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Corporate Finance
1. If you invest Rs.25,000/- today at a compound interest of 9%, what will be the future value
after 15 years?
 (a) Rs.91,062/-
 (b) Rs.91,260/-
 (c) Rs.91,620/-
 (d) Rs.91,200/-
 (e) None of the above
If choice a is selected set score to 2.
2. Finance function involves:-

 (a) Safe custody of funds only
 (b) Expenditure of funds only
 (c) Procurement of finance only
 (d) Procurement and effective utilization of funds
If choice d is selected set score to 2.
3. The primary objective of corporate management is:-

 (a) Maximization of wealth of shareholders
 (b) Maximization of EBIT
 (c) Maximization of market share price
 (d) Maximization of EPS
 (e) All of the above
If choice e is selected set score to 2.
4. What is the payback period on cash flow (non discounted) of the following project?
 (a) 2.5 years

 (b) 3 years
 (c) 3.5 years
 (d) 2 years
If choice b is selected set score to 2.
1/23/2019 AXP Internal 1

5. The goal of wealth maximization takes into consideration:-
 (a) Risk related to uncertainty of returns
 (b) Timing of expected returns
 (c) Amount of returns expected
 (d) All of the above
6. Time value of money facilitates comparison of cash flows occurring at different time periods
by:-
 (a) a) Compounding all cash flows to a common point of time
 (b) b) Discounting all cash flows to a common point of time
 (c) c) Using either (a) or (b)
 (d) d) Neither (a) nor (b)
 (e) e) None of the above
If choice c is selected set score to 2.
7. 'X' Ltd. Company issues Rs.50,000/-, 8% debentures at a premium of 10%. The tax rate
applicable to the company is 60%. What is the cost of debt?
 (a) 3.5%
 (b) 4.21%
 (c) 2.91%
 (d) 4%
8. What is the NPV (approximate), if cost of capital is 10% on cash flow of the following project?
 (a) Rs.493.40/-
 (b) Rs.-9507.60/-
 (c) Rs.9507.60/-
 (d) Rs.-493.40/-

9. Money has a time value because:-
 (a) a) The individuals prefer future consumption to present consumption
 (b) b) A rupee today is worth more than a rupee tomorrow in terms of purchasing power
 (c) c) A rupee today can be productively deployed to generate real returns tomorrow
 (d) Both (b) and (c)
10. Cash flows occurring in different periods should not be compared unless:-
 (a) The flows occur no more than one year from each other
 (b) The flows have been discounted to a common date
 (c) High rates of interest can be earned on the flows
 (d) Interest rates are expected to be stable
11. What is the risk premium of a security, if the market return is 15%, Beta 0.8 and risk-free rate
of return is 9%.
 (a) 6.0%
 (b) 4.8%
 (c) 8.4%
 (d) 7.2%
12. Relationship between annual effective rate of interest and annual nominal rate of interest is, if
frequency of compounding is more than 1:-
 (a) Effective Rate ‹ Nominal rate
 (b) Effective rate › Nominal rate
 (c) Effective Rate = Nominal rate

13. If you invest Rs.20,000/- today at a compound interest of 9.25%, what will be the future value
after 15 years?
 (a) Rs.75,396/-
 (b) Rs.75,960/-
 (c) Rs.75,930/-
 (d) Rs.75,460/-
14. What is the NPV if cost of capital is 10% on cash flow of the following project?
 (a) Rs.2,340/-
 (b) Rs.2,400/-
 (c) Rs.2,450/-
 (d) Rs.2,404/-
15. A student takes a loan of Rs.50,000/- from SBI. The rate of interest being charged by SBI is 10
percent per annum. What would be the amount of equal annual installment if he wishes to
pay it back in five installments at the end of every year ( PVIF 10%, 5 Years is 0.621 and PVIFA is
3.791 )?
 (a) Approx. Rs.15,620/-
 (b) Approx. Rs.15,450/-
 (c) Approx. Rs.13,190/-
 (d) Approx. Rs.11,000/-

16. You have determined the profitability of a planned project by finding the present value of all
the cash flows from that project. Which of the following would cause the project to look more
appealing in terms of the present value of those cash flows?
 (a) The discount rate decreases

 (b) The cash flows are extended over a longer period of time, but total amount of the cash
flows remains the same
 (c) The discount rate increases
17. Which of the following statements is correct?

 (a) An investment which compounds interest semiannually, and has a nominal rate of 10 per
cent, will have an effective rate less than 10 percent
 (b) The present value of a 3-year $100 annuity due is less than the present value of a 3-year
$100 ordinary annuity
 (c) The proportion of the payment of a fully amortized loan which goes toward interest decli
nes over time
18. A company wants to retire a loan Rs.5,00,000/-, 10 years from today. What amount should it
invest each year for 10 years if the funds can earn 8 percent per annum. The first investment
will be made at the beginning of this year ( FVIF 10%, 10 Years is 2.594 and FVIFA is 15.937.
 (a) Approx. Rs.31,950/-
 (b) Approx. Rs.40,000/-
 (c) Approx. Rs.34,000/-
 (d) Approx. Rs.28,000/-

19. Find out the weighted average cost of capital from the following data:-
 (a) 8.0%
 (b) 8.11%
 (c) 8.2%
 (d) 7.5%
20. A company has 10 percent perpetual debt of Rs.1,00,000/-. The tax rate is 35 percent.
Determine the cost of debt if the company issued at discount of 10 percent.
 (a) 5.0 percent
 (b) 5.91 percent
 (c) 7.22 percent
 (d) 6.5 percent
21. Which of the following bank accounts has the highest effective annual return?
 (a) An account which pays 9 percent nominal interest with daily compounding
 (b) An account which pays 10 percent nominal interest with daily compounding
 (c) An account which pays 10 percent nominal interest with annual compounding
 (d) An account which pays 10 percent nominal interest with monthly compounding

