CS Executive

Going through the Cash Flow Statement – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Cash Flow Statement – Corporate and Management Accounting MCQs

Question 1.
The term cash includes
(A) Cash and Bank Balances
(B) All the Current Assets
(C) All the Current Liabilities
(D) None of the above
Answer:
(A) Cash and Bank Balances

Question 2.
“Cash flow statement reveals the effects of transactions involving movement of cash”. This statement is ….
(A) Correct
(B) Not correct
(C) Partially correct
(D) None of the above
Answer:
(A) Correct

Question 3.
Which of the following Accounting Standard deals with preparation of Cash Flow Statement
(A) AS-5
(B) AS – 6
(C) AS-3
(D) AS – 11
Answer:
(C) AS-3

Question 4.
Which of the following method can be used by listed company for preparation of Cash Flow Statement
(A) Direct Method
(B) Indirect Method
(C) Both (A) & (B)
(D) Either (A) or (B)
Answer:
(B) Indirect Method

Question 5.
As per AS-3, Cash includes
(A) Cash in hand and demand deposit with banks
(B) Term deposit with bank
(C) Short term highly liquid investment readily convertible into cash which are subject to insignificant risk of changes in value
(D) Both (A) & (B)
Answer:
(D) Both (A) & (B)

Question 6.
As per AS-3, an investment normally qualifies as a “cash equivalent” only when it has a short maturity of, say, from
the date of acquisition.
(A) 6 months or more
(B) 5 months or less
(C) More than 3 months
(D) 3 months or less
Answer:
(D) 3 months or less

Question 7.
Which of the following can be categorized as cash equivalents as per AS-3
(A) Treasury bill
(B) Commercial paper
(C) Money market funds
(D) All of the above
Answer:
(D) All of the above

Question 8.
As per AS-3, Cash includes
(A) Highly liquid investments that are readily convertible into known amounts of cash
(B) Demand deposits with banks.
(C) Investment, when it has a short maturity of, say, 3 months or less from the date of acquisition.
(D) All of the above
Answer:
(B) Demand deposits with banks.

Question 9.
Which of the following is/are cash flow from Operating Activities
(A) Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits
(B) Cash receipts and payments relating to futures contracts, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purposes
(C) Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities and
(D) All of the above
Answer:
(D) All of the above

Question 10.
Which of the following is/are cash flow from Investing Activities
(A) Cash advances and loans made to third parties other than advances and loans made by a financial enterprise.
(B) Cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures
(C) Interest received on investment in debentures and bonds.
(D) All of the above
Answer:
(D) All of the above

Question 11.
Which of the following is / are cash flow from Financing Activities
(A) Cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings
(B) Cash receipts from disposal of intangibles.
(C) Cash receipts and payments relating to futures contracts, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purposes.
(D) All of the above
Answer:
(A) Cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings

Question 12.
Under Direct Method of Cash Flow Statement, starting point is …………..
(A) Profit before working capital changes
(B) Funds from operation
(C) Cash receipt from customers
(D) Cash paid to suppliers & employees
Answer:
(C) Cash receipt from customers

Question 13.
In cash flow statement cash flow on account of income tax paid is shown:
(A) Under the heading “Cash flow from investing activities”
(B) Under the heading “Cash flow from financing activities”
(C) Under the heading “Cash flow from operating activities” before heading cash generated from operation
(D) Under the heading “Cash flow from operating activities” after the heading cash generated from operation
Answer:
(D) Under the heading “Cash flow from operating activities” after the heading cash generated from operation

Question 14.
Taxes on income should be classified as:
(A) Operating Activities
(B) Investing Activities
(C) Financing Activities
(D) Operating Activities, unless they can be specifically identified with financial and investing activities
Answer:
(D) Operating Activities, unless they can be specifically identified with financial and investing activities

Question 15.
While preparing cash flow statement as per Indirect Method which of the following is added in net profit before working capital changes to calculate cash flow from operating activities
(A) Increase in current assets
(B) Decrease in current liabilities
(C) Voluntary separation payments
(D) Decrease in current assets
Answer:
(D) Decrease in current assets

Question 16.
The Preparation of Cash flow statement is governed by AS-3 (Revised). This statement is
(A) Correct
(B) Not correct
(C) Partially correct
(D) None of the above
Answer:
(A) Correct

Question 17.
A cash flow statement is like an income statement
(A) I agree
(B) I disagree
(C) I cannot say
(D) This statement is ambiguous
Answer:
(B) I disagree

Question 18.
Funds flow statement and cash flow statement are one and the same
(A) True
(B) False
(C) I cannot say
(D) This statement is irrelevant
Answer:
(B) False

Question 19.
Increase in the amount of bills payable results in ………….
(A) Increase in cash
(B) Decrease in cash
(C) No change in cash
(D) Cannot say anything without monetary figures
Answer:
(A) Increase in cash

Question 20.
Cash from operations is equal to
(A) Net profit plus increase in outstanding expenses
(B) Net profit plus increase in debtors
(C) Net profit plus increase in stock
(D) None of the above
Answer:
(A) Net profit plus increase in outstanding expenses

Question 21.
Cash equivalents are short term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
(A) I agree
(B) I disagree
(C) I cannot say
(D) This statement is ambiguous
Answer:
(A) I agree

Question 22.
For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of ……….
(A) Gold
(B) Cash
(C) Investment
(D) Real estate
Answer:
(B) Cash

Question 23.
Non-cash transactions
(A) Form part of cash flow statement
(B) Do not form part of cash flow statement
(C) May or may not form part of cash flow statement
(D) I cannot say whether they are part of cash flow statement
Answer:
(A) Form part of cash flow statement

Question 24.
Which of the following would be considered a cash-flow item from an “investing” activity
(A) Cash outflow from interest
(B) Cash outflow from dividend
(C) Cash outflow to acquire fixed assets
(D) All of the above
Answer:
(C) Cash outflow to acquire fixed assets

Question 25.
Which of the following is a cash flow from a “financing” activity
(A) Cash outflow to the government for taxes
(B) Cash outflow to shareholders as dividends.
(C) Cash outflow to purchase bonds issued by another company
(D) All of the above
Answer:
(B) Cash outflow to shareholders as dividends.

Question 26.
On an accounting statement of cash flows an “increase(decrease) in cash and cash equivalents” appears as …………..
(A) Cash flow from operating activities.
(B) Cash flow from investing activities.
(C) Cash flow from financing activities
(D) None of the above
Answer:
(D) None of the above

Question 27.
Which of the following is NOT a cash outflow for the firm
(A) Depreciation
(B) Dividends
(C) Interest payments
(D) Taxes
Answer:
(A) Depreciation

Question 28.
Which of the following involves a movement of cash
(A) A bonus issue
(B) A rights issue
(C) Depreciation of fixed assets
(D) Creation of a provision for pensions
Answer:
(B) A rights issue

Question 29.
Which one of the following events will increase the cash balances of a business
(A) Loan repayment to banks
(B) Debtors paying amounts owed
(C) Bank granting it an overdraft facility
(D) Sale of stock on credit
Answer:
(B) Debtors paying amounts owed

Question 30.
Which one of the following events will reduce the cash balances of a business
(A) Dividend proposed pending share-holder approval
(B) Purchase of stock on credit
(C) Creditors paid amounts owed
(D) Purchase of fixed assets on interest free credit
Answer:
(C) Creditors paid amounts owed

Question 31.
Which one of the following is false
(A) If cash outflows exceed cash inflows on an ongoing basis, the business will eventually run out of cash
(B) Rapidly expanding companies can sometimes face a cash shortage
(C) Cash is the lifeblood of a business and without it the business will die
(D) A profitable company will never run out of cash
Answer:
(D) A profitable company will never run out of cash

Question 32.
A business may incur an operating loss in a given financial year yet has more cash in the bank at the end. A reason for this could be that:
(A) Some fixed assets were sold for cash
(B) Dividends paid were higher this year than last
(C) Payments to creditors were made more promptly
(D) Debtors were allowed a longer period of credit
Answer:
(A) Some fixed assets were sold for cash

Question 33.
A company has a negative cash flow from operating activities. What could explain this negative cash flow
(A) The repayment of a loan
(B) A sudden increase in credit sales
(C) High levels of dividend payments
(D) A substantial investment in new fixed assets
Answer:
(B) A sudden increase in credit sales

Question 34.
AS – 3 (Cash Flow Statements) requires that cash receipts and payments should be analyzed into three categories. Under which category would you expect to find the cash proceeds from a share issue
(A) Financing Activities
(B) Investing Activities
(C) Operating Activities
(D) Redemption Activities
Answer:
(A) Financing Activities

Question 35.
In AS – 3 (Cash Flow Statements) where would you find a bank current account debit balance
(A) In cash and cash equivalents
(B) In investing activities
(C) In financing activities
(D) In operating activities
Answer:
(A) In cash and cash equivalents

Question 36.
All of the following are true regarding the cash flow statement except
(A) This statement explains the causes of the change in the cash balance
(B) Cash outflows are shown in parentheses to indicate that payments must be subtracted
(C) This statement reports information as of a certain date and therefore, is dated like the balance sheet
(D) This statement classifies cash transactions as operating, investing, or financing
Answer:
(C) This statement reports information as of a certain date and therefore, is dated like the balance sheet

Question 37.
All of the following are true regarding the purpose of the statement of cash flows except
(A) It is for predicting future cash flows
(B) It is for determining the company’s ability to pay dividends to shareholders and interest and principle to creditors
(C) It is for evaluating management decisions
(D) It is for reporting net income
Answer:
(D) It is for reporting net income

Question 38.
All of the following are true regarding the operating activity section of the cash flow statement except
(A) The direct or indirect format may be used to present the information
(B) The direct method includes the sale of assets reporting a gain or a loss
(C) A negative cash flow warrants investigation
(D) It includes cash transactions affecting (non-cash) current asset and current liability accounts
Answer:
(B) The direct method includes the sale of assets reporting a gain or a loss

Question 39.
Why is the statement of cash flows useful to the analyst
(A) It is the only source in financial statements for learning about cash generation.
(B) Focusing on net income can be misleading if a company has a healthy profit, but cannot translate the profit into cash.
(C) The statement of cash flows reveals why a company was able to generate a profit
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 40.
The following items would be classified as operating activities on the statement of cash flows:
(A) Acquisitions of equipment, payment of dividends, revenue.
(B) Proceeds from borrowing, payments of dividends, purchases of supplies
(C) Payments for inventory, payments for salaries, cash received from sale of goods
(D) Payments on loans, payments for taxes, payments for rent
Answer:
(C) Payments for inventory, payments for salaries, cash received from sale of goods

Question 41.
The following items would be classified as investing activities on the statement of cash flows:
(A) Proceeds from borrowing, payment of dividends, receipt of dividends
(B) Proceeds from borrowing, payment of dividends, receipt of dividends
(C) Sale of property, purchase of equity securities, loans to others
(D) Sale of goods, receipt of dividends, repurchase of firm’s own stock
Answer:
(C) Sale of property, purchase of equity securities, loans to others

Question 42.
The following items would be classified as financing activities on the statement of cash flows:
(A) Proceeds from borrowing, payment of dividends, repayment of debt.
(B) Payments for inventory, payments to lenders, payments for taxes.
(C) Sales of goods, repayment of debt, loans to others
(D) Loans to others, returns from loans to others, acquisition of land
Answer:
(A) Proceeds from borrowing, payment of dividends, repayment of debt.

Question 43.
What impact does depreciation have on the cash account
(A) Depreciation results in an decrease to cash.
(B) Depreciation has no impact on the cash account
(C) Depreciation only impacts the cash account if inflation has occurred.
(D) Depreciation results in an increase to cash
Answer:
(B) Depreciation has no impact on the cash account

Question 44.
If net cash provided or used by operating, financing and investing activities are added together, the result is:
(A) The change in cash
(B) Cash inflow
(C) Net income
(D) Cash out flow
Answer:
(A) The change in cash

Question 45.
Which of the following statement is true
(A) The payment of interest on a note payable is a cash flow from a financing activity.
(B) Collection of principal on a note receivable is a cash flow from financing activities.
(C) The difference between the indirect and direct methods of cash flow determination only affects the determination of investing activities cash flows.
(D) Cash flows associated with property, plant, and equipment acquisition and disposition are reported as cash flows from investing activities.
Answer:
(D) Cash flows associated with property, plant, and equipment acquisition and disposition are reported as cash flows from investing activities.

Question 46.
Which of the following statement is/ are false
(A) The statement of cash flows explains how the cash balance changed during a particular period of time.
(B) Under the indirect method, depreciation expense is added to net income, because it decreases net income but doesn’t consume a cash flow.
(C) Cash flows associated with issuance and retirement of long-term debt and equity are reported as cash flows from investing activities.
(D) Under the indirect method, an increase in prepaid expenses is deducted from net income.
Answer:
(C) Cash flows associated with issuance and retirement of long-term debt and equity are reported as cash flows from investing activities.

Question 47.
Which of the following transactions would not create a cash flow
(A) A company purchased some of its own shares from a shareholder.
(B) Amortization of a patent
(C) Payment of a cash dividend.
(D) Sale of equipment at book value.
Answer:
(B) Amortization of a patent

Question 48.
Which of the following would not be reported as an investing activity
(A) Selling a depreciable asset for cash at a loss.
(B) Purchasing patent using cash.
(C) Purchasing land in exchange for stock.
(D) Purchasing shares of stock of another company using cash.
Answer:
(C) Purchasing land in exchange for stock.

Question 49.
Which of the following statements for the statement of cash flows is correct
(A) A company with a net loss on the income statement will always have a net cash outflow from operating activities.
(B) A purchase of equipment is classi¬fied as a cash inflow from investing activities.
(C) Cash dividends received on stock investments are classified as cash flows from operating activities.
(D) Cash dividends paid are classified as cash flows from operating activities.
Answer:
(B) A purchase of equipment is classified as a cash inflow from investing activities.

Question 50.
Which of the following is reported as a cash flow from investing activities
(A) Cash received from dividends earned.
(B) Purchasing land in exchange for common stock.
(C) Selling a long-term investment at a loss for cash.
(D) Interest paid on long term loans.
Answer:
(C) Selling a long-term investment at a loss for cash.

Question 51.
Which statement regarding the indirect method is false
(A) Depreciation expense is added to net income.
(B) An increase in accounts receivable is added to net income.
(C) An increase in accounts payable is added to net income.
(D) An increase in inventory is subtracted from net income
Answer:
(B) An increase in accounts receivable is added to net income.

Question 52.
Which of the following transactions would be reported as a financing activity
(A) The cash received as interest on long term investment.
(B) Acquiring land by signing bills payable.
(C) Paying cash to shareholder for dividends.
(D) Purchasing shares of another company using cash.
Answer:
(C) Paying cash to shareholder for dividends.

Question 53.
Which of the following statement is/ Eire false
(A) As per AS-3 listed companies has to prepare Cash Flow Statement by Direct Method.
(B) Cash flows from financing activities include those cash flows with respect to issuing and retiring long-term debt and equity.
(C) Cash flows from financing activities include those cash flows with respect to paying previously declared dividends.
(D) All of the above
Answer:
(A) As per AS-3 listed companies has to prepare Cash Flow Statement by Direct Method.

Question 54.
Which of the following would be deducted from net income when determining cash flows from operating activities under the indirect method
(A) An decrease in accounts payable.
(B) Depreciation expense.
(C) A increase in prepaid insurance.
(D) A gain on the sale of a depreciable asset.
Answer:
(D) A gain on the sale of a depreciable asset.

Question 55.
Which of the following would be added to net income when determining cash flows from operating activities under the indirect method
(A) An increase in accounts payable.
(B) Patent amortization expense.
(C) A decrease in prepaid insurance.
(D) A gain on the sale of a depreciable asset.
Answer:
(B) Patent amortization expense.

Question 56.
Which of the following would be deducted from net income when determining cash flows from operating activities under the indirect method
(A) A decrease in bills payable
(B) Patent amortization expense
(C) A decrease in prepaid rent.
(D) A loss on the sale of a depreciable asset.
Answer:
(A) A decrease in bills payable

Question 57.
Which of the following transactions would increase the net cash flow from Operating Activities
(A) Issuance of capital stock for cash at a price above par.
(B) Purchase of truck by issuing a bills payable.
(C) Sale of equipment for cash at a gain.
(D) Collection of an account receivable from a customer.
Answer:
(D) Collection of an account receivable from a customer.

Question 58.
For purposes of preparing a cash flow statement, which of the following is not considered a “cash equivalent”
(A) A money market fund.
(B) An investment in bonds
(C) Treasury bills.
(D) Commercial paper.
Answer:
(B) An investment in bonds

Question 59.
An important distinction between the direct method and the indirect method of preparing a statement of cash flows is that:
(A) The direct method reconciles accrualbased net income with net cash flow from operations; the indirect method shows the specific cash inflows and outflows constituting the operating activities.
(B) The direct method results in a lower (more conservative) figure for net cash flow from operating activities than does the indirect method.
(C) The format of the section computing net cash flow from operating activities is different under the two methods.
(D) All of the above
Answer:
(C) The format of the section computing net cash flow from operating activities is different under the two methods.

Question 60.
Which of the following statement is true
(A) When a company purchases equipment issuing shares, the equipment purchase is reported as a financing activity.
(B) When a company sells equipment for cash at a loss, cash flows from investing activities decreases.
(C) Collection of principal on a bills receivable is a cash flow from financing activities.
(D) None of the above
Answer:
(D) None of the above

Question 61.
In a statement of cash flows, the acquisition of land by issuing equity or preference shares:
(A) Is not shown at all, since no cash was received or disbursed.
(B) Is shown as an investing activity.
(C) Is shown as a financing activity
(D) Is shown in a supplementary schedule as a non-cash investing and financing transaction
Answer:
(D) Is shown in a supplementary schedule as a non-cash investing and financing transaction

Question 62.
Which of the following characteristics does not apply to cash equivalents
(A) Short-term
(B) Highly-liquid
(C) Readily convertible into cash
(D) Highly sensitive to interest rate changes
Answer:
(D) Highly sensitive to interest rate changes

Question 63.
Which of the following would not be an adjustment to net income using the indirect method
(A) Amortization expense
(B) An increase in prepaid insurance
(C) An increase in inventories
(D) An increase in land
Answer:
(D) An increase in land

Question 64.
Which one of the following is NOT a category of cash flows required to be shown on the statement of cash flows
(A) Cash flows from operating activities
(B) Cash flows from financing activities
(C) Cash flows from taxation
(D) Cash flows from investing activities
Answer:
(C) Cash flows from taxation

Question 65.
If a company changes from offering 30 days’ credit to customers to offering 50 days credit, which of the following statements is correct
(A) Cash generated from operations will increase.
(B) Cash generated from financing activities will decrease.
(C) Cash generated from operations will decrease.
(D) There will be no effect on the statement of cash flows.
Answer:
(C) Cash generated from operations will decrease.

Question 66.
Which of the following would NOT be revealed by a company’s statement of cash flows
(A) Whether the company has paid a dividend during the year
(B) How the company has managed its working capital over the last financial year
(C) Whether the company has exceeded its overdraft limit during the year
(D) Whether the company has raised extra long-term funding during the year
Answer:
(C) Whether the company has exceeded its overdraft limit during the year

Question 67.
Which of the following activities can increase cashflow from investing activities
(A) Purchasing production equipment with cash.
(B) Selling products and receiving cash.
(C) Paying out cash dividends.
(D) Selling an office building and receiving cash.
Answer:
(D) Selling an office building and receiving cash.

Question 68.
Cash flows directly related to the
production and sale of the firm’s products and services are called:
(A) Investing cash flows
(B) Financing cash flows
(C) Operating cash flows
(D) None of the above
Answer:
(C) Operating cash flows

Question 69.
Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of shares, and cash outflows to pay cash dividends or repurchase shares are called:
(A) Investing cash flows
(B) Operating cash flows
(C) Financing cash flows
(D) None of the above
Answer:
(C) Financing cash flows

Question 70.
Holding all other things constant, which of the following represents a cash outflow
(A) The company sells a machine.
(B) The company acquires inventory.
(C) The company receives a bank loan.
(D) The company increases accounts payable.
Answer:
(B) The company acquires inventory.

Question 71.
If you are looking to review a firm’s sources and uses of cash flows over the year, the easiest place to find that information is
(A) The Income Statement
(B) The Statement of Retained Earnings
(C) The Statement of Cash Flows
(D) The Balance Sheet
Answer:
(C) The Statement of Cash Flows

Question 72.
In order to identify the amount of funds that a firm borrowed during the preceding year, what section is the best source within the Statement of Cash Flows
(A) Operating Flows
(B) Investment Flows
(C) Financing Flows
(D) Total Net Cash Flows
Answer:
(C) Financing Flows

Question 73.
If you start with earnings before interest and taxes and then subtract a firm’s tax expense while adding back the amount of depreciation expense for the firm during the year, the resulting figure is called
(A) Free Cash Flow
(B) Operating Cash Flow
(C) Net Cash Flow
(D) Gross Cash Flow
Answer:
(B) Operating Cash Flow

Question 74.
In a statement of cash flows, interest payments to lenders and other creditors should be classified as a(«):
(A) Operating Activity
(B) Borrowing Activity
(C) Lending Activity
(D) Financing Activity
Answer:
(D) Financing Activity

Question 75.
An increase in inventories of ₹ 5,000 over the course of a year would be shown on the company’s statement of cash flows prepared under the indirect method as:
(A) An addition to net income of ₹ 5,000 in order to arrive at net cash provided by operating activities.
(B) A deduction from net income of ₹ 5,000 in order to arrive at net cash provided by operating activities.
(C) An addition of ₹ 5,000 under investing activities.
(D) A deduction of ₹ 5,000 under investing activities.
Answer:
(B) A deduction from net income of ₹ 5,000 in order to arrive at net cash provided by operating activities.

Question 76.
Principle revenue generating activities are called as ………….
(A) Financing Activities
(B) Investing Activities
(C) Operating Activities
(D) None of the above
Answer:
(C) Operating Activities

Question 77.
Unrealized gains & losses from foreign exchange rates are ………
(A) Not cash flows
(B) Cash flows from operating activities
(C) Cash flows from investing activities
(D) Cash flows from financing activities
Answer:
(A) Not cash flows

Question 78.
The statement of cash flows is:
(A) Another name for the statement of financial position.
(B) A financial statement that reports the cash inflows and cash outflows for an accounting period, and that classifies those cash flows as operating activities, investing activities, or financing activities.
(C) A financial statement that lists the types and amounts of assets, liabilities, and equity of a business on a specific date.
(D) A financial statement that lists the types and amounts of the revenues and expenses of a business for an accounting period.
Answer:
(B) A financial statement that reports the cash inflows and cash outflows for an accounting period, and that classifies those cash flows as

Question 79.
Cash flows arising from interest and dividends received in the case of a financial enterprise should be classified as cash flows arising from
(A) Investing Activities
(B) Financing Activities
(C) Operating Activities
(D) Extraordinary Activities
Answer:
(C) Operating Activities

Question 80.
Preference shares of a company acquired shortly before their specified redemption date
(A) Will be shown in investing activities
(B) Will be shown in financing activities
(C) Will be shown in operating activities
(D) Will be shown as cash & cash equivalents
Answer:
(D) Will be shown as cash & cash equivalents

Question 81.
When the instalment paid in respect of a fixed asset acquired on deferred payment basis includes both interest and loan, the interest element is classified under activities and the loan element is classified under activities.
(A) Financing, Investing
(B) Investing, Operating
(C) Operating, Financing
(D) Investing, Operating
Answer:
(A) Financing, Investing

Question 82.
Cash flows from operating activities are:
(A) Primarily derived from the principal revenue-producing activities of the enterprise
(B) Generally result from the transactions and other events that enter into the determination of net profit or loss.
(C) Both (A) & (B)
(D) Either (A) or (B)
Answer:
(C) Both (A) & (B)

Question 83.
Cash flows arising from the purchase and sale of dealing or trading securities are classified as ………..
(A) Operating Activities
(B) Investing activities
(C) Financing activities
(D) Extraordinary activities
Answer:
(A) Operating Activities

Question 84.
Cash advances and loans made by financial enterprises are usually classified
(A) Operating Activities
(B) Investing activities
(C) Financing activities
(D) Extraordinary activities
Answer:
(A) Operating Activities

Question 85.
Cash flows arising from transactions in a foreign currency should be recorded in an enterprise’s reporting currency by applying to the foreign currency amount the exchange rate
(A) Prevailing at the beginning of the financial year.
(B) At average rate
(C) Prevailing at the end of the financial year.
(D) Between the reporting currency and the foreign currency at the date of the cash flow.
Answer:
(D) Between the reporting currency and the foreign currency at the date of the cash flow.

Question 86.
Income statement of Z Ltd. for the year ended was as follows:

Net profit before working capital changes = ?
(A) ₹ 1,15,200
(B) ₹ 8,64,000
(C) ₹ 4,80,000
(D) ₹ 3,52,000
Answer:
(D) ₹ 3,52,000

While calculating “Net profit before working capital changes” through shortcut method following logic is applied.
Cost of goods sold and operating expenses incurred in cash have to be deducted from sales. If income statement starts from gross profit then only operating expenses incurred in cash has to deducted.

Alternatively, If you start from net profit then add the following items to get funds from operation:

• Non-operating expenses
• Non-cash items like depreciation or goodwill written off
• Financial expense like interest.

Deduct following items:
Non-operating income like profit on sale of assets or investment.
40,32,000 – 31,68,000 – 3,84,000 – 1,28,000 = 3,52,000

Question 87.
Net profit before working capital changes of N Ltd. is ₹ 3,52,000. Changes in working capital during the year is as follows:

Cash generated from operation = ?
(A) ₹ 5,61,280
(B) ₹ 6,18,880
(C) ₹ 1,47,720
(D) ₹ 5,61,280
Answer:
(B) ₹ 6,18,880

Question 88.
Extracts of cash flow statement prepared by Z Ltd. are as follows:
Cash generated from operation is ₹ 5,41,000.
Income tax paid ₹ 1,80,000.
Sale of fixed assets ₹ 50,000.
Voluntary separation payment paid ₹ 80,000 and
Law compensation suit received is ₹ 1,25,000.
Cash flow from operating activities = ₹
(A) ₹ 4,06,000
(B) ₹ 3,56,000
(C) ₹ 5,36,000
(D) ₹ 4,16,000
Answer:
(A) ₹ 4,06,000
5,41,000 – 1,80,000 – 80,000 + 1,25,000 = 4,06,000. Sale of fixed assets ₹ 50,000 is not taken in calculation because it will come under the heading “Cash flow from investing activities”.

Question 89.
Accounts of S Ltd. shows that balance of cash and cash equivalents has been increase by ₹ 19,200 as compared to last year. If cash flow statement revels net cash inflow from financing activities is ₹ 19,200 and cash outflow from investing activities is ₹ 4,80,000.
Cash from operating activities = ₹
(A) ₹ 5,18,400
(B) ₹ 4,99,200
(C) ₹ 4,60,800
(D) ₹ 4,80,000
Answer:
(D) ₹ 4,80,000

Question 90.
From the following details calculate the cash flow from operating activities.

Net profit before working capital changes is  5,39,000. Cash flow from operation ?
(A) ₹ 5,41,000
(B) ₹ 3,61,000
(C) ₹ 3,41,000
(D) ₹ 3,99,000
Answer:
(B) ₹ 3,61,000

Question 91.
From the following details calculate the cash generated from operations.
Net profit before working capital changes is ₹ 3,051 lakhs. Net increase in current assets was ₹ 3,205 lakhs, while there is net increase in current liabilities by ₹ 9 lakhs.
(A) + ₹ 6,247 lakhs
(B) -₹ 145 lakhs
(C) + ₹ 6,256 lakhs
(D) – ₹ 6,265 lakhs
Answer:
(B) -₹ 145 lakhs

Question 92.
Cash flow statement of BB Ltd. shows the following position:
Cash inflows from operating activities ₹ 4,06,000, Cash outflow from investing activities ₹ 3,18,000 and Cash outflows from financing activities ₹ 18,000. Cash & cash equivalent at the end was ₹ 1,35,000.
Cash & cash equivalent at the beginning=?
(A) ₹ 6,07,000
(B) ₹ 29,000
(C) ₹ 5,71,000
(D) ₹ 65,000
Answer:
(D) ₹ 65,000

Question 93.
If opening balance of accounts receivable is ₹ 2,68,800; closing balance is ₹ 2,97,600 and toted credit sales during the year was ₹ 40,32,000. What is the cash received from debtors under the direct method of cash flow statement
(A) ₹ 40,60,800
(B) ₹ 45,98,400
(C) ₹40,03,200
(D) ₹ 43,00,800
Answer:
(C) ₹40,03,200

Question 94.
From the following details calculate the cash paid to suppliers and employees as per direct method of cash flow statement.


(A) ₹ 32,56,320
(B) ₹ 37,70,800
(C) ₹ 33,84,320
(D) ₹ 36,42,880
Answer:
(C) ₹ 33,84,320

Question 95.
From the following details find out the cash & cash equivalent at the end.

(A) ₹65,000
(B) ₹ 1,15,000
(C) ₹ 35,000
(D) ₹ 1,40,000
Answer:
(A) ₹65,000
90,000 – 2,00,000 – 3,50,000 – 1,00,000 – 45,000 + 15,000 + 3,53,000 – 1,10,000 + 1,50,000 – 60,000 + 1,00,000 – 18,000 + 90,000 + 50,000 + 1,00,000 = 65,000

Question 96.
From the following details find out the cash & cash equivalents at the end.


At the end of the year it was noted that there is foreign exchange loss of ₹ 1.600 in value of short-term investment.
(A) 11,64,000
(B) ₹ 1,62,400
(C) ₹ 1,65,600
(D) 14,06,600
Answer:
(C) ₹ 1,65,600
84,000 + 20,000 + 60,000 + 1,600 = 1,65,600.
In case of foreign exchange loss there are two effects while solving the problem on cash flow statement. First effect will be debit to profit & loss adjustment account and second effect is to add to cash & cash equivalents at the end.

Question 97.
A Ltd. paid income tax on capital gains ₹ 2,16,300 resulting from disposal of fixed assets. It should be shown in:
(A) Operating Activities
(B) Investing Activities
(C) Financing Activities
(D) By way of adjustment in cash & cash equivalents at the end.
Answer:
(B) Investing Activities
Since disposal of fixed asset is classified under investing activity; capital gain tax paid will also come under investing activity.

Question 98.
N Ltd. purchased machinery form Australia for A$ 50,000 on 1.10.2015. It entered into currency option contract for purchase of foreign exchange to pay for machinery and paid premium ₹ 25,000. How will you classify such premium in the cash flow statement of N Ltd.?
(A) Operating Activities
(B) Investing Activities
(C) Financing Activities
(D) Extraordinary Activities
Use the following information to answer next 5 questions on the basis of direct method of cash flow statement.-
Following is the summary of cash transactions extracted from the books of Zigzag Ltd.:


Answer:
(B) Investing Activities
Since purchase of fixed asset is classified under investing activity; premium paid for entering currency option contract will also come under investing activity.

Question 99.
Cash paid to suppliers & employees =₹
(A) ₹ 4,094 thousand
(B) ₹ 4,462 thousand
(C) ₹ 5,566 thousand
(D) ₹ 1,104 thousand
Answer:
(B) ₹ 4,462 thousand

Question 100.
Cash generated from operations = ₹
(A) ₹ 4,094 thousand
(B) ₹ 4,462 thousand
(C) ₹ 5,566 thousand
(D) ₹ 1,104 thousand
Answer:
(D) ₹ 1,104 thousand

Question 101.
Cash flows from operating activities = ₹
(A) ₹ 618 thousand
(B) ₹ 1,104 thousand
(C) ₹ 424 thousand
(D) ₹ 562 thousand
Answer:
(A) ₹ 618 thousand

Question 102.
Cash flows from investing activities = ₹
(A) ₹ (460) thousand
(B) ₹ 256 thousand
(C) ₹ (60) thousand
(D) ₹ (204) thousand
Answer:
(D) ₹ (204) thousand

Question 103.
Cash flows from financing activities = ₹
(A) ₹ (460) thousand
(B) ₹ 256 thousand
(C) ₹ (60) thousand
(D) ₹ (204) thousand
Answer:
(C) ₹ (60) thousand

Question 104.
Income statement of N Ltd. for the year ended was as follows:

Net profit before working capital changes
(A) ₹ 91,050
(B) ₹ 1,09,050
(C) ₹ 97,450
(D) ₹ 99,300
Answer:
(B) ₹ 1,09,050

Question 105.
Income statement of S Ltd. for the year ended was as follows:

Net profit before working capital changes = ₹
(A) ₹ 3,696
(B) ₹ 3,051
(C) ₹ 3,942
(D) ₹ 4,317
Answer:
(B) ₹ 3,051
20,301 – 15,984 – 375 – 891 = 3,051

Question 106.
Indian Info Line, a stock brokering firm, received ₹ 1,50,000 as premium for forward contract entered for purchase of equity shares. How will you classify this amount in the cash flow statement of the firm
(A) Operating Activities
(B) Investing Activities
(C) Financing Activities
(D) Extraordinary Activities
Answer:
(A) Operating Activities
Cash flow from principal revenue-producing activities of the enterprise has to be classified as “Cash flow from operating activities”. Hence if stock brokering firm receives premium for forward contract; it will come under “Cash flow from operating activities”.

Question 107.
Income statement of Z Ltd. for the year ended was as follows:

Net profit before working capital changes = ₹
(A) ₹ 5,98,500
(B) ₹ 5,43,500
(C) ₹ 9,16,000
(D) ₹ 5,41,500
Answer:
(B) ₹ 5,43,500
46,37,200 – 37,21,200 – 3,17,500 = 5,98,500

Question 108.
Income statement of Z Ltd. for the year ended was as follows:

Increase in current assets ₹ 1,13,800
Increase in current liability ₹ 24,800,
Cash flows from operating activities = ₹
(A) ₹ 8,40,500
(B) ₹ 4,24,500
(C) ₹ 4,79,500
(D) ₹ 5,34,500
Answer:
(C) ₹ 4,79,500

Question 109.
Use the following information to calculate net cash from operating activities: cash sales ₹ 1,00,000; cash from account receivable ₹ 2,00,000; cash dividends received ₹ 3,000; dividends paid ₹ 4,000; rent paid ₹ 5,000; and amortization expense ₹ 6,000.
(A) ₹ 2,98,000
(B) ₹ 2,94,000
(C) ₹ 98,000
(D) ₹ 2,92,000
Answer:
(B) ₹ 2,94,000
1,00,000 + 2,00,000 + 3,000- 4,000 – 5,000 = 2,94,000

Question 110.
Use following information to calculate net cash from investing activities:
Sell of capital asset for ₹ 10,000 cash and a ₹ 1,000 gain; purchase a bond investment for f 16,000; receive ₹ 2,000 interest payment from the bond investment; and pay off a ₹ 3,000 mortgage payable.
(A) ₹ 5,000 net cash outflow from investing activities
(B) ₹ 4,000 net cash outflow from investing activities
(C) ₹ 6,000 net cash outflow from investing activities
(D) ₹ 9,000 net cash outflow from investing activities
Answer:
(B) ₹ 4,000 net cash outflow from investing activities
10,000 – 16,000 + 2,000 = – 4,000.
Sell price of 10,000 includes gain hence not required to separately added.
Mortgage payable comes under financing activities.

