SEMESTER 3

CORPORATE FINANCE
QUESTION BANK
1. The only feasible purpose of financial management is
a) Wealth Maximization
b) Sales Maximization
c) Profit Maximization
d) Assets maximization
2. Agency cost consists of
a) Binding
b) Monitoring
c) Opportunity and structure cost
d) All of the above
3. Time value of money indicates that
a) A unit of money obtained today is worth more than a unit of money obtained in future
b) A unit of money obtained today is worth less than a unit of money obtained in future
c) There is no difference in the value of money obtained today and tomorrow
d) None of the above
4. If the nominal rate of interest is 10% per annum and there is quarterly compounding, the
effective rate of interest will be:
a) 10% per annum
b) 10.10 per annum
c) 10.25%per annum
d) 10.38% per annum
5. Relationship between annual nominal rate of interest and annual effective rate of interest, if
frequency of compounding is greater than one:
a) Effective rate > Nominal rate
b) Effective rate < Nominal rate
c) Effective rate = Nominal rate
d) None of the above
6. Mr. X takes a loan of Rs 50,000 from HDFC Bank. The rate of interest is 10% per annum. The
first installment will be paid at the end of year 5. Determine the amount of equal annual
installments if Mr. X wishes to repay the amount in five installments.
a) Rs 19500

b) Rs 19400
c) Rs 19310
d) None of the above
7. CAPM accounts for:
a) Unsystematic risk
b) Systematic risk
c) Both a and b
d) None of the above
8. If the coupon rate is constant, the value of bond when close to maturity will be
a) Issued value
b) Par value
c) Redemption value
d) All of the above
9. Financial planning is ---------- function of a finance manager
a) Executive
b) Auxiliary
c) incidental
d) None of these
10. Profit maximization may lead to better and efficient utilization of the recourses only when
there is --------a) Monopoly
b) Oligopoly
c) Perfect competition
d) None of these
11. __________ is concerned with the maximization of a firm's earnings after taxes.
A. Shareholder wealth maximization
B. Profit maximization
C. Stakeholder maximization
D. EPS maximization
12. Which of the following statements is correct regarding profit maximization as the primary
goal of the firm?
a) Profit maximization considers the firm's risk level.
b) Profit maximization will not lead to increasing short - term profits at the expense of
lowering expected future profits.
c) Profit maximization does consider the impact on individual shareholder's EPS.
d) Profit maximization is concerned more with maximizing net income than the stock price.
13. A concept that implies that the firm should consider issues such as protecting the consumer,
paying fair wages, maintaining fair hiring practices, supporting education, and considering
environmental issues.

a)
b)
c)
d)

Financial management
Profit maximization
Agency theory
Social responsibility

14. Which of the following is not normally a responsibility of the treasurer of the modern
corporation but rather the controller?
a) Budgets and forecasts
b) Asset management
c) Investment management
d) Financing management
15. To whom does the Treasurer most likely report?
a) Chief Financial Officer.
b) Vice President of Operations.
c) Chief Executive Officer.
d) Board of Directors
16. The __________ decision involves efficiently managing the assets on the balance sheet on a
day to - day basis, especially current assets.
a) asset management
b) financing
c) investment
d) accounting
17. Which of the following is not a perquisite (perk)?
a) Company - provided automobile.
b) Expensive office.
c) Salary.
d) Country club membership.
18. Which of the following is not normally a responsibility of the controller of the modern
corporation?
a) Budgets and forecasts.
b) Asset management.
c) Financial reporting to the IRS.
d) Cost accounting.
19. All constituencies with a stake in the fortunes of the company are known as __________.
a) shareholders
b) stakeholders
c) creditors
d) customers
20. Which of the following statements is not correct regarding earnings per share (EPS)
maximization as the primary goal of the firm?
a) EPS maximization ignores the firm's risk level.

