7_December_2023_CAIIB_ABFM_Revision_and_Marathon_Session_Part_2

CAIIB Examination
Advanced Business & Financial

Management
Marathon – Part 2 (150 MCQs)
Q. 51
Calculate the Degree of Financial leverage for a firm with following details:
Sales (@ ₹100/unit) = ₹24,00,000
Variable cost = 50%
Fixed cost = ₹10,00,000
Cost of debt = ₹10,00,000 @10% p.a.
Equity capital = ₹10,00,000 (₹100/share)
Tax @ 50%
(a) 1.6
(b) 1.8
(c) 2.0
(d) 2.2
Answer: Option C
Q. 51
EBIT = Sales – Variable cost – Fixed cost
= ₹24,00,000 – (50% x ₹24,00,000) - ₹10,00,000
= ₹2,00,000
EBT = EBIT – Interest

= ₹2,00,000 – (10% x ₹10,00,000) = ₹1,00,000
DFL = EBIT / EBT = 2

Q. 52
A Company ABC Ltd. produces and sells 20,000 shirts. The selling price per shirt is ₹ 500, Variable
cost is ₹ 200 per shirt and fixed operating cost is ₹ 40,00,000. Calculate degree of operating
leverage.
(a) 2
(b) 2.5
(c) 3
(d) 3.5
Answer: Option C
Q. 52
Contribution = Sales – Variable cost
= (₹500 x 20,000) – (₹200 x 20,000) = ₹60,00,000
EBIT = Contribution – Fixed cost

= ₹60,00,000 - ₹40,00,000 = ₹20,00,000
DOL = Contribution / EBIT = 3 times

Q. 53
A firm has sales of ₹ 10,00,000, variable cost of ₹ 7,00,000 and fixed costs of ₹ 2,00,000
and debt of ₹ 5,00,000 at I0% rate of interest, What is the combined leverage?
(a) 3
(b) 4
(c) 5
(d) 6
Answer: Option D
Q. 53
Contribution = Sales – Variable cost = ₹10,00,000 - ₹7,00,000 = ₹3,00,000
EBIT = Contribution – Fixed costs = ₹3,00,000 - ₹2,00,000 = ₹1,00,000
EBT = EBIT – Interest = ₹1,00,000 - ₹50,000 = ₹50,000
DOL = Contribution / EBIT = 3 & DFL = EBIT /EBT = 2
Combined Leverage = DOL x DFL = 6

