FM Previous years’ MCQs compilation with

Answers By CA.CMA Suraj Tatiya S

CHAPTER 1: NATURE SIGNIFICANCE AND SCOPE OF FINANCIAL

MANAGEMENT
2019 - Dec [31] Which of the following is true regarding financial decisions of a firm?
(a) Investment Decisions are dependent on Financing Decisions.
(b) Financing Decisions are dependent on Dividend Decisions.
(c) Dividend Decisions are dependent on Investment Decisions.
(d) All three decisions are inter- related. (1 mark)
Answer:
(d) All three decisions are inter- related.
2019 - Dec [33] The competing objectives of financial management have been:
(a) Profit Maximization and Wealth Maximization
(b) Profit Maximization and Economic Value Maximization
(c) Economic Value Maximization and Wealth Maximization
(d) EPS Maximization and Economic Value Maximization (1 mark)
Answer:
(a) Profit Maximization and Wealth Maximization.
2020 - Dec [1] Find the correct statement regarding the profit maximisation:
(a) Profit maximization considers the firm’s risk level.
(b) Profit maximization will not lead to increasing short-term profits at the expense of lowering expected future
profits.
(c) Profit maximization does consider the impact on individual shareholder’s EPS.
(d) Profit maximization is concerned more with maximizing net income than the stock price. (1 mark)
Answer:
(d) Profit maximization is concerned more with maximizing net income than the stock price.
2020 - Dec [3] .............. is the most appropriate goal of the firm.
(a) Shareholder wealth maximization
(b) Profit maximization
(c) Stakeholder maximization
(d) EPS maximization (1 mark)
Answer:
(a) Shareholder wealth maximization
2020 - Dec [5] Investment Decision in Financial Management does not include:
(a) Dividend Payout Decision
(b) Capital Budgeting Decision
(c) Working Capital Management
(d) Re-allocation of Capital (1 mark)
Answer:
(a) Dividend Payout Decision

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2020 - Dec [6] The main function of a financial manager include the following except:
(a) Asset Management
(b) Capital Structure Planning
(c) Fund Management
(d) Internal Control and Audit (1 mark)
Answer:
(d) Internal Control and Audit

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 CHAPTER 2: CAPITAL BUDGETING
2019 - Dec [26] A sum of ₹50,000 is invested @ 12% p.a. for 6 years. What will be the present value of its
maturity value, assuming a required rate of return of 10%?
(a) ₹86,000
(b) ₹98,700
(c) ₹55,667
(d) ₹56,504 (1 mark)
Answer:
(c) ₹55,667
2019 - Dec [29] Firm A is considering a project A. The project involves cash outlay of ₹50,000 (f = 0), working
capital outlay of ₹20,000 (f = 2), and is expected to generate Cash Flow After Tax (CFAT) of ₹12,000 per annum
for 5 years excluding working capital release back and terminal value of 20%. What would be your advice to the
company using Net Present Value approach, if its cost of capital is 10%?
(a) Accept the project.
(b) Either Accept or Reject it as NPV is zero.
(c) Reject the project.
(d) Information incomplete. (1 mark)
Answer:
(c) Reject the project.
2019 - Dec [32] What will be the maturity value of a sum of ₹18,000 invested today at the rate of 5% p.a. for 10
years?
(a) ₹29,360
(b) ₹28,320
(c) ₹29,320
(d) ₹35,220 (1 mark)
Answer:
(c) ₹29,320
2019 - Dec [34] Which of the following is an example of systematic risk in stocks?
(a) Company strike
(b) Industrial recession
(c) Unexpected entry of a new competitor in the market
(d) Bankruptcy of a major supplier (1 mark)
Answer:
(b) Industrial recession
2019 - Dec [38] Which of the following are not applicable in the case of Payback period calculation of investment
appraisal?
(a) It is simple in concept and application.
(b) It favours only those projects that generate substantial inflows in the earlier years.
(c) The cut-off period is chosen arbitrarily.
(d) It considers the time value of money. (1 mark)
Answer:
(d) It considers the time value of money.
2019 - Dec [41] Decision rules based on Benefit Cost Ratio (BCR) and Net Benefit Cost Ratio (NBCR) criteria
implies:
(a) If BCR < 1, accept the project
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(b) If NBCR < 0, accept the project
(c) If NBCR > 0, reject the project
(d) If BCR < 1, reject the project (1 mark)
Answer:
(d) If BCR < 1, reject the project
2019 - Dec [43] An interest rate that has been annualized using compound interest is termed as:
(a) Annual interest rate.
(b) Discounted interest rate.
(c) Effective annual interest rate.
(d) Simple interest rate. (1 mark)
Answer:
(c) Effective annual interest rate.
2019 - Dec [46] Capital Budgeting Decisions are part and parcel of:
(a) Financing and Investing Decisions
(b) Investing and Dividend Decisions
(c) Financing and Dividend Decisions
(d) Only Investing Decisions. (1 mark)
Answer:
(d) Only Investing Decisions.
2019 - Dec [48] .................... is the present value of an asset, if the annual cash inflow is ₹1,000 per year for
next 5 years and the discount rate is 15%.
(a) ₹2,500
(b) ₹3,500
(c) ₹3,352
(d) ₹2,481 (1 mark)
Answer:
(c)₹3,352
2019 - Dec [50] The effective rate of interest for a sum of money compounded quarterly is 12.55%. What is its
nominal yield?
(a) 12.05%
(b) 12.25%
(c) 12.15%
(d) 12% (1 mark)
Answer:
(d) 12%
2019 - Dec [52] What is the present value of an annuity of *15,000 starting immediately (t = 0) and paying another
5 annual instalments? Assume a discounting rate of 12%.
(a) 85,460
(b) 82,500
(c) 75,120
(d) None of these (1 mark)
Answer:
(d) None of the option is correct. The correct answer is ₹69,072. [15,000 + 15,000 x (PVAF12%, 5) or (15,000 +
15,000 x 3.6048)],
2019 - Dec [55] If an investment of ₹3,00,000 pays ₹25,000 p.a. in perpetuity, what is the Net Present Value, if
the interest rate is 9%?

