Finesse, The Finance Club of SJMSOM, IIT Bombay

Finance Preparation Test 2

Total Marks - 30

1) The relation between the yield-to-maturity (YTM) and the implied forward rate at maturity
for a bond is analogous to
a. relation between average and marginal costs in economics.
b. relation between spot rate and discount rates of bond.
c. relation between interest rate and inflation.
d. None of the following

2) What is the duration for a 5-year maturity zero coupon bond with yield to maturity of 12%?
a. 1 year
b. Can be redeemed any time
c. 5 years
d. None of the above

3) The difference in acid test ratio and quick ratio is because of:
a. Receivables
b. Marketable Securities
c. Cash
d. Payables

4) XYZ Company profit before tax for the financial year ending 31st March 2009 was Rs. 10
million and the equity share capital as on 31st March 2008 and 31st March 2009 was Rs. 80
million and Rs. 120 million respectively. Calculate the return on equity of XYZ company for
the year 2008-09.
a. 10%
b. 100 million
c. 20%
d. Data insufficient

5) Which of the following are assumptions of the CAPM model?

a. All investors are mean variance optimizers.
b. Market does not digest all information instantaneously
c. Investors do not have the same investment horizon
d. There are transaction costs in the market
e. Options a and c

6) If the market is _______, the period after a favourable (unfavourable) event would not
generate returns beyond (less than) what is suggested by an equilibrium model such
as CAPM.
a. weak-form efficient
b. strong form efficient
c. semi-strong form efficient
d. Inefficient
 Finesse, The Finance Club of SJMSOM, IIT Bombay

7) Which of the following requires the calculation of free cash flows?

a. PE
b. PEG
c. DCF
d. CAPM
e. WACC

8) Compute the approximate Present value of the following:

Cash out flow for year 1 : Rs.10

Cash outflow for year 2: Rs. 20
Cash outflow for year 3 Rs. 30
Discount the cash flows at 10%
a. 40
b. 50
c. 55
d. 60

9) Which action is a central bank least likely to take if it wants to encourage businesses and
households to borrow for investment and consumption purposes?

a. Sell long-dated government securities.

b. Purchase long-dated government treasuries.
c. Purchase mortgage bonds or other securities.
d. Reduce money supply

10) How often are Interest rates revisited by the MPC of the RBI?
a. Every 15 days
b. Every 1 month
c. Every 2 months
d. Every 3 months

11) Which of the following is not a primary goal of raising equity capital?
a. To finance the purchase of long-lived assets.
b. To finance the company’s revenue-generating activities.
c. To ensure that the company continues as a going concern.
d. None of the above

12) Money received from customers for products to be delivered in the future is recorded as:
a. revenue and an asset.
b. an asset and a liability.
c. revenue and a liability.
d. revenue and Shareholder’s fund
 Finesse, The Finance Club of SJMSOM, IIT Bombay

13) Swaps can be based on

a. Interest
b. Principal and Interest
c. Equity
d. Any of the above

14) Which of the following is exercisable before expiry?

a. Forward
b. Future
c. American call
d. European put

15) ________ is a measure of sensitivity of the value of an option to its stock price.
a. Delta
b. Theta
c. Gamma
d. Synthetic Beta

16) SEBI, the capital market regulator, ______________

a. is a division of the Ministry of Finance
b. has been set-up by self-regulatory bodies like AMFI, AMBI, stock exchanges etc., to
police the capital market.
c. is an autonomous body set-up under an act of parliament?
d. was set up by the Government of India to meet the requirements stipulated by
IOSCO.

17) The operations of private mutual funds are regulated by _______________.

a. SEBI
b. Ministry of Finance
c. NSCCL
d. AMFI

18) The insurance sector regulator in India is the ____________.

a. IRDA
b. FMC
c. SEBI
d. RBI

19) A paper currency note does not have any intrinsic value or value of its own. Such type of
money is called ________.
a. cash money
b. flat money
c. fiat money
d. Real money
 Finesse, The Finance Club of SJMSOM, IIT Bombay

20) Strike Price for a call option on a stock is Rs. 125 and the underlying stock price is Rs. 120. If
the Premium is Rs.2, the option is _____.
a. In the money
b. Out of the money
c. At the money
d. Deep in the money

21) ________ is the discount rate which makes its net present value equal to zero.
a. Accrued Interest rate
b. Compounding rate
c. Inflation rate
d. Internal Rate of Return (IRR)

22) Scheme A has 2.5% entry load, Scheme B has none. No scheme has an exit load. How much
more annual returns will be A have to deliver to match B's performance if B delivers 12%
annual returns
a. 2.5%
b. 14.5%
c. 14.87%
d. 2.87%

23) A decrease in assets would least likely be consistent with:

a. Increase in expense
b. Decrease in revenue
c. Increase in contributed capital
d. Decrease in liabilities

24) If a firm raises Rs. 1000 Cr by issuing new common stock, which of its financial statements
will reflect the transaction:
a. P&L and Statement of Owner’s Equity
b. Balance Sheet, P&L, and Cash Flow Statement
c. Balance Sheet, Cash Flow Statement and Statement of Owner’s Equity
d. Cash Flow Statement and Statement of Owner’s Equity

25) Which principle requires that COGS be recognized in the same period in which the sale of
the related inventory is recorded?
a. Going concern
b. Certainty
c. Matching
d. Accrual

26) Which of the following is most similar to a short position in the underlying asset?
a. Buying a put
b. Writing a put
 Finesse, The Finance Club of SJMSOM, IIT Bombay

c. Buying a call
d. Investing in a mutual fund that holds the stock

27) Which of the following limit buy orders would be most likely to go unexecuted?
a. A marketable order
b. An order behind the market
c. An order making a new market
d. All of the above

28) Which of the following is least likely a rationale for using price multiples method?
a. It is easy to calculate
b. The fundamental P/E ratio is insensitive to its inputs
c. The use of forward values in the divisor provides an incorporation of the future
d. Both a and c

29) Birmingham Corporation is launching a new product with a social media marketing campaign
that will cost $2,000,000. To finance the project, Birmingham's CEO gathered the following
information:
Required return on equity 15%
Before-tax required return on debt 7%
ABC Corp's tax bracket 20%

If the CEO decides to issue $1,500,00 in new debt and $500,000 in common stocks, then the
marginal weighted average cost of capital (WACC) is closest to:
a. 7.2
b. 7.95
c. 7.8
d. 8.25

30) Minimum net worth required for corporate to issue commercial paper
a. 10 Cr
b. 20Cr
c. 4 Cr
d. 100 Cr