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CMA Inter Paper 11 (FMDA) study materials
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CMA Inter Paper 11 (FMDA) practice questions

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Question 1Scope and Objectives of Financial Management

In financial management, the primary objective of a company is normally taken to be:

  1. maximising sales turnover and market share
  2. maximising the accounting profit reported each year
  3. maximising shareholders' market wealth Correct answer.
  4. minimising the weighted average cost of capital

Explanation

The modern objective is to maximise the market value of shareholders' equity, which captures the long-term cash-flow consequences of decisions. Accounting profit, sales growth and a lower cost of capital are either means to that end or incomplete measures of value creation.

Question 2Scope and Objectives of Financial Management

Which of the following is a financing decision in a company?

  1. Purchasing a new plant to expand capacity
  2. Selecting the debt-equity mix for a new project Correct answer.
  3. Setting the credit period allowed to customers
  4. Deciding the dividend payout to equity shareholders

Explanation

Financing decisions determine how the firm raises funds, including the choice between debt and equity and the resulting capital structure. Buying a plant is an investment decision, dividend payout is a dividend decision, and customer credit is working-capital management.

Question 3Scope and Objectives of Financial Management

Compared with financial accounting, financial management is primarily concerned with:

  1. employing funds to achieve the firm's objectives Correct answer.
  2. recording past transactions for external financial reporting
  3. preparing financial statements under accounting standards
  4. computing taxable income for statutory tax filings

Explanation

Financial management is decision-oriented: it plans, acquires and allocates funds to meet the firm's objectives. Financial accounting instead records past transactions and reports them to external users under applicable standards.

Question 4Scope and Objectives of Financial Management

A firm's profit-maximisation goal is criticised as a financial objective mainly because it:

  1. automatically reflects the market price of shares
  2. is based on cash flows rather than accrual profit
  3. cannot be measured from the income statement
  4. ignores the timing of returns and their risk Correct answer.

Explanation

Profit ignores when cash flows occur and the risk attached to them, so two projects with the same profit can differ greatly in value. It is also an accounting accrual measure rather than a cash-flow or market-value measure.

Question 5Scope and Objectives of Financial Management

A chief executive approves a costly head-office renovation that adds little value but enhances personal prestige. This situation best illustrates:

  1. a liquidity problem in working capital management
  2. a capital rationing constraint faced by the firm
  3. a dividend policy decision taken by the board
  4. an agency conflict between managers and shareholders Correct answer.

Explanation

An agency relationship arises when managers act for shareholders, and conflicts occur when managers pursue personal benefits at the owners' expense. The renovation is a perquisite that consumes shareholder funds without adding value.

Question 6Scope and Objectives of Financial Management

A company raises its cash balance far above the level needed for operations. The most likely effect is:

  1. lower profitability and higher liquidity Correct answer.
  2. higher profitability and higher liquidity
  3. lower profitability and lower liquidity
  4. higher profitability and lower liquidity

Explanation

Cash is a low-return asset, so holding more than the operating requirement lowers the return on funds employed. At the same time, the larger cash balance improves the firm's ability to meet short-term obligations.

Question 7Scope and Objectives of Financial Management

Under the modern approach, the scope of financial management includes:

  1. only recording and reporting business transactions
  2. acquiring and financing assets to create value Correct answer.
  3. only administering statutory tax compliance
  4. only raising funds from capital markets

Explanation

The modern approach treats financial management as covering investment, financing and asset-management decisions with the aim of creating value. Raising funds is only one part of that wider scope.

Question 8Scope and Objectives of Financial Management

Shareholder wealth maximisation is preferred to profit maximisation because market price per share reflects:

  1. the current year's dividend payment only
  2. the timing, size and risk of expected cash flows Correct answer.
  3. the latest year's reported accounting profit alone
  4. the book value of the company's net assets

Explanation

Market price per share is forward-looking and incorporates the amount, timing and risk of expected cash flows. Accounting profit, book value and a single year's dividend each capture only one dimension and can misstate value.

Question 9Scope and Objectives of Financial Management

A profitable company plans to cut annual research spending, which will raise this year's reported profit but is expected to reduce long-term cash flows. Under a shareholder-wealth objective, the finance manager should:

  1. accept the cut because reported profit rises
  2. reject the cut only if it reduces the dividend
  3. accept the cut because cash outflow falls immediately
  4. reject the cut because it destroys long-term value Correct answer.

