Name_________________________________ ID:_____________________

Birla Institute of Technology & Science, Pilani

Pilani Campus – Rajasthan
Comprehensive Exam – ECON / FIN F 315
Financial Management
II Semester– 2023-24 Open Book
Maximum Marks: 120 Date: 15 May 2024 Duration: 180 Minutes
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Instructions:
There are 3 Parts:
Part A – Multiple Choice Questions 40 Marks Suggested time: 40-45 minutes
Part B – Problem-solving 40 Marks Suggested time: 70-75 minutes
Part C – Problem-solving 40 Marks Suggested time: 60 minutes

You can collect the Part B question paper after submitting Part A, and Part C can be collected
after submitting Part B.

Part A - Table for Multiple Choice Questions for Part A

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

1. Which of the following would not improve the current ratio?

a. Borrow short term to finance additional fixed assets
b. Issue long-term debt to buy inventory
c. Sell common stocks to reduce current liability
d. Liquidate fixed assets to reduce accounts payable
e. Purchase marketable securities rather than investing in fixed assets

Ans: A
2. If the gross profit margin is unchanged while the net profit margin declined over the same
period you would suspect that:
a. The cost of goods sold has increased
b. Firm changed a lower rate of depreciation compared to last year
c. Firm paid less dividends
d. The firm retired existing debt this year and thus did not get any tax shield
e. The firm’s sales increased and it paid higher taxes than last year

Ans: E
3. A firm can improve (lower) its debt-to-total assets ratio by doing which of the following?
a. Borrow more at risk free rate
b. Sell common stock
c. Lend more at risk free rate
d. Shift short term to long term debt
e. Sell assets

Ans: B
4. If an investor believes in the basic principle of a risk-reward relationship, her conclusion
regarding security ratings and yields between an AAA bond and a AA bond would be that:
a. Default risk differs but yields would equal
b. Default risk on AA bond will be greater than AAA bond and yield of AA bond will be
lower than AAA bond
c. AAA bond would have a lower default risk and higher yield compared to AA bond
d. AAA bond would have the lower yield and lower default risk than AA bond
e. AA bond would have the lower yield than AAA bond

Ans: D
5. If a firm repurchases 50 percent of its outstanding shares in the open (secondary) market
the result would be:
a. A decline in its assets
b. A decline in EPS
c. An increase in cash
d. An increase in number of stockholders
e. A fall in liability

Ans: A
6. What does the importance of ethical behavior, integrity and trust call into question?
a. What do we do next?
b. Who does what?
c. The extent to which management should attempt to change the underlying beliefs and
values of individual followers.
d. None of the above
e. all, a, b, and c

Ans: C

7. If A is the price of an ordinary share, B is the expected dividend in one year’s time, and C
is the expected constant annual growth rate, what is the equation for deducing the cost of an
ordinary share (D)?
a. D = (B/A) – C
b. D = B/A +C
c. D = A/(B-C)
d. D = A/(B+C)
e. None

Ans: B

8. The cost of capital changes with how the funds are being used by the corporation.
a. The statement is True.
b. The statement is False.
c. The statement cannot be verified with the given information.
d. None of these.
Ans: B

9. Retained earnings are always the cheapest source of financing for every corporation
because it is their own money.
a. The statement is True.
b. The statement is False.
c. The statement cannot be verified with the given information.
d. None of these.
Ans: B

10. Which of the following is relevant in determining the cash flows of a project?
a. Sunk Costs.
b. Depreciation.
c. Payback Period.
d. Net Present Value.
e. there are multiple correct options
Ans: B

11. You are considering investing in a new cotton-bailing machine. The purchase price of a
new bailer is $ 10,000. It will cost $ 750 to transport the bailer to your location. The old
bailer will be sold for $ 2,000 and your tax rate is 40%. The net investment for this project is
(in $):
a. 11,950.
b. 10,750.
c. 9,550.
d. 8,950.
e. none of the above
Ans: A

12. If EBIT increases by 50% on an increase in sales from 635,000 to 698,000 units, what is
the degree of operating leverage of the firm?
a. 13690.
b. 1260.
c. 5.
d. 0.5.
Ans: C

13. Choosing between two mutually exclusive projects, the company will choose the project
having:

a. a higher net present value.

b. a shorter payback period.
c. a lower internal rate of return.
d. a lower cost of capital.

