AIMA Solved Assignments for FM05
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Subject Code: FM05
Subject Name: CORPORATE FINANCE
Component name: ASSIGNMENT 1
Assignment Start Date: 15/11/2022
Assignment End Date: 15/01/2023
Question 1:- Corporate Financial decisions of the firm are guided by-
a) Firm’s wealth
b) Risk–return trade –off
c) Retention ratio
d) Financial leverage
Question 2:- Which one of the following is a capital budgeting decision?
a) Determining how much debt should be borrowed from a particular lender
b) Deciding when to repay a long-term debt
c) Determining how much inventory to keep on hand
d) Deciding whether or not to open a new store
Question 3:- The primary goal of corporate finance is to:
a) maximize current dividends per share of the existing shares.
b) minimize operational costs and maximize firm efficiency.
c) maximize the current value per share.
d) All of the above
Question 4:- Accounting profits and cash flows are:
a) generally the same since they reflect current laws and accounting standards.
b) generally the same since accounting profits reflect when the cash flows are received.
c) generally not the same because cash inflows occur before revenue recognition.
d) generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows.
Question 5:- The process of planning and managing a firm`s long-term investments is called:
a) working capital management.
b) capital structure.
c) agency cost analysis.
d) capital budgeting.
Question 6:- The excess return required from a risky asset over that required from a risk-free asset is called the:
a) risk premium.
b) excess return.
c) discounting rate
d) average return.
Question 7:- An annuity stream of cash flow payments is a set of:
a) equal cash flows occurring each time period forever.
b) equal cash flows occurring each time period for a fixed length of time.
c) increasing cash flows occurring each time period forever.
d) increasing cash flows occurring each time period for a fixed length of time.
Question 8:- The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:
a) treasurer.
b) director.
c) controller.
d) chief operations officer.
Question 9:- Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.
a) ordinary annuities; early annuities
b) late annuities; straight annuities
c) annuities due; ordinary annuities
d) ordinary annuities; annuities due
Question 10:- Which of the following are correct methods for computing the operating cash flow of a project assuming that the interest expense is equal to zero?
a) EBIT + Depreciation – Taxes
b) EBIT + Depreciation + Taxes
c) EBIT – Depreciation – Taxes
d) None of the above
Question 11:- A mutually exclusive project is a project whose:
a) acceptance or rejection affects other projects.
b) cash flow pattern exhibits more than one sign change.
c) acceptance or rejection has no effect on other projects.
d) All of the options given here are correct.
Question 12:- DCF techniques are superior than non-DCF techniques because-
a) non-DCF techniques are based on time value of money
b) DCF techniques are based on time value of money
c) DCF techniques are based on cash-flows
d) non-DCF techniques are based on cash-flows
Question 13:- Discounting cash flows involves:
a) multiplying expected future cash flows by the cost of capital.
b) discounting all expected future cash flows to reflect the time value of money.
c) taking the cash discount offered on trade merchandise.
d) discounting only those cash flows that occur at least 10 years in the future.
Question 14:- Which of the following is not a part of Discounted cash flow (DCF) criteria-
a) Net present value
b) Internal rate of return
c) Accounting rate of return
d) Profitability index
Question 15:- The present value of an investment`s future cash flows divided by the initial cost of the investment is called the:
a) net present value.
b) internal rate of return.
c) average accounting return.
d) profitability index.
Question 16:- Select the incorrect statement –
a) The long term claims are said to form the capital structure of an enterprise
b) Capital structure represents the proportionate relationship between debt and equity
c) Equity includes paid –up share capital , share premium and reserves and surplus
d) None of these
Question 17:- The use of the fixed – charges sources of funds, such as debt along with owners equity in the capital structure , is called –
a) Operating leverage
b) Financial leverage
c) Combined leverage
d) Interest coverage ratio
Question 18:- The expected rate of return that an investor could earn by investing his money in financial assets of equivalent risk is called –
a) Retention ratio
b) Dividend –pay-out ratio
c) Optimum capital structure
d) Opportunity cost of capital
Question 19:- The financial leverage will have a favourable impact on EPS and ROE only when the firm’s – (Where ROI = Return on Investment & i = interest on debt)
a) ROI = i
b) ROI > i
c) ROI < i
d) None of these
Question 20:- The percentage change in the earnings before interest and taxes relative to a given percentage change in sales, is called degree of –
a) Operating leverage
b) Combined leverage
c) Financial leverage
d) None of the above
Subject Code: FM05
Subject Name: CORPORATE FINANCE
Component name: ASSIGNMENT 2
Question 1:- The variability of EBIT is called –
a) Unique risk
b) Market risk
c) Operating risk
d) Financial risk
Question 2:- Which one of the following statements concerning net present value (NPV) is correct?
a) An investment should be accepted if, and only if, the NPV is exactly equal to zero.
b) An investment should be accepted only if the NPV is equal to the initial cash flow.
c) An investment should be accepted if the NPV is positive and rejected if it is negative.
d) Any project that has positive cash flows for every time period after the initial investment should be accepted.