Explanation

Wealth maximisation requires evaluating the decision by its effect on long-term expected cash flows, not by this year's reported profit. A cut that raises current profit but reduces the present value of future cash flows destroys shareholder value and should be rejected.

Question 10Scope and Objectives of Financial Management

A company's shares are thinly traded, so observed market prices are an unreliable measure of shareholder wealth. The most appropriate operational proxy for wealth maximisation is to:

  1. minimise the book value of outstanding debt
  2. maximise the firm's market share in its industry
  3. maximise the net present value of expected cash flows Correct answer.
  4. maximise earnings per share reported each quarter

Explanation

When market prices are unreliable, the finance manager uses net present value as the practical decision rule because it measures the change in owner wealth from expected cash flows. EPS, market share and debt book value are accounting or strategic measures that need not maximise value.

Question 11Scope and Objectives of Financial Management

In a large manufacturing company, which of the following activities falls within the treasurer's sphere rather than the controller's sphere?

  1. Preparing monthly variance reports for factory managers
  2. Managing working capital and short-term borrowing requirements Correct answer.
  3. Designing the product costing system used for inventory valuation
  4. Preparing the annual statutory financial statements and notes

Explanation

The finance function is conventionally divided between the treasurer and the controller. The treasurer manages cash, working capital, borrowing, foreign-exchange exposure and relationships with lenders and investors, while the controller handles accounting, budgeting, costing, internal control and reporting. Statutory statements, product costing and variance reporting therefore belong to the controller.

Question 12Scope and Objectives of Financial Management

The investment decision in financial management is best described as:

  1. Selecting the mix of debt and equity used to finance the firm's operations
  2. Committing funds to long-lived assets in expectation of future returns Correct answer.
  3. Determining the proportion of earnings to be distributed to shareholders
  4. Setting the credit terms offered to trade customers and the collection policy

Explanation

Financial management is built around the investment, financing and dividend decisions. The investment decision concerns selecting long-lived assets and projects whose expected future benefits exceed their cost. The financing and dividend decisions deal with the funding mix and distribution of earnings, while credit terms are a working-capital matter.

Question 13Scope and Objectives of Financial Management

Two mutually exclusive projects require the same initial outlay and have the same expected annual return, but the cash flows of Project P are more widely dispersed than those of Project Q. A risk-averse investor applying the risk-return framework will:

  1. Prefer P, because the wider dispersion offers a chance of much higher returns
  2. Prefer P only if it is financed entirely from retained earnings rather than debt
  3. Be indifferent between them, since their expected returns are equal
  4. Prefer Q, because it offers the same expected return with less risk Correct answer.

Explanation

A risk-averse investor demands compensation for bearing risk. When two projects offer the same expected return, the one with the narrower dispersion of outcomes is preferred because it delivers that return with less uncertainty. Choosing the wider-dispersion project would require a higher expected return to make it acceptable.

Question 14Scope and Objectives of Financial Management

A state-owned bus company is expected to keep fares affordable while covering its operating costs from revenue. Its principal financial objective is best described as:

  1. Minimising the book value of its fleet to reduce depreciation charges
  2. Maximising reported profit by raising fares whenever demand allows
  3. Achieving value for money in delivering the required service Correct answer.
  4. Maximising the wealth of its shareholders through higher share prices

Explanation

Public-sector and not-for-profit entities do not have shareholders, so shareholder-wealth maximisation is not their objective. They are expected to deliver specified services with economy, efficiency and effectiveness, collectively called value for money, while covering their costs. Profit may be a constraint or a surplus requirement, but it is not the primary objective.

Question 15Scope and Objectives of Financial Management

Project A is expected to return Rs. 50 lakh at the end of one year, while Project B is expected to return Rs. 50 lakh at the end of three years. Both require the same initial outlay and are equally risky. Under the wealth-maximisation criterion, Project A is preferred because:

  1. It requires a smaller cash outflow at the start of the project
  2. Its accounting profit is recognised earlier in the income statement
  3. It has a shorter payback period, which is the theoretically ideal criterion
  4. Money received sooner can be reinvested, giving it a higher present value Correct answer.

Explanation

Wealth maximisation discounts all expected cash flows at the investor's required return, so the timing of cash flows matters. A rupee received earlier can be reinvested and therefore has a higher present value than the same rupee received later, even when both projects are equally risky and have the same nominal inflow. Accounting recognition and payback do not measure the change in wealth.

