F9 Practice Kit 400 Mcqs

MCQs
ACCA F9 Practice
Kit
Financial By:
Sumbal Asif
Management
UPDATED FOR
2014-15
COPYRIGHT 2011 ACCA LIVE | Most affordable online classes for CAT and ACCA
EXAMS Page | 1
ACCA F9
Practice
Kit
Financial
Management
By: Sumbal Asif
COPYRIGHT 2011 ACCA LIVE | Most affordable online classes for CAT and ACCA
Page | 2
ACCA F9 | Practice Questions Kit
TABLE OF CONTENTS
Chapter 1 Interest Rate Risk 5
Chapter 2 Foreign Currency Risk 12
Chapter 3 Introduction to Financial Management 21
Chapter 4 Introduction to Working Capital Management 31
Chapter 5 Managing Working Capital 39
Chapter 6 Working Capital Finance 48
Chapter 7 Investment Decisions 58
Chapter 8 Investment Appraisal Using DCF Method 67
Chapter 9 Investment Appraisal: Taxation and Inflation 78
Chapter 10 Investment Appraisal: Managing Risk 88
Chapter 11 Specific Investment Decisions 97
Chapter 12 The economic Environment for Business 107
Chapter 13 Financial Markets and Institutions 115
Chapter 14 Sources of Finance 123
Chapter 15 Dividend Policy
133
Chapter 16 Gearing and Capital Structure
141
Chapter 17 Cost of Capital
152
Chapter 18 Capital Structure
Chapter 19 Business Valuation 162
Chapter 20 Market Efficiency 179
For more FREE resources on ACCA | CA | CFA | CIA | CIMA | FIA visit:
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ABOUT THE AUTHOR
Sumbal Asif, an ACCA affiliate herself, is busy developing study material and related resources to different
professional qualifications including ACCA.
She invites feedback from students, visitors and teachers to help make this publication and others even better.
About the book

Although this publication has been written keeping the students studying paper 9 of ACCA course, however, the
students of other professional qualifications like CA, CIMA and ACCA etc. who want to test their financial
management basics can also consult this Practice Questions Kit.
This book is divided in different chapters according to ACCA F9 syllabus so that students can practice the questions
pertaining to specific topic easily.
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1 Interest Rate
Risk
Q1
Interest rate risk relates to:
A) Sensitivity of profits and cash flows to interest rate fluctuations.

B) Sensitivity of capital assets and expenditures to change in interest rate fluctuation.
C) Sensitivity of demand and supply of companies
D) None of the above
Q2
ABC co. operating in UK faces a negative gap situation because of:
1. Rise in interest rates by the time of maturity

2. Fall in interest rate by the time of maturity
A) 1and2
B) 1 only
C) 2 only
D) None of the above.
Q3
Which of the following is not the cause of interest rate fluctuation?
A) Inflation
B) Balance of payment
C) Liquidity preference of investors
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1 Interest Rate
Risk
Q4
Levanto co. wants to borrow $100000 after 2 months for a period of 6 months to invest in a project Interest
rates are anticipated to increase. Assuming interest rate after 2 months is 14%.
What will be the result if Levanto Co. plans to undertake FRA with the given information?
2v8 FRA 8%-10%

2v6 FRA 9.25% to 10.25%
A. Bank will pay L co. $ 20000

B. Bank will receive $20000
C. L co. will pay $20000
D. None of the above
Q5
Which of the following is limitation of future contracts:
A) Standardized nature, not tailor made

B) Certainty for speculators.
C) It cant be use for hedging
D) Both A and B above.
Q6
The shape of the yield curve depends much upon the expectation about the futures level of short term interest
rate;
A) True
B) False
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1 Interest Rate
Risk
Q7
Which of the following statement best describes the features of interest rate options?
A) It is a right not the obligation to deal at an agreed future interest rate and pre decided date.
B) It is where liabilities and assets with common interest rate are matched
C) It is where company balance out its fixed and floating interest rate borrowings
D) It is where a company fixes its interest rate for future borrowings.
Q8
The reason for an upward sloping yield curve could be:
A) Taxation policies
B) Economic crisis
C) Liquidity preferences
D) Import restrictions.
Q9
A theory which suggests that the slope of yield curve will reflect the different market with different conditions
is known as:
A) Expectation theory
B) Liquidity preference
C) Market segment theory
Q10
While choosing for hedging instrument which of the following factors are necessary to be considered:
A) Cost
B) Flexibility
C) Ability to benefit
D) All of the above
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1 Interest Rate
Risk
Q11
Encircle which of the following is a valid statement:
A) Borrower is always to buy cap

B) Borrower is always to sell Floor
C) Lender is always to buy cap
D) A and b above.
Q12
Interest rate swaps help us to:
A) Secure better deposit rates

B) Raise cheap loans
C) Minimize transaction risk
D) A and B above
Q13
Borrower faces risk of decrease in interest under fixed rate system and increase in interest rate under floating
rate system:
A) True
B) False
Q14
ABC co. has borrowed a $ loan on fixed interest rate of 4.5% and wants to hedge its position from fixed to
floating rate, which hedging strategy will be suitable.;
A) Currency swaps
B) Interest rate swaps
C) Currency options
D) FRAs
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1 Interest Rate
Risk
Q 15
Which of the following is not a correct statement about FRAs
1. They are available for fixed interest rate determined by bank

2. They are available for smaller amounts
3. They are difficult to obtain for period over one year
A) 2 only
B) 1 and 2
C) 3 only
D) All of the above
Q16
It grants right to buyer rather than forming an obligation at agreed interest rate and decide maturity date
A) Interest rate swap

B) Interest rate options
C) Interest rate futures
D) Currency options
Q17
Basis risk is a risk associated with imperfect hedging:
A) True
B) False
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1 Interest Rate
Risk
Answers
Q1. A
Q2. B
Q3. D
Q4. A.
Q5. A
Q6. A
Q7. A
Q8. C
Q9.C
Q10. D
Q11. D
Q12 .D
Q13 .A
Q14 .B
Q15. A
Q16 .B
Q17. A
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2 Foreign Currency
Risk
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2 Foreign Currency
Risk
Q1
Abc co. operating in USA, possess a subsidiary in Bangladesh whose currency is constantly depreciating. In few
years time that subsidiary co. value decreases drastically in ABC co. financials.
Which risk the company faced?
A) Translation risk
B) Transaction risk
C) Economic risk
D) Interest rate risk.
Q2
XYZ co. Having as home currency has exports of $200,000 and imports of $80,000 after one month. Its spot
rate is 1.6120-1.6130 $\, whereas its one month forward rate is 1.6020-1.6030 $/. What is the expected
amount of net receipt in if forward hedge is taken?
A) 174673
B) 74860
C) 74906
D) 192360
Q3
A legally binding contract between Abc co. and XYZ co. to buy or sell currency at pre specified date and pre-
determined rate will be known as :
A) Forward contract
B) Currency SWAPS
C) Money market hedge
D) Currency options.
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2 Foreign Currency
Risk
Q4
A Uk based co. holds following subsidiary in two countries:
B co. in UAE
Z co. in USA
B owes Z 100,000 and Z owes B 45000.both intercompany balances are set against to reach a net debt
owed by B to Z of 55000. Which of the following principle is applied:
A) Netting
B) Matching
C) Leading
D) Logging
Q5
XYZ co. operating in UK exports $ 300,000 goods to a USA based co.What is the expected amount if receipt in
after 3 minths time if miney market hedge is taken.
Borrowing rate lending rate

$. 5 %. 4%
8%. 7%
Spot rate given is 1.60-1.61$\
A) 189884
B) 187256
C) 193502
D) 188425
Q6
A standardized contract available in only major currencies which are quoted against $ accompanied by no
default risk best describes:
A) Currency options
B) Forward contracts
C) Money market hedge
D) Futures contract
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2 Foreign Currency
Risk
Q7
Which of the following is the least likely to be characteristic of currency futures:
A) They offers lower transaction cost comparatively.

B) Pricing transparency due to tradable nature
C) The exact date of transaction is not necessary to be known.
D) They are tailored made contracts.
Q8
Which of the following defines currency options:
A) A right to holder to call or put foreign currency at a specific rate and future date.
B) An agreement where two organization agree to exchange their payments threaded with different
terms and conditions.
C) An obligation upon holder to buy or sell foreign currency at a specified rate and future date.
D) These are least flexible financial instruments to be used for hedging.
Q9
Risk of Adverse movement of exchange rate between contract date and settlement date is known as:
A) Translation risk
B) Economic risk
C) Transaction risk
D) Interest rate risk.
Q10
Assuming AB co. operates in USA wishes to exchange its $ loan in order to hedge against fluctuating exchange
rates in long term. Which of the following will be more appropriate:
A) Currency Option
B) Currency Swaps
C) Currency Futures.
D) Leading.
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2 Foreign Currency
Risk
Q11
Supply and demand of currency is least likely to be influenced by :
A) Government policy
B) Balance of payments
C) Rate of inflation.
D) Increase in population.
Q12
L co. manufactures vehicles in France which they sell within European Union to countries which use Euro. Its
competitor is based in USA and $ is slowly depreciating against .Recently L co. has faced declining sales
revenue due to strengthening of Euro .Which of the following risk L co. is facing :
A) Economic risk
B) Interest rate risk
C) Business risk
D) Security risk.
Q13
If real interest rate between two economies are same and fisher effect holds the Forward rate and Future rate
will be equal assuming tgere are no other factors effecting:
A) True
B) False
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2 Foreign Currency
Risk
Q14
GHI co. is a Japanese exporter who receives a payment from USA customer of $ 70000.How much yen GHI co.
will receive if spot rate is 89.3-91.4 $\.
A) 765.9
B) 76.59
C) 783.87
Q15
Which of the following is the advantage of fixed exchange rate system:
A) Low monitoring cost

B) Offers flexibility as per market conditions.
C) It gives certainty to business environment.
D) Depletion of foreign exchange reserves
Q16
Which of the following best describes exchange rate:
A) A rate upon which one country's currency is traded with another country's currency.
B) A rate offered by bank to borrow a large sum of money.
C) Both A and B above
D) none of the above
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2 Foreign Currency
Risk
Q17
A hedging process under which credit balances are off set against debit balances so that only reduced amount
is to be exchanged in the end is known as:
A) Netting
B) Matching
C) both A and B above
Q18
A company operating in UK imports $ 170000 goods. Spot rate is assumed to be 1.6198-1.6200 $\.What will
be the expected amount of payment in 4 months time if money market hedge is taken.
Borrowing rare. Lending rate
$. 6% 5%
. 8%. 7%
A) 278074
B) 107950
C) 105970
D) 105984
Q19
Giant co. Operating in Germany imports $ 50000 goods after two months. How will company open the future
contract?
1. sell futures
2. buy futures
3. sell $ futures.
A) 2 only
B) 1 only
C) all 3 of the above
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2 Foreign Currency
Risk
Q20
Purchasing power parity revolves around:
A) Inflation rate
B) Spot rate
C) Future rate
D) All 3 of the above.
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2 Foreign Currency
Risk
Answers
Q1. A
Q2. B
Q3. A
Q4. A
Q5. B
Q6. D
Q7. D
Q8. A
Q9. C
Q10. B
Q11. D
Q12. A
Q13. A
Q14. A
Q15. C
Q16. A
Q17. A
Q18. D
Q19. B
Q20. D
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3 Introduction to
Financial Management
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3 Introduction to
Q1
Financial manager of private company majorly aims to:
A) Maximize earning per share.

B) Maximize shareholder wealth
C) Maximize market share
D) Maximize expenses
Q2
Mr.Luice is working upon the profits of his company to decide how much profit should be distributed among
the shareholder. This decision refers to:
A) Investment Decision
B) Dividend decision
C) Financing decision
D) Risk taking decision
Q3
Startegy is best described as:
A) The fundamental purpose of an organization

B) The beliefs that are shared among the stake holders
C) The course of action to achieve objective
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3 Introduction to
Q4
ABC co. has in issue $2000 share capital of 25 cents each. Its financial statement shows:
$
PBIT 1302
Interest (280)
--------
PBT 1022
Tax (307)
--------
PAT 715
What is the EPS for ABC co.?
A) 8.9 cents
B) 0.089 cents
C) 35.7 cents
D) 0.3575 cents
Q5
Which of the following is a correct statement?
A) Management accounting function is responsible to work upon internally used information of an

organization.
B) Financial accounting function is responsible to work upon externally gathered information of an
organization
C) Financial management relates to management of finance
D) All of the above
Q6
The wealth maximization to the shareholders will be delivered by:
A) Dividend payments
B) Increase in market value of shares
C) Both of the above
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3 Introduction to
Q7
Which one of the following is not an internal stakeholder group?
A) Management
B) Employees
C) Pensioners
D) Suppliers
Q8
The directors appointed by shareholders to run the company best explained by:
A) Business relation
B) Agency relation
Q9
Calculate dividend yield for ABC co.
Profit after tax $ 240000

Dividend cover 3 times
No. of shares of $1 250000
Market price per share $4
A) 8%
B) 24%
C) 26%
D) 34%
Q10
Current ratio is the most suitable ratio to measure companys short term liquidity:
A) True
B) False
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3 Introduction to
Q11
Following information of XYZ co. is available.
$
$1 ordinary share 50
$1 preference shares 25
Net profit (before dividends) 20
Ordinary dividend 7
Preference dividend 3
Market price per ordinary share 5
Calculate price earnings ratio

A) 12.5 times
B) 31.35 times
C) 14.7 times
D) 19.3 times
Q12
Investment decision, risk management decisions and financial decisions are often called as the decision triangle
of financial management?
A) True
B) False
Q13
Bravado co. earnings per share are $ 0.67 and half of the earnings are paid out as dividends. Dividend yield of
the co. is given as 7%.What is the share price per share?
A) $4.79
B) $9.57
C) $0.0469
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3 Introduction to
Q14
Retained earnings are the same as cash in bank:
A) True
B) False
Q15
Which of the following best describes Efficiency;
A) The extent to which declared objectives are met

B) Relationship between input and output
C) Acquiring reasonable quality and quantity of inputs to achieve given level of output
D) All of the above
Q16
A yardstick which is used to measure the achievement of objectives using least possible resources is best
described by:
A) Value for money

