Answer To 1a
Answer To 1a
Controller & Treasurer are independent & they have their own Perspectives & Drivers as detailed below:
Controller
Treasurer
Therefore, from the above it is clear that, controller & treasurer have different roles to play. However, majority of the Indian companies
works with Financial Controller who himself takes care of the treasury department / Portfolio.
Therefore, as far as from Indian context, it can be concluded that, controller is also responsible for treasury jobs & there is no
separate treasurer / treasury department exists
Particulars
Cost of Machinery
Ref
Year 0
Year 1
(a)
800,000
(b)
150,000
Year 2
Year 3 Rs.
Year 4
Year 5
Year 6
Calculating
Present
Value of
Cash flows:
c = (ab)
650,000
Repayment in equal
instalments every year
d=6*15 0,000
900,000
150,000
150,000
150,000
150,000
150,000
150,000
250,000
Rate of Interest
= total interest
/ total
borrowings
f=e/c
Rate of interet per annum
38.46%
g = f / 6 yrs
6.41%
of
repayment
2
6:5:4:3: 2:1
years
-
i.e.
(6+5+4+3+2
(ratio)
+1)
250000
71429
59524
47619
35714
23810
11905
(250,000
(250,000
(250,00
(250,00
(250,000*
(250,00
*6/21)
*5/21)
0*4/21)
0*3/21)
2/21)
0*1/21)
2) Principal Outstanding
adjustment
i=d-h
650000
78571
90476
102381
114286
126190
378571
264286
138095
138095
Yearwise Interest
rates: - Principal
Outstanding at year end
650000
571429
480952
(571429-
(480952
(378571
(264286-
(138095
i)
i)
- i)
- i)
i)
- i)
h/
princip al
RATE OF
o/s
INTEREST
at year
EVERY YEAR
beginni ng)
11.0%
10.4%
9.9%
9.4%
9.0%
8.6%
(h /
(h /
(h /
(h /
(h /
(h /
650000)
571429)
480952)
378571)
264286)
138095)
Money has time value. For ex: Rs.1000 received today is not the same worth after a year (actually it is less)
Present value of cash flows: It indicates the value of expected worth at current value. (Discounts the expected cash flows at
appropriate discount rate (may be 10%, 20% etc.,)
Discount rate will generally be equal to = Inflation rate + Reqd. rate of return + risk free premium rate Details required for
calculating Present Value of cash flows: Cash flows year wise, discount rate. This technique is very useful for decision-making.
Annuity due: Uniform/ Constant/ Equal cash flows every year
Computation:
Annuity * Present value annuity factor (PVAF)
Illustration:
Mr. A would like to receive Rs.1000/- every year for 10
years from now.
It is assumed discount rate 10%, the present value annuity
factor for 10 years 10% is 6.144.
Question 3a: How leverage is linked with capital structure? Take example of
a MNC and analyze.
Answer to 3a:
Leverage: It is an advantage gained (it may be anything)
Leverage is linked with Capital Structure, since an organization having a optimum capital structure (where
WACC (weighted average cost of capital) is minimum) is a great leverage/ advantage both to the company
as well for the investors.
Organizations, generally have two types of risks; operating risks impact of fixed costs & variability of EBIT
& Financial risks impact of interest cost/financial charges & variability of EBT.
Example:
XYZ ltd has the following nos:
Contribution Rs.100 lacs, fixed cost Rs.25 lacs, Financial Charges/debt cost Rs.40 lacs.
Particulars
Value (Rs. In lacs)
Contribution
100
Fixed cost
25
EBIT
75
Interest cost
35
EBT
40
XYZ Ltd. has following:
Operating leverage
Financial leverage
Contribution / EBIT = 100 / 75 = 1.33
EBIT / EBT = 75 / 40 = 1.87
It is always preferable to have low operating risk & high financial risk (subject to Return on capital
employed (ROCE) > Interest cost on debt funds)
We can conclude that, XYZ ltd (MNC) is having a optimum capital structure & manageable risk.