Question 16Scope and Objectives of Financial Management

A company is evaluating a project with a positive net present value that will cause reported earnings per share to fall in each of the first three years because of depreciation and interest charges. According to the shareholder-wealth-maximisation objective, the company should:

  1. Accept it only if the depreciation charge can be capitalised so that EPS does not fall
  2. Accept it, because positive NPV adds to shareholder wealth despite the fall in EPS Correct answer.
  3. Defer it until EPS is expected to rise, regardless of the project's NPV
  4. Reject it, because a fall in EPS shows that shareholder value has been destroyed

Explanation

Shareholder wealth rises when the present value of a project's cash inflows exceeds its outlay, which is precisely what a positive NPV measures. Accounting EPS is reduced by depreciation and by interest on the financing used, and it does not capture the timing or risk of the project's cash flows. A value-maximising firm therefore accepts positive-NPV projects even when near-term EPS falls.

Question 17Types of Financing

Which type of security gives its holder a residual claim on the profits and assets of a company after all fixed obligations are met?

  1. Preference share
  2. Secured debenture
  3. Commercial paper
  4. Equity share Correct answer.

Explanation

Equity shareholders are the residual owners of a company. They receive dividends only after interest, tax and preference dividends are paid, and on winding up they rank after creditors and preference shareholders. Preference shares and debentures carry prior claims, while commercial paper is short-term debt.

Question 18Types of Financing

A highly rated manufacturing company wants to raise short-term funds from the money market without creating a charge on its assets. Which instrument is most suitable?

  1. Trade credit
  2. Certificate of deposit
  3. Commercial paper Correct answer.
  4. Equity share

Explanation

Commercial paper is an unsecured promissory note issued by highly rated corporates to raise short-term money-market funds, usually at a discount. It does not require the issuer to create a charge on assets. Certificates of deposit are bank instruments, trade credit comes from suppliers and equity is long-term ownership capital.

Question 19Types of Financing

Preference shares ordinarily carry which of the following rights?

  1. Voting rights on every ordinary resolution
  2. A charge over the company's fixed assets
  3. Priority in dividend payment over equity shares Correct answer.
  4. Guaranteed repayment at the investor's option

Explanation

Preference shares carry a fixed or fixed-rate dividend that must be paid before any equity dividend. They normally vote only on resolutions affecting their rights, and they do not have a charge on assets or a guaranteed repayment right. That makes dividend priority the correct feature.

Question 20Types of Financing

A technology start-up has a scalable idea but no tangible assets, negative cash flows and high uncertainty. Which source of finance is most appropriate at the early stage?

  1. Secured term loan from a bank
  2. Venture capital Correct answer.
  3. Trade credit from suppliers
  4. Public issue of debentures

Explanation

Venture capital is equity or quasi-equity finance for early-stage, high-risk businesses with scalable growth potential. Because the start-up has no tangible security or stable cash flow, a secured term loan or public debenture issue is difficult to arrange. Trade credit is a short-term supplier facility, not start-up capital.

Question 21Types of Financing

A shareholder holds 500 equity shares whose cum-rights market price is ₹150. The company offers a 1-for-5 rights issue at ₹120 per share. What is the theoretical value of the right attached to each existing share?

  1. ₹30
  2. ₹6
  3. ₹25
  4. ₹5 Correct answer.

Explanation

Theoretical ex-rights price = [(5 × ₹150) + (1 × ₹120)] ÷ 6 = ₹145. The value of the right attached to each existing share is the cum-rights price minus TERP, i.e. ₹150 − ₹145 = ₹5. Equivalently, (₹150 − ₹120) ÷ 6 = ₹5.

Question 22Types of Financing

Sweat equity shares issued by a company are best described as shares issued:

  1. To lenders in full settlement of overdue interest
  2. To directors or employees for know-how or IP rights Correct answer.
  3. To the public through a recognised stock exchange listing
  4. To existing shareholders in proportion to their present shareholding

Explanation

Sweat equity shares are issued to directors or employees at a discount or for consideration other than cash, in recognition of know-how, intellectual property or value additions. Indian company law requires a special resolution and valuation by a registered valuer. They are not a rights issue, public issue or debt settlement.

Question 23Types of Financing

Why might a growing company prefer convertible debentures to a plain term loan?