22. What is the NPV (approximate), if cost of capital is 10% on cash flow of the following project?
 (a) Approx. Rs.-5,500/-

 (b) Approx. Rs.5,500/-
 (c) Approx. Rs. 4,600/-
 (d) Approx. Rs.4,600/-
23. If you invest Rs.30,000/- today at a compound interest of 9.50%, what will be the future value
after 10 years?
 (a) Rs.74,734/-
 (b) Rs.74,897/-
 (c) Rs.74,347/-
 (d) Rs.74,934/-
24. You are interested in investing your money in a bank account. Which of the following banks
provides you with the highest effective rate of interest?
 (a) Bank 1; 8 percent with monthly compounding
 (b) Bank 2; 8 percent with annual compounding
 (c) Bank 4; 8 percent with daily (365-day) compounding
 (d) Bank 3; 8 percent with quarterly compounding

25. What is the NPV if cost of capital is 12% on cash flow of the following project?
 (a) Rs.657/-
 (b) Rs.-765/-
 (c) Rs.567/-
 (d) Rs.-756/-
26. Which of the following is not considered a capital component for the purpose of calculating
the weighted average cost of capital as it applies to capital budgeting?
 (a) Accounts payable
 (b) Long term debt
 (c) Common stock
 (d) Preferred stock
27. A company has determined that its optimal capital structure consists of 40 percent debt and
60 percent equity. Given the following information, calculate the firm's weighted average cost
of capital, where rd = 6%, Tax rate = 40%, Share Price = $25, Growth = 0%, Dividend = $2.00.
 (a) 7.2%
 (b) 7%
 (c) 6.2%
 (d) 6%
 (e) 8%

28. Find out the weighted average cost of capital from the following data:-
 (a) 9.26%
 (b) 12.0%
 (c) 11.15%
 (d) 10.3%
29. Which of the following is not considered a capital component?

 (a) Long term debt
 (b) Common stock
 (c) Permanent short term debt
 (d) All of the above are considered capital components
30. The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5 percent and the
market risk premium (rM - rRF) is 6 percent. What is the companys cost of common stock, r s?
 (a) 7%
 (b) 12.4%
 (c) 7.2%
 (d) 12.2%
 (e) 11%

31. Equity shares of Phonex Ltd. are quoted in the market at Rs.17.00/-. The dividend expected a
year hence is Rs.1.50/-. The expected rate of dividend growth is 8%. The cost of equity capital
to the company is:-
 (a) 13.88%
 (b) 16.82%
 (c) 15.46%
 (d) 11.08%

 (a) a) If a company's tax rate increases but the yield to maturity of its non callable bonds re
mains the same, the company's marginal cost of debt capital used to calculate its weighted ave
rage cost of capital will fall
 (b) b) All else equal, an increase in a company's stock price will increase the marginal cost of
common stock,re.
 (c) c) All else equal, an increase in interest rates will decrease the marginal cost of common
stock, re.
 (d) d) Both (a) and (b)
33. A stock split will cause a change in the total rupee amounts shown in which of the following
balance sheet accounts?
 (a) Cash
 (c) Paid-in capital
 (d) Retained earnings

 (a) a) The WACC is a measure of the before-tax cost of capital
 (b) b) Typically the after-tax cost of debt financing exceeds the after-tax cost of equity financ
ing
 (c) c) The WACC measures the marginal after-tax cost of capital

35. Which of the following actions will enable a company to raise additional equity capital (that is,
which of the following will raise the total book value of equity)?
 (a) a) The establishment of a new-stock dividend reinvestment plan
 (b) b) A stock split
 (c) c) The establishment of an open-market purchase dividend reinvestment plan
 (d) d) A stock repurchase
 (e) e) Both (a) and (d)
36. A company has a capital structure which consists of 50 percent debt and 50 percent equity.
Which of the following statements is correct?
 (a) The WACC represents the cost of capital based on historical averages. In that sense, it do
es not represent the marginal cost of capital
 (b) The cost of equity financing is greater than or equal to the cost of debt financing
 (c) The WACC exceeds the cost of equity financing
 (d) The WACC is calculated on a before-tax basis

 (a) a) The weighted average cost of capital for a given capital budget level is a weighted aver
age of the marginal cost of each relevant capital component which makes up the firm's target c
apital structure
 (b) b) The weighted average cost of capital is calculated on a before-tax basis
 (c) c) An increase in the risk-free rate is likely to increase the marginal costs of both debt and
equity financing
 (d) d) Both (a) and (c)
 (e) e) All of the above
38. Which of the following is not an advantage of using book value weights for computing the cost
of capital?
 (a) The calculation of the weights is very simple
 (b) Book value weights are likely to fluctuate less over a period as these are not affected by t
he fluctuations in market prices
 (c) Book value weights are consistent with the concept of cost of capital
 (d) Book value weights are the only usable basis when market values are not obtainable or r
eliable

39. Which of the following are examples of a primary market transaction?
 (a) a) A company issues new common stock
 (b) b) A company issues new bonds
 (c) c) An investor asks his broker to purchase 1,000 shares of Microsoft common stock
 (d) d) All of the above
 (e) e) Both (a) and (b)
40. If the expected rate of return on a stock exceeds the required rate:-
 (a) The company is probably not trying to maximize price per share
 (b) The stock is a good buy
 (c) The stock should be sold
 (d) Dividends are not being declared
 (e) The stock is experiencing supernormal growth
41. Which of the following is/are true about NPV?