500
1,000
200
Variable costs
300
Fixed Cost
150
----150
Interest
50
-----
100
Q LTD.
(In Rs. Lakhs)
3
00
------7
00
4
00
------4
00
1
00
------2
00
Answer 3b:
P ltd
Particulars
Q ltd
(in Rs. Lacs)
50
0
20
0
30
0
15
0
15
0
50
10
0
Sales
Variable costs
Contibution
Fixed cost
PBIT / EBIT
Interest
Profit before Tax / EBT
1000
300
700
400
300
100
200
Computation:
a) Opearting leverage:
= Contribution / EBIT
b) Financial leverage:
= EBIT / EBT
c) Combined leverage:
= Contirbution / EBT
Comments:
2.
0
2.3
1.
5
1.5
3.0
3.5
WACC = Sum [proportion of each component of capital (weights) * individual cost of capital]
Note: Tax rates needs to be adjusted in respect of debt funds.
Question 4b: The following items have been extracted from the liabilities
side of the balance sheet of XYZ Company as on 31st December 2005.
Paid up capital:
4, 00,000 equity shares of Rs each
40,00,000
Loans:
16% non-convertible debentures
12% institutional loans
20,00,000
60,00,000
Dividend
Earning
average market price
Per share
per share
per share
7.2
10.50
65
You are required to calculate the weighted average cost of capital, using book values as weights and
earnings/price ratio as the basis of cost of equity. Assume 9.2% tax rate
Answer 4b:
Computation of Weighted Average Cost of Capital (WACC):
Nature of Capital
Value
Cost of capital
Weights
(basis of
bookvalues
O/S.)
Weights * Cost of
Capital
a) Equity Capital
b) 16% non-convertible debentures
4,000,000
2,000,000
5.38
2.42
6,000,000
50%
5.45
10.90
Interest (1-taxrate) =
12% (100%-9.2%)
Total
Working Note: 1
12,000,000
100%
13.25
Cost of equity:
Price earnings approach =
Earnings per share /
Market price per share
10.50 / 65 =
16.15%
Answer 5a:
Debentures to be redeemed after 7 years
5,000,000
12%
0.452
2,261,746
therefore, company has to invest Rs.22,61,746 @ 12% earning in Sinking fund to cover
the repayment expected 7 years from now.
Loan Amortization
Capital Recovery
A loan amortization schedule is a repayment plan that The reciprocal of Present value annuity factor is
calculated before repayment of a loan begins. (PVAF) is the capital recovery.
Amortization schedules are used for fixed interest long
Below example will clarify better the meaning:
term loans such as mortgages, expenses like R& D
expenses, Purchase of Goodwill, Voluntary Retirement
payment expenses, Amalgamation expenses etc.
Procedure with Ex: Procedure with Ex: Mr.X plan to lend Rs.1 lac today for a period of 5 years @ int.rate of
12%, M/s.XYZ ltd has incurred a Rs.50, 00,000 as lump sum
how much income Mr.X should receive each
year payment towards voluntary retirement separation to recover investment & principal back.
charges during the accounting year 2009-2010.
The result is known as capital recovery & which XYZ
ltd have planned to amortize the above expenses can be arrived by capital recovery factor.
for a period of 10 years commencing from FY.09-10
Calculation:
Therefore, the schedule of amortization for 10 year
period as follows:
Present value = Annuity * PVAF @12%,5years
Rs. 500,000/- per years for 10 years
Capital Recovery
PVAF@12%,5years
Annuity
/
*
Question 5b: A bank has offered to you an annuity of Rs. 1,800 for 10 years if
you invest Rs. 12,000 today. What is the rate of return you would earn? .
Answer 5b:
Particulars
Rs.
1800
10
18000
12000
6000
50%
5%
Assignment - C
Cost (perunit):
Rs.