b) EPS maximization does not specify the timing or duration of expected EPS.
c) EPS maximization naturally requires all earnings to be retained.
d) EPS maximization is concerned with maximizing net income.
21. __________ is concerned with the maximization of a firm's stock price.
a) Shareholder wealth maximization
b) Profit maximization
c) Stakeholder welfare maximization
d) EPS maximization
22. Corporate governance success includes three key groups. Which of the following represents
these three groups?
a) Suppliers, managers, and customers.
b) Board of Directors, executive officers, and common shareholders.
c) Suppliers, employees, and customers.
d) Common shareholders, managers, and employees.
23. "Shareholder wealth" in a firm is represented by:
a) the number of people employed in the firm.
b) the book value of the firm's assets less the book value of its liabilities.
c) the amount of salary paid to its employees.
d) the market price per share of the firm's common stock.
24. The long - run objective of financial management is to:
a) maximize earnings per share.
b) maximize the value of the firm's common stock.
c) maximize return on investment.
d) maximize market share.
25. What are the earnings per share (EPS) for a company that earned $100,000 last year in after tax profits, has 200,000 common shares outstanding and $1.2 million in retained earning at the
year end?
a. Rs. 100,000
b. Rs. 6.00
c. Rs.0.50
d. Rs.6.50
26. The cost of monitoring management is considered to be a (an):
a. bankruptcy cost.
b. transaction cost.
c. agency cost.
d. institutional cost.
27 . The focal point of financial management in a firm is:
a. the number and types of products or services provided by the firm.
b. the minimization of the amount of taxes p aid by the firm.
c. the creation of value for shareholders.
d. the dollars profits earned by the firm.

28. The decision function of financial management can be broken down into the decisions.
a) financing and investment
b) investment, financing, and asset management
c) financing and dividend
d) capital budgeting, cash management, and credit management
29 . The controller's responsibilities are primarily.............. in nature, while the treasurer's
responsibilities are primarily related to.............
a. operational; financial management
b. financial management; accounting
c. accounting; financial management
d. financial management; operations
30. Agency theory examines the:
a. relationship between the owners and managers of the firm
b. insurability of the firm's assets
c. relationship between dividend policy and firm value
d. value of the firm relative to other firms in the industry
31. Financial markets:
a. exist as a vast global network of individuals and financial institutions
b. include a broad group representing lenders, borrowers, owners, institutional
investors, corporations, government units and others
c. circulate information quickly that affects prices of securities
d. all of the above
32. Capital is allocated by financial markets by:
a. a lottery system between investment dealers
b. pricing securities based on their risk and expected future cash flows
c. by pricing risky securities higher than low - risk securities
d. by a government risk - rating system based on AAA for low risk and CCC for
high risk
33. The allocation of capital is determined by:
a. expected rates of return
b. the Bank of Canada
c. the initial sale of securities in the primary market
d. the size of the federal debt
34. The mix of debt and equity in a firm is referred to as the firm's:
a. primary capital
b. capital composition
c. cost of capital
d. capital structure
35. The main focus of finance for the last 40 years has been:
a. mergers and acquisitions
b. conglomerate firms

c. inflation
d. risk - return relationships
36. To financial analysts, "working capital" means the same thing as __________.
a. total assets
b. fixed assets
c. current assets
d. current assets minus current liabilities.
37 . Which of the following would be consistent with an aggressive approach to financing
working capital?
a. Financing short - term needs with short term funds.
b. Financing permanent inventory buildup with long - term debt.
c. Financing seasonal needs with short- term funds.
d. Financing some long - term needs with short - term funds.
38. Which of the following would be consistent with a conservative approach to financing
working capital?
a. Financing short - term needs with short - term funds.
b. Financing short - term needs with long - term debt.
c. Financing seasonal needs with short - term funds.
d. Financing some long - term needs with short - term funds
39. For a healthy business the current ratio lies between
a. 0 to 1.5
b. 1.5 to 3
c. 3 to 4.5
d. 4.5 to 6
40-In ABC analysis A class consist of items having ________.
a. Accurate records
b. Good records
c. Minimal records
d. No records
41-The symptom of large inventory accumulation in anticipation of price rise in future will be
indicated by
a. Asset turnover ratio
b. Working Capital turnover ratio
c. Inventory turnover ratio
d. All of the above
42.The comparison of financial data of same time period of different organisations engaged in
similar business.
a) Time series analysis
b) Cross-sectional analysis