Question 111.
Use following information to calculate net cash from financing activities:
Issue of shares ₹ 2,00,000; repurchase a company’s own shares ₹ 20,000; pay mortgage payable principal ₹ 1,00,000; pay mortgage payable interest ₹ 10,000; a stock dividend is declared and distributed that reduces retained earnings by ₹ 30,000; and a cash dividend is declared and paid that reduces retained earnings by ₹ 40,000.
(A) ₹ 40,000 net cash inflow from financing activities
(B) ₹ 10,000 net cash inflow from financing activities
(C) ₹ 30,000 net cash inflow from financing activities
(D) ₹ 60,000 net cash inflow from financing activities
Answer:
(C) ₹ 30,000 net cash inflow from financing activities
2,00,000-20,000- 1,00,000 – 10,000- 40,000 = 30,000.
Stock dividend means bonus issue, which do not involve any cash flow.

Question 112.
The balance sheet reported a beginning balance of ₹ 20,000 in Accounts Receivable and an ending balance of ₹ 15,000. The income statement reported Sales Revenue of ₹ 2,00,000. Using this information, compute cash collected from customers.
(A) ₹ 1,95,000
(B) ₹ 2,05,000
(C) ₹ 2,00,000
(D) ₹ 2,15,000
Answer:
(B) ₹ 2,05,000
2,00,000 + 20,000- 15,000 = 2,05,000

Question 113.
The balance sheet reported a beginning balance of ₹ 2,00,000 for the book value of equipment and an ending balance of ₹ 1,60,000. The income statement reported amortization expense of ₹ 20,000 and gain on the sale of equipment of ₹ 10,000. The cash flow statement reported acquisitions of capital assets totalling ₹ 30,000. Using this information, compute cash received from the sale of equipment.
(A) ₹ 40,000
(B) ₹ 20,000
(C) ₹ 50,000
(D) ₹ 60,000
Answer:
(D) ₹ 60,000

Question 114.
N Ltd. provides following information:

(A) ₹ 89,000
(B) ₹ 1,15,000
(C) ₹ 1,25,000
(D) ₹ 1,11,000
Answer:
(D) ₹ 1,11,000

Question 115.
S Ltd. provides following information:

(A) ₹ 2,59,000
(B) ₹ 3,27,000
(C) ₹ 3,47,000
(D) ₹ 3,81,000
Answer:
(D) ₹ 3,81,000

Question 116.
NSZ Ltd. paid an interim dividend of ₹ 1,00,000 along with ₹ 10,200 as corporate dividend tax. How will you classify this in the cash flow statement of the NSZ Ltd.?
(A) ₹ 1,00,000 as outflow in financing activities and ₹ 10,200 as outflow in operating activities.
(B) ₹ 1,10,200 as outflow in investing activities
(C) ₹ 1,00,000 as outflow in investing activities and ₹ 10,200 as outflow in operating activities.
(D) ₹ 1,10,200 as outflow in financing activities.
Answer:
(D) ₹ 1,10,200 as outflow in financing activities.

Question 117.
Z Ltd. income statement reported total revenues, ₹ 8,50,000 and total expenses ₹ 7,20,000 including ₹ 40,000 as depreciation. The balance sheet reported the following:
Accounts receivable – opening balance, ₹ 50,000 and ending balance, ₹ 40,000; Accounts payable – opening balance, ₹ 22,000 and ending balance, ₹ 28,000. Therefore, based only on this information, how much was the net cash inflow from operating activities
(A) ₹ 1,26,000
(B) ₹ 1,66,000
(C) ₹ 1,74,000
(D) ₹ 1,86,000
Answer:
(D) ₹ 1,86,000

Question 118.
LK Ltd. issued ₹ 50,000 of bonds, paid cash dividends of ₹ 8,000, sold long-term investments for ₹ 12,000, received ₹ 5,000 of dividend revenue, purchased treasury stock for ₹ 15,000, and purchased new equipment for f 19,000. What is the net cash flow from financing activities
(A) ₹ 70,000 inflow
(B) ₹ 27,000 inflow
(C) ₹ 80,000 inflow
(D) ₹ 42,000 inflow
Answer:
(D) ₹ 42,000 inflow

Question 119.
Reliance Capital, a financial service company, made a loan of ₹ 1 crore during the financial year 2015-16; it will be classified as
(A) Operating Activities
(B) Investing Activities
(C) Financing Activities
(D) Extraordinary Activities
Answer:
(A) Operating Activities

Question 120.
P Ltd. reported a net loss of ₹ 10,000 for the year ended 31.12.2007. During the year, accounts receivable decreased ₹ 5,000, inventory increased ₹ 8,000, accounts payable increased by ₹ 10,000, and amortization expense of ₹ 5,000 was recorded. During 2007, operating activities
(A) Used net cash of ₹ 2,000
(B) Used net cash of ₹ 8,000
(C) Provided net cash of ₹ 2,000
(D) Provided net cash of ₹ 8,000
Answer:
(C) Provided net cash of ₹ 2,000

Question 121.
S Ltd. had an increase in inventory of ₹ 40,000. The cost of goods sold was ₹ 90,000. There was a ₹ 5,000 decrease in accounts payable from the prior period. What were S Ltd. cash payments to suppliers
(A) ₹ 1,35,000
(B) ₹ 85,000
(C) ₹ 1,25,000
(D) ₹ 95,000
Answer:
(A) ₹ 1,35,000

Question 122.
If a company issues 1 million ₹ 1 shares at ₹ 1.30 per share, what will be the effect on the statement of cash flows
(A) Cash flows from financing activities will increase by ₹ 1.3 million.
(B) Cash flows from investing activities will increase by ₹ 1.3 million.
(C) Cash flows from investing activities will increase by ₹ 1.0 million.
(D) Cash flows from financing activities will increase by ₹ 1.0 million.
Answer:
(A) Cash flows from financing activities will increase by ₹ 1.3 million.

Question 123.
P Ltd. prepares its statement of cash flows using the indirect method. Its unamortized bond discount account decreased by ₹ 25,000 during the year. How should P Ltd. report the change in unamortized bond discount in its statement of cash flows
(A) As a financing cash inflow
(B) As a financing cash outflow
(C) As an addition to net income in the operating activities section
(D) As a subtraction from net income in the operating activities section
Answer:
(C) As an addition to net income in the operating activities section

Question 124.
In a given year a company decreased its inventory by ₹ 2,50,000, purchased ₹ 3,50,000 worth of fixed assets and took on a new ₹ 5,00,000 loan. What is the net change of the company’s cash as a result of these transactions
(A) -1,00,000
(B) + 1,00,000
(C) – 4,00,000
(D) +4,00,000
Answer:
(D) +4,00,000

Question 125.
State Bank of India, received a gross ₹ 1,500 Crores demand deposits from the customers and customers withdrawn ₹ 1,300 Crores of demand deposit during the financial year 2015-16. How will you classify this amount in the cash flow statement of the firm
(A) Operating activities ₹ 1,500 Crores as inflow, financing activities ₹ 1,300 as outflow.
(B) Investing activities ₹ 1,500 Crores as inflow, financing activities ₹ 1,300 as outflow.
(C) Financing Activities, on net basis₹ 200 Crores as inflow
(D) Operating Activities, on net basis ₹ 200 Crores as inflow
Answer:
(D) Operating Activities, on net basis ₹ 200 Crores as inflow

Question 126.
NS Ltd. had EBIT of ₹ 5,00,000 and had a depreciation expense of ₹ 2,00,000 this last year. If the firm was subject to an average tax rate of 30%, what was NS Ltd. operating cash flow for the year ₹ If you need to, assume that interest expense was zero.
(A) 3,05,000
(B) 3,50,000
(C) 4,50,000
(D) 5,50,000
Answer:
(D) 5,50,000

Question 127.
E & Co. had operating cash flow equal to ₹ 850 for 2014. If its earnings before interest and taxes was ₹ 1,000 while its tax bill was ₹300, what was E & Co. depreciation expense for the year.
(A) 150
(B) 550
(C) 1,550
(D) Not enough information to calculate
Answer:
(A) 150

Question 128.
Discount and Finance House of India (DFHI) purchased Commercial Paper (CP) of ₹ 100 Crores on 28.2.2015 for 89 days maturity. This is ready market for sale/ purchase of commercial paper. While preparing cash flow for the financial year ended 31.3.2015, DHFI should show CP of ₹ 100 Crores
(A) In investing activities.
(B) In financing activities.
(C) As cash equivalents.
(D) As a footnote to cash flow statement being contingent liability.
Answer:
(C) As cash equivalents.

Question 129.
Dec 2014: In cash flow statement, interest received by company is classified as —
(A) Operating activities
(B) Cash and cash equivalents
(C) Investing activities
(D) Financing activities
Answer:
(C) Investing activities

Question 130.
Dec 2014: In cash flow statement, dividend paid in case of financing company is classified as —
(A) Operating activities
(B) Investing activities
(C) Financing activities
(D) Cash and cash equivalents
Answer:
(A) Operating activities

Question 131.
Dec 2014: From the following data,find the value of building sold during the year:

A piece of land has been sold during the year and the profit on sale has been credited to capital reserve. Depreciation charged on building during the year is ₹ 5,000; no additions have been made under this head during the year.
(A) ₹ 30,000
(B) ₹ 50,000
(C) ₹ 40,000
(D) 145,000
Answer:
(D) 145,000

Question 132.
June 2015:
The following information pertains to Expert Ltd.:

Net profit before working capital changes is ₹ 5,56,000. The cash flow from operating activities will be —
(A) 4,26,800
(B) 5,76,800
(C) 5,35,200
(D) 4,16,800
Answer:
(A) 4,26,800

Question 133.
June 2015: In case of a financial enterprise, interest received on debentures held as investment is –
(A) Financing activity
(B) Investing activity
(C) Operating activity
(D) None of the above
Answer:
(C) Operating activity

Question 134.
June 2015: As per Accounting Standard-3, cash equivalents include –
(A) Treasury bills
(B) Commercial papers
(C) Money market funds
(D) All of the above
Answer:
(D) All of the above

Question 135.
June 2015: Cash payments to and on behalf of employees is an example of cash flow from –
(A) Operating activity
(B) Investing activity
(C) Financing activity
(D) None of the above
Answer:
(A) Operating activity

Question 136.
June 2015: Net profit before working capital changes of Super Ltd. is ₹ 4,35,000. Changes in working capital during the year Cash generated from operation for Super Ltd. will be -……..
Particulars — ₹
Decrease in stock — 2,58,000
Decrease in bills payable — 8,400
Increase in bills receivable — 38,800
Increase in prepaid expenses — 2,500
Increase in outstanding expenses — 7,800
Cash Genarated from operating system Ltd. will be……….
(A) ₹ 2,18,900
(B) ₹ 7,45,500
(C) ₹ 6,51,100
(D) ₹ 2,34,500
Answer:
(C) ₹ 6,51,100

Question 137.
June 2015: In an organization, provision for taxation as on 31 st December, 2013 was ₹ 16,000 and on 31st December, 2014 ₹ 18,000. Provision for taxation of ₹ 19,000 was made during the year 2014. The tax paid during the year is—
(A) ₹ 17,000
(B) ₹ 19,000
(C) ₹ 2,000
(D) ₹ 16,000
Answer:
(A) ₹ 17,000

Question 138.
Dec 2015: Match the following :
List-I — List-II
P. Cash flow statements — 1. Inflow of funds
Q. Inflow of cash — 2. Short-term financial planing
R. Investment (maturity period 3 months) — 3. Financing activity
S. Payment of dividend — 4. Cash equivalent
Select the correct answer from the options given below

Answer:
(A)

Question 139.
Dec 2015:
Statement-I:
In funds flow analysis, current assets and current liabilities are shown separately in a statement of changes in working capital.
Statement-II:
In cash flow analysis, increases and decreases of all current accounts are adjusted in the calculation of cash flow from operating activities.
Select the correct answer from the following
(A) Both statements are correct
(B) Both statements are incorrect
(C) Statement-I is correct, but Statement-II is incorrect
(D) Statement-I is incorrect, but Statement-II is correct
Answer:
(A) Both statements are correct

Question 140.
Dec 2015: Match the following:
List-I — List-II
P. Cost accounting — 1. Change in working capital
Q. Funds flow statement — 2. Deals with the cost of production, selling & distribution
R. Cash flow statement — 3. Is an important technique of financial analysis
S. Ratio analysis — 4. Cash & cash equivalents

Answer:
(A)

Question 141.
Dec 2015:
Assertion (A):
Cash flow statement enhances the comparability of report.
Reason (R):
Cash flow statement eliminates the effect of using different treatments for same transactions.
Select the correct answer from the following —
(A) Both A and R are true and R is the correct explanation of A
(B) Both A and R are true, but R is not the correct explanation of A
(C) A is true, but R is false
(D) A is false, but R is true
Answer:
(A) Both A and R are true and R is the correct explanation of A

Question 142.
Dec 2015: Arrange the following categories of cash inflows and cash outflows in the correct order of cash flow statements:
(1) Cash flows from investing activities
(2) Cash flows from financing activities
(3) Cash flows from operating activities.
Select the correct answer from the options given below —
(A) (3), (1), (2)
(B) (1), (3), (2)
(C) (3), (2), (1)
(D) (2), (1), (3)
Answer:
(A) (3), (1), (2)

Question 143.
Dec 2015:
Statement-1:
According to AS-3, provision for taxation should always be treated as a non-operating charge on profits.
Statement-II:
Dividend on shares is an appropriation of profits and not a trading charge.
Select the correct answer from the following
(A) Both statements are correct
(B) Both statements are incorrect
(C) Statement-I is correct, but Statement-II is incorrect
(D) Statement-I is incorrect, but Statement-II is correct
Answer:
(A) Both statements are correct

Statement I is correct because provisions for taX’ is non-cash item and always added to net profit to calculate ‘net profit before working capital changes’. In Cash Flow Statement ‘tax actually paid’ is deducted to arrive at ‘net cash flow
from operating activities’.

Statement II is also correct because dividend is paid on equity share capital or preference share capital i.e. to the shareholders who are owners of the enterprises and hence it is appropriation of profit and not a trading charge.

Question 144.
June 2016: Pride Ltd. has profit after tax ₹ 90,000, depreciation ₹ 17,000, and decrease of debtors ₹ 20,000. The cash generated from operating activities will be …………..
(A) ₹ 87,000
(B) ₹ 93,000
(C) ₹ 1,27,000
(D) ₹ 53,000
Answer:
(C) ₹ 1,27,000

Question 145.
June 2016: The purchase of machinery by issuing long-term notes payable should be reported as a
(A) Non-cash investing and financing activity
(B) Cash outflow in the operating activity
(C) Cash outflow in the investing activity
(D) Cash outflow in the financing activity
Answer:
(A) Non-cash investing and financing activity

Question 146.
June 2016: Which statement contains opening as well as closing balances of cash and cash equivalents and prepared on accrual basis —
(A) Cash flow statement
(B) Fund flow statement
(C) Both (A) and (B) above
(D) Statement of income & expenditure
Answer:
(A) Cash flow statement

Question 147.
Dec 2016: Income from investments is a cash flow from —
(A) Operating activities
(B) Investing activities
(C) Financing activities
(D) None of the above
Answer:
(B) Investing activities

Question 148.
Dec 2016: A cash flow statement is based upon while fund flow statement recognizes
(A) Cash basis of accounting; accrual basis of accounting
(B) Accrual basis of accounting; conventional basis of accounting
(C) Mercantile basis of accounting; cash basis of accounting
(D) Cash basis of accounting; cash basis of accounting
Answer:
(A) Cash basis of accounting; accrual basis of accounting

Question 149.
Dec 2016: Consider the following statements:
(1) Depreciation reduces tax liability; hence it is a source of funds.
(2) Decrease in current liabilities during the year results in an increase in working capital.
(3) The term cash equivalents include short-term marketable investments.
(4) Conversion of debentures into equity shares appears in funds flow statement.
(5) Only non-cash expenses are added to net profit to find out funds from operation.
Select the incorrect statements from the options given below —
(A) (1), (3), (4) and (5)
(B) (1), (2), (4) and (5)
(C) (1), (4) and (5)
(D) (2), (3) and (4)
Answer:
(C) (1), (4) and (5)

Question 150.
Dec 2016: Preference share capital of ₹ 5,00,000 was redeemed at a premium of 10%, partly out of proceeds of issue of 20,000 equity shares of ₹ 10 each issued at 10% premium and partly out of profits otherwise available for dividends. Choose the correct effect on different activities of cash flow statement from the options given below:
(A) In financing activities, cash outflow ₹ 5,50,000 and cash inflow ₹ 2,20,000.
(B) In financing activities, cash outflow ₹ 5,50,000 and in investing activities, cash inflow ₹ 2,20,000
(C) Net ₹ 3,30,000 will be outflow in operating activities
(D) In investing activities cash outflow of 15,50,000 and in financing activities cash inflow of ₹ 2,20,000
Answer:
(A) In financing activities, cash outflow ₹ 5,50,000 and cash inflow ₹ 2,20,000.

Question 151.
2017: In cash flow, income tax paid is treated as:
(A) Operating activity
(B) Investing activity
(C) Financing activity
(D) Not shown any where
Answer:
(A) Operating activity

Question 152.
June 2017: By ‘Cash Equivalents’ we mean:
(A) Bank Balance
(B) Short-term highly Liquid Securities
(C) Investments
(D) Investments in debenture
Answer:
(B) Short-term highly Liquid Securities

Question 153.
June 2017: Match the following:


Answer:
(B)

Question 154.
June 2017: Arrange the following categories of cash inflows and cash outflows in a correct order:
(1) Cash from investing activities
(2) Cash from financing activities
(3) Cash from operating activities
Select the correct answer from the options given below
(A) 2,1 and 3
(B) 1,3 and 2
(C) 3,2 and 1
(D) 3,1 and 2
Answer:
(D) 3,1 and 2

Question 155.
Dec 2017: In case of financial enterprises, cash flows arising from are classified as cash flows from operating activities.
(A) Interest Paid
(B) Interest Received
(C) Dividend Received
(D) All of the above
Answer:
(D) All of the above

Question 156.
Dec 2017: Some of the account balances of KK Ltd. are as follows in its balance sheet:
June 2018: In cash flow statement, proceeds from sales of an asset will be considered as:

If the interest paid on debentures was 20,000, the net cash flows from financing activities were:
(A) 1,75,000
(B) 1,55,000
(C) 2,05,000
(D) 2,25,000
Answer:
(B) 1,55,000

Question 157.
Dec 2017: Both cash how statement and fund flow statement are:
(A) Prepared on cash basis
(B) Prepared on the basis of working capital
(C) Useful for long-term analysis
(D) None of the above
Answer:
(D) None of the above

Question 158.
June 2018: Which of the following involves a movement of cash?
(A) Abonusissue
(B) A right issue
(C) Depreciation of fixed assets
(D) Provision for taxes
Answer:
(C) Depreciation of fixed assets

Question 159.
June 2018: The following item would be classified as operating activities in the statement of cash lows: .
(A) Acquisition of equipment, payment of dividends
(B) Proceeds from borrowing, payment of interest
(C) Payment of salaries, cash received from sale of goods
(D) Payments on loan, payments for taxes
Answer:
(C) Payment of salaries, cash received from sale of goods

Question 160.
June 2018: When the instalment paid in respect of a fixed asset acquire on deferred payment basis includes both
interest and loan, the interest element is classified under activities and the loan element is classified under
activities.
(A) Financing, Investing
(B) Investing, Operating
(C) Operating, Financing
(D) Investing, Operating
Answer:
(A) Financing, Investing

Question 161.
June 2018: In cash flow statement, proceeds from sales of an asset will be considered as:
(A) Investing activity
(B) Financing activity
(C) Operating activity
(D) None of the above
Answer:
(A) Investing activity

Question 162.
June 2018: Which one of the following is fake?
(A) If cash outflows exceed cash inflows on an ongoing basis, the business will eventually run out of cash.
(B) Rapidly expanding companies can sometimes face a cash shortage.
(C) Cash is the lifeblood of a business and without it the business will die.
(D) A profitable company will never run out of cash.
Answer:
(D) A profitable company will never run out of cash.

Question 163.
Dec 2018: In case of financial enterprises, cash flow arising from interest and dividends should be classified as cash flow from:
(A) Operating Activities
(B) Financing Activities
(C) Investing Activities
(D) Business Activities
Answer:
(A) Operating Activities

Question 164.
Dec 2018: Investments at the beginning and at the end of the year 2017-18 were ₹ 255 Lakh and ₹ 210 Lakh respectively. During the year 40 percent of original investments were sold at a profit of ₹ 63 Lakh. Amount of cash inflow and outflow respectively from Investments will be:
(A) ₹ 102 Lakh and ₹ 57 Lakh
(B) ₹ 165 Lakh and ₹ 57 Lakh
(C) ₹ 45 Lakh and Nil
(D) ₹ 147 Lakh and ₹ 39 Lakh
Answer:
(B) ₹ 165 Lakh and ₹ 57 Lakh

Question 165.
June 2019: The following information of a non-financial enterprise is given:
Purchase of fixed assets ₹ 40,000; Proceeds from sale of equipments ₹ 35,000; Interest received ₹ 3,000; Interest paid ₹ 6,000, Dividend received ₹ 4,000 and Dividend paid ₹ 15,000. Amount of cash from investing activities will be –
(A) ₹ 1,000
(B) ₹ (4,000)
(C) ₹ 2,000
(D) ₹ (2,000)
Answer:
(C) ₹ 2,000
– 40,000 + 35,000 + 3,000 + 4,000 = 2,000

Question 166.
June 2019: PQR Ltd. have the following balances:
Investment at the end of the year 2017 – 18 ₹ 85,000, Investment at the end of the year 2018-19 ₹ 70,000. During the year the company had sold 40% of its original investment at a profit of 50%. What will be the amount of cash inflow and cash outflow from the investment:
(A) ₹ 51,000 and ₹ 36,000
(B) ₹ 51,000 and ₹ 19,000
(C) ₹ 1,21,000 and ₹ 85,000
(D) ₹ 1,21,000 and ₹ 19,000
Answer:
(B) ₹ 51,000 and ₹ 19,000

Management of Cash and Marketable Securities – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Management of Cash and Marketable Securities – Financial Management MCQ

Question 1.
Which of the following will NOT appear in a Cash Budget?
(A) Machinery bought on hire purchase
(B) Depreciation of machinery
(C) Sales revenue
(D) Wages
Answer:
(B) Depreciation of machinery

Question 2.
Which of the following is not true about a cash budget?
(A) A cash budget sets out all cash receipts and payments that a business expects to make over a period of time.
(B) Cash budgets are usually prepared on a month-to month basis.
(C) Cash budgets show the expected bank balance at the end of the month.
(D) Cash budgets include personal cash receipts and expenses.
Answer:
(D) Cash budgets include personal cash receipts and expenses.

Question 3.
Of the four costs shown below, which would not be included in the cash budget of an insurance firm?
(A) Depreciation of fixed asset
(B) Commission paid to agents
(C) Office salaries
(D) Capital cost of a new computer
Answer:
(A) Depreciation of fixed asset

Question 4.
A cash budget for the six months ended 30th September 2020 shows an anticipated overdraft of approximately ₹ 9,05,500. Which of the following would reduce the expected overdraft?
(A) Allowing customers two months credit, instead of one month credit, in which to pay.
(B) Suppliers’ purchases being made for cash, instead of one month’s credit.
(C) Assets being leased, rather than purchased for cash, in 2020.
(D) Charging depreciation on fixed assets at 25% on the straight-line basis, rather than 20%.
Answer:
(C) Assets being leased, rather than purchased for cash, in 2020.

Question 5.
NSZ Ltd. cash budget forewarns of a short term surplus. Which of the following would be appropriate action to be taken in such a situation?
(A) Increase debtors and stock to boost sales
(B) Purchase new fixed assets
(C) Repay long term loans
(D) All of the above
Answer:
(A) Increase debtors and stock to boost sales

Question 6.
Which of the following is least likely to be considered a short-term marketable security?
(A) An original issue 30 years corporate bond with 1 year remaining until final maturity.
(B) An original issue 30 years government bond with 1 year remaining until final maturity.
(C) 90 days Treasury bill.
(D) Short-term corporate debt instruments with 9 months original maturity.
Answer:
(A) An original issue 30 years corporate bond with 1 year remaining until final maturity.

Question 7.
Which of the following would NOT lead to an increase in net cash flow?
(A) Larger sales volume
(B) Reduced materials costs
(C) Lower depreciation charge
(D) Higher selling price
Answer:
(C) Lower depreciation charge

Question 8.
The optimal balance of marketable securities held to take care of probable deficiencies in the firm’s cash account is referred to as the ……. segment in the firm’s portfolio of short-term marketable securities.
(A) Ready cash
(B) Controllable cash
(C) Free cash
(D) Cash and cash equivalent
Answer:
(A) Ready cash

Question 9.
Advantages of maintaining cash budgets would not include one of the following:
(A) Surplus cash can be put to more profitable uses if expected to occur
(B) Debtors can be paid more quickly
(C) Time is available to investigate the possible future sources of finance
(D) Overdrafts can be negotiated in advance of when they are needed
Answer:
(B) Debtors can be paid more quickly

Question 10.
Which of the following statements most accurately describes the modern approach to cash management?
(A) Cash management involves the efficient disbursement of cash.
(B) Cash management involves the efficient collection and disbursement of cash.
(C) Cash management involves the efficient processing, collection, and depositing of cash.
(D) None of the above
Answer:
(C) Cash management involves the efficient processing, collection, and depositing of cash.

Question 11.
Which of the following would be found in a cash budget?
(A) Capital expenditure
(B) Provision for doubtful debts
(C) Depreciation
(D) Accrued expenditure
Answer:
(C) Depreciation

Question 12.
Collection float is the
(A) Total time between the mailing of the cheque by the customer and the availability of cash to the receiving firm.
(B) Time consumed in clearing the cheque through the banking system.
(C) Time the cheque is in the mail.
(D) Time during which the cheque received by the firm remains uncollected.
Answer:
(A) Total time between the mailing of the cheque by the customer and the availability of cash to the receiving firm.

Question 13.
Which of the following will not affect preparation of cash budget?
(A) Loan taken by firm
(B) Proceeds from asset disposal
(C) Reduction in provision for doubtful debts
(D) Cash sales
Answer:
(C) Reduction in provision for doubtful debts

Question 14.
Deposit float is the
(A) Total time between the mailing of the cheque by the customer and the availability of cash to the receiving firm.
(B) Time consumed in clearing the cheque through the banking system.
(C) Time the cheque is in the mail.
(D) Time during which the check received by the firm remains uncollected.
Answer:
(D) Time during which the check received by the firm remains uncollected.

Question 15.
Which of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for the calendar year 2019?
(A) The annual depreciation for the year 2019.
(B) Purchase order issued in December 2014 for items to be delivered in February 2019.
(C) Dividends declared in November 2019, to be paid in January 2020 to shareholders of record as of December – 2019
(D) Funds borrowed from a bank on a note payable taken out in June 2018 with an agreement to pay the principal and all of the interest owed in December 2019.
Answer:
(D) Funds borrowed from a bank on a note payable taken out in June 2018 with an agreement to pay the principal and all of the interest owed in December 2019.

Question 16.
Availability float is the
(A) Total time between the mailing of the cheque by the customer and the availability of cash to the receiving firm.
(B) Time consumed in clearing the cheque through the banking system.
(C) Time the cheque is in the mail.
(D) Time during which the cheque received by the firm remains uncollected.
Answer:
(B) Time consumed in clearing the cheque through the banking system.

Question 17.
A cash budget is like an income statement.
(A) I agree
(B) I disagree
(C) I cannot say
(D) The statement is ambiguous
Answer:
(B) I disagree

Question 18.
Cash management is a broad term used for collecting and managing cash.
Speculative motive of holding cash refers to –
(A) Holding the cash to utilize it in internal projects.
(B) Holding the cash for any future loss the company is expecting.
(C) Holding the cash to avail any future investment opportunity.
(D) Holding the cash to utilize it for international project.
Answer:
(C) Holding the cash to avail any future investment opportunity.

Question 19.
Non-cash transactions
(A) Form part of cash budget
(B) Do not form part of cash budget
(C) May or may not form part of cash budget
(D) I cannot say whether they are part of cash budget
Answer:
(B) Do not form part of cash budget

Question 20.
Companies hold cash time to time. Transaction motive of holding cash means
(A) Keeping a cash reserve for purchasing goods and services to balance out the cash inflows and outflow.
(B) Keeping the cash for all the transactions made during a periodic term.
(C) Keeping the cash for transactions mandatory for day to day activities
(D) Keeping the transactions for foreign trading.
Answer:
(A) Keeping a cash reserve for purchasing goods and services to balance out the cash inflows and outflow.

Question 21.
Cash Budget statement shows the position of business as on …………. of the business period.
(A) Opening date
(B) Closing date
(C) Between opening and closing date
(D) None of the above
Answer:
(C) Between opening and closing date

Question 22.
The statement of cash flows tells us –
(A) The financial position of the business at a point in time.
(B) The forecast cash movements over a period of time.
(C) How much cash has been received and paid during an accounting period.
(D) How much profit the business has made during an accounting period.
Answer:
(C) How much cash has been received and paid during an accounting period.

Question 23.
Net profit+Non-cash expenditure=
(A) Cash profit
(B) Cash flow
(C) Out of cash
(D) Cash gross profit
Answer:
(A) Cash profit

Question 24.
Cash flow is –
(A) Linked only to the balance sheet.
(B) Linked only to the income statement.
(C) Not linked to the balance sheet or income statement.
(D) Linked to the balance sheet and income statement.
Answer:
(D) Linked to the balance sheet and income statement.

Question 25.
The term cash includes
(A) Cash and Bank Balances
(B) All the Current Assets
(C) All the Current Liabilities
(D) None of the above
Answer:
(A) Cash and Bank Balances

Question 26.
Which of the following statement is/are correct and which are incorrect?
I. Idle cash resources entail a great deal of cost in terms of interest charges and in terms of opportunities costs.
II. As per speculative motive of holding case, the efficient firms seek to deploy surplus cash in short term investments to get better returns.
III. Baumol’s model of cash management assumes that the cash is used randomly over a period of time.
Select the correct answer from the options given below:
(A) I & III
(B) I only
(C) II only
(D) III only
Answer:
(D) III only

Question 27.
“Cash budget reveals the effects of transactions involving movement of cash’’. This statement is
(A) Correct
(B) Not correct
(C) Partially correct
(D) None of the above
Answer:
(A) Correct

Question 28.
Which of the following is/are motive(s) for holding cash?
1. Transactional Motive
2. Speculative Motive
3. Derivative Motive
4. Contingency Motive
5. Promissory Motive
Select the correct answer from the options given below:
(A) 1,2,3
(B) 2,4,5
(C) 1,2,4
(D) 1,3,5
Answer:
(C) 1,2,4

Question 29.
Which one of the following events will reduce the cash balances of a business?
(A) Dividend proposed pending share-holder approval
(B) Purchase of stock on credit
(C) Creditors paid amounts owed
(D) Purchase of fixed assets on interest free credit
Answer:
(C) Creditors paid amounts owed

Question 30.
Which of the following statement is false?
(A) If the firm is engaged in cash purchase of raw material from a number of sources, its requirement of cash would be less than that a firm which buys on credit.
(B) A firm having cash purchase and cash sale would need to maintain more cash balance than a firm which buys on credit and sells on credit.
(C) Realistic cash forecasting mean that cash forecast for the entire next year should be prepared at its commencement.
(D) All of the above
Answer:
(A) If the firm is engaged in cash purchase of raw material from a number of sources, its requirement of cash would be less than that a firm which buys on credit.

Question 31.
A business may incur an operating loss in a given financial year yet has more cash in the bank at the end. A reason for this could be that:
(A) Some fixed assets were sold for cash
(B) Dividends paid were higher this year than last
(C) Payments to creditors were made more promptly
(D) Debtors were allowed a longer period of credit
Answer:
(A) Some fixed assets were sold for cash

Question 32.
The motive of holding cash for contingencies is based –
(A) On the fact the most liquid current asset has the maximum potential of value addition to a firm’s business.
(B) On size of the cash pool that depends upon the overall operations of the firm.
(C) On the need to maintain sufficient cash to act as a cushion to buffer against unexpected events.
(D) On medium through which all the transactions of the firm are carried out.
Answer:
(C) On the need to maintain sufficient cash to act as a cushion to buffer against unexpected events.

Question 33.
All of the following are true regarding the purpose of the statement of cash flows / cash budget except
(A) It is for predicting future cash flows
(B) It is for determining the company’s ability to pay dividends to share-holders and interest and principle to creditors
(C) It is for evaluating management decisions
(D) It is for reporting net income
Answer:
(D) It is for reporting net income

Question 34.
Which of the following is not method of preparation of cash budget?
(A) Receipts & Payments Method
(B) Adjusted Income Method
(C) Adjusted Balance Sheet Method
(D) Adjusted Revenue Method
Answer:
(D) Adjusted Revenue Method

Question 35.
Which of the following transactions would not create a cash flow?
(A) A company purchased some of its own shares from a shareholder.
(B) Amortization of a patent
(C) Payment of a cash dividend.
(D) Sale of equipment at book value.
Answer:
(B) Amortization of a patent

Question 36.
Which of the following is not an operating cash flow?
(A) Collection of cash from receivables
(B) Payment of income tax
(C) Payment of cash for operating expenses
(D) Purchase of equipment for cash
Answer:
(D) Purchase of equipment for cash

Question 37.
If you start with earnings before interest and taxes and then subtract a firm’s tax expense while adding back the amount of depreciation expense for the firm during the year, the resulting figure is called
(A) Free Cash Flow
(B) Operating Cash Flow
(C) Net Cash Flow
(D) Gross Cash Flow
Answer:
(B) Operating Cash Flow

Question 38.
Marketable securities are primarily
(A) Short-term debt instruments
(B) Short-term equity securities
(C) Long-term debt instruments
(D) Long-term equity securities
Answer:
(A) Short-term debt instruments

Question 39.
In cash flow method for preparing cash budget, payment of dividends and prepaid payments are –
(A) Deducted from opening balance of cash
(B) Added to opening balance of cash
(C) Not included in cash budget
(D) None of the above
Answer:
(A) Deducted from opening balance of cash

Question 40.
Concentration banking -…………..
(A) Increases idle balances.
(B) Moves excess funds from a concentration bank to regional banks.
(C) Is less important during periods of rising interest rates.
(D) Improves control over corporate cash.
Answer:
(D) Improves control over corporate cash.

