Quizcb1 – Actuators Education Institute

CB1000006

Question 1
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Which of the following best decribes the concerns arising from the agency relationship in companies?

The directors may act in their own interests at the expense of those of the shareholders.
The shareholders may have different interests from one another.
The directors may be unwilling to consider the company's duties to society
The directors may put the interests of lenders before those of the shareholders.

CB1000007

Question 2
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Which of the following best explains why a declining share price is thought to impose some discipline on weak directors?

The value of the directors' share options will decline.
The shareholders will withdraw their cash from the company.
The cost of capital will be depressed.
The company will be vulnerable to a takeover.

CB1000010

Question 3
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Which of the following best describes the possibility of an agency relationship between company directors and debenture holders?

There is no agency relationship because the debenture holders are protected by the terms of their debenture.
The directors could indulge in risky behaviour that threatens the value of the debenture holders' stake in the company.
The debenture holders do not appoint the directors and so the directors are not the debenture holders' agents.
The debenture holders bear exactly the same agency risks as the shareholders.

CB1000012

Question 4
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Which of the following is legally responsible for the commitment owed by a limited company to the company’s lenders?

the company's directors
the company's external auditor
the company's shareholders
the company's treasurer, who negotiated the terms of the loan with the lenders

CB1000020

Question 5
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Which of the following best describes the relationships between the interests of major groups of stakeholders in a limited company?

The directors will ensure that all stakeholders' interests are satisfied.
The stakeholders' interests will often conflict and their relationships will be defined entirely by formal, written contracts.
The stakeholders' interests will often conflict and their relationships will be defined by a combi-nation of contracts and implicit agreements.
The stakeholders will work together for their mutual benefit.

CB1000022

Question 6
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Why might maximisation of profit be a less acceptable corporate objective than maximisation of shareholder wealth?

It is rarely to the directors' advantage to improve profit.
Profit can be a short-term measure of performance only.
Profits can lead to pressure to pay dividends.
The shareholders do not benefit from profit.

CB1000023

Question 7
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Which of the following is an example of an agency problem?

It might be difficult to recruit capable directors.
The directors might award themselves excessive salaries.
The share price may decline because of poor sales.
Interest rates may increase the cost of borrowing.

CB1000024

Question 8
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Which of the following best explains why the maximisation of shareholder wealth is said to be the primary objective for company directors?

It aligns the directors' interests with those of the shareholders.
It eliminates agency problems.
It maximises profit.
It provides a measurable basis for evaluating decisions.

CB1000025

Question 9
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Which of the following statements best describes the driver of the market price of a quoted company?

expectations of future revenues
expectations of future dividends
historical trends of reported profits
historical trends of dividend payments

CB1000026

Question 10
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Which of the following statements describes the agency problem?

Agents may feel that they cannot trust their principals.
Agents may have insufficient authority to manage their principals' affairs.
Principals may feel that they cannot trust their agents.
Principals may not have the necessary expertise to manage their own businesses.

CB1000027

Question 11
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Why would the directors of a quoted company spend more than necessary on their external audit?

Auditors are greedy and will overcharge if they can.
Company directors do not understand the pricing of audit services.
Finance directors are frequently recruited from the external audit firm.
To signal that the financial statements are credible in the face of agency concerns.

CB1000028

Question 12
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How can the directors of quoted companies deal with the different risk preferences of the many shareholders who have invested in their companies?

by aiming to maximise market capitalisation
by maximising expected returns, regardless of risk
through minimising risk as much as possible
by seeking feedback from shareholders

CB1000029

Question 13
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Which of the following would be a suitable duty for a non-executive director?

development of a business plan to support application for bank funding
participation in the selection of executive directors
selection between major mutually exclusive projects
selection of the principal supplier for key raw materials

CB1000030

Question 14
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Which of the following best summarises the attitude that the directors of a quoted company should take towards social responsibility?

Social responsibility can and should constrain the creation of wealth.
Social responsibility is just as important as the maximisation of shareholder wealth.
The directors should place social responsibility before their own interests.
The directors should take care to ensure that they are seen to be socially responsible, even if they are not

CB1000031

Question 15
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How should the directors of a quoted company view agency problems?

Agency problems are inevitable and so they should be ignored.
Agency Problems are perceived, but do not exist in reality.
Agency problems concern the shareholders and not the directors.
Agency problems may be reduced through transparency and accountability.

CB1000033

Question 16
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Why are quoted companies required to have non-executive directors on their boards?

Executive directors are corrupt and incompetent.
Executive directors are often inexperienced.
Non-executive directors can fulfill a supervisory role.
Non-executive directors require lower salaries than executives.

CB1000034

Question 17
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Which of the following is an agency cost?

board meetings
directors' salaries
external audit of a company's financial statements
interest on corporate debt

CB1000181

Question 18
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Which of the following best describes the potential exposure of a member of a limited liability partnership (LLP)?

Members of an LLP are not exposed to any risk of loss.
The LLP itself could fail, costing each member his or her stake in the business.
Each member is personally liable for his or her share of the LLP's liabilities.
Each member is jointly and severally liable for the liabilities of the LLP.

CB1000182

Question 19
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If a company has the phrase ‘Public Limited Company’ or the abbreviation ‘plc’ after its name you know:

that the company must be large.
that the company must be quoted on a stock exchange.
that the company must have an established track record.
none of the above.

CB1000183

Question 20
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What aspect of a limited liability partnership (LLP) is ‘limited’?

The liability of individual members is limited to £100,000.
The liability of individual members is limited to their agreed share of the partnership's liabilities.
No member can suffer loss due to the acts or omissions of another member.
The LLP's creditors cannot normally seek payment from the members themselves.

CB1000185

Question 21
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A company has issued £0.25 shares at a premium of £0.20 per share. The shareholders have each paid £0.22 for each share that they hold. What is the maximum liability that each shareholder might bear with respect to each share in the event that the company cannot pay its liabilities?

£0.03
£0.20
£0.23
£0.25

CB1000187

Question 22
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Which of the following statements about limited companies is correct?

A company's shareholders will never be personally liable for the company's obligations.
A small company's shareholders must be directors.
Company directors can be shareholders.
Companies can be managed by professional managers, whereas sole traders and partnerships must be managed by their owners.

CB1000190

Question 23
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A manufacturing company has been approached by a public limited company (PLC) that wishes to apply for trade credit. Which of the following statements about the applicant’s PLC status is correct?

A PLC has a stock market quotation, making it more accountable.
A PLC has a wide shareholding, reducing the risk of conflicting interests.
A PLC is a larger entity than a private limited company.
A PLC is not necessarily more creditworthy than a private limited company.

CB1000191

Question 24
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Martin has just been admitted to a long established business partnership. He has bought 20% of the partnership equity, although he has not paid for this yet. He will be entitled to 15% of the partnership profit. If the firm incurs any liability, what proportion of that liability will be Martin’s legal responsibility?

0%
15%
20%
100%

CB1000210

Question 25
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A UK taxpayer has disposed of four assets during the year. Which of the following gains could be subject to Capital Gains Tax?

The taxpayer purchased a large sum of Euros for use on holiday, which were not spent and were worth more than had been paid for them when converted back to Sterling.
The taxpayer had invested in shares issued by his employer and sold them at a gain.
The taxpayer purchased a rare model of sports car, but sold it soon afterwards at a profit because he found it difficult to drive.
The taxpayer sold his family home, realising a profit, in order to move to a smaller property.

CB1000211

Question 26
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A UK taxpayer has earned income in Australia and has paid tax to the Australian tax authorities equivalent to £10,000. Under UK tax law the income would have been subject to tax of £8,000. Which of the following is most likely to apply?

The taxpayer can reclaim the whole of the tax paid in Australia.
The taxpayer can offset the £10,000 paid in Australia against the total tax liability arising in the UK.
The taxpayer can offset £8,000 against the total tax liability arising in the UK.
The taxpayer does not have to declare the income earned in Australia to the UK tax authorities.

CB1000212

Question 27
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What is the most logical explanation for the requirement that investment income sometimes has tax deducted at source?

to discourage companies from paying dividends
to ensure that taxpayers who have insufficient income to pay tax are required to pay tax on their investment income
to enable governments to tax investment income at a higher rate than earned income
to simplify the collection of tax

CB1000213

Question 28
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In many countries, capital gains are not taxed until the assets on which the gain has arisen are sold. Which of the following is the most logical explanation of this practice?

It assists taxpayers in their tax planning.
It ensures the maximum possible revenue into government funds.
It is easier to determine an objective tax expense.
It is unfair to tax capital gains.

CB1000214

Question 29
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Which of the following best explains why many countries do not allow depreciation to be treated as an expense for tax purposes?

Depreciation is not a real expense.
The calculation of depreciation allows too much discretion.
The tax treatment of depreciation maximises the revenue from corporate tax.
There is no relationship between depreciation and cashflows.

CB1000215

Question 30
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A parent company has a foreign subsidiary located in a host country that does not have a double tax arrangement with the parent’s home country. The foreign subsidiary pays regular dividends to the parent company. Which of the following will apply?

The subsidiary will not be taxed on profits earned in its host country and the parent will pay tax on dividends in its home country.
The subsidiary will pay tax on profits earned in its host country and the parent will not be required to declare the dividends as taxable income in its home country.
The subsidiary will pay tax on profits earned in its host country and the parent will pay tax on dividends received in its home country.
The subsidiary will pay tax on profits earned in its host country and the parent will pay tax on dividends received in the subsidiary's host country.

CB1000385

Question 31
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Which of the following is NOT a characteristic of Eurobonds?

They are relatively free from the controls of sovereign government.
They are traded in an international over-the-counter market.
They have tax deducted at source.
They are bearer bonds and are generally unsecured.

CB1000387

Question 32
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Which of the following long-term liabilities would normally carry the highest rate of interest?

fixed-charge debenture
floating-charge debenture
long-term lease
unsecured bank loan

CB1000390

Question 33
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Which of the following best describes the reason for a company that has secured debt issuing subordinated debt?

The cost of subordinated debt will be lower than the secured debt.
The issue will not affect the rights of existing debt holders.
There are fewer formalities associated with the issue of subordinated debt than secured debt.
The issue of subordinated debt will be viewed as a sign of confidence by the markets.

CB1000392

Question 34
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Which of the following is most likely to explain a company’s decision to issue subordinated debt?

A lower rate of interest will be available.
Existing lenders may have the right to prevent the issue of further senior debt.
Subordinated debt may offer tax advantages.
The shareholders will feel more secure if the company issues subordinated debt rather than senior debt.

CB1000395

Question 35
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A company wishes to issue convertible stock with a conversion date in five years’ time.
Which of the following proposals for the conversion terms is likely to be the most attractive to investors?

Compulsory conversion to equity shares at the end of year five.
Investors can choose to convert to equity shares at the end of year five. If they do not convert then their securities will continue as loan stock indefinitely.
Investors can choose to convert to equity shares at the end of year five. If they do not convert then their securities will continue as loan stock that will be redeemable after a further five years.
Investors can choose to convert to equity shares at the end of year five. If they do not convert then their securities will be converted to preference shares.

CB1000396

Question 36
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Which of the following best explains what is meant by the ‘Euro’ prefix in Eurobonds?

