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intermediate financial management
Taxmans Fundamentals Of Financial Management 14th Edition R.P. Rustagi - Solutions
Firm’s Cost of Capital is the average cost of :(a) All sources,(b) All borrowings,(c) All share capital,(d) All Bonds & Debentures.
In order to calculate Weighted Average Cost of Capital, weights may be based on :(a) Market Values,(b) Target Values,(c) Book Values,(d) All of the above.
In case of partially debt-financed firm, k0 is less than :(a) kd,(b) ke,(c) Both (a) and (b),(d) None of the above.
In case the firm is all-equity financed, WACC would be equal to :(a) Cost of Debt,(b) Cost of Equity,(c) Neither (a) nor (b),(d) Both (a) and (b).
Marginal Cost of capital is the cost of :(a) Additional Sales,(b) Additional Funds,(c) Additional Interests,(d) None of the above.
Which is the most expensive source of funds?(a) New Equity Shares,(b) New Preference Shares,(c) New Debts,(d) Retained Earnings.
Which of the following cost of capital require tax adjustment?(a) Cost of Equity Shares,(b) Cost of Preference Shares,(c) Cost of Debentures,(d) Cost of Retained Earnings.
Weighted Average Cost of Capital is generally denoted by :(a) kA,(b) kW,(c) kO,(d) kC,
Cost of Capital for Bonds and Debentures is calculated on :(a) Before-Tax basis,(b) After-Tax basis,(c) Risk-free Rate of Interest basis,(d) None of the above.
Cost of Capital for Government securities is also known as :(a) Risk-free Rate of Interest,(b) Maximum Rate of Return,(c) Rate of Interest on Fixed Deposits,(d) None of the above.
Which of the following has the highest cost of capital?(a) Equity shares,(b) Loans,(c) Bonds,(d) Preference Shares.
Which of the following sources of funds has an Implicit Cost of Capital?(a) Equity Share Capital,(b) Preference Share Capital,(c) Debentures,(d) Retained earnings.
Cost of Capital refers to :(a) Flotation Cost,(b) Dividend,(c) Required Rate of Return,(d) None of the above.
True or False Retained earnings have implicit cost only
True or False Cost of existing share capital and fresh issue of capital are same.
True or False Cost of Equity share capital depends upon the market price of the share.
True or False Cost of Pref. share capital is determined by the rate of fixed dividend.
True or False Cost of debt is the same as the rate of interest.
True or False WACC is the overall cost of capital of the firm.
True or False Every source of fund has an explicit cost of capital.
True or False Cost of debt and Cost of Pref. share capital, both, require tax adjustment.
True or False Tax liability of the firm is relevant for cost of capital of all the sources of funds.
True or False Different sources have same cost of capital.
True or False Risk free interest rate and cost of capital are same things
True or False Cost of capital is basic data for NPV technique.
True or False Cost of capital does not comprise any risk premium.
True or False Different sources of funds have a specific cost of capital related to that source only.
True or False The cost of capital is the required rate of return to maintain the value of the firm.
Certainty Equivalent Approach is theoretically superior to the Risk Adjusted Discount Rate. Do you agree?P4.1 A company is considering an investment proposal to instal new milling controls. The project will cost 50,000. The facility has a life expectancy of 5 years and no salvage value. The
What are similarities and dissimilarities between NPV and IRR? Which of the two methods will you prefer when they give different ranking of investment of proposals?Why [B.Com. (H), D.U., 2015, 2016]
Differentiate between Risk-adjusted Discount Rate and Certainty Equivalent methods of incorporation of risk in capital budgeting. [B.Com. (H), D.U., 2008, 2010, 2012]
While evaluating single project with convention cash flows, both NPV and IRR methods give identical decisions.Explain. [B.Com. (H), D.U., 2013]
Contrast IRR method with NPV method. Why might these two techniques lead to conflict in project ranking?[B.Com. (H), D.U., 2008, 2009]
Explain Payback period method of capital budgeting.How does it differ from Profitability Index?[B.Com. (H), D.U., 2007, 2010]
Examine the assumption of reinvestment rate with respect to the NPV method and the IRR method.