Q. 54
ABC Ltd has estimated that for a new product, the break-even point is 2,000 units, if the
items are sold for ₹ 14 per unit. The Cost Accounting department has currently identified
variable cost of ₹ 9 per unit.
Calculate the degree of operating leverage for sales volume of 2,500 units and 3,000
units?
(a) 2 and 3
(b) 3 and 4
(c) 5 and 3
(d) 5 and 2
Answer: Option C
Q. 54
Q. 55
XYZ Ltd. is evaluating the purchase of a new machinery with a depreciable base of
₹1,00,000; expected economic life of 4 years and change in earnings before taxes and
depreciation of ₹45,000 in 2021, ₹30,000 in year 2022, ₹25,000 in year 2023 and ₹
35,000 in year 2024. Assume straight-line depreciation and a 20% tax rate.
Find the net cash flow in 2023.
(a) 20,000
(b) 25,000
(c) 29,000
(d) 21,000
Answer: Option B
Q. 55
Q. 56
A project costs ₹20,00,000 and yields annually a profit of ₹3,00,000 after depreciation @
10% (straight line method) but before tax at 50%. Calculate the payback period for the
project.
(a) 4.6 years
(b) 5.7 years
(c) 6.2 years
(d) 6.8 years
Answer: Option B
Q. 56
Q. 57
Which of the following statements does not accurately describe the implications of financial and
operating leverage for a business?
(a) A high Degree of Financial Leverage (DFL) implies that a relatively small change in EBIT can
lead to a larger change in EPS due to the proportionality between EBT and EPS.
(b) With high operating leverage, a company will experience a substantial change in EBIT for a
given change in sales quantity because fixed costs remain constant.
(c) A decrease in EBIT due to lower sales will not significantly impact EBT when a firm has high
financial leverage, since interest expenses are fixed and do not change with sales volumes.
(d) In the case of high financial leverage, a company could sustain controlled risks in smaller
business scenarios as losses can be managed more easily than in larger projects.
Answer: Option C
Q. 57
The correct answer is option C.
Statement A is correct: High DFL means that changes in EBIT will cause larger relative
changes in EPS, because of the fixed nature of interest expense and the proportionality
between EPT and EPS..
Statement B in correct: A company with DOL will see significant changes in EBIT with
changes in sales, as fixed costs do not change.
Statement C is incorrect: Since interest expenses are fixed, a reduction in EBIT leads to a
more substantial percentage decrease in EBT, reflecting the amplified effect of financial
leverage on earnings.
Statement 4 is correct: In smaller business scenarios, going above the optimal level of
financial leverage might be manageable due to smaller scale risks.
Q. 58
Which of the following statements is incorrect regarding the Discounted cash flow (DCF)
approach to valuation?
(a) For a company valuation, the DCF method includes an explicit forecast period typically
ranging from 5 to 15 years.
(b) Interest income demonstrates the value of money over time and is the compensation
for delating payment.
(c) In DCF, the discount rate is unrelated to the company’s cost of capital and serves
merely as a procedural figure.
(d) The present value of a company includes both the cash flows during the explicit
forecast period and after.
Answer: Option C
Q. 58
The correct answer is option C.
Statement A is correct: The DCF approach usually involves a forecast period between 5
and 15 years to predict cash flows.
Statement B in correct: Interest income reflects the concept that current money is worth
more than future money because of its earning potential.
Statement C is incorrect: The discount rate is integral to DCF, linked to the company’s cost
of capital, and it factors in risk and time value.
Statement 4 is correct: DCF combines cash flows within the explicit forecast period and
beyond to estimate a company’s total value.
Q. 59
Arora Enterprises has following information for year ended 31 March 2023:
Equity share capital (₹10/share) : ₹60 lakh
10% debentures of ₹100 each : ₹40 lakh
Sales : ₹100 lakh
Fixed cost (excluding interest) : ₹8 lakh
P/V ratio: 30%
Income tax @ 35%
Calculate the DFL and DOL .
(a) DFL = 1.10 ; DOL = 2
(b) DFL = 0.08 ; DOL = 2.08
(c) DFL = 2.1 ; DOL = 1.4
(d) DFL = 1.2 ; DOL = 1.4
Answer: Option D
Q. 59
Contribution = P/V ratio X Sales = 0.3 x ₹100 lakh = ₹30 lakh
EBIT = Contribution – Fixed costs = 30 lakh – 8 lakh = ₹22 lakh
EBT = EBIT – Interest = ₹22 lakh - ₹4 lakh = ₹18 lakh
DFL = EBIT / EBT = 22/18 = 1.2
DOL = Contribution / EBIT = 30 / 22 = 1.4

Q. 60
Tulip industries is a manufacturing company with stable earnings and consistent reinvest strategies. It’s
being evaluated for acquisition by a larger conglomerate, which is delving into various financial metrics to
ascertain the company’s value.
Market value of equity : ₹3 crore
Market value of debt : ₹1 crore
Cash reserves : ₹20 lakh
EBITDA : ₹70 lakh
What is the enterprise value to EBITDA multiple for Tulip industries?
(a) 5.4
(b) 6.4
(c) 5.8
(d) 6.8 Answer: Option A
Q. 60
Enterprise value (EV) = Market value of equity + Market value of debt – Cash
= 3,00,00,000 + 1,00,00,000 – 20,00,000
= 3,80,00,000
EV/EBITDA = ₹3,80,00,000 / ₹70,00,000

