Question-wise Details

Question 1

Question 1:
Time: 9 Min 20 Sec Marks: 1 / 1

The following table summarizes prices of various default-free zero-coupon bonds (expressed as a
percentage of Face value): (1 Mark)

Time to Maturity (Years) 1 2 3 4 5

Price (Per Rs. 100 Face

94.52 89.68 85.40 81.65 78.35
Value)

Assuming annual compounding frequency, what is the effective Yield to Maturity of the bond with
five year time to maturity? __________________

Response:
5%

Answer:

Best answer Correct answer

Question 2:
Time: 2 Min 55 Sec Marks: 1 / 1
 The following table summarizes prices of various default-free zero-coupon bonds (expressed as a
percentage of Face value): (1 Mark)

Time to Maturity (Years) 1 2 3 4 5

Price (Per Rs. 100 Face Value) 94.52 89.68 85.40 81.65 78.35

What is the percentage change in price of the bond with five year time to maturity, if the yield to
maturity decreases by 1% from the current level? ____________________

Response:
4.90%

Answer:

Best answer Correct answer

Question 3:
Time: 28 Sec Marks: 1 / 1
 The following table summarizes prices of various default-free zero-coupon bonds (expressed as a
percentage of Face value): (1 Mark)

Time to Maturity (Years) 1 2 3 4 5

Price (Per Rs. 100 Face Value) 94.52 89.68 85.40 81.65 78.35

If you plot the effective Yield to Maturity of the five default-free Zero Coupon Bonds (whose prices
are provided in the table above) against their corresponding time to maturity, what would be the
shape of the derived yield curve?

Options Response Answer

Upward sloping curve

Downward sloping curve

U-shaped curve

Inverted U-shaped curve

Question 4:
Time: 1 Min 6 Sec Marks: 1 / 1
 The following table summarizes prices of various default-free zero-coupon bonds (expressed as a
percentage of Face value): (1 Mark)

Time to Maturity (Years) 1 2 3 4 5

Price (Per Rs. 100 Face Value) 94.52 89.68 85.40 81.65 78.35

Consider an Indian corporate bond with a INR 1000 face value, 8% coupon with semi-annual
coupon payments and an effective YTM of 9%. It has been 57 days since the last coupon
payment was made, and there are 182 days in the current coupon period. The accrued interest
for this bond is closest to? _______________________

Response:
12.53

Answer:

Best answer Correct answer

Question 5:
Time: 1 Min 8 Sec Marks: 1 / 1
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a
percentage of Face value): (1 Mark)

Time to Maturity (Years) 1 2 3 4 5

Price (Per Rs. 100 Face Value) 94.52 89.68 85.40 81.65 78.35

Which of the following statements is FALSE?

Options Response Answer

Bond prices converge to the

bond s face value due to the time

effect, but simultaneously move

up and down due to unpredictable

changes in bond yields.

As interest rates and bond yields

fall, bond prices will rise.

Bonds with higher coupon rates

are more sensitive to interest rate

changes.

Shorter maturity zero coupon

bonds are less sensitive to

changes in interest rates than are

longer-term zero coupon bonds

 Question 2

Question 1:
Time: 4 Min 18 Sec Marks: 2 / 2

Assume a company has earnings per share (EPS) of INR 50 and pays out 50% in dividends. The
earnings growth rate for the next 3 years is expected to be 25%. At the end of the third year the
company will start paying out 100% of earnings in dividends, and earnings will increase at an
annual rate of 5% thereafter. Assume that the annual required rate of return by equity
shareholders is 15%.

What is the intrinsic value of each share? _______________________ (2 Marks)

Response:
795.13

Answer:

Best answer Correct answer

Question 2:
Time: 2 Min 17 Sec Marks: 2 / 2

Assume a company has earnings per share (EPS) of INR 50 and pays out 50% in dividends. The
earnings growth rate for the next 3 years is expected to be 25%. At the end of the third year the
company will start paying out 100% of earnings in dividends, and earnings will increase at an
annual rate of 5% thereafter. Assume that the annual required rate of return by equity
shareholders is 15%.

