Objective Questions and Answers of Financial Management
Objective Questions and Answers of Financial Management
com
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(a)Current Ratio, (b)Acid Test Ratio,(c) Interest Coverage Ratio,(d) Debtors Turnover.
23. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason for such
behavior could be:
(a) Increase in Costs of Goods Sold, (b)If Increase in Expense,(c) Increase in Dividend,(d)Decrease in Sales.
24. Which of the following statements is correct?
(a) A Higher Receivable Turnover is not desirable, (b) Interest Coverage Ratio depends upon Tax Rate,
(c)Increase in Net Profit Ratio means increase in Sales, (d) Lower Debt-Equity Ratio means lower Financial Risk.
25. Debt to Total Assets of a firm is .2. The Debt to Equity boo would be:
(a) 0.80, (b)0.25, (c) 1.00, (d)0.75
26. Which of the following helps analysing return to equity Shareholders?
(a) Return on Assets, (b) Earnings Per Share, (c) Net Profit Ratio, (d)Return on Investment.
27. Return on Assets and Return on Investment Ratios belong to:
(a) Liquidity Ratios,(b)Profitability Ratios,(c)Solvency Ratios,(d)Turnover.
28. XYZ Ltd. has a Debt Equity Ratio of 1.5 as compared to 1.3 Industry average. It means that the firm has:
(a) Higher Liquidity, (b)Higher Financial Risk,(c)Higher Profitability,(d)Higher Capital Employed.
29. Ratio Analysis can be used to study liquidity, turnover, profitability, etc. of a firm. What does Debt-Equity
Ratio help to study?
(a)Solvency,(b)Liquidity,(c)Profitability,(d) Turnover,
30. In Inventory Turnover calculation, what is taken in the numerator?
(a) Sales,(b)Cost of Goods Sold,(c)Opening Stock,(d) Closing Stock.
[Answers : 1. (d); 2. (a) 3. (a); 4. (d); 5. (b); 6. (b); 7. (b); 8. (b); 9. (b); 10. (d); 11. (b); 12. (c); 13. (c); 14. (d) ; 15. (d);
16. (c); 17. (b); 18. (c);19. (a); 20. (c);21. (b);22. (c);23. (b);24. (d);25. (b);26. (b); 27. (b); 28. (b); 29. (a); 30. (b) ].
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(a) Preparation of Projected Statements,(b) Preparation of Actual Statements,(c) Comparison of Actual with
Projected,(d) Ordering the employees that projected figures m come true.
13. Which of the following is not true for cash Budge?
(a) That shortage or excess of cash would appear in a particular period.(b) All inflows would arise before
outflows for those periods. (c) Only revenue nature cash flows are shown.(d) Proposed issue of share capital in
shown as an inflow.
[Answers: 1. (c); 2. (d); 3. (d); 4. (d); 5. (c); 6. (d); 7. (d), 8 (d), 9. (c); 10. (d); 11. (b); 12. (c); 13. (c)]
5. State whether each of the following statements is True (T) or False (F):
(i)Investment decisions and capital budgeting are same.
(ii)Capital budgeting decisions are long term decisions.
(iii)Capital budgeting decisions are reversible in nature.
(iv) Capital budgeting decisions do not affect the future Stability of the firm.
(v)There is a time element involved in capital budgeting.
(vi)An expansion decision is not a capital budgeting decision
(vii)In mutually exclusive decision situation, the firm can accept all feasible proposals.
(viii) Capital budgeting and capital rationing are alternative to each other.
(ix) Correct capital budgeting decisions can be taken by comparing the cost with future benefits.
(x) Future expected profits from an investments are taken as returns from the investment for capital budgeting.
(xi) Cash flows are the appropriate measure of costs and benefits from an investment proposal.
(xii) Sunk cost is a relevant cost in capital budgeting.
(xiii) The opportunity cost of an input is always considered, in capital budgeting.
(xiv) Allocated overhead costs are not relevant for capital budgeting.
(xv) Cash flows and accounting profits are different.
(xvi) Cash flows are same as profit before tax.
(xvii) Net cash flow is on after tax basis.
[Answers : (i) F, (ii) T, (iii) F, (iv) F, (v) T, (vi) F, (vii) F, (viii) F, (ix) F, (x) F, (xi) T, (xii) F, (xiii) F, (xiv) T, (xv) T,
(xvi)F, (xvii) T
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(a) Opportunity Costs, (b)Sunk Costs,(c) Change in Working Capital,(d) Inflation effect.
19. A proposal is not a Capital Budgeting proposal if it:
(a) is related to Fixed Assets,(b) brings long-term benefits,(c) brings short-term benefits only,(d) has very large
investment.
20. In Capital Budgeting, Sunk cost is excluded because it is:
(a) of small amount,(b) not incremental,(c) not reversible,(d) All of the above.