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(a) -22222
(b) +22222
(c) +24736
(d) +27250 (1 mark)
Answer:
(a) -22222
2020 - Dec [7] The present value of ₹1,000 to be received after one year at the rate of 8% per annum is ₹926, if
discounted half yearly, the present value would be:
(a) ₹924.55
(b) ₹930.00
(c) ₹600.96
(d) ₹934.00 (1 mark)
Answer:
(a) ₹924.55
2020 - Dec [8] What is the present value of the maturity value of ₹10,000 which has been given on 15% interest
for five years while required rate of return is 10%? (FV @ 15% after 5 years is 2.01136, FV @ 10% after 5 years
is 1.61051)
(a) ₹12,488.94
(b) ₹12,494.88
(c) ₹21,494.88
(d) ₹21,488.94 (1 mark)
Answer:
(a) ₹12,488.94
2020 - Dec [9] MNP Ltd. is considering purchasing of an Asset costing ₹80,000 and having a useful life of 4
years. During the first 2 years, the net incremental after-tax cash flows are ₹25,000 per annum and for the last
two years ₹20,000 per annum. What is the Payback period for this investment?
(a) 3.2 years
(b) 3.5 years
(c) 4.0 years
(d) Cannot be determined from this information. (1 mark)
Answer:
(b) 3.5 years
2020 - Dec [10] ABC project has the following cash inflows for 4 years as ₹34,444; ₹39,877; ₹25,000; and
₹52,800 respectively. The initial Investment is ₹1,04,000. Find the correct statement from the following: Present
value of an annuity of rupee one on various discounting factor in 4th year is:
9% 3.2397
13% 2.9745
15% 2.8550
16% 2.7982
17% 2.7432
18% 2.6901 (1 mark)
(a) The IRR is less than 9%.
(b) The IRR is greater than or equal to 9%, but less than 13%.
(c) The IRR is greater than 16%, but less than 18%.
(d) The IRR is greater than or equal to 17%. v (1 mark)
Answer:

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(c) The IRR is greater than 16%, but less than 18%.
2020 - Dec [11] A firm expects an NPV of ₹8,000 if the economy is exceptionally strong (30% probability), an
NPV of ₹4,000 if the economy is normal (40% provability), and an NPV of ₹2,000 if the economy is exceptionally
weak (30% probability). Expected Net present value is .................... .
(a) ₹5,200
(b) ₹6,000
(c) ₹5,000
(d) ₹4,600 (1 mark)
Answer:
(d) ₹4,600
2020 - Dec [22] Find the correct statements regarding the risk-adjusted discount rate (RADR) approach ?
(a) Under the RADR approach, we should accept a project if its net present value (NPV) calculated using a risk-
adjusted discount rate is positive.
(b) Adjusting the firm’s overall cost of capital upward is required if the project or group are of higher than average
risk.
(c) Under the RADR approach, we would still compare a project’s internal rate of return (IRR) to the firm’s overall
weighted-average cost of capital in order to decide acceptance/'rejection.
(d) Adjusting the firm’s overall cost of capital downward is required if the project or group are of lower than
average risk. (1 mark)
Answer:
(a) Under the RADR approach, we should accept a project if its net present value (NPV) calculated using a risk-
adjusted discount rate is positive.

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 CHAPTER 3: CAPITAL STRUCTURE AND LEVERAGE ANALYSIS
2019 - Dec [4] If a company acquired a helicopter for its top management for a certain period on a fixed payment,
which of the following will be true regarding leverage?
(a) DOL will increase
(b) DFL will increase
(c) DOL will decrease
(d) DCL will remain unchanged (1 mark)
Answer:
(a) DOL will increase.
2019 - Dec [5] Which of the following is not a valid assumption of MM approach to capital structure?
(a) Securities are infinitely divisible
(b) Lack of free flow of information
(c) Transactions costs are zero
(d) No taxation (1 mark)
Answer:
(b) Lack of free flow of information
2019 - Dec [7] A firm has a DOL of 6 at a certain production level. If Sales of the firm rise by 1%, it implies that:
(a) EBIT will also rise by 1 %
(b) EBIT will rise by 1/6%
(c) EBIT will rise by 6%
(d) Change in EBIT is undecided (1 mark)
Answer:
(c) EBIT will rise by 6%
2019 - Dec [12] Earnings per share (EPS) is equal to:
(a) Profit after tax/no. of shares in authorized capital
(b) Profit after tax/no. of shares in issued capital
(c) Profit after tax/net worth
(d) Profit before tax/net worth (1 mark)
Answer:
(b) Profit after tax/no. of shares in issued capital.
2019 - Dec [13] Interest coverage ratio of 6 indicates:
(a) Sales are 6 times of interest.
(b) Profit after tax is 6 times of interest.
(c) EBIT is 6 times of interest.
(d) Interest is 6 times profit after tax. (1 mark)
Answer:
(c) EBIT is 6 times of interest.
2019 - Dec [22] The Capital Structure of Neel Ltd. is as under:
Equity + Reserves & Surplus 7200 Lakhs
10% Preference Shares 750 Lakhs
12% Term Loans 7150 Lakhs
What should be the approx. Earnings Before Interest and Taxes (EBIT) so that Earning Per Share (EPS) is
O(Nil)? Assume Tax Rate 35%.
(a) 723.00 Lakhs

