MCQ On Financial Management

PRINCIPLES OF FINANCIAL MANAGEMENT
CHAPTER – 1
SCOPE AND OBJECTIVES OF FINANCIAL MANAGEMENT
MULTIPLE CHOICE QUESTIONS
1. The only viable goal of financial management is:
A. sales maximization
B. profit maximization
C. assets maximization
D. wealth maximization
(D)
2. The basic objective of financial management is:
A. maximisation of profits
B. maximisation of shareholder’s wealth
C. ensuring financial discipline in the organization
D. none of the above
(B)
3. Finance function involves:
A. expenditure of funds only

B. safe custody of funds only
C. procurement of finance only
D. procurement and effective utilization of funds
(D)
4. The goal of wealth maximization takes into consideration:
A. timing of expected returns

B. amount of returns expected
C. risk related to uncertainty of returns
D. all of the above
(D)
5. Financial management is mainly concerned with:
A. arrangements of funds
B. efficient management of every business
C. all aspects of acquiring and utilizing means of financial resources for firm’s
activities
(C)
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6. The investment decisions should aim at investment in assets only when they are
expected to earn a return greater than a minimum acceptable return is termed
as:
A. hurdle rate
B. growth rate
C. interest rate
D. internal rate of return
(A)
7. The traditional view of financial management looks at:
A. mobilization of funds through financial instruments

B. orientation of Financial function with Accounting function
C. arrangement of short-term and long-term funds from financial institutions
D. all of the above
(D)
8. The modern approach to financial management view:
A. the assets to be acquired

B. the pattern of financing the assets
C. the total requirements of the firm
D. all of the above
(D)
9. The financing of long-term assets should be made from:
A. debt funds
B. equity funds
C. long-term funds
D. short-term funds
(C)
10. In fund raising decisions, one should keep in view:
A. cost of various funds and financial risk

B. impact of taxation on earnings per share
C. advantages and disadvantages of debt component in capital mix
D. all of the above
(D)
11. The financial health of the firm depends on its ability to generate sufficient _____
to pay its employees, suppliers, creditors and owners.
A. cash
B. profit
C. wealth
D. growth
(A)
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12. Liquidity and profitability are _____________ goals for the Finance manager.
A. finance
B. separate
C. different
D. competing
(D)
13. Wealth maximization means maximizing the ___________________ of a course
of action.
A. profit
B. growth
C. net present value
(C)
14. ___________ maximization objective considers the risk and time value of money.
A. Value
B. Profit
C. Wealth
D. Growth
(B)
15. Which of the following is not an advisable financial strategy that may be followed
by a finance manager of an organisation when interest rates are low:
A. Borrow moneys at fixed rate of interest to increase the company’s gearing

and to maximize return on equity
B. Borrow long-term funds rather than short-term funds
C. New projects should be suspended temporarily till the interest rates of the
economy increases
D. Replace the high cost debt with low cost debt
(C)
TRUE OR FALSE TYPE QUESTIONS
1. Financial management deals with two major decisions/functions, namely, investment

and financing decisions.
(False)
2. Profit/EPS maximization is the sole objective of financial management.
(False)
3. Agency problem occurs when the management tries to fulfil its own interests at the
cost of value of the firm.
(True)
4. Agency cost consists of (a) monitoring (b) binding (c) opportunity and (d) structuring
cost such as stock options and cash bonuses, etc.
(True)
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CHAPTER – 2
FINANCIAL STATEMENT ANALYSIS
1. The financial statement that provide financial position is:
A. balance sheet
B. income statement
C. cash flow statement
D. funds flow statement
(A)
2. The business firm which adopts same accounting policies, methods and practices
from year to year is known as:
A. consistency
B. vertical consistency
C. horizontal consistency
D. third dimensional consistency
(C)
3. A software company adopts same accounting principles, policies, methods and
practices which are generally followed by other companies in the software
industry. Adoption of such similar practices and policies would promote:
A. Vertical consistency
B. Horizontal consistency
C. Dynamic consistency
D. Third dimensional consistency
(D)
4. One of the major vehicles of corporate financial reporting to shareholders is:
A. balance sheet
B. annual report
C. income statement
D. financial statements
(B)
5. The information about the financial position, performance and changes in
financial position are given in:
A. balance sheet
B. income statement
C. cashflow statement
D. all of the above
(D)
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6. The revenues are recognized when they are earned usually at the date of a
transaction with a third party under:
A. accrual concept
B. matching concept
C. materiality concept
D. going concern concept
(A)
7. The preparation of statement of retained earnings is a common accounting
practice of:
A. companies
B. partnership firms
C. sole proprietorship
D. all of the above
(A)
8. The analysis oriented on efficiency of working capital management and
profitability of current operation is known as:
A. liquidity analysis
B. financial analysis
C. short-term analysis
D. profitability analysis
(C)
9. The study of quantitative relationship of one financial item to another based on
a financial statement on a particular date is known as:
A. vertical analysis
B. financial analysis
C. horizontal analysis
D. short-term analysis
(B)
10. Comparative financial statements reveal the following:
A. absolute data in money values

B. increase or reduction in absolute data in terms of percentages
C. increase or reduction in absolute data in terms of money values
D. all of the above
(D)
11. Comparative financial statements prepared for financial statement analysis
normally reveal which of the following:
A. a side by side presentation of figures for two or more years

B. absolute data in money value for two or more years
C. increase or decrease between the absolute figures in money value for two or
more years
D. all of the above
(D)
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12. Financial statements of two or more firms can be made for drawing inferences
is termed as:
A. external analysis
B. horizontal analysis
C. comparative analysis
D. interfirm comparison
(D)
13. The figures shown in financial statements are converted to percentages so as to
establish each element to the total figure of the statement in:
A. trend ratios
B. common size statements
C. comparative financial statements
(B)
14. EBITDA stands for:
A. earnings before interest, tax, debt and amortisation

B. earnings before interest, tax, depreciation and amortisation
C. earnings before inter-company transactions, tax, debt and annual charges
D. extraordinary income ;before interest, tax, depreciation and annual charges
(B)
15. In an inflationary period, the use of FIFO will make which one of the following
more realistic:
A. balance sheet
B. cashflow statement
C. profit and loss account
(C)
16 Free cashflow means:
A. cash available for financing incremental working capital

B. cash available for financing additional investment in plant and machinery
C. cash available for meeting financial flows like debt servicing, dividend
payments, etc.
(C)
17.. In a financial statement analysis, the figures of a series of years are collected and
the first year figures are taken as the base year. Afterwards, the items in the
base year are taken as 100 and based on this base the corresponding figures of
financial statements in the other years are concluded. Such an analysis is
generally called as:
A. Ratio analysis
B. Trend analysis
C. Cash Flow analysis
D. Dynamic Ratio
(B)
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18. In preparing the common size profit and loss account which of the following is
generally taken as a common base?
A. Sales
B. Net profit
C. Net capital assets
D. Total value of shares
(A)
19. Same accounting principles should be used for preparing financial statements
for different periods. This convention in preparing the financial statement is
called:
A. Convention of consistency
B. Convention of reciprocity
C. Convention of equality
D. Convention of equivalency
(A)
20. A graphical representation used in the financial analysis showing when
payments are made is called:
A. Time value
B. Time period
C. Time line
D. Compounding
(C)
21. Which of the following term refers to the financial statement analysis carried out
mainly using the published financial statement information?
A. Public analysis
B. External analysis
C. Internal analysis
D. Investment review
(B)
22. On the basis of modus operandi, the analysis and interpretation of financial
statements may be classified into:
A. External analysis and Internal analysis

B. General analysis and Specific analysis
C. Government analysis and Board analysis
D. Horizontal and Vertical analysis
(D)
23. Which of the following is not a common tool employed in financial statement
analysis?
A. Comparative Financial Statements

B. Common Size Statements
C. Trend Analysis
D. Investor Analysis
(D)
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24. Comparison of the financial statements of two or more firms drawing inferences
is called:
A. Dynamic comparison
B. Sector level comparison
C. Inter-firm comparison
D. Industrial comparison
(C)
25. A financial statement that summarizes a company’s assets, liabilities and
shareholder’s equity at a specific point in time is:
A. Balance Sheet
B. Financial Statement
C. Income and Expenditure Statement
D. Cash Flow Statement
(A)
26. In a common-size balance sheet each item is expected as a percentage of:
A. Equity capital
B. Debt capital
C. Fixed assets
D. Total assets
(D)
27. A method of financial statement analysis where figures shown in the financial
statements are converted into percentages so as to establish each element to the
total figure of the statement is:
A. Comparative financial statement

B. Common-size statement
C. Trend ratios
D. Parallel statement
(B)
28. On the basis of the material used for analysis and interpretation of the financial
statement analysis, the financial statement analysis could be classified as:
A. External analysis and Internal analysis

B. Public analysis and Private analysis
C. General analysis and Specific analysis
D. Government analysis and Board analysis
(A)
29. Which of the following financial analysis method takes into account the time
value for money?
A. Pay back method

B. Bail-out Pay back method
C. Net present value method
D. Pay back method for unequal returns
(C)
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30. A process of evaluating the relationship between component parts of a financial
statement to obtain a better understanding of a firm’s position and performance
is generally referred to as:
A. Financial statement analysis

B. Issue analysis
C. Performance analysis
D. Income statement analysis
(A)
31. A company employs one method of depreciation for one class of assets and
employs another method of depreciation for another class of assets in the same
accounting year. Adoption of such different methods of depreciation for
different class of assets would be a case of:
A. Vertical consistency
B. Horizontal consistency
C. Third dimensional consistency
D. Dynamic inconsistency
(A)
32. A financial Forecasting approach which is based on the premise that most
Balance Sheet and Income Statement Accounts vary with sales involving
preparation of a sales forecast and Proforma Financial Statements to estimate
the needs for external financing is called:
A. Percentage of Sales method

B. Balance sheet method
C. Percentage of profit method
D. None of the above
(A)
33. A process of evaluating the relationship between component parts of a financial
statement to obtain a better understanding of a firm’s position and performance
is generally referred to as:
A. Financial statement analysis

B. Issue analysis
C. Performance analysis
D. Income statement analysis
(A)
1. Financial statements are an important source of information to shareholders and

stakeholders.
(True)
2. Both the Balance Sheet and the Income Statement shows the financial position of the
firm at the end of the year.
(False)
3. Balance Sheet of a company must be prepared in the horizontal format only.
(False)
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4. Preparation of Profit & Loss Appropriation Account is a requirement under the
Companies Act, 1956?
(False)
5. Ratio analysis is the only technique of analysis of financial statements.
(False)
6. Methodical presentation of financial statements helps in (nat?ion) of various
ratios.
(True)
7. In Common Size Statements, each item is expressed as a percentage of some common
items (total).
(True)
8. Trend Percentage Analysis helps in Dynamic Analysis.
(True)
9. Financial forecasting is following by financial planning.
(True)
10. Financial Planning deals with the preparation of financial statements.
(False)
11. Projected Financial Statements are prepared on the basis of opening financial
statements.
(False)
12. Financial planning is incomplete without cash budget.
(True)
13. Projected Financial Statements can be prepared only if several other budgets are
available.
(True)
14. There is no assumption required for the preparation of projected financial statements.
(False)
OBJECTIVE TYPE PROBLEMS
1. An investment produces annual returns of 12% in the first year, 7% in the

second year and 10% in the third year. What is the annualized return over the
three years?
A. 9.65%
B. 9.42%
C. 9.67%
(A)
Working:
Annualized return over the 3 years
= (1.12 × 1.07 × 1.10)1/3 – 1
= 1.096477 – 1 = 0.096477 or 9.65%
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2. A sum deposited at a bank fetches Rs.16,000/- after 4 years at 15% simple rate
of interest. The principal amount is:
A. Rs.10,000/-
B. Rs.12,000/-
C. Rs.14,000/-
D. Rs.80,000/-
(A)
Working:
A = P(1 + nr)
16,000 = P(1 + 4 × 0.15)
16,000 = P 1.6
P = 16,000/1.6 = Rs.10,000
3. The compound interest on Rs.800/- for 5 years at 12% compounded annually is:
A. Rs.4,900/-
B. Rs.5,100/-
C. Rs.5,500/-
D. Rs.6,100/-
(D)
Working:
A = P(1 + i)n
= 8,000 (1 + 0.12)5
= 8,000 × 1.125
= 8,000 × 1.76234 = Rs.14,098.72 say Rs.14,100
Compound interest:
= Rs.14,100 – Rs.8,000
= Rs.6,100
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4. A firm can invest Rs.12,000/- in a project with a life of 4 years. The projected
cash inflow are as follows: Year 1 – Rs.3,000/-; Year 2 – Rs.4,000/-; Year 3 –
Rs.5,000/-; Year 4 – Rs.3,500/-. The cost of capital is 10%. The NPV of the
project is:
A. Rs.180/-
B. Rs.210/-
C. Rs.280/-
D. Rs.110/-
(A)
Working:
The present value of cashflows is:
(Rs.)
Year 1 (Rs.3,000 × 1/1.101) 2,727.27
Year 2 (Rs.4,000 × 1/1.102) 3,305.79
Year 3 (Rs.5,000 × 1/1.103) 3,756.57
Year 4 (Rs.3,500 × 1/1.104) 2,390.55
12,180.18
Less: Initial cash outlay 12,000.00
NPV 180.18
5. If the nominal rate of interest is 10 per cent per annum and frequency of
compounding is 4, i.e., quarterly compounding, the effective rate of interest will
be:
A. 10.25% per annum

B. 10.38% per annum
C. 10.00 % per annum
(B)
Working:
6. If frequency of compounding is more than 1, the relationship between annual

effective rate of interest and annual nominal rate of interest is:
A. Effective rate < Nominal rate

B. Effective rate > Nominal rate
C. Effective rate = Nominal rate
(B)
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7. If annual effective rate of interest is 10.25% per annum and nominal rate of
return is 10 per cent per annum, what is the frequency of compounding?
A. 1
B. 3
C. 2
(C)
8. A student takes a loan of Rs.50,000/- from SBI. The rate of interest being
charged by SBI is 10 per cent per annum. What would be the amount of equal
instalment if he wishes to pay it back in five instalments and first instalment he
will pay at the end of year 5?
A. Rs.19,310/-
B. Rs.15,000/-
C. Rs.11,000/-
(A)
9. How much amount should an investor invest now in order to receive five
annuities starting from the end of this year of Rs.10,000/- if the rate of interest
offered by bank is 10% per annum?
A. Rs.40,000/-
B. Rs.45,000/-
C. Rs.37,910/-
D. None of these
(C)
10. How much amount should an investor invest now in order to receive annuities
forever starting from the end of this year of Rs.10,000/-, if the rate of interest
offered by bank is 10% per annum?
A. Rs.75,000/-
B. Rs.1,00,000/-
C. Cannot be determined
(B)
11. A company wants to retire a loan of Rs.5,00,000/-, 10 years from today. What
amount should it invest each year for 10 years if the funds can earn 8 per cent
per annum. The first investment will be made at the beginning of this year.
A. Rs.50,000/-
B. Rs.40,000/-
C. Rs.31,950/-
(C)
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CHAPTER – 3
RATIO ANALYSIS
1. A very high current ratio may be due to:
A. piling up of inventory
B. inefficiency in collection of debtors
C. high balance in cash and bank without proper investment
D. all of the above
(D)
2. A very high current ratio will:
A. increase the profitability

B. not affect the profitability
C. adversely impact the profitability
(C)
3. One of the following is not an absolute liquid asset:
A. cash in hand
B. cash at bank
C. bills receivable
D. marketable investments
(C)
6. The defensive-interval ratio is a measure of:
A. short-term liquidity
B. short-term solvency
C. long-term liquidity
D. long-term solvency
(A)
7. Shareholders equity includes:
A. equity share capital

B. reserves and surplus
C. preference share capital
D. all of the above
(D)
8. Fixed interest bearing funds do not include one of the following:
A. debentures
B. public deposits
C. long-term investments
D. preference share capital
(C)
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9. The ratio which indicates proportion of long-term funds deployed in fixed assets
is:
A. fixed assets/debt funds

B. long-term funds/fixed assets
C. fixed assets/long-term funds
D. fixed assets/shareholders funds
(C)
10. Asset management ratios are used to measure the speed with which various
accounts are converted into:
A. sales or cash
B. cash or bank
C. sales or inventory
D. fixed assets or current assets
(A)
11. The ratio of sales value per square foot of floor space is not suitable for:
A. trading concerns
B. departmental stores
C. wholesale warehouse
D. manufacturing concern
(D)
12. A high ratio of total assets turnover ratio indicates:
A. over trading
B. over gearing
C. idle capacity
D. capital gearing
(A)
13. A longer creditors payment period as compared to industry indicates:
A. operating in sellers’ market

B. damages credit rating and relationship with suppliers
C. suppliers are willing to supply on too long credit period
D. operations are being financed by suppliers free of interest
(C)
14. The term cash profit indicates:
A. net profit + depreciation

B. net profit (-) interest (-) tax
C. gross profit + interest + depreciation
D. net profit before depreciation, interest and tax
(A)
15
15. A firm seeks to increase its current ratio from 1.5 before its closing date of the
accounts. The action that would make it possible is:
A. delaying payment of salaries

B. increase charge for depreciation
C. making cash payment to creditors
D. selling marketable securities for cash at book value
(C)
16. If a firm’s total debt-to-equity ratio is higher than the industry average but the
long-term debt-to-equity ratio is lower than the industry average, this suggests
that the firm:
A. is less profitable than the industry

B. is unable to make its interest payments
C. is holding a larger amount of current assets
D. has a higher level of short-term liabilities than the industry
(D)
17. The return on equity indicates:
A. measure of leverage
B. measure of profitability
C. the efficiency in use of assets in achieving sales
D. all of the above
(D)
18. Return on capital employed is also known as:
A. return on total assets

B. return on investment
C. return on fixed assets
D. return on shareholders’ funds
(B)
19. Return on investment can be increased by:
A. increasing the profit margin

B. reduction of invested capital
C. increasing the investment turnover
D. all of the above
(D)
20. Acid test ratio can be expressed as ___________________.
current assets
A.
current liabilities
current assets
B. quick liabilities
quick assets
C. current liabilities
current assets
D. quick liabilities
(C)
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21. The immediate solvency ratio is:
A. Quick ratio
B. Current ratio
C. Stock Turnover ratio
D. Debtors Turnover ratio
(A)
22. The margin of safety for a firm in a very volatile market in 5 per cent. Which of
the following is true?
A. The margin of safety is probably too high

B. The margin of safety is probably too low
C. The margin of safety is adequate
D. We can’t tell
(B)
23. Contribution per unit is Rs.100/-. Fixed costs are Rs.6,00,000/-. Production and
sales are 8,000 units. When sales rise:
A. total contribution rises by an amount greater than profit

B. total contribution rises by an amount smaller than profit
C. total contribution and profit rise by the same amount
D. contribution margin drops
(C)
24. One of the following is not an assumption that underlies CVP analysis.
A. Fixed costs per unit will remain the same throughout the relevant range.
B. Variable cost per unit will increase as sales increases.
C. Variable costs have a linear relationship with sales.
D. Selling price is constant throughout the relevant range.
(B)
25. Which is the correct equation that calculates P (profit before tax)? Assume,
Selling Price per unit = Rs.S, Variable Cost per unit = Rs.V, Number of units
sold = U units and Total Fixed costs = Rs.F.
A. P = SV – F
B. P = (S – V) – F
C. P = FS – V
D. P = S (V – S)
(B)
26. Debtors turnover ratio is calculated by:
A. Credit sales/Average debtors

B. Total sales/Average debtors
C. Credit sales/Debtors ‘ days in a year
D. Cash sales/Total debtors
(A)
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27. Which of the following assets is not a quick current asset for the purpose of
calculating acid test ratio?
A. Short-term bills receivable

B. Cash
C. Stock or inventory
D. Debtors
(C)
28. In a company, the inventories are easily saleable and the sundry debtors make
payments quickly, in such cases the current ratio of the company can be:
A. Higher than the generally considered satisfactory standard of 2

B. Lower than the generally considered satisfactory standard of 2
C. Zero
D. The quick sale of inventories and quick realization of debtors does not have
any impact on current ratio
(C)
29. An important financial analysis technique which is used to measure and
establish a relationship between the two interrelated accounting figures in a
financial statement is referred to as:
A. Fund Flow Analysis

B. Cash Flow Analysis
C. Trend Analysis
D. Ratio Analysis
(D)
30. The ratio between the net operating income produced by an asset and its capital
cost (the original price paid to buy the asset) or alternatively its current market
value is called:
A. Capitalisation rate
B. Interest rate
C. Yield curve
D. Yield to maturity
(A)
31. Capital gearing ratio denotes the relationship between:
A. Assets and capital

B. Loans and capital
C. Equity share holder’s funds and long-term borrowed funds
D. Debentures and equity capital
(D)
32. Dividend Payout Ratio is:
A. Profit After Tax ÷ Dividend paid

B. DPS ÷ EPS
C. Preference Dividend ÷ Profit After Tax
D. Preference Dividend ÷ Equity Dividend
(B)
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33. In Ratio Analysis, the term Capital Employed refers to:
A. Equity Share Capital

B. Net worth
C. Shareholders’ Funds
(D)
Explanation:
In ratio analysis capital employed means:

1. The total amount of capital used for the acquisition of profits.
2. The value of all the assets employed in a business.
3. Fixed assets plus working capital.
4. Total assets less current liabilities.
34. EBIT/Total assets ratio is:
A. Liquidity ratio
B. Profitability ratio
C. Solvency ratio
D. Turnover ratio
(B)
35. In Net Profit Ratio, the denominator is:
A. Net Purchases
B. Net Sales
C. Credit Sales
D. Cost of goods sold
(B)
36. Which of the following refers to Statutory Liquidity Ratio?
A. The amount that the commercial banks require to maintain in the form of
gold or government approved securities before providing credit to the
customers.
B. The maximum amount that the Reserve Bank of India would lend to the
commercial banks in proportional to their deposits.
C. The maximum amount a commercial bank can lend to its customers out of
the deposits collected by it.
D. The ratio that should be maintained by all banks and financial intermediaries
between their credits and their deposits.
(A)
37. A higher debtors turnover ratio means:
A. The business is not able to recover the accounts receivables in a timely

manner
B. The business is able to recover the accounts receivables quickly
C. The accounts receivables and debtors turnover ratio has no relationship
D. The business is highly profitable
(B)
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38. Inventory Turnover Ratio measures the relationship of inventory with:
A. Average Sales
B. Cost of Goods Sold
C. Total Purchases
D. Total Assets
(B)
39. Net Profit Ratio signifies:
A. Operational Profitability
B. Liquidity Position
C. Big-term Solvency
D. Profit for Lenders
(D)
40. A high debtors turnover ratio indicates:
A. Low amounts tied in up in debtors balance

B. Increases in sales turnover
C. Efficient conversion of debtors into cash
D. As stated in (A) and (C) above
(D)
41. Accounting Ratios are important tools used by:
A. Managers
B. Researchers
C. Investors
D. All of the above
(D)
42. In Current Ratio, Current Assets are compared with:
A. Current Profit
B. Current Liabilities
C. Fixed Assets
D. Equity Share Capital
(B)
43. 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
(D)
46. Debts to Total Assets Ratio can be improved by:
A. Borrowing more
B. Issue of Debentures
C. Issue of Equity Shares
D. Redemption of Debt
(D)
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47. Ratio of Net Income to Number of Equity Shares is known as:
A. Price Earnings Ratio

B. Net Profit Ratio
C. Earnings per Share
D. Dividend per Share
(C)
48. Trend Analysis helps comparing performance of a firm:
A. With other firms

B. Over a period of firm
C. With other industries
(B)
49. 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
(C)
50. Suppliers and Creditors of a firm are interested in:
A. Profitability Position
B. Liquidity Position
C. Market Share Position
D. Debt Position
(B)
51. 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
(C)
52. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing.
The reason for such behaviour could be:
A. Increase of Cost of Goods Sold

B. Increase in Expense
C. Increase in Dividend
D. Decrease in Sales
(B)
53. 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
(D)
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54. Which of the following helps analysing return to Equity Shareholders?
A. Return on Assets
B. Earnings Per Share
C. Net Profit Ratio
D. Return on Investment
(B)
55. Return on Assets and Return on Investment Ratios belong to:
A. Liquidity Ratios
B. Profitability Ratios
C. Solvency Ratios
D. Turnover
(B)
56. XYZ Ltd., has a Debt-Equity Ratio of 1.5 as compared to 1.3 Industry average.
It means that the firm has:
A. Higher Liquidity
B. Higher Profitability
C. Higher Financial Risk
D. Higher Capital Employed
(C)
57. Ratio Analysis can be used to study liquidity, turnover, profitability, etc., of a
firm. What does Debt-Equity Ratio help to study?
A. Solvency
B. Liquidity
C. Profitability
D. Turnover
(A)
58. In Inventory Turnover calculation, what is taken in the numerator?
A. Sales
C. Opening Stock
D. Closing Stock
(B)
1. Liquidity Ratios help in analyzing the cash position of the firm.

(False)
2. In calculation of Acid Test Ratio, Inventory is included in current assets.
(False)
3. Working Capital Turnover Ratio may be classified as an Activity Ratio.
(True)
4. Debt-equity Ratio is a measure of long-term solvency of a firm.
(True)
22
5. GP Ratio and NP Ratio give the profitability of the firm from the point of view of the
shareholders.
(False)
6. Current ratio and acid test-test ratio of a business firm are virtually the same; this
implies that the firm has low investment in inventory.
(True)
7. A company’s current ratio is 2.0. If it uses cash to pay creditors, this transaction
would cause a decrease in current ratio.
(False)
8. Solvency ratios measure the firm’s ability to cater to the obligations arising out of
long-term debt.
(True)
9. In general, low turnover ratios are desirable.
(False)
10. Ratio Analysis provides the solution to the financial problems.
(False)
11. Equity funds are greater than equity capital in a loss-incurring firm.
(False)
12. Return on equity funds is determined by dividend EAT by average net worth.
(False)
13. Internal growth rate is the maximum rate at which the firm can grow without external
financing of any kind.
(True)
14. The sustainable growth rate is the maximum rate at which the company can grow by
using retained earnings.
(False)
15. It is conceptually correct to determine stock turnover ratio (finished goods) by
dividing cost of goods sold by average stock.
(True)
FILL IN THE BLANKS TYPE QUESTIONS
1. Four-times stock turnover implies __________ months inventory holding period.

(three)
2. Presently, current assets and current liabilities of a company are Rs.16 lakh and Rs.8
lakh respectively. The current ratio will ___________ (increase/decrease) on
purchase of new machinery.
(decrease)
3. Purchase of treasury bills will _______________ (weaken/not affect) acid-test ratio.
(not affect)
4. Assume that the company’s existing debt-equity ratio is 2 : 1, the ploughing back of
profits by a company will ______________ (increase/decrease) it.
(decrease)
5. A two-months debtor collection period implies that debtors turnover ratio is ________
(6 times/2 times).
(6 times)
6. __________________ (Interest coverage ratio/Debt service coverage ratio)is a more
rigorous test of the solvency position of a business firm.
(Debt service coverage ratio)
23
7. Rate of Return (ROR) on shareholders’ equity is computed dividing Earnings After
Tax (EAT) by ______________________ (share capital/shareholders’ funds).
(shareholders’ funds)
8. Issue of 12% preference shares will ___________ (decrease/increase) debt-equity
ratio of a corporate enterprise.
(decrease)
1. Consider the following information relating to Shiva Ltd.: Networth Rs.250

lakh; Total assets Rs.600 lakh; Long-term debt Rs.200 lakh; Current liabilities
Rs.150 lakh. The debt-equity ratio of the company is:
A. 0.583
B. 0.333
C. 0.800
D. 1.400
(C)
Working:
Long − term debt Rs. 200 lakh

Debt − Equity ratio = = = 0.800
Networth Rs. 250 lakh
2. Profit margin (net) of B.S. Ltd. is 7% while turnover is 3 times of its capital. The
return on investment of the concern is:
A. 20%
B. 18%
C. 21%
D. 19%
(C)
Working:
Net profit Sales

ROI = × = 0.07 × 3 = 21%
Sales Capital employed
3. If current ratio is given as 2.5, liquid assets are Rs.60,000, then the value of the
stock will be:
A. Rs.60,000
B. Rs.40,000
C. Rs.20,000
D. Rs.30,000
(B)
24
4. BB Ltd. has sales of Rs.7,74,000 with after-tax profit of Rs.93,000. If the
company’s asset turnover is 2.55, its return on assets (ROA) is:
A. 11.83%
B. 30.64%
C. 26.54%
D. 21.69%
(B)
Working:
Rs. 93,000
ROA = Profit margin × Asset turnover = × 2.55
Rs. 7,74,000
= 0.3064 or 30.64%
5. Which of the following firms would have the least liquidity:
A. Current ratio = 2.2 and quick ratio = 1.6

B. Current ratio = 2.2 and quick ratio = 1.1
C. Current ratio = 1.2 and quick ratio = 0.6
D. Current ratio = 1.2 and quick ratio = 0.8
(C)
6. If the Current ratio and Liquid ratio of a firm are 2.2 and 0.8 respectively and
its Current liabilities is Rs.10 lakh. The value of stock held by the firm is
Rs.______ lakh.
A. 12
B. 14
C. 16
(B)
Working:
CA CA
= 2.2 = 2.2
CL Rs. 10 lakh
∴ CA = 2.2 × Rs. 10 lakh = Rs. 22 lakh
CA − Stock Rs. 22 lakh − Stock

= 0.8 i. e., = 0.8
CL Rs. 10 lakh
Rs. 22 lakh − Stock = 0.8 × Rs. 10 lakh
Rs. 22 lakh − Stock = Rs. 8 lakh
Stock = Rs. 22 lakh − Rs. 8 lakh = Rs. 14 lakh
25
7. The current ratio of BM Ltd. is 2:1, while quick ratio is 1.80:1. If the current
liabilities are Rs.40,000, the value of the stock will be:
A. Rs.6,400
B. Rs.8,000
C. Rs.10,000
D. Rs.12,000
(B)
Working:
Current ratio = 2 ∶ 1 (given)
Current assets 2
=
Current liabilities 1
Current assets 2
=
Rs. 40,000 1
Current assets = 2 × Rs. 40,000 = Rs. 80,000
Quick Ratio = 1.8 (given)
Current assets − Stock

= 1.8
Current liabilities
Rs. 80,000 − Stock

= 1.8
Rs. 40,000
Rs. 80,000 − Stock = 1.8 × Rs. 40,000
Rs. 80,000 − Stock = Rs. 72,000
𝑆𝑡𝑜𝑐𝑘 = 𝑅𝑠. 80,000 − 𝑅𝑠. 72,000 = Rs.8,000
26
8. Warfield company having net working capital of Rs.3 lakh has the current ratio
of 1.8 and liquid ratio of 1.6. Its value of stock is:
A. Rs.55,000
B. Rs.65,000
C. Rs.75,000
D. Rs.85,000
(C)
Working:
𝑵𝒆𝒕 𝒘𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 = 𝑹𝒔. 𝟑, 𝟎𝟎, 𝟎𝟎𝟎
CA
= 1.8 (given)
CL
CA = 1.8 CL CA − CL = 3,00,000
3,00,000
1.8 CL − CL = 3,00,000 CL =
0.80
∴ Current liabilities = Rs. 3,75,000
Current assets = Rs. 3,75,000 × 1.8
CA − Stock
= Rs. 6,75,000 = 1.6 (given)
CL
CA − Stock = 1.6 × CL
6,75,000 − Stock = 1.6 × 3,75,000
Stock = 6,75,000 − 6,00,000 = Rs. 75,000
27
CHAPTER – 4
FUNDS FLOW AND ECONOMIC VALUE ADDED ANALYSIS
1. Payment to creditors will result in:
A. sources of funds
B. no impact of funds
C. application of funds
(B)
2. The funds flow analysis is presented in a format known as:
A. funds flow statement

B. statement of changes in financial position
C. statement of sources and application of funds
D. all of the above
(D)
3. The repayment of long-term loans previously made by the organization will
result in:
A. source of fund
B. application of fund
C. increase in working capital
D. decrease in working capital
(B)
4. Conversion of partly paid debentures into equity shares will:
A. cause to apply the fund

B. have no impact on fund
C. cause to increase the fund
D. cause to decrease in working capital
(B)
5. In arriving at the funds generated from operations, an amount appropriated in
the Profit and Loss Account towards transfer to General Reserve will be:
A. added back to the reported profit

B. deducted from the reported profit
C. shown as application of fund in funds flow statement
D. need not be adjusted anywhere
(A)
28
6. The dividends distributed to the shareholders and taxes paid during the year are
shown as application of funds when provisions for dividends and provision for
taxes are treated as:
A. fund items
B. non-fund items
C. current liabilities
D. non-current liabilities
(D)
7. Losses made in trading activities will cause to:
A. use up the funds

B. reduce working capital
C. decrease current assets
D. increase current liabilities
(A)
8. One of the following is used as a tool of financial management:
A. statement of changes in working capital

B. statement of funds generated from operations
C. statement of sources and application of funds
D. income statement and statement of financial position
(C)
9. One of the following is not an objective of funds flow analysis:
A. statutory requirements
B. in raising new finances
C. working capital utilization
D. as an instrument of planning and control
(A)
10. Which of the following is correct:
A. EVA is the net present value

B. EVA is the addition of the total value of operating assets
C. EVA is the value derived by deducting cost of sales from revenue
D. EVA is to determine whether an investment contributes positively to the
owner’s wealth
(D)
11. Which of the following computations is not required in the measurement of
Economic Value Added (EVA)?
A. Adjusted capital employed

B. Net operating profit after tax
C. Weighted average cost of capital
D. Current market value of assets and liabilities
(D)
29
12. The management interest is tied with those of shareholders under:
A. EVA bonus system

B. EVA incentive system
C. EVA compensation system
D. All of the above
(D)
13. Which of the following is an application of fund?
A. Purchase of machinery
B. Repayment of loan
C. Payment of dividend
D. All the above
(D)
14. For preparing a funds flow statement, unexpired insurance is treated as a:
A. Current asset
B. Non-current asset
C. Current liability
D. Non-current liability
(A)
15. The term ‘EVA’ is used for:
A. Extra Value Analysis

B. Economic Value Added
C. Expected Value Analysis
D. Engineering Value Analysis
(B)
16. When preliminary expenses are written off, there is:
A. Source of fund
B. Outflow of fund
C. No flow of fund
D. Application of fund
(C)
17. In case of divisible projects, which of the following can be used to attain
maximum NPV?
A. Internal Rate of Return

B. Feasibility Set Approach
C. Profitability Index Approach
D. Any of the above
(C)
30
18. In case of indivisible projects, which of the following may not give the optimum
result?

