Time Value

TIME VALUE OF MONEY 1. If you were scheduled to receive Rs 100,000 five years hence, but you wish to sell your contract note for its present value, which type of compounding would you rather have the purchaser of your contract note to use to find the purchase price, 8 percent compounded: (a) (b) (c) (d) (e) Continuously Quarterly Semi-annually Annually None of the above 2. According to the rule of 69, the doubling period is equal to (a) (b) (c) (d) (e) 0. 25 + (69/ Interest rate) 0. 35 + (69/ Interest rate) 0. 69 + (0. 35/ Interest rate) 0. 69 + (0. 25 / Interest rate) None of the above 3. For a depositor, when the frequency of compounding is increased (a) (b) (c) (d) (e) Additional gains increase Additional gains dwindle Additional gains are unaffected There are no additional gains None of the above 4. Present value interest factor of a perpetuity represents (a) (b) (c) (d) (e) Interest rate in percentage terms Reciprocal of interest rate in percentage terms Reciprocal of interest rate in decimal terms Interest rate in decimal terms None of the above 5. The present value of a perpetuity of one rupee when the interest rate is r percent is: (a) (b) (c) (d) (e) 1/r 1/ r2 1/r0. 2 r2 None of the above 1 6. The present value of an annuity due is equal to the present value of a regular annuity multiplied by : (a) (b) (c) (d) (e) r (1 + r) 1/r r(1 + r) None of the above 7. Recurring deposit in a bank is a typical example of: (a) (b) (c) (d) (e) Deferred annuity Annuity due Regular annuity Compound annuity None of the above 8. Deposits in a sinking fund is an example of: (a) ( b) (c) (d) (e) Deferred annuity Annuity due Regular annuity Either a or c None of the above 9. In a loan amortisation schedule, as the number of years increases: (a) (b) c) (d) (e) The interest amount increases The principal repayment amount increases The annual installment amount decreases Both a and c None of the above KEY 1 (d) 2 (b) 3 (b) 4 (c) 5 (a) 6 (b) 7 (b) 8 (d) 9 (a) 2 VALUATION OF STOCKS AND BONDS 1. The annual interest on a bond in relation to its prevailing market price is called its: (a) (b) (c) (d) (e) Coupon rate Promised yield Current yield Yield to maturity None of the above 2. Internal rate of return on a bond investment is its (a) (b) (c) (d) (e) Current yield Yield to maturity Holding period return Realised yield None of the above . The constant-growth dividend discount model will not produce a finite value if the dividend growth rate is: (a) (b) (c) (d) (e) Above its historical average Below its historical average Above the market capitalisation rate Below the market capitalisation rate None of the above 4. For any given stock, which of the following must be true? (a) (b) (c) (d) (e) Market value ? book value ? par value Book value ? market value ? par value Par value ? market value ? book value Par value = book value ? market value None of the above must be true 5. Limited growth prospects are indicated by (a) (b) (c) (d) (e) High dividend High P/E ratio Low dividend High dividend and low P/E ratio None of the above 3 6. Riskier stocks have (a) (b) (c) (d) (e) Higher P/E multiple Lower P/E multiple Higher variance (b) and (c) None of the above 7. Which of the following is not true? (a) (b) (c) (d) (e) Earnings-price ratio is equal to r when PVGO is zero Earnings-price ratio is less than r when PVGO is positive Earnings-price ratio is less than r when PVGO is negative Earnings-price ratio is more than r when PVGO is negative None of the above 8. An increase in the market value of a company indicates: (a) (b) (c) (d) (e) Increase in profitability Increase in revenues Increase in future prospects All the above None of the above 9. Intrinsic value of a security is its: (a) (b) (c) (d) (e) DCF value Book value Real value Market capitalization value None of the above 10. Which one of the following is not a major driver of growth? (a) (b) (c) (d) (e) Sales growth ratio Ploughback ratio Return on equity All the above None of the above 11. In the case of stocks with lower P/E multiples: (a) Liquidity is low (b) Required return is high (c) Risk is high 4 d) All the above (e) None of the above 12. All trades on NSE are guaranteed by: (a) (b) (c) (d) (e) SEBI NSDL NSCC CDSL None of the above 13. In respect of the sample shares, sensex reflects the movement of: (a) (b) (c) (d) (e) Average total market value of the floating stocks Average market value of the floating stocks times a fixed multiple Average capitalisation of the issued and paid up stocks Average aggregate market value of the subscribed stocks None of the above Formatted: Font color: Auto Formatted: Font color: Auto Formatted: Font color: Auto 14. The book value of a firm? s equity is nothing but the book value of its assets minus the book value of its liabilities: a. True b. False 15. Market value of a firm has to be at least equal to its: (a) (b) (c) (d) (e) Book value Cash and bank balance Net asset value Lowest of the above None of the above 16. Intrinsic value of a security is its: (a) (b) (c) (d) (e) Market value Book value Economic value Resale value None of the above 5 KEY 1 (c) 12 (c) 2 (b) 13 (a) 3 (c) 14(a) 4 (e) 15(e) 5 (d) 16(c) 6 (d) 7 (c) 8 (e ) 9 (a) 10 (a) 11 (d) 6 RISK AND RETURN 1. Variance will always be (a) (b) (c) (d) (e) Positive Negative Variable Very high None of the above 2. A normal distribution is completely characterised by (a) (b) (c) (d) (e) Expected return and standard deviation Required return and variance Expected return and range Standard return and expected variance None of the above 3. If a variable is normally distributed what percentage of the values fall within a band of one standard deviation on either side of the arithmetic mean. (a) (b) (c) (d) (e) 95. 4 percent 68. 3 percent 99. 7 percent 57. 5 percent None of the above 4. If a variable is normally distributed what percentage of values will fall within a band of three standard deviations on either side of the arithmetic mean? (a) (b) (c) (d) (e) 95. 4 percent 68. 3 percent 99. 7 percent 57. 5 percent None of the above 5. Which of the following is true? (a) (b) (c) (d) The geometric mean is always less than the arithmetic mean The geometric mean is always greater than the arithmetic mean The geometric mean and the arithmetic mean are always the same The geometric mean is always less than the arithmetic mean, except when all the return values being considered are equal (e) None of the above 7 . When the probability distribution of rate of return of a security is defined, the possible outcomes: (a) (b) (c) (d) (e) Should be mutually exclusive Should be collectively exhaustive Should not add to more than 1 All the above None of the above 7. Preparing the probability distribution of rate of return of a security is: (a) An objective exercise based on the pre vailing market conditions (b) An objective exercise based on the past history of the securities performance (c) An objective exercise based on the future prospects of the security. d) A subjective exercise (e) None of the above 8. While analysing the returns of a security based on a continuous probability distribution, probabilities are assigned to: (a) (b) (c) (d) (e) Individual points on the curve Intervals between two points on the curve The gradient between any two referenced points on the curve Either b or c None of the above 9. Diversification eliminates risk if returns are: (a) (b) (c) (d) (e) Not perfectly positively correlated