Raw materials
52.0
Direct labour
19.5
Overheads
39.0
110.5
Profit
19.5
Selling price
130.0
Answer 1:
Particulars
Cost/unit
Raw Material
52
Direct Labour
19.5
Prime cost
Overheads
39
Total cost
110.5
Profit
19.5
Sales
130
Statement of Working Capital for HLL - 70,000 units production per
year:
Particulars
No of
months
Computation
3640000
1365000
5005000
2730000
7735000
1365000
9100000
Rs.
1
0.5
2
36,40,000/12*1month
50,05,000/12*0.5 months
91,00,000*3/4 (credit
sales)/12*2
303333
208542
1137500
12000
1661375
1
36,40,000/12*1month
1.5 weeks 13,65,000/12*0.34
or
0.34
month
303333
38675
Overheads outstanding
27,30,000/12*1
227500
569508
1091867
PI = 2
NPV = Rs.100,000
NPV technique is better than PI technique for capital budgeting decisions. NPV shows wealth at the end in
absolute amount, which will be helpful to make decisions clearly, whereas the same advantage is not
available with PI technique.
However, PI shows return over investment in times, which will be very useful for immediate decision
making.
Generally, over the years, organizations prefer NPV technique for capital budgeting decisions than PI
technique.
I.
Cash Flows
(Rs.)
Co
C1
C2
C3
- 10,000
+ 10,000
-----
-----
-10,000
+ 7,500
+ 7,500
-----
- 10,000
+ 2,000
+ 4,000
+ 12,000
-10,000
+ 10,000
+ 3,000
+ 3,000
according to each of the following methods: (1.) Payback, (2.) ARR, (3.) IRR, (4.) NPV assumingdiscount
rates of 10 and 30 percent.
II. Assuming the project is independent, which one should be accepted? If the projects are mutuallyexclusive,
which project is the best?
Answer 2b:
I)
Methods
(1) Payback
@10% discount rate
@30% discount rate
(2) Accounting rate of
Project A
Project B
Project C
Project D
1 + years
1 + years
100%
1.13 years
1.25 years
150%
2.14 years
3 + years
180%
1.7 years
2.8 years
160%
return (ARR)
(3) NPV
@10% discount rate
(909)
3017
4140
3824
@30% discount rate
(2308)
207
(633)
833
(4) IRR
0%
32%
26%
38%
Independent project: Project with higher NPV needs to be selected, which shows wealth in absolute value
at the end of the project
Therefore, Project C needs to be accepted.
II) In case projects are mutually exclusive:
First disparity between projects needs to be resolved. NPV selects Project C whereas IRR selects Project
D, therefore, disparity exists. Since cash outflows (Rs.10, 000/-) are same for both the projects, the
disparity arisen is called as Cash flow disparity.
It can be resolved by using Incremental cash flow technique. After resolving, the right project can be
accepted.
Workings are as follows:
PROJECT A:
The following has been calculated assuming discount rates of 10%
& 30% separately:
1) Payback period: time period to recover initial investment
a) Discounted @10%
Years
Cash
flows
b) Discounted @30%
Discount
rate *
Discounte
d cash
flows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
Disco
u nt
rate
*
@ 10%
@
30%
(4) =
(2) * (3)
(1)
(2)
(3)
(5)
(10,000
)
(1)
1.00
0
0
(10,000)
(10,000)
0
0.90
1
10,000
9
9,091
(909)
1
* disocunt rate computed using formule = 1 / (1+r) to the power
n;where r = disocunt rate & n = year
(2)
(3)
(5)
1.000 (10,000)
(10,000)
10,000
0.769 7,692
(2,308)
(4) =
(2) *
(3)
(10,000)
Payback period = Base year + [(unrecovered disocunted cash flow of base year /