Question 3:- MM Proposition I without taxes is used to illustrate:
a) the value of an unlevered firm equals that of a levered firm.
b) leverage does not affect the value of the firm.
c) if the value of levered firm is higher than an unlevered firm, then through arbitrage value will become equal.
d) All of these.
Question 4:- Under the Net Income approach ,the firm will have the maximum value and minimum WACC, when it is –
a) zero debt-financed
b) 50 per cent debt-financed
c) almost 100 per cent debt -financed
d) firm`s value is independent of its capital structure
Question 5:- Payback is frequently used to analyse independent projects because:
a) it considers the time value of money.
b) all relevant cash flows are included in the analysis.
c) it is easy and quick to calculate.
d) it produces better decisions than those made using either NPV or IRR.
Question 6:- The difference between the present value of an investment and its cost is the:
a) net present value.
b) internal rate of return.
c) payback period.
d) profitability index.
Question 7:- When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:
a) accepted because the internal rate of return is positive.
b) accepted because the profitability index is greater than 1.
c) accepted because the profitability index is negative.
d) rejected because the net present value is negative.
Question 8:- In actual practice, managers may use the: I. IRR because the results are easy to communicate and understand. II. payback because of its simplicity. III. net present value because it is considered by many to be the best method of analysis.
a) I and II only
b) II and III only
c) I and III only
d) I, II, and III
Question 9:- The proposition that the value of the firm is independent of its capital structure is called:
a) NI approach
b) MM Proposition I.
c) MM Proposition II.
d) Pecking order theory.
Question 10:- You are considering a project with the following data: Internal rate of return 8.7% Profitability ratio .98 Net present value -Rs 393 L Payback period 2.44 years Required return 9.5% Which one of the following is correct given this information?
a) The discount rate used in computing the net present value must have been less than 8.7%.
b) The discounted payback period will have to be less than 2.44 years.
c) The discount rate used to compute the profitability ratio was equal to the internal rate of return.
d) This project should be rejected based on the internal rate of return.
Question 11:- The discount rate that makes the net present value of an investment exactly equal to zero is called the:
a) accounting rate of return.
b) internal rate of return.
c) average accounting return.
d) profitability index.
Question 12:- The change in firm value, as per MM Proposition II in the presence of corporate taxes is only is:
a) positive as equity holders face a lower effective tax rate.
b) positive as equity holders gain the tax shield on the debt interest.
c) negative because of the increased risk of default and fewer shares outstanding.
d) negative because of a reduction of equity outstanding.
Question 13:- Select the option that is not an essential requirement of determining reorder point under certainty –
a) Credit limit
b) Lead time
c) Average usage
d) Economic order quantity
Question 14:- Select that inventory control system that measures the significance of each item of inventories in terms of its values
a) Just-in-time systems
b) ABC analysis
c) Out-sourcing
d) Computerized inventory control systems
Question 15:- A formal cash management approach for determining a firm’s optimum cash balance under certainty is called –
a) Adjusted net income method
b) Miller –Orr model
c) Baumol model
d) Receipt and disbursement method
Question 16:- When the borrower is provided with working capital finance by the bank against the security of movable property, it is called-
a) Lien
b) Hypothecation
c) Mortgage
d) Pledge
Question 17:- When the firm’s actual bank balance is greater than the balance shown in the firm’s books, the difference is called-
a) Deposit float
b) Disbursement float
c) Projected cash flow
d) None of the above
Question 18:- The facility under which the borrower is allowed to withdraw funds in excess of the balance in his current account, up to a certain specified limit , during a stipulated period, is called
a) Letter of credit
b) Cash credit
c) Overdraft
d) Short term Loan
Question 19:- Changes in ownership, business mix, assets mix and alliances, with a view to enhance the shareholder value is called –
a) Spin-off
b) Buyback of shares
c) Capital restructuring
d) Merger
Question 20:- When the target company spins off some of its businesses in the form of an independent subsidiary company, it is called-
a) Poison pill
b) Divestiture
c) White knight
d) Golden parachute