Question No: 1
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
Question No: 2
Which of the following is a characteristic of preferred stock?
a)These stocks have not stated liquidating value
b)Dividends on these stocks can be cumulative
c)These stocks hold credit ratings quite different from bonds
d)These stocks have not any kind of priority over common stocks
Question No: 3
Mr. A, as a financial consultant, has prepared a feasibility report of a project for XYZ Company that the company is planning to undertake. He has suggested that the project is feasible. The consultancy fee paid to Mr. A will be considered as:
a)Sunk cost
b)Opportunity cost
c)Both sunk cost and opportunity cost
d)Neither sunk cost nor opportunity cost
Question No: 4
One would be indifferent between taking and not taking the investment when:
a)NPV is greater than Zero
b)NPV is equal to Zero
c)NPV is less than Zero
d)All of the given options
Question No: 5
Which of the following is a measure of accounting profit relative to book value?
a)Net Present Value
b)Profitability Index
c)Internal Rate of Return
d)Average Accounting Return
Question No: 6
Which of the following M&M propositions states that it is completely irrelevant how a firm chooses to arrange its finances ?
a)1st proposition
b)2nd proposition
c)3rd proposition
d)None of the given options
Question No: 7
According to 2nd M&M proposition, cost of equity does NOT depend upon which of the following ?
a)The required return of firm s assets
b)The firm s cost of debt
c)The firm s stockholders
d)The firm s debt-equity ratio
Question No: 8
Mr. Sami has bought 50 shares of a corporation one year ago at Rs. 20 per share.Over the last year, you received a dividend of Rs. 2 per share. At the end of theyear, the stock sells for Rs. 25. If Mr. Sami sells the stock at the end of the year,what will be his total cash inflow ?
Rs. 100
Rs. 250
Rs. 1,000
Rs. 1,350
Question No: 9
While performing the feasibility analysis for a project, an operating cash flow of Rs. 250,000 has been calculated. Net working capital has increased by Rs. 50,000.There was no capital spending during the year. What will be the total cash flow for the project?
Rs. 170,000
Rs. 200,000
Rs. 215,000
Rs. 230,000
Question No: 10
Autos & computers are included in which of the following MACRS property class?
3-year
5-year
7-year
None of the given options
Question No: 11
The next dividend for a company is Rs. 5 per share. The stock current price is Rs. 50 per share. What will be the cost of capital if the dividends are estimated to grow steadily at 5%?
12.88%
13.07%
14.22%
15.00%
Question No: 12
Trade credit is more likely to be granted if:
a)The selling firm has a cost advantage over other lenders
b)The selling firm can engage in price discrimination
c)The selling firm can obtain favorable tax treatment
d)All of the given options
Question No: 13
Which one of the following motives refers to the need for holding cash to satisfy normal disbursement and collection activities associated with a firm s ongoing operations?
a)Speculative motive
b)Transaction motive
c)Precautionary motive
d)Personal motive
Question No: 14
What would be the standard deviation of returns for an investment that has a variance of 0.008 ?
0.08944
0.09101
0.09487
0.10521
Question No: 15
Which of the following statement is INCORRECT regarding financial leverage ?
a)Financial leverage can dramatically alter the payoffs to the shareholders.
b)Financial leverage refers to the extent to which a firm relies on the debt.
c)Financial leverage must affect the overall cost of capital in any condition.
d)Financial leverage may not affect the overall cost of capital.
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N:1 a
Answer No: 1
To find the overall (weighted average) cost of capital, you need to take a weighted average of the cost of common equity, the cost of preferred stock, and the cost of debt. So, the correct answer is d) The cost of common equity, the cost of preferred stock, and the cost of debt. To calculate the weighted average cost of capital, you would need to know the weights of each component (based on the proportion of equity, preferred stock, and debt in the company's capital structure) and the respective costs associated with each component.
Answer No: 2
A characteristic of preferred stock is that dividends on these stocks can be cumulative. Cumulative preferred stock means that if a company fails to pay dividends to preferred stockholders in any year, it must make up those missed dividends in future years before paying dividends to common stockholders.
Answer No: 3
The consultancy fee paid to Mr. A for preparing the feasibility report of a project for XYZ Company will be considered as an opportunity cost. An opportunity cost refers to the cost of forgoing the next best alternative when making a decision. In this case, the opportunity cost is the fee Mr. A could have earned by working on another project instead of XYZ Company's project.
