Cost of Capital – Financial Management MCQ

Cost of Capital – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Cost of Capital – Financial Management MCQ

Question 1.
The 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 2.
In which of the following method cost of equity capital is computed by dividing the dividend by market price per share or net proceeds per share?
(A) Price Earning Method
(B) Adjusted Price Method
(C) Adjusted Dividend Method
(D) Dividend Yield Method
Answer:
(D) Dividend Yield Method

Question 3.
In weighted average cost of capital, a company can affect its capital cost through –
1. Policy of capital structure
2. Policy of dividends
3. Policy of investment
Select the correct answer from the options given below:
(A) 1 only
(B) 2 & 3
(C) 1 & 3
(D) All 1, 2 & 3
Answer:
(D) All 1, 2 & 3

Question 4.
Which of the following is correct formula to calculate cost of equity under dividend yield method?
Cost of Capital – Financial Management MCQ 1
Cost of Capital – Financial Management MCQ 2
Answer:
(A)

Question 5.
……….. is the rate of return associated with the best investment opportunity for the firm and its shareholders that will be forgone if the projects presently under consideration by the firm were accepted.
(A) Explicit Cost
(B) Future Cost
(C) Implicit Cost
(D) Specific Cost
Answer:
(C) Implicit Cost

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.
Which of the following model/method makes use of beta (5) 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 8.
Marginal cost –
(A) is the weighted average cost of new finance raised by the company.
(B) is the additional cost of capital when the company goes for further raising of finance.
(C) is the cost of raising an additional rupee of capital.
(D) All of the above
Answer:
(D) All of the above

Question 9.
Bond risk premium is added in to bond yield to calculate –
(A) Cost of option
(B) Cost of common stock
(C) Cost of preferred stock
(D) Cost of working capital
Answer:
(B) Cost of common stock

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.
Statement I:
Where earnings, dividends and equity share price all grow at the same rate, the cost of equity capital may be computed by dividend growth method.
Statement II:
When risk free rate is added to the market rate of return risk premium for the stock is arrived.
Select the correct answer from the options given below:
(A) Statement I is false but Statement II is true
(B) Both Statement I and Statement II are false
(C) Statement II is false but Statement I is true
(D) Both Statement I and Statement II are true
Answer:
(C) Statement II is false but Statement I is true

Question 12.
Interest rates, tax rates and market risk premium are factors which –
(A) Industry cannot control
(B) Industry can control
(C) Firm must control
(D) Firm cannot control
Answer:
(D) Firm cannot control

Question 13.
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 14.
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 15.
For each component of capital, a required rate of return is considered as:
(A) Component cost
(B) Evaluating cost
(C) Asset cost
(D) Asset depreciation value
Answer:
(A) Component cost

Question 16.
…….. is the rate that the firm pays to procure financing.
(A) Average Cost of Capital
(B) Combine Cost
(C) Economic Cost
(D) Explicit Cost
Answer:
(D) Explicit Cost

Question 17.
Which of the following method of cost of equity is similar to the dividend price approach?
(A) Discounted cash flow (DCF) method
(B) Capital asset pricing model
(C) Price earning method
(D) After tax equity method
Answer:
(C) Price earning method

Question 18.
Preferred dividend is divided by preferred stock price multiply by (1 – floatation cost) is used to calculate –
(A) Transaction cost of preferred stock
(B) Financing of preferred stock
(C) Weighted cost of capital
(D) Component cost of preferred stock
Answer:
(D) Component cost of preferred stock

Question 19.
Statement I:
Cost of retained earnings is the opportunity : cost of dividends foregone by shareholders.
Statement II:
The opportunity cost of reserve & surplus may be considered as their cost, which is equivalent to the income that would otherwise earn by placing these funds in alternative investment.
Select the correct answer from the options, given below:
(A) Statement I is false but Statement II is true
(B) Both Statement I and Statement II are false
(C) Statement II is false but Statement I is true
(D) Both Statement I and Statement II are true
Answer:
(D) Both Statement I and Statement II are true

Question 20.
How you will calculate expected dividend i e. dividend at the end of year one?
(A) D1 = [D0(1 + g)]
(B) D1 = [D0(1 -t)]
(C) D1 = [D0× (1 – g)]
(D) D1 = [D0 +(1 – g)](1 -t)
Answer:
(A) D1 = [D0(1 + g)]

Question 21.
In weighted average cost of capital, rising in interest rate leads to –
(A) Increase in cost of debt
(B) Increase the capital structure
(C) Decrease in cost of debt
(D) Decrease the capital structure
Answer:
(A) Increase in cost of debt

Question 22.
………… is the cost which has already been incurred for financing a particular project
(A) Future Cost
(B) Historical Cost
(C) Implicit Cost
(D) Opportunity Cost
Answer:
(B) Historical Cost

Question 23.
In weighted average cost of capital, capital components are funds that are usually offered by:
(A) Stock market
(B) Investors
(C) Capitalist
(D) Exchange index
Answer:
(B) Investors

Question 24.
Overall cost of capital is called as –
(A) Composite cost of capital
(B) Combined cost of capital
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 25.
Premium which is considered as difference of expected return on common stock and current yield on Treasury bonds is called –
(A) Past risk premium
(B) Expected premium
(C) Current risk premium
(D) Beta premium
Answer:
(C) Current risk premium

Question 26.
Which of the following figure is irrelevant while calculating cost of redeemable preference shares?
(A) Floatation cost
(B) Discount
(C) EPS
(D) Net proceeds
Answer:
(C) EPS

Question 27.
Select which of the following statement is correct?
(I) Capital budget decision largely depends on the cost of capital of each source.
(II) Capital structure is the mix or proportion of the different kinds of short term securities.
Cost of capital helps to evaluate the financial performance of the firm.
(IV) As per MM approach, the cost of equity (Ke) is equal to capitalization rate of pure equity stream minus a premium for business risk.
Select the correct answer from the options given below:
(A) (I) and (II)
(B) (I), (III) and (IV)
(C) (D) and (III)
(D) (I) and (III)
Answer:
(D) (I) and (III)

Question 28.
An interest rate which is paid by firm as soon as it issues debt is classified as pre-tax –
(A) Term structure
(B) Market premium
(C) Risk premium
(D) Cost of debt
Answer:
(D) Cost of debt

Question 29.
Which of the following is controllable factor affecting the cost of capital of the firm?
(A) Dividend policy
(B) Level of interest rates
(C) Tax rates
(D) All of the above
Answer:
(A) Dividend policy

Question 30.
Which of the following is uncontrollable factor affecting the cost of capital of the firm?
(A) Investment Policy
(B) Capital Structure Policy
(C) Debt service charges
(D) None of the above
Answer:
(D) None of the above

Question 31.
Type of cost which is used to raise common equity by reinvesting internal earnings is classified as………
(A) Cost of common equity
(B) Cost of mortgage
(C) Cost of stocks
(D) Cost of reserve assets
Answer:
(A) Cost of common equity

Question 32.
Which of the following is correct formula to calculate cost of irredeemable preference shares?
(A) Preference dividend ÷ Net proceeds
(B) Preference dividend × (1 -t)
(C) [Preference dividend × (1 -t)] ÷ Net proceeds
(D) [Preference dividend -n Net proceeds] × (1-t)
Answer:
(A) Preference dividend ÷ Net proceeds

Question 33.
Which of the following factor affects the determination of cost of capital of the firm?
(A) General economic conditions
(B) Market conditions
(C) Operating and financing decisions
(D) All of the above
Answer:
(D) All of the above

Question 34.
Cost of equity which is raised by reinvesting earnings internally must be higher than the –
(A) Cost of initial offering
(B) Cost of new common equity
(C) Cost of preferred equity
(D) Cost of floatation
Answer:
(B) Cost of new common equity

Question 35.
During planning period, marginal cost to raise a new debt is classified as –
(A) Debt cost
(B) Borrowing cost
(C) Relevant cost
(D) Embedded cost
Answer:
(C) Relevant cost

Question 36.
After tax cost of debentures not redeemable during the life time of the company is –
(A) [Interest -5- Net proceeds] × (1 -t)
(B) Interest × (1 -t) ÷ Net proceeds
(C) Interest × (1 +t) ÷ Net proceeds
(D) [Interest ÷ Net proceeds] × (1 +t)
Answer:
(B) Interest × (1 -t) ÷ Net proceeds

Question 37.
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:
(C) Equity risk premium

Question 38.
A firm’s overall cost of capital:
(A) varies inversely with its cost of debt.
(B) is unaffected by changes in the tax rate.
(C) is another term for the firm’s internal rate of return.
(D) is the required return on the total assets of a firm.
Answer:
(D) is the required return on the total assets of a firm.

Question 39.
Key sources of value (earning an excess return) for a company can be attributed primarily to
(A) competitive advantage and access to capital
(B) quality management and industry attractiveness
(C) access to capital and quality management
(D) industry attractiveness and competitive advantage
Answer:
(D) industry attractiveness and competitive advantage

Question 40.
Which of the following is correct formula to calculate cost of redeemable debentures?
Cost of Capital – Financial Management MCQ 3
Answer:
(D)

Question 41.
The weighted average cost of capital (K0) results from a weighted average of the firm’s debt and equity capital costs. At a debt ratio of zero, the fin a is 100% equity financed. As debt is substituted for equity and as the debt ratio increases, the –
(A) K0 declines because the after-tax debt cost is less than the equity cost (Kd < Ke).
(B) K0 increases because the after-tax debt cost is less than the equity cost (Kd<Ke).
(C) K0 do not show any change and tend to remain same.
(D) None of the above
Answer:
(A) K0 declines because the after-tax debt cost is less than the equity cost (Kd < Ke).

Question 42.
The overall (weighted average) cost of capital is composed of a weighted average of
(A) the cost of common equity and the cost of debt
(B) the cost of common equity and the cost of preferred stock
(C) the cost of preferred stock and the cost of debt
(D) the cost of common equity, the cost of preferred stock, and the cost of debt
Answer:
(D) the cost of common equity, the cost of preferred stock, and the cost of debt

Question 43.
While calculating the WACC, cost of each component of the capital is weighted –
(A) In the ratio of 1:2:3:4
(B) by the relative proportion of that type of funds in the capital structure.
(C) by the relative proportion of that type of funds to total assets in the company
(D) Both (A) and (C)
Answer:
(B) by the relative proportion of that type of funds in the capital structure.

Question 44.
Which of the following formula you will use while calculating value of the firm?
(A) NOPAT ÷ K
(B) NOPAT × K0
(C) NOPAT ÷K0(1-t)
(D) None of the above
Answer:
(A) NOPAT ÷ K

Question 45.
For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure?
(A) Cost of debt
(B) Cost of preferred stock
(C) Cost of common equity
(D) Cost of retained earnings
Answer:
(A) Cost of debt

Question 46.
The cost of preference share capital is calculated –
(A) by dividing the fixed dividend per share by the price per preference share and then adding risk premium.
(B) by dividing the fixed dividend per share by the price per preference share and then adding growth rate.
(C) by dividing the fixed dividend per share by the price per preference share.
(D) by dividing the fixed dividend per share by the book value per preference share.
Answer:
(C) by dividing the fixed dividend per share by the price per preference share.

Question 47.
Statement I:
Cost of equity capital is the rate of return which equates the present value of expected dividends with the market share price.
Statement II:
Dividend Yield Method cannot be used to calculate cost of equity of units suffering losses.
Select correct answer from the options given below:
(A) Both Statements are false.
(B) Statement I is true but Statement II is false.
(C) Statement II is true but Statement I is false.
(D) Both Statements are true.
Answer:
(D) Both Statements are true.

Question 48.
Which of the following is not a recognized approach for determining the cost of equity?
(A) Dividend discount model approach
(B) Before-tax cost of preferred stock plus risk premium approach
(C) Capital-asset pricing model approach
(D) Before-tax cost of debt plus risk premium approach
Answer:
(B) Before-tax cost of preferred stock plus risk premium approach

Question 49.
While calculating WACC on market value basis which of the following is not considered –
(A) After tax cost of debt
(B) Reserve and surplus
(C) Weight of each fund in capital structure
(D) Cost of term loan
Answer:
(B) Reserve and surplus

Question 50.
CAPM describes the between risk and return for securities.
(A) Linear relationship
(B) Hypothetical relationship
(C) No relationship
(D) Diagonal relationship
Answer:
(A) Linear relationship

Question 51.
Janardan is attempting to determine his company’s weighted-average cost of capital. His first step was to determine the required rates of return for his company’s long-term debt, preferred stock, and common stock. He then adjusted these required rates of return by multiplying each return by one minus the company’s marginal tax rate. Janardan is planning on using these three adjusted required return figures as his component costs of capital. How is Janardan doing so far?
(A) All three of Janardan’s component cost figures are correct.
(B) All three component cost figures are wrong.
(C) Only the required return (yield) on preferred stock and debt should have been adjusted for taxes.
(D) Only the required return (yield) on debt should have been adjusted for taxes.
Answer:
(D) Only the required return (yield) on debt should have been adjusted for taxes.

Question 52.
Which of the following may be defined as the cost of raising an additional rupee of capital?
(A) Average cost of capital
(B) Cost of retained earnings
(C) Marginal cost of capital
(D) Marginal cost of reserve & surplus
Answer:
(C) Marginal cost of capital

Question 53.
The non-diversifiable risk is attributable to factors that affect –
(A) Particular business
(B) All businesses
(C) Particular project
(D) Not to all businesses
Answer:
(B) All businesses

Question 54.
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 55.
Assertion (A):
The marginal weights represent the proportion of funds the firm intends to employ.
Reason (R):
The problem of choosing between the book value weights and the market value weights does not arise in the case of marginal cost of capital computation.
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 56.
Which of the following is example of non-diversifiable risk?
(W) Interest Rate Changes
(X) Inflation
(Y) Political Changes
Select the correct answer from the options given below:
(A) (W) & (Y)
(B) (W) & (X)
(C) (X) & (Y)
(D) All of the above
Answer:
(D) All of the above

Question 57.
The cost of equity capital is all of the following EXCEPT:
(A) the minimum rate that a firm should earn on the equity-financed part of an investment.
(B) a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
(C) by far the most difficult component cost to estimate.
(D) generally lower than the before-tax cost of debt.
Answer:
(D) generally lower than the before-tax cost of debt.

Question 58.
Which of the following risk can be eliminated by an investor?
(A) Diversifiable risk
(B) Non-diversifiable risk
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) Diversifiable risk

Question 59.
Required rate of return = ?
(A) Risk free rate + Risk premium
(B) Risk free rate – Risk premium
(C) Risk free rate + Risk premium (1 -1)
(D) Risk free rate – Risk premium (1 +1)
Answer:
(A) Risk free rate + Risk premium

Question 60.
In calculating the proportional amount of equity financing employed by a firm, we should use:
(A) The common stock equity account on the firm’s balance sheet.
(B) The sum of common stock and preferred stock on the balance sheet.
(C) The book value of the firm.
(D) The current market price per share of common stock times the number of shares outstanding.
Answer:
(D) The current market price per share of common stock times the number of shares outstanding.

Question 61.
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 62.
In calculating the costs of the individual components of a firm’s financing, the corporate tax rate is important to which of the following component cost?
(A) Common stock
(B) Debt
(C) Preferred stock
(D) None of the above
Answer:
(B) Debt

Question 63.
The rate of return on its existing assets that a firm must earn to maintain the current value of the firm’s stock is called the:
(A) Return on equity
(B) Internal rate of return
(C) Weighted average cost of capital
(D) Current yield
Answer:
(C) Weighted average cost of capital

Question 64.
Economic value added measures –
(A) the excess earning over P/E ratio
(B) the excess returns over cost of capital.
(C) the excess returns over existing EPS
(D) the excess earning over ROE
Answer:
(B) the excess returns over cost of capital.

Question 65.
Which one of the following is a correct statement regarding a firm’s weighted average cost of capital (WACC)?
(A) The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.
(B) An increase in the market risk premium will tend to decrease a firm’s WACC.
(C) A reduction in the risk level of a firm will tend to increase the firm’s WACC.
(D) The WACC will decrease when the tax rate decreases for all firms that utilize debt financing.
Answer:
(A) The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.

Question 66.
If a company’s EVA is negative –
(A) it is destroying shareholders 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 shareholders wealth even though it may be reporting positive and growing EPS or return on capital employed

Question 67.
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 68.
Market values are often used in computing the weighted average cost of capital because –
(A) This is the simplest way to do the calculation.
(B) This is consistent with the goal of maximizing shareholder value.
(C) This is required by the Securities & Exchange Board of India.
(D) This is a very common mistake.
Answer:
(B) This is consistent with the goal of maximizing shareholder value.

Question 69.
…………. enhance the market value of shares and therefore equity capital is not free of cost.
(A) Face value
(B) Dividends
(C) Redemption value
(D) Book value
Answer:
(B) Dividends

Question 70.
Consider statements given below:
1. A debt-equity ratio of 2:1 indicates that for every 1 unit of equity, the company can raise 2 units of debt. The cost of floating a debt is greater than the cost of floating an equity issue.
State True or False:
(A) 1-True, 2-True
(B) 1-False, 2-True
(C) 1-False, 2-False
(D) 1-True, 2-False
Answer:
(D) 1-True, 2-False

Question 71.
Which one of the following represents ……….. the best estimate for a firm’s pre-tax cost of debt?
(A) twice the rate of return currently offered on risk-free securities
(B) the firm’s historical cost of capital
(C) the current yield-to-maturity on the firm’s existing debt
(D) the current coupon on the firm’s existing debt
Answer:
(C) the current yield-to-maturity on the firm’s existing debt

Question 72.
EVA = ?
(A) PAT – (Capital Employed × WACC)
(B) NOPAT -(Capital Employed × Ke)
(C) NOPAT-(Capital Employed × WACC)
(D) NOPAT – (Total Assets × Ke × Kd)
Answer:
(C) NOPAT-(Capital Employed × WACC)

Question 73.
An increase in market value of preferred stock will ………. the cost of preferred stock.
(A) increase
(B) not affect
(C) either increase or decrease
(D) decrease
Answer:
(D) decrease

Question 74.
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 75.
Capital structure weights are based on the:
(A) market value of a firm’s equity and the face value of its debt.
(B) initial issue values of a firm’s debt and equity.
(C) firm’s dividend and bond yields.
(D) market values of a firm’s debt and equity.
Answer:
(D) market values of a firm’s debt and equity.

Question 76.
The average of a firm’s cost of equity and after tax cost of debt that is weighted based on the firm’s capital structure is called the –
(A) Reward to risk ratio
(B) Weighted capital gains rate
(C) Structured cost of capital
(D) Weighted average cost of capital
Answer:
(D) Weighted average cost of capital

Question 77.
Which of the following action can be taken to improve EVA?
(A) Improve Asset Turnover Ratios
(B) Change the capital structure by substituting lower cost debt for higher cost equity
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 78.
Sam Toys is considering developing and distributing a new board game for children. The project is similar in risk to the firm’s current operations. The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm’s rapid growth. How should the firm determine its cost of equity?
(A) by adding the market risk premium to the after tax cost of debt
(B) by multiplying the market risk premium by (1 – 0.40)
(C) by using the dividend growth model
(D) by using the capital asset pricing model
Answer:
(D) by using the capital asset pricing model

Question 79.
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 80.
All else constant, which one of the following will increase a firm’s cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of ₹1 a share and has a beta of 1.2.
(A) a reduction in the dividend amount
(B) an increase in the dividend amount
(C) a reduction in the market rate of return
(D) a reduction in the risk-free rate
Answer:
(D) a reduction in the risk-free rate

Question 81.
………. 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 82.
A firm’s overall cost of equity is:
(A) is generally less that the firm’s WACC given a leveraged firm.
(B) unaffected by changes in the market risk premium.
(C) highly dependent upon the growth rate and risk level of the firm.
(D) generally less than the firm’s after tax cost of debt.
Answer:
(C) highly dependent upon the growth rate and risk level of the firm.

Question 83.
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 84.
The after tax cost of debt generally increases when:
I. A firm’s bond rating increases.
H. Market rate of interest increases.
III. Tax rates decrease.
IV. Bond prices rise.
Select correct answer from the options given below:
(A) I & III only
(B) II & III only
(C) I, II & III only
(D) II, III & IV only
Answer:
(B) II & II only

Question 85.
Rank in ascending order (ie. 1 = lowest, while 3 = highest) the likely after-tax component costs of a Company’s long-term financing.
(A) 1 = bonds; 2 = common stock; 3 = preferred stock.
(B) 1 = bonds; 2 = preferred stock; 3 = common stock.
(C) 1 = common stock; 2 = preferred stock; 3 = bonds.
(D) 1 = preferred stock; 2 = common stock; 3 = bonds.
Answer:
(B) 1 = bonds; 2 = preferred stock; 3 = common stock.

Question 86.
The cost of preferred stock is computed the same as the:
(A) Pre-tax cost of debt
(B) Return on an annuity
(C) After tax cost of debt
(D) Return on a perpetuity
Answer:
(D) Return on a perpetuity

Question 87.
The pre-tax cost of debt:
(A) is based on the current yield to maturity of the firm’s outstanding bonds.
(B) is equal to the coupon rate on the latest bonds issued by a firm.
(C) is equivalent to the average current yield on all of a firm’s outstanding bonds.
(D) is based on the original yield to maturity on the latest bonds issued by a firm.
Answer:
(A) is based on the current yield to maturity of the firm’s outstanding bonds.

Question 88.
The cost of preferred stock:
(A) is equal to the dividend yield.
(B) is equal to the yield to maturity.
(C) is highly dependent on the dividend growth rate.
(D) is independent of the stock’s price.
Answer:
(A) is equal to the dividend yield.

Question 89.
………. describes the relationship between non diversifiable and return for securities.
(A) Risk Reward Model
(B) CAPM Model
(C) MM Model
(D) Stewart Model
Answer:
(B) CAPM Model

Question 90.
The after tax cost of debt:
(A) varies inversely to changes in market interest rates.
(B) will generally exceed the cost of equity if the relevant tax rate is zero.
(C) is unaffected by changes in the market rate of interest.
(D) has a greater effect on a firm’s cost of capital when the debt-equity ratio increases.
Answer:
(D) has a greater effect on a firm’s cost of capital when the debt-equity ratio increases.

Question 91.
Match the following:
List I — List II
A. Expected dividend — 1. Flotation cost
B. Beta coefficient — 2. Retained earnings
C. Issue expenses — 3. CAPM
D. Personal tax rate — 4. Growth rate
Select the correct answer from the options given below:
Cost of Capital – Financial Management MCQ 4
Answer:
(C)

Question 92.
Weighted average cost of capital for a firm may be dependent upon the firm’s:
1. Rate of growth
2. Debt-equity ratio
3. Preferred dividend payment
4. Retention ratio
Select correct answer from the options given below:
(A) 1 & 3 only
(B) 2 & 4 only
(C) 1, 2 & 4 only
(D) 1,2,3 & 4
Answer:
(D) 1,2,3 & 4

Question 93.
By observing the financial market, we can observe that –
(A) Normally cost equity is more than cost of debt
(B) Normally cost of debt is more than cost of equity
(C) If beta factor is more than 1 then security is less risky than market
(D) None of the above
Answer:
(D) None of the above

Question 94.
Which one of the following statements is correct for a firm that uses debt in its capital structure?
(A) The WACC should decrease as the firm’s debt-equity ratio increases.
(B) When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred.
(C) The firm’s WACC will decrease as the corporate tax rate decreases.
(D) The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.
Answer:
(A) The WACC should decrease as the firm’s debt-equity ratio increases.

Question 95.
Match List-I with List-II:
Cost of Capital – Financial Management MCQ 5
Answer:
(A)

Question 96.
As per Net Income approach if capitalization rate increases, market value of firm –
(A) Decreases
(B) Increases
(C) Remains constant
(D) Without data it is not possible to tell what will happen
Answer:
(A) Decreases

Question 97.
Which of the following formula is correct to calculate the value of levered firm as per MM Model? .
(A) Value of unlevered firm – (Value of debt × Tax Rate)
(B) Value of unlevered firm × Value of debt × Tax Rate
(C) Value of unlevered firm + (Value of debt × Tax Rate)
(D) Value of unlevered firm ÷ (Value of debt ÷ Tax Rate)
Answer:
(C) Value of unlevered firm + (Value of debt × Tax Rate)

Question 98.
Match List-I with List-II:
Cost of Capital – Financial Management MCQ 6
Answer:
(B)

Question 99.
P/E Ratio is –
(A) Profitability ratio
(B) Turnover ratio
(C) Market test ratio
(D) Liquid ratio
Answer:
(C) Market test ratio

Question 100.
Market price = ?
(A) P/E Ratio × EPS
(B) EPS/Ke
(C) D1/Ke
(D) All of the above
Answer:
(D) All of the above

Question 101.
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 = 0375 Le. 37.5%

Question 102.
F Ltd. issued 1,00,000 equity share of ₹ 100 each at a premium of ₹ 20 each. Company has incurred issue expenses of ₹ 50,000. Corporate tax rate is 40%. The equity shareholders expects the rate of dividend to 18% p.a. Cost of equity = ?
(A) 15.60%
(B) 15.65%
(C) 15.06%
(D) 16.50%
Answer:
(C) 15.06%
Issue expenses are 50,000.
Issue expenses per share = 0.5.
Net proceeds per share = 120 – 0.5 = 119.5
18/119.5 = 0.1506 i.e. 15.06%

Question 103.
The equity of JPG Ltd. is traded in the market at ₹ 225 each. It book value per share is ₹ 100. The dividend expected at the year end per share is ₹ 45. The subsequent growth in dividends is expected at the rate of 0.06. Calculate the cost of equity capital.
(A) 0.26
(B) 0.22
(C) 0.33
(D) 0.28
Answer:
(A) 0.26
Cost of Capital – Financial Management MCQ 28

Question 104.
Sara Ltd. has its shares having face value of ₹ 25 each quoted on the stock exchange, the current price per share is ₹ 60. The gross dividends per share over the last four years have been ₹ 3, ₹ 3.3, ₹ 3.63 & ₹ 4. Calculate cost of equity.
(A) 17.33%
(B) 13.17%
(C) 15.33%
(D) 0.01733
Answer:
(A) 17.33%
It can be observed from the data that dividends are growing by 10%.
Cost of Capital – Financial Management MCQ 29

Question 105.
Current market price of equity shares of Jack Ltd. is ₹ 120. The company has issued new equity shares of ₹ 30 each at ₹ 120 and the cost of its flotation is ₹ 1.50 per share. The gross dividends per share over the last six years have been ₹ 3.15, ₹ 3.3, ₹ 3.48, ₹ 3.63, ₹ 3.81 and ₹ 4.02. It is expected to maintain the fixed dividend payout ratio in the future. Applicable tax rate is 35%. Cost of equity of Jack Ltd. is –
(A) 0.856
(B) 0.0856
(C) 0.0865
(D) 0.0586
Answer:
(B) 0.0856
It can be observed from the data of dividend that it growing by 5%.
Cost of Capital – Financial Management MCQ 31
Ke = 0.0856 = 8.56%

Question 106.
Bharat Ltd. has its equity shares of ₹ 10 each quoted in a stock exchange with market price of ₹ 140. A constant expected annual growth rate of 6% and a dividend of ₹ 9 per share has been paid for the last year. Calculate the cost of capital.
(A) 12.28%
(B) 12.43%
(C) 66.82%
(D) 12.81%
Answer:
(D) 12.81%
Cost of Capital – Financial Management MCQ 32

Question 107.
F Ltd. has paid-up capital of ₹ 10,00,000. Equity share of ₹ 10 each and the current market price of its equity shares is ₹ 630. The dividend declared by the company during last 5 years is given below:
Year — DPS
2014 — 13.50
2015 — 15.75
2016 — 22.50
2017 — 27.00
2018 — 31.50
Risk free rate of interest on government securities is 9%. Ke = ?
(A) 45.3%
(B) 30.2%
(C) 28.9%
(D) 16.4%
Answer:
(B) 30.2%
It can be observed from the data that dividend is growing by average rate of 24% as shown below. Hence, growth rate can be taken as 24%.
Cost of Capital – Financial Management MCQ 33

Question 108.
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 3636,363 – 12,36,363 = 24,00,000
EPS =24,00,000/1,50,000 = 16 pcr share
Price Earning Method.
Cost of Capital – Financial Management MCQ 34

Question 109.
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 1096. Company estimates its EBI 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
Cost of Capital – Financial Management MCQ 35
Cost of Capital – Financial Management MCQ 36

Question 110.
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 7.596. 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%
Ke = Rf+β(Rm– Rf)
= 7.5+1.1214(13-7.5)
= 13.6796

Question 111.
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 0.61275. Risk premium is 0.0825. Calculate cost of equity capital.
(A) 21%
(B) 6.28%
(C) 14.77%
(D) 12%
Answer:
(A) 21%
Ke = Rf+ p (Rm— Rf)
Note: Risk Premium = (Rm — Rf)
= 6.1275 + 1.8025 (8.25)
= 2196

Question 112.
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) ₹ 2,80,800
(C) ₹ 2,08,800
(D) ₹ 2,80,008
Answer:
(B) ₹ 2,80,800
Cost of Capital – Financial Management MCQ 37

Question 113.
Lava Inc.’s ₹ 100 par value preferred stock just paid its ₹ 10 per share annual dividend. The preferred stock has a current market price of ₹ 96 a share. The firm’s marginal tax rate is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lava Inc. would be closest to –
(A) 6.52 percent
(B) 6.25 percent
(C) 10.24 percent
(D) 10.42 percent
Answer:
(D) 10.42 percent
10/96=0.1042 i.e 10.42%

Question 114.
A financial consultant has gathered following facts for HPLC Ltd. Systematic risk of the firm is 1.1425. 182 days treasury bill yield is 6%. Expected yield on market portfolio is 13%. GDP growth rate is 996. Sensex is 39,118. What is the cost of equity?
(A) 13.96%
(B) 14.00%
(C) 14.52%
(D) 18.91%
Answer:
(B) 14.00%
Ke=Rf+p(Rm-Rf)
= 6 + 1.1425 (13 – 6)
= 14%

Question 115.
Following details are submitted by Rajlakhami Ltd.
EBIT
Equity Capital Reserves & Surplus 10% Debentures Current Assets Cost of Equity Income Tax Rate Economic Value Added = ?
(A) ₹ 43.75 lakh
(B) ₹ 40.75 lakh
(C) ₹ 43.57 lakh
(D) ₹ 45.37 lakh
Answer:
(A) ₹ 43.75 lakh
Cost of Capital – Financial Management MCQ 38

Question 116.
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
Cost of Capital – Financial Management MCQ 39

Question 117.
The beta coefficient of Zebra Ltd. is 1.16. The company has been maintaining 2.5% rate of growth in dividends and earnings. The last dividend paid was ₹ 1.20 per share. Return on government securities is 5%. Return on market portfolio is 7%. The current market price of one share of Zebra Ltd. is ₹ 14. The earnings per share is ₹ 1.95. It was decided to take cost of equity, the average for four methods that are generally adopted to calculate the cost of equity in general. Average Ke = ?
(A) 10.33%
(B) 13.93%
(C) 11.29%
(D) 7.32%
Answer:
(A) 10.33%
Cost of Capital – Financial Management MCQ 40

Question 118.
A Company issues ₹ 50,00,000 12% Debentures of ₹ 100 each. Risk premium is 8%. Debentures are redeemable after the expiry of fixed period of 7 years. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at par.
(A) 0.78
(B) 7.8%
(C) 8.7%
(D) 0.87
Answer:
(B) 7.8%
Cost of Capital – Financial Management MCQ 41

Question 119.
Prsanna Ltd. issued 12% bonds of ₹ 100 each at par. Corporate tax rate is 34% including surcharge and education cess. Cost of Debt = ?
(A) 7.92%
(B) 8.42%
(C) 10%
(D) 12.48%
Answer:
(A) 7.92%
Cost of Capital – Financial Management MCQ 42

Question 120.
Parag Ltd. issued 14% bonds of ₹ 100 each at 98%. Corporate tax rate is 34%. Issue expense per bond was ₹ 1.5. Cost of Debt=?
(A) 9.24%
(B) 9.38%
(C) 9.58%
(D) 9.12%
Answer:
(C) 9.58%
Cost of Capital – Financial Management MCQ 43

Question 121.
A Company issues ₹ 75,00,000 12% Debentures of ₹ 100 each. Risk premium is 13.5%. Debentures are redeemable after the expiry of fixed period of 7 years at par. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at 10% discount.
(A) 9.72%
(B) 7.80%
(C) 9.27%
(D) 8.46%
Answer:
(A) 9.72%
Cost of Capital – Financial Management MCQ 44

Question 122.
A Company issues ₹ 48,50,000 12% Debentures of ₹ 100 each. Debentures are redeemable at par after the expiry of fixed period of 7 years. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at 10% premium. –
(A) 6.77%
(B) 6.07%
(C) 7.60%
(D) 6.88%
Answer:
(B) 6.07%
Cost of Capital – Financial Management MCQ 45

Question 123.
Following data is available for XYZ Ltd.:
No. of debentures = ₹ 5,00,000
Face value = ₹ 1,000
Coupon rate = 8%
Discount on issue = 1% of face value
Issue expenses = ₹ 6,25,000
Term =12 years
Corporate tax rate = 25%
These debentures are redeemable at premium of ₹ 14.
What is cost of debt (Kd)?
(A) 6.20%
(B) 5.87%
(C) 6.44%
(D) 8.32%
Answer:
(A) 6.20%
Cost of Capital – Financial Management MCQ 46

Question 124.
Y Ltd. issues preference shares of face value ₹ 500 each carrying 14% dividend and it realizes ₹ 480 per share. The shares are repayable after 12 years at 2% premium. Corporate tax rate is 25%. Issue expense per share was ₹ 2.5.
(A) 14.65%
(B) 15.82%
(C) 14.73%
(D) 14.92%
Answer:
(C) 14.73%
Cost of Capital – Financial Management MCQ 47

Question 125.
PAPA Ltd. retains ₹ 26,25,000 out of its current earnings. The expected rate of return to the shareholders, if they had invested the funds elsewhere is 15%. The brokerage is 2% and the shareholders come in 14% tax bracket. Calculate the cost of retained earnings.
(A) 12.64%
(B) 11.37%
(C) 14.80%
(D) 12.90%
Answer:
(A) 12.64%
Since, the expected rate of return to the shareholders, if they had invested the funds elsewhere is 15%. The brokerage is 2%. Net Ke = 15-0.3 = 14.7.
Cost of retained earnings:
K = Ke (1 – tp) tp = Personal tax rate applicable to shareholder.
= 14.7 (1 – 0.14)
= 12.64%

Question 126.
Chetna Fashions is expected to pay an annual dividend of ₹ 0.80 a share next year. The market price of the stock is ₹ 22.40 and the growth rate is 5%. What is the firm’s cost of equity?
(A) 7.58 percent
(B) 7.91 percent
(C) 8.24 percent
(D) 8.57 percent
Answer:
(D) 8.57 percent
Cost of Capital – Financial Management MCQ 48

Question 127.
Sweet Treats common stock is currently priced at ₹ 19.06 a share. The company just paid ₹ 1.15 per share as its annual dividend. The dividends have been increasing by 2.5% annually and are expected to continue doing the same. What is this firm’s cost of equity?
(A) 8.68%
(B) 8.86%
(C) 6.18%
(D) 6.03%
Answer:
(A) 8.68%
Cost of Capital – Financial Management MCQ 49

Question 128.
Narendra Ltd. is planning for issue of 15% Preference Shares of ₹ 100 each, redeemable at par after 8 years. They are expected to be sold at a premium of 596. Flotation cost is 9% of face value. Corporate tax is 35% and corporate dividend tax is 10%. The cost of preference shares on the basis of present value of future cash flow shall be –
Use following rates for your calculations:
Cost of Capital – Financial Management MCQ 50
(A) 17.49%
(B) 16.22%
(C) 18.34%
(D) 19.20%
Answer:
(A) 17.49%

Question 129.
Z Ltd. is planning for issue of 15% Debentures of ₹ 100 each, redeemable at par after 5 years. They are expected to be sold at par. Flotation cost is 10% of face value. Corporate tax is 35%. Cost of debentures on the basis on present value of future cash flow shall be –
Use following rates for your calculations:
Cost of Capital – Financial Management MCQ 27
(A) 11.37%
(B) 12.57%
(C) 14.87%
(D) 12.97%
Answer:
(B) 12.57%

Question 130.
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 ie. 10%

Question 131.
Mr. Investor, purchases an equity share of growing company, ATT Ltd. for ₹ 210. He expects that the ATT Ltd. to pay dividend of ₹ 10.5, ₹ 11.025 & ₹ 11.575 in year 1, 2 & 3 respectively. He expects to sell shares at the end of year 3 at ₹ 243.10. Determine the growth rate in dividend.
(A) 4%
(B) 5%
(C) 6%
(D) 7%
Answer:
(B) 5%
Cost of Capital – Financial Management MCQ 51

Question 132.
Mr. Lucky, purchases an equity share of growing company, XYY Ltd. for ₹ 525. He expects that the XYY Ltd. to pay dividend of ₹ 26.25, ₹ 27.83 & ₹ 29.50 in year 1, 2 & 3 respectively. He expects to sell shares at the end of year 3 at ₹ 607.75. What is the required rate of return of Mr. Lucky on his equity investment?
(A) 11.50%
(B) 10.50%
(C) 10.05%
(D) 11.05%
Answer:
(D) 11.05%
Cost of Capital – Financial Management MCQ 52

Question 133.
Mumbai Ltd. expected to pay dividend at ₹ 2 for the next year. As the company is a market leader with good future, dividend is likely to grow by 5% every year. The equity shares are now treaded at ₹ 80 per share in the stock exchange. Tax rate applicable to the company is 50%. The capital structure of the company also contains debt on which interest is payable @ 14%. The. capital structure has ratio of Equity & Debt 80:20. WACC = ?
(A) 9.40%
(B) 7.40%
(C) 8.40%
(D) 7.98%
Answer:
(B) 7.40%
Cost of Capital – Financial Management MCQ 56

Question 134.
Beeta Ltd. has furnished the following information:
Earnings Per Share (EPS) — ₹ 14
Dividend Payout Ratio — 25%
Market Price Per Share — ₹ 140
Rate of Tax — 26%
Growth rate of dividend — 9%
The company wants to raise additional capital of ₹ 10 lakhs including debt of 14 lakhs. Cost of debt (before tax) is 12% up to ₹ 2 lakhs and 1496 beyond that. Compute the marginal weighted average cost of additional capital.
(A) 11.75%
(B) 10.75%
(C) 11.57%
(D) 12.57%
Answer:
(B) 10.75%
Cost of Capital – Financial Management MCQ 54

Question 135.
National Ltd. has 12,000 equity shares of ₹ 100 each. Sale price is equity share ₹ 115 per share; flotation cost ₹ 5 per share. Expected dividend growth rate is 5% and expected dividend at the end of the financial year is ₹ 11 per share. What is the cost of equity shares of National Ltd.?
(A) 0.1133
(B) 0.1278
(C) 0.1475
(D) 0.15
Answer:
(D) 0.15
Cost of Capital – Financial Management MCQ 55

Question 136.
Raman Ltd. has 1096 Preference Share Capital of ₹ 4,50,000. Face value is ₹ 10. Issue price of preference share is ₹ 100 per share; flotation cost ₹ 2 per share. What is the cost of preference shares to Raman Ltd.?
(A) 10.20%
(B) 9.10%
(C) 12.50%
(D) 11.22%
Answer:
(A) 10.20%
Cost of Capital – Financial Management MCQ 66

Question 137.
Raja Ltd. has 8% Debentures (Face value ₹ 2,500) of ₹ 9,00,000 which are redeemable at 5% premium, sold at 98%, 3% flotation costs with maturity of 20 years. Corporate tax rate is 35%. The company paid debenture interest of 60,000 out of total interest payable of 72,000. After tax cost of debt is -…………
(A) 8.7%
(B) 7.7%
(C) 5.7%
(D) 6.7%
Answer:
(C) 5.7%
Cost of Capital – Financial Management MCQ 67

Question 138.
Equity shares of Anuradha Ltd. are quoted in stock exchange at ₹ 325 per share. New issue priced at ₹ 312.5 and flotation cost will be ₹ 12.5 per share. During 5 years dividend on equity shares have steadily grown from ₹ 26.5 to ₹ 35.48. Dividend at the end of current year is expected at ₹ 37.5 per share. It has retained earning of ₹ 30,00,000. Corporate tax is 35% and shareholders are in tax slab of 20%. Ignore dividend tax. Calculate cost of equity and cost of retained earnings?
(A) Ke= 18.50%; Kr = 14.80%
(B) Ke = 18.00%; Kr = 14.40%
(C) Ke = 17.54%; Kr = 14.03%
(D) Ke = 18.94%; Kr = 15.15%
Answer:
(A) Ke= 18.50%; Kr = 14.80%
During 5 years dividend on equity shares have steadily grown from 26.5 to 35.48. Hence, growth rate = g = 6%.
Cost of Capital – Financial Management MCQ 68

Question 139.
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 (β) = 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
Cost of Capital – Financial Management MCQ 86
Cost of Capital – Financial Management MCQ 70

Question 140.
The company proposes to issue 11 year 15% debentures of ₹ 500. Yield on debentures of similar maturity and risk class is 16%; flotation cost 3% of face value. Corporate tax is 35%. Issue price and after tax cost of debt would be –
(A) Issue price = 486.75; Kd = 12.10%
(B) Issue price = 468.75; Kd = 11.10%
(C) Issue price = 475.68; Kd = 10.10%
(D) Issue price = 457.86; Kd = 12.12%
Answer:
(B) Issue price = 468.75; Kd = 11.10%
Market price of debenturesCost of Capital – Financial Management MCQ 71
Since, the yield on debentures of similar maturity and risk class is 16%, the company would be required to offer debenture at discount.
Cost of Capital – Financial Management MCQ 72

Question 141.
From the following details calculate the WACC:
Cost of Capital – Financial Management MCQ 9
(A) 17.28%
(B) 16.52%
(C) 16.34%
(D) 17.93%
Answer:
(A) 17.28%
Cost of Capital – Financial Management MCQ 73

Question 142.
A Company has ₹ 180 Million of 10% Debentures having face value of ₹ 100. The debentures are redeemable after 3 years and interest is paid annually. The current ex-interest debenture market value is ₹ 103. Pre-tax cost of debentures on the basis of present value of future cash flow shall be –
Use following rates for your calculations:
Cost of Capital – Financial Management MCQ 10
(A) 9.32%
(B) 7.91%
(C) 8.02%
(D) 8.82%
Answer:
(D) 8.82%

Question 143.
The following is the capital structure of a company:
Cost of Capital – Financial Management MCQ 11
Current market price of equity share is ₹ 200. For the last year the company had paid equity dividend at 25% and its dividend is likely to grow 5% every year. Corporate tax rate is 30% and shareholders personal income tax rate is 20%. Compute WACC on the basis of book value.
(A) 13.36%
(B) 14.50%
(C) 13.96%
(D) 12.32%
Answer:
(A) 13.36%

Question 144.
The following is the capital structure of a company:
Cost of Capital – Financial Management MCQ 12
Current market price of equity share is ₹ 200. For the last year the company had paid equity dividend at 25% and its dividend is likely to grow 5% every year. Corporate tax rate is 30%. Compute WACC on the basis of market value.
(A) 14.5 percent
(B) 13.5 percent
(C) 12.9 percent
(D) 14.1 percent
Answer:
(A) 14.5 percent

Question 145.
Debt as percentage of total capital of the Kinara Ltd. is 20%. Its cost of equity is 16% and pre-tax cost of debt is 12%. Tax rate is 50%. What is overall cost of capital
(A) 16%
(B) 14%
(C) 15%
(D) 16.6%
Answer:
(B) 14%
Cost of Capital – Financial Management MCQ 74

Question 146.
Debt as percentage of total capital of the Tiger Ltd. is 60%. Its cost of equity is 24% and pre-tax cost of debt is 20%. Tax rate is 50%. What is overall cost of capital of Tiger Ltd.?
(A) 14.6%
(B) 13.6%
(C) 17.6%
(D) 15.6%
Answer:
(D) 15.6%
Cost of Capital – Financial Management MCQ 75

Question 147.
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
Cost of Capital – Financial Management MCQ 76

Question 148.
AB Ltd. estimates the cost of equity and debt components of its capital for different levels of debt; equity mix as follows:
Debt as % of total capital Cost of equity Cost of debt (pre-tax)
Cost of Capital – Financial Management MCQ 13
Tax Rate is 50%
Select the best capital mix for the company so that its overall cost of capital is minimum.
(A) I
(B) II
(C) III
(D) IV
Answer:
(B) II

Question 149.
The preferred stock of ISO Ltd. pays an annual dividend of ₹ 6.50 a share and sells for ₹ 48 a share. What is ISO’s cost of preferred stock?
(A) 9.19%
(B) 7.38%
(C) 13.54%
(D) 9.46%
Answer:
(C) 13.54%
6.5/48 = 0.1354 i.e. 13.54%

Question 150.
Calculate the weighted marginal cost of capital for the company, if it raises ₹ 10 Crores next year, given the following information:
(i) Next expected dividend is ₹ 3.60 and expected to grow at the rate of 7%.
(ii) Income-tax rate is 40%.
(iii) Amount will be raised by equity and debt in equal proportions.
(iv) Additional issue of equity shares will result in the next price per share being fixed at ₹ 32.
(v) Debt capital raised by way of term loans will cost 15%. for the first ₹ 2.5 Crores and 16%. for the balance.
Select the correct answer from the options given below:
(A) 12.775%.
(B) 15.625%.
(C) 13.775%.
(D) 15.475%.
Answer:
(B) 15.625%.
Cost of Capital – Financial Management MCQ 77

Question 151.
Nikon Enterprises just paid an annual dividend of ₹ 1.56 per share. This dividend is expected to increase by 3 percent annually. Currently, the firm has a beta of 1.13 and a stock price of ₹ 28 a share. The risk-free rate is 3 percent and the market rate of return is 10.5 percent. What is your best estimate of Nikon’s cost of equity?
(A) 8.74 percent
(B) 11.48 percent
(C) 9.72 percent
(D) 10.11 percent
Answer:
(D) 10.11 percent
Cost of Capital – Financial Management MCQ 78

Question 152.
Jakson Ltd. has 12,000 bonds outstanding at a quoted price of 98 percent of face value. The bonds mature in eleven years and carry a 9 percent annual coupon. What is your best estimate of Jackson’s after-tax cost of debt if the applicable tax rate is 35 percent?
(A) 6.03%
(B) 5.77%
(C) 8.33%
(D) 7.04%
Answer:
(A) 6.03%
Cost of Capital – Financial Management MCQ 79

Question 153.
Mona Industries has a capital structure of 55% common stock, 10% preferred stock, and 45% debt. The firm has a 60% dividend payout ratio, a beta of 0.89, and a tax rate of 38%. Given this, which one of the following statements is correct?
(A) The after-tax cost of debt will be greater than the current yield-to-maturity on the firm’s bonds.
(B) The firm’s cost of preferred is most likely less than the firm’s actual cost of debt.
(C) The firm’s cost of equity is unaffected by a change in the firm’s tax rate.
(D) The cost of equity can only be estimated using the SML approach.
Answer:
(C) The firm’s cost of equity is unaffected by a change in the firm’s tax rate.