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(b) 724.75 Lakhs
(c) 725.69 Lakhs
(d) ' 729.30 Lakhs (1 mark)
Answer:
(c) 725.69 Lakhs
2019 - Dec [23] ABC Limited books of accounts show profit from operation (EBDIT) at 7500 Lakhs, it paid 12%
on a debt of 71,000 Lakhs, Depreciation is 7100 Lakhs and Tax 35%. Profit after Tax will be:
(a) 7184 Lakhs
(b) 7182 Lakhs
(c) 7178 Lakhs
(d) 7180 Lakhs (1 mark)
Answer:
(b) 7182 Lakhs
2019 - Dec [36] Given that the effective rate of interest is 9.31% p.a., what is the nominal rate of interest p.a., if
compounding is carried out quarterly?
(a) 9.25%
(b) 8.5%
(c) 9%
(d) 9.20% (1 mark)
Answer:
(c) 9%
2019 - Dec [37] Decisions related to the mix of debt and equity in the balance sheet best relates to which of the
following?
(a) Capital budget ^
(b) Capital structure
(c) Capital expenditure
(d) Operating leverage (1 mark)
Answer:
(b) Capital structure.
2019 - Dec [56] Which approach in capital structure argues that the overall capitalization rate and the cost of
debt remains constant for all degrees of leverage, as the same is offset by an increase in the equity capitalization
rate?
(a) Nl Approach
(b) NOI Approach
(c) Walter’s Approach
(d) Gordon’s Approach (1 mark)
Answer:
(b) NOI Approach.
2019 - Dec [60] A firm has a Degree of Operating Leverage (DOL) of 5 and Degree of Financial Leverage (DFL)
of 4. The interest burden is ₹300 Lakhs, variable cost as a % to sales is 75%, and the effective tax rate is 45%.
Its fixed cost is:
(a) ₹1600 Lakhs
(b) ₹1450 Lakhs
(c) ₹1500 Lakhs
(d) ₹1700 Lakhs (1 mark)
Answer:

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(a) ₹1600 Lakhs.
2020 - Dec [4] Earnings per share can be calculated as:
(a) Use the income statement to determine earnings after taxes (net income) and divide by the previous period’s
earnings after taxes. Then subtract I from the previously calculated value.
(b) Use the income statement to determine earnings after taxes (net income) and divide by the number of
common shares outstanding if no preference shares are outstanding.
(c) Use the income statement to determine earnings after taxes (net income) and divide by the number of
common and preferred shares outstanding.
(d) Use the income statement to determine earnings after taxes (net income) and divide by the forecasted
period’s earnings after taxes. Then subtract I from the previously calculated value. (1 mark)
Answer:
(b) Use the income statement to determine earnings after taxes (net income) and divide by the number of
common shares outstanding if no preference shares are outstanding.
2020 - Dec [12] Calculate the value of the firm MNP Ltd. according to the Net Income Approach. The company
expects a net operating income of ₹80,000. It has ₹2,00,000, 8% Debentures. The equity capitalization rate of
the company is 10%, (ignore the Income Tax).
(a) ₹8,40.000
(b) ₹8,60,000
(c) ₹8,80,000
(d) 7 8,90,000 (1 mark)
Answer:
(a) ₹8,40,000
2020 - Dec [13] ABC Ltd. expects a net operating income of ₹1,00,000. It has ₹5,00,000,6% Debentures. The
overall capitalization is 10%. Calculate cost of equity according to the Net Operating Income Approach.
(a) 14%
(b) 21%
(c) 18%
(d) 21.8% (1 mark)
Answer:
(a) 14%
2020 - Dec [15] A company PQR Ltd. has EBIT of ₹2,00,000. Expected return on its Investment @ of 12%. What
is the total value of the firm according to Miller-Modigliani theory?
(a) ₹16,66,667
(b) ₹17,85,714
(c) ₹20,00,000
(d) ₹22,40,000 (1 mark)
Answer:
(a) ₹16,66,667
2020 - Dec [16] A firm has EBIT of ₹50,000. Market value of debt is ₹80,000 and overall capitalization rate is
20%. Market value of equity under NOI Approach is:
(a) ₹1,70,000
(b) ₹2,50,000
(c) ₹30,000
(d) ₹1,30,000 (1 mark)
Answer:
(a) ₹1,70,000

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2020 - Dec [17] X company has sales of ₹12,00,000, Variable Cost is 50% and fixed cost ₹2,50,000. Operating
leverage of the company is :
(a) 1.33
(b) 1.67
f
(c) 1.71
(d) 2 (1 mark) Answer:
(c) 1.71
2020 - Dec [27] A firm provides the following information: Sold 2,00,000 units @ ₹30 per unit; Variable cost ₹15
per unit, fixed cost ₹10,00,000 and debt of ₹10,00,000 at 10% rate of interest. Calculate the degree of Financial
leverage.
(a) 1.5
(b) 0.66
(c) 1.053
(d) Insufficient information (1 mark)
Answer:
(c) 1.053
2020 - Dec [28] SKY Ltd, is considering three different financing alternatives - debt, preferred stock and common
equity. The firm has created an EBIT- EPS chart that shows several indifference points. What does each
indifference point show the firm ?
(a) The level of EBIT that generates identical EPS under different alternative financing plans.
(b) The level of sales that generates identical EBIT and EPS figures.
(c) It shows the level of EBIT and EPS at which DFL is identical under different alternative financing plans.
(d) None of the above (1 mark)
Answer:
(a) The level of EBIT that generates identical EPS under different alternative financing plans.