What will be the price-to-earnings (PE) ratio of the stock at the end the third year?
___________________________ (2 Marks)
 Response:
10.5

Answer:

Best answer Correct answer

Question 3:
Time: 17 Sec Marks: 0 / 1

Assume a company has earnings per share (EPS) of INR 50 and pays out 50% in dividends. The
earnings growth rate for the next 3 years is expected to be 25%. At the end of the third year the
company will start paying out 100% of earnings in dividends, and earnings will increase at an
annual rate of 5% thereafter. Assume that the annual required rate of return by equity
shareholders is 15%.

What is the net present value of growth opportunities (NPVGO) of the stock today?
____________________________ (1 Mark)

Response:
378.47

Answer:

Best answer Correct answer

Question 4:
Time: 18 Sec Marks: 0 / 1
 Assume a company has earnings per share (EPS) of INR 50 and pays out 50% in dividends. The
earnings growth rate for the next 3 years is expected to be 25%. At the end of the third year the
company will start paying out 100% of earnings in dividends, and earnings will increase at an
annual rate of 5% thereafter. Assume that the annual required rate of return by equity
shareholders is 15%.

Assume that the stock is trading at INR 1,000 per share today. Everything else remaining the
same, what rate of the perpetual earnings growth during the terminal period will justify the current
market valuation of the stock? _______________________ (1 Mark)

Response:
7.67%

Answer:

Best answer Correct answer

Question 5:
Time: 16 Sec Marks: 1 / 1

Assume a company has earnings per share (EPS) of INR 50 and pays out 50% in dividends. The
earnings growth rate for the next 3 years is expected to be 25%. At the end of the third year the
company will start paying out 100% of earnings in dividends, and earnings will increase at an
annual rate of 5% thereafter. Assume that the annual required rate of return by equity
shareholders is 15%.

Everything else remaining same, which of the following changes would lead to a reduction in the
intrinsic value of the share? (1 Mark)
Options Response Answer

An increase in the earnings per

share

An earlier increase in the dividend

pay-out ratio

An increase in the required return

by shareholders

An increase in terminal growth

rate of earnings
 Question 3

Question 1:
Time: 2 Min 15 Sec Marks: 2 / 2

Azad Hind Dhaba (AHD), a company which runs a chain of restaurants, is considering expanding
into the snack food business and you have collected the following information on the investment:
- Unlevered beta of firms in snack food business is 0.80.
- The equity in AHD has a book value of INR 500 million and a price-to-book ratio of 4x.
- The firm has INR 300 million (in both book and market value terms) in interest bearing debt.
- AHD has an A rating and default spread for A rated bonds is 1% over risk-free rate.
- The risk-free rate is 4% and the equity risk premium is 5%.
- Marginal tax rate is 30%
Assuming that this project will be funded using the same mix of debt and equity as the company,
estimate the following for the ‘snack food’ project: (2 marks)

Levered Beta of the project _________________________________________

Response:
0.88

Answer:

Best answer 0.88

Question 2:
Time: 15 Sec Marks: 1 / 1

Azad Hind Dhaba (AHD), a company which runs a chain of restaurants, is considering expanding
into the snack food business and you have collected the following information on the investment:
- Unlevered beta of firms in snack food business is 0.80.
- The equity in AHD has a book value of INR 500 million and a price-to-book ratio of 4x.
- The firm has INR 300 million (in both book and market value terms) in interest bearing debt.
- AHD has an A rating and default spread for A rated bonds is 1% over risk-free rate.
- The risk-free rate is 4% and the equity risk premium is 5%.
- Marginal tax rate is 30%
Assuming that this project will be funded using the same mix of debt and equity as the company,
estimate the following for the ‘snack food’ project: (1 Mark)

Cost of equity of the project

_____________________________________________________________
 Response:
8.42

Answer:

Best answer 8.42%

Question 3:
Time: 1 Min 15 Sec Marks: 1 / 1

Azad Hind Dhaba (AHD), a company which runs a chain of restaurants, is considering expanding
into the snack food business and you have collected the following information on the investment:
- Unlevered beta of firms in snack food business is 0.80.
- The equity in AHD has a book value of INR 500 million and a price-to-book ratio of 4x.
- The firm has INR 300 million (in both book and market value terms) in interest bearing debt.
- AHD has an A rating and default spread for A rated bonds is 1% over risk-free rate.
- The risk-free rate is 4% and the equity risk premium is 5%.
- Marginal tax rate is 30%
Assuming that this project will be funded using the same mix of debt and equity as the company,
estimate the following for the ‘snack food’ project: (1 Mark)
After-tax cost of debt of the project _______________________________

Response:
3.5

Answer:

Best answer 3.50%

Question 4:
Time: 56 Sec Marks: 2 / 2
 Azad Hind Dhaba (AHD), a company which runs a chain of restaurants, is considering expanding
into the snack food business and you have collected the following information on the investment:
- Unlevered beta of firms in snack food business is 0.80.
- The equity in AHD has a book value of INR 500 million and a price-to-book ratio of 4x.
- The firm has INR 300 million (in both book and market value terms) in interest bearing debt.
- AHD has an A rating and default spread for A rated bonds is 1% over risk-free rate.
- The risk-free rate is 4% and the equity risk premium is 5%.
- Marginal tax rate is 30%
Assuming that this project will be funded using the same mix of debt and equity as the company,
estimate the following for the ‘snack food’ project: (2 marks)

Weighted Average Cost of Capital (WACC) of the project

_____________________________________________________________

Response:
7.78

Answer:

Best answer 7.78%

Question 5:
Time: 43 Sec Marks: 1 / 1

Azad Hind Dhaba (AHD), a company which runs a chain of restaurants, is considering expanding
into the snack food business and you have collected the following information on the investment:
- Unlevered beta of firms in snack food business is 0.80.
- The equity in AHD has a book value of INR 500 million and a price-to-book ratio of 4x.
- The firm has INR 300 million (in both book and market value terms) in interest bearing debt.
- AHD has an A rating and default spread for A rated bonds is 1% over risk-free rate.
- The risk-free rate is 4% and the equity risk premium is 5%.
- Marginal tax rate is 30%
Assuming that this project will be funded using the same mix of debt and equity as the company,
estimate the following for the ‘snack food’ project: (1 Mark)

Everything else remaining the same, which of the following would decrease the Weighted
Average Cost of Capital (WACC) of the project?
Options Response Answer

An increase in the risk-free rate

An increase in the unlevered beta

of firms in snack food business

An increase in the marginal tax

rate of the project

An increase in the default spread

of bonds issued by the firm

 Question 4

Question 1:
Time: 4 Min 11 Sec Marks: 2 / 2

A project is proposed to be funded by a combination of debt and equity. The debt funding would
involve raising INR 200 million of debt in the form of 10 year maturity bonds with face value of
INR 1000 and an annually paid coupon of 10%. The equity funding would involve issuance of 5
million common equity shares with face value of INR 10 per share. The equity shareholders are
likely to receive an annual dividend of INR 10 per share from next year end, which is expected to
increase at a constant rate of 5% thereafter till perpetuity. Assume that the marginal tax rate is
30%. (2 marks)

If the required annual return of bond investors is 8%, what would be the issue price of each
bond? _____________________________________________________________________

Response:
1134.20

Answer:

Best answer 1134.2

Question 2:
Time: 41 Sec Marks: 1 / 1

A project is proposed to be funded by a combination of debt and equity. The debt funding would
involve raising INR 200 million of debt in the form of 10 year maturity bonds with face value of
INR 1000 and an annually paid coupon of 10%. The equity funding would involve issuance of 5
million common equity shares with face value of INR 10 per share. The equity shareholders are
likely to receive an annual dividend of INR 10 per share from next year end, which is expected to
increase at a constant rate of 5% thereafter till perpetuity. Assume that the marginal tax rate is
30%. (1 Mark)

If the required annual return of equity investors is 15%, what would be the issue price of each
equity share? ___________________________________________________________
 Response:
100

Answer:

Best answer 100

Question 3:
Time: 39 Sec Marks: 0 / 1

A project is proposed to be funded by a combination of debt and equity. The debt funding would
involve raising INR 200 million of debt in the form of 10 year maturity bonds with face value of
INR 1000 and an annually paid coupon of 10%. The equity funding would involve issuance of 5
million common equity shares with face value of INR 10 per share. The equity shareholders are
likely to receive an annual dividend of INR 10 per share from next year end, which is expected to
increase at a constant rate of 5% thereafter till perpetuity. Assume that the marginal tax rate is
30%. (1 Mark)

What would be the debt-to-equity ratio of the project in market value terms? _________

Response:
0.45

Answer:

Best answer 40.00%

Question 4:
Time: 1 Min 20 Sec Marks: 0 / 2

A project is proposed to be funded by a combination of debt and equity. The debt funding would
involve raising INR 200 million of debt in the form of 10 year maturity bonds with face value of
INR 1000 and an annually paid coupon of 10%. The equity funding would involve issuance of 5
million common equity shares with face value of INR 10 per share. The equity shareholders are
likely to receive an annual dividend of INR 10 per share from next year end, which is expected to
increase at a constant rate of 5% thereafter till perpetuity. Assume that the marginal tax rate is
30%. (2 Marks)

What would be the Weighted Average Cost of Capital (WACC) of the total proceeds raised to
fund the project as mentioned above? _______________________________________________
 Response:
12.07%

Answer:

Best answer 12.31%

Question 5:
Time: 1 Min 4 Sec Marks: 0 / 1

A project is proposed to be funded by a combination of debt and equity. The debt funding would
involve raising INR 200 million of debt in the form of 10 year maturity bonds with face value of
INR 1000 and an annually paid coupon of 10%. The equity funding would involve issuance of 5
million common equity shares with face value of INR 10 per share. The equity shareholders are
likely to receive an annual dividend of INR 10 per share from next year end, which is expected to
increase at a constant rate of 5% thereafter till perpetuity. Assume that the marginal tax rate is
30%. (1 Mark)

What would be the impact of a reduction in the marginal tax rate on the Weighted Average Cost
of Capital (WACC) of the project?

Options Response Answer

It will reduce the project’s WACC

It will increase the project’s WACC

It will have no impact on the

project’s WACC

The project’s WACC may either

reduce or increase, depending on

the credit rating of its debt

securities
 Question 5

Question 1:
Time: 19 Min 10 Sec Marks: 1 / 1

ABC Ltd. (ABC) is currently evaluating alternative capital structures to fund the needed capital for
a new project. It is estimated that the new project will add Rs. 1,000,000 to the EBIT of ABC. In
this connection, ABC is comparing two different capital structures. Plan I would result in issuance
of 650,000 new common equity shares (@ of Rs.10 per share). Plan II would result in Rs.
6,500,000 of additional debt (8% p.a. interest rate before tax). The current capital structure and
other information is as follows: (1 Mark)

- Current Paid-up capital (@ of Rs.10 per share) : Rs. 8,000,000

- Current Debt (7% p.a. interest rate before tax) : Rs. 5,000,000
- Current Preference Shares (Dividend 10%) : Rs. 1,500,000
- Current EBIT : Rs. 1,000,000
- Taxes can be assumed at 50%

What is the Earnings Per Share (EPS) of ABC under the existing capital structure?
_________________________________________

Response:
0.22

Answer:

Best answer 0.22

Question 2:
Time: 53 Sec Marks: 2 / 2
 ABC Ltd. (ABC) is currently evaluating alternative capital structures to fund the needed capital for
a new project. It is estimated that the new project will add Rs. 1,000,000 to the EBIT of ABC. In
this connection, ABC is comparing two different capital structures. Plan I would result in issuance
of 650,000 new common equity shares (@ of Rs.10 per share). Plan II would result in Rs.
6,500,000 of additional debt (8% p.a. interest rate before tax). The current capital structure and
other information is as follows: (2 Marks)

- Current Paid-up capital (@ of Rs.10 per share) : Rs. 8,000,000

- Current Debt (7% p.a. interest rate before tax) : Rs. 5,000,000
- Current Preference Shares (Dividend 10%) : Rs. 1,500,000
- Current EBIT : Rs. 1,000,000
- Taxes can be assumed at 50%

