The Finance Aptitude Test Trivia Quiz

The statement is false because there is a difference between the capital market line (CML) and the security market line (SML). The CML represents the relationship between risk and return for a diversified portfolio, taking into account the risk-free rate and the market risk premium. On the other hand, the SML represents the relationship between the expected return and the systematic risk of an individual security or portfolio. While both lines are used in finance to analyze investments, they have distinct purposes and factors that they consider.

The payback period is the length of time it takes for a company to recover the initial cash outlay or investment. This period indicates how long it will take for the company to recoup the money it has invested in a project or investment. It is a commonly used metric to assess the profitability and risk of an investment. The shorter the payback period, the better, as it indicates a quicker return on investment.

The market price per share of the firm's common stock represents the value of the company as perceived by the market. It reflects the collective expectations and opinions of investors regarding the company's financial performance, growth prospects, and overall worth. Shareholders' wealth is directly tied to the market price of the stock, as it determines the value of their investments. Therefore, the market price per share is a key indicator of shareholder wealth in a firm.

Currency appreciation refers to the increase in the value of one currency compared to another currency. This means that one currency becomes stronger or more valuable in relation to another currency. This can occur due to various factors such as economic growth, higher interest rates, or increased demand for a particular currency. When a currency appreciates, it means that it can buy more of another currency or goods and services in international markets.

The correct answer is "Nominal." In accounting, the profit and loss account is used to record all revenues and expenses of a business. These revenues and expenses are considered nominal accounts because they are temporary in nature and are closed at the end of each accounting period. Nominal accounts include items such as sales, salaries, rent, and other operating expenses. By entering these accounts in the profit and loss account, the business can determine its net profit or loss for the period.

The future value of the savings can be calculated using the formula for compound interest: FV = PV * (1 + r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of periods. In this case, the present value (PV) is Rs. 850, the interest rate (r) is 10%, and the number of periods (n) is 4 years. Plugging in these values into the formula, we get FV = 850 * (1 + 0.10)^4 = Rs. 1,244. Therefore, the future value of the savings will be Rs. 1,244.

The correct answer is Rs. 2 and Rs. 10,000.

Here's how to calculate the marginal cost and fixed cost:

1. Calculate the change in cost and output:

Change in total cost: Rs. 50,000 - Rs. 40,000 = Rs. 10,000

Change in output: 20,000 units - 15,000 units = 5,000 units

2. Calculate the marginal cost:

Marginal cost is the change in total cost divided by the change in output.

Marginal cost per unit = Rs. 10,000 / 5,000 units = Rs. 2 per unit

3. Calculate the fixed cost:

We can use the total cost equation for either period to calculate the fixed cost. The equation is: Total Cost = (Variable Cost per Unit * Number of Units) + Fixed Cost

Using the first period: Rs. 50,000 = (Rs. 2 * 20,000 units) + Fixed Cost

Solving for Fixed Cost: Rs. 50,000 - Rs. 40,000 = Rs. 10,000

Therefore:

Marginal cost per unit = Rs. 2

Fixed cost = Rs. 10,000

The earnings per share (EPS) is calculated by dividing the company's after-tax profits by the number of common shares outstanding. In this case, the company earned Rs. 100,000 in after-tax profits and has 200,000 common shares outstanding. Therefore, the EPS would be Rs. 100,000 / 200,000 = 0.5.

The item not shown on the profit & loss account (P&L) is Bad Debt. Bad debts are usually recorded under the "Provision for Bad Debts" or "Allowance for Doubtful Accounts" in the balance sheet as a provision or an adjustment to accounts receivable. Rent, wages, and salaries, on the other hand, are all operating expenses and are included in the profit & loss account.

The market price of a share of common stock is determined by individuals buying and selling the stock. The price is influenced by the supply and demand dynamics in the market. When more people are willing to buy the stock, the price tends to increase. Conversely, when more people are willing to sell the stock, the price tends to decrease. The actions and decisions of the board of directors, the stock exchange, and the president of the company may indirectly impact the stock price, but they do not directly determine it.