B. Feasibility Set Approach
C. Profitability Index Approach
D. Any of the above
(B)
19. Profitability Index when applied to Divisible Projects, impliedly assumes that:
A. Project cannot be taken in parts

B. NPV is linearly proportionate to part of the project taken up
C. NPV is additive in nature
D. Both (B) and (C)
(D)
20. EAV should be used in case of:
A. Divisible Projects
B. Repetitive Projects
C. One-off Investments
D. Indivisible Projects
(B)
21. EAV is equal to:
A. NPV × PVAF(r,n)
B. NPV + PVAF(r,n)
C. NPV ÷ PVAF(r,n)
D. NPV – PVAF(r,n)
(C)
22. If a project has positive NPV, its EAV is:
A. Equal to NPV
B. More than NPV
C. Less than NPV
D. Any of the above
(C)
23. Two mutually exclusive projects with different economic lives can be compared
on the basis of:

B. Profitability Index
C. Net Present Value
D. Equivalent Annuity Value
(D)
31
24. Risk in Capital Budgeting implies that the decision-maker knows
_____________ of the cash flows.
A. Variability
B. Profitability
C. Certainty
(B)
25. In certainty-equivalent approach, adjusted cash flows are discounted at:
A. Accounting Rate of Return

B. Internal Rate of Return
C. Hurdle Rate
D. Risk-free Rate
(D)
26. Risk in Capital budgeting is same as:
A. Uncertainty of Cash flows

B. Probability of Cash flows
C. Certainty of Cash flows
D. Variability of Cash flows
(D)
27. Which of the following is a risk factor in capital budgeting?
A. Industry specific risk factors

B. Competition risk factors
C. Project specific risk factors
D. All of the above
(D)
28. In Risk-Adjusted Discount Rate method, the normal rate of discount is:
A. Increased
B. Decreased
C. Unchanged
(A)
29. In Risk-Adjusted Discount Rate Method, which one of the following is adjusted?
A. Cash flows
B. Life of the proposal
C. Rate of discount
D. Salvage Value
(C)
32
30. NPV of a proposal, as calculated by Risk Adjusted Discount Rate Method, real
Certainty Equivalent Approach will be:
A. Same
B. Unequal
C. Both (A) and (B)
D. Neither (A) nor (B)
(B)
31. Risk of Capital Budgeting can be incorporated by:
A. Adjusting the Cash flows

B. Adjusting the Discounting Rate
C. Adjusting the life
D. All of the above
(D)
32. Which element of the basic NPV equation is adjusted by the Risk Adjusted
Discount Rate?
A. Denominator
B. Numerator
C. Both
D. None
(A)
33. In Certainty Equivalent Approach, the Certainty Equivalent factors for
different years are:
A. Generally increasing
B. Generally decreasing
C. Generally the same
(B)
34. Which of the following is correct for Risk Adjusted Discount Rate?
A. Accept a project if NPV at RADR is negative

B. Accept a project if IRR is more than RADR
C. RADR is overall cost of capital plus risk-premium
D. All of the above
(C)
35. In Payback period approach to risk the target payback period is:
A. Not adjusted
B. Adjusted upward
C. Adjusted downward
D. Either (B) or (C)
(C)
33
36. In Sensitivity Analysis, the emphasis is on assessment of sensitivity of:
A. Net Economic Life

B. Net Present Value
C. Both (A) and (B)
(B)
37. Most Sensitive variable as given by the Sensitivity Analysis should be:
A. Ignored
B. Given least importance
C. Given the maximum importance
(C)
38. Expected Value of Cash Flow (EVCF) is:
A. Certain to occur
B. Most likely Cashflows
C. Arithmetic Average Cashflow
D. Geometric Average Cashflow
(B)
39. Concept of joint probability is used in case of:
A. Independent Cashflows
B. Uncertain Cashflows
C. Dependent Cashflows
D. Certain Cashflows
(C)
40. Decision-tree approach is used in:
A. Proposals with longer life

B. Sequential decisions
C. Independent Cashflows
D. Accept-Reject Proposal
(B)
41. Cost of Capital refers to:
A. Flotation Cost
B. Dividend
C. Required Rate of Return
(C)
42. Which of the following sources of funds has an implicit cost of Capital?

B. Preference Share Capital
C. Debentures
D. Retained Earnings
(D)
34
43. Which of the following has the highest cost of capital?
A. Equity Shares
B. Loans
C. Bonds
D. Preference Shares
(A)
44. Cost of Capital for Government Securities is also known as:
A. Risk-free Rate of Interest

B. Maximum Rate of Return
C. Rate of Interest on Fixed Deposits
(A)
45. Cost of Capital for Bonds and Debentures is calculated on:
A. Before Tax basis

B. After Tax basis
C. Risk-free Rate of Interest basis
(B)
46. Weighted Average Cost of Capital is generally denoted by:
A. KA
B. KW
C. KO
D. KC
(C)
47. Which of the following cost of capital require tax adjustment?
A. Cost of Equity Shares

B. Cost of Preference Shares
C. Cost of Debentures
D. Cost of Retained Earnings
(C)
48. What is the most expensive source of funds:
A. New Equity Shares

B. New Preference Shares
C. New Debts
(A)
49. Marginal cost of capital is the cost of:
A. Additional Sales
B. Additional Funds
C. Additional Interests
(B)
35
50. In case the firm is all-equity financed, Weighted Average Cost of Capital would
be equal to:
A. Cost of Debt
B. Cost of Equity
C. Neither (A) nor (B)
D. Both (A) and (B)
(B)
51. In case of partially debt-financed firm, Ko is less than:
A. Kd
B. Ke
C. Both (A) and (B)
(B)
52. In order to calculate Weighted Average, Cost of weights may be based on:
A. Market Values
B. Target Values
C. Book Values
D. All of the above
(D)
53. Firm’s Cost of Capital is the average cost of:
A. All sources
B. All borrowings
C. Share capital
D. Share Bonds and Debentures
(A)
54. An implicit cost of increasing proportion of debt is:
A. Tax would not be available on new debt

B. Price Earnings Ratio would increase
C. Equity shareholders would demand higher return
D. Rate of Return of the company would decrease
(C)
55. Cost of Redeemable Preference Share Capital is:
A. Rate of Dividend
B. After Tax Rate of Dividend
C. Discount Rate that equates Present Value of inflows and outflows relating to
capital
(C)
36
56. Which of the following is true?
A. Retained earnings are cost free

B. External Equity is cheaper than Internal Equity
C. Retained Earnings are cheaper than External Equity
D. Retained Earnings are costlier than External Equity
(C)
57. Cost of capital may be defined as:
A. Weighted Average cost of all debts

B. Rate of Return expected by Equity Shareholders
C. Average Internal Rate of Return of the Projects of the firm
D. Minimum Rate of Return that the firm should earn
(D)
58. Minimum Rate of Return that a firm must earn in order to satisfy its investors,
is also known as:
A. Average Return on Investment

B. Weighted Average Cost of Capital
C. Net Profit Ratio
D. Average Cost of borrowing
(B)
59. Cost of Capital for Equity Share of Capital does not imply that:
A. Market Price is equal to Book Value of share

B. Shareholders are ready to subscribe to Rights Issue
C. Market Price is more than Issue Price
D. (A) and (C) above
(D)
60. In order to calculate the proportion of equity financing used by the company,
the following should be used:
A. Authorised Share Capital

B. Equity Share Capital plus Reserves
C. Equity Share Capital plus Preference Share Capital
D. Equity Share Capital plus Long-term Debt
(B)
37
CHAPTER – 5
CASH FLOW ANALYSIS
1. Cash flow statement provides information that:
A. is of a cash budget
B. provides basis for financial planning
C. is independent of financial statements
D. supplements the profit and loss account and balance sheet
(D)
2. Cash receipts from disposal of fixed assets is treated as:
A. cash inflows from investing activities

B. cash inflows from financing activities
C. cash inflows from operating activities
D. cash inflows from extraordinary items
(A)
3. One of the following is not treated as cash equivalent:
A. treasury bills
B. public deposit
C. commercial paper
D. certificate of deposit
(B)
4. Unrealized gains and losses arising in foreign exchange are:
A. cash flows from investing activities

B. cash flows from financing activities
C. not treated as cashflows
(C)
5. Cash flows arising from transactions in a foreign currency should be by applying
the exchange rate prevailing:
A. at the average rate of exchange

B. at the lowest exchange rate in the year
C. at the reporting date of cashflow statement
D. at the rate prevailing on the date of transaction
(C)
6. The payments relating to capitalised research and development costs are treated
as cashflows from:
A. financing activities
B. investing activities
C. operating activities
(B)
38
7. One of the following is considered cash transaction:
A. conversion of debt into equity

B. adjustment of bonus towards call money
C. acquisition of an enterprise by means of issue of shares
D. purchase of plant and machinery by issue of unsecured debentures payable
after one year
(B)
8. AS-3 (Revised) is mandatory for:
A. listed companies
B. companies having a turnover of more than Rs.50 crores
C. (A) and (B) above
(C)
9. Securities premium collected amounts to cashflow from:
A. investing activities
B. operating activities
C. financing activities
(C)
10. Which of the following items result in cash flows?
A. Issue of shares
B. Transfer to general reserve
C. Goodwill written off
D. Salaries outstanding
(A)
11. Which of the following is not a cash inflow?
A. Purchase of a fixed asset

B. Sale of fixed asset
C. Issue of debentures
D. Cash from business operations
(A)
12. Cash flow statement is mandatory in:
A. All stock companies

B. All listed companies
C. All commercial companies
D. All commercial and industrial businesses whose turnover for the accounting
period is 25 crores
(B)
39
13. Which of the following does not affect cash flows proposal?
A. Salvage Value
B. Depreciation Amount
C. Tax Rate Change
D. Method of Project Financing
(D)
14. Cash inflows from a project include:
A. Tax Shield of Depreciation

B. After-tax Operating Profits
C. Raising of Funds
D. Both (A) and (B)
(D)
15. Depreciation is incorporated in cash flows because it:
A. is unavoidable cost
B. is a cash flow
C. reduces tax liability
D. involves an outflow
(C)
16. If there is no inflation during a period, then the Money Cashflow would be equal
to:
A. Present Value
B. Real Cashflow
C. Real Cash flow + Present Value
D. Real Cash flow – Present Value
(B)
17. The real Cashflows must be discounted to get the present value at a rate equal
to:
A. Money Discount Rate

B. Inflation Rate
C. Real Discount Rate
D. Risk free rate of interest
(C)
18. Money Cashflows should be adjusted for:
A. Only Inflation Effect

B. Only Time Value of Money
C. Neither of (A) and (B)
D. Both (A) and (B)
(C)
40
TRUE OF FALSE TYPE QUESTIONS
1. Cash from business operations can be determined from income statement.

(False)
2. Working capital from business operations can be determined from profit and loss
account.
(True)
3. Sources of cash should always be more than uses of cash, in the context of cash flows
statement.
(False)
4. Interest paid on debentures is a part of operating activities.
(False)
5. Interest received on two-month deposits in bank is shown under investing activities.
(False)
6. Sources of cash and uses of cash are to be equal.
(False)
7. Cash flows are inflows and outflows of cash and cash-equivalents.
(True)
8. Revaluation of building affects cashflows.
(False)
9. Sale proceeds from machinery, being a source of finance, form part of financing
activities.
(False)
10. Cash flow statement is mandatory for all business firms.
(False)
11. In normal circumstances, a firm has positive cash from operations and negative cash
flow from investing activities.
(False)
12. Cash planning is a part of long-term financial planning.
(False)
13. Cash Budget is also known as Master Budget.
(False)
14. Cash Budget is an important element of profit planning.
(False)
15. Cash flows are the appropriate measure of costs and benefits from an investment
proposal.
(True)
16. Cash flows and accounting profits are different.
(True)
17. Cash flows are same as profit before tax.
(False)
18. Net Cash flow is on after tax basis.
(True)
19. Money Cash flows should be discounted at nominal discount rate.
(True)
20. Real Cash flows should be discounted at nominal discount rate.
(True)
21. Cash is the most important but least earning current asset.
(True)
41
22. Management of cash means management of cash inflows.
(False)
23. Cash management always attempts at minimizing the cash balance.
(True)
24. Cash cycle is equal to operating cycle for a firm.
(False)
25. In cash management, expected surplus cash, if any, is not considered at all.
(False)
26. Operating Cash Flows to Firm (OCFF) are always more than Operating Cash Flows
to Equity (OCFE).
(True)
27. Expected value of cashflows is equal to the arithmetic average of the cashflows.
(False)
28. In case dependent cashflows, the risk is measured with reference to joint probabilities.
(True)
1. Cash flow statement (based on AS-3) indicates change in __________________

(cash/ bank/cash and cash-equivalents).
(cash and cash-equivalents)
2. Decrease in creditors _________________ (decreases/increases) cash.
(decreases)
3. Interest received on long-term investments is shown under
______________________ (operating/financing/investing) activities.
(investing)
4. Decrease in inventory ________________ (decreases/increases) cash.
(increases)
5. Increase in pre-paid expenses _____________________ (decreases/increases) cash.
(decreases)
6. Cash payments to suppliers for goods and services are shown under ______________
(operating/financing/investing) activities.
(operating)
7. Cash-flow statement based on AS-3) for listed companies should be presented as per
the (direct/indirect) method.
(indirect)
8. Cash payments to acquire long-term assets form part of _______________(financing/
investing) activities.
(investing)
9. Buy-back of shares is shown under _______________ (financing/investing)
activities.
(financing)
10. Dividends paid to shareholders are classified as _____________________ (financing/
investing) activities.
(financing)
42
1. A chemical company has net sales of Rs.50 lakh, cash expenses (including taxes)
of Rs.35 lakh and depreciation expenses of Rs.5 lakh. If debtors decrease over
the period by Rs.6 lakh, cash from operation will be:
A. Rs.21 lakh
B. Rs.25 lakh
C. Rs.28 lakh
D. Rs.35 lakh
(A)
Working:
Cash from operations = Rs.50 lakh – Rs.35 lakh + Rs.6 lakh + Rs.21 lakh
2. A company has net sales of Rs.300 lakh, cash expenses (including taxes) of Rs.140
lakh and depreciation expenses of Rs.50 lakh. If debtors increase over the period
by Rs.40 lakh, cash from operation will be:
A. Rs.160 lakh
B. Rs.170 lakh
C. Rs.120 lakh
D. Rs.110 lakh
(C)
Working:
Cash from operations = Rs.300 lakh – Rs.140 lakh – Rs.40 lakh = Rs.120 lakh
43
CHAPTER – 6
ANALYSIS OF OPERATING AND FINANCIAL LEVERAGES
1. High proportion of gearing will increase:
A. business risk
B. financial risk
C. cost of funds
D. shareholders’ equity
(B)
2. A highly geared company exposes to:
A. inflation risk
B. business risk
C. financial risk
D. interest rate risk
(C)
3. The industries where demand is volatile and profits are subject to fluctuations
should have:
A. low level of gearing

B. high level of gearing
C. more long-term debt
(A)
4. High level of gearing means:
A. proportion of loan funds to networth is high

B. proportion of fixed assets to total assets is high
C. proportion of long-term debt to shareholders fund is low
D. proportion of long-term assets to shareholders funds is high
(A)
5. Capital gearing indicates the degree of vulnerability of earnings available to:
A. debenture holders
B. equity shareholders
C. preference shareholders
D. term-lending institutions
(B)
6. A company has a high leverage. This would imply that:
A. it has low financial risk

B. it has high business risk
C. it has low business risk
D. it has high financial risk
(D)
44
7. Income tax paid is concerned with:
A. Operating activities
B. Investing activities
C. Financing activities
D. None of these
(A)
8. A company is highly geared when it raised:
A. Finance by one equity capital

B. Finance by only debentures
C. More finance by debentures than by preference shares
D. More finance by debentures than by equity shares
(D)
9. A company is said to be highly geared. This means:
A. The largest proportion of the funding in the company has come from equity
B. The largest proportion of the funding in the company has come from
retained earnings
C. The largest proportion of the funding in the company has come from
borrowings
D. The largest proportion of the company profit has come from financial
activities
(C)
10. The risk inherent in the company’s operation even if there is no debt used in the
business if referred to as:
A. Bad risk
B. Financial risk
C. Non-debt risk
D. Business risk
(D)
11. A firm with high level of gearing, its ability to meet fixed interest payments out
of current earnings:
A. Diminishes
B. Enhances
C. Remains unaffected
D. Does not change
(A)
12. Real rate of return is equal to:
A. Nominal Rate × Inflation Rate

B. Nominal Rate ÷ Inflation Rate
C. Nominal Rate – Inflation Rate
D. Nominal Rate + Inflation Rate
(B)
45
13. Money Discount Rate is equal to:
A. (1 + Inflation Rate) (1 + Real Rate) - 1

B. (1 + Inflation Rate) 4 - (1 + Real Rate) - 1
C. (1 + Real Rate) 4 - (1 + Inflation Rate) - 1
D. (1 + Real Rate) + (1 + Inflation Rate) - 1
(A)
14. Real Discount Rate is equal to:
A. (1 + Inflation Rate) (1 + Money D Rate) - 1

B. (1 + Money D Rate) + (1 + Inflation Rate) - 1
C. (1 + Money D Rate) 4 - (1 + Inflation Rate) - 1
D. (1 + Money D Rate) - (1 + Inflation Rate) - 1
(C)
15. Which of the following cannot be true?
A. Inflation Rate > Money Discount Rate

B. Real Discount Rate < Money Discount Rate
C. Inflation Rate < Real Discount Rate
D. Inflation Rate = Real Discount Rate
(A)
16. Operating leverage helps in analysis of:
A. Business Risk
B. Financing Risk
C. Production Risk
D. Credit Risk
(A)
17. Which of the following is studied with the help of financial leverage?
A. Marketing Risk
B. Interest Rate Risk
C. Foreign Exchange Risk
D. Financing Risk
(D)
18. Combined Leverage is obtained from operating leverage and financial leverage
by their:
A. Addition
B. Subtraction
C. Multiplication
D. Any of these
(C)
19. High degree of financial leverage means:
A. High Debt Proportion

B. Lower Debt Proportion
C. Equal Debt and Equity
D. No debt
(A)
46
20. Operating Leverage arises because of:
A. Fixed cost of production

B. Fixed Interest cost
C. Variable cost
(A)
21. Financial Leverage arises because of:
A. Fixed cost of production

B. Variable cost
C. Interest cost
(C)
22. Operating Leverage is calculated as:
A. Contribution ÷ EBIT
B. EBIT ÷ PBT
C. EBIT ÷ Interest
D. EBIT ÷ Tax
(A)
23. Financial Leverage is calculated as:
A. EBIT ÷ Contribution
B. EBIT ÷ PBT
C. EBIT ÷ Sales
D. EBIT ÷ Variable Cost
(B)
24. Which combination is generally good for firms?
A. High OL and High FL

B. Low OL and Low FL
C. High OL and Low FL
D. None of these
(C)
25. Combined leverage can be used to measure the relationship between:
A. EBIT and EPS

B. PAT and EPS
C. Sales and EPS
D. Sales and EBIT
(C)
26. Financial Leverage is zero if:
A. EBIT = Interest
B. EBIT = Zero
C. EBIT = Fixed Cost
D. EBIT = Preferential Dividend
(B)
47
27. Business risk can be measured by:
A. Financial leverage
B. Operating leverage
C. Combined leverage
(B)
28. Financial Leverage measures relationship between:
A. EBIT and PBT

B. EBIT and EPS
C. Sales and PBT
D. Sales and EPS
(B)
29. Use of Preference Share Capital in Capital structure:
A. Increases OL
B. Increases FL
C. Decreases OL
D. Decreases FL
(B)
30. Relationship between change in sales and change in fixed costs is measured by:
A. Financial leverage
B. Combined leverage
C. Operating leverage
(B)
31. Operating leverage works when:
A. Sales increases
B. Sales decreases
C. Both (A) and (B) above
(C)
32. Which of the following is correct?
A. CL = OL + Fl
B. CL = OL – FL
C. CL = OL × FL
D. CL = OL ÷ FL
(C)
33. If the fixed cost of production is zero, which one of the following is correct?
A. OL is zero
B. FL is zero
C. CL is zero
(D)
48
34. If the firm has no debt, which one is correct?
A. OL is One
B. FL is One
C. OL is Zero
D. FL is Zero
(B)
35. If a company issues new share capital to redeem debentures, then:
A. OL will increase
B. FL will increase
C. OL will decrease
D. FL will decrease
(D)
36. If a firm has a DOL of 2.8, it means:
A. If sales increase by 2.8%, the EBIT will increase by 1%

B. If EBIT increases by 2.8%, the EPS will increase by 1%
C. If sales rise by 1%, EBIT will rise by 2.8%
(C)
37. Higher Operating Leverage is related to the use of:
A. Debt
B. Equity
C. Fixed Cost
D. Variable Cost
(C)
38. Higher Financial Leverage is related to use of:
A. Higher Equity
B. Higher Debt
C. Lower Debt
(B)
39. In order to calculate Earnings per Share, Profit After Tax and Preference
Dividend is divided by:
A. Market Value of Equity Shares

B. Number of Equity Shares
C. Face Value of Equity Shares
(B)
40. Trading on Equity is:
A. Never beneficial
B. Always beneficial
C. May be beneficial
(C)
49
41. Benefit of Trading on Equity is available only if:
A. Rate of Interest < Rate of Return

B. Rate of Interest > Rate of Return
C. Both (A) and (B)
D. None of these
(A)
42. Indifference Level of EBIT is one at which:
A. EPS is Zero
B. EPS is Minimum
C. EPS is Highest
D. None of these
(D)
43. Financial Break-even level of EBIT is one at which:
A. EPS is One
B. EPS is Zero
C. EPS is Infinite
D. EPS is Negative
(B)
44. Relationship between change in Sales and Operating Profit is known as:
A. Net Profit Ratio

B. Gross Profit Ratio
C. Operating Leverage
D. Financial Leverage
(C)
45. If a firm has no Preference Share Capital, Financial Break-even level is defined
as equal to:
A. Earnings Before Interest and Tax

B. Interest Liability
C. Equity Dividend
D. Tax Liability
(B)
46. At difference level of EBIT, different capital have:
A. Same EPS
B. Same PAT
C. Same PBT
D. Same EBIT
(A)
50
47. Which of the following is not a relevant factor in EPS Analysis of capital
structure?
A. Tax Rate
B. Rate of Interest on Debt
C. Dividend paid last year
D. Amount of Preference Share Capital
(C)
48. For a constant EBIT, if the debt level is further increased then:
A. EPS may increase

B. EPS will never increase
C. EPS will always increase
(A)
49. Between two capital plans, if expected EBIT is more than indifference level of
EBIT, then:
A. Both plans can be rejected

B. Both plans are good
C. One is better than the other
(C)
50. Financial Break-even level of EBIT is:
A. Intercept at Y-axis
B. Intercept at X-axis
C. Slope of EBIT – EPS line
(B)
51. Which of the following is true of Net Income Approach?
A. Higher Debt is better

B. Higher Equity is better
C. Debt Ratio is irrelevant
(A)
52. In case of Net Income Approach, the Cost of Equity is:
A. Constant
B. Increasing
C. Decreasing
(A)
51
53. In case of Net Income Approach, when the debt proportion is increased, the cost
of debt:
A. Increases
B. Decreases
C. Constant
(C)
54. Which of the following is true of Net Income Approach?
A. VF = VE + VD
B. VE = VF + VD
C. VD = VF + VE
D. VF = VE – VE
(A)
55. In Net Operating Income Approach, which one of the following is constant?
A. Cost of Equity
B. Cost of Debt
C. WACC & Kd
D. Ke and Kd
(C)
56. NOI approach advocates that the degree of debt financing is:
A. Relevant
B. Irrelevant
C. May be Relevant
D. May be Irrelevant
(B)
57. ‘Judicious use of leverage’ is suggested:
A. Net Income Approach

B. Net Operating Income Approach
C. Traditional Approach
D. All of the above
(C)
58. In MM-Model, irrelevance of capital structure is based on:
A. Cost of Debt and Equity

B. Arbitrage Process
C. Decreasing Ko
D. All of the above
(B)
59. ‘That there is no corporate tax’ is assumed by:

D. All of these
(D)
52
60. That ‘personal leverage can replace corporate leverage’ is assumed by:
A. Traditional Approach
B. MM Model
C. Net Income Approach
D. Net Operating Income Approach
(B)
61. Which of the following argues that the value of levered firm is higher than that
of the unlevered firm?

C. MM Model with taxes
D. Both (A) and (C)
(D)
62. In Traditional Approach, which one is correct?
A. Ke rises constantly
B. Kd decreases constantly
C. Ko decreases constantly
(D)
63. Which of the following assumes constant kd and ke?

D. MM Model
(A)
A. Under Traditional Approach, overall cost of capital remains same

B. Under NI Approach, overall cost of capital remains same
C. Under NOI Approach, overall cost of capital remains same
(C)
65. The Traditional Approach to Value of the firm is that:
A. There is no optimal capital structure

B. Value can be increased by judicious use of leverage
C. Cost of Capital and Capital Structure are independent
D. Risk of the firm is independent of capital structure
(B)
66. Which of the following is incorrect for NOI?
A. ko is constant
B. kd is constant
C. ke is constant
D. kd and ko are constant
(C)
53
67. Which of the following is incorrect for value of the firm?
A. In the initial proposition, MM Model argues that value is independent of the

financing mix.
B. Total value of levered and unlevered firm is otherwise arbitrage will take
place.
C. Total value incorporates borrowings by firm but excludes personal
borrowing.
D. Total value does not change because underlying does not change with
financing mix.
(D)
68. Which of the following appearing in the balance sheet generates tax advantage
and hence affects the Capital structure decision?
A. Reserves and Surplus

B. Long-term Debt
C. Preference Share Capital
(B)
69. In MM Model with taxes, where ‘r’ is the interest rate, ‘D’ is the total debt and
‘t’ is tax rate, then present valued shields would be:
A. r×D×t
B. r×D
C. D×t
D. (D × r)/(I - t)
(C)
70. Walter’s Model suggests for 100% DP Ratio when:
A. ke = r
B. ke < r
C. ke > r
D. ke = 0
(C)
71. If a firm has ke > r the Walter’s Model suggests for:
A. 0% payout
B. 100% payout
C. 50% payout
D. 25% payout
(A)
72. Walter’s Model suggests that a firm can always increase i.e., of the share
by:
A. Increasing Dividend
B. Decreasing Dividend
C. Constant Dividend
(D)
54
73. ‘Bird-in-hand’ argument is given by:
A. Walker’s Model
B. Gordon’s Model
C. MM Model
D. Residuals Theory
(B)
74. Residuals theory argues that dividend is a:
A. Relevant Decision
B. Active Decision
C. Passive Decision
D. Irrelevant Decision
(C)
75. Dividend irrelevance argument of MM Model is based on:
A. Arbitrage
B. Hedging
C. Issue of Debentures
D. Issue of Bonus Shares
(A)
76. Which of the following is not true for MM Model?
A. Share price goes up if dividend is paid

B. Share price goes up if dividend is not paid
C. Market value is unaffected by Dividend policy
D. All of the above
(C)
77. Which of the following stresses on investor’s preference reorient dividend than
higher future capital gains?
A. Walter’s Model
B. Gordon’s Model
C. Residuals Model
D. MM Model
(B)
78. MM Model of Dividend irrelevance uses arbitrage between:
A. Dividend and Bonus

B. Dividend and Capital Issue
C. Profit and Investment
(B)
79. If ke = r, then under Walter’s Model, which of the following is irrelevant?
A. Earnings per share

B. Dividend per share
C. DP Ratio
(C)
55
80. MM Model argues that dividend is irrelevant as:
A. The value of the firm depends upon earning power

B. The investors buy shares for capital gain
C. Dividend is payable after deciding the retaining earnings
D. Dividend is a small amount
(A)
81. Which of the following represents passive dividend policy?
A. That dividend is paid as a percentage of EPS

B. That dividend is paid as a constant amount
C. That dividend is paid after retaining profits for reinvestment
D. All of the above
(C)
82. In case of Gordon’s Model, the MP for Zero payout is Zero. It means that:
A. Shares are not traded

B. Shares are available free of cost
C. Investors are not ready to offer any price
(C)
83. Gordon’s Model of dividend relevance is same as:
A. No-growth Model of equity valuation

B. Constant growth Model of equity valuation
C. Price-Earnings Ratio
D. Inverse of Price-Earnings Ratio
(B)
84. If ‘r’ = ‘ke’, then MP by Walter’s Model and Gordon’s Model for different
payout ratios would be:
A. Unequal
B. Zero
C. Equal
D. Negative
(C)
56
1. The degree of operating leverage is a measure of financial risk.

(False)
2. The degree of financial leverage is a measure of business risk.
(False)
3. The EBIT level at which the EPS is the same for two alternative financial plans is
known as the financial break-even point.
(False)
4. At financial break-even point, EPS is zero.
(True)
5. The greater the projected level of EBIT than the indifference point, the stronger is the
case for the use of equity.
(False)
6. The combined leverage is the summation of the degree of operating leverage and
financial leverage.
(False)
7. The combined leverage is a measure of total risk of the firm.
(True)
8. High fixed operating costs increase the financial leverage.
(False)
9. The larger the amount of fixed financial costs, the larger is the EBIT required to
recover them.
(True)
10. There exists inverse relationship between fixed costs and leverage.
(False)
11. Financial BEP is a summation of interest payable on debt and dividend on preference
shares.
(False)
12. Operating leverage analyses the relationship between sales level and Earnings per
share.
(False)
13. Financial leverage depends upon the operating leverage.
(False)
14. Dividend on Preference Shares is a factor of operating leverage.
(False)
15. Operating leverage may be defined as Contribution divided by Earnings per share.
(False)
16. Financial leverage depends upon the fixed financial charges.
(True)
17. Favourable financial leverage and trading on equity are the same.
(True)
18. Combined leverage establishes the relationship between operating leverage and
financial leverage.
(False)
19. Financial leverage is always beneficial to the firm?
(False)
57
20. Total risk of a firm is determined by the combined effect of operating and financial
leverage.
(False)
21. Combined leverage helps in analysing the effect of change in sales level on the EPS
of the firm.
(True)
1. The figures available for XYZ Ltd. for the year ended 31 st March, 2007 is:
Interest on debt Rs.4,00,000; Preference dividend Rs.2,00,000; Corporate tax
rate is 40%. The financial leverage of the company if its EBIT is Rs.15,00,000
is:
A. 1.75
B. 2.88
C. 1.96
D. 3.75
(C)
Working:
Financial leverage if EBIT is Rs.15,00,000
15,00,000
= = 1.96
2,00,000
15,00,000 − 4,00,000 − [ 1 − 0.40 ]
2. ABC Ltd. manufactured and sold 20,000 units with a variable cost of Rs.20 p.u.
and Rs.30 as selling price. The fixed overheads incurred during the period was
Rs.1,00,000. The operating leverage of the firm is:
A. 2.0
B. 1.5
C. 1.0
D. 2.5
(A)
Working:
Contribution = (20,000 × Rs.30) – (20,000 × Rs.20) = Rs.2,00,000

Fixed cost = Rs.1,00,000
Operating leverage = Rs.2,00,000/Rs.1,00,000 = 2
58
3. The balance sheet of XYZ Ltd. shows the capital structure as follows: 2,50,000
Equity shares of Rs.10 each; 32,000, 12% Preference shares of Rs.100 each;
General reserve of Rs.14,00,000; Securities premium account Rs.6,00,000;
25,000, 14% Fully secured non-convertible debentures of Rs.100 each. Terms
loans from financial institutions Rs.10,00,000. The leverage of the firm is:
A. 67.2%
B. 62.5%
C. 59.8%
D. 56.3%
(C)
Working:
Fixed income funds

= Preference share capital + Debentures + Term loans
= Rs.32,00,000 + Rs.25,00,000 + Rs.10,00,000 = Rs.67,00,000
Equity funds
= Equity share capital + General reserve + Securities premium
= Rs.25,00,000 + Rs.14,00,000 + Rs.6,00,000 = Rs.45,00,000
Total funds used in the capital structure
= Rs.67,00,000 + Rs.45,00,000 =
Rs.1,12,00,000
Rs. 67,00,000
Leverage = × 100 = 59.8%
Rs. 1,12,00,000
4. Consider the figures available for ABC Ltd.

