CA-1
Question 1
Which of the following is NOT an advantage of DCF techniques?
Response: [none]
Correct answer: The cost of capital may change over the life of the investment
Question 2
A project is being considered that would require 500 skilled labour hours. The
current labour force is fully employed and would have to be taken off-work that is
currently contribution of $12 per hour. The current workers are paid at the rate of $10
per hour. What is the relevant cost of labour to be included in the project appraisal ?
Response: [none]
Correct answer: $11,000
Question 3
Which of the following is a difference between primary and secondary capital
markets?
Response: Primary capital markets relate to the sale of new securities, while
secondary capital markets are where securities trade after their initial offering
Correct answer: Primary capital markets relate to the sale of new securities, while
secondary capital markets are where securities trade after their initial offering
Question 4
Initial Investment $110,000; annual cash flows $24,400; scrap value at end of 5
years is $10,000. What is the project's ROCE using initial capital costs method?
Response: 4%
Correct answer: 4%
Question 5
The real cost of capital for a company is 8% p.a. and the general inflation rate is 5%
p.a. At what rate of interest would the nominal cash flows of a project be discounted?
Response: 13.40%
Correct answer: 13.40%
Question 6
Value for money can be defined as getting the best possible combination of services
from the least resources, which means maximising the benefits for the lowest
possible cost. Which of the following is not a criteria for achieving Value?
Response: Etiquettes
Correct answer: Etiquettes
Question 7
Which of the following does not consider Time Value of Money?
Response: Payback Period
Correct answer: Payback Period
Question 8
Which of the following government actions relate predominantly to fiscal policy?
Response: Borrowing money from the capital markets and spending it on public
works
Correct answer: Borrowing money from the capital markets and spending it on
public works
Question 9
$3,000 is to be received in one year's time. It then grows by 2% every year in
perpetuity. What is the present value if the discounting factor is 10%?
Response: $37,500
Correct answer: $37,500
Question 10
Which of the following is relevant for discounted cash flow project appraisal?
Response: [none]
Correct answer: Opportunity Costs
Question 11
A company is forecasting sales of 10,000 units per annum for each of the next 5
years. The selling price per unit is $5 per unit (at current prices) inflating at the rate
of 5% per year. They require Working Capital at the start of each year to be 10% of
the sales revenue for the following 12 months. What will be the Working Capital cash
outflow at time 2?
Response: [none]
Correct answer: $275
Question 12
A project is expected to earn $5,000 per year (at current prices) in perpetuity,
inflating at 4% per year. The first receipt will be in one year's time. The cost of capital
is 12%. What is the PV of the receipts (to the nearest $100)?
Response: $65,000
Correct answer: $65,000
Question 13
A payment of $3,600 is to be made every year for 7 years, the first payment being
made at the end of the first year. What is the PV of the Annuity if the rate of interest
is 8%?
Response: $18,742
Correct answer: $18,742
Question 14
Which of the following is NOT a relevant cash flow?
Response: Allocated costs
Correct answer: Allocated costs
Question 15
Which of the following statements is NOT true?
Response: Payback is often used as a "first screening" method in investment
appraisal.
Correct answer: Payback method takes into account the profits earned after the
payback period
Question 16
Which of the following is an example of a relevant cash flow to be considered in an
investment appraisal process for a new project?
Response: Additional tax that will be paid on extra profits generated
Correct answer: Additional tax that will be paid on extra profits generated
Question 17
A company wants to prepare a Budget for the forthcoming year. Which of the
following approaches would result in achieving maximum goal congruence?
Response: [none]
Correct answer: Let the Senior management and Div Managers jointly develop the
goals and allow the Div Managers to plan for its implementation
Question 18
Which of the following statements is NOT true?
Response: The ROCE method of investment appraisal takes into account the length
of the project
Correct answer: The ROCE method of investment appraisal takes into account the
length of the project
Question 19
In relation to a long term lease, which of the following is NOT correct?
Response: [none]
Correct answer: The lessor will be responsible for repairs and maintenance of the
leased asset
Question 20
Which of the following would you expect to be the responsibility of financial
management ?
Response: [none]
Correct answer: Advising on investment in non‐current assets
Question 21
A project involves an initial investment of $1,200,000. Annual cash flows from the
project are likely to be $350,000. What will be the payback period in years and
months?