disocunted cash flows of next year) *12]
Discounted
cashflows
Unrecove
red
discounte
d cash
flows
Years
Cash
flows
Discoun
t rate *
@ 10%
b) Discounted @30%
Discounte
d
cashflows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
Discou
nt rate
*
@
30%
Unrecove
red
Discounted
discounte
cashflows
d cash
flows
(1)
(2)
(3)
(4) =
(2) * (3)
(5)
(1)
(2)
(3)
(4) =
(2) * (3)
(5)
(10,000)
1.000
(10,000)
(10,000)
(10,000)
1.000
(10,000)
(10,000)
7,500
0.909
6,818
(3,182)
7,500
0.769
5,769
(4,231)
7,500
0.592
4,438
207
2
7,500
0.826 6,198
3,017
2
* disocunt rate computed using formule = 1 / (1+r) to the power
n;where r = disocunt rate & n = year
Payback period = Base year + [(unrecovered disocunted cash flow of base year /
disocunted cash flows of next year) *12]
where base year =
flows turns 0 or +ve
Cash
flows
b) Discounted @30%
Discoun
t rate *
Years
Cash
flows
@ 10%
(1)
(2)
(3)
Discoun
t rate *
Discounted
cashflows
@ 30%
(1)
(2)
(3)
(4) = (2)
* (3)
(10,000
)
1.000
(10,0
00)
1.000
(10,000)
7,500
0.909
7,500
0.769
5,769
7,500
7,500
NPV
0.826
NPV
0.592
4,438
207
NPV falls
NPV goes
up
Cash
flows
Discoun t
rate *
Discounte
d
cashflows
@ 32%
(1)
(2)
(3)
(4) =
(2) * (3)
(10,000
)
1.000
(10,000)
7,500
0.758
5,682
7,500
0.574
4,304
NPV
(14)
therefore, IRR for Project B =
( 207+14)]*32% - 30%
IRR
PROJECT C:
30% +
1.873
30%
31.87%
[207
Years
Cash
flows
b) Discounted
@30%
Discoun
t rate *
Discounte
d
cashflows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
Discount
rate *
Disco
unted
cashf
lows
Unrecove
red
discounte
d cash
flows
@ 30%
(4) =
(2) * (3)
(5)
(1)
(2)
(3)
(4) =
(2) *
(3)
(5)
(10,000
)
1.000
(10,000)
(10,000)
(10,000)
1.000
(10,0
00)
(10,000)
2,000
0.909
1,818
(8,182)
2,000
0.769
1,538
(8,462)
4,000
0.826
3,306
(4,876)
4,000
0.592
2,367
(6,095)
12,000
0.455
5,462
(633)
3
12,000
0.751 9,016
4,140
3
* disocunt rate computed using formule = 1 / (1+r) to the power
n; where r = disocunt rate & n = year
Payback period = Base year + [(unrecovered disocunted cash flow of base year / disocunted cash flows of
next year) *12]
where base year =
flows turns 0 or +ve
a) Discounted @10%
b) Discounted @30%
Years
Cash
flows
Discoun
t rate *
Discounted
cash flows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
Disco
unt
rate *
Discoun
ted
cashflo
ws
@
30%
(4) =
(2) * (3)
(1)
(2)
(3)
(4) =
(2) * (3)
(10,000)
1.000
(10,000)
(10,000)
1.000
(10,000)
2,000
0.909
1,818
2,000
0.769
1,538
4,000
0.826
3,306
4,000
0.592
2,367
12,000
0.751
9,016
12,000
0.455
5,462
NPV
4,140
NPV
* disocunt rate computed using formule = 1 / (1+r) to the power n;
where r = disocunt rate
& n = year
3) IRR (Internal rate of return): which is the rate of
return at which NPV = 0
For project C , IRR is calculated as below:
IRR = L1 + [NPVL1 / (NPVL1 - NPVL2)] *
(L2 - L1)
where L1 = guess rate (depend on NPV, disocunted at
given required rate of return)
L2 = one more
guess rate
Relationship between discount rate and NPV:
inverse relationship:
Discount rate
goes up
Discount rate comes down
NPV falls
NPV goes
up
Cash
flows
Discoun
t rate *
@ 26%
(1)
(2)
(10,000
)
(3)
1.000
Discounte
d
cashflows
(4) =
(2) * (3)
(10,000)
(633)
2,000
0.794
1,587
4,000
0.630
2,520
12,000
0.500
5,999
NPV
106
therefore, IRR for Project B = 30% + [-633 /( -633106)]*26%