 (a) a) It considers all the cash flows
 (b) b) It gives more weightage to distant flows than to near-term flows
 (c) c) It considers time value of money
 (d) Both (a) and (c)
42. Cash flows occurring from a project in different period are comparable unless:-if:
 (a) Interest rates are expected to be stable
 (b) The flows have been discounted to a single date
 (c) The flows occur periodically every year
 (d) Interest can be earned on the cash flows

43. Consider the following data:
If the tax rate is 35%, the weighted average cost of funds taking market value as weights is:-
 (a) 14.00%
 (b) 15.82%
 (c) 14.96%
 (d) 15.00%
 (e) 16.62%
44. The _________ is the time period that elapses from the point when the firm sells a finished
good on account to the point when the receivable is collected..
 (a) cash conversion cycle
 (b) average payment period
 (c ) average collection period
 (d) average age of inventory

45. Conflicts in ranking of projects on the basis of NPV and IRR arise due to:-
 (a) a) Disparity in the timing of cash inflows
 (b) b) Disparity in the size of cash inflows
 (c) c) Disparity in the life of cash flows
 (d) Both (a) and (b)

46. _________ projects do not compete with each other; the acceptance of one _________ the
others from consideration.
 (a) Independent; does not eliminate
 (b) Capital; eliminates
 (c) Replacement; does not eliminate
 (d) Mutually exclusive; eliminates
47. The rationale for not including sunk costs in capital budgeting decisions is that they:-
 (a) Revert at the end of the investment
 (b) Represent nominal, not real, outflows
 (c) Are usually small in magnitude
 (d) Are historical costs
48. Which of the following events is likely to encourage a company to raise its target debt ratio?
 (a) a) An increase in the corporate tax rate
 (b) b) An increase in the personal tax rate
 (c) c) An increase in the company's operating leverage
49. Which of the following would increase the likelihood that a company would increase its debt
ratio in its capital structure?
 (a) a) An increase in costs incurred when filing for bankruptcy
 (b) b) An increase in the corporate tax rate
 (c) c) A decrease in the firm's business risk

50. The aggressive financing strategy results in the firm financing its short-term needs with
_________ funds and its long-term needs with _________ funds.
 (a) long-term; short-term
 (b) short-term; long-term
 (c) Permanent; seasonal

 (d) seasonal; permanent

 (a) a) A firm can use retained earnings without paying a flotation cost. Therefore, while the c
ost of retained earnings is not zero, the cost of retained earnings is generally lower than the aft
er-tax cost of debt financing
 (b) b) The capital structure that minimizes the firm's cost of capital is also the capital structu
re that maximizes the firm's stock price
 (c) c) The capital structure that minimizes the firm's cost of capital is also the capital structur
e that maximizes the firm's earnings per share
 (d) d) If a firm finds that the cost of debt financing is currently less than the cost of equity fi
nancing, an increase in its debt ratio will always reduce its cost of capital
 (e) Both (a) and (b)

 (a) a) Since debt financing raises the firm's financial risk, raising a company's debt ratio will a
lways increase the company's WACC
 (b) b) Since debt financing is cheaper than equity financing, raising a company's debt ratio w
ill always reduce the company's WACC
 (c) c) Increasing a company's debt ratio will typically reduce the marginal cost of both debt a
nd equity financing; however, it still may raise the company's WACC

53. According to NI approach:-
 (a) a) The total market value of a firm and the cost of capital are dependent on the capital st
ructure
 (b) b) The total market value of a firm and the cost of capital are independent of capital stru
cture
 (c) c) The capital structure has no relevance
54. Under Net Income Approach (NIA), change in the capital structure of a company:-
 (a) Does not cause any change either in the overall cost of capital or in the total value of a fir
m
 (b) No changes in overall cost of capital
 (c) Causes corresponding change in the overall cost of capital as well as the total value of a fi
rm
 (d) Causes corresponding change in the overall cost of capital only
55. In Net Operating Income (NOI) approach, market value of a firm:-

 (a) Is sometimes affected by capital structure changes
 (b) Is affected by capital structure changes
 (c) Is affected proportionately
 (d) Is not at all affected by capital structure changes
56. Financial structure includes:-

 (a) Long term as well as short term sources of funds
 (b) Equity share capital of the company
 (c) Long term sources of funds
 (d) Medium term source of funds

57. The term capital structure:-
 (a) Is not part of financial structure
 (b) Is part of financial structure
 (c) Is part of appropriation account
 (d) Is part of profit & loss account
58. Which of the following statement(s) is true?

 (a) Risk that can be eliminated by diversification is called specific risk
 (b) Risk that cannot be avoided, regardless of how much you diversity is known as market ris
k
 (c) The variability of earnings before interest and taxes is referred to as business risk
59. Which of the following is not a feature of debt finance?

 (a) a) Dilution of control
 (b) b) Low cost
 (c) c) Financial risk
60. Which of the following factors has an effect on business risk?

 (a) Demand for products manufactured by the firm
 (b) Volatility in prices of the products manufactured by the firm
 (c) Variability in input prices

61. The Modigliani-Miller argument is that:-
 (a) a) The value of the levered firm will be more than that of unlevered firm
 (b) b) The value of the unlevered firm will be more than the levered firm
 (c) c) Levered firms cannot enjoy a premium over unlevered firms as the investors will abolis
h the difference through personal leverage
 (d) Either (a) or (b) may be true depending on other circumstances
62. Business risk refers to:-

 (a) a) Variability of sales
 (b) b) Variability of the market value of the firm
 (c) c) Variability of cost of raw materials
63. Which of the following is true?

