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business
intermediate financial management
Taxmans Fundamentals Of Financial Management 14th Edition R.P. Rustagi - Solutions
Which of the following is not a relevant factor in EBITEPS Analysis of capital structure ?(a) Rate of Interest on Debt(b) Tax Rate(c) Amount of Preference Share Capital(d) Dividend paid last year.
At Indifference level of EBIT, different capital plans have :(a) Same EBIT(b) Same EPS(c) Same PAT(d) Same PBT.
If a firm has no Preference share capital, Financial Breakeven level is defined as equal to :(a) EBIT(b) Interest liability(c) Equity Dividend(d) Tax Liability.
Relationship between change in Sales and change in Operating Profit is known as :(a) Financial Leverage(b) Operating Leverage(c) Net Profit Ratio(d) Gross Profit Ratio.
Financial Break-even level of EBIT is one at which :(a) EPS is one(b) EPS is zero(c) EPS is Infinite(d) EPS is Negative.
Indifference Level of EBIT is one at which :(a) EPS is zero(b) EPS is Minimum(c) EPS is highest(d) None of these.
Benefit of ‘Trading on Equity’ is available only if :(a) Rate of Interest < Rate of Return(b) Rate of Interest > Rate of Return(c) Both (a) and (b)(d) None of (a) and (b).
Trading on Equity is :(a) Always beneficial(b) May be beneficial(c) Never beneficial(d) None of the above.
In order to calculate EPS, Profit after Tax and Preference Dividend is divided by :(a) MP of Equity Shares(b) Number of Equity Shares(c) Face Value of Equity Shares(d) None of the above.
True or False EBIT-EPS Analysis is an extension of financial leverage analysis.
True or False Preference dividend is not a factor of indifference level of EBIT.
True or False All equity plan and Debt-equity plan have no indifference level of EBIT.
True or False Indifference level of EBIT is one at which EPS under two or more financial plans would be same.
True or False Indifference level of EBIT is one at which EPS is zero.
True or False At financial breakeven level of EBIT, EPS would be zero.
True or False Financial breakeven level occurs when EBIT is zero.
True or False EPS depends upon the composition of capital structure.
True or False If EBIT for two firms are same, then the EPS of these firms would also always be same.
True or False EBIT is also known as operating profits.
So, 50% increase in sales is required for 100% increase in EBIT.]P6.3 XYZ Ltd. has an average selling price of 10 per unit.Its variable unit costs are 7, and fixed costs amount to 1,70,000. It finances all its assets by equity funds.It pays 30% tax on its income. ABC Ltd. is identical to XYZ
What are various factors which affect business and financial risk of a firm? Differentiate between the two.P6.1 The following figures relate to two companies:(In lacs)P LTD. Q LTD.Sales 750 1,000 Variable Cost 300 300 Contribution 450 700 Fixed costs 225 400 EBIT 225 300–Interest 75 100 Profit
What does combined leverage measure? What should be the changes in the degree of combined leverage in each of following situations:(a) The fixed cost increases.(b) The sale price decreases.[B.Com.(H.), D.U., 2010]
The purpose of measuring operating leverage is different from that of financial leverage. Explain[B.Com.(H.) D.U., 2009]
Is it true that a firm with high degree of OL should have high degree of FL ? Examine. [B.Com. (H.) D.U., 2014]
Which combination of the operating and financial leverages constitutes (i) risky situation and (ii) ideal situation.
What is combined leverage? Examine its significance in financial planning of a firm.
Why must the finance manager keep in mind the degree of FL in evaluating various financial plans ? When FL becomes favourable? [B.Com.(H.), D.U. 2004, 2013]
Explain the concept of financial leverage. Examine the impact of financial leverage on the EPS. Does the financial leverage always increases the EPS?
Distinguish between operating leverage and financial leverage. How the two leverages can be measured?[B.Com.(H.), D.U. 2007]
Differentiate between the business risk and financing risk of a firm. How are they measured by the leverage?[B.Com.(H.), D.U., 2005, 2006, 2008, 2012]
What do you mean by leverage? Why is increasing leverage indicative of increasing risk?
Write short notes on(a) Fixed Financial Costs.(b) Combined Leverage.