Net sales = Rs.2,400 lakh; EBIT as % of sales = 10%; Corporate tax rate = 40%
Capital employed: Equity share capital (Rs.10 each) Rs.400 lakh
10% Preference shares of Rs.100 each Rs.250 lakh
12% Secured debentures Rs.180 lakh
The EPS of the company is:
A. 3.67
B. 2.65
C. 1.98
D. 2.85
(B)
Working:
EBIT = Rs.2,400 lakh × 10/100 = Rs.240 lakh

Preference dividend = Rs.250 lakh × 10/100 = Rs.25 lakh
Interest on debentures = Rs.180 lakh × 12/100 = Rs.21.6 lakh
Number of equity shares = 40,00,000
(EBIT − I)(1 − t) − Dp (240 − 21.6)(1 − 0.40) − 25

EPS = = = Rs. 2.65
N 40
59
5. Q Ltd. is having sales of Rs.1,000 lakh and its variable cost represents 30% of its
sales. The fixed cost for the year is Rs.400 lakh and the interest on its term loan
is Rs.100 lakh. The total leverage of the company is:
A. 2.33
B. 1.5
C. 3.45
D. 3.5
(D)
Working:
Contribution = Rs.1,000 lakh – Rs.300 lakh = Rs.700

lakh
Profit before tax = Rs.700 lakh – Rs.400 lakh – Rs.100 lakh = Rs.200
lakh
Contribution Rs. 700 lakh

Combined leverage = = = 3.5
EBT Rs. 200 lakh
6. The financial data furnished for A Ltd. for the year ended 31 st March, 2009 as
follows: Operating leverage = 3 : 1; Financial leverage = 2 : 1; Interest charges
p.a. is Rs.12 lakh; Corporate tax rate is 40%. The variable cost as % of sales is
60%. The EBIT of the company is:
A. Rs.24 lakh
B. Rs.22 lakh
C. Rs.32 lakh
D. Rs.18 lakh
(A)
Working:
Financial leverage = 2 (given)
EBIT
=2
EBIT − Interest
EBIT
=2
EBIT − 12
2 EBIT − 24 = EBIT
∴ EBIT = Rs. 24 lakh
60
7. A Firm has EBIT of Rs.50,000/-. Market value of debt is Rs.80,000/- and overall
capitalization rate is 20%. Market value of firm under NOI Approach is:
A. Rs.2,50,000/-
B. Rs.1,70,000/-
C. Rs.1,40,000/-
D. Rs,1,30,000/-
(B)
Working:
61
CHAPTER – 7
TIME VALUE OF MONEY
1. The difference in value of money today and tomorrow is referred as:
A. Time value of money

B. Inflation
C. Return on investment
D. Base rate
(A)
2. Time value of money explains that:
A. a unit of money received today and at some other time in future is equal
B. a unit of money received today is worth less than a unit received in future
C. a unit of money received today is worth more than a unit received in future
(C)
3. Time value of money exists not due to:
A. the possibility to increase profits

B. inflationary conditions exist for money
C. personal consumption preference is delayed
D. foregoing reinvestment opportunities for sometime
(A)
4. Time value of money facilitates comparison of cash flows occurring at different
time periods by:
A. discounting all cash flows to a common point of time

B. compounding all cash flows to a common point of time
C. using either (A) or (B)
D. neither (A) nor (B)
(C)
5. The interest rate on a loan or financial product restated from the nominal
interest rate as an interest rate with annual compound interest payable and
which is used to compare the annual interest between loans with different
compounding terms (daily, monthly, annually, or other) is called:
A. Effective Interest Rate

B. Compound Interest Rate
C. Simple Interest Rate
D. Discounted Interest Rate
(A)
62
6. Which of the following type of annuity has a higher present value?
A. Ordinary annuity
B. Annuity due
C. The present value does not change
D. Annuity present
(B)
7. The process of investing money as well as reinvesting interest earned thereon
would be described as:
A. Discounting
B. Investing
C. Depreciating
D. Compounding
(D)
8. Which are the two basic techniques for adjusting time value for money?
A. Discounting and Compounding

B. Valuing and Discovering
C. Appreciating and Depreciating
D. Budgeting and Forecasting
(A)
9. The formula for finding the future value of an ordinary annuity (A) using the
amount of instalment (P), interest rate per period (i), number of instalments (n) is:
A. A = P ? [(1 + i)n-1/i]
B. A = P ? (1 + i)n
C. A = P/(1 + i)n
D. A = P/(1 + i)n-1
(A)
10. Generally, the longer the term of an investment’s maturity period, the higher
the rate of interest. This can be reasoned with:
A. The risk is more in holding securities for a longer period than short period
and investors therefore expects return commensurate with the risk
B. In the long-term investments funds are tied up for a longer period and for
this investors would expect more returns
C. Both of these
D. None of these
(C)
11. Which of the following is not an advisable financial strategy that may be followed
by a finance manager of an organisation when interest rates are low:
A. Borrow more moneys at fixed rate of interest to increase the company’s

gearing and to maximize return on equity
B. Borrow long-term funds rather than short-term funds
C. New projects should be suspended temporarily till the interest rates of the
economy increases
D. Replace the high cost of debt with low cost debt
(C)
63
12. The formula for determining the effective annual interest is (where knom is the
nominal interest rate and m is the number of compounding periods):
A. EAR = (1 + knom/m)m ? 1
B. EAR = EAR ? (1 + m) ? knom
C. EAR = knom/m
D. EAR = EAR/knom
(A)
13. Formula for determining the present value (PV) of a future amount (FVn) n
years in the future, at interest rate k is:
A. PV = FVn/(1 + k)n
B. PV = FVn/(1 + k)n
C. PV = FVn/1 + k)n-1
D. PV = FVn/(1 + k)n + 1
(B)
14. Which of the following is a factor that contributes to the time value of money?
A. Risk and Uncertainty

B. Inflation
C. Consumption
D. All of the above
(D)
15. An annuity that is not scheduled to begin payments until a given date is generally
called:
A. Ordinary annuities
B. Deferred annuities
C. Annuity due
D. Annuity yield
(B)
16. With the increase in the interest prevailing in an economy, the present value of
money paid in future will:
A. Increase
B. Decrease
C. Remain unchanged
D. Present value and interest rate has no relation
(B)
17. The interest rate adjusted for inflation is generally called:
A. The nominal rate of interest

B. The real rate of interest
C. Inflated rate of interest
D. Internal rate of interest
(B)
64
1. Time value of money signifies that the value of a unit of money remains unchanged
during different time periods.
(False)
2. Time value of a unit of money is different over different periods on account of the
reinvestment opportunities with the firms.
(True)
3. Cash flows accruing to the firms at different time periods are directly comparable.
(False)
4. Either compounding or discounting technique can be used, to make heterogeneous
cash flows comparable.
(True)
5. Effective and nominal rate of interest remain the same irrespective of the frequency
of compounding.
(False)
6. Effective rate of interest is positively correlated with frequency of compounding.
(True)
7. To arrive at the present value of cash flows, discounting is done at the rate which
represents opportunity cost of funds.
(True)
8. Present value tables for annuity can be directly applied to mixed stream of cash flows.
(False)
9. To facilitate comparison of cash flows that are occurring at different time periods, the
technique of either compounding all cash flows to the terminal year or discounting all
cash flows to the time zero periods can be adopted.
(True)
1. You buy a car for Rs.8,00,000/- but you do not have to make the payment until
next year (that is, one year later only you need to pay). The prevailing interest
rate is 3%. What price are you paying for the car in present rupee value?
A. Rs.8,02,400/-
B. Rs.8,24,000/-
C. Rs.7,76,700/-
D. Rs.8,00,000/-
(C)
Working:
65
2. An investment produces annual returns of 12% in the first year, 7% in the
second year and 10% in the third year. What is the annualized return over the
three years?
A. 9.65%
B. 9.42%
C. 9.67%
(A)
Working:
Annualized return over the 3 years
= (1.12 × 1.07 × 1.10)1/3 – 1
= 1.096477 – 1 = 0.96477 or 9.65%
3. A sum deposited at a bank fetches Rs.16,000 after 4 years at 15% simple rate of
interest. The principal amount is:
A. Rs.10,000
B. Rs.80,000
C. Rs.12,000
D. Rs.14,000
(A)
Working:
A = P(1 + nr)
16,000 = P(1 + 4 × 1.10)1/3 – 1
16,000 = P1.6
P = 16,000/1.6 = Rs.10,000
66
4. The compound interest on Rs.800 for 5 years at 12% compounded annually is:
A. Rs.4,900
B. Rs.5,100
C. Rs.6,100
D. Rs.5,500
(C)
Working:
A = P(1 + i)n
= 8,000 (1 + 0.12)5
= 8,000 × 1.125
= 8,000 × 1.76234 = Rs.14,098.72 say Rs.14,100
Compound interest
= Rs.14,100 – Rs.8,000 = Rs.6,100
5. A firm can invest Rs.12,000 in a project with a life of 4 years. The projected cash
inflow are as follows: Year 1 – Rs.3,000; Year 2 – Rs.4,000; Year 3 – Rs.5,000;
Year 4 – Rs.3,500. The cost of capital is 10%. The NPV of the project is:
A. Rs.180
B. Rs.210
C. Rs.280
D. Rs.110
(A)
Working:
The present value of cashflows is: (Rs.)

Year 1 (Rs.3,000 × 1/1.10) 2,727.27
Year 2 (Rs.4,000 × 1/1.102) 3,305.79
Year 3 (Rs.5,000 × 1/1.103) 3,756.57
Year 4 (Rs.3,500 × 1/1.104) 2,390.55
12,180.18
Less: Initial cash outlay 12,000.00
NPV 180.18
67
6. The present value of Rs.13,401.96 paid 6 years from now at an interest rate of
5% would be:
A. Rs.10,000.00
B. Rs.14,000.00
C. Rs.13,401.96
D. Rs.15,401.96
(A)
Working:
68
CHAPTER – 8
COST OF CAPITAL
1. The cost of capital is not similar to one of the following:
A. target rate
B. hurdle rate
C. cut-off rate
(D)
2. When the firm is overgeared, it faces:
A. business risk
B. financial risk
C. market rate risk
D. interest rate risk
(B)
3. When the firm is associated with greater business risk and financial risk, it calls
for payment of additional return to the providers of capital and debt, called as:
A. target return
B. risk premium
C. risk free return
D. additional interest
(B)
4. The weighted average cost of capital is not similar to:
A. risk adjusted return

B. overall cost of capital
C. required rate of return
D. minimum rate of return
(A)
5. Nominal share capital is:
A. That part of the authorized capital which is issued by the company

B. The amount of capital which is actually applied for by the prospective
shareholders
C. The maximum amount of share capital which a company is authorized to
issue
D. The amount actually paid by the shareholders
(C)
69
6. The value of which one of the following assets increases in the initial years of its
life remains constant thereafter and finally begins to decline?
A. Live stock
B. Patents
C. Goodwill
D. Machinery
(A)
7. Required rate of return of a project can be calculated as ______________.
A. Rf + Rm + βp
B. Rf βp (Rm - Rf)
C. Rf + Rm (βp + Rt)
D. Rf + Rf (βp + Rm)
(B)
1. Cost of capital is cost of borrowing funds.

(False)
2. Equity capital does not carry any cost as a company is under no legal obligation to
pay dividends.
(False)
3. Like equity capital, retained earnings also do not cause any cost to the company.
(False)
4. Weighted average cost of capital takes into consideration cost of long-term sources
of finance.
(True)
5. Retained earnings do not have explicit cost. They carry implicit cost.
(True)
6. Overall cost of capital decreases on payment of entire long-term debt.
(False)
7. Cost of retained earnings is less than cost of equity.
(True)
8. Beta is a measure of unsystematic risk.
(False)
9. Cost of additional equity share capital is the same as that of existing equity share
capital.
(False)
10. The highest is the corporate tax rate, the higher is the cost of debt.
(False)
11. Beta is a measure of systematic risk.
(True)
12. Cost of debt is higher than cost of equity.
(False)
13. Cost of preference share capital is higher than cost of debt.
(True)
70
14. Cost of preference share capital is higher than cost of equity share capital.
(False)
15. Among all long-term sources of finance, equity capital carries maximum cost.
(True)
16. The cost of capital is the required rate of return to ascertain the value of the firm.
(True)
17. Different sources of funds have a specific cost of capital related to that source only.
(True)
18. Cost of capital does not comprise any risk premium.
(False)
19. Cost of capital is basic data for NPV technique.
(True)
20. Risk-free interest rate and cost of capital are same things.
(False)
21. Different sources have same of cost of capital.
(False)
22. Tax liability of the firm is relevant for cost of capital of all the sources of funds.
(False)
23. Cost of Debt and cost of Preference Share Capital, both require tax adjustment.
(False)
24. Every source of fund has an explicit cost of capital.
(False)
25. WACC is the overall cost of the capital of the firm.
(True)
26. Cost of debt is the same as the rate of interest.
(False)
1. By using the constant growth formula, find out the cost of equity of a company
which has growth rate of 5%, last year’s dividend Re.1.00, and current market
price of the company’s equity share is Rs.20.
A. 10.25%
B. 10%
C. 8.25%
D. 12%
(A)
Working:
Do (1 + g) Re. 1 (1 + 0.05)
Ke = + g= + 0.05 = 0.1025 or 10.25%
Po Rs. 20
71
2. The shares of BBA company are selling at Rs.30 per share. The firm had paid
dividend @ Rs.2 per share last year. If the estimated growth of the company is
approximately 8% per year, the cost of equity capital of the company will be:
A. 15.5%
B. 15.2%
C. 16%
D. 16.5%
(B)
Working:
D1 Rs. 2 (1 + 0.08)
Cost of Equity (K e ) = + g= + 0.08 = 0.152 or 15.20%
Po Rs. 30
3. ABC Ltd. has a gearing ratio of 30%, the cost of equity is computed at 21% and
cost of debt 14%. The corporate tax rate is 40%. The WACC of the company
is:
A. 17.22%
B. 14.70%
C. 18.34%
D. 19.44%
(A)
Working:
WACC = (21% × 0.70) + [14% (1 − 0.40) × 0.30] = 14.7% + 2.52%

= 17.22%
4. A share of Star Ltd. is currently quoted at Rs.55. The retained earnings per
share being 40% is Rs.4 per share. If the investors expect annual growth rate of
10%, what would be the cost of equity of Star Ltd.?
A. 20.5%
B. 21.0%
C. 22.0%
D. 23.5%
(C)
Working:
Retained earnings per share = Rs.4
EPS = Rs.4 × 100/40 = Rs.10
Dividend = Rs.10 × 60/100 = Rs.6
Do (1 + g) Rs. 6 (1 + 0.10)
Cost of Equity (Ke) = + g = + 0.10
Po Rs. 55
= 0.22 or 22%
72
5. A company has an equity rate of return of 12% and a debt rate of return of 6%.
Its gearing ratio is 40%. The tax rate is 30%. Interest payments on debt are
chargeable for tax. The weighted average cost of capital of the company is:
A. 8.88%
B. 9.88%
C. 10.88%
D. 9.60%
(A)
Working:
WACC = (0.12 × 0.60) + [(0.06 × 0.40) (1 – 0.30)]
= 0.072 + 0.0168 = 0.0888 or 8.88%
6. Dell Ltd. has Rs.100 preference share redeemable at a premium of 10% with 15
years maturity. The coupon rate is 12%. Flotation cost is 5%, sale price is Rs.95.
The cost of preference share is:
A. 12.85%
B. 13.03%
C. 13.33%
D. 14.50%
(C)
Working:
110 − 90
12 + [ 15 ] 12 + 1.33
Kp = = = 0.1333 or 13.33%
110 + 90 100
2
73
7. Vishnu Steels Ltd. has issued 30,000 irredeemable 14% debentures of Rs.150
each. The cost of flotation of debentures is 5% of the total issued amount. The
company’s taxation rate is 40%. The cost of debenture is:
A. 8.95%
B. 7.64%
C. 9.86%
D. 8.84%
(D)
Working:
(Rs.)
Total issued amount (30,000 × Rs.150) 45,00,000
Less: Floatation cost (Rs.45,00,000 × 5/100) 2,25,000
Net proceeds from issue 42,75,000
Annual interest charge
= Rs.45,00,000 × 14/100 = Rs.6,30,000
I (1 − t) 6,30,000 (1 − 0.40)
Kd = = 0.0884 or 8.84%
NP 42,75,000
8. Prabhat Ltd. has 5,00,000 equity shares of Rs.10 each and its current market
value is Rs.18 each. The after tax profit of the company for the year ended 31 st
March, 2007 is Rs.15,60,000. The cost of equity capital based on price earning
method is:
A. 17.33%
B. 9.4%
C. 18.28%
D. 14.22%
(A)
Working:
EPS = Rs.15,60,000/5,00,000 shares = Rs.3.12
Rs. 3.12
Ke = = 0.1733 or 17.33%
Rs. 18
74
9. Modern Ltd.’s share beta factor is 1.40. The risk free rate of interest on
government securities is 9%. The expected rate of return on the company equity
shares is 16%. The cost of equity capital based on CAPM is:
A. 9%
B. 16%
C. 18.8%
D. 15.8%
(C)
Working:
Ke = 9% + 1.40 (16% - 9%) = 18.8%
75
CHAPTER – 9
CAPITAL STRUCTURE DECISIONS
1. The term ‘capital structure’ denotes:
A. Total of Liability side of Balance Sheet

B. Equity Funds, Preference Capital and Long-term Debt
C. Total Shareholders’ Equity
D. Types of Capital Issued by a Company
(B)
2. Theoretically, the optimum capital structure implies a ratio of debt and equity
at which __________________________ would be least the market value of the
firm would be the highest.
A. opportunity cost
B. cost of debt funds
C. marginal cost of capital
D. weighted average cost of capital
(D)
3. One of the following is not an assumption of capital structure theories.
A. There are no corporate taxes.

B. The firm’s business risk constant overtime.
C. The dividend payout ratio varies between 0% and 100%.
D. There are only two sources of funds of the firm: perpetual risk-less debt and
ordinary shares.
(C)
4. The Modigliani-Miller approach to capital structure theory is based on certain
simplified assumptions. One of the following is not included in such assumption.
A. Investors are rational.

B. No corporate income-tax.
C. Capital markets are imperfect.
D. Investors have homogeneous expectations.
(C)
5. Factor that is irrelevant in determining the choice of debt-equity mix:
A. taxation
B. industry norm
C. the nature of asset-base
D. variability of cashflows
(B)
76
6. In perfect capital markets:
A. leasing will always be preferable to borrowing to buy

B. borrowing to buy will always be preferable to leasing
C. leasing and borrowing to buy will always be equivalent
(C)
7. The ability of a firm with high level of gearing to meet fixed interest payments
out of current earnings:
A. enhances
B. diminishes
C. does not change
D. remain unaffected
(B)
8. Capital structure decisions should always aim at having debt component in
order to:
A. gain tax savings

B. balance the capital structure
C. gain control over the company
D. increase the earnings available for equity shareholders
(D)
9. The non-productive projects are to be financed by:
A. debt funds
B. equity funds
C. retained earnings
D. debt and equity funds
(C)
10. In using debt-equity ratio in capital structure decisions, there is an optimal
capital structure where:
A. the WACC is minimum

B. the cost of debt is lowest
C. the cost of savings are highest
D. the marginal tax benefit is equal to marginal cost of financial distress
(D)
11. If EBIT is less than financial break-even point then:
A. cost debt raises

B. no impact on EPS
C. EPS will be positive
D. EPS will be negative
(D)
77
12. If the expected level of EBIT exceeds the indifference point:
A. EPS will reduce

B. the use of debt financing would be advantageous
C. the use of equity financing would be advantageous
(B)
13. The level of EBIT beyond which the benefits of financial leverage begins to
operate with respect to EPS is known as:
A. optimum capital structure

B. financial break-even point
C. financial indifference point
D. weighted average cost of capital
(C)
14. The trade-off between financial and NEDC (non-employment of debt capital)
risks will determine the:
A. level of EPS
B. level of EBIT
C. optimum capital structure
D. level of financial distress costs
(C)
15. The net operating income approach to capital structure is based on the
assumption that _________________.
A. the cost of debt is constant

B. the investors see the firm as a whole
C. the overall cost of capital is constant
D. all of the above
(D)
16. According to the traditional approach, what is the effect of increase in degree of
leverage on the valuation of the firm?
A. increases
B. decreases
C. remains unaffected
D. increases first and then decreases
(D)
17. According to NOI approach, with increase in debt/equity ratio the financial risk
of equity holders ________________.
A. increases
B. decreases
C. no change
D. depends on degree of leverage
(A)
78
18. In a capital budgeting context, the ratio of present value of inflows to the present
value of outflows is called:
A. Profitability index
B. Quick index
C. Desirability ratio
D. Favourable ratio
(A)
19. The act of placing restrictions on the amount of new investments is called:
A. Restrictive project accounting

B. Highly restrictive project planning
C. Capital rationing
D. Capital account planning
(C)
20. Which of the following is true with reference to the term capital structure?
A. The term capital structure refers to the percentage of capital (money) at work
in a business by type.
B. The term capital structure ordinarily refers to the proportion of debt and
equity in the total capital of the company.
C. The term capital structure concerns with the long terms funds in the
business.
D. All of the above.
(D)

D. Capital account planning
(C)
22. Which of the following is not likely to be a characteristic of a fixed capital?
A. Fixed capital can appreciate or depreciate

B. Fixed capital is used for purchase of fixed assets
C. Fixed capital is used for promotion and expansion of business
D. Fixed capital has high liquidity
(D)
23. Which of the following is a factor that influences the fixed capital requirement
of a firm?
A. Nature of business
B. Size of the business
C. Technological environment of the business
D. All of the above
(D)
79
24. Structure and amount of long-term equity and debt capitals of a firm is generally
referred to as:
A. Depreciation
B. Working capital
C. Capitalization
D. Conversion
(C)
25. DU PONT Analysis deals with:
A. Analysis of Current Assets

B. Analysis of Profit
C. Capital Budgeting
D. Analysis of Fixed Assets
(B)
26. Debt Financing is a cheaper source of finance because of:
A. Time Value of Money

B. Rate of Interest
C. Tax –deductibility of Interest
D. Dividends not payable to lenders
(C)
27. In order to find out cost of equity capital under CAPM, which of the following
is not required:
A. Beta Factor
B. Market Rate of Return
C. Market Price of Equity Share
D. Risk-free Rate of Interest
(C)
28. Tax-rate is relevant and important for calculation of specific cost of capital of:

B. Preference Share Capital
C. Debentures
D. (A) and (B) above
(C)
29. Advantage of Debt Financing is:
A. interest is tax-deductible
B. it reduces Weighted Average Cost of Capital
C. does not dilute Owner’s control
D. all of the above
(D)
80
30. Cost of issuing new shares to the public is known as:
A. Cost of Equity
B. Cost of Capital
C. Flotation Cost
D. Marginal Cost of Capital
(C)
31. 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. Equity shares have higher risk than debt
C. Equity shares are easily saleable
D. All of the three above
(B)
32. Which of the following is not a generally accepted approach for calculation of
Cost of Equity?
A. CAPM
B. Dividend Discount Model
C. Rate of Preferential Dividend plus Risk
D. Price-Earnings Ratio
(C)
1. In the traditional approach, the cost of equity is independent of amount of debt.

(False)
2. In practice, equity financing allows a firm to go for cheaper sources of finance in
future.
(True)
3. Financial distress is exclusively related to the risk of bankruptcy.
(False)
4. In case, the projected level of EBIT is substantially higher than the indifference point,
the levered plan is likely to be beneficial for the firm.
(True)
5. Cost of debt relates only to the amount of interest payable on borrowings.
(False)
6. Sales and Production Budgets are Capital Budgets.
(False)
7. In Rolling Budget System, budget is prepared for every month.
(False)
8. Percentage of Sales method can be used to prepare both the PIS and PBS.
(True)
9. Investment decisions and capital budgeting are one and the same.
(False)
10. In Payback Period method, the risk of the proposal is incorporated by lessening the
target payback period.
(True)
81
11. In Certainty Equivalents method, both the cashflows and the discount rate are
adjusted.
(False)
12. In Sensitivity Analysis, the NPV of the proposal is adjusted.
(False)
13. In Sensitivity Analysis, one variable is adjusted at a time to see its effect on NPV.
(False)
14. Sensitivity Analysis helps in calculation of NPV of the proposal.
(False)
1. According to Net Income (NI) approach capital structure decision is ______________

to the valuation of the firm. (relevant/irrelevant)
(relevant)
2. Market price per share ______________ if more debt is used in NI approach.
(increases/decreases/remains unchanged)
(increases)
3. According to NOI approach, cost of equity is ______________.
(residual)
4. __________________ implies buying securities in a market where price is low and
selling where it is high.
(arbitrage process)
5. ______________ analysis is better than EBIT-EPS analysis (from the point of view
of profitability) in evaluating proposed financial plans.
(EBIT-MPS)
6. Indifference point which factors provision for sinking fund also provides __________
(uncommitted/committed) earnings per share.
(uncommitted)
7. Coverage ratio which considers sinking fund payments also is determined dividing
EBIT by _________________.
(EBIT/I + [SF/(I – t)]
8. To retain control over management, a firm would prefer use of _________
(debt/equity).
(debt)
9. In case sales are subject to wide fluctuations, a firm should employ more __________
(debt/equity).
(equity)
10. Firms at their infancy should rely more on _________ (debt/equity).
(equity)
11. The __________________ implies that the firm with an adequate notice can repay
the suppliers of funds.
(call provision)
82
1. BKC Ltd. has profits before interest and taxes of Rs.3,00,000. The applicable
tax rate is 40%. Its required rate of return on equity in the absence of borrowing
is 18%. In the absence of personal taxes, the value of the company in an MM
world with no leverage is:
A. Rs.10,00,000
B. Rs.11,60,000
C. Rs.12,60,000
D. Rs.14,00,000
(A)
Working:
Rs. 3,00,000 × 0.6

Company value = = Rs. 10,00,000
0.18
83
CHAPTER – 10
DIVIDEND AND RETENTION POLICIES
1. In a company form of business, the wealth created is reflected in the

___________ of its shares.
A. assets value
B. market value
C. dividend growth
D. dividends declared
(B)
2. A shareholder has received bonus shares in the proportion of 1:1. What is her
stockholding in the company (indicate the most appropriate alternative)?
A. stake holding has gone up

B. stake holding remains the same
C. stake holding has gone up with more share available for trading
D. stake holding remains the same with more shares available for trading
(D)
3. In the real world, corporate finance managers have the following goals in mind
while declaring dividends.
A. avoid the need to raise fresh equity

B. resort to dividend cuts as and when needed
C. maintain a long-term target debt-equity ratio
D. projects with positive NPV are not be cut to pay dividends
(B)
4. The dividend decisions are concerned with
A. the frequency of such payments

B. the amounts to be retained by the firm
C. determination of quantum of profits to be distributed to the owners
D. all of the above
(D)
5. The price of a company’s shares has risen from Rs.10/- to Rs.400/-. Small
investors are complaining that this is affecting their ability to buy shares in the
company. Which one of the following might overcome the problem?
A. a share split
B. a share buy-back
C. issuing stock option
D. a share consolidation
(A)
84
6. The dividend policy of the firm and its market price of share is determined by:
A. book value
B. dividend yield
C. earnings per share
D. price earnings ratio
(C)
7. A low book value signifies:
A. poor track record of profitability

B. liberal distribution policy of bonus and dividend
D. neither (A) nor (B) above
(C)
8. Four companies have the following P/E ratios:
Company E F G H
P/E ratio 17 24 12 8
Which of the statement about the companies is incorrect?
A. F’s share price must be, twice that of G

B. E’s share price is 17 times its earnings
C. H has the lowest share price relative to its earnings growth
D. F has the greatest expectations of future earnings growth
(A)
9. Which of the following is not an assumption of the MM theory for irrelevance of
dividends?
A. No flotation costs
B. Irrational investors
C. No transaction costs
D. No tax discrimination on capital gains and dividends
(B)
10. According to the Gordon model, the discount rate used by the investors’ exhibits
____________________ relationship with the retention rate.
A. a directly proportional
B. an inversely proportional
C. no relationship at all
(A)
11. The market price of the share, according to Gordon model, is ________________
affected with the increasing payment of dividends.
A. favourably
B. unfavourably
C. unaffected
(A)
85
12. According to Walter’s model, the value of the share is
_______________________ proportion to the D/P ratio.
A. in inverse
B. in direct
C. in linear
D. not related at all
(D)
13. The arbitrage process implies that the market value plus current dividends of
two firms which are alike in all respects except ____________________ ratio will
be identical.
A. D/P
B. P/E
C. Debt/Equity
(A)
14. Under what condition is the Walter model similar to MM hypothesis with regard
to the payment of dividends?
A. r>k
B. r=k
C. r<k
(B)
15. Regarding shares:
A. the rate of interest is fixed

B. the rate of interest is not fixed
C. the rate of dividend is fixed
D. the rate of dividend is not fixed
(D)
16. The amount in unpaid dividend accounts of companies shall be transferred to
the:
A. Dividend Equalisation Reserve of the company

B. Investor Education and Protection Fund
C. Investor Protection Fund
D. General Revenue Account of the Central Government
(B)
17. Dividend declared by a company must be paid in:
A. 20 days
B. 30 days
C. 32 days
D. 42 days
(B)
86
18. Dividend Distribution Tax is payable by:
A. Shareholders to Government
B. Shareholders to Company
C. Company to Government
D. Holding to Subsidiary Company
(C)
19. Which of the following generally does not result in increase in total dividend
liability?
A. Share-split
B. Right Issue
C. Bonus Issue
D. All of the above
(A)
20. Dividends are paid out of:
A. Accumulated Profits
B. Gross Profit
C. Profit After Tax
D. General Reserve
(C)
21. In India, Dividend Distribution Tax is paid on:
A. Equity Share
B. Preference Share
C. Debenture
D. Both (A) and (B) above
(D)
22. In India, if dividend on equity shares is not paid within 30 days, it is transferred
to Investors Education Fund in:
A. 2 days
B. 3 days
C. 4 days
D. 7 days
(C)
23. ‘Constant Dividend Per Share’ Policy is considered as:
A. Stable Dividend Policy

B. Increasing Dividend Policy
C. Decreasing Dividend Policy
(A)
87
24. Which of the following is not a type of dividend payment?
A. Share Split
B. Bonus Issue
C. Rights Issue
D. Both (B) and (C)
(A)
25. Which of the following is an element of dividend policy?
A. Production capacity
B. Change in Management
C. Information content
D. Debt Service
(C)
26. Stock split is a form of:
A. Dividend Payment
B. Bonus Issue
C. Financial Restructuring
D. Dividend in kind
(C)
27. In stock dividend:
A. Authorized capital always increases

B. Paid up capital always increases
C. Face value per share decreases
D. Market price per share decreases
(D)
28. Which of the following is not considered in Litner’s Model?
A. Dividend payout ratio

B. Current EPS
C. Speed of adjustment
D. Preceding year EPS
(D)
29. Which of the following is not relevant for dividend payment for a year?
A. Cash flow position

B. Profit position
C. Paid-up capital
(D)
30. Cash Budget does not include:
A. Issue of Capital
B. Dividend Payable
C. Total Sales Figure
D. Postal Expenditure
(C)
88
31. Which of the following is not a motive to hold cash?
A. Transaction Motive
B. Precautionary Motive
C. Capital Investment Motive
(C)
32. Cheques deposited in bank may not be available for immediate use due to:
A. Net Float
B. Receipt Float
C. Payment Float
D. Playing the Float
(B)
33. Difference between the bank balance as per Cash Book and Pass Book may be
due to:
A. Float
B. Factoring
C. Overdraft
(A)
34. Concentration Banking helps in:
A. Increasing Creditors
B. Increasing Collection
C. Reducing idle Bank Balance
D. Reducing Bank Transactions
(B)
35. The Transaction Motive for holding cash is for:
A. Safety Cushion
B. Daily Operations
C. Purchase of Assets
D. Payment of Dividends
(B)
36. Which of the following should be reduced to minimum by a firm?
A. Receipt Float
B. Payment Float
C. Concentration Banking
D. All of the above
(A)
37. Cash required for meeting specific payments should be invested with an eye on:
A. Yield
B. Maturity
C. Liquidity
D. All of the above
(D)
89
38. Miller-Orr Model deals with:
A. Optimum Cash Balance

B. Optimum Finished Goods
C. Optimum Receivables
D. All of the above
(A)
39. Float Management is related to:
A. Cash Management
B. Inventory Management
C. Receivables Management
D. Raw Materials Management
(A)
40. Which of the following is not an objective of cash management?
A. Minimization of cash balance

B. Optimization of cash balance
C. Maximization of cash balance
D. Zero cash balance
(B)
41. Which of the following is not true of cash budget?
A. Cash budget is based on accrual concept

B. Cash budget is based on cash flow concept
C. Cash budget indicates timings of short-term borrowing
D. Repayment of principal amount of law is shown in cash budget
(A)
42. Baumol’s Model of Cash Management attempts to:
A. Minimization of total cost

B. Minimize the holding cost
C. Minimization of cash balance
D. Minimization of transaction cost
(A)
43. Which of the following is not considered by Miller-Orr Model?
A. Holding cost
B. Cost of transaction
C. Variability in cash requirement
D. Total annual requirement of cash
(D)
44. Basic characteristic of short-term marketable securities are:
A. High Risk
B. High Return
C. High Safety
D. High Marketability
(D)
90
45. Marketable securities are primarily:
A. Equity shares
B. Preference shares
C. Short-term debt investments
D. Fixed deposits with companies
(C)
1. If the cost of capital of the firm (k) is higher than the rate of return (r), the firm will
retain its earnings as it would lead to the reduction of its cost of capital.
(False)
2. MM theory of irrelevance of dividends is applicable only to firms which have a
constant investment policy.
(True)
3. According to MM theory, the market price of the share will remain unchanged even
after the payment of dividends.
(True)
4. Dividend can only be paid out of the current year’s earnings.
(False)
5. A company is free to choose whatever dividends it must pay. It does not have
restrictions from any of the stakeholders.
(False)
6. Stock repurchases increase during boom times when firms accumulate excess cash.
(False)
7. The effective wealth of shareholders does not change with the issue of bonus shares.
(True)
8. A new firm can pay dividends to its shareholders out of its paid-up capital as it may
not have enough profits to pay dividends but has strong growth prospects in the future.
(False)
9. A firm cannot pay dividends out of its accumulated balance of retained earnings.
(False)
10. Firms with more stable income streams generally tend to retain a majority of their
earnings so as not to impair the stability of their income.
(False)
11. Share splits tend to dilute the ownership of the firm as more shares are offered to
shareholders.
(False)
12. Dividend is a part of retained earnings.
(False)
13. Dividend is compulsorily payable to preference shareholders.
(False)
14. Effective dividend policy is an important tool to achieve the goal of wealth
maximization.
(True)
15. Retained earnings are an easily available source of funds at no explicit cost.
(True)
91
16. Dividend payout ratio refers to that portion of total earnings which is distributed
among shareholders.
(True)
17. Percentage rate of dividend is also known as dividend payout ratio.
(True)
18. Dividends are paid out of profit and they do not affect the liquidity position of the
firm.
(False)
19. Stability of dividend refers to the fact that the rate of dividend must be fixed.
(False)
20. While designing a dividend policy, the legal provisions may be considered by the
firm.
(False)
21. Cash dividend and bonus share issue affect the firm in the same way.
(False)
22. Dividends in India can be paid only out of profits.
(False)
23. Cost Preference share capital is determined by the rate of fixed dividend.
(True)
1. The test of adequate acceptable opportunities for the firm while considering its
dividend policy is the relation between _________________ and
________________.
(return on investment, cost of capital)
2. Investors can be expected to prefer ____________________ to
__________________ owing to the tax differential between the dividend and capital
gains tax.
(retention of earnings, payment of dividend)
3. Walter’s model and Gordon’s model are applicable to firms in which all financing is
done through ________________ and with ____________________ leverage.
(retained earnings, zero)
4. In a stock split, the par value of the share is ___________ (reduced/increased) and the
number of shares is proportionately ____________reduced/increased).
(reduced, increased)
5. ____________ involves payment to existing owners of dividend in the form of shares.
(Bonus shares)
6. An optimum dividend policy should strike a balance between ___________________
and _________________ in order to maximize the wealth of the shareholders.
(current dividends, future growth)
92
1. Syntex Ltd. is to pay dividend of Rs.2.15 at the end of the year and is expected
to grow at 11.2% per year forever. If the required rate of return on the
company’s stock is 15.2% p.a., its intrinsic value will be:
A. Rs.59.77
B. Rs.53.75
C. Rs.52.50
D. Rs.50.50
(B)
Working:
D1 Rs. 2.15 Rs. 2.15