The bonds are denominated in euros.
The bonds are issued offshore, outside of legal or tax jurisdictions.
The bonds are issued only in Europe.
The bonds are regulated under European law.

CB1000397

Question 37
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Which of the following is NOT a disadvantage of issuing preference shares?

Preference dividends can be suspended at the directors' discretion.
Preference dividends do not offer tax relief.
equity shareholders cannot be paid dividends before preference shareholders
Shareholders have to be offered a higher rate than would be paid on an equivalent loan.

CB1000398

Question 38
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Which of the following best describes the par value of an equity share?

The market value of a quoted company's shares.
The price at which the share could be sold in an arm's length transaction.
The value attached to the share for bookkeeping purposes.
The value that would be attributed to the share for tax purposes in the event that it is sold.

CB1000401

Question 39
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What are the potential implications for debenture holders of an increase in interest rates in the economy?

Cashflows from debenture instruments will increase and the value of the debentures will increase.
Cashflows from debenture instruments will increase, but the value of the debentures will remain the same.
Cashflows from debenture instruments will remain the same, but the value of the debentures will decrease.
Cashflows from debenture instruments will remain the same, but the value of the debentures will increase.

CB1000402

Question 40
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Why might buyers be prepared to buy zero-coupon debentures?

The company may offer exceptional security.
The debentures may be issued at a significant discount.
The debentures may be issued at a significant premium.
Prevailing interest rates may be low.

CB1000406

Question 41
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It has been suggested that the long-term returns from investing in equities are higher than those for many other types of investment. What does this tell us about the cost of equity to the issuing companies?

Equities are a relatively expensive source of finance.
Equities are a relatively inexpensive source of finance.
It tells us very little because there is no link between the cost of equity and the returns offered to shareholders.
The cost of equity finance is excessive.

CB1000408

Question 42
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Which of the following cases is a suitable situation in which a convertible security might be issued?

A business start-up that wishes to issue equity cheaply.
A business start-up that wishes to reduce its cost of debt.
An established business that has a high gearing ratio.
An established business that has a low gearing ratio.

CB1000411

Question 43
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When does a bondholder receive the nominal value of a bond?

at the time of purchase
annually
whenever coupon payments are made
at maturity

CB1000414

Question 44
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A company has issued subordinated debt securities. Which of the following reflects the priority that would apply in the event of default?

mortgage loans first, followed by preference shares, then equity shares, then subordinated debt
mortgage loans first, followed by preference shares, then subordinated debt, then equity shares
mortgage loans first, followed by subordinated debt, then preference shares, then equity shares
subordinated debt first, followed by mortgage loans, then preference shares, then equity shares

CB1000418

Question 45
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A company has 10 million ordinary shares in issue with a market price of £2.00 per share. The company is about to make a rights issue that will give the right to buy one new share for £1 .60 for every five shares previously held. What is the theoretical ex-rights price of the company’s shares?

£1.60
£1 .80
£1 .93
£2.00

CB1000420

Question 46
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In certain circumstances a stock exchange may grant a quotation for a company even though the company is not making any new shares or existing shares available to the market. This method of obtaining a quotation is known as:

a placing.
a prospectus issue.
a tender issue.
an introduction.

CB1000426

Question 47
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Hold plc has 20 million shares outstanding priced at £5 a share. A rights issue will allow one share to be purchased for every five shares currently held by shareholders for £3 each. Which of the following is true?

The number of shares outstanding will fall to 16 million.
The firm will raise £32 million.
The stock price will fall to £4.67.
The company's total value will decrease to £88 million.

CB1000430

Question 48
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A quoted company made a substantial rights issue. A shareholder who had a substantial shareholding did not wish to take up the right to buy shares and forgot to sell those rights. Which of the following best describes the effects of this forgetful shareholder’s actions?

The forgetful shareholder was worse off because of the rights issue and the other shareholders were unaffected.
The forgetful shareholder was no worse off because the rights were sold on his behalf and the other shareholders were no better off.
The forgetful shareholder was unaffected by the rights issue and the other shareholders were better off.
The forgetful shareholder was unaffected by the rights issue and the other shareholders were worse off.

CB1000431

Question 49
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Which of the following would be the most significant constraint on the board of a company that wishes to issue additional equity shares?

The company has high gearing.
The share price is presently very high.
The shares are presently trading at a discount to their nominal value.
The whole of the authorised share capital has been issued.

CB1000436

Question 50
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A company has 10 million shares in issue. The company’s share price is $\${4.00}$ per share. The directors are considering a one for five rights issue at $\${3.50}$ per share. Issue costs have been estimated at $800,000. Calculate the expected share price after the rights issue.

$3.85
$3.92
$4.62
$4.70

CB1000440

Question 51
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A newly formed company was funded by an equity injection, in which the shareholders purchased a total of 10,000 £1 fully-paid shares for £2.50 each. Which of the following figures will appear in the company’s statement of financial position?

Share capital (£) - 10,000, Share premium (£) - 15,000
Share capital (£) - 10,000, Share premium (£) - 25,000
Share capital (£) - 25,000, Share premium (£) - 0
Share capital (£) - 25,000, Share premium (£) - 15,000

CB1000442

Question 52
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Why should an eligible bill of exchange be regarded as a very secure investment?

The issuer is eligible to issue secure bills of exchange.
The holder of the bill is eligible to claim repayment in full at any time.
The bill has been guaranteed by a bank.
The bill has been drafted by an eligible intermediary.

CB1000446

Question 53
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Why might an overdraft be the cheapest way to fund working capital requirements?

Banks can call in overdrafts without notice.
Banks offering overdraft facilities are in competition with one another.
Overdrafts attract a relatively low rate of interest.
The entity's funding needs are fluctuating.

CB1000447

Question 54
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Which of the following might make it cheaper to fund the use of an asset through a finance lease rather than borrowing in order to purchase the asset outright?

Finance leases are often offered by banks.
Finance leases transfer the risks of ownership to the lessee.
The lessor retains ownership of the asset.
The term of a finance lease may be for less than the asset's useful life.

CB1000449

Question 55
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Which of the following describes the cost of trade credit?

The cost of trade credit is included in the purchase price of the goods being purchased.
The cost of trade credit is known and transparent.
Trade credit is provided free of charge.
Trade credit liabilities can be settled late without consequence.

CB1000452

Question 56
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Which of the following statements is correct?

A bank overdraft is more flexible than a fixed-term loan.
A bank overdraft must be repaid within a year.
Banks cannot recall overdrafts because doing so would put customers out of business.
Banks generally secure overdrafts against specific assets.

CB1000454

Question 57
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Which of the following situations is best suited to the purchase of a currency option?

The buyer wishes to gain from any change in future exchange rates.
The buyer wishes to eliminate all future uncertainty.
The buyer wishes to determine the 'worst possible' outcome.
The buyer wishes to determine the 'best possible' outcome.

CB1000457

Question 58
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An Australian trader is due to receive a substantial receipt in Euros in three months’ time. Which of the following best explains why the trader might use a currency option rather than a currency future to hedge this transaction?

The value of currency futures can be highly volatile.
The counterparty to a financial future might default and leave the position exposed.
An option will provide scope for an upside if the Euro strengthens.
An option will provide scope for an upside if the Euro weakens.

CB1000459

Question 59
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An Australian company entered into a futures contract to exchange Australian dollars for one million US dollars on 31 July 2014 [ie a contract to buy US dollars]. Which of the following will happen if the US dollar strengthens against the Australian dollar?

The Australian company will have to pay an additional margin to the counterparty.
The Australian company will have to pay an additional margin to the futures clearing house.
The Australian company will receive a partial refund of its margin payment from the counterparty
The Australian company will receive a partial refund of its margin payment from the futures clearing house.

CB1000461

Question 60
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An option gives its holder the right to purchase 1,000 shares for £1 .40 each. The shares were trading at £1.20 when the options were issued. They are presently trading at £1 .30. The holder paid £0.10 per share for the option. What is the option’s strike price?

£0.10
£1 .20
£1 .30
£1 .40

CB1000464

Question 61
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What is the purpose of the margin on a futures contract?

to ensure that the exchange's commissions are paid
to even out the cashflows associated with the transaction
to link the future price to the inherent price of the underlying instrument or commodity
to protect the counterparties against loss

CB1000465

Question 62
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A company with floating rate debt has entered into a swap arrangement with a counterparty that has fixed rate debt. What are the implications to the company of a default by the counterparty?

Nothing will change.
The company will be forced to pay interest on both loans.
The company will be left with floating rate debt.
The company's loan will be written off.

CB1000589

Question 63
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Which of the following statements best describes the role of accounting standards in the preparation of financial statements for publication?

Accounting standards have little impact on the process of preparing financial statements.
Accounting standards provide companies with a broad indication of what the financial statements should contain.
Accounting standards reduce variations between companies in the way they prepare accounts.
Accounting standards eliminate all scope for disagreement over accounting.

CB1000590

Question 64
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Which of the following accounting concepts provides justification for the fact that book values of certain assets may not always reflect their true value?

business entity
going concern
money measurement
realisation

CB1000592

Question 65
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A company’s external auditor included an emphasis of matter in the audit report. Which of the following statements best describes the meaning of an emphasis of matter?

The auditor wishes to draw attention to an important matter that has been disclosed in the notes to the financial statements.
The auditor wishes to draw attention to the limitations of the work undertaken during the audit.
The audit report is being qualified.
The auditor disagrees with the information in the financial statements.

CB1000593

Question 66
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Which of the following is most likely to arise as a consequence of the money measurement concept?

Assets will be recorded at cost.
Some valuable assets will be excluded from the financial statements altogether.
Expenses will be accrued regardless of when the associated payment is made.
Assets will not be written down to their break-up values.

CB1000595

Question 67
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Which of the following accounting concepts is breached when a company recognises a gain in the market value of its property?

money measurement
going concern
cost concept
business entity

CB1000597

Question 68
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A company is preparing its financial statements and must decide on an accounting policy for an unusual situation that is not covered by accounting standards. Which of the following best explains how the company should proceed?

The company can use any policy that it wishes.
The company should use the policy that ensures the smallest profit.
The company should use the policy that yields the strongest statement of financial position.
The company should apply the logic in any accounting standard that deals with broadly comparable circumstances, even though that standard is not directly applicable.

CB1000598

Question 69
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Which of the following best summarises the dual aspect concept?

There are frequently two or more ways to approach any accounting judgement.
Every transaction affects two balances and both must be adjusted in the bookkeeping records ..
There ought to be independent verification of matters of judgement.
The bookkeeping records ought to be backed up regularly and the backup copy kept securely.

CB1000839

Question 70
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An external auditor cannot conduct an adequate audit because the directors have withheld a significant amount of vital audit evidence. What form of external audit report would be appropriate in these circumstances?

adverse opinion
disclaimer of opinion
emphasis of matter
except for opinion

CB1000840

Question 71
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Who makes the final decision as to whether International Financial Reporting Standards are used as the basis for accounting in any given country?

the International Accounting Standards Board (IASB)
the national government
professional accountancy bodies
the national stock exchange

CB1000841

Question 72
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To whom is the external auditor’s report normally addressed?

the directors
the lenders
the shareholders
the Stock Exchange

CB1000842

Question 73
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Which of the following best describes the need for the consistency concept in financial reporting?