Question 154.
Baba Ltd. has a cost of equity of 12%, a pre-tax cost of debt of 7%, and a tax rate of 35%. What is the firm’s weighted average cost of capital if the debt-equity ratio is 0.60?
(A) 9.21%
(B) 10.01%
(C) 10.13%
(D) 11.11%
Answer:
(A) 9.21%
Cost of Capital – Financial Management MCQ 80

Question 155.
JKL Ltd. has ₹ 10 equity shares amounting to ₹ 15 Crore. The current market price per equity share is ₹ 60. The prevailing default risk free interest rate on 10 year GOI treasury bonds is 5.5%. The average market risk premium is 8%. The beta of the company is 1.1875. K, = ?
(A) 15%
(B) 11%
(C) 12%
(D) 13%
Answer:
(A) 15%
K=Rf + β(Rm– Rf)
= 5.5 + 1.1875 × 8 = 15%

Question 156.
ABC Ltd. has three divisions: A, B & C. Division A has the least risk and Division C has the most risk. ABC Ltd. has an after tax cost of debt of 4.6% and a cost of equity of 9.5%. Company is financed with 50% debt & 50% equity. Management has told the divisional manager of Division A that projects in that division are assigned a discount rate that is 1% less than the firm’s weighted average cost of capital. What is the discount rate applicable to Division A?
(A) 6.65%
(B) 6.31%
(C) 7.18%
(D) 6.05%
Answer:
(D) 6.05%
Cost of Capital – Financial Management MCQ 81

Question 157.
PWA Ltd. has ₹ 1,000,9.5% debentures amounting to ₹ 1,500 Million. The debentures of PWA Ltd. are redeemable after 3 years and are quoting at ₹ 981.05 per debenture. The beta of the company is 1.1785. The applicable income tax rate for the company is 35%. Kd = ?
(A) 1.59%
(B) 6.87%
(C) 7.86%
(D) 8.67%
Answer:
(B) 6.87%
Cost of Capital – Financial Management MCQ 82

Question 158.
PWA Ltd. has ₹ 100,10.5% preference shares amounting to ₹ 100 Million. The preferred stock of the company is redeemable after 5 years is currently selling at ₹ 98.15 per preference share. The beta of the company is 1.7158. The applicable income tax rate for the company is 35%. KP =?
(A) 10%
(B) 11%
(C) 12%
(D) 13%
Answer:
(B) 11%
Cost of Capital – Financial Management MCQ 83

Question 159.
G Ltd. has 10,000 shares of common stock outstanding at a price per share of ₹ 46 and a rate of return of 14%. The Company has 5,000 shares of 7% preferred stock outstanding at a price of ₹ 58 a share. The outstanding debt has a total face value of ₹ 2,00,000 and a market price equal to 98% of face value. Yield-to-maturity (YTM) on the debt is 8.03%. What is the firm’s weighted average cost of capital?
(A) 10.62%
(B) 12.65%
(C) 8.62%
(D) 9.99%
Answer:
(A) 10.62%
Cost of Capital – Financial Management MCQ 84

Question 160.
Calculate the marginal cost of capital (MCC) for the firm if it raises ₹ 750 million for a new project. The firm plans to have a target debt to value ratio of 20%. The beta of new project is 1.4375. The debt capital will be raised through term loans. It will carry interest rate of 9.5% for the first ₹ 100 million and 10% for the next ₹ 50 million. The current market price per equity share is ₹ 60. The prevailing default risk free interest rate on 10-year GOI treasury bonds is 5.5%. The average market risk premium is 8%.
(A) 14.86%
(B) 12.22%
(C) 13.04%
(D) 15.95%
Answer:
(A) 14.86%
Cost of Capital – Financial Management MCQ 85
ABC Ltd. needs additional finance of 750 million with debt to value ratio of 80%.
This finance will be raised as follows:
Cost of Capital – Financial Management MCQ 87

Question 161.
Black & White Ltd. has a cost of equity of 11% and a pre-tax cost of debt of 8.5%. The firm’s target weighted average cost of capital is 9% and its tax rate is 35%. What is the firm’s target debt-equity ratio?
(A) 0.6203
(B) 0.5756
(C) 0.5572
(D) 0.5113
Answer:
(B) 0.5756
Kd = 8.5 (1 – 0.35) = 5.525%.
WACC is 9 thus total of product must be 900 (9 × 100).
Let the % of debt in total capital be ‘x’
Thus, % of equity must be 100 – x
Cost of Capital – Financial Management MCQ 88

Question 162.
You are analyzing the beta for A Ltd. and have divided the Company into four broad business groups, with market values and betas for each group.
Cost of Capital – Financial Management MCQ 14
Cost of Capital – Financial Management MCQ 15
A Ltd. had ₹ 50 billion in debt outstanding. Market risk premium is 8.5. Treasury bond rate is 7.5%. Estimate cost of equity for A Ltd.
(A) 16.85%
(B) 20.25%
(C) 18.34%
(D) 24.50%
Answer:
(C) 18.34%

Question 163.
R&G Company has equity share capital (2,00,000 shares) ₹ 20,00,000. The company’s share has current market price of ₹ 27.75 per share. The expected dividend per share in next year is 50% of the 2019 EPS. The EPS of the last 4 years is as follows. The past trends are expected to continue.
Cost of Capital – Financial Management MCQ 16
Calculate the cost of ordinary equity.
(A) 17%
(B) 24%
(C) 16%
(D) 21%
Answer:
(A) 17%
It can be observed from the data of EPS that it is growing by 12% per annum. Hence, growth rate can be taken 12%.
Cost of Capital – Financial Management MCQ 89
D1 = 2.773 × 50%
= 1.3865
It is given in problem that the expected divided per share in next year is 50% of the 2019 EPS.

Question 164.
The Company can issue 14% new debenture. The company’s debenture is currently selling at ₹ 98. Face value of debenture is ₹ 100. The company’s marginal tax rate is 50%. What is cost of debenture (i) based on book value; (ii) based on market value?
(A) 14% & 14.28%
(B) 6% & 6.12%
(C) 7% & 7.14%
(D) 8% & 8.16%
Answer:
(C) 7% & 7.14%
Cost of debt based on book value  Cost of debt based on marker value:
Cost of Capital – Financial Management MCQ 90

Question 165.
Ganesh Ltd. requires amount of ₹ 5,00,000 to finance a project. It was decided to raise such finance by issue of debentures. Cost of debt is 10% (before tax) up to ₹ 2,00,000 and 13% (before tax) beyond that. Tax rate is 30%. What is the average marginal cost of capital of new finance of ₹ 5,00,000?
(A) 7.37%
(B) 11.5%
(C) 8.26%
(D) 9.12%
Answer:
(C) 8.26%
Cost of Capital – Financial Management MCQ 91

Question 166.
C Ltd. wishes to raise additional finance of ₹ 20 lakhs for meeting its investment plans. C Ltd. has ? 4,00,000 in the form of retained earnings available for investment purposes. Further details are:
Debt equity ratio 25:75. Earnings per share, ₹ 12. Dividend payout 50% of earnings. Expected growth rate = 10%. Market price per share = ₹ 60. Tax rate = 30%. Shareholder’s personal tax rate=20%. Cost of debt at the rate of 10% (before tax) up to ₹ 2,00,000 and 13% (before tax) beyond that.
WACC = ?
(A) 16.27%
(B) 17.52%
(C) 15.89%
(D) 14.42%
Answr:
(A) 16.27%
Determination of Pattern for raising the additional finance:
Equity = 20,00,000 × 75% = 15,00,000
Debt = 20,00,000 × 25% = 5,00,000
Cost of equity – Dividend Growth Method:
Cost of Capital – Financial Management MCQ 92
Calculate cost of debt as per hint of previous question and then calculate WACC as shown below.
Cost of Capital – Financial Management MCQ 93
WACC = 1626.50 = 16.27%

Question 167.
Gentry Motor, Inc. a producer of turbine generator, is in this situation:
EBIT = ₹ 40 lakhs
Tax rate = 35%
Debt outstanding = ₹ 20 lakhs
Kd = 10%
Ke = 15%
Shares outstanding = 6,00,000 shares
What is the Gentry’s earning per share (EPS) and market price per share (Po)?
(A) EPS = 3.98; Market Price = ₹ 27.76
(B) EPS = 4; Market Price = ₹ 26.67
(C) EPS = 4.72; Market Price = ₹ 30.44
(D) EPS = 3; Market Price = ₹ 25
Answer:
(B) EPS = 4; Market Price = ₹ 26.67
Cost of Capital – Financial Management MCQ 94
Cost of Capital – Financial Management MCQ 95

Question 168.
Following are the extracts from financial statements of Zipway Ltd.:
Cost of Capital – Financial Management MCQ 17
Market price per equity share is 15 and per debenture is 95. Calculate WACC on market value basis.
(A) 12.25%
(B) 10.88%
(C) 14.56%
(D) 13.74%
Answer:
(B) 10.88%
Cost of Capital – Financial Management MCQ 96

Question 169.
Following data is available for H Ltd.:
Cost of Capital – Financial Management MCQ 18
All the earnings are distributed after payment of all taxes. Assume that the income-tax rate on the company is 35% and the additional tax on the amount
of dividend distributed is 20%. Calculate
WACC.
(A) 6.524%
(B) 8.125%
(C) 10,897%
(D) 12.346%
Answer:
(A) 6.524%
Cost of Capital – Financial Management MCQ 97

Question 170.
Following data is available for Z Ltd.:
Cost of Capital – Financial Management MCQ 19
All the earnings are distributed after payment of all taxes. Assume that the income-tax rate on the company is 35% and the additional tax on the amount of dividend distributed is 20%. Calculate WACC.
(A) 8.214%
(B) 10.582%
(C) 9.299%
(D) 12.324%
Answer:
(C) 9.299%
Cost of Capital – Financial Management MCQ 97

Question 171.
A company is planning to raise ₹ 20,00,000 additional long-term funds to finance its additional capital budget of the current year. The debentures of the company to be sold on a 14% net yield basis to the company, and equity shares to be sold at ₹ 50 per share net to the company, are the alternatives being considered. The company expects to pay dividend of ₹ 5 per share at the end of coming year. The required rate of return is 16%. Determine the growth rate of the company which market is anticipating.
(A) 3%
(B) 4%
(C) 5%
(D) 6%
Answer:
(D) 6%

Question 172.
The required rate of return is 16%. Management is anticipating 8% growth rate. The company expects to pay dividend of ₹ 5 per share at the end of coming year. On this basis, at what price should the equity share be sold by the company?
(A) 60.2
(B) 62.5
(C) 64.3
(D) 61.7
Answer:
(B) 62.5

Question 173.
Following information has been extracted from the books of Unique Fashioners Ltd.:
Cost of Capital – Financial Management MCQ 20

Applicable tax rate is 40%. Company has been paying 20% dividend per annum constantly. Compute average cost of capital on book value weights if the current market price of a share of ₹ 100 is ₹ 160.
(A) 14.87%
(B) 12.73%
(C) 9.24%
(D) 10.42%
Answer:
(D) 10.42%
Cost of Capital – Financial Management MCQ 98

Question 174.
Workout the marginal cost of capital from the following data:
Cost of Capital – Financial Management MCQ 21
(A) 13.83%
(B) 12.83%
(C) 14.83%
(D) 15.83%
Answer:
(A) 13.83%

Question 175.
Workout the marginal cost of capital from the following data:
Cost of Capital – Financial Management MCQ 22
(A) 15.20%
(B) 14.20%
(C) 16.20%
(D) 18.20%
Answer:
(C) 16.20%

Question 176.
Workout overall cost of capital after raising of additional finance from the following data:
Cost of Capital – Financial Management MCQ 23
(A) 12.91%
(B) 15.91%
(C) 17.91%
(D) 14.91%
Answer:
(D) 14.91%
Cost of Capital – Financial Management MCQ 99

Question 177.
The prevailing risk-free rate of interest in 10-Year GOl Treasury Bonds is 5.5%. The average risk premium is 8%. The beta of the company is 1.1875. The beta of project is 1.4375. The debt can be raised at an interest rate of 9.5% up to first 10 Crore and @ 10% for the rest of the amount. Tax rate is 35%. You are required to calculate cost of equity and debt.
Cost of Capital – Financial Management MCQ 24
Cost of Capital – Financial Management MCQ 25
Answer:
(A)
Cost of equity – CAPM Method:
K=Rf+P(Rm-Rf)
= 5.5 + 1.4375 × 8 = 17%Cost of Capital – Financial Management MCQ 100
The company now wants to take up a project requiring an investment of 75 Crore with a debt-equity ratio of 2096. Hence, debt portion will be 15 Crore and equity portion will be 60 Crore.
Cost of Capital – Financial Management MCQ 101

Question 178.
The prevailing risk-free rate of interest in 10-Year GOI Treasury Bonds is 5.5%. The average risk premium is 8%. The beta of the company is 1.1875. The company now wants to take up a project requiring an investment of ₹ 75 Crore with a debt- equity ratio of 20%. The beta of this project is 1.4375. The debt can be raised at an interest rate of 9.5% up to first ₹ 10 Crore and @10% for the rest of the amount. Find out the marginal cost of capital, if the tax rate is 35%.
(A) 13.38 percent
(B) 14.86 percent
(C) 15.34 percent
(D) 12.12 percent
Answer:
(B) 14.86 percent
Cost of equity – CAPM Method:
K=Rf+P(Rm-Rf)
= 5.5 + 1.4375 × 8 = 17%Cost of Capital – Financial Management MCQ 100
The company now wants to take up a project requiring an investment of 75 Crore with a debt-equity ratio of 2096. Hence, debt portion will be 15 Crore and equity portion will be 60 Crore.
Cost of Capital – Financial Management MCQ 101

Question 179.
Cost of equity and preference capital of Priyanka Ltd. are 17.43% & 10%. Before tax cost of debentures and term loan are 12% & 15%. Applicable tax rate is 30%. Ratio of weight in capital structure is 5:2:3:5 of Equity, Preference, Debt & Term Loan respectively. Priyanka Ltd. has following investment opportunities that are typical average risk projects for the company:
Projects — Rate of Return
A — 17.4%
B — 16.0%
C — 14.2%
D — 13.7%
E — 10.7%
Which projects should Priyanka Ltd. accept?
(A) A, B, C but not E & D
(B) A, B, D but not C & E
(C) A, B, C & D but not E
(D) B, C, D & E but not A
Answer:
(C) A, B, C & D but not E
Overall cost of capital of Priyanka Ltd. is 12.32% so it can accept the project that yield above it. Thus, it accept Project A, B, C & D but not E.

Question 180.
Sushant Ltd. gives following details:
₹ in lakhs
Equity shares — 50
10% Preference shares — 10
14% Debentures — 20
Equity shares are sold at ₹ 25 per share. Company will pay next year a dividend of ₹ 4 per share which will grow at 8% forever.
Company raises an additional ₹ 20 lakhs by issuing 15% debentures. This would increase the expected dividend to ₹ 5 per share with no change in growth rate, but the price will fall to ₹ 20 per share. What is the impact of raising additional finance?
(A) WACC fall from 17.8% to 15.2%
(B) WACC increases from 17.8% to 20.65%
(C) WACC fall from 21.65% to 18.7%
(D) WACC increases from 18.7% to 21.56%
Answer:
(D) WACC increases from 18.7% to 21.56%
Cost of Capital – Financial Management MCQ 102
Cost of Capital – Financial Management MCQ 103

Question 181.
Capital structure of S Ltd. is as under:
6% Debentures (₹ 100 each) — 2,00,000
7% Debentures (₹ 100 each) — 1,00,000
8% Pref. shares (₹ 100 each) — 2,00,000
Equity shares (₹ 100 each) — 4,00,000
Retained earnings — 1,00,000
EPS of the company in the past many years has been ₹ 15. Equity shares are sold at ₹ 125. Tax rate is 30% and shareholders’ personal tax liability is 10%. Find out WACC of the company on book value basis.
(A) 8.81 percent
(B) 10.92 percent
(C) 4.79 percent
(D) 15.33 percent
Answer:
(A) 8.81 percent
Cost of Capital – Financial Management MCQ 104
Cost of Capital – Financial Management MCQ 105

Question 182.
Shares of Alfa Ltd. are currently being quoted at a price earnings ratio of 7.5 times. Retained earnings of the company being 37.5% is ₹ 6 per share. Compute company’s cost of equity if investors’ expected annual growth rate is 8%.
(A) 15%
(B) 16%
(C) 17%
(D) 20%
Answer:
(C) 17%
Cost of Capital – Financial Management MCQ 106

Question 183.
If expected rate of return on equity shares is 1596, dividend just paid is ₹ 10 per share and expected annual growth rate is 10% then at what price share will trade in market at the end of year one?
(A) ₹ 222 per share
(B) ₹ 44.4 per share
(C) ₹ 111 per share
(D) ₹ 200 per share
Answer:
(A) ₹ 222 per share
Cost of Capital – Financial Management MCQ 107
Cost of Capital – Financial Management MCQ 108

Question 184.
A Ltd. gives following details:
Equity Capital [ 10 each] — ₹ 2,50,000
Market value per share — ₹ 20
Dividend per share — ₹  4
Debentures [ 100] — ₹ 1,00,000
Market value per debenture — 125
Interest rate — 10%
Tax rate — 50%
WACC based on market value = ?
(A) 12.20%
(B) 16.80%
(C) 18.40%
(D) 13.60%
Answer:
(B) 16.80%
Cost of Capital – Financial Management MCQ 109

Question 185.
B Ltd. gives following details:
Equity Capital [₹ 10 each] — ₹ 5,00,000
Market value per share — ₹ 12
Dividend per share — ₹ 2.88
Debentures [₹ 100] — ₹ 2,50,000
Market value per debenture 80
Interest rate — 8%
Tax rate — 50%
WACC based on market value = ?
(A) 19.25%
(B) 22.65%
(C) 16.45%
(D) 18.75%
Answer:
(A) 19.25%

Question 186.
P Ltd. is considering various proposals costing less than 30 lakhs. Company does not want to disturb its present capital structure of 30% debt and 70% of equity.
Other details:
Cost of Capital – Financial Management MCQ 26
Assuming the tax rate is 50%, compute the cost of capital of two projects ABC and XYZ whose fund requirements are 8 lakhs and 21 lakhs respectively
(A) ABC = 13.10%; XYZ = 11.12%
(B) ABC = 11.30%; XYZ = 12.15%
(C) ABC = 12.03%; XYZ = 15.12%
(D) ABC = 10.30%; XYZ = 13.15%
Answer:
(B) ABC = 11.30%; XYZ = 12.15%
Cost of Capital – Financial Management MCQ 110

Question 187.
Krishna Ltd. is currently financed with 10,00,000, 7% bonds and 20,00,000 of common stock. The stock has a beta of 1.5, risk-free rate of return 4% and market risk premium 3.5%. The marginal tax rate for a company of this size is 35%. Compute the WACC of Krishna Ltd. on book value basis?
(A) 6.87%
(B) 8.76%
(C) 9.34%
(D) 7.68%
Answer:
(D) 7.68%
Cost of Capital – Financial Management MCQ 111

Question 188.
Apoorva Ltd. has assets of ₹ 32,00,000 that have been financed as follows:
Equity shares (100 each) — 18,00,000
General reserve — 3,60,000
Debt — 10,40,000
For the year ended the company’s total profits before interest and taxes were 6,23,000. Company pays 8% interest on borrowed capital and the tax bracket is 40%. The market value of the equity is 150 per share. From the above, determine the weighted average cost of capital using market values as weights.
(A) 9.01%
(B) 10%
(C) 12%
(D) 11.23%
Answer:
(B) 10%
Cost of Capital – Financial Management MCQ 112

Question 189.
ABC Ltd. has 10,000 shares 7 each, 10,000,12% debentures and 20,000 as short term loan @ 10%. Tax rate for the company is 30%. Assume the cost of equity capital as 20%. Calculate WACC at book value.
(A) 16.24%
(B) 17.48%
(C) 14.26%
(D) 13.27%
Answer:
(A) 16.24%
Cost of Capital – Financial Management MCQ 113

Question 190.
Mohan Ltd. has paid increasing dividends of ₹ 0.54, ₹ 0.58, ₹ 0.62, ₹ 0.67 and ₹ 0.72 a share over the past 4 years, respectively. Firm estimates that future increases in their dividends will be comparable to the arithmetic average growth rate over these past 4 years. The stock is currently selling for? 38.60 a share. The risk-free rate is 4% and the market risk premium is 8%. What is your best estimate of cost of equity if their beta is 1.22?
(A) 14.06%
(B) 9.46%
(C) 12.97%
(D) 11.61%
Answer:
(D) 11.61%
(0.58 – 0.54)/0.54 × 100 = 7.41%
(0.62 – 0.58)/0.58 × 100 = 6.90%
(0.67 – 0.62)/0.62 × 100 = 8.07%
(0.72 – 0.67)/0.67 × 100 = 7.46%
Average rate of growth = 7.46%
Ke as per dividend growth model = (0.77/38.60) + 0.0746 = 0.0945 ie. 9.45%
Ke as per CAPM Model = 4 + (1.22 × 8)= 13.76%
Best estimate of cost of equity = (9.45 + 13.76)/2 = 11.61%

Question 191.
What is the overall (weighted average) cost of capital in the following situation?
The firm has 12 million in long-term debt, 2 million in preferred stock, and 8 million in common equity- all at market values. The before-tax cost for debt, preferred stock, and common equity forms of capital are 8%, 9%, and 15%, respectively. Assume 40% tax rate.
(A) 6.40%
(B) 6.54%
(C) 8.89%
(D) 10.90%
Answer:
(C) 8.89%
Cost of Capital – Financial Management MCQ 114

Question 192.
Equity dividend expected at the end of year is 20 per share whereas anticipated dividend growth rate is 5%. Corporate tax is 30%. Market price per share is 200. What is cost of equity?
(A) 10.5%
(B) 15%
(C) 12.9%
(D) 14%
Answer:
(B) 15%

Question 193.
Dividend per share is 15 and sell it for 120 and floatation cost is 3, then component cost of preferred stock will be – ………………
(A) 12.82 times
(B) 0.l282tirnes
(C) 0.1282
(D) 12.82
Answer:
(C) 0.1282

Question 194.
If future return on common stock is 19% and rate on T-bill is 11% then current market risk premium will be:
(A) 30%
(B) 8%
(C) 0.8
(D) None of the above
Answer:
(B) 8%

Question 195.
Stock selling price is 65, expected dividend is 20 and cost of common stock is 42% then expected growth rate will be –
(A) 11.23%
(B) 0.01123
(C) 11.23 times
(D) 11.23
Answer:
(A) 11.23%

Question 196.
Dividend per share is 18 and sell it for 122 and floatation cost is 4, then component cost of preferred stock will be:
(A) 1525%
(B) 1525 times
(C) 0.01525
(D) 15.52%
Answer:
(A) 1525%

Question 197.
Stock selling price is 45, an expected dividend is 10 per share and an expected growth rate is 8%, then cost of common stock would be:
(A) 3.02
(B) 32%
(C) 3022%
(D) 32.30%
Answer:
(C) 3022%

Question 198.
Interest rate is 12% and tax savings (1-0.40) then after-tax component cost of debt will be –
(A) 0.072
(B) 7.2 times
(C) 17.14
(D) 17.14times
Answer:
(A) 0.072

Question 199.
Cost of common stock is 14% and bond risk premium is 9% then bond yield will be –
(A) 0.0156
(B) 0.05
(C) 0.23
(D) 0.6428
Answer:
(B) 0.05

Question 200.
Cost of common stock is 16% and bond yield is 9% then bond risk premium would be-
(A) 0.07
(B) 7.0
(C) 0.0178
(D) 0.25
Answer:
(A) 0.07

Capital Structure – Financial Management MCQ

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

Capital Structure – Financial Management MCQ

Question 1.
…………. refers to the mix of a firm’s capitalization and includes long term sources of funds.
(A) Leverage
(B) Capital structure
(C) Debt mix
(D) Owner’s equity
Answer:
(B) Capital structure

Question 2.
The term “capital structure” refers to:
(A) Current assets & current liabilities
(B) Long-term debt, preferred stock, and common stock equity
(C) Total assets minus liabilities
(D) Share holders’ equity
Answer:
(B) Long-term debt, preferred stock, and common stock equity

Question 3.
The decisions regarding the forms of financing, their requirements and their relative proportions in total capitalization known as –
(A) Equity decisions
(B) Equilibrium decisions
(C) Outright decisions
(D) Capital structure decisions
Answer:
(D) Capital structure decisions

Question 4.
Which of the following statement is false?
I. In case the firm wants to grow at a faster pace, it would be required to incorporate debt in its capital structure to a greater extent.
II. If the firm has no long term debt in its capital structure, it means that either it is risk averse or it has cost of equity capital or cost of retained earnings less than the cost of debt.
Select the correct answer from the options given below:
(A) Statement I is true while Statement II is false.
(B) Statement I is false while Statement II is true.
(C) Both Statement I and Statement II are false.
(D) Both Statement I and Statement II are true.
Answer:
(D) Both Statement I and Statement II are true.

Question 5.
While designing a capital structure a finance manager should choose a pattern of capital which –
(A) Minimizes cost of capital
(B) Maximizes the owners return.
(C) Maximizes cost of capital and minimizes the owners return.
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 6.
Which of the following changes in capital structure would you recommend for growth at faster rate?
(A) Incorporate more retained earnings out of profit and loss account.
(B) Incorporate debt in its capital structure to a greater extent.
(C) Merge with other companies.
(D) Pay more dividend to equity share-holders.
Answer:
(B) Incorporate debt in its capital structure to a greater extent.

Question 7.
The manner in which an organization’s assets are financed is referred to as its –
(A) Capital structure
(B) Financial structure
(C) Asset structure
(D) Owners structure
Answer:
(B) Financial structure

Question 8.
Optimal capital structure consists of -…………..
(A) Appropriate mix of fixed assets and current assets.
(B) Appropriate mix of long term debts and fixed assets.
(C) Appropriate mix of sales and profit.
(D) Appropriate mix of debt and equity.
Answer:
(D) Appropriate mix of debt and equity.

Question 9.
Which of the following is not included in capital structure?
(A) Long term debt
(B) Preferred stock
(C) Current assets
(D) Retained earnings
Answer:
(C) Current assets

Question 10.
Which of the following shows significance of capital structure?
(A) Capital structure reflects the overall strategy of the firm.
(B) One can get a reasonably accurate broad idea about the risk profile of the firm from its capital structure.
(C) The capital structure acts as a tax management tool.
(D) All of the above
Answer:
(D) All of the above

Question 11.
Financial structure involves creation of –
(1) Long term assets
(2) Short term assets
Select the correct answer from the options given below:
(A) (2) only
(B) Neither (1) nor (2)
(C) (1) only
(D) Both (1) and (2)
Answer:
(D) Both (1) and (2)

Question 12.
Which of the following statement is incorrect?
(1) High debt funds in capital structure increases EPS.
(2) High debt funds increases the operating or business risk.
Select the correct answer from the options given below:
(A) Both Statement 1 and Statement 2 are correct.
(B) Statement 1 is correct while Statement 2 is incorrect.
(C) Statement 2 is correct while Statement 1 is incorrect.
(D) Both Statement 1 and Statement 2 are incorrect.
Answer:
(D) Both Statement 1 and Statement 2 are incorrect.

Question 13.
Financial structure is ……………. concept while capital structure is concept
(A) inappropriate; appropriate
(B) appropriate; inappropriate
(C) narrow; broader
(D) broader; narrow
Answer:
(D) broader; narrow

Question 14.
Assertion (A):
The capital structure should be determined within the debt capacity of the company and this capacity should not be exceeded.
Reason (R):
The debt capacity of a company depends on its ability to generate future cash flows. It should have enough cash to pay creditors’ fixed charges and principal sum.
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 are true but R is not correct explanation of A.
(D) Both A and Rare true and R is correct explanation of A.
Answer:
(D) Both A and Rare true and R is correct explanation of A.

Question 15.
Which of the following capital structure consist of zero debt components in the structure mix?
(A) Pyramid Shaped Capital Structure
(B) Inverted Pyramid Shaped Capital Structure
(C) Horizontal Capital Structure
(D) Vertical Capital Structure
Answer:
(C) Horizontal Capital Structure

Question 16.
Which of the following statement is false?
(A) The use of excessive debt threatens the solvency of the company.
(B) A firm having operating loss would find it worthwhile to incorporate debt in the capital structure in a greater measure.
(C) The capital structure should be flexible.
(D) None of the above
Answer:
(B) A firm having operating loss would find it worthwhile to incorporate debt in the capital structure in a greater measure.

Question 17.
One can get a reasonably accurate broad idea about the risk profile of the firm from its –
(A) Dividend policy
(B) Capital structure
(C) Debt service ratio
(D) Earning yield
Answer:
(B) Capital structure

Question 18.
A critical assumption of the net operating income (NOI) approach to valuation is that:
(A) Debt and equity levels remain unchanged.
(B) Dividends increase at a constant rate.
(C) Ko remains constant regardless of changes in leverage.
(D) Interest expense and taxes are included in the calculation.
Answer:
(C) Ko remains constant regardless of changes in leverage.

Question 19.
If the debt component in the capital structure is predominant –
(A) The fixed interest cost of the firm will be minimum thereby decreasing its risk.
(B) Earnings per share (EPS) will be very low.
(C) Dividend expectations of equity shareholders are also and P/E Ratio may decrease.
(D) The fixed interest cost of the firm increases thereby increasing its risk.
Answer:
(D) The fixed interest cost of the firm increases thereby increasing its risk.

Question 20.
Capital structure relates to …………. capital deployment for creation of ……… assets.
(A) long term; long term
(B) long term; short term
(C) short term; long term
(D) short term; short term
Answer:
(A) long term; long term

Question 21.
Assertion (A):
The capital structure acts as a tax management tool also.
Reason (R):
Relatively lesser component of equity capital is vulnerable to hostile takeovers.
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 are true but R is not correct explanation of A.
(D) Both A and Rare true and R is correct explanation of A.
Answer:
(C) Both A and R are true but R is not correct explanation of A.

Question 22.
Select which of the following statement is correct.
Horizontal capital structure -…………
1. is quite stable.
2. is formed by a small amount of equity share capital.
3. there is absence of debt.
4. have increasing component of debt.
Select the correct answer from the options given below:
(A) 1, 2 & 4
(B) 2 & 3
(C) 1 only
(D) 1 & 4 only
Answer:
(C) 1 only

Question 23.
One can design capital structure with proper proportions of equity, preference and debt mix. The choice of the combination of these sources is called –
(A) Structural mix
(B) Policy mix
(C) Capital structure mix
(D) Finance mix
Answer:
(C) Capital structure mix

Question 24.
In horizontal capital structure –
(A) expansion of the firm takes place by issuance of debt securities.
(B) expansion of the firm takes place by issuance of debt securities and preferred stocks.
(C) expansion of the firm takes in a lateral manner, i.e. through equity or retained earning only.
(D) expansion of the firm takes place by issuance of short term and marketable securities.
Answer:
(C) expansion of the firm takes in a lateral manner, i.e. through equity or retained earning only.

Question 25.
According to Cost Principle an ideal pattern or capital structure is one that -…………..
(A) Minimizes cost of capital structure
(B) Maximizes earnings per share (EPS).
(C) Both (A) and (B)
(D) None of the above
Answer:
(C) Both (A) and (B)

Question 26.
In a …………. the base of the structure is formed by a small amount of equity share capital. This base serves as the foundation on which the super structure of preference share capital and debt is built.
(A) horizontal capital structure
(B) vertical capital structure
(C) diagonal capital structure
(D) matrix capital structure
Answer:
(B) vertical capital structure

Question 27.
According to Risk Principle……..
(A) Reliance is placed on excessive use of debt financing for capital requirements than common equity.
(B) Reliance is placed on ability of finance manager than external analyst.
(C) Reliance is placed more on common equity for financing capital requirements than excessive use of debt.
(D) Reliance is placed more on short term finance for financing capital requirements than excessive use of working capital.
Answer:
(C) Reliance is placed more on common equity for financing capital requirements than excessive use of debt.

Question 28.
Match List I with List II:
Capital Structure – Financial Management MCQ 1
Select the correct answer from the options given below
Capital Structure – Financial Management MCQ 2
Answer:
(D)

Question 29.
Use of more and more debt and preference capital –
(A) affects equity share values and in unfavourable situation equity share prices may consequently drop.
(B) increases value of debt and preference capital and equity share.
(C) Increases the profit after tax (PAT) even though sales pattern shows decreasing trends.
(D) All of the above
Answer:
(A) affects equity share values and in unfavourable situation equity share prices may consequently drop.

Question 30.
Match List – I with List – II:
Capital Structure – Financial Management MCQ 3
Answer:
(C)

Question 31.
Business Risk is –
(A) Avoidable risk
(B) Unavoidable risk
(C) Not relevant
(D) Less important than financial risk
Answer:
(B) Unavoidable risk

Question 32.
Which of the following statement is true in relation to vertical capital structure?
(A) The incremental addition in the capital structure is almost entirely in the form of debt.
(B) The absence of debt it results in the lack of financial leverage and hence low financial risk.
(C) Since there is more equity shares EPS is likely to be high.
(D) For this capital structure combined leverage is very low as compared to other firms in industry which have more equity finance.
Answer:
(A) The incremental addition in the capital structure is almost entirely in the form of debt.

Question 33.
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 34.
A pyramid shaped capital structure has –
(A) Retained earnings of the firm which are usually lower than the cost of debt.
(B) A large proportion consisting of equity capital and retained earnings which have been ploughed back into the firm over a considerably large period of time.
(C) Incremental addition in the capital structure is almost entirely in the form of debt.
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 35.
Assertion A:
While making a choice of the capital structure the future cash flow position should be kept in mind.
Reason R:
Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital.
Select the correct answer from the options given below:
(A) A is true and R is false
(B) A is false and R is true
(C) Both A and R are true and R is not correct explanation of A.
(D) Both A and Rare true and R is correct explanation of A.
Answer:
(D) Both A and Rare true and R is correct explanation of A.

Question 36.
To have optimal capital structure the firm must fulfil the following conditions:
I. Return on investment should be greater than cost of investment.
II. There should be minimum financial risk.
III. There is absence of equity finance.
IV. The capital structure should be flexible
V. Cost of investment should be greater than ROI.
Select correct answer from the options given below:
(A) III, I
(B) IV,II & V
(C) II, I & IV
(D) II & IV
Answer:
(C) II, I & IV

Question 37.
Business risk is influenced by –
(A) Revenue
(B) Variable cost
(C) Fixed assets
(D) All of the above
Answer:
(D) All of the above

Question 38.
Capital Structure of a firm –
(A) Is a reflection of the overall investment and financing strategy of the firm.
(B) Shows how much reliance is being placed by the firm on external sources of finance and how much internal accrual is being used to finance expansions
(C) Means the structure or constitution or break-up of the capital employed by a firm.
(D) All of the above
Answer:
(D) All of the above

Question 39.
With the help of Interest Coverage Ratio (ICR) ratio an effort is made to find out –
(A) How many times the profit after tax (PAT) is available to the payment of interest.
(B) How many times the net operating profit after tax (NOPAT) is available to the payment of interest.
(C) How many times the EBIT is available to the payment of interest.
(D) Most suitable bank for negotiation.
Answer:
(C) How many times the EBIT is available to the payment of interest.

Question 40.
Pyramid Shaped Capital Structure –
(A) Have a high proportion of fixed assets and considerably a very low proportion of current assets.
(B) Have a high proportion of debts and considerably a very low proportion of equity.
(C) Have a high proportion of equity and considerably a very low proportion of debt.
(D) Have a high proportion of current assets and considerably a very’ low proportion of liquid assets.
Answer:
(C) Have a high proportion of equity and considerably a very low proportion of debt.

Question 41.
Financial Risk is –
(A) Affected by demand of firm products, variations in prices and proportion of fixed cost in total cost.
(B) Represented by the variability of earnings before interest and tax (EBIT)
(C) Is unavoidable if firm does not use debt in its capital structure.
(D) All of the above
Answer:
(C) Is unavoidable if firm does not use debt in its capital structure.

Question 42.
Inverted Pyramid Shaped Capital Structure –
(A) Has a large component of equity capital.
(B) Is highly stable and permanent.
(C) Is opposite as that of pyramid shaped capital structure.
(D) Has reasonable level of debt but an ever increasing component of retained earnings.
Answer:
(C) Is opposite as that of pyramid shaped capital structure.

Question 43.
Which of the following statement is true?
(0 Flexibility principle states that the management chooses such a combination of sources of financing which it finds easier to adjust according to changes in need of funds in future too.
(ii) Penalty for not meeting financial obligations is bankruptcy.
(iii) Firms with high business risk therefore tend toward less highly leveraged capital structures, and firm with low business risk tend toward more highly leveraged capital structures.
Select correct answer from the options given below:
(A) (i) only
(B) (i) and (iii)
(C) (i) only
(D) All of the above
Answer:
(D) All of the above

Question 44.
Which of the following is vulnerable to hostile takeovers?
(A) Horizontal Capital Structure
(B) Vertical Capital Structure
(C) Pyramid Shaped Capital Structure
(D) All of the above
Answer:
(B) Vertical Capital Structure

Question 45.
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 46.
Operating/Business Risk refers to the risk of –
(A) Inability to pay fixed financial payments (e.g., payment of interest, preference dividend, return of the debt capital, etc.)
(B) Inability to discharge permanent operating costs (e.g., rent of the building, payment of salary, insurance instalment, etc.)
(C) Both (A) and (B)
(D) None of the above
Answer:
(B) Inability to discharge permanent operating costs (e.g., rent of the building, payment of salary, insurance instalment, etc.)

Question 47.
Which of the following is floatation cost?
(A) Commission of underwriters
(B) Brokerage paid on issue of securities
(C) Stationery expenses on issue of securities
(D) All of the above
Answer:
(D) All of the above

Question 48.
……….. denotes the level of EBIT for which the firm’s EPS equals zero.
(A) Financial break-even point
(B) Margin of safety
(C) Equilibrium point
(D) Min-max point
Answer:
(A) Financial break-even point

Question 49.
Which of the following is correct formula to calculate EPS?
(A) [(EBIT + I) (1 – T) – Dp]/N0
(B) [EBIT -1 + T – Dp]/N0
(C) [(EBIT -1) (1 – T) – Dp]/N0
(D) [(EBIT -1) (1 – T) + Dp]/N0
Answer:
(C) [(EBIT -1) (1 – T) – Dp]/N0

Question 50.
If the EBIT is less than the financial 5 breakeven point, then the EPS will be –
(A) Positive
(B) Negative
(C) Zero
(D) Maximum
Answer:
(B) Negative

Question 51.
According to Net Income Approach, capital structure decision –
(A) Is relevant to the value of the firm.
(B) Of the firm are irrelevant.
(C) Will not lead to any change in the total value of the firm and the market price of shares.
(D) Division between debt and equity is irrelevant.
Answer:
(A) Is relevant to the value of the firm.

Question 52.
According to Net Operating Income Approach –
(A) Capital structure decisions of the firm are irrelevant.
(B) Any change in the leverage will not lead to any change in the total value of the firm and the market price of shares, as the overall cost of capital is independent of the degree of leverage.
(C) The division between debt and equity is irrelevant.
(D) All of the above
Answer:
(D) All of the above

Question 53.
According to ……………, the firm can increase its total value by decreasing its overall cost of capital through increasing the degree of leverage.
(A) Net Operating Income Approach
(B) Net Income Approach
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(B) Net Income Approach

Question 54.
As per Net Income Approach the value of the firm will be maximum at a point where –
(A) Average cost of equity is minimum.
(B) Average cost of debt is minimum.
(C) Weighted average cost of equity is maximum.
(D) Weighted average cost of capital is minimum.
Answer:
(D) Weighted average cost of capital is minimum.

Question 55.
Any change in the leverage will not lead to any change in the total value of the firm and the market price of shares, as the overall cost of capital is independent of the degree of leverage. This is as per
(A) Net Operating Income Approach
(B) Net Income Approach
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) Net Operating Income Approach

Question 56.
Inability to pay fixed financial payments e.g. payment of interest, preference dividend, return of the debt capital, etc. is called as –
(A) Business risk
(B) Financial risk
(C) Operating risk
(D) (A) and (C)
Answer:
(B) Financial risk

Question 57.
If expected level of EBIT is more than the breakeven point, then the EPS will be –
(A) Minimum
(B) Negative
(C) Positive
(D) Infinite
Answer:
(C) Positive

Question 58.
The overall cost of capital under Net Income Approach is –
(A) EBIT 4 ÷ Value of firm
(B) Net Income 4÷ Ke
(C) Value of firm 4 ÷ EBIT
(D) EBIT4 ÷ Ko
Answer:
(A) EBIT 4 ÷ Value of firm

Question 59.
Which formula would you use to calculate market value of equity?
(A) Net Income 4÷Ke
(B) Ke ÷ Net Income
(C) Sales 4÷Ke
(D) Gross Profit 4÷ Ke
Answer:
(A) Net Income 4÷Ke

Question 60.
Which of the following proposition is made by Modigliani and Miller?
(A) The total market value of a firm and its cost of capital are independent of its capital structure.
(B) The cost of equity (Ke) is equal to capitalization rate of pure equity stream plus a premium for financial risk.
(C) The cut-off rate for investment decision making for a firm in a given risk class is not affected by the manner in which the investment is financed.
(D) All of the above
Answer:
(D) All of the above

Question 61.
Which of the following assumption is valid as per MM Approach?
1. There is imperfect competition in the market.
2. There is no transaction cost.
3. All investors are rational.
4. All information is not freely available. Select the correct answer from the options given below:
(A) 1 & 2
(B) 4 & 1
(C) 1 & 3
(D) 3 & 2
Answer:
(D) 3 & 2

Question 62.
According Modigliani & Miller Approach
(A) Individuals (arbitragers) through the use of personal leverage can alter corporate leverage.
(B) Financial risk increases with more debt content in the capital structure.
(C) The total value of a firm is not affected by its capital structure
(D) All of the above
Answer:
(D) All of the above

Question 63.
A situation where a firm has more capital than it needs is called as –
(A) Over Finance
(B) Over Capitalization
(C) Over Trading
(D) Over Realization
Answer:
(B) Over Capitalization

Question 64.
Which of the following is one of the causes of over capitalization?
(A) Reduction in the market price of shares.
(B) Borrowing huge amount at higher rate than rate at which company can earn.
(C) Reduction in the rate of dividend and interest payments.
(D) Buying of shares in the unleveraged firm.
Answer:
(B) Borrowing huge amount at higher rate than rate at which company can earn.

Question 65.
Which of the following is one of the causes of over capitalization?
(A) Raising more money through issue of shares or debentures than company can employ profitably.
(B) Excessive payment for the acquisition of fictitious assets such as goodwill etc.
(C) Improper provision for depreciation, replacement of assets and distribution of dividends at a higher rate.
(D) All of the above
Answer:
(D) All of the above

Question 66.
The pecking order theory is popularized by-
(A) Franco and Merton
(B) Modigliani and Miller
(C) Myers and Majluf
(D) Myers and Merton
Answer:
(C) Myers and Majluf

Question 67.
Financing comes from three sources, internal funds, debt and new equity. Companies prioritize their sources of financing, first preferring internal financing, and then debt, lastly raising equity as a “last resort”. Hence, internal financing is used first; when that is depleted, then debt is issued; and when it is no longer sensible to issue any more debt, equity is issued. This is as per
(A) Order pecking theory
(B) Sequential theory
(C) Sequential pecking theory
(D) Pecking order theory
Answer:
(D) Pecking order theory

Question 68.
Finance function comprises –
(A) Safe custody of funds only
(B) Expenditure of funds only
(C) Procurement of finance only
(D) Procurement & effective use of funds
Answer:
(D) Procurement & effective use of funds

Question 69.
Finance functions includes –
(A) Planning for funds
(B) Raising of funds
(C) Allocation of resources
(D) All of the above
Answer:
(D) All of the above

Question 70.
Earning Yield computed by
(A) EPS/Current Market Price Per Share
(B) Paid up value of Share/100
(C) EPS/Profit × 100
(D) EPS/Market Price
Answer:
(A) EPS/Current Market Price Per Share

Question 71.
Assertion (A):
High capital gearing leads to greater speculation.
Reason (R):
Proportion of equity share capital in relation to the total capital comprising the other securities is small leading to capitalization being highly geared.
(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 a correct explanation of A.
(C) A is true but R is false
(D) A is false but R is true
Answer:
(D) A is false but R is true

Question 72.
Which is external source of finance?
(A) Letters of Credit
(B) Advance from customers
(C) Finance from Companies
(D) All of the above
Answer:
(D) All of the above

Question 73.
The traditional approach towards the valuation of a company assumes that –
(A) The cost of capital is independent of the capital structure of the firm.
(B) The firm maintains constant risk regardless of the type of financing employed.
(C) There exists no optimal capital structure.
(D) That management can increase the total value of the firm through the judicious use of financial leverage.
Answer:
(D) That management can increase the total value of the firm through the judicious use of financial leverage.

Question 74.
Which of the following statements regarding the net operating income approach is incorrect?
(A) The overall capitalization rate, Ko is constant.
(B) The cost of debt funds, K is constant.
(C) The required return on equity, Kc, is constant.
(D) The total value of the firm is unaffected by changes in financial leverage.
Answer:
(C) The required return on equity, Kc, is constant.

Question 75.
Two identical companies exist except that Company A uses no debt and Company B uses some debt. The total value of Company A is less than the total value of Company B, but you own 2% of Company B. Based on the arguments by Modigliani and Miller regarding the total value principle, what should you do?
(A) Buy 2% of Company A with funds from “shorting” your shares in Company B. Submit a press release that
the two companies should be worth identical values. This will cause Company A to rise in value and leave you extra funds for investment.
(B) You should borrow enough funds to equal the difference in company value, purchase shares of Company A with these funds, and sell your shares in Company B. This will leave extra funds for an investment of your choice.
(C) Sell your shares, personally borrow 2% of the quantity of company debt, and purchase 2% of Company A. This will leave extra funds for an investment of your choice.
(D) Sell enough of your shares (Company B) to pin-chase 2% of Company A. This will leave extra funds for an investment of your choice.
Answer:
(C) Sell your shares, personally borrow 2% of the quantity of company debt, and purchase 2% of Company A. This will leave extra funds for an investment of your choice.

Question 76.
Which term would most likely be associated with the phrase “actions speak louder than words”?
(A) Incentive signalling
(B) Shareholder wealth maximization
(C) Financial signalling
(D) Optimal capital structure
Answer:
(C) Financial signalling

Question 77.
External sources of finance do not include:
(A) Overdrafts
(B) Leasing
(C) Retained earnings
(D) Debentures
Answer:
(C) Retained earnings

Question 78.
Internal sources of finance do not include:
(A) Retained earnings
(B) Ordinary shares
(C) Better management of working capital
(D) Trade credit
Answer:
(B) Ordinary shares

Question 79.
A firm’s optimal capital structure:
(A) Is the debt-equity ratio that exists at the point where the firm’s weighted after-tax cost of debt is minimized.
(B) Is generally a mix of 40% debt and 60% equity
(C) Is the debt-equity ratio that results in the lowest possible weighted average cost of capital.
(D) Is found by locating the mix of debt and equity which causes the earnings per share to equal exactly ?
Answer:
(C) Is the debt-equity ratio that results in the lowest possible weighted average cost of capital.

Question 80.
M&M Proposition I, without taxes, states that:
(A) Firms should borrow to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
(B) Financial risk is determined by the debt-equity ratio.
(C) The cost of equity rises when financial leverage rises.
(D) It is completely irrelevant how a firm arranges its finances.
Answer:
(D) It is completely irrelevant how a firm arranges its finances.

Question 81.
Which of the following step would you recommend to avoid the negative consequences of over capitalization?
(A) Company should go for thorough reorganization.
(B) Buyback of shares.
(C) Reduction in claims of debenture-holders and creditors.
(D) All of the above
Answer:
(D) All of the above

Question 82.
Which one of the following statements concerning financial leverage is correct?
(A) If a firm employs financial leverage, the shareholders will be exposed to greater risk.
(B) A firm employing leverage will always have higher earnings per share than a firm which does not employ leverage.
(C) The benefits of leverage are unaffected by changes in a firm’s earnings before interest and taxes.
(D) The earnings per share remain constant even when an all-equity firm switches to a debt-equity ratio of 4.
Answer:
(A) If a firm employs financial leverage, the shareholders will be exposed to greater risk.