Perfectly positively correlated Perfectly negatively correlated All the above None of the above 10. If the return on a security is negatively correlated with the market return, its beta is: (a) (b) (c) (d) (e) Less than zero Less than one but more than zero More than one Independent of the market return None of the above 8 11. To judge creditworthiness of firms, leading international rating firms use debt ratios expressed in: (a) (b) (c) (d) (e) Market values Book values Real values Discounted values None of the above 12. A defensive stock is characterised by: (a) (b) (c) (d) (e) Negative beta Positive beta less than one Positive beta more than one Beta equal to one None of the above 3. When you want to know the central tendency of a series of returns, the arithmetic mean is the appropriate measure: a. True b. False 14. For a given series of returns geometric mean is always greater than the Arithmetic mean: b. True b. False 15. Business risk of a firm : (a) (b) (c) (d) (e) Is the risk of the firm without financial leverage Depends on cyclicality of revenues Depends on operating lev erage All the above None of the above 16. Debt rating firms such as Standard & Poor? and Moody? s use debt ratios expressed in market values to judge credit worthiness: a. True b. False KEY 1 (a) 12 (b) 2 (a) 13(a) 3 (b) 14(b) 4 (c) 15(d) 5 (d) 16(b) 9 6 (d) 7 (d) 8 (b) 9 (c) 10 (a) 11 (b) TECHNIQUES OF CAPITAL BUDGETING 1. As discount rate increases, NPV of a simple project (a) (b) (c) (d) (e) Increases at a decreasing rate Decreases at an increasing rate Decreases at a decreasing rate Decreases at a steady rate None of the above 2. When time-varying discount rates are involved the suitable investment criterion is (a) (b) (c) (d) (e) NPV IRR MIRR Discounted Pay Back Period None of the above 3. If initial investment is Rs. 10 million and NBCR is 0. 2, the NPV is (a) (b) (c) (d) (e) Rs. 50 million Rs. 2 million Rs. 8 million Rs. 5 million None of the above 4. IRR is unreliable for ranking projects when (a) (b) (c) (d) (e) Life of the projects are long Projects have different patterns of cash flow Projects have decreasing cash flows Both a and c None of the above . If you do not know the discount rate for a project, the right investment criterion to be used will be (a) (b) (c) (d) (e) IRR MIRR NPV BCR None of the above 10 6. The IRR of a capital investment (a) Changes when the cost of capital changes (b) Is equal to annual cash flows divided by the project? s cost when the cash flows are an annuity (c) Is similar to the yield to maturity on a bond (d) Must exceed the cost of capital in order for the firm to accept the investment (e) Both b and d are true (f) Both c and d are true 7. The modified internal rate of return (MIRR) is superior to the regular IRR because: (a) MIRR modifies IRR to reflect project risk (b) While IRR may be negative, MIRR can never be negative (c) MIRR assumes that project cash flows are reinvested at the cost of capital whereas the regular IRR assumes that the project cash flows are reinvested at the project? s own IRR (d) The problem of multiple rates does not exist with MIRR (e) c and d (f) b, c, and d 8. When a firm takes on a new project with a positive NPV, it will necessarily increase the value of the firm. . True b. False 9. The NPV rule assumes that the intermediate cash flows of a project are reinvested at a rate equal to: (a) (b) (c) (d) (e) The cost of capital The cost of equity The internal rate of return The current yield None of the above 10. The modified internal rate of return (MIRR) is superior to the regular IRR because: (a) (b) (c) (d) (e) It assumes that project cash flows are reinvested at the cost of capital Reinves tment cost of capital is more realistic It is not a subjective measure both a and b None of the above 1 11. Which of the following is true: (a) IRR rule assumes that intermediate cash flows are reinvested at the cost of capital (b) The IRR rule cannot distinguish between lending and borrowing (c) IRR is difficult to apply when short-term interest rates from long-term interest rates (d) IRR cannot be used when the cost of capital is not known (e) None of the above KEY 1 (c) 2 (a) 3 (b) 4 (b) 5 (a) 6 (f) 7 (e) 8 (b) 9 (a) 10 (d) 11 (b) 12 PROJECT CASH FLOWS 1. Which one of the following may not be generally relevant in establishing the time horizon for cash flow analysis? (a) (b) (c) (d) (e) Investment planning horizon of the firm Physical life of the plant Technological life of the plant Product market life of the plant None of the above 2. While defining the cash flows on the investment side, interest cost is not considered because: (a) (b) (c) (d) (e) It is a proxy to the rate of return Historical interest rates have no relevance It is included in the cost of capital Both b and c None of the above . All incidental effects of a project on the rest of the firm should be considered while estimating project cash flows because: (a) (b) (c) (d) (e) It may have a complementary relationship with the existing activities It may have a competitive relationship with the existing activities It may have a supplementary relationship with the existing activities Both a and b None of the above 4. The cost created for the rest of the firm as a consequence of undertaking a project is: (a) (b) (c) (d) (e) The company weighted average cost of capital The marginal cost of capital The project weighted average cost of capital An opportunity cost None of the above 5. For purposes of investment analysis, what matters is: (a) (b) (c) (d) Overhead costs allocated to the project Incremental overhead costs attributable to the project Weighted average overhead costs attributable to the project Projected average overhead costs attributable to the project 13 (e) None of the above 6. Which of the following may not generally result in underestimation of project cash flows? (a) (b) (c) (d) (e) Ignoring intangible benefits Under estimation of salvage values Overlooking the value of future options Under estimation of project cost of capital None of the above 7. Product cannibalisation involves (a) (b) (c) (d) (e) Erosion of sales of an existing product due to own new product Erosion of sales of an existing product due to an own older product Erosion of sales due to a competitor? s existing product Erosion of sales due to a competitor? new product None of the above 8. Which one of the following is a sunk cost (f) (g) (h) (i) (j) R & D expenditure not leading to a product Preliminary survey expenses before setting up the plant Sponsorship expenses of Indian cricket team Contribution to Prime Ministers Relief Fund None of the above 9. In the financing side of a project, explicit funds include (k) Trade creditors (l) Bank overdraft (m) Provision for income tax (n) Provis ion for proposed dividend (o) None of the above KEY 1 (b) 2 (c) 3 (d) 4 (d) 5 (b) 6 (d) 7 (a) 8 (b) 9 (b) 14 RISK ANALYSIS IN CAPITAL BUDGETING 1. While evaluating the risk of a project, an undiversified shareholder is more concerned about: (a) (b) (c) (d) (e) Stand-alone risk Corporate risk Market risk All the above None of the above 2. In which of the following, values of a set of variables are varied concurrently by specified values? (a) (b) (c) (d) (e) Scenario analysis Sensitivity analysis Simulation analysis Decision tree analysis None of the above 3. In which of the following, correlations between variables are to be handled properly? (a) (b) (c) (d) (e) Scenario