21. Savings in respect of a cost is treated in capital budgeting as:
(a) An Inflow,(b) An Outflow,(c) Nil, (d) None of the above.
[Answers : l(a), 2(a), 3(c), 4(b), 5(d), 6(d), 7(a), 8(d), 9(b), 10(d), 11(d), 12(c), 13 (c), 14(c), 15(b), 16(c), 17(c), 18(b),
19(c), 20(b), 21(a)]
7. State whether each of the following statement is True (T) or False (F):
(i) Irrespective of the issue involved in a capital budgeting anon, the basic techniques can be used in all cases.
(ii) Capital Rationing as a situation when the Government has imposed a ceiling on investment by a firm.
(iii) A firm should always implement a positive NPV props irrespective of fund requirement.
(iv) Money cash flows should be discounted at nominal discount rate.
(v) Real cash flows should be discounted at normal discount rate.
(vi) EAM is, in a way, an extension of NPV method.
(vii) EAM should be used in accept-reject decision situation.
(viii) Feasibility Set Approach is based on the NPV method of capital budgeting.
(ix) Selection based on PI method gives optimum decision making in case of indivisible projects.
(x) A firm should ignore the replacement timing of an asset.
(xi) There is no need to defer a positive NPV proposal.
(xii) Multi-period and Multi-constraints are one and the same thing.
(xiii) Inflation affects not only the cash flows but also the discount rate.
Answers: (i) F, (ii) F, (iii) F, (iv) T, (v) T, (vi) T, (vii) F (viii) T, (ix) F, (x) F, (xi) F, (xii) F, (xiii) T
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[Answers: 1. (b); 2. (a); 3. (c); 4. (c); 5. (d); 6. (b); 7. (c); 8. (b); 9. (a); 10. (d);ll. (a); 12. (c); 13. (a); 14. (c); 15. (b);1 6.
(c); 17. (c); 18. (d)]
19. Write her each of the following statement is True (T) or False (F)
(i) A risky situation is one in which the probability for the occurrence or non-occurrence of an event cannot be
assigned.
(ii) In capital budgeting proposals, risk may arise due to different factors.
(iii) In risky capital budgeting proposals, the discount rate is not known with certainty.
(iv) Risk Adjusted Discount Rate and Certainty Equivalents are on based statistical measures.
(v) In Payback Period method, the risk of the proposal is incorporated by lessening the target payback period.
(vi) In Certainty Equivalents method, both the cashflows and the discount rate are adjusted.
(vii) In Sensitivity Analysis, the NPV of the proposal is adjusted.
(viii) In Sensitivity Analysis, one variable is adjusted at a time to see its effect on the NPV.
(ix) Sensitivity Analysis helps in calculation of NPV of the proposal.
(x) Expected value of cash flows is equal to the arithmetic average of the cash flows.
(xi) In case of capital budgeting, higher the standard deviation better the project is.
(xii) In case of dependent cash flows, the risk is measured with reference to joint probabilities.
(xiii) Coefficient of variation is as good a measure of risk as the standard deviation.
(xiv) Decision Tree Approach is suitable to analyse a multistage decision situation.
(xv) Abandonment evaluation of a project is ma the implementation of a capital budgeting proposal.
[Answers: (i) F, (ii) T, (iii) F, (iv) F, (v) T, (vi) F, (vii F,(viii) F, (ix) F, (x) F, (xi) F, (xii) T, (xiii) F, (xiv) T, (xv) F]
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27. Cost of Equity Share Capital is more than cost of debt because:
(a) Face value of debentures is more than face value of shares,(b) Equity shares have higher risk than debt,
(c) Equity shares are easily saleable,(d) All of the three above.
28. Which of the following is not a generally accepted approach for Calculation of Cost of Equity?
(a) CAPM,(b) Dividend Discount Model,(c) Rate of Pref. Dividend Plus Risk,(d) Price-Earnings Ratio.
[Answers : l(c), 2(d), 3(a), 4(a), 5(b), 6(c), 7(c), 8(a), 9(b), 10(b), 11 (b), 12(d), 13(a), 14(c), 15(c), 16(c), 17(d), 18(b),
19(d), 20(b), 21 (b), 22(c), 23(c), 24(c), 25(d), 26(c), 27(b), 28(c)].
23. State whether each of the following statements is True (T) or False (F)
(i) Operating leverage analyses the relationship between sales level and EPS.
(ii) Financial leverage depends upon the operating leverage.
(iii) Dividend on Pref. shares is a factor of operating leverage.
(iv) Operating leverage may be defined as Contribution ÷ EPS.
(v) Financial leverage depends upon the fixed financial charges.
(vi) Favourable financial leverage and trading on equity are same.
(vii) Combined leverage establishes the relationship between operating leverage and financial leverage.
(viii) Financial leverage is always beneficial to the firm.
