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Financial Management Question Bank (Finance Quiz - 11)

1. The dollar is trading at CHF 1.6640. Interest rates prevailing in Switzerland and U.S.A. are 2% p.a. and 3% p.a. respectively. What is the 3 months forward quote for CHF / $
[A]1.6478
[B]1.6599
[C]1.6681
[D]1.6803


2. If the cost of an investment is Rs.2000 and it pays Rs.175 in perpetuity at an interest rate of 8%, the benefit cost ratio of the investment is
[A]–1.09
[B]–0.09
[C]0.70
[D]1.09


3. The ‘backwardation’ in a futures market refers to a situation
[A]When the futures prices are higher than cash prices
[B]When the futures prices are lower than cash prices
[C]When the basis is positive
[D]Both (b) and (c) above


4. Which of the following is/are not true regarding capital structure theory as stated by Miller & Modigliani?
I. If the given assumptions hold, the total market value of the firm is independent of the degree of leverage
II. In the presence of taxes, the market value of the firm is increased by the tax shield of debt
III. If bankruptcy costs are considered, the expected cost of bankruptcy decreases when the debtequity ratio increases
[A]Only (I) above
[B]Only (III) above
[C]Both (I) and (III) above
[D]Both (II) and (III) above


5. Which of the following statements is false?
[A]Capital expenditure benefits accrue over a long term
[B]Net present value uses cost of capital as the discounting rate
[C]Internal rate of return considers the time value of money
[D]If the benefit-cost ratio is equal to one, the equity shareholders can be said to have earned more than expected return


6. Other things being equal, which of the following will cause an increase in the yield to maturity?
[A]Decrease in coupon rate
[B]Increase in the issue price
[C]Decrease in the amount repayable at maturity
[D]Decrease in the maturity period


7. Which of the following situations lead to an increase in volatility in the call money market?
[A]Reduction in cash reserve ratio
[B]Prepayment of term loans by a large number of borrowers
[C]Entry of the financial institutions (FIs) into the market
[D]Payment of large amount of advance taxes by the banks and FIs


8. Which of the following would result in an increase in the debt-to-equity ratio? (Assume there are no flotation costs).
[A]A firm issues common stock and uses the proceeds to repurchase an equal amount of preferred stock
[B]A firm issues preferred stock and uses the proceeds to repurchase an equal amount of bonds
[C]A firm with positive additions to retained earnings uses the cash it generates to retire the existing debt
[D]A firm issues bonds and uses the proceeds to purchase short-term assets


9. Solana Ltd. follows a policy of fixed dividend payout of 80%. The earning per share for the year 2005-2006 is Rs.4.50 per share and the same is expected to grow by 20% during the year 2006-2007. The firm earns a return of 18% on its investments. The cost of equity of the company is 15%. The value of the share based on Gordon model would be (approximately)
[A]Rs.31.58
[B]Rs.33.85
[C]Rs.35.75
[D]Rs.39.55


10. Which of the following is a disadvantage of bought-out-deals?
[A]It is difficult to convince a wholesale investor
[B]The promoters of the company do not get the funds immediately
[C]It is a very time consuming procedure
[D]Sponsor may exploit the situation


11. Which of the following will decrease with an increase in the interest rate?
[A]Future Value Interest Factor
[B]Future Value Interest Factor of Annuity
[C]Capital Recovery Factor
[D]Present Value Interest Factor of a perpetual annuity


12. Which of the following is correct with respect to under-trading?
[A]Low amount of assets employed in the business of an entity
[B]Low amount of working capital required by a company
[C]Less amount of sales turnover achieved by a company in comparison to the level of working capital
[D]It is very risky situation in relation to the working capital management of a company


13. Which of the following is an indirect method of financing current assets with the support of a bank?
[A]Purchase/discount of bills
[B]Letter of credit
[C]Cash credit
[D]Overdraft


14. Walter’s model on dividend policy assumes that
[A]The firm offers an increasing amount of dividend per share at a given level of price per share
[B]The firm has a finite life
[C]The cost of capital of the firm is variable
[D]The retained earnings are the only source of finance available to the firm


15. Which of the following is a spontaneous source of financing current assets?
[A]Accrued wages and salaries
[B]Commercial paper
[C]Public Deposits
[D]Cash credit


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