FINANCIAL & STRATEGIC MANAGEMENT – DECEMBER 2019

PART – I

1. Which of the following is true regarding financial decisions of a firm?

(a) Investment Decisions are dependent on Financing Decisions.
(b) Financing Decisions are dependent on Dividend Decisions.
(c) Dividend Decisions are dependent on Investment Decisions.
(d) All the three decisions are inter-related.

2. What will be the maturity value of a sum of ` 18,000 invested today at the rate of 5% p.a.
for 10 years?
(a) ` 29,360
(b) ` 28,320
(c) ` 29,320
(d) ` 35,220

FV of Single Cash Flow

𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛
= 18000(1 + 0.05)10
= 29,320/−

3. The competing objectives of financial management have been:

(a) Profit Maximization and Wealth Maximization
(b) Profit Maximization and Economic Value Maximization
(c) Economic Value Maximization and Wealth Maximization
(d) EPS Maximization and Economic Value Maximization

4. Which of the following is an example of systematic risk in stocks?

(a) Company strike
(b) Industrial recession
(c) Unexpected entry of a new competitor in the market
(d) Bankruptcy of a major supplier

5. Treasury Bills are issued by:

(a) Public limited companies.
(b) Blue chip companies.
(c) Banks and selected all-India Financial Institutions only.
(d) Central government.

6. Given that the effective rate of interest is 9.31% p.a., what is the nominal rate of interest
p.a., if compounding is carried out quarterly?
(a) 9.25%
(b) 8.5%
(c) 9%
(d) 9.20%

𝑖
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒 = (1 + )𝑛 − 1
𝑛
𝑖
0.0931 = (1 + )4 − 1
4
 𝑖
1.0931 = (1 + )4
4

𝑇𝑎𝑘𝑒 4𝑡ℎ 𝑅𝑜𝑜𝑡 𝑜𝑛 𝐵𝑜𝑡ℎ 𝑠𝑖𝑑𝑒𝑠.

𝑖
1.0225 = 1 +
4

𝑖 = (1.0225 − 1) × 4

𝑖 = 9%

7. Decisions related to the mix of debt and equity in the balance sheet best relates to which
of the following?
(a) Capital budget
(b) Capital structure
(c) Capital expenditure
(d) Operating leverage

8. Which of the following are not applicable in the case of Payback period calculation of
investment appraisal?
(a) It is simple in concept and application.
(b) It favours only those projects that generate substantial inflows in the earlier years.
(c) The cut-off period is chosen arbitrarily.
(d) It considers the time value of money.

9. The Security Market Line shows the relationship between:

(a) Expected rate of return and beta
(b) Expected rate of return and diversifiable risk
(c) Required rate of return and unsystematic risk
(d) Realized rate of return and beta

10. The cost of retained earnings is equal to:

(a) Dividend pay-out ratio
(b) Rate of return expected on the Equity Share
(c) Risk-free rate of return
(d) Dividend yield ratio

11. Decision rules based on Benefit Cost Ratio (BCR) and Net Benefit Cost Ratio (NBCR)
criteria implies:
(a) If BCR <1, accept the project
(b) If NBCR < 0, accept the project
(c) If NBCR > 0, reject the project
(d) If BCR < 1, reject the project

12. An equity share with beta greater than unity would be called:
(a) A defensive stock, because it is expected to decrease more than the market increase
(b) An aggressive stock, because it is expected to increase more than the market
increase
(c) A defensive stock, because it is expected to increase more than the market decrease
(d) A aggressive stock, because it is expected to decrease more than the market increase

13. An interest that has been annualized using composed interest is terms as:
(a) Annual interest rate.
 (b) Discounted interest rate.
(c) Effective annual interest rate.
(d) Simple interest rate.

14. The risk aversion of investors can be measured by:

(a) Risk-free rate of return.
(b) Market rate of return.
(c) Variance of the return from a security.
(d) The difference between the market rate of return and the risk-free rate of
return.