  1. Convertibles carry a lower legal obligation than preference dividends
  2. The interest paid on convertibles is tax-deductible, whereas loan interest is not
  3. Convertibles never dilute the ownership of existing shareholders
  4. Conversion can reduce cash repayment burden while limiting immediate equity dilution Correct answer.

Explanation

Convertible debentures usually carry a lower coupon than a plain term loan because the lender receives an option to convert into equity. Conversion defers equity dilution and can reduce the cash needed to repay principal, while interest remains tax-deductible. The conversion option does not eliminate dilution permanently.

Question 24Types of Financing

Which combination best describes a finance lease from the lessee's perspective?

  1. Short cancellable lease in which the lessor maintains the asset
  2. Lease term much shorter than the asset's useful life
  3. Lessor retains residual risk and lessee has no purchase option
  4. Long non-cancellable lease with lessee bearing ownership risks Correct answer.

Explanation

A finance lease transfers substantially all the risks and rewards of ownership to the lessee. It is typically long-term and non-cancellable, and the lessee recognises a right-of-use asset and a lease liability. Short cancellable leases with the lessor bearing maintenance and residual risk are operating leases.

Question 25Types of Financing

A firm sells goods on 60-day credit to large, creditworthy buyers. It wants immediate cash, collection support and protection from bad debts. Which arrangement fits best?

  1. Non-recourse factoring Correct answer.
  2. Cash credit against hypothecation of stock
  3. Bill discounting with recourse
  4. Commercial paper issue

Explanation

Non-recourse factoring involves selling receivables to a factor that assumes the credit risk of the debtors and usually handles collection. The firm receives cash upfront and is protected if customers fail to pay. Cash credit against stock, commercial paper and with-recourse bill discounting do not transfer bad-debt risk in this way.

Question 26Types of Financing

Which statement about bonus issues and stock splits is correct?

  1. A stock split cuts face value without capitalising reserves Correct answer.
  2. A bonus issue reduces the face value of each share
  3. A stock split capitalises reserves and raises paid-up capital
  4. A bonus issue requires fresh cash from shareholders

Explanation

A bonus issue capitalises free reserves by issuing fully paid bonus shares, so paid-up capital rises while the face value per share stays unchanged. A stock split instead divides each existing share into shares of smaller face value without capitalising reserves. Therefore only the statement that a stock split cuts face value without capitalising reserves is correct.

Question 27Types of Financing

Which source of finance is a spontaneous liability that arises from the normal operating cycle rather than from a negotiated borrowing arrangement?

  1. Trade credit Correct answer.
  2. Commercial paper
  3. Factoring
  4. Bank overdraft

Explanation

Trade credit arises when a supplier allows the buyer to pay for goods or services at a later date. It is described as spontaneous because the balance usually grows with the level of purchases and does not require a separate loan negotiation. Commercial paper is a money-market borrowing, factoring converts receivables into cash, and a bank overdraft is a sanctioned facility.

Question 28Types of Financing

A company is about to launch an initial public offer but needs cash within the next few months to cover issue expenses and working capital until the proceeds are received. Which type of finance is most appropriate for this interim requirement?

  1. Seed capital
  2. Mezzanine financing
  3. Bridge financing Correct answer.
  4. Trade credit

Explanation

Bridge financing is short-term interim funding designed to cover a temporary cash gap before a planned permanent issue or long-term financing is completed. Seed capital is early-stage equity for a new venture, mezzanine financing is a later-stage layer between debt and equity, and trade credit is supplier credit tied to purchases. The IPO-linked interim need therefore fits bridge financing.

Question 29Financial Analysis and Planning - Ratio Analysis

Which ratio is computed by dividing the dividend per equity share by the earnings per equity share?

  1. Dividend yield
  2. Proprietary ratio
  3. Earnings retention ratio
  4. Dividend payout ratio Correct answer.

Explanation

The dividend payout ratio is dividend per equity share divided by earnings per equity share, and it shows the share of attributable profit that is distributed to equity holders. Whatever is not distributed is retained in the business as the retention ratio. Dividend yield, by contrast, compares dividend per share with the market price per share.

Question 30Financial Analysis and Planning - Ratio Analysis

The proprietary ratio of a company expresses which of the following relationships?