Question 41.
As per Cash flow method, the amount of expected net operating cash profit during the fiscal is—
(A) Added to the opening balance of cash
(B) Deducted from the opening balance of cash
(C) Not included in cash budget
(D) None of the above
Answer:
(A) Added to the opening balance of cash

Question 42.
Which of the following marketable securities is the obligation of a commercial bank?
(A) Commercial paper
(B) Negotiable certificate of deposit
(C) Repurchase agreement
(D) T-bills
Answer:
(B) Negotiable certificate of deposit

Question 43.
Which of the following method is based on technique of cash flow statement?
(A) Cash Accounting Period
(B) Projected Balance Sheet Method
(C) Project forecast method
(D) None of the above
Answer:
(C) Project forecast method

Question 44.
The most basic requirement for a firm’s marketable securities –
(A) Safety
(B) Yield
(C) Marketability
(D) Transaction
Answer:
(A) Safety

Question 45.
Which of the following statements are not true about Projected Balance Sheet Method?
(A) It is good for long-term
(B) It is appropriate for annual cash forecast
(C) It is of extreme use for planning and control
(D) None of the above
Answer:
(C) It is of extreme use for planning and control

Question 46.
Float management is related to –
(A) Cash Management
(B) Inventory Management
(C) Receivables Management
(D) Raw Materials Management
Answer:
(A) Cash Management

Question 47.
While preparing cash budget, if there is no specific direction in respect of a particular item, it is assumed that payments or receipts will take place in –
(A) Current month
(B) Next month
(C) Month of occurrence
(D) Insufficient data to decide
Answer:
(C) Month of occurrence

Question 48.
Which of the following is not true of cash budget?
(A) Cash budget indicates timings of short-term borrowing.
(B) Cash budget is based on accrual concept.
(C) Cash budget is based on cash flow concept.
(D) Repayment of principal amount of law is shown in cash budget.
Answer:
(B) Cash budget is based on accrual concept.

Question 49.
Baumol’s Model of Cash Management attempts to:
(A) Minimise the holding cost
(B) Minimization of transaction cost
(C) Minimization of total cost
(D) Minimization of cash balance
Answer:
(C) Minimization of total cost

Question 50.
Which of the following would not lead to an increase in net cash flow?
(A) Higher selling price
(B) Reduced materials costs
(C) Lower depreciation charge
(D) Larger sales volume
Answer:
(C) Lower depreciation charge

Question 51.
Z Ltd. has an estimated cash payments of ₹ 8,00,000 for a one month period and the payments are expected to steady over the period. The fixed cost per transaction is ₹ 250 and interest rate on marketable securities is 12% p.a. Optimal cash balance = ₹ and No. of transaction = ?
(A) 20,000; 4.8
(B) 2,00,000; 48
(C) 20,00,000; 480
(D) 2,00,00,000; 4,800
Answer:
(B) 2,00,000; 48

Question 52.
The budgeted sales for the next four quarters are ₹ 1,92,000, ₹2,88,000, ₹2,88,000 & ₹ 3,36,000, respectively. It is estimated that sales will be paid as follows:
75% of the total will be paid in the quarter that the sales were made. Of the balance 50% will be paid in the quarter after the sale was made. The remaining 50% will be paid in the quarter after this.
The amount of cash received in quarter 3 will be
(A) ₹ 2,76,000
(B) ₹ 1,44,000
(C) ₹ 3,24,000
(D) ₹ 2,40,000
Answer:
(A) ₹ 2,76,000

Question 53.
A company has made the following budget forecasts for next year:

No other relevant information is available.
What is the company’s budgeted cash holding at 31 December next year?
(A) ₹ 34,000
(B) ₹ 26,000
(C) ₹ 6,000
(D) ₹ 56,000
Answer:
(D) ₹ 56,000

Question 54.
BDL Ltd. is currently preparing its cash budget for the year to 31 March 2019. An extract from its sales budget for the same year shows the following sales values.
March — 60,000
April — 70,000
May — 55,000
June — 65,000
40% of its sales are expected to be for cash. Of its credit sales, 70% are expected to pay in month after sale and take 2% discount. 27% are expected to pay in the second month after the sale, and the remaining 3% are expected to be bad debts. The value of sales budget to be shown in the cash budget for May 2018 is
(A) ₹ 60,532
(B) ₹ 61,120
(C) ₹ 66,532
(D) ₹ 86,620
Answer:
(A) ₹ 60,532

Question 55.
If the beginning balance of cash is ₹ 5,000 and the desired closing cash balance is ₹ 10,000, with the only other cash-related items being sales/revenue ₹ 15,00,000, direct materials purchases ₹ 10,45,000, and cost of direct labour ₹ 4,68,000, what would be the surplus or deficit of cash at the end of the period?
(A) Deficit of ₹ 8,000
(B) Surplus of ₹ 18,000
(C) Deficit of ₹ 18,000
(D) No surplus or deficit
Answer:
(C) Deficit of ₹ 18,000
5,000 + 15,00,000 (sales) – 10,45,000 (material purchase) – 4,68,000 (labour) – 10,000 (desired cash balance) = – 18,000

Question 56.
A Ltd. has observed its receivable collection pattern to be as follows: 40% in the month of the sale, 45% in the month following the sale, and 13% in the second month following the sale. Sales for the last 3 months of the year were as follows:
October ₹ 3,00,000; November, ₹ 4,50,000 and December, ₹ 6,25,000. Sales for January are budgeted to be ₹ 3,75,000.
What are the budgeted cash collections for January?
(A) ₹ 3,75,000
(B) ₹ 4,89,750
(C) ₹ 4,95,750
(D) ₹ 6,25,000
Answer:
(B) ₹ 4,89,750

Question 57.
N Ltd. has a separate account for cash disbursement. An estimated cash payments of ₹ 2,62,500 for a one month period and the payments are expected to steady over the period. The fixed cost per transaction is ₹ 25 and interest rate on marketable securities yields 7.5% p.a. Optimal cash balance = ?
(A) ₹ 45,826
(B) ₹ 14,491
(C) ₹ 4,583
(D) ₹ 43,826
Answer:
(A) ₹ 45,826

Question 58.
Use the following information to calculate net cash flow:
Cash sales ₹ 1,00,000; cash from account receivable payments ₹ 2,00,000; cash dividends received ₹ 3,000; dividends paid ₹ 4,000; rent paid ₹ 5,000 and amortization expense ₹ 6,000.
(A) ₹ 2,98,000
(B) ₹ 2,94,000
(C) ₹ 3,04,000
(D) ₹ 2,90,000
Answer:
(B) ₹ 2,94,000
1,00,000 + 2,00,000 + 3,000 – 4,000 – 5,000 = 2,94,000

Question 59.
If opening balance of accounts receivable is ₹ 2,68,800; closing balance is ₹ 2,97,600 and total credit sales during the year was ₹ 40,32,000. What is the cash received from debtors?
(A) ₹ 40,60,800
(B) ₹ 45,98,400
(C) ₹ 40,03,200
(D) ₹ 43,00,800
Answer:
(C) ₹ 40,03,200
2,68,800 + 40,32,000 – 2,97,600 = 40,03,200

Question 60.
Jagdish has made the following predictions for his business for the first 6 months of trading to 30th June 2019:
Sales in Jan, Feb & March = ₹ 20,000 per month
Sales in April, May & June = ₹ 35,000 per month
Sales will be on 1 month credit. Total cash received from customers during the 6 months ended 30th June 2019, will be:
(A) ₹ 1,65,000
(B) ₹ 1,45,000
(C) ₹ 1,85,000
(D) ₹ 1,30,000
Answer:
(D) ₹ 1,30,000

Question 61.
Jolly has made the following predictions for his business for the first 6 months of trading to 30 June 2019:
Sales in Jan, Feb & March = ₹ 20,000 per month
Sales in April, May & June = ₹ 35,000 per month
Sales will be on 1 month credit. Purchases will be for cash.
If goods are sold at a gross profit margin of 40%, and goods are replaced as soon as they are sold, the amount payable to suppliers in March 2019, will be:
(A) ₹ 8,000
(B) ₹ 10,000
(C) ₹ 12,000
(D) ₹ 14,000
Answer:
(C) ₹ 12,000
20,000 × 60% = 12,000

Question 62.
The annual cash requirement of A Ltd. is ₹ 10,00,000. The company has marketable securities in lot size of ₹ 50,000. Cost of conversion of marketable securities per lot is ₹ 1,000. The company can earn 5% annual yield on its securities. Calculate total cost.
(A) ₹ 21,000
(B) ₹ 21,250
(C) ₹ 18,750
(D) ₹ 12,500
Answer:
(B) ₹ 21,250

From the above calculation it is observed that when lot size of securities is Rs. 2,00000 the total costs are minimum at Rs. 10,000 and hence ills an economic lot size of selling securities.
Calculation of economic lot size by applying Baumol Model is as follows:

Question 63.
An extract from Chandan’s Cash Budget is given below: the 3 months ended 30th June?
(A) No overdraft facility is required.
(B) An overdraft of a little over ₹ 5,000 is required.
(C) An overdraft of a little over ₹ 8,000 is required.
(D) An overdraft of a little over ₹ 20,000 is required.

Answer:
(D) An overdraft of a little over ₹ 20,000 is required.

Question 64.
In a firm, the forecast of wages for month of December, January, February and March are ₹ 4,800, ₹ 6,000, ₹ 6,400 and ₹ 6,800. The time-lag in payment of wages is 1 /8 month.
Determine the amount of wages payable in each month January to March.
(A) ₹ 6,750, ₹ 6,350 and ₹ 5,850
(B) ₹ 5,850, ₹ 6,350 and ₹ 6,750
(C) ₹ 5,850, ₹ 6,750 and ₹ 6,350
(D) None of the above
Answer:
(B) ₹ 5,850, ₹ 6,350 and ₹ 6,750

Question 65.
Given estimated sales in February, March, April, May & June are ₹ 90,000, ₹ 96,000, ₹ 54,000, ₹ 87,000 & ₹ 63,000. In case 50% of sales are realized in the next month and balance in the next of next month, determine cash collection from sales in April and May.
(A) ₹ 93,000 and ₹ 75,000
(B) ₹ 93,000 and ₹ 70,500
(C) ₹ 75,000 and ₹ 70,500
(D) ₹ 75,000 and ₹ 75,000
Answer:
(A) ₹ 93,000 and ₹ 75,000

Question 66.
JPL has two dates when it receives its cash inflows, ie. Feb. 15 and Aug. 15. On each of these dates, it expects to receive ₹ 15 Crores. Cash expenditure are expected to be steady throughout the subsequent 6 month period. Presently, the ROI in marketable securities is 8% p.a., and the cost of transfer from securities to cash is ₹ 125 each time a transfer occurs. What is the optimal transfer size using the EOQ Model? What is the average cash balance?
(A) ₹ 9,06,186;₹ 4,53,093
(B) ₹ 96,825; ₹ 48,413
(C) ₹ 3,06,186; ₹ 1,53,093
(D) ₹ 9,68,246;₹ 4,84,123
Answer:
(D) ₹ 9,68,246;₹ 4,84,123

Question 67.
The annual cash requirement of A Ltd. is ₹ 10,00,000. The company has marketable securities in lot size of ₹ 1,00,000. Cost of conversion of marketable securities per lot is ₹ 1,000. The company can earn 5% annual yield on its securities. Calculate total cost.
(A) ₹ 10,500
(B) ₹ 10,450
(C) ₹ 12,500
(D) ₹ 14,500
Answer:
(C) ₹ 12,500

Question 68.
Z Ltd. has a separate account for cash disbursement. An estimated cash payments of ₹ 6,56,250 for a one month period and the payments are expected to steady over the period. The fixed cost per transaction is ₹ 20 and interest rate on marketable securities yields 10% p.a.
(A) ₹ 57,283
(B) ₹ 56,125
(C) ₹ 57,125
(D) ₹ 56,283
Answer:
(B) ₹ 56,125

Question 69.
The annual cash requirement of A Ltd. is ₹ 10,00,000. Cost of conversion of marketable securities per lot is ₹ 1,000. The company can earn 5% annual yield on its securities. Optimal cash balance = ? and No. of transactions = ?
(A) 1,00,000; 5
(B) 4,00,000; 10
(C) 2,00,000; 5
(D) 2,00,000; 10
Answer:
(C) 2,00,000; 5

Question 70.
Dec 2014: The following information is available:
Wages for January: ₹ 20,000 Wages for February: ₹ 22,000 Delay in payment of wages: 1/2 month
The amount of wages paid during the month of February is —
(A) ₹ 11,000
(B) ₹ 22,000
(C) ₹ 20,000
(D) ₹ 21,000
Answer:
(D) ₹ 21,000

Question 71.
Dec 2014: In an organization, cash sales is 25% and credit sales is 75%. Sales for October, 2013 is ₹ 12,00,000, November, 2013 ₹ 14,00,000, December, 2013 ₹ 16,00,000, January, 2014 ₹ 6,00,000 and February, 2014 ₹ 8,00,000. 60% of credit sales are collected in the next month after sales, 30% in the second month and 10% in the third month. No bad debts are anticipated. The cash collected in the month of February, 2014 from debtors is —
(A) ₹ 15,00,000
(B) ₹ 9,80,000
(C) ₹7,35,000
(D) ₹ 80,000
Answer:
(C) ₹7,35,000

Question 72.
June 2015: In Rise Ltd., cash sales is 25% and credit sales 75%. Sales for November, 2014 is ₹ 15,00,000, December, 2014? 14,00,000, January, 2015 ? 16,00,000, February, 2015 ₹ 10,00,000 & March, 2015 ₹ 9,00,000. 60% of the credit sales are collected in the next month after sales, 30% in the second month and 10% in the third month. No bad debts are anticipated. The cash collected in the month of March, 2015 from debtors is —
(A) ₹ 14,60,000
(B) ₹ 14,20,000
(C) ₹ 12,20,000
(D) ₹ 9,15,000
Answer:
(D) ₹ 9,15,000

Question 73.
June 2015: Estimated wages for January is ₹ 4,000 and for February ₹ 4,400. If the delay in payment of wages is 1/2 month, the amount of wages to be considered in cash budget for the month of February will be –
(A) ₹ 4,000
(B) ₹ 4,400
(C) ₹4,600
(D) ₹ 4,200
Answer:
(D) ₹ 4,200

Question 74.
June 2016: Kriti Ltd. has provided following information for the quarter January to March:

20% of the sales are on cash basis and balance on credit basis. The amount to be collected from debtors in the month of February and March will be —
(A) Zero and ₹ 8,000 respectively
(B) ₹ 8,000 & ₹ 16,000 respectively
(C) ₹ 8,000 & ₹ 24,000 respectively
(D) ₹ 16,000 & ₹ 36,000 respectively
Answer:
(C) ₹ 8,000 & ₹ 24,000 respectively

Amount collected from debtors = Opening Balance + Credit Sales – Closing Balance
Feb = 16,000 + 32,000 – 40,000 = 8,000
Mar = 40,000 + 48,000 – 64,000 = 24,000

Question 75.
Dec 2016: While preparing cash budget, which of the following items would not be included —
(A) Interest paid to debenture holders
(B) Salaries and wages
(C) Bonus shares issued
(D) Income-tax paid
Answer:
(C) Bonus shares issued

Question 76.
Dec 2016: Consider the following statements:
(1) Depreciation reduces tax liability, hence it is a source of funds.
(2) Decrease in current liabilities during the year results in an increase in working capital.
(3) The term cash equivalents includes short-term marketable investments.
(4) Conversion of debentures into equity shares appears in funds flow statement.
(5) Only non-cash expenses are added to net profit to find out funds from operation.
Select the incorrect statements from the options given below —

Answer:
(C)

From the above calculation it is observed that when lot size of securities is Rs. 2,00000 the total costs are minimum at Rs. 10,000 and hence ills an economic lot size of selling securities.
Calculation of economic lot size by applying Baumol Model is as follows:

Question 77.
Dec 2018: Which of the following involves a movement of cash?
(A) A bonus issue
(B) A right issue
(C) Depreciation of fixed assets
(D) Provision for taxes
Answer:
(B) A right issue

Question 78.
Dec 2018: Working capital will not change if there is:
(A) Increase in current assets
(B) Payment to the creditors
(C) Decrease in current liabilities
(D) Decrease in current assets
Answer:
(B) Payment to the creditors

Question 79.
Dec 2018: Which one of the following is fake?
(A) If cash outflows exceed cash inflows on an ongoing basis, the business will eventually run out of cash.
(B) Rapidly expanding companies can sometimes face a cash shortage.
(C) Cash is the lifeblood of a business and without it the business will die.
(D) A profitable company will never run out of cash.
Answer:
(D) A profitable company will never run out of cash.

Question 80.
June 2019: The following information extracted from the records of P Ltd.
Sales for October, November and December, 2018 are ₹ 90,000, ₹ 1,10,000 and ₹ 80,000respectively. 40% of its sales are expected to be for cash. Of its credit sales 70% are expected to pay in the month after sales and take 2% discount on it. Balance is expected to pay in second month after sales and 3% of it is expected to bad debts. What are the sales receipts to be shown in cash budget for the month of December?
(A) ₹ 92,990
(B) ₹ 1,23,174
(C) ₹ 95,609
(D) ₹ 1,25,793
Note: MCQ is wrongly drafted; for further clarification please see the hints.
Answer:

None of the option contains figure of 91,856 and hence MCQ is wrong.

Question 81.
June 2019: The following information What will be the amount of cash from is given:
Depreciation provided dining the year: Furniture ₹ 15,000, Building ₹ 14,000. The statement of P&L for the year: Opening balance ₹ 38,500 Add Profit for the year 140,300, Less: Goodwill written off ? 15,000, Closing balance ₹ 63,800. What will be the amount of cash from is given: operations?
(A) ₹ 69,300
(B) ₹ 54,300
(C) ₹ 78,800
(D) ₹ 25,300
Answer:
(A) ₹ 69,300
63,800 + 15,000 + 15,000 + 14,000 – 38,500 = 69,300

Going through the Valuation, Principles & Framework – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Valuation, Principles & Framework – Corporate and Management Accounting MCQs

Question 1.
Which of the following statement is incorrect regarding ‘Business Valuation?
(A) It is an examination conducted towards rendering an estimate or opinion as to the fair market value of a business interest at a given point in time.
(B) Valuation is an art rather than an exact science.
(C) Business valuation is a precise science.
(D) Valuation estimates and opinions are generally stated as a range of values.
Answer:
(C) Business valuation is a precise science.

Question 2.
Assertion (A):
Valuation can be used as a very effective business tool by management for better decision making throughout the life of the enterprise.
Reason (Re-valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, determination of tax liability and in litigation.
Select the correct answer from the options given below:
(A) A is true but R is false
(B) A is false but R is true
(C) Both A and R true but R is not correct explanation of A
(D) Both A and R true and R is correct explanation of A
Answer:
(D) Both A and R true and R is correct explanation of A

Question 3.
A business valuation is an examination conducted towards rendering as to the fair market value of a business interest at a given point in time.
(A) An estimate
(B) An Opinion
(C) An estimate or opinion
(D) Ruling or judgment
Answer:
(C) An estimate or opinion

Question 4.
Which of the following item is not deducted while calculating Capital Employed as per ‘Long Term Funds Approach?
(A) Outstanding & accrued interest
(B) Tax provisions
(C) Debentures
(D) Non-current liabilities
Answer:
(C) Debentures

Question 5.
Like accounting, valuation is –
(A) Method
(B) An exact science
(C) An art rather than an exact science
(D) None of the above
Answer:
(C) An art rather than an exact science

Question 6.
Which of the following item will not be deducted while calculating shareholders funds as per Net Asset value Method?
(A) Debentures
(B) Liabilities not provided in account
(C) Dividend
(D) Outstanding expenses
Answer:
(C) Dividend

Question 7.
As per Net Asset value Method while calculating capital employed debtors are taken at
(A) Book value
(B) Realizable value
(C) Present value
(D) Value in use
Answer:
(B) Realizable value

Question 8.
Companies in merger need valuation of business as a going concern to settle the:
(A) Assets
(B) Liabilities
(C) Purchase consideration
(D) Deferred tax
Answer:
(C) Purchase consideration

Question 9.
Net asset value per share is also known as –
(A) Internal value per share
(B) Intrinsic value per share
(C) Economic value per share
(D) Recoverable value per share
Answer:
(B) Intrinsic value per share

Question 10.
A number of different measurement bases are employed to different degrees and in varying combinations in valuation of different assets in different areas of application. You are required to state which of the following base is not used in business valuation?
(A) Historical Cost
(B) Current Cost
(C) Realizable Value
(D) Notional cost
Answer:
(D) Notional cost

Question 11.
Which of the following is deducted while calculating net assets available to equity shareholders?
(A) Proposed preference dividend
(B) Share suspense account
(C) Know-how
(D) Non-trading investment
Answer:
(A) Proposed preference dividend

Question 12.
As per historical cost concept -…………
(A) Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset were acquired currently.
(B) Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal.
(C) Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire them at the time of their acquisition.
(D) Assets are carried at the present value of the future net cash inflows that the item is expected to generate in the normal course of business.
Answer:
(C) Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire them at the time of their acquisition.

Question 13.
Market based methods of valuation should not be adopted when -………..
(A) When business is too small
(B) When assets are less than liabilities of the business
(C) In case of significant and unusual fluctuations in market price
(D) It is difficult to estimate the realizable value in case of going concern.
Answer:
(C) In case of significant and unusual fluctuations in market price

Question 14.
………….. is same as the Realizable (settlement) value. This is the value (net of expenses) that can be realized by disposing off the assets in an orderly manner.
(A) Present Value
(B) Historical Cost
(C) Realizable (Settlement) Value
(D) Liquidation Value
Answer:
(C) Realizable (Settlement) Value

Question 15.
Market value method is generally the most preferred method in case of -…………
(A) Frequently traded shares of companies listed on stock exchanges having nationwide trading
(B) Valuation of a division of a company
(C) Where the share are not listed or are thinly traded
(D) Where there is an intention to liquidate it and to realize the assets and distribute the net proceeds.
Answer:
(A) Frequently traded shares of companies listed on stock exchanges having nationwide trading

Question 16.
Discounted cash flow valuation is based upon -………….
(A) Expected future discount that likely to be earned.
(B) Real worth of the business
(C) Expected future cash flows and discount rates.
(D) Earning capacity of the company
Answer:
(C) Expected future cash flows and discount rates.

Question 17.
Net Realizable Value means –
(A) Price the buyer is ready to pay.
(B) Same value as the present value.
(C) Value net of expenses.
(D) Higher of the net selling price and value in use.
Answer:
(C) Value net of expenses.

Question 18.
Statement I:
Net Asset Method can be fairly used to value shares when the firm is liquidated.
Statement II:
This method does not give any weight to earning capacity of the company.
Select the correct answer from the options given below:
(A) Statement I is correct but Statement II is incorrect
(B) Statement I is incorrect but Statement II is correct
(C) Both Statement I and Statement II are incorrect
(D) Both Statement I and Statement II are correct
Answer:
(D) Both Statement I and Statement II are correct

Question 19.
Which of the following is normally used as discounting factor under the discounted cash flow valuation?
(A) Cost of equity
(B) Cost of debt
(C) Annuity factor
(D) Overall cost of capital
Answer:
(D) Overall cost of capital

Question 20.
Present value means –
(A) Value in use
(B) Value of future cash flows
(C) Value calculated using IRR
(D) Present value that buyer is ready to pay
Answer:
(B) Value of future cash flows

Question 21.
Which of the following is required to be taken into consideration while valuing equity shares of the company?
(A) Size of the block of shares
(B) Restricted transferability aspect
(C) Dividends
(D) All of the above
Answer:
(D) All of the above

Question 22.
Match the following:
List-I — List-II
A. Present Value — 1. Lower of the replacement value & recoverable value
B. Liquidation value — 2. Higher of the net selling price and value in use
C. Deprival Value — 3. Value of the future net cash inflows
D. Recoverable Value — 4. Value net of expenses
Select the correct answer from the options given below:

Answer:
(B)

Question 23.
Which of the following is correct formula for Capitalization of Earning Method?
(A) ‘Net Operating Income’ divided by ‘Capitalization Rate’
(B) ‘Net Profit’ divided by ‘Discount Rate’
(C) ‘Net Operating Income’ divided by ‘Growth Rate’
(D) ‘Dividend Per Share’ divided by ‘Annuity Rate’ multiplied by total number of shares
Answer:
(A) ‘Net Operating Income’ divided by ‘Capitalization Rate’

Question 24.
In which of the following cases valuation is essential?
(A) Conversion of debt instruments into shares.
(B) On directions of Tribunal or Authority or Arbitration Tribunals.
(C) When issuing shares to public either through an Initial Public Offer or by offer for sale.
(D) Valuation is always depends on fact that who is valuing what.
Answer:
(D) Valuation is always depends on fact that who is valuing what.

Question 25.
Which of the following is another name for the required return on a stock?
(A) Discount rate
(B) Dividend payout ratio
(C) Retention ratio
(D) Value
Answer:
(A) Discount rate

Question 26.
Which of the following is not a general principle involved in business valuation?
(A) Value is determined at a specfic point in time.
(B) Value is prospective.
(C) Value is influenced by liquidity.
(D) Valuation is always depends on fact that who is valuing what.
Answer:
(D) Valuation is always depends on fact that who is valuing what.

Question 27.
Which of the following is equal to the present value of all cash proceeds received by a stock investor?
(A) Value
(B) Retention ratio
(C) Dividend payout ratio
(D) Discount rate.
Answer:
(A) Value

Question 28.
Which of the following do financial analysts consider least important when assessing the long-run economic and financial outlook of a company?
(A) Expected return on equity
(B) Prospects of the relevant industry
(C) Expected changes in EPS
(D) General economic conditions
Answer:
(D) General economic conditions

Question 29.
Provisions relating to ‘valuation by registered valuers’ are contained in -…………
(A) Section 247 of the Companies Act, 2013
(B) Section 242A of the Income-tax Act, 1961
(C) Section 347 of the Companies Act, 2013
(D) Section 240AB of the Income-tax Act, 1961
Answer:
(A) Section 247 of the Companies Act, 2013

Question 30.
Which of the following is NOT a method of business valuation?
(A) Asset based
(B) Earnings based
(C) Market based
(D) Equity based
Answer:
(D) Equity based

Question 31.
Analysts commonly consider all of the following to be indicators that the market is overvalued except…………..
(A) High average P/E ratio
(B) High average price-to-book ratio
(C) High average dividend yield
(D) All of the above
Answer:
(C) High average dividend yield

Question 32.
Which of the following best describes the replacement value of a business?
(A) Value if sold off piece-meal
(B) Value to replace assets with new
(C) Cost of setting up an equivalent venture
(D) Net present value of current operations
Answer:
(B) Value to replace assets with new

Question 33.
As per Section 247 of the Companies Act, 2013, where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the –
(A) Audit committee
(B) Board of Directors of the company.
(C) Board of Directors on recommendation of audit committee.
(D) Audit committee or in its absence by the Board of Directors of that company.
Answer:
(D) Audit committee or in its absence by the Board of Directors of that company.

Question 34.
Which of the following best defines the market capitalization for a company’s shares?
(A) When a company is listed ie. goes ‘public’
(B) When a company issues new shares and thus increases its capital
(C) Current share price
(D) Share price X number of shares in issue
Answer:
(D) Share price X number of shares in issue

Question 35.
Value of perpetual bond is calculated by:
(A) Interest divided by rate of cost of equity
(B) Fixed income on security divided by required rate of return
(C) Fixed income on security divided by growth rate
(D) Interest divided by rate of growth
Answer:
(B) Fixed income on security divided by required rate of return

Question 36.
As per Section 247(3) of the Companies Act, 2013, if a valuer contravenes the provisions of this section or the rules made thereunder, the valuer shall be punishable with fine which shall not be less than but which may extend to …………
(A) ₹ 50,000; ₹ 1,00,000.
(B) ₹ 25,000;₹ 1,00,000.
(C) ₹ 75,000; ₹ 1,50,000.
(D) ₹ 25,000; ₹ 50,000.
Answer:
(B) ₹ 25,000;₹ 1,00,000.

Question 37.
The value of ……….. is the present value of its par value for maturity years discounted at required rate of return.
(A) Irredeemable bond
(B) Perpetual bond
(C) Volatility of bond
(D) Deep discount bond
Answer:
(D) Deep discount bond

Question 38.
Value of business as per Asset based valuation -…………
(A) Liquidation value of assets minus replacement value of liabilities
(B) Market value of assets minus present value of liabilities
(C) Current/realizable value assets minus current value liabilities
(D) Current assets minus current liabilities
Answer:
(C) Current/realizable value assets minus current value liabilities

Question 39.
The rate of tax affects the –
(A) Cost of retained earning
(B) Cost of debt
(C) Cost of equity
(D) All of the above
Answer:
(D) All of the above

Question 40.
Floatation costs are those expenses which are incurred while –
(A) issuing securities
(B) repayment of debts
(C) negotiations for business deal
(D) repayment of equity and debts
Answer:
(A) issuing securities

Question 41.
From the following details calculate the net asset value:
Fixed assets 1,000 lakh (1,215 lakh)
Cash in hand 35 lakh
Current assets 440 lakh (470 lakh)
Current liabilities 55 lakh
Dividend payable 6 lakh
Figures in bracket indicates market prices of the assets/liabilities.
(A) 1,665 lakh
(B) 1,629 lakh
(C) 1,420 lakh
(D) 1,720 lakh
Answer:
(A) 1,665 lakh
1,215 + 35 + 470-55 = 1,665

Question 42.
Following details are available for two Y Ltd. has 40 lakh Equity Shares of ₹ 75 paid-up.What is the intrinsic value per share for these companies?


X Ltd. has 9 lakh Equity Shares of 150 each, 135 paid-up.
Y Ltd. has 40 lakh Equity Shares of 75 paid-up.
What is the intrinsic value per share for these companies?
(A) ₹ 185.10 & ₹ 180 per share
(B) ₹ 118.50 & ₹ 102 per share
(C) ₹181.50 & ₹ 108 per share
(D) ₹ 185.10 & ₹ 102 per share
Answer:
(C) ₹181.50 & ₹ 108 per share

Question 43.
Ramola Ltd. gives the following cash flows estimate:
2015: ₹ 2,000 lakhs
2016 to 2018: Compound growth rate 6.5%
2019 to 2022: Compound growth rate 9.5%
Apply 20% risk-adjusted discount rate and determine the value of business.
(A) ₹ 9,530.07 lakh
(B) ₹ 9,053.70 lakh
(C) ₹ 9,750.03 lakh
(D) ₹ 9,350.07 lakh
Answer:
(D) ₹ 9,350.07 lakh

Question 44.
If business is likely to generate cash flow as given below in next 5 years then what is the value of business as per discounted cash flow method.
Year 1: 120 lakh
Year 2: 160 lakh
Year 3: 200 lakh
Year 4: 280 lakh
Year 5:340 lakh
Use 20% discount factor.
(A) ₹ 598.53 lakh
(B) ₹ 589.53 lakh
(C) ₹ 578.35 lakh
(D) ₹ 553.98 lakh
Answer:
(A) ₹ 598.53 lakh

Question 45.
Balance sheets of FDL Ltd. and GCL Ltd. are as follows:

Both companies were amalgamated and a new company WWL Ltd. was formed. Fixed assets of FDL were valued at ₹ 10,000 and that of GCL were valued at ₹ 9,000. WWL would issue the requisite number of equity shares of ₹ 10 each at 50% premium to discharge the claim of equity shareholders of FDL and GCL. How many shares of WWL should be issued to take over the business of the two merging companies?
(A) 1,200 shares
(B) 1,500 shares
(C) 1,334 shares
(D) 1,800 shares
Answer:
(B) 1,500 shares

Total shares to be issued = 766.67 + 733.33 = 1,500

Question 46.
The Wind Urja Ltd. (WUL) is a closely held unlisted company with financial details as under:

Worldwide Wind Energy Ltd. is ready to takeover WUL by paying 35% premium over the market value of assets and liabilities as goodwill. Calculate the price which WWEL is ready to pay to shareholders of WUL.
(A) ₹ 7,535 lakhs
(B) ₹ 10,725 lakhs
(C) ₹ 10,172.25 lakhs
(D) ₹ 12,217.52 lakhs
Answer:
(C) ₹ 10,172.25 lakhs

Question 47.
The shares of company are selling at ₹ 45 per share. The firm had paid dividend @ ₹ 4.5 per share last year. The estimated growth of the company is approximately 5% per year. Determine the cost of equity of the company.
(A) 15.5%
(B) 12.3%
(C) 11.4%
(D) 16.8%
Answer:
(A) 15.5%

Question 48.
The shares of company are selling at ₹ 20 per share. The firm had paid dividend @ ₹ 2 per share last year. The estimated growth of the company is approximately 8% per year. Required rate of return is 15.5%. Market value of equity shares as per dividend growth model will be:
(A) ₹ 32.4 per share
(B) ₹ 28.8 per share
(C) ₹ 25.5 per share
(D) ₹ 29.1 per share
Answer:
(B) ₹ 28.8 per share

Question 49.
ZPA Ltd. is foreseeing a growth rate of 12% p.a. in the next two years. The growth rate is likely to fall to 10% for the third year and forth year. After that growth rate is expected to stabilize at 8% p.a. If the last dividend (D0) paid was ₹ 1.5 per share and investor’s required rate of return is 16%, find out the intrinsic value per share of ZPA Ltd. as of date.

(A) ₹ 22.33 per share
(B) ₹ 23.32 per share
(C) ₹ 33.22 per share
(D) ₹ 23.23 per share
Answer:
(A) ₹ 22.33 per share

Question 50.
Balance Sheet of Smileheavy Ltd. as at 31.3.2019 reveals as under:


Current value of Land & Buildings is ₹ 30,00,000, Furniture, Fixture & Fittings is ₹ 2,50,000. Inventory is valued at ₹ 9,11,000. Debtors are expected to realize 90% of their book value. You are informed that preference dividend has not been paid for the last 5 years. Calculate the intrinsic value of per equity shares having face value of ₹ 6 each fully paid-up by Net Assets Method.
(A) ₹ 9.037 per share
(B) ₹ 5.037 per share
(C) ₹ 6.42 per share
(D) ₹ 5.42 per share
Answer:
(D) ₹ 5.42 per share

Question 51.
A large chemical company has been expected to grow at 14% per year for next 4 years and then to grow indefinitely at the same rate as national economy ie. 5%. The required rate of return on equity share is 12%. Assume that company paid a dividend of ₹ 2 per share last year (D0 = 2). Determine the market price of the shares today.
(A) ₹ 42.60 per share
(B) ₹ 46.20 per share
(C) ₹ 40.62 per share
(D) ₹ 45.46 per share
Answer:
(C) ₹ 40.62 per share

Question 52.
The required rate of return of investors is 15%. ABC Ltd. declared and paid annual dividend of ₹ 4 per share. It is expected to grow @ 20% for the next 2 years and 10% thereafter. Compute the price at which the shares should sell.
PVFactors: @ 15% for Year 1 = 0.8696 and Year 2= 0.7561.
(A) ₹ 108.80 per share
(B) ₹ 104.40 per share
(C) ₹ 110.10 per share
(D) ₹ 105.25 per share
Answer:
(B) ₹ 104.40 per share

Intrinsic value of ABC Ltd. is 104.40.