15. If a firm declared 25% dividend on share of Face Value of ` 10, its growth rate is 5%, and
if the rate of capitalization is 12%, its expected price would be ` ……………….. .
(a) 31.25
(b) 33.50
(c) 36.00
(d) 37.50

Dividend Growth Model

𝐷1
𝑃0 =
𝐾𝑒 − 𝑔

(10 × 25%) + 5%
=
12% − 5%

2.625
=
7%

= 37.5/−

16. Capital Budgeting Decisions are part and parcel of:

(a) Financing and Investing Decisions
(b) Investing and Dividend Decisions
(c) Financing and Dividend Decisions
(d) Only Investing Decisions

17. Diversification can eliminate risk, if the securities of a portfolio are:

(a) Perfectly positively correlated
(b) Perfectly negatively correlated
(c) Weakly positively correlated
(d) Weakly negatively correlated

18. ……………….. is the present value of an asset, if the annual cash inflow is ` 1,000 per
year for next 5 years and the discount rate is 15.
(a) ` 2,500
(b) ` 3,500
(c) ` 3,352
(d) ` 2,481

𝑃𝑉 𝑜𝑓 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 = 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 × 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐹𝑎𝑐𝑡𝑜𝑟

= 1000 × 3.352
= 3352/−
19. An investor purchases an 8% bond having a face value of ` 1,000 and maturity of 5
years for ` 900. A year later he sells it for ` 960 in the market. The holding period gain of
the investor is:
(a) 8.88%
(b) 14.00%
(c) 14.58%
(d) 15.55%

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 + 𝑃𝑟𝑖𝑐𝑒 𝑅𝑖𝑠𝑒

𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = × 100
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
(1000 × 8%) + (960 − 900)
= × 100
900
80 + 60
= × 100
900

= 15.55%

20. The effective rate of interest for a sum of money compounded quarterly is 12.55%. What
is its nominal yield?
(a) 12.05%
(b) 12.25%
(c) 12.15%
(d) 12%

𝑖
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒 = (1 + )4 − 1
4
𝑖
0.1255 = (1 + )4 − 1
4
𝑖
1.1255 = (1 + )4
4
𝑇𝑎𝑘𝑒 4𝑡ℎ 𝑅𝑜𝑜𝑡 𝑜𝑛 𝐵𝑜𝑡ℎ 𝑠𝑖𝑑𝑒𝑠.

𝑖
1.0299 = 1 +
4

𝑖 = (1.0299 − 1) × 4

𝑖 = 12%

21. The price of a share is ` 100 today. It grows to ` 125 at the end of the 1st year, ` 187.5
at the end of the 2nd year and ` 243.75 at the end of the 3rd year. What is the average
rate of return?
(a) 35.5%
(b) 35%
(c) 34.5%
(d) 34%

125 − 100
1𝑠𝑡 𝑦𝑟 = × 100 = 25%
100

187.5 − 125
2𝑛𝑑 𝑦𝑟 = × 100 = 50%
125
 243.75 − 187.5
3𝑟𝑑 𝑦𝑟 = × 100 = 30%
187.5

25% + 50% + 30%

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 =
3
= 35%

22. What is the present value of an annuity of ` 15,000 starting immediately (t = 0) and
paying another 5 annual instalments? Assume a discounting rate of 12%.
(a) ` 85,460
(b) ` 82,500
(c) ` 75,120
(d) ` 88,120

My Answer is coming: 69075/-

Options given in the question are wrong. You can check in ICSI Suggested answers also.
They have mentioned this.
𝑃𝑉 = 15000 + (𝑃𝑉 𝑜𝑓 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑜𝑓 5 𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑠𝑡𝑎𝑙𝑙𝑚𝑒𝑛𝑡𝑠)
= 15000 + (15000 × 3.605)
= 69075/−

23. Which of the following does not contribute to systematic risk?

(a) Change in the interest rates.
(b) Change in the level of government spending.
(c) Emergence of a new competitor.
(d) Change in the industrial policy.