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 CHAPTER 4: SOURCES OF RAISING LONG-TERM FINANCE AND
COST OF CAPITAL
2019 - Dec [20] The Weighted Average Cost of Capital computations:
(a) Assign more weight to Equity.
(b) Assign more weight to Debentures.
(c) Excludes Retained Earnings.
(d) Assigns weights based on Market Value or Book Value. (1 mark)
Answer:
(d) Assigns weights based on Market Value or Book Value.
2019 - Dec [21] The liability side of Shivanee Ltd.’s Balance Sheet shows Equity capital ₹25 Lakhs and Retained
Earnings ₹50 Lakhs. Face value of its share is ₹100 each and market value is ₹300 each. If the investors expect
a Rate of Return of 18%, and if the cost of floatation of issuing fresh Equity is 5%, what is the Cost of Retained
Earnings?
(a) 17.50%
(b) 18.00%
(c) 9.00%
(d) 8.75% (1 mark)
Answer:
(b) 18.00%
2019 - Dec [40] The cost of retained earnings is equal to:
(a) Dividend pay-out ratio
(b) Rate of return expected on the Equity Share
(c) Risk-free rate of return
(d) Dividend yield ratio (1 mark)
Answer:
(b) Rate of return expected on the Equity Share.
2019 - Dec [54] Varun Ltd. is issuing 1Lakh 12% Irredeemable preference shares of the face value of ^100 each.
If the floatation cost is ?2 per share, what is the cost of these Preference Shares?
(a) 12.00%
(b) 12.14%
(c) 12.24%
(d) 12.34% (1 mark)
Answer:
(c) 12.24%
2020 - Dec [14] Compute the average cost of capital by using market value as weights from the following
information:
Net Operating Income ₹2,00,000. Total Investment ₹10,00,000, if the firm uses 5% debenture of ₹4,00,000 and
equity capitalization rate is 11%.
(a) 20%
(b) 9.9%
(c) 9.82%
(d) 11% (1 mark)
Answer:
(c) 9.82%
2020 - Dec [18] A Ltd. issues ₹50,000 8% debentures at a discount of 5%. The tax rate is 50%. The cost of debt
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capital is:
(a) 5.42%
(b) 5.1%
(c) 4.42%
(d) 4.21% (1 mark)
Answer:
(d) 4.21%
2020 - Dec [19] A company issues 10,000 10% Preference Shares of ₹100 each redeemable after 10 years at
a premium of 5%. The cost of issue is ₹2 per share. The cost of preference capital is:
(a) 10.14%
(b) 10.34%
(c) 10.74%
(d) 10.54% (1 mark)
Answer:
(d) 10.54%
2020 - Dec [20] Number of existing equity share = P crore, Market value of existing share = ₹55, Net earnings =
₹80 crore. Cost of equity on basis of Earning-price Ratio approach is:
(a) 5.55%
(b) 5.15%
(C) 18.18%
(d) 18.02% (1 mark)
Answer:
(c) 18.18%
2020 - Dec [21] ABC Ltd. has the following capital structure:
Equity share capital ₹10,00,000,10% preference share'capital ₹5,00,000, 8% Debenture ₹15,00,000. Cost of
equity is estimated to be 15%. Calculate the Weighted Average Cost of Capital, assuming tax rate is 50%.
(a) 6.67%
(b) 8.67%
(c) 9.67%
(d) 7.67% (1 mark)
Answer:
(b) 8.67%
2020 - Dec [23] PQR Ltd. keeps a perpetual fixed amount of debenture with coupon rate of 16% in its books.
Debenture sells at par (face value ₹100) in the market and company pays 40% tax. What is the cost of debenture,
if sold at 10% premium in the market ?
(a) 8.82%
(b) 8.72%
(c) 8.27%
(d) 9.10% (1 mark)
Answer:
(b) 8.72%
2020 - Dec [24] ANT Corporation common stock has a beta, (P), of 1.5. The risk-free rate is 8%, and the market
return is 12%. Determine the cost of equity shares using the CAPM.
(a) 14%
(b) 11%
(c) 12%

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(d) 13% (1 mark)
Answer:
(a) 14%
2020 ■ Dec [25] MNP Ltd. has a target capital structure of 60 percent common stock, 10 percent preferred stock,
and 30 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 7 percent, and the cost of debt
is 10 percent. The relevant tax rate is 40 percent. What is its WACC ?
(a) 11.3%
(b) 11.5%
(c) 11.7%
(d) 12.1% (1 mark)
Answer:
(b) 11.5%
2020 - Dec [26] A company has currently 2,000 equity shares of ₹100 each and its earnings are ₹20,000. Its
current market price is ₹110 and the growth rate of EPS is expected to be 5%. The cost of equity is ...:.............
(a) 10.94%
(b) 9.55%
(c) 9.95%
(d) 11.60% (1 mark)
Answer:
(b) 9.55%