analysis Sensitivity analysis Simulation analysis Decision tree analysis None of the above 4. A lower price: (a) (b) (c) (d) (e) Increases potential demand Decreases the break-even level Increases the break-even level Both a and c None of the above 5. Which one of the following is the best way of incorporating risk in the decision process? (a) (b) (c) (d) Certainty equivalent Pay back period requirement Risk-adjusted discount rate Judgmental evaluation 15 (e) None of the above 6. Financial break even occurs at the point of time when the (a) (b) (c) (d) (e) Firm starts making operating profits Accumulated losses are wiped off Present value of investment becomes zero Cash flows become steady None of the above . Randomly selected values are used in (a) (b) (c) (d) (e) Sensitivity analysis Break even analysis Decision tree analysis Simulation analysis None of the above rate 8. The NPV of a simple project decreases at a constant rate as the discount increases. a. True b. False 9. When the cash flows of a project are perfectly correlated, the standard deviation of the NPV is: n (a) ? t=1 A _____ – I ( 1+ i)t ? t _____ – I ( 1+ i)t ? t _____ ( 1+ i)t 1/2 n (b) ? t=1 n (c) ? t=1 n (d) ? t=1 ? _____ (1+ i)2t 2 t (e) None of the above 16 10. An investor for whom the certainty index is less than the expected value, is (p) (q) (r) (s) (t) Risk loving Risk averse Risk neutral Risk allergic None of the above KEY 1 (b) 2 (a) 3 (c) 4 (d) 5 (e) 6 (c) 7 (d) 8 (b) 9 (c) 10 (b) 17 THE COST OF CAPITAL 1. Which of the following is not reflected in the company cost of capital? (a) (b) (c) (d) (e) Rate of return expected on a proposed investment Business risk of the existing assets Risk of the existing capital structure All the above None of the above 2. A firm has an existing bank loan contracted at 10 percent a year back. The bank has since reduced the lending rates and the company, if it wants, can raise a fresh loan from the bank at 9 percent. While determining the WACC, the cost of bank loan for the company would be: (a) (b) (c) (d) (e) 10 percent 9 percent Weighted average of the old and new bank interest rates Either b or c None of the above 3. The correct cost of debt to be used in calculation of the average cost of capital is the: (a) (b) (c) (d) (e) Marginal cost of debt Yield to maturity Average cost of debt Either a or b None of the above 4. Cost of retained earning is (a) (b) (c) (d) (e) Nil Nearly equal to cost of depreciation Nearly equal to cost of equity Nearly equal to average cost of debt None of the above 5. In determining cost of capital using „Bond yield plus risk premium approach? the risk premium is set at (a) 2 % of the bond yield (b) 4 % of the bond yield (c) 1% of the bond yield if the latter is more than 12 % 18 (d) Both a and c (e) None of the above 6. The chief merit of using book value proportions to calculate WACC is that (a) (b) (c) (d) (e) It is unbiased It is simple It is more realistic It is based on audited figures None of the above . For a given capital structure, the levels of total new financing at which the cost of the new components would change is called (a) (b) (c) (d) (e) Turning points Breaking points Inversion points Relevant points None of the above 8. When the marginal cost of capital is the same for two projects and there are no funds constraints, you will select (a) (b) (c) (d ) (e) Project with the shorter payback period Project with the higher IRR Both the projects if NPVs are positive Preferably project with higher IRR and higher NPV None of the above 9. Which of the following conditions should be satisfied for using WACC for evaluating new investments? (a) The risk of new investments is the same as the average risk of existing investments (b) The cost of equity is greater than the cost of debt (c) The capital structure of the firm will not be affected by the new investments (d) a and c (e) None of the above 19 10. The risk-adjusted discount rate method assumes that the risk increases with time at: (a) (b) (c) (d) (e) Increasing rate A constant rate Decreasing rate A random rate None of the above KEY 1 (a) 2 (b) 3 (a) 4 (c) 5 (e) 6 (b) 7 (b) 8 (c) 9 (d) 10 (b) 20 CAPITAL BUDGETING: EXTENSIONS 1. General Electric? s Stoplight Matrix is used for: (a) (b) (c) (d) (e) Resource allocation Identification of worthwhile projects Abandoning worthless projects Scaling up corporate efficiency None of the above 2. Which of the following conditions must be satisfied by a capital budget to be meaningful and viable? (a) (b) (c) (d) (e) It must be compatible with the resources of the firm It must be controllable It must be endorsed by executive management All the above None of the above . A company? s debt equity ratio is 1:1. It proposes to undertake an aerodrome project with proposed debt equity ratio of 3:1. The discount rate that should be applied to the project should be: (a) (b) (c) (d) (e) Weighted average cost of debt Marginal cost of debt Incremental discount rate Adjusted discount rate None of the above 4. Which of the following are options embedded in real life projects? (a) (b) ( c) (d) (e) Incremental option Flexibility option Abandment option All the above None of the above 5. Which of the following may not result in positive NPV projects? a) (b) (c) (d) (e) Marketing reach Government policy Customer affluence Product differentiation None of the above 21 6. Which of the following is a necessary condition to ensure success in business strategies? (a) (b) (c) (d) (e) Intuition Vision of the leader Rigorous analysis Sponsorship None of the above 7. In determining the adjusted present value, tax shields on financing effects are discounted at (a) (b) (c) (d) (e) Opportunity cost of equity Marginal cost of debt Weighted average cost of debt Average of a and b None of the above KEY 1 (a) 2 (d) 3 (d) 4 (d) 5 (c) 6 (c) 7 (b) 22 MARKET EFFICIENCY AND FINANCING DECISIONS 1. There will be no concern about transfer of wealth from existing to new shareholders if new securities are issued (a) (b) (c) (d) (e) above market price at market price at par by book building method None of the above 2. Market efficiency implies that: (a) (b) (c) (d) (e) Errors in the market prices are biased Market price equals intrinsic value Price deviations cannot be predicted It is not possible to identify over and under-valued stocks None of the above 3. Market efficiency exists because; (a) (b) (c) (d) (e) Portfolio managers are doing their job well There is keen competition among market participants New information cannot be predicted in advance All the above None of the above 4. Returns over horizons of a few weeks or months would be positively correlated because of the action of: (a) (b) (c) (d) (e) Noise traders Arbitrageurs Speculators Both a and b None of the above 5. Which of the following is a calendar anomaly? (a) (b) (c) (d) (e) Week end effect January effect Budget effect Both a and b None of the above 23 6. Serial correlation tests, run tests and filter rules tests have been commonly employed to verify: (a) (b) (c) (d) (e) Strong form of efficient market hypothesis Semi- strong form of efficient market hypothesis Weak form of efficient market hypothesis Both a and b None of the above 7. In an efficient market, the market price of a security is: (a) (b) (c) (d) (e) An unbiased predictor of its intrinsic value An unbiased estimate of its intrinsic value A logical mean of the market participants? expectations The expected value