Question 83.
Market values are often used in computing the weighted average cost of capital because
(A) This is the simplest way to do the calculation.
(B) This is consistent with the goal of maximizing shareholder value.
(C) This is required in India by the Securities and Exchange Board of India.
(D) This is a very common mistake
Answer:
(B) This is consistent with the goal of maximizing shareholder value.

Question 84.
Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M & M:
(A) One will be at greater risk of bankruptcy.
(B) The firm with greater financial leverage will have the higher value.
(C) This proves that markets cannot be efficient.
(D) This will not continue because arbitrage will eventually cause the firms to sell at the same value.
Answer:
(D) This will not continue because arbitrage will eventually cause the firms to sell at the same value.

Question 85.
An EBIT-EPS indifference analysis chart is used for –
(A) Evaluating the effects of business risk on EPS.
(B) Examining EPS results for alternative financing plans at varying EBIT levels.
(C) Determining the impact of a change in sales on EBIT.
(D) Showing the changes in EPS quality over time
Answer:
(B) Examining EPS results for alternative financing plans at varying EBIT levels.

Question 86.
EBIT of NS Ltd. is ₹ 4,50,000.
Debt in capital structure – ₹ 9,00,000
Cost of debt (Kd) =12%
Cost of equity (Ke) =15%
Ignore taxation.
Total market value of X Ltd. = ?
(A) ₹ 22,80,000
(B) ₹ 31,80,000
(C) ₹ 21,80,000
(D) ₹ 30,80,000
Answer:
(B) ₹ 31,80,000
Capital Structure – Financial Management MCQ 39
Analysis: Capital structure having debts of 4,50,000 is recommended as overall cost of capital is minimum.

Question 87.
EBIT of R Ltd. is ₹ 5,00,000. The company has 10%, ₹ 20,00,000 debentures. The equity capitalization rate i.e. IC is 16%. Calculate market value of firm as per Net Income (NI) Approach. Ignore taxation.
(A) ₹ 20,00,000
(B) ₹ 38,75,000
(C) ₹ 38,57,000
(D) ₹ 20,75,000
Answer:
(B) ₹ 38,75,000

Question 88.
Take the data of above question and calculate the overall cost of capital.
(A) 12.90%
(B) 11.90%
(C) 10.90%
(D) 9.90%
Answer:
(A) 12.90%

Question 89.
EBIT of NS Ltd. is ₹ 4,50,000.
Debt in capital structure = ₹ 6,00,000
Cost of debt (Kd) =10%
Cost of equity (Ke) = 12.5%
Ignore taxation.
Total market value of X Ltd. = ?
(A) ₹ 37,20,000
(B) ₹ 34,72,222
(C) ₹ 32,70,000
(D) ₹ 34,70,000
Answer:
(A) ₹ 37,20,000
Capital Structure – Financial Management MCQ 39
Analysis: Capital structure having debts of 4,50,000 is recommended as overall cost of capital is minimum.

Question 90.
A new project under consideration requires a capital outlay of ₹ 300 lakhs. The required funds can be raised either fully by equity shares of ₹ 100 each or by equity shares of the value of ₹ 200 lakhs and by loan of ₹ 100 lakh at 15% interest. Assuming a tax rate of 50%, calculate the figure of profit, before tax that would keep the equity investors indifferent to the two options.
(A) ₹ 4.5 lakh
(B) ₹ 45 lakh
(C) ₹ 450 lakh
(D) ₹ 40.5 lakh
Answer:
(B) ₹ 45 lakh
Capital Structure – Financial Management MCQ 10
Capital Structure – Financial Management MCQ 11
x = EBIT=45 Lakhs
At EBIT of ₹ 45 Lakhs, EPS under both option will be same i.e. ₹ 7.5 per share.

Capital Structure – Financial Management MCQ 12

Question 91.
Capital structure of A Ltd. is as follows:?
Capital Structure – Financial Management MCQ 4
Company earns 12% on its employed capital. Tax rate is 35%. It requires a sum of ₹ 25 lakhs to finance its expansion programme for which following plans are available to it:
(i) Issue 20,000 equity shares of ₹ 100 at a premium of ₹ 25 per share or
(ii) Issue 10% preference shares. Calculate indifference point.
(A) EBIT = ₹ 11,21,154
(B) EBIT = ₹ 15,75,154
(C) EBIT = ₹ 16,75,000
(D) EBIT = ₹ 16,00,000
Answer:
(C) EBIT = ₹ 16,75,000
Capital Structure – Financial Management MCQ 40
Capital Structure – Financial Management MCQ 41
Capital Structure – Financial Management MCQ 42
Capital Structure – Financial Management MCQ 43

Question 92.
EBIT is of NS Ltd. ₹ 4,50,000.
Debt in capital structure = ₹ 7,50,000
Cost of debt (Kd) =11%
Cost of equity (Ke) = 13.5%
Ignore taxation.
Total market value and overall cost of capital of X Ltd. = ?
(A) 34,72,222; 14.96%
(B) 34,27,222;12.96%
(C) 34,72,222; 12.96%
(D) 32,72,222; 14.96%
Answer:
(C) 34,72,222; 12.96%
Capital Structure – Financial Management MCQ 39
Analysis: Capital structure having debts of 4,50,000 is recommended as overall cost of capital is minimum.

Question 93.
Capital structure of Z Ltd. is as follows:
Capital Structure – Financial Management MCQ 5
Company earns 12% onits employed capital. Tax rate is 35%. It requires a sum of ₹ 25 lakhs to finance its expansion programme for which following plans are available to it:
(i) Issue 20,000 equity shares of ₹ 100
at a premium of ₹ 25 per share or
(ii) Issue 8% debentures.
What should be EBIT of the company so that EPS under both plans will be same?
(A) ₹ 11, 12, 154
(B) ₹ 11, 21, 514
(C) ₹ 11, 21, 154
(D) ₹ 11, 21, 4 15
Answer:
(C) ₹ 11, 21, 154
Capital Structure – Financial Management MCQ 40
Capital Structure – Financial Management MCQ 41
Capital Structure – Financial Management MCQ 42
Capital Structure – Financial Management MCQ 43

Question 94.
X Ltd. is considering the following two alternative financing plans:
Capital Structure – Financial Management MCQ 6
The indifference point between the plans is ₹ 2,40,000. Corporate tax rate is 30%. Calculate rate of dividend on preference shares.
(A) 8.00%
(B) 8.04%
(C) 8.40%
(D) 8.80%
Answer:
(C) 8.40%
Capital Structure – Financial Management MCQ 44
Capital Structure – Financial Management MCQ 45

Question 95.
EBIT is of NS Ltd. ₹ 4,50,000. Which of the following capital structure will you recommend?
Capital Structure – Financial Management MCQ 7
Select the correct answer from the options given below:
(A) 1
(B) 2
(C) 3
(D) 4
Answer:
(A) 1
Capital Structure – Financial Management MCQ 39
Analysis: Capital structure having debts of 4,50,000 is recommended as overall cost of capital is minimum.

Question 96.
Operating income of A Ltd. is ₹ 5,00,000. The firms cost of debt is 10% and currently firm employs ₹ 15,00,000 of debt. The overall cost of capital of the firm is 15%. You are required to determine ‘total value of the firm’ and ‘market value of equity’ using Net Operating Income Approach (NOI). Ignore taxation.
(A) ₹ 33,33,333; ₹ 15,00,000
(B) ₹ 33,33,333; ₹ 18,33,333
(C) ₹ 18,33,333; ₹ 15,00,000
(D) ₹ 20,22,222; ₹ 18,22,222
Answer:
(B) ₹ 33,33,333; ₹ 18,33,333

Question 97.
Sun Ltd. has 12% debt of ₹ 30,00,000. It earns 24% before interest and tax on its total assets of ₹ 50,00,000. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Income Approach.
(A) ₹ 58,00,000
(B) ₹ 20,00,000
(C) ₹ 55,00,000
(D) ₹ 40,00,000
Answer:
(B) ₹ 20,00,000
Capital Structure – Financial Management MCQ 46
Capital Structure – Financial Management MCQ 47
Capital Structure – Financial Management MCQ 48

Question 98.
Moon Ltd. earns 24% before interest and tax on its total assets of ₹ 50,00,000. It is unlevered company and has no debts in its capital structure. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Income Approach.
(A) ₹ 60,00,000
(B) ₹ 40,00,000
(C) ₹ 50,00,000
(D) ₹ 55,00,000
Answer:
(B) ₹ 40,00,000
Capital Structure – Financial Management MCQ 46
Capital Structure – Financial Management MCQ 47
Capital Structure – Financial Management MCQ 48

Question 99.
Sun Ltd. has 12% debt of ₹ 30,00,000. It earns 24% before interest and tax on its total assets of ₹ 50,00,000. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Operating Income Approach.
(A) ₹ 58,00,000
(B) ₹ 56,00,000
(C) ₹ 54,00,000
(D) ₹ 52,00,000
Answer:
(D) ₹ 52,00,000
Capital Structure – Financial Management MCQ 46
Capital Structure – Financial Management MCQ 47
Capital Structure – Financial Management MCQ 48

Question 100.
Moon Ltd. earns 24% before interest and tax on its total assets of ₹ 50,00,000. It is unlevered company and has no debts in its capital structure. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Operating Income Approach.
(A)  ₹ 20,00,000
(B) ₹ 30,00,000
(C) ₹ 40,00,000
(D) ₹ 50,00,000
Answer:
(B) ₹ 30,00,000
Capital Structure – Financial Management MCQ 46
Capital Structure – Financial Management MCQ 47
Capital Structure – Financial Management MCQ 48

Question 101.
Merry Ltd. has EBIT of ₹ 30,00,000 and 40% tax rate. It required rate of return on equity in the absence of borrowing is 18%. In the absence of personal taxes, what is the ‘total value of the company’ and ‘value of equity’ in an MM world with ₹ 40,00,000 in debt.
(A) ₹ 116 lakh; ₹ 46 lakh
(B) ₹ 116 lakh; ₹ 76 lakh
(C) ₹ 161 lakh; ₹ 67 lakh
(D) ₹ 161 lakh; ₹ 64 lakh
Answer:
(B) ₹ 116 lakh; ₹ 76 lakh
Capital Structure – Financial Management MCQ 49
According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied by the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) Total Value of levered firm
Value of the company with 40,00,000 in debt:
1,00,00,000 + (40,00,000 × 40%) = 1,16,00,000
Total value – Value of debt Value of equity
1,16,00,000 – 40,00,000 = 76,00,000
Value of the company with 7000,000 in debt:
1,00,00,000 + (70,00,000 × 40%) = 1,28,00,000
Total value – Value of debt = Value of equity
1,28,00,000 – 70,00,000= 58,00,000

Question 102.
X Ltd. has EBIT of ₹ 30,00,000 and 40% tax rate. It required rate of return on equity in the absence of borrowing is 18%. In the absence of personal taxes, what is the ‘total value of the company’ and ‘value of equity’ in an MM world with ₹ 70,00,000 in debt.
(A) ₹ 128 lakh; ₹ 85 lakh
(B) ₹ 128 lakh; ₹ 58 lakh
(C) ₹ 182 lakh; ₹ 58 lakh
(D) ₹ 182 lakh; ₹ 85 lakh
Answer:
(B) ₹ 128 lakh; ₹ 58 lakh
Capital Structure – Financial Management MCQ 49
According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied by the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) Total Value of levered firm
Value of the company with 40,00,000 in debt:
1,00,00,000 + (40,00,000 × 40%) = 1,16,00,000
Total value – Value of debt Value of equity
1,16,00,000 – 40,00,000 = 76,00,000
Value of the company with 7000,000 in debt:
1,00,00,000 + (70,00,000 × 40%) = 1,28,00,000
Total value – Value of debt = Value of equity
1,28,00,000 – 70,00,000= 58,00,000

Question 103.
Following details are presented by Y Ltd.:
Capital Structure – Financial Management MCQ 8
Company earns a profit of ₹ 3,00,000 per annum after meeting its interest liability of ₹ 1,20,000 on 12% Debentures. Calculate return on capital employed.
(A) 10%
(B) 12%
(C) 14%
(D) 16%
Answer:
(C) 14%
EBIT = ₹ 3,00,000 + ₹ 1,20,000 = ₹ 4,20,000
Capital Structure – Financial Management MCQ 13
Capital Structure – Financial Management MCQ 14

Question 104.
Financing alternatives for obtaining the requisite amount of ₹ 20 Crores are under consideration. It was decided to issue equity shares of ₹ 10 par at a premium of 140 each. Share issue expenses as also under pricing of the issue in comparison to ruling market price result in net proceeds of ₹ 40 for every new share issued. How many equity shares are required to be issued for availing finance of ₹ 20 Crore
(A) 0.5 Crore shares
(B) 0.05 Crore shares
(C) 5 Crore shares
(D) 4 Crore shares
Answer:
(A) 0.5 Crore shares
Capital Structure – Financial Management MCQ 15
Capital Structure – Financial Management MCQ 16

Question 105.
Financing alternatives for obtaining the requisite amount of ₹ 20 Crores are under consideration.
Alternative I: Equity shares can be issued at ₹ 10 par with a premium of ₹ 40 each. Share issue expenses as also under pricing of the issue in comparison to ruling market price result in net proceeds of ₹ 40 for every new share issued.
Alternative II: Company can borrow the requisite amount at 15% rate of interest per year.
The company decided to borrow ₹ 10 Crore at 15% rate of interest per year and the balance amount obtained by share issue at par terms indicated in the first alternative.
How many equity shares are required to be issued for availing finance of ₹ 20 Crore?
(A) 0.25 Crore shares
(B) 0.025 Crore shares
(C) 2.5 Crore shares
(D) 25 Crore shares
Answer:
(A) 0.25 Crore shares
Capital Structure – Financial Management MCQ 15
Capital Structure – Financial Management MCQ 16

Question 106.
A company needs ₹ 31,25,000 for the construction of new plant. The following two plans are feasible:
(i) Company may issue 3,12,500 equity shares at ₹ 10 per share.
(ii) Company may issue 1,56,250ordinary equity shares at ₹ 10 per share and 15,625 debentures of ₹ 100 denomination bearing an 8% rate of interest.
Corporate income-tax rate is 40%. Calculate indifference point.
(A) ₹ 2,50,000
(B) ₹ 2,75,000
(C) ₹ 2,25,000
(D) ₹ 3,00,000
Answer:
(A) ₹ 2,50,000
Capital Structure – Financial Management MCQ 17

Question 107.
A company needs ₹ 31,25,000 for the construction of new plant. The following two plans are feasible:
(i) Company may issue 3,12,500 equity shares at ₹ 10 per share.
(ii) Company may issue 1,56,250 equity shares at ₹ 10 per share and 15,625 preference shares at ₹ 100 per share bearing an 8% rate of dividend.
Corporate income-tax rate is 40%.
At indifferent point EPS under both plans will be -…….
(A) ₹ 0.75 per share
(B) ₹ 0.95 per share
(C) ₹ 0.60 per share
(D) ₹ 0.80 per share
Answer:
(D) ₹ 0.80 per share
Capital Structure – Financial Management MCQ 18

Question 108.
M Ltd. requires ₹ 25,00,000 for a new plant. This plant is expected to yield EBIT of ₹ 5,00,000. The company considers the objectives of maximizing EPS. It has 3 options to finance the project – by raising debt of ₹ 2,50,000 or ₹ 10,00,000 or ₹ 15,00,000 and the balance, in each case, by issuing equity shares. Company’s shares is currently selling at ₹ 150, but it is expected to decline to ₹ 125 in case the funds are borrowed in excess of ₹ 10,00,000. The funds can be borrowed at the rate of 10% up to ₹ 2,50,000 and 15% up to ₹ 10,00,000 and at 20% over ₹ 10,00,000. The tax rate is 50%. Which form of financing should company choose?
(A) Option III containing debt issue of ₹ 15,00,000
(B) Option II containing debt issue of ₹ 10,00,000
(C) Option II containing debt issue of ₹ 2,50,000
(D) None of the above
Answer:
(B) Option II containing debt issue of ₹ 10,00,000

Question 109.
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
Capital Structure – Financial Management MCQ 19

Question 110.
There are two firms P and Q which are identical except P does not use any debt in its capital structure while Q has ₹ 8,00,000, 9% debentures in its capital structure. Both the firms have EBIT of ₹ 2,60,000 p.a. and the capitalization rate is 10%. Corporate tax is 30%. Calculate the total market value of these firms according to MM Hypothesis.
(A) ₹ 20,60,000; ₹ 18,20,000
(B) ₹ 18,20,000; ₹ 20,60,000
(C) ₹ 18,20,000; ₹ 12,60,000
(D) ₹ 12,60,000; ₹ 20,60,000
Answer:
(B) ₹ 18,20,000; ₹ 20,60,000
Capital Structure – Financial Management MCQ 20
According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied by the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) = Total Value
Value of the company with 8,00,000 In debt (Q Ltd.):
18,20,000 + (8,00,000 × 30%) 20,60,000
Total value – Value of debt Value of equity
20,60,000 – 8,00,000 = 12,60,000

Question 111.
B Ltd. requires ₹ 12 lakh to finance its activities. Its earnings before interest and tax amount to ₹ 2 lakh. The Finance Manager has forwarded three proposals:
Capital Structure – Financial Management MCQ 9
The market price of a share of the company is 40 which is expected to come down to 25 a share, if the market borrowings exceeds 7,50,000. Which proposal is most profitable proposal from shareholders point view?
(A) Proposal I
(B) Proposal II
(C) Proposal Ill
(D) None of the above
Answer:
(B) Proposal II
Capital Structure – Financial Management MCQ 21
Interest expenses for various proposals:
Proposal-I 2,00,000 × 10% = 20,000
Proposal-II = (2,50,000 × 10%) + (3,50,000 × 14%) = 74,000
Proposal-III = (2,50,000 × 10%) + (3,75,000 × 14%) + (3,75,000 × 16%) = 1,37,500
Capital Structure – Financial Management MCQ 22
Analysis: Since, EPS is highest under Proposal-il, the company is advised to go with this proposal.

Question 112.
Skyline Software Ltd. wants to implement a project for which 30 lakhs is required. Following financing options are at hand:
Option 1:
Equity Shares — 30,000
Option 2
Equity Shares — 10,000
12% Preference Shares — 10,000
10% Debentures — 10,000
Calculate the indifference point & EPS at that level of EBIT assuming corporate tax to be 35%.
(A) ₹ 4,26,923; ₹ 12.00
(B) ₹ 4,26,923; ₹ 9.25
(C) ₹ 5,53,846; ₹ 9.25
(D) ₹ 3,00,000; ₹ 6.25
Answer:
(B) ₹ 4,26,923; ₹ 9.25
Capital Structure – Financial Management MCQ 23
6.5x = 19.5x – 55,50ß00
– 13x = – 5550,000
x = EBIT = 4,26,923
At EBIT of ₹ 4,26,923, EPS under both option will be same i.e ₹ 9.25 per share.

Question 113.
Alpha Ltd. is contemplating conversion of 500 14% convertible bonds of ₹ 1,000 each. Market price of the bond is ₹ 1,080. Bond indenture provided that 1 bond will be exchanged for 10 shares. P/E ratio before redemption is 20:1 and anticipating price earnings ratio after redemption is 25:1. Number of shares outstanding prior to redemption are 10,000. EBIT amounts to ₹ 2,00,000. The company is in the 35% tax bracket.
Calculate market price –
(i) Pre-redemption and
(ii) Post redemption.
(A) ₹ 169 & ₹ 216.67 per share
(B) ₹ 159 & ₹ 206.67 per share
(C) ₹ 179 & ₹ 226.67 per share
(D) ₹ 170 & ₹ 220 per share
Answer:
(A) ₹ 169 & ₹ 216.67 per share
Capital Structure – Financial Management MCQ 24

Question 114.
Following data is available for Company X:
Total Assets : ₹ 15,00,000
1096 Debt : ₹ 9,00,000
EBIT : 2096 of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate market value of equity using Net Income (NT) approach.
(A) ₹ 16,00,000
(B) ₹ 7,00,000
(C) ₹ 10,00,000
(D) ₹ 5,00,000
Answer:
(B) ₹ 7,00,000
Capital Structure – Financial Management MCQ 25

Question 115.
Following data is available for Company Y:
Total Assets : ₹ 15,00,000
Debt : Nil
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate market value of equity using Net Income (NI) approach.
(A) ₹ 10,00,000
(B) ₹ 16,00,000
(C) ₹ 12,00,000
(D) ₹ 15,00,000
Answer:
(A) ₹ 10,00,000
Capital Structure – Financial Management MCQ 26

Question 116.
Following data is available for P Ltd.:
Total Assets : ₹ 15,00,000
1096 Debt : ₹ 9,00,000
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate total value of the firm using Net Operating Income (NOI) approach.
(A) ₹ 5,50,000
(B) ₹ 14,50,000
(C) ₹ 10,50,000
(D) ₹ 12,50,000
Answer:
(B) ₹ 14,50,000
Capital Structure – Financial Management MCQ 27
Capital Structure – Financial Management MCQ 28

Question 117.
Following data is available for Q Ltd.:
Total Assets : ₹ 15,00,000
Debt : Nil
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate total value of the firm using Net Operating Income (NOI) approach.
(A) ₹ 8,00,000
(B) ₹ 9,00,000
(C) ₹ 12,00,000
(D) ₹ 10,00,000
Answer:
(D) ₹ 10,00,000

Question 118.
A student studying Financial Management subject is not able to understand when total market value will be the same for Company X and Company Y if both companies have same total assets.
Company X calculates total value under Net Income (NI) approach and Company Y calculates total value under Net Operating
Income (NOI) approach. Help him by selecting correct option.
(A) When tax rate is same for both the companies.
(B) When one company is totally financed by debt and other is totally finance by equity.
(C) When both companies are financed by equity only.
(D) When both companies adopt same selling price.
Answer:
(C) When both companies are financed by equity only.

Question 119.
Trade International is an all-equity firm that has projected earnings before interest and taxes of ₹ 4,97,000 forever. The current cost of equity is 16% and the tax rate is 34%. The company is in the process of issuing ₹ 1.5 million of bonds at par that carry a 6% annual coupon. What is the levered value of the firm?
(A) ₹ 20, 50, 125
(B) ₹ 24, 48, 009
(C) ₹ 21, 13, 609
(D) ₹ 25, 60, 125
Answer:
(D) ₹ 25, 60, 125
Capital Structure – Financial Management MCQ 29
According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied by the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) = Total Value Value of the company with 15,00,000 In debt:
20,50,125 + (15,00,000 × 34%) = 25,60,125

Question 120.
Bharat Cylinders has 15,000 shares of stock outstanding and no debt, as the original founder of the firm did not approve of debt financing. The new CEO is considering issuing ₹ 2,50,000 of debt and using the proceeds to retire 5,000 shares of stock. The interest rate on debt is 7.5%. What is the break-even level of EBIT between these two capital structure options?
(A) ₹ 59,250
(B) ₹ 38,500
(C) ₹ 56,250
(D) ₹ 47,750
Answer:
(C) ₹ 56,250
Capital Structure – Financial Management MCQ 30

Question 121.
What is the market value of common equity under the NOI approach? The firm has an expected net operating income of ₹ 5,000 with ₹ 4,000 of debt (market value). Assume that the overall capitalization rate is 20%.
(A) ₹ 5,000
(B) ₹ 20,000
(C) ₹ 21,000
(D) ₹ 24,000
Answer:
(C) ₹ 21,000
Capital Structure – Financial Management MCQ 31

Question 122.
Ganesha Ltd. is setting up a project with a capital outlay of ₹ 60,00,000. It has two alternatives in financing the project cost.
Alternative (a): 100% equity finance
Alternative (b): Debt-equity ratio 2:1
The rate of interest payable on the debts is 18% p.a. Corporate tax rate is 40%. Calculate the indifference point between the two alternative methods of financing.
(A) ₹ 10,80,000
(B) ₹ 18,80,000
(C) ₹ 18,00,000
(D) ₹ 10,08,000
Answer:
(A) ₹ 10,80,000

Question 123.
One-third of the total market value of X Ltd. consists of loan stock, which has a cost of 10%. Another company, Y Ltd. is identical in every respect to X Ltd., except that its capital structure is all-equity, and its cost of equity is 16%. According to Modigliani and Miller, if we ignored taxation and tax relief on debt capital, what would be the cost of equity of X Ltd.?
(A) 14%
(B) 17%
(C) 19%
(D) 13%
Answer:
(C) 19%
Miller and Modigliani’s first model argues that no optimal capital structure exists and supports this proposition with arbitrage theory. Therefore, the two companies should have similar WACCs. Because Y Ltd. is all-equity financed, its WACC is the same as its cost of equity finance, i.e. 16%. It follows that X Ltd. should have
WACC equal to 16% also.
Therefore, (1/3 × 10%) + (2/3 × Ke) 16%
3.3333 + 0.6667x =16
06667x = 12.6667
Hence, x = Ke = 19%.

Question 124.
IPL Ltd. has EBIT of ₹ 1,00,000. The company makes use of debt and equity capital. The firm has 10% debentures of ₹ 5,00,000 and the firm’s equity capitalization rate is 15%. You are required to compute: (i) Current value of the firm; (ii) Overall cost of capital.
(A) ₹ 3,33,333; 15%
(B) ₹ 8,33,333; 12%
(C) ₹ 5,33,333; 14%
(D) ₹ 6,33,333; 18%
From the following information answer next 4 questions.
Alpha Ltd. & Beta Ltd. are identical except for capital structures. Alpha has 50% debt and 50% equity, whereas Beta has 20% debt and 80% equity. All percentages are in market-value terms. The borrowing rate for both companies is 8% in a no-tax world, and capital markets Eire assumed to be perfect. Both companies have net operating income of ₹ 3,60,000 and the overall capitalization rate of the company, Ke is 18%.
Answer:
(B) ₹ 8,33,333; 12%
Capital Structure – Financial Management MCQ 32
Capital Structure – Financial Management MCQ 33
This method to calculate overall cost of capital works i/there is no tax. If tax rate is given in question then overall cost of capital Le. WACC should be calculated as per method shown above.

Question 125.
If you own 2% of the stock of Alpha, what is your return?
(A) ₹ 5,000
(B) ₹ 4,600
(C) ₹ 3,500
(D) ₹ 5,600
Answer:
(D) ₹ 5,600
Capital Structure – Financial Management MCQ 34
Implied required equity return (Beta Ltd.) =\(\frac{3,28,000}{10,00,000}=20.5 \%\)

Question 126.
What is the implied required rate of return on equity of Alpha Ltd.?
(A) 22%
(B) 26%
(C) 20%
(D) 28%
Answer:
(D) 28%
Capital Structure – Financial Management MCQ 34
Capital Structure – Financial Management MCQ 35

Question 127.
What is the market value of equity of Beta Ltd.?
(A) ₹ 16,00,000
(B) ₹ 14,00,000
(C) ₹ 12,00,000
(D) ₹ 10,00,000
Answer:
(A) ₹ 16,00,000
Capital Structure – Financial Management MCQ 34
Capital Structure – Financial Management MCQ 35

Question 128.
What is the implied required rate of return on equity of Beta Ltd.?
(A) 10.5%
(B) 18,5%
(C) 15.5%
(D) 20.5%
From the following information answer next 4 questions.
RES Ltd. is an all equity financed company with a market value of ₹ 25,00,000 and cost of equity, Ke = 21%. The company wants to buy back equity shares worth ₹ 5,00,000 by issuing and raising 15% perpetual debt of the same amount. Rate of tax may be taken as 30%. After the capital restructuring and applying MM Model (with taxes), you are required to answer next 2 questions:
Answer:
(D) 20.5%
Capital Structure – Financial Management MCQ 34
Capital Structure – Financial Management MCQ 35

Question 129.
What is the EBIT of the unlevered firm?
(A) ₹ 5,25,000
(B) ₹ 6,70,000
(C) ₹ 7,50,000
(D) ₹ 6,50,000
Answer:
(C) ₹ 7,50,000
Capital Structure – Financial Management MCQ 35

Question 130.
What is the PAT of levered firm?
(A) ₹ 5,25,000
(B) ₹ 4,52,700
(C) ₹ 4,72,500
(D) ₹ 4,25,700
Answer:
(C) ₹ 4,72,500
Capital Structure – Financial Management MCQ 36
Capital Structure – Financial Management MCQ 37
According to MM, the value of levered firm would exceed that of the unlevered firm by an amount equal to the levered firms debt multiplied b’ the tax rate.
Value of unlevered firm + (Value of debt × Tax rate) = Total Value
Value of the company with 5,00,000 In debt:
25,00,000 + (5,00,000 × 30%) 26,50,000
Total value – Value of debt = Value of equity
26,50,000 – 5,00,000 = 21,50,000
\(\mathrm{K}_{e}=\frac{D}{P_{0}}=\frac{4,72,500}{21,50,000}=0.2198 \text { i.e. } 21.98 \%\)
Cost of debt:
Kd =I(1 -t)
Ki = 15(1 -0.30)
Ki = 10.5%
Calculation of overall cost of capital (market value basis):
Capital Structure – Financial Management MCQ 38

Question 131.
What is the value of equity of levered firm?
(A) ₹ 26,50,000
(B) ₹ 22,50,000
(C) ₹ 21,50,000
(D) ₹ 24,50,000
Answer:
(C) ₹ 21,50,000

Question 132.
What is the overall cost of capital of levered firm?
(A) 21.98%
(B) 10.50%
(C) 19.81%
(D) 19.18%
Answer:
(C) 19.81%

Leverages – Financial Management MCQ

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

Leverages – Financial Management MCQ

Question 1.
The term Leverage in general refers to a ……………
(A) Relationship between fixed cost and profit.
(B) Relationship between sales and fixed cost.
(C) Relationship between two interrelated variables.
(D) Relationship between two unrelated variables.
Answer:
(C) Relationship between two interrelated variables.

Question 2.
In financial analysis Leverage represents the influence of one over some other related
(A) Non-financial variable; financial variable
(B) Financial variable; financial variable
(C) Financial variable; non-financial variable
(D) Variable relating to revenue; financial variable
Answer:
(B) Financial variable; financial variable

Question 3.
Which of the following is not commonly used measures of leverage in financial analysis?
(A) Operating Leverage
(B) Financial Leverage
(C) Combined Leverage
(D) Matrix Leverage
Answer:
(D) Matrix Leverage

Question 4.
………….. is the ratio of net operating income before fixed charges to net operating income after fixed charges.
(A) Financial Leverage
(B) Operating Leverage
(C) Operation Leverage
(D) Fiscal Leverage
Answer:
(B) Operating Leverage

Question 5.
Operating leverage indicates the tendency of operating probts (EBIT) to vary disproportionately with –
(A) Probt
(B) Fixed cost
(C) Sales
(D) EPS
Answer:
(C) Sales

Question 6.
Degree of ………… is the ratio of the percentage increase in earning per share (EPS) to the percentage increase in earnings before interest and taxes (EBIT).
(A) Operating Leverage
(B) Combined Leverage
(C) Working Capital Leverage
(D) Financial Leverage
Answer:
(D) Financial Leverage

Question 7.
There is no operating leverage if there is no …………
(A) Probt
(B) Sales
(C) Fixed cost
(D) EPS
Answer:
(C) Fixed cost

Question 8.
EBIT is usually the same thing as: …………
(A) Funds provided by operations
(B) Earnings before taxes
(C) Net income
(D) Operating probt
Answer:
(D) Operating probt

Question 9.
Which of the following is correct formula to calculate Operating Leverage?
Leverages – Financial Management MCQ 1
Answer:
(A)

Question 10.
In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will:
(A) Fall
(B) Rise
(C) Stay the same
(D) Still be indeterminate until interest and preferred dividends paid are known
Answer:
(A) Fall

Question 11.
Which of the following is correct formula to calculate Operating Leverage?
Leverages – Financial Management MCQ 2
Answer:
(C)

Question 12.
A firm’s degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL).
(A) Plus
(B) Minus
(C) Divided by
(D) Multiplied by
Answer:
(D) Multiplied by

Question 13.
If operating leverage is 4, this means that –
(A) 4% change in sales will cause 1% change in EBIT.
(B) 1% change in sales will cause 4% change in EBIT.
(C) 1% change in sales will cause 4% change in EPS.
(D) 4% change in sales will cause 1% change in EPS.
Answer:
(B) 1% change in sales will cause 4% change in EBIT.

Question 14.
Degree of total leverage can applied in measuring change in –
(A) EBIT to a percentage change in sales
(B) EPS to a percentage change in EBIT
(C) EPS to a percentage change in sales
(D) Sales to a percentage change in EBIT
Answer:
(C) EPS to a percentage change in sales

Question 15.
If the fixed costs are high, the operating leverage will also be –
(A) Low
(B) High
(C) Zero
(D) Negative
Answer:
(B) High

Question 16.
Measure of business risk is –
(A) Operating leverage
(B) Financial leverage
(C) Combines leverage
(D) Working capital leverage
Answer:
(A) Operating leverage

Question 17.
The presence of fixed costs in the total cost structure of a firm results into –
(A) Financial Leverage
(B) Operating Leverage
(C) Super Leverage
(D) Progressive leverage
Answer:
(B) Operating Leverage

Question 18.
A high operating leverage indicates –
(A) Highly favourable situation as it consists of low fixed costs.
(B) Highly risky situation as it consists of large interest costs.
(C) Highly favourable situation as it consists of higher EPS.
(D) Highly risky situation as it consists of large fixed costs.
Answer:
(D) Highly risky situation as it consists of large fixed costs.

Question 19.
Match List-I with List-II and select the correct answer using the codes given below the lists
Leverages – Financial Management MCQ 3.
Answer:
(C)

Question 20.
Operating leverage depends on –
I. Contribution
II. Interest cost
III. Fixed cost
IV. Volume of sales
V. EPS
VI. Profit after tax (PAT)
Select correct answer from the options given below:
(A) I, IV, III
(B) II, V,VI
(C) I, III, V
(D) VI, I, III
Answer:
(A) I, IV, III

Question 21.
Which of the following is correct formula to calculate Financial Leverage?
Leverages – Financial Management MCQ 4
Answer:
(D)

Question 22.
A firm has a DOL of 4.5 at Q units. What does this tell us about the firm?
(A) If sales rise by 4.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 4.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1 %, then EPS will rise by 4.5%.
(D) If sales rise by 1 %, then EBIT will rise by 4.5%
Answer:
(D) If sales rise by 1 %, then EBIT will rise by 4.5%

Question 23.
High operating leverage shows –
(A) Higher burden of fixed cost and high EBIT.
(B) Low burden of fixed cost and high EBIT.
(C) Higher burden of fixed cost and low EBIT.
(D) Low burden of fixed cost and low EBIT.
Answer:
(C) Higher burden of fixed cost and low EBIT.

Question 24.
Operating leverage is directly ………. to business risk.
(A) Proportional
(B) Not proportional
(C) Unrelated
(D) Not related
Answer:
(A) Proportional

Question 25.
A firm has a DFL of 5.5. What does this tell us about the firm?
(A) If sales rise by 5.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 5.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1 %, then EPS will rise by 5.5%.
(D) If sales rise by 1 %, then EBIT will rise by 5.5%.
Answer:
(C) If EBIT rises by 1 %, then EPS will rise by 5.5%.

Question 26.
More operating leverage leads to –
(A) Less financial risk
(B) More financial risk
(C) More business risk
(D) Less business risk
Answer:
(C) More business risk

Question 27.
Which of the following is correct formula to calculate Financial Leverage?
Leverages – Financial Management MCQ 5
Answer:
(A)

Question 28.
Higher operating leverage is related to the use of additional
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
Answer:
(A) Fixed costs

Question 29.
Financial leverage indicates –
(A) The tendency of profit before tax (PBT) to vary disproportionately with sales.
(B) The tendency of sales to vary disproportionately with fixed cost.
(C) The tendency of profit after tax (PAT) to vary disproportionately with fixed cost.
(D) The tendency of profit before tax (PBT) to vary disproportionately with operating profit (EBIT).
Answer:
(D) The tendency of profit before tax (PBT) to vary disproportionately with operating profit (EBIT).

Question 30.
Lower financial leverage is related to the use of additional
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
Answer:
(D) Common equity financing

Question 31.
The operating leverage indicates the impact of changes in sales on –
(A) Operating income
(B) Operating cost
(C) Operating profit after tax
(D) Operating sales
Answer:
(A) Operating income

Question 32.
Match List-I with List-II and select the correct answer using the codes given below the lists:
Leverages – Financial Management MCQ 6
Answer:
(C)

Question 33.
If financial leverage is 2.5, this means that -……….
(A) 2.5% change in EBIT will cause 1% change in EBT
(B) 1% change in sales will cause 2.5% change in EBT
(C) 2.5% change in sales will cause 1% change in EBT
(D) 1% change in EBIT will cause 2.5% change in EBT
Answer:
(D) 1% change in EBIT will cause 2.5% change in EBT

Question 34.
Which of the following is correct formula to calculate Financial Leverage (FL) when capital structure consists of preference shares and equity shares?
Leverages – Financial Management MCQ 7
Answer:
(C)

Question 35.
Which of the following formulas represents a correct calculation of the degree of operating leverage?
(A) (Q-Qbe)/Q
(B) (EBIT)/(EBIT – FC)
(C) [Q(P – V) + FC]/[Q(P – V)]
(D) [Q(P – V)]/[Q(P – V) – FC]
Answer:
(D) [Q(P – V)]/[Q(P – V) – FC]

Question 36.
Where a company has large amount of fixed interest charges, the financial leverage will be
(A) High
(B) Low
(C) Negative
(D) Unreliable
Answer:
(A) High

Question 37.
Which of the following formulas represents the correct calculation of the degree of financial leverage?
(A) [NI + T + I]/[NI -I – PD/(1 – T)]
(B) EBIT/[EBIT -1 – PD/(1 – T)]
(C) EBIT/[NI -1 – PD/(1 – T)]
(D) All of the above are correct methods to calculate the degree of financial leverage (DFL).
Answer:
(B) EBIT/[EBIT -1 – PD/(1 – T)]

Question 38.
The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service is referred to as the …………………
(A) debt capacity
(B) debt-service burden
(C) adequacy capacity
(D) fixed-charge burden
Answer:
(A) debt capacity

Question 39.
High financial leverage is not good as is it indicates the large content of –
(A) Fixed cost
(B) Fixed interest charges
(C) Variable cost charges
(D) Contribution
Answer:
(B) Fixed interest charges

Question 40.
The cash required during a specific period to meet interest expenses and principal payments is referred to as the:
(A) Debt capacity
(B) Debt-service burden
(C) Adequacy capacity
(D) Fixed-charge burden
Answer:
(B) Debt-service burden

Question 41.
Earnings to equity shareholders (EPS) will fluctuate violently if –
(A) Financial leverage is very high
(B) Operating leverage is very high
(C) Working capital leverage is very high
(D) Operating leverage is very low
Answer:
(A) Financial leverage is very high

Question 42.
If the Return on Investment (ROI) exceeds the rate of interest on debt, it is financial leverage.
(A) Unfavourable
(B) Adverse
(C) A favourable
(D) Negative
Answer:
(C) A favourable

Question 43.
Which one of the following is correct?
(i) Liquidity ratios measure’s long term solvency of a concern.
(ii) Inventory is a part of liquidity assets.
(iii) Financial leverage is related to business risk.
(iv) The amount of gross assets is equal to net capital employed.
Select the correct answer from the options given below:
(A) (i), (ii) and (iv)
(B) (ii), (iii) and (iv)
(C) (i), (ii), (iii) and (iv)
(D) None of the above
Answer:
(D) None of the above

Question 44.
High operating leverage combined with high financial leverage will constitute –
(A) Favourable situation
(B) Positive situation
(C) Less risky situation
(D) Risky situation
Answer:
(D) Risky situation

Question 45.
Read the following statement.
(i) With the increase in fixed cost operating leverage diminishes.
(ii) Net working Capital is the excess of current assets over current liabilities.
(iii) Greater the size of the business unit larger will be the requirement of working capital.
(iv) Working Capital is also known as circulating capital.
Which of the above statement is correct?
(A) (i), (ii) and (iii)
(B) (ii), (iii) and (iv)
(C) (iii), (iv) and (i)
(D) (i), (ii) and (iv)
Answer:
(B) (ii), (iii) and (iv)

Question 46.
Which of the following can be treated as ‘Ideal Situation?
(A) High operating cost and low financial leverage.
(B) Low operating leverage and high financial leverage.
(C) Operating & financial leverage both should below.
(D) Operating & financial leverage both should be high.
Answer:
(C) Operating & financial leverage both should below.

Question 47.
Assertion (A):
High operating leverage shows higher burden of fixed cost.
Reason (R):
As fixed cost goes on increasing EBIT reduces.
Select the correct answer from the options given below:
(A) (A) is correct but (R) is incorrect.
(B) (A) is incorrect but (R) is correct.
(C) Both (A) and (R) are not correct.
(D) (A) is correct and (R) is correct explanation of (A)
Answer:
(D) (A) is correct and (R) is correct explanation of (A)

Question 48.
Which of the following statement is correct?
(A) If a business firm has a lot of variable costs as compared to fixed costs, then the firm is said to have high operating leverage.
(B) Combined Leverage = % change in EPS multiplied by % change in Sales
(C) If a business firm has a lot of fixed costs as compared to variable costs, then the firm is said to have high operating leverage.
(D) If contribution is less than fixed cost, operating leverage will be favourable and vice versa.
Answer:
(C) If a business firm has a lot of fixed costs as compared to variable costs, then the firm is said to have high operating leverage.

Question 49.
Operating leverage may be defined as:
(A) the degree to which debt is used in financing the firm
(B) the difference between price and variable costs
(C) the extent to which capital assets and fixed costs are utilized
(D) the difference between fixed costs and the contribution margin
Answer:
(C) the extent to which capital assets and fixed costs are utilized

Question 50.
Degree of ………….. is the ratio of percentage change in earning per share to the percentage change in sales.
(A) Financial leverage
(B) Operating leverage
(C) Combined leverage
(D) Working leverage
Answer:
(C) Combined leverage

Question 51.
The conservative firm will utilize:
(A) High fixed costs
(B) High degree of operating leverage
(C) Low degree of operating leverage
(D) Low profit margin
Answer:
(C) Low degree of operating leverage

Question 52.
Which of the following is correct formula to calculate Combined Leverage when capital structure consists of preference shares and equity shares?
Leverages – Financial Management MCQ 8
Answer:
(D)

Question 53.
Which one of the following is correct?
(I) Hard core working capital assets may be defined as that part of the current assets which represent the very minimum level of raw materials, work-in-process, finished goods, stores, debtors and cash which are in circulation to ensure continuity of production.
(II) Operating leverage is the ratio of fixed cost to net operating income after tax.
Select the correct answer from the options given below:
(A) Statement I correct while Statement II is incorrect.
(B) Statement II correct while Statement I is incorrect.
(C) Both Statement I and Statement II are incorrect.
(D) Both Statement I and Statement II are correct.
Answer:
(A) Statement I correct while Statement II is incorrect.

Question 54.
Which of the following statement is true?
(1) If contribution exceeds fixed cost, operating leverage will be favourable and vice versa.
(2) If ROI exceeds the rate of interest on debt, financial leverage will be favourable and vice versa.
Select correct answer from the options given below:
(A) (1) only
(B) (2) only
(C) Both (1) and (2)
(D) Neither (1) nor (2)
Answer:
(C) Both (1) and (2)

Question 55.
Indentify incorrect statement.
1. Securitization is short term finance arrangement.
2. If ROI is exactly equal to the rate of interest on debt, there is no financial leverage and EPS will not be affected.
3. A negative working capital means the company currently is unable to meet its long-term liabilities.
4. A desire to maintain an established dividend policy may affect the volume of working capital, or changes in working capital may bring about an adjustment of dividend policy.
Select correct answer from the options given below:
(A) 2 & 4
(B) 1 & 3
(C) 1 & 4
(D) 2 & 3
Answer:
(B) 1 & 3

Question 56.
Assertion (A):
Financial leverage indicates the tendency of EBT to vary disproportionately with operating profit.
Reason (R):
Management wants to maximize EPS and in doing so it also satisfies the primary goal of financial management i e. maximization of the owner’s wealth as represented by the value of business.
Select correct answer from the options given below:
(A) Both A and Rare true and R is correct explanation of A.
(B) Both A and R are true but R is not correct explanation of A.
(C) A is true but R is false.
(D) A is false but R is true.
Answer:
(B) Both A and R are true but R is not correct explanation of A.

Question 57.
The relationship between the cost of equity and financial leverage in accordance with MM proposition II can be expressed by-
(A) R = Equity/100
(B) R = Equity/Debt × 100
(C) R=ro + (ro-rd)(1-Tc)
(D) R = Equity/Income
Answer:
(C) R=ro + (ro-rd)(1-Tc)

Question 58.
Match List-I with List-II and select the correct answer using the codes given below the lists:
Leverages – Financial Management MCQ 9
Answer:
(C)

Question 59.
Degree of Combined leverage can be obtained by –
(A) EBIT + Fixed Costs/EBIT – Interest Expense
(B) EBT/Sales
(C) Sales/Contribution × 100
(D) Sales/Cash × 100
Answer:
(A) EBIT + Fixed Costs/EBIT – Interest Expense

Question 60.
Match List-I with List-Il and select the correct answer using the codes given below the lists:
Leverages – Financial Management MCQ 10
Answer:
(A)

Question 61.
Match List-I with List-II and select the correct answer using the codes given below the lists:
Leverages – Financial Management MCQ 11
Answer:
(D)

Question 62.
Factoring is a -……………
(A) Financial Planning
(B) Production Plan
(C) Cost of Sales
(D) New Financial Service
Answer:
(D) New Financial Service

Question 63.
Degree of operating leverage can be computed by
(A) % change in Operating Income /% change in sales
(B) 96 Sales/% Profit
(C) Sales/Cost of Production
(D) Sales/Fixed Cost
Answer:
(A) % change in Operating Income /% change in sales

Question 64.
Which formula may be used for ‘EPS?
(A) Net Profit/100 × Share Capital
(B) Dividend/Net Profit × 100
(C) Net Income – Dividend on Preferred Stock/Average outstanding Shares
(D) Net Profit/Sales
Answer:
(C) Net Income – Dividend on Preferred Stock/Average outstanding Shares

Question 65.
Factoring involves –
(A) Purchase and collection of debts
(B) Sales ledger management
(C) Provision of specialized services relating to credit investigation
(D) All of the above
Answer:
(D) All of the above

Question 66.
Capital Employed is –
(A) Fixed Assets + Cash + Bank
(B) Shareholders Funds + Long Term Funds
(C) Assets – Net Worth
(D) Long Term Funds + Current Liabilities – Current Assets
Answer:
(B) Shareholders Funds + Long Term Funds

Question 67.
A firm with high operating leverage has:
(A) Low fixed costs in its production process.
(B) High variable costs in its production process.
(C) High fixed costs in its production process.
(D) High price per unit.
Answer:
(C) High fixed costs in its production process.

Question 68.
A firm with high operating leverage is characterized by while one with high financial leverage is characterized by ………..
(A) Low fixed cost of production; low fixed financial costs
(B) High variable cost of production; high variable financial costs
(C) High fixed costs of production; high fixed financial costs
(D) Low costs of production; high fixed financial costs
Answer:
(C) High fixed costs of production; high fixed financial costs

Question 69.
If three Options are available to the company and operating leverage is same in all the three options; however, financial leverage is increasing then combined leverage will be –
(A) Same in all the three options
(B) Increasing in all the three options
(C) Dressing in all the three options
(D) Not possible to tell without figures.
Answer:
(B) Increasing in all the three options

Question 70.
If financial leverage in one then which of following two figures will be the same –
(A) Sales; contribution
(B) Contribution; EBIT
(C) EBIT; EBT
(D) None of the above
Answer:
(C) EBIT; EBT

Question 71.
In which of the following case it can be said that the firm has favourable financial leverage?
(A) When interest on loan funds is greater than internal rate of return (IRR).
(B) When interest on loan funds is less than return on investment (ROI).
(C) When return on investment (ROI) is equal to than internal rate of return (IRR).
(D) When return on investment (ROI) is greater than interest on loan funds.
Answer:
(D) When return on investment (ROI) is greater than interest on loan funds.