24. Varun Ltd. is issuing 1 Lakh 12% Irredeemable preference shares of the face value of `
100 each. If the floatation cost is ` 2 per share, what is the cost of these Preference
Shares?
(a) 12.00%
(b) 12.14%
(c) 12.24%
(d) 12.34%

𝑃𝐷
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑆 = × 100
𝑁𝑃
(100 × 12%)
= × 100
100 − 2
12
= × 100
98

= 12.24%

25. If an investment of ` 3,00,000 pays ` 25,000 p.a. in perpetuity, what is the Net Present
Value, if the interest rate is 9%?
(a) ` – 22222
(b) ` + 22222
(c) ` + 24736
(d) ` + 27250
 25000
𝑃𝑉 𝑜𝑓 𝐼𝑛𝑓𝑙𝑜𝑤 = = 2,77,778/−
9%

𝑁𝑃𝑉 = 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤 − 𝑂𝑢𝑡𝑓𝑙𝑜𝑤

= 2,77,778 − 3,00,000

= −22,222/−

26. Which approach in capital structure argues that the overall capitalization rate and the
cost of debt remains constant for all degrees of leverage, as the same is offset by an
increase in the equity capitalization rate?
(a) NI Approach
(b) NOI Approach
(c) Walter’s Approach
(d) Gordon’s Approach

27. An arrangement where a bank allows a borrower to overdraw up to a certain limit for
working capital financing is known as:
(a) Bridge Loan
(b) Cash Credit
(c) Term Loan
(d) Leverage Buy Out

28. Funds represented by cheques which have been issued, but which have not been debited
from bank is technically referred to as:
(a) Indenture
(b) Forward Cover
(c) Float
(d) Proxy

29. The Net Working Capital (NWC) of a firm is ` 14 Lakhs. It purchased ` 30 Lakhs worth of
raw materials on credit, issued 7% debentures for ` 20 Lakhs, and purchased a machine
for ` 18 Lakhs for cash. The new NWC of the firm will be:
(a) ` 12 Lakhs
(b) ` 16 Lakhs
(c) ` 15 Lakhs
(d) ` 10 Lakhs

Effect on NWC
(𝑖)𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑜𝑓 𝑅𝑀 𝑜𝑛 𝐶𝑟𝑒𝑑𝑖𝑡 = 𝑛𝑜 𝑒𝑓𝑓𝑒𝑐𝑡
(𝑖𝑖)𝐼𝑠𝑠𝑢𝑒𝑑 𝐷𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒 = 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑁𝑊𝐶 𝑏𝑦 20 𝐿𝑎𝑘ℎ𝑠
(𝑖𝑖𝑖)𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝑓𝑜𝑟 𝐶𝑎𝑠ℎ = 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑁𝑊𝐶 𝑏𝑦 18 𝐿𝑎𝑘ℎ𝑠
Net Effect Increase 2 Lakhs
+Opening 14 Lakhs
=Closing 16 Lakhs

30. A firm has a Degree of Operating Leverage (DOI) of 5 and Degree of Financial Leverage
(DFL) of 4. The interest burden is ` 300 Lakhs, variable cost as a % to sales is 75%, and
the effective tax rate is 45%. Its fixed cost is:
(a) ` 1600 Lakhs
(b) ` 1450 Lakhs
(c) ` 1500 Lakhs
 (d) ` 1700 Lakhs

𝐸𝐵𝐼𝑇
𝐹𝐿 =
𝐸𝐵𝑇
𝐸𝐵𝐼𝑇
𝐹𝐿 =
𝐸𝐵𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐸𝐵𝐼𝑇
4=
𝐸𝐵𝐼𝑇 − 300

4 𝐸𝐵𝐼𝑇 − 1200 = 𝐸𝐵𝐼𝑇

3 𝐸𝐵𝐼𝑇 = 1200
𝐸𝐵𝐼𝑇 = 400

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝐹𝐿 =
𝐸𝐵𝐼𝑇
𝐶
5=
400
𝐶 = 2000

𝐹𝐶 = 𝐶 − 𝐸𝐵𝐼𝑇

𝐹𝐶 = 2000 − 400 = 1600

31. ABC analysis is useful for:

(a) Analyzing inventory based on their usage and movement
(b) Reduction of total investment in material
(c) Determining the optimal level of safety stock
(d) Analyzing inventory based on their availability

32. Consider the following factors – Gross operating cycle – 80 days; Net operating cycle – 55
days; Raw material holding period – 40 days, Conversion period – 2 days; Finished goods
holding period – 20 days; Average collection period will be:
(a) 87 days
(b) 37 days
(c) 18 days
(d) 62 days

𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 = 𝑅 + 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝐹 + 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑

80 = 40 + 2 + 20 + 𝐶
𝐶 = 18 𝑑𝑎𝑦𝑠

33. MNC expects its sales to increase by 10% from the current year level of ` 5 million. With
a Net Profit Margin of 8% and a payout ratio of 30%, what financing for the next year will
be available from internal sources?
(a) ` 4,40,000
(b) ` 3,08,000
(c) ` 0.4 million
(d) ` 0.404 million

𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑙 𝑆𝑜𝑢𝑟𝑐𝑒𝑠 𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 = 𝑆𝑎𝑙𝑒𝑠 × 𝑁𝑃% × (1 − 𝑝𝑎𝑦𝑜𝑢𝑡)

= (50,00,000 + 10%) × 8% × (1 − 0.3)
= 55,00,000 × 8% × 0.7%
= 3,08,000/−

34. If a company acquired a helicopter for its top management for a certain period on a fixed
payment, which of the following will be true regarding leverage?
(a) DOL will increase
(b) DFL will increase
(c) DOL will decrease
(d) DCL will remain unchanged

35. Which of the following is not a valid assumption of MM approach to capital structure?
(a) Securities are infinitely divisible
(b) Lack of free flow of information
(c) Transactions costs are zero
(d) No taxation

36. Which of the following will not have an impact on a firm’s treasury position?
(a) Dividend payment
(b) Tax payment
(c) Buying fixed assets
(d) Issuing bonus shares

37. A firm has a DOL of 6 at a certain production level. If Sales of the firm rise by 1%, it
implies that:
(a) EBIT will also rise by 1%
(b) EBIT will rise by 1/6%
(c) EBIT will rise by 6%
(d) Change in EBIT is undecided

38. Determination of “safety stock” requires a trade-off between:

(a) Carrying costs and stock-out cost
(b) Ordering cost and carrying cost
(c) Ordering cost and stock-out cost
(d) Lead time and order point

39. Which of the following is not a valid assumption of EOQ model?

(a) Demand forecast is available
(b) Inventory can be replenished immediately
(c) Cost per order is variable
(d) Carrying cost is a fixed percentage

40. Which of the following investment decisions is required to be taken for a stock, if its
intrinsic value is greater than its market value?
(a) Sell
(b) Hold
(c) Buy
(d) Indifferent

41. Monthly demand for a raw material is 150 units. Ordering cost per order is ` 8 and
annual carrying cost per unit is ` 2. Economic Order Quantity (EOQ) under the above
circumstances will be:
(a) 90
(b) 120
(c) 150
(d) 180
 2×𝐴×𝑂
𝐸𝑂𝑄 = √
𝐶

2 × (150 × 12) × 8
=√
2

= √14400

= 120 𝑈𝑛𝑖𝑡𝑠

42. Earnings per share (EPS) is equal to:

(a) Profit after tax/no. of shares in authorized capital
(b) Profit after tax/no. of shares in issued capital
(c) Profit after tax/net worth
(d) Profit before tax/net worth

43. Interest coverage ratio of 6 indicates:

(a) Sales are 6 times of interest.
(b) Profit after tax is 6 times of interest.
(c) EBIT is 6 times of interest.
(d) Interest is 6 times profit after tax.

44. Debtors turnover ratio reflects:

(a) Collection period
(b) Debtors in relation to credit sales
(c) Debtors in relation to total sales
(d) Aging of the debtors

45. Consider the following data and compute the total sales amount:
(i) Closing balance of receivables : ` 30 lakhs
(ii) Opening balance of receivables : ` 20 lakhs
(iii) Average collection period : 25 days
(iv) Credit sales are 73% of sales (assume 365 days in a year)
(a) ` 365 lakhs
(b) ` 500 lakhs
(c) ` 550 lakhs
(d) ` 730 lakhs

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑒𝑏𝑡𝑜𝑟
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠/365