(ix) Total risk of a firm is determined by the combined effect of operating and financial leverages.
(x) Combined leverage helps in analysing the effect of change in sales level on the EPS of the firm.
[Answers :(i) F, (ii) F, (iii) F, (iv) F, (v) T, (vi) T, (vii) F,(viii) F, (ix) T, (x) T]
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25. State whether each of the following statements is True (T) or False (F).
i. EBIT is also known as operating profits.
ii. If EBIT for two firms are same, then the EPS of these firms would also always be same.
iii. EPS depends upon the composition of capital structure,
iv. Financial breakeven level occurs when EBIT is zero.
v. At financial breakeven level of EBIT, EPS would be zero.
vi. Indifference level of EBIT is one at which EPS is zero.
vii. Indifference level of EBIT is one at which EPS under two or more financial plans would be same.
viii. All equity plan and Debt-equity plan have no indifference level of EBIT.
ix. Preference dividend is not a factor of indifference level of EBIT.
x. EBIT-EPS Analysis is an extension of financial leverage analysis.
xi. Trading on equity is resorted to with a view to decrease EPS.
[Answers : (i) T, (ii) F, (iii) T, (iv) F, (v) T, (vi) F, (vii) T, (viii) F (ix) F, (x) T, (xi) F]
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(a) Cost of Equity, (b) Cost of Debt,(c) WACC & kd, (d)Ke and Kd
6. NOI Approach advocates that the degree of debt financing is:
(a) Relevant,(b) May be relevant,(c) Irrelevant,(d) May be irrelevant.
7. 'Judicious use of leverage' is suggested by:
(a) Net Income Approach,(b) Net Operating Income Approach,(c) Traditional Approach,(d) All of the above.
8. Which one is true for Net Operating Income Approach?
(a) VD = VF - VE,(b) VE = VF + VD,(c) VE = VF - VD,(d) VD = VF + VE.
9. In the Traditional Approach, which one of the following remains constant?
(a) Cost of Equity,(b) Cost of Debt,(c) WACC,(d) None of the above.
10. In MM-Model, irrelevance of capital structure is based on:
(a) Cost of Debt and Equity,(b) Arbitrage Process,(c) Decreasing k 0, (d) All of the above.
11.'That there is no corporate tax' is assumed by:
(a) Net Income Approach,(b) Net Operating Income Approach,(c) Traditional Approach,(d) All of these.
12. 'That personal leverage can replace corporate leverage' is assumed by:
(a) Traditional Approach,(b) MM Model,(c) Net Income Approach,(d) Net Operating Income Approach.
13. Which of the following argues that the value of levered firm is higher than that of the unlevered firm?
(a) Net Income Approach,(b) Net Operating Income Approach,(c) MM Model with taxes,(d) Both (a) and (c).
14. In Traditional Approach, which one is correct?
(a) ke rises constantly,(b) kd decreases constantly,(c) k0 decreases constantly,(d) None of the above.
15. Which of the following assumes constant kd and ke?
(a) Net Income Approach,(b) Net Operating Income Approach,(c) Traditional Approach,(d) MM Model.
16. Which of the following is true?
(a) Under Traditional Approach, overall cost of capital remains same,(b) Under NI Approach, overall cost of
capital remains same,(c) Under NOI Approach, overall cost of capital remains same,(d) None of the above.
17. The Traditional Approach to Value of the firm m that:
(a) There is no optimal capital structure,(b) Value can be increased by judicious use of leverage
(c) Cost of Capital and Capital structure are m dent,(d) Risk of the firm is independent of capital structure
18. A firm has EBIT of Rs. 50,000. Market value of debt is Rs. 80,000 and overall capitalization rate is 20%.
Market value of firm under NOI Approach is:
(a) Rs. 2,50,000,(b) Rs. 1,70,000,(c) Rs. 30,000,(d) Rs. 1,30,000.
19. Which of the following is incorrect for NOI?
(a) k0 is constant,(b) kd is constant, (c) ke is constant,(d) kd & k0 are constant.
20. Which of the following is incorrect for value of the firm?
(a) In the initial preposition, MM Model argues that value is independent of the financing mix.
(b) Total value of levered and unlevered firms is otherwise arbitrage will take place.
(c) Total value incorporates borrowings by firm but excludes personal borrowing.
(d) Total value does not change because underlying does not change with financing mix.
21. Which of the following appearing in the balance! generates tax advantage and hence affects the c, structure
decision ? (a) Reserves and Surplus,(b) Long-term debt,(c) Preference Share Capital,(d) Equity Share Capital.
22. In MM Model with taxes, where 'r' is the interest rate, ‘D’ is the total debt and 't' is tax rate, then present
valued shields would be: (a) r×D×t, (b) r×D,(c) D×t, (d) (D× r)/(l-t).
