FB Practice Test 1 Set 2 Solutions

Finance & Banking Fund

Practice Test 1 - Set2 - Solution (Last

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Please click on the particular cell to see the calculation 1 Option 1 Option 2 Option 3 Option 4

Sameer is an investor who has three options. Which one should he choose? A) Lend to a borrower who is willing to pay compound interest of 12%. B) Buy property which will give a CAGR of 12% Both are the same (A) (B) Can't say as the investment amount is not given.

Solution

As CAGR also takes compounding into effect, the ultimate impact is just the same. Infact while we calculate CAGR we calculate the compounded rate at which the given amount will turn to the final amount. So, in this case both investment will yield similar returns.

2

A company's sales revenue becomes five times, of what it was 4 years ago. Calculate the CAGR for sales revenue of this company. What will happen to this CAGR, if the revenue becomes 6.5 times of year 1, in the next year?

Option 1 Option 2 Option 3 Option 4

Solution

3

Option 1 Option 2 Option 3 Option 4

49.53%, CAGR will decrease in the next year 78.98%, CAGR will increase in the next year 78.98% CAGR will decrease in the next year 49.53% CAGR will increase in the next year CAGR = (Final value/Initial value)1/n - 1. = 5^(1/4) - 1 = 49.53%. In the 6th year CAGR will be = 6.5^(1/5) -1 = 43.09% Hence, CAGR has decreased. Anand has an FD which is yielding an annual interest of 8.5%. Now he is planning to liquidate this FD and invest this money into a business which will also give him an expected return of 8.5%. Calculate the NPV and IRR for the new project. NPV=0 IRR = 8.5% NPV=1 IRR = 8.5% NPV=-1 IRR = 4.25% Data insufficient

Solution

Anand is earning as much in his new business, as he was earning with his FD. So the returns are equal to the comparison rate. Hence, NPV would be 0. Also, IRR is that rate of interest at which NPV is equal to zero, hence in this case IRR would be 8.5%. The following data relates to three independent investment projects:

4

Option 1 Option 2 Option 3 Option 4

Assume a 10 percent required rate of return and rank these projects according to Net Present value. A, C, B C, B, A A, B, C B, C, A

Year

Solution

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Net Present Value (Sum of all the cash flows)

We see that NPV is highest for Project A, followed by proje

5 Option 1 Option 2 Option 3 Option 4

Solution

6

Option 1 Option 2 Option 3 Option 4

Solution

7

Option 1 Option 2 Option 3 Option 4

Cilon Exporters in India are expecting a payment from a US client of USD 10 million. What are the risks that the company is facing? Operational Risk Credit Risk Market Risk Both b and c The correct answer is option d. Cilon Exporters face both - credit risk (US client may default on the payment) and market risk (INR may appreciate against USD). Sumit wants to invest in an option in which risk is minimum. Which of the following options should he choose? A) Investment in shares of a company. B) Investment in shares of different companies, in the same sector. C) Investment in shares of different companies, in different related sectors (e.g. automotive and steel). D) Investments in shares of different companies, in different sectors, which are not co-related. Only (D) Both (A) & (D) Only (A) Only ( C ) Risk is specific to a particular industry/company. So, in order to diversify the risk one should choose stocks of companies which are not correlated to each other. If that be the case, the performance of one stock will not affect the other, hence risk will be minimum.

An investor wishes to invest in the stock markets for the short term. The market is very volatile at this time, so in order to hedge himself against the risk, the investor goes in for derivative products such as stock options, instead of buying stocks. What important things should he keep in mind before investing?

The The The The

amount of premium he would be paying for buying the options. probability of the loss he may suffer. amount he is investing. amount of loss he may suffer

For measuring the risk, two most important things to be considered are : The quantum (amount) of loss one may suffer, and the probability of occurrence of such loss. Solution

These two factors will help in deciding whether the premium paid for the options is justified. Hence,three of the given options are important for making this decision.