What will the Earnings Per Share (EPS) of ABC, if it pursues the new project under plan I?
_____________________________________________________________

Response:
0.47

Answer:

Best answer 0.47

Question 3:
Time: 2 Min 15 Sec Marks: 2 / 2

ABC Ltd. (ABC) is currently evaluating alternative capital structures to fund the needed capital for
a new project. It is estimated that the new project will add Rs. 1,000,000 to the EBIT of ABC. In
this connection, ABC is comparing two different capital structures. Plan I would result in issuance
of 650,000 new common equity shares (@ of Rs.10 per share). Plan II would result in Rs.
6,500,000 of additional debt (8% p.a. interest rate before tax). The current capital structure and
other information is as follows: (2 marks)

- Current Paid-up capital (@ of Rs.10 per share) : Rs. 8,000,000

- Current Debt (7% p.a. interest rate before tax) : Rs. 5,000,000
- Current Preference Shares (Dividend 10%) : Rs. 1,500,000
- Current EBIT : Rs. 1,000,000
- Taxes can be assumed at 50%

What will the Earnings Per Share (EPS) of ABC, if it pursues the new project under plan II?
_______________________________
 Response:
0.52

Answer:

Best answer 0.52

Question 4:
Time: 12 Sec Marks: 1 / 1

ABC Ltd. (ABC) is currently evaluating alternative capital structures to fund the needed capital for
a new project. It is estimated that the new project will add Rs. 1,000,000 to the EBIT of ABC. In
this connection, ABC is comparing two different capital structures. Plan I would result in issuance
of 650,000 new common equity shares (@ of Rs.10 per share). Plan II would result in Rs.
6,500,000 of additional debt (8% p.a. interest rate before tax). The current capital structure and
other information is as follows: (1 Mark)

- Current Paid-up capital (@ of Rs.10 per share) : Rs. 8,000,000

- Current Debt (7% p.a. interest rate before tax) : Rs. 5,000,000
- Current Preference Shares (Dividend 10%) : Rs. 1,500,000
- Current EBIT : Rs. 1,000,000
- Taxes can be assumed at 50%

Which plan should the company pursue, if it aims to maximize its Earnings Per Share (EPS)?

Options Response Answer

Plan I

Plan II

Both the plans

Neither of the plans

Question 5:
Time: 28 Sec Marks: 1 / 1
ABC Ltd. (ABC) is currently evaluating alternative capital structures to fund the needed capital for
a new project. It is estimated that the new project will add Rs. 1,000,000 to the EBIT of ABC. In
this connection, ABC is comparing two different capital structures. Plan I would result in issuance
of 650,000 new common equity shares (@ of Rs.10 per share). Plan II would result in Rs.
6,500,000 of additional debt (8% p.a. interest rate before tax). The current capital structure and
other information is as follows: (1 Mark)

- Current Paid-up capital (@ of Rs.10 per share) : Rs. 8,000,000

- Current Debt (7% p.a. interest rate before tax) : Rs. 5,000,000
- Current Preference Shares (Dividend 10%) : Rs. 1,500,000
- Current EBIT : Rs. 1,000,000
- Taxes can be assumed at 50%

Which of these considerations would be LEAST relevant with respect to the capital structure
decision making of a company?

Options Response Answer

Credit rating of its debt security

Financial flexibility of the company

Type of assets and uncertainty of

operating income

Operating cycle of the company

 Question 6

Question 1:
Time: 2 Min 9 Sec Marks: 1 / 1

In a CAPM world, assume that a risky asset A has an expected rate of return of 11% and a
standard deviation of 21% and a risk-free security B offers a rate of return of 4%. Assume that
equity market risk premium is 5%. (1 Mark)

What would be the standard deviation of a portfolio P which has an expected return of 13%, and
is constituted with only the risky asset A and the risk-free security B?
_____________________________________________________________

Response:
27%

Answer:

Best answer 27.00%

Question 2:
Time: 32 Sec Marks: 1 / 1

In a CAPM world, assume that a risky asset A has an expected rate of return of 11% and a
standard deviation of 21% and a risk-free security B offers a rate of return of 4%. Assume that
equity market risk premium is 5%. (1 Mark)

