Which of the following statements is most correct?
a. One of the ways in which firms can mitigate or reduce agency problems
between bondholders and stockholders is by increasing the amount of debt in
the capital structure.
b. The threat of takeover is one way in which the agency problem between
stockholders and managers can be alleviated.
c. Managerial compensation can be structured to reduce agency problems between
stockholders and managers.
d. Statements b and c are correct.
e. All of the statements above are correct
2. Until this year, Cheers Inc. was organized as a partnership.
This year, the partners have decided to organize the business as
a corporation. As a result of this change in organizational
form, which of the following statements is most correct?
a. Cheers’ shareholders (the ex-partners) will now have limited
liability.
b. Cheers will now be subject to fewer regulations.
c. Cheers will now pay less in taxes.
d. Cheers’ investors will now find it more difficult to transfer
ownership.
e. Cheers will now find it more difficult to raise additional
capital.
3. Last year, Owen Technologies reported negative net cash flow and negative free
cash flow. However, its cash on the balance sheet increased. Which of the
following could explain these changes in its cash position?
a. The company had a sharp increase in its depreciation and amortization
expenses.
b. The company had a sharp increase in its inventories.
c. The company issued new common stock.
d. Statements a and b are correct.
e. Statements a and c are correct.
4. Cox Corporation recently reported an EBITDA of $22.5 million and $5.4 million
of net income. The company has $6 million interest expense and the corporate
tax rate is 35 percent. What was the company’s depreciation and amortization
expense?
a. $ 4,333,650
b. $ 8,192,308
c. $ 9,427,973
d. $11,567,981
e. $14,307,692
5. Company A and Company B have the same total assets, return on
assets (ROA), and profit margin. However, Company A has a higher
debt ratio and interest expense than Company B. Which of the
following statements is most correct?
a. Company A has a higher ROE (return on equity) than Company B.
b. Company A has a higher total assets turnover than Company B.
c. Company A has a higher operating income (EBIT) than Company B.
d. Statements a and b are correct.
e. Statements a and c are correct.
6. The Wilson Corporation has the following relationships:
Sales/Total assets 2.0´
Return on assets (ROA) 4.0%
Return on equity (ROE) 6.0%
What is Wilson’s profit margin and debt ratio?
a. 2%; 0.33
b. 4%; 0.33
c. 4%; 0.67
d. 2%; 0.67
e. 4%; 0.50
7. Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2.
The company has $2 million in sales and its current liabilities are $1 million.
What is the company’s inventory turnover ratio?
a. 5.0
b. 5.2
c. 5.5
d. 6.0
e. 6.3
8. The risk-free rate is 6 percent. Stock A has a beta of 1.0, while Stock B has a beta
of 2.0. The market risk premium (k M – k RF ) is positive. Which of the following
statements is most correct?
a. Stock B’s required rate of return is twice that of Stock A.
b. If Stock A’s required return is 11 percent, the market risk premium is 5
percent.
c. If the risk-free rate increases (but the market risk premium stays unchanged),
Stock B’s required return will increase by more than Stock A’s.
d. Statements b and c are correct.
e. All of the statements above are correct.
9. Bradley Hotels has a beta of 1.3, while Douglas Farms has a beta
of 0.7. The market return is 12 percent. The risk-free rate of
interest is 7 percent. By how much does Bradley’s required
return exceed Douglas’ required return?
a. 3.0%
b. 6.5%
c. 5.0%
d. 6.0%
e. 7.0%
10. Which of the following statements is most correct?
a. If annual compounding is used, the effective annual rate equals the nominal
rate.
b. If annual compounding is used, the effective annual rate equals the periodic
rate.
c. If a loan has a 12 percent nominal rate with semiannual compounding, its
effective annual rate is equal to 11.66 percent.
d. Statements a and b are correct.
e. Statements a and c are correct.