B) Corporate governance
C) Internal controls
Q17
Corporate governance revolves around:
A) Risk management
B) Internal controls
C) Accountability
D) Al l of the above
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3 Introduction to
Q18
The debt and equity relationship in the capital structure will be measured using:
A) Financial gearing
B) Dividend yield
C) Interest cover
D) All of the above
Q19
Cattle co. is willing to evaluate its short term liquidity. Which of the following will be mist helpful ratio:
A) Current ratio
B) Cash ratio
C) Debt to asset ratio
D) Gross profit margin
Q20
Which of the following is the reason for government stake in companies;
A) Taxation
B) Encouraging infant industries
C) Positive balance of payments account
D) All of the above
Q21
Return on equity display the earning power of shareholders investment but it cannot be used to compare two
firms in same industry;
A) True
B) False
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3 Introduction to
Q22
WSH co. has in issue 240000 ordinary share s of$0.50 each. It has paid a dividend of $ 9600 where as its current
market price is assumed to be $3.20.Calculate its dividend yield.
A) 1.25%
B) 2%
C) 4%
D) 8%
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3 Introduction to
Answers
1. B
2. B
3. C
4. A
MV=EPS * P/E
No. of shares= 2000/0.25=8000
Eps = 715/8000=0.089
5. D
6. C
7. D
8. B
9. A
Dividend cover=pat/ordinary dividend

3 times=$240000/OD
OD=$80000
Dividend yield= Dividend per share/Market price per share *100
= (80000/250000)/$4 *100
=8%
10. A
11. CP/E = Market Price per share /Earning per Share
= $5/ {($20-$3)/50)] =14.7 times
12. B
13. A
Dividend yield=dividend per share/market price per share

7%=0.67*0.5/market price per share
Market price per share= $4.79
14. B
15. B
16. A
17. D
18. A
19. B
20. D
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3 Introduction to
21. B
22. A
Dividend yield=dividend per share/market price per share
= ($9600/240000)/$3.20 *100
= 1.25%
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4 Introduction to
Working Capital Management
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4 Introduction to
Q1
Which of the following will help ABC co. to increase its current ratio:
A) Increase in inventory
B) Increase in trade receivables
C) Increase in trade payables
Q2
Abc co. has recently hired a new trainee accountant who is confused about the calculation of working capital.
Tell him which one of the following is a correct formula to get right working capital:
A) Current assets less long term liabilities

B) Net assets less current assets
C) Current assets less current liabilities
D) All of the above.
Q3
At the year ended 30 June 2014 ABC ltd made sales of almost $ 760000, of which 25% were for cash. The trade
receivables at 30 June 2013 were$ 25000 and at 30 June 2012 were $36000.Calulate Trade receivables
collection period using average receivables.
A) 20 Days
B) 29 days
C) 12 days
D) 16 days
Q4
Assuming Buffalo co. current ratio is 2.5:1 whereas at the same time its acid test ratio is supposed to be
1.4:1.Provided current liabilities are $ 60000 .Calculate its inventory?
A) $66000
B) $54545
C) $234000
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4 Introduction to
Q5
Green co. acid test ratio has fallen whereas turnover has remained constant. Which of the following could be a
reason?
A) Increase in cash
B) Decrease in trade payable
C) Decrease in inventory
D) Increase in trade payables
Q6
Company has recently purchased new inventory on credit. Choose the true effect upon;
Current ratio Acid test ratio
A) Decrease Decrease
B) Increase Increase
C) Unchanged Decrease
D) Unchanged Increase
Q7
In order to avoid liquidity problems which of the following is true?
A) Working capital must decreases as sales increases

B) Working capital must increases as sales increase
C) Working capital remain unchanged as sales increases
Q8
Extron plc accounts for year ended 31 Dec 2013 shows increase in sales revenue by 50% but increase in cost of
sales by 60%.Whuich of the given reason for change in profit margins is valid.
A) Increase in sales prices

B) Increase in supplier prices
C) None of the above
D) All of the above
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4 Introduction to
Q9
Allied co. inventory turnover is 5 times years. Average inventory shown in financial accounts is $ 34000.Futher
to this sale of A co. is made at mark up of one third. Calculate sales value?
A) $226667
B) $1670000
C) $680000
D) $72000
Q10
Calculate trade payable period if:
$
Purchases 34000
Cost of sales 24000
Trade payables 5600
Accruals 1100
A) 85 days
B) 11days
C) 16 days
D) 60 days
Q11
Which of the following is the example of overcapitalization:
A) Equal amounts of current assets and current liabilities held by a company

B) Excessive inventories accompanied by excessive account payables
C) Excessive inventories with few accounts payable
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4 Introduction to
Q12
Which of the following is not a symptom of overtrading?
A) Rapid increase on turnover

B) Rapid increase in volume of current assets
C) Inventory turnover slows down
Q13
Calculate cash operating cycle if:
Trade payable days 56

Trade receivable days 78
Inventory turnover days 18
A) 40 days
B) 116 days
C) 152 days
D) 4 days
Q14
Which of the following explicitly expresses the efficiency level of a company to control its overheads?
A) Current assets/Current liabilities

B) Gross profit/Sales
C) Net profit/ sales
Q15
Abc co will be declared to be over trading when it faces:
A) Excessive noncurrent assets

B) Too much working capital
C) Shortage of working capital
D) Shortage of noncurrent assets
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4 Introduction to
Q16
Which of the following is likely to result in low inventory turnover:
A) Accumulation of obsolete inventory

B) Successful promotion
C) Increase in existing customer orders
Q17
A Company is going to experience high liquidity ratio if it replaces its machinery earlier than planned.
A) True
B) False
Q18
If a companys return on capital employed is said to be 20% and the net profit ratio calculated is 8%.What will
be the asset turnover?
A) 2.5 times
B) 8 times
C) 2 times
D) 4 times
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4 Introduction to
Answers
1) B
2) C
3) A
= {(25000+36000)/2} / (760000* 0.75) *365

= 19.5 almost 20 days.
4) A
Current ratio= Current assets / current liabilities = 2.5:1

Acid test ratio= (Current assets stock)/ Current liabilities = (1.4:1)
____________
Inventory as a ratio to current liabilities. = 1.1:1
So at current liabilities 1 inventories are 1.1
If current liabilities are $60000 than inventory will be = 60000*1.1 = 66000
5) D
6) A
7) B
8) B
9) A
Cost of sales =5 times *$34000 = $170000

Sales= 170000 + (170000* 1/3)
=226666.66
= $226667
10) D
=trade payables/credit purchase

=5600/34000 *365
=60 days
11) C
12) D
13) A
=Trade receivables + inventory days-trade payables
=78+18-56=40 days
14) C
15) D
16) A
17) A
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4 Introduction to
18) A
= ROCE / net asset turnover = net profit ratio
=net profit /capital employed / capital employed / sales =net profit /sales
=20% / - =8%
=20/8 = 2.5 times
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5 Managing Working Capital
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Q1
ABC co. found out that it cost $ 30 to place an order and 60c to hold a unit / year. The number of orders placed
in a year are 24 .Assuming, the demand for the commodity in a year is 60000 units. Find the order size, the
inventory cycle length and total cost of holding inventory?
A) Quantity 2450 units , Cycle length 2.17 weeks , total cost $1470
B) Quantity 2450 units, Cycle length 15.2 weeks, total cost $1470
C) Quantity 2450 units , Cycle length 2.17 weeks, total cost $2190
Q2
Which one of the following is true about inventory?
A) An order which is placed too late will result in loss of sales

B) An order which is placed too soon will boost holding costs
C) Reorder levels helps minimizing risk by giving reasonable minimum inventory levels.
Q3
As the profit margins per unit increase the necessity to hold safety stock increases.
A) True
B) False
Q4
Which one of the following is the least likely to be the benefit of having JIT system.
A) Inventory holding costs are minimized

B) Low delivery costs of inventory.
C) Less tied up working capital
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Q5
Which of the given statement about EOQ is false?
A) It assumes steady demand of business product

B) It assumes inventory is immediately available
C) It accounts for seasonal; and economic fluctuations
D) All of the above
Q6
A company carries low inventory and at times it has to suffer with no inventory due to delay delivery of
supplies. What are the consequences of this?
A) Improved customer satisfaction

B) Wastage of labor resource
C) Declining sales and demand of finish product
D) B and C above
Q7
Determine the reason and effect of extended credit period allowed to receivable upon the profit.
A) Declining profits due to increased interest expenses

B) Declining profits due to improving bad debts ratio
C) Declining profits due to decreased sales.
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Q8
The company can easily manage its accounts receivables using:
1) In house credit ratings

2) Customer history analysis
3) Aging debtors analysis
4) Just in time system
A) 1 and 2 above
B) All of the above
C) 1 ,2 and 3 above
D) 1 and 3 above
Q9
Just in time system will not be appropriate for:
A) Food manufacturer
B) Hospitals
C) Car manufacturer
D) All of the above
Q10
Bravado co. has sales of $ 65000/month (one month credit) giving rise to variable costs of $45000. If Bravado
co. extends its credit period from one month to two months its sales would increase by 25%. Given cost of
capital is 15%.If all the customers take advantage of this opportunity how much will be the net benefit?
A) $45375
B) $57563
C) $142875
D) $60000
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Q11
Hoboo co. sold goods for $ 11680 on cash and also on credit for $ 32485
Its Trade receivables are expected to be received every 30 days.
What will be the closing trade receivables balance?
A) $960
B) $1710
C) $2670
D) $3630
Q12
A company sales are made evenly over a 360 days year.10% of the sales are for cash .The trade receivables are
$ 26700 and Debtor days are said to be 30 days. Calculate total sales if the company.
A) $320400
B) $356000
C) $801000
D) $890000
Q13
XYZ co . offers 30 days credit period to its customers .It offers 5% discount if payment is made within 15 days of
date of invoice. What will be the percentage cost of this discount to XYZ co.
A) 71.3%
B) 46.4%
C) 38.9%
D) 25%
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Q14.The procedure through which trade debts are purchased at a discount is known as:
A) Credit insurance
B) Early settlement discount
C) Invoice discounting
D) Counter trade
Q15
Debt Factoring is best described as:
1. Selling your trade payables to another company in order to remain more liquid
2. Selling your trade receivables to another company to help short term liquidity
3. To buy debts from other companies in return of profit
A) 1 and 3 above
B) 2 and 3 above
C) 1 above
D) 2 above
Q16
Which of the following is least likely to be the benefit of factoring?
A) Bad debt management cost is reduced

B) It depicts Negative attitude to customers relation
C) Business have enough cash to pay suppliers quickly and avail discounts
D) Enjoys credit protection is case creditors fails to pay.se of debt management
Q17
How a company can overcomes the risk arising from foreign accounts receivables:
A) Advances against collection received by bank

B) Documentary credits
C) Discounting bills of credit
D) All of the above
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Q18
Trade payables effective management includes all except for:
A) Satisfactory credit terms

B) Minimize credit purchases or even all purchases on cash
C) Good supplier relation
D) Extended credit periods in times of liquidity crisis
Q19
Marvin co. holds policy under which it orders almost 35000 units when inventory level falls to 22000 units.
Expected demand to meet production requirement is 350000 units. Orders are received 3 weeks after being
placed with the supplier. Assuming 52 weeks a year and constant demand calculate average inventory?
A) 19307 units
B) 1807 units
C) 36807 units
D) 32769 units
Q20
Which of the following is correct about factoring?
A) In case where factor bares the risk of loss of bad debts and provides insurance to the client against
loses is known as non recourse service
B) In case where payments are made to the client even before debtor pays is known as factor finance.
C) In case of non- recourse the firm will decide the action to be taken against bad debts and not the
factor
D) A and B above
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Answers
1) A
EOQ = (2*30*60000)/0.6 =2449 approx. 2450

Cycle length = 52 weeks/ no. of orders =52/24 = 2.17 weeks
Total cost = (60000/2450 * $30) + ((2450/2)* 60 c) = $1470
2) D
3) A
4) B
5) C
6) D
7) A
8) C
9) B
10) A
$
Current receivables 65000
After implementing proposal- receivables (130000*1.25) 162500
Net increase in receivables 97500
Finance cost @ 15% (14625)

Annual contribution from additional sales (20000*12*25%) 60000
Net benefit 45375
11) C
Debtors period = trade receivables/ credit sales *365
30 days = Trade receivables/ $32485 * 365
Trade receivables=$2670
12) B
Debtor days = $26700/credit sales *360

30 = $26700/ Credit sales * 365
= $320400
As Credit sales are 90 % of total sales so $320400/90% = $356000
13) A
=1- {100/(100-5)}^-( 365/15)
=71.3%
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14) C
15) D
16) B
17) D
18) B
19) A
Usage of inventory per week= 350000/52=6730.7 approx. 6731 units

Average lead time= 3 weeks
Reorder level= 22000 units
Buffer safety stock = 22000-(6731*3) =1807 units
Average inventory=1807+ {35000/2} =19307 units.
20) D
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6 Working Capital Finance
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Q1
Company holds cash for the following reasons except for:
A) To meet regular commitments of paying regular business transactions.

B) To meet any sort of emergency cash needs of business
C) To gain interest rate benefits in future with the help of speculation
D) To show banks of their cash reserves when borrowing long term finance
Q2
Abc co. Cash budget shows that it will exceed its overdraft limit. Which of the given item of expenditure should
be considered for delaying?
A) Debenture interest
B) Dividends
C) Rent and rates
D) Taxation
Q3
The bank balance of green co. at 1 March 2014 was $6000. Following information is available:
February 2014 ($) March 2014($)

Credit sales 80000 90000
Credit purchases 56000 48000
Wages 18000 18000
Drawings 1000 500
Depreciation 800 800
Trade receivables pay in month following sales whereas trade payables paid in the month following purchases.
Calculate bank balance at 31 march?
A) $10700
B) $11500
C) $28700
D) $29500
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Q4
Hobo co. is preparing a cash flow forecast for the upcoming year. Current estimates show that an increase of
$50000 will be needed. Which of the following can fulfill the need of Hobo co.?
A) A bonus issue of $ 1 50000 shares

B) Net proceeds from sale of machinery of $ 50000
C) Pay all trade payables valuing $50000 early
D) Reduce depreciation charge by $50000
Q5
Following information is available about Levanto co. Estimated sales
Months Cash $ Credit $

February 10000 15000
March 10000 25000
April 10000 35000
Trade receivables are expected to pay as:

60% in month following sale
40% in second month following sale
How much cash to be received in April from the sales?
A) $21000
B) $25000
C) $31000
D) $45000
Q6
Which of the following will not be helpful in easing cash shortages for a company:
A) Postponing capital expenditure

B) Rescheduling loan payments to delayed dates
C) Asking creditors to extent credit periods
PakAccountants.com
Q7
The process of administering financial assets and holdings of a business is best described by:
A) Treasury management
B) Risk management
C) Customer management
D) All of the above
Q8
Which of the following is not the benefit of having centralized treasury department?
A) Foreign exchange risk management

B) Low borrowing cost when fianc arranged in bulk
C) Highly diversified sources of finance
D) Experts can be employed at a single area minimizing costs.
Q9
The cash budget of Coco ltd shows a deficiency of $30000 arising at the end of next six months budget. Which
action will be the best possible remedy to this issue?
A) $31000 net proceeds from the right issue to existing shareholders.