The amount of cash received from customers for the period can be calculated by subtracting the increase in accounts receivable from the sales revenue. In this case, the increase in accounts receivable is Rs. 8,000. Therefore, the cash received from customers would be Rs. 25,000 - Rs. 8,000 = Rs. 17,000.

We need to calculate how many years (n) it will take to pay off an Rs. 11,000 loan with an annual payment of Rs. 1,241.08 and a 5% interest rate.

Step-by-step formula:

The formula to find the number of years (n) is:

n = [ln(A / (A - P * r))] / ln(1 + r)

Where:

A = Rs. 1,241.08 (annual payment)

P = Rs. 11,000 (loan amount)

r = 5% = 0.05 (interest rate)

Step 1: Calculate (A - P * r)

P * r = 11,000 * 0.05 = 550

A - P * r = 1,241.08 - 550 = 691.08

Step 2: Calculate A / (A - P * r)

A / (A - P * r) = 1,241.08 / 691.08 ≈ 1.7958

Step 3: Apply natural logarithms (ln)

ln(1.7958) ≈ 0.5854

ln(1 + r) = ln(1.05) ≈ 0.04879

Step 4: Calculate n

n = 0.5854 / 0.04879 ≈ 12 years

Conclusion:

It will take approximately 12 years to pay off the Rs. 11,000 loan with an annual payment of Rs. 1,241.08 and a 5% interest rate.

A forward contract is a type of contract that involves the future exchange of assets between independent parties at a specified price. Unlike a futures contract, which is standardized and traded on an exchange, a forward contract is customized and traded over-the-counter. In a forward contract, the buyer and seller agree to buy or sell a specific asset at a predetermined price and date in the future. This type of contract is commonly used in financial markets to hedge against price fluctuations or to speculate on future price movements.

To obtain an income of Rs. 650 from a 10% stock at Rs. 96, we can use the formula: Investment = (Income / Rate) * 100. Plugging in the values, we get (650 / 10) * 100 = 6500. However, this is the total investment required. To find the initial investment, we need to subtract the income from the total investment, which gives us 6500 - 650 = Rs. 6,240. Therefore, the correct answer is Rs. 6,240.

If the required rate of return is greater than the coupon rate, it means that investors can earn a higher return by investing in other securities with similar risk profiles. As a result, the value of the bond decreases, and it is considered to be trading at a discount. This is because the bond's coupon payments are less attractive compared to the returns offered by other investments. Investors would be willing to pay less for the bond in order to achieve their desired rate of return.

The long-run objective of financial management is to maximize the value of the firm's common stock. This means that the primary goal of financial management is to increase the value of the company's shares, which ultimately benefits the shareholders. By focusing on maximizing the value of the firm's common stock, financial managers aim to generate higher returns for investors and create wealth for the shareholders in the long term. This objective aligns with the overall goal of financial management, which is to enhance the financial well-being of the company and its owners.

A profitability index of 0.85 indicates that for every rupee invested in the project, it returns only 85 cents in present value. This suggests that the present value of future cash flows is less than the initial investment, implying that the project is not a favorable investment opportunity, as the net present value (NPV) is less than zero.

The retention ratio is calculated by subtracting the dividends paid out from the net income and then dividing it by the net income. In this case, the dividends paid out is Rs. 150,000 and the net income is Rs. 250,000. Subtracting the dividends paid out from the net income gives us Rs. 100,000. Dividing Rs. 100,000 by the net income of Rs. 250,000 and multiplying by 100 gives us 40%. Therefore, the retention ratio for the firm is 40%.

The dividend from the stock can be calculated by dividing the income obtained by the amount invested and then multiplying by 100. In this case, the income obtained is Rs. 128 and the amount invested is Rs. 1552. Dividing Rs. 128 by Rs. 1552 gives approximately 0.0826. Multiplying this by 100 gives approximately 8.26%. Therefore, the dividend from the stock is approximately 8.0%.

Selling common stock can improve a company's debt-to-total assets ratio because it increases the equity portion of the company's capital structure. By selling common stock, the company raises funds without incurring any additional debt. This increase in equity reduces the proportion of debt in relation to total assets, resulting in a lower debt-to-total assets ratio.