11. Which of the following statements is most correct?
a. All else equal, if a bond’s yield to maturity increases, its price will fall.
b. All else equal, if a bond’s yield to maturity increases, its current yield will
fall.
c. If a bond’s yield to maturity exceeds the coupon rate, the bond will sell at a
premium over par.
d. All of the statements above are correct.
e. None of the statements above is correct
12. A bond with a $1,000 face value and an 8 percent annual coupon pays interest
semiannually. The bond will mature in 15 years. The nominal yield to maturity
(K d ) is 11 percent. What is the price of the bond today?
a. $ 784.27
b. $ 781.99
c. $1,259.38
d. $1,000.00
e. $ 739.19
13. Variable costs are budgeted to be 60% of the sales value whereas the fixed costs
are estimated as 10% of the sales value. If the company increases its selling price
by 10% and fixed cost per unit, variable cost per unit and the sales volume remain
the same ,
the effect of the contribution will be
a. An increase by 3%
b. An increase by 10%
c. A increase by 25%
d. A increase by 30%
14. Increase in total variable cost is due to :
(i) increase in fixed cost; (ii) increase in sales;
(iii) increase in production.
15. An example of fixed cost is :
(i) direct material cost; (ii) works manager’s salary;
(iii) depreciation of machinery; (iv) chargeable expenses.
16. Cost of goods produced includes :
(i) production cost and finished goods inventory
(ii) production cost and work-in- progress;
(iii) production cost, work-in- progress and finished goods inventory.
17 Indirect costs are known as,
(i) Variable costs (ii) Fixed costs
(iii) Overheads (iv)None of the above.
18. If Rs 10 is spend on producing 10 units and Rs 15 for producing 15, then the fixed
cost per unit is,
(i) Rs 0 (ii) Rs 1
(iii) Rs 2 (iv) None of the above
19 The variable cost per unit is,
(i) Variable in nature. (ii) Fixed in nature.
(iii) Semivariable in nature. (iv) None of the above.
20 A company presently does not utilise its available capacity. In case of full
capacity utilisation, the cost per unit shall,
(i) Increase (ii) Decrease
(iii) Remain constant (iv) None of the above
21. Which of these activities does not exclusively come within the scope of
corporate financial decision-making?
1. How much should be invested?
2. How much is to be allocated to the marketing budget?
3. Which type of finance should be chosen?
4. How much finance should be raised?
22. Which of the following is not a fundamental concept in Corporate Finance?
1. Net present value
2. The relationship between risk and return
3. The business cycle
4. Double-entry book-keeping.
23. What does the general principle of disclosure and transparency mean?
1. The company is obliged to reveal all holding companies, strategic
alliances, and joint ventures to the government.
2. The company is obliged to reveal all investment plans to employees.
3. The company is obliged to reveal all information in a timely manner
which could have a significant effect on shareholder welfare.
4. The company is obliged to lodge audited accounts with Companies House.
24. What is the stakeholder view of the firm?
1. Shareholders should eventually be returned their stake in the firm.
2. The firm must honour its wider social obligations as well as making
money.
3. The only obligation on the firm is to maximize profit.
4. The firm exists to maximize return.
25. What is the Grameen bank?
1. A US investment bank.
2. A Bangladeshi bank specializing in microfinance.
3. A Japanese bank specializing in Forex trading.
4. A British hedge fund.
26. Which of the following people or institutions is not the author of a corporate
governance code?
1. International Corporate Governance Network.
2. Cadbury.
3. OECD.
4. Harvard-Yale.
27. In finance we refer to the market for short-term government and corporate debt
securities as the market.
1. Money
2. Capital
3. Prinary
4. Secondary
28. Which of the following would generally have unlimited liability?
i. A limited partner in a partnership.
ii. A shareholder in a corporation.
iii. The owner of a sole proprietorship.
iv. A member in a limited liability company (LLC).
30. In finance we refer to the market where existing securities are bought and sold as
the market
1. Money
2. Capital
3. Primary
4. Secondary
31. Which of the following examples would be deductible as an expense on the
corporation's income statement?
1. Interest paid on outstanding bonds.
2. Cash dividends paid on outstanding common stock.
3. Cash dividends paid on outstanding preferred stock
4. All of the above.
32. Which investment will be characterized by the highest monetary return at the end
of the investment horizon? Assume annual compounding.