All similar transactions should input into the bookkeeping records in the same way throughout the accounting period.
Financial statements prepared by an entity should be comparable from year to year.
Financial statements prepared by different entities should be comparable.
The users of financial statements should use consistent criteria for interpreting accounting information.

CB1000843

Question 74
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Which group of users will be most interested in the fair value of a company’s non-current assets?

business contacts
employees
lenders
shareholders

CB1000844

Question 75
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Which of the following best describes the role of International Financial Reporting Standards (IFRS) in the situations in which they are applicable?

IFRS eliminate inconsistency in accounting choices.
IFRS ensure consistent disclosure across all companies.
IFRS prevent misleading financial reporting.
IFRS provide guidance on the appropriate treatment of specific matters.

CB1000846

Question 76
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Which of the following best explains what it means when the external auditor issues a disclaimer of opinion?

The auditor disagrees with the figures prepared by the directors.
The auditor is satisfied that the financial statements give a true and fair view.
The auditor is unable to express an opinion on the truth and fairness of the financial statements.
The auditor wishes to withdraw an opinion that has previously been reported.

CB1000859

Question 77
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A new International Financial Reporting Standard (IFRS) has come into effect, requiring companies to change an important accounting policy.
Which of the following best explains the implications of the concept of consistency in this case?

Consistency requires that the new IFRS be ignored in order to give a true and fair view.
The audit report should carry an emphasis of matter paragraph to highlight the change in the accounting policy.
The financial statements should show two versions of the figures, both with and without the changes arising from the new IFRS.
The International Accounting Standards Board is responsible for addressing the issues relating to consistency.

CB1000865

Question 78
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Which of the following best explains the implications of the going concern concept in financial accounting?

It is a fact that businesses tend to continue indefinitely.
Incorrect valuations of property, plant and equipment can be tolerated.
The figures will remain the same if the business faces closure.
The financial statements will be comparable from period to period.

CB1000866

Question 79
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Who is responsible for the truth and fairness of a company’s financial statements?

the board of directors
the chief accountant
the external auditors
the International Accounting Standards Board (IASB)

CB1000867

Question 80
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Which of the following best describes the circumstances in which an emphasis of matter paragraph will be included in the external auditor’s report?

The auditor wishes to draw attention to a specific statement elsewhere in the audit report.
The financial statements contain a material uncertainty.
The financial statements do not give a true and fair view.
There is an immaterial irregularity in the financial statements.

CB1000868

Question 81
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Which of the following is NOT a correct interpretation of the prudence concept?

An asset that cost $\${400,000}$ was professionally revalued at $\${500,000}$ and that valuation has been recognised in the financial statements.
An asset that could be sold for between $\${500,000}$ and $\${800,000}$ has been valued at $\${400,000}$ in the financial statements.
An asset that could be sold for between $\${500,000}$ and $\${800,000}$ has been valued at $\${600,000}$ in the financial statements.
An intangible asset could be worth up to $\${800,000}$, but the asset's value has not been recognised in the financial statements.

CB1000869

Question 82
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Which of the following best reflects the significance of a company receiving an unmodified audit opinion?

The company is a good investment.
The company's financial statements are accurate.
The company's financial statements can be relied upon for stewardship purposes.
The directors have not abused their position of trust.

CB1000870

Question 83
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Which of the following statements best explains the role of the external auditor from an agency perspective?

The auditor enables the shareholders to rely on the financial statements prepared by the directors.
The auditor ensures that the company is well managed.
The auditor provides the directors with independent advice on accounting and financing matters.
The shareholders can task the external auditor to examine particular areas of concern.

CB1000871

Question 84
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Which of the following statements is a valid interpretation of an unmodified external auditor’s report?

The auditor has checked all transactions and balances and found everything to be in order.
The auditor has material misgivings about the truth and fairness of the financial statements.
The auditor is of the opinion that there are no material breaches of the applicable accounting reporting standards.
The directors have properly discharged all of their duties with regard to the financial statements.

CB1000872

Question 85
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Which of the following best describes the responsibility of the external auditor? The external auditor:

expresses an opinion on the fair presentation of the financial statements.
prepares the financial statements.
reassures the directors that the financial statements present fairly.
reassures the shareholders that the company is a sound investment.

CB1000873

Question 86
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Why would the directors of a quoted company pay close attention to the company’s draft financial statements?

The directors are unlikely to understand the financial statements.
The external auditor cannot be trusted to check the draft financial statements properly.
The information obtained from the company's internal management accounts is unreliable.
The shareholders will use the financial statements to evaluate the directors' stewardship.

CB1000874

Question 87
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A holiday company takes bookings for holidays up to a year before customers travel. The company recognises revenue from those bookings in the same accounting period as the costs associated with providing the holidays are incurred. Which accounting concept is the holiday company applying?

accruals
dual aspect
matching
prudence

CB1000877

Question 88
Flag

A company purchased some inventory towards the end of the financial year which remained unsold at the year end. Which of the following statements describes the manner in which this will be reflected in the financial statements?

an expense in the statement of profit or loss and a cash outflow in the cashflow statement
an expense in the statement of profit or loss and no effect on the cashflow statement
no effect on the statement of profit or loss and a cash outflow in the cashflow statement
no effect on either the statement of profit or loss or the cashflow statement

CB1000878

Question 89
Flag

Which of the following statements relating to current assets is correct?

Current assets will be realised within one year.
Current assets have short expected useful lives.
Current assets comprise cash and items that will be converted into cash in the normal course of business.
Current assets always comprise inventories, receivables, bank and cash.

CB1000879

Question 90
Flag

An actuary started a consultancy in 2005 by investing his life savings of £40,000 in the business and borrowing £20,000 from a bank. Since then, the consultancy has grown to the point where it owns an office worth £100,000 and equipment worth £7,000. Trade receivables in the form of work that has been invoiced but not yet paid for total £8,000. The business now has bank loans totalling £82,000 and owes £500 for unpaid bills. What is the value of the actuary’s equity?

£25,000
£32,500
£40,000
£52,500

CB1000880

Question 91
Flag

Which of the following best describes the statement of changes in equity?

a summary of revenues and expenses for the period
a summary of the assets, liabilities and equity as at the end of the period
a summary of changes in capital and reserves attributable to the equity holders
a summary of movements in cash and cash equivalents for the period

CB1000881

Question 92
Flag

What is the difference between profit and comprehensive income?

Profit is calculated in accordance with International Financial Reporting Standards (IFRS) and comprehensive income is not.
Comprehensive income covers a longer period than profit.
Profit must be disclosed but comprehensive income need not.
Comprehensive income includes unrealised gains that are excluded from profit.

CB1000882

Question 93
Flag

A company’s trade receivables were £200,000 at the beginning of the year and £250,000 at the end. Cash sales were £900,000 and credit sales were £1 ,700,000. How much cash was collected from customers during the year?

£1,650,000
£2,550,000
£2,600,000
£2,650,000

CB1000883

Question 94
Flag

A business had assets at the beginning of the year worth £700,000 and liabilities worth £240,000. At the end of the year assets were worth £910,000 and liabilities were worth £260,000. The owners have not invested any equity and have received no dividend. What profit did the company make during the year?

£190,000
£210,000
£230,000
£650,000

CB1000884

Question 95
Flag

A typical cashflow statement adds depreciation back to operating profit in order to arrive at cash generated from operations. Which of the following explains the treatment of depreciation?

Depreciation affects cashflow but not profit.
Depreciation affects profit but not cashflow.
Depreciation is a subjective estimate.
Depreciation is not an operating expense.

CB1000904

Question 96
Flag

An item of equipment cost £5,000 and has an estimated useful life of ten years, at which time it is anticipated that it will be scrapped and sold for £200. The machine is now three years old. What is this machine’s book value if the company uses the straight-line method of depreciation?

£3,360
£3,440
£3,500
£3,560

CB1000905

Question 97
Flag

A building was purchased for £500,000 and has been depreciated by £20,000. It has recently been revalued at £700,000. What will be the balance on the revaluation reserve?

£180,000
£200,000
£220,000
£700,000

CB1000908

Question 98
Flag

Which of the following best summarises the difference between straight line and reducing balance depreciation?

Reducing balance will lead to a higher charge in the short term after fresh investment in assets and a higher total charge over the life of the assets.
Reducing balance will lead to a lower charge in the short term after fresh investment in assets and a higher total charge over the life of the assets.
Reducing balance will lead to a higher charge in the short term after fresh investment in assets but the same total charge over the life of the assets.
Reducing balance will lead to a higher charge in the short term after fresh investment in assets but a lower total charge over the life of the assets.

CB1000913

Question 99
Flag

A company owns a building that cost €800,000. Depreciation to date on the building is €200,000. The company’s directors have decided to revalue the building at its fair value of €950,000. What will be the balance on the company’s revaluation reserve?

€150,000
€200,000
€350,000
€750,000

CB1000915

Question 100
Flag

A company owns an item of equipment that cost £10,000 on 1 July 2010. The equipment’s estimated useful life was 10 years, at which time its estimated scrap value was £3,000. What is the depreciation charge on this equipment for the year ended 30 June 2018, assuming the straight line method of depreciation?

£700
£1,000
£1 ,300
£4,400

CB1000917

Question 101
Flag

Which of the following statements best describes the purpose of the depreciation charge?

The depreciation charge creates a reserve for the replacement of assets when they reach the end of their useful lives.
The depreciation charge ensures that asset values remain realistic.
The depreciation charge ensures that businesses obtain tax relief on the consumption of assets' values.
The depreciation charge reflects the consumption of an asset's value during the period that benefits from that consumption.

CB1000919

Question 102
Flag

A company owns property that cost $\${5.0}$ million and has been depreciated by $\${1.5}$ million. The property has recently been revalued at $\${8.1}$ million. What figure will appear in the revaluation reserve in respect of this asset?

$1.6 million
$3.1 million
$4.6 million
$6.6 million

CB1000920

Question 103
Flag

A company’s factory cost $\${50}$ million. Depreciation to date on the building is $\${12}$ million. The factory was recently valued at $\${55}$ million. What amount will appear in the company’s revaluation reserve in respect of this revaluation?

$5 million
$17 million
$38 million
$55 million

CB1000928

Question 104
Flag

Which of the following best describes the parent company / subsidiary company relationship?

A subsidiary company is wholly owned by its parent.
A subsidiary company is largely owned by its parent.
A subsidiary company is influenced by its parent.
A subsidiary company is controlled by its parent.

CB1000930

Question 105
Flag

A parent company owns a 30% holding in an associate. The associate’s profit for the year is £8m. The associate paid a dividend of £6m. How much income will appear in the parent’s consolidated statement of profit or loss ( or income statement) in respect of this associate?

£1.8m
£2.4m
£6.0m
£8.0m

CB1000932

Question 106
Flag

An 80% controlling interest was acquired in a subsidiary company when it had equity shares with a book value of £800,000 in issue and retained earnings of £600,000. The book value of the subsidiary’s equity shares remains unchanged but retained earnings are now worth £900,000. What value should be attributed to the non-controlling interest in this subsidiary?

£60,000
£180,000
£280,000
£340,000

CB1000939

Question 107
Flag

Char1ie is a 100% subsidiary of the Corpo Group. Corpo is a major quoted corporation. Charlie has serious cash flow problems and is struggling to meet its immediate liabilities. Which of the following statements is correct?