Question 72.
As compared to other firms in the industry, the company has high beta and high operating leverage. It shows that –
(A) Company is in more risk as compared to other firms in the industry.
(B) Company is in less risk as compared to other firms in the industry.
(C) Company’s risk and risk of all other firms in the industry is same.
(D) None of the above
Answer:
(A) Company is in more risk as compared to other firms in the industry.

Question 73.
Combined leverage shows –
Leverages – Financial Management MCQ 12
Answer:
(D)

Question 74.
Which of the following figure is not required to calculate operating leverage?
(A) Contribution
(B) EBIT
(C) EPS
(D) All of the above
Answer:
(C) EPS

Question 75.
Which of the following figure is not required to calculate financial leverage?
(A) EBT
(B) Contribution
(C) Sales
(D) Market price
Answer:
(D) Market price

Question 76.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Operating Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
Answer:
(B) 2.40
Leverages – Financial Management MCQ 61
Leverages – Financial Management MCQ 62

Question 77.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Financial Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
Answer:
(A) 1.11
Leverages – Financial Management MCQ 61
Leverages – Financial Management MCQ 62

Question 78.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Combined Leverage.
(A) 2.67
(B) 2.30
(C) 2.00
(D) 2.15
Answer:
(A) 2.67
Leverages – Financial Management MCQ 61
Leverages – Financial Management MCQ 62

Question 79.
If operating leverage is 2.1429 and financial leverage is 1.0699 then combined leverage will be -………….
(A) 2.2927
(B) 2.0029
(C) 0.4993
(D) Data given is not sufficient
Answer:
(A) 2.2927
Combined Leverage = 2.1429 × 1.0699 = 2.2927

Question 80.
If combined leverage is 2 and financial leverage is 1.25 then operating leverage will be -……………
(A) 0.625
(B) 2.50
(C) 1.60
(D) Data given is not sufficient
Answer:
(C) 1.60
Combined Leverage = Operating Leverage × Financial Leverage
2 = x × 1.25
x = Operating Leverage = 2/1.25 = 1.6

Question 81.
If combined leverage is 2.2926 and operating leverage is 2.1429 then financial leverage will be
(A) 1.0699
(B) 0.9347
(C) 4.9128
(D) Data given is not sufficient
Answer:
(A) 1.0699

Question 82.
A company has sales of ₹ 1 lakh. The variable costs are 40% of the sales while the fixed operating costs amount to ₹ 30,000. The amount of interest on long-term debts is ₹ 10,000. You are required to calculate the combined leverage.
(A) 4
(B) 2
(C) 3
(D) 5
Answer:
(C) 3
Leverages – Financial Management MCQ 27

Question 83.
Operating leverage is 4. This means 10% change in sales will cause -……………
(A) 4% change in variable cost
(B) 40% change in EPS
(C) 4% change in EBIT
(D) 40% change in EBIT
Answer:
(D) 40% change in EBIT

Question 84.
Financial leverage is 2.5. This means 10% change in EBIT will cause -……….
(A) 2.5% change in EBT
(B) 2.5% change in EPS
(C) 25% change in sales
(D) 25% change in EBT and EPS
Answer:
(D) 25% change in EBT and EPS

Question 85.
Combined leverage is 3.125. This means 10% change in Sales will cause -…………..
(A) 31.25% change in PAT
(B) 31.25% change in EPS
(C) 31.25% change in capital employed
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 86.
If there is a 10% increase in sale, EBIT increase by 35% and if sales increase by 6%, taxable income will increase by 24%. Operating leverage must be –
(A) 1.15
(B) 3.50
(C) 4.00
(D) 2.67
Answer:
(B) 3.50
If there is a 10% increase in sale, EBIT increase by 35% (10 × 3.5). Concept of operating leverage applied.

Question 87.
If EBIT increases by 6%, taxable income increases by 6.9%. If sales increase by 6%, taxable income will increase by 24%.
Financial leverage must be -………….
(A) 1.19
(B) 1.13
(C) 1.12
(D) 1.15
Answer:
(D) 1.15
If EBIT increases by 6% taxable income increase by 6.9% (6 × 1.15). Concept of financial leverage applied.

Question 88.
If sales increase by 6% taxable income ie. PAT and EPS will increase by 24%.
Combined leverage must be –
(A) 3
(B) 4
(C) 5
(D) 6
Answer:
(B) 4
If sales increase by 6% taxable income will increase by 24% (6 × 4). Concept of combined leverage applied.

Question 89.
The capital structure of a company consists of the following securities.
10% Preference Share Capital — 1,00,000
Equity Share Capital (₹ 10 Shares) — 1,00,000
12% Debenture — 75,000
The amount of operating profit is ₹ 69,000. The company is in 35% tax bracket. You are required to calculate the financial leverage of the company.
(A) 1.1500
(B) 1.5466
(C) 1.1566
(D) 1.1554
Answer:
(B) 1.5466
Leverages – Financial Management MCQ 63

Question 90.
Operating leverage is 7 and financial leverage is 2.2858. How much change in sales will be required to bring 70% change in EBIT?
(A) 10%
(B) 70%
(C) 11.429%
(D) 30%
Answer:
(A) 10%

Question 91.
Financial leverage = 1.5465 EBIT = ₹ 1,38,000
Interest = ₹ 18,000 Tax rate = 35%.
Capital structure of the company consists of equity shares and preference shares.
Amount of Preference Dividend = ?
(A) ₹ 19,950
(B) ₹ 19,898
(C) ₹ 20,000
(D) ₹ 19,899
Answer:
(C) ₹ 20,000

Question 92.
Total assets of Alpha Company are ₹ 3,00,000. The company’s total assets turnover ratio is 3, its fixed operating cost is ₹ 1,50,000 and its variable operating cost ratio is 50%. The income-tax rate is 50%. It also has long term debts of ₹ 1,20,000 on which interest @ 10% is payable. Operating, Financial & Combined Leverages of the company are –
(A) 1.5; 1.042; 1.563 respectively
(B) 1.05; 1.42; 1.05625 respectively
(C) 1.50; 1.42; 2.13 respectively
(D) 1.55; 1.042; 1.6151 respectively
Answer:
(A) 1.5; 1.042; 1.563 respectively
Leverages – Financial Management MCQ 28
Leverages – Financial Management MCQ 29

Question 93.
Contribution = ₹ 4,00,000
EBIT = ₹ 3,00,000
10% Debenture = ₹ 6,00,000
Combined leverage = ?
(A) 1.63
(B) 1.66
(C) 1.68
(D) 1.62
Answer:
(B) 1.66
Operating leverage = 4,00,000/3,00,000= 1.33
Financial leverage = 3,00,000/2,40,000 = 1.25
Combined leverage = 1.33 × 1.25 = 1.66

Question 94.
Operating leverage = 2
Combined leverage = 3.5
EBIT = ₹ 2,80,000
Interest = ₹ 40,000
Tax rate = 50%.
Capital structure of the company consists of equity shares and preference shares.
Amount of Preference Dividend = ?
(A) ₹ 39,967
(B) ₹ 39,970
(C) ₹ 39,000
(D) ₹ 40,000
Answer:
(D) ₹ 40,000
Leverages – Financial Management MCQ 30

Question 95.
EBIT = ₹ 4,00,000 Fixed cost = ₹ 6,00,000 Interest = ₹ 80,000 Combined leverage = ?
(A) Sufficient data is not given
(B) 3.12
(C) 3.215
(D) 3.125
Answer:
(D) 3.125
Contribution = 4,00,000 + 6,00,000 = 10,00,000
EBT = 4,00,000 – 80,000 = 3,20,000
Leverages – Financial Management MCQ 31

Question 96.
EBIT = ₹ 40,000 Variable cost = ₹ 2,40,000 Sales = ₹ 4,00,000 Operating leverage = ?
(A) 3.5
(B) 4.125
(C) 4.0
(D) 3.125
Answer:
(C) 4.0
Leverages – Financial Management MCQ 33

Question 97.
Contribution = ₹ 7,00,000
Fixed cost = ₹ 2,00,000
Interest = ₹ 3,00,000
Financial leverage = ?
(A) 2.0
(B) 1.5
(C) 2.5
(D) 1.0
Answer:
(C) 2.5

Question 98.
Contribution of a firm is ₹ 4,000.
Situation A — ₹ 1,000
Situation B — ₹ 2,000
Situation C — ₹ 3,000
Compute the operating leverage for the three situations.
(A) 1.33; 1.18; 1.82
(B) 1.33; 2.36; 2.86
(C) 2.86; 2.00; 3.64
(D) 1.33; 2.00; 4.00
Answer:
(D) 1.33; 2.00; 4.00
Leverages – Financial Management MCQ 64

Question 99.
EBIT of a firm is ₹ 3,000.
Leverages – Financial Management MCQ 13
Compute the financial leverage for the three plans respectively.
(A) 1.33; 1.11; 1.43
(B) 1.25; 1.18; 1.43
(C) 1.66; 1.48; 1.90
(D) 1.25; 1.11; 1.43
Answer:
(D) 1.25; 1.11; 1.43
Leverages – Financial Management MCQ 64

Question 100.
Calculate Financial Leverage & EPS assuming 20% before tax rate of return on assets. Other data:
Leverages – Financial Management MCQ 14
Applicable tax rate firm is 50%.
Select the correct answer from the options given below:
Leverages – Financial Management MCQ 15
Answer:
(C)
Leverages – Financial Management MCQ 34

Question 101.
If the combined leverage and operating leverage figures of a company are 2.5 and 1.25 respectively, find the financial leverage and P / V ratio, given that the equity dividend per share is ₹ 2, interest payable per year is ₹ 1 lakh, total fixed cost ₹ 0.5 lakh and sales ₹ 10 lakhs.
(A) 3.125; 25%
(B) 2.00; 40%
(C) 2.00; 25%
(D) 3.00; 40%
Answer:
(C) 2.00; 25%
Operating Leverage × Financial Leverage = Combined Leverage
1.25 × Financial Leverage = 2.5
Financial Leverage = 2

Leverages – Financial Management MCQ 35

Question 102.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. What is the firm’s ROI?
(A) 72%
(B) 27%
(C) 32%
(D) 23%
Answer:
(B) 27%

Question 103.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. Does it have favourable financial leverage?
(A) ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(B) ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(D) ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.
Answer:
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.

Question 104.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000.
If the firm belongs to an industry whose asset turnover is 3, does it have high or low asset leverage?
(A) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 4 which is high as compared to industry.
(B) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 1.75 which is low as compared to industry.
(C) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 0.75 which is low as compared to industry.
(D) None of the above
Answer:
(C) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 0.75 which is low as compared to industry.

Question 105.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. What are the operating, financial and combined leverages of the firm?
(A) 1.22, 1.44, 1.18
(B) 1.22, 1.12, 1.44
(C) 1.22, 1.18, 1.44
(D) 1.20, 1.18, 1.44
Answer:
(C) 1.22, 1.18, 1.44

Question 106.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. At what level of sales the EBT of the firm will be equal to zero?
(A) ₹ 22,84,091
(B) ₹ 10,05,000
(C) ₹ 22,48,910
(D) ₹ 10,50,000
Answer:
(A) ₹ 22,84,091

Question 107.
Following data is available for A Ltd.
Financial Leverage — 3:1
Interest — 2,000
Operating Leverage — 4:1
Variable cost (% to sales) — 66.67%
Income Tax Rate — 45%
Contribution = ?
(A) ₹ 6,000
(B) ₹ 12,000
(C) ₹ 36,000
(D) ₹ 18,000
Answer:
(B) ₹ 12,000

Question 108.
Following data is available for B Ltd.
Financial Leverage — 4:1
Interest — 3,000
Operating Leverage — 5:1
Variable cost (% to sales) — 75%
Income Tax Rate — 45%
What are the sales of B Ltd.?
(A) ₹ 12,000
(B) ₹ 20,000
(C) ₹ 60,000
(D) ₹ 80,000
Answer:
(D) ₹ 80,000

Question 109.
Following data is available for C Ltd.
Financial Leverage — 2:1
Interest — ₹ 10,000
Operating Leverage — 3:1
Variable cost (% to sales) — 50%
Income Tax Rate — 45%
What is the sales and profit after tax (PAT) of C Ltd?
(A) ₹ 1,20,000; ₹ 5,500
(B) ₹ 1,00,000; ₹ 5,000
(C) ₹ 1,50,000;₹ 6,500
(D) ₹ 1,50,000;₹ 6,000
Answer:
(A) ₹ 1,20,000; ₹ 5,500

Question 110.
A Financial Analyst has gathered following data for PQR Ltd.
Change in revenue = 27%
Change in operating profit after tax = 20%
Change in operating income = 25%
What should be the operating leverage of PQR Ltd.?
(A) 0.74
(B) 0.93
(C) Above 1.00
(D) 1.93
Answer:
(B) 0.93

Question 111.
A Financial Analyst has gathered following data for TUV Ltd. & WXY Ltd.:
Leverages – Financial Management MCQ 16
Using the concept of operating leverage concept and beta state which company has more risk as compared to market?
(A) TUV Ltd. is more risky
(B) WXY Ltd. is more risky
(C) TUV Ltd. & WXY Ltd. both are more risky as compared to market as there operating leverages and betas are more than market. However, WXY Ltd. is more risky than market as well as TUV Ltd.
(D) TUV Ltd. & WXY Ltd. both are less risky as compared to market as there operating leverages and betas are more than market.
Answer:
(C) TUV Ltd. & WXY Ltd. both are more risky as compared to market as there operating leverages and betas are more than market. However, WXY Ltd. is more risky than market as well as TUV Ltd.

Question 112.
Details of R Ltd. are given below:
Leverages – Financial Management MCQ 17
Leverages – Financial Management MCQ 18
Operating & Combined Leverage are 1.4 & 2.8 respectively. Income Tax Rate is 30%. Calculate EPS.
(A) 1.50
(B) 1.55
(C) 1.05
(D) 1.00
Answer:
(C) 1.05
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2
Leverages – Financial Management MCQ 36
2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55
Leverages – Financial Management MCQ 37
Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14
Leverages – Financial Management MCQ 38
Leverages – Financial Management MCQ 39

Question 113.
Take the data of above question and calculate P/V Ratio.
(A) 23.8%
(B) 22.8%
(C) 20.8%
(D) 24.8%
Answer:
(A) 23.8%
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2
Leverages – Financial Management MCQ 36
2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55
Leverages – Financial Management MCQ 37
Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14
Leverages – Financial Management MCQ 38
Leverages – Financial Management MCQ 39

Question 114.
Take the data of above question and tell at what level of sales the earning before tax (EBT) of the company will be equal to zero?
(A) ₹ 19.00 lakh
(B) ₹ 19.20 lakh
(C) ₹ 19.29 lakh
(D) ₹ 19.92 lakh
From the following information answer next 5 questions:
The capital structure of JCPL Ltd. is as follows:
Leverages – Financial Management MCQ 19
Answer:
(C) ₹ 19.29 lakh
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2
Leverages – Financial Management MCQ 36
2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55
Leverages – Financial Management MCQ 37
Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14
Leverages – Financial Management MCQ 38
Leverages – Financial Management MCQ 39

Additional Information:
Profit after tax (tax rate 30%) — ₹ 1,82,000
Operating expenses (including depreciation ₹ 90,000) being 1.50 times of EBIT.
Equity share dividend paid — 15%.
Market price per equity share — ₹ 20.

Question 115.
Calculate operating & financial leverage.
(A) 1.30; 1.59
(B) 1.59; 1.30
(C) 1.39; 1.50
(D) 1.50; 1.39
Answer:
(A) 1.30; 1.59
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 116.
Cover for the preference and equity share of dividends = ?
(A) 1.10; 3.65
(B) 1.65; 1.10
(C) 1.85; 2.10
(D) 3.64; 1.10
Answer:
(D) 3.64; 1.10
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 117.
Earnings Per Share (EPS) = ?
(A) 1.56
(B) 1.65
(C) 1.91
(D) 1.19
Answer:
(B) 1.65
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 118.
Earning Yield Ratio = ?
(A) 8.00%
(B) 8.52%
(C) 8.25%
(D) 8.75%
Answer:
(C) 8.25%
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 119.
Price earnings ratio = ?
(A) 12.00 times
(B) 12.12 times
(C) 12.21 times
(D) 12.19 times
Answer:
(B) 12.12 times
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 120.
You are Finance Manager Big Pen Ltd. The degree of operating leverage of your company is 5.0. The degree of financial leverage of your company is 3.0. Your Managing Director has found that the degree of operating leverage and the degree of financial leverage of your nearest competitor Small Pen Ltd. are 6.0 and 4.0 respectively. In his opinion, the Small Pen Ltd. is better than that Big Pen Ltd. because of higher value of degree of leverages. Which of the following statement is correct in relation to facts given above?
(A) High operating leverage shows higher burden of fixed cost consequently higher business risk. As Small Pen Ltd. has higher operating leverage hence it has high business risk as compared to Big Pen Ltd.

(B) High financial leverage shows higher burden of interest cost consequently higher financial risk. As Small Pen Ltd. has higher financial leverage hence it has high financial risk as compared to Big Pen Ltd.

(C) High combined leverage shows combined effect of higher burden of fixed and interest cost consequently higher business & financial risk. As Small Pen Ltd. has higher combined leverage hence it has high business risk & financial risk

(D) All of the above
From the following information answer next 3 questions:

A simplified income statement of Abbiash Ltd. is given below.
Leverages – Financial Management MCQ 20
Answer:
(D)

Question 121.
Calculate percentage increase in EBIT if sales increases by 10%.
(A) 13.61%
(B) 13.16%
(C) 13.25%
(D) 13.52%
Answer:
(A) 13.61%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61% change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 122.
Calculate percentage increase in EBT if EBIT increases by 10%.
(A) 21.21%
(B) 21.00%
(C) 21.22%
(D) 22.11%
Answer:
(C) 21.22%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61% change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 123.
Calculate percentage increase in EPS if sales increases by 10%.
(A) 28.00%
(B) 28.88%
(C) 28.44%
(D) 28.33%
From the following information answer next 5 questions:
DIGI Computers Ltd. is a manufacturer of computer systems. It has total sales of ₹ 1 Crore. Its variable and fixed costs amount to ₹ 60 lakhs and ₹ 10 lakhs respectively. It has borrowed ₹ 60 lakhs @ 10% per annum and has an equity capital of ₹ 75 lakhs.
Answer:
(B) 28.88%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61%
change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 124.
What is company’s return on investment (ROI)?
(A) 20.00%
(B) 22.00%
(C) 22.22%
(D) 20.22%
Answer:
(C) 22.22%
Leverages – Financial Management MCQ 43
Leverages – Financial Management MCQ 44
Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:
Leverages – Financial Management MCQ 45
Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:
Leverages – Financial Management MCQ 46

Question 125.
Does it have favourable financial leverage?
(A) ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(B) ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(D) ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.
Answer:
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
Leverages – Financial Management MCQ 43
Leverages – Financial Management MCQ 44
Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:
Leverages – Financial Management MCQ 45
Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:
Leverages – Financial Management MCQ 46

Question 126.
If the firm belongs to an industry whose asset turnover is 1, does it have high or low asset leverage?
(A) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 2.74 which is high as compared to industry.
(B) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 1.75 which is low as compared to industry.
(C) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 0.74 which is low as compared to industry.
(D) None of the above
Answer:
(C) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 0.74 which is low as compared to industry.

Question 127.
What are the operating, financial and combined leverages of the firm?
(A) 1.33; 1.25; 1.67
(B) 1.33; 1.67; 1.25
(C) 1.25; 1.33; 1.67
(D) None of the above
Answer:
(A) 1.33; 1.25; 1.67
Leverages – Financial Management MCQ 43
Leverages – Financial Management MCQ 44
Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:
Leverages – Financial Management MCQ 45
Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:
Leverages – Financial Management MCQ 46

Question 128.
If sales drop to ₹ 50 lakhs, what will be the new EBIT?
(A) ₹ 20,00,000
(B) ₹ 15,00,000
(C) ₹ 50,00,000
(D) ₹ 10,00,000
Answer:
(D) ₹ 10,00,000
Leverages – Financial Management MCQ 43
Leverages – Financial Management MCQ 44
Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:
Leverages – Financial Management MCQ 45
Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:
Leverages – Financial Management MCQ 46

Question 129.
From the following data of Abhishek Ltd., compute the operating leverage, financial leverage, combined leverage.
EBIT — 10 lakh
Profit before tax (PBT) — 4 lakh
Fixed cost — 6 lakh
(A) 1.6; 2.5; 4.0
(B) 2.5; 1.6; 4.0
(C) 4.0; 2.5; 1.6
(D) 4.0; 1.5; 2.5
Answer:
(A)
Leverages – Financial Management MCQ 47

Question 130.
From the following data of Tanishka Ltd., compute the percentage change in earnings per share (EPS), if sales are expected to increase by 5%:
EBIT — 16.00 lakh
Profit before tax (PBT) — 6.40 lakh
Fixed cost — 9.60 lakh
(A) 5%
(B) 10%
(C) 4%
(D) 20%
Answer:
(D) 20%
From the following data of Tanishka Ltd., compute the percentage change in earnings per share (EPS), if sales are expected to increase by 5%. Thus, 5% change in sales will cause 20% change in PAT/EPS.

Question 131.
Following data is available for Alpha Ltd.
Financial leverage — 2:1
Operating leverage — 3:1
Interest charges — 20 lakh
Corporate tax rate — 40%
Variable (% of sales) — 60%
Sales ?
(A) 1,00,00,000
(B) 1,20,00,000
(C) 2,00,00,000
(D) 3,00,00,000
Answer:
(D) 3,00,00,000

Question 132.
Following data is available for X Ltd.
Variable cost (% of sales) — 70%
Interest expense — ₹ 20,000
DOL — 5:1
DFL — 3:1
Corporate tax rate — 30%
EBIT = ?
(A) ₹ 30,000
(B) ₹ 20,000
(C) ₹ 60,000
(D) ₹ 15,000
Answer:
(A) ₹ 30,000
Leverages – Financial Management MCQ 48

Question 133.
Following data is available for Y Ltd.
Variable cost (% of sales) — 75%
Interest expense — ₹ 30,000
DOL — 6:1
DFL — 4:1
Corporate tax rate 30%
Contribution = ?
(A) ₹ 9,60,000
(B) ₹ 2,40,000
(C) ₹ 3,00,000
(D) ₹ 7,80,000
Answer:
(B) ₹ 2,40,000
Leverages – Financial Management MCQ 49

Question 134.
Following data is available for Z Ltd.
Variable cost (96 of sales) — 50%
Interest expense — ₹ 1,00,000
DOL — 2:1
DFL — 2:1
Corporate tax rate — 30%
Sales = ?
(A) ₹ 4,00,000
(B) ₹ 6,00,000
(C) ₹ 8,00,000
(D) ₹ 9,00,000
From the following information answer next 3 questions:
Leverages – Financial Management MCQ 21
Answer:
(C) ₹ 8,00,000
Leverages – Financial Management MCQ 50

Question 135.
What percentage will EBIT increase, if there is a 1096 increase in sales?
(A) 32.096
(B) 31.1496
(C) 33.71%
(D) 32.5%
Answer:
(D) 32.5%

Question 136.
What percentage will taxable income increase, if EBIT increases by 6%?
(A) 6.86%
(B) 6.67%
(C) 6.33%
(D) 6.22%
Answer:
(A) 6.86%

Question 137.
What percentage will taxable income increase, if the sales increase by 6%
(A) 22.29%
(B) 22.92%
(C) 22.78%
(D) 22.87%
From the following information answer next 3 questions.
Following information relating to the operations and capital structure of Swadeshi Ltd. is available:
Installed capacity: 2,000 units
Production & sales: 50% of installed capacity
Selling price per unit: ₹ 20
Variable cost per unit: ₹ 10.
Fixed costs:
Situation-1: ₹ 4,000
Situation-2: ₹ 5,000
Capital structure:
Leverages – Financial Management MCQ 22
Answer:
(A) 22.29%

Question 138.
What is the Operating Leverage?
Leverages – Financial Management MCQ 23
Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10
Leverages – Financial Management MCQ 51

Question 139.
What is the Financial Leverage?
Leverages – Financial Management MCQ 24
Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10
Leverages – Financial Management MCQ 51

Question 140.
What is the Combined Leverage?
Leverages – Financial Management MCQ 25
Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10
Leverages – Financial Management MCQ 51

Question 141.
Total assets of Honey Well Ltd. are ₹ 6,00,000. Total assets turnover ratio is 2.5 times. The fixed operating costs are ₹ 2,00,000 and variable operating cost ratio is 40%. Income tax rate is 30%. Calculate operating, financial and combined leverage?
(A) 1.2857; 1.0355; 1.3314
(B) 1.0355; 1.2857; 1.3314
(C) 1.3314; 1.0355; 1.2857
(D) 1.2857; 1.3314; 1.2857
Answer:
(A) 1.2857; 1.0355; 1.3314
Leverages – Financial Management MCQ 52
Leverages – Financial Management MCQ 53

Question 142.
Total assets of Q Ltd. are ₹ 6,00,000. Total assets turnover ratio is 2.5 times. The fixed operating costs are ₹ 2,00,000 and variable operating cost ratio is 40%. Income tax rate is 30%. No. of equity shares are 18,000. Determine the likely level of EBIT if EPS is ₹ 6.
(A) ₹ 1,54,286
(B) ₹ 1,78,286
(C) ₹ 1,54,682
(D) ₹ 1,78,862
Answer:
(B) ₹ 1,78,286
Leverages – Financial Management MCQ 54

Question 143.
Which of the following company has greater business risk? (₹ in lakhs)
Leverages – Financial Management MCQ 65
(A) A Ltd.
(B) B Ltd.
(C) C Ltd.
(D) D Ltd.
Answer:
(D) D Ltd.
D Ltd. has high operating leverage and hence its business risk is higher as compared to other companies.

Question 144.
ABC Ltd. has an average selling price of ₹ 10 per unit. Its variable unit costs are ₹ 7 and fixed costs amount to ₹ 1,70,000. It finances all its assets by equity funds. It pays 30% tax on its income. PQR Ltd. is identical to ABC Ltd. except in respect of the pattern of financing. The latter finances its assets 50% by equity and 50% by debt, the interest on which amounts to ₹ 20,000.
Which of the following statement is correct?
(A) Both companies have similar business risk.
(B) PQR Ltd. has high financial risk as compared to ABC Ltd.
(C) PQR Ltd. has high business risk & financial risk as compared to ABC Ltd.
(D) All of the above
Answer:
(D) All of the above
(1) High operating leverage shows higher burden of fixed cost consequently higher business risk. As both companies has similar operating leverage hence both has same business risk.
(2) High financial leverage shows higher burden of interest cost consequently higher financial risk. As POR Ltd. has higher financial leverage hence it has high financial risk as compared to ABC Ltd.
(3) High combined leverage shows combined effect of higher burden of fixed and interest cost consequently higher business & financial risk. As POR Ltd. has higher combined leverage hence it has high business risk & firancial risk as compared to ABC Ltd.

Question 145.
Bling Ltd. supplies following data:
Operating leverage 2.5; financial leverage 3; EPS ₹ 30; market price per share ₹ 225; and capital 20,000 shares. It is proposed to raise a loan of ₹ 50,00,000 @18% for expansion. After expansion, sales will increase by 25% and fixed cost by ₹ 3,00,000.
Work out the market price per share after expansion, assuming tax rate @ 50%.
(A) 25.56
(B) 52.56
(C) 56.25
(D) 65.52
Answer:
(C) 56.25
Leverages – Financial Management MCQ 55
x = Profit available for equity shareholder 6,00,000
Tax rate is 509õ hence profit before tax will be Rs. 12,00,000.
Leverages – Financial Management MCQ 56
Leverages – Financial Management MCQ 57

Question 146.
S Ltd. produces products with a selling price per unit of ₹ 100. Fixed cost is ₹ 2,00,000. 5,000 units are produced and sold. Annual profit is ₹ 50,000. Company’s all equity-financed assets are ₹ 5,00,000. The company proposes to change its production process, adding ₹ 4,00,000 to investment by debt financing and ₹ 50,000 to fixed operational costs. The consequences of such a proposal are:
(i) Reduction in variable cost per unit by — ₹ 10
(ii) Increase in output by — 2,000 units
(iii) Reduction in selling price per unit to — ₹ 95
Assume cost of capital 10%. Measure the degree of operating leverage for present and proposed situation.
(A) 4.85; 3.00
(B) 2.58; 5.00
(C) 5.00; 2.85
(D) 2.85; 5.00
Answer:
(C) 5.00; 2.85
Leverages – Financial Management MCQ 58

Question 147.
During year 2018-19, Gulf Oil India made sales of worth ₹ 257 Crores, which was down by 7.4% compared to previous year’s sales. While the company could reduce its overheads, its variable input cost went-up significantly. As a result, variable cost-to-sales ratio in 2018-19 stood at 55.8% as opposed to 48.5% in the previous year. The financial highlights for the year 2018 – 19 are as given under:
(₹ in Crores)
Sales — 257.00
Overheads — 103.50
Depreciation — 2.70
Interest — 6.50
Earnings before tax — 0.70
Company is expecting a decline in sales by 1% in the next year. If the cost structure remains the same, what will be the expected EBIT?
(A) ₹ 6.06 Crore
(B) ₹ 5.60 Crore rise by 1%.
(C) ₹ 60.06 Crore
(D) ₹ 5.06 Crore
Answer:
(A) ₹ 6.06 Crore
Leverages – Financial Management MCQ 59
Operating leverage is 15.78; thus, if company is expecting a decline in sales by 1% in the next year, then EBIT will decline by 15.78%.
Expected EBIT = 7.20 – 1.14 (15.78% of 7.20) = 6.06 Crores

Question 148.
A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
(A) If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
(B) If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
(C) If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%
Answer:
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%.

Question 149.
A firm has a DFL of 3.5. What does this tell us about the firm?
(A) If sales rise by 3.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 3.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1%, then EPS will rise by 3.5%.
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
Answer:
(C) If EBIT rises by 1%, then EPS will rise by 3.5%.

Question 150.
Calculate the degree of financial leverage (DFL) for a firm when its EBIT is 20,00,000. The firm has 30.00,000 in debt that costs 10% annually. The firm also has a 9%, ₹ 10,00,000 preferred stock issue outstanding. The firm pays 40% in taxes.
(A) 0.78
(B) 0.80
(C) 1.24
(D) 1.29
Answer:
(A) 0.78
Leverages – Financial Management MCQ 60

Management of Cash and Marketable Securities – Financial Management MCQ

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
Management of Cash and Marketable Securities – Financial Management MCQ 5
Management of Cash and Marketable Securities – Financial Management MCQ 6

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
Management of Cash and Marketable Securities – Financial Management MCQ 7

Question 53.
A company has made the following budget forecasts for next year:
Management of Cash and Marketable Securities – Financial Management MCQ 2
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
Management of Cash and Marketable Securities – Financial Management MCQ 8

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
Management of Cash and Marketable Securities – Financial Management MCQ 9

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
Management of Cash and Marketable Securities – Financial Management MCQ 10

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
Management of Cash and Marketable Securities – Financial Management MCQ 24

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
Management of Cash and Marketable Securities – Financial Management MCQ 11

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
Management of Cash and Marketable Securities – Financial Management MCQ 25
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:
Management of Cash and Marketable Securities – Financial Management MCQ 26

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.
Management of Cash and Marketable Securities – Financial Management MCQ 3
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
Management of Cash and Marketable Securities – Financial Management MCQ 12

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
Management of Cash and Marketable Securities – Financial Management MCQ 13

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
Management of Cash and Marketable Securities – Financial Management MCQ 14
Management of Cash and Marketable Securities – Financial Management MCQ 15

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
Management of Cash and Marketable Securities – Financial Management MCQ 16

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
Management of Cash and Marketable Securities – Financial Management MCQ 17

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
Management of Cash and Marketable Securities – Financial Management MCQ 18
Management of Cash and Marketable Securities – Financial Management MCQ 19

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
Management of Cash and Marketable Securities – Financial Management MCQ 20

Question 74.
June 2016: Kriti Ltd. has provided following information for the quarter January to March:
Management of Cash and Marketable Securities – Financial Management MCQ 4
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
Management of Cash and Marketable Securities – Financial Management MCQ 21
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 —
Management of Cash and Marketable Securities – Financial Management MCQ 23
Answer:
(C)
Management of Cash and Marketable Securities – Financial Management MCQ 25
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:
Management of Cash and Marketable Securities – Financial Management MCQ 26

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:
Management of Cash and Marketable Securities – Financial Management MCQ 22
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

Inventory Management – Financial Management MCQ

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

Inventory Management – Financial Management MCQ

Question 1.
Raw materials are directly identifiable as part of the final product and are classified as
(A) Period costs
(B) Fixed costs
(C) Direct materials
(D) Any of the above
Answer:
(C) Direct materials

Question 2.
Inventory consists of
(A) Intangible property
(B) Tangible property
(C) (A) or (B)
(D) (A) & (B)
Answer:
(B) Tangible property

Question 3.
Which of the following statement is correct in relation to “need for proper inventory control”?
(A) Inadequate inventory may lead to keep men and machines waiting.
(B) Materials do not constitute a significant part of the total production cost hence proper planning and controlling of inventories is not a big deal.
(C) Funds are not tied up in surplus stores and stocks.
(D) All of the above
Answer:
(A) Inadequate inventory may lead to keep men and machines waiting.

Question 4.
Inventory is valued at ………….
(A) Replacement price
(B) Replacement price or purchase value, whichever is less.
(C) At cost or net realizable value which-ever is less.
(D) Replacement price or net realizable value, whichever is less.
Answer:
(C) At cost or net realizable value which-ever is less.

Question 5.
………… indicates the level of each particular item of stock at any point of time.
(A) Bill of Material
(B) Material Requisition Note
(C) A bin card
(D) All of the above
Answer:
(C) A bin card

Question 6.
Which of the following details are recorded in bin card?
(A) Date of order and suppliers name along with address
(B) Record of quantities only
(C) Record of both quantities & values
(D) All of the above
Answer:
(B) Record of quantities only

Question 7.
Inventory held for sale in the ordinary course of business is known as ………….
(A) Finished Goods
(B) Raw Material
(C) Work-in-progress
(D) Miscellaneous inventory
Answer:
(A) Finished Goods

Question 8.
…………… is a list of materials, with specifications, material codes and quantity of each material required for a particular job, process or production unit.
(A) Material Transfer Note
(B) Bill of Materials
(C) Purchase Requisition
(D) Bin Card
Answer:
(B) Bill of Materials

Question 9.
Which of the following method is based on the assumption that, latest consignment of materials or goods manufactured are exhausted first and the closing stock is valued at the cost of earliest lot in hand?
(A) FIFO Method
(B) Highest-in-first-out method
(C) Average cost method
(D) LIFO Method
Answer:
(A) FIFO Method

Question 10.
…………….. are those cost, which can be identified and traceable to particular product or costing unit or cost centre.
(A) Indirect material costs
(B) Period costs
(C) Direct material costs
(D) Fixed costs
Answer:
(C) Direct material costs

Question 11.
Wood used in production of tables and chairs, steel bars used in steel factory etc are the examples of …………
(A) Indirect material
(B) Direct material
(C) Fixed material
(D) All of the above
Answer:
(B) Direct material

Question 12.
Under of inventory valuation, the historical cost of inventory is estimated by calculating at selling price and then deducting an amount equal to the estimated gross margin of profit on such stocks.
(A) Simple Average Price Method
(B) Weighted Average Price Method
(C) Adjusted Selling Price Method
(D) Market Price Method
Answer:
(C) Adjusted Selling Price Method

Question 13.
When materials are unloaded, the warehouse staff checks the material unloaded with the delivery note. Then the warehouse staff prepares a…………, a copy of which is given to the supplier’ carrier as a proof of delivery.
(A) Delivery note
(B) Material receipt note
(C) Bill of Material
(D) Purchase Requisition
Answer:
(B) Material receipt note

Question 14.
……….. .. are those items, which are moving at a slow rate and this may arise due to general depression in demand due to keen g competition.
(A) Dormant stocks
(B) Written-off stocks
(C) Slow moving stocks
(D) Any of the above
Answer:
(C) Slow moving stocks

Question 15.
CIMA defines ………… as, an internal instruction to a buying office to procure goods or services.
(A) Bin card
(B) Store accounting
(C) Bill of Material
(D) Purchase requisition
Answer:
(D) Purchase requisition

Question 16.
In which of the following posting is done before the transaction takes place?
(A) Bill of Material
(B) Bin card
(C) Purchase requisition
(D) General ledger
Answer:
(B) Bin card

Question 17.
……………….. are those items which are not moving temporarily but their movement is expected shortly.
(A) Slow moving stock
(B) Dormant stocks
(C) Non marketable stock
(D) Less efficient stock
Answer:
(B) Dormant stocks

Question 18.
When materials are delivered, a supplier’s carrier will usually provide a document called to confirm the details of delivery.
(A) Material Transfer Note
(B) Materials Inspection Note
(C) Delivery Note
(D) Purchase Requisition
Answer:
(C) Delivery Note

Question 19.
………… represents the unusable loss,which can be sold. It is a residue, which is measurable and has a minor value.
(A) Waste
(B) Scrap
(C) Spoilage
(D) Defective
Answer:
(B) Scrap

Question 20.
If small quantities of direct material used in the end product like gums and threads are used in binding books then it may be categorized as
(A) Miscellaneous cost
(B) Preliminary cost
(C) Indirect material cost
(D) Fixed cost of production
Answer:
(C) Indirect material cost

Question 21.
Under which of the following method of inventory valuation, the closing inventory is valued at the lowest possible price?
(A) Standard cost method
(B) Adjusted selling price method
(C) Specific identification method
(D) Highest-in-first-out method
Answer:
(D) Highest-in-first-out method

Question 22.
Bill of material acts as an authorization to the in procuring the materials and the concerned department in material requisition from the stores.
(A) Manufacturing department
(B) Store department
(C) Research department
(D) Sales department
Answer:
(B) Store department

Question 23.
………. records the quantity details,rates and values of stock movements.
(A) Stores ledger
(B) Sales ledger
(C) Material Transfer Note
(D) Delivery Note
Answer:
(A) Stores ledger

Question 24.
…………… are that portion of the process loss, which can be converted into a finished product by incurring more material and labour expenses.
(A) Waste
(B) Scrap
(C) Spoilage
(D) Defectives
Answer:
(B) Scrap

Question 25.
CIMA defines as, ……….. “the recording as they occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quality and value”.
(A) Pre-paid Inventory System
(B) Continuous Stock Taking
(C) Perpetual Inventory System
(D) Budgetary Control System
Answer:
(C) Perpetual Inventory System

Question 26.
Which of the following accounting treatment is correct in relation to “Spoilage”?
(A) Loss due to spoilage can be debited to the job /product /process in which it occurred.
(B) It may be charged to factory over-heads so that the loss is borne by all products.
(C) If spoilage occurs on a specific job/ special order, it is charged to that job itself.
(D) All of the above
Answer:
(D) All of the above

Question 27.
Which of the following technique can be used for inventory control?
(A) Standard Costing
(B) ABC Analysis
(C) Integrated Accounting System
(D) Any of the above
Answer:
(B) ABC Analysis

Question 28.
…………….. is an optimum quantity of material to be ordered every time an order is placed. EOQ may be defined as that quantity of purchase which minimizes material order cost and material carrying cost.
(A) Quantity in such lot which has maximum discount
(B) Special Order Quantity (SOQ)
(C) Standard Order Quantity (SOQ)
(D) Economic Order Quantity (EOQ)
Answer:
(D) Economic Order Quantity (EOQ)

Question 29.
The model and formula of EOQ was developed by in 1913.
(A) F.W. Taylor
(B) F. Wilson Harris
(C) F. Walter Harris
(D) F.W. Marshall
Answer:
(B) F. Wilson Harris

Question 30.
………. are those materials or components which are so damaged in the manufacturing process that they cannot be repaired or reconditioned.
(A) Spoilage
(B) Waste
(C) Scrap
(D) Defective
Answer:
(A) Spoilage

Question 31.
Under which of the following plan the analyst lays down a minimum and maximum quantity for each stock item keeping in view its usage, requirements and margin of safety required to minimize risk of stock outs?
(A) ABC plan
(B) Two-bin system
(C) Order cycling systems
(D) Min-Max plan
Answer:
(D) Min-Max plan

Question 32.
Under …………. a pre-determined price is fixed for valuing each material.
(A) Base Stock Method
(B) Specific Identification Method
(C) Market Price Method
(D) Standard Cost Method
Answer:
(D) Standard Cost Method

Question 33.
………….. may be defined as that quantity of purchase which minimizes material order cost and material carrying cost.
(A) Basic Ordering Quantity
(B) Constant Ordering Quantity
(C) Economic Order Quantity
(D) Any of the above
Answer:
(C) Economic Order Quantity

Question 34.
Which of the following statement is true in relation to ABC Analysis of inventory control?
(A) Category A: It contains a relatively large number of inexpensive items.
Category B: It contains inventory items, which are neither very expensive nor very cheap.
Category C: It contains inventory items, which are in massive quantities.
(B) Category A: It contains inventory items, which are neither very expensive nor very cheap. Moreover, they are used in moderate quantities.
Category B: It contains a relatively large number of items. But they are either very inexpensive items or used in very small quantities so that they do not constitute small percentage of the total value of inventories.
Category C: It contains inventory items, which are expensive or used in massive quantities. Thus, they low in quantity but high in value.
(C) Category A: It contains inventory items, which are low in quantity but high in value.
Category B: It contains inventory items, which are neither very expensive nor very cheap. They are used in moderate quantities.
Category C: It contains inventory items, which are in massive quantities, but they are very inexpensive
(D) Any of the above
Answer:
(C)

Question 35.
Which of the following is property of “Normal Waste”?
(A) It is included in output quantity.
(B) It do not involves further costs of disposing
(C) It is avoidable and controllable
(D) None of the above
Answer:
(D) None of the above

Question 36.
…………….. are goods/units which can be converted into a finished product by incurring more material & labour expenses.
(A) Scrap
(B) Waste
(C) Spoilage
(D) Defectives
Answer:
(D) Defectives

Question 37.
Under ………… a continuous record of receipt and issue of materials is maintained by the stores department and the information about the stock of material is always available.
(A) Perpetual Inventory System
(B) Continuous Stock Taking
(C) Periodic Inventory System
(D) Just in time
Answer:
(A) Perpetual Inventory System

Question 38.
Reorder Level = Safety Stock + …………..
(A) Maximum re-order period
(B) Maximum usage
(C) Minimum consumption
(D) Normal lead time consumption
Answer:
(D) Normal lead time consumption

Question 39.
Which of the following treatment is correct for “Waste”?
(A) Abnormal waste is unavoidable and uncontrollable and treated as part of the product cost.
(B) Normal waste is transferred to the Costing P & L A/c
(C) Both (a) & (b)
(D) Neither (a) nor (b)
Answer:
(D) Neither (a) nor (b)

Question 40.
Which of the following is required in order to calculate EOQ?
(A) Cost of equity (Ke)
(B) Stock-out Cost
(C) Opportunity Cost
(D) All of the above
Answer:
(B) Stock-out Cost

Question 41.
Which of the following formula is used to calculate Re-order Level?
(A) (Maximum usage × Maximum re-order period)
(B) Safety Stock + Normal lead time consumption
(C) (Average usage × Average re-order period)
(D) (A) or (B)
Answer:
(D) (A) or (B)

Question 42.
Which of the following is/are example of “Waste” in relation to material cost?
(A) Smoke
(B) Sawdust in timber industry
(C) Portion of the process loss, which can be converted into a finished product
(D) All of the above
Answer:
(A) Smoke

Question 43.
Which of the following formula is used to calculate Maximum Level?
(A) (Re-order level + Re-order qty) – (Maximum consumption × Maximum reorder period)
(B) (Re-order level + Re-order qty) – (Minimum consumption × Minimum reorder period)
(C) (Re-order level 4- EOQ) – (Minimum consumption × Minimum re-order period)
(D) (B) or (C)
Answer:
(D) (B) or (C)

Question 44.
Re-order Level is also known as ……………
(A) Re-order Quantity
(B) Economic order quantity
(C) Reorder point
(D) (A) or (C)
Answer:
(D) (A) or (C)

Question 45.
Danger Level = ?
(A) (Maximum consumption × Lead time for emergency purchase
(B) (Average consumption × Lead time for emergency purchase)
(C) (Minimum × Lead time for emergency purchase
(D) Ordering Level – (Average Usage × Re-order Period)
Answer:
(B) (Average consumption × Lead time for emergency purchase)

Question 46.
………… purchase means the purchase of goods or material such that delivery immediately precedes their use.
(A) Economic order quantity
(B) Reorder point
(C) Re-order Quantity
(D) Just in time (JIT)
Answer:
(D) Just in time (JIT)

Question 47.
(Maximum usage – Average Usage) × Lead Time = ?
(A) Re-order Point
(B) Danger Level
(C) Safety Stock Level
(D) Reorder Level
Answer:
(C) Safety Stock Level

Question 48.
Which of these is not a Material control technique:
(A) ABC Analysis
(B) Fixation of raw material levels
(C) Maintaining stores ledger
(D) Control over slow moving and non moving items
Answer:
(C) Maintaining stores ledger

Question 49.
Out of the following, what is not the work of purchase department?
(A) Receiving purchase requisition
(B) Exploring the sources of material supply
(C) Preparation and execution of purchase orders
(D) Accounting for material received
Answer:
(D) Accounting for material received

Question 50.
Bin Card is a ……………….
(A) Quantitative as well as value wise records of material received, issued and balance
(B) Quantitative record of material received, issued and balance
(C) Value wise records of material received, issued and balance
(D) A record of labour attendance
Answer:
(B) Quantitative record of material received, issued and balance

Question 51.
Stores Ledger is a:
(A) Quantitative as well as value wise records of material received, issued and balance
(B) Quantitative record of material received, issued and balance
(C) Value wise records of material received, issued and balance
(D) A record of labour attendance
Answer:
(A) Quantitative as well as value wise records of material received, issued and balance

Question 52.
Economic order quantity is that quantity at which cost of holding and carrying inventory is
(A) Maximum and equal
(B) Minimum and equal
(C) It can be maximum or minimum depending upon case to case
(D) Minimum and unequal
Answer:
(B) Minimum and equal

Question 53.
ABC analysis is an inventory control technique in which:
(A) Inventory levels are maintained
(B) Inventory is classified into A, B and C category with A being the highest quantity, lowest value.
(C) Inventory is classified into A, B and C Category with A being the lowest quantity, highest value
(D) Either (B) or (C)
Answer:
(C) Inventory is classified into A, B and C Category with A being the lowest quantity, highest value

Question 54.
Which one out of the following is not an inventory valuation method?
(A) FIFO
(B) LIFO
(C) Weighted Average
(D) EOQ
Answer:
(D) EOQ

Question 55.
In case of rising prices (inflation), FIFO method will:
(A) Provide lowest value of closing stock and profit
(B) Provide high est value of closing stock and profit
(C) Provide highest value of closing stock but lowest value of profit
(D) Provide highest value of profit but lowest value of closing stock
Answer:
(B) Provide high est value of closing stock and profit

Question 56.
In case of rising prices (inflation), LIFO method will:
(A) Provide lowest value of closing stock and profit
(B) Provide highest value of closing stock and profit
(C) Provide highest value of closing stock but lowest value of profit
(D) Provide highest value of profit but lowest value of closing stock
Answer:
(A) Provide lowest value of closing stock and profit

Question 57.
Cost of abnormal wastage is:
(A) Charged to the product cost
(B) Charged to the profit & loss account
(C) Charged partly to the product and partly profit & loss account
(D) Not charged at all.
Answer:
(B) Charged to the profit & loss account