1. 5 years at the interest rate of 5% per year.
2. 7 years at the interest rate of 3% per year.
3. 4 years at the interest rate of 9% per year.
4. 2 years at the interest rate of 6% per year.
33. Which of the following represents the future value of £1,000 invested at 10%
per annum for 10 years?
1. £2,500
2. £1,913
3. £2,594
4. £2,600
34.. Which of the following is not a characteristic of wholesale markets?
1. Firms deal with other firms.
2. Lending and borrowing is coordinated through banks.
3. Borrowing and lending is not intermediated.
4. Very large quantities of money are at stake
35. Which of the following world stock exchanges were in the top five by value
of transaction in 2009?
1. London Stock Exchange.
2. Shanghai Stock Exchange.
3. Deutsche Börse.
4. Hong Kong Exchanges.
36. Which of the following is not a characteristic of a preference share?
1. Ranks last for payment in the event of company liquidation.
2. Unpaid dividend accrues until it can be paid.
3. Do not usually have voting rights unless dividends fall into
arrears.
4. It is more like debt than a share in its characteristics
37. Which of the following is not one of the qualities which makes debt
attractive to firms?
1. The cost of debt is generally less than the cost of share
capital and hence can lower the overall cost of capital for a
firm.
2. Debt interest only gets paid when the company is making a
profit.
3. It reduces the amount of corporate tax payable by firms by
reducing the amount of taxable profit.
4. The required return on debt is lower because, from the
lender's point of view, debt is less risky than equity.
29. What is the value of a 6%, five year bond with annual coupons and face value
equal to £1,000, if the current yield to maturity is 6%?
1. £1,089
2. £920
3. £1,200
4. £1,000
30. What is the value of the firm usually based on?
1. The value of debt and equity.
2. The value of equity.
3. The value of debt.
4. The value of assets plus liabilities.
31. Which of the following is not a reason why firms typically do not report values
for intangible capital?
1. A firm's intangible capital is the main source of its
competitive advantage.
2. It may be hard to firmly establish intangible value in the
event of a dispute.
3. There are no completely reliable metrics that allow us to do
it.
4. Tangible capital is of significantly greater value than
intangible capital.
32. Volatility risk of a single asset is usually measured by which of the
following?
1. Standard deviation.
2. Variance.
3. Correlation.
4. Covariance.
33. Which of these is an appropriate measure of individual share risk (i.e. the risk of
a single share held aspart of a porfolio)?
1. Variance.
2. Beta.
3. Standard deviation.
4. Correlation.
34. The sum of squared deviations from the mean, multiplied by probability,
describes which of the following?
1. Standard deviation.
2. Variance.
3. Correlation.
4. Covariance.
35. The standard deviation is calculated as the square root of variance because the
variance calculation results in which of the following?
Too many decimal places.
Sample bias.
Two roots.
Squared units.
36. If an asset has zero beta, then it can be described in which of the following
ways?
It is very risky.
It is risk free.
It is riskier than the market portfolio.
It has the same risk as the market portfolio.
37. If an asset has a beta of one, then it can be described in which of the
following ways?
It is very risky.
It is risk free.
It is riskier than the market portfolio.
It has the same risk as the market portfolio.
38. If a share return is higher than is justified by the share's beta, then which of the
following will restore market equilibrium?
Fall in the share's price, rise in share return.
Rise in the share's price, fall in share return.
Fall in the share's price, fall in share return.
Rise in the share's price, rise in share return.
39. A 'commodities forward contract' is which of the following?
A contract in which the counterparties agree to exchange a commodity at some date in
the future but at a price decided now.
A contract in which the counterparties agree to exchange a commodity now but at a price
decided in the future.
A standardized exchange traded contract.
The option but not the right to buy the underlying at some point in the future.
40. If you were a famer growing crops for market, how would you hedge your
risk?
By taking contracts to sell at a pre-agreed forward price.
By taking contracts to buy at a pre-agreed forward price.
By taking contracts to sell at the spot price.
By taking contracts to buy at the spot price.
41. If you were buying food for a big hamburger chain, how would you hedge your
risk?
