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Assignment - A
Question 1a: Should the titles of controller and treasurer be adopted under
Indian context? Would you like to modify their functions in view of the
company practice in India? Justify your opinion?
Answer to 1a:
Controller & Treasurer are independent & they have their own Perspectives & Drivers as detailed below:
Controller
Responsibilities
include,
Double
entry
accounting, financial reporting, Fraud measure,
detective controls, Financial restatement,
Compliance with statutory requirements like
Rules, Accounting standards, GAAP, IFRS etc.,
Controller works & forecasts the events for a
long term. Main focus income statement
Treasurer
Responsible for Liquidity management ( very
important function), Risk Management, More
focus on financial statements, follows leading
practices & responsible for the future
performance of company (projects cash flows)
Treasurer works/ forecasts the events regularly (
daily / weekly) focus Balance sheet & future
capital structure, capital expenditure etc.,
Treasurer concentrates more on cash availability
focus i.e. how to bring in the required cash etc,
Ref
Cost of Machinery
(a)
Down Payment
made by firm
(b)
Financed through
c = (aborrowings
b)
Repayment in equal
instalments every
year
( maximum of six
years)
Total interest paid
over 6 year period
Year 0
Year 2
Year 3
Rs.
Year 4
Year 5
Year 6
150,000
150,000
150,000
150,000
150,000
150,000
800,000
150,000
650,000
d=6*15
0,000
900,000
e=dc
250,000
Rate of Interest
= total interest
/ total
f=e/c
borrowings
Year 1
38.46 %
Rate of interet g = f / 6
yrs
per annum
6.41 %
Break of interest
cost / principal
repayment:
1) interest cost (can
be apportioned in
6:5:4:3:
the ratio of no
2:1
of
years
repayment
i.e.
earlier the years
more
(ratio)
the interest cost &
vice versa)
h
2) Principal
Outstanding
adjustment
Yearwise
Interest rates: Principal
Outstanding at year
end
(prinicpal o/s at
year beginning Principal
repayment)
RATE OF
INTEREST
EVERY YEAR
21
(6+5+4+3+2
+1)
250000
71429
(250,000
*6/21)
59524
(250,000
*5/21)
47619
(250,00
0*4/21)
35714
(250,00
0*3/21)
23810
(250,000*
2/21)
11905
(250,00
0*1/21)
i=d-h
650000
78571
90476
102381
114286
126190
138095
650000
571429
480952
378571
264286
138095
(480952
- i)
(378571
- i)
(650000i)
h/
princip
al o/s
at year
beginni
ng)
11.0%
(h /
650000)
(571429i)
10.4%
(h /
571429)
9.9%
9.4%
(h /
480952)
(h /
378571)
(264286i)
9.0%
(h /
264286)
(138095
- i)
8.6
%
(h/
138095)
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
Sales
Variable costs
Contribution Fixed costs
Fixed Cost
Interest
Answer 3b:
P ltd
Particulars
Q ltd
( in R s. Lacs )
Sales
Variable costs
Contibution
Fixed cost
PBIT / EBIT
Interest
Profit before Tax / EBT
500
200
300
150
150
50
100
1000
300
700
400
300
100
200
a) Opearting leverage:
= Contribution / EBIT
2.0
2.3
b) Financial leverage:
= EBIT / EBT
1.5
1.5
c) Combined leverage:
= Contirbution / EBT
3.0
3.5
Computation:
Comments:
Question 4a: Define various concepts of cost of capital. Explain the procedure of
calculating weighted average cost of capital.
Answer 4a:
Concepts of Cost of Capital:
a) All source of finance have its own cost. Out of long source finance, equity mode of sourcing is costlier
than debt financing because of expectation of shareholders.
b) RISK VS. COST: Equity mode of finance will have low risk but costlier as against debt funds which will
have high risk but relatively cheaper & have tax advantage thus reducing the net cost of debt.
Organizations have to effectively trade off between risk, cost & control.
c) Optimum Capital Structure: When the firm / organization has a combination of debt and equity, such
that the wealth of the firm is maximum. At this point, cost of capital is minimum & market price of a
share is maximum.
Procedure of calculating Weighted Average Cost of Capital (WACC):
It is computed by reference to proportion of each component of capital (book value or market value as
specified) as weights.