Response: [none]
Correct answer: 3 years and 6 months
Question 22
If a machine with annual running costs of $100,000 was diverted from producing
output selling for $50,000 to producing a special order worth $70,000, what would be
the "relevant" costs to be considered?
Response: [none]
Correct answer: $50,000
Question 23
Which of the following is an example of a financial objective that an entity should
choose to pursue?
Response: [none]
Correct answer: Restricting the level of borrowings to a particular level
Question 24
Which of the following is NOT typically a principal objective of macroeconomic
policy?
Response: [none]
Correct answer: To achieve a balance of payments deficit
Question 25
A company has a "monetary" cost of capital of 21% p.a. The general rate of inflation
is estimated at 8%. What is the "real" rate of cost of capital?
Response: [none]
Correct answer: 12%
Question 26
By having business in different countries, which of the following is reduced by an
entity?
Response: [none]
Correct answer: Political Risk
Question 27
Which of the following is incorrect in relation to managing performance of Not For
Profit Organization ?
Response: [none]
Correct answer: Efficiency means doing things quickly: minimising the amount of
time that is spent on a given activity.
Question 28
The lower risk of a project can be recognised by increasing which of the following ?
Response: [none]
Correct answer: The estimates of future cash inflows from the project
Question 29
Which of the following statements is NOT correct?
Response: [none]
Correct answer: The IRR method is superior for ranking mutually exclusive projects
Question 30
Which of the following involves tracking trend, sequence of events or streams of
activities ?
Response: Monitoring
Correct answer: Monitoring
Continuous Assessment – 2
Question 1
Which of the following is a drawback of the Payback Period method of investment
appraisal?
Response: It is profit based
Correct answer: It does not measure the potential impact on shareholder wealth
Question 2
EOQ minimizes which of the following ?
Response: Total Ordering Cost
Correct answer: Total Inventory Maintenance Cost
Question 3
Which of the following tasks will be carried out by a member of the financial
management team?
Response: Evaluating proposed expansion plans
Correct answer: Evaluating proposed expansion plans
Question 4
The following data has been calculated for BB Company. Receivables 58 days;
Inventory turnover:10 times per annum; Payable: 45 days; Non-Current Asset: 36
days. What is the length of the cash operating cycle?
Response: 23 days
Correct answer: 49.5 days
Question 5
X Company is considering investment in a new 40 year project which will require an
investment of $50,000 (with 0 scrap value) and has a payback period of 20 years.
The 40-year prroject has consistent cash flows each year. What is the return on
capital employed?
Response: 5%
Correct answer: 5%
Question 6
In ABC inventory management system, Class A items will require which of the
following?
Response: Higher safety stock
Correct answer: Higher safety stock
Question 7
Which of the following is NOT a feature of current assets?
Response: Longer Life
Correct answer: Longer Life
Question 8
Which of the following might be associated with a shortening working capital cycle?
Response: [none]
Correct answer: Taking longer to pay suppliers
Question 9
Which of the following statements about NPV and IRR is accurate?
Response: Two NPV calculations are needed to evaluate the IRR using linear
interpolation
Correct answer: Two NPV calculations are needed to evaluate the IRR using linear
interpolation
Question 10
Which of the following is NOT a benefit of carrying inventories ?
Response: Reducing carrying cost
Correct answer: Reducing carrying cost
Question 11
In response to market expectations, the credit period has been increased from 45
days to 60 days. What would this result in?
Response: Increase in average collection period
Correct answer: Increase in average collection period
Question 12
A school decides to have larger classes, and examination results suffer as a
consequence. In terms of "value for money" framework, which one of the following
statements is True?
Response: Economy has increased but efficiency has decreased
Correct answer: Efficiency has increased but effectiveness has decreased
Question 13
The lower risk of a project can be recognized by increasing which of the following?
Response: The estimates of future cash inflows from the project
Correct answer: The estimates of future cash inflows from the project
Question 14
Shadow Company has a monetary cost of capital of 10%. If inflation rate is 4%,
what is the real cost of capital?
Response: [none]
Correct answer: 5.80%
Question 15
What is Permanent Working Capital also known as?
Response: Fixed Working Capital
Correct answer: Fixed Working Capital
Question 16
Which of the following statement is correct?
Response: Financial objectives should be qualitative so that their achievement can
be measured
Correct answer: Shareholder wealth maximization is the primary financial objective
for a company listed on a stock exchange
Question 17
What is the main purpose of Corporate Governance?