c) Spatial data analysis

d) None of the above
43.-An example of fixed asset is
a. Live stock
b. Value stock
c. Income stock
d. All of the above
44-The following is (are) the limitation of Economic Order Quantity assumption(s).
a. Demand may vary throughout the year
b. It assumes that the storage space is unlimited
c. Prices of materials change throughout the year
d. All of the above
45. The following is (are) the type(s) of capital budgeting decision(s)
a. Diversification
b. Replacements
c. Expansion
d. All of the above
46. Dividend present value for period of non-constant growth in addition with horizon value is
used to calculate
1. stock extrinsic value
2. stock intrinsic value
3. dividend intrinsic value
4. stock intrinsic value
47. Current price is Rs.40 and dividend paid is Rs.10 then dividend yield will be
a) Rs25
b) 25%
c) Rs.4
d) 4%
48. Stock in small companies, owned by few people but not actively traded is classified as
a) closely held stock
b) largely held stock
c) attributed stock

d) successful stock
49. Process in which stockholders transfer right to vote to any other person is classified as
a) proxy
b) transfer process
c) voting process
d) assigning right process
50. Rate of return which considers riskiness and an available returns on investments is classified
as
a) constant dividend
b) constant rate
c) maximum rate of return
d) minimum acceptable rate of return
51. Stock market theory which states that stocks are in equilibrium and impossible for investors
to beat market is classified as an
a) inefficient market hypothesis
b) efficient market hypothesis
c) efficient stock hypothesis
d) inefficient stock hypothesis
52. Stock which has fixed payments and failure of payments which do not lead to bankruptcy is
classified as
a) common stock
b) preferred stock
c) bonds equity
d) common shares
53. An efficient market hypothesis states all public information which is reflected in current
market prices is classified as
a) weak form efficiency
b) strong form efficiency
c) market efficiency

d) semi strong efficiency

54. A formula such as an original investment plus an expected capital gain is used to calculate
a) final stock
b) expected stock
c) expected final stock price
d) final stock price
55. In expected rate of return for constant growth, expected total rate of return is equal to
a) buying pricing
b) dividend yield
c) rate of return
d) selling pricing
56. Owners of corporation having certain rights and privileges are considered as
a) special stockholders
b) common stockholders
c) public stocks
d) enactive stocks
57. Preferred stock dividends must be paid on common stock and must have
a) fixed amount of dividends
b) fixed amount of shares
c) variable amount of dividends
d) variable amount of shares
58. Present value of dividends which is expected to be provided in future is classified as an
a) intrinsic value of stock
b) extrinsic value of stock
c) intrinsic bonds
d) extrinsic bonds
59. Information which is reflected in current market prices with help of past price movements is
classified as

a) market efficiency
b) semi strong efficiency
c) weak form efficiency
d) strong form efficiency
60. Value of future dividends after horizon date is classified as
a) hypothesis value
b) horizon value
c) terminal value
d) Both B and C
61. Real rate of return, risk and expected inflation are primary determinants of
a) minimum rate of return
b) accepted return
c) expected return
d) real risk free rate
62. An expected dividend yield is subtracted from an expected rate of return which is used to
calculate
a) specialized growth rate
b) capital gains yield
c) casual growth yield
d) past growth rate
63. Calculation of formula in common stock valuation does not include
1. intrinsic value
2. dividend of stockholder
3. number of stock issued
4. expected growth rate
64. An actual rate of return is subtracted from expected growth rate then it is divided from
dividend stockholders expects use for calculating
a) dividend growth model
b) actual growth model