Corpo has no reason to support Charlie.
Corpo is forbidden from supporting Charlie unless there is a contractual reason for doing so.
Corpo is required by law to support Charlie and settle the liabilities.
Corpo will make a commercial decision as to whether it will support Charlie.

CB1000941

Question 108
Flag

A parent company’s only asset is an £8 million investment in a 60% subsidiary. The subsidiary’s assets are valued at £25 million. What value will be attributed to group assets in the consolidated financial statements?

£8 million
£15 million
£25 million
£33 million

CB1000944

Question 109
Flag

Which of the following best explains the fact that a consolidated statement of financial position does not show a figure in respect of non-controlling interest?

All of the subsidiaries are wholly owned by the parent company.
None of the subsidiaries were acquired as going concerns.
The group has no associated undertakings.
The parent company has a widespread shareholding.

CB1000947

Question 110
Flag

An insurance company’s financial statements show a conservatively high valuation of liabilities in respect of insured risks. Which of the following best explains this?

The directors wish to manipulate future profits.
The external auditor has been negligent.
The directors wish to manipulate the company's tax bill.
The nature of the industry makes such a valuation prudent.

CB1000950

Question 111
Flag

J is a quoted company that owns 5% of K, an unquoted company. J has contracts in place that gives it the right to be involved in any decisions made by K’s directors. J also has the right to replace K’s directors at any time. How should K be accounted for in the J Group’s consolidated financial statements?

as an associate
as an investment
as a non-controlling interest
as a subsidiary

CB1000996

Question 112
Flag

Over a particular period, a company’s profit before tax was £700,000. Share capital is £400,000 and retained earnings are £470,000. Long-term liabilities are £600,000. Interest on long-term liabilities was £48,000. What was the company’s return on capital employed for the period described above?

48%
51%
75%
86%

CB1000998

Question 113
Flag

Which of the following best explains why investment analysts often calculate Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA)?

EBITDA is less prone to fluctuations and volatility than net profit.
Depreciation and amortisation are not real costs to the business.
Investment analysts are only interested in performance before tax.
EBITDA is regarded as less prone to manipulation than net profit.

CB1000999

Question 114
Flag

Net asset value per share is calculated by subtracting intangible assets from ordinaty shareholders’ equity and dividing the remainder by the number of shares in issue. Which of the following best explains the relevance of net asset value per share?

In the event that the entity is wound up the chances are that its intangible assets will not have any market value, but the shareholders will be certain to receive the value of the remaining net assets after disposal.
In the event that the entity is wound up the net asset value per share is likely to represent the best possible outcome that the shareholders can expect.
The shareholders should monitor the net asset value per share and should insist that the entity be wound up in the event that net asset value per share exceeds the market value of the company's shares.
Net asset value per share is likely to correspond to the value that an unquoted company's shares would have on the open market.

CB1001001

Question 115
Flag

A company had cash sales of £60 million and credit sales of £150 million during its most recent financial year. The company had trade receivables of £40 million and £5 million of sundry receivables for rental income and similar balances at the year end. How long is the trade receivables turnover period?

70 days
78 days
97 days
110 days

CB1001002

Question 116
Flag

Which of the following best summarises the relevance of the income (interest) cover ratio?

provides shareholders with an important insight into the risks associated with their investment, but is relatively unimportant to lenders
provides no useful information to either shareholders or lenders
provides lenders with an insight into the short-term risks associated with their loans, but is relatively unimportant to shareholders
provides lenders with an insight into the short-term risks associated with their loans and is important to shareholders

CB1001005

Question 117
Flag

Which of the following best explains why companies must publish their diluted earnings per share?

Diluted earnings per share takes account of the board's intentions to issue fresh equity.
Undiluted earnings per share is irrelevant for decision making purposes.
The undiluted earnings per share figure can be misleading when an equity issue has occurred during the year.
Existing equity holdings can be diluted by the right to purchase fresh equity at a preferential rate.

CB1001007

Question 118
Flag

Use the following information to calculate return on capital employed.

6.1%
6.4%
7.7%
8.0%

CB1001009

Question 119
Flag

What is the most realistic interpretation of a low interest cover ratio in a highly cash generative business?

Any fluctuation in operating profit will lead to a greater fluctuation in earnings per share.
The company may be unable to meet its loan repayments.
The company may be unable to pay its interest.
The company may be in breach of its debt covenants.

CB1001034

Question 120
Flag

Which of the following is NOT a potentially correct interpretation of a high gross profit percentage?

The entity has negotiated high selling prices.
The entity has negotiated low cost prices.
The entity is overcharging its customers.
The entity is undercharging its customers.

CB1001035

Question 121
Flag

A company’s earnings before interest and tax is £400,000. It has one million £1 shares in issue, fully paid, and retained earnings of £800,000. Long term liabilities are £500,000. What is the entity’s return on capital employed?

17.4%
22.2%
26.7%
30.8%

CB1001037

Question 122
Flag

How will the components of the return on capital employed ratio be affected if a company charges depreciation too slowly?

Return will be understated and capital employed will be overstated.
Return will be overstated and capital employed will be overstated.
Return will be overstated and capital employed will be understated.
Return will be understated and capital employed will be understated.

CB1001039

Question 123
Flag

Why are preference shares normally treated as debt when calculating the gearing ratio?

Preference shares affect the volatility suffered by ordinary shareholders.
Preference shares can sometimes be classified as debt in the financial statements.
Preference dividends can be suspended.
Preference shares can be redeemable.

CB1001041

Question 124
Flag

Which of the following best explains why investment analysts often use earnings before interest, tax, depreciation and amortisation (EBITDA) as a performance measure?

EBITDA is a more objective measure than profit for the year.
EBITDA is a more realistic measure of overall performance than profit for the year.
EBITDA is likely to be greater than profit for the year.
EBITDA is likely to be smaller than profit for the year.

CB1001065

Question 125
Flag

A company’s operating profit for the year was $\${20m}$, before allowing for interest. Share capital was $\${11m}$, share premium $\${7m}$, revaluation reserve $\${2m}$, retained earnings $\${6m}$, long term borrowings $\${8m}$ and trade payables $\${4m}$. Calculate the capital employed figure that would enable you to calculate the company’s return on capital employed ratio.

$27m
$28m
$34m
$38m

CB1001066

Question 126
Flag

Which of the following is most likely to occur when a company’s trade receivables turnover period, in days, has reduced?

A decrease in trade receivables and a decrease in cash.
A decrease in trade receivables and an increase in cash.
An increase in trade receivables and a decrease in cash.
An increase in trade receivables and an increase in cash.

CB1001067

Question 127
Flag

A company’s diluted earnings per share is significantly lower than its basic earnings per share. How should that be interpreted?

Heavy losses are expected.
The company has a large number of warrants in issue.
The company is a poor investment.
There is an active market in traded options on the company's shares.

CB1001068

Question 128
Flag

A company has a low profit margin but a high return on capital employed when compared to its main competitors. Which of the following interpretations is most likely to explain this combination?

The company's selling prices are at an optimal level.
The company's selling prices are at an optimal level, but the company is spending too much on other operating activities.
The company's selling prices are too high.
The company's selling prices are too low.

CB1001069

Question 129
Flag

A company’s operating profit is €2 million. Its finance charges were €0.5 million. Shareholder equity is €20 million and long term borrowings are €6 million. What is the company’s return on capital employed?

5.8%
7.7%
9.6%
10.0%

CB1001070

Question 130
Flag

One of a firm’s major customers buys large quantities of goods on trade credit. The customer’s payments have started to become erratic and are often slightly overdue. Which of the following would be the most appropriate response of the firm to this behaviour?

Cease all future credit sales.
Initiate court action against the customer for immediate payment of all overdue balances.
Limit future credit sales while overdue balances are outstanding.
Seize all unpaid goods from the customer's premises.

CB1001071

Question 131
Flag

Which of the following is the most realistic interpretation of a company having a low asset utilisation ratio and a high profit margin?

The company is trading at a loss.
The company's selling prices are high, possibly restricting sales activity.
The company's selling prices are low, possibly encouraging sales activity.
The company's selling prices are optimal.

CB1001072

Question 132
Flag

Which of the following best explains why intangible assets are excluded from the calculation of asset cover?

Intangible assets are generally worthless.
Intangible assets are not owned by the company.
Intangible assets cannot be transferred to the lender in the event of default.
Intangible assets may be difficult to realise in the event of the company's failure.

CB1001073

Question 133
Flag

Which of the following best describes the difference between basic and diluted earnings per share (EPS)?

Diluted EPS adjusts for any planned share issues that the directors plan to implement during the next financial year.
Diluted EPS adjusts for the impact of additional share issues that have been made during the course of the year.
Diluted EPS adjusts for the potential effects of instruments that grant the right to buy additional shares.
Diluted EPS takes account of decreases in the share price that have occurred during the financial year.

CB1001074

Question 134
Flag

A manufacturing company has an operating profit of £30.0 million. Finance charges were £1.6 million and tax was £2.5 million. The company’s share capital was £80 million, retained earnings were £140 million and long-term debt was £20 million. Calculate the company’s return on capital employed.

11 .5%
12.5%
12.9%
13.6%

CB1001075

Question 135
Flag

A company makes sales on credit of $100,000 every month. Trade receivables generally take 50 days to pay. What would be the impact on cash of changing the terms of trade so that receivables were settled after 40 days?

The bank balance will increase immediately.
The bank balance will increase over the next 40 days.
The bank balance will increase over the next 50 days.
The bank balance will increase within a month.

CB1001076

Question 136
Flag

Why might a manufacturing company’s return on capital employed be overstated during times of inflation?

Competitors will increase selling prices.
Depreciation on property, plant and equipment may be understated.
Employee wages will decline in spending power.
Sales revenue will be overstated.

CB1001077

Question 137
Flag

A wholesaling company has ‘prebooked’ sales by recording revenues that will not be earned until the first month of the following financial year. Which of the following statements best describes the impact that this will have on the analysis of the company’s financial statements for this year?

Both sales and cost of sales will be overstated, so the accounting ratios will not be affected.
Inventory will be understated and trade receivables overstated.
Profit and cash will be overstated.
Profit will be overstated, but return on capital employed will be unaffected.

CB1001078

Question 138
Flag

You are reviewing the financial statements of several major retailers. One company has a relatively high asset utilisation ratio and a relatively low profit margin. How should this be interpreted?

The company has a relatively high return on capital employed.
The company has a relatively low return on capital employed.
The company sets high prices in order to maximise profit.
The company sets low prices in order to increase sales volume.

CB1001079

Question 139
Flag

Why do analysts disregard intangible assets when calculating net asset value per share?

Intangible assets have no value to the shareholders.
Intangible assets may prove difficult to sell if the company fails.
It is unrealistic to expect company directors to use intangible assets to create value.
Only tangible assets can be controlled.

CB1001080

Question 140
Flag

Which of the following is a valid formula for Return on Capital Employed (ROCE)?