of a normal distribution None of the above 8. Study of market efficiency teaches corporates that: (a) Manipulation of earnings does not pay (b) It is advantageous to issue debt rather than equity (c) The objective of corporate finance should be to maximise the market value of the firm in due course (d) Equity issues should not be deferred because the stock price was significantly low in recent periods (e) None of the above 9. In an efficient market, an unbiased estimate of the intrinsic value of a security can be obtained from its: (a) (b) (c) (d) (e) Market value Book value Cash value Capital value None of the above 0. According to Efficient Market Theory, price changes cannot be forecast since: (a) Inflation cannot be predicted with any acceptable degree of accuracy (b) New information cannot be predicted in advance. (c) Insiders and other vested interest groups will not allow the market to become efficient (d) All the above (e) None of the above 24 11. Though elegant in theory, bulk of the results of empirical studies have fa iled to support Efficient Market Hypothesis: a. True b. False 12. A puzzling calendar anomaly is : (a) (b) (c) (d) (e) The Mid Summer Effect The Easter Effect The January Effect The March Effect None of the above 13. Noise trade is always supported by: (a) (b) (c) (d) (e) Efficient Market Hypothesis Rational expectations theory Technical analysis Fundamental analysis None of the above KEY 1(b) 2 (e) 3 (d) 4 (d) 5 (d) 6 (c) 7 (b) 8 (a) 9(a) 10(b) 11(b) 12(c) 13(e) 25 SOURCES OF LONG-TERM FINANCE 1. As per law the issue price of a share cannot be: (a) Less than the par value (b) Less than the issue price of any preceding public offer. c) More than twenty times the average P/E multiple for the past years. (d) More than 20 times the book value (e) None of the above 2. When a company? s net profit doubles, that has to result in: (a) (b) (c) (d) (e) Increase in market value Increase in book value Decrease in cost of equity Both a and b None of the above three 3. Which one of the following is known not to have any effect on the market price of stocks? (a) (b) (c) (d) (e) Current earnings Growth prospects Risk Company size None of the above 4. Which one of the following is generally viewed with skepticism by the stock market? a) (b) (c) (d) (e) Debenture issue Equity issue Soliciting public deposits Not declaring large dividends None of the above 5. If you are the CEO of a company, which one of the following will you decide to skip in a lean year? (a) (b) (c) (d) Declaring preference dividend Declaring equity dividend Declaring bonus issue Putting on hold new projects 26 (e) None of the above 6. The par value of an equity share is the value: (a) (b) (c) (d) (e) As stated in the memorandum The price at which it is issued The price at which it will be repurchased Both a and c None of the above . The income on which the equity holders have a residual claim is: (a) (b) (c) (d) (e) Profit after tax Profit after tax plus equity dividend Profit after tax less equity dividend Profit after tax less preferred dividend None of the above 8. When the financial performance of a company is impressive, the board of directors, if they so wish, can: (a) (b) (c) (d) (e) Refuse to pay equity dividend Cannot refuse to pay equity dividend without shareholders? approval Refuse to pay preference dividend Both b and c None of the above 9. Issue expenses are the least in the case of: (a) (b) (c) (d) (e) Public issue of equity Public issue of debentures Rights issue Private placement None of the above 10. According to CAPM, going in for debt financing: (a) (b) (c) (d) (e) Decreases the cost of equity Increases the cost of equity Does not affect the cost of equity Either a or c None of the above 27 KEY 1 (a) 2 (b) 3 (e) 4 (b) 5 (d) 6 (a) 7 (d) 8 (a) 9 (c) 10 (b) 28 RAISING LONG TERM FINANCE 1. IPO refers to the first issue of: (a) (b) (c) (d) (e) Equity Debentures Preference shares Either a or b None of the above . The first option to acquire the equity investment held by a VC is typically give to: (a) (b) (c) (d) (e) The public The promoters of the VC fund The associates of the VC fund The promoters of the assisted firm None of the above 3. A rights issue generally tends to result in: (a) (b) (c) (d) (e) Increase in return on equity Decrease in earnings per share Decrease in return on investments Increase in earnings pe r share None of the above 4. In which of the following the identity of investors is generally known at the time of approval of shareholder approval itself? a) (b) (c) (d) (e) Private placement Preferential allotment Convertible debentures GDR None of the above 5. Lead manager of a public issue can be likened to (a) (b) (c) (d) (e) master of ceremonies best man in a wedding conductor of an opera producer of a movie None of the above 29 6. Which one of the following is not a potential advantage that prods a company to go public? (a) (b) (c) (d) (e) Accountability Respectability Investor recognition Liquidity None of the above 7. Composite application form sent along with letter of offer of a rights issue includes (a) (b) (c) (d) (e) a form showing the number of rights shares the shareholder is entitled to a form through which rights can be renounced in favour of someone a form for rejecting the offer both a and b None of the above 8. Wealth of an existing shareholder per se is not affected by the right offering if he (a) (b) (c) (d) (e) sells the rights does not participate in the right exercises the rights partially both a and b None of the above 9. Before a company makes a preferential allotment (a) (b) (c) (d) (e) it must pass a special resolution obtain special approval under section 81(1A) from government both a and b either a or b None of the above 10. Dilution of proportional ownership can be avoided by making (a) (b) (c) (d) (e) private placement debenture issue a rights issue either b or c None of the above 11. Book building is used to help in better (a) Price discovery (b) Retail participation 30 (c) Institutional participation (d) Investor communication (e) None of the above 12. In any IPO, there is infusion of capital in the company: a. True b. False 13. Who among the following is not an eligible QIB? (a) (b) (c) (d) (e) State Industrial Development Corporations Mutual Funds Scheduled commercial banks Foreign institutional investors registered with SEBI None of the above 14. If a company? s project has not been appraised by financial institutions or scheduled commercial banks, it is not eligible for an IPO: a. True b. False 15. Retail investors cannot change their bids during the bidding process in: (a) (b) (c) (d) (e) French auction Book building Commodity auction All the above None of the above 16. In a preferential allotment of shares, the lock-in period is applicable to : (a) (b) (c) (d) (e) 17. QIPs : (a) (b) (c) (d) (e) Fetch a good price Entail minimal cost Can be completed very quickly All the above None of the above The appraising bank FII Lead Manager of the investment bank. The promoters None of the above 31 18. To get an anchor investor you should look among: (a) (b) (c) (d) (e) QIBs QIPs FIIs HNIs None of the above 19. The focus area for an Investment Bank is : (a) (b) (c) (d) (e) Investment Commercial banking Merchant banking All the above None of the above 0. In India, a trader who performs market-making function for a security is not permitted to engage in proprietary trading function in the same