1) All of the following are fundamental sources of uncertainty that make up risk premium, except

a: Inflation Risk
b: Business Risk
c: financial Risk
d: exchange rate

2) Which one of the following is likely to be highest?

a: Marginal cost of capital
b: Cost of Debt
c: Treasury bill rate
d: WACC

3) Focusing on a project’s individual risk and ignoring the fact that a project is a part of firms portfolio of
assets is known
a: Standalone Risk
b: Market
c: Within firm
d: Corporate

4) About risk aversion is true:

a: Risk averse investors will not take on risk
b: give a choice between two assets with equal rate of return, the investor will always select the asset with
the lower level of risk
c: most investors are not risk averse
d: risk aversion implies that the risk return line the CML and the SML and down-sloping curves.

5) A company has $5million in debt outstanding with a coupon rate of 12% currently. The YTM of these
bonds is 14%.if the tax rate is 40%, what is the after tax cost of debt?
a: 14
b: 12
c: 5.6
d: 8.4

6) Which one is true?

a: firms with low price /book value(P/BV) ratios tend to outperform high P/BV ratio firm on a risk adjusted
basis.
b: cash flow figure are typically more stable than earning figure
c: P/BV and price/cash flow (P/CF) ratio should be used in conjunction with price/earning (P/E)ratios in
fundamental analysis
d: all of the above

7) Given the following

i] US interest rate is 6%
ii] the INR/USD spot rate is 40
iii] the INR forward rate is 36 INR/USD
iv] the domestic Indian interest rate is 8%
which of the following is true?
a: capital will flow into India
b: if you borrow USD you will generate arbitrage profit by investing in INR
c: if you borrow INR you will generate arbitrage profit by investing in INR
d: to arbitrage borrow at 6%,convert them to INR and lend the INR out of 8%.
a: III only
b: I & IV only
c: I, II , IV
d: I , II , III

9) Movement along the demand curve result from changes in:

a: disposable income
b: availability of substitutes
c: price of goods
d: demographics such as number of customers.

10) The uncertainty in return on asset due to nature of a firms operation known as:
a: Business Risk
b: financial flexibility
c: financial leverage
d: tax efficiency

11) Modigliani& Miller demonstrated that if corporate taxes and bankruptcy are introduced into an otherwise
perfect world the WACC will:
a: fall then bottom out and then finally start to rise
b: not change across the various level of debt in financial structure
c: rise the plateau and financially stability to fall
d: fall continues as more debt is added to the capital structure

12) Financial leverage magnifies:

a: operating income variability
b: taxes
c: dividend
d: EPS variability

14) If a firm uses debt financing & sales risk from this current level-
a: % change in net income will equal a % change in operating income
b: Earning before interest and tax depends on the interest rate on change on debt
c: the % change in net income will be less than % change in net operating income
d: the % change in net income will be greater than % change in net operating income

15) Reversal of deferred tax liability a/c will mean :

a: cash flow has been lessened by the amount of reversal
b: the actual tax bill is equal to the tax expenses reported in the income statement
c: the actual tax bill is greater than the tax expenses reported in the income statement
d: the actual tax bill is lower than the tax expenses reported in the income statement
16) which is true?
a: financial leverage is directly is directly related to operating leverage
b: a firm with low operating leverage has a small proportion of its total cost in fixed cost
c: increase the personal tax will not affect the capital structure decision
d: a firm with high business risk is more likely to increase its use of financial leverage than firm with low
business risk

17) When investor inflation expectation increases, all else equal the security market line(SML)
a:shift downward in the parallel manner
b: rotate counter clockwise
c: shift upward in the parallel manner
d: rotate clockwise

18) For purpose of financial analysis all of the following should be adjusted with a change in interest rate except:
a: value of dept
b: interest expenses
c: value of equity
d: debt to equity ratio

19) A firm issues a $ 5million zero coupon with a maturity of four years where market rates are 8% proceeds
from the issues are –
a: $ 500000
b: $ 3675149
c: $ 365345
d: $ 4629630