Question 58.
The average annual consumption of material is 20,000 kg at a price of ₹ 2 per kg. The storage cost is 16% on average inventory and the cost of placing one order is ₹ 50. How much is to be purchased at a time?
(A) 2,500 kg
(B) 2,000 kg
(C) 2,532 kg
(D) 2,352 kg
Answer:
(A) 2,500 kg
Inventory Management – Financial Management MCQ 64
Inventory Management – Financial Management MCQ 65

Question 59.
Annual consumption of material – 4,000 units
Ordering Cost – ₹ 5
Cost per unit – ₹ 2
Storage & carrying cost – 8% p.a.
Economic Order Quantity for the item is:
(A) 500 units
(B) 800 units
(C) 300 units
(D) 400 units
Answer:
(A) 500 units
Inventory Management – Financial Management MCQ 63

Question 60.
The annual demand of a certain component bought from the market is 1,000 units. The cost of placing an order is ₹ 60 and the carrying cost per unit is ₹ 3 p.a. The Economic Order Quantity for the item is ?..
(A) 200 units
(B) 400 units
(C) 600 units
(D) 500 units
Answer:
(A) 200 units
\(\mathrm{EOQ}=\sqrt{\frac{2 \times 1,000 \text { units } \times \text { Rs. } 60}{\text { Rs. } 3}}\)
= 200

Question 61.
For a particular item of store, the following information are available:
Re-order quantity =12 units
Maximum consumption per week = 300 units
Normal consumption per week = 200 units Re-order period = 2 to 4 weeks The Re-order level = ?
(A) 600 units
(B) 400 units
(C) 1,200 units
(D) None of the above
Answer:
(C) 1,200 units
Re-order level (Maximum usage X Maximum delivery period)
= (300 units × 4 weeks)
1,200 units

Question 62.
Which of the following items can be classified as “A” as per ABC Analysis of inventory control?
Inventory Management – Financial Management MCQ 1
Inventory Management – Financial Management MCQ 61
Answer:
(B)

Question 63.
Which of the following items can be classified as “C” as per ABC Analysis of inventory control?
Inventory Management – Financial Management MCQ 3
(A) Item number 5 only
(B) Item number 5, 4
(C) Item number 3, 4
(D) Item number 5, 2
Answer:
(A) Item number 5 only
Inventory Management – Financial Management MCQ 12
Inventory Management – Financial Management MCQ 13

Question 64.
A manufacturer requires 9,600 units of a certain component annually. This is currently purchased from a regular supplier at ₹ 50 per unit. The cost of placing an order is ₹ 60 per order and the annual carrying cost is ₹ 5 per price. Annual ordering plus carrying cost = ?
(A) 2,400
(B) 480
(C) 4,800
(D) 240
Answer:
(A) 2,400
Inventory Management – Financial Management MCQ 14

Question 65.
A publishing house purchases 2,000 units of a particular item per year at a unit cost of ₹ 20. The ordering cost per order is ₹ 50 and the inventory carrying cost is 25%. How will be the total cost if company decides to buy in EOQ?
(A) 41,325
(B) 41,000
(C) 41,500
(D) 41,525
Answer:
(B) 41,000
Inventory Management – Financial Management MCQ 15

Question 66.
A factory requires 1,500 units of an item per month. The cost of each unit is 27. The cost per order is 150 and inventory carrying charge works Out to 20% of average inventory. Supplier offers 2% price discount on a minimum supply of 1,200 units. How much money will be saved h accepting suppliers offer?
(A) 6,995
(B) 9,695
(C) 12,870
(D) Nothing will be saved and company will have to incur extra cost.
Answer:
(B) 9,695
Inventory Management – Financial Management MCQ 16
Inventory Management – Financial Management MCQ 17

Question 67.
JP Ltd., manufactures of a special product, follows the policy of EOQ for one of its components. The component’s details are as follows:
Purchase price per component: ₹ 200
Cost of an order: ₹ 100
Annual cost of carrying one unit in inventory: 10% of purchase price
Total cost of inventory and ordering per annum: ₹ 4,000
Compute the EOQ.
(A) 200 units
(B) 400 units
(C) 600 units
(D) 800 units
Answer:
(A) 200 units
Inventory Management – Financial Management MCQ 18
Inventory Management – Financial Management MCQ 19

Question 68.
A firm requires 16,000 units of a certain component which it buys at ₹ 60 each. The cost of placing an order and following it up is ₹ 120 and the annual storage charges works out to 10% of the cost of the item. To get maximum benefit the firm should place order for at a time.
(A) 1,000 units
(B) 900 units
(C) 800 units
(D) 700 units
Answer:
(C) 800 units
EOQ = 800 units

Question 69.
The average annual consumption of material is 20,000 kg at a price of ₹ 2 per kg. The storage cost is 16% on average inventory and the cost of placing one order is ₹ 50. What is the time gap between two orders?
(A) 7 orders in year
(B) 8 orders in year
(C) 9 orders in year
(D) 6 orders in year
Answer:
(B) 8 orders in year
EOQ = 2,500
Inventory Management – Financial Management MCQ 20

Question 70.
G Ltd. produces a product, which has a monthly demand of 4,000 units. The product requires a component X, which is purchased at ₹ 20. For every finished product, one unit of component is required. The ordering cost is ₹ 120 per order and the holding cost is 10% p.a. EOQ = ?
(A) 2,400 units
(B) 4,200 units
(C) 4,400 units
(D) 2,200 units
Answer:
(A) 2,400 units
Annual consumption = 4.000 × 12 = 48,000
\(\mathrm{EOQ}=\sqrt{\frac{2 \times 48,000 \text { units } \times \text { Rs. } 120}{\text { Rs. } 20 \times 10 \%}}\)
= 2,400 units

Question 71.
In a Company the weekly minimum and maximum consumption of Material-A are 25 and 75 emits respectively. The re-order quantity as fixed by the company is 300 units. Material-A is received within 4 to 6 weeks from the date of supply order.
Minimum Level = ?
(A) 450 units
(B) 200 units
(C) 650 units
(D) 800 units
Answer:
(B) 200 units
Re-order = (Maximum usage × Maximum delivery period) level
= (75 units × 6 weeks)
= 450 units
Minimum = Re-order level – (Average usage × Average delivery period) level
= 450 units – (50 units × 5 weeks)
= 200 units

Question 72.
A company manufactures several components in batches. The following data relates to one component:
Annual demand: 32,000 units;
Set-up cost per batch: ₹ 120.
Annual rate of interest: 12%;
Cost of production per unit: ₹ 16.
The Economic Batch Quantity is
(A) 2,500 units
(B) 4,000 units
(C) 3,000 units
(D) 2,000 units
Answer:
(D) 2,000 units
Inventory Management – Financial Management MCQ 21

Question 73.
G Ltd. produces a product, which has a monthly demand of 4,000 units. The product requires a component X, which is purchased at ₹ 20. For every finished product, one unit of component is required. The ordering cost is ₹ 120 per order and the holding cost is 10% p.a. At EOQ level purchase,Ordering Cost + Carrying Cost = ?
(A) 2,400
(B) 4,800
(C) 2,800
(D) 4,400
Answer:
(B) 4,800
Annual consumption = 4,000 × 12 48,000
Ordering + Carrying Cost
Inventory Management – Financial Management MCQ 22

Question 74.
Raw material price =₹ 60 per kg., Handling cost = ₹ 360, Freight = ₹ 390 per order, Incremental carrying cost of inventory of raw material = ₹ 0.50 per kg per month. Cost of working capital finance on the investment in inventory = ₹ 9 per kg p.a. Annual production = 1,00,000 units.
2.5 units are obtained from one kg of raw material. EOQ = ?
(A) 2,000 kg
(B) 3,000 kg
(C) 4,000 kg
(D) 5,000 kg
Answer:
(A) 2,000 kg
Calculation of annual consumption:
For 2.5 finished unit – 1kg of raw material required
For 1,00,000 units -?
Inventory Management – Financial Management MCQ 23

Question 75.
If the minimum stock level and average stock level of raw material A are 4,000 and 9,000 units respectively, find out its “Re-order quantity”.
(A) 10,000 units
(B) 5,000 units
(C) 2,500 units
(D) 26,000 units
Answer:
(A) 10,000 units
Let the Re-order quantity be ‘x’.
Average Stock Level Minimum Stock Level + Re-order quantity
9,000 = 4,000 + ½ x
X = 10,000 units

Question 76.
Re-order quantity of material X is 5,000 kg.; Maximum level 8,000 kg.; Minimum usage 50 kg. per hour; minimum re-order period 4 days; daily working hours in the factory is 8 hours. You are required to calculate the re-order level of material X.
(A) 4,600 kg
(B) 400 kg
(C) 4,200 kg
(D) 11,400 kg
Answer:
(B) 400 kg
Let the Re-order Level be ‘x
Maximum level = (Re-order level + Re-ordering qty) – (Minimum usage X
Minimum delivery period)
8,000 (x units + 5,000 kg) – (400 kg X 4 days)
8,000 = x-3,400 kg
x = 4,600kg
Minimum usage = 50 kg × 8 hours 400 kg

Question 77.
A manufacturer used 400 units of a Component every month and buys them entirely from an outside supplier @ ₹ 40 per unit. The order placing and receiving cost is ₹ 100 and storage and carrying cost is 15% of the value of Stock. To get maximum benefit the manufacturer should place order at a time for ………
(A) 300 units
(B) 400 units
(C) 450 units
(D) 500 units
Answer:
(B) 400 units
\(\mathrm{EOQ}=\sqrt{\frac{2 \times 4,800 \text { units } \times \text { Rs. } 100}{40 \times 15 \%}}\)
= 400 units

Question 78.
Normally delivery takes place in 6 days. 1-day stock will be safety stock. Average consumption per day 150 units.
Re-order Point = ?
(A) 1,050 units
(B) 1,350 units
(C) 900 units
(D) None of the above
Answer:
(A) 1,050 units
Re-order Point = 7 × 150 = 1,050 units
Alternatively, (6 × 150) + (1 × 150) = 900 + 150 = 1,050

Question 79.
Minimum Level = 2,750 units, Re-order level = 6,000 units, Average delivery period = 6.5 weeks. Normal usage = ?
(A) 500 units
(B) 750 units
(C) 400 units
(D) 350 units
Answer:
(A) 500 units
Let the normal usage be ‘X’
Minimum Level Re-order level – (Normal usage × Average delivery period)
2,750 units 6,000 units – (x X 6.5 weeks)
Normal usage 500 units
Let the normal usage be ‘X’
Minimum Level Re-order level – (Normal usage × Average delivery period)
2,750 units 6,000 units – (x × 6.5 weeks)
Normal usage 500 units

Question 80.
Maximum Level = 6,832 units Re-order level = 6,000 units Minimum usage = 250 units Minimum delivery period = 5 weeks. EOQ/Re-order quantity = ?
(A) 2,082 units
(B) 4,791 units
(C) 3,791 units
(D) 2,750 units
Answer:
(A) 2,082 units
Let the Re-ordering qty be ‘x’
Maximum Level = (Re-order level + Re-ordering qty) – (Minimum usage X Minimum delivery period)
6,832 units = (6,000 units + x) – (250 units X 5 weeks)
Re-ordering qty = 2,082

Question 81.
PQR Ltd. produces a product, which has a monthly demand of 52,000 units. The product requires a Component X, which is purchased at ₹ 15 per unit. For every finished product, 2 units of component X are required. The ordering cost is ₹ 350 per order and the carrying cost is 12% p.a. If the minimum lot size to be supplied is 52,000 units. What is the extra cost, the company has to incur?
(A) 19,827
(B) 15,545
(C) 16,827
(D) 19,828
Answer next 5 question on the basis of
Inventory Management – Financial Management MCQ 4
Answer:
(B)

Question 82.
Re-order quantity = ?
(A) 115.47 units
(B) 186.19 units
(C) 188.47 units
(D) 166 units
Answer:
(B) 186.19 units

Question 83.
Re-order level = ?
(A) 368 units
(B) 536 units
(C) 200 units
(D) 450 units
Answer:
(D) 450 units

Question 84.
Minimum level = ?
(A) 368 units
(B) 536 units
(C) 200 units
(D) 450 units
Answer:
(C) 200 units

Question 85.
Maximum level = ?
(A) 368 units
(B) 536 units
(C) 200 units
(D) 450 units
Answer:
(B) 536 units

Question 86.
Average stock level = ?
(A) 368 units
(B) 536 units
(C) 200 units
(D) 450 units
Answer:
(A) 368 units

Question 87.
Pooja Pipes Ltd. uses about 75,000 valves per year and the usage is fairly constant at 6,250 valves per month. The valve costs ₹ 1.50 per unit when bought in large quantities; and the carrying cost is estimated to be 20% of average inventory investment on an annual basis. The cost to place an order and process the delivery is ₹ 18. Frequency of order = ?
(A) 25 orders per year
(B) 52 orders per year
(C) 20 orders per year
(D) 50 orders per year
Answer:
(A) 25 orders per year
\(\text { EOQ }=\sqrt{\frac{2 \times 75,000 \text { units } \times \text { Rs. } 18}{1.5 \times 20 \%}}\)
= 3,000 units
Inventory Management – Financial Management MCQ 20

Question 88.
Details of lead time:
Average – 10 days
Maximum – 15 days
Minimum – 6 days
Emergency purchases – 4 days.
Danger level = ?
(A) 440 units
(B) 150 units
(C) 440 units
(D) 60 units
Answer:
(D) 60 units
Danger level = (Average consumption × Lead time for emergency purchase)
= (15 × 4 days)
= 60 units

Question 89.
Average monthly market demand = 2,000 tubes, Ordering cost = ₹ 100 per order, Inventory carrying cost = 20% per annum, Cost of tubes = ₹ 500 per tube, Normal usage =100 tubes per week. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it worth accepting?
(A) EOQ purchase is the best policy of purchase and hence there is no need to accept any discount offer form supplier.
(B) Do not accept offer of quarterly supply of 1,500 tubes at 5% discount as it will increase total annual cost.
(C) Accept offer of quarterly supply of 1,500 tubes at 5% discount as it will save ₹ 64,851.
(D) Accept offer of quarterly supply of 1,500 tubes at 5% discount as it will save ₹ 68,601.
Answer:
(D) Accept offer of quarterly supply of 1,500 tubes at 5% discount as it will save ₹ 68,601.
Annual consumption = Normal usage × No. weeks in year
= 100 tubes × 52 weeks
= 5,200 tubes
Inventory Management – Financial Management MCQ 27
Inventory Management – Financial Management MCQ 28

Question 90.
About 50 items are required every day for a machine. A fixed cost of ₹ 50 per order is incurred for placing an order. The inventory carrying cost per item amount to ₹ 0.02 per day. The lead period is 32 days. Re-order Level = ?
(A) 500 units
(B) 1,600 units
(C) 1,100 units
(D) 600 units
Answer next 5 question on the basis of following data:
Inventory Management – Financial Management MCQ 5
Answer:
(B) 1,600 units

Question 92.
Re-order level = ?
(A) 189.5 units
(B) 207 units
(C) 92 units
(D) 287 units
Answer:
(B) 207 units

Question 93.
Minimum level = ?
(A) 189.5 units
(B) 207 units
(C) 92 units
(D) 287 units
Answer:
(C) 92 units

Question 94.
Maximum level = ?
(A) 92 units
(B) 189.5 units
(C) 207 units
(D) 287 units
Answer:
(D) 287 units

Question 95.
Average stock level = ?
(A) 287 units
(B) 92 units
(C) 189.5 units
(D) 207 units
Answer:
(C) 189.5 units

Question 96.
A Company manufactures 5,000 units of a product per month. The cost of placing an order is ₹ 100. The purchase price of the raw material is ₹ 10 per kg. The reorder period is 4 to 8 weeks. The consumption of raw material varies from 100 kg. to 450 kg per week, the average consumption being 275 kg. The carrying cost of inventory is 20% p.a. EOQ = ?
(A) 14,300 kg
(B) 1,196 kg
(C) 4,396 kg
(D) 3,173 kg
Answer:
(B) 1,196 kg
Annual consumption = Average consumption × No. weeks in year
=275kg × 52
= 14,300kg

Question 97.
Re-order Level = 3,750 units, Minimum Level = 1,750 units, Average Delivery Period=2 weeks, Average Consumption=?
(A) 1,750 units
(B) 1,250 units
(C) 1,500 units
(D) 1,000 units
Answer:
(D) 1,000 units
Minimum Level = Re-order Level – (Average Consumption × Average Delivery Period)
1,750 units = 3,750 units -( x × 2 weeks)
x = Average Consumption = 1,000 units

Question 98.
Normally delivery takes place in 6 days. 3 day stock will be safety stock. Average consumption per day 150 units. Minimum consumption per day is 75 units. Re-order Point ?
(A) 1,125 units
(B) 675 units
(C) 900 units
(D) 1,350 units
Answer:
(D) 1,350 units
Re-order Point = 9 × 150 = 1,350 units
Alternatively, (6 × 150) + (3 × 150) – 900 + 450 = 1,350

Question 99.
Annual consumption = 54,000 castings, EOQ = 300 castings, Time gap between two orders = ?
(A) 2 days
(B) 180 days
(C) 0.5 days
(D) 90 days
Answer:
(A) 2 days

Question 100.
Safety Stock = 30 days consumption,
Annual consumption (360 days) = 12,000 units, Normal lead time =15 days. Re- g order Level = ?
(A) 1,096 units
(B) 1,500 units
(C) 1,000 units
(D) 500 units
Answer:
(B) 1,500 units
Normal Lead time consumption = \(\frac{12,000}{360}\) × 15 = 500 units
Re-order Level = (Safety Stock + Normal lead time consumption) = (1,000 units + 500 units)
= 1,500 units

Question 101.
Minimum Level = 2,750 units, EOQ = 2,082 units, Average Level = ?
(A) 4,832 units
(B) 3,457 units
(C) 3,791 units
(D) 4,791 units
Answer:
(C) 3,791 units
Average Level = Minimum Level + b Re-ordering Quantity
= 2,750 units + 1/2 2,082 units
= 3,791 units

Question 102.
Time gap between two orders = 3.6 days, Ordering Quantity = 400 packs,
No. of days in a year = 360 days, Annual Consumption = ?
(A) 41,111 packs
(B) 40,000 packs
(C) 44,444 packs
(D) 55,555 packs
Answer:
(B) 40,000 packs
Inventory Management – Financial Management MCQ 30

Question 103.
The annual carrying cost of material ‘X’ is ₹ 3.6 per unit and its total carrying cost is ₹ 9,000 per annum. What would be the economic order quantity for material ‘X’, if there is no safety stock of material X?
(A) 5,000 units
(B) 16,200 units
(C) 682 units
(D) None of the above
Answer:
(A) 5,000 units
Carrying Cost = \(\frac{\mathrm{EOQ}}{2}\) Carrying cost p. u. p. a
9,000 = \(\frac{\mathrm{EOQ}}{2} \times 3.6\)
EOQ = 5,000 Units.

Question 104.
Opening Stock = 25,000 units, Closing Stock = 15,000 units, Purchases = 1,90,000 units. (Take 1 year = 360 days). Stock Velocity = ?
(A) 30 days
(B) 90 days
(C) 60 days
(D) 36 days
Answer:
(D) 36 days
Inventory Management – Financial Management MCQ 31

Question 105.
Inventory turnover ratio = 2.5 times, Opening Stock=90,000 units, Closing Stock = 1,10,000 units. Purchases = ?
(A) 2,30,000 units
(B) 2,70,000 units
(C) 2,50,000 units
(D) 2,40,000 units
Answer:
(B) 2,70,000 units
Inventory Management – Financial Management MCQ 32
Material Consumed = 2,50,000
Opening Stock + Purchases – Closing Stock = Material Consumed
90,000 + Purchases – 1,10,000 = 2,50,000
Purchases = 2,70,000

Question 106.
Stock Velocity =180 days, Material consumed = 1,50,000, Closing Stock = 62,500 units. Opening stock = ?
(A) 2,12,500 units
(B) 3,00,000 units
(C) 87,500 units
(D) 1,62,500 units
Answer:
(C) 87,500 units
Inventory Management – Financial Management MCQ 33

Question 107.
At what price per unit would Part No. A32 be entered in the store Ledger, if following invoice was received from supplier:
Inventory Management – Financial Management MCQ 6
(A) ₹ 970
(B) ₹ 1,000
(C) ₹ 800
(D) ₹ 850
Answer:
(D) ₹ 850
Inventory Management – Financial Management MCQ 34

Question 108.
EOQ =100 units, Annual consumption = 2,000 units, Carrying cost per unit per annum = ₹ 480, Ordering cost = ?
(A) ₹ 1,400
(B) ₹ 1,200
(C) ₹ 1,600
(D) ₹ 2,000
Answer:
(B) ₹ 1,200
Inventory Management – Financial Management MCQ 35

Question 109.
No. of deliveries =16 deliveries, EOQ = 80 bags, Carrying cost per unit per annum = ₹ 560, Ordering cost = ₹
(A) ₹ 1,400
(B) ₹ 1,200
(C) ₹1,600
(D) ₹ 2,000
Answer:
(A) ₹ 1,400
Inventory Management – Financial Management MCQ 62

Question 110.
Total cost = 24,30,000, No. of orders = 4 orders, Ordering cost = ₹ 750, Ordering qty = 10,000 units, Carrying cost per unit per annum = ₹ 15. Material price per unit =
(A) 58.80
(B) 60.20
(C) 60.80
(D) 60.00
Answer:
(A) 58.80
Inventory Management – Financial Management MCQ 36

Question 111.
Calculate the value of closing stock from the following according to FIFO method:
1st January, 2014: Opening balance: 50 units @ ₹ 4
Receipts:
5th January, 2014: 100 units @ ₹ 5
12th January, 2014: 200 units @ ₹ 4.50
Issues:
2nd January, 2014: 30 units
18th January, 2014: 150 units
(A) ₹ 765
(B) ₹ 805
(C) ₹ 786
(D) ₹ 700
Answer:
(A) ₹ 765
Inventory Management – Financial Management MCQ 37
Inventory Management – Financial Management MCQ 38

Question 112.
Calculate the value of closing stock from the following according to LIFO method:
1st January, 2014: Opening balance: 50 units @ ₹ 4
Receipts:
5th January, 2014:100 units @ ₹ 5
12th January, 2014: 200 units @ ₹ 4.50
Issues:
2nd January, 2014: 30 units
18th January, 2014: 150 units
(A) ₹ 765
(B) ₹ 805
(C) ₹ 786
(D) ₹ 700
Answer:
(B) ₹ 805
Inventory Management – Financial Management MCQ 39

Question 113.
Calculate the value of closing stock from the following according to Weighted Average method:
1st January, 2014: Opening balance: 50 units @ ₹ 4
Receipts:
5th January, 2014: 100 units @ ₹ 5
12th January, 2014: 200 units @ ₹ 4.50 Issues:
2nd January, 2014: 30 units
18th January, 2014: 150 units
(A) ₹ 765
(B) ₹ 805
(C) ₹ 786
(D) ₹ 700
Answer:
(C) ₹ 786
Inventory Management – Financial Management MCQ 40

Question 114.
Calculate re-order level from the following:
Safety stock: 1,000 units Consumption per week: 500 units
It takes 12 weeks to reach material from the date of ordering.
(A) 1,000 units
(B) 6,000 units
(C) 3,000 units
(D) 7,000 units
Answer:
(D) 7,000 units
(500 × 12) + 1,000 = 7,000

Question 115.
From the following information, calculate the extra cost of material by following EOQ:
Annual consumption = 45,000 units
Ordering cost per order = ₹ 10
Carrying cost per unit p. a. = ₹ 10
Purchase price per unit = ₹ 50
Re-order quantity at present = 45,000 units
There is discount of 10% per unit in case of purchase of 45,000 units in bulk.
(A) No saving
(B) ₹ 2,00,000
(C) ₹ 2,22,010
(D) ₹ 2,990
Answer:
(D) ₹ 2,990
EOQ=\(\sqrt{\frac{2 \times 45,000 \text { units } \times \text { Rs. } 10}{\text { Rs. } 10}}\)
= 300 units
Inventory Management – Financial Management MCQ 41
Inventory Management – Financial Management MCQ 42
Advice: Total cost at suppliers offer is less by 2,990 (22,53,000 – 22,50,010), so suppliers offer is acceptable.

Question 116.
Dec 2014: Which type of material is classified as ‘A’ type in ABC analysis —
(A) High price, more quantity
(B) High price, less quantity
(C) Low price, more quantity
(D) Low price, less quantity
Answer:
(B) High price, less quantity

Question 117.
Dec 2014: Which of the following formula cannot be used to calculate re-order level —
(A) Minimum level + consumption during lead time
(B) Maximum consumption X maximum re-order period
(C) Maximum consumption X lead time+ safety stock
(D) Minimum consumption X minimum re-order period
Answer:
(D) Minimum consumption X minimum re-order period

Question 118.
Dec 2014: Which of the following is recorded by bin card —
(A) Quantity
(B) Quantity and value
(C) Value
(D) Quality
Answer:
(A) Quantity

Question 119.
Dec 2014: If the minimum stock level and average stock level of raw material ‘A’ are 4,000 & 9,000 units respectively, what is its reorder quantity —
(A) 8,000 units
(B) 11,000 units
(C) 10,000 units
(D) 9,000 units
Answer:
(C) 10,000 units
Let the reordering quantity be ‘x’
Average Level Minimum Level + ½ Reordering quantity
9,000 = 4,000 + 0.5x
5,000 = 0.5x
x = Reordering quantity = 10,000

Question 120.
Dec 2014: The method of regular physical verification of material throughout the year is known as..
(A) Periodic stock taking
(B) Bin card system
(C) Continuous stock taking
(D) Stock ledger system
Answer:
(C) Continuous stock taking

Question 121.
Dec 2014: In inflationary situation, which system of inventory valuation shows higher profits —
(A) LIFO
(B) FIFO
(C) HIFO
(D) Weighted average
Answer:
(B) FIFO

Question 122.
Dec 2014: Under which of the following inventory control technique, maximum and minimum level of each stock is laid down —
(A) Min-max plan
(B) Two bin system
(C) Order cycle system
(D) ABC analysis
Answer:
(A) Min-max plan

Question 123.
Dec 2014: A company manufactures 5,000 units of a product per month. The cost of placing an order is ₹ 100. Purchase price of the raw material is ₹ 10 per kg. Average consumption of raw material is 275 kg per week. The carrying cost of inventory is 20% per annum. The economic order quantity is –
(A) 1,196 kg
(B) 707 kg
(C) 2,449 kg
(D) 2,400 kg
Answer:
(A) 1,196 kg
Annual consumption = Average consumption X No. weeks in year
275 kg×52
= 14,300kg
\(=\sqrt{\frac{2 \times 14,300 \mathrm{~kg} \times \text { Rs. } 100}{\text { Rs. } 10 \times 20 \%}}\)
EOQ 1,195.83 kg (say 1,196 kg)

Question 124.
June 2015: Under which of the following inventory control techniques, two piles or bundles are maintained for each item of stock —
(A) Min-max plan
(B) Order cycling system
(C) Two-bin system
(D) ABC analysis
Answer:
(C) Two-bin system

Question 125.
June 2015: A store ledger is a record of receipts, issues and closing balances of material by entering  …………….
(A) Quantity only
(B) Quantity and value
(C) Value only
(D) Quality only
Answer:
(B) Quantity and value

Question 126.
June 2015: Bill of material acts as an authorization to the stores department in procuring the material and all the materials listed on the bill are sent to the —
(A) Sales department
(B) Production department
(C) Accounts department
(D) Stores department
Answer:
(B) Production department

Question 127.
June 2015: Which of the following method is based on the assumption that costliest materials are issued first and inventory is valued at the lowest possible price —
(A) FIFO method
(B) UFO method
(C) Highest-in-first-out method
(D) Weighted average method
Answer:
(C) Highest-in-first-out method

Question 128.
June 2015: For a product-X, following information is available:
Maximum consumption per week: 300 units Normal consumption per week: 200 units Re-order period: 2 to 4 weeks
The re-order level will be —
(A) 400 units
(B) 1,200 units
(C) 600 units
(D) 800 units
Answer:
(B) 1,200 units
Re-order Level = (Maximum usage × Maximum delivery period)
= (300 units × 4 weeks)
= 1,200 units

Question 129.
June 2015: A company requires 1,500 units, of an item per month. The cost of each unit is ₹ 30. The cost of placing an order is ₹ 200 and the material carrying charges work out to be 20% of the average material. The economic order quantity (EOQ) is —
(A) 1,095 units
(B) 316 units
(C) 490 units
(D) 33 units
Answer:
(A) 1,095 units
Inventory Management – Financial Management MCQ 43

Question 130.
June 2015: Following information is available regarding a product-X:
1st January, 2015:
Opening balance: 50 units @ ₹ 4 Receipts:
5th January, 2015: 100 units @ ₹ 5
12th January, 2015: 200 units @ ₹ 5.50 Issues:
2nd January, 2015: 30 units 18th January, 2015: 170 units
The value of closing stock according to FIFO method is —
(A) ₹ 660
(B) ₹ 770
(C) ₹ 825
(D) ₹ 1,100
Answer:
(C) ₹ 825
Inventory Management – Financial Management MCQ 44

Question 131.
June 2015: In case of rising prices, FIFO method will provide –
(A) Lowest value of closing stock and profit
(B) Highest value of closing stock and profit
(C) Highest value of closing stock but lowest value of profit
(D) Lowest value of closing stock but highest value of profit
Answer:
(B) Highest value of closing stock and profit

Question 132.
Dec 2015: In a company, weekly minimum and maximum consumption of Material-A is 25 and 75 units respectively. The re-order quantity as fixed by the company is 300 units. The material is received within 4 to 6 weeks from issue of supply order. Maximum level of Material-A is —
(A) 640 Units
(B) 650 Units
(C) 175 Units
(D) 560 Units
Answer:
(B) 650 Units
Reorder Level = (Maximum usage× Maximum re-order period)
= (75 × 6)
= 450
Maximum level = (Re-order level + Re-order qty) – (Minimum consumption × Minimum re-order period)
=(450+300)-(25×4)
= 650

Question 133.
Dec 2015: FIFO method of valuing material issues is suitable in times of —
(A) Rising prices
(B) Falling prices
(C) Price fluctuation
(D) Boom period
Answer:
(B) Falling prices

Question 134.
Dec 2015: About 50 units are required every day for a machine. Fixed cost of ₹ 50 is incurred for placing an order. The inventory carrying cost per unit amounts to ₹ 0.02 per day. The lead period is 32 days. Economic Order Quantity is —
(A) 200 Units
(B) 300 Units
(C) 500 Units
(D) 100 Units
Answer:
(C) 500 Units
Annual Consumption = 50 × 365 = 18,250. Carrying cost p. u. p. a = 0.02 × 365 =7.3
Inventory Management – Financial Management MCQ 45
Inventory Management – Financial Management MCQ 46

Question 135.
June 2016: XYZ Ltd. had 4,000 units of inventory in hand on 1st March, 2016, costing ₹ 4 per unit. Purchases and issues of material during the month were as follows:
Inventory Management – Financial Management MCQ 7
The cost of inventory as on 31st March, 2016 under FIFO and weighted average cost method will be
(A) ₹ 27,000 and ₹ 24,498
(B) ₹ 27,000 and ₹ 23,625
(C) ₹ 22,000 and ₹ 23,625
(D) ₹ 22,000 and ₹ 24,498
Answer:
(A) ₹ 27,000 and ₹ 24,498
Inventory Management – Financial Management MCQ 47
Inventory Management – Financial Management MCQ 48

Question 136.
June 2016: EOQ is 200 units, ordering cost ₹ 20per order and total purchases 4,000 units. The carrying cost per unit will be —
(A) ₹ 2
(B) ₹ 6
(C) ₹4
(D) None of the above
Answer:
(C) ₹4
Inventory Management – Financial Management MCQ 49
40,000 x 1,60,000
x = 4
Alternatively, students can adopt following procedure to solve the MCQ.
Figure of each option should be put in above formula and check that whether
EOQ comes to 200 or not. If you apply figure of Option (C) ₹ 4 in above formula,
EOQ comes to 200 and hence Option (C) is correct.

Question 137.
June 2016: Which one of the following statements is true in ABC classification of materials —
(A) ‘C’ items of material have moderate % of cost and high % of quantity
(B) ‘A’ items of material have high % of cost and low % of quantity
(C) ‘A’ items of material have high % of cost and high % of quantity
(D) ‘B’ items of material have moderate % of cost and low % of quantity
Answer:
(B) ‘A’ items of material have high % of cost and low % of quantity

Question 138.
June 2016: In a situation of rising prices, profit and tax liability would be lower under method than under method of material issue pricing.
(A) FIFO; LIFO
(B) LIFO; FIFO
(C) LIFO; Average
(D) FIFO; Average
Answer:
(B) LIFO; FIFO

Question 139.
June 2016: The technique of economic order quantity is losing significance since the development of —
(A) Perpetual inventory
(B) Just-in-time
(C) First-in-first-out
(D) ABC analysis
Answer:
(B) Just-in-time

Question 140.
June 2016: Following information is given for Component ‘A’:
Normal usage 50 units per week, maximum usage 75 units per week, re-order period 4 to 6 weeks. The minimum level of stock will be —
(A) 250 Units
(B) 150 Units
(C) 450 Units
(D) 200 Units
Answer:
(D) 200 Units
Re-Order Level (Maximum Usage × Maximum Delivery Period)
= (75 Units × 6 Weeks)
= 450
Minimum Level Re-Order Level – (Normal Usage × Average Delivery
Period)
= 450 Units – (50 Units × 5 Weeks)
= 200

Question 141.
June 2016: Quarterly consumption of materials: 2,000 kg; Cost of placing an order: ₹ 50; Cost per unit: ₹ 40; Storage and other carrying costs: 8% of average inventory. The economic order quantity and number of orders to be placed per quarter of the year will be —
(A) 400 kg and 5 orders
(B) 500 kg and 4 orders
(C) 500 kg and 12 orders
(D) 400 kg and 6 orders
Answer:
(B) 500 kg and 4 orders
Inventory Management – Financial Management MCQ 50

Question 142.
June 2016:
Re-order quantity Minimum usage Minimum lead time Maximum stock level Re-order level will be Re-order quantity :300 kg
Minimum usage :20 kg per day
Minimum lead time : 5 days
Maximum stock level : 400 kg
(A) 350 kg
(B) 200 kg
(C) 375 kg
(D) 150 kg
Answer:
(B) 200 kg
Maximum level = (Re-order level + Re-ordering qty)- (Minimum usage X
Minimum delivery period)
400 = (x + 300 units) – (20 units X 5 days)
x = 200

Question 143.
June 2016: Which one of the following is the correct sequence of the purchase procedure of inventory —
(A) Indenting for material, issuing tenders, receiving quotations, and placing order
(B) Issuing tenders and receiving quotations, indenting for material, and placing order
(C) Placing order, issuing tenders and receiving quotations, and indenting for material
(D) Indenting for material and placing order
Answer:
(A) Indenting for material, issuing tenders, receiving quotations, and placing order

Question 144.
Dec 2016: ………. account does not record the balance of stores ledger control account.
(A) Manufacturing
(B) Trading
(C) Profit and loss
(D) Work-in-progress
Answer:
(B) Trading

Question 145.
Dec 2016: A firm requires 12,800 units of a certain component which it buys @ ₹ 60 each. The cost of placing an order and following it up is ₹ 150 and annual storage charges work out to 10% of the cost of items. Number of units to be ordered to get maximum benefit to the firm are —
(A) 1,000
(B) 900
(C) 800
(D) 320
Answer:
(C) 800
Inventory Management – Financial Management MCQ 51
Inventory Management – Financial Management MCQ 52

Question 146.
Dec 2016: Which of the following are advantages of perpetual inventory system:
(i) No interruption of production process
(ii) More wastage of material
(iii) Detect loss of stock due to theft, shrinkage, fire, etc,
(iv) Ascertain stock without physical verification
Select the correct answer from the options given below —
(A) (i), (ii) and (iii)
(B) (ii), (iii) and (iv)
(C) (i), (ii) and (iv)
(D) (i), (iii) and (iv)
Answer:
(B) (ii), (iii) and (iv)

Question 147.
Dec 2016: Following statements are either true (T) or false (F):
(P) FIFO method of valuing material issues is suitable in time of rising prices
(Q) Valuation of closing stock is same under both FIFO and LIFO method
(R) Bin card makes a record of the quantity and value of materials kept in the stores
(S) A bill of material gives a complete list of all material required with quantities for a particular job.
Select the correct answer from the options given below —
Inventory Management – Financial Management MCQ 8
Answer:
(C)

Question 148.
Dec 2016: Match the following
(P) Visible or invisible 1. Defectives loss that cannot be collected and in certain cases it involves further costs of disposing
(Q) Residue which is 2. Spoilage measurable and has a minor value
(R) Components so 3. Scrap damaged in process and cannot be repaired
(S) Imperfections may 4. Waste arise because of substandard work, can be made perfect by paying some additional expenses
Select the correct answer from the options given below —
Inventory Management – Financial Management MCQ 9
Answer:
(A)

Question 149.
Dec 2016: A written comprehensive order, with specification, material code and quantity sent to inform the purchase department, of a need for material is called —
(A) Purchase order
(B) Bill of material
(C) Purchase requisition
(D) Bin card
Answer:
(B) Bill of material

Question 150.
Dec 2016: Choose the correct statements from the following:
(1) All the indirect taxes are added to the purchase price of material
(2) Trade and cash discounts are deduct-ed from the cost of material
(3) ABC analysis is a value based system of material control
(4) In the garment manufacturing, the cost of thread and buttons are indirect material costs.
Select the answer from the options given below —
(A) (1) and (2)
(B) (2), (3) and (4)
(C) (3) and (4)
(D) (1), (3) and (4)
Note: MCQ is wrongly drafted. For further clarification please see the hints.
Inventory Management – Financial Management MCQ 53

Question 151.
Dec 2016: Amaze Ltd. had an opening inventory of 5,000 units costing ₹ 5 per unit on 1st April, 2016. Following receipts and issues took place in April, 2016:
5th April, 2016: Purchased 800 units @ ₹ 8 per unit
12th April, 2016: Purchased 200 units @ ₹ 8 per unit
15th April, 2016: Issued 3,000 units 25th April, 2016: Purchased 1,000 units @ ₹ 9 per unit
Cost of inventory as on 30th April, 2016 under weighted average basis will be —
(A) ₹ 25,500
(B) ₹ 27,000
(C) ₹ 20,000
(D) ₹ 23,500
Answer:
(A) ₹ 25,500
Inventory Management – Financial Management MCQ 54

Question 152.
Dec 2016: A company produces a single product for which following data is available:
Average production per week: 200 units Usage per unit: 10 kg Re-order level: 8,000 kg Delivery time required: 2 weeks
The minimum level of stock required will be —
(A) 3,000 kg
(B) 5,000 kg
(C) 4,000 kg
(D) 2,500 kg
Answer:
(C) 4,000 kg
Minimum level = Re-order level – (Normal usage × Average delivery
period)
= 8,000-(2,000×2)
= 4000

Question 153.
Dec 2016: Which of the following is considered as normal loss of material —
(A) Pilferage
(B) Loss due to flood
(C) Loss due to accident
(D) Loss arising from careless handling of material
Note: MCQ is wrongly drafted. For further clarification see the hints.
Normal loss is unavoidable and uncontrollable.
Normal loss is that loss which has necessarily incurred and thus is unavoidable.
Examples:

  • Loss by evaporation
  • Loss due to loading and unloading
  • Loss due to breaking the bulk, etc.

Abnormal loss is that loss which arises due to inefficiency in operations, mischief, carelessness, etc.

Examples are –

  • Theft or pilferage
  • Breakage
  • Fire, accident, flood
  • Use of inaccurate instruments
  • Improper storage etc.

In option all the losses are given are ‘Abnormal losses’; hence none of the given option is correct.

Question 154.
Dec 2016: The maximum and minimum lead time is 4 weeks and 3 weeks respectively. If the maximum and minimum weekly consumption is 25 units and 20 units respectively, the re-ordering level will be —
(A) 100 Units
(B) 110 Units
(C) 120 Units
(D) 140 Units
Answer:
(A) 100 Units
Re-Order Level = (Maximum Usage × Maximum Delivery Period)
= (25 × 4)
= 100 units

Question 155.
June 2017: A, B, C analysis is
(A) a system of profit planning
(B) a technique of financial analysis
(C) a technique of inventory control
(D) a technique of profit determination
Answer:
(C) a technique of inventory control

Question 156.
June 2017: Two avoidable reasons for the difference between bin card and physical quantity of material may be and wrong posting in the bin card.
(A) Pilferage
(B) Normal
(C) Abnormal
(D) Reasonable
Answer:
(A) Pilferage

Question 157.
June 2017: When prices fluctuate widely, which of the following method will even out the effect of fluctuations?
(A) Weighted average
(B) FIFO
(C) LIFO
(D) Simple average
Answer:
(A) Weighted average

Question 158.
June 2017: In which of the following methods, material issues are priced at pre-determined rate?
(A) Replacement price method
(B) Specific price method
(C) Inflated price method
(D) Standard price method
Answer:
(D) Standard price method

Question 159.
June 2017: Which of the following does not normally appear on a material requisition form?
(A) Job number
(B) Unit cost
(C) Supplier’s name
(D) Quantity requisitioned
Answer:
(C) Supplier’s name

Question 160.
Dec 2017: Which of the following difference in material stock adjusted by considering as part of material cost?
(A) Apparent differences
(B) Differences due to abnormal causes
(C) Differences due to avoidable causes
(D) Differences due to unavoidable causes
Answer:
(D) Differences due to unavoidable causes

Question 161.
Dec 2017: This type of loss is connected with both input and output:
(A) Waste
(B) Scrap
(C) Defectives
(D) All of the above
Answer:
(A) Waste

Question 162.
Dec 2017: Decision regarding centralized purchase of material has to be taken on the basis of:
(A) Geographical separation of plant
(B) Homogeneity of products
(C) Type of material to be purchased
(D) All of the above
Answer:
(D) All of the above

Question 163.
Dec 2017: The rate per kg of material P, Q, R & S are respectively ₹ 12, ₹ 15, ₹ 18 & ₹ 21. The input-output ratios of the material are 140%, 130%, 120% & 110% respectively. The most economical material for production is:
(A) P
(B) Q
(C) R
(D) S
Answer:
(A) P
Rate per kg of input of material P, Q, R and S are ₹ 12, ₹ 15, ₹ 18 & ₹ 21. Input output ratio of materials are 140%, 130%, 120% and 110%.
Suppose 1 kg input is introduced then output will be 1.4, 1.3, 1.2 and 1.1 kg respectively.
Cost per kg of output will be –Inventory Management – Financial Management MCQ 55

Question 164.
Dec 2017: During the time of inflation, the method of pricing of material issue which leads to a lower material costs for a job is:
(A) FIFO
(B) LIFO
(C) HIFO
(D) Standard Pricing Method
Answer:
(A) FIFO

Question 165.
Dec 2017: A Ltd. submits following data:
Normal uses (unit per week): 50 Minimum usage (unit per week): 25 Maximum usage (unit per week): 75 Re-order period (weeks): 4-6 Calculate re-order level.
(A) 100 units
(B) 200 units
(C) 150 units
(D) 450 units
Answer:
(D) 450 units
Re-Order Level = (Maximum Usage × Maximum Delivery Period)
= (25 × 4)
= 100 units

Question 166.
Dec 2017: If the annual carrying cost of Material Z is ₹ 4 per unit and its total carrying cost is ₹ 12,000 p.a., the economic order quantity of material is:
(A) 3,000 units
(B) 4,000 units
(C) 5,000 units
(D) 6,000 units
Answer:
(D) 6,000 units
Inventory Management – Financial Management MCQ 56

Question 167.
Dec 2017: The most suitable inventory control technique for spare parts is:
(A) ABC analysis
(B) VED analysis
(C) JIT analysis
(D) Control ratios
Answer:
(B) VED analysis

Question 168.
Dec 2017: Under LIFO method, the purchases and issues are as follows:
March 1 Purchased 300 units @ ₹ 3 each
March 5 Purchased 600 units @ ₹ 4 each
March 6 Issued 500 units
March 12 Purchased 700 units @₹ 5 each
March 16 Issued 800 units
The value of closing stock shall be:
(A) ₹ 900
(B) ₹ 1,200
(C) ₹ 1,500
(D) ₹ 2,100
Answer:
(A) ₹ 900
Inventory Management – Financial Management MCQ 57
Inventory Management – Financial Management MCQ 58

Question 169.
June 2018: Which of the following is not a cost price method of pricing of material issues?
(A) First-in-first-out (FIFO)method
(B) Last-in-first-out (LIFO) method
(C) Standard price method
(D) Specified price method
Answer:
(D) Specified price method

Question 170.
June 2018: Which of the following is not correct for calculation of re-ordering level of inventory?
(A) Maximum consumption X Maximum re-order period
(B) (Maximum consumption X Lead time) + Safety stock
(C) Minimum level + Consumption during time lag period
(D) (Maximum consumption X Lead time) – Safety stock
Answer:
(B) (Maximum consumption X Lead time) + Safety stock

Question 171.
June 2018: ……….. is a value based system of inventory control, in which materials are analyzed according to their value so that costly and more valuable materials are given greater attention.
(A) MAX-MIN plan
(B) Review of slow and non moving items
(C) ABC Analysis
(D) Order cycling system
Answer:
(C) ABC Analysis

Question 172.
June 2018: For the financial year ended 31st March, 2017, the figures extracted from the balance sheet of EXE Ltd. are as follow:
Opening stock ₹ 29,000 Closing stock ₹ 31,000 Cost of goods sold ₹ 2,40,000 The stock turnover ratio will be:
(A) 12 times
(B) 10 times
(C) 8 times
(D) 9 times
Answer:
(C) 8 times
Inventory Management – Financial Management MCQ 59

Question 173.
June 2018: If EOQ is 200 units, ordering cost is ₹ 20 per order and total purchases is 4,000 units. The carrying cost per unit will be:
(A) ₹ 4
(B) ₹ 6
(C) ₹ 8
(D) ₹ 2
Answer:
(A) ₹ 4
\(\mathrm{EOQ}=\sqrt{\frac{2 \times \text { Annual consumption } \times \text { Ordering cost }}{\text { Carrying cost p. u. p. a }}}\)
Put the figures given in option in above formula and check at which figure EOQ
comes 200.
Option A is correct.