= 5.4
Q. 61
The _____ value is often calculated as the number of outstanding shares multiplied by the ______. It
represents the equity market perception of a company, unlike the ______ value, which considers all
liabilities and cash assets to approximate a company’s total _______.
(Select the most appropriate answer from the option given below)
(a) Market, share price, enterprise, worth
(b) Book, asset value, market, capitalization
(c) Enterprise, earnings, book, operations
(d) Equity, profit margins, market, assets
Answer: Option A
Q. 61
The market value is often calculated as the number of outstanding shares multiplied by
the share price. It represents the equity market perception of a company, unlike the
enterprise value, which considers all liabilities and cash assets to approximate a
company’s total worth.
Q. 62
Relative valuation approach is also known as _______.
(Select the most appropriate answer from the options given)
(a) Income approach
(b) Asset approach
(c) Liability approach
(d) None of the above
Answer: Option D
Q. 62
Relative valuation approach is also known as "Market approach." Therefore, none of the
options provided (Income approach, Asset approach, Liability approach) directly
corresponds to the term commonly associated with relative valuation.
Q. 63
The worth of an asset can be determined by analysing its pricing in relation to the
pricing of comparable assets in terms of a common variable such as earnings, cash flows,
book value, or sale is known as ______.
(a) Discounted cash flow valuation
(b) Relative valuation
(c) Contingent claim valuation
(d) Free cash flow valuation
Answer: Option B
Q. 63
The worth of an asset determined by analyzing its pricing in relation to the pricing of
comparable assets in terms of a common variable such as earnings, cash flows, book
value, or sales is known as "Relative valuation." Therefore, the most appropriate answer
from the options given is "Relative valuation."
Q. 64
A ratio that illustrates the stock market's readiness to pay for one rupee of earnings per
share is referred to as an earnings multiple. This is known as ______.
(a) Ratio of Price to Net profit
(b) Ratio of Earnings to price
(c) Ratio of Price to Earnings
Answer: Option C
Q. 65
The price-to-earnings ratio goes up when any of the following conditions are met:
(a) Growth goes up, discount rate goes down, and reinvestment rate stays the same
(b) Growth goes down, discount rate goes down, and reinvestment rate goes up
(c) Growth exceeds expectations, but discount rate and reinvestment rate fall short of
expectations
(d) Discount rate goes down and reinvestment rate goes up
Answer: Option D
Q. 66
Which of the following is not factored into the WACC calculation?
(a) Weight or proportion of debt
(b) Equity's proportion or weight
(c) Individual tax rate on interest income
(d) Cost of equity capital
Answer: Option C
Q. 67
When making valuations, market-based approaches should not be used ______.
(a) when the size of the company is insufficient.
(b) when a company's assets are lower than its liabilities.
(c) in the event that there are significant and unprecedented shifts in the market price.
(d) when it is challenging to provide an accurate estimation of the realisable value in the
event of a going concern.
Answer: Option C
Q. 68
The discounted cash flow method of valuation is based on __________.
(a) a discount for the future that is anticipated and is likely to be earned.
(b) the company's valuation
(c) Anticipated cash flows along with discount rates
(d) a company's potential for earnings
Answer: Option C
Q. 69
Under the discounted cash flow valuation, which of the following is typically employed
as the discounting factor?
(a) Cost of equity
(b) Cost of debt
(c) Annuity factor
(d) Overall cost of capital
Answer: Option D
Q. 70
The shares of company are quoted at ₹ 40 per share. Last year the firm had paid
dividend @ ₹ 4 per share. The estimated growth of the company is approximately 16%
per year. The required rate of return is 20%. What is the market value of equity shares as
per dividend growth model?
(a) ₹ 132 per share
(b) ₹ 288 per share
(c) ₹ 116 per share
(d) ₹ 244 per share
Answer: Option C
Q. 70
The Dividend Growth Model, also known as the Gordon Growth Model, is given by the
formula:
Price per Share = [Dividend per Share × (1 + Growth Rate)]/[Required Rate of Return −
Growth Rate]
= [4 x 1.16] / [0.2 – 0.16]
= 4.64 /0.04 = 116
Q. 71
Which of the following does not appear on the profit and loss statement for a
construction company that specialises in real estate?
(Select the most appropriate answer from the options given below)
(a) Revenue from apartment sales
(b) Interest that is repaid to financiers
(c) Cash that was put into the bank.
(d) Expenses related to depreciation
Answer: Option C
Q. 72
It is expected of a valuer to conduct himself in a professional manner with objectivity at
all times, by ensuring that his decisions are made _______.
(a) without the existence of any kind of prejudice
(b) with the use of force
(c) with full assurance
(d) without excessive influence of any party
Answer: Option A
Q. 73
Which of the following is not a place where records of sales of real estate in a certain
area can be gathered?
(a) Sales data available at the Registrar's Office
(b) Newspaper advertisements
(c) Information about auction sales from various authorities
(d) Equity market
Answer: Option D
Q. 73
• The equity market is not a place where records of sales of real estate in a certain area
can be gathered.
• Real estate transactions and sales data are typically recorded and available in places
such as the Registrar's Office, newspaper advertisements, and information about
auction sales from various authorities. The equity market primarily deals with stocks
and securities, not real estate transactions.
Q. 74
Which of the following valuation techniques is best for evaluating an owner-occupied,
non-income producing, residential bungalow?
(a) Discounted Cash Flows Method
(b) Direct Sales Comparison Method
(c) Profit Approach
(d) Hypothetical construction plan
Answer: Option B
Q. 74
• For an owner-occupied, non-income producing, residential bungalow, the most
appropriate valuation technique is the "Direct Sales Comparison Method." This method
involves comparing the subject property to similar properties in the same or nearby
areas that have recently been sold.
• The other valuation techniques mentioned, such as the Discounted Cash Flows
Method, Profit Approach, and Hypothetical construction plan, are more commonly
used for income-producing properties or situations where future income or profitability
is a significant factor in the valuation. For residential properties, especially those not
generating rental income, the Direct Sales Comparison Method is typically the
preferred approach.
Q. 75
Which of the following amounts to direct costs and is included in replacement cost?
(a) Material expense
(b) Financial charges
(c) Legal costs
(d) Licence costs
Answer: Option A
Q. 76
A cost driver is:
(a) An item of production overheads.