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 CHAPTER 5: PROJECT FINANCE
2019 - Dec [35] Treasury Bills are issued by:
(a) Public limited companies.
(b) Blue chip companies.
(c) Banks and selected all- India Financial Institutions only.
(d) Central government. (1 mark)
Answer:
(d) Central government.
2020 - Dec [29] Which one is not a characteristics of Little-Mireless (L-M) approach ?
(a) Domestic currency is used as numeraire
(b) Uncommitted social income is the measurement base
(c) At one place all SCBA objectives are fulfilled
(d) International price is used as numeraire (1 mark)
Answer:
(a) Domestic currency is used as numeraire
2020 - Dec [30] Different aspects of UNIDO approach of social cost benefit analysis are examined in how many
stages ?
(a) 2
(b) 3
(c) 4
(d) 5 (1 mark)
Answer:
(d) 5

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 CHAPTER 6: DIVIDEND POLICY
2019 - Dec [18] Walter model can be applied only to those companies which:
(a) Earn high profits.
(b) Make investment by resorting to high level of debts.
(c) Make investments without borrowing or raising external equity.
(d) Do not make any investment. (1 mark)
Answer:
(c) Make investments without borrowing or raising external equity.
2019 - Dec [27] The cost of capital of a firm is 12% and its expected Earning Per Share at the end of the year is
₹20. Its existing payout ratio is 25%. The company is planning to increase its payout ratio to 50%. What will be
the effect of this change on the market price of equity shares (MPS) of the company as per Gordon’s model, if
the reinvestment rate of the company is 15%?
(a) It will increase by ₹444
(b) It will decrease by ₹444
(c) It will increase by ₹222
(d) It will decrease by ₹222 (1 mark)
Answer:
(b) It will decrease by ₹444
2019 - Dec [45] If a firm declared 25% dividend on share of Face Value of ₹10, its growth rate is 5%, and if the
rate of capitalization is 12%, its expected price would be ₹
(a) 31.25
(b) 33.50
(c) 36.00
(d) 37.50 (1 mark)
Answer:
(d) 37.50
2020 - Dec [31] The earning per share of a company is ₹10. It has an internal rate of return of 15% and the
capitalization rate of the same risk class is 12.5%. If Walter’s model is used, what should be the price of a share
at optimum payout ?
(a) 92
(b) 94
(c) 96
(d) 98 (1 mark)
Answer:
(c) 96
2020 - Dec [32] From the following information find the market value per share as per Walter’s model:
Earnings of the Company ₹5,00,000, Dividend Payout ratio 60%, No. of shares outstanding 1,00,000, Equity
capitalization rate is 12% and Rate of return on investment is 15% .
(a) 45.83
(b) 48.53
(c) 49.27
(d) 47.19 (1 mark)
Answer:
(a) 45.83
2020 - Dec [33] Modigliani and Miller argue that the dividend decision .................
(a) Is irrelevant as the value of the firm is based on the earning power of its assets.

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(b) Is relevant as the value of the firm is not based just on the earning power of its assets
(c) Is irrelevant as dividends represent cash leaving the firm to shareholders, who own the firm anyway.
(d) Is relevant as cash outflow always influences other firm decisions
(1 mark)
Answer:
(a) Is irrelevant as the value of the firm is based on the earning power of its assets.
2020 * Dec [34] Determine the market price of a share of XVZ Ltd. as per Gordon’s Model, given equity
capitalisation rate = 11%, Expected Earning = ₹20, rate of return on investment = 10% and retention ratio = 30%.
(a) ₹165
(b) ₹175
(c) ₹185
(d) ₹195 (1 mark)
Answer:
(b) ₹175
2020 - Dec [35] A Company Ltd., has 50,000 shares outstanding. The current market price of the shares is ₹50
each. The company expects the net profit of ₹1,00,000 during the year and ft belongs to a risk class for which
the appropriate capitalisation rate has been estimated to be 25%. The company is considering dividend of ₹10
per share for the current year. What wpl be the price of the share at the end of the year, if the dividend is not
paid?
(a) ₹60.5
(b) ₹62.5
(c) ₹72.5
(d) ₹52.5 (1 mark)
Answer:
(b) ₹62.5
2020 - Dec [36] Which of the following statements is not true in the context of M-M’s dividend theory?
(a) The firm operates in perfect capital markets
(b) All investors are rational
(c) There is no fixed investment policy of the firm
(d) The dividend policy of the firm is irrelevant (1 mark)
Answer:
(c) There is no fixed investment policy of the firm
2020 - Dec [46] An investor is holding 100 shares of PQR Ltd. The current rate of dividend paid by the company
is ₹10 per share. The long term growth rate is expected to be 10% and the expected rate of return is 20%.
Current market price of the share is:
(a) 110
(b) ₹112
(c) ₹120
(d) ₹111 (1 mark)
Answer:
(a) 110

