1.
Consider the following basic principles of capital budgeting.
a.) Capital budgeting decision is based on the after-tax net profit of the project.
b.) The interest cost specific to a project should be ignored while estimating the
cash flows.
Which statements do you agree with?
A: Statement (a) but not Statement (b)
B: Statement (b) but not Statement (a)
C: Neither (a) nor (b)
2.
Super-strong Inc. is a manufacturer of drinking soda. Super-strong is now considering to
launch its own whiskey brand. It pays $80,000 to a consultancy firm for market research.
The research indicates a favorable market potential for whiskey & an increase in the sale of
its soda water by 10% if the whiskey brand is launched.
While evaluating the whiskey project, Super-strong should:
A: include the cost of market research but ignore the effect on soda sales.
B: exclude the cost of market research but consider the effect on soda sales.
C: include the cost of market research & the effect on soda sales.
3.
Jefferson Inc. is planning to start a new project in its defunct textile mill. However there is
divergence of opinion in the management regarding the project. Some executives are of the
opinion that that the defunct mill should be sold instead of starting a project. However
in-house research was conducted for the feasibility of the project & it produced the following
estimates:
The project would require an outlay of $600,000, the amount being paid one year from now.
Thereafter, the project will generate cash inflows of $250,000 annually over subsequent 8 years.
It will then cost $200,000 to shut the project over the following year. Assume all cash flows
occur at the end of the year.
What should the minimum price be set for the mill if the company decides against the
commencement of project? The required rate of return is 15%
A: $404,329
B: $464,978
C: $396,913
4.
The annual cost of trade credit for terms 2/10 net 45 when the payments are made on 45th
day will be closest to:
A) 23%
B) 23.45%
C) 24.4%
5.​
In an NPV profile, which one of the following discount rates is most likely the crossover
rate for two projects A and B:
a)​
The discount rate at which the IRRs of both projects equals 0
b)​
The discount rate at which the NPV’s of both the projects are 0
c)​
The discount rate at which the NPV’s of both the projects are equal
6. Which of the following is most likely an example of a pull on the company’s liquidity :
a)
Paying vendors before time
b)
Uncollected receivables
c)
Bad debts
7. Which of the following statements is least accurate with respect to the calculation of
operating cash flows?
A. Any capital expenditures required should not be deducted from cash flow
because these will be reflected through depreciation expense later on.
B. Taxes are calculated before interest is deducted.
C. An increase in working capital is deducted from net income.
8. Johny Paints is considering a project that requires an initial outlay of $500,000. The project
is expected to generate annual cash flows of $120000, $200000, $45000 and $300000 at
the end of year 1, 2, 3 and 4 respectively. The firm wants to finance 50% of the required
capital through equity. The floatation cost is 5%. Calculate the NPV for the project when
required return for the project is 10%.
A. $678.89
B. $593.36
C. $333.33
9. Which of the following sources of funding is most likely to be considered as a signal of
detoriating financial position?
A. Committed line of credit from banks
B. Credit from vendors
C. Liquidating long term assets
10. Your company is evaluating three projects that require a rate of return of 11%. The cash
flows for these projects are as follows:​
​
​
Year
Project X ​
Project Y ​
Project Z ​
​
​
0
1
2
3
​
(500,000) 300,000 ​150,000 ​
275,000​
(750,000) 400,000 ​100,000 ​
285,000​
(1,000,000) 500,000 ​
375,000​
475,000​
Which projects would you undertake if the projects were independent?
A. X and Z
B. Z only
C. Y only
11. Your company is evaluating three projects that require a rate of return of 11%. The cash
flows for these projects are as follows:​
​
​
Year
Project X ​
Project Y ​
Project Z ​
​
​
0
1
2
3
​
(500,000) 300,000 ​150,000 ​
275,000​
(750,000) 400,000 ​100,000 ​
285,000​
(1,000,000) 500,000 ​
375,000​
475,000​
Which projects would you undertake if the projects were mutually exclusive?
A. X and Z
B. Z only
C. Y only
12.
Primary sources of liquidity most likely include which of the following?
A) Generating cash from short term investments.
B) Negotiating debt agreements
C) Liquidation of long-term assets
13.
Which of the following is least likely included in management’s decisions about a project’s
viability?
A) Externalities
B) Sunk Costs
C) Cash flows of the project
14.
Which of the following will most likely be ill-suited for shareholders’ long-term interest?
A) A board of directors has served for fifteen years.
B) The board should meet regularly outside the presence of management.
C) The chairman of the board is also the former CEO of the firm
15.
If the cost of the equity is 12% and after tax cost of debt is 8%. What is the Cost of capital
for a firm whose planned capital structure (D: E) is2:3 and the tax rate is 25%.
A) 8%
B) 10.4%
C) 9.6%
16.
Which of the following statement regarding WACC is least likely correct?
A) WACC is an appropriate discount rate for evaluating projects that possess similar
level of risk as company’s existing projects.
B) For a profitable project, WACC should be lower than the return.
C) Existing Debt-Equity ratios should be preferred over the target Debt equity ratio while
calculating WACC.
17. Which of the following forms of corporate structure is most exposed to the issue of double
taxation of its profits?​
A. Sole Proprietorship​
B. Partnership​
C. Corporation
18. Which fo the following most likely defines the Activist Shareholder?​
A. These are investors who eventually with to acquire majority stake in the company
B. these investors wish to acquire enough stake to be able to influence the operations of the
organisation and thereby enhance their own returns
C. these are investors in a hostile takeover
19. Calculate the cost of supplier financing if the terms being offered are 4/30 net 120
a.​ 12%
b.​ 13%
c.​ 18%
20. If a project has initial outlay of 2 Million and will generate annual cash inflows of 400000 for
a total of 7 years, calculate the IRR of the project
a.​ 12.41%
b.​ 9.20%
c.​ 15.67%