(b) A common cost which is shared over cost centres.
(c) Any cost relating to transport.
(d) An activity which generates costs.
Answer: Option D
Q. 77
ln activity-based costing, costs are accumulated by activity using:
(a) Cost drivers
(b) Cost objects
(c) Cost pools
(d) Cost benefit analysis
Answer: Option C
Q. 77
• Cost Object: This is an item for which the cost measurement is required and it can be a
product, service or a customer.
• Cost Pool: This term is used for grouping of the costs incurred on a particular activity
which drives them
• Cost Driver: This is any factor that causes a change in the cost of activity. These are
further classified into Resource Cost Driver and Activity Cost Driver.
o A Resource Cost Driver measures the quantity of resources consumed by an activity
and the Activity Cost Driver is a measure of production, marketing, research etc.
o Measuring units can be number of units produced, number of sales personnel,
number ofresearch projects, number ofhours spent on project etc.
Q. 78
Which of the following statements is correct?
(a) Good quality and lower prices are generally considered as the criteria for decision on
imports substitutes.
(b) If the product is for mass consumption, the price and demand elasticity is normally too
high.
(c) Relevant Cost is not a fixed or onetime concept but a concept relevant at a given time
for a given situation.
(d) All of the above
Answer: Option D
Q. 78
• Relevant Cost is not a fixed or onetime concept but a concept relevant at a given time
for a given situation. It varies in total from one alternative to another and can be
applied to all business decisions.
• If the product is for mass consumption, the price and demand elasticity is too high even
to risk a marginal increase in the price.
• lmport Substitutes: Good quality and lower prices are generally considered as the
criteria for such decision. However, bulk purchase requirements, exchange fluctuations,
remedies in case of supply failure or shortage and stringent (LC) payment terms may
deter you from taking the decision and hence the relevant cost analysis.
Q. 79
Steps in ABC Analysis include:
(a) Identification of activities and their respective costs.
(b) Identification of cost driver of each activity and computation of an allocation rate per
activity.
(c) Allocation of overhead cost to products/ services based on the activities involved.
(d) All of the above.
Answer: Option D
Q. 79
There are various stages or steps for the ABC System which are briefly stated below.
1. Identify the project for costing exercise.
2. Identify different activities within the organisation.
3. Identify the direct cost of the products.
4. Identify the overheads to be related to the activities.
5. Spread the support services across the primary activities.
6. Determine the activity cost drivers.
7. Compute the total cost of the products or the objects.
Q. 80
Which of the following statements are true?
1. Activity based Management involves activity analysis and performance
measurement.
2. Activity based costing serves as a major source of information in ABM.
(a) (1) True; (2) False
(b) (1) True; (2) True
(c) (1) False; (2) True
(d) (1) False; (2) False
Answer: Option B
Q. 81
Certainty Equivalent approach is:
(a) Guaranteed return from an investment after adjusting for certainty equivalent
coefficient.
(b) Return that is expected over the lifetime of a project.
(c) Equivalent to Net Present Value.
(d) An important component in Decision Tree Analysis.
Answer: Option A
Q. 82
Scenario Analysis is considered under scenarios such as:
(a) Worst Case Scenario
(b) Base Case Scenario
(c) Best Case Scenario
Answer: Option D
Q. 83
Sensitivity analysis is useful in decision making because:
(a) It shows the probabilities associated with each outcome.
(b) It tells the user how much critical each input is for the Output value.
(c) It allows to calculate the probable results under different scenarios.
(d) The results of Sensitivity Analysis are reliable.
Answer: Option B
Q. 84
When the risk is high, the cash flow under certainty equivalent coefficient is:
(a) Higher
(b) Lower
(c) No Impact
(d) Can be any of the above
Answer: Option B
Q. 85
Risk arises from various sources such as:
(a) Market Risk
(b) Competition Risk
(c) International Risk
Answer: Option D
Q. 86
Capital budgeting is done for:
(a) Evaluating short term investment decisions.
(b) Evaluating medium term investment decisions.
(c) Evaluating long term investment decisions.
(d) None of the above.
Answer: Option C
Q. 87
IRR method would favour project proposals which have:
(a) Heavy cash inflows in the early stages of the project.
(b) Evenly distributed cash inflows throughout the project.
(c) Heavy cash inflows at the later stages of the project.
Answer: Option A
Q. 88
The re-investment assumption in the case of the IRR technique assumes that:
(a) Cash flows can be re-invested at the projects IRR.
(b) Cash flows can be re-invested at the weighted cost of capital.
(c) Cash flows can be re-invested at the marginal cost of capital.
Answer: Option A
Q. 89
Multiple IRRs are obtained when:
(a) Cash flows in the early stages of the project exceed cash flows during the later stages.
(b) Cash flows reverse their signs during the project.
(c) Cash flows are uneven.
Answer: Option B
Q. 90
What is the Internal rate of return for a project having cash flows of ₹ 40,000 per year
for 10 years and a cost of ₹ 2,26,009? (Select the most appropriate answer from the
options given below)
(a) 8%
(b) 9%
(c) 10%
(d) 12%
Answer: Option D
Q. 91
A capital budgeting technique which does not require the computation of cost of capital
for decision making purposes is ____________.
(a) Net Present Value method
(b) Internal Rate of Return method
(c) Modified Internal Rate of Return method
(d) Payback Period method
Answer: Option D
Q. 92
IRR method would favour project proposals which have:
(a) Heavy cash inflows in the early stages of the project.
(b) Evenly distributed cash inflows throughout the project.
(c) Heavy cash inflows at the later stages of the project.
Answer: Option A
Q. 93
While evaluating capital investment proposals, time value of money is used in which of
the following techniques? (Select the most appropriate answer from the options given
below)
(a) Payback Period method
(b) Accounting rate of return
(c) Net present value
Answer: Option C
Q. 94
Depreciation is included as a cost in which of the following techniques?
(a) Accounting rate of return
(b) Net present value
(c) Internal rate of return
Answer: Option A
Q. 95
A Company Management is considering a ₹1,00,00,000 investment in a project with a 5-
year life and no residual value. If the total income from the project is expected to be
₹60,00,000 and recognition is given to the effect of straight-line depreciation on the
investment, the average rate of return is:
(a) 12%
(b) 24%
(c) 60%
(d) 75% Answer: Option B
Q. 95
The average rate of return (ARR) can be calculated using the following formula:
ARR = (Average Annual Profit/Average Investment) ×100
Calculate Average Annual Profit:

Average Annual Profit = (Total Income − Depreciation) / Number of Years
Average Annual Profit = (60,00,000 − 0)/5 = 12,00,000
Average Annual Profit=560,00,000−0=12,00,000
Calculate Average Investment:
Average Investment=1,00,00,000+02=50,00,000Average Investment=21,00,00,000+0=50,00,000
Now, calculate ARR: ARR=12,00,00050,00,000×100ARR=50,00,00012,00,000×100
ARR=24%ARR=24%
Q. 96
The Degree of Operating Leverage is calculated as:
(a) Contribution ÷ EBIT
(b) EBIT ÷ PBT
(c) EBIT ÷ Interest
(d) EBIT ÷ Tax
Answer: Option A
Q. 96
Q. 97
Operating fixed costs ₹ 20,000
Sales ₹ 1,00,000
P/V Ratio 40%
The degree of operating leverage is:
(a) 2.00
(b) 2.50
(c) 2.67
(d) 2.47
Answer: Option A
Q. 97
Calculate Contribution:
• Contribution = Sales × P/V Ratio
• Contribution = 1,00,000 × 0.40 = 40,000
Now, calculate Operating Profit:
• Operating Profit = Contribution − Operating Fixed Costs
• Operating Profit = 40,000 − 20,000 = 20,000
Now, calculate the Degree of Operating Leverage (DOL):