  1. Shareholders' funds divided by total outside liabilities
  2. Shareholders' funds divided by total assets Correct answer.
  3. Total outside liabilities divided by total assets
  4. Net profit after tax divided by shareholders' funds

Explanation

The proprietary ratio measures the proportion of total assets financed by owners' funds, and is computed as shareholders' funds (equity capital plus reserves less fictitious assets) divided by total assets. A high proprietary ratio indicates a strong equity base and low dependence on outsiders. It is a capital-structure ratio, not a profitability ratio.

Question 31Financial Analysis and Planning - Ratio Analysis

The interest coverage ratio (times interest earned) is computed as:

  1. Interest expense divided by earnings before interest and tax
  2. Earnings before interest and tax divided by total long-term debt
  3. Profit after tax divided by interest on long-term debt
  4. Earnings before interest and tax divided by interest expense Correct answer.

Explanation

Interest coverage compares the operating earnings available for servicing debt with the interest charge itself, so it is EBIT divided by interest expense and is expressed in times. A higher figure means the firm can absorb a larger fall in EBIT before it fails to meet interest. Profit after tax is not used because interest is charged before tax.

Question 32Financial Analysis and Planning - Ratio Analysis

A firm reports current assets of ₹10,00,000, which include inventory of ₹4,00,000 and prepaid expenses of ₹1,00,000, and current liabilities of ₹4,00,000. What is its quick ratio?

  1. 1.50
  2. 2.50
  3. 0.80
  4. 1.25 Correct answer.

Explanation

Quick assets exclude inventory and prepaid expenses, because neither can be relied upon to convert into cash at short notice. Quick assets are therefore ₹10,00,000 − ₹4,00,000 − ₹1,00,000 = ₹5,00,000, and the quick ratio is ₹5,00,000 ÷ ₹4,00,000 = 1.25.

Question 33Financial Analysis and Planning - Ratio Analysis

Cost of goods sold is ₹9,00,000, opening inventory is ₹1,40,000 and closing inventory is ₹1,60,000. What is the inventory turnover ratio?

  1. 0.17 times
  2. 6.00 times Correct answer.
  3. 5.63 times
  4. 6.43 times

Explanation

Inventory turnover is cost of goods sold divided by average inventory, with average inventory taken as the mean of the opening and closing balances. Average inventory is (₹1,40,000 + ₹1,60,000) ÷ 2 = ₹1,50,000, so turnover is ₹9,00,000 ÷ ₹1,50,000 = 6.00 times. Using cost of goods sold rather than sales keeps the numerator on the same cost basis as inventory.

Question 34Financial Analysis and Planning - Ratio Analysis

A company has equity share capital of ₹30,00,000, reserves of ₹12,00,000, 10% debentures of ₹18,00,000 and earnings before interest and tax of ₹12,00,000. What is its return on capital employed?

  1. 40.0%
  2. 66.7%
  3. 28.6%
  4. 20.0% Correct answer.

Explanation

Return on capital employed is PBIT divided by capital employed, where capital employed is equity share capital plus reserves plus long-term borrowings. Capital employed is ₹30,00,000 + ₹12,00,000 + ₹18,00,000 = ₹60,00,000, so ROCE is ₹12,00,000 ÷ ₹60,00,000 = 20%. PBIT is used because the ratio is struck before interest and tax.

Question 35Financial Analysis and Planning - Ratio Analysis

Credit sales for the year are ₹36,00,000. Opening debtors are ₹4,00,000 and closing debtors are ₹5,00,000. Taking 360 days in a year, what is the average collection period?

  1. 90 days
  2. 45 days Correct answer.
  3. 50 days
  4. 40 days

Explanation

Average debtors are (₹4,00,000 + ₹5,00,000) ÷ 2 = ₹4,50,000, so the debtors turnover is ₹36,00,000 ÷ ₹4,50,000 = 8 times. The average collection period is 360 ÷ 8 = 45 days. Only credit sales are used, since cash sales create no debtors.

Question 36Financial Analysis and Planning - Ratio Analysis

A company earns a net profit margin of 5% and an asset turnover of 2 times, and its return on equity is 15%. Under the Du Pont framework, what is its equity multiplier (total assets ÷ shareholders' funds)?

  1. 1.0
  2. 2.5
  3. 3.0
  4. 1.5 Correct answer.