Question 174.
June 2018: Which of the following items can be classified as “C” as per ABC analysis of inventory control?
Items Annual usage Unit Value per Unit (7)
Inventory Management – Financial Management MCQ 10
(A) Item number 5 only
(B) Item number 2 only
(C) Item numbers 3 and 4
(D) Item numbers 1 and 2
Answer:
(A) Item number 5 only
Inventory Management – Financial Management MCQ 60

Question 175.
Dec 2018: In ……….. technique of inventory control, quantities in hand of each item or class of stock is reviewed periodically say 30, 45 or 60 days.
(A) ABC Analysis
(B) Two-bin System
(C) Order Cycling System
(D) Perpetual Inventory System
Answer:
(C) Order Cycling System

Question 176.
Dec 2018: If the Minimum Stock Level is 2,500 units, Normal Consumption is 150 units, Maximum Re-order Period is 10 days and Normal Re-order Period is 8 days, then Re-order Level will be:
(A) 1,500 units
(B) 4,000 units
(C) 1,200 units
(D) 3,700 units
Answer:
(D) 3,700 units

Question 177.
Dec 2018: If annual total carrying cost, per unit carrying cost and cost per order are ₹ 15,000, ₹ 10 ₹ 150 respectively, then Economic Order Quantity will be:
(A) 1,500 units
(B) 3,000 units
(C) 100 units
(D) 200 units
Answer:
(D) 200 units

Question 178.
Dec 2018: Which of the following documents records quantity and value of the material?
(A) Bin card
(B) Stores ledger
(C) Both (A) and (B)
(D) None of (A) and (B)
Answer:
(B) Stores ledger

Question 179.
…………. method of pricing of material issues is not popular as it always undervalues the stock and leads to creation of secret reserve.
(A) Weighted Average Price
(B) Base Stock
(C) Highest in First Out
(D) Standard Price
Answer:
(C) Highest in First Out

Question 180.
Dec 2018: The monthly requirement of a component is 4,000 units. The cost per order is ₹ 1,000 and the carrying cost per unit per annum is ₹ 24. The Economic Ordering Quantity is:
(A) 2,000 units
(B) 4,000 units
(C) 577.35 units
(D) 1,825.74 units
Answer:
(A) 2,000 units

Question 181.
Dec 2018: During the time of inflation, which method of pricing of material issues leads to a higher material costs for a job?
(A) First in first out method
(B) Last in first out method
(C) Highest in first out method
(D) Standard pricing method
Answer:
(B) Last in first out method

Question 182.
June 2019: The following information is given:
10,000 units of material are consumed per year; per unit cost is Answer: 20; cost of processing an order is ₹ 50; Annual interest rate is 5%; Annual carrying cost of material per unit is 15% (other than interest). What would be the Economic Order Quantity (EOQ)?
(A) 200 units
(B) 500 units
(C) 400 units
(D) 100 units
Answer:
(B) 500 units

Question 183.
June 2019: Which of the following is the objective of inventory management?
(A) To ensure timely delivery of inventory for production
(B) To avoid under or over production
(C) To maintain investment in inventories at lowest level
(D) All of the above
Answer:
(D) All of the above

Question 184.
June 2019: V Ltd. is the manufacturer of picture tubes for TV, The following are details of their operation. Minimum usages 50 tubes per week, Maximum usages 200 tubes per week; Normal usages 100 tubes per week; lead time to supply 4-6 weeks; and Re-order quantity 400 tubes. What would be the maximum and minimum level of stock?
(A) 1,400 units and 700 units
(B) 1,200 units and 700 units
(C) 1,300 units and 600 units
(D) 1,100 units and 600 units
Answer:
(A) 1,400 units and 700 units

Question 185.
June 2019: Smoke, dust, gases and loss of weight due to seasoning are examples of
(A) Scrap
(B) Spoilage
(C) Defectives
(D) Waste
Answer:
(D) Waste

Question 186.
June 2019: The following information is given for receipts and issues of a material in the month of March, 2019.
Answers:
Inventory Management – Financial Management MCQ 11
What is the value of closing stock under
FIFO and LIFO method?
(A) 800 and 900
(B) 900 and 800
(C) 1,000 and 900
(D) 900 and 1,000
Answer:
(D) 900 and 1,000

Receivable Management – Financial Management MCQ

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

Receivable Management – Financial Management MCQ

Question 1.
Receivables means – ………..
I. Book debts
II. Debtors
III. Account receivables
Select correct answer from the options given below:
(A) I & II
(B) II & III
(C) I & III
(D) All of the above
Answer:
(D) All of the above

Question 2.
Receivables arise -…………….
1. If the goods are sold on credit.
2. If the goods are sold on cash
3. If the services are rendered on credit
4. If the services are rendered on cash.
Select correct answer from the options given below:
(A) 1 only
(B) 1 & 2
(C) 1 & 3
(D) All 1 to 4
Answer:
(C) 1 & 3

Question 3.
A decrease in the firm’s receivable turnover ratio means that –
(A) it is collecting credit sales more quickly than before
(B) it is collecting credit sales more slowly than before
(C) sales have gone down
(D) inventories have gone up
Answer:
(B) it is collecting credit sales more slowly than before
For example, if the hrm goes from 6 turns to 3 turns, the firm is increasing the average collection period from 60 days to 120 days (assuming a 360 day year). Thus, it is collecting more slowly.

Question 4.
The goal of receivables management is to maximize the value of the firm by achieving a trade-off between —
(A) Risk & Profitability
(B) Liquidity & Profitability
(C) Return & Profitability
(D) Return & Liquidity
Answer:
(A) Risk & Profitability

Question 5.
What do we call, when a firm extends credit terms that encourage the buyers of certain products to take delivery before the peak sales period and to defer payment until after the peak sales period?
(A) Trade account
(B) Cash discount
(C) Peak trade account
(D) Seasonal dating
Answer:
(D) Seasonal dating

Question 6.
Which of the following function is required to be performed by the finance manager in relation to proper management of receivables?
(A) To obtain optimum (not maximum) value of sales.
(B) To adopt relaxed policy for administrative expense.
(C) To increase opportunity cost of funds blocked in the receivables.
(D) To make more purchases at bigger discounts.
Answer:
(A) To obtain optimum (not maximum) value of sales.

Question 7.
The payment terms 2/10, Net 30 tell us that:
(A) 2% discount will be awarded if the payment is made within 10 days of invoice date; otherwise, the full amount is payable within next 10 days of invoice date.
(B) 10% discount will be awarded if the payment is made within 20 days of invoice date; otherwise, the full amount is payable within 30 days of invoice date.
(C) 2% discount will be awarded if the payment is made within 30 days of invoice date; otherwise, the full amount is payable within next 10 days of invoice date.
(D) 2% discount will be awarded if the payment is made within 10 days of invoice date; otherwise, the full amount is payable within 30 days of invoice date.
Answer:
(D) 2% discount will be awarded if the payment is made within 10 days of invoice date; otherwise, the full amount is payable within 30 days of invoice date.

Question 8.
Risk of non-payment may due to –
(A) Insolvency
(B) Liquidity problems
(C) Intention of cheating
(D) All of the above
Answer:
(D) All of the above

Question 9.
The cash discount is given to customers for:
(A) Early payments
(B) Good business relations
(C) Bulk purchase
(D) Frequent purchases
Answer:
(A) Early payments

Question 10.
Which of the following tool may be used to determine the degree of risk associated with cash collections?
A. Standard deviation
B. Co-efficient of variation
Select the correct answer from the options given below:
(A) B only
(B) Neither A nor B
(C) A only
(D) Both A and B
Answer:
(D) Both A and B

Question 11.
The accounts receivable that cannot be collected because of their bank ruptcy or another reason are termed as:
(A) Collectible accounts
(B) Bad customers
(C) Doubtful accounts
(D) Uncollectible accounts
Answer:
(D) Uncollectible accounts

Question 12.
Which of the following sentence describes correct strategy for proper administration of receivables?
(A) Most of the firms dissuade credit sales to first time customers.
(B) Promoting cash sales
(C) Firms must have special staff ear-marked for recovery efforts.
(D) (A) and (C)
Answer:
(D) (A) and (C)

Question 13.
Accounts receivable are reported in the balance sheet:
(A) At face value
(B) At gross value
(C) At net realizable value
(D) At net credit sales value
Answer:
(C) At net realizable value

Question 14.
……….. may also be offered for the early payment of dues.
(A) Trade discounts
(B) Special discounts
(C) Both (A) and (B)
(D) Cash discounts
Answer:
(D) Cash discounts

Question 15.
Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:
(A) An increase in the average collection period.
(B) A decrease in bad debt losses.
(C) An increase in sales.
(D) Higher profits.
Answer:
(A) An increase in the average collection period.

Question 16.
Credit rating is a study of credit standard of a customer Le. 5 C’s. Which of the following correctly describes those 5 C’s?
(A) Character, Capacity, Capital, Conditions & Collateral security
(B) Character, Capacity, Complaint, Conditions & Collateral security
(C) Character, Charm, Capital, Conditions & Collateral security
(D) Charter, Capacity, Capital, Conditions & Collateral security
Answer:
(A) Character, Capacity, Capital, Conditions & Collateral security

Question 17.
An exercise of credit rating involves –
(A) Doing it internally by a team within the firm
(B) Doing it through external special agencies.
(C) (A) or (B)
(D) None of the above
Answer:
(C) (A) or (B)

Question 18.
Place the methods of collecting on delinquent accounts from the most likely lowest to highest cost.
(A) Letters, phone calls, legal action, and personal visits.
(B) Phone calls, letters, legal action, and personal visits.
(C) Letters, phone calls, personal visits, and legal action.
(D) Personal visits, phone calls, letters, and legal action.
Answer:
(C) Letters, phone calls, personal visits, and legal action.

Question 19.
An important means to get an insight into collection pattern of debtors is the preparation of their –
(A) List of proposed discount
(B) Discount schedule
(C) Schedule of personal information of debtors
(D) Ageing Schedule.
Answer:
(D) Ageing Schedule.

Question 20.
Which of the following may be a reason why you would choose a policy with a higher Average Collection Period (ACP)?
(A) Lower percentage of collections in late dates.
(B) Higher percentage of collections in early dates.
(C) Lower percentage of collections in early dates.
(D) Higher percentage of collections in middle dates
Answer:
(B) Higher percentage of collections in early dates.

Question 21.
………….. is an arrangement to have debts collected by a third party entity for a fee.
(A) Factoring
(B) Aging
(C) Forming
(D) Crediting
Answer:
(A) Factoring

Question 22.
Selling accounts receivable to a third party at a reduced price is part of the collection process known as –
(A) Settling
(B) Writing off
(C) suing
(D) Factoring
Answer:
(D) Factoring

Question 23.
In ……….. type of factoring the bank/ factor takes all the risk and bear all the loss in case of debts becoming bad debts.
(A) Non-Recourse Factoring
(B) Invoice Discounting
(C) Maturity Factoring
(D) Recourse Factoring
Answer:
(A) Non-Recourse Factoring

Question 24.
Which one of the following would help to reduce the number of accounts receivable delinquencies?
(A) Ease the credit approval process
(B) Know your customers’ situations
(C) Refuse to extend payments
(D) Stop sending reminder letters
Answer:
(B) Know your customers’ situations

Question 25.
In factoring arrangement the debts as and when fall due are collected by the –
(A) Debtor
(B) Seller
(C) Factor
(D) Agent
Answer:
(C) Factor

Question 26.
A system used to decide whether to grant credit by assigning a numerical value that is related to the creditworthiness of the applicant is a(n)
(A) Credit Scoring System
(B) ERP System
(C) D & B Rating Classification System
(D) JIT System
Answer:
(A) Credit Scoring System

Question 27.
The factoring transaction involves
(A) Three parties Creditor, Buyer & Factor
(B) Four parties Seller, Buyer, Creditor & Factor
(C) Three parties Seller Buyer & Factor
(D) Four parties Debtor, Seller, Buyer, & Factor
Answer:
(C) Three parties Seller Buyer & Factor

Question 28.
…………. is a process by which a company clubs its different financial assets to form a consolidated financial instrument which is issued to investors. In return, the investors in such securities get interest.
(A) Factoring
(B) Securitization
(C) Bills rediscounting
(D) Forfaiting
Answer:
(B) Securitization

Question 29.
The main purpose of factoring accounts receivable is:
(A) to create an additional guarantee of collection
(B) to establish a legal proof for future use
(C) to meet immediate cash needs
(D) to invest accounts receivable in another business
Answer:
(C) to meet immediate cash needs

Question 30.
Which of the following function is/ are performed by the factor in factoring arrangement?
1. Administration of sellers’ sales ledger.
2. Collection of receivables purchased.
3. Provision of finance.
4. Protection against risk of bad debts.
5. Rendering advisory services in relation to receivables.
Select correct answer from the options given below:
(A) 3, 1, 5
(B) 2,4,3
(C) 4, 1, 3 & 5
(D) All 1 to 5
Answer:
(D) All 1 to 5

Question 31.
In a factoring with recourse, the loss resulting from bad debts is born by –
(A) the organization buying the accounts receivable
(B) the organization selling the accounts receivable
(C) the intermediate organization
(D) all of the above
Answer:
(B) the organization selling the accounts receivable

Question 32.
Under which of the following factoring arrangement the bank/factor purchases the receivables on the condition that any loss arising out or bad debts will be borne by the company which has taken factoring?
(A) Resource Factoring
(B) Recourse Factoring
(C) Non-Recourse Factoring
(D) Maturity Factoring
Answer:
(B) Recourse Factoring

Question 33.
In a factoring without recourse transaction, the loss resulting from bad debts is born by:
(A) Intermediate organization
(B) CEO of the organization
(C) Organization selling the accounts 2 receivable
(D) Organization buying the accounts receivable
Answer:
(D) Organization buying the accounts receivable

Question 34.
Which of the following is transferred in factoring arrangement?
(A) Receivable
(B) Payable
(C) Outstanding liabilities
(D) Prepaid assets
Answer:
(A) Receivable

Question 35.
Credit policy of every company is largely influenced by and
(A) Liquidity, accountability
(B) Liquidity, profitability
(C) Liability, profitability
(D) Liability, liquidity
Answer:
(B) Liquidity, profitability

Question 36.
Which of the following correctly describes ‘maturity factoring’ arrangement?
(A) A factoring arrangement which involves special purpose vehicle.
(B) A process which is governed by private contract between company and factoring firm.
(C) Under this type of factoring the bank provide an advance to the company against the account receivables and in turn charges interest rate from the company for the payment which bank has given to the company.
(D) In this type of factoring bank/factor does not give any advance to the company rather bank/factor collects it from customers and pays to the company either on the date of collection from the customers or on a guaranteed payment date.
Answer:
(D) In this type of factoring bank/factor does not give any advance to the company rather bank/factor collects it from customers and pays to the company either on the date of collection from the customers or on a guaranteed payment date.

Question 37.
In which type of factoring, the customer is not informed of the factoring arrangement?
(A) Private Factoring
(B) Secrete Factoring
(C) Undisclosed Factoring
(D) Untold Factoring
Answer:
(C) Undisclosed Factoring

Question 38.
Which of the following statements (in general) is correct?
(A) A low receivables turnover is desirable.
(B) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
(C) An increase in net profit margin with no change in sales or assets means a poor ROI.
(D) The higher the tax rate for a firm, the lower the interest coverage ratio.
Answer:
(B) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

Question 39.
Four parties involved in securitization are –
(A) Obligor, Owner, Special Purpose Vehicle, Investor
(B) Debtor, Owner, Special Purpose Vehicle, Investor
(C) Special Purpose Vehicle, Investor
Creditor & Financial Institution
(D) Investor, Obligor, Agent, Special Purpose Vehicle
Answer:
(A) Obligor, Owner, Special Purpose Vehicle, Investor

Question 40.
Which one of the following would NOT tighten a firm’s credit policy?
(A) Implementing a more stringent credit standard
(B) Shortening the net due period
(C) Lengthening the discount period
(D) Requiring a cash down payment on any purchase
Answer:
(C) Lengthening the discount period

Question 41.
Factoring involves arrangement.
Securitization is arrangement.
(A) Long term finance; long term finance
(B) Short term finance; long term finance
(C) Short term finance; short term finance
(D) Long term finance; short term finance
Answer:
(B) Short term finance; long term finance

Question 42.
Which one of the following correctly applies to a credit scoring system?
(A) Borrowers with low credit scores should be granted higher credit limits.
(B) Borrowers with higher incomes should be granted a higher score than borrowers with lower incomes.
(C) A business selling luxury items should be granted a higher score during periods of weak economic growth.
(D) The more collateral provided by a firm, the lower the credit score assigned.
Answer:
(B) Borrowers with higher incomes should be granted a higher score than borrowers with lower incomes.

Question 43.
(DFHI) aims to impart liquidity to commercial bills, which have already been discounted by commercial banks
(A) Discount & Finance House of India
(B) Discount & Finance Home of India
(C) Discount & Factoring House of India
(D) Discount & Factoring Home of India
Answer:
(A) Discount & Finance House of India

Question 44.
Making a credit decision is based upon all of the following except which?
(A) Character
(B) Capital
(C) Complaint
(D) Collateral
Answer:
(C) Complaint

Question 45.
Bill discounting is always with
(A) recourse
(B) non-recourse
(C) recourse or without recourse
(D) resource
Answer:
(A) recourse

Question 46.
Non-Recourse factoring is called as –
(A) Maturity Factoring
(B) Full Factoring
(C) Material Factoring
(D) Non-Finance Factoring
Answer:
(B) Full Factoring

Question 47.
…………….is a means of financing used by exporters that enables them to receive cash immediately by selling their medium-term receivables (the amount an importer owes the exporter) at a discount, and eliminate risk by making the sale without recourse, meaning the exporter has no liability regarding possible default by the importer on paying the receivables.
(A) Forfaiting
(B) Factoring
(C) Securitization
(D) Reconstruction Factoring
Answer:
(A) Forfaiting

Question 48.
A forfaiter purchase of the receivables, the sum of which is typically guaranteed by the –
(A) exporter’s bank
(B) importer’s bank
(C) buyer’s bank
(D) financer’s bank
Answer:
(B) importer’s bank

Question 49.
Forfaiting eliminates –
(A) Risk of the exporter not receiving payment
(B) Credit risk and transfer risk
(C) Risks posed by foreign exchange rate or interest rate changes.
(D) All of the above
Answer:
(D) All of the above

Question 50.
Forfaiting is –
(A) either with recourse or without re¬course
(B) always without recourse
(C) pure financing agreement
(D) (B) and (C)
Answer:
(D) (B) and (C)

Question 51.
………. is an arrangement to have export debts collected by a third party entity for a fee.
(A) Export factoring
(B) Forfaiting
(C) Striding
(D) Countertrade
Answer:
(A) Export factoring

Question 52.
The term credit policy is used to refer to decisions variable:
(A) Credit standards
(B) Credit terms
(C) Collection efforts
(D) All of the above
Answer:
(D) All of the above

Question 53.
…………. refers to the use of a firm’s receivable to secure a short term loan.
(A) Factoring
(B) Pledging
(C) Monitoring
(D) Securitization
Answer:
(B) Pledging

Question 54.
Which of the following statement(s) 5 is/are correct?
(A) Control of bad-debts is an important part of controlling the working capital or the current assets of the company
(B) Credit policy should be followed which may not lead to bad-debts and expedite collections
(C) Periodical checks should be maintained by classifying debtors as outstanding from 0-30 days, 30-60 days, 60-90 days and 90 and over
(D) All of the above
Answer:
(D) All of the above

Question 55.
You are considering relaxation of Credit policy ie. increasing credit period from 30 days to 45 days then in which of the following circumstances you will advice to do so -……….
(A) If the present profit increases
(B) If present loss reduces
(C) If present bad debt reduces
(D) All of the above
Answer:
(D) All of the above

Question 56.
What relationship exists between the average collection period and accounts receivable turnover?
(A) Both ratios are expressed in number of days
(B) As average collection period increases (decreases) the accounts receivable turnover decreases (increases)
(C) Both ratios are expressed in number of times receivables are collected per year
(D) There is a direct and proportional relationship
Answer:
(B) As average collection period increases (decreases) the accounts receivable turnover decreases (increases)

Question 57.
Which of the following statement is correct?
(A) The higher the debtors turnover ratio betters the position.
(B) Lower the velocity betters the position.
(C) Both (A) & (B)
(D) None of the above
Answer:
(C) Both (A) & (B)

Question 58.
Select the odd one in relation to topic of management of receivables?
(A) Debtors
(B) Factoring
(C) Creditor
(D) Forfaiting
Answer:
(C) Creditor

Question 59.
If you are proposing to introduce relaxed credit policy, you will adopt it if –
(A) There is increase in profit
(B) There is reduction in loss
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 60.
When net sales for the year are ₹ 2,50,000 and debtors ₹ 50,000, the average collection period is:
(A) 60 days
(B) 45 days
(C) 42 days
(D) 73 days
Answer:
(D) 73 days
Average collection period =
Receivable Management – Financial Management MCQ 4

Question 61.
If credit sales for the year is ₹ 5,40,000 and Debtors at the end of year is ₹ 90,000 the Average Collection Period will be –
(A) 30 days
(B) 61 days
(C) 90 days
(D) 120 days
Answer:
(B) 61 days
Receivable Management – Financial Management MCQ 5

Question 62.
Romoji Ltd. has sales of ₹ 1,18,00,000 and its debtor turnover ratio is 4.2. Cost of goods sold is ₹ 82,60,000. Debtors = ?
(A) ₹ 19,66,725
(B) ₹ 19,66,663
(C) ₹ 19,66,263
(D) ₹ 19,66,667
Answer:
(D) ₹ 19,66,667
Receivable Management – Financial Management MCQ 6
Note: Debtors turnover ratio can be calculated by taking ‘credit sales ’ or ‘cost of goods sold’. As per data given in question if ‘credit sales’ figure is used to calculate debtors then it comes to 28,09,524; but no such option is given hence debtors are calculated on ‘cost of goods sold’.

Question 63.
X Ltd. cash sales and credit sales are ₹ 5,67,500 & ₹ 87,50,000 respectively. Cost of goods sold is ₹ 61,25,000. Debtors are ₹ 8,20,833 and bills receivable are ₹ 2,00,000.
Debtors turnover ratio = ?
(A) 6.00
(B) 7.46
(C) 10.66
(D) 5.38
Answer:
(A) 6.00
Receivable Management – Financial Management MCQ 7

Question 64.
Total sales of LMN Ltd. are ₹ 31,248 out of which 25% are cash sales. Closing balance of debtors are ₹ 9,468. Debtors velocity = ?
(A) 4.2 months
(B) 157 days
(C) 148 days
(D) 4.43 month
Answer:
(C) 148 days
Receivable Management – Financial Management MCQ 8

Question 65.
Debtors velocity = 3 months
Sales = ₹ 25,00,000
Bills receivable & Bills payable were ₹ 60,000 and ₹ 36,667 respectively.
Sundry debtors = ?
(A) ₹ 6,25,000
(B) ₹ 5,25,000
(C) ₹ 5,65,000
(D) ₹ 6,65,000
Answer:
(C) ₹ 5,65,000
Receivable Management – Financial Management MCQ 9
x Account Receivable = 6,25,000
Debtors + Bills Receivable = Account Receivable
x + 60,000 = 6,25,000
x = Debtors = 5,65,000

Question 66.
K Ltd. had sales last year of ₹ 26,50,000, including cash sales of ₹ 2,50,000. If its average collection period was 36 days, its ending accounts receivable balance is closest to (Assume a 365 day year.)
(A) ₹ 2,63,127
(B) ₹ 2,40,000
(C) ₹ 2,36,712
(D) ₹ 2,40,721
Answer:
(C) ₹ 2,36,712

Question 67.
Apollo Ltd. sells its products allowing a 2 credit period of 15 days only. The average %, variable cost is 60% of sales value and current sales amount to ₹ 100 lakhs. Data for the year is as follows:
Receivable Management – Financial Management MCQ 1
Debtors are calculated on cost.
(A) Incremental profit ₹ 3.50 lakh
(B) Incremental loss ₹ 3.50 lakh
(C) Incremental profit ₹ 4.20 lakh
(D) Incremental loss ₹ 4.20 lakh
Answer:
(A) Incremental profit ₹ 3.50 lakh
Receivable Management – Financial Management MCQ 10
Receivable Management – Financial Management MCQ 11

Question 68.
F Ltd. is examining relaxation of its credit policy. It sells at present 20,000 units at a price of ₹ 100 per unit, the variable cost per unit is ₹ 88 and average cost per unit at the current sales volume is ₹ 92. All the sales are on credit, the average collection period being 36 days. A relaxed credit policy is expected to increase sales by 10% and the average age of receivables to 60 days. Assuming 15% return, should F Ltd. relax its credit policy?
Note: 1 Year = 360 days
(A) Yes, F Ltd. can change its policy as it lead to 15.79% increase in profit.
(B) No, F Ltd. need not to change its policy as there is no incremental return.
(C) Yes, F Ltd. can change its policy as it lead to incremental return of ₹ 2,400.
(D) None of the above option is correct.
Answer:
(A) Yes, F Ltd. can change its policy as it lead to 15.79% increase in profit.

Question 69.
Average cost increases from ₹ 88 to ₹ 92. Incremental profit & incremental debtors is 148,000 & 13,04,000 respectively. Cost of capital is 15%. What is the rate of incremental return on change of credit policy?
(A) 15.79%
(B) No incremental return
(C) 0.79%
(D) 1.58%
Answer:
(A) 15.79%
Receivable Management – Financial Management MCQ 12

Question 70.
ABC Ltd. is considering certain relaxation in its credit policy from 60 days to 69 days.
Receivable Management – Financial Management MCQ 2
Required rate of return and P/V ratio are 20 % & 30% respective1.
Debtors are calculated on cost
(A) Company should not change policy as debtors are increasing.
(B) Change in policy may lead to profit of ₹ 23,830.
(C) Change in policy may lead to incremental profit of ₹ 18,542.
(D) Company should not change in policy due incremental loss.
Answer:
(C) Change in policy may lead to incremental profit of ₹ 18,542.
Receivable Management – Financial Management MCQ 13

Question 71.
In order to increase sales from normal level of ₹ 2,40,000 per annum, the marketing manager submits following two proposal for relaxing credit policy:
Proposal I: Increase credit period from 30 days to 45 days which will lead to increase in sales by ₹ 12,000.
Proposal II : Increase credit period from 30 days to 60 days which will lead to increase in sales by ₹ 18,000.
P/V Ratio and excepted pre-tax rate of return are 33.33% and 20 respectively.
Which of the following statement is correct?
Debtors are calculated on sales.
(A) Data given in question is not sufficient because without data as to cost no conclusion can be drawn.
(B) As compared to present policy, profit will increase by ₹ 1,800 for Proposal II and by ₹ 2,000 for Proposal II.
(C) As compared to present policy, profit will increase by ₹ 1,700 for Proposal I and by ₹ 2,000 for Proposal II.
(D) As compared to present policy, profit will increase by ₹ 1,700 for Proposal I and by ₹ 1,400 for Proposal II.
Answer:
(D) As compared to present policy, profit will increase by ₹ 1,700 for Proposal I and by ₹ 1,400 for Proposal II.
Receivable Management – Financial Management MCQ 14
Receivable Management – Financial Management MCQ 15

Question 72.
A Company has prepared the following projections for a year:
Sales — 21,000
Selling price per unit — ₹ 40
Variable costs per unit — ₹ 25
Total costs per unit — ₹ 35
Credit period allowed — 1 month
The company proposes to increase the credit period to 2 months. The change in the policy will increase the sale by 8%. The company desires a return of 25% on it investment. Debtors are calculated on cost. The company may decide to shift to proposed policy because –
(A) Total profit in proposed policy will be ₹ 1,30,200 whereas it is ₹ 1,05,000 for present policy.
(B) Incremental profit is ₹ 25,200
(C) Incremental return is 36.92%
(D) All of the above
Answer:
(D) All of the above

Question 73.
Analysis of debtor’s collection history of Karina Ltd. shows the following facts. 42% debtors pays the amount due within 4 days of sales; 18% debtors pays within 20 days and 40% debtors pays within 40 days of sales. What is the average collection period of Karina Ltd. ?
(A) 23 days
(B) 28 days
(C) 21 days
(D) 18 days
Answer:
(C) 21 days
Receivable Management – Financial Management MCQ 16

Question 74.
In year 2018, 7% customer paid the amount due in 5 days from the date of sale; 54% customer paid the amount in 30 days and 39% customer paid the amount in 44 days from the date of sale.
In year 2019,13% customer paid the amount due in 4 days from the date of sale; 64% customer paid the amount in 25 days and 23% customer paid the amount in 58 days from the date of sale.
The average collection period –
(A) in year 2019 increased by 4 days
(B) in year 2019 decreased by 3 days
(C) in year 2019 increased by 3 days
(D) in year 2019 decreased by 4 days
Answer:
(D) in year 2019 decreased by 4 days
Receivable Management – Financial Management MCQ 17

Question 75.
A firm has current sales of ₹ 25,48,000. The firm has unutilized capacity. In order to boost its sales, it is considering the relaxation in its credit policy. The proposed terms of credit will be 60 days credit against the present policy of 45 days. As a result, debtors (calculated on sales) will be –
(A) increased by 1,06,735
(B) decreased by 1,04,712
(C) increased by 1,06,167
(D) increased by 1,04,635
Answer:
(C) increased by 1,06,167
Increase in credit period = 60 – 45 = 15 days
Increase m Debtors = \(\frac{25,48,000}{360} \times 15\) =1,06,167

Question 76.
A firm has current sales of ₹ 38,22,000. In order to boost its sales, it is considering the relaxation in its credit policy. The proposed terms of credit will be 40 days credit against the present policy of 25 days. The firm’s sales are expected to increase by 10%. As a result, debtors (calculated on sales) will be –
(A) increased by ₹ 1,72,725
(B) decreased by ₹ 1,75,175
(C) decreased by ₹ 1,75,775
(D) increased by ₹ 1,75,175
Answer:
(D) increased by ₹ 1,75,175
Increase m Debtors = \(\frac{38,22,000 \times 1.1}{360} \times 15\) =1,75,175

Question 77.
A firm has current sales of 12,56,48,750. It is considering the relaxation in its credit policy. The proposed terms of credit will be 60 days credit against the present policy of 45 days. As a result, the bad debts will increase from 1.5% to 2% of sales. The firm’s sales are expected to increase by 10%. Variable operating costs is 72% of sales. Firm’s corporate tax rate is 35%, and it requires after-tax return of 15%. Should firm change its credit period?
Note: Firm calculate its debtor on sales.
(A) No, the firm should not change its pol-icy as profit will decline by ₹ 3,50,177
(B) Yes, the firm should change its policy as profit will increase by ₹ 5,39,036
(C) Yes, the firm should change its policy as profit will increase by ₹ 5,38,623
(D) Yes, the firm should change its policy as profit will increase by ₹ 3,50,105
Answer:
(D) Yes, the firm should change its policy as profit will increase by ₹ 3,50,105

Question 78.
Sales Manager of AB Ltd. suggests that if credit period is given for 1.5 months then sales may likely to increase by ₹ 1,20,000 per annum. Cost of sales amounted to 90% of sales. The risk of non-payment is 5%. Income tax rate is 3 0%. The expected return on investment is ₹ 3,375 (after tax). Should the company change its credit policy?
(A) Yes, as total net profit under proposed policy will be ₹ 4,200.
(B) No, as total net profit under proposed policy will be ₹ 4,200.
(C) Yes, as incremental net profit under proposed policy will be ₹ 4,200.
(D) No, as incremental net loss under proposed policy will be ₹ 4,200.
Answer:
(C) Yes, as incremental net profit under proposed policy will be ₹ 4,200.

Question 79.
XYZ Ltd. has credit sales amounting to ₹ 32,00,000. Sale price per unit is ₹ 40, the variable cost is ₹ 25 while the average cost is ₹ 32. Average age of receivables of the firm is 72 days. Firm is considering to tighten the credit standards. It will result in a fall in sales to ₹ 28,00,000, and the average age of receivables to 45 days. Assume 20% of return. Proposed policy will yield –
1 Year= 360days and debtors are calculated on cost.
(A) Incremental profit of ₹ 1,05,350
(B) Incremental loss of ₹ 1,05,350
(C) Incremental profit of ₹ 1,05,530
(D) Incremental loss of ₹ 1,05,530
Answer:
(B) Incremental loss of ₹ 1,05,350

Question 80.
A company has sales of ₹ 25,00,000. Average collection period is 50 days, bad debts losses are 5% of sales and collection expenses are ₹ 25,000. The cost of funds is 15%. The company has two alternative collection programmes:
Receivable Management – Financial Management MCQ 3
Debtors are calculated on sales.
Advice the company by selecting the most correct option –
(A) The company should shift toward Programme I as profit is increasing by ₹ 10,274.
(B) The company should shift toward Programme II as profit is increasing by ₹ 15,548.
(C) The company should not change its policy as Programme I & Programme II does not have any incremental profits.
(D) The company may shift to Programme I or Programme II as both have incremental profit of ₹ 10,274 & ₹ 15,548 respectively but Programme II will be selected as it has more incremental profit as compared to Programme I.
Answer:
(D) The company may shift to Programme I or Programme II as both have incremental profit of ₹ 10,274 & ₹ 15,548 respectively but Programme II will be selected as it has more incremental profit as compared to Programme I.
Receivable Management – Financial Management MCQ 18
Receivable Management – Financial Management MCQ 19

Question 81.
H Ltd. has current sales of ₹ 20,00,000. It is planning to introduce a discount policy of 2/10, Net 30. As a result, the Company expects the average collection period to go down by 10 days and 80% of the sales opt for cash discount facility. Required return on investment is 20%, should it introduce the new discount policy?
(A) Yes, as profit is increasing by ₹ 20,888.
(B) No, as profit is decreasing by ₹ 20,889.
(C) Make no policy change.
(D) No, as profit is decreasing by ₹ 20,837.
Answer:
(B) No, as profit is decreasing by ₹ 20,889.

Question 82.
Current profit of R & Co. is ₹ 3,00,000. It is planning to introduce a discount policy of 2/10, Net 3 0. Due to change in policy profit is expected to increase by ₹ 50,000. Firm’s current average collection period is 30 days which is expected to fall by 10 days. Present investment in debtor is ₹ 58,333 which will be reduced by ₹ 16,666. However, due to increased sales, increased working capital required will be of ₹ 20,000 (without taking into account the effect of debtors). Total discount likely to be claimed in new policy will amount to ₹ 11,000.20% is the required return on investment. What is the impact of change in policy?
(A) Profit will decrease by ₹ 38,000.
(B) Profit will increase by ₹ 38,000.
(C) Profit will increase by ₹ 38,334.
(D) Profit will decrease by ₹ 38,533.
Answer:
(C) Profit will increase by ₹ 38,334.
Receivable Management – Financial Management MCQ 20

Question 83.
Present credit terms of P Ltd. are 1/10 Net 30. Its annual sales are ₹ 80 lakhs, its average collection period is 20 days. Its variable and average total costs to sales are 0.85 & 0.95 and its Ko is 10%. Proportion of sales on which customers currently take discount is 0.5. Company is relaxing its discount terms to 2/10 Net 30 which will increase sales by ₹ 5 lakh, reduce average collection period to 14 days and increase the proportion of discount to sales to 0.8. What will be the effect of on company’s profit? Take year as 360 days. Debtors are calculated on cost.
(A) Profit will increase by ₹ 9,900
(B) Profit will increase by ₹ 9,986
(C) Profit will increase by ₹ 8,986
(D) Profit will decrease by ₹ 9,986
Answer:
(D) Profit will decrease by ₹ 9,986
Receivable Management – Financial Management MCQ 21
Working Note:
Present discount = 80,00000 × 50% × 1% = 40,000
Proposed discount 8500000 × 80% × 2% = 1,36,000

Question 84.
G Ltd. presently gives credit terms of ‘net 30 days’. It has ₹ 600 lakh in credit sales and its average collection period is 45 days. To stimulate sales, the company may give credit terms of ‘net 60 days’ with sales expected to increase by 15%. After the change, the average collection period is expected to be 75 days. Variable cost to sales ratio is 80% and before tax required rate of return on investment in receivables is 20%. Assume 360 days in a year. Debtors are calculated on sales. Should the company extend its credit period?
(A) Yes, as there is incremental return of 26.18%
(B) Yes, as there is incremental return of 26.32%
(C) Yes, as there is incremental return of 26.52%
(D) Yes, as there is incremental return of 26.81%
Answer:
(A) Yes, as there is incremental return of 26.18%
Receivable Management – Financial Management MCQ 22

Question 85.
Following are the details regarding then operation of firm:
Sales : ₹ 12,00,000
Selling price p.u. : 10
Variable cost p.u. : 7
Total cost p.u. : 9
Credit period : 1 month
Firm is considering a proposal to change credit period from 1 month to 2 months. The sales are expected to increase by 25%. Firm’s required return is 25%.
Debtors are calculated on cost.
Which of the following statement is correct?
(A) Total profit of the firm after change in policy will be ₹ 2,10,000.
(B) Incremental profit and investment in debtors will be ₹ 90,000 & ₹ 1,25,000 respectively.
(C) Incremental return will be 72%.
(D) All of the above.
Answer:
(D) All of the above.
Receivable Management – Financial Management MCQ 23

Question 86.
S Ltd. currently has sales of ₹ 30,00,000 with an average collection period of 2 months. At present, no discounts are offered. Management of the company is thinking to allow a discount of 2% on sales which will result as under:
(i) The average collection period would reduce to one month.
(ii) 50% of customers would take advantage of 2% discount.
Company would normally require a 25% return on its investment. Advise whether to extend the discount on sales.
Debtors are calculated on sales.
(A) Yes, as profit will increase by ₹ 32,500
(B) Yes, as profit will increase by ₹ 30,500
(C) Yes, as profit will increase by ₹ 31,500
(D) Yes, as profit will increase by ₹ 32,000
Answer:
(A) Yes, as profit will increase by ₹ 32,500
Receivable Management – Financial Management MCQ 24

Question 87.
A group of new customers with 10% risk of non-payment, desires to establish business connection with you. The group desires 1.5 months credit and is likely to increase the sales of your concern by ₹ 1,20,000 p.a. Cost of sales would be 80% of sales. Tax rate is 40% and required rate of return after tax is 40%. Debtors are calculated on cost. Should new business connection be established?
(A) Yes, as there is reduction in loss
(B) No, as profit is increasing
(C) Yes, profit is increasing by ₹ 7,200
(D) No, loss will increase by ₹ 7,200
Answer:
(C) Yes, profit is increasing by ₹ 7,200
Receivable Management – Financial Management MCQ 25

Question 88.
A manufacturing firm has credit sales of ₹ 360 lakh and its average collection period is 30 days. Firm estimates bad debt losses at around 2% of credit sales. Firm spends ₹ 1,40,000 annually on debtors’ administration.
A factoring firm has offered to buy the firm’s receivables. The factor will charge 1% commission and will pay an advance against receivables on an interest @15% p.a. after withholding 10% as reserve. How much net amount will be paid by the Factor to the Firm ₹ 3 Assume 360 days in a year.
(A) ₹ 26,36,625
(B) ₹ 26,63,625
(C) ₹ 26,36,526
(D) ₹ 26,63,265
Answer:
(A) ₹ 26,36,625
Receivable Management – Financial Management MCQ 26
Receivable Management – Financial Management MCQ 27
Receivable Management – Financial Management MCQ 28

Question 89.
A manufacturing firm has credit sales of ₹ 360 lakh and its average collection period is 30 days. Firm estimates bad debt losses at around 2% of credit sales. Firm spends ₹ 1,40,000 annually on debtors’ administration. A factoring firm has offered to buy the firm’s receivables. The factor will charge 1% commission and will pay an advance against receivables on an interest @15% p.a. after withholding 10% as reserve. Net saving/loss to the Firm due to factoring arrangement = ?
(A) (99,500)
(B) (8,60,000)
(C) 99,500
(D) 7,60,500
Answer:
(C) 99,500
Receivable Management – Financial Management MCQ 26
Receivable Management – Financial Management MCQ 27
Receivable Management – Financial Management MCQ 28

Question 90.
Based on the current credit policy, 25% of the customers pay in 15 days, 50% pay in 60 days, and 25% pay in 150 days. Based on the new proposal, 22% of the customers would pay in 20 days, 50% would pay in 30 days, and 28% would pay in 90 days. What is the approximate effect of the new credit policy proposal on the average collection period (ACP)?
(A) ACP would decrease by 5 days.
(B) ACP would decrease by 15 days.
(C) ACP would decrease by 20 days.
(D) ACP would decrease by 26 days.
Answer:
(D) ACP would decrease by 26 days.
Receivable Management – Financial Management MCQ 29

Question 91.
Amit Gupta, a trader is considering changing its credit policy. The incremental cash flows associated with this change are as follows:
Increase in sales of ₹ 13,100, increase in cost of goods sold of ₹ 6,900, increase in bad debts of ₹ 1,500, increase in other costs of ₹ 2,700 and an increase in taxes of ₹ 750. The incremental initial cash outflow at time zero is ₹ 16,450. The applicable discount rate is 9.5%. What is the net present value (NPV) of this proposed change in the credit policy?
(A) (3,292)
(B) (1,089)
(C) (1,444)
(D) (15,200)
Answer:
(A) (3,292)
Cash flow = 13,100 – 6,900- 1,500 – 2,700 – 750 = 1,250
Present value of cash flow = 1250 ÷ 0.095 = 13,158
Net present value = 13,158 – 16,450 = – 3292

Question 92.
You are analyzing two separate credit policies. Policy A will produce annual sales of ₹ 6,45,000 and annual interest expense of ₹ 11,500. Cost of goods sold will equal 53% of sales and bad debts will be 3% of sales. The tax rate is 35%. In comparison, Policy B would have 5% less in sales, interest expense of ₹ 6,000, 53% cost of goods sold, and bad debts equal to 1 % of sales. All other expenses are equal to ₹ 1,21,000 under both policies. Which one of the following statements is correct concerning these two credit policies?
(A) Policy A produces ₹ 34,250 more in sales than Policy B.
(B) Policy B produces ₹ 8,317 more in net income than Policy A.
(C) Policy B produces ₹ 8,317 more in net income than Policy A.
(D) Policy B produces ₹ 2,317 more in net income than Policy A.
Answer:
(D) Policy B produces ₹ 2,317 more in net income than Policy A.
Receivable Management – Financial Management MCQ 30

Question 93.
M Ltd. expects annual sales of ₹ 2.45 million next year. They have a strict credit policy of 2/10, net 20. Based on a 365-day year, 1 % of their customers pay in 1 day, 41 % pay in 10 days, 56% pay in 23 days and 2% pay in 60 days. What is the expected value of their accounts receivable for next year?
(A) ₹ 1,22,097
(B) ₹ 1,26,583
(C) ₹ 4,09,639
(D) ₹ 4,55,699
Answer:
(A) ₹ 1,22,097
Receivable Management – Financial Management MCQ 31

Question 94.
Firoz has been analyzing the accounts receivables of his firm. Based on the current credit policy, 21% of the customers pay in 14 days, 76% pay in 41 days and 3% pay in 112 days. Based on his best estimates and a new policy that he is proposing, Firoz feels that 42% of the customers would pay in 21 days, 56% would pay in 35 days and 2% would pay in 90 days. What is the effect of the new credit policy proposal on the average collection period?
(A) Average collection period would decrease by 7 days.
(B) Average collection period would decrease by 4 days.
(C) Average collection period would increase by 4 days.
(D) Average collection period would increase by 7 days.
Answer:
(A) Average collection period would decrease by 7 days.

Question 95.
Ninety-per cent of X company’s total sales of ₹ 6,00,000 is on credit. If its year-end receivables turnover is 5, the average collection period (based on a, 365 day year) and the year-end receivables are, respectively:
(A) 365 days and ₹ 1,08,000
(B) 73 days and ₹ 1,20,000
(C) 73 days and ₹1,08,000
(D) 81 days and ₹ 1,08,000
Answer:
(C) 73 days and ₹1,08,000

Question 96.
K Ltd. had sales last year of ₹ 265 million, including cash sales of ₹ 25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to – (Assume a 365-day year)
(A) ₹ 26.1 million
(B) ₹ 23.7 million
(C) ₹ 7.4 million
(D) ₹ 18.7 million
Answer:
(B) ₹ 23.7 million

Question 97.
The credit policy of S Ltd. is “1.5/10, Net 35.” At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took the cash discount?
(A) Lower than the present level.
(B) No change from the present level.
(C) Higher than the present level.
(D) Unable to determine without more information.
Answer:
(A) Lower than the present level.

Question 98.
A firm sells ₹ 5,00,000 p.a. with 3% bad debt losses. Two alternative policies are available. Policy A would increase sales by ₹ 3,00,000, but bad debt losses on additional sales would be 8%. Policy B would increase sales by an additional ₹ 1,20,000 over Policy A and bad debt losses on the additional ₹ 1,20,000 of sales would be 15%. The average collection period will remain at 60 days (6 turns per year) no matter the policy decision made. Profit margin will be 20% of sales and no other expenses will increase. Opportunity cost is 20%.
(A) Make no policy change.
(B) Change to only Policy A.
(C) Change to Policy B (means also taking Policy A first).
(D) All policies lead to the same total firm profit, thus all policies are equal.
Answer:
(C) Change to Policy B (means also taking Policy A first).

Question 99.
Elite Corporation Ltd. is considering a change in their credit terms. The firm is considering offering a 1.5% discount. Most likely competitors will follow suit, so sales will remain at ₹ 1 Million and 40% of sales will be eligible to take advantage of the discount. The firm anticipates that receivables will be reduced by ₹ 30,000 and the firm has an opportunity cost of 18%. Should the firm change its credit terms?
(A) Yes
(B) No
(C) It does not really matter as the benifits and the costs are identical.
(D) It cannot be determined from the given information.
Answer:
(B) No

Question 100.
A firm has total credit sales of ₹ 80 lakh and its average collection period is 80 days. The past experience indicates that bad debt losses are around 1% of the credit sales. The firm spends ₹ 1,20,000 per year on administering its credit sales which is avoidable costs. A factor is prepared to buy the firm’s receivables. He will charge 2% commission. He will advance against receivables to the firm at 18% after withholding 10% as reserve. How much net amount will be paid by the Factor to the Firm? (Assume 360 days in year)
(A) ₹ 17,77,778
(B) ₹ 15,64,444
(C) ₹ 15,01,866
(D) ₹ 15,46,667
Answer:
(C) ₹ 15,01,866
Receivable Management – Financial Management MCQ 32

Working Capital Management – Financial Management MCQ

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

Working Capital Management – Financial Management MCQ

Question 1.
Working capital is also known
(A) Operation capital
(B) Operating capital
(C) Current assets capital
(D) Capital relating to main projects of the company
Answer:
(B) Operating capital

Question 2.
A positive working capital means that –
(A) the company is able to pay-off its long-term liabilities.
(B) the company is able to select profitable projects.
(C) the company is unable to meet its short-term liabilities.
(D) the company is able to pay-off its short-term liabilities.
Answer:
(D) the company is able to pay-off its short-term liabilities.

Question 3.
Working capital =………….
(A) Core current assets less current liabilities
(B) Core current assets less core current liabilities
(C) Liquid assets less current liabilities
(D) Current assets less current liabilities
Answer:
(D) Current assets less current liabilities

Question 4.
Other things remaining constant, if the debtors increases as compared to last year it means –
(A) Company has poor credit policy
(B) Company has positive working capital
(C) Company has negative working capital
(D) Company has no working capital
Answer:
(B) Company has positive working capital

Question 5.
Which of the following will be considered while calculating working capital?
(1) Short Term Advances
(2) Stock of WIP
(3) Short Term Investments
(4) Perpetual inventory policy
Select the correct answer from the options given below.
(A) (2) & (3)
(B) (1) & (3)
(C) (1), (2) & (3)
(D) All of the above except (4)
Answer:
(D) All of the above except (4)

Question 6.
Contingencies are – ………..
(A) Added to gross working capital
(B) Deducted from gross working capital
(C) Contingencies are not considered in financial management; it is considered in accounts only
(D) None of the above
Answer:
(A) Added to gross working capital

Question 7.
For reducing and controlling working capital requirement which of the following step is required to be taken –
(A) Increase in manufacturing cycle
(B) Increase of credit period allowed by creditors to the extent that do not affect the production.
(C) Increase in credit period given to customers
(D) All of the above
Answer:
(B) Increase of credit period allowed by creditors to the extent that do not affect the production.

Question 8.
Working capital is a highly effective barometer of a company’s efficiency and effectiveness.
(A) operational and servicing
(B) long term
(C) operational and financial
(D) positive and negative
Answer:
(C) operational and financial

Question 9.
Statement I:
Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well.
Statement II:
Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due.
Select the correct answer from the options given below.
(A) Statement I is correct while Statement II is incorrect.
(B) Statement II is correct while Statement I is incorrect.
(C) Both Statement I and Statement II are correct.
(D) Both Statement I and Statement II are incorrect.
Answer:
(C) Both Statement I and Statement II are correct.