Intrinsic value of share P = = = = Rs. 53.75
Ke − g 0.152 − 0.112 0.04
2. SB Ltd. has in issue 50,000 equity shares of Rs.10 each. The shares are currently
quoted at Rs.50 each (ex dividend). Current year’s proposed dividend is Rs.5
per share. If the current dividend policy is maintained, the shareholder’s wealth
will be:
A. Rs.25,00,000
B. Rs.23,50,000
C. Rs.27,50,000
(C)
Working:
Shareholder’s wealth
= Market value + Dividend
= (Rs.50 × 50,000 shares) + (Rs.5 × 50,000 shares) = Rs.27,50,000
93
3. Sonex’s share is expected to generate a dividend and terminal value (one year
from now) of Rs.580. The share has a beta of 1.4 and risk-free return is 8% and
the expected market return is 14%. The equilibrium price of Sonex’s share in
the market should be:
A. Rs.600
B. Rs.498
C. Rs.520
D. Rs.550
(B)
Working:
E(Ri) = Rf + βi (Rm – Rf)
= 8 + 1.4 (14 – 8) = 16.4%
Rs. 580
Share price = = 498
1 + 0.164
4. PR company’s equity share is expected to provide a dividend of Rs.3 and fetch a

price of Rs.40 a year hence. What price would it sell for now if investors’
required rate of return is 15%?
A. Rs.35.50
B. Rs.37.39
C. Rs.38.27
D. Rs.40.00
(B)
Working:
Rs. 40 + Rs. 3
Po = = Rs. 37.39
1.15
94
CHAPTER – 11
PROJECT PLANNING AND CONTROL
1. A new machinery in place of old equipment due to technological changes is

termed as:
A. balancing
B. expansion
C. replacement
D. modernization
(D)
2. Setting up an entirely new project which is not concerned with the existing
business is known as:
A. expansion
B. diversification
C. forward integration
D. backward integration
(B)
3. The contractor takes complete responsibility to construct, erect, commission and
supply the plant and keeps it ready to operate by the owner in:
A. EPC contract
B. BOT contract
C. BOO contract
D. LROT contract
(A)
4. One of the following is a time-cost trade-off option:
A. CAT schedule
B. Line of balance
C. Most efficient plan
D. Commitment control
(C)
5. A contract in which the price payable for supplies or services is determined on
the basis of actual cost of production of the supplies or services concerned plus
profit either at a fixed rate per unit or at a fixed percentage on the actual cost of
production is referred to as:
A. A self-contained contract
B. A cost-plus contract
C. A Turn-Key contract
D. A piece-work contract
(B)
95
1. In mutually exclusive decision situation, the firm can accept all feasible proposals.
(False)
96
CHAPTER – 12
CAPITAL BUDGETING TECHNIQUES
1. IRR of a project is that rate where NPV tends to be:
A. one
B. zero
C. less than one
D. more than
(B)
2. Estimate of future cashflows should not include:
A. income-tax receipts and payments

B. projections of cash inflows from the continuing use of the asset
C. net cashflows, if any, to be received (or paid) for the disposal of the asset at
the end of its useful life
D. all of the above
(A)
3. While analyzing prospective investments for capital investment decisions, the
only relevant measure to consider is:
A. sunk cost
B. operating profits
C. incremental cashflows
D. cashflow from operations
(C)
4. The relation between terminal value (Tn) and present value (Po) is given by the
equation:
A. Tn = Po (1 + r)-n
B. Tn = Po (1 + r)n
C. Tn = Po/(1 + r)n
D. Po = Tn (1 + r)n
(B)
5. The net present value method of capital budgeting assumes that cashflows are
reinvested at:
A. cost of debt
B. risk-free rate
C. internal rate of return
D. discount rate used in the analysis
(D)
97
6. The accepted measure of general inflation based on the assumed expenditure
patterns of an average family is:
A. retail price index

B. general price index
C. stock market index
D. consumer price index
(A)
7. Where the costs and revenues change at differing rates of inflation is known as:
A. general inflation
B. specific inflation
C. differential inflation
D. synchronized inflation
(C)
8. Where the purchasing power equals the actual cashflows it is called:
A. real cashflows
B. money cashflows
C. differential cashflows
D. inflation adjusted cashflows
(A)
9. Where the firm has sufficient profits from its existing operations, the loss on the
new project will:
A. increase WACC
B. cause overall loss
C. increase of debt
D. reduce the overall tax liability
(D)
10. Where the project causes an overall loss, the resulting ______________ from the
loss can be carried forward to a future profit making year:
A. cashflow
B. cash inflow
C. cash outflow
D. real cashflow
(B)
11. Taxation effects of a project will have impact on:
A. investment incentives
B. projects profits and losses
C. weighted average cost of capital
D. all of the above
(D)
98
12. Investment incentives in the form of capital allowances includes:
A. sales tax deferment

B. accelerated depreciation
C. rent-free land and buildings
D. cash subsidy given for backward area
(B)
13. Capital budgeting is the process:
A. used in sell or process further decision

B. of determining how much capital share to issue
C. of making capital expenditure decision
D. of eliminating unprofitable product lines
(C)
14. In a capital rationing situation, in the case of two mutually exclusive projects:
A. The project with a lower payback period is accepted, when the respective
payback periods are less than or equivalent to the stipulated desired payback
period.
B. The project with a higher payback period is accepted when the respective
payback period are less than or equivalent to the stipulated desired payback
period.
C. The project with a higher payback period is accepted when the respective
payback period are greater than or equivalent to the stipulated payback
period.
D. The project with a lower payback period is accepted when the respective
payback period is greater than or equivalent to the stipulated desired
payback period.
(A)
15. Internal Rate of Return is also called:
A. Yield method
B. Unknown method
C. Variable method
D. Present Value method
(A)
16. The rate of return earned on security if it is held till maturity is generally called:
A. Yield curve
B. Yield to maturity (YTM)
C. Rate of Interest
D. Annuity
(B)
99
17. A plant would cost Rs.50,000 and would fetch Rs.10,000 in the first year,
Rs.20,000 in the second year, Rs.20,000 in the third year. Hence, pay-back would
be:
A. 3 years
B. 4 years
C. 2 years
D. 1 year
(A)
18. Which of the following statements about the payback period method of capital
budgeting tool is not correct?
A. In payback period method time value of money is ignored.

B. It considers the cash inflows received throughout the project life into
consideration.
C. Payback period does not consider the rate of return on investment.
D. When the cash inflows are uniform the formula for payback period is cash
outflow divided by annual cash inflow.
(B)
19. Enterprises which use payback period method for project selection often use a
standard for comparing the project payback period. Such standard payback
period generally called stipulated payback period is influenced by:
A. Stipulated payback period depends on the nature of the business with respect
to the product, technology used and speed at which technological changes
occur, rate of product obsolescence, etc.
B. Stipulated payback period is determined by the management’s capacity to
evaluate the environment vis-à-vis the enterprise’s products, markets and
distribution channels and identify the ideal business design and specify the
time target.
C. Both A and B.
D. Stipulated payback period is influenced by the cost of borrowings only.
(C)

D. Capital Account planning
(C)
21. In a capital budgeting context, the ratio of present value of inflows to the present
value of outflows is called:
A. Profitability index
B. Quick index
C. Desirability index
D. Favourable ratio
(A)
100
22. Net present value is:
A. Equal to the initial investment in a project

B. Equal to the present value of the project benefits
C. Simplified by the fact that future cash flows are easy to estimate
D. Is equal to zero when the discount rate used is equal to IRR
(D)
1. Two mutually exclusive projects (A and B) have been evaluated. Project A has an
NPV of Rs.8 lakh and an IRR of 16 per cent; Project B has NPV of Rs.7 lakh but has
IRR of 18 per cent. Since Project B has higher IRR, it should be selected.
(False)
2. The cost of capital for new projects is 15 per cent. Two competing projects (X & Y)
respectively; since IRR of project X is higher, it should be selected.
(False)
3. Two competing projects have the following NPVs: Project X, + 5 lakh (with initial
outlay of Rs.25 lakh) and Project Y, + Rs.4,20,000 (with initial outlay of
Rs.20,00,000). The company should opt for project X as it has higher NPV.
(True)
4. A project requires an initial investment of Rs.10,00,000. The estimated cash inflows
from the project are as follows: Rs.3 lakh (year 1), Rs.1 lakh (year 2), Rs.3 lakh (year
3), Rs.6 lakh (year 4) and Rs.4 lakh (year 5). The pay back of the project is 4 years.
(False)
5. A project requires an investment of Rs.20 lakh. The estimated profit after tax for
years 1-5 are: Rs.3 lakh, Rs.3 lakh, Rs.6 lakh and Rs.8 lakh. The accounting rate of
return is 21 per cent.
(False)
6. In the case of independent investment projects, if the NPV of the project is zero, IRR
is equal to cost of capital.
(True)
7. A company has evaluated 3 investment proposals under IRR method, yielding
different rates of return. Though the IRR values are varying, reinvestment rate of
intermediate cash inflows is assumed to be the same for all these three proposals.
(False)
8. Since IRR is expressed in percentage figure, it is the best method of evaluating capital
budgeting projects.
(False)
9. The more distant the CFAT, the higher is the present value of such cash flows.
(False)
10. NPV is the best method of evaluating long-term investment proposals.
(True)
11. Budgeting helps in establishing the responsibilities at different levels.
(True)
12. A budget is a collation of forecasts and plans expressed in financial terms.
(True)
13. Capital budgeting decisions are long-term decisions.
(True)
101
14. Capital budgeting decisions are reversible in nature.
(False)
15. Capital budgeting decisions do not affect the future stability of the firm.
(False)
16. There is a time element involved in capital budgeting.
(True)
17. An expansion decision is not a capital budgeting decision.
(False)
18. Capital budgeting and capital rationing are alternative to each other.
(False)
19. Correct capital budgeting decisions can be taken by comparing the cost with future
benefits.
(False)
20. Future expected profits from an investments are taken as returns from the investment
for capital budgeting.
(False)
21. Sunk cost is a relevant cost in capital budgeting.
(False)
22. The opportunity cost of an input is always considered, in capital budgeting.
(False)
23. Allocated overhead costs are not relevant for capital budgeting.
(True)
24. Irrespective of the issue involved in a capital budgeting anon, the basic techniques
can be used in all cases.
(False)
25. Capital rationing is a situation when the Government has imposed a ceiling on
investment by a firm.
(False)
26. Sunk cost is a relevant cost in capital budgeting.
(False)
27. A firm should always implement a positive NPV props irrespective of fund
requirement.
(False)
28. EAM is, in a way, an extension of NPV method.
(True)
29. EAM should be used in accept-reject decision situation.
(False)
30. Feasibility Set Approach is based on the NPV method of capital budgeting.
(True)
31. Selection based on PI method gives optimum decision making in case of indivisible
projects.
(False)
32. A firm should ignore the replacement timing of an asset.
(False)
33. There is no need to defer a positive NPV proposal.
(False)
34. Multi-period and Multi-constraints are one and the same thing.
(False)
102
35. Inflation affects not only the cash flows but also the discount rate.
(True)
36. A risky situation is one which the probability for the occurrence or non-occurrence of
an event cannot be assigned.
(False)
37. In capital budgeting proposals, risk may arise due to different factors.
(True)
38. In risky capital budgeting proposals, the discount rate is not known with certainty.
(False)
39. Risk Adjusted Discount Rate and Certainty Equivalents are based on statistical
measures.
(False)
40. In case of capital budgeting, the higher the standard deviation better the project is.
(False)
41. Coefficient of variation is as good a measure of risk as the standard variation.
(False)
42. Decision Tree Approach is suitable to analyse a multistage decision situation.
(True)
43. Abandonment evaluation of a project is made for the implementation of a capital
budgeting proposal.
(False)
44. Cost of equity share capital depends upon the market price of the share.
(True)
45. Cost of existing share capital and fresh issue of capital are the same.
(False)
46. Retained earnings have implicit cost only.
(True)
47. WACC is always calculated with reference to book value of different sources of
funds.
(False)
48. Book Value and Market Value weights are always different.
(False)
49. Retained earnings have no market value, so these are not included in WACC (based
on market value).
(False)
50. EBIT is also known as operating profits.
(True)
51. If EBIT for two firms are same, then the EPS of these firms would always be same.
(False)
52. EPS depends upon the composition of capital structure.
(True)
53. Financial breakeven level occurs when EBIT is zero.
(False)
54. At financial breakeven level of EBIT, EPS would be zero.
(True)
55. Indifference level of EBIT is one at which EPS is zero.
(False)
103
56. Indifference level of EBIT is one at which EPS under two or more financial plans
would be same.
(True)
57. All Equity plan and Debt-equity plan have no indifference level of EBIT.
(False)
58. Preference dividend is not a factor of indifference level of EBIT.
(False)
59. EBIT-EPS Analysis is an extension of financial leverage analysis.
(True)
60. Trading on equity is resorted to with a view to decrease EPS.
(False)
61. The financial decision affects the total operating profits of the firm.
(False)
62. The equity shareholders get the residual profit of the firm.
(True)
63. There is no difference of opinion on the relationship between capital structure and
value of the firm.
(False)
64. The ultimate conclusions of NI approach and the NOI approach are same.
(False)
65. The NI approach, the ke is assumed to be same and constant.
(True)
66. The NI approach, the ko falls as the degree of leverage is increased.
(True)
67. In NOI approach kd and ko are taken as constant.
(True)
68 In NOI approach says that there is no optional capital structure.
(True)
69. The traditional approach says that a firm may attain an optimal capital structure.
(True)
70. At optimal capital structure, the ko of the firm is the highest.
(False)
71. MM model provides a behavioural justification of NOI approach.
(True)
72. In MM model, personal leverage and corporate leverage are considered as perfect
substitute.
(True)
73. MM model is difficult to be applied in practice.
(True)
74. In the basic MM model, leverage does not affect the value of the firm.
(True)
75. In the MM model, the value of the levered firm can be found by first finding out value
of unlevered firm.
(True)
76. There is a difference of opinion on relationship between dividend payment and value
of the firm.
(False)
77. Walters model supports the view that dividend is relevant for value of the firm.
(True)
104
78. Gorden’s model suggests that dividend payment does not affect the market price of
the share.
(False)
79. In the Walters model, the DP ratio should depend upon the relationship between r and
ke.
(True)
80. Residual theory says that dividend decision is no decision.
(True)
81. MM model deals with irrelevance of dividend decision.
(True)
82. MM model is a fool proof model of dividend irrelevance.
(False)
82. In the arbitrage process of MM model, the dividends paid by a company are replaced
by fresh investment.
(True)
83. MM model assets that value of the firm is not affected whether the firm pays dividend
or not.
(True)
84. DP ratio of a firm should be directly related to future growth plans of the firm.
(True)
85. Capital profits can never be distributed as -4 the shareholders.
(False)
86. In India, there is a restriction on the rate 4 being paid by a company.
(False)
87. No company in India can pay final dividend which has already paid an interim
dividend.
(False)
88. Receipts and disbursement method of preparation of cash budget is the most widely
used method.
(True)
89. Concentration banking is a method of controlling cash outflows.
(False)
90. Baumol’s model of cash management assumes a constant rate of use of cash.
(True)
91. Baumol’s model attempts at optimization of cash balance.
(False)
92. Capital expenditure is not considered in cash budget.
(False)
93. Issue of share capital or debentures are taken as inflows in cash budget.
(True)
94. Conversion of debentures into share capital is equal to issue of share capital and hence
it is a type of cash inflow.
(False)
95. Same considerations are applicable to short-term sources as well as long-term sources
of funds.
(False)
96. As bank overdraft is availed by business firms on a regular basis, it may be considered
as a long-term source of funds.
(False)
105
97. For availing funds from short-term sources, credit rating of borrower is generally not
required.
(True)
98. Credit purchase can be a good source of short-term finance.
(True)
99. Cash discount should always be availed by the pu8rchasing firm irrespective of the
rate of discount.
(False)
100. A firm should always arrange the funds by delaying the payment to creditors and
payables.
(False)
101. In India, commercial papers can be issued for any amount and for any duration.
(False)
102. Commercial Papers can be issued only if minimum credit rating is pr5ocured by the
issuer company.
(True)
103. Bill discounting is a good source of short-term finance to all firms.
(False)
104. In India, all types of short-term financing from banks must be secured.
(True)
105. Short-term unsecured debentures are not popular among Indian Corporates.
(True)
106. Reserve Bank of India constituted Tandon Committee to suggest the norms for long-
term credit facility from banks to borrowers.
(False)
107. One of the objectives of Tandon Committee is to suggest inventory norms for
different industries.
(True)
108. Tandon Committee has suggested different methods for calculation of Maximum
Permissible Bank Finance.
(True)
109. Kannan Committee has suggested for full discretion for determining borrowing limits
of borrowers.
(True)
110. A lease is a temporary transfer of title of an asset in return for a rental income.
(False)
111. Lease transactions in India are governed by the Lease Act.
(False)
112. Technically, the lessee becomes the owner of the asset or the lease period.
(False)
113. Operating lease and Sale and lease-back are different types of finance lease.
(True)
114. Sale and Lease-back and Leveraged lease are types of finance lease.
(True)
115. Treatment of Operating lease in AS-19 is almost same as required by tax laws in
India.
(True)
106
116. As per AS-19, in case of Finance lease, the asset is shown in the balance sheet of the
lessee.
(True)
117. Lease financing is a type of capital budgeting decision from the point of view of the
lessee.
(False)
118. Tax-shield on depreciation and interest is an important variable both for the lessor
and the lessee.
(True)
119. A lessee should evaluate the lease options as against the buying option.
(True)
120. Net benefit of leasing is the NPV of lease option from the point of view of lessor.
(False)
121. While evaluating lease as a source of long-term financec, the lessee should give more
emphasis on As-19.
(False)
122. Lease outflows should be discounted at the interest rate to find out the present values.
(False)
123. A Finance lease has more financial implications than in Operating lease from the
point of view or both the lessor and the lessee.
(True)
124. Financial services refer to facilities relating to capital market.
(False)
125. Non-banking finance companies are engaged in financial services.
(True)
126. NBFCs provide financial services to corporate sector only.
(False)
127. All NBFCs operating in India must be registered with SEBI.
(False)
128. Regulatory framework for NBFCs is provided by RBI.
(True)
129. Any NBFC can borrow funds on mutually agreed terms.
(False)
130. Prudential norms for Assets and Investments by BNFCs were framed on the
recommendations of Narasimham Committee.
(True)
131. Assets of NBFCs are also classified as Standard, Non-standard, Doubtful and Lost.
(True)
132. NBFCs are not allowed to operate in Insurance sector.
(False)
133. A merchant banker helps in procuring overdraft from a commercial bank.
(False)
134. All merchant bankers have to be registered with RBI.
(False)
135. A lead manager has post-issue responsibilities also.
(True)
136. Merchant bankers should follow the prescribed code of conduct.
(True)
107
137. Credit rating is an authoritative guarantee regarding; the credit position of a person.
(False)
138. RBI has prescribed guidelines for the operations of credit rating agencies in India.
(False)
139. Securitization and Factoring are two sides of the same coin.
(False)
140. Securitization in India is regulated by RBI.
(True)
141. Valuation of bonds and equity shares can be made by the same valuation model.
(False)
142. Equity shares cannot be valued because equity shares have no redemption.
(False)
143. Instrinsic value and market price of equity shares are always equal.
(False)
144. BV of an equity share is the best measure of valuation.
(False)
145. P factor is a measure of value of share.
(False)
146. Face value, issue Price and Market Value of bond must be same.
(False)
147. Market value of debt instruments depends upo9n the market value of collateral.
(False)
148. Basic or Current yield on a bond is calculated with reference to the face value or issue
price of a debenture.
(False)
149. YTM of a bond is the same as the IRR of the bond investment.
(True)
150. Bond valuation depends upon the discounted cash flow technique.
(True)
151. Bond Valuation is sensitive to both the interest rate and required rate of return of the
investor.
(False)
152. Required rate of return and bond valuation are inversely related.
(True)
153. Principal objective of making investment is return, hence, risk can be ignored by an
investor.
(False)
154. Return includes only the interest or dividend received from an investment.
(False)
155. Holding period return includes the capital gain as well as revenue return.
(True)
156. If more than one value of return is expected, then expected return can be ascertained
with the help of probabilities.
(True)
157. Risk refers to possibility of loss from an investment.
(False)
158. Business risk arises because of competition in the market.
(True)
108
159. Financial risk of a firm depends upon composition of capital structure.
(True)
160. Systematic risk is diversifiable.
(False)
161. Systematic risk remains fixed irrespective of number of securities in portfolio.
(True)
162. Degree of risk and risk premium are positively related.
(True)
163. No investor is ready to take risk in whatsoever situation.
(False)
164. Standard deviation is better than coefficient of variation as measure of risk.
(False)
165. Higher Risk may be assumed by an investor if the r is lower.
(False)
166. Variation in expected return from an investment is known as risk.
(True)
167. Derivatives are securities similar to share and debentures.
(False)
167. Underlying assets of a derivative must be a physical test.
(False)
168. Standardised forward contracts may be called futures.
(True)
169. Forward contracts are traded only at computerised stock exchanges.
(False)
170. All futures contracts must be settled by delivery of the asset.
(False)
171. In case of futures, the counterparty guarantee is provided by the exchange.
(True)
172. Futures contracts do have a theoretical price.
(True)
173. Seller of futures contract incurs a loss when the future price increases.
(True)
174. Option premium is the price for getting a right against other party.
(True)
175. In options, the option writer has a right against the option holder.
(False)
176. Options contract is only an extended version of a futures contract.
(False)
177. Call options and put options are inverse of each other.
(False)
178. American options can be exercised only on the strike date.
(False)
179. There is no fixed strike date in European options.
(False)
180. Option premium is one time non-refundable amount.
(True)
181. Expiry date of an option contract is mutually decided by the parties.
(False)
109
182. Loss of the call options holder is always limited.
(True)
183. Loss of the put option holder is always limited.
(True)
184. Excess of call option market price over the strike price is called instrinsic value.
(True)
185. Intrinsic value of an option is non-negative.
(True)
186. Swap deals with the delivery of a physical asset.
(False)
187. Swap arrangements are always standardized.
(False)
188. All derivatives contracts on NSE are cash settled.
(True)
189. Futures and Options are available on the shares in India.
(True)
190. The terms mergers and takeovers refers to same type of situation.
(False)
192. Accounting Standard 14 (AS-14) classifies mergers as Vertical and Horizontal.
(False)
193. A conglomerate merger is a situation when all firms of a group are amalgamated into
one.
(False)
194. ‘Poisson Pill’ and ‘White knight’ are types of mergers.
(False)
195. Increasing profit and lessening competition are the only objectives of mergers.
(False)
196. Financial evaluation of the target firm is a compulsory step in the merger process.
(True)
197. Assets and Earnings of the target firm can be used for evaluation of the firm.
(True)
198. Economic Value Added (EVA) of a firm is always positive.
(False)
199. Swap Ratio and Share Exchange Ratio are one and the same.
(True)
200. In case the swap ratio is calculated on the basis of EPS, the market value of holding
of equity shareholders would be protected.
(False)
201. In order to protect the earnings available to shareholders, the swap ratio should be
based on EPS.
(True)
202. In hostile Takeover bid, the price of the merger depends upon the mutual consent.
(False)
203. In tender offer method, every shareholder has to sell his shares to the acquiring firm.
(False)
204. The aim of the new takeover Code Announced by SEBI is to make the process of
takeover more transparent.
(True)
110
205. Offer once made to acquire shares cannot be revoked.
(False)
206. No competitive bid can be made for takeover of shares of the company.
(False)
207. A merger proposal can be evaluated as a capital budgeting decision.
(True)
208. Exchange rate refers to value of one currency in terms of $.
(False)
209. Value of currency in terms of another currency remains the same.
(False)
210. Direct Quote and Indirect Quote are inversely related.
(True)
211. Ask Price and Bid Price are quoted by a dealer in the market.
(True)
212. Difference between Ask and Bid Price gives rise to arbitrage in foreign exchange.
(False)
213. Forward Rate is not the same as would prevail on the fixed date in future.
(True)
214. Forward transactions generally give gain or loss to the parties.
(True)
215. Forward rates are quoted at premium or discount to the spot rate.
(True)
216. Forward rates are quoted only as outright rates.
(False)
217. A ‘plus’ sign denotes a premium and ‘minus’ sign denotes a discount in the forward
exchange market.
(False)
218. A cross rate is the average of spot and forward rates.
(False)
219. Inconsistency in the cross rates gives rise to arbitrage.
(False)
220. Arbitrage in foreign exchange market arises due to inefficiencies of the market.
(True)
221. Purchasing Power Parity Theorem and Interest Rate parity Theorem are inverse of
each other.
(False)
222. PPP contends that the exchange rates between two currencies adjust till the
purchasing power parity is achieved.
(True)
223. Relative PPP deals with the changes in exchange rates.
(True)
224. Violations of PPP lead to arbitrage opportunities.
(True)
225. Currency which has higher inflation rate devalues relative to the currencies having
lower rates of inflation.
(True)
226. Fisher Effect deals with the interplay of interest rates and inflation rates.
(True)
111
227. International Fisher Effect contends that currency with higher interest depreciates.
(True)
228. Interest Rate Parity Theorem deals with the money supply and foreign exchange rates.
(False)
229. IRP helps understanding the determination of forward exchange rates.
(True)
230. Several types of tools of foreign exchange risk management are available to importers
and exporters.
(True)
231. Expropriation refers to the risk arising out of change in rates.
(False)
232. Capital market includes money market and foreign exchange market.
(False)
233. Stock exchanges are a part of primary market segment.
(False)
234. Securities are issued in the secondary market segment.
(False)
235. SEBI is an association of stock exchange in India.
(False)
236. Primary objectives of SEBI include Investors’ Protection and Regulation of capital
market in India.
(True)
237. Badla system is prevailing in India.
(False)
238. Book-building system cannot be used for issue of shares.
(False)
239. Operations of stick exchanges are directly controlled by Government.
(False)
240. National Stock Exchange has been established by SEBI.
(False)
241. OTCEI is a subsidiary of National Stock Exchange.
(False)
242. At the Stock Exchange, Mumbai (BSE Ltd.) the trading in shares in made through
out-cry system.
(False)
243. The term ‘brought out’ deal is related to OTCEI.
(True)
244. The efficiency with which the information is reflected in the market price of
securities, is denoted as the strength of the market.
(False)
245. SEBI regulates the operations in both the primary and the secondary market.
(True)
246. New issue Market is an element of primary market.
(True)
247. Individual investors can deal with only in secondary market.
(False)
248. National Stock Exchange of India is a Public Sector Organisation.
(False)
112
249. In the on-line trading system at the National Stock Exchange, the badla system has
been formalized.
(False)
250. SEBI has been constituted under the Securities (Contracts and Regulation) Act, 1956.
(False)
251. SEBI is constituted from amongst the directors of various stock exchange.
(False)
252. The purpose of issuing different types of Rules and Regulations by SEBI is to bring
monetary gains to the investors.
(False)
253. Government need not bother about the protection of the investors.
(False)
254. SEBI has issued various guidelines to educate investors.
(False)
255. Mutual fund is a pool of money belonging to various investors.
(True)
256. Money Market Mutual Funds are also traded at Stock Exchange.
(True)
257. Every Mutual Fund has to calculated the NAV as per the procedure given in the SEBI
Guidelines.
(True)
258. Options and Futures Contracts in India are settled on calendar month basis.
(True)
259. In Green Shoe Option, the investors are allotted as many shares as applied.
(False)
260. Demutualisation refers to separation of trading and ownership right of stock
exchange.
(True)
261. GSO is available only in case of issue of shares by book building process.
(True)
262. In Depository system, a shareholder is a beneficial owner.
(True)
263. Depository participant is an agent of an investor.
(False)
264. In book-building process, the price of the security is announced by the company.
(False)
265. Rolling Settlement is a system of settlement of accounts of brokers.
(False)
266. Sensex is an index number of 50 shares.
(False)
267. NSE and BSE are the only stock exchanges in India.
(False)
268. The oldest stock exchange in India is NSE.
(False)
269. Futures and Options in shares are traded only BSE and NSE.
(True)
113
1. ____________ present value tables can be used only when cashflows are uniform to
determine NPV.
(Annuity)
2. In the case of mixed stream of cash flows, _________ present value tables are used
to determine NPV.
(simple)
3. _____________________ determines the number of years required to recover initial
investment outlay.
(Payback method)
4. In the case of _____________ investment proposals, IRR and NPV method provides
the same result.
(independent)
5. In the case of conflict in ranking, _______ method provides better result than _______
method.
(NPV, IRR)
6. Overall budget is also known as _______________.
(master budget)
7. Budgets prepared at the single level of activity are referred to as _____________.
(fixed budgets)
8. ______________ estimates costs at several levels of activity.
(Flexible budget)
9. For most of the business firms, ________________ is the key budget.
(sales budget)
10. Budgets are an important tool of _____________.
(profit planning)
11. Minimum desired cash balance concept is useful in the preparation of ____________.
(cash budget)
12. Cash budget is a tool of ________________ financial planning.
(short-term)
13. Factors generating cash are categorized into two broad categories, namely,
__________________________.
(operating and financial)
14. The primary objective of cash budget is to ascertain whether there is likely to be
____________________ of cash at any time.
(excess/shortage)
15. Sales and production budgets ae ________________ budgets.
(operating)
16. _______________________ method is the most appropriate measure for cost
reduction investment projects with unequal lives.
(Equivalent annual costs)
17. _____________________ is an appropriate method for revenue-expanding
investment proposals with unequal lives.
(Equivalent annual NPV)
18. Intermediate cash inflows are assumed to have been reinvested at the rate of ________
under IRR method.
(IRR)
114
19. Intermediate cash inflows are assumed to be reinvested at _________________ under
NPV method.
(cost of capital)
20. _____________________ method is an appropriate measure in projects selection
(when they are divisible) under capital rationing.
(Present value index)
21. __________ cash flows are substantially lower than _____________ cash flow, when
adjusted for inflation factor.
(Real, nominal)
22. __________________________ should be used to discount real cashflows in
selecting investment projects requiring adjustment for inflation.
(Real cost of capital)
23. Capital budgeting decisions should either reckon the inflation factor in
_________________________ as well as in cost of capital or exclude it completely.
(cash inflows after taxes
24. Real cost of capital is obtained dividing nominal cost of capital by _______________.
(1 + Inflation rate)
25. CFAT will be deflated by _________________ to determine real CFAT.
(inflation rate)
115
1. A company has obtained quotes from two different manufacturers for
equipment. The details are as follows:
Product Cost (Rs. million) Estimated life (years)
Make X 4.50 10
Make Y 6.00 15
Ignoring operation and maintenance cost, which one would be cheaper? The
cost of capital is 10%.
[Given: PVIFA (10%, 10 years) = 6.1446 and PVIFA (10%, 15 years) = 7.6061]
A. Make X will be cheaper

B. Make Y will be cheaper
C. Cost will be the same
(A)
Working:
Make X
Purchase cost = Rs.4.50 million
Equivalent annual cost = 4.50/6.1446 = Rs.0.73235 million
Make Y
Purchase cost = Rs.6.00 million
Equivalent annual cost = 6.00/7.6061 = Rs.0.78884 million
Therefore, equivalent annual cost of Make X is lower than Make Y, Make X is

suggested to purchase.
116
2. The project details relate to two competing companies, Alps and Himalayas, for
identical projects:
(i) The net present value (NPV) of Alps is Rs.20,000 and its internal rate of
return (IRR) is 18%.
(ii) For the same life period, Himalayas’ estimated cashflows are:
Year 0 1 2 3
Cashflows (Rs.000) (450) 300 200 100
and its cost of capital is 15%.
Which of the following combinations is correct concerning the NPV and the IRR
of the two projects?
Projects
Alps Himalayas
A. Higher NPV Higher IRR
B. Higher NPV Lower IRR
C. Lower NPV Higher IRR
D. Lower NPV Lower IRR
(C)
Working:
Year Cashflow DCF Present DCF Present

@ 15% values @ 20% values
0 (450) 1.000 (450) 1.000 (450)
1 300 0.870 261 0.833 250
2 200 0.756 151 0.694 139
3 100 0.658 66 0.570 58
NPV 28 (3)
Hence, IRR = 20% approximately.