Make a comparison between NPV and IRR methods.Which one of the two you find to be more rationale and why?
“The Terminal Value method overcome the shortcomings of the assumption of reinvestment rate”. In the light of this statement, explain the procedure of this terminal value method.
What is Profitability Index? Which is superior ranking criteria - PI or NPV?[B.Com. (H), D.U., 2007, 2009, 2011, 2018]
Why do NPV and IRR techniques of evaluation of capital budgeting lead to conflicting project ranking ?[B.Com. (H.), D.U., 2013]
Describe the concept of discounted cash flows in making investment decisions and its superiority over the traditional methods of investment evaluation.
“Despite being conceptually unsound, payback period is very popular in business as a criteria for assigning priorities to investment projects.”[B.Com. (H), D.U., 2008, 2012]
How do you calculate the Accounting Rate of Return?Explain the treatment of depreciation in calculation of net investment. What are the limitations of ARR?[B.Com. (H), D.U., 2009, 2011]
“The pay back period is more a method of liquidity rather than profitability”. Examine. [B.Com. (H), D.U., 2006]
Explain the traditional methods of evaluating long-term projects. [B.Com. (H), D.U., 2017]
Cash flows of different time periods in absolute items are incomparable. Explain. [B.Com. (H), D.U., 2013]
How the concept of time value of money is applied to capital budgeting? What are the methods based on time value of money?
Write short notes on:(a) Reinvestment Rate.(b) Discounted Cash flow Methods.(c) Discounted Payback Period.
Number of IRR for a project is equal to:(a) Number of Cash flows,(b) Number of Cash Outflows,(c) Life of the Project,(d) Changes in the signs of cash flows.
If IRR of a project is equal to opportunity cost of capital, then:(a) Project should be repeated,(b) NPV will be zero,(c) Project has no cash flows,(d) NPV will be positive.
Which of the following is likely to increase the NPV of a project?(a) Increase in cost of capital,(b) Decrease in working capital,(c) Spreading cash flows over a longer period,(d) Decreasing the net revenues.
Which of the following statement is correct with reference to Capital Budgeting?(a) All Capital Budgeting techniques lead to same decision.(b) Internal Rate of Return does not consider time value of money.(c) NPV method is superior to payback method as the former considers time value of money.(d)
NPV technique is based on:(a) Discounting Procedure,(b) Compounding Procedure,(c) Averaging Procedure,(d) None of the above.
Accounting Rate of Return is based on:(a) Average Expected Profit,(b) Average Past Profit,(c) Average Cash Profit,(d) Life of the Project.
A project has a Profitability Index of 1.30. What does it mean?(a) That NPV is less than zero.(b) That Payback period is more than one year.(c) That the project returns 1.30 for every 1 invested in project.(d) That IRR is 1.30 times that of the Hurdle Rate.
Project costing 8,00,000 and a life of 5 years is expected to bring cash inflows of 2,00,000 p.a. What is the payback period?(a) 5 years,(b) 4 years,(c) 3 years,(d) None of the above.
Which of the following assumes that cash flows from a project are uniform throughout the life of the project?(a) Internal Rate of Return,(b) Net Present Value,(c) Profitability Index,(d) None of the above.
Which of the following methods focuses on the maximization of wealth of shareholders?(a) Accounting Rate of Return,(b) Payback Period,(c) Profitability Index,(d) Internal Rate of Return.
Which of the following methods state the return from a project in percentage form?(a) Terminal Value Method,(b) Discounted Payback Method,(c) Internal Rate of Return,(d) Net Present Value.
In case of risky projects, the required rate of return would generally be :(a) Higher,(b) Lower,(c) Same as for others,(d) None of the above.
Which method of capital budgeting assumes that the cash flows are reinvested at project’s rate of return?(a) Terminal Value,(b) Net Present Value,(c) Internal Rate of Return,(d) Accounting Rate of Return.
In case of selection of mutually exclusive projects, the rule is:(a) Only the best one,(b) All the good ones,(c) All Positive NPV projects,(d) None of the above.