Question 53.
Anurag has invested in a share whose dividend is expected to grow @15% for 5 years and thereafter @ 5% till life of the company. Find out the value of the share, if current dividend is ₹ 4 per share and investors required rate of return is 6%.
(A) ₹ 656.93 per share
(B) ₹ 665.39 per share
(C) ₹ 666.99 per share
(D) ₹ 693.56 per share
Answer:
(A) ₹ 656.93 per share

Question 54.
A bond has face value of ₹ 1,000 and coupon rate is 8%. Interest on bond is payable annually. Find the value of bond if the required rate of return is 6% and bond is perpetual bond.
(A) ₹ 1,333
(B) ₹ 1,667
(C) ₹ 1,445
(D) ₹ 1,222
Answer:
(A) ₹ 1,333

Question 55.
A bond has face value of ₹ 1,000 and coupon rate is 8%. Interest on bond is payable annually. Find the value of bond if the required rate of return is 10% and bond has maturity of 20 years.
(A) ₹ 681.12
(B) ₹ 849.21
(C) ₹ 830.12
(D) ₹ 765.48
Answer:
(C) ₹ 830.12

Question 56.
ZPA Ltd. issued ₹ 1,000 optionally convertible debentures at a coupon rate of 10%. These debentures are convertible to 50 equity shares today. The shares are quoting ₹ 25 in stock market. Investor expects 8% return on his investment. Debentures are redeemable after 5 years. Will you suggest conversion?
(A) No, as fair value of debenture is ₹ 1,080.30 which is more than fair market value of shares
(B) No, as fair value of debenture is ₹ 1,170.60 which is less than fair market value of share
(C) Yes, as fair value of debenture is ₹ 1,080.30 which is less than fair market value of shares
(D) Yes, as fair value of debenture is ₹ 1,238.30 which is more than fair market value of shares
Answer:
(C) Yes, as fair value of debenture is ₹ 1,080.30 which is less than fair market value of shares

Market value of shares =50 × 25= 1,250
Analysis: Since market value of shares is more than fair value of debenture an investor is advised to convert debentures into equity shares.

Question 57.
Zensar Ltd. issued 5 year 12% Bond. Face value of the bond is ₹ 1,000 which is redeemable in 5 equal installments. What would be the current price of the bond if the YTM is 10%?
(A) ₹ 1,170.60
(B) ₹ 1,080.30
(C) ₹ 1,048.13
(D) ₹ 1,238.30
Answer:
(C) ₹ 1,048.13

Question 58.
What is value of deep discount bond issued by IDBI for a maturity period of 15 years and having a par value of ₹ 1,00,000 if the required rate of return is 12%?
(A) ₹ 12,000
(B) ₹ 15,400
(C) ₹ 22,600
(D) ₹ 18,300
Answer:
(D) ₹ 18,300
The value of deep discount bond is the present value of ₹ 1,00,000 for 15 years discounted at 12%. The value of deep discount bond = 1,00,000 × 0.183 = 18,300

Question 59.
A Zero Coupon Bond (ZCB) was issued at a face value of ₹ 2,50,000 and has maturity of 5 years. Its YTM is 8%. What would be fair price of bond today?
(A) ₹ 1,70,250
(B) ₹ 1,80,520
(C) ₹ 1,60,750
(D) ₹ 1,90,140
Answer:
(A) ₹ 1,70,250
The value of zero coupon bond is the present value of ₹ 2,50,000 for 5 years discounted at 8%.
The value of zero coupon bond = 2,50,000 × 0.681 = ₹ 1,70,250

Question 60.
A Zero Coupon Bond (ZCB) was issued at a face value of ₹ 2,50,000 and has maturity of 5 years. Its YTM is 8%.
Whether investor should buy, hold or sell the ZCB if the current market price is – (a) ₹ 1,85,000 (b) ₹ 1,65,000
Select the correct answer from the options given below.

Answer:
(C)
The value of zero coupon bond is the present value of ₹ 2,50,000 for 5 years discounted at 8%.
The value of zero coupon bond = 2,50,000 × 0.681 = ₹ 1,70,250
Investment Decisions:
(a) If the current market price of ZCB is ₹ 1,85,000, investor should sell the bond as market price is more than fair market value of the bond.
(b) If the current market price of ZCB is ₹ 1,65,000, investor should buy the bond as market price is less than fair market value of the bond.

Question 61.
Agfa Industries is planning to issue a debenture series on the following terms:

Current market rate on similar debentures is 15% p.a. The Company proposes to price the issue in such a manner that it can yield 16% compounded rate of return to the investors. Debentures will be redeemed at 5% premium on maturity. Determine the issue price of the debentures.
(A) ₹ 71.33
(B) ₹ 79.42
(C) ₹ 83.67
(D) ₹ 70.44
Answer:
(A) ₹ 71.33

Question 62.
John holds 10 Bonds whose face value is ₹ 1,000. Coupon rate is 9%. Yield is 12% and bond matures in 3 years. What is the value of John’s total investment today?
(A) ₹ 10,000
(B) ₹ 9,282
(C) ₹ 10,822
(D) ₹ 9,984
Answer:
(B) ₹ 9,282

Question 63.
Parag holds 10 Bonds whose face value is ₹ 1,000. Coupon rate is 10%. Yield is 12% and bond matures in 5 years. What is the value of Parag’s total investment today?
(A) ₹ 10,000
(B) ₹ 9,275
(C) ₹ 10,527
(D) ₹ 9,875
Answer:
(B) ₹ 9,275

Value 10 bonds = 927.5 × 10 9,275

Question 64.
Ram holds 100 irredeemable preference shares of Modi Ltd. coupon rate is 11%. Yield is 13%. Face value is ₹ 100. What is the value of Ram’s total investment today?
(A) ₹ 8,578
(B) ₹ 8,246
(C) ₹ 8,462
(D) ₹ 9,578
Answer:
(C) ₹ 8,462

\(\frac{11}{0.13}=84.62\)
Value of I 00 preference shares = 100 × 84.62 = 8,462

Question 65.
Lakhan holds 100 irredeemable preference shares of Maya Ltd. Coupon rate is 12%. Yield is 13%. Face value is ₹ 100. What is the value of Lakhan’s total investment today?
(A) ₹ 9,438
(B) ₹ 9,231
(C) ₹ 9,134
(D) ₹ 9,292
Answer:
(B) ₹ 9,231
\(\frac{12}{0.13}\)=92.31
Value of 100 preference shares = 100 X 92.31 = 9,231

Question 66.
Domino is an all-equity firm with a current cost of equity of 18%. The EBIT of the firm is ₹ 2,04,000 annually forever. Currently, the firm has no debt but is in the process of borrowing ₹ 5,00,000 at 9% interest. The tax rate is 34%. What is the value of the unlevered firm?
(A) ₹ 7,23,150
(B) ₹ 6,54,900
(C) ₹ 7,48,000
(D) ₹ 6,09,900
Answer:
(C) ₹ 7,48,000

Security Analysis and Portfolio Management – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Security Analysis and Portfolio Management – Financial Management MCQ

Question 1.
Security Analysis is a process of estimating for individual securities.
(A) Return and risk
(B) Risk and correlation
(C) Correlation and coefficient
(D) Return and coefficient
Answer:
(A) Return and risk

Question 2.
Standard deviation determine -…………..
(A) Systematic risk of a security
(B) Unsystematic risk of security
(C) Total risk of security
(D) Premium of security
Answer:
(C) Total risk of security

Question 3.
Financial Assets are -…………
(A) Pieces of paper representing an indirect claim to real assets in form of debt or equity commitments.
(B) Tangible, material things such as buildings, furniture, automobiles etc.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) Pieces of paper representing an indirect claim to real assets in form of debt or equity commitments.

Question 4.
………….. is one who exercises any degree of discretion as to the investment or management of the portfolio of the securities or the funds of the client.
(A) Non-discretionary portfolio manager
(B) Portfolio investor
(C) Discretionary portfolio manager
(D) Portfolio custodian
Answer:
(C) Discretionary portfolio manager

Question 5.
Return from listed security is in two forms –
(A) One is interest and second is capital appreciation in price.
(B) One is stock split and second is dividend.
(C) One is interest and second is dividend.
(D) One is dividend and second is capital appreciation in price.
Answer:
(D) One is dividend and second is capital appreciation in price.

Question 6.
Which of the following is correct formula to calculate returns of listed security?
(A) [(P₁ – P₀) + D] ÷ [P₀ x 100]
(B) [(P₁ – P₀) + D] ÷ [P₀ x 100]
(C) [(P₁ – P₀) – D] ÷ [P₀ x 100]
(D) [(P₁ – P₀) + D (1 -t)] ÷ [P₀ x 100]
Answer:
(A) [(P₁ – P₀) + D] ÷ [P₀ x 100]

Question 7.
If probability of occurrence is assigned, then the expected return would be:
(A) average return being assigned to return of security for the various scenarios
(B) weighted average of probabilities being assigned to return of security for the various scenarios
(C) weighted average return with probabilities being assigned to return of security for the various scenarios
(D) weighted average return multiplied by risk with probabilities being assigned to return of security for the various scenarios
Answer:
(C) weighted average return with probabilities being assigned to return of security for the various scenarios

Question 8.
Standard deviation is a deviation from -……………
(A) Arithmetic mean
(B) Harmonic mean
(C) Median mean
(D) Mode mean
Answer:
(A) Arithmetic mean

Question 9.
Standard deviation is expressed -……………
(A) always in percentage
(B) in same units in respect of which the deviation is computed.
(C) in terms of rupee risk
(D) in terms of amount
Answer:
(B) in same units in respect of which the deviation is computed.

Question 10.
The market price of a bond depend on -……………
(A) The coupon rate and terms of the indenture
(B) The coupon rate and maturity date
(C) The terms of the indenture, and maturity date
(D) The coupon rate, terms of the indenture, and maturity date
Answer:
(D) The coupon rate, terms of the indenture, and maturity date

Question 11.
Investment with lower standard deviation carries -……………
(A) High risk
(B) Less risk
(C) Infinite risk
(D) Avoidable risk
Answer:
(B) Less risk

Question 12.
Which of the following is on the horizontal axis of the Security Market Line?
(A) Standard deviation
(B) Beta
(C) Expected return
(D) Required return
Answer:
(B) Beta

Question 13.
Covariance is a measurement of -……………
(A) The co-movement between two variables
(B) The link between the variability of returns in two independent securities
(C) Both (A) and (B)
(D) None of the above
Answer:
(C) Both (A) and (B)

Question 14.
Expected worth is the –
(A) Inverse of standard deviation
(B) Correlation between a security
(C) Same as discrete probability distribution
(D) Weighted average of all possible outcomes
Answer:
(D) Weighted average of all possible outcomes

Question 15.
Positive Covariance indicates that –
(A) Returns on two assets bear a tendency to off-set each other Le. if return on A is above par, return on B is likely to be below par. If return on A is below par, return on B is likely to be above par.
(B) There is no distinct relationship between the movements in returns of two securities.
(C) Returns on two assets tend to go together, ie. if return on A is above par, return on B is also likely to be above par.
(D) Higher discount rate should be used in capital budgeting to discount the cash flow.
Answer:
(C) Returns on two assets tend to go together, ie. if return on A is above par, return on B is also likely to be above par.

Question 16.
Liquidity risk:
(A) is risk investments bankers face
(B) is lower for small companies
(C) is risk associated with secondary market transactions
(D) increases whenever interest rates increases
Answer:
(C) is risk associated with secondary market transactions

Question 17.
Correlation Coefficient supplements and upgrades the –
(A) Expected return
(B) WACC
(C) Covariance
(D) Mean deviation
Answer:
(C) Covariance

Question 18.
Consider a graph with standard deviation on the horizontal axis and expected return on the vertical axis. The line that connects the risk-free rate and the optimal risky portfolio is called:
(A) Indifference curve
(B) Capital market line
(C) Characteristic line
(D) Security market line
Answer:
(B) Capital market line

Question 19.
A risk associated with project and way considered by well diversified stockholder is classified as –
(A) Expected risk
(B) Beta risk
(C) Industry risk
(D) Returning risk
Answer:
(B) Beta risk

Question 20.
Which of the following is correct formula to Correlation Coefficient?
(A) Cov_xy x σ _x x σ_y
(B) Cov_xy÷ (σ_x × σ_y)
(C) (σ_x x σ_y) ÷ Cov_xy
(D) (σ_x ÷ σ_y) x Cov_xy
Answer:
(B) Cov_xy÷ (σ_x × σ_y)

Question 21.
An attempt to make correction by adjusting historical beta to make it closer to Em average beta is classified as –
(A) Adjusted stock
(B) Adjusted beta
(C) Adjusted coefficient
(D) Adjusted risk
Answer:
(B) Adjusted beta

Question 22.
The efficient frontier –
(A) Is the set of optimal portfolios that offers the highest expected return for a defined level of risk’
(B) Is the set of optimal portfolios that offers the lowest risk for a given level of expected return
(C) Helps to decide whether a new security can be selected or rejected
(D) All of the above
Answer:
(D) All of the above

Question 23.
A corporate bond is a corporation’s write undertaking that it will refund a specific amount of money plus –
(A) Premium
(B) Interest
(C) Nothing
(D) Security
Answer:
(B) Interest

Question 24.
The common stock of a company must provide a higher expected return than the debt of the same company because
(A) There is less demand for stock than for bonds.
(B) There is greater demand for stock than for bonds.
(C) There is more systematic risk involved for the common stock.
(D) There is a market premium required for bonds.
Answer:
(C) There is more systematic risk involved for the common stock.

Question 25.
As per ‘Efficient Frontier’ concept, if the security falls below the frontier –
(A) The security is efficient and hence will be selected.
(B) The security dominates some security on previously drawn security and hence the frontier itself will have to be re-draw.
(C) The security is dominated by some security on the frontier and will be rejected.
(D) It shows that earning of the security is above market return and hence will be selected.
Answer:
(C) The security is dominated by some security on the frontier and will be rejected.

Question 26.
Capital Market Line is firstly initiated by:
(A) Mohsin
(B) Linter
(C) Markowitz
(D) William Sharpe
Answer:
(D) William Sharpe

Question 27.
For an all-equity financed firm, a project whose expected rate of return plots should be rejected.
(A) Above the characteristic line
(B) Above the security market line
(C) Below the security market line
(D) Below the characteristic line
Answer:
(C) Below the security market line

Question 28.
Portfolio risk will be when two components of a portfolio stand perfectly positively correlated and will be when the same are perfectly negatively correlated.
(A) Minimum; Maximum
(B) Maximum; Minimum
(C) Minimum; Less
(D) Maximum; More
Answer:
(B) Maximum; Minimum

Question 29.
A main difference among real and nominal interest proceeds is that -……….
(A) Real returns adjust for inflation and nominal returns do not
(B) Real returns use actual cash flows and nominal use expected cash flows
(C) Real interest adjusts for commissions and nominal returns do not
(D) Real returns show highest possible return and nominal returns show lowest possible return
Answer:
(A) Real returns adjust for inflation and nominal returns do not

Question 30.
The beta of the market is: -…………
(A) -1.0
(B) 0
(C) 1.0
(D) 0.5
Answer:
(C) 1.0

Question 31.
Non-systematic risk is furthermore identified as -…………
(A) No diversiable risk
(B) Market risk
(C) Random risk
(D) Company specific risk
Answer:
(D) Company specific risk

Question 32.
Beta is measure of -…………
(A) Non-diversifiable risk
(B) Diversihable risk
(C) Total risk
(D) Covariance
Answer:
(A) Non-diversifiable risk

Question 33.
Investors should be agreeing to invest in riskier investments merely –
(A) If return is short
(B) If there are no safe alternatives except for holding cash
(C) If expected return is adequate for risk level
(D) If there are true speculators
Answer:
(C) If expected return is adequate for risk level

Question 34.
Negative covariance indicates that -………..
(A) Returns on two assets bear a tendency to off-set each other i.e. if return on A is above par, return on B is likely to be below par. If return on A is below par, return on B is likely to be above par.
(B) Returns on two assets tend to go together, ie. if return on A is above par, return on B is also likely to be above par.
(C) There is no distinct relationship between the movements in returns of two securities.
(D) There is unnecessary relationship between the movements in returns of two securities.
Answer:
(A) Returns on two assets bear a tendency to off-set each other i.e. if return on A is above par, return on B is likely to be below par. If return on A is below par, return on B is likely to be above par.

Question 35.
Holding two securities as an alternative of will not decrease hazard occupied by an investor if two securities are:
(A) Perfectively positive correlated
(B) Perfectively negative correlated
(C) No correlation
(D) All of answers are correct
Answer:
(A) Perfectively positive correlated

Question 36.
A beta of 1.15 for a security would indicate that -………….
(A) Security is trading 15% higher than market index
(B) Security is 15% riskier than index/ market.
(C) Security is 15% less risky than index/ market.
(D) Security and market has covariance of 0.15.
Answer:
(B) Security is 15% riskier than index/ market.

Question 37.
Choice of correlation coefficient is between -………….
(A) 0 to 1
(B) 0 to 2
(C) Minus 1 to +1
(D) Minus 1 to 3
Answer:
(C) Minus 1 to +1

Question 38.
A beta of 0.8 for a security would indicate that -………….
(A) Security is 20% riskier than index/ market.
(B) Security is 80% less risky than index/ market.
(C) Security is 20% less risky than index/ market.
(D) Security is 80% riskier than index/ market
Answer:
(C) Security is 20% less risky than index/ market.

Question 39.
Markowitz model presumed generally investors are –
(A) Risk averse
(B) Risk natural
(C) Risk seekers
(D) Risk moderate
Answer:
(A) Risk averse

Question 40.
Zero covariance indicate that –
(A) There is close relationship between the movements in returns of two assets.
(B) There is positive relationship between the movements in returns of two securities.
(C) There is strong relationship between the movements in returns of two assets.
(D) There is no distinct relationship between the movements in returns of two securities.
Answer:
(D) There is no distinct relationship between the movements in returns of two securities.

Question 41.
Which of the following is correct formula to calculate beta (P)?

Answer:
(D) All of the Above

Question 42.
Capital Asset Pricing Model (CAPM) provides the link between –
(A) Return and total risk
(B) Risk and covariance
(C) Return and non-diversifiable risk
(D) Return and diversifiable risk
Answer:
(C) Return and non-diversifiable risk

Question 43.
Which of the following investment advice will you provide to your client investor if CAPM Return < Expected return?
(A) Sell
(B) Hold
(C) Buy
(D) Short
Answer:
(C) Buy

Question 44.
As per ‘Efficient Frontier’ concept, if the security falls on frontier –
(A) The security is efficient and hence will be selected
(B) The security dominates some security on previously drawn security and hence the frontier itself will have to be re-drawn
(C) The security is efficient but will be rejected.
(D) The security is dominated by some security on the frontier and will be rejected.
Answer:
(A) The security is efficient and hence will be selected

Question 45.
Capital market line (CML) represents –
I. Portfolios that optimally combine risk and return.
II. The trade-off between risk and return for efficient portfolios.
III. Covariance value in order to help comparison with corresponding values for the other pairs of securities constituting the portfolio.
IV. The relationship between return and risk.
Select the correct answer from the options given below.
(A) IV and I only
(B) II, III and IV only
(C) III and n only
(D) III, IV and I only
Answer:
(D) III, IV and I only

Question 46.
Which of the following investment advice will you provide to your client investor if CAPM Return > Expected return?
(A) Sell
(B) Buy
(C) Hold
(D) None of the above
Answer:
(A) Sell

Question 47.
If expected return is more than required return as per CAPM, then -…………
(A) Security is overvalued and hence can be bought
(B) Security is correctly priced and hence should be hold
(C) Security is undervalued and hence can be sold
(D) Security is undervalued and hence can be bought
Answer:
(C) Security is undervalued and hence can be sold

Question 48.
The Security Market Line (SML) is a line drawn on a chart that serves as a graphical representation of the -…………
(A) MM Model
(B) Capital Asset Pricing Model
(C) Markowitz Model
(D) NOI Model
Answer:
(C) Markowitz Model

Question 49.
The opportunity line is the:
(A) Set of all portfolios with the same expected rate of return but different standard deviations.
(B) Set of investment opportunities made available by mixing a risky asset and a risk-free asset.
(C) Set of investment opportunities made available by mixing two risky assets.
(D) Set of portfolios among which the investor is indifferent.
Answer:
(B) Set of investment opportunities made available by mixing a risky asset and a risk-free asset.

Question 50.
The Security Market Line (SML) is a line drawn on a chart that serves as a graphical representation of the Capital Asset Pricing Model, which shows different levels of …………. of various marketable securities
plotted against the expected return.
(A) Systematic risk
(B) Statement Q is true and Statement P is false.
(C) Both Statement P and Statement Q are true.
(D) Both Statement P and Statement Q are false.
Answer:
(A) Systematic risk

Question 51.
Market risk is also called: ………
(A) Systematic risk and unique risk.
(B) Unique risk & non diversifiable risk.
(C) Systematic risk & diversihable risk.
(D) Non diversifiable risk & systematic risk.
Answer:
(D) Non diversifiable risk & systematic risk.

Question 52.
As per ‘Efficient Frontier’ concept, if the security falls above the frontier –
(A) the security is dominated by some security on previously drawn security and hence the frontier itself will have to be re-drawn.
(B) the security dominates some security on previously drawn security and hence the frontier itself will have to be re-drawn.
(C) the security is dominated by some security on the frontier and will be rejected.
(D) the security is efficient and hence will be selected.
Answer:
(B) the security dominates some security on previously drawn security and hence the frontier itself will have to be re-drawn.

Question 53.
Which of the following investment advice will you provide to your client investor if CAPM Return = Expected return?
(A) Sell
(B) Buy
(C) Hold
(D) Put
Answer:
(C) Hold

Question 54.
If required return as per CAPM is more than expected return, then –
(A) Security is undervalued ……….. and can be sold
(B) Security is correctly priced and hence should be hold
(C) Security is overvalued and hence can be bought
(D) Security is undervalued and hence can be bought
Answer:
(A) Security is undervalued ……….. and can be sold

Question 55.
If an asset’s expected return plots above the security market line, the asset is:
(A) Overpriced
(B) Underpriced
(C) Fairly priced (if it has an unusually large amount of unique risk)
(D) Both the first and third answers.
Answer:
(B) Underpriced

Question 56.
The X-axis of the Security Market Line (SML) chart represents –
(A) Expected return
(B) Risk in terms of beta
(C) Standard deviation
(D) Co-efficient
Answer:
(B) Risk in terms of beta

Question 57.
The market risk premium is the slope of the:
(A) Security market line
(B) Opportunity line
(C) Efficient frontier
(D) Capital market line
Answer:
(A) Security market line

Question 58.
…………. is also called a Characteristic Line.
(A) Capital Market Line
(B) Security Market Line
(C) Opportunity line
(D) Line of expected return
Answer:
(B) Security Market Line

Question 59.
According to the CAPM, overpriced securities have:
(A) Negative alphas
(B) Positive alphas
(C) Zero betas
(D) Zero alphas
Answer:
(A) Negative alphas

Question 60.
Consider following two statements:
P. Beta coefficient is the measure of risk in CML.
Q. Standard deviation determines the risk factors of the SML.
Select correct answer from the options given below.
(A) Statement P is true and Statement Q is false.
(B) Statement Q is true and Statement P is false.
(C) Both Statement P and Statement Q are true.
(D) Both Statement P and Statement Q are false.
Answer:
(D) Both Statement P and Statement Q are false.

Question 61.
The beta of the risk-free asset is:
(A) 0
(B) 0.5
(C) 2.0
(D) 1.0
Answer:
(A) 0

Question 62.
Security Market Line graphs defines -………
(A) Efficient portfolios
(B) Non-efficient portfolios
(C) Disposable portfolios
(D) Both efficient and non-efficient portfolios.
Answer:
(D) Both efficient and non-efficient portfolios.

Question 63.
Capital asset pricing theory asserts that portfolio returns are best explained by:
(A) Economic factors
(B) Systematic risk
(C) Specific risk
(D) Diversification
Answer:
(B) Systematic risk

Question 64.
According to security market line, the expected return of any security is a function of:
(A) Diversifiable risk
(B) Unique risk
(C) Unsystematic risk
(D) Systematic risk
Answer:
(D) Systematic risk

Question 65.
According to the capital market line, the expected return of any efficient portfolio is a function of:
(A) Unsystematic risk
(B) Systematic risk
(C) Unique risk
(D) Total risk
Answer:
(D) Total risk

Question 66.
Which of the following statements about the market portfolio is false?
(A) The market portfolio is on the efficient frontier.
(B) The market portfolio lies, on the security market line.
(C) The market portfolio contains both systematic and unsystematic risk.
(D) The market portfolio lies on the capital market line.
Answer:
(C) The market portfolio contains both systematic and unsystematic risk.

Question 67.
Alpha is an indicator of the extent to which the –
(A) Actual return of a security deviates from those predicated by market experts.
(B) Actual return of a security deviates from those predicated by derivative market
(C) Actual return of a security deviates from those predicated by its beta value.
(D) Actual return of a security deviates from those predicated by its probable distribution value.
Answer:
(C) Actual return of a security deviates from those predicated by its beta value.

Question 68.
Alpha is denoted by symbol -………
(A) A
(B) ¥
(C) α
(D) Δ
Answer:
(C) α

Question 69.
Negative alpha value indicates that -………
(A) Expected return is less than required return as per CAPM and hence security is overvalued. Such security should be sold.
(B) Expected return is less than required return as per CAPM and hence security is undervalued. Such security should be bought.
(C) Expected return is more than required return as per CAPM and hence security is undervalued. Such security should be bought.
(D) Expected return is equal to required return as per CAPM and hence security is correctly valued. Such security should be hold.
Answer:
(A) Expected return is less than required return as per CAPM and hence security is overvalued. Such security should be sold.

Question 70.
Systematic Risk is -………
(A) Uncontrollable
(B) Controllable
(C) Avoidable
(D) Voidable
Answer:
(A) Uncontrollable

Question 71.
Positive alpha value indicates that –
(A) Expected return is less than required return as per CAPM and hence security is overvalued. Such security should be sold.
(B) Expected return is more than required return as per CAPM and hence security is undervalued. Such security should be bought.
(C) Expected return is equal to required return as per CAPM and hence security is correctly valued. Such security should be hold.
(D) Expected return is more than required return as per CAPM and hence security is overvalued. Such security should be sold.
Answer:
(B) Expected return is more than required return as per CAPM and hence security is undervalued. Such security should be bought.

Question 72.
Systematic risk = ?
(A) Beta × SD of market
(B) Total risk – SD of market
(C) Total risk – Beta
(D) Beta ÷ SD of market
Answer:
(B) Total risk – SD of market

Question 73.
…………… is also called specific risk.
(A) Systematic risk
(B) Unsystematic risk
(C) Covariance
(D) Coefficient
Answer:
(B) Unsystematic risk

Question 74.
Which of the following is objective of Fundamental Approach to valuation of securities?
(A) To conduct a company stock valuation and predict its probable price evolution.
(B) To make a projection on its business performance.
(C) To find out the intrinsic value of the share.
(D) All of the above are correct
Answer:
(D) All of the above are correct

Question 75.
Efficient market hypothesis (EMH) was developed by –
(A) Professor Eugene Fama
(B) Professor Miller
(C) Professor Mark Linter
(D) Professor Marshall
Answer:
(A) Professor Eugene Fama

Question 76.
The advocates of the Efficient-market hypothesis (EMH) theory contend that securities markets are –
(A) Perfect
(B) Imperfect
(C) Monopolistic
(D) Perfect or at least not too imperfect.
Answer:
(D) Perfect or at least not too imperfect.

Question 77.
The EMH was developed by Professor Eugene Fama who argued that –
(A) Stocks always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.
(B) It should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by chance or by purchasing riskier investments.
(C) Efficient capital markets prices of traded securities always fully reflect all publicly available information concerning those securities.
(D) All of the above.
Answer:
(D) All of the above.

Question 78.
Dow Jones theory was formulated by -………….
(A) John P. Dow
(B) Charles H. Dow
(C) James T. Dow
(D) Michel R. Dow
Answer:
(B) Charles H. Dow

Question 79.
According to Dow Jones theory, share prices demonstrate a pattern over 4 to 5 years. These patterns can be divided into three distinct cyclical trends –
(A) Preliminary, primary and secondary trends
(B) Preliminary, bullish and bearish trends
(C) Primary, secondary and minor trends
(D) Primary, secondary and major trends.
Answer:
(C) Primary, secondary and minor trends

Question 80.
…………. suggests that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.
(A) Technical analysis theory
(B) Random walk theory
(C) Efficient market theory
(D) Fundamental Market theory
Answer:
(B) Random walk theory

Question 81.
According to the Sharpe single index model the return for each security can be given by the –
(A) I + βI + E
(B) I × βI × E
(C) I ÷ βI ÷ E
(D) I – βI – E
Answer:
(A) I + βI + E

Question 82.
Covariance between Security X and Security Y is zero. This indicate that -…………………
(A) There is strong relationship between the movements in returns of two securities.
(B) There is positive relationship between the movements in returns of two securities.
(C) There is no distinct relationship between the movements in returns of two securities.
(D) There is negative relationship between the movements in returns of two securities.
Answer:
(C) There is no distinct relationship between the movements in returns of two securities.

Question 83.
Following details are available for two securities:

Answer:
(C)
X: (0.05 × 30) + (0.20 × 25) + (050 × 20) + (0.20 × 15) + (0.05 × 10) 20%
Y: (0.05 × 39) + (020 × 29) + (0.50 × 21) + (0.20 × 13) + (0.05 × 3) = 21%

Question 84.
You have been given following data for Security X:

Calculate standard deviation of security.
(A) 3.02%
(B) 3.36%
(C) 4.57%
(D) 4.12%
Answer:
(A) 3.02%

Question 85.
Following details are available for EX Ltd. & FX Ltd. securities.

Covariance between Security EX and Security FX is –
(A) 85
(B) 58
(C) -58
(D) -54
Answer:
(B) 58

Question 86.
Covariance between Security X and Security Y is + 45.8. This indicate that –
(A) If return on Security X is below par,return on Security Y is likely to be above par.
(B) Returns on Security X & Security Y tend to go together, i.e. if return on X is above par, return on Y is also likely to be above par.
(C) Returns on Security X & Security Y bear a tendency to off-set each other.
(D) Covariance of these to two securities is positive which means standard deviation of both securities must be negative.
Answer:
(B) Returns on Security X & Security Y tend to go together, i.e. if return on X is above par, return on Y is also likely to be above par.

Question 87.
Covariance between Security X and security Y is – 42. This indicate that –
(A) Returns on Security X & Security Y bear a tendency to off-set each other.
(B) Covariance of these two securities is negative that means standard deviation of both securities must be positive.
(C) There is no distinct relation between Security X and Security Y.
(D) Return on Security X is above par, return on Security Y is also likely to be above par.
Answer:
(A) Returns on Security X & Security Y bear a tendency to off-set each other.

Question 88.
Covariance between Security P & Q is 48.91. Standard deviation of Security P is 5.36 while that of Security Q is 9.13. Compute value of correlation coefficient.
(A) 0
(B) 1
(C) -1
(D) 0.899
Answer:
(B) 1

Question 89.
An investor has invested in Security A & B in the ratio of 70:30. Standard deviation of Security A & B is 4.47 & 7.62 respectively. Covariance AB is 34. Correlation Coefficient of Security A & B is 1. Risk of portfolio is –
(A) 5.41%
(B) 6.48%
(C) 3.13%
(D) 7.26%
Answer:
(A) 5.41%

Question 90.
X and Y are two securities in portfolio for which available. following information is …………..

Correlation coefficient is + 0.7.
What weight you will assign to the Security Y so that portfolio risk is lowest.
(A) 15.38%
(B) 84.62%
(C) 82.46%
(D) 20.18%
Answer:
(B) 84.62%

Question 91.
Suppose risk free rate is 4% and λ is 2.5%. If an investor takes 13% risk, he can expect a return of –
(A) 32.5%
(B) 52%
(C) 10%
(D) 36.5%
Answer:
(D) 36.5%
Risk free rate is 4% and λ is 2.5%. Thus, for every 1% increase in the risk, the investor can expect 2.5% above risk-free return. Thus, if an investor takes 13% risk, he can expect a return of 36.5%
(13 × 2.5 + 4).

Question 92.
Yogesh invest ₹ 1,25,000 in shares of BABA Ltd., a listed company. At the end of period investment value is ₹ 1,32,000.He gets dividend of ₹ 8,000. Return from investment is –
(A) 11%
(B) 12%
(C) 13%
(D) 14%
Answer:
(B) 12%
[(1,32,000 – 1,25,000) + 8,000]/1,25,000 12%

Question 93.
Following data is available for two listed securities:
Cov_rb = 37
σ_b = 8.49%
Correlation coefficient between security R and Security B is +0.8595. The standard deviation of Security R should have been -………..
(A) 4.03%
(B) 8.04%
(C) 5.07%
(D) 6.09%
Answer:
(C) 5.07%
Covariance = Corr_rb × σ_r × σ_b
37 = 0.8595 × σ_r × 8.49
37 = 7.297 × σ_r
σ = 5.07

Question 94.
Actual return of GK Ltd. for last four year is 20%, 14%, 17% and 18%. GLtd. has beta of 1.15. Return on market portfolio is 15%. Risk free rate of return is 6%. Compute Alpha value and decide whether to hold, buy or to sell the security.
(A) Alpha value is + 0.8 and hence it is advised to sell the security.
(B) Alpha value is – 0.9 and hence it is advised to buy the security.
(C) Alpha value is – 0.8 and hence it is advised to short sell the security
(D) Alpha value is + 0.9 and hence it is advised to buy the security.
Answer:
(D) Alpha value is +0.9 and hence it is advised to buy the security.

Question 95.
Return of last 5 years of listed security is 16.2%, 19.8%, 18%, 15% & 21%. Five years ago price of the security was 120 per share. What is its average return
(A) 18%
(B) 19%
(C) 20%
(D) 21%
Answer:
(A) 18%

Question 96.
Return of last 5 years of listed security is 16.2%, 19.8%, 18%, 15% & 21%. Five years ago price of the security was 120 per share. What is its holding period return
(A) 135.55%
(B) 128.58%
(C) 145.64%
(D) 154.45%
Answer:
(B) 128.58%
120 × 1.162 × 1.198 × 1.18 × 1.15 × 1.21
= 274.29 (274.29 – 120)/120 × 100 = 128.58%

Question 97.
Dividend for last 4 years of Tara Ltd. was ₹ 7, ₹ 5,12.8 & ₹ 10 and market price was ₹ 120, ₹ 80, ₹ 130 & ₹ 150 respectively. What is the average return of last 3 years considering capital gain and dividend.
(A) 19.28%
(B) 14.48%
(C) 10.84%
(D) 16.65%
Answer:
(A) 19.28%

Question 98.
Given the probability of 0.1, 0.4, 0.3 & 0.2 estimated returns of the security are 36%, 26%, 20% & 15% respectively. Risk free rate is 6% and cost of capital is 13%. Total risk of security is –
(A) 36%
(B) 12%
(C) 6%
(D) 4%
Answer:
(C) 6%

Question 99.
From the following data, you are required to calculate the covariance of Security G and Security K and interpret the result.