Therefore, Alps – Lower NPV; Himalayas – Higher IRR.
3. XYZ Company is contemplating three projects, each of which would require an

initial investment of Rs.1,00,000 and each of which is expected to generate a cash
inflow of Rs.20,000 per year. The payback period is five years
(Rs.1,00,000/Rs.2,00,000), and the payback reciprocal would be:
A. 50%
B. 20%
C. 25%
D. 25,000
(B)
Working:
1 divided by the payback period (i.e., the reciprocal of the payback time) is called
payback reciprocal. This often gives a quick, reasonably accurate estimate of the
Internal Rate of Return (IRR) on an investment when the project life is more than
twice the payback period and the cash inflows are uniform during every period.
117
CHAPTER – 13
LEASE OR BUY DECISIONS
1. A financial lease is preferred in the situation:
A. when the long-term stability of asset is uncertain

B. when the asset is subject to rapid obsolescence
C. when the lessee want to own the asset but does not have enough funds to
invest
(C)
2. The lessor intends to recover his capital outlay plus a required rate of return on
funds used in:
A. finance lease
B. operating lease
C. leveraged lease
D. sales and lease back
(A)
3. The lessor undertakes to finance only a part of the money required to purchase
the asset in:
A. finance lease
B. operating lease
C. leveraged lease
D. sale and leaseback
(C)
4. The lessee can claim as business expenditure:
A. lease rent
B. insurance and repairs
C. maintenance expenses
D. all of the above
(D)
5. One of the following is a normal practice in structuring the lease rentals:
A. stepped-up plan
B. equal annual plan
C. balloon payment plan
D. deferred payment plan
(B)
118
6. The hire purchaser will acquire full title to the asset when:
A. on making final payment

B. on entering into hire purchase contract
C. on payment of substantial amount of instalments
(A)
7. The risk of obsolescence on the asset is borne by the:
A. lessor
B. lessee
(A)
8. A type of instalment credit under which the purchaser agrees to take the goods
on hire at a stated rental is called:
A. Hire purchase
B. Hire rental
C. Factoring
D. Leasing
(A)
9. In which of the following type of leases, the ownership of the asset is most likely
to be retained by the manufacture of the asset itself?
A. Sale and lease back

B. Financial lease
C. Capital lease
D. Direct lease
(D)
10. Under leveraged lease arrangement who among the following is entitled to
depreciation?
A. The lessor
B. The lessee
C. The third party
D. No one is entitled to depreciation
(A)
11. A leasing arrangement whereby a company agrees to provide an aircraft and at
least one pilot to another company is generally called:
A. Dry lease
B. Capital lease
C. Wet lease
D. Sub-lease
(C)
119
12. What is the normal method of treating the depreciation in case of lease
financing?
A. In lease financing, the depreciation is claimed as an expense in the books of

lessee.
B. In lease financing, the depreciation is claimed as an expense in the books of
the lessor.
C. In lease financing no depreciation is normally allowed in the books of the
lessor as the asset usage is with the lessee.
D. In lease financing depreciation is not allowed for both lessor and lessee.
(B)
13. Which of the following is a characteristic of a sale and lease back transaction?
A. The owner of the asset sells the assets to the buyer and takes back the assets
on lease from the buyer on payment of lease rentals.
B. Sale and lease back transactions are most suited for depreciating assets.
C. Sale and lease back transactions does not ensure quality of the leased assets
to the lessee.
D. Under such transaction, the buyer assumes the role of a lessee and the seller
assumes the role of a lessor.
(A)
14. A type of lease agreement where the lessee gets only a limited right to use the
asset and where the lessor is responsible for the upkeep and maintenance of the
asset and where the lessee is not given any uplift to purchase the asset at the end
of the lease period is normally termed as:
A. Financial lease
B. Ownership lease
C. Operational lease
D. Lease purchase
(C)
15. A transaction in which leased property is re-leased or again leased by the
original lessee to a third party is called:
A. Sub-lease
B. Capital lease
C. Wet lease
D. Dry lease
(A)
16. Which of the following is not a type of lease?
A. Financial lease
B. Operating lease
C. Leveraged leasing
D. Dynamic leasing
(D)
120
17. Which of the following is a correct statement for explaining an operating lease?
A. It is generally a long-term, non-cancellable lease.

B. The essential point of lease agreement is that it contains a condition whereby
the lessor agrees to transfer the title for the asset at the end of the lease
period at a nominal cost. At lease it must give an option to the lessee to
purchase the asset he has used at the expiry of the lease.
C. Mines, Computers hardware, trucks and automobiles are found suitable for
operating lease because the rate of obsolescence is very high in this kind of
assets.
D. The lease agreement here is irrevocable. Practically all the risks incidental
to the asset ownership and all the benefits arising there from are transferred
to the lessee who bears the cost of maintenance, insurance and repairs.
(C)
18. A type of non-cancellable long-term lease contract where lease agreement
contains a condition whereby the lessor agrees to transfer the title for the asset
at the end of the lease period at a nominal cost and where the risk and rewards
incidental to the ownership of the leased asset is transferred to lessee but not the
actual ownership is called:
A. Financial lease
B. Ownership lease
D. Lease purchase
(A)
19. Which of the following is considered an advantage of acquiring capital assets on
lease?
A. Saving of Capital: Leasing covers the full cost of the equipment used in the
business by providing 100% finance. The lessee is not to provide or pay any
margin money as there is no down payment. In this way the saving in
capital or financial resources can be used for other productive purposes, e.g.,
purchase of inventories.
B. Flexibility and Convenience: The lease agreement can be tailor-made in
respect of lease period and lease rentals according to the convenience and
requirement of all lessees.
C. Planning Cash Flows: Leasing enables the lessee to plan its cash flows
properly. The rentals can be paid out of the cash coming into the business
from the use of the same assets.
(D)
20. In which of the following type of financing the lessee automatically becomes the
owner of the asset once the last instalment is paid?
A. Financial lease
B. Ownership lease
D. Hire purchase
(D)
121
21. Which of the following statement is true with regard to hire purchase and
instalment sale?
A. Both hire purchase and instalment sale are one and the same.
B. In higher purchase the right of ownership passes to the buyer with the
payment of first instalment whereas in case of instalment sale, the right of
ownership passes to the buyer only after payment of last instalment.
C. In instalment sale the right of ownership passes to the buyer with the
payment of first instalment whereas in case of hire purchase, the right of
ownership passes to the buyer only after payment of last instalment.
D. Hire purchase is non-cancellable contract whereas instalment sale is
cancellable.
(C)
22. Which of the following is not a characteristic of the financial or capital lease?
A. It is generally a long-term, non-cancellable lease.

B. The essential point of financial lease agreement is that it contains a condition
whereby the lessor agrees to transfer the title for the asset at the end of the
lease period at a nominal cost. At least it must give an option to the lessee to
purchase the asset he has used at the expiry of the lease.
C. The lease agreement is irrevocable. Practically all the risks incidental to the
asset ownership and all the benefits arising therefrom are transferred to the
lessee who bears the cost of maintenance, insurance and repairs.
D. The title deeds remain with the lessee.
(D)
23. A financial contract between the business customer (user) and the equipment
supplier (normally owner) for using a particular asset/equipment over a period
of time against the periodic payments is generally referred to as:
A. A public private contract

B. A lease
C. A loan
D. A purchase
(B)
24. In lease system interest is calculated on:
A. Hire purchase price

B. Cash down payment
C. Cash price outstanding
(C)
25. A short-term lease which is often cancellable is known as:
A. Net Lease
B. Finance Lease
C. Leverage Lease
D. Operating Lease
(D)
122
26. Which of the following is not a usual type of lease arrangement?
A. Sale and leaseback

B. Goods on Approval
C. Leverage Lease
D. Direct Lease
(B)
27. Under income-tax provisions, depreciation on lease asset is allowed to:
A. Lessor
B. Lessee
C. Any of the two
D. None of the two
(A)
28. Under the provisions of AS-19 ‘Leases’, a leased asset is shown in the balance
sheet of:
A. Manufacturer
B. Lessor
C. Lessee
D. Financing Bank
(C)
29. A lease which is generally not cancellable and covers full economic life of the
asset is known as:
A. Financial Lease
B. Operating Lease
C. Economic Lease
D. Sale and Leaseback
(A)
30. Lease which includes a third party (a lender) is known as:
A. Sale and Leaseback

B. Direct Lease
C. Inverse Lease
D. Leveraged Lease
(D)
31. One difference between Operating and Financial Lease is:
A. There is often an option to buy in operating lease.

B. There is often a call option in financial lease
C. An operating lease is generally cancellable by lease
D. A functional lease is generally cancellable by lease
(C)
123
32. From the point of view of the lessee, a lease is a:
A. Working capital decision

B. Financing decision
C. Buy or make decision
D. Investment decision
(B)
33. For a lessor, a lease is a:
A. Investment decision
B. Financing decision
C. Dividend decision
(A)
34. 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
(B)
1. It is mandatory for the lessor to transfer ownership to the lessee in the case of financial
leases.
(False)
2. Depreciation is charged in the books of the owner in leasing as well as hire-purchase.
(False)
1. While operating leases are ________________ (cancellable/non-cancellable) during

lease period at the option of the lessee, financial leases are _____________________
(cancellable/non-cancellable).
(cancellable, non-cancellable)
2. Lease rents are higher in case of _________________ (financial/operating) leases.
(operating)
3. Lease period is higher for __________________ (operating/financial) leases.
(financial)
4. A lease is classified as a ________________ if it transfers substantially all the risk
and rewards incidental to ownership.
(financial lease)
5. A lease is classified as an ________________ if it does not transfer substantially all
the risk and rewards incidental to ownership.
(operating lease)
6. Sale and lease back is ______________ (a direct/an indirect) form of leasing.
(an indirect)
124
7. There are ________ (two/three) parties in the leveraged lease.
(three)
8. ___________ lease is subject to renewal for the secondary lease period during which
lease rents are substantially low.
(Financial)
9. From the perspective of lessee, the lease is similar to _________ (debt/equity) form
of financing.
(debt)
10. From the perspective of lessor, leasing is ___________________ (capital budgeting/
financing) decision.
(capital budgeting)
11. In ______________ (hire-purchase/lease) agreement, the ownership is transferred on
payment of last instalment.
(hire-purchase)
12. In ____________ (hire-purchase/lease), it is customary to make cash down payment
to the owner of the asset.
(hire-purchase)
13. In ___________________ (instalment/hire-purchase/lease) contract of sales is
entered into, the goods are delivered and the ownership is transferred to the buyer.
(instalment)
14. The lessor uses _______________________ (pre-tax cost of debt/cost of capital) as
a discount rate to evaluate financial lease.
(cost of capital)
15. The lessee will opt for the leasing decision if the NAL amount is ________________
(positive/negative).
(positive)
16.
1. HP Leasing company expects a minimum yield of 10% on its investment in the

leasing business. It proposes to lease a machine costing Rs.5,00,000 for 10 years.
If yearly lease payments are received in advance, the lease rental to be charged
by the company for the lease will be:
A. Rs.81,372
B. Rs.73,975
C. Rs.72,370
D. Rs.84,130
(B)
Working:
Lease rent p.a. @ 10% for 10 years = Rs.5,00,000/6.759 = Rs.73,975
125
CHAPTER – 14
WORKING CAPITAL PLANNING
1. The excess of current assets over current liabilities is called:
A. working capital
B. net current assets
C. net working capital
D. all of the above
(D)
2. The minimum levels of various current assets required by the firm to ensure the
continuity of operation is known as:
A. net current assets

B. core current assets
C. net working capital
D. permanent current assets
(B)
3. The need for working capital arises because of time gap between production of
goods and their actual realization after sales is termed as:
A. business cycle
B. operating cycle
C. cash conversion cycle
(B)
4. One of the following will not prolong the operating cycle:
A. use of outdated machinery and technology

B. holding of excess balances in cash and bank
C. purchase of materials in excess of requirements
D. lack of production planning, coordination and control
(B)
5. The adoption of JIT, supply chain management, vendor management will
drastically reduce the levels of:
A. raw material stock

B. work-in-progress stock
C. finished goods stock
D. all of the above
(D)
126
6. The firm attempts to increase its level of sales without having a support of
adequate working capital in a situation of:
A. overtrading
B. over capitalization
C. under capitalization
D. prolonged operating cycle
(A)
7. Which of the following is a non-current asset?
A. Debtors
B. Pre-paid insurance
C. Land
D. Stock
(C)
8. Working Capital Turnover measures the relationship of Working Capital with:
A. Fixed Assets
B. Sales
C. Purchases
D. Stock
(B)
9. Which of the following statements are correct?
A. The term structure of interest rates describes the relationship between the
interest rates and loan maturities.
B. The term structure of interest rates describes the relationship between
maturity and yield.
C. A fall in interest rates would result in a rise in the price of fixed interest
securities and a fall in yields.
(D)
10. The assets that are relatively liquid and is likely to be converted into cash within
the firm’s operating cycle are generally called:
A. Current Assets
B. Variable Assets
C. Fixed Assets
D. Volatile Assets
(A)
11. Which of the following items is not an operating expense?
A. Advertising
B. Depreciation of the office equipment
C. General management salaries
D. Loss on the sale of motor van
(D)
127
12. Gross working capital of a firm refers to:
A. The firm’s investment in current assets

B. The firm’s current assets plus the fixed capital
C. The firm’s current assets plus the debentures
D. The firm’s current assets minus the current liabilities
(A)
13. The minimum requirement of current assets by the firm without which it cannot
operate smoothly is generally called as:
A. Variable working capital

B. Fixed working capital
C. Standard working capital
D. Solid working capital
(B)
14. Which of the following refers to working capital factoring?
A. A company factors the anticipated sales in the future and estimates the
working capital requirements.
B. A company takes into account the changes in the business environment such
as changes in interest rate, foreign exchange rates, etc., and estimate the
working capital requirements.
C. A company sells its business accounts to banks and lending institutions
which provide instant cash equivalent to the amount of accounts receivables.
D. A company considers the delay in receipt of the sales proceeds and estimates
the additional working capital.
(C)
15. Which of the following would describe the term bridge financing?
A. It is generally short-term finance.

B. It is an interim financing for an individual or business until permanent or the
next stage of financing can be obtained.
C. Bridge loans are typically more expensive than conventional financing.
(D)
16. Working capital is the difference between current assets and:
A. Current liabilities
B. Fixed assets
C. Tangible assets
D. Goodwill
(A)
17. Which of the following is a method employed for computation of working
capital?
A. Operating cycle concept and current asset holding period

B. Ratio of sales
C. Ratio of fixed investments
D. All of the above
(D)
128
18. A company adopts aggressive current assets policy. This would mean:
A. Lower liquidity and higher risk

B. Higher liquidity and lower risk
C. Moderate liquidity and higher risk
D. Lower liquidity and lower risk
(A)
19. The part of the firm’s capital, which is required for financing short-term or
current assets such a cash marketable securities, debtors and inventories is
generally called:
A. Working Capital
B. Running Capital
C. Preference Capital
D. Gearing Capital
(A)
20. Which of the following is least likely to be a determinant of the working capital
of a firm?
A. Available Cash
B. Debtors
C. Inventories
D. Plant and Machinery
(D)
1. Working capital is primarily required due to non-synchronous nature of the expected

cash inflows and required cash outflows.
(True)
2. Higher net working capital leads to higher liquidity and higher profitability.
(False)
3. Conservative approach warrants that long-term funds should be used to finance the
permanent part of the current assets and the temporary/seasonal requirements should
be financed by short-term funds.
(False)
4. According to hedging approach, current assets should be financed from long-term
sources.
(False)
5. Trade-off plan, in general, is considered an appropriate financing strategy for working
capital.
(True)
6. There is an inverse relationship between the length of operating cycle of a firm and
its working capital.
(False)
7. In general, manufacturing enterprises require higher working capital than trading
firms.
(True)
129
8. The longer the production cycle, the higher is the working capital needed or vice
versa.
(True)
9. There is a positive correlation between level of business activity and working capital
needs of a business firm.
(True)
10. Efficiency of operation accelerates the pace of cash cycle of a firm but it does not
affect its working capital requirements.
(False)
11. A firm should carry higher working capital than required to execute smoothly its
planned level of business activity.
(False)
12. The entire sum of net profit earned by a corporate can, per-se, be considered a source
of financing working capital.
(False)
13. Cash cost approach is an appropriate basis of computing working capital requirements
of a business firm.
(True)
14. Working capital tied up with debtors should be estimated in relation to the selling
price.
(False)
15. From the perspective of determining net working capital, all current liabilities
including short-term sources of finance are considered.
(False)
16. Return on Equity and Earnings per Share are one and the same thing.
(False)
1. The average daily sales of a company are Rs.5 lakh. The company normally
keeps a cash balance of Rs.80,000. If the weighted operating cycle of the
company is 45 days, its working capital requirement will be:
A. Rs.112.9 lakh
B. Rs.113.3 lakh
C. Rs.115.8 lakh
D. Rs.225.8 lakh
(D)
Working:
Working capital for 45 days = (Rs.5 lakh × 45 days) + 0.80 lakh = Rs.225.80
lakh
130
CHAPTER – 15
INVENTORY MANAGEMENT
1. A low inventory turnover means:
A. obsolete goods on hand

B. adverse impact on liquidity
C. investment tied up in stocks
D. all of the above
(D)
2. If the inventory turnover ratio has decreased from past, it means that:
A. sales is dropping
B. inventory is growing
C. inventory is growing or sales are dropping
(C)
3. Inventory means:
A. stock of raw material and stores

B. stock of work-in-progress and semi-finished goods
C. stock of finished goods
D. all of the above
(D)
4. The factors influencing finished goods inventory are:
A. available storage space

B. accuracy of sales forecast
C. production batch quantity exceeding sales requirement
D. all of the above
(D)
5. The stock turnover ratio indicates:
A. debtors balance
B. sales movement
C. slow moving stocks
(C)
6. In ABC analysis, ‘C’ class items require:
A. tight control
B. loose control
C. moderate control
D. high safety stocks
(B)
131
7. Which of the following assets is not a quick current asset for the purpose of
calculating acid test ratio?
A. Short-term bills receivable

B. Cash
C. Stock or inventory
D. Debtors
(C)
8. Economic order Quantity is the _____________ size of the order for a particular
item of inventory; at that point the ordering and carrying costs of inventory are
minimized.
A. least
B. medium
C. optimum
D. maximum
(C)
9. What is Economic Order Quantity?
A. Cost of an order
B. Cost of Stock
C. Reorder level
D. Optimum order size
(D)
10. Inventory turnover measures the relationship of inventory with:
A. Average Sales
C. Total Purchases
D. Total assets
(B)
11. Economic Order Quantity is the quantity that minimises:
A. Total Ordering Cost

B. Total Inventory Cost
C. Total Interest Cost
D. Safety Stock Level
(A)
12. Which of the following is true with reference to the inventory carrying cost?
A. It is a productive cost which add value to the inventory

B. It is an unproductive expenditure that does not add any value to the material
C. It is a productive cost and measures should be taken to increase the
inventory carrying cost
D. It is another term for depreciation
(B)
132
13. EOQ is the quantity that minimizes:
A. Total Ordering Cost

B. Total Inventory Cost
C. Total Interest Cost
D. Safety Stock Level
(A)
14. ABC analysis is used in:
A. Accounting Policies
B. Corporate Governance
C. Inventory Management
D. Receivables Management
(C)
15. If no information is available, the general rule for valuation of stock for balance
sheet is:
A. Standard Cost
B. Historical Cost
C. Realizable Value
D. Replacement Cost
(B)
16. In ABC Inventory Management System, Class ‘A’ items may require:
A. Higher Safety Stock

B. Frequent Deliveries
C. Periodic Inventory System
D. Updating of inventory records
(A)
17. Inventory holding cost may include:
A. Material Purchase Cost

B. Penalty charge for default
C. Interest on loan
(D)
18. Use of Safety Stock by a firm would:
A. Increase Inventory Cost

B. Decrease Inventory Cost
C. No effect on Cost
(A)
133
19. Which of the following is true for a company which uses continuous review
inventory system?
A. Order Interval is fixed

B. Order Interval varies
C. Order Quantity is fixed
D. Both (A) and (C)
(D)
20. In the EOQ Model:
A. EOQ will increase if order cost increases

B. EOQ will decrease if holding cost decreases
C. EOQ will decrease if annual usage increases
(A)
21. EOQ determines the order size when:
A. Total Order Cost is minimum

B. Total Number of order is least
C. Total Inventory Costs are minimum
(C)
22. ABC analysis is useful for analyzing the inventories:
A. Based on their Quality

B. Based on their Usage and Value
C. Based on Physical Volume
D. All of the above
(B)
23. If A = Annual Requirement, O = Order Cost and C = Carrying Cost per unit per
annum, then EOQ is:
A. 2AOC
B. (2A)/C)2
C. √2AO/C
D. 2A ÷ OC
(C)
24. Inventory is generally valued as lower of:
A. Market Price and Replacement

B. Cost and Net Realizable Value
C. Cost and Sales Value
D. Sales Value and Profit
(B)
134
25. Which of the following is not included in cost of inventory?
A. Purchase Cost
B. Transportation Cost
C. Selling Costs
D. Import Duty
(C)
26. Cost of not carrying sufficient inventory is known as:
A. Carrying Cost
B. Holding Cost
C. Total Cost
D. Stock-out Cost
(D)
27. Which of the following is not a benefit of carrying inventories?
A. Reduction in Ordering Cost

B. Avoiding Lost Sales
C. Reducing Carrying Cost
D. Avoiding Production Shortages
(C)
28. Which of the following is not a standard method of inventory valuation?
A. Standard Cost
B. Average Pricing
C. First-in First-out
D. Realizable Value
(B)
29. System of procuring goods when required, is known as:
A. Just in Time (JIT)

B. Free on Board (FOB)
C. Always Better Control (ABC)
D. Economic Order Quantity (EOQ)
(A)
30. What is Economic Order Quantity?
A. Cost of an Order
B. Cost of Stock
C. Reorder Level
D. Optimum Order Size
(D)
135
1. Inventory management does not include management work-in-progress.

(False)
2. Stock of finished goods should be as high as possible so that no customer is denied
the sale.
(False)
3. There is no explicit benefit of keeping inventory, hence no stock be maintained.
(False)
4. Carrying cost of inventory includes the carriage in.
(False)
5. Carrying cost and ordering cost are opposite forces in receivable management.
(True)
6. Cost of stock-out occurs whenever the firm has no stock of a particular firm.
(False)
7. ABC analysis helps to ascertain the minimum level of stock of raw material.
(False)
8. The EOQ model attempts to minimize the total cost of holding inventory.
(True)
9. EOQ model assumes a constant usage rate for a particular item.
(True)
10. Average inventory in EOQ model is ½ of EOQ.
(True)
1. Finance manager is to _________________________ of the various functional areas

regarding the appropriate inventory levels.
(reconcile the conflicting consideration/view points)
2. _________________________ is the fixed cost of placing and receiving an order for
acquisition of inventory.
(Ordering costs)
3. Costs of holding inventory are referred to as___________________.
(carrying costs)
4. ____________________ is a widely used classification technique to identify various
items of inventory for purposes of inventory control.
(ABC system)
5. While category _______ items warrant the most rigorous control, category ________
items require minimum attention.
(‘A’, ‘C’)
6. _______________________ is the level of inventory at which total cost of inventory
consisting of acquisition/ordering and carrying cost is minimal.
(Economic order quantity)
7. ____________________ is the level of inventory at which fresh order for producing
additional inventory is placed.
(Re-order point)
8. _____________ refers to the time normally taken in receiving the inventory supplies
after placing orders with suppliers.
(Lead time)
136
9. _________________ is the amount of inventory that needs to be maintained to meet
unforeseen situations, say, unanticipated increase in daily usage and increase in lead
time.
(Safety stock)
10. In EOQ, average inventory is determined by dividing _________________.
(order size/2)
1. Zee Ltd. uses Material A for the production of Product M. The safety stock of
Material A is 300 units; the supplier quotes a delivery delay of two or three
weeks. If the company uses 500 to 800 units a week according to the activity
levels, the reorder level of Material A will be:
A. 2,300 units
B. 2,400 units
C. 2,700 units
D. 2,800 units
(C)
Working:
Reorder Level
= Safety stock + (Maximum delivery period × Maximum usage)
= 300 units + (3 weeks × 800 units) = 2,700 units
2. If the minimum stock level and average stock level of raw material ‘A’ are 4,000
and 9,000 units respectively, find out its reorder quantity.
A. 8,000 units
B. 11,000 units
C. 10,000 units
D. 9,000 units
(C)
Working:
Average stock level = Minimum stock level + ½ Reorder quantity

9,000 units = 4,000 units + ½ Reorder quantity
½ Reorder quantity = 9,000 units – 4,000 units
Reorder quantity = 5,000 units/0.5 = 10,000 units
137
3. The budgeted sales and cost of sales of Rahaman Brothers for the coming year
are Rs.15 crore and Rs.10 crore respectively. The current level of inventory is 5
times. Considering that the inventory is financed at an average cost of 10% p.a.
The expected cost saving for the budget period by doubling the inventory
turnover would be:
A. Rs.20 lakh
B. Rs.10 lakh
C. Rs.15 lakh
D. Rs.7.5 lakh
(B)
Working:
Current level of inventory held = Rs.10 core/5 = Rs.2 crore

With stock turnover doubling, the average level of inventory will be Rs.1 crore
10
∴ Inventory carrying cost = Rs. 1 crore × = 10 lakh
100
CHAPTER – 16
RECEIVABLES MANAGEMENT
1. A high debtors turnover indicates:
A. low amounts tied up in debtors balance

B. increases in sales turnover
C. efficient conversion of debtors into cash
D. as stated in (A) and (C) above
(D)
2. The efficiency of credit control procedures is indicated by:
A. debtors turnover ratio

B. bad debts to sales ratio
C. creditors turnover ratio
D. fixed assets turnover ratio
(B)
3. The costs relating to the administration of receivables do not include one of the
following:
A. opportunity cost of extending credit

B. expenditure incurred on credit control checks
C. screening the potential customers for granting credit
D. accounting, recording and processing costs of debtors balance
(A)
138
4. An arrangement under which a financial institution undertakes the task of
collecting the book debts of its client in return for a service charge in the form
of discount or rebate is called:
A. Crediting
B. Factoring
C. Financial discounting
D. Over drafting
(B)
5. Which of the following is not a merit of factoring arrangement from the view
point of a firm?
A. As a result of factoring services, the firm can concentrate on their core

activities such as manufacturing and selling without worrying about the
collection of debtors.
B. The risk of bad debts is eliminated.
C. The factoring institution also provides advice on business trends and other
related matters which can be beneficial to the firms.
D. As the factoring institution provides interest on the receivables factoring is
also a good instrument for parking temporary funds.
(D)
6. 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
(C)
7. 5 Cs of the credit does not include:
A. Collateral
B. Character
C. Conditions
(D)
8. Which of the following is not an element of credit policy?
A. Sales Price
B. Credit Terms
C. Collection Policy
D. Cash Discount Terms
(A)
9. Ageing schedule incorporates the relationship between:
A. Average Age of Directors

B. Debtors and Days Outstanding
C. Average Age of all Employees
D. Creditors and Days Outstanding
(B)
139
10. Bad debt cost is not borne by factor in case of:
A. Pure factoring
B. Without Recourse Factoring
C. With Recourse Factoring
(C)
11. Which of the following is not a technique of receivables Management?
A. Ageing Schedule
B. Funds Flow Analysis
C. Collection Matrix
D. Days sales outstanding
(B)
12. Which of the following is not a part of credit policy?
A. Collection Effort
B. Cash Discount
C. Credit Standard
D. Paying Practices of Debtors
(D)
13. Which is not a service of a Factor?
A. Administering Sales Ledger

B. Advancing against Credit Sales
C. Assuming bad debt losses
(D)
14. Credit Policy of a firm should involve a trade-off between increased:
A. Sales and Increased Profit

B. Profit and Increased Cost of Receivables
C. Sales and Cost of goods sold
(B)
15. Out of the following, what is not true in respect of Factoring?
A. Continuous arrangement between Factor and Seller

B. Sale of Receivables to the Factor
C. Factor provides cost-free finance to Seller
(C)
16. Payment to Creditors is a manifestation of cash held for:
A. Transactionary Motive
B. Precautionary Motive
C. Speculative Motive
D. All of the above
(A)
140
17. If the closing balance of receivables is less than the opening balance for a month
then which one is true out of the following?
A. Collections > Current Purchases

B. Collections > Current Sales
C. Collections < Current Purchases
D. Collections < Current Sales
(B)
18. If the average balance of debtors has increased, which of the following might not
show a change in general?
A. Total Sales
B. Current Ratio
C. Bad Debt loss
D. Average Payables
(D)
19. Securitization is related to conversion of:
A. Receivables
B. Stock
C. Investments
D. Creditors
(A)
20. In response to market expectations, the credit suspense has been increased form
45 days to 60 days. This would result in:
A. Decrease in Sales
B. Decrease in Debtors
C. Increase in Bad Debts
D. Increase in Average Collection Period
(D)
21. If a company sells its receivables to another party to raise funds, it is known as:
A. Securitization
B. Factoring
C. Pledging
(B)
22. Cash Discount term 3/15, net 40 means:
A. 3% Discount if payment in 15 days, otherwise full payment in 40 days

B. 15% Discount if payment in 3 days, otherwise full payment in 40 days
C. 3% Interest if payment made in 40 days and 15% Interest thereafter
(A)
141
23. If the Sales of a firm are Rs.60,00,000 and the average debtors are Rs.15,00,000,
then the receivables turnover is:
A. 25%
B. 400%
C. 4 times
D. 0.25 times
(C)
24. If cash discount is offered to customers, then which of the following would
increase?
A. Sales
B. Debtors
C. Debt collection period
D. All of the above
(A)
25. Receivables Management deals with:
A. Receipts of raw materials

B. Debtors collection
C. Creditors Management
D. Inventory Management
(B)
26. Which of the following is related to Receivables Management?
A. Cash Budget
B. Economic Order Quantity
C. Ageing Schedule
D. All of the above
(C)
1. Default costs are caused due to failure of customers to pay on time.

(False)
2. Financial costs to support credit-sales are referred to as collection costs.
(False)
3. Credit standards represent minimum requirements for extending credit to a customer.
(True)
4. Financial costs of investment in debtors are determined with reference to selling price
at which credit sales are made.
(False)
5. It is always in the interest of a business firm to pursue tight credit standards as they
yield lower collection costs and bad debts.
(False)
6. Business firms should not opt for relaxation of credit standards as they cause increase
in collection costs, amount of bad debts and financial costs.
(False)
142
7. The credit term ‘3/10 net 30’ implies that the debtor would be entitled for cash
discount of 3 per cent if payment is made within 10 days, 2 per cent if it is made
within 20 days and 1 per cent if it is made in 30 days.
(False)
8. The credit term ‘2/10 net 30’ implies that the customer is entitled to 2 per cent cash
discount only when he pays within 10 days after the beginning of credit period.
(True)
9. Financial costs of investment in debtors are determined with reference to cash cost of
sales.
(True)
10. The financial framework of analysis of various decision areas in receivable
management should factor all measurable costs and benefits.
(True)
11. Receivables management involves a trade-off between costs and benefits of
receivables.
(True)
12. Receivables management deals only with the collection of cash from the debtors.
(False)
13. The objective of credit policy is to curtail the credit period allowed to customers.
(False)
14. Credit period allowed to customers must be equal to credit period allowed by the
supplier to the firm.
(False)
15. Delinquency cost refers to bad debts losses to the firm.
(False)
16. Liberalizing the discount rate means increasing the discount rate for the same period.
(True)
17. Credit evaluation of a customer is a cost process; hence it need not be undertaken by
a selling firm.
(False)
18. In order to minimize the level of receivables, a firm should follow strict and
aggressive collection procedures.
(False)
19. Ageing schedule of receivables is one way of monitoring the receivables.
(True)
20. Services of a factor are always beneficial.
(False)
143
CHAPTER – 17
MANAGEMENT OF CASH AND MARKETABLE SECURITIES
1. The availability of cash in the near future after taking into account of financial
commitments is known as:
A. liquidity
B. solvency
C. cashflow
D. cash-rich
(A)
2. Baumol’s model is based on certain assumptions. One of the statements given
below is not an assumption.
A. payments position cannot be assessed reasonably

B. rate of cash usage is constant and known with certainty
C. the holding cost of cash balance is assumed to be constant
D. short-term marketable securities can be freely bought and sold
(A)
3. In a Miller-Orr cash management model, ‘Z’ represents:
A. return point
B. optimum point
C. upper control limit
D. lower control limit
(A)
4. The investment in short-term marketable securities is not made for one of the
following objectives:
A. to improve liquidity ratio

B. to earn interest for the holding period of investment
C. to convert into cash as and when cash shortage is faced
D. to increase return on investment by earning interest on idle funds
(A)
5. The idea of fixing the exchange rate of a currency by matching its value to the
value of another single currency or to a basket of currencies, or to another
measure of value, such as gold or silver is referred to as:
A. Money laundering
B. Currency pegging
C. Currency decontrolling
D. Money exchange
(B)
144
6. Money market deals with:
A. Short-term securities
B. Long-term securities
C. Mutual funds
D. All of the above
(A)
7. Which of the following is Marginal Standing Facility (MSF)?
A. A scheme of borrowing and lending between the commercial banks

B. A scheme introduced by the Reserve Bank of India for lending to banks
C. A scheme introduced by the Reserve Bank of India for lending to State
Governments
D. A scheme introduced by Indian banks for jointly obtaining foreign exchange
from other countries
(B)
8. Bull is a:
A. Buying speculator
B. Selling speculator
C. Forwarding agent
(A)
9. Which of the following is not a cash inflow?
A. Purchase of a fixed asset

B. Sale of fixed asset
C. Issue of debentures
D. Cash from business operations
(A)
10. The term securities include:
A. Shares
B. Debentures
C. Both (A) and (B)
(C)
11. The process of pooling and repacking homogenous illiquid financial assets into
marketable securities than can be sold to investors is generally referred to as:
A. Factoring
B. Securitization
C. Amortization
D. Book-building
(B)
145
12. Which of the following is a financial instrument?
A. Insurance Company
B. A Mutual Fund
C. A Bank
D. A Fixed Deposit
(D)
13. Bank overdraft is a good source of ________________ finance.
A. Short-term
B. Medium-term
C. Long-term
D. Any of the above
(A)
14. The difference between equities and debt securities is:
A. Equities represent ownership in a corporation and debt represents a

contractual liability of the corporation
B. Holders of equity securities get paid before holders of debt securities in the
event of a bankruptcy
C. Equities are short-term and debt securities are long-term
D. Equities pay interest and debt securities pay dividends
(A)
15. Regarding debentures:
A. The rate of interest is fixed

B. The rate of interest is not fixed
C. The rate of dividend is fixed
D. The rate of dividend is not fixed
(A)
16. Sale of securities after the trading hours:
A. Short selling
B. Stop loss
C. Kerb dealing
D. Profit make
(C)
17. The type of collateral (security) used for short-term loan is:
A. Real Estate
B. Plant and Machinery
C. Stock of Goods
(C)
146
18. Which of the following is a liability of a bank?
A. Junk Bonds
B. Treasury Bills
C. Commercial Papers
D. Certificate of Deposits
(D)
19. Commercial Paper is a type of:
A. Fixed Coupon Bond

B. Unsecured Short-term Debt
C. Equity Share Capital
D. Government Bond
(B)
20. Which of the following is not a spontaneous source of short-term funds?
A. Trade Credit
B. Accrued Expenses
C. Provision for Dividend
D. All of the above
(C)
21. Concept of Maximum Permissible Bank Finance was introduced by:
A. Kannan Committee
B. Chore Committee
C. Nayak Committee
D. Tandon Committee
(D)
22. In India, Commercial Papers are issued as per the lines issued by:
A. Securities and Exchange Board of India

B. Reserve Bank of India
C. Forward Market Commission
(B)
23. Commercial Paper are generally issued at a price:
A. Equal to face value

B. More than face value
C. Less than face value
D. Equal to redemption value
(C)
24. Which of the following is not applicable to commercial paper?
A. Face Value
B. Issue Price
C. Coupon Rate
(D)
147
25. The basic objective of Tandon Committee recommendations is that the
dependence of industry on hand should gradually:
A. Increase
B. Remain Stable
C. Decrease
(C)
26. Cash discount terms offered by trade creditors can never be accepted because:
A. Benefit is very small

B. Cost is very high
C. No sense to pay earlier
(D)
27. Deep Discount Bonds are issued at:
A. Face Value
B. Maturity Value
C. Premium to Face Value
D. Discount to Face Value
(D)
28. Principal value of a bond is called the:
A. Maturity Value
B. Issue Price
C. Par Value
D. Market Price
(C)
29. If the required rate of return of a particular bond is less than coupon rate, it is
known as:
A. Par Bond
B. Junk Bond
C. Discount Bond
D. Premium Bond
(A)
30. Market interest rate and bond price have:
A. No relationship
B. Positive relationship
C. Inverse relationship
D. Same relationship
(C)
148
31. If a coupon bond is selling at discount, then which of the following is true?
A. Po < Par and YTM < Coupon

B. Po < Par and YTM > Coupon
C. Po > Par and YTM < Coupon
D. Po > Par and YTM > Coupon
(B)
32. If the formula Ke (D1/P0 + g, D1/P0 refers to:
A. Interest yield
B. Dividend yield
C. Capital gain yield
(B)
33. The rate of interest payable on a bond is also called:
A. Effective Rate of Interest

B. Yield to Maturity
C. Coupon Rate
D. Internal Rate of Return
(C)
34. A long-term Bond issued with collateral is called:
A. Debenture
B. Junk Bond
C. Treasury Bills
D. Preference Share
(A)
35. A company may call the bonds when:
A. It is not earning profits

B. Interest rates have dropped
C. Interest rates have increased
(B)
36. Rate of Interest on convertible debenture is generally ________________ the rate
on non-convertible debentures.
A. same as
B. lower than
C. higher than
(B)
37. At the time maturity comes closer, then market price of a bond approaches:
A. Issue Price
B. Face Value
C. Zero Value
D. Redemption Value
(D)
149
38. Market Price of Bond and Market Rate of Interest has:
A. Inverse relationship
B. Positive relationship
C. No relationship
(A)
39. Which of the following is a feature of zero coupon bonds?
A. Sold at Par
B. Sold at Premium
C. Pays no Interest
D. Not Redeemable
(C)
40. Bonds that are covered by specific collaterals are called:
A. Junk Bond
B. Secured Bonds
C. Floating Rate Bonds
D. Deep Discount Bonds
(B)
41. Which of the following will cause an increase in bond values?
A. Decrease in Redemption Amount

B. Decrease in Coupon Rate
C. Increase in Redemption Amount
D. Increase in Redemption Period
(C)
42. Which of the following is always true for Bonds?
A. FV of a Bond = Issue Price

B. Redemption Value = Amount received by bondholder at maturity
C. Bonds are redeemable at market value
D. All of the above
(B)
43. In a 3 Year Bond purchased and held till maturity, the rate earned is called:
A. Coupon Rate
B. Current Yield
C. Yield to maturity
D. Holding Period Return
(C)
44. An investor should buy a bond if:
A. Market Value = Redemption

B. Market Value < Redemption
C. Intrinsic Value < Market Value
D. Intrinsic Value > Market Value
(D)
150
45. In case the maturity period of a bond increases, the volatility:
A. Increases
B. Decreases
C. Remains the same
D. Both (A) and (B)
(A)
46. Current Market Price of a Bond is equal to its par Value if:
A. Face Value is Rs.1,000

B. Coupon is paid half-yearly
C. Coupon Rate = Current Yield
D. It is a Government Bond
(C)
47. If the coupon rate and required rate of return are equal, the value of the bond is
equal to:
A. Market Value
B. Par Value
C. Redemption Value
(C)
48. YTM of a Bond is not affected by:
A. Issue Price
B. Coupon Rate
C. Redemption Value
D. Interest Amount
(A)
49. If Coupon Rate is less than Required Rate of Return; as the maturity approaches
the discount on bond:
A. Increases
B. Decreases
C. Remains Constant
(B)
50. An investor buys a bond today and sells after 3 months, the or rate of return
realised is known as:
A. Current Yield
B. Yield to Maturity
C. Holding Period Return
D. Required Rate of Return
(C)
151
1. Cash, in a narrow sense, implies currency and bank balances only.