security: a. True b. False KEY 1 (a) 12(b) 2 (d) 13(e) 3 (b) 14(a) 4 (b) 15(a) 5 (c) 16(d) 6 (a) 17(d) 7 (d) 18(a) 8 (a) 19(c) 9 (d) 20(b) 10 (d) 11 (a) 32 CAPITAL STRUCTURE AND FIRM VALUE 1. According to net operating income approach increase in leverage will affect (a) (b) (c) (d) (e) cost of debt cost of equity overall capitalisation rate both a and b None of the above . According to net income approach, as leverage decreases (a) (b) (c) (d) (e) average cost of capital decreases average cost of capital increases cost of debt increases cost of equity decreases None of the above 3. According to the Merton Miller argument, the original MM proposition which says that financial leverage does not matter in a tax-free world (a) (b) (c) (d) (e) is valid in a world where both corporate and personal taxes exist is not valid in a world where both corporate and personal taxes exist is valid n a world where the corporates are exempt from taxes is valid in a world where corporate taxes exist but no personal taxes exist None of the above 4. Which one of the following statements is true? (a) (b) (c) (d) (e) Net operating income approach and MM? s first proposition are identical Net income approach and MM? s second proposition are identical Net operating income a pproach and traditional approach are identical Net income approach and MM? s first proposition are identical None of the above 5. One of the assumptions underlying the MM proposition is that firms can be grouped into equivalent risk classes based on their (a) (b) (c) (d) (e) systematic risk financial risk business risk both a and b None of the above 33 6. According to the signaling theory of capital structure, the pecking order of financing is as follows: (a) (b) (c) (d) (e) External equity finance, debt finance and internal finance Internal finance, external equity finance and debt finance Debt finance, external equity finance and internal finance Retained earnings, debt finance and external equity finance None of the above . According to Myers, the pecking order of financing can be fully explained if there is (a) (b) (c) (d) (e) asymmetric information and divergent expectations homogeneous expectations and symmetric information rational expectations reasonable expectations None of the above 8. According to the net operating income approach, the overall capitalisation rate and the cost of debt remain constant for all degrees of leverage: a. True b. False 9. According to the rational expectations hypothesis, what matters in economics is the congruence between what actually happens and what was supposed to happen. . True b. False 10. According to the net income approach, the average cost of capital remains constant for all levels of financial leverage. a. True b. False 11. The relationship between the return on equity (ROE), return on investment (ROI), cost of debt (r), debt-equity ratio (D/E), and tax rate (t) is as follow (a) (b) (c) (d) (e) ROE = [ROI +(ROI –r) D/E ] (1-t) ROE = [ROI – (ROI –r) D/E ] (1-t) ROE = [ROI +(ROI + r) D/E ] (1-t) ROE = [ROI +( r- ROI ) D/E ] (1-t) None of the above 34 KEY 1 (b) 2 (b) 3 (a) 4 (a) 5 (c) 6 (d) 7 (a) 8 (a) 9 (b) 10 (b) 11 (a) 35 CAPITAL STRUCTURE DECISIONS 1. Financial risk is minimum in (a) (b) (c) (d) (e) debt issue IPO rights equity issue both b and c None of the above 2. Financial slack is more valuable to a firm with (a) (b) (c) (d) (e) poor growth opportunities more intangible assets high liquidity less intangible assets None of the above 3. A powerful defence against bankruptcy is (a) (b) (c) (d) (e) flexibility higher growth expansion modernisation None of the above 4. A company should avoid financial hype in an efficient market because of the dominant role of (a) (b) (c) (d) (e) SEBI lead steers aggressive investors conservative investors None of the above 5. Which of the following is an indirect cost of bankruptcy? (a) Due to myopia, managers may sacrifice actions to build value in the long run (b) Legal and administrative costs are quite high (c) Arguments between shareholders and creditors delay the liquidation of assets (d) If assets are sold under distressed conditions, they may fetch a price significantly less than their economic value 36 e) None of the above 6. Weakened commitment of employees, customers, suppliers, distributors, and other stakeholders is a direct cost of financial distress a. True b. False 7. Creditors face the problem of moral hazard when they lend to a firm that has a large outstanding debt in relation to the value of its assets. a. True b. False 8. The tradeoff theory explains satisfactorily why profitable firms like Hi ndustan Lever depend so little on debt. a. True b. False 9. According to the rational expectations hypothesis what matters in economics is what was rationally expected to happen: a. True b. False KEY 1 (d) 2 (b) 3 (a) 4 (b) 5 (a) 6 (b) 7 (b) 8 (b) 9 (b) 37 DIVIDEND POLICY AND FIRM VALUE 1. Walter model assumes that for financing future investments, a firm will rely only on (a) (b) (c) (d) (e) debentures term loans retained earnings external equity None of the above 2. Value of a firm according to MM depends solely on its (a) (b) (c) (d) (e) equity borrowing capacity earning power dividend payout ratio None of the above 3. As per Gordon model when the rate of return is less than the discount rate, as the dividend payout ratio increases, price per share (a) (b) (c) (d) (e) increases decreases remains unchanged at first increases and then decreases None of the above 4. Radicalists support (a) (b) (c) (d) (e) low dividend payout high dividend payout steady dividend payout stock splits None of the above 5. According to the Walter model, the price of a share is equal to : D ——k (E-D) r/k ———-k (a) + 38 (c) D ——-k _ (E-D) r/k ————-k (E +D) r/k —————-k (c) D ———k + (d) D ——-k + E-D)r/k ————–k (e) None of the above 6. According to the traditional position on the impact of dividend policy on the firm value, the firm value is positively influenced by: (a) (b) (c) (d) (e) A liberal payout policy A conservative payout policy Slow but s teady increase in dividends Higher retention ratio None of the above 7. MM? s view on dividend policy and firm value is: (a) (b) (c) (d) (e) Traditional Radical Academic Subjective None of the above KEY 1 (c) 2 (c) 3 (a) 4 (a) 5 (a) 6 (a) 7 (c) 39 DIVIDEND DECISION 1. Which one of the following is not a plausible reason for paying dividends? a) (b) (c) (d) (e) Investor preference for dividends Information signaling Temporary excess cash Clientele effect None of the above 2. According to the Lintner? s model of corporate dividend behaviour, the current dividend can be explained (a) (b) (c) (d) (e) as a weighted average of past earnings in terms of current earnings and previous year dividend solely in terms of previous year dividend both a and b None of the above 3. Dividend declaration is usually made in (a) (b) (c) (d) (e) board meeting annual general meeting special shareholder meeting b or c None of the above . Bonus shares can be issued out of (a) (b) (c) (d) (e) revaluation rese rve share premium collected in cash excess cash balance accounts receivable None of the above 5. In a stock-split (a) (b) (c) (d) (e) earnings are capitalised EPS remains unchanged book value declines both a and c None of the above 40 6. Which of the following can be a motivator for share buy backs? (a) (b) (c) (d) (e) Price stability Idle cash Tax advantage All the above None of the above 7. The post-buyback debt-equity ratio of company should not exceed : (a) (b) (c) (d) (e) 2 . : 1 1. 