B) Ruling off the depreciation charge of $34000 as planned.
C) Delaying bonus issue for a year
Q10
Which of the following statement about Baumol model assumptions is correct:
A) The cash is readily consumed with the passage of time

B) Business holds marketable securities which can easily be liquidated when needed
C) Optimum cash levels can be decided based on optimum inventory levels.
D) All of the above
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Q11
Alpha ltd need $ 48000 for each of the one year period in future. It has to bare a fix cost of $ 8000 to raise
funds at an interest rate of 24% per annum Given the .Interest rate which alpha co. earned on its short term
securities is 18%. Suggest Alpha co. the amount of funds to raise at the time?
A) $113137
B) $1265
C) $65320
D) $40000
Q12
The Miller Orr model works by setting limits as follows:
1) As cash balance reaches upper limits the firm buys securities

2) As cash balance reaches lower limit the firm sells securities
3) At high interest rates in market the gap between upper and lower limits should be widen up
A) 1 and 3 above
B) 1 and 2 above
C) 2 and 3 above
D) All of the above
Q13
Bravado co. minimum cash balance is $ 4000 whereas its variance of daily cash flows is equivalent to standard
deviation of $ 1000 /day. If the given transaction cost of trading securities is $25 and the interest rate is
0.0125%/day .Determine upper limit and lower limit.
A) Upper limit $19940 ,lower limit $9313

B) Upper limit $19940 , Lower limit $5313
C) Upper limit $15940,Lower limit $9313
D) Upper limit $15940,Lower limit $ 5313
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Q14
Which of the statement regarding working capital financing are correct?
A) Short term sources of funding are riskier, cheaper and flexible

B) Long term sources of funding are riskier, cheaper but less flexible comparatively.
C) Short term sources of funding are not riskier and cheaper but flexible
D) A and B above
Q15
Increasing current liabilities, reducing current assets accompanied by reducing long term debts will result in
greatest risk of technical insolvency in the company.
A) True
B) False
Q16
Whole of fluctuating current assets and part of permanent assets are financed by short term sources. Which
approach does this define?
A) Conservative approach
B) Moderate approach
C) Aggressive Approach
D) Risk taking approach
Q17
The security issued by the bank assuring for the deposits of specific sum of money and acknowledging its
responsibility in financial management terms is known as:
A) Treasury bills
B) Certificate of deposits
C) Deposit agreement
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Q18
The working capital requirement is best described by:
A) Inventories + Receivables-payables +prepayments- accruals

B) Inventories+ machinery depreciation-payables + receivables
C) Inventories receivable s+ payables-prepayments
D) Total assets long term liabilities
Q19
The surplus cash is reinvested when following factors are considered:
A) Liquidity, profitability and risk

B) Interest rates
C) Term to maturity
Q20
Which of the models are relevant for calculating optimal cash holding levels;
A) Baumol model
B) Miller Orr model
C) Cash flow model
D) A and B above
Q21
Permanent working capital is described as the amount of current assets required to meet the firms long term
minimum need:
A) True
B) false
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Q22
Which of the following is correct about working capital?
1) Amount of working capital needed by business for day to day need is investment decision
2) Amount needed is to be raised by which sources is known as financing decision
3) Balancing both financing and investment of working capital is known as conservative approach
A) 1 and 2 above
B) 2 and 3 above
C) 1 and 3 above
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Answers
1) D
2) B
3) B
Bank balance at 1march 2014 6000

Add cash from February trade receivables 80000
Less cash paid for February purchases (56000)
Less Wage (18000)
Less Drawings (500)
________________
Bank balance at 31 march 2014 11500
4) B
5) C
Cash sales $ 10000

Collection from last month credit sales ($25000860%) $15000
Collection from two months earlier credit sales ($15000*40%) $6000
___________________
Total cash receipts in April $31000
6) D
7) A
8) C
9) A
10) D
11) A
Cost of holding cash + 24%-18%=6%

Reorder quantity = (2*8000*48000) /6%) =$113137
12) B
13) A
Spread = 3 {3/4 *[ (25*1000000)/0.000125]}^1/3 = $15940
Upper limit = lower limit + 15940= 4000+15940= $19940
Lower limit =lower limit + 1/3 * spread = 4000+1/3* 15940= $9313
14) A
15) A
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16) C
17) B
18) A
19) D
20) D
21) A
22) A
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7 Investment Decisions
PakAccountants.com
Q1
Which of the following expense falls under the category of capital expenditure?
A) Expenditures incurred on renewals of patent rights

B) Wages paid in return for manufacturing goods
C) Cost of air conditioning the office of director
D) Legal expenses incurred for debt collection
Q2
Which of the following is true:
A) When a second hand asset is purchased than any expenditure incurred on it to put it into working
condition is a capital expenditure
B) Carriage cost paid on purchase of goods is classified as revenue expenditure.
C) Cost of demolishing an old building to replace it with a new one is a capital expenditure.
D) All of the above
Q3
Determine the basic aim of a commercial organization as compare to not for profit organization?
A) They consider maximizing quality to give better product to society.

B) They consider maximizing quantity to generate social benefits.
C) They consider maximizing customer satisfaction
D) They aim for financial considerations only
Q4
What is the advantage of effective budgetary control system?
A) Manager spend a lot of their time on preparing budgets

B) The budget may be imposed from top down t senior managers
C) The budget figures are not changed once they have been set, despite the happenings within trading
year
D) Resources of an organization are given the most economical use.
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Q5
What is not the purpose of preparing budgets?
A) To develop a long term strategy

B) To communicate strategies and objectives down to the staff
C) To design an action plan to help achieve upcoming year objectives
D) To prepare an operational plan for immediate future
Q6
Capital budgets are usually prepared for longer time periods as compare to other budgets and then later
broken down into pieces to match up other budgets period.
A) True
B) False
Q7
Which of the following best describe the word soft capital rationing?
A) To carry out a qualitative evaluation check upon a project

B) The impositions of internal constraints due to limited managerial resources
C) The scarcity of resources faced due to setting of external limits resulting in high financing costs and
restrictions upon external financing choices.
Q8
Go/no-go decisions are made depending upon:
A) Type of investment
B) Amount of investment required
C) Risk attached to it
PakAccountants.com
Q9
Which of the following is less appropriate;
A) Ideas related to Increasing capacity and efficiency best comes from the factory managers
B) Ideas related to day to day cost minimization best comes from high level management.
C) Ideas related to innovations and strategic view best comes from the higher levels of management.
D) The proposals best accepted when its in line with the strategy and objectives of an organization
Q10
ABC co. Finance manager is confused while appraising the new project proposal. Which of the following factor
he must not consider at analysis and acceptance stage:
A) Classifying the project type

B) Financial appraisal
C) Comparing to capital budget available
D) Monitoring the outcomes and evaluating whether it met the purpose.
Q11
Which of the given costs are not relevant cost of investment appraisal:
A) Opportunity cost
B) Marketing research expenditures
C) Working capital costs
D) Labor training cost
Q12
The annual profits from the project appraised can be calculated by;
A) Deducting incremental fixed costs from Incremental contribution

B) Adding incremental fixed costs to incremental contribution
C) Comparing incremental contribution to current profits.
PakAccountants.com
Q13
Opportunity costs are fundamental costs of forgoing another opportunity and it is used in computing cost
benefit analysis while appraising projects.
A) True
B) False
Q14
Alizbeth proposed these two statements to his senior about capital budgeting.
1. Opportunity cost must not be encountered while appraising a project s it is not true cash item.
2. Working capital is to be released at the end of the project
3. Sunk costs are part of project appraisal calculations.
Which of the above statement are correct?
A) 1 and 3 above
B) 1 only
C) 1 an d 2 above
D) 2 and 3 above
Q15
Amy is to appraise a project and she has gathered the data as follows:
Sunk cost $4000

Opportunity cost $6000
Now she is confused that which costs are relevant for investment appraisal. Tell Amy about this issue.
A) Opportunity cost
B) Sunk cost
C) None of the above
D) Both of the above.
PakAccountants.com
Q16
A company is planning to purchase a machinery costing $500,000 having useful life of 5 years. Its cash flows for
the next 5 years will be as follows.
Year Cash flows

1 (200,000)
2 300,000
3 300,000
4 500,000
5 100,000
Calculate the payback period.
A) 3 years 2 months
B) 4 years 2 months
C) 3 years 9 months
D) 2 years 8 months
Q17
Which of the following is least likely to be the problem associated with payback period?
A) It does not consider time value of money

B) It does not consider whole project life
C) It neglects the cash flows after payback period
D) It is difficult to calculate in practical situations
Q18
The accounting rate of return is better measured;
A) Total annual accounting profit expressed as a percentage of estimated average investment

B) Average annual accounting profits expressed as a percentage of Estimated average investment
C) Average accounting annual profits expressed as a percentage of total funds invested.
PakAccountants.com
Q19
ABC co is planning to undertake a project with initial outlay of $ 600,000 and it will yield annual profits (after
depreciation) of $40000 per year for next 5 years. The residuals value of projects asset will be $ 60000.calculate
ARR
A) 1.48%
B) 7.41%
C) 12.12%
D) 2.42%
Q20
Which of the following is not an advantage of ROCE method:
A) It is quick and simple to calculates

B) It is a relative measure rather than absolute
C) It encounters entire project life
Q21.
There are two mutually exclusive proposals available to Smith co..
years Proposal 1 cash flows ($) Proposal 2 cash flows ($)

0 (initial investment.) (1000,000) (1200,000)
Residual values 55000 12000
Profits after depreciation.
1 (20,000) 40,000
2 60,000 50000
3 40,000 60000
4 20,000 20000
5 10,000 10,000
Which proposal to choose on the basis of ARR?
A) Proposal 1 as it has higher ARR

B) Proposal 2 as it has higher ARR
C) Proposal 1 as it has lower ARR
D) Proposal 2 as it has lower ARR
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Answers
1) C
2) D
3) D
4) D
5) A
6) A
7) B
8) D
9) B
10) D
11) B
12) A
13) A
14) C
15) A
16) A
Year Cash flows

0 (500,000) (500,000)
1 (200,000) (700,000)
2 300,000 (400,000)
3 300,000 (100.000)
4 500,000
5 100,000
Payback period = 3 years and 2.4 months

Months= 100/500*12=2.4
17) D
18) B
19) C
Average investment= ($ 600,000+$ 60000)/2=$330,000

ARR= 40000/330,000 *100=12.12%
20) B
21) B
Proposal 1:
Average profit=( -20000+60000+40000+20000+10000)/5 = $22000
Estimated investment= (1000000+55000)/2 =$527500
ARR= 22000/527500*100=4.17%
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Proposal 2:
Average profit: ( 40000+50000+60000+20000+10000)/5=$36000
Estimated investment= (1200,000+12000)/2=$606000
ARR= 36000/606000*100=5.94%
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8 Investment Appraisal Using
DCF Methods
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DCF Methods
Q1
Discounted cash flow method takes cash flows into account rather than profits because
A) Cash flows shows the actual occurrence of costs and benefit

B) They show notional costs more accurately
C) Time factor is best encountered using cash flows rather than profit.
D) A and B above.
Q2
Alen is recently employed by a multinational company and he is asked to appraise a project. He has the
following two opinions about discounting;
1. Discounting is to use future value and convert it into present value

2. Discounting is to use present value and convert it to future value
3. Discounting tells us how much worth the given project has in todays term
4. Discounting tells us how much worth the given project has in future.
A) 1 and 2 above
B) 1 and 3 above
C) 2 and 4 above
D) 1 and 4 above
Q3
ABC co. is planning to invest assuming to get a compound rate of return of 15% on its investment. How much
do it need to invest now to get $25000 in 3 years? (To nearest 100)
A) $16400
B) $21700
C) $38000
D) $25600
PakAccountants.com
DCF Methods
Q4
Which of the given statement is not true about NPV?
A) It takes into account the concept of time value of money

B) It compares PV of cash n flows with PV of all cash outflows
C) In case of two mutually exclusive projects one must choose project with lower NPV
Q5
Which of the following best describes annuity factor?
1. It is series of cash flows of equal amount after equal intervals for infinite period of time
2. It is series of cash flows of equal; amounts after equal intervals for a limited period of time
A) 1 only
B) 2 only
Q6
Which of the following decisions are true.
A) A project with negative NPV must be undertaken

B) A project with positive NPV must not be undertaken
C) A project with comparatively higher NPV must be rejected
PakAccountants.com
DCF Methods
Q7
Calculate NPV for the given project. Assuming discount factor of 10%
Year cash flow $

0 (500,000)
1 200,000
2 200,000
3 200,000
4 200,000
5 200,000
A) $258157
B) $758157
C) $4721020
Q8
Cost of capital is based on two things
1. Cost of funds that company raises

2. The minimum return a company must generate from its investments
A) True
B) False
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DCF Methods
Q9
Bravado ltd has two possible projects but can only raise funds to finance one of them. Investment appraisal
techniques produced the following results:
Project A Project B
Pay back period 3.5 years 3 years
NPV $450,000 $250,000
ARR 15% 15%
Which project to choose?
A) Project A because it has lesser payback period and higher NPV

B) Project B because it has lower NPV accompanied by lower pay back period
C) Project B because it sounds more feasible
Q10
Interest is to be included in NPV Performa as it is not encountered by discount factor?
A) True
B) False
Q11
XYZ ltd has cost of capital of 15%.It is planning to invest $450,000 in a project which will then generate a
constant return of $100,000 in year 1 and then $50,000 till perpetuity. Calculate its NPV?
A) 123150
B) 166700
C) -123150
D) -166700
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DCF Methods
Q12
Abc co. using investment appraisal techniques calculated IRR of its project to be 19.33% where as its WACC is
15%. Depending on the information provided suggest whether to undertake project or not?
A) It must undertake project as its IRR is greater than WACC

B) It must not undertake as its IRR is greater than WACC
C) It must undertake as there is WACC is too high.
D) It must not undertake as IRR is too high
Q13
In case of mutually exclusive projects:
A) Must Reject both

B) Must Accept both
C) Accept either but not both
D) All of the above
Q14
A project with non-conventional cash flows is likely to have more than one IRR;
A) True
B) False
Q15
Which of the following is not true about IRR;
A) It is the minimum %age return a project will generate

B) It is a point where cost of capital and NPV is zero
C) It is not a relative measure
D) All of the above
PakAccountants.com
DCF Methods
Q16
Which of the following is not an advantage of DCF method:
A) It takes into account time value of money

