Financial Management

431. Financial Leverage measures relationship between

  1. EBIT and PBT
  2. EBIT and EPS
  3. Sales and PBT
  4. Sales and EPS
Correct answer: (B)
EBIT and EPS

432. If a firm has a DOL of 2.8, it means:

  1. If sales increase by 2.8%, the EBIT will increase by 1%
  2. If EBIT increase by 2.896, the EPS will increase by 1 %
  3. If sales rise by 1%, EBIT will rise by 2.8%
  4. None of the above
Correct answer: (C)
If sales rise by 1%, EBIT will rise by 2.8%

433. Benefit of 'Trading on Equity' is available only if:

  1. Rate of Interest < Rate of Return
  2. Rate of Interest > Rate of Return
  3. Both (a) and (b)
  4. None of (d) and (b)
Correct answer: (A)
Rate of Interest < Rate of Return

434. Between two capital plans, if expected EBIT is more than indifference level of EBIT, then

  1. Both plans be rejected
  2. Both plans are good
  3. One is better than other
  4. None of the above
Correct answer: (C)
One is better than other

435. In the Traditional Approach, which one of the following remains constant?

  1. Cost of Equity
  2. Cost of Debt
  3. WACC
  4. None of the above
Correct answer: (D)
None of the above

436. In Traditional Approach, which one is correct?

  1. ke rises constantly
  2. kd decreases constantly
  3. k0 decreases constantly
  4. None of the above
Correct answer: (D)
None of the above

437. Which of the following is incorrect for value of the firm?

  1. In the initial preposition, MM Model argues that value is independent of the financing mix
  2. Total value of levered and unlevered firms is otherwise arbitrage will take place
  3. Total value incorporates borrowings by firm but excludes personal borrowing
  4. Total value does not change because underlying does not change with financing mix
Correct answer: (D)
Total value does not change because underlying does not change with financing mix

438. Walter’s Model suggests that a firm can always increase i.e. of the share by

  1. Increasing Dividend
  2. Decreasing Dividend
  3. Constant Dividend
  4. None of the above
Correct answer: (D)
None of the above

439. Which of the following stresses on investor's preference reorient dividend than higher future capital gains ?

  1. Walter's Model
  2. Residuals Theory
  3. Gordon's Model
  4. MM Model
Correct answer: (C)
Gordon's Model

440. Gordon's Model of dividend relevance is same as

  1. No-growth Model of equity valuation
  2. Constant growth Model of equity valuation
  3. Price-Earning Ratio
  4. Inverse of Price Earnings Ratio
Correct answer: (B)
Constant growth Model of equity valuation
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