(False)
2. Cash, in broad sense, includes marketable securities and time deposits in banks.
(True)
3. Transaction, precautionary and speculative are three motives for holding cash.
(False)
4. Speculative motive cash balance serves to provide a cushion to meet unexpected
contingencies.
(False)
5. To meet the payment schedule and to minimize funds committed to cash balance are
two basic objectives of cash management.
(True)
6. Costs caused due to inadequate cash are referred to as short costs.
(True)
7. Baumol model takes into account all motives of holding cash.
(False)
8. Miller-Orr model assumes that cash balances randomly fluctuate between an upper
bound and lower bound.
(True)
9. Orgler’s model is based on operating cash flows.
(False)
10. Cash budget is based on operating cash flows.
(False)
11. The higher the period of cash cycle, the higher is cash turnover.
(False)
12. Time taken by the bank in collecting payment from the customer’s bank is referred to
as deposit float.
(False)
13. Investment in marketable securities is intended to obtain a return on temporarily idle
cash.
(True)
14. Term loans are secured while debentures are non-secured.
(False)
15. The creation of the Debenture Redemption is non-obligatory and depends on the
discretion of the management for all debenture issues.
(False)
16. Credit rating of all debenture issues is compulsory in India.
(True)
17. Companies which have defaulted on the payment of interest to the debenture holders
cannot distribute dividends without the permission of the debenture trustees and the
lead institution, if any.
(True)
18. A “AAA” rating given by CRISIL to a company guarantees timely payment of the
interest and repayment of the principal by the issuing company.
(False)
19. Only those assets which are secured by collateral can be securitized.
(False)
152
20. The sale of the securities by the SPV after the securitization of the assets is open to
retain investors.
(False)
1. Term loans are akin to ___________________ of debentures in contrast to their

public offering to investors.
(private placement)
2. _______________________ is a secured debenture redeemable at a premium over
the face value/purchase price.
(Secured premium note)
3. ______________________ refers to the various means that attempt to buffer
investors against losses on the asset collateralizing their investment.
(Credit enhancement)
4. ___________________________ are backed by loans secured by specified real estate
property.
(Mortgage backed security)
CHAPTER – 18
SOURCES OF WORKING CAPITAL FINANCE
1. The function of a factor does not include one of the following:
A. discounting of bills
B. purchase of trade debts
C. collection of receivables
D. sales ledger management
(A)
2. The customer is intimated about the assignment of debt to the factor and also
directed to make payments to the factor instead of the firm is known as:
A. credit factoring
B. invoice factoring
C. notified factoring
D. factoring with recourse
(C)
4. One of the following is a common source of finance for a small business firm:
A. factoring
B. bills acceptance
C. bills discounting
D. commercial paper
(C)
153
5. MPBF (Maximum Permissible Bank Finance) under First method of lending is
ascertained as:
A. 75% of (Current assets – Current liabilities)

B. 75% of (Current assets – Current liabilities other than bank borrowings)
C. 75% of (Current assets – Current liabilities other than bank borrowings
D. Current assets – 75% of current liabilities other than bank borrowings
(B)
6. Which of the following is not a merit of factoring arrangement from the view
point of a firm?
A. As a result of factoring services, the firm can concentrate on their core

activities such as manufacturing and selling without worrying about the
collection of debtors.
B. The risk of bad debts is eliminated.
C. The factoring institution also provides advice on business trends and other
related matters which can be beneficial to the firms.
D. As the factoring institution provides interest on the receivables factoring is
also a good instrument for parking temporary funds.
(D)
7. Firms that have some degree of debt financing can be referred to as:
A. Indebted firms
B. Levered firms
C. Bankrupt firms
D. Optimal firms
(B)
8. The increase in use of debt leads to:
A. Increase in financial risk and high earning per share

B. Decrease in financial risk and high earning per share
C. Decrease in financial risk and low earning per share
D. Increase in financial risk and low earning per share
(A)
9. Which of the following is the least likely to be a determinant of the working
capital of a firm?
A. Available Cash
B. Debtors
C. Inventories
D. Plant and Machinery
(D)
10. Which of the following is a non-current asset?
A. Debtors
B. Pre-paid insurance
C. Land
D. Stock
(C)
154
1. Trade credit is a spontaneous source of finance.

(True)
2. There are neither explicit nor implicit financial (interest) costs of trade credit.
(False)
3. Cash credits and working capital term loans are two ways by which working capital
finance is obtained by banks in India.
(False)
4. Like cash credit, letter of credit is also a direct form of working capital finance
provided by banks.
(False)
5. Under hypothecation mode of security, banks provide credit to borrowers against the
security of movable property, say, inventory of goods.
(True)
6. Under hypothecation mode of security, goods hypothecated continue to be in the
possession of the borrower.
(True)
7. Like hypothecation, under pledge mode of security, goods continue to be in
possession of the borrower.
(False)
8. While a mortgage can be created only by the act of parties, a charge may be created
by the operation of law also.
(True)
9. Commercial paper is a short-term secured negotiable instrument of a fixed maturity.
(False)
10. Commercial papers are regulated by the SEBI.
(False)
11. All public limited companies whose securities are listed on the stock exchange are
entitled to raise funds by issuing commercial papers.
(False)
12. Factoring involves the outright sale of receivables, bad-debts losses to be borne by
the factor.
(True)
13. Since factoring involves the outright sale of receivables, bad-debts losses are to be
borne by the factor.
(False)
14. Rate of commission charged by the factor is the same whether the debts are factored
with recourse or without recourse.
(False)
15. Factoring without recourse facilitates off-balance sheet financing.
(True)
155
ADVANCED FINANCIAL MANAGEMENT
CHAPTER – 19
FINANCIAL STRATEGY AND PLANNING
1. The exchange rate of national currency with other foreign currencies will
influence the organization relates to:
A. factor influencing at national level

B. factor influencing at international level
C. factor influencing at organizational level
(A)
2. ________ defines what the organization wants to become in the longer term and
wants to go to fulfil its purpose and achieve its mission.
A. Aim
B. Goal
C. Strategy
D. Objective
(C)
3. The important assumptions in ascertaining internal growth rate is:
A. the earnings after tax should be in direct proportion to sales

B. the dividend payout of retention ratio should be as per the targeted rate
C. the increase in sales will cause increase in assets of the concern, in direct
proportion
D. all of the above
(D)
4. Sustainable Growth Rate (SGR) cannot be achieved in one of the following ways,
without increase in further equity:
A. increase in profit margin

B. increase in networth of the firm
C. decrease in proportion of assets to sales
D. increase in debt component proportionate to equity
(B)
5. Which is the best method among these for valuation of a firm where not much
data about its profit is available and its shares are not actively traded?
A. Market value
B. Discounted cash flow
C. Net asset based approach
(C)
156
6. A measure of the value of a company, calculated by multiplying the number of
either the outstanding shares or the floating shares by the current price per share
is called:
A. Market capitalization
B. Re-capitalization
C. Net worth of the company
D. Net value of the company
(A)
7. Financial Planning deals with:
A. Preparation of Financial Statements

B. Planning of Capital Issue
C. Preparing Budgets
D. All of the above
(C)
8. Financial Planning starts with the preparation of:
A. Master Budget
B. Cash Budget
C. Balance Sheet
(D)
9. Which of the following is not a part of Master Budget?
A. Budget Manual
B. Operating Budgets
C. Projected Balance Sheet
D. Capital Expenditure Budget
(A)
10. Which of the following is not shown in Cash Budget?
A. Proposed Issue of Capital

B. Depreciation
C. Loan Repayment
D. Interest on Loan
(B)
11. In ‘Percentage of Sales’ method of preparation of Projected Financial
Statement, the Operating Expenses should be projected on the basis of:
A. % of Profit Before Tax

B. % of Cost of Goods Sold
C. % of Sales
D. % of Gross Profit
(C)
157
12. In ‘Percentage of Sales’ method, various items of balance sheet are estimated on
the basis of:
A. % of Share Capital
B. % of Sales in current year
C. % of Fixed Assets
D. % of Sales in preceding year
(D)
13. In Projected Balance Sheet, a balancing figure:
A. May appear on Assets side

B. May appear on Liabilities side
C. Either (A) or (B) above
D. Would never appear
(C)
14. Procedure for preparation of ‘Projected Financial Statements’ should start
from:
A. Projection of Fixed Assets

B. Projection of Capital
C. Projection of Sales
D. Projection of Profit
(C)
15. Which of the following is not considered while preparing Cash Budget?
A. Accrual Principle
B. Difference in Capital and Revenue items
C. Conservation Principle
D. All of the above
(D)
16. Which of the following may not be a part of projected Financial Statements?
A. Projected Income Statement

B. Projected Trial Balance
C. Projected Cash Flow Statement
D. Projected Balance Sheet
(B)
17. Process of Financial Planning ends with:
A. Preparation of Projected Statements

B. Preparation of Actual Statements
C. Comparison of Actual Statements with Projected Statements
D. Ordering the employees that Projected Figures come true
(C)
158
18. Which of the following is not true for Cash Budget?
A. The shortage or excess of cash would appear in a particular period

B. All inflows would arise before outflows for those periods
C. Only revenue nature cash flows are shown
D. Proposed issue of share capital is shown as an inflow
(C)
1. Book value is the total value of all valuable assets including fictitious assets, less
external liabilities.
(False)
2. Discounted cash flow approach of valuation of business is superior to the P/E ratio
approach if the future cash earnings are well predictable.
(True)
3. Valuation of firm and valuation of equity in discounted cash flow approach provide
identical results despite using different definitions of FCFF and discount rates.
(True)
4. Unpaid dividends on preference shares are reckoned liability of the firm in asset based
valuation.
(True)
5. For business valuation, adjustments are required for contingent liabilities that may
fructify.
(True)
6. A positive net profit after taxes always implies that there is an economic value
addition to the firm.
(False)
7. Unrecorded assets should be accounted in asset based valuation.
(True)
1. Market value approach cannot be applied to _____________ (listed/unlisted) firms.

(unlisted)
2. Goodwill is discounted present value of ______________ to be earned by the firm in
future.
(super profits)
159
CHAPTER – 20
PROJECT CASHFLOWS ESTIMATION
1. The ratio that indicates the extent of ability of the borrower in repayment of
principal and interest is:
A. proprietary ratio
B. debt-equity ratio
C. interest coverage ratio
D. debt service coverage ratio
(D)
2. Cash payment to employees is a cash flow relating to:
A. Operating activities
B. Investing activitiesFinancing activities
C. All of the above
(A)
160
CHAPTER – 21
RISK EVALUATION IN CAPITAL BUDGETING
1. If greater risk is associated with receiving of future economic benefit, the

_________ discount rate is adopted.
A. lower
B. higher
C. normal
D. positive
(B)
2. A capital budgeting method that takes into consideration the time value of
money is the:
A. Annual rate of return method

B. Return on shareholders’ equity method
C. Cash payback technique
D. Internal rate of return method
(D)
3. The formula for computing the accounting rate of return is:
A. Net profit after tax/Average investment

B. Profit before tax and depreciation/Average investment
C. Average investment/Profit after tax
D. Total investment/Profit After tax
(A)
4. In the context of capital budgeting decisions, the time when cumulative cash
inflows are equal to the outflows of a project are termed as:
A. Payback period
B. Payment period
C. Net present value period
D. Time period
(A)
5. Capital budgeting is the process:
A. Used in sell or process further decision

B. Of determining how much capital share to issue
C. Of making capital expenditure decision
D. Of eliminating unprofitable product lines
(C)
161
6. Which of the following statement is incorrect about the capital budgeting?
A. Capital Budgeting is a project selection exercise performed by the business

enterprise.
B. Capital Budgeting uses the concept of present value to select the projects.
C. Capital Budgeting uses tools such as payback period, net present value,
internal rate of return, profitability index to select projects.
D. Capital budgeting is the process of determining the amount of share capital
to be issued to the prospective share holders and the cost of their issue.
(D)
7. Capital Budgeting is a part of:
A. Investment Decision
B. Working Capital Management
C. Marketing Management
D. Capital Structure
(A)
8. Capital Budgeting deals with:
A. Long-term Decisions
B. Short-term Decisions
C. Both (A) and (B)
(A)
9. Which of the following is not used in Capital Budgeting?
A. Time Value of Money

B. Sensitivity Analysis
C. Net Assets Method
D. Cash Flows
(C)
10. Capital Budgeting Decisions are:
A. Reversible
B. Irreversible
C. Unimportant
D. All of the above
(B)
11. Which of the following is not incorporated in Capital Budgeting?
A. Tax-Effect
B. Time Value of Money
C. Required Rate of Return
D. Rate of Cash Discount
(D)
162
12. Which of the following is not a Capital Budgeting decision?
A. Expansion Programme
B. Merger
C. Replacement of an Asset
D. Inventory Level
(D)
13. A sound Capital Budgeting technique is based is on:
A. Cash Flows
B. Accounting Profit
C. Interest Rate on Borrowings
D. Last Dividend Paid
(A)
14. Which of the following is not a relevant cost in Capital Budgeting?
A. Sunk Cost
B. Opportunity Cost
C. Allocated Overheads
D. Both (A) and (C) above
(D)
15. Capital Budgeting decisions are based on:
A. Incremental Profit
B. Incremental Cash Flows
C. Incremental Assets
D. Incremental Capital
(B)
16. Which of the following is not true with reference to capital budgeting?
A. Capital budgeting is related to asset replacement decisions

B. Cost of Capital is equal to minimum required return
C. Existing investment in a project is not treated as sunk cost
D. Timing of cash flows is relevant
(C)
17. Which of the following is not following in capital budgeting?
A. Cash flows Principle

B. Interest Exclusion Principle
C. Accrual Principle
D. Post-tax Principle
(C)
18. Which of the following is not true for capital budgeting?
A. Sunk costs are ignored

B. Opportunity costs are excluded
C. Incremental cash flows are considered
D. Relevant cash flows are considered
(B)
163
19. Which of the following is not applied in capital budgeting?
A. Cash flows be calculated in incremental terms

B. All costs and benefits are measured on cash basis
C. All accrued costs and revenues be incorporated
D. All benefits are measured on after-tax basis
(C)
20. Evaluation of Capital Budgeting Proposals is based on Cash Flows because:
A. Cash flows are easy to calculate

B. Cash flows are suggested by SEBI
C. Cash is more important than profit
(C)
21. Which of the following is not included in incremental cash flows?
A. Opportunity Costs
B. Sunk Costs
C. Change in Working Capital
D. Inflation effect
(B)
22. A proposal is not a Capital Budgeting proposal if it:
A. Is related to fixed assets

B. Brings long-term benefits
C. Brings short-term benefits only
D. Has very large investment
(C)
23. In Capital Budgeting, Sunk cost is excluded because it is:
A. Of small amount
B. Not incremental
C. Not reversible
D. All of the above
(B)
24. Savings in respect of a cost is treated in capital budgeting as:
A. An Inflow
B. An Outflow
C. Nil
(A)
25. In capital budgeting, the term Capital Rationing implies:
A. That no retained earnings are available

B. That no external funds can be raised
C. That limited funds are available for investment
D. That no fresh investment is required in current year
(C)
164
26. Feasibility Set Approach to Capital Rationing can be applied in:
A. Divisible Projects
B. Accept-Reject Situations
C. Mutually Exclusive Projects
(B)
27. Beta, β, of risk-free investment is:
A. Zero
B. One
C. Minus One
D. None of these
(A)
28. Return of a portfolio is:
A. Lowest Return
B. Highest Return
C. Total Return of all elements
D. Average Return of all elements
(C)
29. Which of the following is a diversifiable risk?
A. Inflation Risk
B. Seasonal Risk
C. Interest Rate Risk
D. All of the above
(B)
30. Which of the following is non-diversifiable risk?
A. Industrial recession
B. Political instability
C. Lock-out company
D. Both (A) and (C)
(C)
A. Risk can be reduced to zero

B. Diversification does not affect risk
C. Diversification always reduces risk to zero
(D)
32. Standard deviation can be used to measure:
A. Risk of an investment
B. Return of an investment
C. Both (A) and (B)
(A)
165
A. Higher the Beta, lower the risk

B. Higher the Beta, higher the risk
C. Risk is constant
D. Beta is constant
(B)
34. Amount of risk-reduction in a portfolio depends upon:
A. Market movement
B. Number of Shares
C. Degree of Correlation
D. Both (B) and (C)
(C)
35. In a diversified portfolio, a new security adds:
A. Liquidity Risk
B. Systematic Risk
C. Unsystematic Risk
(B)
36. Risk-return trade off implies:
A. Ignorance of Risk
B. Minimization of Risk
C. Maximization of Risk
D. Optimization of Risk
(D)
37. Basic objective of diversification is:
A. Increasing Return
B. Maximizing Return
C. Decreasing Risk
D. Maximizing Risk
(C)
37. Risk-aversion of an investor can be measured by:
A. Portfolio Return
B. Market Rate of Return
C. Risk –free Rate of Return
(D)
38. Risk of portfolio depends upon:
A. Risk of elements
B. Correlation of elements
C. Proportion of elements
D. All of the above
(D)
166
39. Which of the following will increase the required rate of return?
A. Increase in Interest Rates

B. Increase in Risk-free Rate
C. Increase in Degree of Risk-Aversion
D. All of the above
(D)
40. Systematic risk of security can be measured by:
A. Beta
B. Range
C. Standard Deviation
D. Co-efficient of Variation
(A)
41. Which of the following is unsystematic risk to a firm?
A. Inflation
B. Interest Rate
C. Surcharge of Income-tax
D. Scarcity of Raw Material
(D)
42. Total portfolio risk is equal to systematic risk plus:
A. Unavoidable risk
B. Diversifiable risk
C. Non-diversifiable risk
(B)
43. Which of the following is diversifiable through diversification?
A. Systematic
B. Unsystematic
C. Both of the above
(B)
44. Which of the following is the variability of the return from a share associated
with the market as a whole?
A. Avoidable
B. Systematic
C. Unsystematic
(B)
167
45. Which of the following describes the relationship between expected rate of
return and the standard duration? Or deviation
A. Characteristic Line
B. Capital Market Line
C. Security Market Line
(B)
46. Which of the following describes the relationship between expected rate of
return and the P?
A. Characteristic Line
B. Capital Market Line
C. Security Market Line
(C)
47. Which of the following describes the relationship between systematic risk and
return?
A. Capital Market Line

B. Harry Marketing Model
C. Arbitrage Pricing Theory
D. Capital Assets Pricing Model
(D)
48. In CAPM, β (Beta) factor measures:
A. Life of an asset
B. Risk of an asset
C. Return of an asset
D. Capital Investment
(B)
49. Which if the beta for a treasury stock?
A. Zero
B. One
C. Less than One
D. Greater than One
(A)
50. Stock beta measures:
A. EPS
B. Dividend
C. Stock Volatility
D. Debt Equity Ratio
(C)
168
51. Risk avoidable through proper diversification is known as:
A. Total Risk
B. Portfolio Risk
C. Systematic Risk
D. Unsystematic Risk
(D)
52. If the intrinsic value of a share is less than the market price, which of the most
reasonable?
A. That market is undervaluing the share

B. That market is overvaluing the shares
C. That the company is high dividend paying
D. That shares have been lesser degree of risk
(B)
53. An aggressive share should have a beta:
A. Equal to One
B. Equal to Zero
C. Less than Zero
D. Greater than One
(D)
54. A Futures contract is a standardized version of a:
A. Put Option
B. Call Option
C. Forward Contract
D. Call + Put Option
(C)
55. Margins are imposed on options sellers to safeguard the interests of:
A. Buyers
B. Brokers
C. Exchanges
D. All of the above
(D)
56. In Futures trading, the margin is payable to the broker by:
A. Buyer of Futures
B. Seller of Futures
C. Both of (A) and (B)
D. Neither of (A) and (B)
(C)
169
57. 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. Straddle
B. Strangle
C. European Option
D. American Option
(D)
58. In India, derivatives in interest rates are regulated by:
A. Ministry of Finance
D. Securities and Exchange Board of India
(B)
59. The maximum loss of a call option holder is equal to:
A. Premium
B. Spot Price
C. Strike Price + Premium
D. Strike Price – Spot Price
(A)
60. The maximum loss of a put option writer is equal to:
A. Spot Price
B. Strike Price
C. Strike Price – Premium
D. Strike Price + Premium
(C)
61. Intrinsic Value of a ‘out-of-money’ call option is equal to:
A. Zero
B. Premium
C. Spot Price
D. Strike Price
(A)
62. Holder of an American call option can:
A. Sell asset only expiration

B. Buy the asset only on expiration
C. Sell the asset on or before expiration
D. Buy the asset on or before expiration
(D)
63. How will the increase in volatility in asset price affect the value of the option?
A. Increase the value

B. Decrease the value
C. May not affect
D. Any of the above
(A)
170
64. Holder of European put option can:
A. Sell the asset on or before expiry

B. Sell the asset before expiry only
C. Sell the asset on or after expiry
D. Sell the asset on expiry only
(D)
65. Maximum gain of a put option holder is restricted to:
A. Spot Price
B. Strike Price
C. Spot Price – Premium
D. Strike Price – Premium
(D)
66. Break-even of a call option occurs when spot price is equal to:
A. Premium
B. Strike Price + Premium
(B)
67. Break-even of a put option occurs when spot price is equal to:
A. Premium
B. Strike Price + Premium
(C)
68. Before expiry date, the time-value of a call option is:
A. Intrinsic Value
B. Strike Price – Spot Price
C. Spot Price – Strike Price
D. Market Premium – Intrinsic Value
(D)
69. Out of the 4 factors, i.e., (i) Dividend Yield, (ii) Market Interest Rates, (iii) Time
to Expiry, and (iv) Price volatility, which affect the premium of an option?
A. (ii) and (iv)

B. (i), (ii) and (iv)
C. (i), (iii) and (iv)
D. (ii), (iii) and (iv)
(C)
70. In Futures, the terms and conditions are standards with reference to:
A. Quantity only
B. Rate and Date only
C. Place of Delivery only
D. All of the above
(D)
171
71. In call options, which of the following has an inverse relation with its value?
A. Volatility
B. Spot Price
C. Strike Price
D. Time to Expiry
(C)
72. If Strike Price is more than the Spot Price of the asset, the call option is known
as:
A. European Option
B. American Option
C. In the Money option
D. Out of Money Option
(D)
73. A firm can acquire target firm by:
A. Purchasing assets of Target Firm

B. Purchasing shares of Target Firm
C. Purchasing Assets or Shares of Target Firm
(B)
74. ABC Ltd., acquires substantial number of equity shares in XYZ Ltd. It is a case
of:
A. Merger
B. Absorption
C. Acquisition
D. Amalgamation
(C)
75. PQR Ltd., is a profit making company. It is absorbed into another group
company XYZ Ltd. which is a loss company. This is a case of:
A. Takeover
B. Reverse Merger
C. Horizontal Merger
D. Hostile Takeover Bid
(B)
76. Under AS 14, and amalgamation in the nature of merger is a case where _______
of shareholders of transferor company have agreed to become shareholders of
transferee company.
A. 100%
B. At least 90%
C. 25% or more
D. More than 50%
(B)
172
77. Merger of two companies under BIFR supervision is known as:
A. Offer of Sale
B. Reverse Merger
C. Arranged Merger
D. Negotiated Merger
(C)
78. Which of the following is not a usual method of calculation of Share Swap Ratio?
A. Profit Before Tax

B. Market Turnover
C. Economic Value Added
D. All of the above
(D)
79. An acquirer offer to buy shares directly from the shareholders is known as:
A. Takeover
B. Poison Pill
C. Tender Offer
D. White Knight
(C)
80. If a swap ratio is calculated on the basis of EPS, then which of the following
would be protected for two groups of shareholders?
A. Total Assets
B. Total Earnings
C. Total Market Value
D. All of the above
(B)
81. If the price-Earnings Ratio of two companies are same and they merge on the
basis of share swap ratio (EPS based), which of the following will be protected
for two groups of shareholders?
A. Paid-up Capital and Market Values

B. Paid-up Capital and Earnings
C. Market Value and Earnings
D. Earnings and Assets
(C)
82. ABC Ltd., acquires 100% of Preference Share Capital of PQR Ltd. It would
result in:
A. Vertical Merger
B. No relationship
C. Hostile Takeover bid
D. Holding-subsidiary relationship
(D)
173
83. Which of the following is a case of ‘Spin off’?
A. A division converted into a company

B. Assets transferred to lenders
C. Assets sold in the market
(A)
84. Spot exchange rate is the rate of exchange between two currencies:
A. for future delivery

B. for immediate delivery
C. for delivery at a particular spot in future
(B)
85. Price of one currency in terms of another currency is known as:
A. Ask Price
B. Direct Route
C. Exchange Rate
D. Any of the above
(D)
86. No. of units of domestic currency required to buy one unit of a foreign currency
is known as:
A. Spot Rate
B. Cross-Rate
C. Direct Route
D. Indirect Route
(C)
87. Normally direct ask price is ___________ than the direct bid price.
A. equal
B. greater
C. less than
(B)
88. If the spot rate of $ in Mumbai is Rs.45.50 and 1 month forward rate is Rs.46.45,
then which is correct for forward market?
A. That $ is at a premium
B. That $ is at a discount
C. Rupee is at a premium
(A)
174
89. If the spot rate of $ in Mumbai is Rs.46.70 and 3 months rate is Rs.46.45, then
which is correct for forward market?
A. That Rupee is at a premium

B. That Rupee is at a discount
C. $ is at a premium
(A)
90. Foreign Currency Exchange Rate risk can be hedged in:
A. Options Market
B. Futures Market
C. Money Market
D. All of the above
(D)
91. An Indian Exporter has despatched goods worth $ 1,00,000 receivable in
2 months’ time. He can hedge exchange rate risk by:
A. Buying a $ Call Option

B. Selling a $ Call Option
C. Buying a $ Put Option
D. Selling a $ Put Option
(B)
92. Mr. X has to pay $ 5,00,000 in three months’ time for the imports made by him.
Correct hedging policy for him would be to:
A. Buy a $ Call Option

B. Sell a $ Call Option
C. Buy a $ Put Option
D. Sell a $ Put Option
(A)
93. Relationship between Spot and Forward Exchange Rate is referred to as:
A. One-price Rule
B. Interest Rate Parity
C. Exchange Power Parity
D. Purchasing Power Parity
(B)
94. Adjustment in Exchange Rates due to different inflation rates in two countries
is known as:
A. On Price Rate
B. Interest Rate Parity
C. Purchasing Power Parity
D. Exchange Power Parity
(C)
175
95. Purchasing Power Parity refers to that:
A. Interest rates across countries will eventually be the same

B. There is relationship between spot and forward rates
C. Goods should sell at the same price across countries after exchange rate is
considered
(C)
96. Forward exchange rate is the rate of exchange between two currencies:
A. Prevailing today for future delivery

B. Would prevail at a future date
C. Prevailing today for immediate delivery
(A)
97. Assets Management Company is formed to:
A. Manage bank’s assets

B. Manage mutual funds’ investments
C. Construct infrastructure projects
D. Run a stock exchange
(B)
98. Prime duty of a merchant banker is:
A. maintaining records of clients

B. giving loans to clients
C. working as a Capital Market Intermediary
D. all of the above
(C)
99. Basic objective of a money market mutual fund is:
A. Guaranteed rate of return

B. Investment in short-term securities
C. Both (A) and (B)
(B)
100. Which of the following is not regulated by SEBI?
A. Depositories
B. Mutual Funds
C. Foreign Direct Investment
D. Foreign Institutional Investors
(C)
101. Which of the following is true for mutual funds in India?
A. Entry loan is allowed

B. Entry loan is not allowed
C. Exit loan is allowed in some cases
D. Exit loan is not allowed entry load is allowed
(C)
176
102. Which of the following is not available in India?
A. Index Futures
B. Index Options
C. Commodity Futures
D. Commodity Options
(D)
103. Which of the following is the benefit of Depositories?
A. Reduced Risk of stolen, fake, forged shares

B. Reduction in the share transfer time to the buyer
C. No Stamp Duty on transfer of shares in dematerialized format
D. All of the above
(D)
104. Credit Rating of a debt security is:
A. Merely opinion
B. Positive suggestion
C. Guarantee of repayment
(A)
105. The first computerized online stock exchange in India was:
A. BSE
B. MCX
C. NSE
D. OTCEI
(D)
106. Which of the following is working as demutualized stock exchange since its
beginning?
A. BSE
B. DSE
C. NSE
D. All of the above
(C)
107. Which of the following is not traded on Indian Stock Market?
A. Index Futures
B. Index Options
C. Stock Futures
D. Forward Rate Agreements
(D)
108. How may Depositories are there in India?
A. One
B. Two
C. Three
D. Zero
(B)
177
109. The amount in unpaid dividend accounts of companies shall be transferred to
the:
A. Investor Protection Fund

B. Investor Education and Protection Fund
C. Dividend Equalisation Reserve of the Company
D. General Revenue Account of the Central Government
(B)
110. Secondary Market in India is regulated by:
A. Ministry of Finance
D. Securities and Exchange Board of India
(D)
111. ______________ funds o not have a fixed date of redemption.
A. Diversified
B. Open ended
C. Closed ended
D. Both (B) and (C)
(B)
113. In India, NIFTY and SENSEX are calculated on the basis of:
A. Paid-up Capital
B. Market Capitalization
C. Free-float Capitalization
D. Authorized Share Capital
(C)
1. Coefficient of variation is an absolute measure of risk.