Question 10.
While calculating working capital based on cash cost –
(A) Depreciation is ignored
(B) Non-cash items are not considered
(C) Debtors are calculated on the basis of cost of goods sold and not on sale price
(D) All of the above
Answer:
(D) All of the above

Question 11.
A negative working capital means that -………..
(A) the company has no current assets at all
(B) the company currently is unable to meet its short-term liabilities
(C) the company has negative earnings before interest and tax
(D) the company currently is able to meet its short-term liabilities
Answer:
(B) the company currently is unable to meet its short-term liabilities

Question 12.
Which of the following analyzes the accounts receivable, inventory and accounts payable cycles in terms of number of days?
(A) Operation cycle
(B) Current asset cycle
(C) Operating cycle
(D) Business cycle
Answer:
(C) Operating cycle

Question 13.
Which of the following method is not used for calculating working capital cycle?
(A) Percentage of sales method
(B) Regression analysis method
(C) Operating cycle approach
(D) Trial and error method
Answer:
(D) Trial and error method

Question 14.
Which of the following is correct formula to calculate WIP Conversion Period?
Working Capital Management – Financial Management MCQ 1
Answer:
(C)

Question 15.
Initial Working Capital -…………
(A) supplies the funds necessary to meet the current working expenses.
(B) is used to raise the volume of production by improvement or extension of machinery.
(C) is required at the time of the commencement of business
(D) represents the amount utilized at the time of contingencies.
Answer:
(C) is required at the time of the commencement of business

Question 16.
Which of the following is determinant of working capital?
(1) Nature and size of business
(2) Manufacturing cycle
(3) Credit policy
(4) Production policy
Select the correct answer from the options given below.
(A) (1) only
(B) (1) and (2) only
(C) (1), (2) and (3) only
(D) (1), (2), (3) and (4)
Answer:
(D) (1), (2), (3) and (4)

Question 17.
Which of the following statement is correct?
(A) A desire to maintain an established dividend policy may affect the volume of working capital.
(B) Changes in working capital may bring about an adjustment of dividend policy.
(C) Payment of dividend may reduce cash in current assets considerably which in turn may reduce the available working capital for the company.
(D) All of the above
Answer:
(D) All of the above

Question 18.
Regular Working Capital –
(A) supplies the funds necessary to meet the current working expenses ie. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses.
(B) refers to the firm’s investment in current assets.
(C) is amount over and above the permanent level of working capital.
(D) refers to the difference between current asset and Current liabilities.
Answer:
(A) supplies the funds necessary to meet the current working expenses ie. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses.

Question 19.
Which of the following is correct formula to calculate working capital leverage?
Working Capital Management – Financial Management MCQ 2
Answer:
(D)

Question 20.
One of the important objective(s) of working capital management is/are –
(A) To maintain the optimum levels of investment in current assets.
(B) To reduce the levels of current liabilities.
(C) Improve the return on capital employed.
(D) All of the above
Answer:
(D) All of the above

Question 21.
Fluctuating Working Capital is also called as —
(A) Reserve Margin Working Capital
(B) Temporary Working Capital
(C) Permanent Working Capital
(D) Variable working capital
Answer:
(D) Variable working capital

Question 22.
Operating cycle is also called as –
(A) Working cycle
(B) Business cycle
(C) Current asset cycle
(D) Working capital cycle
Answer:
(D) Working capital cycle

Question 23.
For reducing and controlling working capital requirement which of the following step is required to be taken –
(i) Reduction of manufacturing cycle.
(ii) Increase of credit period allowed by creditors to the extent that do not affect the production.
(iii) Reduction in credit period given to customers.
Select the correct answer from the options
given below
(A) (i) &(iii)
(B) (ii) & (iii)
(C) (i) & (ii)
(D) All of the above
Answer:
(D) All of the above

Question 24.
Capital which is needed to meet the seasonal requirements of the business –
(A) Gross Working Capital
(B) Reserve Margin Working Capital
(C) Net working capital
(D) Fluctuating Working Capital
Answer:
(D) Fluctuating Working Capital

Question 25.
A higher current assets/fixed assets ratio indicates –
(A) Hedging Approach
(B) Conservative Approach
(C) Matching/hedging Approach
(D) Aggressive Approach
Answer:
(B) Conservative Approach

Question 26.
Aggressive approach covers those policies –
(A) where the firm relies heavily on short term bank finance.
(B) seeks to increase dependence on long term financing.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) where the firm relies heavily on short term bank finance.

Question 27.
Gross working capital refers to –
(A) the amount utilized at the time of contingencies.
(B) the firm’s investment in current assets.
(C) the capital which is required at the time of the commencement of business.
(D) the working capital which is necessary on a continuous and uninterrupted basis.
Answer:
(B) the firm’s investment in current assets.

Question 28.
A conservative policy implies –
(A) greater liquidity and lower risk
(B) greater risk and lower liquidity
(C) negligible risk
(D) no risk at all with low liquidity
Answer:
(A) greater liquidity and lower risk

Question 29.
If a firm has insufficient working capital and tries to increase sales, it can easily over-stretch the financial resources of the business. This is called –
(A) Overrating
(B) Over trading
(C) Overcoming
(D) Overtone
Answer:
(B) Over trading

Question 30.
Which of the following represents the amount utilized at the time of contingencies?
(A) Reserve Working Capital
(B) Net working capital
(C) Extra working capital
(D) Fixed working capital
Answer:
(A) Reserve Working Capital

Question 31.
Permanent Working Capital is also known as –
(A) Fixed working capital
(B) Temporary working capital
(C) Long term funds
(D) Gross margin working capital
Answer:
(A) Fixed working capital

Question 32.
A lower current assets/fixed assets ratio means –
(A) Matching/hedging Approach
(B) Aggressive current assets policy
(C) Riskier current assets policy
(D) Conservative current assets policy
Answer:
(B) Aggressive current assets policy

Question 33.
Any amount over and above the permanent level of working capital is known as working capital.
(A) Temporary
(B) Fluctuating
(C) Variable
(D) All of the above
Answer:
(D) All of the above

Question 34.
Current assets are those assets –
(A) Which can be sold by the companies.
(B) Which are less important from production angle.
(C) Which are held by the companies to pay-off current liabilities.
(D) Which are converted in to cash within a period of one year.
Answer:
(D) Which are converted in to cash within a period of one year.

Question 35.
Current assets are usually financed through –
(A) equity capital, preference capital, debentures, bonds and long term bank loans.
(B) (A) and (C)
(C) mode of overdraft, cash credit, public deposits etc.
(D) money market instrument and long term securities.
Answer:
(C) mode of overdraft, cash credit, public deposits etc.

Question 36.
To carry on a business, a certain minimum level of working capital is necessary on a continuous and uninterrupted basis. This requirement is referred to as –
(A) Permanent working capital
(B) Long term working capital
(C) Fixed working capital
(D) Both (A) and (C)
Answer:
(D) Both (A) and (C)

Question 37.
Which of the following is/are method of maximum permissible bank finance as recommended by the Tandon Committee?
(A) 75% of (Current Assets – Current Liabilities)
(B) 50% of (Current Assets – Current Liabilities)
(C) 75%of(CoreCurrentAssets-Current Liabilities)
(D) 50% of (Core Current Assets-Current Liabilities)
Answer:
(A) 75% of (Current Assets – Current Liabilities)

Question 38.
………… varies inversely with profitability.
(A) Liquidity
(B) Risk
(C) Gross profit
(D) None of the above
Answer:
(A) Liquidity

Question 39.
………….. refers to the difference between current asset and current liabilities.
(A) Differential working capital
(B) Net working capital
(C) Operation working capital
(D) None of the above
Answer:
(B) Net working capital

Question 40.
Permanent working capital -…………
(A) varies with seasonal needs.
(B) includes fixed assets.
(C) is the amount of current assets required to meet a firm’s long-term minimum needs.
(D) includes accounts payable.
Answer:
(C) is the amount of current assets required to meet a firm’s long-term minimum needs.

Question 41.
Financing a long-lived asset with short-term financing would be
(A) an example of “moderate risk-moderate (potential) profitability” asset financing.
(B) an example of “low risk-low (potential) profitability” asset financing.
(C) an example of “high risk – high (potential) profitability” asset financing.
(D) an example of the “hedging approach” to financing.
Answer:
(C) an example of “high risk – high (potential) profitability” asset financing.

Question 42.
Hard core working capital is also known as –
(A) Hard current assets
(B) Core current assets
(C) Core current liabilities
(D) Hard current liabilities
Answer:
(B) Core current assets

Question 43.
An aggressive policy indicates –
(A) higher liquidity and poor risk
(B) higher risk and poor liquidity
(C) higher risk and higher liquidity
(D) lower risk with lower liquidity
Answer:
(B) higher risk and poor liquidity

Question 44.
Tandon Committee Report on Working Capital relates to norms for ………….
(A) inventory and receivables
(B) gross profit and inventory
(C) receivable, gross profit and inventory
(D) net profit and receivables
Answer:
(A) inventory and receivables

Question 45.
In deciding the appropriate level of current assets for the firm, management is confronted with –
(A) Trade-off between profitability and risk.
(B) Trade-off between liquidity and marketability.
(C) Trade-off between equity and debt.
(D) Trade-off between short-term versus long-term borrowing.
Answer:
(A) Trade-off between profitability and risk.

Question 46.
Which of the following is not correct with matching strategy?
(A) All assets should be financed with permanent long term capital.
(B) Temporary current assets should be financed with temporary working capital.
(C) Long term assets should be financed from long term capital.
(D) Permanent current assets should be financed with permanent working capital.
Answer:
(A) All assets should be financed with permanent long term capital.

Question 47.
Paucity of working capital may lead to a situation where –
(A) the firm may not be able to its long term finance
(B) the firm may not be able to meet its liabilities
(C) the firm may not be able to achieve its sale target
(D) the firm may taken some different project with low internal rate of return.
Answer:
(B) the firm may not be able to meet its liabilities

Question 48.
Which of the following is/are method of maximum permissible bank finance as recommended by the Tandon Committee?
(A) [50% of (Current Assets – Core Current Assets)] – Current Liabilities
(B) [75% of (Core Current Assets – Current Assets)] – Current Liabilities
(C) [75% of (Current Assets – Core Current Assets)] – Current Liabilities
(D) [80% of (Current Assets – Core Current Assets)] – Current Liabilities
Answer:
(C) [75% of (Current Assets – Core Current Assets)] – Current Liabilities

Question 49.
What is difference between current ratio and quick ratio?
(A) The current ratio includes inventory and quick ratio does not.
(B) The current ratio does not include inventory and quick ratio does.
(C) The current ratio includes physical capital and quick ratio does not.
(D) The current ratio does not include physical capital and quick ratio does.
Answer:
(A) The current ratio includes inventory and quick ratio does not.

Question 50.
It is understood that a current ratio of ……….. for a manufacturing firm implies that the firm has an optimum amount of working capital.
(A) 1 (one)
(B) 2 (two)
(C) 3 (three)
(D) 2.5 (two and half)
Answer:
(B) 2 (two)

Question 51.
Which of the following is relevant while planning for working capital requirement?
(A) Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
(B) Identify the level of inventory which allows for uninterrupted production.
(C) Identify the appropriate credit policy.
(D) All of the above
Answer:
(D) All of the above

Question 52.
A conservative policy means –
(A) lower return and risk.
(B) higher return and risk.
(C) lower return but very high risk.
(D) higher return and higher risk.
Answer:
(A) lower return and risk.

Question 53.
An aggressive policy produces –
(A) higher return and risk
(B) lower return and risk
(C) lower return and very low risk
(D) none of the above
Answer:
(A) higher return and risk

Question 54.
Accounts receivable are analyzed by –
(A) the average number of days it takes to make sale.
(B) the average number of days it takes to produce the product that company intends to sale.
(C) the average number of days it takes to collect an account.
(D) Any of the above
Answer:
(C) the average number of days it takes to collect an account.

Question 55.
Which of the following would not be financed from working capital?
(A) Cash float.
(B) Accounts receivable.
(C) Credit sales.
(D) A new personal computer for the office
Answer:
(D) A new personal computer for the office

Question 56.
Which of the following is/are method of maximum permissible bank finance as recommended by the Tandon Committee?
(A) 60% of Current Assets – Current Liabilities
(B) 7596 of Current Assets – Current Liabilities
(C) 5096 of Current Assets – Current Liabilities
(D) 4096 of Current Assets – Current Liabilities
Answer:
(B) 7596 of Current Assets – Current Liabilities

Question 57.
Net working capital refers to –
(A) total assets minus fixed assets.
(B) current assets minus current liabilities.
(C) current assets minus inventories.
(D) current assets.
Answer:
(B) current assets minus current liabilities.

Question 58.
Which of the following is correct formula to calculate debtor’s collection period?
Working Capital Management – Financial Management MCQ 3
Working Capital Management – Financial Management MCQ 4
Answer:
(C)

Question 59.
Which of the following working capital strategies is the most aggressive?
(A) Making greater use of short term finance and maximizing net short term asset.
(B) Making greater use of long term finance and minimizing net short term asset.
(C) Making greater use of short term finance and minimizing net short term asset.
(D) Making greater use of long term finance and maximizing net short term asset.
Answer:
(C) Making greater use of short term finance and minimizing net short term asset.

Question 60.
Working capital is also known as –
(A) Current capital or circulating capital
(B) Work-in-progress capital
(C) Day-to-day capital
(D) Trading capital
Answer:
(A) Current capital or circulating capital

Question 61.
Inventory is listed as a part of current assets. Stock or inventory in an organization means
(A) Goods that are readily available for sale
(B) All the assets available for sale
(C) All the raw material, Semi-finished and the finished goods in the organization
(D) Goods that can be sold within a short span of time
Answer:
(C) All the raw material, Semi-finished and the finished goods in the organization

Question 62.
What are the aspects of working capital management?
I. Inventory management
II. Receivable management
III. Cash management
Select the correct answer from the options given below.
(A) I
(B) II
(C) III
(D) All of the above
Answer:
(D) All of the above

Question 63.
Working Capital Turnover measures the relationship of Working Capital with:
(A) Fixed Assets
(B) Sales
(C) Purchases
(D) Stock
Answer:
(B) Sales

Question 64.
Accounts payable are analyzed by the –
(A) average number of days it takes to pay a supplier fixed assets.
(B) average number of days it takes to pay a supplier invoice.
(C) average number of days it takes to pay a salary of employee.
(D) Any of the above
Answer:
(B) average number of days it takes to pay a supplier invoice.

Question 65.
Which of the following is correct formula to calculate credit period availed?
Working Capital Management – Financial Management MCQ 5
Answer:
(B)

Question 66.
In Current Ratio. Current Assets are compared with:
(A) Current Profit
(B) Current Liabilities
(C) Fixed Assets
(D) Equity Share Capital
Answer:
(B) Current Liabilities

Question 67.
There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?
(A) That the Capital Employed has reduced
(B) That the Profitability has gone up
(C) That debtors collection period has increased
(D) That Sales has decreased.
Answer:
(C) That debtors collection period has increased

Question 68.
…………… refers to the length of time allowed by a firm for its customers to make payment for their purchases.
(A) Holding period
(B) Pay-back period
(C) Average collection period
(D) Credit period
Answer:
(D) Credit period

Question 69.
Working capital management is primarily concerned with the management and financing of:
(A) Cash & inventory
(B) Current assets & current liabilities
(C) Current assets
(D) Receivables and payables
Answer:
(B) Current assets & current liabilities

Question 70.
Operating cycles period equals:
(A) Collection period+Inventory holding period – Creditor Payment Period
(B) Collection period-Inventory holding period + Creditor Payment Period
(C) Creditor Payment Period-(-Inventory holding period – Collection period
(D) Any of the above
Answer:
(A) Collection period+Inventory holding period – Creditor Payment Period

Question 71.
Which of the following is not a metric to use for measuring the length of the cash cycle?
(A) Acid test days
(B) Accounts receivable days
(C) Accounts payable days
(D) Inventory days
Answer:
(A) Acid test days

Question 72.
Decrease in current assets means –
(A) Increase in working capital
(B) Decrease in inventories
(C) Decrease in working capital
(D) Increase in accounts payable days.
Answer:
(C) Decrease in working capital

Question 73.
Which of the following is not considered while calculating accounts receivable period?
(A) Bills receivable
(B) Cash sales
(C) Debtors
(D) Credit sales
Answer:
(B) Cash sales

Question 74.
Which of the following will not be considered while calculating working capital on cash cost basis?
(A) Depreciation
(B) Prepaid expenses
(C) Raw material consumed
(D) Bills receivable
Answer:
(A) Depreciation

Question 75.
Which of the following assets is not a quick current asset?
(A) Short term bills receivables
(B) Cash
(C) Stock
(D) Debtors less provision for bad and doubtful debts
Answer:
(C) Stock

Question 76.
………… is also known as working capital ratio.
(A) Current ratio
(B) Quick ratio
(C) Liquid ratio
(D) Working capital turnover ratio
Answer:
(A) Current ratio

Question 77.
What does the accounts receivable turnover ratio tell us?
(A) How often account receivable received
(B) How many time account receivable is collected
(C) Account receivable balance at the end of the period
(D) Bad debt balance at the year end
Answer:
(B) How many time account receivable is collected

Question 78.
The best ratio to evaluate short-term liquidity is:
(A) Working capital turnover ratio
(B) Current ratio
(C) Creditors velocity
(D) All of the above
Answer:
(B) Current ratio

Question 79.
Which best describes the gross margin ratio?
(A) Leverage ratio
(B) Liquidity ratio
(C) Coverage ratio
(D) Profitability ratio
Answer:
(D) Profitability ratio

Question 80.
Inventory turnover ratio evaluates:
(A) Company’s ability to move inventory
(B) Company’s inventory purchasing efficiency
(C) Both (A) & (B)
(D) None of the above
Answer:
(C) Both (A) & (B)

Question 81.
All of the following statements are true regarding ratios that measure a company’s ability to pay current liabilities except
(A) Working Capital = Current Assets – Current Liabilities
(B) A higher current ratio is always preferred to a lower current ratio.
(C) Inventory and prepaid expense are included in the numerator of the current ratio, but not in the numerator of the acid-test ratio.
(D) In most industries, a current ratio of 2.0 is considered adequate.
Answer:
(B) A higher current ratio is always preferred to a lower current ratio.

Question 82.
Which of the following would NOT improve the current ratio?
(A) Borrow short term to finance additional fixed assets.
(B) Issue long-term debt to buy inventory
(C) Sell common stock to reduce current liabilities
(D) Sell fixed assets to reduce accounts payable
Answer:
(A) Borrow short term to finance additional fixed assets.

Question 83.
If the trend of the current ratio is increasing, while the trend of the acid-test ratio is decreasing over a period of time, this could be a warning that the firm is:
(A) Depleting its inventories
(B) Having trouble collecting its receivables
(C) Purchasing too much treasury stock
(D) Carrying excess inventories
Answer:
(D) Carrying excess inventories

Question 84.
What relationship exists between the average collection period and accounts receivable turnover?
(A) As average collection period increases (decreases) the accounts receivable turnover decreases (increases)
(B) There is a direct and proportional relationship
(C) Both ratios are expressed in number of days
(D) Both ratios are expressed in number of times receivables are collected per year
Answer:
(A) As average collection period increases (decreases) the accounts receivable turnover decreases (increases)

Question 85.
Which of the following statements is most correct?
(A) If a company increases its current liabilities by ₹ 1,000 and simultaneously increases its inventories by ₹ 1,000, its current ratio must rise.
(B) If a company increases its current liabilities by ₹ 1,000 and simultaneously increases its inventories by ₹ 1,000, its quick ratio must fall.
(C) A company’s quick ratio never exceed its current ratio.
(D) (B) & (C) is correct.
Answer:
(D) (B) & (C) is correct.

Question 86.
Purchase of stock for cash will current ratio.
(A) Reduce
(B) Improve
(C) Not change
(D) Can’t say
Answer:
(C) Not change

Question 87.
Explain the important ratio that would be used in following situation:
A bank is approached by a company for a loan of ₹ 50 lakh for working capital purposes.
(A) Capital Structure /Leverage Ratios
(B) Profitability Ratios
(C) Liquidity Ratios
(D) Activity Ratios
Answer:
(C) Liquidity Ratios

Question 88.
Instead of “Annual Factory Cost” WIP Conversion Period can be calculated taking “ ……….” as base.
(A) Annual Sales
(B) Cost of Production
(C) Cost of Goods Sold
(D) Cost of Sales
Answer:
(B) Cost of Production

Question 89.
If annual sales figure is not available then which of the following figure will be taken as base for calculation of debtors?
(A) Factory Cost
(B) Cost of Production
(C) Cost of Goods Sold
(D) Cost of Sales
Answer:
(B) Cost of Production

Question 90.
If current assets increases by 20% and current liabilities decreases by 20% as compared to last year figures then –
(A) Working capital decreases as compared to last year
(B) Working capital increases as compared to last year
(C) There will be no change in working capital
(D) Without figures it is impossible to tell whether working capital will increase or decrease
Answer:
(B) Working capital increases as compared to last year

Question 91.
If raw material consumed is ₹ 8,42,000; cost of production is ₹ 14,25,000; Stock of raw material & WIP is ₹ 1,24,000 and 1,72,000 respectively then Raw Material Conversion period will be –
Note: 1 Year = 365 days
(A) 54 days
(B) 18 days
(C) 29 days
(D) 49 days
Answer:
(A) 54 days
Raw material conversion period
Working Capital Management – Financial Management MCQ 15

Question 92.
Calculate the working capital from the following data:
Particulars — X
Raw Material Stock — 11,70,000
WIP Stock — 9,58,750
Finished Goods Stock — 26,65,000
Debtors — 55,12,000
Cash & Bank — 6,00,000
Creditors — 17,55,000
Outstanding expenses — 14,95,000
(A) 76,75,550
(B) 76,55,750
(C) 75,65,750
(D) 77,55,650
Answer:
(B) 76,55,750
Working capital = 11,70,000 + 9,58150 + 26,65,000 + 55,12,000 + 6,00,000 – 17,55,000 – 14,95,000 = 76,55,750

Question 93.
Annual credit sales Cash sales Debtors Bills receivable Finished goods Collection Period = ?
Note: 1 Year = 360 days
(A) 29 days
(B) 30 days
(C) 49 days
(D) Data given is not sufficient
Answer:
(C) 49 days
Debtors Collection Period:
Working Capital Management – Financial Management MCQ 16

Question 94.
Financial statement of A Ltd. shows the following data:
Opening stock ₹ 1,75,000, Total purchase ₹ 10,75,000 including cash purchase ₹ 1,75,000, total sales ₹ 15,00,000 out of which 20% are on cash basis. Closing stock is ₹ 1,50,000. Stock turnover ratio = ?
(A) 7.67
(B) 6.77
(C) 7.76
(D) 7.66
Answer:
(B) 6.77
Working Capital Management – Financial Management MCQ 17

Question 95.
WIP Conversion Period =18 days
Raw Material Consumed = ₹ 8,42,000
Stock of WIP = ₹ 72,000
Cost of Production = ?
(A) ₹ 14,00,000
(B) ₹ 22,67,000
(C) ₹ 5,83,000
(D) ₹ 14,60,000
Answer:
(D) ₹ 14,60,000
Working Capital Management – Financial Management MCQ 19
x = Annual Cost of Production 14,60,000

Question 96.
A Ltd. financial statement shows the following data:
Equity ₹ 5,67,500, Reserve & surplus ₹ 3,87,850, total debt ₹ 5,88,778 out of which ₹ 2,88,778 are long term debt, fixed assets are ₹ 11,44,128.
Current Ratio = ?
(A) 2.48
(B) 1.92
(C) 3.68
(D) 1.33
Answer:
(D) 1.33
Current liabilities = 5,88,778 – 2,88,778 = 3,00,000
Total assets = 5,67,500 + 3,87,850 + 5,88,778 = 15,44,128
Current assets = 15,44,128 – 11,44,128 = 4,00,000
Current ratio =\( \frac{4,00,000}{3,00,000}=1.33\)

Question 97.
Total sales of OLX Ltd. are ₹ 31,248 out of which 25% are cash sales. Closing balance of debtors are ₹ 9,468. Debtors collection period = ?
Note: 1 Year — 365 days
(A) 4.2 months
(B) 157 days
(C) 148 days
(D) 4.43 month
Answer:
(C) 148 days
Working Capital Management – Financial Management MCQ 20

Question 98.
Raw material consumption= ₹ 6,48,000 Raw material purchase = ₹ 8,42,000 Annual cost of production = ₹ 14,42,000 Creditors = ₹ 75,000
Bills payable = ₹ 25,000 Creditors Payment Period = ?
Note: 1 Year = 360 days
(A) 34 days
(B) 43 days
(C) 40 days
(D) 39 days
Answer:
(B) 43 days
Creditors Payment Period
Working Capital Management – Financial Management MCQ 22

Question 99.
The following information is available for your calculation.
Working Capital Management – Financial Management MCQ 6
Level of activity 1.56,000 units
Raw materials are in stock on average two month and Materials are in process, on average half month.
Calculate value of ‘Raw Material Stock’ for working capital purpose.
(A) ₹ 26,65,000
(B) ₹ 23,40,000
(C) ₹ 6,45,250
(D) ₹ 9,58,750
Answer:
(B) ₹ 23,40,000
Working Capital Management – Financial Management MCQ 23

Question 100.
From the following data calculate finished goods conversion period for the years 2019 & 2020.
Working Capital Management – Financial Management MCQ 7
Note: 1 Year = 360 days
(A) 29 days & 39 days
(B) 39 days & 29 days
(C) 25 days & 35 days
(D) 35 days & 25 days
Answer:
(A) 29 days & 39 days
Working Capital Management – Financial Management MCQ 24

Question 101.
Maximum permissible bank finance as per first method of Tandon Committee norms was ₹ 57,41,813 while current liabilities are reported at 32,50,000. Current assets = ?
(A) ₹ 1,09,05,750
(B) ₹ 81,79,313
(C) ₹ 1,09,07,550
(D) ₹ 1,05,09,750
Answer:
(A) ₹ 1,09,05,750
Maximum permissible bank finance as per first method = 75% of
(Current Assets – Current Liabilities)
57,41,813 = 0.75 × (x – 32,50,000)
57,41,813 = 0.75x – 24,37,500
0.75x = 81,79,313
x = Current Assets = 1,09,05,750

Question 102.
Current assets of Z Ltd. are ₹ 3,70,000 which includes stock ₹ 1,00,000 and prepaid expense ₹ 70,000. Its current liability are ₹ 1,60,000 which includes provision for tax ₹ 60,000.
Liquid Ratio = ?
(A) 1.25
(B) 1.52
(C) 1.22
(D) 0.95
Answer:
(A) 1.25
Working Capital Management – Financial Management MCQ 25

Question 103.
Following information is provided by the DPS Ltd. for the year ending 31st March 2019.
Raw material storage period — 55 days
WW conversion period — 18 days
Finished goods storage period — 22 days
Debt collection period — 45 days
Creditor’s payment period — 60 days
Annual operating cost including depreciation of ₹ 2,10,000 was ₹ 21,00,000.
[1 Year =360 days]
You are required to calculate working capital on cash cost basis.
(A) ₹ 4,20,000
(B) ₹ 4,66,667
(C) ₹ 7,35,000
(D) ₹ 8,16,667
Answer:
(A) ₹ 4,20,000
Working Capital Management – Financial Management MCQ 26

Question 104.
KT Ltd. opening stock was ₹ 2,50,000 and closing stock was ₹ 3,75,000. Sales during the year was ₹ 13,00,000 and gross profit ratio was 25% on sales. Average accounts payable are ₹ 80,000. Creditors Turnover Ratio = ?
(A) 13.75
(B) 14.33
(C) 13.33
(D) 14.44
Answer:
(A) 13.75
Working Capital Management – Financial Management MCQ 27
2,50,000 + Cost of production/purchase – 3,75,000 = 9,75,000
Cost of production/purchase = 11,00,000
Creditors Turnover Ratio =\(\frac{11,00,000}{80,000}\) = 13.75

Question 105.
Raw material conversion period is 36 days. Raw material consumed and cost of goods sold in the year is ₹ 1,80,000 & ₹ 2,16,000 respectively. How much raw material stock will appear in working capital statement?
Note: 1 Year = 360 days
(A) ₹ 18,000
(B) ₹ 20,000
(C) ₹ 21,600
(D) ₹ 19,800
Answer:
(A) ₹ 18,000
Working Capital Management – Financial Management MCQ 28

Question 106.
Creditors payment period = 60 days Material consumed = ₹ 1,20,000 Material purchased in cash = ₹ 10,000 Material purchased on credit = ₹ 90,000 Creditors that will appear in balance sheet and working capital statement = ?
Note: 1 Year = 360 days
(A) ₹ 16,667
(B) ₹ 15,000
(C) ₹ 20,000
(D) ₹ 36,667
Answer:
(B) ₹ 15,000

Question 107.
Opening and closing balance of creditors are ₹ 2,00,000 & ₹ 2,40,000 respectively. Raw material purchased on credit was ₹ 11,00,000. Creditors payment period for the purpose of working capital statement will be –
[1 Year = 360 days]
(A) 72 days
(B) 32 days
(C) 65 days
(D) 78 days
Answer:
(A) 72 days
Creditors payment period
Working Capital Management – Financial Management MCQ 29

Question 108.
N Ltd. gives the following information:
Current Ratio — 2.8
Total assets — ₹ 60,00,000
Fixed assets — ₹ 32,00,000
Current liabilities = ?
(A) ₹ 28,00,000
(B) ₹ 10,00,000
(C) ₹ 18,00,000
(D) ₹ 12,00,000
Answer:
(B) ₹ 10,00,000
Current assets = 60,00,000 – 32,00,000 = 28,00,000
\(2.8=\frac{28,00,000}{x}\)
x = Current liabilities = 10,00,000

Question 109.
N Ltd. gives the following information:
Liquid ratio — 1.6
Current Assets — ₹ 28,00,000
Current Liabilities — ₹ 10,00,000
Stock = ?
(A) ₹ 28,00,000
(B) ₹ 10,00,000
(C) ₹ 18,00,000
(D) ₹ 12,00,000
Answer:
(D) ₹ 12,00,000
Working Capital Management – Financial Management MCQ 30

Question 110.
S Ltd. gives the following information:
Net working capital ₹ 2,80,000
Current ratio — 2.4
Liquid ratio — 1.6
Current Assets ?
(A) ₹ 2,00,000
(B) ₹ 2,80,000
(C) ₹ 4,80,000
(D) ₹ 3,60,000
Answer:
(C) ₹ 4,80,000
Current Ratio = \(\frac{x}{y}\)
2.4 = \(\frac{x}{y}\)
2.4y = x
Working Capita] = CA – CL
2,80,000 = 2.4y – y
2,80,000 = 1.4y
y = 2,00,000
x = Current Assets = 2,00,000 × 2.4 = 4,80,000

Question 111.
Debtors as per working capital
statement = ₹ 3,00,000
Debtors collection period = 45 days
Gross profit ratio = 20%
Cash sales = ₹ 5,00,000
1 year = 365 days
Total sales = ?
(A) ₹ 24,00,000
(B) ₹ 19,00,000
(C) ₹ 29,00,000
(D) ₹ 25,00,000
Answer:
(C) ₹ 29,00,000
Working Capital Management – Financial Management MCQ 31
Credit Sales = 24,00,000
Total sales = 24,00,000 + 5,00,000 = 29,00,000

Question 112.
Operating cycle days of Ramji Ltd. is 167 days. Other details are as follows:
Raw material stock velocity — 79 days
Debtors collection period — 70 days
WIP conversion period — 36 days
Finished goods conversion — 29 days period
Creditors payment period = ?
(A) 47 days
(B) 94 days
(C) 52 days
(D) 59 days
Answer:
(A) 47 days
Let the creditors payment period be ‘x’.
79 + 70 + 36 + 29 – x = 167
– x = – 47
x = Creditors payment period = 47

Question 113.
Operating cost is ₹ 18,90,000.
Current assets Eire ₹ 5,20,000
Current liabilities are ₹ 1,00,000
Operating cycle days = ?
(Assume a 360 days year.)
(A) 80 days
(B) 99 days
(C) 19 days
(D) 70 days
Answer:
(A) 80 days
Working Capital Management – Financial Management MCQ 32

Question 114.
NS Ltd. gives the following information:
Current Ratio = 2.4
Quick Ratio =1.0
Stock = ₹ 5,60,000
Current Assets = ?
(A) ₹ 9,60,000
(B) ₹ 6,90,000
(C) ₹ 4,00,000
(D) ₹ 4,60,000
Answer:
(A) ₹ 9,60,000
Working Capital Management – Financial Management MCQ 33

Question 115.
Gross profit ratio = 20%.
Stock velocity = 6 month
Gross profit for the year ended amounts to ₹ 5,00,000. Stock of the year is ₹ 20,000 more than what it was at the beginning of the year
Closing stock = ?
(A) ₹ 10,00,000
(B) ₹ 9,90,000
(C) ₹ 10,10,000
(D) ₹ 10,20,000
Answer:
(C) ₹ 10,10,000
Working Capital Management – Financial Management MCQ 34
Working Capital Management – Financial Management MCQ 35

Question 116.
No. of operating cycle in a year = 4.5
No. of days in year = 360 days
Working capital = 8,40,000
Operating cost = ?
(A) ₹ 35,00,000
(B) ₹ 37,80,000
(C) ₹ 36,40,000
(D) ₹ 38,80,000
Answer:
(B) ₹ 37,80,000
Working Capital Management – Financial Management MCQ 36

Question 117.
If current assets are ₹ 1,09,05,750 and current liabilities are ₹ 32,50,000 then maximum permissible bank finance as per first method of Tandon Committee norms is –
(A) ₹ 57,41,813
(B) ₹ 49,29,313
(C) ₹ 52,29,813
(D) ₹ 49,41,813
Answer:
(A) ₹ 57,41,813
Maximum permissible bank finance as per Tandon Committee norms:
Method 1: 75% of (Current Assets – Current Liabilities)
= 0.75 × (1,09,05,750 – 32,50,000)
= 57,41,813

Question 118.
Debtors velocity = 3 months
Sales = ₹ 25,00,000
Bills receivable & Bills payable were ₹ 60,000 and ₹ 36,667 respectively.
Sundry debtors = ?
(A) ₹ 6,25,000
(B) ₹ 5,25,000
(C) ₹ 5,65,000
(D) ₹ 6,65,000
Answer:
(C) ₹ 5,65,000
Working Capital Management – Financial Management MCQ 37
x = Account Receivable = 6,25,000
Debtors + Bills Receivable = Account Receivable
x + 60,000 = 6,25,000
x = Debtors = 5,65,000

Question 119.
Creditors velocity = 2 months.
Cost of goods sold = ₹ 20,00,000
Opening stock = ₹ 9,90,000
Closing stock = ₹ 10,10,000
Bills receivable & Bills payable were ₹ 60,000 and ₹ 36,667 respectively.
Creditors = ?
(A) 3,36,667
(B) 3,66,333
(C) 3,30,367
(D) 3,00,000
Answer:
(D) 3,00,000
Opening stock + Purchase – Closing stock = Cost of goods sold
9,90,000 + x – 10,10,000 = 20,00,000
x Purchase = 20,20,000
Working Capital Management – Financial Management MCQ 38
x = Accounts Payable = 3,36,667
Creditors + Bifis Payable Account Payable
x + 36,667 = 3,36,667
x = Creditors = 3,00,000

Question 120.
If current assets are ₹ 1,09,05,750 and current liabilities are ₹ 32,50,000 then maximum permissible bank finance as per second method of Tandon Committee norms is –
(A) ₹ 57,41,813
(B) ₹ 49,29,313
(C) ₹ 52,29,813
(D) ₹ 49,41,813
Answer:
(B) ₹ 49,29,313
Maximum permissible bank finance as per Tandon Committee norms:
Method 2: 75% of Current Assets – Current Liabilities = (0.75 × 1,09,05,750) – 32,50,000
= 49,29,313

Question 121.
When the current ratio is 2:5, and the amount of current liabilities is ₹ 25,000, what is the amount of current assets?
(A) ₹ 62,500
(B) ₹ 12,500
(C) ₹ 10,000
(D) None of these
Answer:
(C) ₹ 10,000

Question 122.
Total ‘cost of sales’ and ‘sales’ of Gama Ltd. is ₹ 3,19,80,000 and ₹ 4,13,40,000 respectively. It makes 20% sales on cash basis. Debtors are allowed 2 months credit period. If company calculates working capital on cash cost basis then debtors are –
(A) ₹ 55,12,000
(B) ₹ 42,12,000
(C) ₹ 42,64,000
(D) ₹ 55,64,000
Answer:
(C) ₹ 42,64,000
Working Capital Management – Financial Management MCQ 39

Question 123.
If credit sales for the year is ? 5,40,000 and Debtors at the end of year is ? 90,000 the Average Collection Period will be?
Note: 1 year = 365 days
(A) 30 days
(B) 61 days
(C) 90 days
(D) 120 days
Answer:
(B) 61 days

Question 124.
Total wages for the year of Rakshit Ltd., a listed company are ₹ 64,80,000 out of which ₹ 2,40,000 are paid in cash immediately after they became due. Lag in payment of wages – 1 month. If you are appointed to prepare working capital statement for the company, then how much outstanding wages you will take while preparing working capital statement?
(A) ₹ 5,40,000
(B) ₹ 5,50,000
(C) Not enough data
(D) ₹ 5,20,000
Answer:
(D) ₹ 5,20,000
Working Capital Management – Financial Management MCQ 40

Question 125.
K Ltd. had sales last year of ₹ 26,50,000, including cash sales of ₹ 2,50,000. If its average collection period was 36 days, its ending accounts receivable balance is closest to (Assume a 365 day year.)
(A) ₹ 2,40,000
(B) ₹ 2,36,712
(C) ₹ 2,63,127
(D) ₹ 2,40,721
Answer:
(A) ₹ 2,40,000

Question 126.
Outstanding overheads appearing in balance sheet are 9,75,000. Lag in payment g of overheads is 30 days. Overheads accrue evenly throughout the year, total overheads incurred by the company are –
(A) ₹ 1,17,00,000
(B) ₹ 32,500
(C) ₹ 2,92,50,000
(D) ₹ 1,92,50,000
Answer:
(A) ₹ 1,17,00,000
Outstanding Overheads = Total Overheads = \(\times \frac{\text { Lag in payment of overheads }}{360}\)
9,75000 = Total Overheads × \(\frac{30}{360}\)
Total Overheads = 1,17,00,000

Question 127.
From the information given below calculate the amount of fixed assets. Fixed assets to proprietors fund = 1.25, Net Working Capital = ₹ 6,00,000.
(A) 20,00,000
(B) 24,00,000
(C) 3,42,857
(D) 8,00,000
Answer:
(B) 24,00,000

Question 128.
If a firm has ₹ 100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1, what is the firm’s Net Working Capital?
(A) ₹ 10
(B) ₹ 100
(C) ₹ 200
(D) ₹ 1,200
Answer:
(C) ₹ 200
Working Capital Management – Financial Management MCQ 41
y = 1000
x = Current Assets 1,000 × 1.2= 1,200
Working Capital 1,200 – 1,000 200

Question 129.
A company plans to manufacture and sell 400 units of domestic appliances per month at a price of ₹ 600 each. The ratios of cost to selling price are –
Raw materials — 30%
Packing material — 10%
Direct labour — 15%
Direct expenses — 5%
Fixed overhead are ₹ 4,32,000 p.a.
Finished goods stock = 200 units
Working days in year are taken as 300 days for budget year. Norms maintained for work-in-progress is 7 days. Finished goods stock and WIP stock will appear in balance sheet and working capital of the company at –
(A) ₹ 31,920;₹ 80,000
(B) ₹ 80,000;₹ 31,920
(C) ₹ 90,000; ₹ 67,200
(D) ₹ 90,000;₹ 31,920
Answer:
(D) ₹ 90,000;₹ 31,920
Working Capital Management – Financial Management MCQ 42
Working Capital Management – Financial Management MCQ 43

Question 130.
Following is the balance sheet of PBX Ltd. Calculate maximum permissible bank finance by Third Method of Tandon Committee norms. Assume the level of Core Current Assets to be ₹ 60 lakhs.
Working Capital Management – Financial Management MCQ 8
Working Capital Management – Financial Management MCQ 10
(A) 450 1akhs
(B) 360 lakhs
(C) 315 Iakhs
(D) 425 lakhs
Answer:
(C) 315 Iakhs
Current Assets = 960 Lakhs; Current Liabilities = 360 Lakhs
Maximum permissible bank borrowing as per 3rd method of Tandon Committee norms:
= [75% of (Current Assets – Core Current Assets)] – Current Liabilities
= [0.75 × (960 – 60)] – 360
= 315 Lakhs

Question 131.
Current assets & current liabilities of Deelip Ltd. are 9,60,000 and 3,60,000 respectively. Maximum permissible bank finance as per Tandon Committee norms is 3,15,000. What are the core current assets of Deelip Ltd?
(A) ₹ 60,000
(B) ₹ 45,000
(C) ₹ 30,000
(D) ₹ 90,000
Answer:
(A) ₹ 60,000
3,15,000 = [75% of (Current Assets- Core Current Assets)] – Current Liabilities
3,15,000 = [0.75 × (9,60,000 – x)] – 3,60,000
3,15,000 = 7,20,000 – 0.75x – 3,60,000
45,000 = – 0.75x
x = Core Current Assets = 60,000

Question 132.
Maximum permissible bank finance as per 1st method of Tandon committee norms is ₹ 3,18,75,000. Long terms loans are ₹ 5,58,80,450. Current liabilities are ₹ 70,00,000. Current assets of the company are –
(A) ₹ 4,25,00,000
(B) ₹ 4,95,00,000
(C) ₹ 3,55,00,000
(D) ₹ 1,10,00,726
Answer:
(B) ₹ 4,95,00,000
3,18,75,000 = 75% of (Current Assets – Current Liabilities)
3,18,75,000 = 0.75 × (x – 70,00,000)
3,18,75,000 = O,75x – 52,50,000
3,71,25,000 = 0.75x
x Current Assets = 4,95,00,000

Question 133.
From the following information calculate the responsiveness of ROCE for changes in current assets ie. Working Capital Leverage.
Working Capital Management – Financial Management MCQ 11
Current assets are likely to decline by 20%over the existing level
(A) 0.405;0.435
(B) 0.403;0.453
(C) 0.453; 0.404
(D) 0.435; 0.405
Answer:
(D) 0.435; 0.405
Working Capital Management – Financial Management MCQ 44

Question 134.
MNO Ltd. submit following figures: Current Assets = ₹ 232.5 lakh
Core current assets = ₹ 30 lakh
Maximum permissible bank finance as third method of Tandon Committee norms = ₹ 55.625 lakh
Working capital in this case is –
(A) ₹ 136.25
(B) ₹ 106.05
(C) ₹ 163.25
(D) ₹ 160.05
Answer:
(A) ₹ 136.25
55.625 = [75% of (Current Assets – Core Current Assets)] – Current Liabilities
55.625 = [0.75 × (232.5 – 30)] – x
55.625 = 151.875 – x
x = Current Liabilities 96.25
Working Capital = 232.5 – 96.25 = 136.25

Question 135.
Management of Royal Ltd. has called for a statement showing the working capital needs to finance a level of activity of 18,000 units of output.
Working Capital Management – Financial Management MCQ 12
Work-in-progress (full for material, 70% & 40% completion in respect of wages & overheads) will approximate to 15 days of production.
1 year = 360 days. Calculate closing stock of WIP.
(A) ₹ 22,125
(B) ₹ 20,652
(C) ₹ 20,562
(D) ₹ 20,875
Answer:
(A) ₹ 22,125
Cost Structure for WIP:
Working Capital Management – Financial Management MCQ 45
Working Capital Management – Financial Management MCQ 46

Question 136.
Management of Royal King Ltd. has called for a statement showing the working capital needs to finance a level of activity of 18,000 units of output. Cost structure per unit:
Working Capital Management – Financial Management MCQ 13
Work-in-progress (full for material, 70% & 40% completion in respect of wages & overheads) will approximate to 15 days of production. 1 year = 360 days. Calculate closing stock of WIP on cash cost basis.
(A) ₹ 22,125
(B) ₹ 19,250
(C) ₹ 19,215
(D) ₹ 20,625
Answer:
(D) ₹ 20,625
Working Capital Management – Financial Management MCQ 47

Question 137.
Opening and closing stock of SVK Ltd. is ₹ 1,20,000 & ₹ 1,80,000 respectively. Material consumed in income statement is shown at ₹ 3,60,000. Suppliers of material extend 4 week credit. How much of creditors will be shown in preparation of working capital statement?
(A) ₹ 32,380
(B) ₹ 32,830
(C) ₹ 32,308
(D) ₹ 32,803
Answer:
(C) ₹ 32,308
Opening Raw Material + Purchases – Closing Raw Material = Material Consumed
1,20,000 + Purchases – 1,80,000 = 3,60,000
Purchases = 4,20,000
Creditors 4 weeks \(\left(4,20,000 \times \frac{4}{52}\right)\) = 32308

Question 138.
Opening and closing stock of SVK Ltd. is ₹ 1,20,000 & ₹ 1,80,000 respectively. Material consumed in income statement is shown at ₹ 3,60,000. Suppliers of material extend 4 week credit. How much of creditors will be shown in preparation of working capital statement if cash purchase is ₹ 50,000?
(A) ₹ 28,246
(B) ₹ 28,642
(C) ₹ 28,426
(D) ₹ 28,462
Answer:
(D) ₹ 28,462
Opening Raw Material + Purchases- Closing Raw Material = Material Consumed
1,20,000 + Purchases – 1,80,000 = 3,60.000
Purchases = 4,20,000
Credit purchase = 4,20,000 – 50,000 = 3,70,000
Working Capital Management – Financial Management MCQ 48

Question 139.
The following cost information per unit has been ascertained for annual production of 36,000 units:
Variable manufacturing overheads = ₹ 2 Fixed manufacturing overheads = ₹ 1 Lag in payment of overheads = one month
Expected production and sales are 48,000 units and 35,000 units respectively.
Outstanding overheads will be shown in working capital statement at –
(A) ₹ 11,000
(B) ₹ 11,667
(C) ₹ 12,000
(D) ₹ 12,500
Answer:
(A) ₹ 11,000
Working Capital Management – Financial Management MCQ 49
Fixed overheads are × 1 per unit at current level of activity i..e. 36,000 packets.
Hence total fixed overheads at current level of activity 36,000 × 1 = 36,000. Fixed
overheads remains same hence even at increased production of 48,000 packets
fixed overheads will remain same i..e. ₹ 36,000.
Working Capital Management – Financial Management MCQ 58

Question 140.
Calculate the debtors on cash cost basis form the following information for working capital purpose:
Working Capital Management – Financial Management MCQ 14
Rate of gross profit is 20%.
(A) ₹ 4,70,000
(B) ₹ 4,00,000
(C) ₹ 3,76,000
(D) ₹ 4,76,000
Answer:
(B) ₹ 4,00,000
Calculation of cost of goods sold:
Working Capital Management – Financial Management MCQ 59
It is stated in the problem that rate of gross profit is 2096 and export sales price 1096 below domestic price. Rate of gross profit for export sale has to be taken 10%. Further export sale has to be made 10096 from 90% for the purpose of calculation of gross profit.
Working Capital Management – Financial Management MCQ 60

Question 141.
From the following information calculate the working capital:
Equity share capital — 18,00,000
Stock — 3,15,000
Income tax payable — 56,250
Outstanding expenses — 1,40,000
Prepaid expenses — 37,500
Debtors — 4,00,000
Creditors — 1,50,000
The management is of the opinion to make 12% margin for contingencies on computed figure.
(A) ₹ 4,81,250
(B) ₹ 4,59,370
(C) ₹ 4,87,500
(D) ₹ 4,51,370
Answer:
(C) ₹ 4,87,500
Working Capital Management – Financial Management MCQ 61

Question 142.
From the following information calculate the net working capital:
Current assets — 92,75,000
Current liabilities — 34,62,500
The management is of the opinion to make 20% margin for contingencies on net working capital.
(A) ₹ 69,75,000
(B) ₹ 69,65,625
(C) ₹ 75,75,000
(D) ₹ 72,65,625
Answer:
(D) ₹ 72,65,625
Working Capital Management – Financial Management MCQ 62
58,12,500 + 0.2.x = x
58,12,500 = 0.8x
x = Net working capital = 72,65,625

Question 143.
The CTC Ltd. is attempting to establish a current assets policy. Fixed assets are ₹ 6,00,000 and the firm plans to maintain a 50% debt-to-assets ratio. The interest rate is 10% on all debts. Three alternative current assets policies are under consideration 40%, 50% and 60% of projected sales. Company expects to earn 15% before interest and taxes on sales of ₹ 30,00,000. The effective tax rate is 40%. What is the expected return on equity if company follows ‘AggressivePolicy’?
(A) 19.71%
(B) 24.00%
(C) 16.50%
(D) 18.67%
Answer:
(B) 24.00%
Working Capital Management – Financial Management MCQ 63
Working Capital Management – Financial Management MCQ 64

Question 144.
The CTC Ltd. is attempting to establish a current assets policy. Fixed assets are ₹ 6,00,000 and the firm plans to maintain a 50% debt-to-assets ratio. The interest rate is 10% on all debts. Three alternative current assets policies are under consideration 40%, 50% and 60% of projected sales. Company expects to earn 15% before interest and taxes on sales of ₹ 30,00,000. The effective tax rate is 40%. What is the expected return on equity if company follows ‘Moderate Policy?
(A) 19.71%
(B) 24.00%
(C) 16.50%
(D) 18.67%
Answer:
(A) 19.71%
Working Capital Management – Financial Management MCQ 63
Working Capital Management – Financial Management MCQ 64

Question 145.
The CTC Ltd. is attempting to establish a current assets policy. Fixed assets are ₹ 6,00,000 and the firm plans to maintain a 50% debt-to-assets ratio. The interest rate is 10% on all debts. Three alternative current assets policies are under consideration – 40%, 50% and 60% of projected sales. Company expects to earn 15% before interest and taxes on sales of ₹ 30,00,000. The effective tax rate is 40%. What is the expected return on equity if company follows ‘ModeratePolicy}
(A) 19.71%
(B) 24.00%
(C) 16.50%
(D) 18.67%
Answer:
(C) 16.50%
Working Capital Management – Financial Management MCQ 63
Working Capital Management – Financial Management MCQ 64

Question 146.
Strong Cement Ltd. has an installed capacity of producing 1.25 lakh tones of cement per annum; its present capacity utilization is 80%. The major raw material to manufacture cement is limestone which is obtained on cash basis from a company located near the plant. The company produces cement in200 kg drum. Calculate the number of drums to be manufactured.
(A) 50,000 drums
(B) 60,000 drums
(C) 80,000 drums
(D) 1,00,000 drums
Answer:
(A) 50,000 drums
Production in tone = 1,25,000 tone X 80% = 1,00,000
Number of drums = \(\frac{1,00,000 \text { tone }}{200 \mathrm{~kg} \text { i.e. } 0.2 \text { tone }}\)= 5,00,000 Drums

Question 147.
M Ltd. is engaged in large scale customer retailing. From the following information, you are required to forecast its working capital requirement:
Projected annual sales — ₹ 65 lakhs
Net profit on cost of sales — 20%
Credit allowed to debtors — 10 weeks
Credit allowed by creditors — 4 weeks
Stock carrying (in terms of 8 weeks cost of sales requirement)
Add 10% company calculates debtors on sales to allow for contingencies.
(A) ₹ 14,33,333
(B) ₹ 15,66,667
(C) ₹ 16,33,333
(D) ₹ 16,66,667
Answer:
(D) ₹ 16,66,667
Working Capital Management – Financial Management MCQ 65
Working Capital Management – Financial Management MCQ 66

Question 148.
A company has prepared its annual budget, relevant details of which are reproduced below:
Sales ₹ 46.80 lakh (25% cash sales and balance on credit): 78,000 units
Labour cost: ₹ 6 per unit
Wages are paid as follows:
For 1st & 2nd week: in the 3rd week
For 3rd & 4th week: in the next week.
Assume 1 year = 52 weeks.
How much outstanding wages will appear × in working capital statement?
(A) ₹ 18,000
(B) ₹ 20,000
(C) ₹ 16,000
(D) ₹ 22,000
Answer:
(A) ₹ 18,000
Total wages = 78,000 × 6 = 4,68,000
Wages are paid for 1st and 2nd week in the 3rd week & for 3rd and 4th week in the next week. Thus, wages are paid 3rd & 5th week which shows that lag in payment of wages is 2 week.
Working Capital Management – Financial Management MCQ 67

Question 149.
Following details are available for Pratik Ltd.
Maximum permissible bank finance as per second method of Tandon Committee norms: ₹ 11,96,188
Current liabilities: ₹ 3,73,750
What will be the amount of maximum permissible bank finance as per first method of Tandon Committee Norms?
(A) ₹ 12,98,625
(B) ₹ 12,89,265
(C) ₹ 12,89,625
(D) ₹ 12,98,265
Answer:
(C) ₹ 12,89,625
11,96,188 = 75% of Current Assets – Current Liabilities
11,96,188 = 0.75 × x – 3,73,750
11,96,188 = 0.75x -3,73,750
x = Current Assets = 20,93,250
Method 1: 75% of (Current Assets – Current Liabilities)
= 75% × (20,93,250 – 3,73,750)
= 12,89,625

Question 150.
Selling price is ₹ 50 per unit and production and sales for the year are 69,000 units and 75,000 units respectively. Direct wages are 10% of selling price. There is regular production and sales cycle, and wages and overheads accrue evenly. Wages & overheads are paid in the next month of accrual. One production process cycle is completed in two month. How much outstanding wages will be shown in working capital statement?
(A) ₹ 28,750
(B) ₹ 57,500
(C) ₹ 31,250
(D) ₹ 28,250
Answer:
(A) ₹ 28,750
Working Capital Management – Financial Management MCQ 68

Nature and Scope of Financial Management – Financial Management MCQ

Nature and Scope of Financial Management – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Nature and Scope of Financial Management – Financial Management MCQ

Question 1.
………….. is the life blood of a business.
(A) Finance Manager
(B) Finance
(C) Financial Management
(D) Corporate Financial Management
Answer:
(B) Finance

Question 2.
“Shareholder wealth” in a firm is represented by –
(A) The number of people employed in the firm.
(B) The book value of the firm’s assets less the book value of its liabilities.
(C) The amount of salary paid to its employees.
(D) The market price per share of the firm’s common stock.
Answer:
(D) The market price per share of the firm’s common stock.