(30 + 20)
25 = 2
𝐶𝑆/365

25
25 =
𝐶𝑆/365

𝐶𝑆
25 = 25 ×
365
𝐶𝑆 = 365

𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒 = 73% × 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠

𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒 =
73%

365
=
73%

= 500 𝐿𝑎𝑘ℎ𝑠

46. If the expected dividend is less than the actual dividend paid, the rational expectation
approach suggests that the:
(a) Share price will increase.
(b) Share prices will go down.
(c) Value of the firm will go up.
(d) Both (a) and (c) above

47. The EOQ for a firm is 7200 units. The minimum order size stipulated by the supplier is
9000 units for utilizing a cash discount on the purchase price. The annual usage of the
material in units is 80,000 and the cost per order is ` 100. If the company decides to
utilize cash discount, savings in the total ordering cost will be:
(a) ` 400
(b) ` 500
(c) ` 600
(d) ` 700

Some data is missing in the question and hence, can’t be solved.

48. Walter model can be applied only to those companies which:

(a) Earn high profits.
(b) Make investment by resorting to high level of debts.
(c) Make investments without borrowing or raising external equity.
(d) Do not make any investment.

49. Cash Management Model has been propounded by:

(a) Linter
(b) Walter
(c) Baumol
(d) Gordon

50. The Weighted Average Cost of Capital computations:

(a) Assign more weight to Equity.
(b) Assign more weight to Debentures.
(c) Excludes Retained Earnings.
(d) Assigns weights based on Market Value or Book Value.

51. The liability side of Shivanee Ltd.’s Balance Sheet shows Equity capital ` 25 Lakhs and
Retained Earnings ` 50 Lakhs. Face value of its share is ` 100 each and market value is
` 300 each. If the investors expect a Rate of Return of 18%, and if the cost of floatation of
issuing fresh Equity is 5%, what is the Cost of Retained Earnings?
(a) 17.50%
 (b) 18.00%
(c) 9.00%
(d) 8.75%

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

∴ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛
∴ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = 18%

52. The Capital Structure of Neel Ltd. is as under:

Equity + Reserves & Surplus 200 Lakhs
10% Preference Shares 50 Lakhs
12% Term Loans 150 Lakhs
What should be the approx. Earnings before Interest and Taxes (EBIT) so that Earnings
Per Share (EPS) is 0 (Nil)? Assume Tax Rate 35%.
(a) ` 23.00 Lakhs
(b) ` 24.75 Lakhs
(c) ` 25.69 Lakhs
(d) ` 29.30 Lakhs

Reverse Working:
EPS = 0
+ Pref. Dividend (50 × 10%) = 5
PAT = 5
PBT = 7.69
5
( )
100% − 35%
+ Interest (150 × 12%) = 18
= 25.69

53. ABC Limited books of accounts show profit from operation (EBDIT) at ` 500 Lakhs, it
paid 12% on a debt of ` 1,000 Lakhs, Depreciation is ` 100 Lakhs and Tax 35%. Profit
after Tax will be:
(a) ` 184 Lakhs
(b) ` 182 Lakhs
(c) ` 178 Lakhs
(d) ` 180 Lakhs

EBIT = 500
(-) Debenture = (100)
(-) Interest (1000 × 12%) = (120)
EBT = 280
(-) Tax @ 35% = (98)
PAT = 182 Lakhs

54. As you increase the number of stocks in a portfolio, the systematic risk is likely to:
(a) Remain constant
(b) Increase at a decreasing rate
(c) Decrease at a decreasing rate
(d) Decrease at an increasing rate

55. Current ratio is 4:1. Net Working Capital is ` 30,000. Find the amount of Liquid assets if
value of stock is ` 8,000.
 (a) ` 10,000
(b) ` 40,000
(c) ` 32,000
(d) ` 2,000

𝐶𝐴
𝐶𝑅 =
𝐶𝐿
𝐶𝐴
4=
𝐶𝐿

𝐶𝐴 = 4 𝐶𝐿 _______________(1)