8

Option 1 Option 2 Option 3 Option 4

Solution

Mamta Steels has bought machinery for INR 5 crores in April, 2004. This machine was intended to be utilized for 10 years in production. Also, the salvage value for this machine after 10 years was estimated at INR 10 lakh, at the time of purchase. Calculate the amount of depreciation charged and amount considered under the assets heading, for the year ending March, 2015. Assets - 10 lakh Depreciation - 0 cr. Assets - 10 cr. Depreciation - 1 cr. Assets - 10 cr Depreciation - 1 lakh Assets -1 cr Depreciation - 1 lakh Since, the machine has completed 10 years, from next year onwards - that is, 2015 onwards - there will be no depreciation charged on this machine. The salvage value will be considered in the assets of the company.

9 Option 1 Option 2 Option 3 Option 4

Solution

Rohit has an account with YMC bank. The bank pays the monthly interest on the deposits, to his account on 1st April, 2014. What would be the accounting entries in the books of the bank? Rohit's account will be credited. Interest expense account will be debited. Rohit's account will be credited. Cash account will be debited. Rohit's account will be debited. Interest expense account will be credited. Rohit's account will be debited. Cash account will be credited. The account of Rohit with the bank will get credited as liabilities are increasing for the bank. Interest expense account will be debited as expenses have increased for the bank. As, there is no transaction of cash account will not be affected.

10

Option 1 Option 2 Option 3 Option 4

Amanthar Co. has made plans for the next year to employ total assets of INR 8,00,000; 50% of the assets being financed by borrowed capital at an interest cost of 8% p.a. The direct costs for the year are estimated at INR 4,80,000 and all other operating expenses are estimated at INR 80,000. The goods will be sold to customers at 150% of the direct costs. Tax rate is assumed to be 50%. What is EBT? INR 1,28,000 INR 64,000 INR 160,000 INR 2,40,000

Solution 10 Total Assets Loan (50% of total asset) Interest (8% of Rs.400000) Direct Costs (given) Operating Expenses (given) Revenue (150% of the direct cost) Earning Before Tax (EBT): Revenue – Direct cost - Operating Expenses – Interest expenses

11

Option 1 Option 2 Option 3 Option 4

KDR Steels has reported a PAT of INR 200 cr for the last financial year (FY). They have bought land for a new plant for INR 120 cr last year and have also reported a depreciation of INR 10 cr. What would be the cash flow from operations for the company? Assume all the income was from operating activities. 210 cr 330 cr 90 cr 310 cr CFO= PAT + Non-operating expenses - Noncash operating income + Noncash expenses - Noncash incomes. = (200+10) cr = 210 cr.

Solution

Investments in new plant will not be a part of cash flow from operations, it will be included seperately under cash flow from investment activities. Also, since it is not included in PAT already so we will not consider it here for CFO calculations.

12 Option 1 Option 2 Option 3 Option 4

If you start a window cleaning business and deposit INR 1,000 of your personal money in a bank account for the business, what effects are there on the balance sheet? Assets are increased and Owner's Equity is increased. Liabilities are decreased and Owner's Equity is increased. Assets are increased and Owner's Equity is decreased. Assets are decreased and Liabilities are decreased

Solution

As an owner, you are bringing in capital (i.e. owner's equity). Therefore, owner's equity will increase. The cash (asset) is coming into the business. Therefore, assets value will also increase.

& Banking Fundementals India

et2 - Solution (Last updated 6th August 2014)

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A (Cash Flows) 500000 125000 125000 125000 125000 125000 125000 125000 125000

NPV

B (Cash Flows)

-500000 113636 103306 93914 85377 77615 70559 64145 58313

-120000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000

166866

Project A, followed by project C and is Negative for Project B.

NPV -120000 10909 9917 9016 8196 7451 6774 6158 5598 5089 4627 4206 3824 3476 3160 2873

-28727

C (Cash Flows) -92000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000

NPV -92000 13636 12397 11270 10245 9314 8467 7697 6998 6361 5783 5257 4779 4345 3950 3591 3264 2968 2698 2453 2230 35703

In INR 800000 400000 32000 480000 80000 720000 128000