Response: To facilitate effective management of organizations and to make
organizations more visibly accountable to a wider range of stakeholders
Correct answer: To facilitate effective management of organizations and to make
organizations more visibly accountable to a wider range of stakeholders
Question 18
What is cost of NOT carrying sufficient inventory known as?
Response: Stock-out Cost
Correct answer: Stock-out Cost
Question 19
Sid Company wishes to undertake a project requiring an investment of $732,000
which will generate equal annual cash inflows of $146,400 in perpetuity. If the first
inflow from this investment is a year after the initial invesment, what is the payback
period?
Response: 5 years
Correct answer: 5 years
Question 20
Gross Working Capital is equal to which of the following?
Response: Total Current Assets
Correct answer: Total Current Assets
Question 21
Payment to creditors is a manifestation of cash held for what purpose?
Response: Transaction motive
Correct answer: Transaction motive
Question 22
Which of the following is true for a company which uses continuous review inventory
system?
Response: Order interval varies
Correct answer: Order interval varies
Question 23
80% of sales of $1,000,000 of a firm are on credit. It has a receivable turnover of 8.
What is the average collection period and average debtors of the firm? Assume 360
days.
Response: 45 days and $100,000
Correct answer: 45 days and $100,000
Question 24
In relation to a long term lease, which of the following statements is NOT true?
Response: The lessor will be responsible for repairs and maintenance of the leased
asset
Correct answer: The lessor will be responsible for repairs and maintenance of the
leased asset
Question 25
Which of the following is NOT included in the cost of Inventory?
Response: Selling Cost
Correct answer: Selling Cost
Question 26
Which of the following is typically a benefit of a shorter replacement cycle?
Response: Lower annual depreciation
Correct answer: Better company image and efficiency
Question 27
If there is no inflation during a period, then the monetary cash flow would be equal
to which of the following?
Response: Real Cash Flow
Correct answer: Real Cash Flow
Question 28
Management of Working Capital implies trade-off between which of the following?
Response: Liquidity and Profitability
Correct answer: Liquidity and Profitability
Question 29
If the average balance of debtors has increased, which of the following might not
show a change in general?
Response: Average Payables
Correct answer: Average Payables
Question 30
A lease agreement has a net present value of -$26,496 at a rate of 8%. The lease
involves an immediate down payment of $10,000 followed by four equal annual
payments. What is the amount of annual payment?
Response: $4,981
Correct answer: $4,981
Question 31
What is the main advantage of using simulations to assist in investment appraisal?
Response: More than one variable can change at a time
Correct answer: More than one variable can change at a time
Question 32
Which of the following is not a part of credit policy?
Response: Paying practices of Debtors
Correct answer: Paying practices of Debtors
Question 33
Which of the following is potentially a benefit to the lessee if they lease an asset as
opposed to buying the asset?
Response: Exploiting a low cost of capital
Correct answer: Avoiding tax exhaustion
Question 34
When considering standard deviation as a statistical measure, which of the following
statements is True?
Response: Standard deviation is a measure of variability of a distribution around its
mean
Correct answer: Standard deviation is the weighted average of all possible
outcomes
Question 35
Inventory is generally valued as lower of which of the following?
Response: Cost and Net realizable Value
Correct answer: Cost and Net realizable Value
Question 36
In which of the following the permanent working capital is financed by long term
source of funds?
Response: Conservative approach
Correct answer: Hedging approach
Question 37
Which of the following statement is the correct one?
Response: If capital is rationed, divisible investment projects can be ranked by the
profitability index when determining the optimum investment schedule.
Correct answer: If capital is rationed, divisible investment projects can be ranked by
the profitability index when determining the optimum investment schedule.
Question 38
A company is considering investing in a 2 year project. Machine set-up costs will be
$125,000 payable immediately. Working capital $4,000 is required at the beginning
of the contract and will be released at the end. If cost of capital is 10% what is the
minimum acceptable contract price to be received at the end of the contract?
Response: $152,000
Correct answer: $152,000
Question 39
Which of the following is an example of financial objectives that a company might
choose to pursue?
Response: Earning above a particular level of returns on capital employed
Correct answer: Earning above a particular level of returns on capital employed
Question 40
Tom's cash budget shows a short term surplus in the near future. Which of the
following actions would be appropriate to make use of the surplus?