 (a) Operating leverage measures the sensitivity of EBT to changes in the quantity produced
and sold
 (b) Operating leverage measures the sensitivity of EBIT to changes in quantity produced and
sold
 (c) Operating leverage measures the sensitivity of PAT to changes in quantity produced and s
old
 (d) Operating leverage measures the sensitivity of PBDT to changes in quantity produced an
d sold
64. Total or Combined leverage measures the relationship between:-

 (a) PAT and sales
 (b) Sales and EPS
 (c) EBIT and sales
 (d) EPS and EBIT

65. Which of the following is/are correct?
 (a) a) Value of the firm and cost of capital are directly related
 (b) b) Value of the firm and cost of capital are inversely related
 (c) c) The claim of preference shareholders is prior to that of equity shareholders
66. The ultimate objective of any company is:-

 (a) Wealth maximization
 (b) Sale maximization
 (c) Profit maximization
 (d) Improving its reputation
67. Which of the following best describes a firm's cost of capital?

 (a) a) It is the weighted arithmetic average of the cost of various sources of long term financ
e used by it
 (b) b) The rate of return the firm must earn on its investments in order to satisfy the expecta
tions of investors who provide long term funds to it
 (c) c) It is the weighted arithmetic average of the cost of various sources of long term financ
e and short term finance used by it
68. Which of the following statements is true?

 (a) Retained earnings is the only principal source of finance for growing firms
 (b) Retained earnings represent the profits ploughed back into the business
 (c) Retained earnings represent the extent to which the firm has invested in liquid assets out
of its profits
 (d) Retained earnings are given lesser importance when a firm follows a residual dividend p
olicy

69. Which of the following long term sources of finance puts maximum restraint on managerial
freedom?
 (a) Retained earnings
 (b) Preference capital
 (c) Equity capital
 (d) Term loans
70. The cost of debt remains more or less constant up to a certain degree of leverage but rises
thereafter at an increasing rate. This proposition is based on:-
 (a) Net income approach on capital structure
 (b) Miller-Modigliani approach
 (c) Net operating income approach on capital structure
 (d) Traditional position/Traditional approach on capital structure
71. Which of the following is true regarding sound capital market structure of a company?
 (a) The capital structure should be determined within the debt capacity of the company and
this capacity should not be exceeded
 (b) Use of debt should be avoided as it adds to financial risk of the company
 (c) Minimum use of leverage at minimum cost
 (d) The risk of loss of control of the company due to capital structure is a major concern in a
closely held company
 (e) The capital structure should not change over a period of time
72. Which of the following concepts explains the relationship between shareholders and
Managers?
 (a) Valuation
 (b) Value based management
 (c) Agency consideration
 (d) Shareholder wealth maximization
 (e) Miller-Modigliani

73. A significant assumption of the net operating income is that:-
 (a) Debt and equity levels do not change
 (b) Dividend increase at a constant rate
 (c) It remains constant regardless of changes in leverage
 (d) Interest expense and taxes are included in the calculation
 (e) It decreases up to a certain point of time, and then increases at an increasing rate, with i
ncreasing levels of leverage
74. Which of he following best describes the situation in which a firm is having problem meeting
its financial obligations?
 (a) Business risk
 (b) Legal bankruptcy
 (c) Technical bankruptcy
 (d) Financial risk
 (e) Financial distress
75. Which of the following risks is revealed by capital structure ?

 (a) a) Liquidity risk
 (b) b) Financial risk
 (c) c) Market risk
 (d) d) Firm's total risk
 (e) Both (b) and (d)
76. Trade creditors of a company are mostly interested in the company's:-

 (a) Activity ratios
 (b) Liquidity ratio
 (c) Profitability ratios
 (d) Valuation ratios
 (e) Leverage ratios

77. A decrease in a firm's willingness to pay dividends is likely to result from an increase in its:-
 (a) Profitable investment opportunities
 (b) Stock price
 (c) Access to capital markets
 (d) Earnings stability
78. A stock split will cause a change in the total dollar amounts shown in which of the following
balance sheet accounts?
 (a) Cash
 (c) Paid in capital

 (a) a) If a company puts in place a 2-for-1 stock split, its stock price should roughly double
 (b) b) Share repurchases are taxed less favorably than dividends; this explains why companie
s typically pay dividends and avoid share repurchases
 (c) c) On average, a company's stock price tends to rise when it announces that it is initiating
a share repurchase program
80. Longer the manufacturing period

 (a) Greater is the requirement of working capital
 (b) There is no change in the operating cycle
 (c) Shorter is the requirements of working capital
 (d) Lesser is the requirement of working capital

81. Which of the following factors influence the pay out ratio of a firm?
 (a) a) Funds requirement
 (b) b) Liquidity position of the firm
 (c) c) Access to external sources of financing
82. Which of the following sources cannot be used for payment of dividend?
 (a) a) Current profits after providing for depreciation
 (b) b) Profits for any previous financial year to years
 (c) c) Capital
 (e) Either (b) or (c)
83. Net working capital denotes:-

 (a) Total liabilities
 (b) Excess of fixed assets over current assets
 (c) Excess of current liabilities over current assets
 (d) Excess of current assets over current liabilities
84. Other things held constant, which of the following will cause an increase in working capital?
 (a) Merchandize is sold at a profit, but the sale is on credit
 (b) A cash dividend is declared and paid
 (c) Cash is used to buy marketable securities
 (d) Long term bonds are retired with the proceeds of a preferred stock issue

 (a) Trade credit is provided to a business only when purchases are made
 (b) Commercial paper is a form of short term financing that is primarily used by large, financ
ially stable companies
 (c) Short term debt, while often cheaper than long term debt, exposes a firm to the potentia
l problems associated with rolling over loans
86. Which of the following is not a current asset?