• DOL = Contribution /Operating Profit
• DOL = 40,000 /20,000 = 2
Q. 98
The Degree of Financial Leverage is calculated as:
(a) EBIT ÷ Contribution
(b) EBIT ÷ EBT
(c) EBIT ÷ Sales
(d) EBIT ÷ Variables Cost
Answer: Option B
Q. 99
Which of the following best indicates the business risk?
(a) Operating leverage
(b) Financial leverage
(c) Combined leverage
(d) Total leverage
Answer: Option A
Q. 99
Business risk is best indicated by "Operating leverage."
• Operating leverage refers to the extent to which a company relies on fixed costs in its operations. It is a
measure of the sensitivity of a company's operating income to changes in sales. High operating leverage
means a high proportion of fixed costs, which can amplify the impact of changes in sales on the
company's profitability.
• Financial leverage and combined leverage also contribute to business risk, but operating leverage
specifically focuses on the impact of fixed operating costs on a company's profitability.
• Total leverage is a broader term that can refer to the combined effect of both operating and financial
leverage on a company's earnings and risk.
Q. 100
From the following information, calculate the degree of combined leverage:
Sales ₹20,00,000
Variable Cost 40%
Fixed Cost ₹ 10,00,000
Borrowings ₹ 10,00,000 @8%p.a.
(a) 10 times
(b) 6 times
(c) 1.667 times
(d) 0.10 times

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CAIIB Examination

Advanced Business & Financial

EBT = EBIT – Interest

DFL = EBIT / EBT = 2

EBIT = Contribution – Fixed cost

DOL = Contribution / EBIT = 3 times

DOL = Contribution / EBIT = 3 & DFL = EBIT /EBT = 2

Combined Leverage = DOL x DFL = 6

DFL = EBIT / EBT = 22/18 = 1.2

DOL = Contribution / EBIT = 30 / 22 = 1.4

EV/EBITDA = ₹3,80,00,000 / ₹70,00,000

Calculate Average Annual Profit:

Now, calculate the Degree of Operating Leverage (DOL):

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