$\frac{profit \,before \,tax}{share \,capital \,+ \,reserves \,+ \,long \,term \,debt}$
$\frac{profit \,before \,tax \,and \,interest}{share \,capital \,+ \,reserves}$
$\frac{profit \,before \,tax \,and \,interest}{share \,capital \,+ \,reserves \,+ \,long \,term \,debt}$
$\frac{profit \,before \,tax \,and \,interest}{share \,capital \,+ \,long \,term \,debt}$

CB1001439

Question 141
Flag

Which of the following does NOT explain why historical cost accounting overstates profit during times of inflation?

The bookkeeping system records historical costs and ignores changes in values.
The cost of sales figure ignores the increasing replacement cost of inventory.
Interest is valued at nominal rates rather than real rates.
Depreciation charges do not reflect increasing replacement costs.

CB1001440

Question 142
Flag

A manufacturing company has consistently used historical cost accounting since its incorporation. Which of the following best describes the implications of basing the return on capital employed ratio (return) on historical cost figures?

Both return and capital employed are likely to be understated.
Both return and capital employed are likely to be overstated.
Return is likely to be understated and capital employed is likely to be overstated.
Return is likely to be overstated and capital employed is likely to be understated.

CB1001441

Question 143
Flag

Which of the following best explains why liquidity ratios based on a company’s published accounts are unlikely to be useful for credit control purposes?

The figures are likely to be based on historical costs.
The figures are likely to be inaccurate.
The figures are likely to be manipulated by creative accounting.
The figures are likely to be out of date.

CB1001442

Question 144
Flag

A company has identified a loophole in accounting standards that will enable it to overstate its reported profit, although this will be apparent from a close reading of the notes to the financial statements. Which of the following is the most likely result of using this loophole?

The share price will increase but the price/earnings ratio will be unaffected.
Neither the share price nor the price/earnings ratio will change.
The share price will be unaffected but the price/earnings ratio will reduce.
The share price will be unaffected but the price/earnings ratio will increase.

CB1001443

Question 145
Flag

A manufacturing company’s financial statements are based on historical cost accounting. Which of the following best explains the problems associated with interpreting the company’s financial statements during periods of inflation?

The cost of inventory consumed and depreciation are both overstated.
The cost of inventory consumed and depreciation are both understated.
The cost of inventory consumed is understated and depreciation is overstated.
The cost of inventory consumed is overstated and depreciation is understated.

CB1001446

Question 146
Flag

Which of the following statements best distinguishes a budget from a forecast?
A budget:

has a future orientation.
involves active planning.
may involve feedback against actual.
requires an understanding of the entity.

CB1001447

Question 147
Flag

Which of the following best supports the assertion that the payment of a dividend signals confidence on the part of the directors?

The dividend is paid out of past profits that have actually been earned.
The directors are keen to receive dividends from their own shareholdings.
The directors have to find the cash with which to pay the dividend.
The shareholders will react badly to the non-payment of a dividend.

CB1001448

Question 148
Flag

Why might a share buyback increase a company’s share price?

A share buyback is a sign of confidence on the part of the board.
Buybacks do not involve any transaction costs.
The buyback returns funds that were not generating an acceptable return.
There are no taxes payable on buybacks.

CB1001449

Question 149
Flag

An investor holds a broad portfolio of investments. Which of the following is a systematic risk which may affect the value of her portfolio?

One of the companies in her portfolio has changed the basis on which it prepares its financial statements, thus lowering reported profits.
Legislation changes, resulting in one company losing sales and going into receivership.
Interest rates could rise.
A new product launched by one of the companies in her portfolio is deemed to be a commercial failure.

CB1001450

Question 150
Flag

Which of the following best describes the cost of providing finance from retained earnings?

There is no cost associated with retained earnings.
Retained earnings are less expensive than equity share capital.
Retained earnings are equally expensive as equity share capital.
Retained earnings are more expensive than equity share capital.

CB1001451

Question 151
Flag

Which of the following is an unsystematic (specific) risk?

Interest rates may change.
Company directors may make bad decisions.
Consumer demand can be affected by global economic cycles.
Basic commodity prices can change.

CB1001452

Question 152
Flag

A quoted company’s statement of financial position shows equity shares worth £10m, retained earnings of £20m and non-current liabilities in the form of a £15m nominal loan paying 7% pa interest. The shares have a total market value of £48m and the non-current liabilities have a market value of £ 18m. The company’s cost of equity has been determined as 17% and the cost of debt as 8%. What is the company’s weighted average cost of capital?

11 .60%
14.00%
14.27%
14.55%

CB1001453

Question 153
Flag

A speculator has a policy of investing all of his cash in a single company for a short period in the hope of achieving a capital gain. The speculator is presently looking for a company whose shares have a high beta coefficient. Which of the following is the most rational explanation for the speculator’s desire to identify a high beta security?

High beta securities tend to increase in value.
Specific risks can be diversified away and only systematic risks matter.
The speculator expects stock market prices to strengthen.
The speculator expects stock market prices to weaken.

CB1001454

Question 154
Flag

An investment project is to be evaluated on the basis of a real rate of return. What does that mean for the evaluation of the project?

Inflation should be ignored in predicting cashflows.
Inflation should be included in the predicted cashflows.
It is less likely that the project will be selected.
It is more likely that the project will be selected.

CB1001455

Question 155
Flag

A company’s share price has a beta of close to zero. How should that be interpreted?

Beta cannot be zero, so the figure has been calculated incorrectly.
The company is not sensitive to the factors that affect the market generally.
The company's shares would make an unattractive investment.
There is no risk associated with investing in that company.

CB1001456

Question 156
Flag

A company’s beta coefficient is 1.6 and it has a 30% gearing ratio. How would beta change if the corporation tax rate increased?

Any change in beta would depend on the market's reaction.
Beta would decrease.
Beta would increase.
Beta would remain the same.

CB1001457

Question 157
Flag

A company has bonds in issue, repayable in seven years, with a nominal value of $100m and a coupon rate of 8% pa. The company’s credit rating has been downgraded. Which of the following statements best reflects the implications of the revised credit rating for the company’s cost of debt?

The cashflows will be unaffected, so the cost of debt will remain the same.
The market value of the bonds will decline and the cost of debt will increase.
The market value of the bonds will increase and the cost of debt will decline.
The credit rating will affect future issues only.

CB1001459

Question 158
Flag

An investor cannot afford to construct a properly diversified portfolio. Which of the following best describes the significance of the beta of potential investments to that investor?

Betas have no use whatsoever to this investor.
Low beta investments will be a safer investment for this investor.
The investor should focus on high beta stocks if she believes that the stock market will rise.
The beta coefficient remains just as relevant even when the investor cannot hold a diversified portfolio.

CB1001461

Question 159
Flag

Which of the following is a valid basis for weighting debt and equity in order to calculate the weighted average cost of capital (WACC)?

book value of debt and book value of equity
book value of debt and market value of equity
market value of debt and book value of equity
market value of debt and market value of equity

CB1001464

Question 160
Flag

A quoted company made a significant bond issue. Which of the following statements is correct?

The company's beta coefficient will remain unchanged after the bond issue, until the passage of time indicates whether beta has increased or decreased.
The company's beta coefficient will increase after the bond issue.
The company's beta coefficient will decrease after the bond issue.
The company's beta coefficient will only change if the company continues to earn taxable profits after the bond issue.

CB1001466

Question 161
Flag

How should an investor evaluate a security that has a beta value of zero?

The security has zero risk.
The security has an extremely high risk.
The security offers a return that is not affected by movements of the market as a whole.
The security offers a zero return.

CB1001468

Question 162
Flag

What is implied by a beta of zero on a potential investment?

The investment is high risk.
The investment is risk free.
The investment will make a diversified portfolio less sensitive to movements on the market.
The investment will make a diversified portfolio more sensitive to movements on the market.

CB1001470

Question 163
Flag

In times of inflation:

both real and nominal rates required from projects will be increased.
both real and nominal rates required from projects will be unaffected.
real rates required from projects will be increased, but nominal rates will be unaffected.
real rates required from projects will be unaffected, but nominal rates will be increased.

CB1001579

Question 164
Flag

Which of the following best describes the effects of an increase in the risk characteristics of a project when evaluating its net present value?

The discount rate increases and the net present value increases.
The discount rate increases and the net present value decreases.
The discount rate remains constant, but the net present value decreases.
The discount rate decreases and the net present value decreases.

CB1001580

Question 165
Flag

The payback method of evaluating a project can lead to the wrong decision being made because:

it ignores income beyond the payback period.
the payback period is difficult to calculate.
the returns in later years are uncertain.
of the emphasis placed on the interest factor.

CB1001581

Question 166
Flag

The net present value criterion is generally claimed to provide the most consistent and relevant basis for the selection of investment projects. Which of the following situations creates the greatest threat to the validity of evaluating projects using net present value in practice?

Net present value ignores risk.
Shareholders may disagree with the results of a net present value calculation.
The calculation of net present value can lead to two solutions.
Managers may wish to undertake the project for selfish reasons and could manipulate the analysis.

CB1001582

Question 167
Flag

A company manufactures car engines and buys in a large number of components from other companies. The company has a choice between two investment projects. It can build a small factory that will manufacture the most expensive components that it currently buys in from third parties. The savings on those components will be very substantial. Alternatively, it can build a large factory that will manufacture all of the components that it currently buys in. There will be a saving on all components manufactured, but the amount saved on the less expensive items will be much smaller. Each investment is equally risky. Which of the following is the most likely when the internal rate of return and net present value from the two projects are compared?

The small factory option has a higher IRR than the large factory option, and a higher NPV.
The small factory option has a higher IRR than the large factory option, and a lower NPV.
The small factory option has a lower IRR than the large factory option, and a higher NPV.
The small factory option has a lower IRR than the large factory option, and a lower NPV.

CB1001583

Question 168
Flag

Which of the following justifies the use of the payback method for evaluating capital investment projects?

Management has to predict cashflows from the project in order to determine payback.
Projects with short payback are always more profitable.
Projects with short payback always have higher net present values.
Projects with short payback are always more predictable.

CB1001584

Question 169
Flag

A company has a policy of investing in projects on the basis of their internal rate of return (IRR). Which of the following is a drawback of using IRR?

Positive net present value projects may be rejected.
High yield investment opportunities may be overlooked.
IRR is more difficult to interpret than Net Present Value (NPV).
Ranking mutually exclusive projects on the basis of IRR may give misleading results.

CB1001585

Question 170
Flag

Which of the following best illustrates an opportunity cost?

accepting a project with a negative net present value
rejecting a project with a positive net present value because of funding constraints
understating the projected return on a potentially positive net present value project in order to adjust for risk
rejecting a project with a positive net present value because it has been decided to invest the available funds in a different project

CB1001586

Question 171
Flag

A project that has been under review for some time has been modified so that the cash receipts will remain the same, but their timing will be brought forward throughout the length of the project. How will this affect the project’s internal rate of return and net present value (using a positive risk discount rate)?

The internal rate of return and net present value will both decrease.
The internal rate of return and net present value will both increase.
The internal rate of return will increase and the net present value will decrease.
The internal rate of return will decrease and the net present value will increase.

CB1001587

Question 172
Flag

A new machine will cost a company £700,000 and will increase profits by £180,000 per year. The machine will be depreciated over ten years. What is the payback period on this machine?