- 30%
30% 3.43
IRR
26.57
PROJECT D:
The following has been calculated assuming discount rates of 10% &
30% separately:
1) Payback period: time period to recover initial investment
a) Discounted @10%
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounte
d
cashflows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
Discoun
t rate *
Discou
nted
cashflo
ws
Unrecove
red
discounte
d cash
flows
@ 30%
(4) =
(2) * (3)
(5)
(1)
(2)
(3)
(4)
= (2) *
(3)
(5)
(10,000)
1.000
(10,000)
(10,000)
(10,000)
1.000
(10,000
)
(10,000)
10,000
0.909
9,091
(909)
10,000
0.769
7,692
(2,308)
3,000
0.826
2,479
1,570
3,000
0.592
1,775
(533)
3,000
0.455
1,365
833
3
3,000
0.751 2,254
3,824
3
* disocunt rate computed using formule = 1 / (1+r) to the power
n; where r = disocunt rate & n = year
Payback period = Base year + [(unrecovered disocunted cash flow of base year /
disocunted cash flows of next year) *12]
where base year =
flows turns 0 or +ve
Years
Cash
flows
Discoun
t rate *
b) Discounted @30%
Discounte
d cash
flows
Years
Cash
flows
@ 10%
(1)
(2)
(3)
(4) =
(2) * (3)
(1)
Disco
unt
rate *
@
30%
(2)
(3)
Discounted
cashflows
(4) = (2)
* (3)
(10,000)
1.000
(10,000)
(10,000)
1.000
(10,000)
10,000
0.909
9,091
10,000
0.769
7,692
3,000
0.826
2,479
3,000
0.592
1,775
3,000
0.751
2,254
3,000
0.455
1,365
NPV
3,824
NPV
* disocunt rate computed using formule = 1 / (1+r) to the power
n; where r = disocunt rate & n = year
833
inverse relationship:
Discount rate
goes up
Discount rate comes down
NPV falls
NPV goes
up
Cash
flows
Discoun
t rate *
@ 38%
(1)
(2)
(3)
Discounte
d
cashflows
(4) =
(2) * (3)
(10,000
)
1.000
(10,000)
10,000
0.725
7,246
3,000
0.525
1,575
3,000
0.381
1,142
NPV
(37)
therefore, IRR for Project B =
( 833+37)]*38% - 30%
IRR
30% +
7.66
30%
[833
37.66%
Years
Increme
ntal
Cash
flows
(project
C
project
D)
Discou
nt rate
*
Discounted
cashflows
Years
Cash
flows
@
10%
(1)
(2)
(3)
Discou
nt rate
*
Discounte
d
cashflows
@
30%
(4) =
(2) * (3)
(1)
(2)
(3)
(4) =
(2) * (3)
1.000
1.000
(8,000)
0.909
(7,273)
(8,000)
0.769
(6,154)
1,000
0.826
826
1,000
0.592
592
9,000
0.751
6,762
9,000
0.455
4,096
NPV
316
NPV
* disocunt rate computed using formule = 1 / (1+r) to the power n;
where r = disocunt rate
& n = year
3) IRR (Internal rate of return): which is the rate of
return at which NPV = 0
For project C , IRR is calculated as below:
IRR = L1 + [NPVL1 / (NPVL1 - NPVL2)] *
(L2 - L1)
where L1 = guess rate (depend on NPV, disocunted at
given required rate of return)
L2 = one more
guess rate
Relationship between discount rate and NPV:
inverse relationship:
Discount rate
goes up
NPV falls
NPV goes
up
Cash
flows
Discoun
t rate *
@ 13%
(1)
(2)
Discounte
d
cashflows
(4) =
(2) * (3)
(3)
1.000
(8,000)
0.885
(7,080)
1,000
0.783
783
9,000
0.693
6,237
NPV
(59)
(1,466)
10% +
2.5
10%
[316
12.50%
Target return =
10%
IRR for incremental cash
flows = 12.5%
since IRR for incremental cash flows > Target return,
select / accept Project C
Question 3a: "Firm should follow a policy of very high dividend pay-out
Taking example of two organization comment on this statement"
Answer 3a:
a)
b)
c)
d)
e)
Question 3b: An investor gains nothing from bonus share "Critically analyse
the statement through some real life situation of recent past.