(False)
2. Sensitivity analysis is an absolute measure of risk.
(True)
3. The estimates under sensitivity analysis are normally made under two categories.
(False)
4. The higher the value of the coefficient of variation, the lower is the degree of the risk
associated with the proposed investment project.
(False)
5. Simulation technique shows the impact of changes in all the variables on the
distribution of probable values of NPV, in one iteration only.
(False)
6. The higher is the risk, the higher is the certainty equivalent coefficient.
(False)
7. Conceptually the terms risk and uncertainty can be used interchangeably.
(False)
178
8. Projects involving expansion programmes of existing products meant for the new
types of customers.
(False)
9. Risk-adjusted discount rate approach is conceptually superior to certainty-equivalent
approach to incorporate risk factor in evaluating investment projects.
(False)
10. Risk-free rate if return is employed as a discount rate to evaluate investment projects
using certainty equivalent approach.
(True)
11. The probability distribution approach determines probability of different values of
NPV based on ‘Z’ value.
(True)
12. The decision-tree approach sows the select/important probable outcomes along with
their probabilities.
(False)
179
CHAPTER – 22
CAPITAL, DEBT AND STOCK MARKETS
1. Indicate the odd one in the following:
A. road show
B. underwriting
C. book building
D. green shoe option
(B)
2. In efficient market, the market price is an ‘unbiased estimate’ of the true value
of the stocks (shares). This implies that:
A. the market price always equal the true value

B. the market value has no relation to the true value
C. market make mistakes abut true value, which can be exploited by investors
D. market prices contain errors, but these being random cannot be exploited by
investors.
(D)
3. A transaction tax of 1% is imposed on all stock transactions by the regulatory
authority/government. This will cause the market efficiency to:
A. increase
B. decrease
C. no change
(B)
4. SEBI imposes a blanket restriction on all short sales to prevent speculation in
stocks. This will cause the market efficiency to:
A. decrease
B. increase
C. no change
(A)
5. All transactions to foreign investors acquiring and holding shares in companies
are removed. This will cause the market efficiency to:
A. decrease
B. increase
C. no change
(B)
180
6. The tax rate on dividends is lowered from 20% to 10%. This will cause the
market efficiency to:
A. increase
B. decrease
C. no change
(C)
7. The tax rate on capital gains arising from trading in shares on the stock exchange
is removed. This will cause the market efficiency to:
A. increase
B. decrease
C. no change
(A)
8. Which of the following would describe the reverse book building?
A. A book building process for buy-back of shares

B. A book building process for issue of debentures
C. A book building process for issue of preference shares
D. A book building process for issue of an initial public offer
(A)
9. The difference between a Fixed Deposit in a Bank and the Certificate of Deposit
is:
A. There is no difference. Both are one and the same.

B. The Fixed Deposit can be issued to Non-Resident Indians whereas CD can
be issued only to Indians.
C. The CDs are unsecured negotiable promissory notes which can be
transferable whereas FDs are non-transferable.
D. The fixed deposit in a bank should be more than one lakh whereas CD can
be any multiples of Rs.1,000/-.
(C)
10. A negotiable instrument issued by a depository bank in international markets
that evidences ownership of shares in a company, enabling the company (issuer)
to access investors in capital markets outside its home country is generally
referred to as:
A. Venture Capital
B. Global Depository Receipt
C. Private Equity
D. Commercial Paper
(B)
181
11. Rights issue is made to:
A. Directors of the company

B. Employees of the company
C. To the existing shareholders
D. Public
(C)
12. Net worth of business means:
A. Equity capital
B. Total assets
C. Total assets minus total liabilities
D. Fixed assets minus current assets
(C)
13. Which of the following is not likely to be a method used by a company for raising
money for fixed capital?
A. Issue of shares
B. Private placement of shares
C. Call money
D. Term loans
(C)
14. Which of the following is an unsecured, short-term debt instrument issued by a
corporation with a fixed maturity value?
A. Debenture
B. Commercial Paper
C. Preference Share
D. Equity Share
(B)
15. Which of the following statement is correct about book building?
A. The book building is a price discovery method used only in initial public
offering of a company.
B. The book building is a price discovery method used in Follow on Public
Offering (FPO) of a company.
C. The book building is a price discovery method used only in applying for
loan from a number of financial institutions.
D. The book building is a price discovery method used in IPO and FPO.
(D)
that evidence ownership of shares in a company, enabling the company (issuer)
referred to as:
A. Venture Capital
B. Global Depository Receipts
C. Private Equity
D. Commercial Paper
(B)
182
17. The method of offering shares by providing a price range is called:
A. Book building method

B. Underwriting
C. Green show method
D. Investor-front method
(A)
18. Bonus shares can be issued by a company:
A. Out of reserves created by revaluation of fixed assets

B. Out of share premium not collected in cash
C. Without any provision for it in the articles of association
D. Out of free reserves built out of genuine profits
(D)
19. New issues market is regarded as:
A. Primary market
B. Secondary market
C. Capital market
(A)
20. Which of the following does not form part of the equity capital of a company?
A. The contributed capital, which is the money that was invested in the business
by the owners.
B. Retained earnings, which represents profits from past years that have been
kept by the company and used to strengthen the balance sheet or fund
growth, acquisitions, or expansion.
C. The money borrowed from lenders and financial institutions for undertaking
various projects.
D. Stock dividends granted by the company to the investors as part of its
dividend policy.
(C)
21. Return on investment may be improved by:
A. Increasing Turnover
B. Reducing Expenses
C. Increasing Capital Utilization
D. All of the above
(D)
183
1. Capital markets are a sub-part of the ____________ system.

(financial)
2. __________________ intermediaries act as a link between savers and investors.
(Financial)
3. The primary function of financial intermediaries is to convert __________________
securities into ________________ securities.
(direct, indirect)
4. The two key financial markets are ____________________________.
(money market and capital market)
5. Money market is a market for _______________________ funds having maturity of
_______________________________.
(short-term, one year or less)
6. The capital market consists of _______________________ and the stock exchanges.
(new issue markets)
7. While the primary market deals in ________ securities, the stock market is a market
for ________ securities.
(new, old)
8. The prices of new issues are influenced, to a marked extent, by the price movements
in the ___________ market.
(stock)
9. Origination, underwriting and _______________ are three services provided by the
new issue market.
(distribution)
10. __________ is a method to sell securities to the existing shareholders of a company.
(Rights issue)
11. Pricing issue is left to the investors in _________________.
(book-building method)
184
CHAPTER – 23
EQUITY, DEBT AND MONEY MARKET INSTRUMENTS
1. New issues market is regarded as:
A. Primary market
B. Secondary market
C. Capital market
(A)
2. Debt funds are raised in the form of:
A. bonds
B. term loans
C. debentures
D. all of the above
(D)
3. One of the following is not a commonly employed long-term finance in a
company form of business:
A. bank cash credit

B. debenture capital
C. retained earnings
D. preference capital
(A)
4. It is quite common for banks to issue subordinated debt. The reasons are:
A. fund raising
B. it is treated as quasi-equity
C. it does not increase debt-equity ratio
D. it is included in Tier-II capital for the purpose of determining capital
adequacy
(D)
5. A company is planning to issue 8% debentures of Rs.100 each. Market rate of
bond yield for the same maturity is 7%. The debentures will be issued at:
A. par
B. discount
C. premium
(C)
185
6. Market yield of Government securities has reduced, so the bond price will:
A. increase
B. decrease
C. remain unchanged
(A)
7. Among the instruments listed below which is/are option like instrument(s)?
A. rights
B. warrants
C. puttable and callable bonds
D. all of the above
(C)
8. One of the following is not a part of money market securities:
A. call money
B. commercial paper
C. certificate of deposit
D. 5 year public deposit
(D)
9. Deep Discount Bonds are issued at:
A. Face Value
B. Maturity Value
C. Premium to Face Value
D. Discount to Face Value
(D)
10. The value of a bond/debenture is:
A. present value of contractual payments it receives till maturity

B. present value of interest payments it receives
C. present value of its redemption amount/value
(A)
11. When the required rate of return is greater than coupon rate, the bond will be
valued at:
A. discount
B. premium
C. par value
(A)
186
12. Given the coupon rate to be constant, the value of bond, as it approaches to
maturity, will converge to:
A. its par value

B. redemption value
C. issued value
(B)
13. A bond can be issued at premium if:
A. coupon rate > required returns

B. coupon rate < required returns
C. coupon rate = required returns
(A)
14. An exchange rate quote is given as 1$ = Rs.55.45. such a quote where number
of units of rupees against one unit of dollar is referred to as:
A. Indirect quote
B. Direct quote
C. Equivalent quote
D. Options quote
(B)
15. An exchange rate quote is given as Re.1 = 0.025 euros. Such quotes where the
amount of foreign currency needed to exchange one unit of domestic currency is
referred to as:
A. Indirect quote
B. Direct quote
C. Mixed quoted
D. Spots quote
(A)
16. The price at which a foreign exchange dealer buys a foreign currency is referred
to as:
A. Bid price
B. Exchange price
C. Offer price
D. Balance price
(A)
17. A country has basically a floating rate of currency. But the central bank of the
country influences the exchange value of the currency by engaging in the foreign
exchange market. Such currency regime in place is normally referred to as:
A. Policy of official rate of exchange

B. Policy of floating rate of exchange
C. Policy of freely floating rate of exchange
D. Policy of managed float or dirty float
(D)
187
18. Convertible debentures are also akin in nature to ___________________.
A. Call options
B. Put options
C. Futures contract
(A)
19. Which of the following instruments is similar in nature to call options?
A. Debentures
B. Redeemable preference shares
C. Warrants
(C)
20. For the same strike price and maturity, which of the following strategies is
theoretically safer than the other?
A. Selling a call option

B. Selling a put option
C. Buying a call option
D. Buying a put option
(B)
21. A contract to buy or sell specific quantities of a commodity or financial
instrument at a specified price with delivery set at a specified time in the future
is called:
A. Derivative
B. Futures
C. Options
D. Call money
(B)
22. Generally, longer the term of an investment’s maturity period, the higher the
rate of interest. This can be reasoned with:
A. The risk is more in holding securities for a longer period than short period
and investors therefore expects return commensurate with the risk.
B. In the long-term investments funds are tied up for a longer period for this
investors would expect more returns.
C. Both of these.
D. None of these.
(C)
23. The gain or loss on an investment over a specified period, expressed as a
percentage increase over the initial investment cost is generally referred to as:
A. Annuity
B. Rate of return
C. Nominal interest rate
D. Rate of investment
(B)
188
24. The difference between the yield of a government bond and yield of an
instrument offered by other borrowers (such as yield from equity investment) is
often referred to as:
A. Rate of interest
B. Annuity gap
C. Yield curve
D. Yield gap
(D)
25. Which of the following would describe the term bridge financing?
A. It is generally short-term finance

B. It is an interim financing for an individual or business until permanent or the
next stage of financing can be obtained
C. Bridge loans are typically more expensive than conventional financing
D. All the above
(D)
26. The participants of call money market include:
A. Banks
B. High net worth individuals
C. Foreign Institutional Investors
D. State and Central Governments
(A)
27. Short selling refers to:
A. Buying shares and then selling them on the same day

B. Selling shares without owning them
C. Selling some shares out of a large holding
D. Continuously selling shares in lots
(B)
28. When a right to sell a security is acquired, it is known as:
A. Call option
B. Put option
C. Double option
D. Single option
(B)
29. Call money market is the market for:
A. One week
B. One day
C. One month
D. One year
(B)
189
30. A futures contract is standardized version of a:
A. Put option
B. Call option
C. Call + Put option
D. Forward contract
(D)
31. Patents and copy rights fall under:
A. Current asset
B. Liquid asset
C. Intangible asset
D. Normal asset
(C)
32. A regular stream of financial payments paid annually or at regular intervals
which goes on forever is called:
A. Annuity
B. Annuity due
C. Perpetuity
D. Annuity present
(C)
33. Bills, bonds, equities are arranged in descending order of liquidity. The correct
order is:
A. Bonds, bills equities

B. Equities, bonds, bills
C. Bonds, equities, bills
D. Bills, bonds, equities
(D)
34. Where a country fixes the rate of exchange of its currency with other currencies,
such exchange rates are termed as:
A. Fixed exchange rate

B. Standard exchange rate
C. Floating exchange rate
D. Managed exchange rate
(A)
35. Net present value:
A. is equal to the initial investment in a project

B. is equal to the present value of the project benefits
C. is simplified by the fact that future cash flows are easy to estimate
D. is equal to zero when the discount rate used is equal to the IRR
(D)
190
36. An agreement between the buyer and seller to exchange cash for an asset at a
predetermined date is referred to as:
A. Swap
B. Forward
C. Option
D. Gilt
(B)
37. The difference between Fixed Deposit in a Bank and the Certificate of Deposit
is:
A. There is no difference. Both are one and the same.

B. The FD can be issued to Non-Resident Indians whereas CD can be issued to
only Indians.
C. The CDs are unsecured negotiable promissory notes which can be
transferable whereas FDs are non-transferable.
D. The fixed deposit in a bank should be more than one lakh whereas CD can
be any multiples of Rs.1,000.
(C)
38. “Net worth” of business means:
A. Equity capital
B. Total assets
C. Total assets minus total liabilities
D. Fixed assets minus current assets
(C)
39. Which of the following is an unsecured, short-term debt instrument issued by a
corporation with a fixed maturity value?
A. Debenture
B. Commercial Paper
C. Preference Share
D. Equity
(B)
40. Blue chip means:
A. Shares guaranteed by the government

B. Shares listed in the stock exchange
C. Shares giving consistent high rate of return
D. Shares issued by a loss making company
(C)
41. The issue of shares by a company to its existing shareholders is called:
A. Rights issue
B. Preferential issue
C. Selective issue
D. Internal issue
(A)
191
42. Treasury bills are issued by:
A. The government
B. Public limited companies
C. Private companies
D. All of the above
(A)
43. The essential role of financial market is:
A. Provide a method of saving

B. Provide a way for the government to finance a budget deficit
C. Provide a method of borrowing
D. Provide a method of channelling funds between borrowers and savers
(D)
44. Gilt-edged securities are:
A. The private company securities

B. Public company securities
C. The government securities
D. All the above
(C)
45. The payment for an annuity starts at the commencement of the period. Such
annuity is called:
A. Ordinary annuity
B. Annuity due
C. Annuity beginning
D. Annuity present
(B)
1. Value of a bond is dependent solely on the interest payments it provides.

(False)
2. If Coupon rate = Required rate, the value of the bond would be equal to its par value.
(True)
3. Bond value will differ from its par value, even though yield to maturity = coupon rate.
(False)
4. For a bond, yield to maturity (YTM) is always equal to coupon rate.
(False)
5. Value of a bond with semi-annual interest rate, is greater than the value of bond
providing interest on annual basis.
(True)
6. Constant/variable growth model, for the valuation of equity share, is applicable for
the growth rate g ≤ ke.
(False)
7. In a variable growth model, the dividend is assumed to grow at a constant rate forever
after an initial growth period.
(True)
192
8. Any action by finance manager that increase the risk will reduce the value.
(True)
9. Payment of preference share dividend is not obligatory and depends on the discretion
of the management.
(True)
10. Preference shares do not entail voting rights under all circumstances.
(False)
11. The market value of a warrant is the amount at which the warrant is expected to be
sold in the market.
(False)
1. An equity shareholder can renounce his _____________________ to subscribe to the

additional issue partially/completely.
(pre-emptive right)
2. Ordinary share capital is a high risk ______________ source of finance for investors.
(high-reward)
3. Companies can freely _________ their share issues.
(price)
4. ___________________ is a process to elicit demand for, and price of, securities.
(Book-building)
5. The entire net offer should be compulsorily ___________________ by the syndicate
members/book runner(s).
(underwritten)
6. The book runner(s) and the issuing company would determine the __________ price
on the _______ received through the syndicate members.
(issue, bid)
7. A company making an IPO can avail of the _____________ option.
(green-shoe)
8. Under the green shoe option the amount of shares to be over-allotted can be
________________ of the issue size out of the shares borrowed from the promoters.
(up to 15 per cent)
9. A listed company can raise funds up to _____________ times of its networth through
qualified institutional placement.
(five)
10. A maximum of ____________ per cent of the issue size can be allotted to one single
QIB/allottee.
(fifty)
11. Conversion ratio (in debentures) equals ____________________________ divided
by the conversion price.
(par value of convertible debentures
12. _________________________ is the price at which a convertible bond will sell in
the market without the conversion feature.
(Straight debenture value)
13. ______________ is an instrument that gives its holder the right to purchase a
specified number of shares.
(Warrant)
193
14. ____________ is the price at which holders of warrant can purchase a specified
number of shares.
(Exercise price)
CHAPTER – 24
SECURITIES ANALYSIS AND STOCK MARKET BEHAVIOUR
NIL
194
CHAPTER – 25
FINANCIAL SERVICES AND INSTITUTIONS
1. Capital markets are controlled by:
A. RBI
B. SEBI
C. Government
(B)
A. Foreign Institutional Investors

B. Foreign Direct Investment
C. Mutual Funds
D. Depositories
(B)
3. The rate at which the Reserve Bank of India borrows money from commercial
banks is called:
A. Reserve Repo Rate

B. Repo Rate
C. Call Money Rate
D. Cash Reserve Ratio
(A)
4. Secondary Market in India is regulated by:
A. Reserve Bank of India

B. Securities and Exchange Board of India
C. Ministry of Finance
D. Forward Market Commission
(B)
5. Which of the following is a financial institution?
A. Commercial Paper
B. Mutual Fund
C. Insurance Policy
D. Treasury Bill
(B)
6. Which of the following is commonly quoted interest rate in the financial market?
A. Base rate
B. Interbank lending rate
C. Treasury bill rate
D. All of the above
(D)
195
CHAPTER – 26
DEPOSITORIES AND MUTUAL FUNDS
1. Mutual funds invests their funds in:
A. Specialized securities
B. Diversified securities
C. Equity shares only
(B)
2. A fund that pools the money of various investors having common objective
with a view to invest in various securities is generally referred to as:
A. Mutual Fund
B. Venture capital Fund
C. Private Equity Fund
D. Institutional Depository Fund
(A)
3. In relation to mutual funds, AMC stands for:
A. Annual Maintenance Company

B. Asset Management Company
C. Asset Mutualisation Contract
(B)
4. A company sells its shares directly to a small-group of investors like bank,
insurance companies, financial institutions, mutual funds. Such a practice is
called:
A. Private placement of shares

B. Public placement of shares
C. Rights Issue
D. Debenture Issue
(A)
5. Which of the following is the benefit of Depositories?
A. Reduction in the share transfer time to the buyer

B. Reduced Risk of stolen, fake, forged shares
C. No stamp duty on transfer of shares in dematerialized form
D. All of the above
(D)
196
6. A fund set aside by a corporation or government agency in the form of a specific
reserve for the purpose of periodically redeeming bonds, debentures, and
preferred stocks is generally called:
A. Special Purpose Fund

B. Sinking Fund
C. Contingency Fund
D. Emergency Fund
(B)
referred to as:
A. Venture Capital
C. Private Equity
D. Commercial Paper
(B)
197
CHAPTER – 27
DERIVATIVES AND OPTION PRICING THEORY
1. An options market, enabling exercise of call and put options on the stocks
(shares), is opened up, with options being regularly traded in many of the stocks
listed on the stock exchange. This will cause the market efficiency to:
A. increase
B. decrease
C. no change
(A)
2. The minimum margin which a customer must maintain with the member at all
times for transacting currency futures is known as:
A. initial margin
B. variation margin
C. maintenance margin
D. mark to market margin
(C)
3. Buying and selling call or put option with same strike price but different
expiration dates is called:
A. long hedge
B. short hedge
C. horizontal option spread
(C)
4. Combination of two fixed floating currency swaps to form a fixed to fixed
currency swap is called:
A. circus swap
B. vanilla swap
C. forward swap
D. extendible swap
(A)
5. Buying and selling call and put option with different strike price and different
expiration dates are called:
A. short hedge
B. vertical spread
C. diagonal spread
D. butterfly spread
(C)
198
6. The mechanism of spot and forward exchange ratio is determined by:
A. hedgers
B. speculation
C. arbitrageurs
D. all of the above
(D)
7. A call option whose exercise price is equal to the market price is called:
A. real option
B. butterfly option
C. at-the-money option
D. in-the-money option
(C)
8. Currency swap is a method of:
A. making money by banks

B. speculating the foreign exchange
C. exchanging one currency for another
D. hedging against foreign exchange risk
(D)
9. A derivative financial instrument:
A. is settled at a future date

B. forms part of a hedging relationship
C. is remitted at each balance sheet date
D. all of the above
(A)
10 Write an option does not imply:
A. selling an option
B. taking a long position
C. taking a short position
D. accepting an uncertain obligation
(B)
11. Black-Scholes formula to value the call option is based on certain assumptions.
They include:
A. the share pays no dividend

B. there is no transaction cost
C. only European options are considered
D. all of the above
(D)
199
12. Buying and selling call or put option with same strike price but different
expiration dates is called:
A. long hedge
B. short hedge
C. horizontal option spread
(C)
13. ‘Straddle’ as a type of option trading means:
A. one call, one put, same security, same strike price and same period
B. one call, two puts, same security, same strike price and same period
C. one call, one put, same security, different strike price and same period
(A)
14. Select the wrong statement: A ‘butterfly spread’ is created in any one of the four
ways namely:
A. write two puts at mid-strike price; buy one put above and one put below
B. write two calls at mid-strike price; buy one call above and one call below
C. buy two calls at mid-strike price; write one call above and one call below
D. buy two puts – one above mid-strike price; buy one call above and one call
below
(D)
15. Which of the following is not correct?
A. options are rights without obligations

B. an option holder has the obligation to exercise the right
C. premium to be paid to the writer is known as option price
D. the writer of the option is under obligation to honour his commitment
(B)
16. Which of the following is incorrect?
A. A put option gives the option holder the right to buy a stock at a fixed price.
B. The option holder pays a premium to the option writer to acquire the right.
C. An American option can be exercised on or before the expiration date.
D. A European option can be exercised only on the expiration date.
(A)
17. It is incorrect to say that:
A. derivatives derive their values from some underlying variable which may be
share price
B. the scope of regression line of changes in the spot prices on changes in the
future prices yields the optimum hedge ratio
C. when the asset underlying the futures contract is different from the asset
whose price is to be hedged, it is called as cross hedge.
D. a call option gives its holder the right to buy any quantity of the underlying
asset from the other party at a pre-specified price
(D)
200
18. Which of the following is not an assumption of Black and Scholes Model (BSM)?
A. dividend is paid on the shares

B. the risk-free rate of interest is known
C. only European options are considered
D. dividend is paid on the shares
(A)
19. Value of an out-of-the money option is:
A. Zero
B. Negative
C. (S0 – E)
D. (E – S0)
(A)
20. The price of a call option contract should not be less than:
A. E
B. S0
C. (S0 – E)
D. (E – S0)
(C)
21. The maximum price of a call option contract should nto be more than:
A. E
B. S0
C. (S0 – E)
D. (E – S0)
(B)
22. Time value of an option is:
A. (E – S0)
B. (S0 – E)
C. Intrinsic value of the option – Price of the option
D. Price of the option – Intrinsic value of the option
(D)
23. Fair value of an option represents:
A. Intrinsic value of the option

B. Time value of the option
C. Both (A) and (B) above
(C)
201
24. Which of the following factor(s) has/have a bearing on the option price?
A. Strike price
B. Time to maturity
C. Risk-free rate of return
D. Price of underlying asset
E. Volatility of underlying asset
F. All of the above
(F)
25. The approach in finance which states that permanent assets should be financed
with long-term capital (long-term liabilities + equity) and temporary assets
should be financed with short-term credit is called:
A. Factoring approach
B. Hedging approach
C. Cut off approach
D. Leverage approach
(B)
26. The currency rate quoted today for delivery at a future settlement date at a price
specified today is called:
A. Forward rate
B. Spot rate
C. Swap rate
D. Ask price
(A)
27. A financial instrument which derives its value from the value of underlying
entities such as an asset, index, or interest rate is called:
A. Related Asset
B. Derivative
C. Gilt
D. Commercial Paper
(B)
1. An option is a contract that gives a right to its holder along with the responsibility to
purchase/sell stipulated units of underlying asset at the predetermined rate on/up to a
specified date.
(False)
2. An option writer is one who sells an option contract.
(True)
3. Expiration date is the date beyond which the option has no value.
(True)
4. Strike price is the price at which the holder of the option can buy/sell the underlying
asset.
(True)
202
5. American and European options are alike.
(False)
6. At a given point of time, spot rate > exercise price in the case of in-the-money option,
either call or put.
(False)
7. A call/put option is a contract that gives the right but not the responsibility to its holder
to purchase/sell the underlying asset at a stipulated price on/up to a specified date.
(True)
8. Writing a call option and put option will result in the same course of action.
(False)
9. A holder of a call option can incur losses at the most up to the amount of premium he
pays.
(True)
10. A put option holder can earn profits at the most (theoretically) up to its strike price.
(True)
11. The intrinsic value of an out of the money option is negative.
(False)
203
CHAPTER – 28
INVESTEMENT MANAGEMENT AND RISK-RETURN ANALYSIS
1. An investor who is willing to pay to take risk is:
A. risk-taker investor
B. risk-averter investor
C. risk-neutral investor
(A)
2. An investment is risk-free when actual return is always __________________the
expected return.
A. equal to
B. less than
C. more than
(A)
3. Risk of two securities having different expected return can be compared with:
A. variance of securities
B. coefficient of variation
C. standard deviation of securities
(B)
4. A portfolio consisting of two risky securities can be made risk less, i.e., σp = 0, if:
A. the correlation ranges between 0 to 1

B. the securities are perfectly positively correlated
C. the securities are perfectly negatively correlated
(C)
5. Efficient portfolios are those portfolios, which offer (for a given level of risk):
A. average return
B. minimum return
C. maximum return
(C)
6. Efficient frontier consists of:
A. efficient portfolios
B. both efficient and inefficient portfolios
C. portfolios that are positively correlated securities
D. portfolios that are negatively correlated securities
(A)
204
7. Capital market line is:
A. capital allocation line of a risk-free asset

B. capital allocation of a market portfolio
C. capital allocation of both risk-free asset and market port folio
(C)
8. The point of tangency between efficient frontier and risk-return indifferences
curve depicts:
A. optimal portfolio
B. efficient portfolio
C. sub-optimal portfolio
(A)
9. CAPM accounts for:
A. systematic risk
B. unsystematic risk
C. both (A) and (B) above
(A)
10. The rate of return earned on security if it is held till maturity is generally called:
A. Yield curve
B. Yield to maturity (YTM)
C. Rate of interest
D. Annuity
(B)
11. Which of the following statements are correct?
A. The term structure of interest rates describes the relationship between

interest rates and loan maturities.
B. The term structure of interest rates describes the relationship between
maturity and yield.
C. A fall in interest rates would result in a rise in the price of fixed interest
securities and a fall in yields.
(D)
12. A variety of options are available for reducing short-term foreign exchange risk
exposure. Which of the following is not likely to be one of them?
A. Forward hedges
B. Option hedges
C. Maintaining a foreign currency bank account
D. Delaying the exports
(D)
205
1. Return on any financial asset consists of current yield and capital yield.
(True)
2. Risk of an individual financial asset refers to variability of its returns around its mean
returns.
(True)
3. Return of a portfolio is simply weighted average of returns on individual securities in
the portfolio multiplied by their corresponding proportions (weights) in the portfolio.
(True)
4. For a given correlation coefficient, a minimum variance portfolio can be created, for
which risk of portfolio will be less than the risk of any security in the portfolio.
(True)
5. Correlation among the securities in the portfolio has nothing to do with the risk of
portfolio.
(False)
6. If a portfolio consists of two securities, which are perfectly positively correlated, the
risk of portfolio will simply be the weighted average of the standard deviations of
individual securities.
(True)
7. A portfolio consisting of two risky securities can be made riskless, if the securities
are perfectly negatively correlated.
(True)
8. Efficient frontier consists of those portfolios which offer maximum risk for a given
level of expected returns.
(False)
9. In CAPM, Beta represents total risk, i.e., systematic and unsystematic risk.
(False)
10. The point of tangency between the efficient frontier and risk-return indifference curve
provides optimal portfolio for the investor concerned.
(True)
11. Security market line (SML) and Capital market line (CML) are the same.
(False)
CHAPTER – 29
CAPITAL ASSET PRICING MODEL AND MODERN PORTFOLIO THEORY
1. Which of the following is not an assumption of Capital Asset Pricing Model

(CAPM)?
A. Investors are risk averse

B. There exists perfect competition
C. Dividend payout ratio is nil
D. No taxes or transactions are involved
(C)
206
2. Firm specific risk is also called:
A. Market risk
B. Non-systematic risk
C. Macro risk
D. Unavoidable risk
(B)
3. To an investor holding a well-diversified portfolio, the risk that is relevant is:
A. Total risk
B. Systematic risk
C. Diversifiable risk
(B)
4. Which of the following is a problem with CAPM?
A. In testing the model we are also testing the reliability of our market proxies
and also the market efficiency.
B. The model cannot describe the higher predicated return for small stocks.
C. Fama and French found that when size and the MB ratio are included, beta is
significant.
(D)
5. Security characteristic line defines:
A. The relationship between the security return and the market portfolio return
B. The relationship between the security return and market borrowing rate
C. The relationship between the security return and the risk-free market lending
rate
D. The relationship between the security return and the risk-free borrowing or
lending rate
(A)
6. The beta of a portfolio is equal to:
A. The beta of the market portfolio

B. The arithmetic average of the individual security betas
C. The weighted average of the individual security betas
D. Individual security betas adjusted for correlation
(C)
7. According to APT model, arbitrage opportunity will be eliminated as soon as it
is identified because:
A. There is a relationship between security returns and a limited number of

factors
B. The factors are known by all the investors
C. The relative importance of all factors have been calculated
D. The most important factor is market return
(A)
207
8. Beta represents _____________.
A. Huge risk
B. No risk
C. Systematic risk
D. Unsystematic risk
(C)
9. Markowitz Portfolio Theory is most concerned with:
A. The elimination of systematic risk

B. The effect of diversification on portfolio risk
C. The identification of systematic risk
D. Active portfolio management to enhance return
(B)
10. A portfolio is not efficient if there is another portfolio within:
A. A higher expected return and lower standard deviation

B. A lower expected return and some standard deviation
C. The same expected return and higher standard deviation
(A)
1. Portfolio managers are not required to be registered.

