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INDIAN INSTITUTE OF TECHN'OlOGY, KHARAGPUR


Date
FN/AN, Time: 2 Hrs., Full Marks~ Deptt Undergraduate students enrolled
No. of Students: 125, Mid Spring Semester Examination
Sub. No.: BM40002, Sub Name: Introduction to, Financial Management
3/4 Yr. B.Tech (H) I Dual, Instruction:
Multiple-Choice Questions:

(24)

1. The personal liability of the members is unlimited in a:


a) Cooperative Society
b) Public Limited Company
c) Partnership.
d) Cooperative Society
e) None of the above
2. An example of an intangible asset is
a) Provisions
b) Copyrights
c) Prepaid expenses
d) Depreciation
e) None of the above
3. Share
a)
b)
c)
d)
e)

premium is included in:


Reserves and surplus
Current asset
Profit and loss account
Investments
None of the above

4. Which of the following will be a debit entry?


a) Increase in assets
b) Decrease in owner's equity
c) Increase in expenses
d) All of the above
e) None of the above
5. The accrual basis of reporting of income and expenses in the profit and loss
account is a result of which of the following principles of accounting
a) Historical cost principle
b) Separate entity assumption
c) Matching principle
d) Conservatism principle
e) None of the above
6. Which among the following is not a leverage ratio?
a) Acid-test ratio
b) Interest coverage ratio
c) Debt-service coverage ratio
d) Interest coverage ratio
e) None of the above

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7. If sales are steady and no capital expenditure is to be incurred, fixed assets


turnover ratio of a firm over the years will:
a) Increase
b) Decrease
c) Remains steady
d) Either b or c
e) None of the above
8. If you were scheduled to receive Rs 100,000 five years hence, but you wish to sell
your contract note for its present value, which type of compounding would you
rather have the purchaser of your contract note to use to find the purchase price, 8
percent compounded:
a) Continuously
b) Quarterly
c) Semi-annually
d) Annually
e) None of the above
9. Present value interest factor of a perpetuity represents
a) Interest rate in percentage terms
b) Reciprocal of interest rate in percentage terms
c) Reciprocal of interest rate in decimal terms
d) Interest rate in decimal terms
e) None of the above
10.A bond will sell above its par value when:
a) The coupon rate is below the required rate of return
b) The required rate of return is below the coupon rate
c) The coupon rate is likely to be changed in future
d) Any of the above
e) None of the above
11. For any given stock, which of the following must be true ?
a) Market value > book value > par value
b) Book value> market value> par value
c) Par value > market value > book value
d) Par value = book value < market value
e) None of the above must be true
12. The key inputs to the valuation of securities does not usually involve:
a) Discount rate
b) Timing
c) Purchase price
d) Any of the above
e) None of the above

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Numerical Problems

1. The summarised Profit and Loss Account and Balance Sheet of Biocon are given
below:
(10)

Profit and Loss Account for the Year Ended March 31, 2007
(Amounts in Rs.million)
Total revenue
8630
Operating profit (PBIT)
1788
Interest and finance charges
78
PBT
1710
Provision for tax
127
PAT
1583

Balance Sheet as at March 31, 2007


(Amounts in Rs.million)
Sources of Funds
Shareholders' funds
9416
Loan funds
1068
Deferred tax liability
398
10882
Application of Funds
Fixed assets
6949
Intangible assets
512
Investments
786
4799
Current assets, loans, and advances
Inventories : 1507
Others
: 3292
Current liabilities and provisions
2164
2635 ..
Net current assets
10882
The paid up capital of Biocon as at March 31, 2007 is Rs.500 million (Par value per share
is Rs.5). Assume that all of it is equity. The market price per share on March 31, 2007 was
Rs.486.20.
Find, the values for the following financial ratios. Regard deferred tax liability as part of
debt.
e) Interest coverage ratio
a) Net profit margin
f) Price -earnings ratio
b) Asset turnover ratio
g) Market value to book value ratio
c) Financ;ialleverage multiplier
d) Return on eqtJity

2. You plan to go abroad for higher studies after working for the next five years and
understand that an amount of Rs.2,000,000 will be needed for this purpose at that
time. You have decided to accumulate this amount by investing a fixed amount at the
end of each year in a safe scheme offering a rate of interest at 10 percent. What
amount should you invest every year to achieve the target amount?
(3)

3. Surmec, Inc. has sales of $2.1 million last year. The company's primary business line
is manufacturing of nuts and bolts. Since this is a mature industry, the analysts are
certain that the sales will grow at a steady rate of 7 percent a year for as far as they
can tell. The company reportsnet income that represents 23 percent of sales. They
management would like to buy a new fleet of trucks, but can only do so only_ once the
profit reaches $620,000 a year.
At the end of what year will Surmec be able to buy the new fleet of trucks?

(3)

4. What is the difference between the effective rate of interest and stated rate of interest
in the following cases:
(3)
Case A: Stated rate of interest is 8 percent and the frequency of compounding is
six times a year.
Case B: Stated rate of interest is 10 percent and the frequency of compounding is
four times a year.
case C. Stated rate of interest is 12 percent and the frequency of compounding is
twelve times a year.

5. A Rs. 1000 par value bond, bearing a coupon rate of 12 % payable semi-annually will
mature after 5 years.
( 4)
i.
If the required rate of return on the bond is 16 % p.a., what is its value?
ii.
If the bond is currently selling at Rs. 965, what is the approximate YTM per annum?

6. The equity stock of I-LABS Ltd is currently selling for Rs.465 per share. The expected
dividend a year from now is Rs.10.00. The investors' required rate of return on the
stock is 20%. If the constant growth model applies to I-LABS Ltd what is the expected
growth rate?
(3)

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