Which of the following method of evaluation of capital budgeting proposals focuses on liquidity?(a) Internal Rate of Return,(b) Net Present Value,(c) Accounting Rate of Return,(d) Payback Period.
NPV method and IRR method always give to mutually exclusive projects :(a) Same Ranking,(b) Different Ranking,(c) Inverse Ranking,(d) None of the above.
NPV of a proposal indicates :(a) Net Incremental Profit,(b) Net addition to Wealth,(c) Total Value of the Proposal,(d) None of the above.
PI of a Project is the ratio of Present Value of Inflows to :(a) Initial Cost,(b) PV of outflows,(c) Total Cash inflows,(d) Total Outflows.
In Capital Budgeting Decisions, a single cost of capital is used because :(a) Required Rate of Return is same for all projects,(b) It avoids calculation of Required Rate for different projects,(c) Both (a) and (b),(d) None of the above.
Payback Period Technique is based on :(a) All Cash Flows,(b) Only higher Cash Flows,(c) Earlier Cash Flows,(d) Selected Cash Flows.
Reinvestment Rate Assumption is implied in :(a) Net Present Value,(b) Internal Rate of Return,(c) Both (a) and (b),(d) None of the above.
In case of Mutually Exclusive Proposals :(a) Only the best project is selected,(b) All Projects with Positive NPV are selected,(c) Even Negative NPV Project may be selected,(d) At least two proposals are selected.
Which of the following variables is not known in Internal Rate of Return?(a) Initial Cash Flows,(b) Discount Rate,(c) Terminal Inflows,(d) Life of the Project.
Profitability Index method is an extension of :(a) Net Present Value,(b) Internal Rate of Return,(c) Payback Period,(d) Accounting Rate of Return.
Which of the following statements is correct?(a) If PI < I, its NPV is less than zero,(b) If PI = 0, its NPV is greater than zero,(c) If P > 1, its NPV will be negative,(d) PI of a project is always greater than one.
True or False IRR technique always gives clear-cut decision rule.
True or False The reinvestment rate in NPV and IRR is always same.
True or False In case of different ranking, the IRR ranking should be preferred.
True or False IRR and NPV always give same decision.
True or False IRR technique is based on all relevant cash flows.
True or False IRR technique cannot be applied if the inflows are not in annuity form.
True or False Same information is required for the calculation of NPV and IRR.
True or False NPV and PI are more or less the same technique.
True or False PI gives the expected return from the proposal in %form.
True or False Profitability Index ignores the salvage value of the project.
True or False NPV represents net addition to wealth of shareholders.
True or False A positive NPV means that the proposal must be undertaken.
True or False In NPV techniques, only the future inflows are discounted.
True or False Time value of money is the hall mark of all discounted cashflow techniques.
True or False Accounting Rate of Return does not ignore time value of money.
True or False Payback technique is more an indication of liquidity than of profitability.
True or False Accounting Rate of Return may be considered as the best technique of evaluation of capital budgeting proposals.
True or False Payback technique is based on discounting technique.
True or False Payback technique incorporates all cashflows of a proposal.
True or False Capital budgeting evaluation technique should be capable of ranking different proposals.
The cash flow approach of measuring future benefits of a project is superior to the accounting approach. Discuss.P3.1 ABC Instruments Ltd. is considering the purchase of a machine to replace an existing machine that has a book value of 24,000, and can be sold for 12,000. The salvage value of
What adjustments are required to convert accounting profits into cash inflows? Explain the rationale for this adjustment.
How would you deal ‘Sunk cost’ and ‘Allocated overheads’in analyzing investment decisions?
What are the distinct categories of investment decisions.Discuss the basic factors on which capital budgeting decisions depend.
What do you mean by incremental cash flows? Explain the treatment of sunk cost and allocated overheads in cash flows.
Define cash flows. How is it different from profit? Explain the superiority of cash flows in investment decision making. [B.Com. (H), D.U., 2016]
What are different types of cash flows associated with capital budgeting process? Why are they taken after tax?
Examine the effects of depreciation policy on the cash flows of a firm. How does depreciation affect the cash flows of a proposal?
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