20) Which influences the cost of capital :

a: general economic condition
b: marketability of securities
c: amount of financing the firm requires
d: all of these are correct

21) Which of following regarding the issuance of bonds is true? – Bonds issued at
a: premium will have overstated cash flow from operation (CFO)
b: Discount will have overstated cash flow from financing (CFF)
c: Discount will have overstated cash flow from operation (CF0)
d: Premium will have overstated cash flow from finance (CFF)

22) Hughes continental is assessing its business risk .which factors would not be considered in analysis?
a: unit sales trends
b: unit sales levels
c: input price variability
d: use of preferred stock instead of common financial stock acquisition

23) Evidence that a firm has high business risk would be provided by its volatile:
a: sales
b: PAT
c: operation profit
d: fixed cost

24) Exchange rate for Indian Rs is 40per USD.

Exchange rate for pound is 0.0125 per indian rupees
Calculate Pound / USD exchange rate?
a: 2
b: 0.5
c: 1.5
d: cant say

The consumer price index is best described as :

A) The inflation rate for a given period of time
B) An unbiased estimate of changes in the cost of living
C) A weighed average cost for a basket of goods and services

A profitable company can increase its return on equity (other things equal) by :
A) Decreasing its asset turn over
B) Increasing its financial leverage
C) Decreasing its ratio of EBT to EBIT

The asset beta of a firm equals its equity beta if :

A) The company has no debt
B) The company has no equity
C) The company’s debt equals its equity

Q. 4- When a company is evaluating to mutually exclusive projects that are both profitable but have
conflicting NPV and IRR project ranking, the company should:
A) Accept the project with the highest net present value
B) Accept the project with the highest internal rate of return
C) Use a third method of evaluation such as discounted payback period

Q.5- The required rate of return on an equity security is least likely to

Be affected by the:
A) Real risk : free rate
B) Expected inflation rate
C) Issuer’s effective tax rate

Q 6 – 5.8 % preferred stock with a par value of $ 1000 has an annual yield of 5.4 %. A zero coupon bond
with face value of $ 1000 will mature in three years and has a yield of 4.7 %. Which security has a
highest price today?
A) The preferred stock
B) The zero coupon bond
C) There prices today are equal

Q 7 – Which of the following embedded bond options tends to benefit the borrower?
A) Put option
B) Interest rate cap
C) Conversion option
Q 8 - A lessee has an incentive to report a lease as an operating least rather than a finance lease because
in the initial period , reporting a lease as an operating lease, rather than as a finance lease because in
the initial period, reporting a lease as an operating lease , rather than a finance lease, will result in:
A) Greater total cash flow
B) Higher operating income
C) a lower debt – to- equity ratio.

Q.9- On December 31, pinto company calls its $ 1,000,000, 8% bonds at 101 and reports an extra ordinary
loss of $12,000. Assuming Pinto’s tax rate is 40%. What is the carrying value of the bonds on the call
date?
A) $9,90,000
B) $ 9,98,000
C) $ 1,03,0000

Q.10- Two stocks have identical risks , but one of them offers a higher a expected return than the other
this apparent inefficiency in the market :
A) Indicates that arbitrageurs must be unaware of the mispricing.
B) May persist and even grow larger before any correction occurs.
C) Can only arise when arbitrageurs lack the capital to exploit the situation.