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
% institutional loans
20, 00,000 12
60, 00,000
31 dec
Per share
Dividend
per share
per share
Earning
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.)
a) Equity Capital
b)
16%
debentures
non-convertible
4,000,000
2,000,000
6,000,000
Weights * Cost of
Capital
5.38
2.42
5.45
10.90
Interest (1-taxrate) =
12 % (100%-9.2% )
Total
Working Note: 1
12,000,000
Cost of equity:
Price earnings approach =
Earnings
per
share /
Market price
per share
10.50 / 65 =
16.15 %
100%
13.25
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
Annuity
PVAF@12%,5years
Therefore, capital recovery = 100,000 * 0.27739 =
Rs.27,740 each year for 5 years.
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
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
3640000
Direct Labour
19.5
1365000
Prime cost
5005000
Overheads
39
2730000
Total cost
110.5
7735000
Profit
19.5
1365000
Sales
130
9100000
Statement of Working Capital for HLL - 70,000 units production per
year:
Particulars
No of
months
Computation
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
Overheads outstanding
1
1.5
36,40,000/12*1month
13,65,000/12*0.34
week
s or
0.34
month
1
27,30,000/12*1
303333
38675
227500
569508
1091867
Quantitative analysis:
Present value of inflows = Rs. 200,000
Present value of outflows = Rs. 100,000
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.
II.
Assuming the project is independent, which one should be accepted? If the projects are mutually
exclusive, which project is the best?
Answer 2b:
I)
Project A
Project B
Project C
Methods
(1) Payback
@10% discount
1 + years
1.13 years
2.14 years 3
rate
1 + years
1.25 years
+ years
@30% discount
rate
(2) Accounting rate of
100%
150%
180%
return (ARR)
(3) NPV
@10% discount
(909)
4140
3017
rate
(2308)
207
(633)
@30% discount
rate
(4) IRR
0%
32%
26%
Independent project: Project with higher NPV needs to be selected, which shows
the end of the project
Project D
1.7 years
2.8 years
160 %
3824
833
38 %
wealth in absolute value at
Years
Cash
flows
b) Disc ounted @ 30 %
Discount
rate *
Discounted
cash flows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
Discou
nt rate
*
@
30 %
@ 10%
(4) =
(2) * (3)
(1)
(2)
Discounted
cashflows
Unrecove
red
discounte
d cash
flows
(3)
(5)
(1)
(2)
(3)
(4) =
(2) *
(3)
(5)
(10,000)
1.000
(10,000)
(10,000)
(10,000)
1.00 0
(10,000)
(10,000)
10,000
0.909
9,091
(909)
10,000
0.76 9
7,692
(2,308)
% separately :
*
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
Payback period @ 10% discount rate= 1 + Payback period @ 30% discount rate=
[(3182/3017)*12]
1 + [(4231/207)*12]
=1.13
=1.25 years
years
Cash
flows
Discoun
t rate *
@ 10%
(1)
(2)
(3)
Discounte
d
cashflows
(4) =
(2) * (3)
(10,000)
1.000
(10,000)
7,500
0.909
6,818
7,500
0.826
6,198
therefor
e=
Years
Cash
flows
Discoun
t rate *
Discounted
cashflows
@ 30%
NPV
3,017
(1)
(2)
(10,0
00)
1.000
(10,000)
7,500
0.769
5,769
7,500
0.592
4,438
*
disocunt rate computed using formule = 1 / (1+r) to the
power n; where r = disocunt rate
& n = year
(4) = (2)
* (3)
NPV
(3)
207
up
Cash
flows
Discoun
t rate *
Discounte
d
cashflows
@ 32%
(1)
(2)
(4) =
(2) * (3)
(3)
(10,000)
1.000
(10,000)
7,500
0.758
5,682
7,500
0.574
4,304
(14)
NPV
+ [207 /(
30 % +
IRR 1.873 31.87 %
PROJECT C:
The following has been calculated assuming discount rates of 10%
& 30% separately:
1) Payback period: time period to recover initial investment
a) Disco unted
@10%
Years
Cash
flows
b) Disc ounted
@30%
Discoun
t rate *
Discounte
d
cashflows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
Discount
rate *
Disco
unted
cashf
lows
Unrecove
red
discounte
d cash
flows
@ 10%
(1)
(2)
@ 30%
(4) =
(2) * (3)
(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
Payback period @ 10% discount rate= 2 + Payback period @ 30% discount rate=
[(4876/4140)*12]
exceeds 3 years
=2.14
= 3 + years
years
a) Discounted @10%
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounted
cash flows
Years
Cash
flows
Disco
unt
rate *
@
30 %
@ 10%
(4) =
(2) * (3)
(1)
(2)
(3)
Discoun
ted
cashflo
ws
(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 - L 1)
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
Discount rate comes down
up
Cash
flows
Discoun
t rate *
@ 26%
(1)
(2)
(3)
Discounte
d
cashflows
(4) =
(2) * (3)