Higher FL is related the use of :(a) Higher Equity(b) Higher Debt(c) Lower Debt(d) None of the above
Higher OL is related to the use of higher :(a) Debt(b) Equity(c) Fixed Cost(d) Variable Cost
If a firm has a DOL of 2.8, it means :(a) If Sales increase by 2.8%, the EBIT will increase by 1%(b) If EBIT increase by 2.8%, the EPS will increase by 1%(c) If Sales rise by 1%, EBIT will rise by 2.8%(d) None of the above
If a company issues new share capital to redeem debentures, then:(a) OL will increase(b) FL will increase(c) OL will decrease(d) FL will decrease
If a firm has no debt, which one is correct?(a) OL is one(b) FL is one(c) OL is zero(d) FL is zero
If the fixed cost of production is zero, which one of the following is correct?(a) OL is zero(b) FL is zero(c) CL is zero(d) None of the above
Which of the following is correct?(a) CL = OL + FL(b) CL = OL – FL(c) OL = OL × FL(d) OL = OL ÷ FL
Operating leverage works when:(a) Sales Increases(b) Sales Decreases(c) Both (a) and (b)(d) None of (a) and (b)
Relationship between change in sales and change in EPS is measured by:(a) Financial leverage(b) Combined leverage(c) Operating leverage(d) None of the above
Use of Preference Share Capital in Capital structure:(a) Increases OL(b) Increases FL(c) Decreases OL(d) Decreases FL
Financial Leverage measures relationship between:(a) EBIT and PBT(b) EBIT and EPS(c) Sales and PBT(d) Sales and EPS
Business Risk can be measured by:(a) Financial leverage(b) Operating leverage(c) Combined leverage(d) None of the above
FL is zero if:(a) EBIT = Interest(b) EBIT = Zero(c) EBIT = Fixed Cost(d) EBIT = Pref. Dividend
Combined leverage can be used to measure the relationship between :(a) EBIT and EPS(b) PAT and EPS(c) Sales and EPS(d) Sales and EBIT
Which combination is generally good for a firm?(a) High OL, High FL(b) Low OL, Low FL(c) High OL, Low FL(d) None of these
Financial Leverage is calculated as :(a) EBIT ÷ Contribution(b) EBIT ÷ PBT(c) EBIT ÷ Sales(d) EBIT ÷ Variable Cost
Operating Leverage is calculated as :(a) Contribution ÷ EBIT(b) EBIT ÷ PBT(c) EBIT ÷ Interest(d) EBIT ÷ Tax
Financial Leverage arises because of:(a) Fixed cost of production(b) Variable Cost(c) Interest Cost(d) None of the above
Operating leverage arises because of:(a) Fixed Cost of Production(b) Fixed Interest Cost(c) Variable Cost(d) None of the above
High degree of financial leverage means:(a) High debt proportion(b) Lower debt proportion(c) Equal debt & equity(d) No debt
Combined Leverage is obtained from OL and FL by their:(a) Addition(b) Subtraction(c) Multiplication(d) Any of these
Which of the following is studied with the help of financial leverage?(a) Marketing Risk(b) Interest Rate Risk(c) Foreign Exchange Risk(d) Financing risk
Operating leverage helps in analysis of:(a) Business Risk(b) Financing Risk(c) Production Risk(d) Credit Risk
True or False Combined leverage helps in analysing the effect of change in sales level on the EPS of the firm.
True or False Total risk of a firm is determined by the combined effect of operating and financial leverages.
True or False Financial leverage is always beneficial to the firm.
True or False Combined leverage establishes the relationship between operating leverage and financial leverage.
True or False Favourable financial leverage and trading on equity are same.
True or False Financial leverage depends upon the fixed financial charges.
True or False Dividend on Pref. shares is a factor of operating leverage.(iv) Operating leverage may be defined as Contribution ÷EPS.
True or False Financial leverage depends upon the operating leverage.
True or False Operating leverage analyses the relationship between sales level and EPS.