Q.11-The supply of financial capital is most likely to decrease as a result of:

A) Higher rates of interest
B) an increase in current income
C) an increase in expected future income

Q.12- Companies can often co-ordinate economic activity more efficiently than markets because of :
A) Outsourcing
B) Diseconomies of scale
C) A reduction in transactions costs

Q.13) The national government has undertaken a plan to combat a recession that includes a fiscal
stimulate package. The school of economic thought most likely to support this action is the:
A) Classical
B) Keynesian
C) Monetarist

Q.14) According to the quantity theory of money the most appropriate means to combat inflation is to:
A) Reduce the velocity of money
B) Reduce the money supply
C) Increase the excess reserves of banks

Q.15- A company’s pre-tax cost of fixed –rate debt capital equals the company’s new debt:
A) Coupon rate
B) Current yield
C) To yield maturity
Q.16- A 6% US Treasury note is quoted at price of 97.625 on July-1. The bond pays interest semi-annually
on March -31 and September-30. On July-1, The clean price of this bond closest to:
A) $ 946.41
B) $ 976.25
C) $ 991.71

Economies of scale..
- Are dependent upon short run average cost
- Occur when short run average cost fall with large firm size
- Occur when the long run average cost curve is sloping upward

in a purely competitive market, economic losses indicate that,

- Price is below average total cost
- Collusion is occurring in the market place
- Firm need to expand output to reduce cost

What effect will an increase in expected inflation rate most likely to have on aggregate demand and short
run aggregate supply?
- Both will increase
- Both will decrease
- One will increase & one will decrease

Economic profits are zero if,

- Implicit cost = explicit cost
- Economic depreciation = zero
- Total revenue = sum of all opportunity cost

If the inflation in the country to fall below the range targeted by its government, the central bank would
most likely,
- Sell govt securities
- Increase the reserve equipment
- Decrease the overnight or repo rate

Which of the following best explains why a firm's ratio of "long-term debt to total capital" and its ratio
of "income before interest and taxes to debt interest charges" are both lower than the industry average?
The firm:
- has a high ratio of "current assets to current liabilities."
- has a high ratio of "total cash flow to total long-term debt."
- has more short-term debt than average.

For which of the following applications is the usefulness of financial ratio analysis most likely to be
limited? Analysis of:
- different divisions within a conglomerated firm.
- firms with different fiscal years.
- different size firms within the same industry.
- firms with different base years for asset valuation.
Under which of the following circumstances would it be most appropriate to compare performance
between two firms using common size financial statements? When:
- there is a difference in the accounting procedures followed by the different firms.
- there is a large difference in the level of debt between the different firms.
- the firms are in different industries.
- there is a large difference in the level of sales between the different firms.

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25) Option
a: market risk
b: corporate risk
c: stand alone risk
d: Beta

26) which of the following debt issues will have the highest cash flow from financing bond issued at
this :
a: zero coupon
b: bond issued at par
c: bond issued at premium

27) The nominal required rate is determined by the inflation premium the risk premium and the …

28) using the optimal capital structure will

a: max the stock price
b: maximize revenue

29) capitalization of Operation lease will

a: rise in acid test ratio
b: fall in debt equity ratio

30) Premium Bond

a: Coupon rate > C to Y < to M
b: Coupon rate > C to Y > to M
c: Coupon rate = C to Y = to M
d: Coupon rate < C to Y < to M

13) Which is following statement about Arbitrage pricing theory and capital asset pricing model(CAPM)
is false-
a: APT can equal CAPM
b: in both the APT and CPM the risk free rate is added to premium for risk factor(x) and responsiveness
of asset’s return of factor
c: If zero investment arbitrage does not held the APT does not hold
d: APT is a multi factor model with restrictive assumption

8) Additional debt should be used in the firms capital structure if it increases:

a: earning per share
b: firm earning
c: value of the firm
d: dividend yield

For a fixed level of capital, output increases as the quantity of labor increases, but at a decreasing rate.
This phenomenon is most accurately describe by the law of diminishing
- Return on labor
- Return to capital
- Return to technology

Which of the following statement is most likely accurate, money

- Demand rises with nominal interest rate
- Demand rises with nominal income
- Supple rises with nominal interest rates

For a demand pull effect and cost push effect to cause inflation
- The AD curve has to shift in response to a shift of the AS curve
- The cause of shift in AD or AS must be prepared or sustained
- Economic equilliberium must be re-established at a high price level