Question 3.
Financial Management is study –
(I) of the process of procuring and judicious use of financial resources
(II) undertaken to maximize the value of the firm/owners.
Select the correct answer from the options given below.
(A) (I) only
(B) (II) only
(C) Both (I) and (II)
(D) Neither (I) nor (II)
Answer:
(C) Both (I) and (II)

Question 4.
To increase a given present value, the discount rate should be adjusted –
(A) upward
(B) downward
(C) keep as it is
(D) none of the above
Answer:
(B) downward

Question 5.
Long-run objective of financial management is to –
(A) Maximize earnings per share.
(B) Maximize the value of the firm’s common stock.
(C) Maximize return on investment.
(D) Maximize market share.
Answer:
(B) Maximize the value of the firm’s common stock.

Question 6.
Financial Management is concerned with –
(A) Investment Decisions
(B) Finance Decisions
(C) Dividend Decisions
(D) All of the above
Answer:
(D) All of the above

Question 7.
Procurement of funds interalia includes-
(a) Identification of sources of finance
(b) Determination of finance mix
(c) Raising of funds
(d) Division of profits between dividends and retention of profits of internal funds generation
Select the correct answer from the options given below.
(A) (a) & (b)
(B) (a)(c) & (d)
(C) (b) & (c)
(D) (c), (a), (d) & (b)
Answer:
(D) (c), (a), (d) & (b)

Question 8.
The market price of a share of common stock is determined by:
(A) the board of directors of the firm.
(B) the stock exchange on which the stock is listed.
(C) the president of the company.
(D) individuals buying and selling the stock.
Answer:
(D) individuals buying and selling the stock.

Question 9.
Which of the following is / are basic aspect of financial management?
(1) Procurement of funds.
(2) Appointment of capable financial personnel.
(3) Effective use of funds to achieve business objectives.
(4) Increase the national resources.
Select the correct answer from the options given below.
(A) (1) & (3)
(B) (2) & (4)
(C) (1) & (4)
(D) (2) & (3)
Answer:
(A) (1) & (3)

Question 10.
The focal point of financial management in a firm is – .
(A) the number and types of products or services provided by the firm.
(B) the minimization of the amount of taxes paid by the firm.
(C) the creation of value for shareholders.
(D) the profits earned by the firm.
Answer:
(C) the creation of value for shareholders.

Question 11.
A business organization can obtain funds from –
(A) Issue of preference or equity share capital
(B) Issue of debentures
(C) Loan from banks and financial institution
(D) All of the above
Answer:
(D) All of the above

Question 12.
The decision function of financial management can be broken down into the ………….. decisions.
(A) financing and investment
(B) investment, financing & asset management
(C) financing and dividend
(D) capital budgeting, cash management & credit management
Answer:
(B) investment, financing & asset management

Question 13.
Statement (I):
Since funds can be obtained from different sources therefore their procurement is always considered as complex problem by business concerns.
Statement (II):
Funds produced from different sources have a different characteristic in terms of risk, cost and control.
Select the correct answer from the options given below.
(A) Statement I is correct but Statement II is incorrect.
(B) Statement II is correct but Statement I is incorrect.
(C) Statement I & Statement II both are correct and Statement II support Statement I.
(D) Statement I & Statement II both are incorrect.
Answer:
(C) Statement I & Statement II both are correct and Statement II support Statement I.

Question 14.
The funds raised by the issue of ……….. are the best from the risk point of view for the company.
(A) equity shares
(B) debentures
(C) both (A) & (B)
(D) none of the above
Answer:
(A) equity shares

Question 15.
Financial management is –
(A) Science
(B) Art
(C) Both
(D) None
Answer:
(C) Both

Question 16.
A 30-year bond issued by Reliance Ltd. in 2007 would now trade in the –
(A) Primary money market
(B) Secondary money market
(C) Primary capital market
(D) Secondary capital market
Answer:
(D) Secondary capital market

Question 17.
Which of the following is not function of finance manager?
(A) Investor relations
(B) Credit & collections
(C) Investments
(D) Appointment of financial personnel
Answer:
(D) Appointment of financial personnel

Question 18.
Money market mutual funds –
(A) are also known as finance companies
(B) enable individuals and small businesses to invest indirectly in money-market instruments.
(C) are available only to high net-worth individuals.
(D) are involved in acquiring and placing mortgages.
Answer:
(B) enable individuals and small businesses to invest indirectly in money-market instruments.

Question 19.
Match the following:
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 1
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 2
Select the correct answer from the options given below
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 3
Answer:
(A)

Question 20.
The purpose of financial markets is to:
(A) increase the price of common stocks
(B) lower the yield on bonds
(C) allocate savings efficiently
(D) control inflation
Answer:
(C) allocate savings efficiently

Question 21.
Investment decisions are concerned with –
(A) Efficient allocation of funds to specific assets
(B) Determining the proper amount of funds to be employed in the firm.
(C) Determining the composition of liabilities
(D) Short run projects
Answer:
(A) Efficient allocation of funds to specific assets

Question 22.
_____ ensures that firm utilizes its available resources most efficiently under conditions of competitive markets.
(A) Wealth Maximization
(B) Profit Maximization
(C) Value Maximization
(D) Relation Maximization
Answer:
(B) Profit Maximization

Question 23.
For which of the following reason(s) profit maximization concept is criticized –
1. It is vague conceptually.
2. It ignores timing of returns.
3. It ignores the risk factor
4. Its emphasis is generally on short run projects.
Select the correct answer from the options given below.
(A) 1
(B) 1 & 2
(C) 1, 2 & 3
(D) 1, 2,3 & 4
Answer:
(D) 1, 2,3 & 4

Question 24.
…………. consistent with the object of maximizing owner’s economic welfare.
(A) Profit Maximization
(B) Wealth Maximization
(C) Relation Maximization
(D) All of the above
Answer:
(B) Wealth Maximization

Question 25.
Financial Management is concerned with
(A) Profit Maximization
(B) Both (A) & (C)
(C) Wealth Maximization
(D) Both (A) & (C) plus Relation Maximization
Answer:
(B) Both (A) & (C)

Question 26.
Assertion (A):
Profit maximization as an objective does not take into account the time pattern of returns.
Reason (R):
Finance manager will accept highly risky proposals if they give high profits by applying profit maximization concept.
Select the correct answer from the options given below.
(A) Both A and R are true and R is correct explanation of A.
(B) Both A and R true but R is not correct explanation of A.
(C) A is true but R is false
(D) A is false but R is true
Answer:
(B) Both A and R true but R is not correct explanation of A.

Question 27.
Profit maximization –
(A) cannot be the sole objective of a company
(B) is at best a limited objective.
(C) has to be attempted with a realization of risks involved
(D) all of the above
Answer:
(D) all of the above

Question 28.
Under inflationary conditions the value of money, expressed in terms of its purchasing power over goods and services
(A) Incline
(B) Declines
(C) Increases
(D) Remains constant
Answer:
(B) Declines

Question 29.
………… is a condition where a company cannot meet, or has difficulty paying off, its financial obligations to its creditors, typically due to high fixed costs, illiquid assets or revenues sensitive to economic downturns.
(A) Financial risk
(B) Financial uncertainty
(C) Financial certainty
(D) Financial distress
Answer:
(D) Financial distress

Question 30.
………….. means the organization can no longer meet its financial obligations with its lender or lenders as debts become due.
(A) Financial certainty
(B) Financial insolvency
(C) Financial risk
(D) Indentified risk
Answer:
(B) Financial insolvency

Question 31.
Assertion (A):
Profit maximization, as an objective is too narrow.
Reason (R):
It ignores timing of returns and also fails to take into account the social considerations as also the obligations to various interests of workers, consumers, society, ethical trade practices.
(A) Both A and Rare true and R is correct explanation of A.
(B) Both A and R true but R is not 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 Rare true and R is correct explanation of A.

Question 32.
A permanent ……………. may lead an organization to the chaotic state!
(A) financial insolvency; financial certainty
(B) financial distress; Indentified risk
(C) Indentified risk; financial insolvency
(D) financial distress; financial insolvency
Answer:
(D) financial distress; financial insolvency

Question 33.
Using in ………… the capital structure of a company is called financial gearing.
(A) borrowed funds or fixed cost funds
(B) owners funds or fixed cost funds
(C) owners funds
(D) reserve or balance of profit & loss account
Answer:
(A) borrowed funds or fixed cost funds

Question 34.
High financial gearing will -……………….
(A) decrease the EPS of the company if earnings before interest and taxes are rising
(B) increase the EPS of the company if earnings before interest and taxes are declining
(C) decrease the EPS of the company if earnings before interest and taxes are declining
(D) increase the EPS of the company if earnings before interest and taxes are rising
Answer:
(D) increase the EPS of the company if earnings before interest and taxes are rising

Question 35.
Higher the level of financial gearing -………….
(A) Greater will be the risk.
(B) Lower will be the risk.
(C) Risk will be constant.
(D) None of the above
Answer:
(A) Greater will be the risk.

Question 36.
Financial management is broadly concerned with -…………….
(A) Raising of funds
(B) Creating value to the assets of the business enterprise
(C) Efficient allocation of funds
(D) All of the above
Answer:
(D) All of the above

Question 37.
Financial Management can be judged by the study of the nature of -…………
(A) Corporate, social & benefit decisions.
(B) Accounting, financing & dividend decisions.
(C) Personnel, human cost & economic decisions
(D) Investment, financing & dividend decisions.
Answer:
(D) Investment, financing & dividend decisions.

Question 38.
Which of the following is/are a major aspect of investment decision making process?
(A) Capital budgeting
(B) Formulation of Functional Strategy
(C) Strategic implementation
(D) All of the above
Answer:
(A) Capital budgeting

Question 39.
Investment decisions encompass -……………
(A) Cost of capital
(B) Capital budgeting
(C) Management of liquidity and current assets
(D) All of the above
Answer:
(D) All of the above

Question 40.
Optimal investment decisions need to be made taking into consideration such factors as –
(A) Estimation of capital outlays and the future earnings of the proposed project focusing on the task of value engineering and market forecasting.
(B) Availability of capital and considerations of cost of capital focusing attention on financial analysis.
(C) A set of standards by which to select a project for implementation and maximizing returns therefrom focusing attention on logic and arithmetic.
(D) All of the above
Answer:
(D) All of the above

Question 41.
Financing decisions are concerned with -………….
(A) question whether adding to capital assets today will increase the revenue of tomorrow to cover costs.
(B) commitments of monetary resources at different times in expectation of economic returns in future.
(C) the determination of how much funds to procure from amongst the various avenues available
(D) problem of accepting one proposal and leaving other persists.
Answer:
(C) the determination of how much funds to procure from amongst the various avenues available

Question 42.
According to Solomon, …………. means maximizing the net present value of a course of action to shareholders.
(A) Wealth maximization
(B) Profit maximization
(C) Dividend maximization
(D) None of the above
Answer:
(A) Wealth maximization

Question 43.
Match the following:
List — I — List — II
(I) Profit maximization — (P) Recognizes risk or uncertainty
(II) Wealth maximization — (Q) Ignores the timing of returns
(III) Liquidity — (R) ability to meet short obligations
(IV) Profitability — (S) evaluating the performance in different spheres
Select the correct answer from the options given below.
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 4
Answer:
(B)

Question 44
Return on Investment is –
(A) Profitability ratio
(B) Volume ratio
(C) Short term solvency ratio
(D) Operating ratio
Answer:
(A) Profitability ratio

Question 45.
Theory on cost of capital as propounded by Modigliani and Miller argues that –
(A) Risk is associated with fixed charges in the shape of interest on debt capital.
(B) Cost of capital is independent of the capital structure
(C) High financial gearing will increase the earnings per share of a company if earnings before interest and taxes are rising
(D) Business works as a system comprised of sub-systems.
Answer:
(B) Cost of capital is independent of the capital structure

Question 46.
Example of solvency ratio –
(A) Debt to Equity Ratio
(B) Debt to Total Funds Ratio
(C) Interest Coverage Ratio
(D) All of the above
Answer:
(D) All of the above

Question 47.
Dividend decision is to decide –
(A) How much profit to earn
(B) Whether the firm should distribute all profits or retain them or distribute a portion and retain the balance.
(C) Where the fund should be invested so that maximum dividend can be earned on investment
(D) How to improve dividend yield ratio
Answer:
(B) Whether the firm should distribute all profits or retain them or distribute a portion and retain the balance.

Question 48.
Which of the following is/are ‘fund-based service’ provided by the commercial banks in India?
(A) Term loan
(B) Bill discounting
(C) Overdraft
(D) All of the above
Answer:
(A) Term loan

Question 50.
Which of the following aspects are taken up in detail under the study of financial management?
(1) Determination of size of the enterprise and determination of rate of growth.
(2) Determining the composition of assets of the enterprise.
(3) Determining the mix of enterprise’s financing.
(4) Analysis, planning and control of financial affairs of the enterprise.
Select the correct answer from the options given below.
(A) (4) & (1)
(B) (4), (3) & (2)
(C) (3)&(1)
(D) (2), (4), (1) & (3)
Answer:
(D) (2), (4), (1) & (3)

Question 51.
Which of the following statement is correct?
(1) The term profit is vague.
(2) Profit maximization as an objective is too narrow.
(3) Value / wealth maximization decision do not takes into consideration time value of money and uncertainty of risk.
(4) Investment decisions relate to the
determination as to how much and how frequently cash can be paid out of the profits of an organization as income.
Select the correct answer from the options given below.
(A) (3) & (1)
(B) (2) & (1)
(C) (2) & (4)
(D) (1) & (4)
Answer:
(B) (2) & (1)

Question 52.
Which of the following statement is incorrect?
1. Profit Maximization ignores risk or uncertainty.
2. Wealth Maximization Emphasizes the long term gains.
Select the correct answer from the options given below.
(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2
Answer:
(D) Neither 1 nor 2

Question 53.
Select the correct statement from the following:
(i) In accounting, the measurement of funds is based on cash flows.
(ii) The treatment of funds in financial management is based on the accrual principle.
Select the correct answer from the options given below.
(A) Both (i) and (ii) are correct
(B) Only (i) is correct
(C) Only (ii) is correct
(D) None of the above
Answer:
(A) Both (i) and (ii) are correct

Question 54.
………… may be defined as interest that is calculated as a percentage of the original principal amount.
(A) Compound Interest
(B) Simple Interest
(C) Simple Compound Interest
(D) Compounded Simple Interest
Answer:
(A) Compound Interest

Question 55.
When interest is calculated on total of previously earned interest and the original principal it is
(A) Simple Compound Interest
(B) Effective Rate of Interest
(C) Simple Interest
(D) Compound Interest
Answer:
(D) Compound Interest

Question 56.
Which of the following statement is correct?
1. Discounting converts future amount into present value amount.
2. Compounding converts present value
amount into future value amount.
Select the correct answer from the options given below.
(A) Only 1
(B) Both 1 and 2
(C) Only 2
(D) Neither 1 nor 2
Answer:
(B) Both 1 and 2

Question 57.
………….. is a series of equal payments or receipts occurring over a specified number of periods
(A) Present cash flow
(B) An annuity
(C) Annuity factor
(D) Present value factor
Answer:
(B) An annuity

Question 58.
What is the most appropriate goal of the firm?
(A) Shareholder wealth maximization
(B) Profit maximization
(C) Stakeholder maximization
(D) EPS maximization
Answer:
(A) Shareholder wealth maximization

Question 59.
The ability of a firm to convert an asset to cash is called …………
(A) Solvency
(B) Return
(C) Marketability
(D) Liquidity
Answer:
(D) Liquidity

Question 60.
Which of the following shows the details of the company’s activities involving cash during a period of time?
(A) Income statement
(B) Statement of financial position
(C) Revenue – Costs = Profits
(D) None of the above
Answer:
(D) None of the above

Question 61.
The long-run objective of financial management is to:
(A) Maximize earnings per share.
(B) Maximize the value of the firm’s common stock.
(C) Maximize return on investment.
(D) Maximize market share.
Answer:
(B) Maximize the value of the firm’s common stock.

Question 62.
In the …………………… the future value of all cash inflow at the end of time horizon at a particular rate of interest is calculated.
(A) Risk-free rate
(B) Compounding technique
(C) Discounting technique
(D) Risk Premium
Answer:
(B) Compounding technique

Question 63.
…………. is the price at which the bond is traded in the stock exchange.
(A) Redemption value
(B) Face value
(C) Market value
(D) Maturity value
Answer:
(C) Market value

Question 64.
enhance the market value of shares and therefore equity capital is not free of cost
(A) Face value
(B) Dividends
(C) Redemption value
(D) Book value
Answer:
(B) Dividends

Question 65.
………… and ………… are the two versions of goals of the financial management of the firm.
(A) Profit maximization; Wealth maximization
(B) Production maximization; Sales maximization
(C) Sales maximization; Profit maximization
(D) Value maximization; Wealth maximization
Answer:
(A) Profit maximization; Wealth maximization

Question 66.
…………. and ………… carry a fixed rate of interest and are to be paid off irrespective of the firm’s revenues.
(A) Debentures, Dividends
(B) Debentures, Bonds
(C) Dividends, Bonds
(D) Dividends, Treasury notes
Answer:
(B) Debentures, Bonds

Question 67.
Credit policy of every company is largely influenced by ……….. and ………….
(A) Liquidity, accountability
(B) Liquidity, profitability
(C) Liability, profitability
(D) Liability, liquidity
Answer:
(B) Liquidity, profitability

Question 68.
XYZ is an oil based business company, which does not have adequate working capital. It fails to meet its current obligation, which leads to bankruptcy. Identify the type of decision involved to prevent risk of bankruptcy.
(A) Investment decision
(B) Dividend decision
(C) Liquidity decision
(D) Finance decision
Answer:
(C) Liquidity decision

Question 69.
How earnings per share is calculated?
(A) Use the income statement to determine earnings after taxes (net income) and divide by the previous period’s earnings after taxes. Then subtract 1 from the previously calculated value.
(B) Use the income statement to determine earnings after taxes (net income) and divide by the number of common shares outstanding.
(C) Use the income statement to determine earnings after taxes (net income) and divide by the number of common and preferred shares outstanding.
(D) Use the income statement to determine earnings after taxes (net income) and divide by the fore casted period’s earnings after taxes. Then subtract 1 from the previously calculated value
Answer:
(B) Use the income statement to determine earnings after taxes (net income) and divide by the number of common shares outstanding.

Question 70.
The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if—
(A) Cost of goods sold increased relative to sales.
(B) Sales increased relative to expenses.
(C) Government increased the tax rate.
(D) Dividends were decreased.
Answer:
(C) Government increased the tax rate.

Question 71.
Time value of money indicates that –
(A) A unit of money obtained today is worth less than a unit of money obtained in future.
(B) A unit of money obtained today is worth more than a unit of money obtained in future.
(C) There is no difference in the value of money obtained today and tomor-row.
(D) None of the above
Answer:
(B) A unit of money obtained today is worth more than a unit of money obtained in future.

Question 72.
Time value of money supports the comparison of cash flows recorded at different time period by –
(I) Discounting all cash flows to a common point of time.
(II) Compounding all cash flows to a common point of time.
Select the correct answer from the options given below.
(A) (I) only
(B) (II) only
(C) Using either (I) or (II)
(D) None of the above
Answer:
(C) Using either (I) or (II)

Question 73.
Heterogeneous cash flows can be made comparable by –
(A) Discounting technique
(B) Compounding technique
(C) Either (A) or (B)
(D) None of the above
Answer:
(C) Either (A) or (B)

Question 74.
If ‘Profit Maximization’ concept is applied then which of the following Product will be selected?
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 5
Note: Above table shows projected earnings of the various products for next 5 years.
(A) Product A
(B) Product B
(C) Product C
(D) Product D
Answer:
(B) Product B
More profit is at Product B; hence it should be selected.
(Profit maximization ignores timing of returns)

Question 75.
What is the present value factor for 10% at 6 years?
(A) 0.564
(B) 0.683
(C) 0.621
(D) 0.513
Answer:
(A) 0.564
Follow following steps on calculator.
Type 1; press ÷ sign; type 1.1; press = sign six time.

Question 76.
What is the annuity factor for 13% at 5 years?
(A) 2.974
(B) 3.998
(C) 3.517
(D) 3.402
Answer:
(C) 3.517
Type 1; press ÷ sign; type 1.13; press = sign five time; press ‘GT’ button on calcu¬lator

Question 77.
Find out the present value of projects cash flow from the following data if the cost of capital of the firm is 12%:
Year — Cash flow
1. — 10,000
2. — 12,000
3. — 14,000
4. — 16,000
5. — 22,000
(A) ₹ 51,112
(B) ₹ 51,221
(C) ₹ 51,211
(D) ₹ 52,112
Answer:
(A) ₹ 51,112
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 8

Question 78.
Find out the present value of projects cash flow from the following data if the cost of capital of the firm is 12%:
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 6
(A) 71,200
(B) 72,001
(C) 72,430
(D) 72,100
Answer:
(D) 72,100

Question 79.
If you invest ₹ 10,000 (P0) in a bank at simple interest of 7% p.a., what will be the amount at the end of 3 (n) years?
Note: Use simple interest rate method.
(A) ₹ 12,100
(B) ₹15,400
(C) ₹ 17,500
(D) ₹20,600
Answer:
(A) ₹ 12,100
Future Value, FVn = Pn + SI = P0 + P0(z)(n) = 10,000 + 10,000 (0.07)(3) = 12,100

Question 80.
₹ 2,000 is deposited in a bank for 2 years at simple interest of 6%. How much will be the balance at the end of 2 years?
Note: Use simple interest rate method
(A) ₹ 2,000
(B) ₹ 2,240
(C) ₹ 2,420
(D) ₹ 2,640
Answer:
(B) ₹ 2,240
Required balance is given by
FVn = P0 + Po(0)(n) = 2,000 + 2,000 (0.06)(2) = 2,000 + 240 = 2,240.

Question 81.
Find the rate of interest if the amount owed after 6 (h) months is ₹ 1,050 (A), borrowed amount being ₹ 1,000 (P0).
Note: Use simple interest rate method.
(A) ₹ 5%
(B) ₹10%
(C) ₹ 4%
(D) ₹ 20%
Answer:
(B) ₹10%
We know FVn = P0 + P()( i)( n)
ie. 1,050 = 1,000 + 1,000(i)(6/12)
Or 1,050 – 1,000 = 500(i)
Therefore (i) = 50/500 = 0.10
i..e. (i) = 10%

Question 82.
Determine the compound interest for an investment of ₹ 7,500 at 6% compounded half yearly. Given that (l+i)n for i = 0.03 and n = 12 is 1.42576.
(A) ₹ 3,193.20
(B) ₹ 3,913.20
(C) ₹ 3,319.20
(D) ₹ 3,139.20
Answer:
(A) ₹ 3,193.20
\(i=\frac{6}{2 \times 100}\) = 0.03; n = 6×2=12,P = 1,000
Compound Amount = 7,500 (1 + 0.03)12 = 7,500 × 1.42576 = 10,693.20
Compound Interest = 10,693.20 – 7,500 = 3,193.20

Question 83.
₹ 2,000 is invested at annual rate of interest of 10%. What is the amount after 2 years if the compounding is done annually?
(A) ₹ 2,420.00
(B) ₹ 2,431.00
(C) ₹ 2,440.58
(D) ₹ 2,442.70
Answer:
(A) ₹ 2,420.00
The annual compounding is given by:
FV = P (1 + i)n, n being 2, i being 10/100 = 0.1 and P being 2,000
2,000 (1.1)2 = 2,000 × 1.21 = 2,420

Question 84.
₹ 2,000 is invested at annual rate of interest of 10%. What is the amount after 2 years if the compounding is done semi annually?
(A) ₹ 2,420.00
(B) ₹ 2,431.00
(C) ₹ 2,440.58
(D) ₹ 2,442.70
Answer:
(B) ₹ 2,431.00
For Semi-annual compounding, n = 2 × 2 = 4, i =  0.1/2 = 0.05
FV4 = 2,000 (1 + 0.05)4 = 2,000 × 1.2155 = 2,431

Question 85.
₹ 2,000 is invested at annual rate of interest of 10%. What is the amount after 2 years if the compounding is done monthly?
(A) ₹ 2,420.00
(B) ₹ 2,431.00
(C) ₹ 2,440.58
(D) ₹ 2,442.70
Answer:
(C) ₹ 2,440.58
For monthly compounding, n = 12 × 2 =. 24, i = 0.1 /12 = 0.00833
FV24 = 2,000 (1.00833)24 = 2,000 × 1.22029 = 2,440.58

Question 86.
Determine the compound interest on 1 1,000 at 6% compounded semi-annually for 6 years. Given that (1+i)n = 1.42576 for i = 3% and n = 12.
(A) ₹ 1,425.76
(B) ₹ 425.76
(C) ₹ 452.76
(D) ₹542.67
Answer:
(B) ₹ 425.76
i(6/2)3%, n= 6×2 = 12,P = 1000
Compound amount P (1 + i)n = 1,000(1 + 3%)12 = 1,000 × 1.42576 = 1,425.76
Compound interest = 1,425.76 –  1,000
= 425.76

Question 87.
Ram has taken a 20 month car loan of ₹ 6,00,000. The rate of interest is 12% p.a. What will be the amount of monthly loan amortization?
(A) 33,294.1
(B) 33,249.1
(C) 33,924.1
(D) 32,349.1
Answer:
(B) 33,249.1
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 10

Question 88.
What is the present value of ₹ 1 to be received after 2 years compounded annually at 10%?
(A) 0.83
(B) 0.91
(C) 0.75
(D) 0.68
Answer:
(A) 0.83
Here FV =1, z = 0.1
Required Present Value = FVn (1+i)-n
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 15
Thus, 0.83 shall grow to 1 after 2 years at 10% compounded annually.

Question 89.
Find out the present value of ₹ 2,000 received after in 10 years, if discount rate is 8%.
(A) 926
(B) 1,000
(C) 858
(D) 905
Answer:
(A) 926
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 11
=2,000(0.463)
= 926

Question 90.
Find the amount of an annuity if payment of ₹ 500is made annually for 7 years at interest rate of 14% compounded annually.
(A) ₹ 5,356.25
(B) ₹ 5,563.52
(C) ₹ 5,365.25
(D) ₹ 5,635.52
Answer:
(C) ₹ 5,365.25
R= 500, n= 7 i=0.14
FVA = 500 × FVTFA (7, 0.14) = 500 × 10.7304915 = 5,365.25

Question 91.
A person is required to pay 4 equal annual payments of ₹ 5,000 each in his deposit account that pays 8% interest per year. Find out the future value of annuity at the end of 4 years.
(A) 22,535
(B) 22,553
(C) 22,355
(D) 23,255
Answer:
(A) 22,535
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 13
= 5,000 (4.507)
= 22,535

Question 92.
Assume that the interest rate is greater than zero. Which of the following cash-in-flow streams should you prefer?
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 7
(D) Any of the above, since they each sum to ₹ 1,000.
Answer:
(A)

Question 93.
If 18% is the best risk-free return available, then you would be indifferent to receiving f 100 now or ₹ 118 in one year’s time.
(A) Expressed another way the present value of ₹ 100 receivable one year hence is ₹ 118
(B) Expressed another way the present value of ₹ 118 receivable one year hence is ₹ 100
(C) Both are correct
(D) Data given is insufficient
Answer:
(B) Expressed another way the present value of ₹ 118 receivable one year hence is ₹ 100

Question 94.
₹ 200 is invested at the end of each month in an account paying interest 6% per year compounded monthly. What is the amount of this annuity after 10th payment? Given that (1.005)10 = 1.0511
(A) ₹ 2,404
(B) ₹ 2,044
(C) ₹ 2,440
(D) ₹ 2,004
Answer:
(B) ₹ 2,044
We have =\(\mathrm{A}(\mathrm{n}, \mathrm{i})=\left[\frac{(1+\mathrm{i})^{\mathrm{n}}-1}{\mathrm{i}}\right]^{\mathrm{n}}\)
i being the interest rate (in decimal) per payment period over n payment period.
Here, i = 0.06/12 = 0.005, n = 10.
Required amount is given by A = RA (10, 0.005)
= 200 × 10.22 = 2,044.

Question 95.
Y bought a TV costing ₹ 13,000 by making a down payment of ₹ 3,000 and agreeing to make equal annual payment for 4 years. How much would be each payment if the interest on unpaid amount be 14% compounded annually?
(A) 3,431.71
(B) 3,413.17
(C) 3,134.17
(D) 3,341.71
Answer:
(A) 3,431.71
Nature & Scope of Financial Management - Financial and Strategic Management MCQ 14

Question 96.
Determine the present value of ₹ 700 each paid at the end of each of the next 6 years. Assume an 8% interest.
(A) ₹ 3,263.10
(B) ₹ 3,632.01
(C) ₹ 3,326.01
(D) ₹ 3,236.10
Answer:
(D) ₹ 3,236.10
As the present value of an annuity of ₹ 700 has to be computed. The present value factor of an annuity of ₹ 1 at 8 percent for 6 years is 4.623. Therefore, the present value of an annuity of ₹ 700 will be: 4.623 × ₹ 700 = ₹ 3,236.10

Question 97.
Ramu wants to retire and receive ₹ 3,000 a month. He wants to pass this monthly payment to future generations after his death. He can earn an interest of 8% compounded annually. How much will he need to set aside to achieve his perpetuity goal?
(A) ₹ 4,94,775
(B) ₹ 4,49,775
(C) ₹ 4,49,577
(D) ₹ 4,47,975
Answer:
(B) ₹ 4,49,775

Question 98.
Assuming that the discount rate is 7% per annum, how much would you pay to receive ₹ 50, growing at 5%, annually, forever?
(A) 2,500
(B) 5,200
(C) 2,200
(D) 5,500
Answer:
(A) 2,500

Question 99.
ABCL Company has issued debentures of ₹ 50 lakhs to be repaid after 7 years. How much should the company invest in a sinking fund earning 12% in order to be able to repay debentures?
(A) 4.96 lakhs
(B) 4.92 lakhs
(C) 4.98 lakhs
(D) 5.00 lakhs
Answer:
(A) 4.96 lakhs
R = 3,000
i = 0.08/12 or 0.00667
Substituting these values in the above formula, we get
PVA=\(\frac{3,000}{0.00667}\)=4,49,775

 

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Methods of Valuation – Corporate and Management Accounting MCQs

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

Question 2.
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 3.
Which of the following is correct formula to calculate returns of listed security?
(A) [(P1 – P0) + D] ÷ P0  ×100
(B) [(P1 – P0) + D] ÷ P1 × 100
(C) [(P1 – P0) – D] ÷ P0 × 100
(D) [(P1 – P0) + D (1 -t)] -r P0 × 100
Answer:
(A) [(P1 – P0) + D] ÷ P0  ×100

Question 4.
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 5.
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 6.
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 7.
An attempt to make correction by adjusting historical beta to make it closer to an average beta is classified as –
(A) Adjusted stock
(B) Adjusted beta
(C) Adjusted coefficient
(D) Adjusted risk
Answer:
(B) Adjusted beta

Question 8.
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 9.
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 10.
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 11.
The beta of the market portfolio is:
(A) -1.0
(B) 0
(C) 1.0
(D) 0.5
Answer:
(C) 1.0

Question 12.
Non-systematic risk is furthermore identified as –
(A) No diversifLable risk
(B) Market risk
(C) Random risk
(D) Company specific risk
Answer:
(D) Company specific risk

Question 13.
Beta is measure of –
(A) Non-diversifiable risk
(B) Diversifiable risk
(C) Total risk
(D) Covariance
Answer:
(A) Non-diversifiable risk

Question 14.
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 15.
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 16.
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 17.
Which of the following is correct formula to calculate beta (β)?
Methods of Valuation – Corporate and Management Accounting MCQ 1
(D) All of the above
Answer:
(D) All of the above

Question 18.
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 19.
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 20.
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 21.
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 22.
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) Unsystematic risk
(C) Total risk
(D) Free risk
Answer:
(A) Systematic risk

Question 23.
Market risk is also called:
(A) Systematic risk and unique risk.
(B) Unique risk & non diversihable risk.
(C) Systematic risk & diversihable risk.
(D) Non diversihable risk & systematic risk.
Answer:
(D) Non diversihable risk & systematic risk.

Question 24.
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 25.
If required return as per CAPM is more them 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 26.
According to the CAPM, overpriced securities have:
(A) Negative alphas
(B) Positive alphas
(C) Zero betas
(D) Zero alphas
Answer:
(A) Negative alphas

Question 27.
The beta of the risk-free asset is:
(A) 0
(B) 0.5
(C) 2.0
(D) 1.0
Answer:
(A) 0

Question 28.
Capital asset pricing theory asserts that portfolio returns are best explained by:
(A) Economic factors
(B) Systematic risk
(C) Specihc risk
(D) Diversihcation
Answer:
(B) Systematic risk

Question 29.
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 30.
Alpha is denoted by symbol –
(A) A
(B) ¥
(C) α
(D) ∆
Answer:
(C) α

Question 31.
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 32.
Systematic Risk is –
(A) Uncontrollable
(B) Controllable
(C) Avoidable
(D) Voidable
Answer:
(A) Uncontrollable

Question 33.
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 34.
Systematic risk = ?
(A) Beta X SD of market
(B) Total risk – SD of market
(C) Total risk – Beta
(D) Beta 4- SD of market
Answer:
(A) Beta X SD of market

Question 35.
……….. is also called specific risk.
(A) Systematic risk
(B) Unsystematic risk
(C) Covariance
(D) Coefficient
Answer:
(B) Unsystematic risk

Question 36.
In contrast to the capital asset pricing model, arbitrage pricing theory:
(A) Uses risk premiums based on micro variables.
(B) Requires normally distributed security returns.
(C) Has fewer restrictive assumptions.
(D) Specifies the number and identities of specific factors that determine expected returns.
Answer:
(C) Has fewer restrictive assumptions.

Question 37.
The APT is an equilibrium model developed by:
(A) Stephen Ross and Richard Roll
(B) Stephen Ross
(C) Richard Roll
(D) Harry Markowitz
Answer:
(B) Stephen Ross

Question 38.
Which of the following is NOT an assumption of the APT?
(A) Investors prefer more wealth to less.
(B) Security returns are generated by a linear factor model.
(C) The return-generating process can have more than one common factor.
(D) Investors are risk averse.
Answer:
(D) Investors are risk averse.

Question 39.
Which of the following statements is correct?
(A) The CAPM is considered to be less restrictive than the APT.
(B) Both the CAPM and the APT are built on the same assumptions.
(C) Both the CAPM and the APT state that there is a linear relation between risk and expected return.
(D) Both the CAPM and the APT predict that all investors will hold the same market portfolio.
Answer:
(C) Both the CAPM and the APT state that there is a linear relation between risk and expected return.

Question 40.
Which of the following statements about the APT is false?
(A) The major disadvantage of the APT is that it fails to tell us what the common factors are.
(B) The APT requires that securities that provide the same payoffs must sell at the same price.
(C) The APT is considered to be less restrictive than the CAPM.
(D) Most empirical studies show that only one factor is important in the APT.
Answer:
(D) Most empirical studies show that only one factor is important in the APT.

Question 41.
Which of the following statements is true according to the theory of arbitrage?
(A) Rational investors will arbitrage in a manner consistent with their risk tolerance.
(B) Negative alpha stocks cannot be arbitraged.
(C) Low-beta stocks are consistently overpriced.
(D) Positive alpha stocks will quickly disappear.
Answer:
(D) Positive alpha stocks will quickly disappear.

Question 42.
Which of the following is an assumption of the APT?
(A) Investors follow the mean-variance rule.
(B) All investors hold the market portfolio.
(C) Investors are risk averse.
(D) Short sales are allowed.
Answer:
(D) Short sales are allowed.

Question 43.
Following details are available for two securities:
Methods of Valuation – Corporate and Management Accounting MCQ 2
Answer:
(C)
X: (0.05 × 30) + (0.20 × 25) + (0.50 × 20) + (0.20 × 15) + (0.05 × 10) = 20%
Y: (0.05 × 39) + (0.20 × 29) + (0.50 × 21) + (0.20 × 13) + (0.05 × 3) = 21%

Question 44.
Suppose risk free rate is 4% and X 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 X 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 45.
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 × 100 = 12%

Question 46.
Actual return of GK Ltd. for last four year is 20%, 14%, 17% and 18%. GKLtd.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.
ER = Rf + β (Rm– Rf)
= 6+1.15(15-6)
=16.35%
Methods of Valuation – Corporate and Management Accounting MCQ 10

Question 47.
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 48.
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 49.
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%
Methods of Valuation – Corporate and Management Accounting MCQ 11

Question 50.
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%
Methods of Valuation – Corporate and Management Accounting MCQ 12

Question 51.
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%
Methods of Valuation – Corporate and Management Accounting MCQ 13

Question 52.
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.
Methods of Valuation – Corporate and Management Accounting MCQ 3
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
Methods of Valuation – Corporate and Management Accounting MCQ 14

Question 53.
Pavan has invested in four securities. Amount invested and beta of each security is as follows:
Methods of Valuation – Corporate and Management Accounting MCQ 4
Compute portfolio beta.
(A) 1.524
(B) 1.874
(C) 0.789
(D) 1.315
Answer:
(D) 1.315
Methods of Valuation – Corporate and Management Accounting MCQ 15

Question 54.
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 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=Rf+p(Rm-Rf)
= 8 + 1.45 (16 – 8)
= 19.6%
Revised expected return if the risk premium on the market goes up by 2.5%:
ER = Rf + p (Rm – Rf)
Note: Risk Premium = (Rm – Rf)
= 8+1.45 (10.5) Revised risk premium = 8 + 2.5 = 10.5 = 23.23%

Question 55.
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=Rf+p(Rm-Rf)
= 8 + 1.4 (13 – 8)
= 15%

Question 56.
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 15%
market portfolio
Correlation coefficient of 0.8
portfolio with the market
(A) 16%
(B) 15%
(C) 14%
(D) 12%
Answer:
(B) 15%
Methods of Valuation – Corporate and Management Accounting MCQ 16

Question 57.
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%
Methods of Valuation – Corporate and Management Accounting MCQ 17

Question 58.
The expected return and beta of three securities is as follows:
Methods of Valuation – Corporate and Management Accounting MCQ 5
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?
Methods of Valuation – Corporate and Management Accounting MCQ 6
(A) Overvalued
(B) At par
(C) Undervalued
(D) Overvalued
Answer:
(C) Undervalued
Methods of Valuation – Corporate and Management Accounting MCQ 18
Methods of Valuation – Corporate and Management Accounting MCQ 19

Question 59.
Actual return of T Ltd. for last four year is as follows:
Methods of Valuation – Corporate and Management Accounting MCQ 7
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 ie. 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 ie. 0.4 and hence security is undervalued. Such security should be bought.
Methods of Valuation – Corporate and Management Accounting MCQ 20
Alpha value is positive i.e. 0.4 and hence security is undervalued. Such security should be bought.

Question 60.
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=Rf+p(Rm-Rf)
= 6 + 0.5 (15 – 6)
= 10.5%
Computation of beta for other security:
ER=Rf+p(Rm-Rf)
18 = 6 +p (15-6)
18 = 6 + 9p 12 = 9p
P = 1.3333

Question 61.
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 496. 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) 16.9096
(C) 19.6096
(D) 16.9696
Answer:
(A) 10.69%
Methods of Valuation – Corporate and Management Accounting MCQ 21

Question 62.
Zebra Ltd. has a beta (P) of 1.15. The return on market portfolio is 1496. The risk¬free rate of return is 596. Actual rates of returns over 4 observations are as under:
Methods of Valuation – Corporate and Management Accounting MCQ 8
In which year security is undervalued.
(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=Rf+p(Rm-Rf)
= 5+1.15(14-5)
= 15.35%
Methods of Valuation – Corporate and Management Accounting MCQ 22

Question 63.
Return on Lucky Ltd.’s shares has a standard deviation of 2296, as against the standard deviation of the market at 1296. Correlation co-efficient between market and stock of Lucky Ltd. is 0.796. Compute unsystematic risk of Lucky Ltd.’s shares.
(A) 15.496
(B) 8.496
(C) 6.696
(D) 12.696
Answer:
(C) 6.696
Methods of Valuation – Corporate and Management Accounting MCQ 23
Systematic risk = Beta × SD of market
= β×σM = 1.2833 × 12 = 15.4%
Unsystematic risk = Total risk – Systematic risk
= 22 – 15.4
= 6.696

Question 64.
In a portfolio of the company,₹ 2,00,000 have been invested in Asset-X which has an expected return of 8.596, ₹ 2,80,000 in Asset-Y, which has an expected return of 10.296 and ₹ 3,20,000 in Asset-Z which has an expected return of 1296. What is the expected return for the portfolio?
(A) 12.94596
(B) 10.49596
(C) 10.54996
(D) 15.94596
Answer:
(B) 10.49596
Methods of Valuation – Corporate and Management Accounting MCQ 25

Question 65.
The following data relate to two securities, A and B:
Methods of Valuation – Corporate and Management Accounting MCQ 9
Assume RF = 10% and RM = 18%.
Find out whether the securities, A and B are correctly priced?
Securities A — Securities B
(A) Undervalued — Overvalued
(B) Overvalued — Undervalued
(C) Correctly valued — Undervalued
(D) Overvalued — Correctly valued
Answer:
(C) Correctly valued — Undervalued
Methods of Valuation – Corporate and Management Accounting MCQ 26