(10,000)
1.000
(10,000)
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% -
(633)
IRR 3.43
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) Disco unted @10 %
Years
Cash
flows
b) Discounted @3 0 %
Discoun
t rate *
Discounte
d
cashflows
Unrecover
ed
discounte
d cash
flows
Years
Cash
flows
Discoun
t rate *
@ 10%
(1)
(2)
(3)
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
Payback period @ 10% discount rate= 1 + Payback period @ 30% discount rate=
[(909/1570)*12]
2 + [(533/833)*12]
=1.7
= 2.8 years
years
Years
Cash
flows
b) Discounted @30%
Discoun
t rate *
Discounte
d cash
flows
Cash
flows
Years
@ 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
up
833
Years
Cash
flows
Discoun
t rate *
@ 38%
(1)
(2)
Discounte
d
cashflows
(4) =
(2) * (3)
(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 = 30%
833+37)]*38% - 30 %
IRR 7.66
+ [833 /(
30 % +
37.66 %
Years
Increme
ntal
Cash
flows
(project
C
project
D)
b) Discounted @30%
Discou
nt rate
*
Discounted
cashflows
Years
Cash
flows
@
10%
(1)
Discou
nt rate
*
Discounte
d
cashflows
@
30 %
(4) =
(2) * (3)
(2)
(3)
1.000
(8,000)
0.909
1,000
9,000
(1)
(4) =
(2) * (3)
(2)
(3)
1.000
(7,273)
(8,000)
0.769
(6,154)
0.826
826
1,000
0.592
592
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:
(1,466)
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)
therefore, IRR for Project B = 10%
316+59)]*13% - 10 %
IRR 2.5
+ [316 /(
10 % +
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:
The statement not necessarily be true. Let us take 2 companies;
High dividend pay out company 100% payout
Low dividend payout company 20% payout
a) Less retained earnings
a) More retained earnings
b) Slower / lower growth rate
b) Accelerated/higher growth rate
c) Lower market price
c) Higher market price
d) Cost of equity (Ke) > IRR (r = rate of return
d) Cost of equity (Ke) < IRR (r = rate of return
earned by company on its investment.
earned by company on its investment.
e) Indicates that company is declining.
e) Indicates that company is growing.
It must be noted that, dividend is a trade off between retaining money for capital expenditure and issuing new
shares.
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
Particulars
1) NPV
2) Profitability index
3) Pay Back period
4) Discounted pay back period
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.
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
Cash
flows
(Rs. In
lacs)
Unrecovered
cash flows
Discount rate
*
Discounted
cashflows
Unrecovered
discounted
cash flows
@10%
(1)
(2)
0
1
(25)
(3)
(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
( b) to go in for machine B which is more expensive & has much greater capacity :
Years
Cash
flows
(Rs. In
lacs)
Unrecovered
cash flows
Discount rate
*
Discounted
cashflows
Unrecovered
discounted
cash flows
@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
= 3 years
4) Discounted Payback period = Base year + [(unrecovered disocunted cash flow of base year / disocunted
cash flows 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)
(a)
(b)
(c)
(d)
5 . Degree of the total leverage (DTL) can be calculated by the following formula
[ Given degree of operating leverage (DOL) and degree of financial leverage (DFL )]
(a) DOL + DFL
(b) DOL /DFL
(c) DFL-DOL
(d) DOL x DFL
Answer (d)
6.
(a)
(b)
(c)
The internal rate of return of a project is the discount rate at which NPV is
positive
negative
zero
negative minus positive Answer (c)
13 . Compounding technique is
(a) same as discounting technique
(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 approach Answer (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 . While calculating weighted average cost of capital (
a) Retained earnings are excluded
(b) Bank borrowings for working capital are included
(c) Cost of issues are included
(d) Weights are based on market value or on book value Answer (a)
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 adopted Answer (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)
30 . Operating cycle can be delayed by (
a) Increase in WIP period
(b) Decrease in raw material storage period
(c) Decrease in credit payment period
Answer (d)
40 . The capital structure ratio measure the
(a) Financial Risk
(b) Business Risk
(c) Market Risk
(d) operating risks
Answer (a)