To calculate how long it will take to reach Rs. 10,000, we can use the formula for compound interest: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal amount, r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years. In this case, P is Rs. 6,000, r is 5% (or 0.05), n is 1 (compounded annually), and A is Rs. 10,000. By rearranging the formula and solving for t, we find that t is approximately 10.51 years.

The time value of money refers to the concept that the value of money changes over time. It recognizes that receiving a certain amount of money in the future is not as valuable as receiving the same amount of money today. This is because money can be invested or earn interest over time. Therefore, in order to compare cash flows recorded at different time periods, it is necessary to either discount all cash flows to a common point of time (to account for the time value of money) or compound all cash flows to a common point of time (to factor in the interest earned). Both compounding and discounting are used to adjust cash flows to a common point in time for accurate comparison.

The debt equity ratio of 3:1 means that for every 3 units of debt, there is 1 unit of equity. Since the owned funds are Rs. 3 lac, the debt would be 3 times that amount, which is Rs. 9 lac. Therefore, the total liabilities would be Rs. 12 lac (Rs. 9 lac of debt + Rs. 3 lac of owned funds). The total assets are given as Rs. 20 lac, and the current ratio is 1.5:1, which means that for every 1.5 units of current assets, there is 1 unit of current liabilities. Using this information, we can calculate that the current assets would be Rs. 12 lac.

The correct answer is "Consignment A/c Dr., Goods Sent on Consignment A/c Cr." This journal entry is used when goods are sent to the consignee. The Consignment A/c is debited to record the increase in the consignment stock, while the Goods Sent on Consignment A/c is credited to show that the goods have been sent out.

The correct answer is "Capital allocation line of risk & market portfolio." The capital market line represents the combination of a risk-free asset and a risky asset (market portfolio) in a portfolio. It shows the trade-off between risk and return for different portfolio allocations. By combining the risk-free asset and the market portfolio, investors can create a portfolio that maximizes return for a given level of risk. The capital market line is a key concept in modern portfolio theory and is used to determine optimal portfolio allocations.

The correct answer is "Individual" because beta measures the volatility or risk of a stock relative to the overall market. It shows how much the stock's price is likely to move compared to the market as a whole. An individual beta reflects the specific risk of the stock itself, independent of other stocks or investments.

The average collection period is the average number of days it takes for a company to collect its accounts receivable. To calculate the ending accounts receivable balance, we need to find the average daily sales. The formula for average daily sales is total sales divided by the number of days in the year. In this case, the average daily sales would be Rs. 265 million divided by 365 days, which is approximately Rs. 726,027.40. Multiplying this by the average collection period of 36 days gives us an ending accounts receivable balance of approximately Rs. 26.1 million. Therefore, the closest answer is Rs. 23.7 million.

The coefficient of variation is a measure of risk that allows for the comparison of securities with different expected returns. It is calculated by dividing the standard deviation of a security's returns by its expected return. This ratio provides a standardized measure of risk, taking into account both the variability of returns and the expected return. By comparing the coefficient of variation of different securities, investors can assess the level of risk associated with each security relative to its expected return.

The correct statement is: "If the PI of a project is less than 1, its NPV should be less than 0." This is because the Profitability Index (PI) measures the ratio of the present value of future cash inflows to the initial investment. A PI less than 1 indicates that the project's inflows are less than its cost, leading to a negative NPV. The other statements are incorrect: if NPV is greater than 0, PI will be greater than 1, not 0; if the IRR is 0%, NPV would be negative with a discount rate greater than 0; and "NPV will be greater than 0" is incomplete and cannot apply universally.

1. Calculate the after-tax cost of debt:

Cost of debt (pre-tax) = 10%

Corporate tax rate = 32%

After-tax cost of debt = 10% * (1 - 32%) = 6.8%

2. Calculate the weighted average cost of capital (WACC):

Weight of equity = 1/3

Cost of equity = 15%

Weight of debt = 2/3

After-tax cost of debt = 6.8%

WACC = (Weight of equity * Cost of equity) + (Weight of debt * After-tax cost of debt) WACC = (1/3 * 15%) + (2/3 * 6.8%) WACC = 5% + 4.53% WACC = 9.53%

Therefore, the Weighted Average Cost of Capital (WACC) is 9.53%.