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 CHAPTER 7: WORKING CAPITAL
2019 - Dec [1] ABC analysis is useful for:
(a) analyzing inventory based on their usage and movement
(b) reduction of total investment in material
(c) determining the optimal level of safety stock
(d) analyzing inventory based on their availability (1 mark)
Answer:
(a) analyzing inventory based on their usage and movement.
2019 - Dec [2] Consider the following factors - Gross operating cycle - 80 days; Net operating cycle - 55 days;
Raw material holding period - 40 days, Conversion period - 2 days; Finished goods holding period - 20 days;
Average collection period will be:
(a) 87 days
(b) 37 days
(c) 18 days
(d) 62 days (1 mark)
Answer:
(c) 18 days
2019 - Dec [3] MNC expects its sales to increase by 10% from the current year level of ₹5 million. With a Net
Profit Margin of 8% and a payout ratio of 30%, what financing for the next year will be available from internal
sources?
(a) ?4,40,000
(b) *3,08,000
(c) *0.4 million
(d) *0.404 million (1 mark)
Answer:
(b) *3,08,000
2019 - Dec [6] Which of the following will not have an impact on a firm’s treasury position?
(a) Dividend payment
(b) Tax payment
(c) Buying fixed assets
(d) Issuing bonus shares (1 mark)
Answer:
(d) Issuing bonus shares.
2019 - Dec [8] Determination of “safety stock” requires a trade-off between:
(a) Carrying costs and stock-out cost
(b) Ordering cost and carrying cost
(c) Ordering cost and stock-out cost
(d) Lead time and order point (1 mark)
Answer:
(a) Carrying costs and stock-out cost.
2019 - Dec [9] Which of the following is not a valid assumption of EOQ model?
(a) Demand forecast is available
(b) Inventory can be replenished immediately
(c) Cost per order is variable
(d) Carrying cost is a fixed percentage (1 mark)
Answer:
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(c) Cost per order is variable.
2019 - Dec [11] Monthly demand for a raw material is 150 units. Ordering cost per order is *8 and annual carrying
cost per unit is *2. Economic Order Quantity (EOQ) under the above circumstances will be:
(a) 90
(b) 120
(c) 150
(d) 180 (1 mark)
Answer:
(b) 120
2019 - Dec [14] Debtors turnover ratio reflects:
(a) Collection period
(b) Debtors in relation to credit sales
(c) Debtors in relation to total sales
(d) Aging of the debtors (1 mark)
Answer:
(b) Debtors in relation to credit sales.
2019 - Dec [15] Consider the following data and compute the total sales amount:
(i) Closing balance of receivables: ₹30 lakhs
(ii) Opening balance of receivables: ₹20 lakhs
(iii) Average collection period: 25 days
(iv) Credit sales are 73% of sales (assume 365 days in a year)
(a) ₹365 lakhs
(b) ₹500 lakhs
(c) ₹550 lakhs
(d) ₹730 lakhs (1 mark)
Answer:
(b) ₹500 lakhs
2019 - Dec [17] The EOQ for a firm is 7200 units. The minimum order size stipulated by the supplier is 9000
units for utilizing a cash discount on the purchase price. The annual usage of the material in units is 80,000 and
the cost per order is ₹100. If the company decides to utilize cash discount, savings in the total ordering cost will
be:
(a) ₹400
(b) ₹500
(c) ₹600
(d) None of these (1 mark)
Answer:
(d) None of the option is correct. The correct answer is ₹222.22 or ₹300 [if we break the number of orders in
fraction then in initial case it is 11.11 orders and ordering cost is ,111.11 but in later case it is 8.89 orders and
ordering cost is ₹888.89. The difference of both is ₹222.22. Alternatively, if we ignore the fractions then in initial
case it is 12 orders and ordering cost is ?1,200 but in later case it is 9 orders and ₹900 is the ordering cost.
Hence, the difference of the two is ₹300].
2019 - Dec [19] Cash Management Model has been propounded by:
(a) Lintner
(b) Walter
(c) Baumol
(d) Gordon (1 mark)

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Answer:
(c) Baumol.
2019 - Dec [25] Current ratio is 4 :1. Net Working Capital is ₹30,000. Find the amount of Liquid assets if value
of stock is ?8,000.
(a) ₹10,000
(b) ₹40,000
(c) ₹32,000
(d) ?2,000 (1 mark)
Answer:
(c) ₹32,000
2019 - Dec [30] Economic Order Quantity (EOQ) determines:
(a) The order size that minimize the total inventory cost.
(b) The order size where ordering cost is the lowest.
(c) The order size where the carrying cost is minimum.
(d) The order size which will earn discounts on purchase. (1 mark)
Answer:
(a) The order size that minimize the total inventory cost.
2019 - Dec [57] An arrangement where a bank allows a borrower to overdraw up to a certain limit for working
capital financing is known as:
(a) Bridge Loan
(b) Cash Credit
(c) Term Loan
(d) Leverage Buy Out (1 mark)
Answer:
(b) Cash Credit.
2019 - Dec [58] Funds represented by cheques which have been issued, but which have not been debited from
bank is technically referred to as:
(a) Indenture
(b) Forward Cover
(c) Float
(d) Proxy (1 mark)
Answer:
(c) Float
2019 - Dec [59] The Net Working Capital (NWC) of a firm is ₹14 Lakhs. It purchased ₹30 Lakhs worth of raw
materials on credit, issued 7% debentures for ₹20 Lakhs, and purchased a machine for ₹18 Lakhs for cash. The
new NWC for the firm will be:
(a) ₹12 Lakhs
(b) ₹16 Lakhs
(c) ₹15 Lakhs
(d) ₹10 Lakhs (1 mark)
Answer:
(b) ₹16 Lakhs
2020 - Dec [37] The annual cash requirement of A Ltd. is ₹25 lakh. Cost of conversion of marketable securities
per lot is ₹2,500. The company can earn 5% annual yield on its securities. What will be the economic lot size
according to the Baumcl Model?
(a) ₹1,00,000