33 : 1 1. 0 : 1 1. 0 : 2 None of the above 8. According to Graham and Dodd the weight attached by the market to dividends is equal to: (a) (b) (c) (d) (e) five time the weight attached to retained earnings four times the weight attached to retained earnings three times the weight attached to retained earnings half the weight attached to profit after tax None of the above 9. According to the Lintner model (a) (b) (c) (d) (e) Dt – Dt-1 = c ( r EPSt – Dt-1 ) Dt – Dt-1 = c ( Dt†“1 – r EPSt ) Dt = Dt-1 + c ( EPSt – r Dt-1) Dt = r Dt-1 None of the above 10. According to John Lintner, managers are concerned more about the absolute level of dividend than the change in dividend. a. True b. False 11. Junk bonds are bonds that have a credit rating of: (a) (b) (c) (d) (e) BBB or lower BB or lower B or lower C or lower None of the above 41 12. In which stage of the dividend life cycle, informational asymmetry is moderate? (a) (b) (c) (d) (e) Decline Rapid growth Infancy Maturity None of the above 13. A share buyback programme effectively: (a) (b) (c) (d) (e) Decreases the EPS Decreases the P/E ratio Increases the share price All the above None of the above 4. As per SEBI guidelines, buyback of shares can be done through the Dutch auction route: b. True b. False KEY 1 (c) 12(b) 2 (d) 13(b) 3 (a) 14(a) 4 (b) 5 (c) 6 (d) 7 (a) 8 (b) 9 (a) 10 (b) 11 (b) 42 WORKING CAPITAL POLICY 1. Which portion of total capital generates most of the profits? (a) (b) (c) (d) (e) Fixed assets Investments Working capital Paid-up capital None of the above 2. Which on e of the following is not part of working capital? (a) (b) (c) (d) (e) Inventory Receivables Instalments of term loans due within the next twelve months Investments None of the above . The life span of current assets does not depend on: (a) (b) (c) (d) (e) Sales Production Maintenance Synchronisation among them None of the above 4. The working capital needs of a firm are not influenced by: (a) (b) (c) (d) (e) Nature of business Seasonality of operations Production policy Market conditions None of the above 5. A firm that manages with a small amount of inventory is said to be following a: (a) (b) (c) (d) (e) Aggressive policy Conservative policy Defensive policy Survival policy None of the above 43 6. To be consistent with the „The Matching Principle? fluctuating current assets must be supported by: (a) (b) (c) (d) (e) Equity Debentures Short-term bank borrowings Long- term bank borrowings None of the above 7. A negative cash cycle for a company necessarily implies: (a) (b) (c) (d) (e) Poor management of credit sales Poor management of receivables Poor management of trade creditors Poor management of profitability None of the above 8. Which one of the following typically needs the least working capital? (a) (b) (c) (d) (e) A tea plantation A hotel A construction company A departmental store None of the above . Which one of the following will decrease the length of the cash cycle? (a) (b) (c) (d) (e) Increase in inventory period Increase in accounts receivable period Increase in accounts payable period Decrease in accounts payable period None of the above 10. If you subtract net working capital from gross working capital, you will get: (a) (b) (c) (d) (e) Current assets Current liabilities Fixed assets Net profit None of the above KEY 1 (e) 2 (d) 3 (c) 4 (e) 5 (a) 6 (c) 7 (e) 8 (b) 9 (c) 10 (b) 44 CASH AND LIQUIDITY MANAGEMENT 1. The principal tool of cash management is: (a) (b) (c) (d) (e) Short-term cash forecasting Maximising daily collections Maximising the payment slack Obtention of fine rates None of the above 2. In cash forecasting, which one of the following analysis is generally used? (a) (b) (c) (d) (e) Sensitivity analysis Scenario analysis Simulation analysis Decision tree analysis None of the above 3. The method that is generally used for long-term cash forecasting is: (a) (b) (c) (d) (e) Adjusted net income method Adjusted receipt and payment method Average income and expenditure method Cash deficit gap method None of the above . Which of the following, according to Keynes, is not a motive for holding cash (a) (b) (c) (d) (e) Speculative motive Psychological motive Precautionary motive Transaction motive None of the above 5. Float is the difference between: (a) (b) (c) (d) (e) Available balance and the ledger balance Available balance and the amount yet to be collected Total available balance an d the bank balance Total available balance and the balance in hand None of the above 45 6. Net float is: (a) (b) (c) (d) The difference between disbursement float and collection float The sum of disbursement float and collection float The difference of the available balance and balance on hand Either a or c 7. Which of the following is the most important criterion for evaluating various investment instruments? (a) (b) (c) (d) (e) Safety Yield Liquidity All the above None of the above 8. The most popular mutual fund schemes for investing short- term surpluses are: (a) (b) (c) (d) (e) Equity schemes Balanced schemes Debt schemes Hybrid schemes None of the above 9. Commercial paper is a: (a) (b) (c) (d) (e) Secured bill of exchange Unsecured bill of exchange Secured promissory note Unsecured promissory note None of the above 10. Which one of the following is secured in nature? (a) (b) (c) (d) (e) Certificate of deposit Commercial paper Treasury bill Ready forward None of the above KEY 1 (a) 2 (b) 3 (a) 4 (b) 5 (a) 6 (b) 7 (d) 8 (c) 9 (d) 10 (d) 46 CREDIT MANAGEMENT 1. Most commonly, the trade cycle for a business is financed partly by: (a) (b) (c) (d) (e) The sellers The buyers The financiers All the above None of the above 2. A bill of exchange contains a: (a) (b) (c) (d) (e) Unconditional ndertaking to pay Conditional undertaking to pay Unconditional order to pay Conditional order to pay None of the above 3. The beneficiary of a letter of credit is: (a) (b) (c) (d) (e) The seller The buyer The financing bank Either a or b None of the above 4. Which one of the following is not literally part of the „five C? s of credit (a) (b) (c) (d) (e ) Capital Character Capability Collateral None of the above 5. In sequential analysis of creditworthiness, which one of the following should be your starting point? (a) (b) (c) (d) (e) Capital Character Collateral General economic conditions None of the above 7 6. The measure not commonly employed for judging whether accounts receivables are â€Å"in control† is: (a) (b) (c) (d) (e) Ageing schedule Average collection period Bad debt losses Interest collected on delayed payments None of the above 7. In a consignment sale: (a) (b) (c) (d) (e) The title of the goods is with the consignor The title of the good is with the consignee Consignee is an agent of the consignor Both a and c None of the above 8. In type II error: (a) A bad customer is misclassified as a good credit risk. (b) A good customer is misclassified as a poor credit risk (c) None of the above 9. Under the DSO method, if the value of DSO exceeds the specified norm: (a) (b) (c) (d) (e) Collections are considered to be fast Collections are considered to be slow Collections are considered to be satisfactory Collections are considered to be average None of the above KEY 1 (d) 2 (c) 3 (a) 4 (c) 5 (b) 6 (d) 7 (d) 8 (a) 9 (d) 48 INENTORY MANAGEMENT 1. Maintaining ‘organisation' inventories is not for: (a) (b) (c) (d) (e) Reducing