B) They are easy to compare methods in the market
C) They dont use all relevant cash flows of a project
D) All of the above
Q17
A project has NPV of $73000 at a discount factor of 10% and it has NPV of (63000) at a discount rate of
15%.calculate it IRR.
A) 12.6%
B) 16.2%
C) 10%
D) 0
Q18
Which is an advantage of NPV and not of IRR:
A) It takes into account time value of money

B) It is an absolute measure
C) It considers whole life of the project
Q19
The NPV of the project can be
A) Only positive
B) only negative
C) only Zero
D) Both positive and negative
PakAccountants.com
DCF Methods
Q20
The basic concept of NPV is:
A) The cash today will not be as valuable tomorrow

B) The cash today will be of same worth tomorrow
C) Cash flows increases with time due to accumulation of profits
D) None of the above is correct
Q21
What would not be included in a NPV?
A) Any Expenditure incurred after the payback period

B) Depreciation of capital expenditure
C) Incremental revenue expenditure
D) Residual value of Cost of capital.
Q22
Which investment appraisal technique includes depreciation in calculation?
A) IRR
B) NPV
C) ARR
D) Pay back
Q23
Which method of investment appraisal use profits rather than cashflows to assess a project/.
A) ARR
B) IRR
C) NPV
D) payback
PakAccountants.com
DCF Methods
Q24
The cash flow of a given project is:
A) total net profit plus total depreciation

B) Marginal (additional) net profit plus additional depreciation
C) Total cash received minus additional cash paid
Q25
Which of the following is not relevant to investment decision?
A) Cost of capital
B) Timing of future cash flows
C) Risk
D) Sunk cost
PakAccountants.com
DCF Methods
Answers
1. A
2. B
3. A
PV=FV* {1/1.15^3}
=25000 * 0.6575
=$16437 approx. $16400
4. C
5. B
6. D
7. A
Annuity factor={1-(1+0.10)^-5}/0.10=3.791
Year Cash flow $ Discount factor Discounted cashflow

$.
0 (500,000) 1 (500,000)
1 200,000
2 200,000
3 200,000 3.791 758157
4 200,000
5 200,000
NPV 258157
8. A
9. A
10. B
11. C
Years Cash flows $ DF Discounted CF $

0 500,000 1 (500,000)
1 100,000 0.870 87000
2till infinity 50,000 6.667-0.870=5.797 289850
(123150)
12. A
13. C
14. A
15. C
16. C
17. A
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DCF Methods
IRR= 10+{73000/73000-(-63000)} * (15-10)%= 12.6%
18. B
19. D
20. A
21. B
22. C
23. A
24. B
25. D
PakAccountants.com
9 Investment Appraisal:
Taxation and Inflation
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Q1
Which of the given statement is true about inflation?
A) It is increase in It is the percentage rate of change of a price index over time

B) It is sustained increase in general price level
C) Retail price index is not a measure of inflation
D) A and B above
Q2
Financial accountants assumes that as the inflation rates increases the investors minimum required return will
also increases as they are directly proportionate:
A) True
B) False
Q3
Which of the given statements describes the quality of nominal cash flows as compare to real cash flows:
A) Nominal cash flows includes the effect of inflation

B) Nominal cash flows are shown in present value terms
C) Nominal cash flows are more preferable to use for investment appraisal.
D) All of the above
PakAccountants.com
Q4
Which of the given statements is true?
1. Use nominal rates when cash flows are given on according to various future dates
2. Use real rate when cash flows are given on according to various future dates
3. Use real cash flows and inflate it to get money cash flows
4. Real cash flows are already inflated cash flows.
A) 1 and 4 above
B) 1 and 3 above
C) 2 and 4 above
D) All of the above
Q5
If nominal cost of capital is 10% and inflation is calculated to be 3%.What will be the real cost of capital to
nearest 0.1%?
A) 1.1%
B) 13.3%
C) 6.8%
D) 1.9%
PakAccountants.com
Q6
ABC co. is planning to undertake an investment .Its cash flows are as follow:
Years Cash flows

0 (225,000)
1 150000
2 65000
3 40000
4 15000
5 10000
It has nominal cost of capital of 10%.Inflation is expected to be consistent of 4%.What will be the NPV?
A) $13465
B) $2250
C) $ -13465
D) $ -2250
Q7
A company is considering to acquire a machinery having useful life of 5 years and costing $70000.Machine will
generate annual cost savings of material amounting $30000.However variable overheads are expected to
increase by $4000/annum. All cash flows are in current price terms. Nominal COC is 10% and inflation is
4%.Calculate NPV.
A) $ -40188
B) $ 28540
C) $ -28540
D) $ 40188
Q8
It is assumed that using real cost of capital and real cash flows there is no requirement for further adjustments
before discounting where as in case of using combination of nominal cash flows and nominal cost of capital the
prices in future years are to be calculated before discounting.
A) True
B) False
PakAccountants.com
Q9
Tax is to be paid on the operating cash flows generated by the project .and tax savings on capital allowances
should be adjusted.
A) True
B) False
Q10
Which of the following is not tax allowable:
A) Depreciation
B) Marketing expenses
C) Interest expense
D) Provision for future expenses.
Q11
Which of the following statement is true:
1. Tax will be paid on the cash flows generated by the project.

2. Capital allowances will be available at the rates prescribed by tax authorities.
3. WACC is not required to be tax adjusted.
A) 1 and 2 above
B) 2 and 3 above
C) 1 and 3 above
PakAccountants.com
Q12
If there is profit on disposal of an asset then the company will calculate the balancing allowance figure to get
the tax saving amount
A) True
B) False
Q13
Alan is recently employed by Fushia co. He was asked to appraise a project in which he took tax allowable
depreciation itself in the calculation of NPV rather than the tax effect. Has he treated it correctly?
A) Yes
B) No
Q14
ABC co is to undertake a project for 4 years. Working capital requirement in year 0 is $5000.It will increase with
inflation of 7%/year. What will be the working capital in year 4.
A) $6125
B) $ -6125
C) $ -400
D) $5000
Q15
The taxable revenues arising from the project are to be considered for tax purposes despite the whole cash
flow.
A) True
B) False
PakAccountants.com
Q16
Company has invested $1 million in a machinery having useful life of 5 years after which it will be scraped at
$150,000.Depreciation is to be charged on 25% reducing balance method. If assumed tax rate is 30% what will
be the total tax savings in 5 years to nearest thousand?
A) $255
B) $405
C) $851
D) No tax saving in real terms.
Q17
How effective rate of interest is calculated?
A) Interest rate tax rate

B) Interest rate + tax rate
C) Interest rate *(1-tax rate)
D) Interest rate *(1+ tax rate)
Q18
If nominal interest rate is lower than rate of inflation the real rate of interest is expected to be negative:
A) True
B) False
Q19
In case if a company ignores taxation in DCF calculation what should it do?
A) Redraft DCF
B) Leave it as it is
C) Use a discount rate which is pre tax
D) Use a discount rate which is post tax
PakAccountants.com
Q20
What is the difference between specific and general inflation?
A) General inflation is worldwide level of inflation while Specific inflation is related to a single country.
B) General inflation affects prices of all kinds whereas Specific inflation is related to particular goods.
C) General inflation I long term level of inflation while Specific is short term.
PakAccountants.com
Answers
1. D
2. A
3. A
4. B
5. C
(1+m) =(1+r)(1+i)
(1+10%) = (1+r) (1+3%)
R = 0.06796
Approx. 6.8%
6. C
As actual cash flows of the specific dates are given meaning they are nominal cash flows so will use nominal
COC.
Years Actual Cash flows ($) Discount factor 10% PV ($)

0 (225,000) 1 (250,000)
1 150000 0.909 136350
2 65000 0.826 53690
3 40000 0.751 30040
4 15000 0.683 10245
5 10000 0.621 6210
NPV (13465)
7. D
Real cash flows and real cost of capital.
(1+m)=(1+r)(1+i)
1.1=(1+r)(1.04)
R=5.77%
Cash flows= savings variable cost
=30000-=4000=$26000
Years Cash flows ($) Discount factor (5.77%) PV ($)

0 (70,000) 1 (70000)
1 26000 0.945
2 26000 0.894
3 26000 0.845 =4.238 =110188
4 26000 0.799
5 26000 0.755
NPV. 40188
PakAccountants.com
8. A
9. A
10. D
11. A
12. B
13. B
14. A
Years 0 1 2 3 4
Working 5000 5350 5725 6125 -
capital
requirement
Working (5000) (350) (375) (400) 6125

capital
change
15. B
16. A
Year NBV ($000) CA @25% ($000) Tax savings @30%

($000)
1 1000 250 75
2 750 188 56
3 563 141 42
4 422 106 32
5 316 166 50
255
17. C
18. A
19. C
20. B
PakAccountants.com
Managing Risk
PakAccountants.com
Managing Risk
Q1
Which of the following describes the similarities between risk and uncertainty?
A) They are applied to a situation with several possible outcomes.

B) Probabilities are assigned on the basis of past analysis In both cases.
C) They both are directly proportionate with time factor.
Q2
Which of the given technique is best suitable for assessing uncertainties?
A) Simulation model
B) Discounted payback period
C) Probability analysis
D) Sensitivity analysis.
Q3
ABC co. is expected to invest in a project costing $500,000. Finance manage has predicted a probability of 80 %
that return will be higher than $500,000 but also that it is 20% probability that return might be lower than
$500,000.Abc co. is faced by:
A) Uncertainty
B) Risk
PakAccountants.com
Managing Risk
Q4
Which of the following is not relevant to sensitivity analysis?
A) It assesses the responsiveness of project NPV to the change in variables used to calculate that NPV.
B) It identifies the area which are crucial to the project success
C) It helps carrying out subjective judgment by the higher level of management to find the likelihood of
various outcomes
D) In this technique critical factors are fully under managers control.
Q5
ABC co has recently employed a fresh graduate. He has been asked to carry out sensitivity analysis for which his
perception is that the lower the sensitivity percentage is the more sensitive is NPV to that variable.
A) True
B) False.
Q6
HOBO co. is considering a project having initial investment 0f $550,000 for which discount factor is 10% and
cash flows are as follows:
Years Cash flows

0 (550,000)
1 300,000
2 400,000
Calculate project sensitivity to initial investment.
A) $53100
B) 9.65%
C) 36.36%
D) 10.35%
PakAccountants.com
Managing Risk
Q7
As per the information provided in the above question calculate project sensitivity to cost of capital:
A) 71.4%
B) 17.14%
C) $531000
D) 171..4%
Q8
Identify the weakness of sensitivity analysis approach from the given statement:
A) Looking at factors in isolation is unrealistic.

B) Variables are calculated using predictability approach
C) It focuses on the probability of the variation in either cost or revenues.
Q9
The assessment of separate probabilities of a number of specified outcomes of an investment project is best
described as:
A) Sensitivity analysis
B) Expected values
C) Risk
D) Simulation
Q10
It is assumed that the greater the risk of an expected cash flow will result in smaller certainty equivalent values
for payments and higher certainty equivalent value for receipts:
A) True
B) False
PakAccountants.com
Managing Risk
Q11
Which of the following is the advantage of expected value approach:
A) In case of one off investment the expected NPV will never occur.
B) This is all based on subjectivity when it comes to assigning probabilities.
C) It is most used model practically.
Q12
ABC co. is appraising a project having COC of 15% with following cash flows.
Year Cash flows. $

0 (400,000)
1 125000
2 85000
3 100000
4 200000
5 75,000
The discounted pay back is nearest to:
A) 3 years and 5.5 months

B) 3 years and 1 month
C) 4 years
D) 2 years and 1 month
Q13
Discounted pay back is best described as time required to recover initial investment but not in present value
terms:
A) True
B) False
PakAccountants.com
Managing Risk
Q14
Which of the given statement about discounted payback period is not true.
A) It takes into account whole life of the project

B) It takes into account time value of money
C) It is more practical as it uses adjusted rate to reflect risk and uncertainty
Q15
Which of the following is true?
1. Similarity between payback period and discounted payback period is that they both ignore the
cash flows after payback period.
2. Risk can be dealt by minimizing payback period
3. A project can even be acceptable if its payback is greater than project life.
A) 1 and 2
B) 2 and 3
C) 1 and 3
Q16
A company has $500,000 to invest and has identified the following five projects:
Year Capital required ($m) NPV of the project ($m)

1 5 1.4
2 4 1.2
3 3 1.0
4 2 0.8
5 1 0.5
Which project should it select?
A) 1 only
B) 2 and 5
C) 3 and 4
D) 3 and 5
PakAccountants.com
Managing Risk
Q17
A/an _______________ of expected cash flows can usually be estimated and used both for calculation of NPV
and to measure risk.
A) Uncertainty
B) Simulation model.
C) Probability analysis
D) Sensitivity analysis
Q18
Sensitivity analysis is used in capital expenditure evaluations to quantify the:
A) Type of capital that must be committed to an anticipated project

B) Relationship between the payback period and the economic lives of the asset used in a project
C) Reaction within the market to a new product
D) Amount that an assumed factor used in evaluation of a project could be varied and still produce
acceptable results.
Q19
Which of the given is true about simulation model:
A) It can be constructed by assigning a range of random number digits to each possible value for each of
uncertain variable.
B) Is requires that the random numbers must match their respective probabilities.
C) The decision is made upon expected return and risk
D) All of the above
Q20
It is said that payback period is always shorter than discounted payback period and it takes into account lesser
cash flow of the projects.
A) True
B) False
PakAccountants.com
Managing Risk
Answers.
1. A
2. D
3. B
4. D
5. A
6. B
Years Cash flows Discount factor @ Discounted cash flows

10%
0 (550,000) 1 (550,000)
1 300,000 0.909 272700
2 400,000 0.826 330400
NPV 53100
Sensitivity= 53100/550,000 *100=9.65%

7. A
Years Cash flows Discount factor Discounted cash Discount Discounted

@ 10% flows factor @ cash flows.
20%
0 (550,000) 1 (550,000) 1 (550,000)
1 300,000 0.909 272700 0.833 249900
2 400,000 0.826 330400 0.694 229298
NPV 53100 (70802)
IRR= 15% + {(53100/53100+70802)(20-15)}% = 17.14%

Coc=10%
Sensitivity= IRR-COC/COC *100 = 17.14-10/10 *100 = 71.4%
8. A
9. B
10. B
11. D
PakAccountants.com
Managing Risk
12. A
Year Cash flows. $ Discount factor Discounted cash Pay back.

