Finance Quiz - 6 (Financial Management)

1. Which of the following is false with regard to the Internal Rate of Return (IRR) criterion?
[A]It considers the time value of money
[B]It considers the cash flow stream over the entire investment horizon
[C]It remains unaffected by the pattern of cash inflows and outflows
[D]It is the rate of return which equates the present value of cash inflows to the present value of cash outflows



2. Which of the following is/are false regarding capital structure theory as stated by Miller & Modigliani?
[A]If the given assumptions hold, the total market value of the firm is independent of the degree of leverage
[B]If taxes are considered, the combined income of stock holders and debt holders increases when debt capital is used
[C]If bankruptcy costs are considered, the expected cost of bankruptcy increases, when the debtequity ratio increases
[D]Both (b) and (c) above



3. The annual interest cost associated with credit terms of 1/10, net 30 (assuming 360 days in a year) is approximately
[A]12.65%
[B]15.37%
[C]17.18%
[D]18.18%



4. Which of the following is true regarding the effective and nominal rates of interest?
[A]Effective rate of interest is always lower than the nominal interest rate
[B]Given the nominal interest rate, the frequency of compounding does not affect the effective interest rate
[C]Given the nominal interest rate, the effective rate of interest increases with increase in the frequency of compounding
[D]Given the nominal interest rate, the effective interest rate decreases with increase in the frequency of compounding



5. Which of the following statements are true according to the bond value theorems?
I. When the required rate of return is equal to the coupon rate, the value of the bond is equal to its par value.
II. If the required rate of return is less than the coupon rate, the value of the bond is more than its par value.
III. If the required rate of return is greater than the coupon rate, the discount on the bond increases as maturity approaches.
IV. A bonds price is inversely proportional to the yield to maturity (YTM).
V. For a given difference between the YTM and the coupon rate of the bonds, the longer the term to maturity, the lesser will be the change in price with a change in the YTM.
[A](I), (II) and (III) above
[B](I), (II) and (IV) above
[C](I), (III) and (IV) above
[D](I), (II), (III) and (IV) above



6. Which of the following is/are false regarding aggressive financing policy for current assets?
I. The financing mix will be tilted towards equity
II. Risk of technical insolvency will be high
III. The cost of financing tends to be high.
[A]Only (I) above
[B]Both (I) and (II) above
[C]Both (II) and (III) above
[D]Both (I) and (III) above



7. According to the basic Economic Order Quantity model, which of the following assumptions is false?
[A]Demand is uniform over the planning period
[B]Purchase price remains unaltered irrespective of the order size
[C]The delivery is instantaneous
[D]The ordering costs decline with increase in order size



8. Which of the following is not a principle for determining the costs and benefits of projects?
[A]Interest on long term funds must be excluded from the determination of net cash flows
[B]All revenues and costs accrued must be considered as benefits and costs respectively
[C]The cash flows must be determined in incremental terms
[D]All costs and benefits must be measured in terms of cash flows



9. In the true context which of the following is transferred in a Foreign Exchange market?
[A]Currency
[B]Rate
[C]Assets
[D]Purchasing power



10. Which of the following is false regarding a futures market?
[A]Futures contracts are highly uniform and well specified commitments for a carefully described commodity to be delivered at a certain time and in certain manner
[B]It also specifies the quantity and quality of the commodity that can be delivered to fulfill the futures contract
[C]The futures contracts are traded on an organized exchange without standardized terms of contract
[D]The trading is usually done through brokers, as hedgers are not located on the floor of the exchange



11. The balance of payments (BOP) is a record of one country’s trade dealings with the rest of the world. Which of the following statements is false with regard to BOP?
[A]BOP account shows the country’s trading position and changes in its net position as lender or borrower
[B]BOP account shows the changes in a country’s official reserve holding
[C]Current account is a record of investment and payment flows between a country and the rest of the world
[D]A deficit on the current account means that more goods and services have been imported into the country than have been sold abroad



12. Which of the following trade theories focuses on factor endowments of the trading nations?
[A]The Theory of Absolute advantage
[B]The Theory of Comparative advantage
[C]The Heckscher-Ohlin theory
[D]The International Product Life Cycle theory



13. Purchasing Power Parity (PPP) theory states that the exchange rates between two currencies are in equilibrium when their purchasing power is the same in both the countries and is based on the law of one price. Which of the following is false with regard to the law of one price?
[A]There must be competitive markets for the goods and services in both the countries
[B]Transportation and transaction costs can be significant
[C]Transportation and transaction costs are insignificant
[D]The law of one price applies only to tradable goods



14. Covered Interest Rate Parity does not hold good because of which of the following factors?
I. Transaction costs
II. Political risks
III. Taxes
IV. Liquidity preference
V. Capital controls
[A]Both (I) and (II) above
[B]Both (III) and (IV) above
[C]Both (I) and (V) above
[D]All (I), (II), (III), (IV) and (V) above



15. The shares of X Ltd. are quoted at Rs.267. Put options with strike price of Rs.280 are quoting at a premium of Rs.20. What is the intrinsic value and time value of the put option?
[A]Rs.13 and Rs.7 respectively
[B]Rs.20 and Rs.Nil respectively
[C]Rs.Nil and Rs.20 respectively
[D]Rs.7 and Rs.13 respectively