[Answers : l(b), 2(a), 3(c), 4(a), 5(c), 6(c), 7(c), 8(c), 9(d) 10(b), 11 (d), 12(b), 13(d), 14(d), 15(a), 16(c), 17(b), 18(b)
19(c),20(d),21(b),22(c)].
*
29. Which of the following statements is True (T) or False
(i) Dividend is a part of retained earnings.
(ii)Dividend is compulsorily payable to preference shareholders.
(iii) Effective dividend policy is an important tool to achieve the goal of wealth maximization.
(iv) Retained earnings are an easily available source of funds at no explicit cost.
(v)Dividend payout ratio refers to that portion of total earnings which is distributed among shareholders.
(vi) % rate of dividend is also known as dividend payout ratio.
(vii) There is a difference of opinion on relationship between dividend payment and value of the firm.
(viii) Walters model supports the view that dividend is relevant for value of the firm.
(ix) Gordon's model suggests that dividend payment does not affect the market price of the share.
(x) In the Walters model, the DP ratio should depend upon the relationship between r and k e
(xi) Residual theory says that dividend decision is no decision.
(xii) MM model deals with irrelevance of dividend decision
(xiii) MM model is a fool proof model of dividend irrelevance.
(xiv) In the arbitrage process of MM model, the dividends paid by a company are replaced by fresh investment.
(xv) MM model asserts that value of the firm is not affected whether the firm pays dividend or not.
[Answer (i) F, (ii) F, (iii) T, (iv) T, (v) T, (vi) F, (vii) T, (viii) T, (ix) F, (x) T, (xi) T, (xii) T, (xiii) F, (xiv)T, (xv) T.]
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31. State whether each of the following statements is True (T) or False (F).
(i) DP ratio of a firm should be directly related to future growth plans of the firm.
(ii) Dividends are paid out of profit and therefore do not affect the liquidity position of the firm.
(iii) Stability of dividend refers to the fact that the rate of divided must be fixed.
(iv) While designing a dividend policy, the legal provisions may be considered by the firm.
(v) Cash dividend and bonus share issue affect the firm in the same way.
(vi) Capital profits can never be distributed as-4 the shareholders.
(vii) In India, there is a restriction on the rate 4 being paid by a company.
(viii) No company in India, can pay final dividend already paid an interim dividend.
(ix) Dividends, in India, can be paid only out of profits.
[Answers : (i) T, (ii) F, (iii) F, (iv) F, (v) F, (vi) F, vii (F), T (viii) F, (ix) F.]
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12. Stock split is a form of (a) Dividend Payment, (b)Bonus Issue, (c) Financial restructuring, (d) Dividend in
kind
13. In stock dividend: (a)Authorized capital always increases, (b)Paid up capital always increases, (c) Face value
per share decreases,(d) Market price for share decreases
14. Which of the following is not considered in Lintner's Model ?
(a) Dividend payout ratio,(b)Current EPS,(c)Speed of Adjustment,(d)Preceding year EPS
15. Which of the following is not relevant for dividend payment for a year ?
(a)Cash flow position,(b)Profit position,(c)Paid up capital,(d) Retained Earnings
[Answers l(b), 2(b), 3(c), 4(b), 5(a), 6(c), 7(d), 8(c), 9(c), 10(c), ll(c), 12(c), 13(d), 14(d), 15(d)].
33. State whether each of the following statements is True (T) or False (F)
(i) Management of cash means management of cash in flows.
(ii) Cash is the most important but least earning current asset.
(iii) Cash management always attempts at minimizing the cash balance.
(iv) Cash cycle is equal to operating cycle for a firm.
(v) Receipts and disbursement method of preparation of cash budget is the most widely used method.
(vi) Concentration banking is a method of controlling cash outflows.
(vii) Baumol's model of cash management assumes a constant rate of use of cash.
(viii) Baumol's model attempts at optimization of cash balance.
(ix) In cash management, expected surplus cash, if any, is not considered at all.
(x) Capital expenditures are not considered in cash budget.
(x i) Issue of share capital or debentures are taken as inflows in cash budget.
(xii) Conversion of debentures into share capital is equal to issue of share capital and hence it is a type of cash
inflow.
[Answers (i) F, (ii) T, (iii) T, (iv) F, (v) T, (vi) F, (vii) T, (viii) T,(ix) F, (x) F, (xi) T, (xii) F].
35. State whether each of the following statements is True (T) or False (F).
(i) Receivables management deals only with the collection of cash from the debtors.
(ii) Receivables management involves a trade off between costs and benefits of receivable.
(iii) The objective of a credit policy is to curtail the credit period allowed to customers.
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(iv) Credit period allowed to customers must be equal to credit period allowed by the supplier to the firm.
(v) Delinquency cost refers to bad debt losses to the firm.
(vi) Liberalizing the discount rate means increasing the discount rate for the same period.