Response: Pay supplier's earlier to take advantage of early payment discounts
Correct answer: Pay supplier's earlier to take advantage of early payment discounts
Question 41
Parker Industries is analysing a $200,000 project. A study of expected annual cash
flows for next 5 years shows : After Tax Cash Flows as $45,000 $50,000 $55,000
$60,000 $65,000 $70,000. Their respective probabilities are: 0.10, 0.20, 0.30, 0.20,
0.10 and 0.10. If Parker utilizes a 14% hurdle rate, the probabaility of achieveing a
positive NPV is best found by utilizing which of the following ?
Response: Sensitive Analysis
Correct answer: Simulation Analysis
Question 42
ABC analysis is used in which of the following?
Response: Inventory Management
Correct answer: Inventory Management
Question 43
Which of the following is NOT an advantage of the IRR system?
Response: It is a measure of absolute return
Correct answer: It is a measure of absolute return
Question 44
Which of the following best describes overtrading?
Response: Shorter liquidity
Correct answer: Relevant
Question 45
A project has the following cash flows: Year 0 Outflow $110,000. Year 1-4 Inflow
$40,000. At the cost of capital of 10%, the NPV of the project is $16,800. Applying
sensitivity analysis, what percentage change in the cost of capital would result in
project NPV being 0?
Response: [none]
Correct answer: 70%
CA-3
Question 1
Permanent Working Capital is also known as ?
Response: Fixed Working Capital
Correct answer: Fixed Working Capital
Score: 1 out of 1 Yes
Question 2
"Constant Dividend per Share" is considered as which of the following?
Response: Stable dividend payment
Correct answer: Stable dividend payment
Score: 1 out of 1 Yes
Question 3
Which of the following cost of capital requires tax adjustment ?
Response: Cost of Debentures
Correct answer: Cost of Debentures
Score: 1 out of 1 Yes
Question 4
Which is the best definition of a basis risk?
Response: Interest rates on deposit and on loans are revised at different times.
Correct answer: Interest rates on deposit and on loans move by different amounts
Score: 0 out of 1 No
Question 5
Which of the following is NOT a motive to hold cash?
Response: Capital Investment
Correct answer: Capital Investment
Score: 1 out of 1 Yes
Question 6
Miller Orr cash model deals with which of the following?
Response: Optimum cash balance
Correct answer: Optimum cash balance
Score: 1 out of 1 Yes
Question 7
Which of the following is not the role of a Stock Market?
Response: Involve in speculative trading on behalf of investors
Correct answer: Involve in speculative trading on behalf of investors
Score: 1 out of 1 Yes
Question 8
The agency problem is a driving force behind the growing importance attached to
sound corporate governance. In this context who are the agents?
Response: Managers
Correct answer: Managers
Score: 1 out of 1 Yes
Question 9
Which of the following is correct in the case of Stock Dividend?
Response: Market price per share decreases
Correct answer: Market price per share decreases
Score: 1 out of 1 Yes
Question 10
What does purchasing power parity refer to?
Response: Exchange rate movements will absorb inflation differences
Correct answer: Exchange rate movements will absorb inflation differences
Score: 1 out of 1 Yes
Question 11
Which of the following is the most appropriate definition of cost of capital?
Response: Minimum rate of return that the firm should earn
Correct answer: Minimum rate of return that the firm should earn
Score: 1 out of 1 Yes
Question 12
In sensitivity analysis, the emphasis is on assessment of which of the following?
Response: Net Present Value
Correct answer: Net Present Value
Score: 1 out of 1 Yes
Question 13
Which of the following statements is correct?
Response: Currency swaps can be used to hedge exchange rate risk over longer
periods than the forward market
Correct answer: Currency swaps can be used to hedge exchange rate risk over
longer periods than the forward market
Score: 1 out of 1 Yes
Question 14
Which of the following is a drawback of the payback period method?
Response: It doesn't measure the potential impact on shareholders wealth
Correct answer: It doesn't measure the potential impact on shareholders wealth
Score: 1 out of 1 Yes
Question 15
Feasibility set approach to Capital Rationing can be applied to in which of the
following?
Response: Accept-Reject situation
Correct answer: Accept-Reject situation
Score: 1 out of 1 Yes
Question 16
Which of the following has the highest cost of capital?