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(b) ₹2,50,000
(c) ₹5,00,000
(d) ₹4,75,000 (1 mark)
Answer:
(c) ₹5,00,000
2020 - Dec [38] The following details are available in respect of a firm : Annual requirement of inventory 20,000
units, Cost per unit (other than carrying and ordering cost) is ₹10, Carrying cost are likely to be 10% per year,
Cost of placing an order is ₹500 per order. The economic ordering quantity is:
(a) 4472 Units
(b) 4274 Units
(c) 5270 Units
(d) 4760 Units (1 mark)
Answer:
(a) 4472 Units
2020 - Dec [39] What will be the operating cycle period if raw materials are in store for 2 months, processing
time 21/2 months finished goods remain in store for 15 days, debtors are allowed 60 days’ credit and credit
received from suppliers of raw material is 1 month:
(a) 7 months
(b) 6 months
(c) 61/2 months
(d) 5 months (1 mark)
Answer:
(b) 6 months
2020 - Dec [40] Current assets are twice the current liabilities. If the net working capital is ₹60,000, current assets
would be:
(a) ₹60,000
(b) ₹1,00,000
(C) ₹1,20,000
(d) ₹1,10,000 (1 mark)
Answer:
(c) ₹1,20,000
2020 - Dec [41] Concept of Maximum Permissible Bank financial was introduced by:
(a) Kannan Committee
(b) Chore Committee
(c) Nayak Committee
(d) Tandon Committee (1 mark)
Answer:
(d) Tandon Committee
2020 - Dec [42] Reorder level + Reorder Quantity- (Minimum Consumption xMinimum delivery period)
determines which'stock level:
(a) Reorder level
(b) Maximum level
(c) Minimum level
(d) Average level (1 mark)
Answer:
(b) Maximum level

CA CMA Suraj G Tatiya SGT Yes Academy for CS 8888545545

2020 - Dec [43] Efficiency of a credit control system does not get influenced by:
(a) Timely billing
(b) Accurate billing
(c) Compliance with the specified credit policy
(d) Cash discount availed by the customers (1 mark)
Answer:
(d) Cash discount availed by the customers
2020 - Dec [60] JP Limited has earned 10% return on total assets of ₹18,00,000 and has a net profit ratio of 8%.
Find out sales of the company.
(a) ₹14,40,000
(b) ₹25,00,000
(c) ₹27,50,000
(d) ₹22,50,000 (1 mark)
Answer:
(d) ₹22,50,000

CA CMA Suraj G Tatiya SGT Yes Academy for CS 8888545545

 CHAPTER 8: SECURITY ANALYSIS
2019 - Dec [10] Which of the following investment decisions is required to be taken for a stock, if its intrinsic
value is greater than its market value?
(a) Sell
(b) Hold
(c) Buy
(d) Indifferent (1 mark)
Answer:
(c) Buy
2019 - Dec [16] If the expected dividend is less than the actual dividend paid, the rational expectation approach
suggests that the:
(a) Share price will increase.
(b) Share prices will go down.
(c) Value of the firm will go up.
(d) Both (a) and (c) above. (1 mark)
Answer:
(d) Both (a) and (c) above.
2019 - Dec [49] An investor purchases an 8% bond having a face value of ?1,000 and maturity of 5 years for
₹900. A year later he sells it for ₹960 in the market. The holding period gain of the investor is :
(a) 8.88%
(b) 14.00%
(c) 14.58%
(d) 15.55% (1 mark)
Answer:
(d) 15.55%
2019 - Dec [51] The price of a share is ₹100 today. It grows to ₹125 at the end of the 1st year, ₹187.5 at the end
of the 2nd year and ₹243.75 at the end of the 3rd year. What is the average rate of return?
(a) 35.5%
(b) 35%
(c) 34.5%
(d) 34% (1 mark)
Answer:
(b) 35%
2020 - Dec [44] Before taking investment decision, an investor makes a
comparison of the ................... available from each avenue and elements of ................... involved in it.
(a) Gross Profit, Management
(b) Returns, Management
(c) Returns, Risk
(d) Risk Returns (1 mark)
Answer:
(c) Returns, Risk
2020 - Dec [45] Speculator is a person:
(a) Who acts in a risky financial transaction in the hope of substantial profit
(b) Who acts in a less risky financial transaction, in the hope of substantial profit
(c) Who uses only his own fund to make profit
(d) Who analyse the performance of the company but does not make any transaction (1 mark)
CA CMA Suraj G Tatiya SGT Yes Academy for CS 8888545545
Answer:
(a) Who acts in a risky financial transaction in the hope of substantial profit
2020 - Dec [47] According to theory, it is futile to engage in Technical analysis.
(a) Dow Jones theory
(b) Random Walk theory
(c) Efficient Market theory
(d) None of the above (1 mark)
Answer:
(b) Random Walk theory
2020 - Dec [48] Which of the following statement defines the efficient market?
(a) Information is fully reflected on the stock prices
(b) The stock exchange is fully automated
(c) The market is monitored by the regulation authorities
(d) Free entry and exit of the investors (1 mark)
Answer:
(a) Information is fully reflected on the stock prices
2020 - Dec [49]................... focus more on past price movements of firm’s stock than on the underlying
determinants of future profitability.
(a) Fundamental Analysts
(b) System Analysts
(c) Credit Analysts
(d) Technical Analysts (1 mark)
Answer:
(d) Technical Analysts
2020 - Dec [50] If the markets are efficient, the security price provides:
(a) Inadequate return for taking up risk
(b) Normal return for the level of risk taken
(c) High return for the level of risk taken
(d) Both (b) and (c) (1 mark)
Answer:
(b) Normal return for the level of risk taken