2 years and 10 months
3 years and 11 months
6 years and 4 months
10 years

CB1001589

Question 173
Flag

A company has evaluated a large and complex investment proposal using Monte Carlo simulation. The simulation suggests that there is a 10% probability of a negative net present value, a 60% probability of a small positive net present value and a 30% probability of a substantial positive net present value. How should these results be interpreted?

The actual outcome will be within the upper and lower limits arising from the simulation.
The average outcome calculated from these figures shows how the project is likely to turn out.
The project should proceed because there is only a 10% probability of a loss.
The range and frequency of the expected outcomes provide a broad indication of risk.

CB1001590

Question 174
Flag

What is the most logical interpretation of a very small positive net present value determined for an investment proposal?

The internal rate of return should be calculated in order to determine whether that provides further information.
The investment should only be considered if it also has a very short payback.
The project offers slightly more than the required rate of return and so it is worth considering.
The project should be disregarded because the small net present value means that it is not worth pursuing.

CB1001591

Question 175
Flag

Risk averse individuals often buy lottery tickets despite the fact that the expected value of doing so is negative. What does this reveal?

These individuals are behaving in an irrational manner.
The certainty equivalent of a slim chance of winning a major prize exceeds the cost of a lottery ticket.
The certainty equivalent of a slim chance of winning a major prize is smaller than the cost of a lottery ticket.
Lottery contestants do not understand basic probability theory.

CB1001592

Question 176
Flag

The net present value of a project has been graphed as follows:

Which of the following statements is correct?

The project has a single outflow of cash at the beginning, followed by a series of inflows over its life.
The project has a very small initial investment.
The project has no internal rate of return.
The project has two internal rates of return.

CB1001593

Question 177
Flag

A company often evaluates projects by means of the receipts/costs ratio:
$\frac{Net \,present \,value \,(NPV) \,of \,the \,gross \,revenues}{Net \,present \,value \,(NPV) \,of \,the \,capital \,and \,running \,costs}$
Which of the following best explains the usefulness of this ratio?

It is easy to identify positive and negative net present value (NPV) projects on the basis of this ratio.
The capital and running costs have been committed and a ratio that is just over 1.00 may indicate that the potential benefits do not justify the risks.
The ratio helps with the evaluation of projects that can be abandoned before completion.
The ratio is easier to calculate than internal rate of return (IRR).

CB1001594

Question 178
Flag

Which of the following best explains what would happen if a quoted company’s directors accept a positive net present value (NPV) project that has a very high opportunity cost?

The opportunity cost will only be a problem if the shareholders are informed of it.
Shareholder wealth cannot be affected by opportunity costs.
The shareholders will discover the opportunity cost with the passage of time.
The shareholders will not care about the opportunity cost provided positive NPV projects are being accepted.

CB1001595

Question 179
Flag

A project has been evaluated at its required rate of return of 12% pa and has been found to have a net present value of zero. How should this finding be interpreted?

The project delivers an internal rate of return of 12% and so it should be accepted.
The project should be re-evaluated at a lower rate in order to justify its acceptance.
The project will reduce shareholder wealth and so it should be rejected.
There is no point in investing in this project and so it should be rejected.

CB1001596

Question 180
Flag

An investment project has been evaluated using Monte Carlo simulation. After running the simulation 2.5 million times, the results have stabilised and the expected net present value is positive and averages $\${1}$ million, with a range of outcomes varying from minus $\${200,000}$ to plus $\${1.8}$ million. Which of the following statements best interprets these results?

The project satisfies the net present value criterion.
The project should definitely proceed.
This is a low risk project.
The model should be run another 2.5 million times in order to be certain.

CB1001597

Question 181
Flag

Which of the following statements provides the best explanation for why non-financial factors ought to be considered when evaluating an investment project?

Non-financial factors can be more easily understood.
Non-financial factors can give insights into upside risks.
Non-financial factors are the primary driver of shareholder wealth.
Only anticipated net cashflows matter.

CB1001598

Question 182
Flag

The expected outcome of a project has been estimated using two approaches. The first approach was to predict the outcomes based on five sets of assumptions with given probabilities. The second approach was a Monte Carlo simulation that has been run many thousands of times. The results from both approaches are significantly different. Which of the following statements is correct?

The investment decision should be based on the more pessimistic of the two predicted outcomes.
The approach based on five sets of assumptions can be more readily reviewed and checked for reality.
The Monte Carlo simulation is more sophisticated and is, therefore, more reliable.
The project should be abandoned because there is no way to predict the outcome with any certainty.

CB1001599

Question 183
Flag

You have been asked to determine the internal rate of return (IRR) of a project that has an initial cash outflow, followed by seven years of net cash inflows. The project’s net present value was +$\${500,000}$ when determined at 11% and -$\${500,000}$ when determined at 16%. Which of the following statements concerning the projects IRR is correct?

The IRR is approximately 13.5%.
The IRR is exactly 13.5%.
The IRR is greater than 16%.
The IRR is less than 11 %.

CB1001600

Question 184
Flag

An actuary has prepared a computer model to simulate a complex project’s outcome. The model’s logic has been reviewed carefully. The following table shows the simulation results.

What should be concluded from these results?

Projects should not be evaluated on the basis of simulations.
The decision to proceed should be based on the return of +$2 million.
The required rate of return has been set too high.
The simulation needs to be run many more times.

CB1001601

Question 185
Flag

A company has $10 million available for investment. It is considering investing in three individual investment projects.

What would be the opportunity cost of investing in Project One?

$2 million
$5 million
$11 million
$14 million

CB1001602

Question 186
Flag

The directors of a company are considering investing in a machine that will cost $\${38}$ million. The machine will have a useful life of 5 years. The cost of capital is 10% pa. The directors have determined that the annual capital charge of this machine is $\${10}$ million. The machine will generate revenues of $\${14}$ million and will require annual running costs of $\${1.5}$ million. Which of the following statements is correct?

The annual capital charge method indicates that the company should invest in the machine because it will increase shareholders' wealth.
The annual capital charge method indicates that the company should invest in the machine, but it does not indicate that the investment will increase shareholders' wealth.
The annual capital charge method indicates that the company should not invest in the machine because doing so will reduce shareholders' wealth.
The annual capital charge method indicates that the company should not invest in the machine, even though the investment will increase shareholders' wealth.

CB1001603

Question 187
Flag

A project that is under consideration has a net present value of $\${100m}$. This evaluation takes no account of the very unlikely possibility that a natural disaster will cause significant disruption and leave the company exposed to serious losses. It is impossible to insure against this disaster. Which of the following is the most appropriate response to the threat posed by the disaster?

Abandon the project.
Describe the risk in an appendix to the project evaluation.
Increase the discount rate to compensate for the additional risk.
Subtract the expected value of the costs of the disaster from the $100m net present value.

CB1001604

Question 188
Flag

A project that is under consideration has a net present value of $\${100m}$. This evaluation takes no account of the very unlikely possibility that a natural disaster will cause significant disruption and leave the company exposed to serious losses. It is impossible to insure against this disaster. Which of the following is the most appropriate response to the threat posed by the disaster?

Abandon the project.
Attach a description of the risk to the project evaluation.
Increase the discount rate to compensate for the additional risk.
Subtract the expected value of the costs of the disaster from the $100m net present value.

CB1001605

Question 189
Flag

Which of the following best describes a ‘certainty equivalent’ used in project appraisal?

the expected value of an uncertain future cash inflow calculated using probability theory
the fixed amount that the decision maker would accept as an alternative to an uncertain expectation
the market price of an uncertain future cashflow, taking account of observable values such as beta coefficients
the smallest amount that is anticipated from an uncertain future cash inflow

CB1001606

Question 190
Flag

What is the strongest argument in favour of setting a common hurdle rate across a company for all projects?

All projects in the same industry have the same risk.
The· decision rule is clear and can be applied consistently
A common rate will ensure consistency when capital rationing is in effect.
The hurdle rate is not a material factor in evaluating a project.

CB1001993

Question 191
Flag

A company borrows Rs 1 crores for 6 months to meet its working capital requirement at 8% per annum for which it has to pay the interest in advance. It also has to pay a commitment fee of 0.25% on the amount borrowed. Annual financing cost of this arrangement is:

8.2%
9.2%
9.6%
8.6%

CB1001994

Question 192
Flag

Beyond budgeting implies:

Approach where each activity is re-evaluated each time a budget is produced.
Approach where actuals results always exceeding budgeted results
Approach which compares various units of business based on actual results.
Approach which starts with unit level and builds up to organisation level.

CB1001995

Question 193
Flag

Which of the following is not a problem with forecasting?

There is no major change in external environment / company specific issues in the future year.
Availability of unsuitable data for forecasting.
Entry of new competitor unexpectedly into the market with disruptive technology.
Inflation and sales revenue are correlated from the data observed.

CB1001997

Question 194
Flag

Preference shares are generally considered as being more like debt than equity. Which of the following appropriately explains this?

The tax treatment of preference dividends
Capital gain on preference shares
Fixed participation in profits
None of the above

CB1001999

Question 195
Flag

Which of the following statements is NOT true about Internal Rate of Return (IRR) method of project appraisal

IRR may give multiple solutions.
IRR is less popular than Net Present Value as a measure of project worth.
IRR has the benefit of highlighting the return achieved by the project.
IRR is the most reliable means of choosing between mutually exclusive projects.

CB1002001

Question 196
Flag

Value of Options increases with

Volatility
Uncertainty
Relativity
Risk

CB1002002

Question 197
Flag

Which of the following investors in the derivatives market may find that the contract (they have entered into) is a liability at expiry?
I. Buyer of a call option
II. Writer of a put option
III. Buyer of a put option

I only
II only
III only
I and III

CB1002005

Question 198
Flag

A Zero Coupon bond

Does not earn interest on the money invested.
Is issued at a discount and redeemed at par.
Earns interest at regular intervals.
None of the above.

CB1002006

Question 199
Flag

Which of the following statements with respect to IASB are correct?
I. IASB stands for International Accounting Standardization Board
II. IASB has no authority to require compliance with its accounting standards
III. While setting international accounting standards, IASB does not collaborate with national
accounting standard setters in different countries because it should operate truly
independently.

I only
II only
I and II
All the above

CB1002007

Question 200
Flag

Management of ABC Ltd. is considering change of method used for calculation of depreciation for a machine purchased last year, from Straight-line method to Reducing Balance method of depreciation.
The machine was purchased for INR 10,00,000 and was estimated to have a useful lifetime of 5 years with estimated residual value of INR 1,00,000 at the end of 5th year.
What is the impact on accounting profit of ABC Ltd. because of this change in the second year?

Loss of approximately 2,00,000
Gain of approximately 2,00,000
Loss of approximately 50,000
No impact

CB1002008

Question 201
Flag

A Ltd. has made investments in 3 companies:
$\bullet \quad$ It has 30% holding in X Ltd and right to appoint 3/10 directors
$\bullet \quad$ It has 55% holding in Y Ltd and right to appoint 4/10 directors
$\bullet \quad$ It has 10% holding in Z Ltd and right to appoint 6/10 directors
Which of the following are subsidiaries of A Ltd?