 (a) a) Prepaid expenses
 (b) b) Short term loans and advances
 (c) c) Marketable securities
87. Which of the following is the least liquid among current assets?
 (a) Inventories
 (b) Prepaid expenses
 (c) Cash
 (d) Short term securities
 (e) Debtors
88. The current ratio is obtained by:-

 (a) Dividing quick assets by total liabilities
 (b) Dividing quick assets by long term liabilities
 (c) Dividing current assets by current liabilities
 (d) Dividing current assets by total liabilities
 (e) Dividing quick assets by current liabilities

89. Which of the following best describes working capital gap?
 (a) Quick assets less current liabilities other than bank
 (b) Current assets less short term bank borrowings
 (c) Current assets less current liabilities other than bank borrowings
 (d) Quick assets less current liabilities
 (e) Current assets less current liabilities
90. Financial risk involves:-

 (a) a) Fluctuations in exchange rates
 (b) b) Different interest and inflation rates
 (c) c) Balance of payments position
91. Which of the following features of preference shares is/are similar to those of equity shares?
 (a) a) Redeemability
 (b) b) No obligation to pay dividend
 (c) c) Voting rights
 (d) d) Charge over assets
 (e) e) Both (b) and (c)
92. Euro-Convertible Bonds (ECBs) issued by Indian Companies refer to bonds issued in foreign
currency in:-
 (a) India and any country in Europe
 (b) European countries only
 (c) Europe and North America
 (d) India or any country outside India
 (e) Any country other than India

93. Which of the following is a/are feature(s) of equity capital?
 (a) a) The payment of dividend is compulsory, irrespective of the company's financial perfor
mance
 (b) b) The dividend, if not paid during a year, becomes payable in the next year
 (c) c) Dividend becomes payable only if recommended by the BoD and passed by the compa
ny in the AGM
94. The major advantages of privately placing the securities are:-

 (a) Faster access to funds
 (b) Fewer procedural formalities
 (c) Lower issue cost
 (d) Easy access for any company
95. Which of the following is not a source of long term finance?

 (a) Equity capital
 (b) Term loan
 (c) Debenture capital
 (d) Commercial paper
 (e) Preference capital
96. Which of the following statements is true?

 (a) Equity shareholders enjoy the rewards of ownership and bear the risks of the ownership
 (b) Post-tax cost of debentures is always less than the post-tax cost of the term loans
 (c) The par value and issue price of an equity share are always capital
 (d) All outstanding issues of shares are traded in the primary markets

97. The costliest of long term source of finance is:-
 (a) Preference share capital
 (b) Equity share capital
 (c) Debentures
 (d) Retained earnings
 (e) Capital raised through private placement
98. Which of the following statements is/are true? With the commencement of the Companies
Act, 1956, the issue of preference shares with voting rights has been restricted only to the
following cases:-
 (a) There are arrears in dividends for two or more years incase of cumulative preference sha
res
 (b) Preference dividend is due for a period of two or more consecutive preceding years
 (c) In the preceding six years including the immediately preceding financial year, if the comp
any has not paid the preference dividend for a period of three or more years
99. A cumulative preference share is one:-

 (a) In which all the unpaid dividends are carried forward and payable
 (b) Which allows the issuing company the right to call the preference shares wholly or partly
at a certain price
 (c) Which can be redeemed
 (d) Which can be converted into equity shares
100. Which of the following is/are true about equity capital as a source of finance?
 (a) a) Using equity capital to finance working capital may lead to a situation of 'technical ins
olvency'
 (b) b) Assessing the cost of equity capital is a difficult and complex task
 (c) c) Equity capital provides tax benefits to the issuing company
 (d) d) Cost of retained earnings is lesser than the cost of debt capital
 (e) e) Both (b) and (d)

101. Rights issue is the method of raising funds:-
 (a) a) In which secur
ities are simultaneously issued to the existing shareholders and the public
 (b) b) Generally issued to the existing shareholders at a price lower than the current market
price
 (c) c) Generally entailing lower costs of issue
 (d) d) Generally made to high net worth individuals
 (e) e) Both (b) and (c)
102. Which of the following, from the firm's point of view, can be considered as the
advantage(s) of using equity capital as a source of long term funds?
 (a) a) It does not involve any fixed obligation for payment of dividends
 (b) b) Equity dividends are payable from post-tax earnings. They are not tax deductible expe
nses
 (c) c) It enhances the creditworthiness of the company
103. Which of the following characteristics is/are true, with reference to preference capital?
 (a) a) Preference dividend is payable only out of distributable profits
 (b) b) Preference dividend is tax deductible
 (c) c) The claim of preference shareholders is prior to the claim of equity shareholders
 (e) e) All of the above
104. What is/are the factor(s) which make(s) debentures attractive to investors?
 (a) a) They enjoy a high order of priority in the event of liquidation
 (b) b) Stable rate of return
 (c) c) Protected by the provisions of Debenture Trust Deed
 (d) d) All of the above
 (e) e) Both (a) and (b)

105. The major advantage(s) of entering into a Buy Out Deal (BOD) is/are:-
 (a) An advantage accruing to the investor is that the issue price usually reflects the company
's intrinsic value
 (b) Companies, both existing and new, which do not satisfy conditions laid down by the SEBI
for premium issues, may issue at a premium through the BOD method
 (c) There is less issue cost
 (d) The procedural complexities are reduced considerably and the funds reach the firm upfr
ont
If you invest Rs.25,000/- today at a compound interest of 9%, what will be the future value after 15
years?
 (a) Rs.91,062/-
 (b) Rs.91,260/-
 (c) Rs.91,620/-
 (d) Rs.91,200/-
Finance function involves:-