𝑁𝑊𝐶 = 𝐶𝐴 − 𝐶𝐿

30000 = 4𝐶𝐿 − 𝐶𝐿

𝐶𝐿 = 10000

𝐶𝐴 = 4 × 10000

= 40000

𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡 = 𝐶𝐴 − 𝑆𝑡𝑜𝑐𝑘

= 40000 − 8000
= 32000

56. A sum of ` 50,000 is invested @ 12% p.a. for 6 years. What will be the present value of
its maturity value, assuming a required rate of return of 10%?
(a) ` 86,000
(b) ` 98,700
(c) ` 55,667
(d) ` 56,504

𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑉(1 + 𝑖)𝑛

= 50000(1 + 0.12)6
= 50000 × 1.974
= 98700

𝑃𝑉 = 𝑀𝑉 × 𝑃𝑉𝐹 @ 10% 𝑓𝑜𝑟 6𝑡ℎ 𝑦𝑟

= 98700 × 0.564
= 55667/−

57. The cost of capital of a firm is 12% and its expected Earnings Per Share at the end of
the year is ` 20. Its existing payout ratio is 25%. The company is planning to increase its
payout ratio to 50%. What will be the effect of this change on the market price of equity
shares (MPS) of the company as per Gordon’s model, if the reinvestment rate of the
company is 15%?
(a) It will increase by ` 444
(b) It will decrease by ` 444
(c) It will increase by ` 222
(d) It will decrease by ` 222
At 25% Payout:
G = retention ratio * reinvestment rate
= 75% * 15%
= 11.25%

𝐷1
𝑃𝑜 =
𝐾𝑒 − 𝑔
20 ∗ 25%
𝑃𝑜 =
12% − 11.25%

= 666/−

50% Payout:
G = retention ratio * reinvestment rate
= 50% * 15%
= 7.5%

𝐷1
𝑃𝑜 =
𝐾𝑒 − 𝑔
20 ∗ 50%
𝑃𝑜 =
12% − 7.5%

= 222/−

Change = Decline of 444/-

58. Mr. A is planning to buy a security and is in a dilemma regarding price to be paid. For
this he is relying on the required rate of return on the security. Help him out to calculate
the aforesaid rate (%), if you are informed that security’s standard deviation is 6%,
correlation coefficient of the security with the market is 0.6, and market standard
deviation is 5%. You may assume that return from risk-free security in the market is 8%,
and return on market portfolio is 12%.
(a) 10.68%
(b) 10.88%
(c) 10.58%
(d) 10.78%

𝑆𝐷 𝑜𝑓 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦
𝛽 = 𝐶𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛 𝐶𝑜 − 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 ×
𝑆𝐷 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡

6%
= 0.6 ×
5%

= 0.72

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓 )

= 8% + 0.72(12% − 8%)
= 10.88%

59. Firm A is considering a project A. The project involves cash outlay of ` 50,000 (t = 0),
working capital outlay of ` 20,000 (t = 2), and is expected to generate Cash Flow After
Tax (CFAT) of ` 12,000 per annum for 5 years excluding working capital release back
 and terminal value of 20%. What would be your advice to the company using Net Present
Value approach, if its cost of capital is 10%.
(a) Accept the project.
(b) Either Accept or Reject it as NPV is zero.
(c) Reject the project.
(d) Information incomplete.

𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤 = 50000 + (20000 + 0.826%)

= 66520/−

PV of Cash Inflow

𝑃𝑉 𝑜𝑓 𝐶𝐹𝐴𝑇 = 12000 × 3.791

= 45492

𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒 (𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙)(5𝑡ℎ 𝑦𝑟 𝑒𝑛𝑑) = 50000 × 20% × 0.621

= 6210/−

𝑃𝑉 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 (5𝑡ℎ 𝑦𝑟 𝑒𝑛𝑑) = 20000 × 0.621

= 12420

𝑇𝑜𝑡𝑎𝑙 𝐶𝐼 = 45492 + 6210 + 12420

= 64122

𝑁𝑃𝑉 = 𝐶𝐼 − 𝐶𝑂
= 64122 − 66520
= −2398

𝑅𝑒𝑗𝑒𝑐𝑡 𝑡ℎ𝑒 𝑃𝑟𝑜𝑗𝑒𝑐𝑡.