Select the correct answer from the options given below.
(A) Covariance between Security G & Security K is+56 whichindicate that return on these two securities tend to go together.
(B) Covariance between Security G & Security K is – 48 which indicate that return on these two securities bear tendency to off-set each other.
(C) Covariance between Security G & Security K is + 48 which indicate that return on these two securities tends to go together.
(D) Covariance between Security G & Security K is -56 which indicate that return on these two securities bear tendency to off-set each other
Answer:
(D) Covariance between Security G & Security K is -56 which indicate that return on these two securities bear tendency to off-set each other

Question 100.
Following data is available for the Security P & Q.

Correlation Coefficient for the above two securities is –
(A) – 0.9899
(B) – 0.9989
(C) + 0.8999
(D) + 0.9989
Answer:
(B) – 0.9989
Expected return of both securities is 10% and both securities have same probabilities for the returns hence standard deviation for both the securities will be same as shown below.

Question 101.
Given the probability of 0.05,0.20,0.50, 0.20,0.05 estimated returns of Security A are 14%, 20%, 27%, 34% & 40% respectively. For same probability estimated returns of Security B are 10%, 20%, 28%, 36% & 46% respectively. Which security you will choose for investment and why.
(A) Total risk of Security A is 7.42% while that of Security B is 5.47% hence Security B will be selected.
(B) Covariance between Securities A & Security B is positive ie. +48 hence both securities can be selected.
(C) Expected return of Security B is 28% which is more than return of Security A which has return of 27% and hence Security B will be selected.
(D) Both securities have near about same returns ie.21% and 28% but standard deviation of Security A [6.04%] is less than standard deviation of Security B [7.62%] hence security A will be selected.
Answer:
(D) Both securities have near about same returns ie.21% and 28% but standard deviation of Security A [6.04%] is less than standard deviation of Security B [7.62%] hence security A will be selected.
Security k (0.05 × 14) + (0.20 × 20) + (0.50 × 27) + (0.20 × 34) + (0.05 × 40) = 27%
Security B: (0.05 × 10) + (0.20 × 20) + (0.50 × 28) + (0.20 × 36) + (0.05 × 46) = 28%

Question 102.
Raman has made investment in two securities in ratio of 60:40. Following data is available for these two securities:
Standard — Deviation:
Security —  A: 6.04%
Security —  B: 7.62%
Covariance between Security A & B is +45.80. Raman’s portfolio risk is –
(A) 6.66%
(B) 5.84%
(C) 3.67%
(D) 9.43%
Answer:
(A) 6.66%

Question 103.
Ram has formed portfolio with 3 securities. Proportion of investment in three securities is 35%, 25% & 40%.

Ram’s portfolio risk = ₹
(A) 9.40%
(B) 3.41%
(C) 5.32%
(D) 4.76%
Answer:
(B) 3.41%

Question 104.
NSZ has formed portfolio with three securities P, Q & R. Proportion of investment in three securities is 20%, 70% & 10%. Other data of his portfolio is as follows:

Risk of portfolio = ₹
(A) 9.90%
(B) 11.22%
(C) 10.45%
(D) 8.34%
Answer:
(A) 9.90%

Question 105.
K and H are two securities in portfolio for which following information is available.

Correlation coefficient is + 0.5. Calculate the risk of portfolio using 20:80 weights.
(A) 12.13%
(B) 1321%
(C) 13.12%
(D) 12.31%
Answer:
(C) 13.12%

Question 106.
K and H are two securities in portfolio for which following information is available.

Correlation coefficient is + 0.5. At what weight portfolio risk will be lowest.
(A) 87.51:12.49
(B) 58.71:41.29
(C) 84.17:15.83
(D) 14.29:85.71
Answer:
(D) 14.29:85.71

Question 107.
Security A has return of 12% with 10% risk (σ). Security B has return of 18% with 15% risk (σ). If investor makes investment in two securities in weight of 20:80 his return for portfolio is 16.80% with 13.12% risk (σ). If investor makes investment in two securities in weight of 14.29:85.71 his return for portfolio is 17.14% with 13.63% risk (σ). Which of the following strategy will be adopted by the rational investor
(A) Invest 100% in Security A.
(B) Invest 100% in Security B.
(C) Invest the ratio of 20:80 in A & B.
(D) Invest the ratio of 14.29 : Security A & B.
Answer:
(D) Invest the ratio of 14.29 : Security A & B.

In all the above strategy return is more than risk. Hence, depend upon risk tolerance investor can choose any strategy he likes. 1f investor is willing to take high risk, he wifi be get high return. At strategy (2) return is high Le. 18% but risk is also high. But as rational investor, it advised to choose strategy (4) as risk is lowest and return is also high as compared to risk.

Question 108.
Following is securities: the data regarding six securities:

Which three securities will be selected?
(A) Securities U, V & X
(B) Securities V, W & Z
(C) Securities U, W & Y
(D) Securities W, X & Y
Answer:
(D) Securities W, X & Y
A rational investor will always choose those securities which have high return and low risk.
(1) Security U has return of 10% at a risk of 5%. Security V & Z also has returns of 10% but their risk is 6% & 7% which is more than risk of Security U and hence Security U dominates Security V & Z. Thus, out of Security U, V & Z, Security U can be selected.
(2) Security X has return of 5% and also has risk of 5%. Thus, investment in this security can be ignored for two reason – First, low return and secondly due same risk ie. risk is equal to return.
(3) In Security W & Y risk is high but return is also high.
In view of above observations, investment in Security U, W & Y can be selected based on individual prefer

Question 109.
Standard deviation of Market is 8.4%. Covariance of Security X with Market is 35.7. Risk free rate is 7% while GDP of the economy is growing at 8%. What is market sensitivity index of Security X?
(A) 1.315
(B) 0.879
(C) 0.506
(D) 0.605
Answer:
(C) 0.506

Question 110.
Standard deviation of Security X and Market are 12% & 16% respectively. Covariance of Security X with Market is +96. What is market sensitivity index of Security X?
(A) 0.407
(B) 0.873
(C) 0.375
(D) 0.573
Answer:
(C) 0.375

Question 111.
Beta factor of Security Z is 0.506. Market risk is 8.4%. Correlation coefficient for Security Z and Market is 0.3965. What is the standard deviation of security Z?
(A) 11.45%
(B) 12.44%
(C) 10.98%
(D) 10.72%
Answer:
(D) 10.72%

Question 112.
Beta factor of Security Z is 0.506. Market risk is 8.4%. Correlation coefficient for Security Z and Market is 0.3965. Covariance between Security Z and x Market is -…………..
(A) 35.7
(B) 38.4
(C) 33.3
(D) 32.8
Answer:
(A) 35.7

Question 113.
Return on XM Ltd. shares has a standard deviation of 23%, as against the standard deviation of the market at 19%. Correlation co-efficient between market and stock of XM Ltd. is 0.8. Compute the systematic risk of XM Ltd.’s shares.
(A) 96.84%
(B) 18.4%
(C) 25.78%
(D) 64.85%
Answer:
(B) 18.4%

β = 0.9684
Systematic risk = Beta × SD of market
=0.9684 × 19
= 18.4%

Question 114.
Return on Lucky Ltd. shares has a standard deviation of 20%, as against the standard deviation of the market at 15%. Correlation co-efficient between market and stock of XM Ltd. is 0.9. Compute the unsystematic risk of Lucky Ltd.’s shares.
(A) 5
(B) 2%
(C) 18%
(D) 20%
Answer:
(B) 2%

Systematic risk Beta × SD of market
= 1.2 × 15
=18%
Unsystematic risk Total risk – Systematic risk
=20 – 18
=2%

Question 115.
You are analyzing the beta for ABC Ltd. and have divided the Company into four broad business groups, with market ; values and betas for each group.

Estimate the beta for ABC Ltd. as a company.
(A) 1.275
(B) 1.825
(C) 1.645
(D) 0.895
Answer:
(A) 1.275

Question 116.
Pavan has invested in four securities. Amount invested and beta of each security is as follows:

Compute portfolio beta.
(A) 1.524
(B) 1.874
(C) 0.789
(D) 1.315
Answer:
(D) 1.315

Question 117.
ABC Ltd beta is 1.45. Rate of market return is 16%. Rate of return on government securities is 8%. What is the expected return as per Capital Asset Pricing Model? If the f risk premium on the market goes up by 2.5% points, what would be revised expected return on this stock?
(A) 16.9%; 32.32%
(B) 18.7%; 24.28%
(C) 19.6%; 23.23%
(D) 19.6%; 16.7%
Answer:
(C) 19.6%; 23.23%
ER=R_f+p(R_m-R_f)
= 8 + 1.45 (16 – 8)
= 19.6%
Revised expected return if the risk premium on the market goes up by 2.5%:
ER = R_f + p (R_m – R_f)               Note: Risk Premium = (R_m – R_f)
= 8 + 1.45 (10.5)                     Revised risk premium = 8 + 2.5 = 10.5
= 23.23%

Question 118.
A financial consultant has gathered following facts for H Ltd.
Systematic risk of the firm is 1.4.
182 days Treasury bill yield is 8%
Expected yield on market portfolio is 13%. Calculate expected return based on capital asset pricing model (CAPM).
(A) 18%
(B) 17%
(C) 16%
(D) 15%
Answer:
(D) 15%
ER= R_f+ p (R_m– R_f)
= 8+1.4(13 – 8)
= 15%

Question 119.
An investor is seeking the price to pay for a security, whose standard deviation is 3%. The correlation coefficient for the security with the market is 0.8 and the market standard deviation is 2.2%. The return from government security is 5.2% and from the market portfolio is 9.8%. The investor knows that, by calculating the required return, he can then determine the price to pay for security. What is the required return on the security
(A) 8.44%
(B) 12.66%
(C) 10.22%
(D) 9.77%
Answer:
(C) 10.22%

Question 120.
Calculate the required return on the security from the following information:
Standard deviation — 2.5%
Market standard deviation — 2.0%
Risk free rate of return — 13%
Expected rate of return on market portfolio 15%
Correlation coefficient of portfolio with the market 0.8
(A) 16%
(B) 15%
(C) 14%
(D) 12%
Answer:
(B) 15%

Question 121.
As an Investment Manager you are given the following information:

Risk free return may be taken at 14%. Calculate expected rate of return on market portfolio.
(A) 26.33%
(B) 62.32%
(C) 24.78%
(D) 34.12%
Answer:
(A) 26.33%

Question 122.
As an Investment Manager you are given the following information:
Particulars — β
Cement Ltd. — 0.8
Steel Ltd. — 0.7
Liquor Ltd. — 0.5
GOl bonds — 0.99
Risk free return may be taken at — 14%.
Expected rate of return on market portfolio is — 26.33%.
Average return on portfolio = ?
(A) 23.86%
(B) 22.63%
(C) 26.21%
(D) 23.22%
Answer:
(D) 23.22%
ER=R_f+ (R_m– R_f)
Cement Ltd. = 14 + 0.8 (26.33 – 14) 23.86%
Steel Ltd. = 14+0.7 (26.33 – 14) = 22.63%
Liquor Ltd.= 14+0.5 (26.33 – 14) = 20.17%
GOl Bonds 14+0.99(26.33- 14)26.21%

Question 123.
A Ltd. has an expected return of 21% and standard deviation of 39%. B Ltd. has an expected return of 23% and standard deviation of 37%. A Ltd. has beta of 0.76 and B Ltd. a beta of 1.14. Market return is 20%. A rational and risk averse investor shall make investment in –
(A) A Ltd. as its standard deviation is greater than B Ltd.
(B) A Ltd. as greater risk means possibility of high returns.
(C) A Ltd. as its beta is less than B Ltd.
(D) B Ltd. as it expected return is more than A Ltd. and its risk is also as compared to A Ltd.
Answer:
(D) B Ltd. as it expected return is more than A Ltd. and its risk is also as compared to A Ltd.

Question 124.
A Ltd. has an expected return of 22% and standard deviation of 40%. B Ltd. has an expected return of 24% and standard deviation of 38%. A Ltd. has beta of 0.86 and B Ltd. a beta of 1.24. The correlation of coefficient between return of A Ltd. and B Ltd. is 0.72. The standard deviation of market return is 20%. If you invest 30% in B Ltd. and 70% in A Ltd. what is your expected return and portfolio standard deviation?
(A) 22.6%; 35.74%
(B) 24%; 35%
(C) 22.6%; 37.06%
(D) 22.6%; 34.75%
Answer:
(C) 22.6%; 37.06%

Question 125.
Expected return of Security A is 22% while that of Security B is 24%. Beta of Security A is 0.86 while that of Security B is 1.24. What is risk free rate?
(A) 14.74%
(B) 17.47%
(C) 14.71%
(D) 14.00%
Answer:
(B) 17.47%

22= x+0.86y
24 = x+ 1.24y
– 2= – 0.38y
y = 2/0.38 = 52632
y = R_m – R_f = 5.2632
Putting value of ‘y’ in first equation we can get value of ‘x’.
22=x +0.86y
22 = x + 0.86 × 5.2632
22x + 4.5264
x = Risk free rate = 17.47%

Question 126.
Expected return of Security A is 20% while that of Security B is 25%. Beta of Security A is 0.85 while that of Security B is 1.25.
What is market rate of return?
(A) 21.875%
(B) 22.385%
(C) 18.655%
(D) 20.555%
Answer:
(A) 21.875%

Putting value of y in first equation we can get value of x.
22 = x+ 0.85y
22 = x+ 0.85 × 12.5
20 = x+ 10.625
20 = x+ 4.5264 x = Risk free rate = 17.47%

Question 127.
The expected return and beta of three securities is as follows:

If the risk free rate of return is 6.75% and the expected return on market portfolio is 10.5%, which of the above securities under or correctly valued?

Answer:
(C)

Question 128.
Actual return of T Ltd. for last four year is as follows:
Year — Return
1 — 15.06%
2 — 10.12%
3 — 12.28%
4 — 13.26%
T Ltd. has beta of 1.15. Return on market portfolio is 11.2%. Risk free rate of return is 4%. Compute Alpha value and decide whether to hold, buy or to sell the security.
(A) Alpha value is positive Le. 0.4 and hence security is overvalued. Such security should be sold.
(B) Alpha value is positive Le. 0.4 and hence security is undervalued. Such security should be bought.
(C) Alpha value is negative Le. – 0.2 and hence security is overvalued. Such security should be sold.
(D) Alpha value is negative Le. – 0.2 and hence security is undervalued. Such security should be bought.
Answer:
(B) Alpha value is positive Le. 0.4 and hence security is undervalued. Such security should be bought.


Alpha value is positive ie. 0.4 and hence security is undervalued. Such security should be bought.

Question 129.
Following details are made available to you for a security.
Beta (β) : 1.4
Risk free rate of return : 6.3%
Market rate of return : 13.2%
If the alpha value is + 1.8 what investment action would you suggest?
(A) Buy
(B) Hold
(C) Sell
(D) Short
Answer:
(A) Buy

Question 130.
Following details Eire made available to you for a security.
Beta (β) : 1.4
Risk free rate of return : 6.3%
Market rate of return : 13.2%
If the alpha value is + 1.2 what investment action would you suggest?
(A) Short
(B) Sell
(C) Buy
(D) Hold
Answer:
(C) Buy

Question 131.
Following details are made avaiable to you for a security.
Beta (β) : 1.4
Risk free rate of return : 6.3%
Market rate of return : 13.2%
If the alpha value is zero what investment action would you suggest?
(A) Buy as Security is undervalued.
(B) Sell as Security is undervalued.
(C) Hold as Security is correctly valued.
(D) Sell as Security is overvalued.
Answer:
(C) Hold as Security is correctly valued.

Question 132.
Following details are made avaUable to you for a security.
Beta (β) : 1.4
Risk free rate of return : 6.3%
Market rate of return : 13.2%
If the alpha value is negative i..e. – 2.82 what investment action would you suggest?
(A) Hold
(B) Buy
(C) Sell
(D) None of the above
Answer:
(C) Sell

Question 133.
Stocks A & B have the following historical returns:

Assume that someone held a portfolio consisting of 70% of Stock A and 30% Stock B. What would have been the realized rate of return on the portfolio in each year from 2015 to 2019?
(A) 16.20%
(B) 15.40%
(C) 18.60%
(D) 13.70%
Answer:
(A) 16.20%

Question 134.
Following details are gathered by the investor:
Standard deviation — 2.8%
Market standard deviation — 2.3%
Risk free rate of return — 8%
Expected rate of return on market portfolio — 18%
Correlation coefficient of portfolio with the market — 0.8
Required return on security is –
(A) 14.77%
(B) 17.74%
(C) 15.84%
(D) 20.65%
Answer:
(B) 17.74%

Calculation of required return on the security:
ER=R_f+β(R_m-R_f)
= 8 + 0.974(18 – 8)
= 17.74%

Question 135.
Following details are made available
to you for particular security:
Beta of security : 0.5
Expected return on portfolio : 15%
Risk free rate of return : 0.06
In another security has an expected rate of return of 18%, what would be its beta?
(A) 1.222
(B) 1.111
(C) 1.333
(D) 1.444
Answer:
(C) 1.333
ER= R_f+ P (R_m– R_f)
= 6 + 0.5(15-6)
= 10.5%
Computation of beta for other security:
ER=R_f+β(R_m-R_f)
18 = 6 + β (15 – 6)
18 = 6 + 9β
12 = 9β
P = 1.3333

Question 136.
Following information is available in respect of the return from Reliance’s stock under different economic conditions:

Find out risk associated with it
(A) 5.6%
(B) 6.5%
(C) 8.4%
(D) 4.8%
Answer:
(A) 5.6%

Question 137.
The market portfolio has a historically based expected return of 10% and a standard deviation of 4% during a period when risk-free assets yielded 3%. The 7% risk premium is thought to be constant through time. You are required to find market’s return-risk trade-off.
(A) 1.25
(B) 1.50
(C) 1.75
(D) 2.00
Answer:
(C) 1.75

Question 138.
The market portfolio has a historically based expected return of 0.10 and a standard deviation of 0.04 during a period when risk-free assets yielded 0.03. The 0.07 risk premium is thought to be constant through time. Riskless investments may now be purchased to yield 0.09. A security
has a standard deviation of 0.08 and a coefficient of correlation with the market portfolio is 0.85. The market portfolio is now expected to have a standard deviation of 0.04. You are required to find equilibrium required expected return of the security.
(A) 11.4%
(B) 13.6%
(C) 18.9%
(D) 20.9%
Answer:
(D) 20.9%

Question 139.
Dhanpat, an investor, is seeking the price to pay for a security, whose standard deviation is 5%. The correlation coefficient for the security with the market is 0.75 and the market standard deviation is 4%. The return from risk-free securities is 6% and from the market portfolio is 11%. Dhanpat knows that only by calculating the required rate of return, he can determine the price to pay for the security. What is the required rate of return on the security?
(A) 10.69%
(B) 16.90%
(C) 19.60%
(D) 16.96%
Answer:
(A) 10.69%

Question 140.
Security-A offers an expected rate of return of 14% with a standard deviation of 8%. Security-B offers an expected rate of return of 11% with a standard deviation of 6%. If an investor wishes to construct a portfolio with a 12.8% expected return, what percentage of the portfolio will consist of Security-A & Security-B?
(A) 40:60
(B) 60:40
(C) 70:30
(D) 30:70
Answer:
(B) 60:40
Let the weight of investment in Security-A be ‘x\ Thus, investment in Security-B = [1 – x\ Expected Return = (R_A × W_A) + (R_B × W_B)
12.8 = (14 × x) + (11 × [1 – x])
12.8 = 14x+ 11- 11x
1.8 = 3x
x = 0.6
Thus,
Weight of Security-A = 60%
Weight of Security-B = 40% (100- 60)

Question 141.
Mohan has a portfolio of 6 securities, each with a market value of Rs. 10,000. The current beta (β) of the portfolio is 1.30 and β of the riskiest security is 1.80, Mohan wishes to reduce his portfolio β to 1.15 by selling the riskiest security and replacing it with another security with a lower β. What must be the β of the replacement security?
(A) 0.8
(B) 0.7
(C) 0.9
(D) 1.1
Answer:
(C) 0.9
Beta of a portfolio = Weighted average beta of the securities = ∑WB
Current beta of Mohan’s portfolio = 1.30
Market value of total portfolio = 10,000 × 6 = 60,000
Weight of each security in the portfolio = \(\frac{10,000}{60,000}=\frac{1}{6}\)
Sum of betas of six securities = 1.30× 6 = 7.80
Beta of portfolio after replacement of security =1.15
Sum of betas of six securities after replacement =1.15×6 = 6.90
Since the riskiest security with beta of 1.80 is to be replaced
Sum of betas of six securities – Beta of security to be replaced = Sum of betas of six securities after replacement
7.80- 1.80 + x = 6.90
x = 0.90
Thus, beta of security replaced should be 0.90.

Question 142.
Zebra Ltd. has a beta (β) of 1.15. The return on market portf oho is 14%. The risk free rate of return is 5%. Actual rates of returns over 4 observations are as under:

(A) Year 1 & Year 3
(B) Year 2 & Year 3
(C) Year 3 & Year 4
(D) Year 1 & Year 4
Answer:
(D) Year 1 & Year 4
ER = R_f + β (R_m – R_f)
= 5 + 1.15 (14 – 5)
= 15.35%

Question 143.
Return on Lucky Ltd.’s shares has a standard deviation of 22%, as against the standard deviation of the market at 12%. Correlation co-efficient between market and stock of Lucky Ltd. is 0.7%. Compute unsystematic risk of Lucky Ltd.’s shares.
(A) 15.4%
(B) 8.4%
(C) 6.6%
(D) 12.6%
Answer:
(C) 6.6%

\(\beta=\frac{22}{12} \times 0.7\)
β = 1.2833
Systematic risk = Beta × SD of market
= β × σ_M
= 1.2833 ×12
= 15.4%
Unsystematic risk = Total risk – Systematic risk
= 22 – 15.4
= 6.6%

Question 144.
In a portfolio of the company, ₹ 2,00,000 have been invested in Asset-X which has an expected return of 8.5%, ₹ 2,80,000 in Asset-Y, which has an expected return of 10.2% and ₹ 3,20,000 in Asset-Z which has an expected return of 12%. What is the expected return for the portfolio?
(A) 12.945%
(B) 10.495%
(C) 10.549%
(D) 15.945%
Answer:
(B) 10.495%

Question 145.
The following data relate to two securities, A and B:

Assume RF 10% and RM = 18%.
Find out whether the securities, A and B are correctly priced?
Security A — Security B
(A) Undervalued — Overvalued
(B) Overvalued — Undervalued
(C) Correctly valued — Under valued
(D) Overvalued — Correctly valued
Answer:
(C) Correctly valued — Under valued

Going through the Corporate Financial Reporting – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Corporate Financial Reporting – Corporate and Management Accounting MCQs

Question 1.
The term ‘EVA’ is used for:
(A) Extra Value Analysis
(B) Economic Value Added
(C) Expected Value Analysis
(D) Engineering Value Analysis
Answer:
(B) Economic Value Added

Question 2.
The New York based financial advisory postulated a concept of economic value added.
(A) Shawn Stewart & Co.
(B) Stem Stewart & Co.
(C) Stem Shawn & Co.
(D) S.S.&Co.
Answer:
(B) Stem Stewart & Co.

Question 3.
If a company’s EVA is negative –
(A) It is destroying share holders wealth even though it may be reporting positive and growing EPS or return on capital employed.
(B) It is destroying the overall cost of capital of the firm.
(C) It is increasing the overall cost of capital of the firm causing low NPV.
(D) It is increasing the overall cost of capital of the firm which can be adjusted by risk premium.
Answer:
(A) It is destroying share holders wealth even though it may be reporting positive and growing EPS or return on capital employed.

Question 4.
Cost of equity share or debt is called:
(A) Related cost of capital
(B) Easy to calculate cost of capital
(C) Specific cost of capital
(D) Burden on the shareholder
Answer:
(C) Specific cost of capital

Question 5.
Corporate Financial Reporting contains:
(1) Qualitative information
(2) Quantitative information
Select the correct answer from the options given below
(A) (1) only
(B) Neither (1) nor (2)
(C) (2) only
(D) Both (1) and (2)
Answer:
(D) Both (1) and (2)

Question 6.
Cost of capital is equal to required return rate on equity in case if investors are only –
(A) Valuation Manager
(B) Common Stockholders
(C) Asset Seller
(D) Equity Dealer
Answer:
(B) Common Stockholders

Question 7.
Corporate Financial Reporting may be defined as –
(A) A process of recording the transactions in systematic manner.
(B) Communication of published financial statement and related information from a business enterprise to all users.
(C) A barometer of health of a business entity.
(D) Recording of financial data relating to business in a significant and orderly manner.
Answer:
(B) Communication of published financial statement and related information from a business enterprise to all users.

Question 8.
Which of the following model/method makes use of beta (P) in calculation of cost of equity?
(A) Risk Adjusted Discount Model
(B) Capital Assets Pricing Method
(C) MM Model
(D) Price Earning Method
Answer:
(B) Capital Assets Pricing Method

Question 9.
A corporate balance sheet is also known as:
(A) Statement of changes in assets and liabilities
(B) Statement of sources and application of funds
(C) Statement of financial condition
(D) Statement of object and reason
Answer:
(C) Statement of financial condition

Question 10.
The cost of equity share or debt is called specific cost of capital. When specific costs are combined, then we arrive at –
(A) Maximum rate of return
(B) Internal rate of return
(C) Overall cost of capital
(D) Accounting rate of return
Answer:
(C) Overall cost of capital

Question 11.
Which of the following method can be used by listed company for preparation of Cash Flow Statement?
(A) Direct Method
(B) Indirect Method
(C) Both (A) & (B)
(D) Either (A) or (B)
Answer:
(B) Indirect Method

Question 12.
EVA = ?
(A) PAT – (Capital Employed × WACC)
(B) NOPAT – (Capital Employed × K_e)
(C) NOPAT – (Capital Employed × WACC)
(D) NOPAT – (Total Assets × K_e × K_d)
Answer:
(C) NOPAT – (Capital Employed × WACC)

Question 13.
A business may incur an operating loss in a given financial year yet has more cash in the bank at the end. A reason for this could be that:
(A) Some fixed assets were sold for cash
(B) Dividends paid were higher this year than last
(C) Payments to creditors were made more promptly
(D) Debtors were allowed a longer period of credit
Answer:
(A) Some fixed assets were sold for cash

Question 14.
Assertion (A):
Cost of share capital would be based upon the expected rate of earnings of a company.
Reason (R); Each investor expects a certain amount of earnings, whether distributed or not from the company in whose shares he invests.
Select the correct answer from the options given below:
(A) A is true but R is false
(B) A is false but R is true
(C) A and R both are true but R is not correct explanation of A
(D) A and R both are true and R is correct explanation of A
Answer:
(D) A and R both are true and R is correct explanation of A

Question 15.
All of the following are true regarding the cash flow statement except
(A) This statement explains the causes of the change in the cash balance
(B) Cash outflows are shown in parentheses to indicate that payments must be subtracted
(C) This statement reports information as of a certain date and therefore, is dated like the balance sheet
(D) This statement classifies cash trans-actions as operating, investing, or financing
Answer:
(C) This statement reports information as of a certain date and therefore, is dated like the balance sheet

Question 16.
If we deduct ‘risk free return’ from ‘market return’ and multiply it with ‘beta factor’ and again add ‘risk free return’, the resultant figure will be –
(A) Nil
(B) Risk premium
(C) Cost of equity
(D) WACC of the firm
Answer:
(C) Cost of equity

Question 17.
All of the following are true regarding the purpose of the statement of cash flows except
(A) It is for predicting future cash flows
(B) It is for determining the company’s ability to pay dividends to share-holders and interest and principle to creditors
(C) It is for evaluating management decisions
(D) It is for reporting net income
Answer:
(D) It is for reporting net income

Question 18.
How you will calculate expected dividend ie. dividend at the end of year one?
(A) D₁ = [D₀(1+g)]
(B) D₁ = [D₀(1 -1)]
(C) D₁ = [D₀ × (1-g)]
(D) D₁ = [D₀+(1-g)](1-t)
Answer:
(A) D₁ = [D₀(1+g)]

Question 19.
Match the following:
List-I — List-II
P. Cost accounting — 1. Change in working capital
Q. Funds flow statement — 2. Deals with the cost of production, selling & distribution
R. Cash flow statement — 3. Is an important technique of financial analysis
S. Ratio analysis — 4. Cash & cash equivalents
Select the correct answer from the options given below —

Answer:
(B)

Question 20.
Risk free rate is subtracted from expected market return is considered as:
(A) Country risk
(B) Diversifiable risk
(C) Equity risk premium
(D) Market risk premium
Answer:
(D) Market risk premium

Question 21.
Assertion (A):
Cash flow statement enhances the comparability of report.
Reason (R):
Cash flow statement eliminates the effect of using different treatments for same transactions.
Select the correct answer from the following —
(A) Both A and R are true and R is the correct explanation of A
(B) Both A and R are true, but R is not the correct explanation of A
(C) A is true, but R is false
(D) A is false, but R is true
Answer:
(A) Both A and R are true and R is the correct explanation of A

Question 22.
How the economic value added (EVA) is calculated
(A) It is the difference between the market value of the firm and the book value of equity.
(B) It is the firm’s net operating profit after tax (NOPAT) less cost of capital.
(C) It is the net income of the firm less cost that equals the weighted average cost of capital multiplied by the book value of liabilities and equities.
(D) None of the above is correct
Answer:
(B) It is the firm’s net operating profit after tax (NOPAT) less cost of capital.

Question 23.
Arrange the following categories of cash inflows and cash outflows in the correct order of cash flow statements:
(1) Cash flows from investing activities
(2) Cash flows from financing activities
(3) Cash flows from operating activities.
Select the correct answer from the options given below —
(A) (3), (1), (2)
(B) (1), (3), (2)
(C) (3), (2), (1)
(D) (2), (1), (3)
Answer:
(A) (3), (1), (2)

Question 24.
Which of the following is advantage of EVA
(A) The use of EVA is a substitute for detailed analysis of business drivers.
(B) EVA improves the overall cost of capital.
(C) In some cases, company pay bonuses to the employees on the basis of EVA generated. Thus, it promotes the employees for working hard for generating higher revenue.
(D) EVA improves the skill of financial analyst.
Answer:
(C) In some cases, company pay bonuses to the employees on the basis of EVA generated. Thus, it promotes the employees for working hard for generating higher revenue.

Question 25.
Which one of the following is false
(A) If cash outflows exceed cash inflows on an ongoing basis, the business will eventually run out of cash.
(B) Rapidly expanding companies can sometimes face a cash shortage.
(C) Cash is the lifeblood of a business and without it the business will die.
(D) A profitable company will never run out of cash.
Answer:
(D) A profitable company will never run out of cash.

Question 26.
Which of the following action can be taken to improve EVA
(A) Improve Asset Turnover Ratios
(B) Change the capital structure by sub-stituting lower cost debt for higher cost equity
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 27.
Which of the following matters are required to be covered in Management Discussion & Analysis Report
I. Industry Structure & Developments
II. Opportunities and threats
III. Auditors negative remarks
IV. Product-wise performance
V. Risks and concerns
VI. Notes to financial statements VH. SEBI Directions
Select the correct answer from the options given below —
(A) IV, III, V & I only
(B) I, II, III, & VII only
(C) IV,II,V & I only
(D) I, II, IV, VI & VII only
Answer:
(C) IV,II,V & I only

Question 28.
Market value added is the difference between –
(A) EPS and Price Earning per share
(B) Cost of capital and economic value added
(C) The Company’s adjusted value for inflation and book value of various assets
(D) The Company’s market and book value of shares.
Answer:
(D) The Company’s market and book value of shares.

Question 29.
In the audit report, auditor expresses his opinion whether the financial statement
of the company gives in conformity with the accounting principles.
(A) True & fair view
(B) Full & fair view
(C) True & reasonable view
(D) Full & reasonable view
Answer:
(A) True & fair view

Question 30.
represents the economic profits generated by a business above and beyond the minimum return required by all providers of capital.
(A) Shareholder Value Added (SVA)
(B) Economist Value Added (EVA)
(C) Market Makers Value Added (MM VA)
(D) Debt holders Value Added (DVA)
Answer:
(A) Shareholder Value Added (SVA)

Question 31.
Match List-I with List-II:

Answer:
(A)

Question 32.
The auditor of a company is required to give his report in accordance with the
provision …………. of the Companies Act, 2013.
(A) Section 148
(B) Section 143
(C) Section 149
(D) Section 147
Answer:
(B) Section 143

Question 33.
Which of the following is not a objective of financial reporting given by Financial Accounting Standard Board (FASB)?
(A) The information should be useful to both, the present and potential investors.
(B) It should provide information about how management of an enterprise has discharged its stewardship responsibilities to owners for the use of enterprise resource entrusted to it.
(C) It should provide information about the enterprise’s financial performance during a period.
(D) It should forecast future performance and financial position of the enterprise using past data.
Answer:
(D) It should forecast future performance and financial position of the enterprise using past data.

Question 34.
can be defined as the value
created by the activities of a firm, that is, sales less the cost of bought in goods and services.
(A) Economic value added
(B) Value added
(C) Market value added
(D) Shareholders value added
Answer:
(B) Value added

Question 35.
Value added can be defined as -………..
(A) Wealth generated by the owners and shareholders of the business entity
(B) Value added by increasing net profit of the company
(C) Wealth generated by the entity through the collective efforts of capital providers, management and employees
(D) Net increasing in assets of the business organization.
Answer:
(C) Wealth generated by the entity through the collective efforts of capital providers, management and employees

Question 36.
Which of the following is advantage of Value Added Statement
(A) It helps in judging the productivity of the company.
(B) It helps in ascertaining result i e. profit earned or loss suffered in business during a particular period.
(C) It provides up to date information about the various assets that the firm possesses and the liabilities the firm owes
(D) It measures past performance of the business entity and depicts its current financial position.
Answer:
(A) It helps in judging the productivity of the company.