Answer 3b:
The statement is false. An investor gains bonus shares at zero cost, However, the market price of the stock
will come down & over the long period, the investor definitely maximizes his wealth due to bonus shares.
From company angle, bonus issue is only an accounting entry & it doesnt change the wealth/value of the
firm.
Recently, Bharti Airtel have issued bonus share 2:1, due to which, the investors have gained Bonus shares
at zero cost & the market have come down to the extent of bonus issue & immediately went up & investors
have cashed the bonus shares thus maximized their wealth. However, currently it is trading down due to
varied reasons.
CASE STUDY
Ques 1: You are required to make these calculations and in the light thereof,
advise the finance manager about the suitability, or otherwise, of machine A
or machine B.
Solution:
Advise to finance manager of Brown metals ltd, to select the appropriate machine:
Particulars
Machine A (Rs. In lacs)
Machine B (Rs. In lacs)
1) NPV
12
14
2) Profitability index
1.48
1.35
3) Pay Back period
2 years
3 years
4) Discounted pay back period
3.18 years
3.21 years
It is advised to go in for Machine B with enhanced capacity, which will add more value to the firm.
NPV is higher in respect of Machine B as compared to Machine A & therefore machine with higher
NPV needs to be invested.
Workings are as follows:
(a) to buy machine A which is similar to the existing machine:
Years
Cash
Unrecovered
Discounted
flows
Discount rate
cash flows
cashflows
(Rs. In
*
lacs)
@10%
(1)
(2)
0
1
(25)
(3)
Unrecovered
discounted
cash flows
(4) = (2) *
(3)
(5)
(25)
(25)
1.000
0.909
(25)
-
(25)
(25)
(20)
0.826
(21)
20
0.751
15
(6)
14
14
0.683
10
5
14
28
0.621
9
12
NPV
12
* disocunt rate computed using formule = 1 / (1+r) to the power n; where r = disocunt rate
& n = year
1) Net Present value = Present value of inflows - Present value of outflows = 12 (as computed above)
2) Profitability Index = Present value of inflows / present value of outflows which should be >1
37 / 25
1.48
3) Payback period = Base year + [(unrecovered cash flow of base year / cash flows of next year) *12]
where base year = year in which unrecovered cash flows turns 0 or +ve
Payback period = 2 + [(20/0)*12]
= 2 years
4) Discounted Payback period = Base year + [(unrecovered disocunted cash flow of base year /
disocunted cashflows of next year) *12] where base year = year in which unrecovered cash flows turns
0 or +ve
Payback period = 3 + [(6/4)*12]
=3.18 years
(b) to go in for machine B which is more expensive & has much greater capacity:
Years
Cash
Unrecovered
Discounted
Unrecovered
flows
Discount rate
cash flows
cashflows
discounted
(Rs. In
*
cash flows
lacs)
@10%
(1)
(2)
(3)
(4) = (2) *
(3)
(5)
(40)
(40)
1.000
(40)
(40)
10
(30)
0.909
(31)
14
(16)
0.826
12
(19)
16
0.751
12
(7)
17
17
0.683
12
5
15
32
0.621
9
14
NPV
14
* disocunt rate computed using formule = 1 / (1+r) to the power n; where r = disocunt rate
& n = year
1) Net Present value = Present value of inflows - Present value of outflows = 14 (as computed above)
2) Profitability Index = Present value of inflows / present value of outflows which should be
>1
54 / 40
1.35
3) Payback period = Base year + [(unrecovered cash flow of base year / cash flows of next year) *12]
where base year = year in which unrecovered cash flows turns 0 or +ve
Payback period = 3 + [(16/0)*12]
= 3 years
4) Discounted Payback period = Base year + [(unrecovered disocunted cash flow of base year /
disocunted cashflows of next year) *12] where base year = year in which unrecovered cash flows turns
0 or +ve
Payback period = 3 + [(7/4)*12]
=3.21 years
Assignment - C
1.