What would be the beta of a portfolio Q, which has an expected return of 14%, and is constituted
with only the risky asset A and the risk-free security B?
_____________________________________________________________

Response:
2.00

Answer:

Best answer 2

Question 3:
Time: 1 Min 3 Sec Marks: 0 / 2
 In a CAPM world, assume that a risky asset A has an expected rate of return of 11% and a
standard deviation of 21% and a risk-free security B offers a rate of return of 4%. Assume that
equity market risk premium is 5%. (2 Marks)

What would be the covariance of the portfolio (L) returns with the market (M) returns, if the
portfolio has an expected return of 15%, and is constituted with only the risky asset A and the
risk-free security B? Assume that the standard deviation of the market portfolio (σM) is 22%
__________________________________________________

Response:
32.63%

Answer:

Best answer 10.65%

Question 4:
Time: 23 Sec Marks: 2 / 2

In a CAPM world, assume that a risky asset A has an expected rate of return of 11% and a
standard deviation of 21% and a risk-free security B offers a rate of return of 4%. Assume that
equity market risk premium is 5%. (2 Marks)

What would be the Sharpe Ratio of a portfolio N, which is equally invested in the risky asset A
and the risk-free security B? _____________________________________

Response:
0.33

Answer:

Best answer 0.33

Question 5:
Time: 3 Min 34 Sec Marks: 1 / 1

In a CAPM world, assume that a risky asset A has an expected rate of return of 11% and a
standard deviation of 21% and a risk-free security B offers a rate of return of 4%. Assume that
equity market risk premium is 5%. (1 Mark)

Which of the following is NOT an assumption of the Capital Asset Pricing Model?
Options Response Answer

Investors are risk-averse

Capital market is efficient

Investors have homogenous

expectations about stock specific

characteristics

Investors have similar level of risk

aversion characteristics
 True/False

Question 1:
Time: 5 Min 15 Sec Marks: 1 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

On 31st December, the accrued interest (based on 30 / 360 convention) for a 2-month note
payable dated 16th December with par value of INR 10,000 and 12% bond equivalent yield will
total INR 200. ___________________

Options Response Answer

true

false

Question 2:
Time: 1 Min 21 Sec Marks: 1 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

The sustainable growth rate of dividends for a company tends to decrease, as it increases its
dividend pay-out ratio __________________

Options Response Answer

true

false

Question 3:
Time: 3 Min 39 Sec Marks: 0 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

Diversification reduces the portfolio’s expected return because it reduces the portfolio’s total risk
__________________
 Options Response Answer

true

false

Question 4:
Time: 32 Sec Marks: 1 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

Financial leverage of a firm tends to increase its financial risk as well as the variability of its
income _____________________

Options Response Answer

true

false

Question 5:
Time: 1 Min 8 Sec Marks: 1 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

The CAPM implies that investors require a higher return to hold highly volatile securities
_______________

Options Response Answer

true

false

Question 6:
Time: 1 Min 5 Sec Marks: 1 / 1
 State, whether the following statements are TRUE or FALSE? (1 Mark)

Any portfolio lying on the Capital Market Line (CML) would be an efficient portfolio.
___________________

Options Response Answer

true

false

Question 7:
Time: 3 Min 7 Sec Marks: 1 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

If CAPM holds true, any security that is overpriced will always lie above the Security Market Line
(SML) _______________

Options Response Answer

true

false

Question 8:
Time: 1 Min 40 Sec Marks: 1 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

In principle, the market price of a share of stock equals the discounted value of the stream of
future earnings per share _________________

Options Response Answer

true

false
Question 9:
Time: 3 Min 13 Sec Marks: 0 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

When investing in bonds, we should invest in bonds with higher yields to maturity (YTM) because
they give higher expected returns _________________

Options Response Answer

true

false

Question 10:
Time: 2 Min 39 Sec Marks: 1 / 1

State, whether the following statements are TRUE or FALSE? (1 Mark)

Investments made in zero coupon bonds do not have any interest rate risk ______________

Options Response Answer

true

false