By taking contracts to sell at the spot price.
By taking contracts to buy at the spot price.
By taking contracts to sell at a pre-agreed forward price.
By taking contracts to buy at a pre-agreed forward price.
42. Which of the following describes purchasing power parity (PPP)?
A theory of the exchange rate in which equilibrium is not possible because of excessive
Forex volatility.
An equilibrium theory in which Forex currency rates change to accommodate changes in
relative prices.
An equilibrium theory in which Forex currency rates change to accommodate changes in
interest rates.
An equilibrium theory in which Forex currency rates change to accommodate changes in
trade and capital flows.
43. If a Big Mac hamburger meal costs £3.20 in the UK and ¥416 in Japan, what is
the appropriate PPP rate of exchange for ¥/£?
¥0.008/£1
¥0.08/£1
¥130/£1
¥1.3/£1
44. In Financial Accounting , debit entries are always
Recorded on the right
Recorded on the left
Not recorded at all
None of the above
45. In Financial Accounting , credit entries are always
Recorded on the right
Recorded on the left
Not recorded at all
None of the above
46. Investment decisions normaly,
Precedes the financing decision
Follows the financing decision
Alongside the financing decision
None of the above
47. Financing decisions normaly,
Precedes the investment decision
Follows the investment decision
Alongside the investment decision
None of the above
48. Bin card is maintained by the
(i) Accounts department
(ii) Costing department
(iii) Stores
(iv) None of the above
49. Bin card contains
(i) Details of the price of raw material lying in the Bin
(ii) Details of the price and quantity of raw material lying in the Bin
(iii) Details of quantity of material lying in the Bin
(iv) None of the above
50. A budget that gives a summary of all the functional budgets and projected Profit
and Loss Account is known as
(a) Capital budget
(b) Flexible budget
(c) Master budget
(d) Discretionary budget
51. The fixed-variable cost classification has a special significance in the
preparation of
(a) Flexible budget
(b) Master budget
(c) Cash budget
(d) Capital budget
52. The basic difference between a fixed budget and a flexible budget is that a fixed
budget
(a) includes only fixed costs, and a flexible budget only variable costs
(b) is a budget for a single level of some measures of activity, while a flexible
budget consists of several budgets based on different activity levels
(c) is concerned with future acquisition of fixed assets, while a flexible budget
is concerned with expenses that vary with sales
(d) cannot be changed after a fiscal period begins, while a flexible budget can
be changed after a fiscal period begins
53. When preparing a production budget, the quantity to be produced
equals:
Sales quantity + opening stock + closing stock
Sales quantity – opening stock + closing stock
Sales quantity – opening stock – closing stock
Sales quantity + opening stock – closing stock
54. A job requires 2,400 actual labour hours for completion and it is anticipated
that there will be 20 percent idle time. If the wage rate is Rs 10 per hour ,
what is the budgeted labour cost for the job?
Rs 19200
Rs 24,000
Rs 28,800
Rs 30,000
55. Accounting profit is considered as a ………….. to a company
Liability
Asset
Neither Asset nor a liability
Positive cash flow
56. Cost of capital comprises of
Cost of long term loan + cost of equity capital
Cost of short term funds
Cost of capital employed + cost of short term funds
None of the above
57. The objective of the finance function is
Profit maximization
Wealth Maximisation
EPS maximization
None of the above
58. Administration of accounting is done
By the ICAI
By the SEBI
By Company law
All of the above
59. What is the most important fundamental reason for an acquiring company to
acquire a target company?
To acquire strategic options
To gain economies of scale
To maximize acquiring firm value
To entrench management
60. What does the following trade credit jargon refer to? '5/7 net 30'.
a) A discount of 5% will be given for full payment within 7 days. Failing
that, the account must be settled in 30 days.
b) A discount of 7% will be given for full payment within 5 days. Failing
that, the account must be settled in 30 days.
c) A discount of 30% will be given for full payment within 7 days. Failing
that, the account must be settled in 30 days.
d) A discount of 5% will be given for full payment within 30 days. Failing
that, the account must be settled in 7 days.