Response: Equity shares
Correct answer: Equity shares
Score: 1 out of 1 Yes
Question 17
The current spot rate for the US dollar / Euro is $/€ 2.000 +/- 0.003. The dollar is
quoted at a 0.2c premium for the forward rate. What will a $2,000 receipt be
translated to at the forward rate?
Response: €999.50
Correct answer: €999.50
Score: 1 out of 1 Yes
Question 18
What is EOQ?
Response: Optimum order size
Correct answer: Optimum order size
Score: 1 out of 1 Yes
Question 19
Which of the following statements is correct?
Response: Securitisation is the conversion of illiquid assets into marketable
securities
Correct answer: Securitisation is the conversion of illiquid assets into marketable
securities
Score: 1 out of 1 Yes
Question 20
What does cost of capital refer to?
Response: Required rate of return
Correct answer: Required rate of return
Score: 1 out of 1 Yes
Question 21
In case of mutually exclusive proposals, which is the correct statement?
Response: Only the best project is selected
Correct answer: Only the best project is selected
Score: 1 out of 1 Yes
Question 22
The shape of the yield curve at any point in time isthe result of three theories acting
together. Which of the following theories does NOT influence the yield curve?
Response: Flat yield theory
Correct answer: Flat yield theory
Score: 1 out of 1 Yes
Question 23
Cash operating cycle can be shortened by which of the following?
Response: Increasing credit period from suppliers
Correct answer: Increasing credit period from suppliers
Score: 1 out of 1 Yes
Question 24
Which of the following is correct with respect to "Intermediation"?
Response: "It refers to the process whereby potential borrowers are brought
together with potential lenders by a third party"
Correct answer: "It refers to the process whereby potential borrowers are brought
together with potential lenders by a third party"
Score: 1 out of 1 Yes
Question 25
Which of the following is not considered by Miller Orr?
Response: Total annual requirement of cash
Correct answer: Total annual requirement of cash
Score: 1 out of 1 Yes
Question 26
Which of the following is NOT a feature of current assets?
Response: Longer Life
Correct answer: Longer Life
Score: 1 out of 1 Yes
Question 27
Which of the following statements is correct?
Response: A financial intermediary links those with surplus funds to those with fund
deficits
Correct answer: A financial intermediary links those with surplus funds to those with
fund deficits
Score: 1 out of 1 Yes
Question 28
If a business benefits from GAP exposure, what does it mean?
Response: The timing of interest rate movements on deposits and loans means it
has made a profit
Correct answer: The timing of interest rate movements on deposits and loans
means it has made a profit
Score: 1 out of 1 Yes
Question 29
Which of the following is the least likely reason for seeking a stock market listing ?
Response: Improving existing owners' control over the business
Correct answer: Improving existing owners' control over the business
Score: 1 out of 1 Yes
Question 30
Working capital management involves financing and management of which of the
following?
Response: Receivables and Payables
Correct answer: All Current Assets
Score: 0 out of 1 No
Question 31
Shares of face value $10 are 80% paid up. The company declares a dividend of
50%. What is the amount of DIvidend per share?
Response: $4
Correct answer: $4
Score: 1 out of 1 Yes
Question 32
In capital budgeting, the term Capital Rationing implies which of the following?
Response: That limited funds are available for investments
Correct answer: That limited funds are available for investments
Score: 1 out of 1 Yes
Question 33
What is the reason for debt financing to be a cheaper source of finance?
Response: Tax deductibility of interest
Correct answer: Tax deductibility of interest
Score: 1 out of 1 Yes
Question 34
What is the system of procuring goods when required known as ?
Response: Just in Time
Correct answer: Just in Time
Score: 1 out of 1 Yes
Question 35
Which of the following is the basic characteristic of short term marketable
securities?
Response: High marketability
Correct answer: High safety
Score: 0 out of 1 No
Question 36
The €/$ exchange rate is €1 : $2. ABC company, a Eurozone company makes a
$1,000 sale to a US customer on credit. By the time the customer pays the euro has
strengthened by 20%. What will be the euro receipt?
Response: €416.67
Correct answer: €416.67
Score: 1 out of 1 Yes
Question 37
NPV technique is based on which of the following?
Response: Discounting procedure
Correct answer: Discounting procedure
Score: 1 out of 1 Yes
Question 38
Dividends are paid out of which of the following?