X Ltd and Y Ltd
Y Ltd and Z Ltd
X Ltd and Z Ltd
All 3 companies

CB1002009

Question 202
Flag

The following were calculated from financial statements of a manufacturing company:
Inventory Turnover Period – 10 days
Trade Receivable Turnover Period – 40 days
Trade Payable Turnover Period – 60 days
Which of the following is definitely NOT true?

Business is being run efficiently
Management is trying to use suppliers as source of capital
Company has strained relations with vendors
Company is settling its creditors earlier than its debtors

CB1002010

Question 203
Flag

Investors might be willing to pay higher multiple of the earning per share of company as opposed
to another because:
I. They expect earnings to grow rapidly in future
II. They consider earnings on the stock to be less risky
Which of the statements is correct?

I only
II only
Both I and II
Neither I nor II

CB1002011

Question 204
Flag

“Preference shares are more like debt than equity”. Which of the following statements explain
this most correctly?

the tax treatment of preference dividends
the ability to buy and sell preference shares
the fixed nature of participation in profits
the ability to make capital gains or losses

CB1002012

Question 205
Flag

In a limited liability company, who bears the legal responsibility for the financial affairs?

the board of directors
the external Auditor
the Chief Financial Officer
the Internal Auditor

CB1002013

Question 206
Flag

What is the most appropriate about the cost of providing finance from retained earnings?

There is no cost associated with retained earnings.
Retained earnings are less expensive than equity share capital.
Retained earnings are equally expensive as equity share capital.
Retained earnings are more expensive than equity share capital.

CB1002015

Question 207
Flag

The net present value (NPV) method is generally considered to provide the most consistent and relevant basis for selection of investment projects. Which of the following situations creates the greatest threat to the validity of evaluating projects using NPV in practice?

Net present value ignores risk.
Shareholders may disagree with the results of a net present value calculation.
The calculation of net present value can lead to two solutions.
Managers may wish to undertake the project for selfish reasons and could manipulate the analysis.

CB1002016

Question 208
Flag

A small penalty has been imposed upon a general insurance company by the regulator for breaching a guideline. As per materiality concept, while preparing financial statements, the insurer should:

Disclose the penalty since regulatory breach is a significant event
Not disclose the penalty because the insurer might get a bad reputation for a minor breach
Not disclose the fine since the penalty amount is not material
Disclose only if the regulator specifically asks the insurer to do so

CB1002017

Question 209
Flag

In the statement of financial position, equity can arise by:
I. Sale of shares
II. Revaluation of non-current assets
III. Increase in market capitalisation
IV. Retention of profit

I and II only
II and III only
I, II and III only
I, II and IV only

CB1002018

Question 210
Flag

Which of the following is not a consideration for trade receivable management?

Credit Rating of the customer
Prior trade experience with the customer
Customer's bank balance
Profit margins of the customer

CB1002019

Question 211
Flag

Which of the following is NOT a forecasting technique?

Moving average
Expert judgement
Delphi Technique
Beyond Budgeting Approach

CB1002020

Question 212
Flag

What is the nature of relationship between market price of a share and pay-out ratio of the company?

Pay-out ratio is independent of market price
Pay-out ratio increases with market price, but at a constant rate
Pay-out ratio increases with market price, but at an increasing rate
As market price increases, pay-out ratio decreases

CB1002021

Question 213
Flag

Who of the following is legally responsible for the commitment owed by a private limited company to its lenders?

The directors
The auditor
The shareholders.
The Chief Financial Officer (CFO)

CB1002022

Question 214
Flag

An actuarial consultant in India is due to receive a payment in $US from an overseas client on 31 December 2021. The consultant has decided to buy an option contract to protect himself from fluctuations in the value of the $US. Which of the following is the most important aspect of the option contract he should purchase?

It should be an American option.
It should be an European option.
It should be a call option to buy dollars.
It should be a put option to sell dollars.

CB1002023

Question 215
Flag

Which is the best measure of the cost of retained profits in a business?

Retained earnings are a cost-free source of finance.
The cost of retained earnings is the same as that of the weighted average cost of capital (WACC) of the company
The cost of retained earnings is the same as that of ordinary share capital.
The cost of retained earnings is the same as that of preference shares.

CB1002025

Question 216
Flag

Why financial valuers generally calculate Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA)?

EBITDA is less prone to fluctuations than net profit
Depreciation and amortisation are not real costs to the business
Valuers are only interested in performance before tax
EBITDA is regarded as less prone to manipulation than net profit

CB1002026

Question 217
Flag

A manufacturing company showing a consistent PAT but is facing significant reduction in its working capital position. Which of the following events best explains this divergence?

The company has devalued the value of holding in its subsidiary due to an economic downturn.
The company has increased the credit period to its customers during this period.
The company has declared significant dividends in the last few years.
The company has been unable to use a major chunk of the inventory purchased during the previous years.
The company has issued floating rate debt during a period of rising interest rates.

CB1002027

Question 218
Flag

Company ABC has made Rs.10 cr. profit in 2020-21. It is expected that the company will continue to increase its profit by 10% in each year. On 31st March 2025, the Company is expected to have a terminal value of Rs.50 cr. What is the value of the Company as at March 2022, if the interest rate in the market is 5% p.a.?

Rs.86 cr
Rs.79 cr
Rs.85 cr
Rs.50 cr

CB1002028

Question 219
Flag

Mr. X has a business which is not listed on stock exchange. So he raised a debt of Rs.5cr from Mr. Y and promised to repay it in June 2021 to expand his business. However, he has been unable to repay it on time. So, Mr. Y has filed a legal suit against Mr. X to get ownership of Mr. X’s house worth Rs.5 cr. However, the court ruled the case in favor of Mr. X. Why was the decision in favor of Mr. X?

Mr. Y should allow him more time to repay the debt
Mr. X has a public limited company
Mr. Y should have asked for a guarantee before lending the money
Mr. X has a private limited company

CB1002029

Question 220
Flag

Which of the following risk is systematic in nature?

Customer concentration risk for a company dealing with manufacture of base metal commodities
Credit risk arising from small scale loans granted by microfinance institutions
Cybersecurity risk arising from ransomware attacks
Country risk for an offshore hedge fund dealing with global equities
Natural risk of earthquake like catastrophes for a global re-insurer.

CB1002030

Question 221
Flag

The following financial items are not considered while computing tax liability of a Company:

Dividend received
Revenue
Interest paid
Dividend paid

CB1002031

Question 222
Flag

Which of the following methods of valuing inventory results in the highest overvaluation of an inventory item when it’s prices are falling?

LIFO
FIFO
Weighted average
Net realizable value
CAPM

CB1002032

Question 223
Flag

The share price of Company XYZ Ltd. is currently Rs.100. The Company is now offering 1-for-2 rights issue to all its existing shareholders at Rs.60. The 2 shareholders Mr. A & Mr. B react differently to the rights issue:
Mr. A holds 100 shares and exercises his option for 50% of his holding
Mr. B holds 50 shares and does not exercise his option at all
What is value of holding for Mr. A & Mr. B after the rights issue?

Mr. A Rs.10,833 and Mr. B Rs.5,000
Mr. A Rs.10,833 and Mr. B Rs.4,333
Mr. A Rs.12,000 and Mr. B Rs.4,000
Mr. A Rs.13,000 and Mr. B Rs.4,333

CB1002034

Question 224
Flag

Company ABC is planning to acquire Company XYZ for a value of Rs.100 million in an all cash deal. Company XYZ has a net worth of Rs.120 million according to its financial statement on the date of takeover. The difference of Rs.20 million can be attributed in ABC’s book as:

Goodwill
Revaluation reserve
Non-current asset
Negative goodwill
Current Asset

CB1002037

Question 225
Flag

What is not a motive for growth:

Higher integrity
Increased profits
Lower risks of predating competitors
Stable workforce

CB1002038

Question 226
Flag

A smartphone distributor having multiple stores across the country has decided that instead of setting a budget for each store, it will allow stores to compete with one another for sales & profitability. Which of the following best describes its approach?

Zero based budgeting
Zero based budgeting
Budget flex
Static budgeting
Beyond budgeting

CB1002040

Question 227
Flag

Which of the following is not an objective of an employee:

Job security
Training
Ethical marketing of good
Safe working conditions

CB1002042

Question 228
Flag

In circumstances where a restriction has been placed on the evidence that the auditor can access or where the auditor disagrees with the treatment of a matter related to company accounts, which of the following does the auditor issue:

Disclaimer of an opinion
Qualified opinion
Reserved opinion
Adverse opinion

CB1002043

Question 229
Flag

Mr. X started his own event management company and hired his friend Mr. Y to become the Creative Head. Then, they both hired 10 more employees to help them scale the event management business. What kind of business entity is this?

Sole Trader
Partnership
Limited Company
Limited Liability Partnership

CB1002045

Question 230
Flag

The difference between gross investment & net investment is

Capital investment
Net sale of investments
Depreciation
Revaluation reserve

CB1002046

Question 231
Flag

Which of the following is the correct sequence of finance options in increasing order of risk:

Subordinate debt, Debenture stocks, Convertible preference shares, Equity
Equity, Subordinate debt, Debenture stocks, Convertible preference shares
Convertible preference shares, Equity, Subordinate debt, Debenture stocks
Debenture stocks, Subordinate debt, Convertible preference shares, Equity

CB1002047

Question 232
Flag

Which of the following scenarios best extends itself to JIT inventory management approach of a company?

The company has a complex supply chain with different parts being sourced from multiple countries and the company would like to keep air freight to a minimum
The company engages in retail of fast moving consumer goods
The company manufactures seasonal but standard items with a local supply base centered around it's manufacturing unit
The company engages in cold storage warehousing where it stocks seasonal agricultural products for sale in off season

CB1002048

Question 233
Flag

Which of these is a bearer document?

Non-recourse factoring
Commercial Paper
Overdraft
Trade credit

CB1002049

Question 234
Flag

Which of the following is not a part of sustainability report produced by the directors?

Business sustainability related to sales forecasts, threats, opportunities etc
Social sustainability related to labor practices, health & safety, work hours etc
Economic sustainability relating to anti-competitive practices, anti-corruption etc
Environmental sustainability relating to waste disposal, effluents, water consumption etc

CB1002050

Question 235
Flag

Which of this is not an example of risk mitigation:

Adding a cancellation option in a life insurance policy increases risk; the Company decides to not provide this option
The Company is unsure about lending to a newly launched company. So the Company decides to use non-recourse factoring for all its bills
The Company has a lot of payments to be made next year in Euros, so the Company has purchased an interest rate swap
The Company’s Actuary has projected that a major catastrophe event may occur 10 years from now. As the event is far away, the Company decides to not consider it in this planning and growth discussions

CB1002051

Question 236
Flag

An asset costing Rs.10,000 was purchased 5 years ago & deemed to have a useful life of 10 years, was recently sold for Rs.5,000. It’s value in the books at the time of sale was Rs.4,000. Calculate the written down value depreciation rate used for the asset:

14.86%
20.11%
10%
15%

CB1002052

Question 237
Flag

The distinction between an American Option and European Option is that

Under American Option right can be exercised at any time while European right can be exercised on a specific date
Under American Option right can be exercised on a specific date while European right can be exercised at any time
Under both the options rights can be exercised only at a specific time
Under both the options rights can be exercised on any data

CB1002054

Question 238
Flag

Recognition of a lease as a finance lease as opposed to an operating lease by the lessee will most likely result in a higher:

Debt‐to‐assets ratio.
Return on assets.
Current ratio.
Acid Test Ratio

CB1002055

Question 239
Flag

Statement 1: Apart from normal dividends, cumulative preference shares get an additional dividend if the company’s profits exceed a pre-specified level.
Statement 2: From the investor’s perspective, callable common shares are more risky than puttable common shares.
Which of the following is most likely?