c) constant growth model

d) variable growth model
65. Two alternative expected returns are compared with help of
a) coefficient of variation
b) coefficient of deviation
c) coefficient of standard
d) coefficient of return
66. An expected rate of return is denoted by
1. e-bar
2. r-bar
3. r-hat
4. e-hat
67. Risk affects any firm with factors such as war, recessions, inflation and high interest rates is
classified as
1. diversifiable risk
2. market risk
3. stock risk
4. portfolio risk
68. Risk on a stock portfolio which cannot be eliminated or reduced by placing it in diversified
portfolio is classified as
a) diversifiable risk
b) market risk
c) stock risk
d) portfolio risk
69. External factors such as expiration of basic patents and industry competition effect
a) patents premium
b) competition premium
c) company's beta

d) expiry premium
70. Type of risk in which beta is equal to one is classified as
1. multiple risk stock
2. varied risk stock
3. total risk stock
4. average risk stock
71. A portfolio consists of all stocks in a market is classified as
a) market portfolio
b) return portfolio
c) correlated portfolio
d) diversified portfolio
72. Beta coefficient is used to measure market risk which is an index of
a) coefficient risk volatility
b) market risk volatility
c) stock market volatility
d) portfolio market portfolio
73. Risk which is caused by events such as strikes, unsuccessful marketing programs and other
lawsuits is classified as
a) stock risk
b) portfolio risk
c) diversifiable risk
d) market risk
74. A project whose cash flows are more than capital invested for rate of return then net present
value will be
a) positive
b) independent
c) negative
d) zero

75. In mutually exclusive projects, project which is selected for comparison with others must
have
a) higher net present value
b) lower net present value
c) zero net present value
d) all of above
76. Relationship between Economic Value Added (EVA) and Net Present Value (NPV) is
considered as
1. valued relationship
2. economic relationship
3. direct relationship
4. inverse relationship
77. An uncovered cost at start of year is Rs.200, full cash flow during recovery year is Rs.400
and prior years to full recovery is 3 then payback would be
a) 5 years
b) 3.5 years
c) 4 years
d) 4.5 years
78. In capital budgeting, positive net present value results in
a) negative economic value added
b) positive economic value added
c) zero economic value added
d) percent economic value added
79. An uncovered cost at start of year is divided by full cash flow during recovery year then
added in prior years to full recovery for calculating
a) original period
b) investment period
c) payback period
d) forecasted period

80. In cash flow analysis, two projects are compared by using common life is classified as
a) transaction approach
b) replacement chain approach
c) common life approach
d) Both B and C
81. Other factors held constant, but lesser project liquidity is because of
a) shorter payback period
b) greater payback period
c) less project return
d) greater project return
82. In capital budgeting, an internal rate of return of project is classified as its
a) external rate of return
b) internal rate of return
c) positive rate of return
d) negative rate of return
83. projects which are mutually exclusive but different on scale of production or time of
completion then the
a) external return method
b) net present value of method
c) net future value method
d) internal return method
84. Graph which is plotted for projected net present value and capital rates is called
1. net loss profile
2. net gain profile
3. net future value profile
4. net present value profile
85. A modified internal rate of return is considered as present value of costs and is equal to
a) Present Value of hurdle rate

b) future value of hurdle rate

c) Present Value of terminal value
d) future value of terminal value
86. A point where profile of net present value crosses horizontal axis at plotted graph indicates
project
a) costs
b) cash flows
c) internal rate of return
d) external rate of return
87. Payback period in which expected cash flows are discounted with help of project cost of
capital is classified as
1. discounted payback period
2. discounted rate of return
3. discounted cash flows
4. discounted project cost
88. In alternative investments, constant cash flow stream is equal to initial cash flow stream in
approach which is classified as
1. greater annual annuity method
2. equivalent annual annuity
3. lesser annual annuity method
4. zero annual annuity method
89. Number of years forecasted to recover an original investment is classified as
a) payback period
b) forecasted period
c) original period
d) investment period
90. In capital budgeting, term of bond which has great sensitivity to interest rates is
a) long-term bonds
b) short-term bonds