Response: Profit after tax
Correct answer: Accumulated Profits
Score: 0 out of 1 No
Question 39
Every company should follow which of the followin?
Response: Stable dividend payment
Correct answer: Stable dividend payment
Score: 1 out of 1 Yes
Question 40
If there is no inflation during a period, then the monetary cash flow would be equal
to which of the following?
Response: Real Cash Flow
Correct answer: Real Cash Flow
Score: 1 out of 1 Yes
Question 41
Which of the following is generally not an accepted approach for calculation of cost
of equiy?
Response: Rate of preference dividend plus risk
Correct answer: Rate of preference dividend plus risk
Score: 1 out of 1 Yes
Question 42
A firm has inventory turnover of 6 and cost of goods sold is $750,000. With better
inventory management, the inventory turnover is increased to 10. What would it
result in?A firm has inventory turnover of 6 and cost of goods sold is $750,000. With
better inventory management, the inventory turnover is increased to 10. What would
it result in?
Response: Decrease in inventory by $50,000
Correct answer: Decrease in inventory by $50,000
Score: 1 out of 1 Yes
Question 43
Ageing schedule incorporates the relationship between which of the following?
Response: Debtors and days outstanding
Correct answer: Debtors and days outstanding
Score: 1 out of 1 Yes
Question 44
International capital markets are available for larger companies wishing to raise
larger amounts of finance. Which of the following statements is incorrect?
Response: Eurobonds are short term loans raised by international companies or
other institutions
Correct answer: Eurobonds are short term loans raised by international companies
or other institutions
Score: 1 out of 1 Yes
Question 45
Cash Budget does not include which of the following?
Response: Total Sales
Correct answer: Total Sales
Score: 1 out of 1 Yes
Question 46
Investment banks are sometimes also referred to as which of the following?
Response: Merchant Banks
Correct answer: Merchant Banks
Score: 1 out of 1 Yes
Question 47
Which of the following is not relevant for dividend payment for a year?
Response: Retained Earnings
Correct answer: Paid up capital
Score: 0 out of 1 No
Question 48
In the EOQ model, which of the following is correct?
Response: EOQ will increase if order cost increases
Correct answer: EOQ will increase if order cost increases
Score: 1 out of 1 Yes
Question 49
Which of the following is not a role typically performed by financial intermediaries?
Response: Securitization
Correct answer: Securitization
Score: 1 out of 1 Yes
Question 50
What does Baumol's model of cash management attempt at?
Response: minimize total cost
Correct answer: minimize total cost
Score: 1 out of 1 Yes
Question 51
Bad debts cost is not borne by the Factor in which case?
Response: With Recourse Factoring
Correct answer: With Recourse Factoring
Score: 1 out of 1 Yes
Question 52
Transaction motive for holding cash is which of the following?
Response: Daily operations
Correct answer: Daily operations
Score: 1 out of 1 Yes
Question 53
A new project being conisdered by X Co would require 1000 hours of skilled labour.
The current workforce is already fully employed but more workers can be hired at a
cost of $20 per hour. The current workers paid $15 per hour on a project that earns
acontribution of $10. What is the relevant cost of labour to be included in the project
appraisal?
Response: $20,000
Correct answer: $20,000
Score: 1 out of 1 Yes
Question 54
Stock Split is a form of?
Response: FInancial Restructuring
Correct answer: FInancial Restructuring
Score: 1 out of 1 Yes
Question 55
Which of the following is an element of dividend policy?
Response: Informational content
Correct answer: Informational content
Score: 1 out of 1 Yes
Question 56
If the closing balance of Receivables is less than the opening balance for a month
then which of the following is True?
Response: Collections > Current Sales
Correct answer: Collections > Current Sales
Score: 1 out of 1 Yes
Question 57
A large organisation will have a treasury department to manage liquidity, short-term
investment, borrowings, foreign exchange and other specialised areas. Which of the
following is not an advantage of having a centralised treasury department?
Response: Greater autonomy can be given to subsidiaries and divisions
Correct answer: Greater autonomy can be given to subsidiaries and divisions
Score: 1 out of 1 Yes
Question 58
Which of the following is true?
Response: Retained earnings are cheaper than external equity
Correct answer: Retained earnings are cheaper than external equity
Score: 1 out of 1 Yes
Question 59
Which of the following is not an element of credit policy?