Question 37.
Which of the following is deducted in Value Added Statement in ‘Value Added’ section
(A) Other Income
(B) Replacement Reserve
(C) Deferred tax account
(D) None of the above
Answer:
(D) None of the above

Question 38.
Which of the following is appears in ‘Value Applied’ section in the value-added statement
(A) Decrease in stock
(B) Manufacturing & Other Expenses
(C) Depreciation
(D) All of the above
Answer:
(C) Depreciation

Question 39.
Statement I: EVA measures whether the operating profit is sufficient enough to cover cost of capital.
Statement II: If a company’s EVA is negative it is destroying shareholders’ wealth even though it may be reporting positive and growing EPS or return on capital employed.
Which statement is correct and which statement is false

Answer:
(C)

Question 40.
If we add ‘Cost of Capital’ to ‘Economic Value Added’ we gets -……………..
(A) Profit After Tax
(B) Net Operating Profit After Tax
(C) Gross Value Added
(D) Earnings before Interest and tax
Answer:
(B) Net Operating Profit After Tax

Question 41.
To which type of company the Companies (Auditor’s Report) Order, 2016 (CARO) applies
(A) Banking company.
(B) Insurance company
(C) One Person Company
(D) None of the above
Answer:
(D) None of the above

Question 42.
CARO, 2016 applies to a private limited company being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus not more than as on the balance
sheet date
(A) ₹ 5 Crore
(B) ₹ 1 Crore
(C) ₹ 2 Crore
(D) ₹ 10 Crore
Answer:
(B) ₹ 1 Crore

Question 43.
CARO, 2016 applies to a private limited company which has total revenue as disclosed in Scheduled III to the Companies Act, 2013 including revenue from discontinuing operations exceeding
during the financial year as per the financial statements.
(A) ₹ 15 Crore
(B) ₹ 100 Crore
(C) ₹ 10 Crore
(D) ₹ 25 Crore
Answer:
(C) ₹ 10 Crore

Question 44.
To which type of company the Companies (Auditor’s Report) Order, 2016 (CARO) applies
1. A private limited company being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus more than ₹ 2 Crore as on the balance sheet date.
2. A private limited company which have total borrowings exceeding ₹ 2 Crore from any bank or financial institution at any point of time during the financial year.
3. A private limited company which have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations) less than ₹ 10 Crore during the financial year as per the financial statements.
Select the correct answer from the options given below –
(A) 1 and 2 only
(B) 2 and 3 only
(C) 1 and 3 only
(D) None of the 1, 2 or 3
Answer:
(A) 1 and 2 only

Question 45.
CARO, 2016 shall not apply to the auditor’s report on –
(A) Income statement
(B) Financial statements
(C) Consolidated financial statements
(D) None of the above
Answer:
(C) Consolidated financial statements

Question 46.
As per CARO, 2016 auditor’s report must state whether the company has entered into any non-cash transactions with directors or persons connected with him as contained in of Companies Act, 2013
(A) Section 192
(B) Section 195
(C) Section 292
(D) Section 295
Answer:
(C) Section 292

Question 47.
The Board of every company referred to Section 135 (1), shall ensure that the company spends, in every financial year, at least , of the company made during the 3 immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.
(A) 1% of the profits
(B) 2% of the profit before depreciation
(C) 2% of the average net profits
(D) 5% of the EBIT
Answer:
(C) 2% of the average net profits

Question 48.
Financial statement and Board’s Report shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than before the date of the meeting.
(A) 10 days
(B) 30 days
(C) 7 days
(D) 21 days
Answer:
(D) 21 days

Question 49.
A copy of the financial statements and Board’s report duly adopted at the AGM shall be filed with the Registrar within of the date of AGM.
(A) 60 days
(B) 30 days
(C) 90 days
(D) 21 days
Answer:
(B) 30 days

Question 50.
The Board of Directors of a company shall approve financial statement and the Board’s report by means of resolutions passed -…………..
(A) By circulation
(B) Shareholders ordinary resolution
(C) At meetings of the Board
(D) E-meeting
Answer:
(C) At meetings of the Board

Question 51.
As per Rule 8 of the Companies (Accounts) Rules, 2014, the Report of the Board shall contain the particulars of contracts or arrangements with related parties Section 188 (1) in the -…………
(A) Form AOC-1A
(B) Form AOC-2
(C) Form AOC-3
(D) Form AOC-4A
Answer:
(B) Form AOC-2

Question 52.
Every listed company and every other public company having a paid up share capital of calculated at the end of the preceding financial year shall include, in the report by its Board of directors, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.
(A) ₹ 5 Crore or more
(B) ₹  50 Crore or more
(C) ₹ 25 Crore or more
(D) ₹ 10 Crore or more
Answer:
(C) ₹ 25 Crore or more

Question 53.
Which of the following is not one of the underlying principles of the Corporate Governance
(A) Openness
(B) Integrity
(C) Accountability
(D) Acceptability
Answer:
(D) Acceptability

Question 54.
Directors’ responsibilities are unlikely to include:
(A) A duty of care
(B) A duty to propose high dividends for shareholders
(C) A fiduciary duty
(D) A duty to keep proper accounting records
Answer:
(B) A duty to propose high dividends for shareholders

Question 55.
A director of a limited company may not be liable for wrongful trading if he –
(A) Introduced into the balance sheet an asset based on a valuation of its brands sufficient to meet any short-fall.
(B) Took every step to minimize the potential loss to creditors.
(C) Increased the valuation of its inventories to cover any potential shortfall.
(D) Brought in some expected sales from next year into the current year.
Answer:
(B) Took every step to minimize the potential loss to creditors.

Question 56.
Which of the following actions will not help directors to protect themselves from non-compliance with their obligations and responsibilities
(A) Keeping themselves fully informed about company affairs.
(B) Including a disclaimer clause in their service contracts.
(C) Ensuring that regular management accounts are prepared by the company.
(D) Seeking professional help.
Answer:
(B) Including a disclaimer clause in their service contracts.

Question 57.
The corporate governance structure of a company reflects the individual company’s:
(A) Cultural and economic system
(B) Legal and business system
(C) Social and regulatory System
(D) All of the above
Answer:
(D) All of the above

Question 58.
CSR stands for
(A) Company Social Responsibility
(B) Corporate Social Rights
(C) Corporate Social Responsibility
(D) Company Social Rights
Answer:
(C) Corporate Social Responsibility

Question 59.
CSR and corporate governance
represent a between business
and society.
(A) Social climate
(B) Special contract
(C) Special climate
(D) Social contract
Answer:
(D) Social contract

Question 60.
Who are the stakeholders of the business that are concerned with CSR
(A) Governments, employees, communities, partners, competitors
(B) Employees, research agencies, governments, communities, trade organizations
(C) Suppliers, partners, employees, communities, investors, education institutions
(D) All of the above
Answer:
(D) All of the above

Question 61.
Corporate governance can be defined as:
(A) The system used by firms to control the actions of their employees.
(B) The election process used to vote in a new Board of Director.
(C) The corporate compliance system used by the firm.
(D) The system used by firms to identify who the critical stakeholders are for the firm.
Answer:
(C) The corporate compliance system used by the firm.

Question 62.
The company shall obtain a certificate from either the regarding compliance of conditions of corporate governance of the listing agreement and annex the certificate with the director’s report, which is sent annually to all the shareholders of the company.
(A) Auditors
(B) Practicing Company Secretary
(C) Both (A) and (B)
(D) Either (A) or (B)
Answer:
(D) Either (A) or (B)

Question 63.
Which type of director should be the head of the Stakeholders Grievance Committee
(A) Executive director
(B) Non-executive director
(C) Senior most director
(D) Chairman appointed for shareholders meetings
Answer:
(B) Non-executive director

Question 64.
Which type of committee is not required to form for compliance with provisions of Corporate Governance under the Companies Act, 2013 and SEBI Regulations
(A) Audit Committee
(B) Nomination & Remuneration Committee
(C) Stakeholders Grievance Committee
(D) Corporate Governance Committee
Answer:
(D) Corporate Governance Committee

Question 65.
R Ltd. has disbursed a dividend of ₹ 75 on each equity share of ₹ 25. The market price of share is ₹ 200. Corporate tax rate is 40%. Its cost of equity is –
(A) 30.0%
(B) 37.5%
(C) 35.7%
(D) 33.5%
Answer:
(B) 37.5%
75/200 = 0.375 ie. 37.5%

Question 66.
P Ltd. has 1,50,000 equity shares of ₹ 25 each and its current market value is ₹ 150 each. The before tax profit of the company for the year just ended is ₹ 36,36,363. Tax rate is 34%. Cost of equity of P Ltd. –
(A) 10.76%
(B) 12.72%
(C) 10.67%
(D) 13.48%
Answer:
(C) 10.67%
Profit after tax = 36,36,363 – 12,36,363 = 24,00,000
EPS = 24,00,000/1,50,000 = 16 per share
Price Earning Method:

Question 67.
NSZ Ltd. has equity of 15 Million and 10% debentures of 20 Million. Cost of equity is 18% and pre-tax cost of debt is 10%. Company estimates its EBIT for 7 Million. Applicable tax rate is 30%. What is the Economic value added of NSZ Ltd.
(A) 0.088 Million
(B) 0.678 Million
(C) 0.798 Million
(D) 0.533 Million
Answer:
(C) 0.798 Million

Question 68.
Maya Ltd. share beta factor (p)is 1.1214. Dividend paid by the company last year was ₹ 3.60 per share on face value of ₹ 20. The risk free rate of interest on government bonds is 7.5%. The expected rate of return on company equity shares is 13%. What is the cost of equity (Ke) of Maya Ltd.?
(A) 12.89%
(B) 13.67%
(C) 14.52%
(D) 13.03%
Answer:
(B) 13.67%
K=R_f+P(R_m-R_f)
= 7.5 + 1.1214(13-7.5)
= 13.67%

Question 69.
H Ltd. p is 1.8025. Dividend paid by the company last year was ₹ 9 per share on face value of ₹ 30. The risk free rate is 0.061275. Risk premium is 0.0825. Calculate cost of equity capital.
(A) 21%
(B) 6.28%
(C) 14.77%
(D) 12%
Answer:
(A) 21%
K_e = R_f + p (R_m – R_f)
Note: Risk Premium = (R_m – R_f)
= 6.1275 + 1.8025 × 8.25 = 21%

Question 70.
Rao Ltd. earns profit after tax ₹ 3,96,000. Corporate tax is 0.4. Its capital structure consist of equity shares ₹ 9,60,000; 15% Term loan ₹ 4,80,000. Cost of equity is 0.12. its economic value added is –
(A) ₹ 2,66,400
(B) ₹ 12,80,800
(C) ₹ 2,08,800
(D) ₹ 12,80,008
Answer:
(B) ₹ 12,80,800

Question 71.
Following details are submitted by Rajlakhami Ltd.:
EBIT — ₹ 350 lakh
Equity Capital — ₹ 400 lakh
Reserves & Surplus — ₹ 325 lakh
10% Debentures — ₹ 1,000 lakh
Current Assets — ₹ 82 lakh
Cost of Equity — 17.5%
Income Tax Rate 30%
Economic Value Added = ?
(A) ₹ 43.75 lakh
(B) ₹ 40.75 lakh
(C) ₹ 43.57 lakh
(D) ₹ 45.37 lakh
Answer:
(A) ₹ 43.75 lakh

Question 72.
An analyst has calculated economic value added of ₹ 43,750 for Z Ltd. WACC of the company is 11.5% and applicable tax rate is 30%. The company paid interest of ₹ 1,00,000 during the year. Total assets of the company are ₹ 17,50,000. What is profit after tax (PAT) of the company
(A) ₹ 2,45,000
(B) ₹ 1,45,000
(C) ₹ 1,75,000
(D) ₹ 3,15,000
Answer:
(C) ₹ 1,75,000

Question 73.
Ramola Ltd. report its NOPAT ₹ 25,00,000. Its capital employed and economic value added is ₹ 60,00,000 & ₹ 19,00,000 respectively. What is overall cost of capital of Ramola Ltd.?
(A) 10.9%
(B) 11%
(C) 10%
(D) 9.8%
Answer:
(C) 10%
EVA NOPAT – (Capital Employed × WACC)
19,00,000 25,00,000 – (60,00,000 × x)
– 6,00,000 – 60,00,000x
x = 0.1 i.e. 10%

Question 74.
Compute the EVA with the help of following information:
Equity — 10,00,000
Debt (10%) — 5,00,000
Profit after tax — 2,00,000
Risk-free rate of return is 7%. Beta (P) = 0.9, Market rate of return =15%. Applicable tax rate is 40%.
(A) ₹ 57,950
(B) ₹ 57,590
(C) ₹ 57,905
(D) ₹ 59,750
Answer:
(A) ₹ 57,950

Question 75.
Compute the EVA with the help of following information:
Equity — ₹ 15,00,000
Debt (10%) — ₹ 7,00,000
Profit after tax — ₹ 4,00,000
Risk-free rate of return is 7%.
Beta (β) = 0.9
Market rate of return = 15%.
Applicable tax rate is 40%.
(A) ₹ 1,87,020
(B) ₹ 1,78,020
(C) ₹ 1,87,200
(D) ₹ 1,85,200
Answer:
(A) ₹ 1,87,020

Question 76.
If after -tax operating income is ₹1,85,000, weighted average cost of capital is 11%, total assets are ₹ 4,85,000 and total liabilities are ₹ 3,67,000, then economic value added would be –
(A) ₹ 1,42,020
(B) ₹ 1,72,020
(C) ₹ 1,62,020
(D) ₹ 1,52,020
Answer:
(B) ₹ 1,72,020
Capital employed = 4,85,000 – 3,67,000 = 1,18,000
Cost of capital = 1,18,000 × 11% = 12,980
EVA = 1,85,000 – 12,980 = 1,72,020

Question 77.
Following is the information in respect of Sun Ltd.:
Gross sales — 1,250
Discount allowed — 50
Depreciation on plant & machinery — 70
Dividend to equity shareholders — 40
Raw material consumed — 780
Salary and wages — 160
Interest on term loan — 60
Retained profit for the year — 30
Office expenses — 30
Rate at tax is 30%
Value-added = ?
(A) 380 lakh
(B) 390 lakh
(C) 340 lakh
(D) 280 lakh
Answer:
(B) 390 lakh

Question 78.
Following is the information in respect
Value Applied of KYC Ltd.:

What is profit before tax of KYC Ltd.?
(A) ₹ 100 lakh
(B) ₹ 140 lakh
(C) ₹ 170 lakh
(D) ₹ 180 lakh
Answer:
(A) ₹ 100 lakh

Perform reverse working.
Consider only those items that appear before the figure of ‘profit before tax’ in Profit & Loss Statement and also appears in ‘Value Applied.’ section in Value Added Statement.

Question 79.
Following income statement pertains to Brite Ltd.:


Value added = ?
(A) ₹ 1,713 lakh
(B) ₹ 1,600 lakh
(C) ₹ 1,887 lakh
(D) 1 1,800 lakh
Answer:
(D) 1 1,800 lakh

Question 80.
Following income statement pertains to GHG Ltd.:

Operating cost includes ₹ 20,494 lakhs as wages, salaries & other benefits to employees.
Value added =
(A) ₹ 24,811 lakh
(B) ₹ 24,181 lakh
(C) ₹ 24,118 lakh
(D) ₹ 28,114 lakh
Answer:
(C) ₹ 24,118 lakh

Question 81.
Prosperous Bank has a criterion that it will give loans to companies that have an economic value added (EVA) greater than zero for the past three years on an average. Bank is considering lending money to a small company that has characteristics shown below:
(i) Average operating income after tax equals to ₹ 25,00,000 per year for the last 3 years.
(ii) Average operating income after tax equals to ₹ 25,00,000 per year for the last 3 years.
years equals ₹ 75,00,000.
(iii) Weighted average cost of capital appropriate for the company is 10%, applicable for all 3 years.
(iv) Company’s average current liabilities over past 3 years are ₹ 15,00,000.
Economic Value Added ?
(A) 17,00,000
(B) 18,00,000
(C) 19,00,000
(D) 21,00,000
Answers:
(C) 19,00,000

Project Finance and Types of Financing – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Project Finance and Types of Financing – Financial Management MCQ

Question 1.
Project appraisal by financial institution takes into consideration
(A) Promoter’s capacity and competence
(B) Project
(C) Economic Aspects
(D) All of above
Answer:
(D) All of above

Question 2.
A project would normally be undertaken if its net present value is:
(A) Negative
(B) Exactly the same as the NPV of existing projects
(C) Positive
(D) Zero
Answer:
(C) Positive

Question 3.
The project planning activities and goals include defining:
1. The specific work to be performed and goals that define and bind the project.
2. Estimates to be documented for planning, tracking, and controlling the project.
3. Commitments that are planned, documented, and agreed to by affected groups.
4. Project alternatives, assumptions, and constraints.
Select the correct answer from the options given below.
(A) 1,2, 3 and 4
(B) 2, 3 and 4
(C) 1 and 3 only
(D) 1 and 4 only
Answer:
(A) 1,2, 3 and 4

Question 4.
Which of the following is not one of the three fundamental methods of firm valuation?
(A) Discounted Cash flow
(B) Income or earnings – where the firm is valued on some multiple of accounting income or earnings.
(C) Balance sheet – where the firm is valued in terms of its assets.
(D) Market Share
Answer:
(D) Market Share

Question 5.
The promoter’s capacity and competence should be examined with reference to –
(A) Their management background, traits as entrepreneurs, business
(B) Industrial experience, and past performance in other concerns
(C) Their integrity and reputation, market standing and legal competence
(D) All of the above
Answer:
(D) All of the above

Question 6.
External sources of finance do not include:
(A) Leasing
(B) Debentures
(C) Retained earnings
(D) Overdrafts
Answer:
(B) Debentures

Question 7.
Which of the following is a drawback to a business that issues debentures?
(A) Lenders do not have any voting rights.
(B) There is dilution of control.
(C) There is a dilution of ownership.
(D) The value of liabilities increases.
Answer:
(A) Lenders do not have any voting rights.

Question 8.
Internal sources of finance do not include:
(A) Better management of working capital
(B) Ordinary shares
(C) Trade credit
(D) Retained earnings
Answer:
(B) Ordinary shares

Question 9.
Technical feasibility implies to mean –
(A) Appraisal of project by a team of expert drawn from different disciplines.
(B) The adequacy of the proposed plant and equipment to produce the product within the prescribed norms.
(C) Working plan for implementation of project proposal after investment decision by a company has been taken.
(D) To ensure before taking in hand a project whether or not the proposed project is viable.
Answer:
(B) The adequacy of the proposed plant and equipment to produce the product within the prescribed norms.

Question 10.
The project is viable when BCR is –
(A) One
(B) One or more than one
(C) Two
(D) Two or more than two.
Answer:
(B) One or more than one

Question 11.
Financial aspects of project is judged with reference to –
(A) Availability of land and site.
(B) Availability of servicing facilities like machine shops, electric repair shop, etc.
(C) NPV, Benefit Cost Ratio, Internal Rate of Return, Sensitivity & Risk Analysis
(D) Availability of work force as per required skill and arrangements proposed for training-in-plant and outside.
Answer:
(C) NPV, Benefit Cost Ratio, Internal Rate of Return, Sensitivity & Risk Analysis

Question 12.
The objective of economic appraisal is to -……………
(A) Examine the project from the entire economy’s point of view
(B) Determine whether the project will improve the economic welfare of the country
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 13.
The social analysis consists of -………….
(A) Measurement of the distribution of the income due to the project.
(B) Identification of the impact on the basic needs objectives of the society.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 14.
The UNIDO guidelines provide a comprehensive framework for -………
(A) Appraisal of projects and examine their desirability and merit by using different yardsticks in a step-wise manner
(B) Appraisal of project regarding chance of getting government subsidy.
(C) Adequacy of the proposed plant and equipment to produce the product within the prescribed norms.
(D) All of the above
Answer:
(A) Appraisal of projects and examine their desirability and merit by using different yardsticks in a step-wise manner.

Question 15.
………….. are those which Eire created by combining the features of equity with bond, preference and equity.
(A) Mixed instruments
(B) Baby bond
(C) Hybrid instruments
(D) Hypothetical instruments
Answer:
(C) Hybrid instruments

Question 16.
Zero Coupon bonds are bonds issued at and redeemed at par.
(A) Face value to discount
(B) Discount to face value plus premium
(C) Par to discounted value
(D) Discount to face value
Answer:
(D) Discount to face value

Question 17.
A lowers the interest rate risk by neutralizing the inflation risk.
(A) Carrot and stick bond
(B) Capital indexed bonds
(C) Commodity bonds
(D) Dual convertible bond
Answer:
(B) Capital indexed bonds

Question 18.
Derivatives include a variety of financial contracts, including
(1) Futures
(2) Forwards
(3) Swaps
(4) Options
Select the correct answer from the options given below.
(A) (1) & (4)
(B) (2) & (3)
(C) (2), (4) & (1)
(D) (3), (1), (4) & (2)
Answer:
(D) (3), (1), (4) & (2)

Question 19.
…………. means any instrument in the form of a depository receipt created by Domestic Depository in India against the underlying equity shares of a company incorporated outside India.
(A) Global Depository Receipt (GDR)
(B) American Depository Receipt (ADR)
(C) Indian Depository Receipt (IDR)
(D) Any of the above
Answer:
(C) Indian Depository Receipt (IDR)

Question 20.
IDR is an instrument denominated in –
(A) Foreign currency
(B) Indian Rupees
(C) Partly in (A) and partly in (B)
(D) Either (A) or (B)
Answer:
(B) Indian Rupees

Question 21.
Depository Receipt (DR) is ………….
1. Denominated in foreign currency
2. Traded in foreign exchanges
Select the correct answer from the options given below.
(A) 1 but not 2
(B) 2 but not 1
(C) 1 and 2
(D) Neither 1 nor 2
Answer:
(C) 1 and 2

Question 22.
Depository receipts can be issued by way of ………
(A) Public offering
(B) Private placement
(C) Either (A) or (B)
(D) Neither (A) nor (B)
Answer:
(C) Either (A) or (B)

Question 23.
…………… means modes of raising funds by an Indian company outside India in foreign currency.
(A) American issue
(B) Swiss issue
(C) Euro issue
(D) None of the above
Answer:
(C) Euro issue

Question 24.
Which of following is government security?
(A) Dated securities
(B) Capital indexed bonds
(C) Treasury bills
(D) All of above
Answer:
(C) Treasury bills

Question 25.
Floating rate bonds are bonds with
(A) Fixed interest rate
(B) Variable interest rate
(C) Semi fixed interest rate
(D) None of above
Answer:
(B) Variable interest rate

Question 26.
A bond that allows the issuer of the bond to redeem the bond before the date of maturity is called as -………….
(A) Callable bond
(B) Put bond
(C) Floating rate bonds
(D) Fixed rate bond
Answer:
(A) Callable bond

Question 27.
A bond which has a provision that allows the holder of the bond the right to force the issuer to pay back the principal on the bond is called as –
(A) Callable bond
(B) Put bond
(C) Floating rate bonds
(D) Fixed rate bond
Answer:
(B) Put bond

Question 28.
Capital Indexed Bonds are bonds where interest rate is a fixed percentage over the
(A) Inflation index
(B) Retail price index
(C) Wholesale price index
(D) SENSEX
Answer:
(C) Wholesale price index

Question 29.
Z Ltd. issued CP as per the following details:
Date of issue – 17th January, 2010
Date of maturity – 17th April, 2010
Interest rate – 11.25% p.a.
Amount received is – 9.73
Crore At what amount this CP will be redeemed?
(A) 10 Crore
(B) 11 Crore
(C) 9.5 Crore
(D) 9.95 Crore
Answer:
(A) 10 Crore
The days to maturity of CP are 90 as shown below:

Interest for 90 days = 11.25 × 90/365 = 2.774%
CP are redeemed at face value.
Hence,
Amount Received + Interest = Face Value
100 + 2.774 = 102.774
9.73 Crore + 0.27 Crore = 10 Crore

Question 30.
A company issues 90 days commercial papers of the face value of ₹ 1,000 at ₹ 980. The credit rating expenses are 0.6% of the size of issue, issuing and paying agent charges are 0.25% and stamp duty is to be paid @0.20%. You are required to calculate cost of issuing commercial papers
(A) 10.89%
(B) 12.56%
(C) 15.14%
(D) 14.73%
Answer:
(C) 15.14%
CP are redeemed at face value.
Hence,
Amount Received + Interest = Face Value
980+20= 1,000

Calculation of total cost of funds:

Dividend Policy – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Dividend Policy – Financial Management MCQ

Question 1.
Dividend policy determines –
(A) what portion of earnings will be paid out to stock holders
(B) what portion will be retained in the business to finance long-term growth.
(C) Only (A) not (B)
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 2.
Dividend constitutes the cash flow that accrues to -…………..
(A) Holders
(B) Equity holders
(C) Bond holders
(D) All of the above
Answer:
(B) Equity holders

Question 3.
Which of the following factor will affect the dividend policy of the firm?
1. Insufficiency of cash
2. Firms contractual obligation
3. Ratio of debt to equity
4. Business cycle considerations
Select the correct answer from the options given below.
(A) 1 and 3 only
(B) 2 and 4 only
(C) 2, 3 and 4
(D) 1,2, 3 and 4
Answer:
(D) 1,2, 3 and 4

Question 4.
Retained earnings are –
(A) An indication of a company’s liquidity.
(B) The same as cash in the bank.
(C) Not important when determining dividends.
(D) The cumulative earnings of the company after dividends.
Answer:
(D) The cumulative earnings of the company after dividends.

Question 5.
In retention growth model, percent of net income firms usually pay out as shareholders dividends, is classified as –
(A) Payout ratio
(B) Payback ratio
(C) Growth retention ratio
(D) Present value of ratio
Answer:
(A) Payout ratio

Question 6.
Which of the following is an argument for the relevance of dividends?
(A) Informational content.
(B) Reduction of uncertainty.
(C) Some investor’s preference for current income.
(D) All of the above.
Answer:
(D) All of the above.

Question 7.
As per Modigliani-Miller hypothesis of dividend irrelevance price of share at year zero is –
(A) D₀ + P₀/1 + K_e
(B) (D₁ + P₁)× (1 + K_e)
(C) D₁ + P/1+K_e
(D) 1-(D₀ + P₀)÷K_e
Answer:
(C) D₁ + P/1+K_e

Question 8.
All of the following are true of stock splits except:
(A) Market price per share is reduced after the split.
(B) The number of outstanding shares is increased.
(C) Retained earnings are changed.
(D) Proportional ownership is unchanged.
Answer:
(C) Retained earnings are changed.

Question 9.
Which of the following techniques does not reward shareholders for investing in a company?
(A) Repurchasing company shares
(B) Offering non-pecuniary benefits
(C) Making a rights issue
(D) Offering a scrip dividend
Answer:
(C) Making a rights issue

Question 10.
Forecast by analysts, retention growth model and historical growth rates are methods used for an –
(A) Estimate future growth
(B) Estimate option future value
(C) Estimate growth ratio
(D) Estimate option present value
Answer:
(A) Estimate future growth

Question 11.
The repurchase of stock is considered …………. decision rather than ……….. decision.
(A) an investment; a financing
(B) financing; an investment
(C) an investment; a dividend
(D) a dividend; a financing
Answer:
(B) financing; an investment

Question 12.
If OML Corporation buyback ten percent of its outstanding common stock from the secondary market, the result would be –
(A) A decline in EPS.
(B) An increase in cash.
(C) A decrease in total assets.
(D) An increase in the number of stock-holders.
Answer:
(C) A decrease in total assets.

Question 13.
Historical growth rates, analysis fore-casts and retention growth model are approaches to estimate:
(A) Net present value of gain
(B) Growth rate
(C) Growth gain
(D) Discounted gain
Answer:
(B) Growth rate

Question 14.
The primary goal of a publicly-owned firm interested in serving its stockholders should be to
(A) Maximize expected total corporate profit
(B) Maximize expected EPS
(C) Maximize the stock price per share
(D) Maximize expected net income.
Answer:
(C) Maximize the stock price per share

Question 15.
A decrease in a firm’s willingness to pay dividends is likely to result from an increase in its –
(A) Earnings stability
(B) Access to capital markets
(C) Profitable investment opportunities
(D) Collection of accounts receivable.
Answer:
(C) Profitable investment opportunities

Question 16.
Payout ratio is subtracted from one to calculate –
(A) Growth ratio
(B) Present value ratio
(C) Retention ratio
(D) Future value ratio
Answer:
(C) Retention ratio

Question 17.
Which of the following would not have an influence on the optimal dividend policy?
(A) The possibility of accelerating or delaying investment projects.
(B) A strong share holders’ preference for current income versus capital gains.
(C) The costs associated with selling new common stock.
(D) All of the statements above can have an effect on dividend policy.
Answer:
(D) All of the statements above can have an effect on dividend policy.

Question 18.
A stock split will cause a change in the toted amounts shown in which of the following balance sheet accounts?
(A) Cash
(B) Common stock
(C) Paid-in capital
(D) None of the above
Answer:
(D) None of the above

Question 19.
You currently own 100 shares of stock in Baba Ltd. The stock currently trades at ₹ 120 a share. The company is contemplating a 2:1 stock split. Which of the following best describes your position after the proposed stock split takes place?
(A) You will have 200 shares of stock, and the stock will trade at or near ₹120 a share.
(B) You will have 200 shares of stock, and the stock will trade at or near ₹60 a share.
(C) You will have 100 shares of stock, and the stock will trade at or near ₹60 a share.
(D) You will have 50 shares of stock, and the stock will trade at or near ₹60 a share.
Answer:
(B) You will have 200 shares of stock, and the stock will trade at or near ₹60 a share

Question 20.
Consider following two statements:
(1) Buyback can be used by companies to defend against hostile takeovers since they increase the proportion of debt in a firm’s capital structure.
(2) After a 3-for-1 stock split, a company’s price per share will fall and its number of shares outstanding will rise total value remaining the same.
Which of the above statement is correct? “%
(A) (2) only
(B) Neither (1) nor (2)
(C) (1) only
(D) Both (1) and (2)
Answer:
(D) Both (1) and (2)

Question 21.
The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?
I. Firms that have a 100% retention ratio.
II. Firms that pay a constant dividend.
III. Firms that pay an increasing dividend
IV. Firms that pay a decreasing dividend.
Select correct answer from the options given below.
(A) I & II only
(B) II & III only
(C) II,III & IV only
(D) I, II & III only
Answer:
(C) II,III & IV only

Question 22.
If markets are in equilibrium, which of the following will occur:
(A) Each investment’s expected return should equal its realized return
(B) Each investment’s expected return should equal its required return.
(C) Each investment should have the same realized return.
(D) All of the statements above are correct
Answer:
(B) Each investment’s expected return should equal its required return.

Question 23.
Regular Dividend Policy means -……….
(A) investors get dividend at usual rate.
(B) reserve fund is created to pay fixed amount of dividend
(C) payment of low dividend per share constantly plus extra dividend in the year when the company earns high profit.
(D) All of the above
Answer:
(A) investors get dividend at usual rate.

Question 24.
Which of the following examples best represents a passive dividend policy?
(A) The firm sets a policy such that the proportion of dividends paid from net income remains constant.
(B) The firm pays dividends with what remains of net income after taking acceptable investment projects.
(C) The firm sets a policy such that the quantity (dollar amount per share) of dividends paid from net income remains constant.
(D) All of the above are examples of various types of passive dividend policies
Answer:
(B) The firm pays dividends with what remains of net income after taking acceptable investment projects.

Question 25.
Modigliani and Miller argue that the dividend decision
(A) is irrelevant as the value of the firm is based on the earning power of its assets.
(B) is relevant as the value of the firm is not based just on the earning power of its assets.
(C) is irrelevant as dividends represent cash leaving the firm to shareholders, who own the firm anyway.
(D) is relevant as cash outflow always influences other firm decisions
Answer:
(A) is irrelevant as the value of the firm is based on the earning power of its assets.

Question 26.
Constant payout ratio means –
(A) Declaration same bonus ratio every year.
(B) The payment of fixed percentage of earning as dividend every year.
(C) Constantly paying same dividend if EPS is same for all the year.
(D) None of the above
Answer:
(B) The payment of fixed percentage of earning as dividend every year.

Question 27.
Dividend policy is determined by the –
(A) Shareholders in AGM
(B) CEO of the company
(C) Board of directors
(D) Ministry of Corporate Affairs
Answer:
(C) Board of directors

Question 28.
How you calculate Dividend Cover Ratio?
(A) PAT ÷ Dividend
(B) Dividend ÷ PAT
(C) EBIT ÷ Dividend
(D) Dividend ÷ EBIT
Answer:
(A) PAT ÷ Dividend

Question 29.
Investors may be willing to pay a premium for stable dividends because of the informational content of ………. the desire of investors for………. and certain
(A) institutional considerations; dividends; current income.
(B) dividends; current income; institutional considerations.
(C) current income; dividends; institutional considerations.
(D) institutional considerations; current income; dividends
Answer:
(B) dividends; current income; institutional considerations.

Question 30.
EPS ratio measures –
(A) Earning of the company to ratio of debt and equity
(B) Social earning per individual
(C) The profit available for the equity shareholders on a per share basis.
(D) Profit earned by the enterprises by employment various assets.
Answer:
(C) The profit available for the equity shareholders on a per share basis.

Question 31.
A ………….. is a payment of additional shares to shareholders in lieu of cash.
(A) Stock split
(B) Stock dividend
(C) Extra dividend
(D) Regular dividend
Answer:
(B) Stock dividend

Question 32.
Which of the following is correct formula to calculate P/E Ratio?
(A) Market Price ÷ EPS
(B) EPS ÷ Market Price
(C) PAT ÷ EPS
(D) EPS ÷ PAT
Answer:
(A) Market Price ÷ EPS

Question 33.
A …………… occurs when there is an increase in the number of shares out-standing by reducing the par value of stock.
(A) Stock split
(B) Stock dividend
(C) Extra dividend
(D) Regular dividend
Answer:
(A) Stock split

Question 34.
The P/E ratio reflects –
(A) the market’s confidence in the company’s management effectiveness.
(B) Effectiveness of capital budget process.
(C) the market’s confidence in the company’s stakeholders.
(D) the market’s confidence in the company’s equity.
Answer:
(D) the market’s confidence in the company’s equity.

Question 35.
A ……………. is the expected cash dividend that is normally paid to shareholders.
(A) Stock split
(B) Stock dividend
(C) Extra dividend
(D) Regular dividend
Answer:
(D) Regular dividend

Question 36.
Myron Gordon believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that
(A) Investors are indifferent between dividends and capital gains.
(B) Investors require that the dividend yield and capital gains yield equal a constant.
(C) Capital gains are taxed at a higher rate than dividends.
(D) Investors view dividends as being less risky than potential future capital gains.
Answer:
(D) Investors view dividends as being less risky than potential future capital gains.

Question 37.
………….. is a non-recurring dividend paid to shareholders in addition to the regular dividend.
(A) A stock split
(B) A stock dividend
(C) An extra dividend
(D) A regular dividend
Answer:
(C) An extra dividend

Question 38.
In the real world, we find that dividends –
(A) Usually exhibit greater stability than earnings.
(B) Fluctuate more widely than earnings
(C) Tend to be a lower percentage of earnings for mature firms
(D) Are usually set as a fixed percentage of earnings
Answer:
(A) Usually exhibit greater stability than earnings.

Question 39.
What method of stack repurchase occurs when the buyer purchases securities through a brokerage house?
(A) Dutch-auction
(B) Fixed-price
(C) Open-market
(D) Fair-warning
Answer:
(C) Open-market

Question 40.
What method of stock repurchase occurs when the buyer seeks bids within a specified price range and accepts the lowest price that will allow it to acquire the entire block of securities desired?
(A) Dutch-auction
(B) Fixed-price
(C) Open-market
(D) Fair-warning
Answer:
(A) Dutch-auction

Question 41.
Which of the following is correct formula to calculate dividend payout ratio?
(A) DPS ÷ EPS
(B) EPS ÷ DPS
(C) Market Price ÷ EPS
(D) EPS ÷ Market Price
Answer:
(A) DPS ÷ EPS

Question 42.
The shareholders of your firm anticipate receiving a regular dividend that is consistent with past dividend policies. What benefit occurs to shareholders if the firm repurchases shares with the same total quantity of money that would have been spent on dividends? Assume that the P/E ratio is maintained with either scenario.
(A) Shareholders can postpone or reduce taxes (assuming a lower capital gain rate).
(B) It is cheaper for shareholders to sell existing shares for cash than it costs to reinvest cash dividends into existing shares.
(C) The current shareholders benefit because there are a greater number share holders than if the firm pays a cash dividend.
(D) There is no benefit as shareholders will not be receiving any cash
Answer:
(A) Shareholders can postpone or reduce taxes (assuming a lower capital gain rate).