(False)
2. A portfolio manager has to operate as per the code of conduct prescribed by SEBI.
(True)
3. In Dividend Discount Model, the valuation of equity shares is based on expected
stream of dividends.
(True)
4. In No-growth Dividend Model does not involve present value concept.
(True)
5. No-growth Dividend Model does not involve present value concept.
(False)
6. Gordon’s Model and Constant Growth Model are one and the same.
(True)
7. In Constant Growth Model, the value of equity share is sensitive to growth rate.
(True)
8. In Constant Growth Model, the value of equity share is not sensitive to required rate
of return.
(False)
9. For companies which are not expected to pay dividends equity shares cannot be
valued.
(False)
10. In Walter’s Model, the value of equity share depends upon the DP Ratio.
(True)
11. CAPM helps in determining required rate of return.
(True)
208
12. HM Model deals with evaluation of portfolios.
(Fase)
13. Efficient Frontier consists of a large number of 23 portfolios.
(True)
14. Capital Market Line shows the Marginal Price of shares at the exchanges.
(False)
15. CAPM establishes that the return of a security is related to risk of that security.
(True)
16. β and σ cannot be used interchangeably.
(True)
17. β is a measure of expected return of security.
(False)
18. Security Market Line is the graphical representation of security prices.
(False)
19. CML and SML have same shape and convey same ideas.
(False)
20. CAPM can be used for risk-return relationship of any type of asset.
(True)
CHAPTER – 30
MERGERS AND ACQUISITIONS
1. A strategy of anti-takeover under which the acquirer puts pressure on the

management of the target company by threatening to make an open offer is
known as:
A. Street sweep
B. Bear hug
C. White knight
D. Brand power
(B)
2. Vertical merger is the merger of two firms which are involved:
A. in similar line of business

B. in different stages of distribution and production in same business activity
C. in different/unrelated business activities
(B)
3. Major advantages of merger are:
A. tax benefits
B. synergy
C. economies of scale
D. all the above
(D)
209
4. The type of financing in which an initial payment (to the shareholders of
acquired firm) is followed by additional payment in future years based on the
target firm’s increase in earnings is known as:
A. preference share financing

B. tender offer
C. deferred payment plan
D. ordinary share financing
(C)
5. The type of financing in which the purchaser approaches the shareholders
directly instead of the management to acquire interest in acquired firm is known
as:
A. preference share financing

B. tender offer
C. deferred payment plan
D. ordinary share financing
(B)
6. The practice of offering a loan to a single borrower by a group of lenders who
work together to provide funds for a single borrower is called:
A. Refinancing
B. Aggregate Financing
C. Loan syndication
D. Loan Bidding
(C)
1. Merger can provide tax benefit in the case of set off and carry forward of losses.
(True)
2. The cost of capital of a merged firm is different from both cost of capital of the
acquiring firm and the target firm as synergy effects should be taken and risk
complexion of both the firms changes on merger.
(True)
3. In an amalgamation, the amalgamated company is entitled to carry forward
accumulated losses as well as unabsorbed depreciation of the amalgamating company.
(True)
210
CHAPTER – 31
ADVANCED FINANCIAL MANAGEMENT
1. Corporate governance refers to the distribution of responsibilities among different

stakeholders and its transparent disclosure.
(False)
2. The SEBI has mandated corporate governance in Clause 42 of the listing agreement.
(False)
3. Reflecting the emergence of corporate governance issues, credit rating for Indian
Corporate has been made mandatory.
(False)
4. As the SEBI Clause 49 on corporate governance, independent director means an
executive director.
(False)
5. The Board of Directors of the company should have an optimum combination of
executive and non-executive directors with not less than 50 per cent comprising of
non-executive directors.
(True)
6. Fee/compensation including stock options, paid to all non-executive directors should
be approved by shareholders.
(False)
7. Fee/compensation including stock options, paid to all non-executive directors should
be approved by Board of Directors.
(True)
8. An independent director means a non-executive director of the company who is not a
substantial shareholder of the company.
(True)
9. The emphasis of corporate governance is on business practices which provide
maximum revenue to the equity shareholders.
(False)
10. The corporate governance report by ICRA is not a certificate of statutory compliance
or a commitment on the company’s future financial performance, credit rating or
stock price.
(True)
211
CHAPTER – 32
INTERNATIONAL MONETARY AND FINANCIAL SYSTEM
1. The aim of foreign exchange risk management is:
A. to maximize profits
B. to minimize losses
C. to know with certainty the quantum of future cashflows
D. to earn a minimum level of profit
(C)
2. A firm producing and selling in domestic market may face the following risk
when the economy is open:
A. translation risk
B. operating risk
C. transaction risk
(B)
3. High interest rates often tend to be associated with:
A. underdeveloped countries
B. developed countries
C. appreciating currencies
D. depreciating currencies
(D)
4. Which of the following is/are basic precondition(s) for interest arbitrage theory?
A. free capital mobility

B. no taxes
C. no government restrictions on borrowing in foreign currency
D. all of the above
(D)
5. Exchange rate system where the central bank intervenes to smoothen out
exchange rate fluctuations is known as:
A. free float
B. managed float
C. fixed rate system
D. floating rate system
(B)
212
6. March Eurodollar future is now quoted at 97.98 in CMI. The implied interest
rate is:
A. 2.06%
B. 2.02%
C. 2.00%
(B)
7. _______________________ requires various marketing, production and
financial management strategies to cope with the risks:
A. transaction exposure
B. accounting exposure
C. translation exposure
D. economic exposure
(D)
8. When the payment is done on a draft and the payment is made upon the
presentation of the draft, it is a:
A. clean draft
B. payment draft
C. sight draft
D. documentary draft
(C)
9. In the foreign exchange market, a transaction that involves the purchase of
foreign currency with delivery and payment on the same day or the second
following business day is called:
A. Forward transaction
B. Spot transaction
C. Swap transaction
D. Two day transaction
(B)
10. Which of the following statement would best express the meaning of a floating
exchange rate?
A. Floating exchange rate is where the rate of the currency would be decided by
the central bank or the government of the respective country.
B. Floating exchange rate is the rate of currency exchange that moves
depending on the demand and supply pressures and which is influenced by
market forces and other economic conditions.
C. Floating exchange rate is the official exchange rate floated by the respective
country.
D. Floating exchange rate or float is the difference between the buying rate and
selling rate of a particular currency.
(B)
213
11. Which of the following refers to bank rate?
A. Bank rate is the rate at which Reserve Bank of India borrows money from
commercial banks.
B. Bank rate is the amount of funds that the banks have to keep with the RBI.
C. Bank rate is the rate of interest which RBI charges on the loans and advances
that it extends to banks and other financial intermediaries.
D. Bank rate is the rate at which State and Central Governments park the
money with the Reserve Bank of India.
(C)
1. International firms/MNCs and domestic firms are guided by the same fundamental
goal, that is maximization of shareholders’ wealth.
(True)
2. In multinational capital budgeting decisions, there is no distinction between the total
CFAT that the new foreign investment project generates and the incremental CFAT
the firm eventually has.
(False)
3. In determining the incremental cash inflows after tax for a new foreign capital
budgeting proposal, the allocation of existing fixed overheads of the parent should be
included.
(False)
4. Foreign exchange earnings are generally subject to tax at a single stage.
(False)
5. The concept of single discount rate (based on weighted average cost of capital) is not
appropriate for evaluating foreign projects subject to different risks.
(True)
6. Indian corporate can raise finance through ECBs only from recognised sources such
as banks, export credit agencies, etc.
(True)
7. Trusts and non-profit making organisations can raise finance through ECBs.
(False)
8. Funds raised through ECBs can be used for investment in the capital market.
(False)
9. The ordinary shares underlying the GDRs can be denominated in any freely
convertible foreign currency.
(False)
214
1. Profitability from an investment in a country is adversely affected if the currency of

that country is subject to ________________ (appreciation/depreciation).
(depreciation)
2. Under the Adjusted Present Value Approach to evaluating foreign investment
proposals, each project is assessed ___________ (with/without) reference to the
firm’s other investments.
(without)
3. When a foreign subsidiary is located in a country having a high rate of inflation, it is
advisable to keep _______ (more/less) stocks at that location.
(more)
4. Both working stocks and safety stocks should be kept at the location of a subsidiary
that is ____________ (near to/far from) the market supplying the goods.
(far from)
5. A borrower can raise external commercial borrowings up to a maximum of
_________________ (40/50 million dollars) under the automatic route.
(50 million dollars)
6. Under the USD 100 million scheme of external commercial borrowing (ECB), all
corporate and institutions are permitted to raise ECB up to USD 100 millions at a
minimum simple maturity of ______ (five/three) years.
(three)
7. Corporate which have foreign exchange earnings are permitted to raise ECB up to
_______ (twice/thrice) the average amount of annual exports during the previous
three years, subject to a maximum of USD 200 millions.
(thrice)
8. ECBs of ________ (six/eight) year’s average maturity and above are outside the ECB
ceiling.
(eight)
9. All infrastructure and Greenfield projects are permitted to avail of ECB to the extent
of ___________ (25/50 per cent) of the total project cost, as appraised by a recognised
financial institution.
(50 per cent)
10. Approvals for short-term foreign currency loans with a maturity of less than three
years are given by __________________________ (Department of Economic
Affairs/ Reserve Bank of India.
(Reserve Bank of India)
215
1. Barclays Bank, London has credited the Nostro A/c of ABN Amro, Mumbai with
£ 2,50,000 to fund Barclay’s Bank’s Vostro A/c with ABN Amro, Mumbai, with
what Rupee equivalent ABN Amro Mumbai will credit Barclays Bank’s Vostro
A/c when interbank rate is a £ 1 = Rs.80.9570 – 90?
A. Rs.2,02,39,250/-
B. Rs.2,37,50,000/-
C. Rs.2,36,75,000/-
(A)
Working:
It is a deal of £ purchase by ABN Amro, Mumbai. Therefore, the rate applied is

£ 1 = Rs.80.9570 and the rupee equivalent is:
= £ 2,50,000 × Rs.80.9570 = Rs.2,02,39,250/-.
2. An Indian bank wants to find their Nostro A/c with a US correspondent by

US$ 5,00,000 against INRS when interbank rate is US$ 1 = Rs.47.20/50. The deal
is struck and the overseas bank’s Vostro A/c that is being maintained with the
Indian bank will be credited by:
A. Rs.2,37,50,000/-
B. Rs.2,37,12,500/-
C. Rs.2,36,75,000/-
D. Rs.2,36,00,000/-
(D)
Working:
Rs.47.20 × US$ 5,00,000 = Rs.2,36,00,000/-.
3. Mr. A, a corporate customer of bank B, receives an inward remittance of

US$ 50,000 when interbank spot rate is US$ 1 = 44.40 – 50 and bank margin is
0.25% on cover rate. The bank B would quote to Mr. A after rounding off is:
A. Rs.44.50
B. Rs.44.29
C. Rs.44.45
D. Rs.44.40
(B)
Working:
The spot rate the bank B would quote to Mr. A
= Rs.44.40 × (Rs.44.40 × 0.25/100) = 44.29
216
4. Mr. X, a valued customer engaged in import business, is in spot need to remit
US$ 10,00,000 to his US exporter. What rate you, as a banker, will quote to
Mr. X when interbank spot rate is US$ 1 = Rs.46.95/10 and bank margin is
0.20%?
A. Rs.47.0439
B. Rs.47.1190
C. Rs.47.0058
D. Rs.47.1942
(D)
Working:
The Banker’s quote for selling is:
= Rs.47.10 × (Rs.47.10 × 0.20/100) = Rs.47.1942.
5. A New York bank wants to fund their account called ‘Vostro A/c’, with an Indian
bank by Rs.10 million. What dollar amount the New York bank would deposit
in the Indian bank’s account called ‘Nostro A/c’, maintained in New York when
interbank rate is US$ 1 = Rs.44.50 – 70?
A. US$ 2,23,713.64
B. US$ 2,24,216.37
C. US$ 2,24,719.10
D. US$ 2,23,965.00
(C)
Working:
The banker’s quote for selling is:
= Rs.1,00,00,000/Rs.44.50 = US$ 2,24,719.10.
6. An Indian company is planning to invest in US. The US inflation rate is expected

to be 3% and that of India is expected to be 8% annually. If the spot rate
currently is Rs.45/US$, what spot rate can you expect after 5 years?
A. Rs.59.09/US$
B. Rs.57.00/US$
C. Rs.57.04/US$
D. Rs.57.13/US$
(C)
Working:
According to Purchase Power Parity, spot rate after 5 years
1 + 0.08 5
= Rs. 45 × [ ] = 45 × 1.2675 = Rs. 57.04.
1 + 0.03
217
7. The 6-month forward rate for US dollar against rupee is quoted at Rs.49.50 as
opposed to a spot price of Rs.48.85. The forward premium on US dollar is:
A. 1.50%
B. 3.08%
C. 3.05%
D. 3.03%
(B)
Working:
The forward premium on US dollar is:
F−S 12 49.50 − 48.75 12

= × × 100 = × × 100 = 3.0769% or 3.08%.
S n 48.75 6
8. The spot and 6 months forward rates of L in relation to the rupee (Re./L) are
Rs.77.9542/78.1255 and Rs.78.8550/78.9650 respectively. What will be the
annualized forward margin (premium with respect to Ask price)?
A. 2.31%
B. 2.15%
C. 1.80%
D. 1.59%
(B)
Working:
The forward margin (premium with respect to Ask price) rate:
F−S 12 78.9650 − 78.1255 12

= × × 100 = × × 100
S n 78.1255 6
= 2.1491% or 2.15%.
218
9. The United States dollar is selling in India at Rs.45.20. If the interest rate for a
6 months borrowing in India is 10%and the corresponding rate in USA is 4%,
what would be the rate of forward premium/(discount)?
A. 5.93%
B. 5.88%
C. (5.17%)
D. 5.52%)
(B)
Working:
Interest Rate parity:
1 + rh F
=
1 + rf S
Where, S = Spot rate; F = Forward rate
1 + rh 1 + (0.10/2
F = ×S = × 45.20 = Rs. 46.53
1 + rf 1 + 0.04/2
Rate of premium (discount)
F−S 12 46.53 − 45.20 12

× × 100 = × × 100 = 5.88% premium p. a.
S n 45.20 6
219
10. On April 1, 3-months interest rate in the US$ and Germany DM are 6.5% and
4.5% per annum respectively. The US$/DM spot rate is 0.6560. What would be
the forward rate for DM for delivery on 30th June?
A. US$ 0.6592/DM
B. US$ 0.6528/DM
C. US$ 0.6430/DM
D. US$ 0.6525/DM
(A)
Working:
Using Interest Rate Parity
F 1 + ih
=
So 1 + if
Where, So = 0.6560
ih = 0.065 × 3/12 = 0.01625
if = 0.045 × 3/12 = 0.01125
F 1 + 0.01625
=
0.6560 1 + 0.01125
F 1.01625
=
0.6560 1.01125
1.01125F = 1.01625 × 0.6560
F = 0.66666/1.01125 = 0.6592
Forward rate after 3 months
= US$ 0.6592/DM.
220
11. The spot exchange rate is $ 0.02090/Re. and the six month forward exchange rate
is $ 0.02105/Re. If the normal rate of India 6 month T-bills is 5.50% p.a., what
would be the normal rate of US 6 month T-bills?
A. 8.00%
B. 7.00%
C. 6.50%
D. 6.00%
(B)
Working:
Forward exchange rate 1 + Kh

=
Spot exchange rate 1 + Kf
5.5
Where K f = = 2.75%
2
Kn = ?
$ 0.02105 1 + Kh
=
$ 0.02090 1 + 0.0275
1 + Kh
1.0072 =
1.0275
1 + Kh = 1.0072 × 1.0275
1 + Kh = 1.034898
Kh = 1.034898 – 1
Kh = 0.034898 or 0.0349
Normal rate of US 6 month T-bills = 2 × 0.0349 (annualized)

= 0.0698 say 7% (rounded off)
221
CHAPTER – 33
FOREIGN EXCHANGE EXPOSURE AND RISK MANAGEMENT
1. Internal strategies to reduce or eliminate currency exposure does not include

one of the following:
A. currency invoicing
B. currency option contract
C. netting and offsetting
D. leading and lagging
(B)
2. If the amount and timing of a foreign currency outflow are both uncertain, then
the best hedging technique will be to:
A. buy a put option

B. buy a call option
C. sell a call option
D. buy a forward contract
(B)
3. Variable rate investors are the typical users of:
A. interest rate caps

B. interest rate collars
C. both (A) and (B) above
D. interest rate floors
(D)
4. Variable rate borrowers doesn’t use one of the following as interest rate caps:
A. to retain the ability to benefit from any favourable interest rate movements
B. to obtain certainty about maximum interest rate
C. to reduce the burden of interest contracted at
D. to obtain peace in mind disturbed by raising rate of interest
(C)
A. Foreign Institutional Investors

B. Foreign Direct Investment
C. Mutual Funds
D. Depositories
(B)
222
6. Which of the following term represents an exchange rate between two
currencies, as calculated from their common relationship with a third currency?
A. Cross currency rate

B. Forward currency rate
C. Spot currency rate
D. Bid price
(A)
7. The gradual and systematic writing off of an asset or an account over a period
of time is referred to as:
A. Annuitisation
B. Amortization
C. Restructuring
D. Re-accounting
(B)
A. for immediate delivery

B. for future delivery
C. for delivery at a particular spot in future
(A)
A. Forward hedges
B. Option hedges
(D)
10. Call money market participants are:
A. Companies
B. Governments
C. Banks
D. All of the above
(C)
11. The difference between the spot rate and forward rate in a foreign exchange
market is termed as:
A. Swap rate
B. Value rate
C. Current rate
D. Spread
(A)
223
12. Forward exchange rate is the rate of exchange between two currencies:
A. Prevailing today for future delivery

B. Would prevail at a future date
C. Prevailing today for immediate delivery
(A)
13. Which of the following term represents an exchange rate between two
currencies, as calculated from their common relationship with a third
currency?
A. Cross currency rate

B. Forward currency rate
C. Spot currency rate
D. Bid price
(A)
14. Which of the following factors influences on the foreign exchange rate of a
currency?
I. Interest rate differences between the countries

II. Balance of payment position
III. Inflation rates
IV. Foreign direct investment
A. All of the above

B. None of the above
C. Only I and II
D. I, III, and IV
(A)
15. Which of the following statements is not correct regarding the foreign exchange
market?
A. A foreign exchange market is a decentralized worldwide market.

B. The participants in the foreign exchange market include central banks,
commercial banks, brokers, corporations.
C. A foreign exchange market is a highly centralized market controlled by the
World Bank.
D. The central banks of individual countries intervene in the foreign exchange
market according to their government’s policy and market situation.
(C)
224
16. Which of the following would best express the meaning of a floating exchange
rate?
A. Floating exchange rate is where the rate of the currency would be decided by
the central bank or the government of the respective country.
B. Floating exchange rate is the rate of currency exchange that moves
depending on the demand and supply pressures and which is influenced by
market forces and other economic conditions.
C. Floating exchange rate is the official exchange rate floated by the respective
country.
D. Floating exchange rate or float is the difference between the buying rate and
selling rate of a particular currency.
(B)
A. Forward hedges
B. Option hedges
(D)
18. An exchange rate quote is given as 1$ = Rs.55.45. Such a quote where number
of units of rupees against one unit of dollar is referred to as:
A. Indirect quote
B. Direct quote
C. Equivalent quote
D. Options quote
(B)
19. The price at which a foreign exchange dealer sells a foreign currency is referred
to as:
A. Bid price
B. Exchange price
C. Offer price
D. Balance price
(C)
20. The difference between bid price and ask price in a foreign exchange is referred
to as:
A. Spread
B. Inflation
C. Devaluation
D. Spike
(A)
225
21. Which of the following speculators expect fall in the prices of securities in the
near future?
A. Bull
B. Bear
C. Lame duck
D. Stag
(B)
1. Arbitrageurs participate in the derivatives market to take advantage of a discrepancy

between prices in two different markets.
(True)
2. A futures contract is custom designed.
(False)
3. Stock index futures are cash settled, i.e., there is no delivery of the underlying stocks.
(True)
4. In a normal market, basis, i.e., the difference between the futures price and the spot
price, is negative.
(False)
5. Buying a put option is equivalent to buying insurance.
(True)
6. The payoff for a person who buys a futures contract is similar to the payoff for a
person who shorts an asset.
(False)
7. The cost of carry includes cost of storage in case of stock index futures.
(False)
8. The difference between the spot price and the futures price is called the basis.
(True)
9. Delta of the option measures the change in the option price with respect to the change
in the price of the underlying asset.
(True)
10. An American option can be exercised only at its expiration date.
(False)
11. Exposure relating to the change in accounting income and balance sheet statements
caused by changes in exchange rates is called Transaction exposure.
(False)
12. Change in the value of a company that accompanies an unanticipated change in
exchange rates is called economic exposure.
(True)
13. Forward exchange contracts are traded on at an organised exchange.
(False)
14. Future contracts are carried out through direct dealings between parties.
(False)
15. The benefits that accrue due to favourable movements in foreign exchange rates can
be availed of by using currency options.
(True)
226
16. Firms engaged in international operations should endeavour to have their assets in a
strong currency.
(True)
17. Leading and lagging is an internal technique of foreign exchange risk management.
(True)
18. Translation profits or losses must be reflected in the income statement.
(False)
19. In a call option, the holder has the right to sell (but is under no obligation to sell) a
specific currency at a specific price on a specific maturity date or within a specified
period of time.
(False)
20. Currency swaps involve exchange of interest obligations between two parties.
(False)
1. _____________ (Hedgers/Speculators/Arbitrageurs) take advantage of leverage, i.e.,

the possibility of larger potential gains and large potential losses in the derivatives
market.
(Speculators)
2. Standardisation and trading on stock exchanges are the features of a _____________
(forward/futures) contract.
(futures)
3. Futures contracts have __________ (linear/non-linear) pay-offs.
(linear)
4. As the date of expiration of a futures contract comes near, the basis _______________
(increases/reduces).
(reduces)
5. If a call option is out-of-the money, its intrinsic value is __________ (positive/zero).
(zero)
6. The maximum time-value of an option exists when it is ____________ (in-the-
money/ at the money).
(at-the-money)
7. The downside risk of an option buyer is ___________ (limited/unlimited).
(limited)
8. A call option becomes more valuable as the stock price _______________ (decreases/
increases).
(increases)
9. A put option becomes more valuable as the stock price _______________ (decreases/
increases).
(decreases)
10. It is ___________ (optimal/not optimal) to exercise a call option on a non-divided
paying stock before expiration.
(not optimal)
11. Operating exposure to exchange rate changes has an impact on the firm’s __________
(current/future) operating revenues, costs and cash flows.
(future)
227
12. The more differentiated a firm’s products are, the _______ (more/less) is its operating
exposure to exchange rate changes.
(less)
13. Forward contracts in currencies are closed by
________________________________ (actual delivery of foreign
currency/settlement of difference between the contracted and actual price).
(actual delivery of foreign currency)
14. When the option can be exercised only on the maturity date, it is called an _________
(American/European) option.
(European)
15. Operating exposure to exchange risk is _________ (more/less) if the price elasticity
of demand of the goods/services, the firm deals in is low.
(less)
16. If the immediate exercise of the option yields a positive value to the holder, the option
is said to be ____ (in/at) the money.
(in)
17. The practice of delaying receipts from the foreign currency designated receivables
whose currencies are likely to appreciate the delaying foreign currency designated
payables whose currencies are likely to depreciate is known as ___________ (leading/
lagging).
(lagging)
18. Multilateral netting involves ___________________ (two/more than two parties).
(more than two)
19. A firm having a higher elasticity of substitution between home-country and foreign-
country inputs or production is _____ (more/less) susceptible to foreign exchange
risk.
(less)
20. Where an MNC firm having many foreign subsidiaries creates a reinvoicing centre,
the invoices are made in the name of ___________________ (subsidiaries/
reinvoicing centre).
(reinvoicing centre)
228
CHAPTER – 34
SOURCES OF INTERNATIONAL LONG-TERM FINANCE
1. One of the following is not the characteristics of GDR:
A. 1 GDR = n shares, where ‘n’ must be an integer

B. it is a fixed income security
C. the issuing company has no foreign exchange liabilities
D. it is subject to two-way fungibility
(C)
2. LIBOR stands for:
A. London Inter Bank Offer Rate

B. Local Investigation Bureau of Operating Reports
C. Law in Banking Operational Rules
(A)
3. Global Deposit Receipts are issued to:
A. investors of India who want to subscribe to shares of foreign companies

B. only to persons of Indian origin residing in a foreign country
C. non-resident investors against publicly traded shares of the issuing
companies and denominated in US dollars
D. foreign banks as security to raise foreign currency loans
(C)
4. Eurodollar deposit means:
A. dollar deposit outside USA

B. dollar deposit beyond the control of monetary authority
C. dollar deposit in the US and outside US
(B)
5. _____________________________ is composed of several large banks that accept
deposits and provide loans in various currencies.
A. Foreign exchange market

B. Euro currency market
C. Euro credit market
D. Euro bond market
(B)
229
referred to as:
A. Venture Capital
C. Private Equity
D. Commercial Paper
(B)
7. A negotiable money market instrument issued in dematerialised form or as a
Usance Promissory Note against funds deposited at a bank or other eligible
financial institution for a specified time-period is called trusts, funds,
associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but
only on non-repatriable basis which should be clearly stated on the Certificate.
Such CDs cannot be endorsed to another NRI in the secondary market.
A. Commercial Paper
B. Equity
C. Certificate of Deposit
D. Debenture
(C)
230
CHAPTER – 35
INTERNATIONAL TRADE FINANCE
1. Foreign Direct Investment (FDI) in US dollars increased substantially in a year

in India. This is likely to:
A. Strengthen the rupee vis-à-vis the US dollar

B. Weaken the rupee vis-à-vis the US dollar
C. Will not have any influence on the rupee as the rupee is fully controlled by
the RBI
D. Will not have any influence on the rupee as India is following a fixed rate
regime
(A)
2. Which of the following refers to Statutory Liquidity Ratio?
A. The amount that the commercial banks require to maintain in the form of
gold or government approved securities before providing credit to the
customers.
B. The maximum amount that the reserve bank of India would lend to the
commercial banks in proportion to their deposits.
C. The maximum amount a commercial bank can lend to its customers out of
the deposits collected by it.
D. The ratio that should be maintained by all banks and financial intermediaries
between their credits and their deposits.
(A)
3. Which of the following factor is lease likely to affect the complexity of the foreign
exchange market?
A. Foreign exchange market operates across and within different political,

legal, taxation and cultural systems
B. Foreign exchange market operates with a wider range of currencies
C. Foreign exchange market is largely unregulated
D. Foreign exchange market is largely transacted on US dollars
(D)
4. A negotiable money market instrument issued in dematerialised form or as a
Usance Promissory Note against funds deposited at a bank or other eligible
financial institution for a specified time period is called trusts, funds,
associations, etc. Non-resident Indians (NRIs) may also subscribe to CDs, but
only on non-repatriable basis which should be clearly stated on the Certificate.
The CDs which cannot be endorsed to another NRI in the secondary market is:
A. Commercial Paper
B. Equity
C. Certificate of Deposit
D. Debenture
(C)
231
A. for immediate delivery

B. for future delivery
C. for delivery at a particular in spot in future
(A)
6. Which of the following factor is least likely to affect the complexity of the foreign
exchange market?
A. Foreign exchange market operates across and within different political,

legal, taxation and cultural systems.
B. Foreign exchange market operates with a wider range of currencies.
C. Foreign exchange market is largely unregulated.
D. Foreign exchange market is largely transacted on US dollars.
(D)
7. Which of the following is not a sector of the foreign exchange market?
A. Spot market
B. Forwards and futures market
C. Advances market
D. Currency options
(C)
8. Which of the following best describes a letter of credit?
A. A Letter of Credit is a written instrument issued by a bank at the request of

its customer, the Importer (buyer), whereby the bank promises to pay the
Exporter (Beneficiary) for goods or services, provided that the Exporter
presents all documents called for, exactly as stipulated in the Letter of
Credit, and meet all other terms and conditions set out in the Letter of
Credit.
B. A Letter of Credit is an arrangement of advance payment in international
trade from the customer, the Importer (Buyer), whereby an Exporter for
goods or services is ensured that he gets payment for the services or goods
before the shipment is made.
C. A Letter of Credit is a written instrument as good as a cheque which are
irrevocable in nature issued by the importer to exporter whereby the
Exporter for goods or services are guaranteed of the payment of dues once
the goods reach the importer and the importer certifies that goods received
were of the requisite quality and quantity.
D. A Letter of Credit is the term used for demand draft in international trade.
(A)
9. The rate at which Reserve Bank of India borrows money from commercial banks
is called:
A. Reverse Repo Rate

B. Repo Rate
C. Call money Rate
(A)
232
10. Which of the following is not a sector of the foreign exchange market?
A. Spot market
B. Forward and Futures market
C. Multi-level currency market
D. Currency options market
(C)
11. Which of the following mode of payment is likely to be the riskiest one for an
exporter of goods in international trade?
A. Cash in advance
B. Documentary letter of credit
C. Documentary collection or draft
D. Open account
(D)
12. The rate at which Reserve Bank of India lends money to the commercial banks
is called:
A. Reverse Repo Rate

B. Repo Rate
C. Call Money Rate
(B)
13. A contract involving exchange of one set of cash flows for another in which the
first party promises to make a payment to the second and the second party
promises to make a payment to the first would be referred to as:
A. Barter
B. Swap
C. Rigging
D. Kickback
(B)
1. Foreign exchange is required by a country only to make payments for imports.

(False)
2. Business firms operate on their own in the foreign exchange market.
(False)
3. The role of a central bank in the foreign exchange market is commercial in nature.
(False)
4. Exchange rate is the price of one country’s currency expressed in terms of the
currency of another country.
(True)
5. A foreign exchange quotation can be direct or indirect.
(True)
6. Spread is the difference between the ask price and the bid price.
(True)
233
7. Forward exchange rate is the rate of that day on which the transaction has taken place.
(False)
8. Cross rate is the rate of exchange of two currencies on the basis of exchange quotes
of other pairs of currencies.
True)
9. Foreign exchange quotations are always with respect to the customer.
(False)
10. If the forward rates are higher than the spot rates, the forward rates are at discount.
(False)
1. A rate of Rs.45 per U.S. dollar is an example of _________ (direct/indirect)

quotation.
(direct)
2. Indirect quotations are known as _______________ (European/American)
quotations.
(American)
3. Geographical arbitrage involves ________ (two/three) currencies.
(two)
4. In countries that witness high inflation rates, currency values decline ____ (more/less)
compared to the currencies of countries with lower inflation rates.
(more)
5. The spot and two month forward buying rates of US$ are Rs.44.80 and Rs.45.50
respectively. It implies that Rupee is quoting at a _____________
(premium/discount) in the forward market.
(discount)
6. Given the spot rate of Rs.72.00/£ and interest rate differential of 3 per cent between
the two currencies, the 3 month forward rate should be _____________ (Rs.72.64/£
or Rs.72.54/£ to eliminate any arbitrage gains.
(72.54)
7. If a foreign currency is to be at a premium in the forward market, it should have a
relatively ___________ (higher/lower) interest rate vis-à-vis the home currency.
(lower)
8. When a direct quote of the home currency or any other desired currency is not
available in the foreign exchange market, it is computed with the help of
___________ (spot/forward/cross) rates.
(cross)
9. The settlement of spot transactions in the foreign exchange markets occurs within a
maximum period of ______ (two/three) days.
(two)
10. The rate at which a foreign exchange dealer is ready to sell a currency is called _____
(bid/ask) rate.
(ask)
234
CHAPTER – 36
FINANCIAL MANAGEMENT IN PUBLIC SECTOR
1. The main objectives of the public undertakings involve:
A. to stimulate the economic growth

B. to ensure national defence
C. to control monopoly
D. all of the above
(D)
2. Funds which invest in start-up companies with the hope of a public offering of
shares in the successful venture at sometime in the future are generally termed
as:
A. Pension Funds
B. Mutual Funds
C. Venture Capital Funds
D. A Bank
(C)
3. In relation to mutual funds, AMC stands for:
A. Annual Maintenance Company

B. Asset Management Company
C. Asset Mutualisation Contract
(B)
4. Which of the following statement is true?
A. All venture capital funds are banks

B. All venture capital funds are pension funds
C. All venture capital funds are mutual funds
D. All venture capital funds are private equity funds
(D)
1. Venture capital is a vehicle for equity-oriented finance for technological upgradation

and commercialisation of technology promoted by relatively new entrepreneurs.
(False)
2. Before the emergence of venture capital financing in India, developmental financial
institutions played the role of venture capitalists.
(True)
3. In management buyins, funds are provided to enable the current operating
management to acquire an existing business.
(False)
235
4. Venture capital investments are generally idea-based and growth-based in contrast to
conventional investments, which are asset-based.
(True)
5. The first Chicago Method of valuing venture capital undertakings takes into account
only two points of time in the life of the venture capital investment, namely, the
starting time of investment and the exit time.
(False)
6. A conditional loan is a form of loan finance without any pre-determined repayment
schedule or interest rate.
(True)
7. An offshore investment company is incorporated in the country in which it makes an
investment.
(False)
8. Carried interest is defined as the extra incentive/profit to the managers over and above
the share attributed to their capital contribution and the management fee.
(True)
9. Under the Venture capital Funds (VCPs) Regulations, 1996, any type of organisation
can file an application for being registered as a VCF.
(False)
10. A venture capital investor can be structured as a limited partnership.
(True)
11. A mutual fund can operate as a venture capital fund
(True)
12. Share capital issued by a company for the first time is known as venture capital.
(False)
13. A venture capital firm deals with a new, risky and untested product.
(True)
14. All venture capital funds in India have been promoted by Government.
(False)
1. In the First Chicago Method for valuation of venture capital undertakings

__________ (two/three) alternative scenarios are perceived/considered.
(three)
2. Venture capital funds invest in equity that is ____________ (quoted/unquoted) on the
stock market.
(unquoted)
3. When the venture capital fund also provides business skills to the investee company,
the approach is called ____________ (hands-on/hands-off) approach.
(hands-on)
4. Venture capital funds finance small and medium sized firms in the ______ (early/late)
stages of their development.
(early)
5. The minimum investment in a venture capital fund by an investor must be Rs._______
(5/10 lakh ) under the SEBI Venture Capital Funds Regulations, 1996.
(5 lakh)
236
6. Under the SEBI Venture Capital Funds Regulations, 1996, a venture capital fund must
invest not less than ____________ (65/75 per cent) of its investible funds in unlisted
equity shares/equity linked instruments.
(75 per cent)
7. A venture capital fund, under the provisions of the SEBI Venture Capital Funds
Regulations, 1996, is entitled to get its units listed on any recognised stock exchange
after the expiry of __________ (two/three years) from the date of issuance of its units.
(three years)
8. Under the SEBI Foreign Venture Capital Investors (FVCIs) Regulations, 2000, a
FVCI cannot invest more than (30/25 per cent) of the funds committed for investment
in India in one venture capital unit.
(25 per cent)
9. Under the SEBI Foreign Venture Capital Investors Regulations, 1996, before a
venture capital fund can start its operation, it must have a firm commitment of at least
_______________ (Rs.7.5 crore/Rs.5 crore) from the investors for contribution.
(Rs.5 crore)
10. A venture capital fund can be wound up when ____________ (67/75 per cent) of the
investors in the scheme resolve in a meeting of the unit holders that the fund should
be wound up.
(75 per cent)
237

MCQ On Financial Management

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PRINCIPLES OF FINANCIAL MANAGEMENT

SCOPE AND OBJECTIVES OF FINANCIAL MANAGEMENT

MULTIPLE CHOICE QUESTIONS

1. The only viable goal of financial management is:

A. expenditure of funds only

A. timing of expected returns

A. mobilization of funds through financial instruments

A. the assets to be acquired

A. cost of various funds and financial risk

A. Borrow moneys at fixed rate of interest to increase the company’s gearing

TRUE OR FALSE TYPE QUESTIONS

1. Financial management deals with two major decisions/functions, namely, investment

FINANCIAL STATEMENT ANALYSIS

MULTIPLE CHOICE QUESTIONS

1. The financial statement that provide financial position is:

A. absolute data in money values

A. a side by side presentation of figures for two or more years

A. earnings before interest, tax, debt and amortisation

A. cash available for financing incremental working capital

A. External analysis and Internal analysis

A. Comparative Financial Statements

A. Comparative financial statement

A. External analysis and Internal analysis

A. Pay back method

A. Financial statement analysis

A. Percentage of Sales method

A. Financial statement analysis

TRUE OR FALSE TYPE QUESTIONS

1. Financial statements are an important source of information to shareholders and

OBJECTIVE TYPE PROBLEMS

1. An investment produces annual returns of 12% in the first year, 7% in the

Annualized return over the 3 years

= (1.12 × 1.07 × 1.10)1/3 – 1

= 1.096477 – 1 = 0.096477 or 9.65%

16,000 = P(1 + 4 × 0.15)

= 8,000 × 1.76234 = Rs.14,098.72 say Rs.14,100

The present value of cashflows is:

A. 10.25% per annum

6. If frequency of compounding is more than 1, the relationship between annual

A. Effective rate < Nominal rate

MULTIPLE CHOICE QUESTIONS

1. A very high current ratio may be due to:

A. increase the profitability

A. equity share capital

A. fixed assets/debt funds

A. operating in sellers’ market

A. net profit + depreciation

A. delaying payment of salaries

A. is less profitable than the industry

A. return on total assets

A. increasing the profit margin

A. The margin of safety is probably too high

A. total contribution rises by an amount greater than profit

A. Credit sales/Average debtors

A. Short-term bills receivable

A. Higher than the generally considered satisfactory standard of 2

A. Fund Flow Analysis

A. Assets and capital

A. Profit After Tax ÷ Dividend paid

A. Equity Share Capital

In ratio analysis capital employed means:

A. The business is not able to recover the accounts receivables in a timely