Response: Sales Price
Correct answer: Sales Price
Score: 1 out of 1 Yes
Question 60
Exporters company is concerned that the cash received from overseas sales willnot
be as expected due to exchange rate movements. What type of risk is this?
Response: Transaction risk
Correct answer: Transaction risk
Score: 1 out of 1
Model Question Paper
Course: Financial Management
1.
Which of the following actions is MOST likely to increase shareholder wealth?
a)
The annual report declares full compliance with the corporate governance code
b)
The board of directors decides to invest in a project with a quick payback period
c)
The firm’s cash operating cycle becomes longer
d)
The average cost of capital is increased by a recent financing decision
2.
Supply side economic policy is designed for what purpose?
a)
To improve the ability of the economy to produce goods and services
b)
To reduce interest rates by increasing the money supply
c)
To increase the provision of state services
d)
To raise the level of demand in the economy
3.
Which of the following is most consistent with maximising shareholder wealth?
a)
Profit maximisation
b)
market share growth
c)
Minimising the firm's cost of capital
d)
Maximising earnings per share
4.
Which of the following statements concerning the payback method is correct?
a)
It does not consider the time value of money
b)
It is reliable for project selection decisions
c)
It is the time required to recover the investment and earn a profit
d)
It is a measure of how profitable one investment project is compared to another
5.
In making capital budgeting decisions, management may consider factors that are broader than
relevant costs alone. Which one of the following factors is LEAST likely to be considered a non-financial
or qualitative factor?
a)
Reduction in new product development time
b)
Reduced waste and product reworking
c)
Improved corporate image
d)
Increase in manufacturing flexibility
6.
Which of the following decision-making models equates the initial investment with the present
value of the future cash inflows?
a)
Internal rate of return
b)
Payback period
c)
Profitability index
d)
Accounting rate of return
7.
A machine costing $150,000 has a useful life of eight years, after which time its estimated resale
value will be $25,000. Annual running costs will be $5,000 for the first three years of use and then
$8,000 for each of the next five years. All running costs are payable on the last day of the year to which
they relate. Using a discount rate of 20%, what is the equivalent annual cost of the machine (to the
nearest $100)?
a)
$21,100.00
b)
$43,300.00
c)
$43,300.00
d)
$46,600.00
8.
Blane Co purchases a new machine for $340,000. The machine is expected to increase annual
cash flows by $110,000 per year for the next four years. The appropriate discount rate is 4%. Using the
discounted payback period method, approximately how many years will it take for Blane to recover its
investment?
a)
3.58 years
b)
3.37 years
c)
3.16 years
d)
3.09 years
9.
Which of the following is LEAST likely to characterise overtrading?
a)
Increased short-term borrowing
b)
Increased cash balances
c)
Increased revenue
d)
Reduced working capital
10.
Lyle Co’s inventory reorder level is 500 units, the lead time is three weeks, and the sales volume
is estimated at 50 units per week. Lyle has established which of the following amounts as its safety
stock?
a)
150
b)
350
c)
500
d)
650
11.
Which one of the following would tend to increase the amount of inventory that a company
holds?
a)
Cost of running out of inventory decreases
b)
Cost of holding inventory decreases
c)
Lead time decreases
d)
Variability of sales decreases
12.
The CFO of a company is concerned about the company’s accounts receivable turnover ratio.
The company currently offers customers terms of 3% discount for settlement within 10 days or full
payment within 30 days. Which of the following strategies would most likely improve the company’s
accounts receivable turnover ratio?
a)
Changing customer terms to a 3% discount for settlement within 20 days
b)
Entering into a factoring agreement with a finance company
c)
Changing customer terms to a 1% discount for settlement within 10 days
d)
Using invoice discounting
13.
A factor has offering the following arrangement to Dino Co which has annual sales of $1,500,000
and an average receivables period of one month: The factor will advance 80% of the nominal value of
receivables at a 10% annual interest rate and charge a fee of 2% on revenue. Dino Co estimates that the
firm would save $24,000 in administration expenses over the year. What is the annual net cost of
factoring?
a)
$20,000.00
b)
$12,000.00
c)
$14,800.00
d)
$16,000.00
14.
" In which of the following areas of financial management will the impact of working capital
management be smallest?"
a)
Liquidity management
b)
Interest rate management
c)
Management of relationship with the bank
d)
Dividend policy
15.