@15% flow
0 (400,000) 1 (400,000) (400000)
1 125000 0.870 108750 (291250)
2 150,000 0.756 113400 (117850)
3 100000 0.658 65800 (52050)
4 200000 0.572 114400 (52050/114400)* 12=
5.5 months.
5 75,000 0.497 37275 -
Discounted pay back= 3 years and 5.5 months.
13. B
14. A
15. A
16. C
17. C
18. D
19. D
20. A
PakAccountants.com
11 Specific Investment Decisions
PakAccountants.com
Q1
Which of the following statement is true about Lease:
A) It is a form of contract regarding the hire of specific asset.

B) Under this lessor has possession and use of asset against payments
C) Under this lessee has ownership of the asset
D) All of the above
Q2
John has been recently appointed as a finance manager and he is still confused whether to go for finance lease
or operating lease for the manufacturing unit required to introduce new production lines. Which of his view
points given is not correct:
1. Operating leases will be more risky for ABC co. as all the risk under this agreement lies with the lessee.
2. Finance lease will transfer most of the risk towards the lessee.
3. Finance lease is an agreement for small part of the life of the underlying asset.
4. Operating lease gives lessor the responsibility for maintaining the leased asset.
A) 1 and 4
B) 1 and 3
C) 2 and 4
D) All of the above
Q3
Hoboo co. entered into a lease agreement under which the term of lease was 5 years and the provided useful
life of the leased asset was 10 years. Asset purchase price was $58000 and the annual lease payments are
agreed to be $4500.hoiw should Hoboo co. now classify this:
A) Finance lease
B) Operating lease
C) Sale and lease back
PakAccountants.com
Q4
Which of the following is not a relevant cash flow for lessee under finance lease agreement:
A) Rental payment
B) Maintenance costs
C) Tax savings on A and B
D) Initial investment to buy asset
Q5
Which of the given statements is not true about operating lease:
A) It covers only a specific part of assets useful life.

B) Lessor is not responsible for maintenance of asset
C) Lessor will not show leased asset in his balance sheet
D) Lessor retains risk and rewards of asset
Q6
Sale and lease back possess the following advantages except for:
A) Business can continue use of assets but can get the funds from the sale
B) Lessor can enjoy tax savings on capital allowances on the purchase of the equipment
C) It is difficult to understand therefore not feasible to implement
D) A and C above
Q7
John has leased an asset to ABC co. and john meanwhile sells the asset to his friend Claire assuming that now
the lease continues between ABC co. and Claire according to sale and lease back agreement. Determine
whether John is right?
A) Yes as it is the case of sale and lease back

B) No as this is not the case of sale and leased back
C) Yes as John has sold the asset and transferred the lease
D) No as John and Claire are friends
PakAccountants.com
Q8
Abc co. calculated the net present value of $58000 for operating a new plant for next 5 years at a given cost of
capital of 12%.Calculate the equivalent annual cost of operating this new plant.
A) $102293
B) $11600
C) $16089
Q9
A machinery has useful life of 4 years and following is the PV of costs over each replacement cycle at given cost
of capital of 8%.
Year Replace each year ($) Replace every 2 Replace every 3

years($) years($)
PV of cost over one (56897) (77889) (99887)
replacement cycle
Identify the optimum replacement policy.
A) Replace every year

B) Replace every 2 years
C) Replace every 3 years
D) A and B above
Q10
Which of the given statement best describes capital rationing?
A) It is described as a situation in which a company faces limited funds and therefore chooses between
the available positive NPV projects.
B) It is described as a situation in which a company faces limited skills and knowledge and therefore
chooses between the available positive NPV projects.
C) It is described as a situation in which a company faces limited availability of positive NPV projects and
therefore need to choose the best possible use of its funds.
PakAccountants.com
Q11
Which of the following is not a reason for soft capital rationing?
A) Management reluctance to issue additional shares because of fear of dilution of EPS

B) Management reluctance to raise debt finance because of high interest payments
C) Management is faced by numerous covenants attached with bank loans
Q12
Levanto Company uses several investment appraisal methods to appraise its available investment projects.
However due to limited capital available company has to choose between the projects. On which of the given
basis it will choose optimum utilization of its limited funds in a single period.
A) Profitability index
B) Internal rate of return
C) Equivalent annual cost method
D) All of the above
Q13
Following projects are available to ZY co. of which it has to choose to invest its available capital of $70,000
Projects Investment ($) PV of cash inflows($) NPV($)

Q (40000) 51340 11340
R (15000) 16547 1547
S (20000) 27678 7678
T (30000) 35678 5678
Based on profitability index rank the projects:
Project Q Project R Project S Project T

A 3 4 1 2
B 2 4 1 3
C 3 2 1 4
D 4 2 1 3
PakAccountants.com
Q14
Considering the above information how much NPV can be generated using capital investment of $70000 if
projects are undertaken as ranked.
A) $17018
B) $19018
C) $13356
D) $20910
Q15
Which of the following is not the assumption for single period capital rationing?
A) Projects are divisible

B) Complete certainty of any of the project cannot be guaranteed
C) Projects cannot be postponed
Q16
Profitability index is useful method of capital rationing however its problem includes:
A) It ignores the absolute size of individual projects resulting in choice of small projects with smaller NPV.
B) It is not effective in case of indivisible projects
C) It is limited in situations where projects have differing cash flows patterns
D) All of the above
Q17
Which of the given is not a type of finance lease agreement?
A) Sale and lease back

B) Indirect lease
C) Leveraged leasing
D) All of the above
PakAccountants.com
Q18
Levanto co. is planning to invest in a machinery costing $45000 with 0 scrape value ans=d a useful life of 5
years. Either the company can purchase or it has an option to lease it for 5 years baring lease rentals of $12000
per annum payable at each year end. Assuming 10% cost of capital and ignoring taxation choose the least cost
financing option.
A) Dont purchase as purchasing is expensive as compare to leasing.

B) Dont Lease machinery as PV of lease costs is higher than purchasing cost
C) Lease machinery as PV of lease costs are lower than purchasing cost
D) Neither lease nor buy
Q19
ABC co. has to choose between the projects. Either it can go for project A whose duration is 5 years and it can
generate NPV of $44m at a discount rate 0f 12%.Or Project B whose duration is 8 years and it can generate NPV
of $66m at the same discount rate. Base on equal annual benefit it must choose:
A) Project A
B) Project B
C) Both of the project
D) None of the project
Q20
Which of the statement is true:
1. Hard capital rationing is linked with internal and external factors

2. Soft capital rationing is more preferable over hard capital rationing
3. In case of indivisible projects single period capital rationing does not produce optimal results.
4. Projects which are required to be postponed cannot be dealt at all in while carrying out capital
rationing.
A) 2 and 3
B) 1 and 3
C) 3 only
D) All of the above
PakAccountants.com
Q21
Hard capital rationing can be removed by:
A) Joint venture
B) Franchising
C) Government grants
D) All of the above
PakAccountants.com
Answers
1. A
2. B
3. B
4. D
5. B
6. C
7. B
8. C
=58000/3.605=$16089
9. C
Year Replace each year ($) Replace every 2 years Replace every 3
($) years($)
PV of cost over one (56897) (77889) (99887)
replacement cycle
Annuity factor @ 8% 0.926 1.783 2.577
(61444) (43684) (38761)
Optimum policy is the one with lowest equivalent cost that is replaceable every 3 years.
10. A
11. C
12. A
13. B
Projects Investment ($) PV of cash NPV($) PI Ranking as

inflows($) per PI
Q (40000) 51340 11340 1.28 2
R (15000) 16547 1547 1.10 4
S (20000) 27678 7678 1.38 1
T (30000) 35678 5678 1.19 3
14. D
Project Q and S will be fully undertaken and Project T which is ranked third will only get $10000 capital
investment hence its NPV generated will be :
Investment in year 0 =10000/30000*100 = 33.33%
NPV = $5678*33.33%=$1892
Total NPV = $ 11340+$7678+$1892=$20910
PakAccountants.com
15. B
16. D
17. B
18. B
Pv of lease costs= 3.791*$12000=$45492 > Purchase @ $45000
19. B
Project A =$44m/3.605=$12.2m
Project B =$66m/4.968=$13.3m
20. C
21. D
PakAccountants.com
12 The Economic Environment for
Business
PakAccountants.com
Business
Q1
Which of the given statement is correct in relation to economic policy?
A) Macroeconomics is concerned with the behavior of individual firms

B) Microeconomics is concerned with the overall economy.
C) Macroeconomic policy effect interest rates which effect borrowing costs.
Q2
Microeconomics relates to:
A) The economy as a whole

B) The specific luxury goods industries.
C) The study of individual economic behavior
D) The interactions within the entire economy.
Q3
A country with higher inflation rate as compare to other trading partners is likely to experience:
A) Expensive exports
B) Expensive imports
C) Cheap exports
Q4
Steady balanced growth is likely to conflict with the macroeconomic policy of?
A) Deficit balance of payment

B) High inflation rate
C) Full employment
D) All of the above
PakAccountants.com
Business
Q5
Government might exercise a policy by stimulating exports to promote economic growth. This is the description
of:
A) Fiscal policy
B) External trade policy
C) Monetary policy
D) Exchange rate policy
Q6
Government might intervene to control fiscal policy with the help of:
A) varying rate of interest

B) Increasing public spending
C) Increasing money supply
D) All of the above
Q7
If government is planning in short run to influence spending on goods and services then monetary policy is
directed at directly influencing:
A) Interest rate
B) Inflation rater
C) Unemployment rates
D) Economic growth rates
Q8
The retail price index is used to measure changes in cost of living:
A) True
B) False
PakAccountants.com
Business
Q9
Government targets of exercising monetary policy includes all except for:
A) Growth in money supply

B) Level of interest rates
C) Level of Taxation
D) Volume of expenditure in the economy
Q10
Government concluded that an increase in interest rate is likely to reduce money supply in the economy
resulting in decreased effective demand which will in turn decrease inflation hence balance of payment is
expected to improve:
A) It is true as higher interest rates encourage savings hence reduced consumer expenditure
B) It is true as higher interest rates will increase mortgage payments hence reduced disposable income
C) It is not a true statement as increase interest rate promotes more loans hence higher disposable
incomes.
D) A and B above
Q11
Supply and demand of a currency is affected by all the given factors except for:
A) Rate of inflation
B) Speculation
C) Balance of payment
D) High population growth rate
PakAccountants.com
Business
Q12
Exchange rate policies are used to:
A) Maintain level of interest rates

B) Control inflation
C) Maintain economic stability
D) Control balance of trade deficit
Q13
Dirty Float system is referred as the one in which
A) The exchange is fixed

B) The exchange rate is fluctuating but between the maximum and minimum allowed limit.
C) The exchange rate is allowed to float but is unofficially controlled by central bank
D) The exchange rate is dependent upon the market forces of demand and supply.
Q14
The demand for UK pound in foreign exchange market is expected to be derived from:
A) Exports from the UK + capital inflows into the country

B) Imports into UK + capital inflows into the country
C) Exports from UK + capital outflows from the country
Q15
Assuming South Africa uses floating exchange system and therefore is not bound to rely upon trade restrictions
to manage its imports.
A) True
B) False
PakAccountants.com
Business
Q16
Which of the given Statements best describes Market failure?
A) It is when market fails to allocates resources efficiently

B) Demand by the consumer does not equate to the quantity supplied by suppliers
C) Optimal allocation of resources is not attained
D) All of the above
Q17
Which of the following will help introducing more competition in the market:
A) Price fixing agreements

B) Deregulation
C) Mergers
D) Oligopoly
Q18
Corporate governance revolves around all of the following except for:
A) Ways the company makes decisions

B) Relations with investors
C) Relations with auditors
D) Munising product prices
Q19
Externalities are defined as an effect either negative or positive effect upon the party who is directly related to
the product:
A) True
B) False
PakAccountants.com
Business
Q20
Deregulation brings several advantages including
A) Improved quality
B) Improved cost efficiency
C) Improved economies of scale
D) Reduce competition
PakAccountants.com
Business
Answers
1. C
2. C
3. A
4. C
5. B
6. B
7. A
8. A
9. C
10. D
11. D
12. D
13. C
14. A
15. A
16. D
17. B
18. D
19. B
20. B
PakAccountants.com
13 Financial Markets and
Institutions
PakAccountants.com
Institutions
Q1
Financial intermediary is the one linking down savers and investors and would provide direct financing.
A) True
B) False
Q2
Which of the given statement is correct:
A) Financial market development is inversely related to economic growth

B) Financial market development is directly related to economic growth
C) Financial market development is no way related to economic growth
Q3
The market which is featured to provide funds for large projects such as helping out in construction of factories,
highways bridges, hospital and schools is known as:
A) Money market
B) Secondary market
C) Primary market
D) Capital market
Q4
Already issued securities are better traded upon:
A) Capital market
B) Open market
C) Negotiated market
D) Secondary market
PakAccountants.com
Institutions
Q5
Which of the given statements are true regarding securities;
1. Negotiable securities can be resold

2. Non-negotiable securities cannot be resold
3. Negotiable securities cannot be resold
4. Non-negotiable securities can be resold
A) 1 and 2 above
B) 1 and 4 above
C) 2 and 3 above
D) 1 only
Q6
Which of the given is false about over the counter market (OTC)
A) Transactions are based on individual negotiations

B) Unlisted stock is usually traded through OTC market
C) Securities are traded by Brokers
D) Prices are publically available hence transparency is ensured.
Q7
The process through which liquid assets are converted into marketable asset backed securities is best known
as:
A) Capitalisation
B) Securitisation
C) Privatisation
D) Covertisation
PakAccountants.com
Institutions
Q8
Which of the given statement is true:
A) A euro currency is a bank deposit in a European currency held outside of Europe.

B) Euro banks are largely unregulated
C) Eurocurrency market are principally concerned with long term lending
Q9
Levanto co. is a large multinational organization with excellent credit rating. It is in need of long term loan for a
big capital expansion program for up to 15 years. Which of the following will be more suitable?
A) Eurobonds
B) Mortgage
C) Treasury bills
D) Repos
Q10
ABC co. enters into a repo agreement at the rate of 5.5%. Under this it plans to sell $555000 government
bonds. IT has attached an obligation concluding that these will be repurchased on 120 days. Calculate the
repurchase price?
A) $4218000
B) $585525
C) $565036
D) $10036
Q11
Treasury bills are best described as:
A) A debt instrument is having maturities ranging from a month to a year.