 (a) Safe custody of funds only
 (b) Expenditure of funds only
 (c) Procurement of finance only
 (d) Procurement and effective utilization of funds
What is the payback period on cash flow (non discounted) of the following project?
 (a) 2.5 years

 (b) 3 years
 (c) 3.5 years
 (d) 2 years
The goal of wealth maximization takes into consideration:-

 (a) Risk related to uncertainty of returns
 (b) Timing of expected returns

 (c) Amount of returns expected
What is the NPV (approximate), if cost of capital is 10% on cash flow of the following project?
 (a) Rs.493.40/-
 (b) Rs.-9507.60/-
 (c) Rs.9507.60/-
 (d) Rs.-493.40/-

If the nominal rate of interest is 10 percent per annum and frequency of compounding is 4 i.e. quarterly
compounding, the effective rate of interest will be:-
 (a) 10.25% p.a.
 (b) 10% p.a.
 (c) 10.75% p.a.
 (d) 010.38% p.a.
What is the risk premium of a security, if the market return is 15%, Beta 0.8 and risk-free rate of return is
9%.
 (a) 6.0%
 (b) 4.8%
 (c) 8.4%
 (d) 7.2%
A student takes a loan of Rs.50,000/- from SBI. The rate of interest being charged by SBI is 10 percent per
annum. What would be the amount of equal annual installment if he wishes to pay it back in five
installments at the end of every year?
 (a) Approx. Rs.15,620/-
 (b) Approx. Rs.15,450/-
 (c) Approx. Rs.13,190/-
 (d) Approx. Rs.11,000/-
You have determined the profitability of a planned project by finding the present value of all the cash
flows from that project. Which of the following would cause the project to look more appealing in
terms of the present value of those cash flows?
 (a) The discount rate decreases
 (b) The cash flows are extended over a longer period of time, but the total amount of the cash
flows remains the same
 (c) The discount rate increases
A company wants to retire a loan Rs.5,00,000/-, 10 years from today. What amount should it invest each
year for 10 years if the funds can earn 8 percent per annum. The first investment will be made at
the beginning of this year.
 (a) Approx. Rs.31,950/-
 (b) Approx. Rs.40,000/-
 (c) Approx. Rs.34,000/-
 (d) Approx. Rs.50,000/-

Find out the weighted average cost of capital from the following data:-
 (a) 8.0%
 (b) 8.11%
 (c) 8.2%
 (d) 7.5%
From the following information:
Find out, Operating Leverage & Financial Leverage:-

 (a) 2.5 & 2.0
 (b) 3.5 & 2.5
 (c) 3.0 & 2.0
 (d) 3.0 & 2.5
You are interested in investing your money in a bank account. Which of the following banks provides you
with the highest effective rate of interest?
 (a) Bank 1; 8 percent with monthly compounding
 (b) Bank 2; 8 percent with annual compounding
 (c) Bank 4; 8 percent with daily (365-day) compounding
 (d) Bank 3; 8 percent with quarterly compounding
Which of the following is most correct statement?

(a) The present value of a 5-year annuity due will exceed the present value of a 5-year ordinary ann
uity (Assume that both annuities pay $100 per period and there is no chance of default)
(b) If a loan has a nominal rate of 10 percent, then the effective rate can never be less than 10 perc
ent
(c) If there is annual compounding, then the effective, periodic and nominal rates of interest are all
the same
(d) All of the above

(e) None of the above

Compute the cost of equity using CAPM where risk-free rate of return is 9%, Beta co-efficient of the firm
is 1.1 and assuming a market return of 15% next year.
 (a) 16.5%
 (b) 15.8%
 (c) 16.6%
 (d) 15.6%
Which of the following is not considered a capital component for the purpose of calculating the
weighted average cost of capital as it applies to capital budgeting?
 (a) Accounts payable
 (b) Long term debt
 (c) Common stock
 (d) Preferred stock
If you invest Rs.25,000 today at a compound interest of 9 percent, what will be the future value after 15
years ?
a) Rs. 91,620
b) Rs. 91,062
c) Rs. 91,260 d) Rs.91,200
e) None
2. What is the payback period on cash flow (non-discounted) of the following project?
Project C0 C1 C2 C3 C4
A -5,000 1,000 1,000 3,000 5,000
a) 2 years
b) 2.5 years
c) 3 years
d) 3.5 years
e) None of the above
3. ‘X’ Ltd. Company issues Rs.50,000 8% debentures at a premium of 10%. The tax rate applicable to
the company is 60%. What is the cost of debt?
a) 4.21%
b)2.91%
c) 4%
d)3.5%
e) None
4. What is the NPV (approximate) if cost of capital is 10 percent on cash flow of the following project?
A -10,000 3,000 3,000 3,000 3,000
a) Rs. - 493.40
b) Rs. 493.40
c) Rs. 9507.60

d) Rs.-9507.60
e) None
5. What is the risk premium of a security, if the market return is 15%, Beta 0.8 and risk-free rate of
return is 9%.
a) 7.2%
b) 4.8%
c) 6.0%
d) 8.4%
e) None
6. If you invest Rs.20,000 today at a compound interest of 9.25 percent, what will be the future value
after 15 years ?
a) Rs.75,930
b) Rs.75,960
c) Rs.75,396
d) Rs.75,460
e) None
7. What is the NPV if cost of capital is 10 percent on cash flow of the following project?
A -5,000 1,000 1,000 3,000 5,000
a) Rs.2,340
b) Rs.2,404
c) Rs.2,450
d) Rs.2,400
e) None
8. Compute the cost of equity using CAPM where risk-free rate of return is 11%, Beta co-efficient of the
firm is 1.25 and assuming a market return of 15 percent next year.
a) 16%
b) 15%
c) 16.5%
d) 16.3%
e) None
9. Find out the weighted average cost of capital from the following data:
Securities Book value After tax cost
Equity 5,00,000 13%
Retained earnings 2,00,000 8%
Preference capital 2,00,000 14%
Debentures 4,00,000 5%
--------------
13,00,000
========
a) 8.0%
b) 7.5%
c) 8.11

d) 8.2%
10. From the following information;