Ans: A

14. When the corporate tax rate is positive, the impact of depreciation expense on the
operating cash flows is:

a. zero.
b. positive.
c. negative.
d. not enough information to answer the question.

Ans: B

15. Which of the following statements is CORRECT?

a. The NPV profile graph for a normal project will generally have a positive (upward) slope
as the life of the project increases.
b. An NPV profile graph is designed to give decision makers an idea about how a project's
risk varies with its life.
c. An NPV profile graph is designed to give decision makers an idea about how a project's
contribution to the firm's value varies with the cost of capital.
d. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in
evaluating the project's NPV.
e. An NPV profile graph shows how a project's payback varies as the cost of capital changes.

Ans: C

16. Projects A and B have identical expected lives and identical initial cash outflows (costs).
However, most of one project's cash flows come in the early years, while most of the other
project's cash flows occur in the later years. The two NPV profiles are given below:

Which of the following statements is CORRECT?

a. More of Project B's cash flows occur in the later years.
b. We must have information on the cost of capital in order to determine which
project has the larger early cash flows.
c. The NPV profile graph is inconsistent with the statement made in the problem.
d. The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is
greater than either project's IRR.
e. More of Project A's cash flows occur in the later years.
ANS: E
Statement e is true and the other statements are false. Distant cash flows are more severely
penalized by high discount rates, so if the NPV profile line has a steep slope, this indicates
that cash flows occur relatively late.

17. Which of the following statements is NOT a disadvantage of the regular payback
method?
a. Ignores cash flows beyond the payback period.
b. Does not directly account for the time value of money.
c. Does not provide any indication regarding a project's liquidity or risk.
d. Does not take account of differences in size among projects.
e. Lacks an objective, market-determined benchmark for making decisions.
ANS: C

18. Which of the following statements is CORRECT? Assume that the project being
considered has normal cash flows, with one outflow followed by a series of inflows.
a. A project's MIRR is always less than its regular IRR.
b. If a project's IRR is greater than its WACC, then the MIRR will be less than the
IRR.
c. If a project's IRR is greater than its WACC, then the MIRR will be greater than the
IRR.
d. To find a project's MIRR, we compound cash inflows at the IRR and then discount
the terminal value back to t = 0 at the WACC.
e. A project's MIRR is always greater than its regular IRR.
ANS: B
One could prove that (1) if the IRR is equal to the WACC, then the MIRR and the IRR will
be equal, (2) if the IRR is greater than the WACC, the MIRR will be less than the IRR, and
(3) the MIRR will be greater than the IRR if the IRR is less than the WACC. This situation
exists because the MIRR assumes reinvestment at the WACC and therefore compounds at
that rate, while the IRR assumes reinvestment at the IRR itself and therefore compounds at
the IRR. Therefore, if the IRR exceeds the WACC, the TV found under the IRR method will
be larger, and vice versa. The IRR and the MIRR are found as the rate that causes the PV of
the TV to equal the cost. Therefore, if the IRR exceeds the WACC, causing the IRR's TV to
be larger, then the IRR will exceed the MIRR, and vice versa.

19. ABC Ltd. is considering a project that has the following cash flow and WACC data. What
is the project's discounted payback?

WACC: 10.00%
Year 0 1 2 3 4
Cash flows -$950 $525 $485 $445 $405

a. 1.61 years
b. 1.79 years
c. 1.99 years
d. 2.22 years
e. 2.44 years
ANS: D

20. The primary reason that the NPV method is conceptually superior to the IRR method for
evaluating mutually exclusive investments is that multiple IRRs may exist, and when that
happens, we don't know which IRR is relevant.
a. The statement is true.
b. The statement is false.

Ans: B

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