B) A debt instrument is having maturities ranging up to 270 days
C) A debt instrument is having maturities ranging from 30 to 180 days
PakAccountants.com
Institutions
Q12
Hoboo co. purchased a 160 days treasury bill with a face value of $456000 which is issued for
$416000.Calculate the discount rate?
A) 40%
B) 30%
C) 10%
D) 20%
Q13
Whenever a company enters into a specific agreement with a bank or financial institution a certificate is issued
including terms of agreement. This certificate is known as:
A) Certificate of mutual agreement

B) Certificate of deposit
C) Treasury bills
D) Commercial papers
Q14
Which of the given statement is true?
A) The rate of return on a bond will not necessary be equal to the interest rate of that bond
B) The rate of return will mostly be greater than the interest rate when price of bonds falls between time t
and time t+1
C) Both a and b above
Q15
Identify which of the given is not a discount instrument?
A) Money market deposit

B) Treasury bill
C) Bankers acceptance
D) Commercial paper
PakAccountants.com
Institutions
Q16
What will occur when shareholders are willing to accept lower return on their investment in short term with
the expectation that they will make capital gains in near future?
A) Risk return trade off

B) Reverse yield gap
C) Repos
D) Future
Q17
Derivatives are best described as:
A) Special types of contract that derive its value from its underlying.
B) Special types of contract that drive its value from market variables
C) Special types of contract that derive its value from market forces
D) An interest free contract whose value is pre-determined.
Q18
Which of the given items is form of securities?
A) Share of a multinational company

B) Treasury bills
C) Certificate of deposit
D) All of the above
Q19
It is said that financial markets helps improve economic welfare. Is it true?
A) Yes because financial markets help to move funds from those without productive investment
opportunities to those having such opportunities
B) No, as a huge transaction cost is involved in the whole process.
C) Yes because it allow consumers be more speculative
D) No, as there is no such practical example.
PakAccountants.com
Institutions
Q20
Investment bank is said to be the important financial institution that assists in the initial sale of securities in the
primary market.
A) True
B) False
PakAccountants.com
Institutions
Answers
1. B
2. B
3. D
4. D
5. A
6. D
7. B
8. B
9. A
10. C
Interest= $555000*120/365*5.5%=$10036
Repurchase price= $555000+$10036=$565036
11. A
12. D
A Discount rate= 365/160 * $456000-$416000/$456000=20%
13. B
14. A
15. A
16. B
17. A
18. D
19. A
20. A
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14 Sources of Finance
PakAccountants.com
Q1
Which of the following is an advantage of a short term loan over bank overdraft for the bank?
A) Banks can predict future more certainly as terms and conditions are transparently agreed.
B) Information is obscure
C) Bank cannot ask for securities while lending a short term loan
D) A and b
Q2
ABC co. has borrowed a short term loan to purchase a machinery of $ 56000 at an interest rate of 7% over the
machinery life of 5 years. Calculate annual payment for ABC co. for the loan borrowed.
A) $19600
B) $59920
C) $3920
D) $13659
Q3
Which of the given statements best describes the characteristic of Bank overdraft?
A) Under this Limit is sanctioned by the Bank

B) Under this Amount is sanctioned by the Bank
C) Under this Interest is to be paid whether use the facility or not
D) Bank has no right to increase or reduce the limits as in case of fix term loans.
Q4
Which of the given statements is not true:
A) Bank overdrafts are repayable on demand

B) Ban loans are repayable on demand
C) Trade credit is a form of interest free short term loan
D) B and C above
PakAccountants.com
Q5
Which of the given is an advantage offered to the organization for using debt finance rather than issuing shares
for raising long term finance?
A) It offers tax relief on interest payment

B) It offers easy availability
C) It offers lesser cost if company is 0% geared
D) All of the above
Q6
Which of the given factor will not affect the choice of debt finance?
A) Size of business
B) Past sales analysis
C) Security offered
D) Duration of need
Q7
Under floating charge securities are pledged by specifying type of asset like inventories and not the specific
asset its self:
A) True
B) False
Q8
Which of the given is not a compulsory characteristic of the asset pledged as security?
A) It must be easy to value

B) IT must be easy to realize
C) It must be easy to transfer ownership
D) It is necessary to be a cash item
PakAccountants.com
Q9
Hoboo co. 15% convertible bonds are quoted at $156 per $100 nominal value. They are convertible in 6 years
time at the rate of 25 ordinary shares per $100 .Share price is predicted to be $5.1 now. Annual interest has
just been paid .Find out by how much Share price must change to make this conversion attractive?
A) It must rise by $28.5

B) It must fall by $28.5
C) It must rise by 18%
D) It must fall by 18%
Q10
Which of the given statement is true?
1. Operating lease is one of the same thing to the finance provided as a loan which is then used to buy the
asset needed by effective borrower
2. Warrant is a form of loan note exchangeable for equities at a predetermined price and time at
shareholders discretion
3. Factoring is a form of asset base financing
1 2 3
A True False True
B False True False
C False False True
D True True True
Q11
Convertible loan notes are said to:
A) Form of financial derivative

B) Self-liquidating
C) Useful mean of hedging against risk
D) All of the above
PakAccountants.com
Q12
Which of the statement regarding venture capital proves to be true:
1. It is risk finance used by smaller companies

2. It is provided against equity stake
3. It is not available in case of management buyouts
4. Venture capitalist wants to have their representative appointed to cos board.
1 2 3 4
A True True True True
B False True False True
C False False True False
D True True False True
Q13
Which of the following is not an advantage of stock market listing?
A) Access to a wider pool of finance

B) Growth prospective are enhanced
C) Increased onerous terms
D) Public image effected
Q14
ABC co. has MV of shares $4.It has right issue 1share for every 4 shares on 20% discount to market value.
Calculate theoretical ex right price.
A) $3.84/share
B) $20/.share
C) $19.2/share
D) $3.04/share
PakAccountants.com
Q15
Which of the given statement is true:
A) In case of right issue there is no dilution of control for ex- shareholders

B) Shareholders have right either to exercise right issue or decline it as there is no other option
C) Shareholders dont have to pay for this right issue as it is freely offered as a bonus
D) All of the above
Q16
When a company issues new shares to existing shareholders in proportion to their current holding without any
charge is called:
A) Stock spit
B) Right issue
C) Scrip issue
Q17
Which of the given statement is not true?
A) Stock split does affect the reserves

B) Scrip issue converts equity reserves into share capital
C) Stock split enhance marketability by creating cheaper shares
D) Scrip issue is made out of reserves
PakAccountants.com
Q18
Hoboo co. share capital is 4000,000 shares. It has recently right issue 800,000 new shares and raised funds of
$2,500,000 by which it repaid its loan taken on 12% interest rate .Hoboo co. current Profit after tax is
$1,050,000.Tax rate is 30%.Calculate its old as well as revised EPS after repayment of loan?
Old EPS Revised EPS

A $0.2625 $0.2813
B $26.25 $26.25
C $26.25 $28.13
D $0.2625 $0.2625
Q19
Islamic finance frame work is based on:
1. All parties involves in a transaction cannot make informed decisions without being misled or
cheated
2. Riba is purely prohibited
3. It allows only Pursuing gains without entering into transaction that are forbidden such as
transactions involving alcohol
4. Money provided in the form of deposit is directly loaned
5. Speculation is prohibited
A) 1 ,2 and 5
B) 2 ,3 and 5
C) 2 ,3 and 4
D) All of the above
PakAccountants.com
Q20
Which of the given is the equity mode of finance:
A) Musharaka
B) Murabaha
C) Ijara
D) Sukuk
Q21
A relationship between two or more parties that contributes capital to a business and divide the net profit and
loss on pro rata and it is closely aligned to venture capital concept.
A) Mudaraba
B) Musharaka
C) Murabaha
D) Ijara
Q22
Sukuk is about the finance provider having ownership of the real assets and earning a return sourced from
those assets. Somehow similar to bonds but avoids Riba.
A) True
B) False
Q23
Which of the following is not a characteristic of Ijara finance:
A) It is form of finance lease

B) The lease payments and terms are agreed at the start of the contract
C) The lessor is responsible for maintenance and insurance of assert
D) Provisions can be made to allow lessee to purchase asset at the end of lease
PakAccountants.com
Q24
Islamic finance is based on the concept including all accept:
A) Riba is forbidden
B) Risk and reward shared between investors and users of funds
C) Islamic finance products are completely in compatible with normal financial regulations
D) Money in the form of deposit is not loaned.
PakAccountants.com
Answers
1. A
2. D
Annual payment=$56000/4.100=$13658.5 approx. $13659
3. A
4. B
5. D
6. B
7. A
8. D
9. A
Conversion value= 25*$5.1=$127.5
Conversion premium= $156-$127.5=$28.5
10. C
11. D
12. D
13. C
14. A
4 share * $4=$16
1 share * ($4*0.8)=$3.2
5 shares=$19.2
TERP=19.2/5=$3.84
15. A
16. C
17. A
18. D
Old EPS = $1050,000/$4000,000 * 100 = $0.2625
Revised EPS:
Revised profit= old profit + after tax interest savings on repayment of loan
=$1050,000 +{ ($2500,000* 12%)(1-0.3)}=$1260,000
Revised number of shares= 4000,000+ 800,000=4800,000
Revised EPS= $1260,000/$4800,000=$0.2625
19. B
20. A
21. B
22. A
23. A
24. C
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15 Dividend Policy
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15 Dividend Policy
Q1
Which of the given is not an internal source of finance:
A) Retained earning
B) Trade Credit
C) Working capital efficiency management
D) All of the above
Q2
Which of the given statements is true:
1. Retained earnings bare low issuance cost

2. Retained earnings are flexible source of finance
3. Using retained earnings will not dilute the control of share holders
4. Retained earnings is a form of cash that can simply be invested
1 2 3 4
A True False True True
B False True True False
C True True True True
D False False True False
Q3
Efficient working capital management can:
A) Decrease cash reserves

B) Increase debtor days
C) Reduce bank over draft
D) All of the above
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15 Dividend Policy
Q4
Dividend to be paid must be low as more profit is to be retained when:
A) Need to repay debt in near future

B) There is ease to raise extra finance from other sources
C) Companys liquidity position is improving
D) Companies profitability condition is improving
Q5
Wealth of shareholders is basically represented by:
A) Current Dividends distributed

B) Current Profits generated
C) Current asset value
D) Current market value
Q6
Increased dividend distributed will produce signaling effect showing;
A) Company profits may decrease in near future

B) Company has no positive NPV projects available to invest shareholders funds
C) Company is retaining money for future
Q7
If the companies Investment opportunities with positive NPV projects are exhausted it should only then pay out
dividends. Which of the following defines this?
A) Traditional view theory

B) Irrelevancy theory
C) Residual theory
D) Dividend theory
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15 Dividend Policy
Q8
As per MM theory the value of a company is determined solely by the:
A) Earning power of its assets and investments

B) Retained earnings generated by the assets
C) Dividend payout power of new investments
D) Future prospects of the usage of assets.
Q9
A dividend paid by the issue of additional shares of the company is known as:
A) Simple dividend
B) Delayed dividend
C) bonus dividend
D) Scrip dividend
Q10
Which of the given is not an advantage of scrip dividend:
A) They help preserving company cash position

B) It helps enhancing companies borrowing capacity
C) Transaction cost is incurred but it is low
D) It brings in tax advantage if dividends are inn form of shares
Q11
Shareholders wishing to increase their wealth will be willing to have:
A) High dividends
B) Low dividends
C) No dividends
D) Scrip dividends
PakAccountants.com
15 Dividend Policy
Q12
Identify which of the following is referred to as dead asset:
A) Machinery used on production

B) Building used as office
C) Surplus cash
D) Inventory
Q13
In case of smaller companies share repurchase could be because:
A) There is no immediate purchaser of shares

B) Company production costs are increasing
C) Interest expense is highly increasing
Q14
Retained earnings are best described as:
A) Same as cash in back

B) After dividend cumulative earnings
C) Net profit generated by the company before dividend payment
D) Figure expressing liquidity of a company
Q15
Financial manager of ABC co. assumes that stock split will changed the retained earnings of the company:
A) True
B) False
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15 Dividend Policy
Q16
Hoboo co. has decided to repurchase the shares from the open market .This will result in:
A) Increase in cash balance

B) Increase in number of shareholders
C) Declining EPS
D) Decrease in total assets.
Q17
The payment of Additional shares to shareholders in lieu of cash is known as:
A) Stock dividend
B) Extra dividend
C) Regular dividend
Q18
Repurchase of shares is classified as:
A) Investment decision
B) Dividend decision
C) Financing decision
Q19
The proportion of earnings paid out to common stock holders in form of cash dividend is expressed as;
A) Dividend yield
B) Dividend payout ratio
C) Market share
D) All of the above
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15 Dividend Policy
Q20
Which of the given statement is not true regarding retained earnings?
A) Readily available
B) No arrangement costs
C) Easy to finance large projects even
D) It has its own opportunity cost attached
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15 Dividend Policy
Answers
1. B
2. B
3. C
4. A
5. D
6. B
7. C
8. A
9. D
10. C
11. B
12. C
13. A
14. B
15. A
16. D
17. A
18. C
19. B
20. C
PakAccountants.com
16 Gearing and Capital Structure
PakAccountants.com
Q1
When borrowed funds are used to finance an entitys activities despite the shareholders funds this is known
as:
B) Operational gearing
C) Prior charge capital
D) Financing
Q2
ABC co. is operating clothing business. Recently it has experienced high contribution but low PBIT figure. This
will be result of:
A) High fixed costs

B) High variable costs
C) Low business risk as measured by operational gearing
D) Low fixed costs
Q3
A measure of financial risk which is designed to show risks in terms of profits despite in terms of capital value is
known:
A) Interest yield
C) Interest coverage ratio
D) Price earnings ratio
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Q4
From the given information of Hobo co. calculate prior charge capital ignoring short term debt:
Preference shares $5600

Bonds $480
Bank loans for up to 5 years $560
Bank overdraft $670
Trade payables $567
A) $7310
B) $6180
C) $7877
D) $6640
Q5
Choose the best order of the following sources of finance starting with the cheapest one.
Debentures Preference Retained Loan New

shares earnings stock issue of
shares
A 5 1 2 4 3
B 1 3 4 2 5
C 5 2 4 3 1
D 4 3 2 1 5
Q6
Levanto co. is planning to start new production line for its car manufacturing business. Its Finance manager is
confused whether to go for debt financing or equity financing to raise funds. He has put down three
perspectives. Identify which one is the best possible suggestion:
A) Equity financing is cheapest way to raise funds therefore it will be the most appropriate option
B) As Levanto company is in a healthy competitive position therefore debt financing will be more
appropriate
C) As Operational gearing is low so in order to maintain it Levanto company must go for Equity financing
which will be more appropriate
D) As Levanto companys cash flows are not stable therefore Debt financing will be more appropriate
PakAccountants.com
Q7
If we need to carry out comparison between market price of the share with the earnings per share which of the
given ratio will give the best answer:
A) Dividend cover
B) Dividend yield
C) Interest cover
D) Price earnings ratio
Q8
ABC Company has 400,000 Ordinary shares in issue. It has currently distributed $40000 dividend to its
shareholders. Current Market price/share of ABC co. is 2. Its dividend yield will be:
A) 5%
B) $0.1
C) $5
D) 0.1%
Q9
Dorito co. has debt equity ratio of 2:1.As shown in its balance sheet its debt add upto$65000.What is the value
of total assets of Dorito co.
A) $32500
B) $97500
C) $130,000
PakAccountants.com
Q10
Increase in interest expense of a company indicate that firm has taken:
A) Operating leverage
B) Financial leverage
C) Fixed assets
D) All of the above can be the valid reason
Q11
ABC co. has provided the following information:
Price earnings ratio 14