(a)
(b)
(c)
(d)
The internal rate of return of a project is the discount rate at which NPV is
positive
negative
zero
negative minus positiveAnswer (c)
(a)
(b)
(c)
(d)
1.00
1.25
2.50
2.00
Answer (b)
17. The following data is given for a company. Unit SP = Rs. 2, Variable cost/unit = Re. 0.70, Total fixed
cost- Rs. 1,00,000 Interest Charges Rs. 3,668, Output-1,00,000 units. The degree of operating leverage is
(a) 4.00
(b) 4.33
(c) 4.75
(d) 5.33
Answer (b)
18. Market price of equity share of a company is Rs. 25 and the dividend expected a year hence is Rs. 10.
The expected rate of dividend growth is 5%. The cost of equal capital to company will be
(a) 40%
(b) 45%
(c) 35%
(d) 50%
Answer (b)
19. The dilemma of "liquidity Vs profitability" arise in case of
(a) Potentially sick unit
(b) Any business organization
(c) Only public sector unites
(d) Purely trading companies
Answer (b)
20. The present value of Rs. 15000 receivable in 7 years at a discount rate of 15% is
(a) 5640
(b) 5500
(c) 5900
(d) 5940
Answer (a)
21. A bond of Rs. 1000 bearing coupon rate of 12% is redeemable at par in 10 yrs. If the required
rate of return is 10% the value of bond is
(a) 1000
(b) 1123
(c) 1140
(d) 1150
Answer (a)
22. The EPS of ABC Ltd. is Rs. 10 & cost of capital is 10%.The market price of share at return rate
of 15% and dividend pay out ratio of 40% is
(a) 100
(b) 120
(c) 130
(d) 150
Answer (a)
23. The credit term offered by a supplier is 3/10 net 60.The annualized interest cost of not availing
the cash discount is
(a) 22.58%
(b) 27.45%
(c) 37.75%
(d) 38.50%
Answer (a)
24. The costliest of long term sources of finance is
(a) Preference share capital
(b) Retained earnings
(c) Equity share capital
(d) Debentures
Answer (c)
25. Which of the following approaches advocates that the cost of equity capital & debit capital
remains the degree of leverages varies
(a) Net income approach
(b) Net operating income approach
(c) Traditional approach
(d) Modigliani-Miller approachAnswer (b) & (d)
26. Which of the following is not a feature of an optimal capital structure.
(a) Profitability
(b) Safety
(c) Flexibility
(d) Control
Answer (b)
27.
(a)
(b)
(c)
(d)
28.
(a)
(b)
(c)
(d)
Which of the following factors influence the capital structure of a business entity?
Bargaining power with suppliers
Demand for product of company
Expected income
Technology adoptedAnswer (c)
29. According to the Walters model, a firm should have 100% dividend pay-out ratio when.
(a) r = ke
(b) r < ke
(c) r > ke
(d) g > ke
Answer (a)
37. The simple EOQ model will not hold good under which of the following conditions
(a) Stochastic demand
(b) constant unit price
(c) Zero lead time
(d) Fixed ordering costs
Answer (a)
38. The opportunity cost of capital refers to the
(a) net present value of the investment.
(b) return that is foregone by investing in a project.
(c) required investment in a project.
(d) future value of the investments cash flows.
Answer (b)
39. Which of the following factors does not influence the composition of Working Capital
requirements
(a) Nature of the business
(b) seasonality of operations
(c) availability of raw materials
(d) amount of fixed assets
Answer (d)
40. The capital structure ratio measure the
(a) Financial Risk
(b) Business Risk
(c) Market Risk
(d) operating risks
Answer (a)