60. Economic Order Quantity (EOQ) determines:

(a) The order size that minimize the total inventory cost.
(b) The order size where ordering cost is the lowest.
(c) The order size where the carrying cost is minimum.
(d) The order size which will earn discounts on purchase.

PART – II

61. A corporate strategy can be defined as:

(a) A list of actions about operational planning and statement of organization structure
and control system
(b) A statement of how to compete, direction of growth and method of assessing
environment
(c) Abatement of organization’s activities and allocation of resources
(d) A course of action or choice of alternatives, specifying the resources required to
achieve certain stated objectives

62. A Strategic Business Unit (SBU) is defined as a division of an organization:

(a) That help in the marketing operations.
(b) That enable managers to have better control over the resources.
(c) That help in the choice of technology.
(d) That help in the allocation of scarce resources.

63. Total Quality Management was initially applied in:

 (a) South Korea
(b) Japan
(c) United Kingdom
(d) United State of America

64. How often should strategic management activities be performed?

(a) Annually
(b) Quarterly
(c) Monthly
(d) Continuously

65. What is six-sigma risk/return level?

(a) High-Low
(b) Medium-High
(c) Low-Low
(d) High-High

66. Which “S” is not part of McKinseys 7-S Framework?

(a) Shared value
(b) System
(c) Staff
(d) Synergy

67. Under the BCG growth-share matrix, low share, high-growth businesses or products are
called?
(a) Stars
(b) Cash cows
(c) Question marks
(d) Dogs

68. Ansoff’s matrix is useful for:

(a) Joining a business’s marketing strategy with general strategic direction
(b) Establishing an editorial calendar for staff to follows
(c) Understanding buyer persons and buyer behaviours
(d) Hiring new staff and training them on marketing tactics

69. Which category of benchmarking involves multi-site comparison of process and

performance?
(a) Internal
(b) Generic
(c) Competitive
(d) Functional

70. Which of the following answers to the question:

‘Where does the organization aspire to be in the future?’
(a) Mission Statement
(b) Vision Statement
(c) Objectives
(d) Core Values

71. Which of the following is a force in the Porter’s five forces model of industry
attractiveness?
(a) Bargaining power of suppliers
(b) Competitive market
 (c) Low cost for customers
(d) Opportunity for substitutes

72. The principles of the business process re-engineering (BPR) approach do not include:
(a) Rethinking business processes cross-functionally to organize work around natural
information flows.
(b) Striving for improvements in performance by radical rethinking and redesigning the
process.
(c) Checking that all internal customers act as their own suppliers to identify problems
(d) Scrapping any process line over two years old and starting again from scratch

73. What does Cash Cow symbolize in BCG matrix?

(a) Volatility
(b) Unattractive Investment
(c) Profitability
(d) Cash Drain

74. What are focus strategies?

(a) When a company focuses on supplying differential products which appeal to different
market segments.
(b) Where a company chooses to concentrate on only one market segment or a
limited range of segments
(c) Where a company focuses on achieving lower costs than its rivals so as to compete
across a broad range of market segments
(d) When a company conducts market research through focus groups to determine how
their strategy should be shaped

75. The BCG matrix is based on:

(a) Industry attractiveness and business strength
(b) Industry growth rate and business strength
(c) Industry attractiveness and relative market share
(d) Industry growth and market share

76. Which of these are characteristics of matrix structure?

(a) Decentralization and co-ordination
(b) Centralization and control
(c) Centralization and co-ordination
(d) Decentralization and control

77. Which is the term used in Ansoff’s matrix for increasing market share with existing
products in existing markets?
(a) Market Development
(b) Market Penetration
(c) Product Development
(d) Diversification

78. Successful differentiation strategy allows the company to:

(a) Gain buyer loyalty to its brands
(b) Charge too high a price premium
(c) Depend only on intrinsic product attributes
(d) Have product quality that exceeds buyers’ needs

79. What are enduring statements of purpose that distinguish one business from other
similar firms?
 (a) Policies
(b) Mission statements
(c) Objectives
(d) Rules

80. Typically profits are highest in which stage of industry life-cycle?

(a) Introduction
(b) Growth
(c) Maturity
(d) Decline

81. Blue Ocean Strategy is concerned with:

(a) Moving into new markets with new products
(b) Creating new market places where there is no competition
(c) Developments of products and markets in order to ensure survival
(d) Making the product unique in terms of attributes