$
Earning /share(EPS) 0.60
Dividend/share (DPS) 0.40
Calculate its market price of an issued share?
A) $2.80
B) 45.60
C) $8.40
D) $14.10
Q12
Which of the given statement regarding Small entities is not correct:
A) They are mostly not quoted on stock exchange

B) They are owned by small number of individuals
C) They are owner based entities
D) They cannot apply for loans at all therefore all equity financed.
PakAccountants.com
Q13
If a business is planning to raise more debt finance in near future then dividend yield is likely to:
A) Fall in short term

B) Rise in short term
C) First rise than fall
D) Stay stable
Q14
Why SMEs usually face financing problems while raising funds through banks and other potential investors.
A) There information is less publically available as they are unquoted

B) They usually face maturity gap
C) Due to the size investors are usually not able to locate them easily
D) They have short and summarized previous history on which decision is to be based
Q15
The percentage change in Earning per share divided by percentage change in sales will give us the figure
showing:
C) Combined gearing
Q16
If there is high operational gearing then this would mean that there is use of:
A) Additional fixed costs

B) Additional Debt financing
C) Additional variable cost
D) All of the above
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Q17
If there is low financial gearing then this would mean that there is use of;
A) Additional common equity financing

B) Additional debt financing
C) Additional fixed costs
D) All of the above
Q18
Debt capacity is best described as:
A) The amount of debt the company has already raised for a specified time period
B) The least amount of debt the company can raise in specified time period
C) The maximum amount of debt the company can bare to pay in a specified time period
Q19
XYZ co. has 2000m $1 shares in issue and it is willing to raise $ 500 m finance for its new investment. It has two
options to choose from. Either it can sell 250 m share for $ 2 each or it can issue $500 m 10% loan stock at par
to raise the funds. Assuming tax rate to be 30% .Calculate the indifference point between the both options:
A) $78750
B) $450
C) $500
D) $6500
Q20
A small entity may be restricted to raise debt finance because of the following reasons except for:
A) Low credit rating

B) Entity is unwilling to provide collateral
C) Current borrowings are attached with covenants for not borrowing further
D) Entity managers are unaware about how to apply for debt financing
PakAccountants.com
Q21
Small entity face maturity gap. This maturity gap is defined as:
A) Mismatching of debtors and creditors

B) Mismatching of cash inflows and outflows
C) Mismatching of assets and liabilities
Q22
Following information of GHK ltd is provided:
$ $
Operating profit 200
Interest payable 40
Profit on ordinary activities 160
Taxation 35
Profit after tax 125
Dividends-Preference shares 25
-ordinary shares 50 75
Retained profit for the year 50
Calculate interest cover and dividend cover?
Interest cover Dividend cover

A 4 2
B 4 2.5
C 5 2
D 5 2.5
PakAccountants.com
Q23
Maxi co. Balance sheet shows figures as follow:
Debentures $2.5m
Ordinary shares $1.5m
Preference shares $0.5m
Reserves $2.2m
Share premium $0.2 m
Calculate gearing?
A) 39%
B) 43%
C) 77%
D) 147%
PakAccountants.com
Answers.
1. A
2. A
3. C
4. D
= $(5600 + 480 + 560) = $6640
5. B
6. B
7. D
8. A
Dividend Yield= {($40000/400,000) / $2}*100

= 5%
9. A
10. B
11. C
P/E ratio= MPS/EPS

14= MPS/40.60
MPS= $8.40
12. D
13. A
14. C
15. C
16. A
17. A
18. C
19. B
(PBIT-0)(1-0.3)/2250 = (PBIT-50)(1-0.3)/2000
PBIT *0.7*2000=(PBIT-50)*0.7*2250
1400 PBIT= 1575 PBIT -78750
175 PBIT =78750
PBIT = 450
20. D
21. C
22. C
PakAccountants.com
Interest cover = $200/$40 = 5 times
Dividend cover= $125-$25/ $50 = 2 times
23. B
Gearing= Fixed cost capital / Total capital employed *100

= $(2.5+0.5) m/ $(2.5+1.5+0.5+2.2+0.2) m *100
= 43% approximately
PakAccountants.com
17 Cost of Capital
PakAccountants.com
17 Cost of Capital
Q1
Cost of capital can also be described as:
A) Acknowledgment that most new investment projects bares same degree of risk
B) Opportunity cost of finance
C) Opportunity cost of choosing a project
Q2
Which of the following is not the element of cost of capital?
A) Risk free rate of return

B) Premium for business risk
C) Premium for finance risk
D) Opportunity cost of investment
Q3
Which of the given statement is not relevant to financial risk:
A) It relates to liquidity of the company

B) Highly debt financed companies bares greater premium for finance risk
C) It is same as desired rate of return
D) It relates to high gearing levels of a company.
Q4
ABC co. market value is calculated to be $ 15/ share. Its dividend distributed adds up to $1.75/ share .Growth is
assumed to be 3%.calculate Ke?
A) 14.5%
B) 15%
C) 45%
D) 10%
PakAccountants.com
17 Cost of Capital
Q5
ABC co. MV is $4/ share. It has just announced the dividend of 40c / share. The growth rate is assumed to be
7%.Calculate Ke?
A) 17.7%
B) 18.88%
C) 3.6%
D) 7%
Q6
Following information is available:
Dividend distributed 20 c
EPS 80c
Average return 10%
Calculate MV?
A) $8.6
B) $2.17
C) 7.5%
D) $12
Q7
Which of the following is not the weakness of dividend growth model?
A) It ignores incorporation of risk

B) It does not undertake capital gains into account
C) It ignores issuance cost of new shares
D) It is difficult to understand and use practically
PakAccountants.com
17 Cost of Capital
Q8
Which of the following statement is correct:
1. Unsystematic risk arises due to economic circumstances

2. Market risk cannot be eliminated by diversification
3. Unsystematic Risk cannot be diversified
4. Portfolio theory suggests that investors can reduce risk by diversifying portfolio.
1 2 3 4
A False True False True
B True False False False
C False True True False
D True False True True
Q9
The measure of systematic risk of a security relative to market portfolio is known as;
A) Risk free rate of return

B) Volatility
C) Beta factor
D) Premium
Q10
When the security is less sensitive to systematic risk than the market average Beta will be:
A) Equal to one
B) Greater than one
C) Less than one
D) Zero
PakAccountants.com
17 Cost of Capital
Q11
ABC co. has gathered the following data:
Dividends distributed $1.25/share

Growth 3%/annum
Risk free rate 4%
Beta 1.75
ERM 9%
Suggest what must be its Market value using dividend growth model?
A) $13.21/share
B) $5.22/share
C) $14/share
D) $7.32/share
Q12
CAPM assumes that there is linear relationship between the returns obtained from an individual and average
return from all market securities:
A) True
B) False
Q13
A company Ke is calculated to be 10% whereas its Kd(1-t) is 5%.If debt equity ratio is 60%.Calculate its WACC?
A) 7%
B) 8.125%
C) 7.27%
D) 8.6%
PakAccountants.com
17 Cost of Capital
Q14
ABC co. has issued 800,000 10%bonds which are redeemable at par on $100 at the end of 4 years. The required
rate of return is assumed to be 8%.tax rate given is 30%Calculate market value / bond
A) $106.62
B) $$100
C) $99.8
D) $114.67
Q15
Hoboo co. has issued 15% redeemable loan note having market value of $105.They are redeemable at par at
the end of 5 years. Tax rate is assumed to be 30%.Calculate cost of debt of these Loan notes.
A) 12.91%
B) 15%
C) 9.29%
Q16
XYZ co. has issued 12% convertible loan notes having Market value of $101.35. They are redeemable either into
15 shares or cash at par .Tax rate is 30%. Given current ex- dividend market value of share is $6 and it is
expected to grow by 6%.Calculate Kd?
A) 11.35%
B) 10.5%
C) 9.5%
D) 12.5%
PakAccountants.com
17 Cost of Capital
Q17
If in case mistakenly WACC is underestimated it will result in acceptation of:
A) Projects with zero NPV

B) High opportunity cost projects
C) Unprofitable projects
Q18
Which of the given condition is not necessary to be fulfilled while using WACC as discount factor in investment
appraisal?
A) Business risk of the project must be equal to business risk of the entire company
B) Finance risk and business risk must be in equal proportion
C) In case finance risk of the project is not similar to that of the company then WACC can be used only if
project size is smaller as compare to companys size.
Q19
Which of the following is the most preferred method of weighting?
A) Market values
B) Book values
C) Historical values
Q20
Weighted average cost of capital is composed of weighted averages of:
A) Cost of equity and cost of debt

B) Cost of equity , cost of preference stock
C) Cost of preference stock and cost of debt
D) Cost of debt , cost of preference stock and cost of equity
PakAccountants.com
17 Cost of Capital
Q21
ABC co. is deciding between different projects available. If the expected rate of return in the market is 16% and
risk free rate of return is assumed to be 6%.Advice which of the following project must be chosen by ABC co?
Projects Beta Expected

return
A 0.50 11.2%
B 2.50 25.4%
C 1.25 18.3%
D 1.00 15.8%
PakAccountants.com
17 Cost of Capital
Answers:
1. B
2. D
3. C
4. B
Ke= 1.75 (1+0.03)/15 + 0.03

= 15%
5. B
MV = $4-$0.4=$ 3.6
Ke= 0.40 (1+0.07)/3.6 +0.07 = 18.88%
6. A
G=b *r
={1- (0.20/0.80)]* 10% =0.075
MV= 20 + (1+0.075) / ( 10%-0.075)
= $8.6
7. D
8. A
9. C
10. C
11. A
Ke= 4% + $1.75 (9%-4%) + 12.75%

MV = $1.25 (1+0.03)/ 12.75% - 3% = $13.21/share
12. A
13. B
Debt= 60%
Equity 100%
WACC= 10% (100%/160%) + 5% (60%/160%)
= 8.125%
PakAccountants.com
17 Cost of Capital
14. A
Year 1-4 4
Interest 10
Redemption 100
Df@8% 3.312 0.735
PV of future cash 33.12 73.5
flows
Market value 106.62
15. C
Year Cash flow DF @ 10% PV $ DF @5% PV $

$
0 (105) 1.00 (105) 1.00 (105)
1-5 15(1- 3.791 39.8 4.33 45
0.3)=10.5
5 0.621 62 0.784 78
(3.8) 18
apr0x (4)
YTM = 5% + { 18/18 (-4)} * (10%-5%) = 9.29%
16. A
Years Cash flows DF @10% PV $ DF @ 15% PV $

0 (101.35) 1.00 (101.35) 1.00 (101.35)
1-5 12(1-0.3)=8.4 3.791 31.84 3.352 28.16
5 120 * 0.621 74.52 0.497 59.64
5.01 (13.55)
*Higher of cash or conversion value
Conversion value = $6 *(1.06) *15 = $120

Kd (1-t) = 10% + { 5.01 / 5.01 + 13.55 * (15%-10%) + 11.35%
17. C
18. B
19. A
20. D
21. A
Required rate of return= 6% +0.5 (16%-6%)= 11%
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18 Capital Structure
PakAccountants.com
Q1
Which of the following can be used in the capital structure to increase companys value as per traditional view?
A) Equity finance
B) Debt finance
C) Dividends issue
D) All of the above
Q2
As per Modigliani and miller if capital structure changes then WACC will be:
A) Increased
B) Decreased
C) Not influenced
D) Fluctuating
Q3
Which of the given assumption does not relate to traditional view of capital structure theories?
1. Company pays parts of its earnings as dividends

2. Transaction cost is assumed to be Zero
3. Taxation is considered as per the law
4. Business risk is assumed to be constant
1 2 3 4
A True True True False
B False True False True
C True False True False
D False False True True
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Q4
Under traditional view of capital structure theories optimum level of gearing is where the companies WACC is:
A) Minimized
B) Maximized
C) Zero
D) Negative
Q5
Net operating income approach assumes all except for:
A) Perfect capital markets

B) Transaction costs are highly taxed
C) Loans are available on fixed Kd
D) Investors can borrow on Risk free rate
Q6
Which of the following is not the limitation of MM theory with tax?
A) Bankruptcy cost is ignored

B) Agency cost id ignore
C) No Tax exhaustion considered
D) No Tax shield available
Q7
If we allow for the bankruptcy costs, agency costs and tax exhaustion then cost odf capital of the firm will:
A) First fall and then rises with the increasing level of financial leverage
B) Fall with increasing level of financial leverage
C) Rise with increasing level of financial leverage
PakAccountants.com
Q8
As per the net operating income approach one of the critical assumption is:
A) Dividend increases with a constant rate

B) Debt equity ratio is constant
C) WACC is constant regardless of the changes in gearing levels
Q9
Pecking order theory states;
A) Firm must prefer retained earnings upon other sources of finance

B) Other sources of finance except for retained earnings are highly discouraged by Stakeholders
C) Equity is last resort and not to be choose as a source of finance until the firm is about to liquidate
D) All of the above
Q10
Which of the following theories neglects the assumption of existence of optimal capital structure?
A) Mm theory with tax and pecking order theory

B) MM theory without tax and pecking order theory
C) Traditional view and pecking order theory
D) MM theory without tax , traditional view and pecking order theory
Q11
MM theory with tax assumes that increase in gearing levels will result in constantly increasing Market value of
the firm:
A) True , because of increased savings