Question 43.
Dividend payout ratio – ……………
(A) expresses the relationship between what is available as earnings per share and what is actually paid in the form of dividends out of available earnings.
(B) is a good measure of the dividend policy of the company.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 44.
A dividend reinvestment plan (DRIP) is –
(A) An optional plan, provided by brokerage firms, allowing unit holders to automatically reinvest dividend payments in additional units of the mutual fund.
(B) An optional plan, provided by mutual funds, allowing unit holders to automatically reinvest dividend payments in additional units of the mutual funds.
(C) A mandatory plan, provided by brokerage firms, where shareholders are automatically reinvesting dividend payments in additional units of the mutual fund at a reduced price.
(D) A mandatory plan, provided by mutual funds, where unit holders are automatically reinvesting dividend payments in additional emits of the mutual funds at a reduced price.
Answer:
(B) An optional plan, provided by mutual funds, allowing unit holders to automatically reinvest dividend payments in additional units of the mutual funds.

Question 45.
Which of the following is correct formula to calculate dividend yield ratio?
(A) DPS Question Market Price × 100
(B) (1 – EPS) Question Market Price
(C) EPS Question Market Price × 100
(D) (Market Price × 100) ÷ DPS
Answer:
(A) DPS Question Market Price × 100

Question 46.
Which of the following is not a reason that DeStore.com would prefer to pay a stock dividend rather than a regular cash dividend?
(A) It decreases the supply of shares and enhances shareholder wealth.
(B) It may conserve cash for other firm needs.
(C) It will reduce the stock price into what management perceives as a more beneficial trading range.
(D) It may convey information about the firm to investors that it cannot convey credibly otherwise.
Answer:
(A) It decreases the supply of shares and enhances shareholder wealth.

Question 47.
Some ratios are given below:
I. EPS
II. P/E Ratio
III. Net Profit Ratio
IV. DPS
V. Dividend Yield Ratio
Which of the above ratio can be classified as market test ratio?
(A) Except V all other
(B) II & V only
(C) I, III & IV
(D) All except III
Answer:
(D) All except III

Question 48.
The ……….. is the proportion of earnings that are paid to common shareholders in the form of a cash dividend.
(A) Retention rate
(B) 1 + Retention rate
(C) Growth rate
(D) Dividend payout ratio
Answer:
(D) Dividend payout ratio

Question 49.
All of the following statements are
true regarding ratios that analyze a stock investment except
(A) In general, an increased P/E ratio indicates increased investor confidence in the future of the company.
(B) Shareholders who invest primarily to receive dividends pay special attention to the dividend yield ratio.
(C) Many experts argue that book value is the most useful ratio for investment analysis.
(D) Two ways for shareholders to earn a return on a share investment are receiving dividends and selling the stock investment at again.
Answer:
(C) Many experts argue that book value is the most useful ratio for investment analysis.

Question 50.
The dividend payout ratio describes:
(A) The proportion of earnings paid as dividends
(B) The relationship of dividends per share to market price per share
(C) The percentage change in dividends this year compared to last year
(D) Dividends as a percentage of the price/earnings ratio
Answer:
(A) The proportion of earnings paid as dividends

Question 51.
Which of the following factors is most likely to explain why a company decides to increase its annual dividend?
(A) A firm belief by management that dividends represent a residual payment
(B) A large number of desirable projects.
(C) A large proportion of its shares are owned by institutional investors
(D) Pecking order theory
Answer:
(C) A large proportion of its shares are owned by institutional investors

Question 52.
Company J and Company K each recently reported the same EPS. Company J’s stock, however, trades at a higher price. Which of the following statements is most- correct?
(A) Company J must have a higher P/E ratio.
(B) Company J must have a higher market to book ratio.
(C) Company J must be riskier.
(D) All of the statements above are correct.
Answer:
(A) Company J must have a higher P/E ratio.

Question 53.
Which of the following statements lends most support to the theory that dividend payments are irrelevant to the value of ordinary shares?
(A) Shareholders making homemade dividends face dealing costs
(B) Shareholders are concerned with total earnings rather than with the split between distributed and retained earnings.
(C) Investors’ discount rates increase with time due to uncertainty.
(D) Firms have particular clienteles due to their dividend policy
Answer:
(C) Investors’ discount rates increase with time due to uncertainty.

Question 54.
Which of the following is market test ratio?
(A) Basic Defence Interval
(B) Debt Service Coverage
(C) Dividend Yield Ratio
(D) All of the above
Answer:
(C) Dividend Yield Ratio

Question 55.
Which of the following statements is consistent with dividend irrelevance theory?
(A) Investment decisions are the sole determinant of shareholder wealth
(B) Making homemade dividends causes investors to incur transaction costs
(C) Companies with stable dividend policies build up shareholder clienteles
(D) Investors like to maintain the real value of their dividend payments.
Answer:
(A) Investment decisions are the sole determinant of shareholder wealth

Question 56.
While calculating dividend cover for preference shares numerator should be taken as
(A) EBIT
(B) Profit available for equity shareholder
(C) PAT
(D) PAT + Depreciation
Answer:
(C) PAT

Question 57.
Which of the following statements about the dividend growth model are true?
1. The model prices shares on the basis of the present value of expected future dividends.
2. The model relies on the ability to predict a constant future growth rate for dividend payments.
3. The dividend growth model can accommodate future changes in shareholder’s required rate of return
Select the correct answer from the options given below.
(A) Only 1 and 2 are correct
(B) Only 2 and 3 are correct
(C) 1, 2 and 3 are correct
(D) Only 3 is correct
Answer:
(A) Only 1 and 2 are correct

Question 58.
………… reflects the market’s confidence in the company’s equity.
(A) P/E ratio
(B) Net profit ratio
(C) Cash profit ratio
(D) Total assets turnover ratio
Answer:
(A) P/E ratio

Question 59.
Financial signalling has been raised as an argument in the battle over the relevancy of dividends. Which of the following statements concerning dividends is most likely to be voiced by someone using the financial signalling argument?
(A) A dividend decrease should be viewed by investors as “goodnews.” The dividend decrease acts to add conviction to the statement that the firm has better uses for the earnings of the company than the stockholders.
(B) Reported accounting earnings of a company, not dividends, are a proper reflection or signal of the company’s economic earnings.
(C) The price of a firm’s stock should react unfavourably to an increase in dividends.
(D) Cash dividends speak louder than words when it comes to conveying information about management’s expectations of the future
Answer:
(D) Cash dividends speak louder than words when it comes to conveying information about management’s expectations of the future

Question 60.
…. is a good measure of the dividend policy of the company.
(A) Dividend Payout Ratio
(B) Price Earnings Ratio
(C) Earnings Per Share
(D) None of the above
Answer:
(A) Dividend Payout Ratio

Question 61.
Which of the following statement is correct?
(A) A company may, if so authorized by its articles, pay dividends in proportion to the amount paid-up on each share.
(B) Dividend cannot be paid on calls-in-advance.
(C) All the provisions of the Companies Act, 2013 that are applicable to final dividend are also applicable to interim dividend.
(D) All of the above
Answer:
(D) All of the above

Question 62.
As per provisions of the Companies Act, 2013, dividend can be paid –
1. Out of current profit
2. Out of revaluation reserve
3. Out of profits of previous financial years
4. Out of money provided by the Central or State Government
5. Out of free reserve
Select the correct answer from the options given below.
(A) 1 and 5 only
(B) 1,2, 3 & 5
(C) 1, 3 and 5 only
(D) 1,3, 4 and 5
Answer:
(D) 1,3, 4 and 5

Question 63.
As per Section 128 of the Companies Act, 2013, a company may, before the declaration of any dividend in any financial year, transfer to the reserves of the company.
(A) 25% of its profit
(B) 10% of its profit before tax
(C) such percentage of its profits for that financial year as it may consider appropriate
(D) such percentage of its profits for that financial year as equity shareholder may consider appropriate
Answer:
(C) such percentage of its profits for that financial year as it may consider appropriate

Question 64.
As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the condition that rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the immediately preceding that year.
(A) 5 years
(B) 10 years
(C) 3 years
(D) 4 years
Answer:
(C) 3 years

Question 65.
As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the condition that total amount to be drawn from such accumulated profits shall not exceed as appearing in the latest audited financial statement.
(A) 1/10th of the total assets
(B) 1 /5th of the sum of its paid-up share capital
(C) 1/10th of the sum of its paid-up share capital and free reserves
(D) 1 / 5th of the sum of its paid-up share capital and free reserves
Answer:
(C) 1/10th of the sum of its paid-up share capital and free reserves

Question  66.
As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the condition the balance of reserves after such withdrawal shall not
fall below as appearing in the latest audited financial statement.
(A) 10% of its paid-up share capital
(B) 15% of its paid-up share capital
(C) 15% of its paid-up share capital and free reserve
(D) 10% of its paid-up share capital and free reserve
Answer:
(C) 15% of its paid-up share capital and free reserve

Question 67.
As per the provisions of the Companies Act, 2013, the amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within ………….. from the date of declaration of such dividend.
(A) 30 days
(B) 15 days
(C) 10 days
(D) 5 days
Answer:
(D) 5 days

Question 68.
After declaration of dividend, the company has to pay dividend within of declaration of dividend. If amount of dividend remains unpaid or unclaimed for 30 days of declaration of dividend, then in next ……….. the company has to transfer the amount unclaimed to the to a special account in any scheduled bank to be called the “Unpaid Dividend Account”.
(A) 5 days; 5 days
(B) 30 days; 7 days
(C) 30 days; 5 days
(D) 10 days; 7 days
Answer:
(B) 30 days; 7 days

Question 69.
The shareholders may desire that their dividends be credited directly to their bank account. The request will be made in a form duly filled and sent to the company. This is known as –
(A) Dividend Cheque
(B) Dividend Request Form
(C) Dividend Mandate
(D) Pay Dividend Form
Answer:
(C) Dividend Mandate

Question 70.
According to ………….. dividend policy is strictly a financing decision.
(A) Ezra Solomon
(B) Modigliani-Miller
(C) Marshall
(D) John Miller
Answer:
(A) Ezra Solomon

Question 71.
Professor James E. Walter has developed a theoretical model which shows the relationship between
(A) Dividend policies and common stock prices.
(B) Earning policies and common stock prices.
(G) Cost of capital and common stock prices.
(D) Earning policies and dividend policies
Answer:
(A) Dividend policies and common stock prices.

Question 72.
As per Walter’s Model in case of growth firm –
(A) Dividend policies are irrelevant
(B) Optimal payout ratio is 100%
(C) Payout ratio is irrelevant
(D) Optimal payout ratio is nil
Answer:
(D) Optimal payout ratio is nil

Question 73.
……………. suggests that the market price of share is the present value of future dividends.
(A) Walter’s model
(B) MM Model
(C) Grodon’s model
(D) General knowledge
Answer:
(C) Grodon’s model

Question 74.
As per Grodon’s Model payout ratio is irrelevant in case of –
(A) Growth firm
(B) Normal firm
(C) Declining firm
(D) All of the above
Answer:
(B) Normal firm

Question 75.
How market price will be calculated by using the dividend growth model?
(A) P₀ = D₁÷(K_e – g)
(B) P₀ = (K_e – g) ÷ D₁
(C) P₀ = (1+D₁)÷(K_e-g)
(D) P0 = (1 + D₁) × (K_e – g)
Answer:
(A) P₀ = D₁÷(K_e – g)

Question 76.
Consider following two statements:
(I) A company with large portion of inside ownership, all of whom are high-income individuals.
(II) A growth company with an abundance of good investment opportunities.
For each of the company described above, would you expect it to have a high or low dividend payout ratio?
(A) low dividend payout ratio for both companies
(B) high dividend payout ratio for both companies
(C) low dividend payout ratio for company mentioned in Statement (I) and high dividend payout ratio for company mentioned in Statement (II)
(D) high dividend payout ratio for company mentioned in Statement (I) and low dividend payout ratio for company mentioned in Statement (II)
Answer:
(A) low dividend payout ratio for both companies

Question 77.
Consider following two statements:
(I) A company is experiencing ordinary growth and has high liquidity and much unused borrowing capacity.
(II) A company with volatile and high business risk.
For each of the company described above, would you expect it to have a high or low dividend payout ratio?
(A) low dividend payout ratio for both companies
(B) high dividend payout ratio for both companies
(C) low dividend payout ratio for company mentioned in Statement (I) and high dividend payout ratio for company mentioned in Statement (II)
(D) high dividend payout ratio for company mentioned in Statement (I) and low dividend payout ratio for company mentioned in Statement (II)
Answer:
(D) high dividend payout ratio for company mentioned in Statement (I) and low dividend payout ratio for company mentioned in Statement (II)

Question 78.
If you are calculating market price by using Gordon’s Model, increasing payout ratio other things renaming the same will –
(A) Increase the price per share
(B) Decrease the price per share
(C) Will not have any effect on price of the share
(D) Price will remain constant.
Answer:
(C) Will not have any effect on price of the share

Question 79.
As per Gordon’s Model whether com­pany adopts 50%, 80% or any other payout ratio, market price will remain same when -…………..
(A) K>r
(B) K_e<r
(C) K=r
(D) K>R_f
Answer:
(C) K=r

Question 80.
If you are calculating market price by using dividend growth method D₁ ÷ (K_e – g) increase in growth rate leads to –
(A) Fall in market price of stock
(B) Increase in market price of stock
(C) No change in market price of stock
(D) None of the above
Answer:
(B) Increase in market price of stock

Question 81.
Company A and Company B both cal­culates their market price by using Walter’s formula. Both companies will have same market price if –
(A) R_a > R_c and retention ratio of Com­pany A is more than retention ratio of Company B.
(B) R_a < R_c and retention ratio of Com­pany B is more than retention ratio of Company A.
(C) R_a = R_c whether retention ratio is same or different for both the com­panies.
(D) All of the above
Answer:
(C) R_a = R_c whether retention ratio is same or different for both the com­panies.

Question 82.
As per Walter’s Model when R_a < R_c in­crease in dividend payout ratio will lead to –
(A) Increase in market price
(B) Decrease in market price
(C) No change in market price
(D) None of the above
Answer:
(A) Increase in market price

Question 83.
As per Walter’s Model when R_a < R_c decrease in retention ratio will lead to –
(A) Increase in market price
(B) Decrease in market price
(C) No change in market price
(D) None of the above
Answer:
(A) Increase in market price

Question 84.
As per Walter’s Model when R = R market price will remain same when –
(A) Retention ratio increases
(B) Retention ratio decreases
(C) Retention ratio increase or decreases
(D) None of the above
Answer:
(C) Retention ratio increase or decreases

Question 85.
As per Walter’s Model when R_a > R_c in­crease in dividend payout ratio will lead to –
(A) Increase in market price
(B) Decrease in market price
(C) No change in market price
(D) None of the above
Answer:
(B) Decrease in market price

Question 86.
As per Walter’s Model when R_a > R_c decrease in retention ratio will lead to –
(A) Increase in market price
(B) Decrease in market price
(C) No change in market price
(D) No change in market price
Answer:
(B) Decrease in market price

Question 87.
Which of the following is correct formula to calculate market price as per MM Model?
(A) P₀ = (1 + K_e) ÷ (D₁ + P₁)
(B) P₀ = (D₁ + P₁) × (1 + K_e)
(C) P₀ = (D₁+ P₁) ÷ (1 + K_e)
(D) P₀ = (D₁ + P₁) ÷ (1 – K_e)
Answer:
(C) P₀ = (D₁+ P₁) ÷ (1 + K_e)

Question 88.
As per MM Model total value of firm remains same whether it declares dividend or not. You are required to state if dividend is declared the market price per share as per MM Model –
(A) Increase
(B) Decreases
(C) Remain constant
(D) None of the above
Answer:
(A) Increase

Question 89.
Which one of the following is a non-cash payment made by a firm to its shareholders that dilute the value of each share of stock outstanding?
(A) reverse stock split
(B) cash distribution
(C) stock dividend
(D) regular dividend
Answer:
(C) stock dividend

Question 90.
Market price = ?
(A) D₁ ÷ (K_e – g)
(B) EPS × P/E Ratio
(C) (D₁ + P₁) ÷ (1 + K_e)
(D) All of the above
Answer:
(D) All of the above

Question 91.
The date by which a shareholder must be recorded as the share owner in order to receive a declared dividend is called the:
(A) ex-rights date
(B) ex-dividend date
(C) date of record
(D) date of payment
Answer:
(C) date of record

Question 92.
The target payout ratio is:……………
(A) a firm’s preferred rate of dividend growth.
(B) the inverse of a firm’s equity multiplier.
(C) the preferred number of dividend payments per year divided by 12.
(D) a firm’s long-term desired dividend-to-earnings ratio.
Answer:
(D) a firm’s long-term desired dividend-to-earnings ratio.

Question 93.
The difference between the highest and lowest prices at which a stock has sold is called the stock’s:
(A) Average price
(B) Bid-ask spread
(C) Trading range
(D) Opening price
Answer:
(C) Trading range

Question 94.
Which one of the following statements concerning cash dividends is correct?
(A) The chief financial officer of a corporation determines whether or not a dividend will be paid.
(B) A dividend is not a liability of a firm until it has been declared.
(C) If a firm has paid regular quarterly dividends in the past it is legally obligated to continue doing so.
(D) Cash dividends always reduce the paid-in capital account balance
Answer:
(B) A dividend is not a liability of a firm until it has been declared.

Question 95.
The fact that flotation costs can be significant is justification for:
(A) A firm to issue larger dividends than their closest competitors.
(B) Maintaining a constant dividend policy even when profits decline significantly.
(C) Maintaining a high dividend policy.
(D) Maintaining a low dividend policy and rarely issuing extra dividends.
Answer:
(D) Maintaining a low dividend policy and rarely issuing extra dividends.

Question 96.
When a firm is short of cash yet it wishes to distribute something to shareholders, it should consider –
(A) Cash dividend.
(B) Liquidating dividend
(C) Stock dividend
(D) None of the above
Answer:
(C) Stock dividend

Question 97.
A company wants to buy back stock. How will this impact the company and its stock?
(A) The company makes more money because management owns more stock.
(B) Other investors make less money because management can pay more dividends to internal shareholders before external shareholders.
(C) Because there are fewer shares in the open market, the price of the shares goes up.
(D) The net income of the company will go up because of the increase in stocks
Answer:
(C) Because there are fewer shares in the open market, the price of the shares goes up.

Question 98.
Which of the following would ultimately give the greatest benefit to stockholders?
(A) A stock buyback
(B) The issuance of a bond
(C) A stock split
(D) The issuance of new stock
Answer:
(A) A stock buyback

Question 99.
Match the following:

Select the correct answer from the options given below.

Answer:
(B)

Question 100.
Required return × Retention Ratio=?
(A) K_e (Cost of equity)
(B) WACC
(C) B (Beta)
(D) g (Growth Rate)
Answer:
(D) g (Growth Rate)

Question 101.
The shares of company are selling at ₹ 45 per share. The firm had paid dividend @ ₹ 4.5 per share last year. The estimated growth of the company is approximately 5% per year. Determine the estimated market price of the equity share if the anticipated growth rate of the firm rises to 8%.
(A) ₹ 60.45
(B) ₹ 64.80
(C) ₹ 65.70
(D) ₹ 80.35
Answer:
(B) ₹ 64.80

Question 102.
The shares of company are selling at ₹ 90 per share. The firm had paid dividend @ ₹ 9 per share last year. The estimated growth of the company is approximately 5% per year. Determine the estimated market price of the equity share if the anticipated growth rate of the firm falls to 3%.
(A) ₹ 70.84
(B) ₹ 84.70
(C) ₹ 74.16
(D) ₹ 52.34
Answer:
(C) ₹ 74.16

Question 103.
Details regarding A Ltd. are given below:
E = ₹ 24
K = 11%
r = 12%
If retention ratio is 80%, market price as per Gordon’s Model is –
(A) ₹ 340.68
(B) ₹ 346.82
(C) ₹ 324.65
(D) ₹ 342.86
Answer:
(D) ₹ 342.86

Question 104.
Details regarding B Ltd. are given below:
E = ₹ 24
K = 13.20%
r = 14.40%
If retention ratio is 50%, market price as per Gordon’s Model is –
(A) ₹ 200
(B) ₹ 300
(C) ₹ 400
(D) ₹ 600
Answer:
(A) ₹ 200

Question 105.
Details regarding C Ltd. are given below:
E = ₹ 14.4
K_e =7.92%
r = 8.64%
If retention ratio is 90%, market price as per Gordon’s Model is –
(A) ₹ 200
(B) ₹ 25
(C) ₹ 100
(D) ₹ 130
Answer:
(C) ₹ 100

Question 106.
Following details are available for G Ltd.:
E = ₹ 22
K_e = 12.10%
r = 12.10%
Calculate the value of equity shares when retention ratio is
(a) 50%, (b) 80% , (c) 90%.
(A) ₹183.28; ₹ 183.28; ₹ 183.28
(B) ₹181.82; ₹ 181.82; ₹ 181.82
(C) ₹ 175.26; ₹ 190.26; ₹ 130.26
(D) ₹ 200.22; ₹ 180.24; ₹ 120.18
Answer:
(B) ₹181.82; ₹ 181.82; ₹ 181.82

Question 107.
Market price per share of WX Ltd. is ₹ 400 per share at 50% retention ratio as per Gordon’s Model. The firms cost of equity is below required rate of return. If the firm increases retention ratio –
(A) Its price will decrease and will go below ₹ 400
(B) Its price will increase and will go above ₹ 400
(C) Its price will still remain at ₹ 400
(D) None of the above
Answer:
(B) Its price will increase and will go above ₹ 400

Question 108.
JKL Ltd. is foreseeing a growth rate of 12% p.a. in the next 2 years. The growth rate is likely to fall to 10% for the third year and forth year. After that growth rate is expected to stabilize at 8% p.a. If .the last dividend (D₀) paid was ₹ 2.7 per share and investor’s required rate of return is 16%, find out the intrinsic value per share of JKL Ltd. as of date.

(A) ₹ 55.38
(B) ₹ 40.21
(C) ₹ 50.26
(D) ₹ 46.88
Answer:
(B) ₹ 40.21

Question 109.
A large chemical company has been expected to grow at 14% per year for next 4 years and then to grow indefinitely at the same rate as national economy ie. 5%. The required rate of return on equity share is 12%. Assume that company paid a dividend of ₹ 2 per share last year (D₀ = 2). Determine the market price of the shares today.
(A) ₹ 40.62
(B) ₹ 50.42
(C) ₹ 45.23
(D) ₹ 61.18
Answer:
(A) ₹ 40.62

Question 110.
The required rate of return of investors is 15%. ABC Ltd. declared and paid annual dividend of ₹ 4 per share. It is expected to grow @ 20% for the next 2 years and 10% thereafter. Compute the price at which the shares should sell.
PV Factors: @15% for Year 1 = 0.8696 and Year 2 = 0.7561.
(A) Near about ₹ 108
(B) Near about ₹ 106
(C) Near about ₹ 112
(D) Near about ₹ 104
Answer:
(D) Near about ₹ 104

Question 111.
Anurag has invested in a share whose dividend is expected to grow @15% for 5 years and there after @ 5% till life of the company. Find out the value of the share, if current dividend is ₹ 4 per share and investors required rate of return is 6%.
(A) Near about ₹ 756
(B) Near about ₹ 567
(C) Near about ₹ 657
(D) Near about ₹ 675
Answer:
(C) Near about ₹ 657

Question 112.
The cost of capital and rate of return on investment of GOD Ltd. is 10% and 15% respectively. The company has 10 lakh shares of 10% each. Its earnings per share is ₹ 7.5. Calculate the value of the firm per share using Walter’s Model assuming all earnings are distributed as dividend.
(A) ₹ 75
(B) ₹ 100
(C) ₹ 125
(D) ₹ 150
Answer:
(A) ₹ 75

Question 113.
Cost of capital of MNL Ltd. is less them rate of return on investment. Its market price per share is ₹ 62.50 as per Walter’s Model at 50% retention ratio. If firm increase its retention ratio then –
(A) Its price will fall below — ₹ 62.50
(B) Its price will increase above — ₹ 62.50
(C) Its price will increase above — ₹ 100
(D) It price will not change
Answer:
(B) Its price will increase above — ₹ 62.50

Question 114.
EPS of Kalki Ltd. is ₹ 20. Its cost of capital is 16%. Internal rate of return on investment is 20% and retention ratio is 50%. What is the market price per share of Kalki Ltd. as per dividend growth model ?
(A) ₹ 164.55
(B) ₹ 176.66
(C) ₹ 166.67
(D) ₹ 167.33
Answer:
(C) ₹ 166.67

Question 115.
EPS of Don Ltd. is ₹ 15. Its cost of capital is 16%. Internal rate of return on investment is 20% and retention ratio is 40%. What is the market price per share of Don Ltd. as per Walter’s Model?
(A) ₹ 103.125
(B) ₹ 105.225
(C) ₹ 108.125
(D) ₹ 110.525
Answer:
(A) ₹ 103.125

Question 116.
Following details are available for PQR Ltd:
Earnings per share — ₹ 27.5
Cost of capital — 16%
Internal rate of return on investment — ₹ 20%
Retention ratio — 50%
Calculate the price per share as per Walter’s Model.
(A) ₹ 315.40
(B) ₹ 193.36
(C) ₹ 292.91
(D) ₹ 282.86
Answer:
(B) ₹ 193.36

Question 117.
Following details are available for PQR Ltd.:
Calculate the price per share as per Walter’s Model.
(A) ₹ 190.60
(B) ₹ 188.72
(C) ₹ 176.28
(D) ₹ 189.06
Answer:
(D) ₹ 189.06

Question 118.
Details regarding three companies are given below:

If Walter’s Model is applied with 100% retention ratio market price per share of these companies are –

Answer:
(D)

Question 119.
Khemka Ltd. paid dividend per share of ₹ 3, ₹ 3.6, ₹ 4.32, ₹ 5.18 & ₹ 6.22 for last five year. What is the expected dividend for next year?
(A) ₹ 7.46
(B) ₹ 8.32
(C) ₹ 6.80
(D) ₹ 7.25
Answer:
(A) ₹ 7.46

Question 120.
Details regarding three companies are given below:

If Walter’s Model is applied with 50% retention ratio market price per share of these companies are

Answer:
(D)

Question 121.
ABC Ltd. was started a year back with a paid-up capital of ₹ 56,00,000. The other details are as under:
You are required to find out market price per share using Walter’s formula.
(A) ₹ 138.57 per share
(B) ₹ 131.25 per share
(C) ₹ 175.83 per share
(D) ₹ 185.73 per share
Answer:
(B) ₹ 131.25 per share

Question 122.
The EPS of the Ganga Ltd. is 716. The market capitalization rate applicable to the company is 12.5%. Retained earnings can be employed to yield return of 10%. The company is considering payout ratio of 25%, 50%, 75% and 100%. Which of these, if any, would maximize the wealth of shareholders as per Walter’s Model?
(A) If payout ratio is 25%
(B) If payout ratio is 50%
(C) If payout ratio is 75%
(D) If payout ratio is zero percentage
Answer:
(D) If payout ratio is zero percentage
For Ganga Ltd. R_a > R_c (12.5% > 10). It is growth firm as its rate of return on investment is greater than cost of capital. Optimal payout ratio as per Walter’s Model is nil. (in other words 100% retention policy must be followed to maximize the wealth of shareholders)

Question 123.
Prakash Ltd. has had earnings of ₹ 3.20, ₹ 3.00 & ₹ 5.50 per share for the past 3 years. Company anticipates maintaining the same dividend policy this year as the past 3 years. That dividend policy has resulted in dividends per share of ₹ 1.28, ₹ 1.20 & ₹ 2.20 for the past 3 years. It is anticipated that the next year will result in a large increase in earnings to ₹ 9.80 per share. What dividend do you expect the firm to pay in the next year?
(A) ₹ 3.92
(B) ₹ 1.56
(C) ₹ 3.12
(D) ₹ 4.68
Answer:
(A) ₹ 3.92
DPS Ratio: Year 1:1.28/3.2 × 100 = 40%; Year 2:1.2/3 × 100 = 40%; Year 3:22/5.5 × 100 = 40%
Dividend for next year = 9.8 × 40% = 3.92

Question 124.
MNP Ltd. has made plans for the next year. The company will employ total assets of ₹ 25,00,000; 30% of assets being financed by debt at an interest cost of 9% p.a. The direct costs for the year are estimated at ₹ 15,00,000 and all other operating expenses are estimated at ₹ 2,40,000. Sales revenue are estimated at ₹ 22,50,000. Tax rate is assumed to be 40%.
Return on equity = ?
(A) 12.46%
(B) 15.17%
(C) 11.86%
(D) 15.98%
Answer:
(B) 15.17%
Total assets = 25,00,000;
Equity = 25,00,000 × 70% = 17,50,000;
Debt = 25,00,000 × 30% = 7,50,000
22,50,000 – 15,00,000 – 2,40,000 – 67,500 = 4,42,500
PAT = 4,42,500 – 1,77,000 = 2,65,500
Return on equity = 2,65,500/17,50,000 × 100 = 15.17%

Question 125.
Joshi Corporation is growing at a constant rate of 6% per year. It has both common stock and non-participating preferred stock outstanding. The cost of preferred stock (K) is 8%. The par value of the preferred stock is ₹ 120, and the stock has a stated dividend of 10% of par. What is the market value of the preferred stock
(A) ₹ 125
(B) ₹ 120
(C) ₹ 175
(D) ₹ 150
Answer:
(D) ₹ 150
12/0.08 = 150

Question 126.
A share of common stock has just paid a dividend of ₹ 2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?
(A) ₹ 57.50
(B) ₹ 62.25
(C) ₹ 71.86
(D) ₹ 64.00
Answer:
(A) ₹ 57.50
D₁ =2×1.15 = 2.3
2.3/(0.19 – 0.15) = 57.5

Question 127.
CPC Company’s stock is currently selling for ₹ 40 a share. The stock is expected to pay a ₹ 2 dividend at the end of the year. The stock’s dividend is expected to grow at a constant rate of 7 percent a year forever. The risk-free rate (RF) is 6 percent and the market risk premium (RM – RF) is also 6 percent. What is the stock’s beta?
(A) 1.06
(B) 1.00
(C) 2.00
(D) 0.83
Answer:
(B) 1.00
K_e = 2/40 + 0.07 = 0.12 12%
K =R_f + β(R_m-R_f)
12 = 6 + 6x
6 = 6x
x = β = 1

Question 128.
Retention ratio is 0.60 and return on equity is 15.5% then growth retention model would be –
(A) 14.9%
(B) 25.84%
(C) 16.1%
(D) 9.3%
Answer:
(D) 9.3%
15.5% × 0.60 = 9.3%

Question 129.
Ali Motors recently completed a 3 for 1 stock split. Prior to the split, the company had 10 Million shares outstanding and its stock price was ₹150 per share. After the split, the total market value of the company’s stock equalled 71.5 Billion. What was the price of the company’s stock following the stock split?
(A) ₹ 15
(B) ₹ 45
(C) ₹ 50
(D) ₹ 150
Answer:
(C) ₹ 50
150 × 1/3 = 50

Question 130.
If payout ratio is 0.45 then retention ratio will be:
(A) 55%
(B) 1.45
(C) 0.055
(D) 100%
Answer:
(A) 55%

Question 131.
Retention ratio is 0.55 and return on equity is 12.5% then growth retention model would be –
(A) 0.1195
(B) 0.06875
(C) 0.1305
(D) 0.2272
Answer:
(B) 0.06875

Question 132.
Company Q is all equity financed. For each ₹ 1 of earnings, it consistently pays 30 paisa in dividends and retains 70 paisa for reinvestment. It expects to earn a rate of return of 14% on capital employed. According to the Gordon Growth Model, what would the rate of earnings growth be in future Ignore tax.
(A) 4-2%
(B) 7%
(C) 9-8%
(D) 14%
Answer:
(C) 9-8%
br= g = 0.70 × 14 = 9.8%

Question 133.
DHC Ltd. is looking to purchase WIC Ltd., which has the following information: Revenue ₹ 40,00,000; EBITD ₹ 9,00,000; Basic EPS ₹ 1.40; Net assets ₹ 50,00,000 Dividends paid ₹ 0.50. Research has shown that the price-earnings ratio for companies like WIC Ltd. is 9.5. Based on that ratio, what is the value of WIC Ltd.?
(A) 23,75,000
(B) 85,50,000
(C) 50,00,000
(D) 66,50,000
Answer:
(D) 66,50,000
Market Price = P/E Ratio × EPS = 9.5 × 1.4 = 13.3;
50,00,000×13.3/10 = 66,50,000

Question 134.
Market price of Jhakas Ltd. is ₹200 per share as per Gordon Model. EPS is ₹ 20 per share. Cost of capital is 11%. Rate of return on investment is 12%. What is retention ratio?
(A) 80%
(B) 75%
(C) 100%
(D) 50%
Answer:
(D) 50%

Question 135.
Market price of Sara Ltd. is ₹ 1,000 per share. EPS is ₹ 20 per share. Cost of capital is 11 %. Rate of return on investment is 12%. What is dividend per share?
(A) 2
(B) 3
(C) 4
(D) 5
Answer:
(A) 2

Question 136.
Following information is available in respect of Sober Ltd.:
No. of shares outstanding : 1 lakh
Earnings per share : ₹ 4
Equity capitalization rate : 12%
Rate of return on investment : 15%
You are required to calculate Dividend payout ratio to keep share price at ₹ 40.
(A) 50%
(B) 40%
(C) 60%
(D) 20%
Answer:
(D) 20%

Question 137.
A Chemical company belongs to a risk class for which P / E Ratio is 10. It currently has 50,000 equity shares selling at ₹ 200 each. The firm is contemplating the declaration of dividend of ₹ 16 per share at the current fiscal year which has just started. Given the assumption of Modigliani-Miller, what will be the price of share at the end of the year if dividend is declared?
(A) ₹ 205
(B) ₹ 208
(C) ₹ 204
(D) ₹ 225
Answer:
(C) ₹ 204

Question 138.
Damodhar Ltd. has 10 lakh equity shares outstanding. Current market price of the shares is ₹ 150 each. The board of directors of the company has recommended dividend of ₹ 8 per share. Rate of capitalization is 12%. How many shares are to be issued as per MM Model at the end of accounting year on the assumption that the net income is ₹ 2 Crore and the investment budget is ₹ 4 Crore and dividend is declared as recommended by the directors.
(A) 1,19,047 shares
(B) 1,75,000 shares
(C) 1,57,000 shares
(D) 1,68,419 shares
Answer:
(B) 1,75,000 shares

Question 139.
Take the data above question and calculate the market value of the company after giving effect to proposal as stated above.
(A) ₹ 18,80,00,000
(B) ₹ 15,50,00,000
(C) ₹ 18,50,00,000
(D) ₹ 19,90,00,000
Answer:
(A) ₹ 18,80,00,000

Question 140.
An equity share of ₹ 100 is expected to earn an annual dividend of ₹10 and this share can be sold at price of ₹ 180 at the end of year. If the required rate of return is 12%, calculate the value of equity share.
(A) ₹ 196.46
(B) ₹ 169.64
(C) ₹ 149.66
(D) ₹ 170.05
Answer:
(B) ₹ 169.64

Question 141.
Net profit before tax of Acumen Ltd. is ₹ 17,50,000. The company has 1,00,000 equity shares of face value ₹ 10 each, fully paid-up. Current market price of the shares is ₹ 85 per share. Income-tax @ 30% applies to the company. Compute the P/E ratio for the company.
(A) 5.92
(B) 8.63
(C) 6.94
(D) 9.46
Answer:
(C) 6.94

Question 142.
Following details are available to you for Beauty Ltd.
Internal rate of return — 15%
Capitalization rate — 15%
Earnings per share — ₹ 12
Cash dividend per share — ₹ 5
Calculate the value of an equity share.
(A) ₹ 70
(B) ₹ 80
(C) ₹ 90
(D) ₹ 95
Answer:
(B) ₹ 80

Question 143.
Rama Ltd. had 1,00,000 equity shares of ₹ 10 each outstanding. Shares are currently being quoted at par in the market. In the wake of the removal of the dividend restraint, the company now intends to pay a dividend of ₹ 2 per share for the current financial year. It belongs to a risk class whose appropriate capitalization rate is 15%. Using MM Model and assuming no taxes, ascertain the price of the company’s shares as it is likely to prevail at the end of the year – (i) when dividend is declared; and (ii) when no dividend is declared.