Answer No: 4
One would be indifferent between taking and not taking the investment when the Net Present Value (NPV) is equal to Zero. NPV is a measure of the profitability of an investment. If the NPV is positive (greater than zero), it means the investment is expected to generate a positive return. If the NPV is negative (less than zero), it means the investment is expected to generate a negative return. When the NPV is zero, it means the investment is expected to break even, and there would be no gain or loss.
Answer No: 5
A measure of accounting profit relative to book value is the Average Accounting Return (AAR). AAR is calculated by dividing the average annual accounting profit by the book value of the investment. It provides an indication of how much profit is generated relative to the amount of capital invested in the project.
Answer No: 6
The 1st M&M (Modigliani-Miller) proposition states that it is completely irrelevant how a firm chooses to arrange its finances. This proposition suggests that the value of a firm is determined by its cash flows and not by its choice of capital structure. In other words, the value of a firm does not depend on whether it is financed by debt or equity.
Answer No: 7
According to the 2nd M&M (Modigliani-Miller) proposition, the cost of equity does NOT depend upon the firm's cost of debt. The cost of equity is determined by factors such as the firm's required return of assets, the risk-free rate, and the equity risk premium. The cost of debt, on the other hand, is influenced by factors such as the interest rate, credit rating, and the firm's debt-equity ratio.
Answer No: 8
To calculate Mr. Sami's total cash inflow, we need to consider the dividend received and the selling price of the stock. Mr. Sami bought 50 shares at Rs. 20 per share, so the initial investment is 50 shares * Rs. 20 = Rs. 1,000. He received a dividend of Rs. 2 per share, so the total dividend is 50 shares * Rs. 2 = Rs. 100. The selling price of the stock is Rs. 25 per share, so the total selling price is 50 shares * Rs. 25 = Rs. 1,250. Therefore, Mr. Sami's total cash inflow would be the sum of the dividend and the selling price, which is Rs. 100 + Rs. 1,250 = Rs. 1,350.
Answer No: 9
To calculate the total cash flow for the project, we need to consider the operating cash flow and the change in net working capital. The operating cash flow is Rs. 250,000, and the change in net working capital is an increase of Rs. 50,000. Since there was no capital spending, the total cash flow for the project would be the sum of the operating cash flow and the change in net working capital, which is Rs. 250,000 + Rs. 50,000 = Rs. 300,000.
Answer No: 10
Autos & computers are included in the 3-year MACRS property class. MACRS (Modified Accelerated Cost Recovery System) is a depreciation method used for tax purposes in the United States. Different assets are assigned to different MACRS property classes based on their useful lives.
Answer No: 11
To calculate the cost of capital, we need to use the dividend growth model. The dividend growth model calculates the cost of equity by dividing the next dividend by the current stock price and adding the dividend growth rate. In this case, the next dividend is Rs. 5 per share, and the current stock price is Rs. 50 per share. The dividend growth rate is 5%. Plugging these values into the formula, the cost of capital would be (Rs. 5 / Rs. 50) + 0.05 = 0.10 + 0.05 = 0.15, which is equivalent to 15%.
Answer No: 12
Trade credit is more likely to be granted if the selling firm has a cost advantage over other lenders, as it allows the selling firm to offer more favorable credit terms to its customers. The selling firm may also engage in price discrimination, offering different credit terms to different customers based on their creditworthiness. Additionally, the selling firm may obtain favorable tax treatment by providing trade credit, such as deducting bad debts as business expenses.
Answer No: 13
The need for holding cash to satisfy normal disbursement and collection activities associated with a firm's ongoing operations is referred to as the transaction motive. The transaction motive for holding cash arises from the need to make payments for various expenses (e.g., wages, suppliers) and to receive cash from customers in the normal course of business.
Answer No: 14
To find the standard deviation of returns, you need to take the square root of the variance. If the variance is given as 0.008, then the standard deviation would be the square root of 0.008, which is approximately 0.08944.
Answer No: 15
The statement that is INCORRECT regarding financial leverage is c) Financial leverage must affect the overall cost of capital in any condition. Financial leverage refers to the extent to which a firm relies on debt to finance its operations. While financial leverage can impact the risk and return profile of a firm, it may not necessarily affect the overall cost of capital. The overall cost of capital is determined by factors such as the risk-free rate, the equity risk premium, and the cost of debt, but financial leverage itself does not directly determine the overall cost of capital.