B) False because of increased savings
C) True because of Rising WACC
D) False because of Declining WACC
PakAccountants.com
Q12
Which of the given relation holds true?
WACC NPV of future Market value

cash flows
A) Decreases Increases Increases
B) Increases Increase Decreases
C) Increases Increases Increases
D) Decreases Decreases Decreases
Q13
Beta of fully equity financed company is lower than the beta of highly leveraged company:
A) True
B) False
Q14
Hoboo co. beta asset is assumed to be 0.96. Its debt equity ratio is 120%.tax rate is 30% .calscultae its beta
equity:
A) 0.4364
B) 2.112
C) 1.7664
D) 0.5217
Q15
Levanto co. beta equity is calculated to be 1.4.Its beta debt is 0.1. Tax rate is assumed to be 30%.Calculate its
beta asset if gearing is 60%:
A) 0.756
B) 0.621
C) 0.683
D) 0.734
PakAccountants.com
Q16
Hoboo co. is planning to enter in a project regarding education industry whose beta asset is 0.790.
For Hoboo co. Gearing level is 40%. Tax rate is assumed to be 30%. Rf is given as 5%.Mraket risk premium is
6%.Kd(1-t) is 6%.
Calculate WACC for to be used for appraising this new project of Hoboo co.
A) 9.57%
B) 8.244%
C) 7.17%
D) 10.14%
Q17
Gearing and ungearing betas has its own short comings including;
A) Difficult to locate proxy companies

B) Assumption of perfect market is nor practical
C) Risk free rate is readily available
D) All of the above
Q18
When does it is suggested to combine CAPM and MM theory:
A) Business risk and finance risk of investment is similar to existing business

B) Business risk and finance risk of investment is differing from the existing business
C) Only Business risk of new investment differs from the existing business
D) Only finance risk of new investment differ from the existing business
PakAccountants.com
Q19
CAPM can be used to compare projects of all differing risk classes therefore superior to NPV;
A) True
B) False
Q20
As per the pecking order theory which order is correct to start with:
A) Internal capital> debt< external capital

B) Internal capital =debt= external capital
C) Internal capital >debt> external capital
D) Internal capital <debt <external capital
PakAccountants.com
Answers
1. B
2. C
3. B
4. B
5. B
6. D
7. A
8. C
9. A
10. B
11. A
12. A
13. A
14. C
0.96 = beta equity * 100 / 120(1-0.30)+100 = 1.7664
15. D
Beta asset = {1.4 * 40/40+60(1-0.3) } + { 0.1 * 60 (1-0.3)/40 + 60 (1-0.3)}
= 0.73
16. A
Gear beta asset of industry with Hoboo co. gearing =0.790= Be * 60 / 60 + 40 (1-0.3)
Be=1.158
Ke = 5% + 1.158 * 6%= 11.952%
WACC = 11.952% (60/100 ) + 6% * (40/100) = 9.57%
17. A
18. B
19. A
20. C
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19 Business Valuation
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Q1
Market capitalization is best described as:
A) Total market value of companies outstanding shares

B) Total market value of companied Fixed assets
C) Total reserves of a company
D) Total market value of authorized share capital of a company
Q2
The net asset valuation method provides with the:
A) Higher limit of a company value

B) Lower limit of a company value
C) Average and most appropriate value of accompany
D) Provides best acquisition bid value
Q3
Which of the following must not be included while calculating net asset value of a company?
A) Land used for production process

B) Machinery used is production
C) Goodwill of the company
D) Patents and copyrights having Market value
Q4
Which of the following value must be most preferable for valuing noncurrent assets under net asset method?
A) Historical cost
B) Replacement value
C) Realizable value
D) Book value
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Q5
Which of the following is the characteristic of merger that does not exist under takeover?
A) Economies of scale achieved due to increased operations

B) Competition is minimized
C) Only one obtains control over the other
D) Achieved by purchase of majority shares
Q6
If a company fails to make the expected earning earnings oir dividend payment than which of the following will
help providing measure of possible loss;
A) Asset replacement
B) Asset backing
C) Retention ratio
D) All of the above
Q7
Halloween co. wishes to bid for an unquoted company, Combo ltd.
Combo ltd. Has 10000 share is issue on which Earnings are $100/ share. Exceptional item (loss) of $120000 has
already been deducted from EPS .Tax rate is assumed to be 30%. Growth in earnings is 10%. ABC is a suitable
competitor whose price earnings ratio is 12 and growth prospects are 5%. Calculate Market value of Combo co.
A) $ 108.4/ share
B) $ 1238/ share
C) $1200 / share
D) $1300.8 / share
PakAccountants.com
Q8
ABC co. earnings per share are 120 cents. Its dividend payout ratio is 20%.Rf is given as 5%.Rm is assumed to be
10%. Beta is 2. Calculate its market value. (Hint; Use Ke as R for growth)
A) 896 cents
B) 8.96 cents
C) 166.3 cents
D) 1.663 cents
Q9
XYZ co. has following profits:
2011 2012 2013 2014

PAT ($m) 8 8.4 8.8 8.8
Its Earning yield is 10%.
Calculate its market value using earning yield valuation method:
A) $90.09m
B) $81.90m
C) $133.97m
D) $82.54m
Q10
Which one of the following is not a cash flow based business valuation model?
A) Dividend valuation model

B) Dividend growth model
C) Discounted cash flow basis
D) Earning yield valuation model
PakAccountants.com
Q11
This model is based on the theory that equilibrium price for any share on stock market is the future expected
stream of income from that security discounted at a suitable cost of capital;
A) Dividend valuation model

B) Dividend growth model
C) Discounted cash flow basis
D) All of the above
Q12
Which of the given assumption of dividend models is not true?
A) Investors are homogeneous as well as rational

B) Directors used dividends for positive signaling effect
C) Discount rate > divided growth rate
D) Discount rate < dividend growth rate
Q13
ABC co. market value of share is $45/ share. Its EPS is $0.45. Given the industry P/E ratio is 13 times. Calculate
MV of shares using P/E ratio and identify the reason for difference of your answer from the given market value:
A) $5.85 / share, companies own P/E ratio is as low as 10%

B) $4.5 / share, no difference with given market value
C) $5.85 / share, Companies own P/E ratio is as high as 20 times
D) $4/share, due to poor performance.
Q14
P/E ratio of quoted company is:
A) Lower than unquoted company

B) Equal to unquoted company
C) Higher than unquoted company
D) Zero
PakAccountants.com
15
P/E ratio in business valuation is not based on discounted cash flows:
A. True
B. False
Q16
Alberto co. has given the following information:
2013 2014
Earning/ Share 3 3.4
Dividends 0.6 0.7
Share price $55 $64
It shows that shares have experienced:
A) Increasing P/E ratio

B) Decreasing P/E ratio
C) Stable P/E ratio
D) Negative P/E ratio
Q17
XYZ is to be purchased by RUG co. RUG co. has bided. It must not accept the offer of XYZ co. below:
A) Asset base value

B) P/E ratio value
C) Dividend growth model value
D) Earning yield value
PakAccountants.com
Q18
Market value of redeemable debt is:
A) PV of future interest payment

B) PV of Future redemption value
C) PV of future interest payment+ PV of future redemptions value
D) PV of future interest payment- PV of future redemption value
Q19
Bob co. Earning/share is 100 cents. Its Dividend/ share is 20 cents. Ke is given to be 15%.D1 is 22 cents.
Calculate market value of Bob co.
A) 440 cents
B) 540 cents
C) 340 cents
D) 500 cents
Q20
Current dividend of Holo co. is $50/ share. Dividend will increase with a growth of 12% for next 3 years. From
year 4 onwards dividends will attain a constant growth of 4%/ year for the foreseeable future. Ke is
10%.Calculate MV of the business.
A) $1067
B) $1111
C) $1007
D) $1000
PakAccountants.com
Answers
1. A
2. B
3. C
4. B
5. C
6. B
7. D
MV of combo co. = P/E ratio * EPS = 100 *12 = $1200

Earnings (10000*$100) = $1000000
Add back exceptional item = $120000(-0.3)
= 1084000
Adjusted EPS =108.4
P/E ratio = 12
Adjusted MV = $1300.8
8. A
Growth = B * R
= (1-20%) * (5% + 2(5%))=12%
Market Value= [(120 *20%) (1+12%)} / 15% - 12%
= 896 cents
9. C
EY =10%
Growth = {3 (8.8/8)}-1= 0.0322 or 3.22%%
Market value = $8.8 * 1.0322 / 0.10-0.0322
=$133.97m
10. D
11. A
12. D
13. A
MV= 0.45 *13 =$5.85/ share > given $4.5 per share because of lower P/E artio od ABC co.
14. C
15. A
16. B
17. A
PakAccountants.com
18. C
19. A
D1 = Do (1+g)
22=20(1+g)
G=10%
MV= 22/(15%-10%)
=440 cents
20. A
50 56 62.72 70.24 (70.24*(1+4%)) / (10%-4%)

= 1217
Ke @10% 1 0.909 0.826 0.751 0.751
50 50.9 51.8 52.75 914
MV= $1067
PakAccountants.com
20 Market Efficiency
PakAccountants.com
Q1
Under which of the following funds are directed towards the firm by financial markets in the most productive
way?
A) Perfect market
B) Operational efficiency
C) Informational processing efficiency
D) Allocative efficiency
Q2
Efficient market is best described as where:
A) Securities are priced quickly and all information is fully reflected

B) All participants have same opportunity to make same return
C) Securities are priced accordingly with their intrinsic values
D) All of the above
Q3
Which of the following is not the relevant feature of an efficient market?
A) Low transaction costs

B) Irrational investors
C) Individuals cant dominate the market
D) Information is available at low or no charges
PakAccountants.com
Q4
Which of the following statement does not support the concept that in an efficient stock market share prices
should vary in a rational way?
A) In case a company make bad investment shareholders will find this out resultantly there will be fall in
share value
B) Rise in interest rate will lead to rise in market prices
C) In case a company make high NPV investment its share price will rise because of better dividend
anticipation
D) A and C above
Q5
Under weak form efficient market decisions are to be based on:
A) Past information
B) Present information
C) Future information
D) All of the above
Q6
Under this form decisions are based on past information as well as current publically floated information:
A) Strong form efficiency market

B) Weak form efficiency market
C) Semi-strong form efficiency market
D) All of the above
PakAccountants.com
Q7
In a strongly efficient market financial managers are most likely to focus upon:
A) Maximizing net present value of companys investment

B) Maximizing current dividend
C) Maximizing investment opportunities even require to undertake low NPV projects
Q8
Efficiency of markets basically depends upon:
A) Availability of market participants

B) Efficiency of market forces
C) Availability of information
Q9
In case of inefficient markets if new information enters the market share price will:
A) Rise
B) Fall
C) First rise than fall
D) Lag in adjustment of share price
Q10
Flexible prices refer to the responsiveness of share prices to new information.
A) True
B) False
PakAccountants.com
Q11
In an efficient share pricing market rationality reflects available information
A) True
B) False
Q12
If relevant information becomes available then semi-strong form market and strong form market difference
concerns when:
A) Share prices changes not by how much share prices eventually change
B) Share prices changes and by how much does it change
C) Share prices are aggressive
Q13
Fundamental theory of share value is based o the theory that:
A) Market price of a share can be derived from a valuation of future Dividends

B) Market price of a s are can be derived from balance sheet
C) Market price of a share can be derived from future investments
Q14
Under which of the following share prices are predicted based upon previous trends?
A) Random walk theory

B) Market capitalizations theory
C) Charting
D) Fundamental theory
PakAccountants.com
Q15
Which of the following is consistent with the concept of fundamental analysis theory?
A) Dividend information theory

B) Charting
C) Technical analysis
D) Random walk theory
Q16
The view that besides efficient markets hypothesis psychological factors and irrational behaviors of investors is
called:
A) Psychological theory
B) Behavioural finance
C) Behavioural economics
Q17
ABC co. assumes that a share price can be expected to fluctuate around its intrinsic value. Which of the
following theory does this imply?
A) Chartism theory
B) Technical analysis
C) Random walk theory
D) Fundamental analysis theory
PakAccountants.com
Q18
Which of the following is not a market anomaly?
A) Earning announcement anomaly

B) January effect
C) Accounting changes effect
D) Short run over reactions
Q19
A company which splits its shares gives investors the expectation that:
A) Earnings and dividends are expected to fall in future

B) Earnings and dividend are expected to grow in future
C) Falling Companies repute
D) Falling Market value of the company
Q20
As per Random walk theory prices:
A) changes over time are dependent

B) Changes over time are independent
C) Changes over time is not expected at all
D) All of the above
PakAccountants.com
Answers
1. D
2. A
3. B
4. B
5. A
6. C
7. A
8. C
9. D
10. B
11. A
12. A
13. A
14. C
15. D
16. B
17. C
18. B
19. B
20. B
PakAccountants.com

F9 Practice Kit 400 Mcqs

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MCQs

By: Sumbal Asif

About the book

A) Sensitivity of profits and cash flows to interest rate fluctuations.

1. Rise in interest rates by the time of maturity

2v8 FRA 8%-10%

A. Bank will pay L co. $ 20000

A) Standardized nature, not tailor made

A) Borrower is always to buy cap

A) Secure better deposit rates

1. They are available for fixed interest rate determined by bank

A) Interest rate swap

Which risk the company faced?

Borrowing rate lending rate

Spot rate given is 1.60-1.61$\

A) They offers lower transaction cost comparatively.

A) Low monitoring cost

A) Maximize earning per share.

A) The fundamental purpose of an organization

What is the EPS for ABC co.?

A) Management accounting function is responsible to work upon internally used information of an

Profit after tax $ 240000

Calculate price earnings ratio

A) The extent to which declared objectives are met

A) Value for money

Dividend cover=pat/ordinary dividend

Dividend yield=dividend per share/market price per share

A) Current assets less long term liabilities

Current ratio Acid test ratio

A) Working capital must decreases as sales increases

A) Increase in sales prices

A) Equal amounts of current assets and current liabilities held by a company

A) Rapid increase on turnover

Trade payable days 56

A) Current assets/Current liabilities

A) Excessive noncurrent assets

A) Accumulation of obsolete inventory

= {(25000+36000)/2} / (760000* 0.75) *365

Current ratio= Current assets / current liabilities = 2.5:1

Cost of sales =5 times *$34000 = $170000

=trade payables/credit purchase

A) An order which is placed too late will result in loss of sales

A) Inventory holding costs are minimized

A) It assumes steady demand of business product

A) Improved customer satisfaction

A) Declining profits due to increased interest expenses

1) In house credit ratings

Its Trade receivables are expected to be received every 30 days.

What will be the closing trade receivables balance?

A) Bad debt management cost is reduced

A) Advances against collection received by bank

A) Satisfactory credit terms

EOQ = (2*30*60000)/0.6 =2449 approx. 2450

Finance cost @ 15% (14625)

Debtor days = $26700/credit sales *360

Usage of inventory per week= 350000/52=6730.7 approx. 6731 units

A) To meet regular commitments of paying regular business transactions.

February 2014 ($) March 2014($)

A) A bonus issue of $ 1 50000 shares

Months Cash $ Credit $

Trade receivables are expected to pay as:

How much cash to be received in April from the sales?

A) Postponing capital expenditure

A) Foreign exchange risk management

EOQ = (23060000)/0.6 =2449 approx. 2450