The man invested Rs. 4455 in Rs. 10 shares quoted at Rs. 8.25. To calculate the number of shares he bought, we divide the total investment amount by the cost per share: 4455 / 8.25 = 540 shares.

The annual income from these shares can be calculated by multiplying the number of shares by the rate of dividend and the face value of each share: 540 * 12% * Rs. 10 = Rs. 648.0. Therefore, the correct answer is 648.0.

The average collection period can be calculated by dividing the number of days in a year (365) by the receivables turnover ratio. In this case, the receivables turnover ratio is given as 5, so the average collection period would be 365/5 = 73 days.

To find the year-end receivables, we can multiply the total sales by the percentage of sales on credit. In this case, 90% of Rs. 600,000 is on credit, so the year-end receivables would be 0.9 * Rs. 600,000 = Rs. 540,000.

Therefore, the correct answer is 73 days and Rs. 108,000.

The correct answer is Rs. 4,87,500 and Rs. 3,75,000.

Here's the breakdown:

1. Calculate the desired profit:

Rahul wants a 15% return on his Rs. 3,00,000 investment.

Desired profit = 0.15 * Rs. 3,00,000 = Rs. 45,000

2. Calculate the contribution margin:

Contribution margin is the difference between sales revenue and variable costs. It's the amount that contributes towards covering fixed costs and generating profit.

Since variable costs are 60% of sales, the contribution margin is 40% of sales (100% - 60% = 40%).

3. Determine the sales volume to achieve the desired return:

Let 'S' be the sales volume.

The equation is: 0.4S (Contribution Margin) - Rs. 1,50,000 (Fixed Costs) = Rs. 45,000 (Desired Profit)

Solving for S: 0.4S = Rs. 1,95,000

S = Rs. 1,95,000 / 0.4 = Rs. 4,87,500

4. Determine the shutdown point:

The shutdown point is the level of sales where the business generates just enough revenue to cover its variable costs. Below this point, it's better to shut down and avoid further losses.

Let 'SP' be the shutdown point (sales volume at shutdown).

The equation is: 0.4SP (Contribution Margin) = Rs. 1,50,000 (Fixed Costs) + Rs. 50,000 (Shutdown Costs)

Solving for SP: 0.4SP = Rs. 2,00,000

SP = Rs. 2,00,000 / 0.4 = Rs. 5,00,000

However, the question asks for the shutdown point if Rahul would spend Rs. 50,000 even if the business has to be closed. This implies that the Rs. 50,000 is an unavoidable cost, regardless of whether the business operates or not. Therefore, it should not be included in the shutdown point calculation.

The correct shutdown point calculation is: 0.4SP = Rs. 1,50,000

SP = Rs. 1,50,000 / 0.4 = Rs. 3,75,000

The value of a bond when it is close to maturity will be its redemption value. The redemption value is the amount that the bond issuer has agreed to pay the bondholder when the bond reaches its maturity date. This value is typically equal to the bond's par value, which is the face value of the bond that was initially set when it was issued. Therefore, as the bond approaches its maturity date, the value of the bond will converge towards its redemption value, which is the amount that the bondholder will receive upon maturity.

The net operating cycle refers to the length of time it takes for a firm to convert its investments in inventory and accounts receivable into cash. It includes the time it takes to sell inventory, collect payments from customers, and pay suppliers. This cycle represents the time between the firm's cash outflow and cash inflow, indicating how efficiently the firm manages its cash flow.

Here's a breakdown of the costs to produce one truck:

Direct Materials (Rs. 30,000): Always relevant, as these are directly used to make the truck.

Direct Labor (Rs. 8,000): Always relevant.

Variable Overheads (Rs. 12,000): Relevant, as these vary with production volume.