Explanation

The Du Pont model decomposes return on equity as net profit margin × asset turnover × equity multiplier. Rearranging, 15% = 5% × 2 × equity multiplier, so the multiplier must be 1.5, meaning assets are 1.5 times shareholders' funds. The remaining financing is debt.

Question 37Financial Analysis and Planning - Ratio Analysis

A firm has current assets of ₹6,00,000 and current liabilities of ₹3,00,000, giving a current ratio of 2:1. It then pays trade creditors ₹1,00,000 in cash. What happens to the current ratio?

  1. It improves to 2.5:1 Correct answer.
  2. It remains unchanged at 2:1
  3. It improves to 3:1
  4. It deteriorates to 1.67:1

Explanation

Paying trade creditors in cash reduces current assets and current liabilities by the same absolute amount. When the current ratio is above 1, an equal reduction in both raises the ratio: current assets fall to ₹5,00,000 and current liabilities to ₹2,00,000, giving 2.5:1. The ratio changes because the two figures fall by the same amount but not by the same proportion.

Question 38Financial Analysis and Planning - Ratio Analysis

A company has shareholders' funds of ₹50,00,000 and 10% debentures of ₹30,00,000. Earnings before interest and tax are ₹12,00,000 and the tax rate is 30%. What is the return on equity?

  1. 12.6% Correct answer.
  2. 18.0%
  3. 16.8%
  4. 7.9%

Explanation

Interest on the debentures is 10% of ₹30,00,000, that is ₹3,00,000, so profit before tax is ₹9,00,000 and profit after tax at 30% is ₹6,30,000. Return on equity uses profit after tax over shareholders' funds: ₹6,30,000 ÷ ₹50,00,000 = 12.6%. Debenture interest must be deducted before tax because it is a charge against profit.

Question 39Financial Analysis and Planning - Ratio Analysis

A trading firm reports revenue from operations of ₹25,00,000 and cost of goods sold of ₹18,00,000. What is its gross profit ratio?

  1. 72%
  2. 39%
  3. 28% Correct answer.
  4. 18%

Explanation

Gross profit is ₹25,00,000 minus ₹18,00,000, which equals ₹7,00,000. The gross profit ratio is gross profit divided by revenue from operations, multiplied by 100, giving 7,00,000 ÷ 25,00,000 × 100 = 28%.

Question 40Financial Analysis and Planning - Ratio Analysis

A firm has revenue from operations of ₹40,00,000, cost of goods sold of ₹24,00,000 and operating expenses of ₹6,00,000. What is its operating ratio?

  1. 60%
  2. 25%
  3. 85%
  4. 75% Correct answer.

Explanation

Operating cost is cost of goods sold plus operating expenses, that is ₹24,00,000 + ₹6,00,000 = ₹30,00,000. The operating ratio is operating cost divided by revenue from operations, so ₹30,00,000 ÷ ₹40,00,000 × 100 = 75%.

Question 41Financial Analysis and Planning - Ratio Analysis

Which ratio measures the efficiency with which a firm uses its total assets to generate revenue from operations?

  1. Fixed asset turnover ratio
  2. Proprietary ratio
  3. Working capital turnover ratio
  4. Total asset turnover ratio Correct answer.

Explanation

The total asset turnover ratio is revenue from operations divided by average total assets, and it indicates sales generated per rupee of total assets. Fixed asset turnover uses only fixed assets, while working capital turnover uses net working capital.

Question 42Financial Analysis and Planning - Ratio Analysis

A company has EBIT of ₹12,00,000, 12% debentures of ₹30,00,000, equity share capital of ₹20,00,000 and reserves of ₹10,00,000. What is its return on capital employed?

  1. 12%
  2. 20% Correct answer.
  3. 60%
  4. 40%

Explanation

Capital employed is shareholders' funds plus long-term debt: ₹20,00,000 + ₹10,00,000 + ₹30,00,000 = ₹60,00,000. Return on capital employed is EBIT divided by capital employed, so ₹12,00,000 ÷ ₹60,00,000 × 100 = 20%.

Question 43Financial Analysis and Planning - Ratio Analysis

Credit purchases for the year are ₹18,00,000. Opening creditors are ₹2,20,000 and closing creditors are ₹2,60,000. Taking 360 days in a year, what is the average payment period?

