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UGC/NET - Commerce

Description: It would cover entire syllabus
Number of Questions: 17
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Tags: hard Dividend Policy Capital Budgeting Capital Structure Financial Management
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Which theory is known as the irrelevant concept of dividend theory?

  1. Modigilani and Miller's approach

  2. Walter's approach

  3. Solomon Izra's approach

  4. Gordon's approach

  5. None of these

Show answer
Correct Option: A
Explanation:

According to this theory, dividend decision is irrelevant as far as the valuation of the firm is concerned.

What is/are the assumption(s) of Walter's approach?

  1. All earnings are either distributed or invested.

  2. Internal rate of return and market capitalisation rate are constant.

  3. Firm has infinite life.

  4. Debt or new equity is not issued for the purpose of financing investments.

  5. All of the above

Show answer
Correct Option: E
Explanation:

All of the above are assumptions of Walter's model.

Which of the following is not a statutory provision regarding declaration and payment of dividend under Companies Act 1956?

  1. Dividend can be declared out of divisible profits only or out of money provided by the government.

  2. Dividend can be declared out of capital.

  3. Dividend can be calculated at the declared rate on paid up value of shares.

  4. Dividend can be declared on the nominal value or called up value of shares.

  5. All of the above

Show answer
Correct Option: B
Explanation:

Dividend is never declared out of capital.

Calculate the market value of share if the payout is 75%, EPS of the company is Rs. 8, rate of capitalisation is 10% and the return on retained earnings is 15%.

  1. Rs. 100

  2. Rs. 70

  3. Rs. 90

  4. Rs. 50

  5. Rs. 80

Show answer
Correct Option: C
Explanation:

Value = D + IRR ÷ cost of capital ( E-D) ÷ cost of capital

The firms having internal rate of return less than market capitalisation are known as

  1. normal firms

  2. growth firms

  3. declining firms

  4. zero profit firm

  5. none of these

Show answer
Correct Option: C
Explanation:

Such firms do not have any profitable investment opportunities.

Calculate the price of share when selling price of share is Rs. 100, dividend declared is Rs. 5 at the end of current year and capitalisation rate is 10% when dividend is not paid.

  1. Rs. 107

  2. Rs. 110

  3. Rs. 115

  4. Rs. 120

  5. Rs. 100

Show answer
Correct Option: B
Explanation:

Use formulae of MM approach.

Which of the following statements is/are true about NPV?

  1. It considers the time value of money.

  2. It considers all the cash flows.

  3. It gives more weightage to distant flows than to near-term flows.

  4. Only 1 and 2

  5. 1, 2 and 3

Show answer
Correct Option: D
Explanation:

Both 1 and 2 are considered in NPV method.

Which of the following criteria is/are the best for choosing the best alternative of financing?

  1. Maximising EPS and DPS

  2. Maximising EPS and MPS

  3. Maximising DPS and MPS

  4. Maximising DPS and DPR

  5. All of the above

Show answer
Correct Option: B
Explanation:

Maximising EPS and MPS are two best criteria for choosing the best alternative of financing.

The marginal efficiency of investment method is also known as

  1. NPV

  2. TAR

  3. Terminal value method

  4. PBP

  5. Benefit cost ratio

Show answer
Correct Option: B
Explanation:

It is also known as IRR.

Which of the following is an assumption of terminal value method?

  1. Each annual cash inflow is received at the end of year and is invested in another asset at a certain rate of return.

  2. Discounting rate is derived from the aggregate of the present values of all future cash inflows.

  3. Present value of all cash inflows from investments at different periods is determined.

  4. Rate of return of the annual net profit on investment is calculated.

  5. Time period of the recovery of cost of capital project by its own cash earnings is calculated.

Show answer
Correct Option: A
Explanation:

Money is accumulated and discounted at the discount factor of last year.

Which of the following is/are present value method(s)?

  1. NPV

  2. Present value index method

  3. TAR

  4. Terminal value method

  5. All of the above

Show answer
Correct Option: E
Explanation:

All of the above are PV methods.

According to ____________, the value of firm depends on its earning potential and investment policy, not on dividend distribution.

  1. Walter's approach

  2. MM approach

  3. Gordon's approach

  4. Gordon's revised model

  5. Theory of relevance

Show answer
Correct Option: B
Explanation:

The value of firm depends on its earning.

Calculate the market value of share if the payout is 75%, EPS of the company is Rs. 16, market rate of discount is 12.5% and the return on retained earnings is 10% .

  1. Rs. 100

  2. Rs. 115.20

  3. Rs. 121.60

  4. Rs. 108.80

  5. None of these

Show answer
Correct Option: C
Explanation:

Value = D + IRR ÷ cost of capital ( E-D) ÷ cost of capital

Capital rationing is defined as

  1. the process of allocation of capital funds over various capital projects accoding to their ranks or profitability

  2. the process of distribution of available capital funds among various capital projects according to their ranks or profitability

  3. the process of distributing and allocating funds to existing capital projects accoding to their ranks or profitability

  4. all of the above

  5. only 1 and 2

Show answer
Correct Option: E
Explanation:

Owner' s wealth should be maximised.

Match the above columns ||| |---|---| |a. Matching approach|1. Dividend policy| |b. Ordering quantity|2. Financial W. capital| |c. Structural ratios|3. Inventory management| |d. Bonus shares|4. Capital structure|

  1. a - 1, b - 2, c - 3, d - 4

  2. a - 3, b - 4, c - 2, d - 1

  3. a - 2, b - 3, c - 4, d - 1

  4. a - 3, b - 4, c - 1, d - 2

  5. a - 2, b - 1, c - 3, d - 4

Show answer
Correct Option: C
Explanation:

 This is correct.

Match the options given in the above lists ||| |---|---| |LIST 1:|LIST 2:| |A. Conservative dividend policy|1. Dividend is paid at usual rate regularly.| |B. Irregular dividend policy|2. Dividend is paid at very low rate or zero.| |C. Regular dividend policy|3. Dividend is paid according to the earnings of company.| |D. Constant payout ratio|4. Fixed dividend is paid, irrespective of income.| |E. Constant DPS|5. Fixed percentage of net earnings is paid as dividend.| |F. Strict dividend policy| |

  1. A - 1, B - 2, C - 3, D - 4, E - 5, F - 6

  2. A - 6, B - 3, C - 1, D - 5, E - 4, F - 2

  3. A - 6, B - 5, C - 4, D - 3, E - 2, F - 1

  4. A - 2, B - 6, C - 4, D - 1, E - 3, F - 2

  5. A - 5, B - 6, C - 4, D - 2, E - 3, F - 1

Show answer
Correct Option: B
Explanation:

Regular dividends at the usual rate are paid by the companies following regular dividend policy.

Which of the above statements are the two principles of capital structure?

Consider the given statements:

1. It must be balanced with adequate equity cushion.

2. It must be balanced with adequate debt cushion.

3. Ratio of funded debts to equity should be geared to the degree of stability.

4 . Ratio of equity to funded debts should be geared to the degree of stability.

  1. 3 and 4

  2. 2 and 3

  3. 1 and 3

  4. 1 and 4

  5. 1 and 2

Show answer
Correct Option: C
Explanation:

Correct

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