Financial Management Quiz - 10

1. Which of the following approaches advocates that the overall capitalization rate remains constant for all degrees of leverage and that there is no optimal capital structure?
[A]Traditional approach
[B]Miller and Modigliani approach
[C]Net operating income approach
[D]Both (b) and (c) above


2. Which of the following assumption underlie(s) the definition of cost of capital under capital expenditure decisions?
I. The risk characterizing the new project under consideration is significantly lower than the risk characterizing the existing investments of the firm
II. The firm will continue to adopt the same debt to equity ratio
III. The management of the firm will remain the same.
[A]Only (I) above
[B]Only (II) above
[C]Both (I) and (II) above
[D]Both (I) and (III) above


3. Which of the following functions is/are served by the primary capital market of an economy?
[A]It allows the corporate houses to raise the long term capital by issuing new securities
[B]It offers a market to trade for the outstanding long term securities
[C]It offers a market to trade for the outstanding short term securities
[D]It offers an excellent exit route for the venture capital funding companies


4. Which of the following is not a marketable instrument?
[A]Commercial Paper
[B]Certificate of Deposit
[C]Inter Corporate Deposit
[D]Preference Shares


5. Which of the following functions of the financial system channelises the savings from the savers to the producers in the economy?
[A]Savings function
[B]Liquidity function
[C]Payment function
[D]Risk function


6. A company can increase its paid-up share capital without receiving any money from the shareholders through a
[A]Public issue
[B]Rights issue
[C]Bonus issue
[D]Private placement


7. When a firm increases its net holding of currencies that are expected to rise in value and decreases its net holding of currencies that are expected to fall in value, it is adopting the strategy of
[A]Bilateral netting
[B]Multilateral netting
[C]Balance sheet hedging
[D]Leads and lags


8. The following figures are projected by the production manager of Kajaria Iron:
Average Daily Usage(Units)| Probability|Lead Time (in days)|Probability
300 |0.25 | 6 |0.30
500 |0.50 | 8 |0.40
700 |0.25 | 10 |0.30
What is the amount of normal consumption during the lead-time?
[A]3000 units
[B]4000 units
[C]5000 units
[D]6000 units


9. Other things remaining the same, if the contribution margin for a one year project of a firm increases from Rs.200 lakh to Rs.300 lakh, what will be its impact on the NPV of the project? (Assume, the applicable tax rate is 35 percent and the cost of capital is 10 percent. Round off your answer to the nearest integer)
[A]Increase by Rs.59 lakh
[B]Increase by Rs.65 lakh
[C]Increase by Rs.70 lakh
[D]Increase by Rs.75 lakh


10. If the terms of credit are 1/10 net 40, what will be the implicit cost of trade credit? (Assume 360 days in a year)
[A]11.11 percent
[B]12.12 percent
[C]13.13 percent
[D]14.14 percent


11. Which of the following factors does not influence the working capital management policies of a firm?
[A]Excise duties on the capital equipments
[B]Sudden increase in the demand for the product of the company
[C]Adoption of better technology leading to the reduction in production time
[D]Sudden stoppage of the supply of a major raw material


12. Which of the following statements is true with respect to ‘float’ in the context of cash management?
[A]It is an instrument that may increase the cash inflows
[B]It represents the difference between the total cash inflows and total outflows during any given period
[C]It is the difference between the actual bank balance and the bank balance in the cash book of the company
[D]It means the time required for the encashment of a cheque submitted to a bank


13. M/s Kothari Forge Ltd. has paid a dividend of Rs.3.5 per share on a face value of Rs.10 in the Financial Year ended 31st March, 2004. The relevant data regarding the company and the market are as under:
Current market price of share = Rs.75
Growth rate of earnings and dividends = 7.5%
Beta of share = 0.95
Average market return = 12.5%
Risk free rate = 6%
The intrinsic value of the stock is
[A]Rs.60.00
[B]Rs.80.48
[C]Rs.89.00
[D]Rs.94.26


14. When a firm is a target of hostile tender offer, the target firm invites other friendly bidder. This strategy of takeover defense is called
[A]Poison pills
[B]Crown jewels
[C]White knights
[D]Golden parachute


15. Which of the following foreign exchange exposures refers to the impact on the value of firms’ operations due to unanticipated changes in the exchange rates?
[A]Transformation exposure
[B]Transaction exposure
[C]Translation exposure
[D]Economic exposure