy for him would be to (a)Buy a $ Call Option. (xxiii) T.(c)Money Market. (a)equal.(c)prevailing today for immediate delivery.(c)lesser. 46. (vii) T.) the trading in shares is made through out-cry system.(d) Sell a $ Put Option 10. (xii) The term 'bought out' deal is related to OTCEI. (b). (xiii) F.(b)for future delivery. Current exchange rate is 5 units of X per unit of Y. Relationship between Spot and Forward Exchange Rate s is referred to as (a)Interest Rate Parity.70 and the 3 months rate is Rs.(b)Purchasing Power Parity. Multiple Choice Questions 1.(c)Rupee is at premium. (xvii) Violations of PPP leads to arbitrage opportunities. Mumbai (BSE Ltd.(b)greater. (a). (a).

(xiv) T. (xvi) F. (a). 8. (d). 17. (xiv) Depository participant is an agent of an investor.(c) Working as a Capital Market Intermediary (d)None of the above 3. (xv) T. fake.(d) 1 14.(c) Selling some shares out of a large holding.(d)All of the above 12. (b) Reduced Risk of stolen. (b). (ii) SEBI is constituted from amongst the directors of various stock exchange. (xvi) Rolling Settlement is a system of settlement of accounts of brokers. (d). (xiii) F.(c)Ministry of Finance. In India.(b)Index Futures. (a) Open ended funds. (b). (iv) F. How many depositories are there in India? (a)2. Secondary Market in India is regulated by (a)Reserve Bank of India. (c) No Stamp duty on transfer of shares in dematerialized form (d) All of the above 9.(b)Securities and Exchange Board of India. (c).(d)Forward Rate Agreements 13.(d) Forward Market Commission 16. (v) SEBI has issued various guidelines to educate investors. The amount in unpaid dividend accounts of companies shall be transferred to the (a)Dividend Equalisation Reserve of the company. (vii) T. the price of the security is announced by the company. (ix) T. (x) In Green Shoe Option. 4. (xii) GSO is available only in case of issue of shares by book building process. (ix) Options and Futures Contracts in India are settled on calendar month basis. (vii) F. Short selling refers to (a) Buying shares and then selling them on the same day. (xiv) F. Which of the following is true for mutual funds in India? (a)Exit load is not allowed. 1956. (v) F. (b)Paid up Capital.(b)Investor Education and Protection fund. (b) Giving loans to clients. 2. (viii) Every Mutual Fund has to calculate the NAV as per the procedure given in the SEBI Guidelines.. a shareholder is a beneficial owner.(c)Commodity Options.(c)Positive suggestion .(c)Index Futures.(d) Both A and B. (a). Which of the following is working as demutualized stock exchange since from beginning? (a)NSE. (xviii) F 55.(b)BSE. (ii) F.(b)) To manage mutual funds investments. Which of the following is the benefit of Depositories? a) Reduction in the share transfer time to the buyer. (b). (xx) Futures and Options in shares are traded only at BSE and NSE. (iii) The purpose of issuing different types of Rules and Regulation by SEBI is to bring monetary gains to the investors. 15. (c)] .(c) Mutual Funds.Multiple Choice Questions 1 Assets Management company is formed (a) To manage bank's assets. (iv) F. (xi) T. (xvii) Sensex is an index number of 50 shares.(c)Diversified funds. (c). (xix) The oldest stock exchange in India is NSE.(d) Authorized Share Capital [Answers 1. (xiii)T.(d) None of (a) and (b) 4. (xviii) F. 5. (xi) Demutualisation refers to separation of trading and ownership right of stock exchange.(b)3.(b)Merely opinion. (xiii) In Depository system. (b). 12. (ix) F. 13. forged shares.(d)MCX 11. (xviii) NSE and BSE are the only stock exchanges in India. (Hi) F. (x) F.(c)) To construct infrastructure projects (d) To run a stock exchange 2. 11. (xv) In book-building process.19 [Ans. (ii) F. 3.(xii) T. Prime duty of a merchant banker is (a) Maintaining records of clients.funds do not have a fixed date of redemption. 16.(b) Investment in short-term securities.(c)0. (xvii) F. 6. (b).(b)OTCEI. Which of the following derivative is not traded on Indian Stock Market? (a)Index Options. (xii) T. Which of the following is not available in India? (a)Index Options.(c) Investor Protection Fund. (b). 7.(c)BSE. (xvi) F. (xvii) F..(c)DSE. 10. (v) T. NIFTY and SENSEX are calculated on the basis of (a) Market Capitalization. …. [Answer (i) F.(b) Foreign Direct Investment. (d). Basic objective of a money market mutual fund is (a) Guaranteed rate of return. (a). 17.(d)Commodity Futures 8.(d) Continuously selling shares in lots.(b)Close ended funds.(c)Both (a) and (b).(d)Exit load allowed is some cases 7. (xix) F. the investors are allotted as many shares as applied. (d)None of the above 10.(d) Depositories 6. (viii) T. (iv) Government need not bother about the protection of the investors.(b)Stock Futures. 9. (iii) F. The first computerised online stock exchange in India was (a)NSE. (vi) Mutual Fund is a pool of money belonging to various investors. (b). (i) F. (vi) F. (viii) F. Credit Rating of a debt security is (a)Guarantee of Repayment. Which of the following is not regulated by SEBI? (a) Foreign Institutional Investors. (xi) F. (x) F. (c)Entry load is not allowed. (b). (vii) Money Market Mutual Funds are also traded at Stock Exchange. (xv) F.(d) General Revenue Account of the Central Government 15.(b)Entry load is allowed. (xx) T] 56.(c) Free-float Capitalization. 14.(b) Selling shares without owning them. (vi) T. 5. State whether each of the following statement is True (T) or False (F) (i) SEBI has been constituted under the Securities (Contracts and Regulation) Act.