Which of the following is not the source of the working capital
a)
Commercial Capital
b)
Bank Overdraft
c)
Discounting of Bill
d)
Unsecured Term Loan
16.
Which of the following statements, concerning interest rate futures, is incorrect?
a)
"Interest rate futures can be used to hedge against interest rate changes between the current
date and the date at which the interest rate on the lending or borrowing is set"
b)
Borrowers buy futures to hedge against interest rate rises
c)
" Interest rate futures have standardised terms, amounts and periods"
d)
The futures price is likely to vary with changes in interest rates
17.
What does purchasing power parity refers to?
a)
A situation where two businesses have equal available funds to spend.
b)
Inflation in different locations is the same
c)
Prices are the same to different customers in an economy
d)
Exchange rate movements will absorb inflation differences.
18.
"Which of the following best describes the term 'coupon rate' as applied to loan notes?"
a)
The rate of stamp duty applicable to purchases of the loan notes
b)
" The total rate of return on the loan notes, taking into account capital repayment as well as
interest payments"
c)
"The annual interest received divided by the current ex-interest market price of the loan notes"
d)
" The annual interest received on the face value of the units of the loan notes"
19.
Which of the following statements is part of the traditional theory of gearing?
a)
There must be taxes
b)
There must exist a minimum WACC
c)
Cost of debt increases as gearing decreases
d)
Cost of equity increases as gearing decreases
20.
When a company gives a part of dividend as cash and another part in script, bond, property is
called as?
a)
Interim Dividend
b)
Convertible Dividend
c)
Composite Dividend
d)
Cash dividend
21.
Which of the following is not relevant in dividend policy decisions?
a)
Availability of disposable profits
b)
Investor's expectation
c)
Industry practices
d)
Capital Market conditions
22.
What is the formula for Dividend-payout ratio?
a)
Dividend per share divided by Earnings per share
b)
Dividend per share divided by Market price per share
c)
Dividend per share divided by Face value per share
d)
Cost capital plus dividend yield
23.
What is meant by the cost of capital of a company?
a)
It is the equity shares of the company that will provide variable rates of dividend over a set
period.
b)
It is a metric that is inversely proportional to the overall pile of debts.
c)
It is the return on investment recorded against each fixed asset owned by the company.
d)
Cost of capital of a company is a stat that represents the internal return rates.
24.
Some 8% convertible debentures have a current market value of $106 per cent. The debenture
will be converted into equity shares in 3 years’ time at the rate of 40 shares per $100 of debentures. The
market price is expected to be $3.5 on the date of conversion. What is the cost of capital to the
company for the convertible debentures? Assume a corporation tax of 33%.
a)
5.36%
b)
14.40%
c)
19.90%
d)
10.49%
25.
Consider the following statements concerning financial gearing. Higher financial gearing
increases the risks of:(i) Share price volatility (ii) Earnings per share volatility (iii) Loan default Which of
these statements are correct?
a)
(i) and (ii)
b)
(i) and (iii)
c)
(iii) only
d)
(i), (ii), and (iii)
26.
The Modigliani and Miller (1963) proposition concerning capital structure states that as the level
of debt increases, the weighted average cost of capital falls. Which of the following did the theory fail to
consider?
a)
Corporation Tax
b)
Financial Risk
c)
Bankruptcy Risk
d)
Operating Risk
27.
What is the main objective of capital structure?
a)
Maximise owner’s return and minimise the cost of capital
b)
Maximise owner’s return and maximise the cost of capital
c)
Minimise owner’s return and maximise the cost of capital
d)
Minimise owner’s return and minimise the cost of capital
28.
What does the return on capital employed ratio indicate?
a)
the margin that a business makes between the buying price and selling price of goods
b)
a measure of operating profit compared to capital employed.
c)
a comparison of operating profit to sales.
d)
a measure of expense compared to sales.
29.
"Fernwell wants to buy shares of Gurst Co in two years. Fernwell uses the dividend valuation
model with an assumed dividend growth rate of 5%. If Fernwell discount rate is 10% and Durst’s current
year dividend is $20, what is the approximate price Fernwell will pay?"
a)
$400
b)
$420
c)
$441
d)
$463
30.
"Sarah decides to plot past share price movements to help spot patterns and create an
investment strategy.What does Sarah believe the stock market is?"
a)
Completely inefficient
b)
Weak form efficient
c)
Semi-strong form efficient
d)
Strong form efficient