(vii) Credit evaluation of a customer is a cost process hence it need not be undertaken by a selling firm
(viii) In order to minimize the level of receivables, a firm should follow a strict and aggressive should follow a
strict and aggressive collection procedures.
(ix) Ageing schedule of receivables is one way or monitoring the receivables.
(x) Services of a factor are always beneficial.
[Answers: (i) F, (ii) T, (iii) F, (iv) F, (v) F, (vi) T, (vii) F, (viii) F, (ix) T, (x) F]
37. Whether each of the following statements is True (T) or False (F)
(i) Inventory management does not include management work in progress.
(ii) Stock of finished goods should be as high as possible so that no customer is denied the sale.
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(vi) Cost of stock out occurs whenever the firm has no stock of a particular item.
(vii) ABC analysis helps to ascertain the minimum level of stock of raw material.
(viii) The EOQ model attempts to minimizing the total cost of holding inventory.
(ix) EOQ model assumes a constant usage rate for a particular item.
(x) Average inventory in EOQ model is 1/2 of EOQ.
[Answers (i) F, (ii) F, (iii) F, (iv) F, (v) T, (vi) F, (vii) F, (viii) T, (ix) T, (x) T]
39. State whether each of the following statements is True (T) or False (F):
(i) Same considerations are applicable to short-term sources as well as long-term sources of funds.
(ii) As bank overdraft is availed by business firms on a regular basis, it may be considered as a long-term source
of funds.
(iii) For availing funds from short-term sources, credit rating of borrower is generally not required.
(iv)Credit purchase can be a good source of short-term finance.
(v)Cash discount should always be availed by the purchasing firm irrespective of the rate of discount.
(vi)A firm should always arrange the funds by delaying the payment to creditors and payables.
(vii) In India, commercial papers can be issued for any amount and for any duration.
(viii) Commercial Papers can be issued only if minimum credit rating is procured by the issuer company.
(ix) Bill Discounting is a good source of short term finance to all firms.
(x) In India, all types of short-term financing from banks must be secured.
(xi) Short-term unsecured debentures are not popular among Indian corporates.
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(xii) Reserve Bank of India constituted Tandon Committee to suggest the norms for long-term credit facility
from banks to borrowers.
(xiii) One of the objective of Tandon Committee m suggest inventory norms for different industries.
(xix) Tandon Committee has suggested different method for calculation of Maximum Permissible Bank Finance.
(xv) Kannan Committee suggested for full discretion banks for determining borrowing limits of borrowers.
[Answers (i) F, (ii) F, (iii) T, (iv) T, (v) F, (vi) F, (vii) F, (viii) T, (ix) F, (x) T, (xi) T, (xii) F, (xiii) T, (xiv) T, (xv) T]
41. State whether each of the following statements is True (T) or False (F)
(i) A lease is a temporary transfer of title of an asset in return for a rental income.
(ii) Lease transactions in India are governed by the Lease Act.
(iii) Technically, the lessee becomes the owner of the asset or the lease period.
(iv) Operating lease and Sale and lease-back are different types of transactions.
(v) Sale and Lease-back and Leveraged lease are types of finance lease.
(vi) Treatment of Operating lease in AS-19 is almost same as required by tax laws in India.
(vii) As per AS-19, in case of Finance lease, the asset is shown in the balance sheet of the lessee.
(viii) Lease financing is a type of capital budgeting decision from the point of view of the lessee.
(ix) Tax-shield on depreciation and interest is an important variable both for the lessor and the lessee.
(x) A lessee should evaluate the lease options as against the buying option.
(xi) Net benefit of leasing is the NPV of lease option from the point of view of lessor.
(xii) While evaluating lease as a source of long- term finance, the lessee should give more emphasis on AS-19.
(xiii) Lease outflows should be discounted at the interest rate to find out the present values.
(xiv) A Finance lease has more financial implications mar. in Operating lease from the point of view or both ;he
lessor and the lessee.
[Answers (i) F, (ii) F, (in) F, (iv) T, (v) T, (vi) T, (vii)T, (viii) F, (ix) T, (x) T, (xi) F, (xii) F, (xiii) F, (xiv) T]
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43. State whether each of the following is True (T) or False (F)
(i) Financial services refer to facilities relating to capital market.
(ii) Non-banking finance companies are engaged in financial services.
(iii) NBFCs provide financial services to corporate sector only.
(iv) All NBFCs operating in India must be registered with SEBI.
(v) Regulatory framework for NBFCs is provided by RBI.
(vi)Any NBFC can borrow funds on mutually agreed terms.
(vii) Prudential norms for Assets and Investments by NBFCs were framed on the recommendations of
Narasimhan Committee.
(viii) Assets of NBFCs are also classified as Standard, Non-Standard, Doubtful and Lost.
(ix) NBFCs are not allowed to operate in Insurance sector.