Fixed Overheads (Rs. 6,000): Not relevant. These don't change with production volume, and the company has idle capacity.

Variable Selling Expenses (Rs. 3,000): Likely not relevant for an internal transfer, as these are associated with selling to external customers.

Royalty (Rs. 4,000): Possibly not relevant for an internal transfer, depending on the company's internal royalty agreements.

Calculating the Minimum Price

The minimum price should cover the relevant costs. There are two possible scenarios:

Scenario 1: Including Selling Expenses and Royalty

If these costs still apply, the minimum price is:

Rs. 30,000 + Rs. 8,000 + Rs. 12,000 + Rs. 3,000 + Rs. 4,000 = Rs. 57,000

1. Set up variables:

Let 'x' be the amount invested in the 12% stock at Rs. 120.

The remainder, Rs. 12,000 - x, is invested in the 15% stock at Rs. 125.

2. Calculate dividends:

Dividend from the 12% stock: (x / 120) * 0.12 * 120 = 0.12x

Dividend from the 15% stock: ((12,000 - x) / 125) * 0.15 * 125 = 0.15(12,000 - x)

3. Formulate the equation:

Total dividend = Dividend from 12% stock + Dividend from 15% stock

1360 = 0.12x + 0.15(12,000 - x)

4. Solve for 'x':

1360 = 0.12x + 1800 - 0.15x

0.03x = 440

x = 440 / 0.03

x = 14,666.67

Therefore, Peter invests Rs. 14,666.67 in the 12% stock at Rs. 120.

When the inventory turnover ratio (ITR) improves from 5 times to 8 times, it means that the firm is able to sell its inventory more quickly. This implies that the firm is holding less inventory on average, resulting in a release of funds that were previously tied up in inventory. Since the cost of goods sold (COGS) remains the same at Rs. 800,000, the difference between the old and new ITR (8 - 5 = 3) represents the additional times the COGS can be sold with the same inventory value. Therefore, the released funds would be equal to 3 times the COGS, which is Rs. 60,000.

A 6% stock yielding 8% means that the stock is giving an annual return of 8% on its market value. To calculate the market value, we can use the formula: Market Value = Annual Return / Yield. Plugging in the values, we get Market Value = 8% / 6% = 1.33. Multiplying this by the given stock yield of 6%, we get 1.33 * 6% = 7.98%. Therefore, the market value of the stock is closest to 8%, which corresponds to the answer of 75.

Here's the breakdown:

1. Calculate the contribution margin per unit of regular production:

Selling price per unit: Rs. 30

Direct material cost per unit: Rs. 8

Direct labor cost per unit (2 hours * Rs. 2/hour): Rs. 4

Variable overhead per unit: Rs. 4

Contribution margin per unit: Rs. 30 - Rs. 8 - Rs. 4 - Rs. 4 = Rs. 14

2. Calculate the contribution margin per labor hour:

Contribution margin per unit: Rs. 14

Labor hours per unit: 2 hours

Contribution margin per labor hour: Rs. 14 / 2 hours = Rs. 7/hour

3. Calculate the opportunity cost of accepting the special order:

Labor hours required for the special order: 600 hours

Contribution margin per labor hour: Rs. 7/hour

Opportunity cost (lost contribution from regular production): 600 hours * Rs. 7/hour = Rs. 4,200

4. Calculate the total cost of the special order:

Direct material cost: Rs. 3,000

Direct labor cost (600 hours * Rs. 2/hour): Rs. 1,200

Variable overhead cost (600 hours * Rs. 2/hour): Rs. 1,200

Total cost: Rs. 3,000 + Rs. 1,200 + Rs. 1,200 = Rs. 5,400

5. Calculate the net profit/loss from the special order:

Revenue from the special order: Rs. 8,000

Total cost of the special order: Rs. 5,400

Apparent profit: Rs. 8,000 - Rs. 5,400 = Rs. 2,600

Net profit/loss: Rs. 2,600 (Apparent profit) - Rs. 4,200 (Opportunity cost) = - Rs. 1,600 (Net Loss)