c) internal term bonds

d) external term bonds
91. Process in which managers of company identify projects to add value is classified as
a) capital budgeting
b) cost budgeting
c) book value budgeting
d) equity budgeting
92. A discount rate which equals to present value of TV to project cost present value is classified
as
a) negative internal rate of return
b) modified internal rate of return
c) existed internal rate of return
d) relative rate of return
93. An uncovered cost at start of year is $300, full cash flow during recovery year is $650 and
prior years to full recovery is 4 then payback would be
a) 3.46 years
b) 2.46 years
c) 5.46 years
d) 4.46 years
94. Situation in which firm limits expenditures on capital is classified as
a) optimal rationing
b) capital rationing
c) marginal rationing
d) transaction rationing
95. A project which have one series of cash inflows and results in one or more cash outflows is
classified as
a) abnormal costs
b) normal cash flows
c) abnormal cash flow

d) normal costs
96. If net present value is positive then profitability index will be
a) greater than two
b) equal to
c) less than one
d) greater than one
97. Situation in which one project is accepted while rejecting an other project in comparison is
classified as
a) present value consent
b) mutually exclusive
c) mutual project
d) mutual consent
98. In capital budgeting, two projects who have cost of capital as 12% is classified as
a) hurdle rate
b) capital rate
c) return rate
d) budgeting rate
99. Security present value is Rs.100 and future value is Rs.150 after 10 years and value of 'I =
interest rate' will be
1. 4.14%
2. 0.59%
3. 0.69%
4. 0.79%
100. An annuity with an extended life is classified as
a) extended life
b) perpetuity
c) deferred perpetuity
d) due perpetuity

101. Finance company providing loans at 3% with five compounding periods per year, nominal
annual rate is classified as
1. 15%
2. 0.60%
3. 10%
4. 1.67%
102. Procedure of finding present values in time value of money is classified as
a) compounding
b) discounting
c) money value
d) stock value
103. If payment of security is paid as $100 at end of year for three years, it is an example of
a) fixed payment investment
b) lump sum amount
c) fixed interval investment
d) annuity
104. Cost of common stock is 14% and bond risk premium is 9% then bond yield will be
a) 1.56%
b) 5%
c) 23%
d) 64.28%
105. In weighted average cost of capital, a company can affect its capital cost through
a) policy of capital structure
b) policy of dividends
c) policy of investment
d) all of above
106. Cost of common stock is 13% and bond risk premium is 5% then bond yield would be
a) Rs.18

b) 2.60%
c) 8%
d) 18%
107. If payout ratio is 0.45 then retention ratio will be
a) 0.55
b) 1.45
c) 1.82
d) 0.45
108. Retention ratio is 0.55 and return on equity is 12.5% then growth retention model would be
a) 11.95%
b) 6.88%
c) 13.05%
d) 22.72%
109. In retention growth model, percent of net income firms usually pay out as shareholders
dividends is classified as
a) payout ratio
b) payback ratio
c) growth retention ratio
d) present value of ratio
110. An interest rate which is paid by firm as soon as it issues debt is classified as pre-tax
a) term structure
b) market premium
c) risk premium
d) cost of debt
111. 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.
112. The degree of operating leverage (DOL) is
a) A measure of the change in earnings available to common stockholders associated with a
given change in operating earnings.
b) A measure of the change in operating income resulting from a given change in sales.
c) Lower if the degree of total leverage is higher, other things held constant.
d) Higher if the degree of total leverage is lower, other things held constant.
113. A degree of operating leverage of 3 at 5,000 units means that a
a) 3% change in earnings before interest and taxes will cause a 3% change in sales.
b) 3% change in sales will cause a 3% change in earnings before interest and taxes.
c) 1% change in sales will cause a 3% change in earnings before interest and taxes.
d) 1% change in earnings before interest and taxes will cause a 3% change in sales.
114. Firms with high degrees of financial leverage would be best characterized as having
a) High debt-to-equity ratios.
b) Zero coupon bonds in their capital structures.
c) Low current ratios.
d) High fixed-charge coverage.
115. The discount rate used to determine the present value of a stream of expected future cash
flows is referred to as the __________.
a)
b)
c)
d)

net operating income

capitalization rate
capital structure
yield on the company's market value of common equity