(x) A merchant banker helps in procuring overdraft from a commercial bank.
(xi) All merchant bankers have to be registered with RBI.
(xii) A lead manager has post-issue responsibilities also.
(xiii) Merchant bankers should follow the prescribed code or conduct.
(xiv) Share capital issued by a company for the first time is known as venture capital.
(xv) A mutual fund can operate as a venture capital fund.
(xvi) A venture capital firm deals with a new, risky and untested product.
(xvii) All venture capital funds in India have been promoted by Government.
(xviii) Portfolio managers are not required to be registered.
(xix) A portfolio manager has to operate as per the code of conduct prescribed by SEBI.
(xx) Credit rating is an authoritative guarantee regarding; the credit position of a person.
xxi) RBI has prescribed guidelines for the operations of credit rating agencies in India.
xxii) Securitisation and Factoring are two sides of the same coin.
(xxiii) Securitization in India is regulated by RBI.
[Answers (i)F,(ii)T,(iii)F,(iv)F,(v)T,(vi) F,(vii) T, (viii) T, (ix) F, (x) F (xi) F, (xii) T, (xiii) T, (xiv) F, (xv) T ,(xvi) T,
(xvii) F, (xviii) F, (xix) T, (xx)F, (xxi) F, (xxii) F, (xxiii)T]
44. State whether each of the following statements is True (T) or False (F)
(i)Valuation of bonds and of equity shares can be made by the same valuation model.
(ii) Equity shares cannot be valued because equity shares have no redemption.
(iii)Intrinsic value and market price of equity shares are always equal.
(iv)BV of an equity share is the best measure of valuation.
(v)In Dividend Discount Model, the valuation of equity shares is based on expected stream of dividends.
(vi) No-growth Dividend model, only next years' dividend is capitalised.
(vii)No-growth dividend model does not involve present value concept.
(viii)Gordon's Model and Constant Growth Model are one and same.
(ix) In Constant Growth model, the value of equity share ii sensitive to growth rate.
(x) In Constant Growth model, the value of equity share not sensitive to required rate of return.
(xi) For companies which are not expected to pay dividends equity shares cannot be valued.
(xii) In Walter's Model, the value of equity share depends upon the DP ratio.
(xiii) P factor is a measure of value of share.
(xiv) CAPM helps in determining required rate of return.
(xv) Face Value, Issue Price and Market Value of bond must be same.
(xvi) Market Value of debt instruments depends upon the market value of collateral.
(xvii) Basic or Current yield on a bond is calculated with reference to the face value or issue price of a
debenture.
(xviii)YTM of a bond is the same as the IRR of the bond investment.
(xix) Bond valuation depends upon the discounted cash flow technique.
(xx) Bond Valuation is sensitive to both the interest rate and the required rate of return of the investor.
(xxi) Required rate of return and bond valuation are inversely related.
[Answers: (i) F, (ii) F, (iii) F, (iv) F, (v) T, (vi) T, (vii), E,(viii) T, (ix) T, (x) F, (xi) F, (xii) T, (xiii) F, (xiv) T, (xv) F,
, (xvi) F, (xvii) F, (xviii) T, (xix) T, (xx) F, (xxi) T]
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46. State whether each of the following statements is True (T) or False (F).
(i) Principal objective of making investment is return, hence, risk can be ignored by an investor.
(ii) Return includes only the interest or dividend received from an investment.
(iii) Holding period return includes the capital gain as well as revenue return.
(iv) If more than one value of return is expected, then expected return can be ascertained with the help of
probabilities.
(v) Risk refers to possibility of loss from an investment.
(vi) Business risk arises because of competition in the market.
(vii) Financial risk of a firm depends upon composition of capital structure.
(viii) Systematic risk is diversifiable.
(ix) Systematic risk remains fixed irrespective of number of securities in portfolio.
(x) Degree of risk and risk premium are positively related.
(xi) No investor is ready to take risk in whatsoever situation.
(xii) Standard deviation is better than coefficient of variation as measure of risk.
(xiii) Higher risk may be assumed by an investor if the r is lower.
(xiv) Variation in expected return from an investment is known as risk.
(xv) HM Model deals with evaluation of portfolios.
(xvi) Efficient Frontier consists of a large number or 23 portfolios.
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(a) That shares have lesser degree of risk,(b)That market is over valuing the shares
(c)That the company is high dividend paying, (d) That market is undervaluing the share
29. An aggressive share would have a beta
(a)Equal to Zero, (b) Greater than one, (c)Less than Zero, (d)Equal to one
[Answers 1. (a), 2. (a), 3. (c), 4. (b), 5. (d), 6. (a), 7. b. , 8(b), 9. (a), 10. (d), 11. (c), 12. (d), 13. (d), 14. (d), 15.