the time required for the process Widening the latitude in planning and scheduling successive operations Decoupling the purchasing and production activities to some extent Both b and c None of the above . Which one of the following is not the most commonly used tool of inventory management in India? (a) (b) (c) (d) (e) Just- in-time inventory control ABC analysis FSN analysis Inventory turnover analysis None of the above 3. ABC analysis advocates a selective approach to inventory control with concentration on: (a) (b) (c) (d) (e) Items accounting for the bulk of usage by usage quantity Items accounting for the bulk of usage by usage value The process time related to high value inventory All the above None of the above 4. Which one of the following is not an assumption in the basic EOQ model? (a) The cost of carrying is a fixed percentage of the average value of inventory (b) The cost per order is constant regardless of the size of the order (c) The interval between ordering and receiving goods is constant (d) The usage is even throughout the period (e) None of the above 5. Fixed manufacturing overheads are treated as period costs under: (a) (b) (c) (d) (e) Direct costing Absorption costing Indirect costing Variable costing None of the above 49 6. JIT inventory system requires: (a) (b) (c) (d) (e) Strong and dependable relationship with suppliers Reliable transportation system Either a or b Both a and b None of the above KEY 1 (a) 2 (a) 3 (b) 4 (c) 5 (a) 6 (d) 50 WORKING CAPITAL FINANCING 1. Accruals are treated as part of: (a) (b) (c) (d) (e) Spontaneous financing Regular financing Long- term financing Internal accrual None of the above 2. Which one of the following is the most harmful factor in getting trade credit? (a) (b) (c) (d) (e) Poor earning record Broken promises Unrealistic plans Poor market share None of the above . A firm typically should: (a) Delay the payment till the last day of the net period (b) Delay the payment if possible beyond the net period (c) Avail of the discount for prompt payment in the middle of the discount period (d) Avail of the discount for prompt payment on the last day of the discount period (e) None of the above 4. Which one of the following is not a means of obtaining working capital finan ce? (a) (b) (c) (d) (e) Overdraft Discounting of bills Letter of credit All the above None of the above . In a letter of credit arrangement: (a) (b) (c) (d) (e) Bank assumes the risk Bank supplies the credit Suppliers assume the risk Both a and b None of the above 51 6. In cash credit, the responsibility of cash management lies with: (a) (b) (c) (d) (e) The bank The customer The creditors Both b and c None of the above 7. Which one of the following is typically a demerit of public deposits, for an investor: (a) (b) (c) (d) (e) Interest rate Maturity period Tax exemption Restrictive covenants None of the above . Inter-corporate deposit market is charecterised by: (a) (b) (c) (d) (e) Secrecy Lack of regulations Personal contacts All the above None of the above 9. RBI imposes certain conditions on the terms of issue of a commercial paper because it is: (a) (b) (c) (d) (e) Issued for a short term Issued at a discount to the face value Unsecured Issued for raising working capital None of the above KEY 1 (a) 2 (b) 3 (d) 4 (d) 5 (a) 6 (a) 7 (c) 8 (d) 9 (c) 52 WORKING CAPITAL MANAGEMENT: EXTENSIONS 1. In a MRP system, the master schedule is exploded into: (a) (b) (c) (d) (e) Purchase order for raw materials Shop orders for scheduling the factory Time bound orders for purchase of balancing equipments Both a and b None of the above 2. In which of the following, inventory is treated as the „root of all evil (a) (b) (c) (d) (e) Kaizan Kanban JIT Both b and c None of the above KEY 1 (d) 2 (c) 53 DEBT AND HYBRID FINANCING 1. Market price of a coupon bond is independent of: (a) (b) (c) (d) (e) Maturity period Coupon rate Required rate of return Inflation rate None of the above . Which one of the following can affect real interest rate: (a) (b) (c) (d) (e) Expected higher inflation Tax law changes Heightened competition for funds Both b and c None of the above 3. A debt rating is not a: (a) (b) (c) (d) (e) General evaluation of the issuing organisation Reflection on the timely payment of interest Reflection on the timely payment of principal Recommendation for purchasing a security None of the above 4. Which one of the following is true? a) A debt rating implies that the rating agency performs an audit function (b) A debt rating offers low- cost information (c) A debt rating creates a fiduciary relationship between the rating agency and the users of a rating (d) Both a and b (e) None of the above 5. Which type of firms would do well to incorporate sinking fund provisions in their debt issuances? (a) (b) (c) (d) (e) Firms with higher debt – equity ratio Firms with higher growth rates Firms with smaller asset lives All the above None of the above 54 6. To tackle inflation risk, you will go for: (a) (b) (c) (d) (e) Deep discount bonds Fixed rate bonds Floating rate bonds Inverse floaters None of the above 7. If you are called to fund an airport project, you would prefer to go for (a) (b) (c) (d) (e) deep discount bonds floating rate bonds puttable bonds term loans None of the above 8. Pass Through Securities are serviced from the (a) (b) (c) (d) (e) proceeds of sale of a pool of assets cash flows received from a pool of assets proceeds of a public issue proceeds of a debenture issue for this purpose None of the above . Which one of the following is not a negative covenant in a bond issue? (a) (b) (c) (d) (e) The firm may not dispose or lease its major assets The firm cannot merge with another firm The firm cannot go in for capacity enhancement The firm cannot acquire another firm None of the above 10. When inflation is expected to rise in the coming decade, as a bond issuer, you will prefer to issue (a) (b) (c) (d) (e) Fixed rate bo nds Floating rate bonds Callable bonds Puttable bonds None of the above 55 11. Reinvestment risk for a bond refers to the risk that the periodic interest payment may have to be reinvested at (a) (b) (c) (d) (e) A lower interest rate A higher interest rate A risk-free rate (a) and (c) None of the above 12. For a zero coupon bond (a) (b) (c) (d) (e) Duration is zero Duration is one-half the term to maturity Duration is undefined Duration is the same as the term to maturity None of the above 13. Immunisation attempts to balance (a) (b) (c) (d) (e) Price risk and default risk Price risk and reinvestment risk Recall risk and reinvestment risk Inflation risk and price risk None of the above 4. Which bond has the longest duration? (a) (b) (c) (d) (e) 12-year maturity, 5 % coupon 12-year maturity, 7% coupon 8-year maturity , 7% coupon 8-year maturity , 5 % coupon None of the above 15. Which among the following may not be a plausible reason for a company issuing callable bonds? (a) (b) (c) (d) (e) Superior interest rate forecasting Greater investment flexibility Reducti on in interest rate risk Strategic positioning None of the above 56 KEY 1 (e) 12 (d) 2 (d) 13 (b) 3 (a) 14 (a) 4 (b) 15(d) 5 (d) 6 (c) 7 (a) 8 (b) 9 (c) 10 (a) 11 (a) 57 INTERNATIONAL FINANCIAL MANAGEMENT 1. International foreign exchange market is dominated by (a) (b) (c) (d) (e) Speculative transactions Hedging transactions Mercantile transactions Transactions between central banks None of the above 2. Exchange rates in India are fixed by: (a) (b) (c) (d) (e) Ministry of finance Reserve Bank of India Foreign Exchange Dealers Association of India A committee appointed for this purpose None of the above 3. Commission charged by foreign exchange dealers generally range from: (a) (b) (c) (d) (e) 0. 