It is expected that company will pay next year a dividend of 2 per share which will grow at 7% forever. Assume a 30% tax rate. You are required to:(a) Compute a weighted average cost of capital based on existing capital structure.(b) Compute the new weighted average cost of capital if the company
The expected dividend at the end of current year is 4.75 with a growth rate of 6%. Also calculate the cost of capital of new equity.(vi) A company is about to pay a dividend of 1.40 per share having a market price of 19.50. The expected future growth in dividends is estimated at 12%.[Answers
The firm needs 1,00,000 for expansion and the new shares can be sold only at
The company has just paid a dividend of 3.50 with expected growth of 15% over next 6 years and a growth rate of 8% thereafter.(v) The current market price of share is
‘Market Value Weights’ are superior to ‘Book Value Weights’. Comment.P5.1 Calculate the cost of capital in each of the following cases :(i) A 7-year 100 bond of a firm can be sold for a net price of 97.75 and is redeemable at a premium of 5%. The coupon rate of interest is 10% and the
What is meant by Cost of Capital? What are its components?How is the cost of retained earnings estimated?(B.Com. (H.), D.U., 2015)
The cost of preference share capital is generally lower than the cost of equity. State the reasons.(B.Com. (H.), D.U., 2014)
What are implicit costs and how are these relevant in calculating weighted average cost of capital ?(B.Com. (H.), D.U., 2013)
Explain, in brief the weights that you would take into consideration for computing weighted cost of capital.Why are market value weights considered superior to the book value weights ? (B.Com. (H.), D.U., 2010)
Does a firm’s tax rate affect its cost of capital? What is the effect of flotation costs associated with a new security issue on the firm’s cost of capital ?(B.Com. (H.), D.U., 2010)
‘Cost of existing share capital and fresh issue of capital are always same’? Do you agree? Give reasons.(B.Com. (H.), D.U., 2009)
Book Value vs. Market Value weights in Cost of Capital.(B.Com. (H.), D.U., 2005)
“Cost of retained earnings is same as cost of equity”.Comment. (B.Com. (H.), D.U., 2005)
What are the merits of using market value weights in computing weighted average cost of capital?
State the different approaches to the calculation of cost of equity. Are retained earnings cost free?(B.Com. (H.), D.U., 2007, 2009, 2012)
Retained earnings are free of cost. Do you agree?(B.Com. (H.), D.U., 2017)
“New issue of capital is costlier than the retained earnings”.How and what makes these two to differ?(B.Com. (H.), D.U., 2004)
“As there is no explicit cost of retained earnings, these funds are free of cost”. Critically comment.(B.Com. (H.), D.U., 2011)
How can you determine the cost of equity capital in a growth firm?
Why is that the debt cheapest source of finance for a profit making firm?
The cost of preference share capital is generally lower than the cost of equity. State the reasons.(B.Com. (H.), D.U., 2014)
What is the relevance and significance of cost of capital in capital budgeting? How does the cost of capital enter the capital budgeting process?
Why is the cost of capital most appropriately measured on after-tax basis? What effect does this have on specific cost of capital?
Write short notes on:(a) Implicit cost of capital.(b) Target weights.(c) Explicit cost of capital.(d) Weighted Average Cost of Capital
Advantage of Debt financing is :(a) Interest is tax-deductible,(b) It reduces WACC,(c) Does not dilute owners control,(d) All of the above.
Tax-rate is relevant and important for calculation of specific cost of capital of :(a) Equity Share Capital,(b) Preference Share Capital,(c) Debentures,(d) (a) and (b) above.
In order to find out cost of equity capital under CAPM, which of the following is not required :(a) Beta Factor,(b) Market Rate of Return,(c) Market Price of Equity Share,(d) Risk-free Rate of Interest.
Debt Financing is a cheaper source of finance because of :(a) Time Value of Money,(b) Rate of Interest,(c) Tax-deductibility of Interest,(d) Dividends not Payable to lenders.
The term capital structure denotes :(a) Total of Liability side of Balance Sheet,(b) Equity Funds, Preference Capital and Long term Debt,(c) Total Shareholders Equity,(d) Types of Capital Issued by a Company.
In order to calculate the proportion of equity financing used by the company, the following should be used :(a) Authorised Share Capital,(b) Equity Share Capital plus Reserves and Surplus,(c) Equity Share Capital plus Preference Share Capital,(d) Equity Share Capital plus Long-term Debt.
Cost of Capital for Equity Share Capital does not imply that :(a) Market Price is equal to Book Value of share,(b) Shareholders are ready to subscribe to right issue,(c) Market Price is more than Issue Price,(d) All of the three above.
Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known as :(a) Average Return on Investment,(b) Weighted Average Cost of Capital,(c) Net Profit Ratio,(d) Average Cost of borrowing.
Cost of capital may be defined as :(a) Weighted Average cost of all debts,(b) Rate of Return expected by Equity Shareholders,(c) Average IRR of the Projects of the firm,(d) Minimum Rate of Return that the firm should earn.
Which of the following is true?(a) Retained earnings are cost free,(b) External Equity is cheaper than Internal Equity,(c) Retained Earnings are cheaper than External Equity,(d) Retained Earnings are costlier than External Equity.
Cost of Redeemable Preference Share Capital is :(a) Rate of Dividend,(b) After Tax Rate of Dividend,(c) Discount Rate that equates PV of inflows and outflows relating to capital,(d) None of the above.
An implicit cost of increasing proportion of debt is :(a) Tax shield would not be available on new debt,(b) P.E. Ratio would increase,(c) Equity shareholders would demand higher return,(d) Rate of return of the company would decrease.
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