  1. 40 days
  2. 52 days
  3. 48 days Correct answer.
  4. 45 days

Explanation

Average creditors are (₹2,20,000 + ₹2,60,000) ÷ 2 = ₹2,40,000. Creditors turnover is ₹18,00,000 ÷ ₹2,40,000 = 7.5 times, so the average payment period is 360 ÷ 7.5 = 48 days.

Question 44Financial Analysis and Planning - Ratio Analysis

Revenue from operations is ₹60,00,000. Current assets are ₹18,00,000 and current liabilities are ₹6,00,000. What is the working capital turnover ratio?

  1. 5.00 times Correct answer.
  2. 10.00 times
  3. 3.33 times
  4. 2.50 times

Explanation

Net working capital is current assets minus current liabilities: ₹18,00,000 − ₹6,00,000 = ₹12,00,000. Working capital turnover is revenue from operations divided by net working capital, so ₹60,00,000 ÷ ₹12,00,000 = 5.00 times.

Question 45Financial Analysis and Planning - Ratio Analysis

A company has net profit after tax of ₹8,00,000 and preference dividend of ₹1,00,000. It has 70,000 equity shares and the market price per share is ₹140. What is the price-earnings ratio?

  1. 16.00 times
  2. 10.00 times
  3. 12.25 times
  4. 14.00 times Correct answer.

Explanation

Earnings available to equity shareholders are ₹8,00,000 − ₹1,00,000 = ₹7,00,000. EPS is ₹7,00,000 ÷ 70,000 = ₹10, and the price-earnings ratio is market price divided by EPS, ₹140 ÷ ₹10 = 14.00 times.

Question 46Financial Analysis and Planning - Ratio Analysis

A company paid equity dividend of ₹4,50,000 on 1,50,000 equity shares. The market price per share is ₹90. What is the dividend yield ratio?

  1. 5.00%
  2. 3.33% Correct answer.
  3. 4.00%
  4. 6.00%

Explanation

Dividend per share is ₹4,50,000 ÷ 1,50,000 = ₹3. Dividend yield is dividend per share divided by market price per share, so ₹3 ÷ ₹90 × 100 = 3.33%.

Question 47Financial Analysis and Planning - Ratio Analysis

A firm's inventory turnover ratio is 6 times, average inventory is ₹5,00,000, and gross profit ratio is 25%. What is its revenue from operations?

  1. ₹45,00,000
  2. ₹40,00,000 Correct answer.
  3. ₹30,00,000
  4. ₹37,50,000

Explanation

Cost of goods sold is inventory turnover multiplied by average inventory: 6 × ₹5,00,000 = ₹30,00,000. Since the gross profit ratio is 25%, cost of goods sold is 75% of revenue, so revenue is ₹30,00,000 ÷ 0.75 = ₹40,00,000.

Question 48Financial Analysis and Planning - Ratio Analysis

A firm's debtors turnover ratio is 8 times and average debtors are ₹3,00,000. Cash sales are 20% of total sales. What are total sales?

  1. ₹28,80,000
  2. ₹24,00,000
  3. ₹36,00,000
  4. ₹30,00,000 Correct answer.

Explanation

Credit sales are debtors turnover multiplied by average debtors: 8 × ₹3,00,000 = ₹24,00,000. If cash sales are 20% of total sales, credit sales are 80% of total sales, so total sales are ₹24,00,000 ÷ 0.80 = ₹30,00,000.

Question 49Cost of Capital

A firm has issued 10% debentures of face value ₹100 each at par. If the corporate tax rate is 30%, what is the after-tax cost of debt, ignoring floatation costs?

  1. 7.00% Correct answer.
  2. 13.00%
  3. 3.00%
  4. 10.00%

Explanation

Interest on debentures is a deductible expense, so the cost of debt must be stated on an after-tax basis. The computation is 10% × (1 − 0.30) = 7%. Because the debentures are issued at par, there is no premium or discount to adjust.

Question 50Cost of Capital

A company's equity share currently sells for ₹40. It has just paid a dividend of ₹2 per share, and dividends are expected to grow at 5% per annum forever. Using the dividend growth model, the cost of equity is:

  1. 10.25%
  2. 5.25% Correct answer.
  3. 10.00%
  4. 15.25%

Explanation

The dividend growth model values equity as D1/P0 + g. Next year's dividend is ₹2 × 1.05 = ₹2.10, so the cost is ₹2.10/₹40 + 0.05 = 10.25%. Using the just-paid dividend without growth would understate the cost.