116. The traditional approach towards the valuation of a company assumes that __________.
a) The cost of capital is independent of the capital structure of the firm
b) The firm maintains constant risk regardless of the type of financing employed
c) There exists no optimal capital structure
d) That management can increase the total value of the firm through the judicious use of
financial leverage
117. The presence of which one of the following costs is not used as a major argument against
the M&M arbitrage process?
a) Bankruptcy costs

b) Agency costs.
c) Transactions costs
d) Insurance costs
118. What is the market value of common equity under the NOI approach? The firm has an
expected net operating income of Rs.5,000 with Rs.4,000 of debt (market value). Assume that
the overall capitalization rate is 20%.
a) Rs.5,000
b) Rs.20,000
c) Rs.21,000
d) Rs.25,000
120. Which of the following statements regarding the net operating income approach is
incorrect?
a) The overall capitalization rate, kO, is constant
b) The cost of debt funds, ki, is constant
c) The required return on equity, ke, is constant
d) The total value of the firm is unaffected by changes in financial leverage
121. As the amount of __________ increases the present value of __________.
a)
b)
c)
d)

debt; net tax-shield benefits of debt increases

common equity; bankruptcy and agency costs increase
debt; net tax-shield benefits of debt decrease
common equity; net tax-shield benefits of debt decrease

122. __________ costs are associated with monitoring management to ensure that it behaves
properly
a) Agency
b) Behavioral
c) Bankruptcy
d) Managerial
123. __________ costs are those associated with engaging in various business transactions that
may cause the firm to not have the exact optimal capital structure.
a) Agency
b) Transaction
c) Bankruptcy
d) Managerial
124. Which of the following is the correct formula for Z, the average cash holding, in the MillerOrr model of cash management?
a. Z = 2(3FV/4k) + L

b. Z = 3(4FV/3k) + L
c. Z = 3(3FV/4k) + L
d. Z = 3(3FkV/4) + L
125. The dividend-payout ratio is equal to
a) The dividend yield plus the capital gains yield.
b) Dividends per share divided by earnings per share.
c) Dividends per share divided by par value per share.
d) Dividends per share divided by current price per share.
126. Modigliani and Miller argue that the dividend decision __________.
a) Is irrelevant as the value of the firm is based on the earning power of its assets
b) Is relevant as the value of the firm is not based just on the earning power of its assets
c) Is irrelevant as dividends represent cash leaving the firm to shareholders, who own the
firm anyway
d) Is relevant as cash outflow always influences other firm decisions
127. A(n) __________ is a payment of additional shares to shareholders in lieu of cash.
a) stock split
b) stock dividend
c) extra dividend
d) regular dividend
128. A(n) __________ occurs when there is an increase in the number of shares outstanding by
reducing the par value of stock.
a) stock split
b) stock dividend
c) extra dividend
d) regular dividend
129. A(n) __________ is the expected cash dividend that is normally paid to shareholders.
a) stock split
b) stock dividend
c) extra dividend
d) regular dividend
130. __________ is a nonrecurring dividend paid to shareholders in addition to the regular
dividend.
a)
b)
c)
d)