(c),16(d), 17. (b), 18. (b), 19. (c), 20. (b), 21. (a), 22. (b), 23. (b), 24(a), 25 (d), 26. (b), 27. (a), 28. (b), 29. (b).]
48. State whether each of the following statements is True (T) or False (F)
(i) Derivatives are securities similar to shares and debentures.
(ii) Underlying assets of a derivative must be a physical asset.
(iii) Standardised forward contracts may be called futures.
(iv) Forward contracts are traded only at computerised stock exchanges.
(v) All futures contract must be settled by delivery of the asset.
(vi) In case of futures, the counterparty guarantee provided by the exchange.
(vii) Futures contracts do have a theoretical price.
(viii) Seller of a futures contract incurs a loss when the future price increases.
(ix) Option premium is the price for getting a right against other party.
(x) In options, the option writer has a right against the option holder.
(xi) Options contract is only an extended version of a futures contract.
(xii) Call options and put options are inverse of each other.
(xiii) American options can be exercised only on the strike date.
(xiv) There is no fixed strike date in European options.
(xv) Option premium is one time non-refundable amount.
(xvi) Expiry date of an option contract is mutually decided by the parties.
(xvii) Loss of the call options holder is always limited.
(xviii) Loss of the put option holder is always limited.
(xix) Excess of call option market price over the strike price is called intrinsic value.
(xx) Intrinsic value of an option is non-negative.
(xxi) Swap deals with the delivery of a physical asset.
(xxii) Swap arrangements are always standardised.
(xxiii) All derivatives contracts on NSE are cash settled.
(xxiv) Futures and Options are available on the shares in India.
[Answers (i) F, (ii) F, (iii) T, (iv) F, (v) F, (vi) T, (vii) T, (viii T, (ix) T, (x) F, (xi) F, (xii) F, (xiii) F, (xiv) F, (xv) T,
(xvi) F, (xvii) T, (xviii) T, (xix) T, (xx) T, (xxi) F, (xxii) F, (xxiii) T, (xxiv) 2]
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(a)Rate and Date only, (b)Quantity only,(c)Place of delivery only,(d)All of the above
18. In call options, which of the following has an m relation with its value?
(a)Volatility,(b)Time to Expiry,(c)Strike Price, (d)Spot Price
19. If Strike price is more than the spot price of the asset, the call option is known as
(a)American Option,(b)European Option,(c)Out of Money Option,(d)In the Money Option
[Answers l.(d), 2. (d), 3. (d), 4. (c), 5. (c), 6. (c), 7(a), 8(b), 9. (c), 10. (a), 11. (c), 12. (d), 13. (a), 14. (b), 15 (c), 16(d),
17. (d), 18. (c), 19. (c)]
50. State whether each of the following statement is True (T) or False (F)
(i) The terms mergers and takeovers refer to same type of situation.
(ii) Accounting Standard 14 (AS -14) classifies mergers as Vertical and Horizontal.
(iii) A conglomerate merger is a situation when all firms of a group are amalgamated into one.
(iv)'Poisson Pill' and 'White knight' are types of mergers.
(v) Increasing profit and lessening competition are the only objectives of mergers.
(vi) Financial evaluation of the target firm is a compulsory step in the merger process.
(vii) Assets and Earnings of the target firm can be used for evaluation of that firm.
(viii) Operating Cash flows to Firm (OCFF) are always more than Operating Cash Flows to Equity (OCFE).
(ix) Economic Value Added (EVA) of a firm is always positive.
(x) Swap Ratio and Share Exchange Ratio are one and the same thing.
(xi)In case the swap ratio is calculated on the basis of EPS, the market value of holding of equity shareholders
would be protected.
(xii) In order to protect the earnings available to shareholders, the swap ratio should be based on EPS.
(xiii) In hostile Takeover bid, the price of the merger depends upon the mutual consent.
(xiv) In tender offer method, every shareholder has to sell his shares to the acquiring firm.
(xv) The aim of the new Takeover Code announced by SEBI is to make the process of takeover more
transparent.
(xvi) Offer once made to acquire shares cannot be revoked.
(xvii) No competitive bid can be made for takeover of shares of other company
(xviii) Can a merger proposal be evaluated as a capital budgeting decision.
[Answers (i) F, (ii) F, (iii) F, (iv) F, (v) (F), (vi) T, (vii) T, (viii) T, (ix) F, (x) T, (xi) F, (xii) T, (xiii) F, (xiv) F, (xv) T,
(xvi) F, (xvii) F, (xviii) T ]
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(vi)Forward Rate is not the same as would prevail on the fixed date in future.
(vii) Forward transactions generally give gain or loss to the parties.
(viii) Forward rates are quoted at premium or discount to the spot rate.
(ix) Forward rates are quoted only as outright rates.
(x) A 'plus' sign denotes a premium and a 'minus’ signs denotes a discount in the forward exchange market.
