Finance Objective Test Paper (Financial Management Quiz - 12)

1. Which of the following is/are false regarding capital structure theory as stated by Miller & Modigliani?
I. If agency costs are considered, the expected agency costs increases as the debt-equity ratio decreases.
II. With the given assumptions, there is no optimal capital structure.
III. In the presence of taxes, the market value of the firm decreases by the tax shield of debt.
[A]Only (I) above
[B]Only (II) above
[C]Both (I) and (II) above
[D]Both (I) and (III) above


2. Which of the following may cause a reduction in the economic order quantity for a firm when other things are held constant?
[A]An increase in carrying cost as a percentage of unit price
[B]An increase in the fixed ordering cost per order
[C]An increase in the purchase price of the inventory items
[D]Increasing the delivery time of the materials


3. Which of the following is true with regard to supplier’s line of credit?
[A]It is similar to the letter of credit issued by banks
[B]It is the deferred credit facility offered by the suppliers of machineries
[C]It is a credit facility offered by the banks to meet the working capital requirements
[D]It is an interest free credit offered by the government to promote industrial development in the backward areas


4. Which of the following statements is true if the net present value (NPV) of a project is positive?
[A]Internal rate of return(IRR) is more than the cost of capital
[B]The pay-back period of the project is less than one year
[C]The discount rate is equal to the risk free rate of return
[D]Benefit cost ratio is less than unity


5. A Commercial Paper (CP) with a face value of Rs.25,00,000 is issued at a discounted value of Rs.24,03,846. The term and the rate of the CP respectively are
[A]3-month and 8%
[B]3-month and 16%
[C]6-month and 12%
[D]9-month and 8%


6. A company has retained earnings of Rs.72 lakhs and equity capital of Rs.38 lakhs. If the equity investors expect a rate of return of 17% and the cost of issuing fresh equity is 6%, the cost of the retained earnings to the company is
[A]16.4%
[B]17.0%
[C]17.7%
[D]18.1%


7. Average Daily Usage (Units) Probability
600 0.6
800 0.4
Lead Time (No. of days) Probability
4 0.3
6 0.7
Normal consumption during lead time will be
[A]1776 units
[B]2720 units
[C]3672 units
[D]4080 units


8. The rates available in the market are:
Rs./$ Spot 43.78 / 79
£/$ 0.5285 /86
If an Indian importer requires pounds, the rate quoted to him is
[A]Rs.82.82/£
[B]Rs.82.72/£
[C]Rs.82.79/£
[D]Rs.82.86/£


9. Which of the following is not a feature of futures contract?
[A]Standard volume
[B]Liquidity
[C]Customized maturity
[D]Counterparty guarantee


10. An ageing schedule gives particulars about
[A]Profit and present value
[B]Accounts receivable and proportion of sales
[C]Employees and age of their service
[D]Age-wise distribution of accounts receivable


11. Which of the following is not a merit of using book values as weights for calculating the weighted average cost of capital?
[A]The book value weights are independent of the fluctuations of the market prices
[B]The calculation of weights is simple
[C]The book values of the different sources of finance are approximately related to their present economic values
[D]The book value weights are suitable for a firm whose securities are not traded regularly


12. Which of the following appraisal methods is preferred for comparing mutually exclusive projects providing similar service but have unequal life spans?
[A]Annual capital charge
[B]IRR
[C]NPV
[D]Accounting rate of return


13. The discount yield on a 90 day US T-bill futures of size $ 1,000,000 traded at $992,420 is
[A]2.95%
[B]3.03%
[C]3.06%
[D]3.20%


14. Which of the following is/are important principles do not underlie the measurement of costs and benefits of a project?
[A]All costs and benefits must be measured in terms of cash flows
[B]Interest on short-term loans must not be included for determining the net cash flows
[C]Interest on long-term loans must not be included for determining the net cash flows
[D]The cash flows must be measured in incremental terms


15. An Indian exporter bought put option on dollar at Rs.46.50 by paying a premium of Rs.0.On the date of delivery if spot rate is Rs.46.75, then the net amount realized per dollar will be (ignore time value of money)
[A]Rs.46.20
[B]Rs.46.45
[C]Rs.46.50
[D]Rs.46.75