stock split
stock dividend
extra dividend
regular dividend

131. What method of stock repurchase occurs when the buyer seeks bids within a specified price
range and accepts the lowest price that will allow it to acquire the entire block of securities
desired?
a) Dutch-auction
b) Fixed-price
c) Open-market
d) Fair-warning
132. What method of stock repurchase occurs when the buyer purchases securities through a
brokerage house?
a) Dutch-auction
b) Fixed-price
c) Open-market
d) Fair-warning
133. A dividend reinvestment plan (DRIP) is
a) an optional plan, provided by brokerage firms, allowing shareholders to automatically
reinvest dividend payments in additional shares of the firm's stock
b) an optional plan, provided by large corporate firms, allowing shareholders to
automatically reinvest dividend payments in additional shares of the firm's stock
c) a mandatory plan, provided by brokerage firms, where shareholders are automatically
reinvesting dividend payments in additional shares of the firm's stock at a reduced price
d) a mandatory plan, provided by large corporate firms, where shareholders are
automatically reinvesting dividend payments in additional shares of the firm's stock at a
reduced price
134. A payment made out of a firm's earnings to its owners in the form of either cash or stock is
called a:
a) Dividend.
b) Distribution.
c) Repurchase.
d) Stock split.
135. When a company desires to increase the market value per share of common stock, the
company will implement
a) The sale of treasury stock.
b) A reverse stock split.
c) The sale of preferred stock.
d) A stock split.

136. The date on which the company mails out its declared dividend is called the:
a) ex-dividend date
b) payment date.
c) date or record.
d) announcement date.
137. You own shares in a company that has 2 million shares outstanding. The current share price
is Rs.12. If the company does a 4-3 stock split, what would you expect the share price to be after
the split?
a) Rs. 12
b) Rs.16
c) Rs.9
d) Rs.10
138. The working capital requirement (WCR) is
a) inventories plus receivables less payables
b) working capital less short-term debt less cash
c) inventories plus receivables less payables plus prepayments less accruals
d) working capital plus short-term debt plus cash
139. Working capital is
a) equity plus long-term debt plus non-current assets
b) WCR less short-term debt less cash
c) equity plus long-term debt less non-current assets
d) WCR plus short-term debt plus cash
140. A management philosophy that incorporates a pull system of producing or purchasing
components and products in response to customer demand describes
a) Materials requirement planning (MRP)
b) Kanban
c) Optimised production technology (OPT)
d) Just in time (JIT)
141. In terms of relative risk, which of the following is true
a) Debt is risky for investors while equity is risky for the firm.
b) Both are equally risky for investors.
c) Both are equally risky for the firm.
d) Debt is risky for the firm while equity is risky for the investor.
142. What is the general phenomenon known as gearing?
a) Gearing represents the effect whereby greater fixed cost leads to greater variability of
business outcome.

b) Gearing represents the effect whereby greater variable cost leads to greater variability of
business outcome.
c) Gearing represents the effect whereby greater fixed cost leads to less variability of
business outcome.
d) Gearing represents the effect whereby greater variable cost leads to less variability of
business outcome.
143. If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is
15% that of debt is 10% and the corporate tax rate is 32%, what is the Weighted Average Cost of
Capital (WACC)?
a) 10.533%
b) 7.533%
c) 9.533%
d) 11.350%
144. Which of the following represents Modigliani and Miller's second position on the effect of
capital gearing?
a) There is a negative relationship between financial gearing and the WACC because of the
'free lunch' effect of the tax shield.
b) There is a positive relationship between financial gearing and the WACC because of
financial distress.
c) There is no relationship between financial gearing and the WACC as there are no 'free
lunch' benefits from higher gearing
d) There is a positive relationship between financial gearing and the WACC because of the
increased volatility of the ROE.
145. Pecking order theory suggests which of the following?
a) Internal funds, debt, and external equity have the same risk-adjusted return.
b) Debt is preferred to external equity and internal funds.
c) External equity is preferred to debt which is preferred to internal funds.
d) Internal capital is preferred to debt which is preferred to external funds.
146. Pecking order theory implies?
a) There is a negative relationship between financial gearing and the WACC because of the
'free lunch' effect of the tax shield.
b) There is a positive relationship between financial gearing and the WACC because of
financial distress.
c) There is no relationship between financial gearing and the WACC as there are no 'free
lunch' benefits from higher gearing.
d) The level of gearing is not selected but is itself determined by other strategic business
decisions.
147. In both their dividend model and capital gearing model, Modigliani and Miller use which of
the following principles?
a) The value of the firm is fundamentally determined by its capital gearing ratio.