Interest Rs. 5,000
Sales Rs.50,000
Variable cost Rs.25,000
Fixed cost Rs.15,000
Find out,
(a) Operating Leverage & Financial Leverage
a) 3.0 & 2.0
b) 2.5 & 2.0
c) 3.5 & 2.5
d) 3.0 & 2.5
e) none of the above
11. If you invest Rs.30,000 today at a compound interest of 9.50 percent, what will be the future value
after 10 years ?
a) Rs.74,934
b) Rs.74,347
c) Rs.74,734
d) Rs.74,897
d) None
12. What is the NPV if cost of capital is 12 percent on cash flow of the following project?
A -100,000 20,000 35,000 43,000 36,000
a) Rs.567
b) Rs.657
c) Rs.-756
d) Rs.-765
13. Compute the cost of equity using CAPM where risk-free rate of return is 9%, Beta co-efficient of the
firm is 1.1 and assuming a market return of 15 percent next year.
a) 16.6%
b) 15.6%
c) 16.5%
d) 15.8%
14. Find out the weighted average cost of capital from the following data:
Securities Book value After tax cost
Equity 10,00,000 12%
Retained earnings 4,00,000 11%
Preference capital 4,00,000 12%
Debentures 8,00,000 7%
26,00,000

a) 10.3%
b) 12.0%
c) 11.15
d) 9.26%
15. Equity shares of Phonex Ltd. are quoted in the market at Rs.17.00. The dividend expected a year
hence is Rs.1.50. The expected rate of dividend growth is 8%. The cost of equity capital to the company
is;
a. 11.08%
b. 13.88%
c. 15.46%
d. 16.82%
e. None of the above
16. If the cost of equity is 18%, and the cost of debt is 15% what would be the cost of capital, at a tax
rate of 35% and a debt-equity ratio of 2:1?
a. 13.50%
b. 13.25%
c. 12.48%
d. 16.0%
17. If the interest rate on long-term debt is 18% p.a. and the tax rate of the company is 35%, the cost of
debt is
a. 10.70%
b. 11.70%
c. 12.85%
d. 12.70%
18. Ravi & Co. issues 10% irredeemable preference shares. The face value of each share is Rs.100 and
net amount realized share is Rs.96. The cost of the preference capital is
a. 9.6%
b. 10%
c. 10.42%
d. 14.32%
e. None
19. The future value of a regular annuity of Rs.1000 earning a rate of interest of 12% p.a. for 5 years is
equal to
a. Rs.6,250
b. Rs.6,353
c. Rs.6,425
d. Rs.6,538
e. None
20. How much is a Rupee worth today, if you can expect to receive it a year from now, with no risk of

default?
a. Less than Rs.1
b. Rs. 1
c. More than Rs.1
d. Zero
e. None
21. The present value of Rs.10,00,000 receivable after 60 years, at a discount rate of 10% is
a. Rs.3,284
b. Rs.6,898
c. Rs.18,649
d. Rs.39,440
e. Rs.48,376
22. How much should a company invest at the beginning of each year at 14% so that it can redeem
debentures of Rs.10 lakh at the end of year 10?
a. Rs. 48,195
b. Rs.45,363
c. Rs.51,714
d. Rs. 65,236
e. Rs.71,535
23. Alpha company paid a dividend of Rs.4.50. The current market price of an equity share is Rs.90.
Dividend are expected to grow at the rate of 7%, the cost of equity capital is
a. 11.5%
b. 12.35%
c. 14.25%
d. 16%
e. 18.5%
24. Consider the following data:

Source Market Value (Rs.) Cost (%)
Equity 10,00,000 18
Debt 5,00,000 13
If the tax rate is 35%, the weighted-average cost of funds taking market value as weights is
a. 13.00%
b. 13.82%
c. 14.00%
d 14.82%
e. 14.62%
25. If the cost of equity is 20%, and the cost of debt is 13% what would be the cost of capital, at a tax
rate of 30% and a debt-equity ratio of 3:1?
a. 18.50%
b. 15.25%
c. 17.28%
d. 20.0%

26. What is the risk premium of a security, if the market return is 18%, Beta 1.25 and risk-free rate of
return is 10.5%.
a) 9.38%
b) 10.50%
c) 19.87%
d) 12.76%
27. If the interest rate on long-term debt is 19% p.a. and the tax rate of the company is 33%, the cost
of debt is
a. 14.72%
b. 12.73%
c. 6.27%
d. 13.33%
28. What is the payback period on cash flow (non-discounted) of the following project?
A -50,000 10,000 25,000 35,000 15,000
a. 2 years
a. 2.5 years
b. 3 years
c. 3.5 years
e. None
29. A company has retained earnings of Rs.72 lakh and equity capital of Rs.38 lakh. If the equity
investors expect a rate of return of 17% and the cost of issuing fresh equity is 6%, the cost of the
external equity is
a. 16.4%
b. 17.4%
c. 17.7%
d. 18.10%
e. 19.1%
30. The future value of a regular annuity of Rs.6000 earning a rate of interest of 9% p.a. for years is
equal to
a. Rs.75,048
b. Rs.78,480
c. Rs.74,480
d. Rs.78,840
31. The primary objective of corporate management is;