CA CMA Suraj G Tatiya SGT Yes Academy for CS 8888545545

 CHAPTER 9: PORTFOLIO MANAGEMENT
2019 - Dec [24] As you increase the number of stocks in a portfolio, the systematic risk is likely to:
(a) remain constant
(b) increase at a decreasing rate
(c) decrease at a decreasing rate
(d) decrease at an increasing rate (1 mark)
Answer:
(a) remain constant
2019 - Dec [28] Mr. A is planning to buy a security and is in a dilemma regarding price to be paid. For this he is
relying on the required rate of return on the security. Help him out to calculate the aforesaid rate (%), if you are
informed that security’s standard deviation is 6%, correlation coefficient of the security with the market is 0.6,
and market standard deviation is 5%. You may assume that return from risk-free security in the market is 8%
and return on market portfolio is 12%.
(a) 10.68%
(b) 10.88%
(c) 10.58%
(d) 10.78% (1 mark)
Answer:
(b) 10.88%
2019 - Dec [39] The Security Market Line shows the relationship between:
(a) Expected rate of return and beta
(b) Expected rate of return and diversifiable risk
(c) Required rate of return and unsystematic risk
(d) Realized rate of return and beta (1 mark) ,
Answer:
(a) Expected rate of return and beta.
2019 - Dec [42] An equity share with beta greater than unity would be called:
(a) A defensive stock, because it is expected to decrease more than the market increase
(b) An aggressive stock, because it is expected to increase more than the market increase
(c) A defensive stock, because it is expected to increase more than the market decrease
(d) An aggressive stock, because it is expected to decrease more than the market increase (1 mark)
Answer:
(b) An aggressive stock, because it is expected to increase more than the market increase.
2019 - Dec [44] The risk aversion of investors can be measured by :
(a) Risk-free rate of return.
(b) Market rate of return.
(c) Variance of the return from a security.
(d) The difference between the market rate of return and the risk-free rate of return. (1 mark)
Answer:
(d) The difference between the market rate of return and the risk-free rate of return.
2019 - Dec [47] Diversification can eliminate risk, if the securities of a portfolio are:
(a) perfectly positively correlated
(b) perfectly negatively correlated
(c) weakly positively correlated
(d) weakly negatively correlated (1 mark)
Answer:
CA CMA Suraj G Tatiya SGT Yes Academy for CS 8888545545
(b) perfectly negatively correlated
2019 - Dec [53] Which of the following does not contribute to systematic risk?
(a) Change in the interest rates.
(b) Change in the level of government spending.
(c) Emergence of a new competitor.
(d) Change in the industrial policy. (1 mark)
Answer:
(c) Emergence of a new competitor.
2020 - Dec [2] From which of the following, Economic Value Added (EVA) will not increase:
(a) Operating profits grow without employing additional capital
(b) Unproductive capital is liquidated
(c) Cash flow generated by a business equal to the cost of the capital
(d) Additional capital is invested in the projects, that give higher returns than the cost of procuring new capital.
(1 mark)
Answer:
(c) Cash flow generated by a business equal to the cost of the capital
2020 - Dec [51] Consider a graph with standard deviation on the horizontal axis and expected return on the
vertical axis. The line that connects the riskfree rate and the optimal risky portfolio is called:
(a) The indifference curve
(b) The security market line
(c) The capital market line
(d) The characteristic line (1 mark)
Answer:
(c) The capital market line
2020 - Dec [52] If the standard deviation of a portfolio return is 15% and risk tolerance level for the investor is
40. What will be the risk penalty for the investor?
(a) 4.5%
(b) 2.67%
(c) 6.32%
(d) 5.625% (1 mark)
Answer:
(d) 5.625%
2020 - Dec [53] Which of the following is the equation of the Security Market Line (SML)?
(a) Rj + RF(Rm-RF)
(b) Rj = RF (Rm — Rf)
(c) R, = RF + bi (RF - Rm)
(d) R| = RF + bi (Rm — Rf) (1 mark)
Answer:
(d) Ri = RF + bi(Rm-RF)
2020 - Dec [54] Capital Asset Pricing Model (CAPM) Account for
(a) Unsystematic risk
(b) Systematic risk
(c) Both (a) and (b)
(d) Not used for risk analysis (1 mark)
Answer:
(b) Systematic risk

CA CMA Suraj G Tatiya SGT Yes Academy for CS 8888545545

2020 - Dec [55] When a portfolio comprises investment in three shares (Share A - 40%, Share B - 25% and
Share C - 35%) whose beta factors are 1.3,1.6 and 1.2, respectively, the portfolio beta is:
(a) 1.34
(b) 1.43
(c) 1.24
(d) 1.42 (1 mark)
Answer:
(a) 1.34
2020 - Dec [56] If the risk free rate of interest is 11 % and expected return on market portfolio is 18%, ascertain
expected return of the portfolio if p of portfolio is 0.90.
(a) 17.1%
(b) 17.2%
(c) 17.3%
(d) 18.1% (1 mark)
Answer:
(c) 17.3%
2020 - Dec [57] The unsystematic risk is explained:
(a) By variance of the index
(b) By unexplained variance of the index
(c) By explained variance of the index
(d) Not affected by variance (1 mark)
Answer:
(b) By unexplained variance of the index
2020 - Dec [58] The standard deviation of market returns is 15. The return' of stock X is 25%. The riskless rate
of interest is 5%. The risk premium of the X stock is:
(a) 1.33 •
(b) 5 .
(c) 15
(d) 20 (1 mark)
Answer:
(d) 20
2020 - Dec [59] The Sharpe index assigns the high value to funds that have:
(a) Low standard deviations
(b) Higher returns
(c) Higher risk adjusted returns
(d) Higher risk premium . (1 mark)
Answer:
(c) Higher risk adjusted returns

CA CMA Suraj G Tatiya SGT Yes Academy for CS 8888545545