82. The product-market matrix comprising strategies of penetration, market development,

product development and diversification was first formulated by:
(a) Ansoff
(b) Drucker
(c) Porter
(d) Prahlad

83. Which of the following market structures would be commonly identified with FMCG
products?
(a) Monopoly
(b) Monopolistic competition
(c) Oligopoly
(d) Perfect competition

84. Directional Policy Matrix is same as:

(a) The BCG Model
(b) The 9-cell GE Matrix
(c) The Life-cycle Portfolio analysis
(d) The 3 × 3 competitive positioning matrix

85. Outsourcing is the:

(a) Spinning off of a value-creating activity to create a new firm
(b) Selling of a value-creating activity to other firms
(c) Purchase of a value-creating activity from an external supplier
(d) Use of computers to obtain value-creating data from the Internet

86. The existence of price-wars in the airline industry in India indicates that:
(a) Customers are relatively weak because of the high switching costs created by
frequent flyer programs
(b) The industry is moving towards differentiation of services
(c) The competitive rivalry in the industry is severe
(d) The economic segment of the external environment has shifted, but the airline
strategies have not changed

87. What type of organizational structure do most small business follow?

(a) Divisional Structure
(b) Functional Structure
 (c) Hour Glass Structure
(d) Matrix Structure

88. Which section of the SWOT Matrix involves matching internal strengths with external
opportunities?
(a) The WT cell
(b) The SW cell
(c) The SO cell
(d) The ST cell

89. What can be defined as the art and science of formulating, implementing and evaluating
cross-functional decisions that enable an organization to achieve its objectives?
(a) Strategy Formulation
(b) Strategy Evaluation
(c) Strategy Implementation
(d) Strategic Management

90. The emphasis on product design is very high, the intensity of competition is low, and the
market growth rate is low in the …………….. stage of the industry life-cycle.
(a) Maturity
(b) Introduction
(c) Growth
(d) Decline

91. The most probable time to pursue a harvest strategy is in a situation of ………. .
(a) High growth
(b) Decline in the market life-cycle
(c) Strong competitive advantage
(d) Mergers and acquisition

92. Vertical integration may be beneficial when:

(a) Lower transaction costs and improved co-ordination are vital and achievable
(b) Flexibility is reduced, providing a more stationery position in the competitive
environment
(c) Various segregated specializations will be combined
(d) The minimum efficient scales of two corporations are different

93. Conglomerate diversification is another name for which of the following?

(a) Related diversification
(b) Unrelated diversification
(c) Portfolio diversification
(d) Acquisition diversification

94. When two organizations combine to increase their strengths and financial gains, it is
called:
(a) Hostile takeover
(b) Liquidation
(c) Merger
(d) Acquisition

95. Financial objectives involve all of the following, except:

(a) Growth in revenues
(b) Larger market share
(c) Higher dividends
 (d) Greater return on investment

96. Which of these basic questions should a vision statement answer?

(a) What is our business?
(b) Who are our competitors?
(c) Where we are to go?
(d) Why do we exist?

97. A firm successfully implementing a differentiation strategy would expect:

(a) Customers to be sensitive to price increases
(b) To charge premium prices
(c) Customers to perceive the product as standard
(d) To automatically have high levels of power over suppliers

98. The concept of ‘Core Competence’ has been advocated by:

(a) Gary Hamel and Peter Drucker
(b) C. K. Prahlad and Gary Hamel
(c) C. K. Prahlad and Michael Porter
(d) C. K. Prahlad and Peter Drucker

99. Which of the following can be said to be the strategy followed in TOWS approach?
(a) Defensive Strategy
(b) Offensive Strategy
(c) Attack Strategy
(d) Functional Strategy

100. Porter’s Generic strategies include:

(a) Cost Differentiation, Product Focus, Leadership
(b) Price Leadership, Cost Focus, Product Differentiation
(c) Price Differentiation, Leadership, Cost Focus
(d) Cost Leadership, Differentiation and Focus