a) Maximization of EBIT
b) Maximization of EPS
c) Maximization of market share price
d) Maximization of wealth of share holders

e) All of them
32. Which of the following statements is/are true for the given values of interest and time?
a. Present Value Interest Factor is the reciprocal of Future Value Interest Factor.
b. Future Value Interest Factor Annuity is the reciprocal of Present Value Interest Factor
Annuity.
c. Capital recovery factor is a product of Future Value Interest Factor and reciprocal of Future
Value Annuity Factor.
d. Both (a) and (c) above.
33. Which of the following statements is/are not true?

a. The more frequent the compounding, the higher the future value, other things being equal.
b. For a given amount, greater the discount rate, lesser is the present value.
c. Converting an annuity to an annuity due decreases the present value.
d. Converting an annuity to an annuity due increases the present value.
34. Money has a time value because

a. the individuals prefer future consumption to present consumption
b. a rupee today is worth more than a rupee tomorrow in terms of purchasing power
c. a rupee today can be productively deployed to generate real returns tomorrow
d. both (b) and (c)
e. All of them
35. Cash flows occurring in different periods should not be compared unless
a. interest rates are expected to be stable
b. the flows occur no more than one year from each other
c. high rates of interest can be earned on the flows
d. the flows have been discounted to a common date
e. All of them
36. Sinking fund factor is the reciprocal of

a. future value interest factor
b. present value interest factor
c. future value interest factor of annuity
d. present value interest factor of annuity
e. None of them
37. You have determined the profitability of a planned project by finding the present value of all the
cash flows from that project. Which of the following would cause the project to look more
appealing in terms of the present value of those cash flows?
a. The discount rate decreases.
b. The cash flows are extended over a longer period of time, but the total amount of the cash
flows remains the same.
c. The discount rate increases.
d. Answers b and c above.

e. None of them
38. Which of the following statements is most correct?

a. A 5-year $100 annuity due will have a higher present value than a 5- year $100 ordinary
annuity.
b. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same
amount and same interest rate.
c. If an investment pays 10 percent interest compounded annually, its effective rate will also
be 10 percent.
d. All of the statements above are correct.
39. Which of the following statements is most correct?

a. An investment which compounds interest semiannually, and has a nominal rate of 10
percent, will have an effective rate less than 10 percent.
b. The present value of a three-year $100 annuity due is less than the present value of a threeyear
$100 ordinary annuity.
c. The proportion of the payment of a fully amortized loan which goes toward interest
declines over time.
d. None of the answers above is correct.
e. All of them
40. Which of the following bank accounts has the highest effective annual return?
a. An account which pays 10 percent nominal interest with monthly com-pounding.
b. An account which pays 10 percent nominal interest with daily com-pounding.
c. An account which pays 10 percent nominal interest with annual com-pounding.
d. An account which pays 9 percent nominal interest with daily com-pounding.

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Corporate Finance

2. Finance function involves:-

3. The primary objective of corporate management is:-

 (a) 2.5 years

1/23/2019 AXP Internal 1

1/23/2019 AXP Internal 2

1/23/2019 AXP Internal 3

1/23/2019 AXP Internal 4

 (a) The discount rate decreases

17. Which of the following statements is correct?

1/23/2019 AXP Internal 5

1/23/2019 AXP Internal 6

 (a) Approx. Rs.-5,500/-

1/23/2019 AXP Internal 7

1/23/2019 AXP Internal 8

29. Which of the following is not considered a capital component?

1/23/2019 AXP Internal 9

32. Which of the following statements is correct?

34. Which of the following statements is correct?

1/23/2019 AXP Internal 10

37. Which of the following statements is correct?

1/23/2019 AXP Internal 11

41. Which of the following is/are true about NPV?

1/23/2019 AXP Internal 12

 (b) average payment period

 (c ) average collection period

 (d) average age of inventory

1/23/2019 AXP Internal 13

1/23/2019 AXP Internal 14

 (c) Permanent; seasonal

51. Which of the following statements is correct?

52. Which of the following statements is correct?

1/23/2019 AXP Internal 15

55. In Net Operating Income (NOI) approach, market value of a firm:-

56. Financial structure includes:-

1/23/2019 AXP Internal 16

58. Which of the following statement(s) is true?

59. Which of the following is not a feature of debt finance?

60. Which of the following factors has an effect on business risk?

1/23/2019 AXP Internal 17

62. Business risk refers to:-

63. Which of the following is true?

64. Total or Combined leverage measures the relationship between:-

1/23/2019 AXP Internal 18

66. The ultimate objective of any company is:-

67. Which of the following best describes a firm's cost of capital?

68. Which of the following statements is true?

1/23/2019 AXP Internal 19

1/23/2019 AXP Internal 20

75. Which of the following risks is revealed by capital structure ?

76. Trade creditors of a company are mostly interested in the company's:-

1/23/2019 AXP Internal 21

79. Which of the following statements is correct?

80. Longer the manufacturing period

1/23/2019 AXP Internal 22

83. Net working capital denotes:-

1/23/2019 AXP Internal 23

86. Which of the following is not a current asset?

88. The current ratio is obtained by:-

1/23/2019 AXP Internal 24

90. Financial risk involves:-

1/23/2019 AXP Internal 25

94. The major advantages of privately placing the securities are:-

95. Which of the following is not a source of long term finance?