MCQs:

1) In Current Ratio, Current Assets are compared with:

(a)Current Profit
(b)Current Liabilities
(c)Fixed Assets
(d) Equity Share
Capital
2) Which of the following is not a relevant cost in Capital
Budgeting?
(a) Sunk Cost
(b) Opportunity Cost
(c) Allocated Overheads
(d) Both (a) and (c) above
3) 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.
4) What is Economic Order Quantity?
(a)Cost of an Order
(b)Cost of Stock
(c)Reorder level
(d)Optimum order
size
5) Net Profit Ratio Signifies:
(a) Operational Profitability (b) Liquidity Position
(c) Solvency
(d)Profit
6) The job of a finance manager is confined to
(a)Raising funds
(b) Management of cash
(c)Raising of funds and their effective utilization.
(d) None of these.

1)A company is considering which of two projects it should

invest in. It has only got sufficient funds to invest in one
project. The finance director thinks that the project with
the higher NPV should be chosen, whereas the managing

director thinks that the one with the higher IRR should be
undertaken, especially as both projects have the same
initial investment of $200,000 and life of five years after
investment.
The company has a cost of capital of 10% and the net cash
flows after tax of the projects are given as follows:

Required:
a) Calculate the NPV and IRR of each project.
b) State which project, if any, the finance director and
which project the managing director would recommend.
Give your reasons.
2) HotOil is a medium size company that trades and
invests in the exploration of oil. The company has been
given the opportunity to explore for oil in Africa. After
some preliminary research the following financial
information was available:
i) The expected return on the market for the projects 12%
ii) The risk free rate 6%
iii) The Beta value 1.2
a) Calculate the capital asset price model (CAPM) rate.
b) Define target optimal capital structure.
3) Wilson company is a building construction company
which engages in construction and renovations. It has
quite a strong order book, but is experiencing cash flow

problems. You have been asked to analyze what is causing

these cash problems. Below are extracts from Wilsons
income statement and statement of financial position for
2012 and 2013:

Required:

(a) Explain the term net working capital and its effects
on a business. Give an
example of how a cash rich business and a credit based
business might have
different working capital requirements.
(b) Calculate at least five different ratios for each of the
two years which will help you to explain the cash flow
problem.
4) A local distributor for national tire company expects to
sell approximately 9,600 steel belted radial tires of a
certain size and tread design next year. Annual carrying
costs are $16 per tire, and ordering costs are $75. The
distributor operates 288 days a year.
a) What is the EOQ?
b) How many times per year does the store reorder?
5) Lancaster Engineering Inc. (LEI) has the following
capital structure, which it
considers to be optimal:
Debt
25%
Preferred stock 15%
Common equity 60%
100%
LEIs expected net income this year is $34,285.72, its
established dividend payout ratio is 30 percent, its
federal-plus-state tax rate is 40 percent, and investors
expect earnings and dividends to grow at a constant rate
of 9 percent in the future. LEI paid a dividend of $3.60 per
share last year, and its stock currently sells for $54 per
share.
LEI can obtain new capital in the following ways:
Preferred: New preferred stock with a dividend of $11
can be sold to the public at a price of $95 per share.
Debt: Debt can be sold at an interest rate of 12 percent.
a. Determine the cost of each capital component.
b. Calculate the WACC.
c. LEI has the following investment opportunities that are
average-risk projects for the firm:

Project Cost at t _ 0 Rate of Return

A $10,000 17.4%
B 20,000 16.0
C 10,000 14.2
D 20,000 13.7
E 10,000 12.0
Which projects should LEI accept? Why?