b) The value of the firm is fundamentally determined by the NPV of the firm's projects.
c) The value of the firm is fundamentally determined by its dividend policy.
d) The value of the firm is fundamentally determined by the ability of managers to
communicate with the capital markets.
148. What are home-made dividends and why would investors 'make' them?
a) Home-made dividends represent sales of stock by relatively impatient investors.
b) Home-made dividends represent purchases of stock by relatively impatient investors.
c) Home-made dividends represent sales of stock by relatively patient investors.
d) Home-made dividends represent purchases of stock by relatively patient investors.
149.What is Gordon's 'bird in the hand' fallacy?
a) Investors prefer early resolution of uncertainty and apply a lower discount rate to later
dividends.
b) Investors prefer early resolution of uncertainty and apply a higher discount rate to later
dividends.
c) Investors prefer later resolution of uncertainty and apply a higher discount rate to later
dividends.
d) Investors prefer later resolution of uncertainty and apply a lower discount rate to later
dividends.
150. Which of the following refers to a moral hazard problem?
a. The kind of firm which is desperate to raise equity is not the kind of firm in which you
would care to invest.
b. There are insufficient safeguards to ensure basic honesty in business.
c. Directors may be engaging in insider trading.
d. Once the firm raises equity to solve a financing problem, it may relax and not work hard
enough on the shareholders' behalf.

ANSWER
1 A
2 D
3 A
4 D
5 A
6 C
7 B
8 C
9
1
0
1
1
1
2
1
3
1
4
1
5

A
C
B
D
D
A
A

1
6
1
7
1
8
1
9
2
0
2
1
2
2
2
3
2
4
2
5
2
6
2
7
2
8
2
9
3
0

C
C
B
B
D
A
B
D
B
C
C
C
C
C
A

3
1
3
2
3
3
3
4
3
5
3
6
3
7
3
8
3
9
4
0
4
1
4
2
4
3
4
4
4
5

D
D
A
D
D
C
D
D
B
A
C
B
A
D
D

4
6
4
7
4
8
4
9
5
0
5
1
5
2
5
3
5
4
5
5
5
6
5
7
5
8
5
9
6
0

B
B
A
A
D
B
B
D
C
B
B
A
A
C
D

6
1
6
2
6
3
6
4
6
5
6
6
6
7
6
8
6
9
7
0
7
1
7
2
7
3
7
4
7
5

A
B
C
C
A
C
B
B
C
D
A
C
C
A
A

7
6
7
7
7
8
7
9
8
0
8
1
8
2
8
3
8
4
8
5
8
6
8
7
8
8
8
9
9
0

91 A

92 B

93 D

94 B

D 95 B
B

96 D

97 B

98 A

D 99
10
C
0
10
C
1
10
A
2
10
B
3
10
A
4
10
A
5

A
B
A
B
D
B
D

10
6
10
7
10
8
10
9
11
0
11
1
11
2
11
3
11
4
11
5
11
6
11
7
11
8
11
9
12
0

C
A
C
A
D
A
B
C
A
B
D
D
C
C
C

12
1
12
2
12
3
12
4
12
5
12
6
12
7
12
8
12
9
13
0
13
1
13
2
13
3
13
4
13
5

C
A
B
C
B
B
B
A
D
C
A
C
B
A
B

13
6
13
7
13
8
13
9
14
0
14
1
14
2
14
3
14
4
14
5
14
6
14
7
14
8
14
9
15
0

B
A
C
C
D
D
A
C
A
D
A
B
A
B
D