25 to 0. 50 percent 0. 02 to 0. 05 percent There is no particular range They do not charge any commission None of the above . The bid-ask spread reflects: (a) (b) (c) (d) (e) The breadth of the market The depth of the market The volatility of the market All the above None of the above 5. If the forward bid in points is less than the offer rate in points, which of the following is not true? (a) (b) (c) (d) (e) The foreign currency is at a premium The home currency is at a premium The foreign curr ency is at a discount Both a and b None of the above 6. Currency futures contracts are traded: 58 (a) (b) (c) (d) (e) Over phone/electronic media Over the counter by leading banks In exchanges In all the above In none of the above 7. A tailor made currency option can be purchased from: (a) (b) (c) (d) (e) Organised exchanges Banks dealing in foreign exchange Mercantile agents Investment banks None of the above 8. Eurocurrency market is: (a) (b) (c) (d) (e) 9. The advantage of issuing a GDR is: (a) (b) (c) (d) (e) There is no listing fee Onerous disclosures are not required There are no onerous reporting requirements All the above None of the above Market in which currencies of European nations are traded International market for loans denominated in euro International market for short-term capital International market for long – term capital None of the above 0. Which one of the following attracts stringent listing requirements? (a) (b) (c) (d) (e) Yankee bond ADS GDR Both a and c None of the above 11. Packing credit advance has to be liquidated: (a) (b) (c) (d) (e) By negotiation of export bills By receipt of export proceeds By availing of rupee term loan Either a or b None of the above 59 12. Forfaiting essentially refers to: (a) (b) (c) (d) (e) Financing exporter? s inventory Discounting exporter? s receivables Guaranteeing of the export receivables by the exporter? s bank Surrendering the export proceeds in favour of the discounting bank None of the above 3. The beneficiary of a Letter of Credit is: (a) (b) (c) (d) (e) Importer Exporter Exporter? s bank Importer? s bank None of the above 14. Forward contracts are entered into to hedge: (a) (b) (c) (d) (e) Transaction exposure Translation exposure Operating exposure All the above None of the above 15. Which one of the following may not be a means of mitigating operating exposure? (a) (b) (c) (d) (e) Change in sourcing Shift in the location of production Change in product-market combination Leading and lagging None of the above 6. As foreign exchange market is an OTC market, which of the following is not true? (a) (b) (c) (d) There is lesser price transparency Trades can be customised in terms of maturities There is risk of counter party default There cannot be differences in the exchange rates for the same currency pair, for different counterparties (e) None of the above 60 17. Which of the following currency is traded in both the euromarket and the offshore market? (a) (b) (c) (d) (e) US Dollar British Pound Euro All the above None of the above 18. The spread over SIBOR for a given borrowing is also a function of the prevailing market conditions: a. True b. False 19. Bonds issued by a German company in the US, denominated in dollars are : (a) (b) (c) (d) (e) Foreign bonds Domestic bonds Eurobonds International bonds None of the above 20. In the case of GDRs issued by Indian companies, the reverse conversion i. e. from shares to GDRs is freely permitted: a. True b. False KEY 1 (a) 12 (b) 2 (e) 13 (b) 3 (d) 14 (a) 4 (d) 15 (d) 5 (a) 16(d) 6 (c) 17(d) 7 (b) 18(a) 8 (c) 19(a) 9 (d) 20(b) 10 (a) 11 (d) 61 FINANCIAL MANAGEMENT OF SICK UNITS . RBI study on the causes of industrial sickness shows that the incidence of sickness is highest in India on account of: (a) (b) (c) (d) (e) Labour trouble Market recession Mismanagement and managerial deficiencies Faulty initial planning and other technical drawbacks None of the above 2. If CDR is not possible, the restructuring may be done through: (a) (b) (c) (d) (e) NS OTS ADB Either a or b No ne of the above 3. Which of the following is not a reason for classifying a unit as sick by term lending financial institutions? (a) (b) (c) (d) (e) Default in meeting a certain no. f consequent instalments Continued erosion of market share Cash losses for a certain period Continued erosion of net worth , say by 50 percent None of the above KEY 1 (c) 2 (d) 3 (b) 62 CORPORATE RISK MANAGEMENT 1. Economic risks mostly may not arise on account of : (a) (b) (c) (d) (e) Output price R&D Labour cost Competitive environment None of the above 2. In general, which among the following may not have any significant impact on the performance of a firm? (a) (b) (c) (d) (e) Economic risks Financial risks Technological risks Regulatory risks None of the above 3. Hedging activities aimed at reducing total corporate risk, are regarded as irrelevant by modern finance theory: a. True b. False 4. According to CAPM, only the unique risk has a bearing on the required rate of return: a. True b. False 5. Greater financial flexibility to cope with volatility in financial prices is provided by a: (a) (b) (c) (d) (e) High current ratio High gearing ratio Low gearing ratio High quick ratio None of the above 6. R2 refers to the : (a) (b) (c) (d) Coefficient of multiple regression Variance of regression Coefficient of multiple correlation Coefficient of multiple covariance 63 e) None of the above 7. Total risk cannot be fully offset by hedging with market portfolio: a. True b. False 8. If you want to hedge interest rate risk, you should (a) (b) (c) (d) (e) Go long on interest rate contract Go short on interest rate contract Sell a forward contract Enter into a forward rate agreement None of the above 9. Futures are forward contracts: a. True b. False 10. Y ou will not be marked to market, if you: (a) (b) (c) (d) (e) Purchase a futures contract Sell a futures contract Purchase an options contract Sell an options contract None of the above 11. In a currency swap interest payments are not swapped: a. True b. False 12. Which of the following may not be a reason for going in for a financial swap? (a) (b) (c) (d) (e) Spread compression Market segmentation Market saturation Difference in financial norms None of the above 13. Which among the following is not standardized: (a) (b) (c) (d) (e) Options contract Futures contract Swap contract All the above None of the above 64 14. Insurance companies do face the problem of adverse selection but not that of moral hazard: a. True b. False 15. Globally the most popular measure of risk is: (a) (b) (c) (d) (e) Duration VAR R2 Gap analysis None of the above 6. For commodities the following relationship is expected to hold: Futures price (a) (1+rf)t Futures price (b) (1+rf)t Futures price (c) (1+rf)t Futures price (d) (1+rf)t (e) None of the above = Spot price – Present value of storage costs + Present value of convenience yield = Spot price + Present value of storage costs – Present value of convenience yield = Spot price+Present value of storage costs + Present value of convenience yield = Spot price KEY 1 (b) 12(e) 2 (e) 13(c) 3(a) 14(b) 4(b) 15(b) 5(c) 16(c) 6(c) 7(a) 8(d) 9(a) 10(c) 11(b) 65