(xi) A cross rate is the average of spot and forward rates
(xii) Inconsistency in the cross rates gives rise to arbitrage.
(xiii) Arbitrage in foreign exchange market arises due to inefficiencies of the market.
(xiv) Purchasing Power Parity Theorem and Interest Rite Parity Theorem are inverse of each other.
(xv) PPP contends that the exchange rates between two currencies adjust till the purchasing power parity is
achieved.
(xvi) Relative PPP deals with the changes in exchange rates.
(xvii) Violations of PPP leads to arbitrage opportunities.
(xviii) Currency which has higher inflation rate devalues relative to the currencies having lower rates of infla-
tion.
(xix) Fisher Effect deals with the interplay of interest rates and inflation rates.
(xx) International Fisher Effect contends that currency with higher interest depreciates.
(xxi) Interest Rate Parity Theorem deals with the money supply and foreign exchange rates.
(xxii) IRP helps understanding the determination of forward exchange rates.
(xxiii) Several types of tools of foreign exchange risk management are available to importers and exporters.
(xxiv) Expropriation refers to the risk arising out of change in rates.
[Answer (i) F, (ii) F, (iii) T, (iv) T, (v) F, (vi) T, (vii) T, (viii) T, (ix) F, (x) F, (xi) F, (xii) T, (xiii) F, (xiv) F, (xv) T,
(xvi) T, (xvii) T, (xviii) T, (xix) T, (xx) T, (xxi) F, (xxii) T, (xxiii) T, (xxiv) F].
54. State whether each of the following statement is True (T) or s(F)
(i) Capital market includes money market and foreign exchange market.
(ii) Stock exchanges are a part of primary market segment.
(iii) Securities are issued in the secondary market segment.
(iv)SEBI is an association of stock exchanges in India.
(v) Primary objectives of SEBI include Investors' Protection and Regulation of capital market in India.
(vi) Badla system is prevailing in India.
(vii) Book-building system cannot be used for issue of shares.
(viii) Operations of stock exchanges are directly controlled by Government.
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55. State whether each of the following statement is True (T) or False (F)
(i) SEBI has been constituted under the Securities (Contracts and Regulation) Act, 1956.
(ii) SEBI is constituted from amongst the directors of various stock exchange.
(iii) The purpose of issuing different types of Rules and Regulation by SEBI is to bring monetary gains to the
investors.
(iv) Government need not bother about the protection of the investors.
(v) SEBI has issued various guidelines to educate investors.
(vi) Mutual Fund is a pool of money belonging to various investors.
(vii) Money Market Mutual Funds are also traded at Stock Exchange.
(viii) Every Mutual Fund has to calculate the NAV as per the procedure given in the SEBI Guidelines.
(ix) Options and Futures Contracts in India are settled on calendar month basis.
(x) In Green Shoe Option, the investors are allotted as many shares as applied.
(xi) Demutualisation refers to separation of trading and ownership right of stock exchange.
(xii) GSO is available only in case of issue of shares by book building process.
(xiii) In Depository system, a shareholder is a beneficial owner.
(xiv) Depository participant is an agent of an investor.
(xv) In book-building process, the price of the security is announced by the company.
(xvi) Rolling Settlement is a system of settlement of accounts of brokers.
(xvii) Sensex is an index number of 50 shares.
(xviii) NSE and BSE are the only stock exchanges in India.
(xix) The oldest stock exchange in India is NSE.
(xx) Futures and Options in shares are traded only at BSE and NSE.
[Answer (i) F, (ii) F, (iii) F, (iv) F, (v) F, (vi) T, (vii) T, (viii) T, (ix) T, (x) F, (xi) T, (xii) T, (xiii)T, (xiv) F, (xv) F,
(xvi) F, (xvii) F, (xviii) F, (xix) F, (xx) T]
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14. The amount in unpaid dividend accounts of companies shall be transferred to the
(a)Dividend Equalisation Reserve of the company,(b)Investor Education and Protection fund,(c) Investor
Protection Fund,(d) General Revenue Account of the Central Government
15. Secondary Market in India is regulated by
(a)Reserve Bank of India,(b)Securities and Exchange Board of India,(c)Ministry of Finance,(d) Forward Market
Commission
16. …..funds do not have a fixed date of redemption.
(a) Open ended funds,(b)Close ended funds,(c)Diversified funds,(d) Both A and B.
17. In India, NIFTY and SENSEX are calculated on the basis of
(a) Market Capitalization, (b)Paid up Capital,(c) Free-float Capitalization,(d) Authorized Share Capital
[Answers 1. (b), 2. (c), 3. (b), 4. (b), 5. (b), 6. (d), 7. (c), 8. (d), 9. (b), 10. (b), 11. (a), 12. (d), 13. (a), 14. (b), 15. (b),
16. (a), 17. (c)]
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