Answer:
(D)

Question 144.
Rosa Ltd. has outstanding 1,20,000 shares selling at ₹ 20 per share. The company hopes to make a net income of ₹ 3,50,000 during the year. Company is thinking of paying a dividend of ₹ 2 per share at the end of current year. Capitalization rate has been estimated to be 15%. On the basis of MM model how many new shares the company must issue if the dividend is paid and company needs ?9,50,000 for an approved investment expenditure?
(A) 40,000 equity shares
(B) 50,000 equity shares
(C) 60,000 equity shares
(D) 70,000 equity shares
Answer:
(A) 40,000 equity shares

Question 145.
Take the data of above, question and calculate total market value of the company.
(A) ₹ 35,40,000
(B) ₹ 32,90,000
(C) ₹ 33,60,000
(D) ₹ 34,30,000
Answer:
(C) ₹ 33,60,000

Question 146.
Abhishek Steel Ltd. has one lakh equity shares outstanding which are selling at ₹ 100 each. Its capitalization rate is 14%. The company is expecting ₹ 65 lakh income for the current year and is planning to pay dividend amounting to ₹ 4 lakh. The company wants to invest in a new project which will cost ₹ 75 lakh. It is assumed that the MM Model on dividend policy is applicable. Compute the number of shares to be issued for financing when: A. Dividend is not paid. B. Dividend amounting to ₹ 4 lakh is paid.

Answer:
(B)

Question 147.
Small Events Incorporation has recently paid dividend of ₹ 3.50 per share. The dividends are growing at 10% p.a. and the equity capitalization rate applicable to the company is 12%. Find out the implicit P/E Ratio if the EPS of the company is ₹ 7.
(A) 27.50
(B) 28.50
(C) 30.00
(D) 32.50
Answer:
(A) 27.50

Question 148.
Current price of share of X Ltd. is ₹ 60 and just paid dividend per share is ₹ 4. If the capitalization rate is 12%, what is the dividend growth rate?
(A) 3%
(B) 5%
(C) 4%
(D) 6%
Answer:
(B) 5%

Question 149.
Following information is available in respect of Hajela Ltd.:
No. of shares outstanding : 3 lakh
Net profit : 18 lakh
Equity capitalization rate : 16%
Rate of return on investment : 20%
You are required to calculate Dividend payout ratio to keep share price at ₹ 42.
(A) 42 %
(B) 46%
(C) 58%
(D) 52%
Answer:
(D) 52%

Question 150.
Market price is ₹ 30 per share. Dividends are growing at 2%. Cost of equity is 10.5%. How much dividend must have been paid by the company at the beginning of the year or last year?
(A) 2.55
(B) 2.50
(C) 2.00
(D) 2.60
Answer:
(B) 2.50

Going through the Management Reporting – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Management Reporting – Corporate and Management Accounting MCQs

Question 1.
Management needs information for –
(A) For introducing alterative management for the organization
(B) To effectively carry out a disinvestment programme
(C) Arriving at decisions and for evaluating performance to run the business effectively.
(D) The benefit of society at large.
Answer:
(C) Arriving at decisions and for evaluating performance to run the business effectively.

Question 2.
………… can be defined as means of communication, usually in the written form, of facts which should be brought to the attention of the various levels of management who can use them to take suitable action for proper control.
(A) Formats
(B) Proforma
(C) File
(D) Reports
Answer:
(D) Reports

Question 3.
Top management like to get information like –
(A) Trend of the business, cash flow and fund flow etc.
(B) How to operate machine effectively
(C) Petty cash budget
(D) Latest ruling of High Court on jurisprudence
Answer:
(A) Trend of the business, cash flow and fund flow etc.

Question 4.
A management has only a minimum time to exercise control. Hence, the activities, which are not carried out according to planning and budget, are highlighted before the management. This is the way of following the principle of –
(A) Management by forecasting
(B) Management by exception
(C) Management by unity
(D) Management by delegation
Answer:
(C) Management by unity

Question 5.
Financial control report comes under –
(A) Dynamic financial reports
(B) Static financial reports
(C) Extensive Activity report
(D) None of the above
Answer:
(A) Dynamic financial reports

Question 6.
Which of the following is a kind of information report?
(A) Trend reports
(B) Analytical report
(C) Activity reports
(D) All of the above
Answer:
(D) All of the above

Question 7.
Management reporting can be performed as –
(A) Internal reporting
(B) External reporting
(C) Both (A) & (B)
(D) None of the above
Answer:
(C) Both (A) & (B)

Question 8.
The back bone of any organization is –
(A) Information
(B) Employee
(C) Management
(D) Capital
Answer:
(A) Information

Question 9.
Which of these is usually written in a form of a memorandum?
(A) Informal reports
(B) Formal reports
(C) Professional reports
(D) Business reports
Answer:
(A) Informal reports

Question 10.
Which of the following is a type of matter may be covered in a special report?
(A) Feasibility study for a project
(B) Cost reduction schemes information
(C) Data on make or buy decision
(D) All of the above
Answer:
(D) All of the above

Question 11.
………… are to be presented after making and investigation of the problem which requires to be investigated.
(A) Memorandum
(B) Special reports
(C) Summary
(D) Special facts
Answer:
(B) Special reports

Question 12.
………… is very important method of presenting information to the management in a pictorial manner and attracts the eye of the recipient more quickly and forcibly.
(A) Tabular Reports
(B) Descriptive Reporting
(C) Graphic Presentation
(D) All of the above
Answer:
(C) Graphic Presentation

Question 13.
…………. are presented in the form of comparative statements.
(A) Descriptive Reports
(B) Graphic Presentation
(C) Transactional Analysis
(D) Tabular Reports
Answer:
(D) Tabular Reports

Question 14.
Which of the following general principle that is required to be followed while reporting?
I. Report should have a proper title.
II. Report should be in good form and should have sub-headings and paragraph.
in. Format of report should be changed frequently.
IV. Report should factual.
V. Report need not to save time of the management.
Select the correct answer form the options given below.
(A) I and III only
(B) I & IV only
(C) II, III and V only
(D) IV, I and II only
Answer:
(D) IV, I and II only

Question 15.
Collecting comments and suggestions from users to discover ways to continuously improve the data and process can be described as –
(A) Implementation
(B) Exception
(C) Feedback
(D) Order
Answer:
(C) Feedback

Question 16.
Which of these reports provide information without any evaluation?
(A) Informational
(B) Interpretative
(C) Routine
(D) Progress
Answer:
(A) Informational

Question 17.
………….. report provides rational findings.
(A) Informative
(B) Interpretative
(C) Routine
(D) Progress
Answer:
(B) Interpretative

Question 18.
Which of these is not mentioned in a progress report?
(A) Name of project
(B) Right choice of instruments
(C) Nature of work
(D) Amount of work left
Answer:
(B) Right choice of instruments

Question 19.
Which of these is not a parameter of a formal report?
(A) Presentation
(B) Complaint
(C) Information
(D) Request
Answer:
(B) Complaint

Question 20.
Which of these reports is written before starting a new project?
(A) Feasibility report
(B) Periodic report
(C) Trouble report
(D) Progress report
Answer:
(A) Feasibility report

Question 21.
Which of these must never be a basis for a technical report?
(A) Facts
(B) Tests
(C) Personal prejudices
(D) Experiments
Answer:
(C) Personal prejudices

Question 22.
Reports present conclusions based on:
(A) Intuition
(B) Belief
(C) Impression
(D) Investigation
Answer:
(D) Investigation

Question 23.
Which of these is not a parameter of a report?
(A) Ability to acquire additional information
(B) Quality of additional information acquired
(C) Ability to arrive at subjective evaluation
(D) Ability to provide worthwhile recommendations
Answer:
(C) Ability to arrive at subjective evaluation

Question 24.
The chronological development of information in the body of the report is done according to the:
(A) Logical sequence of events
(B) Order in which events occurred
(C) Choice of the writer
(D) Collection of data
Answer:
(B) Order in which events occurred

Question 25.
Which of these must be avoided in a technical report?
(A) Facts
(B) Logical conclusion
(C) Objective evaluation
(D) Subjective evaluation
Answer:
(D) Subjective evaluation

Analyzing Strategic Edge – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Analyzing Strategic Edge – Strategic Management MCQ

Question 1.
What is the term for the act of recreating a core business process with the goal of improving product output, quality or reducing costs?
(A) Business Process Improvement
(B) Business Process Reengineering
(C) Business Process Change
(D) Business Process Advance
Answer:
(B) Business Process Reengineering

Question 2.
Which of the following is objective of Business Process Reengineering (BPR)?
(A) Boost effectiveness and produce higher quality products for end customer.
(B) Improve efficiency in the production processes.
(C) Providing more meaningful work to employees.
(D) All of the above
Answer:
(D) All of the above

Question 3.
Which of the following is not one of the stepsoftheBusinessProcessReengineering (BPR)?
(A) Identify customers and determine their needs
(B) Determining objectives and frame-work
(C) Formulation of a redesign process plan
(D) Partial modification or marginal improvement in the existing work processes.
Answer:
(D) Partial modification or marginal improvement in the existing work processes.

Question 4.
Which of the following is NOT a principle underlying business process re-engineering (BPR)?
(A) Business process must be managed end to end
(B) Business processes should be agile.
(C) Business processes should use prototype technology
(D) Business processes must be aligned with organizational strategy and needs
(E) None of the above
Answer:
(C) Business processes should use prototype technology

Question 5.
…………. is an approach of setting goals and measuring productivity of firms based on best industry practices or against the products, services and practices of its competitors or other acknowledged leaders in the industry.
(A) Benchmarking
(B) Bench parking
(C) Object marking
(D) Quality marking
Answer:
(A) Benchmarking

Question 6.
Benchmarking –
(A) Helps businesses in improving performance by learning from the best practices and the processes by which they are achieved.
(B) Is a process of continuous improvement in search for competitive advantage.
(C) Is an approach of setting goals and measuring productivity of firms based on best industry practices or against the products, services and practices of its competitors or other acknowledged leaders in the industry.
(D) All of the above
Answer:
(D) All of the above

Question 7.
Consider following two statements.
1. It refers to the analysis and redesign of work flows both within and between the organization and the external entities.
2. Benchmarking is a process of finding the best practices within and outside the industry to which an organization belongs.
Select true statement.
(A) 1 only
(B) 2 only
(C) Both  1 and 2
(D) Neither 1 nor 2
Answer:
(C) Both 1 and 2

Question 8.
Consider following two statements.
I. Benchmarking and Business Process re-engineering are one and the same.
II. Benchmarking is a remedy for all problems faced by organizations.
Select true statement.
(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2
Answer:
(D) Neither 1 nor 2

Question 9.
Managers use this type of benchmarking to identify the best way to compete in the market –
(A) Performance Benchmarking
(B) Process Benchmarking
(C) Strategic Benchmarking
(D) Internal Benchmarking
Answer:
(C) Strategic Benchmarking

Question 10.
………… refers to a process when a company compares itself with the competitors inside its industry.
(A) Functional Benchmarking
(B) Competitive benchmarking
(C) Generic Benchmarking
(D) Strategic Benchmarking
Answer:
(B) Competitive benchmarking

Question 11.
Benchmarking Wheel is a ………. stage process.
(A) Four
(B) Five
(C) Six
(D) Seven
Answer:
(B) Five

Question 12.
Which of the following is not Benchmarking Wheel stage process?
(A) Plan
(B) Find
(C) Analyze
(D) Repeat
Answer:
(D) Repeat

Question 13.
TQM owes its genesis to post war research of American management consultants like –
(A) Drs. Joseph Juran & W. Edwards Dening
(B) Dr. Eric Penfield& Dr. Wilder Penfield
(C) Dr. Eric Berne & W. Edwards Dening
(D) Drs. Joseph Juran & Dr. Wilder Penfleld
Answer:
(A) Drs. Joseph Juran & W. Edwards Dening

Question 14.
Which of the following is not a key feature of Total Quality Management?
(A) Continuous improvement
(B) Identifying customers and their needs
(C) Establishing clear specifications
(D) Teamwork, trust and empowerment
Answer:
(C) Establishing clear specifications

Question 15.
……….. collectively established a common set of quality standards known as ISO 9000.
(A) European Economic Community
(B) American Economic Community
(C) Italian Economic Community
(D) Indian Economic Community
Answer:
(A) European Economic Community

Question 16.
As per TQM principles which of the following is problem -…………….
(A) Process
(B) People
(C) Both process and people
(D) Government policy
Answer:
(A) Process

Question 17.
Which of the following does not correctly depict the TQM principle?
(A) Every employee is responsible for quality.
(B) Quality is a long-term investment.
(C) People, not Processes, are the problem.
(D) AD of the above
Answer:
(B) Quality is a long-term investment.

Question 18.
……….. is also considered as a structured approach in managing uncertainty related to a threat.
(A) Crises management
(B) Risk management
(C) Crises of organizational misdeeds
(D) None of above
Answer:
(B) Risk management

Question 19.
…………. is a defined and disciplined business methodology to increase customer satisfaction and profitability by streamlining operations, improving quality and eliminating defects in every organization-wide process.
(A) Six Sigma
(B) TQM
(C) Five Alpha
(D) Six Beta
Answer:
(A) Six Sigma

Question 20.
The reasons for acquisition are –
(A) Increased market power
(B) Increased diversification
(C) Increased speed to market
(D) All of the these
Answer:
(D) All of the these

Going through the Introduction to Corporate Accounting – Corporate and Management Accounting CS Executive MCQ Questions with Answers you can quickly revise the concepts.

Introduction to Corporate Accounting – Corporate and Management Accounting MCQs

Question 1.
The financial statements of company shall be in the form provided in:……….
(A) Schedule IV
(B) Schedule III
(C) Schedule V
(D) Schedule VI
Answer:
(B) Schedule III

Question 2.
Part I of the Schedule HI to the Companies Act, 2013 gives the -……..
(A) Format of Income Statement
(B) General instructions for preparation of Profit & Loss Account
(C) Format of Balance Sheet
(D) Format of Comparative Statements
Answer:
(C) Format of Balance Sheet

Question 3.
As per Section 129(2) of the Companies Act, 2013, at every of a company,the Board of Directors of the company shall lay before such meeting financial statements for the financial year.
(A) Board Meeting
(B) Annual General Meeting
(C) Extraordinary General Meeting
(D) Ordinary General Meeting
Answer:
(B) Annual General Meeting

Question 4.
The company shall attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in as per the Companies (Accounts) Rules, 2014.
(A) Form No. AOC-1
(B) Form No. AOC-2
(C) Form No. AOC-3
(D) Form No. AOC-4
Answer:
(A) Form No. AOC-1

Question 5.
Notes to accounts shall contain information in addition to that presented in the Financial Statements and shall provide where required:
1. Narrative descriptions or disaggregation’s of items recognized in those statements
2. Information about items that do not qualify for recognition in those statements.
Select the correct answer from the options given below –
(A) 1 only
(B) 2 only
(C) 1 but not 2
(D) Both 1 and 2
Answer:
(D) Both 1 and 2

Question 6.
If the turnover of the company is less than ₹ 100 Crore, the figures appearing in the Financial Statements may be rounded off to nearest –
(A) To the nearest hundreds
(B) To the nearest hundreds and thousands
(C) To the nearest hundreds, thousands, lakhs or millions thereof.
(D) To the nearest hundreds, thousands, lakhs or millions, or decimals thereof.
Answer:
(D) To the nearest hundreds, thousands, lakhs or millions, or decimals thereof.

Question 7.
Statement I:
Where the financial statements of a company do not comply with the accounting standards referred, the company shall disclose in its financial statements, the deviation from the accounting standards but the reasons for such deviation and the financial effects, if any, arising out of such deviation are not required to be given.

Statement II:
As per Section 129 of the Companies Act, 2013 the word “subsidiary” shall include associate company and joint venture.
Select the correct answer from the options given below –
(A) Statement I is true but Statement II is false.
(B) Statement I is false but Statement II is true.
(C) Both Statement I and Statement II are true
(D) Both Statement I and Statement II are false
Answer:
(B) Statement I is false but Statement II is true.

Question 8.
If the turnover of the company more than 100 Crore, the figures appearing in the Financial Statements may be rounded off to nearest -……..
(A) To the nearest hundreds, thousands, lakhs or millions, or decimals thereof.
(B) To the nearest lakhs, millions or crores, or decimals thereof
(C) To the nearest millions or crores or decimals thereof
(D) To the nearest crores or decimals thereof
Answer:
(B) To the nearest lakhs, millions or crores, or decimals thereof

Question 9.
Under which heading the Deferred Tax Liabilities appears in the balance sheet
(A) Current Liabilities
(B) Non-Current Liabilities
(C) Deferred Liabilities
(D) Contingent Liabilities
Answer:
(B) Non-Current Liabilities

Question 10.
An auditor of a company signed the balance sheet, profit & loss account and schedules/notes and furnished the auditor’s report on the same date on which the reports were signed by the directors on behalf of the board. One of the director raised objection stating that the audit cannot be completed and certified in a day. Which of the following statement is correct
(A) Section 143 gives the auditors access at all times to the books of account and vouchers of the company, which amply suggests that they do not have to remain idle at any time after their appointment as auditors.
(B) If the auditor signs the balance sheet on the same date on which the directors have approved it, it may not be inferred from the circumstances that the auditor has not performed the audit efficiently.
(C) There is no violation of Section 134 where the audit is completed before approved of the balance sheet by the Board of directors.
(D) All of the above
Answer:
(D) All of the above

Question 11.
An asset shall be classified as current:
(A) If it is held primarily for the purpose of being traded.
(B) If it is not possible to classify such asset as non-current asset.
(C) If for the asset normal operating cycle cannot be identified.
(D) If such asset expected to be realized after twelve months after the reporting date.
Answer:
(A) If it is held primarily for the purpose of being traded.

Question 12.
A copy of the financial statements, including consolidated financial statement, along with all the documents attached to financial statements, duly adopted at the AGM, shall be filed with the Registrar within ……….of the date of AGM in prescribed manner along with prescribed fees.
(A) 10 days
(B) 30 days
(C) 60 days
(D) 90 days
Answer:
(B) 30 days

Question 13.
As per Schedule III of the Companies Act, 2013, where the normal operating cycle cannot be identified, it is assumed to have duration of -…………
(A) 3 months
(B) 6 months
(C) 9 months
(D) 12 months
Answer:
(D) 12 months

Question 14.
As per Rule 12 of the Companies (Accounts) Rules, 2014, a financial statement shall be filed in which should be pre-certified by Practicing CA.
(A) Form AOC-3
(B) Form AOC-4
(C) Form AOC-5
(D) Form AOC-6
Answer:
(B) Form AOC-4

Question 15.
A liability shall be classified as current when it satisfies any of the following criteria:
(A) It is expected to be settled in the Company’s normal operating cycle.
(B) It is due to be settled within twelve months after the reporting date
(C) The company does not have an un-conditional right to defer settlement of the liability for at least twelve months after the reporting date.
(D) All of the above
Answer:
(D) All of the above

Question 16.
OPC shall file a copy of the financial statements duly adopted by its member, along with all the documents which are required to be attached to such financial
statements, within from the closure
of the financial year.
(A) 30 days
(B) 60 days
(C) 120 days
(D) 180 days
Answer:
(D) 180 days

Question 17.
Which of the following is required to be disclosed in notes to accounts in respect of ‘Share Capital
(A) A reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period
(B) Aggregate number and class of shares bought back
(C) Shares in the company held by each shareholder holding more than 5%.
(D) All of the above
Answer:
(D) All of the above

Question 18.
As per Rule 3 of the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015, all companies having has to file their Balance Sheet, Profit & Loss A/c and other documents with the Registrar using the Extensible Business Reporting Language (XBRL).
(A) Issued capital of ₹ 5 Crore or above
(B) Authorized capital of more than₹ 10 Crore
(C) Paid-up capital of ₹ 5 Crore or above
(D) Subscribed capital of ₹ 25 Crore or above
Answer:
(C) Paid-up capital of ₹ 5 Crore or above

Question 19.
Which of the following appears under the heading ‘Reserves & Surplus’ in the balance sheet
(A) Share Options Outstanding Account
(B) Share Application Money Pending Allotment
(C) Long Term Provisions
(D) Secrete Reserves
Answer:
(A) Share Options Outstanding Account

Question 20.
As per Schedule HI of the Companies Act, 2013, a Company shall disclose by way of notes additional information regarding aggregate expenditure and income in relation to any item of income or expenditure which exceeds:
(A) 0.5% of the revenue from operations
(B) ₹ 10,000
(C) 1% of the revenue from operations ₹ 1,00,000, whichever is higher
(D) 0.5% of the revenue from operations ₹ 10,000, whichever is less.
Answer:
(C) 1% of the revenue from operations ₹ 1,00,000, whichever is higher

Question 21.
As per Rule 3 of the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015, all companies having turnover of has to file their Balance Sheet, Profit & Loss A/c and other documents with the Registrar using the Extensible Business Reporting Language (XBRL)
(A) ₹ 50 Crore or above
(B) ₹ 100 Crore or above
(C) ₹ 250 Crore or above
(D) ₹ 500 Crore or above
Answer:
(B) ₹ 100 Crore or above

Question 22.
As per Section 128. of the Companies Act, 2013, every company shall prepare and keep at its books of account and other relevant books and papers and financial statement for every financial year
(A) Corporate Office
(B) Registered Office
(C) Corporate Office or Registered Office
(D) Head Office
Answer:
(B) Registered Office

Question 23.
Which of the following will be shown in the balance sheet under the heading ‘cash and cash equivalents
(A) Earmarked balances with banks
(B) Bank deposits with more than twelve months maturity
(C) Cheques, drafts on hand
(D) All of the above
Answer:
(D) All of the above

Question 24.
Which of the following type of company is required to file their accounts in Extensible Business Reporting Language (XBRL) format
(A) Banking companies
(B) Insurance companies
(C) Non-Banking Financial companies
(D) None of the above
Answer:
(D) None of the above

Question 25.
Declared dividend must be paid within of declaration.
(A) 5 days
(B) 10 days
(C) 30 days
(D) 60 days
Answer:
(C) 30 days

Question 26.
Retained earnings are – …………
(A) An indication of a company’s liquidity.
(B) The same as cash in the bank.
(C) Not important when determining dividends.
(D) The cumulative earnings of the company after dividends.
Answer:
(D) The cumulative earnings of the company after dividends.

Question 27.
Which of the following type of company is required to file their accounts in Extensible Business Reporting Language (XBRL) format
(I) Subsidiary of Indian Listed Company
(II) Companies which are required to prepare their financial statements in accordance with the Companies (Indian Accounting Standards) Rules, 2015
(III) Private company having turnover of ₹ 99 Crore.
(IV) Public companies having paid-up capital of ₹ 3 Crore.
Select the correct answer from the options given below –
(A) (I)&(II)
(B) (II) & (IV)
(C) (II)&(III)
(D) (I), (II) & (III)
Answer:
(A) (I)&(II)

Question 28.
The primary goal of a publicly-owned firm interested in serving its stockholders should be to
(A) Maximize expected total corporate profit
(B) Maximize expected EPS
(C) Maximize the stock price per share
(D) Maximize expected net income.
Answer:
(C) Maximize the stock price per share

Question 29.
In the real world, we find that dividends -…………………
(A) Usually exhibit greater stability than earnings.
(B) Fluctuate more widely than earnings
(C) Tend to be a lower percentage of earnings for mature firms
(D) Are usually set as a fixed percentage of earnings
Answer:
(A) Usually exhibit greater stability than earnings.

Question 30.
Which of the following statement is correct
(A) A company may, if so authorized by its articles, pay dividends in proportion to the amount paid-up on each share.
(B) Dividend cannot be paid on calls-in- advance.
(C) All the provisions of the Companies Act, 2013 that are applicable to final dividend are also applicable to interim dividend.
(D) All of the above
Answer:
(D) All of the above

Question 31.
As per provisions of the Companies Act, 2013, dividend can be paid -……
1. Out of current profit
2. Out of revaluation reserve
3. Out of profits of previous financial years
4. Out of money provided by the Central or State Government
5. Out of free reserve
Select the correct answer from the options given below.
(A) 1 and 5 only
(B) 1,2,3 & 5
(C) 1, 3 and 5 only
(D) 1,3,4 and 5
Answer:
(D) 1,3,4 and 5

Question 32.
As per Section 128 of the Companies Act, 2013, a company may, before the declaration of any dividend in any financial year, transfer ………… to the reserves of the company.
(A) 25% of its profit after tax
(B) 10% of its profit before tax
(C) such percentage of its profits for that financial year as board of directors may consider appropriate
(D) such percentage of its profits for that financial year as equity shareholder may consider appropriate
Answer:
(C) such percentage of its profits for that financial year as board of directors may consider appropriate

Question 33.
As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfillment of the condition that rate of dividend declared shall not exceed the average of the rates at which dividend was
declared by it in the immediately
preceding that year.
(A) 5 years
(B) 10 years
(C) 3 years
(D) 4 years
Answer:
(C) 3 years

Question 34.
As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfillment of the condition that total amount to be drawn from such accumulated profits shall not exceed …….as appearing in the latest audited financial statement.
(A) 1/10th of the total assets
(B) 1 / 5th of the sum of its paid-up share capital
(C) 1/10th of the sum of its paid-up share capital and free reserves
(D) 1 /5th of the sum of its paid-up share capital and free reserves
Answer:
(C) 1/10th of the sum of its paid-up share capital and free reserves

Question 35.
As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the condition the balance of reserves after such withdrawal shall not
fall below as appearing in the latest
audited financial statement.
(A) 10% of its paid-up share capital
(B) 15% of its paid-up share capital
(C) 15% of its paid-up share capital and free reserve
(D) 10% of its paid-up share capital and free reserve
Answer:
(C) 15% of its paid-up share capital and free reserve

Question 36.
As per the provisions of the Companies Act, 2013, the amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within ………… from the date of declaration of such dividend.
(A) 30 days
(B) 15 days
(C) 10 days
(D) 5 days
Answer:
(D) 5 days

Question 37.
After declaration of dividend, the company has to pay dividend within ……. of declaration of dividend. If amount of dividend remains unpaid or unclaimed for 30 days of declaration of dividend, then in next…….. the company has to transfer the amount unclaimed to the to a special account in any scheduled bank to be called the “Unpaid Dividend Account”.
(A) 5 days; 5 days
(B) 30 days; 7 days
(C) 30 days; 5 days
(D) 10 days; 7 days
Answer:
(B) 30 days; 7 days

Question 38.
In the Balance Sheet Corporate Dividend Tax will be shown as a liability under the heading –
(A) Current Liabilities
(B) Non-Current Liabilities
(C) Tax Liabilities
(D) Deferred Liabilities
Answer:
(A) Current Liabilities

Question 39.
Any money transferred to the unpaid dividend account of a company which remains unpaid or unclaimed for a period
of from the date of such transfer must be transferred by the company to Investor Education and Protection Fund
(A) 3 years
(B) 5 years
(C) 7 years
(D) 10 years
Answer:
(C) 7 years

Question 40.
A Company has a paid up equity share capital of ₹ 37,50,000(of ₹ 10each) and 11% preference share capital of ₹ 12,50,000 (of ₹ 100 each). The balance of profit brought forward from the previous Balance Sheet was ₹ 95,000. Profit for the year ended on 31.3.2018 amounted to ₹ 14,50,000 after tax. The directors proposed a dividend of 24% on equity share capital, after the following provisions:
(I) Transfer 10% of current profits to general reserves.
(II) Provision of dividend on preference shares
Assume corporate dividend tax rate 17%. Closing balance of Profit & Loss A/ c will be –
(A) ₹ 1,86,125
(B) ₹ 3,62,500
(C) ₹ 2,48,350
(D) ₹ 1,75,425
Answer:
(A) ₹ 1,86,125

Question 41.
Trial Balance of Complex Ltd., as at 31.3.2019 shows the following item:

Particulars	Dr. (₹ )	Cr. (₹ )
Advance income tax Provision for tax for year ended 31.3.2018	55,000	30,000

(1) Advance payment of income tax includes ₹35,000 for 2017-2018.
(2) Actual tax liability for 2017-2018 amounts to ₹ 38,000 and no effect for the same has so far be given in accounts.
(3) Provision for income tax has to be made for 2018-2019 for ₹ 40,000.
You are required to calculate:
(a) Liability for taxation for last year Le. 2017-2018;
(b) Extra provision to be made in current year for last year.
(A) ₹ 8,000; ₹ 3,000
(B) ₹ 5,000; ₹ 12,000
(C) ₹ 3,000; ₹ 8,000
(D) ₹ 12,000; ₹ 5,000
Answer:
(C) ₹ 3,000; ₹ 8,000

Question 42.
A company had made provision for tax ₹ 70,000 for last year. Actual tax liability for the last financial year settled at ₹ 68,000. If had paid advance tax for last year ₹ 65,000. Which of the following statement is correct in relation tax treatment in accounts of the company
(A) Liability for taxation for the last year is ₹ 3,000
(B) Provision to write back for the last year ₹ 2,000
(C) Adjustment entry is required to be passed in current year by debiting Provision for Tax A/c and crediting Advance Income Tax A/c ₹ 65,000.
(D) All of the above are correct.
Answer:
(D) All of the above are correct.

Question 43.
Yash Ltd. has only one type of capital, viz, 40,000 equity shares of ₹ 100 each. It also has got reserves totalling ₹ 20,00,000. The company closes its books on 31st March each year. It has paid dividends @ 15% up to 2015-2016 and 20% thereafter. In2018-2019, the company suffered a loss of ₹ 2,50,000; therefore, it wishes to draw required amount out of the reserves to pay dividend at 12%. As the Companies (Declaration of Dividend Out of Reserves) Rules, 2014 how much maximum percentage of dividend can be paid by the company out of reserves.
(A) 12%
(B) 10%
(C) 8.75%
(D) 6.55%
Answer:
(C) 8.75%
Dividends can be declared out of past years profits transferred to reserves. In this case, the company has to comply with the Companies (Declaration of Dividend Out of Reserves) Rules, 2014. It lay down the following conditions subject to which a dividend may be declared by a company in the event of inadequacy or absence of profits in any year out of the profits earned by it in previous years and transferred to reserves.

(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the 3 years immediately preceding that year.

Average rate of dividend = 55/3 = 18.3396
So, 18.3396 dividend can be paid at first instance.
Amount required for dividend at 18.3396 = 40,00,000 X 18.3396 = ₹ 7,33,200.

(2) The total amount to be drawn from such accumulated profits shall not exceed 1 / 10th of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
1/10th of (Paid up capital + Free Reserve)
= (40,00,000 + 20,00,000) × 1 /10
= 6,00,000.
Thus, above amount in condition (1) will be restricted to ₹ 6,00,000.

(3) The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.

So, rate of dividend = 3,50,000/40,00,000 × 100 = 8.75%

(4) The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as appearing in the latest audited financial statement.

Paid up capital × 15% = 40,00,000 × 15% = 6,00,000
As balance of reserve ie. 16,50,000 is more than 6,00,000. This condition is fulfilled.
So, rate of dividend can be 8.75%.

Question 44.
Due to paucity of profits, MUSKAT LTD. an Indian company proposes to declare dividends out of its general reserves.
10% pref. shares (₹ 100 each) — 10,00,000
Equity shares (₹ 100 each) — 30,00,000
General reserve — 8,00,000
Securities premium — 2,00,000
Credit balance of P & L A/c — 20,000
Net profit for the year (after tax) — 1,80,000
Average dividend for last 3 years — 15%
As the Companies (Declaration of Dividend Out of Reserves) Rules, 2014 how much maximum percentage of dividend can be paid by the company out of reserves.
(A) 10%
(B) 8%
(C) 12%
(D) 15%
Answer:
(A) 10%

Dividends can be declared out of past years profits transferred to reserves. In this case, the company has to comply with the Companies (Declaration & Payment of Dividend) Rules, 2014. It lay down the following conditions subject to which a dividend may be declared by a company in the event of inadequacy or absence of profits in any year out of the profits earned by it in previous years and transferred to Reserves.
(1) The rate of dividend should not exceed the average rate of dividend of last 3 years:
(2) The total amount to be drawn from the accumulated profits = up to 1 / 10th of the sum of the paid-up capital and free reserves of the company. The amount so drawn shall first be utilized to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared.
(3) The balance of reserves after such drawal shall not fall below 15% of the paid-up share capital of the company.

Condition 1:
Average rates of dividend i.e. 15%
So 15% dividend can be paid at first instance.

Condition 2:

So, rate of dividend = 4,00,000/40,00,000 × 100 = 10%

Condition 3:
The balance of reserves after such drawal shall not fall below 15% of the paid-up share capital of the company.

Question 45.
The paid-up capital of Apsara Ltd. consisted of 5,00,000 equity shares of ₹ 10 each and 50,000, 8% preference shares of ₹ 100 each. The statement of profit and loss of the company for the year ended 31.3.2019 showed net profit before tax of ₹ 20,00,000. Net profit brought forward from previous year’s balance sheet amounted to ₹ 6,00,000. Company makes a provision of 40% for income tax. Following appropriations were proposed by the company:
Answers:
(a) To pay final dividend @ ₹ 1.50 per share to equity shareholders.
(b) To transfer 5% of net profit to general reserve.
Assume corporate dividend tax rate 17%.
Closing balance of Profit & Loss A/ c will be –
(A) ₹ 3,94,500
(B) ₹ 2,94,500
(C) ₹ 4,94,500
(D) ₹ 1,94,500
Answer:
(A) ₹ 3,94,500