Only Statement 1 is incorrect.
Only Statement 2 is incorrect.
Both statements are correct.
Both Statements are incorrect

CB1002056

Question 240
Flag

How might the interest of the company’s management be NOT aligned with those of shareholders

Linking the management remuneration to the company’s earning
Linking the management remuneration to the company’s share price
Linking the management bonus to the company’s share price
Linking the management bonus to the company’s Credit Rating

CB1002058

Question 241
Flag

Any company’s management wish to receive what sort of opinion from auditors on its accounts?

An unqualified opinion
A qualified opinion
Adverse opinion
None of the above

CB1002059

Question 242
Flag

Which of the option is correct using as an approach to forecasting?

Time series analysis.
Seeking an expert's opinion.
Delphi technique.
All of the above

CB1002060

Question 243
Flag

The cash-flow position can be improved by?

Deferring trade receivables payments
Fast payment of trade payables
Disposing of an asset
All of the above

CB1002061

Question 244
Flag

A company has INR 500,000 line of credit at 10.0% pa with a 1.0% pa commitment fee on the full amount available. The company draws down INR 100,000 for 6 months. The annual financing cost of this arrangement is:

7.5%
15.0%
12.5%
10.0%

CB1002062

Question 245
Flag

Which of the following is not an advantage of external growth against internal growth:

An easier & quicker method of growth
An opportunity to acquire experience of the target company
An opportunity to use spare cash for a mature company
Avoids the risk of dealing with firms that lack integrity

CB1002063

Question 246
Flag

Company X is a large electronics company and Company Y is a small electronics company. Recently Company X invested in Company Y by purchasing 50% of its shares. What is the relationship of Company X to Company Y?

Competitor company
Associate company
Subsidiary company
Controlling company

CB1002064

Question 247
Flag

In case of winding up of a company, who among the below list gets the highest preference for final payoff?

Employees
Preference Shareholders
Floating Charge Debenture Holders
Trade Creditors

CB1002065

Question 248
Flag

Which of the following is not a profitability ratio?

Return on capital employed
Asset utilization ratio
Gross Profit margin
Quick ratio

CB1002066

Question 249
Flag

Which of the following is not a feature of commercial paper?

Commercial Papers are bearer documents & can be transferred by sale
Commercial Papers are repaid with face value plus agreed interest rate which usually exceeds Government securities
Commercial Papers are unsecured in nature
Commercial Paper is a form of short term borrowing

CB1002067

Question 250
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_________ enables an organization to measure, understand and communicate the economic, social and environmental effects of their activities. Fill in the blank.

Sustainability reporting
Regulatory reporting
Internal reporting
Integrated reporting

CB1002068

Question 251
Flag

Home Assistant, a popular home automation software group, has recently made a plan to launch their own hardware called Home Assistant Yellow. The plan is to raise sufficient capital for manufacturing the hardware. Participants in the crowd funding program will be able to first receive the manufactured system on chip.
This is an example of:

Donation based crowd funding
Reward based crowd funding
Loan based crowd funding
Investment based crowd funding

CB1002069

Question 252
Flag

A cloth wholesaler has been very popular and tends to sell his stock every 15 days. His son recently graduated from Premier Business School and is worried that his father’s 6-month long credit period policy for their customers, is bad for his business. On digging further, he has realized that his father takes about a year to pay his suppliers. He is testing profitability by calculating his father’s working capital cycle. How long will it be?

6.5 months
6 months
-5.5 months
-6 months

CB1002070

Question 253
Flag

The current implied interbank exchange rate is 1.5% per quarter. What is the price of 3 month interest rate future?

94
98.5
99.25
97

CB1002071

Question 254
Flag

What is Beyond Budgeting?

It uses a cost-plus approach for all account heads
It involves budgeting for beyond a period of 1 year
There is no budget provided but actual performance is used for leaders to compete over
It includes budgeting of external factors which are beyond control of the Company

CB1002072

Question 255
Flag

Which of the following defines a limited company’s relationship with the outside world?

Annual Company Reports and Accounts
Memorandum of Association
Share Certificate
Articles of Association

CB1002073

Question 256
Flag

What does ‘crystallizing’ mean in debentures?

When a company fails to make one of the coupon payment or the capital repayment, the stockholder may appoint a receiver to intercept income from the secured asset(s).
When a company fails to make one of the coupon payments or the capital repayment, the stockholder may take possession of the secured asset to sell it in order to meet their debt.
When a company fails to make an interest or capital payment, the company can sell or make major alterations to the secured asset only with the mortgage debenture holder’s permission.
When a company fails to make an interest or capital payment, the debenture holders can apply to the courts to convert the floating charge to a fixed charge.

CB1002074

Question 257
Flag

Which of the following statement is true in case of public limited companies?
I. Separation of ownership and management allows share ownership to change without generally interfering with the operations of the business.
II. Limited liability allows large number of people to invest large amounts of money with relatively minimal disclosures.
III. It is subject to information asymmetry across various stakeholders.
IV. It allows the managers of the company to always act in the best interest of the shareholders.

Only II and III are correct
Only I, II and III are correct
Only I is correct
Only I and III are correct

CB1002075

Question 258
Flag

Which of the following statement is incorrect?

An asset-backed security is form of long-term financing.
Asset-backed securities are securities backed by ring-fenced pools of assets.
In case of asset-backed security, if ring fenced pool of assets are insufficient to pay interest or capital, the bondholders will be partially defaulted and they can claim against the company itself.
Assets-backed securities may be backed by car loans, unsecured personal loans, credit cards or other types of loans.

CB1002076

Question 259
Flag

Which of the below statement is not true about shadow banking?

Shadow banks perform maturity transformation.
Shadow banks face the risk of investors losing confidence, which can create liquidity risk.
Shadow banks are subject to the reserve and capital requirements.
Shadow banks borrow money in the money markets.

CB1002077

Question 260
Flag

Which one of the following is a characteristic of future contracts?

A future gives the right but not the obligation to trade in a specified quantity of a specified asset at a specified price on or before the specified date.
A future gives the obligation to trade in a specified quantity of a specified asset at a specified price on or before the specified date.
The buyer of future will have to pay a premium to the seller.
Only the seller of future has to deposit margin with the clearing house .

CB1002078

Question 261
Flag

XYZ is a globally renowned manufacturer of electronic gadgets with headquarters located in India. It uses a network of subsidiaries to maintain control over its supply chain. Its sales network across countries distribute XYZ gadgets, as well as other consumer electronic products. This is an example of

Horizontal integration
Vertical integration
Conglomerate integration
Backward horizontal integration

CB1002079

Question 262
Flag

Which of the following would indicate that ‘X’ is an associated company of ‘Y’?

Y can appoint three of X’s eight board members.
Y can appoint five of X’s eight board members.
Y can nominate three non-voting observers to attend X’s board meetings.
Y will have total control over X.

CB1002080

Question 263
Flag

An investor used to invest in any company only for a short period to achieve a capital gain. She is presently looking for a company’s share with high beta coefficient. Which of the following is a rational explanation for this investor to identify a high beta share?

High beta shares will have low dividend yield
Only systematic risks matter
Investor expects the stock market to weaken
Investor expects the stock market to strengthen

CB1002081

Question 264
Flag

For an insurance company calculate the “New business strain” if

Rs. 1,100
Rs. 9,000
C. Rs. 100
Rs. 150

CB1002082

Question 265
Flag

Which one of the following is the goal of the Financial Manager?

To invest in projects if the rate of return is greater than the cost of borrowing.
To invest in projects that display a positive net present value.
To determine a range of social objectives beyond making profits.
To focus attention on the impact of company’s operation on climate change.

CB1002083

Question 266
Flag

Internal growth is preferred by firms that wish to:

avoid unnecessary Government intervention.
expand geographically.
to share the financial burden and the risk of the project.
to acquire assets or experience.

CB1002084

Question 267
Flag

Which of the following statement is ‘true’ for a Pre-payment crowdfunding?

Investors receive interest on the money they lend, and their capital is repaid over time.
Investors buy shares and benefit if the business succeeds.
In return for giving money, participants are rewarded by receiving a service or a product.
There are no financial rewards and the donors derive satisfaction from helping charitable causes.

CB1002085

Question 268
Flag

Which of the following statement is not true in case of limited companies?

If shares have been issued ‘partly paid’ then in the event of liquidation, shareholders will only be liable to pay the outstanding installments.
If the shares have been issued on ‘partly paid’ basis, at a premium to their par value, only a part of this ‘share premium’ is payable at the outset.
If the company becomes insolvent, creditors cannot claim further payment from the shareholders personal wealth beyond the fully paid value of their shares.
Article of Association set out the internal rules for running the company.

CB1002086

Question 269
Flag

Which of the following correctly describes operating leases?
I. The owner of the asset will retain most of the risks associated with owning the asset.
II. The leaser takes on most of the risks associated with owning the asset.
III. The lease will be for a period similar to the likely life of the asset.
IV. The lease will be for a period substantially shorter than the likely life of the asset.

Only I and III are correct.
Only II and III are correct.
Only II and IV are correct.
Only I and IV are correct.

CB1002087

Question 270
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Which of the following is NOT a correct interpretation of the prudence concept?

An asset that cost ₹3,00,000 was professionally revalued at ₹4,00,000 and that valuation has been recognised in the financial statements at the revised value.
An asset that could be sold between ₹5,00,000 and ₹7,00,000 has been valued at ₹7,00,000 in the financial statements.
An asset that could be sold between ₹5,00,000 and ₹6,00,000 has been valued at ₹4,50,000 in the financial statements.
An intangible asset could be worth up to ₹5,00,000, but the asset’s value has not been recognised in the financial statements.

CB1002088

Question 271
Flag

An investor cannot afford to construct a well-diversified portfolio. Which of the following best describes the significance of the beta of potential investments to that investor?

The investor should focus on high beta stocks if the investor believes that the stock market will rise.
Low beta investments will be a safer investment for the investor.
The beta co-efficient is applicable only when the investor is actively investing in the market.
Betas have no use for the investor.

CB1002089

Question 272
Flag

An investment project has been evaluated using Monte Carlo simulation. After 10 lakh simulations, the results have stabilised and the expected net present value is positive and averages ₹1 crore, with a range of outcomes varying from minus ₹30 lakhs to plus ₹1.7 crore.
Which of the following statements best interprets these results?

This is a low-risk project.
The project satisfies the net present value criterion.
The project fails the net present value criterion.
The model should be run on more simulations.

CB1002090

Question 273
Flag

Which of the following best describes a ‘certainty equivalent’ used in project appraisal?

The expected value of an uncertain future cash inflow.
The fixed amount that the decision maker would accept as an alternative to an uncertain expectation.
The market price of an uncertain future cash flow calculated using different betas.
The smallest amount that is anticipated from an uncertain future cash inflow.

CB1002091

Question 274
Flag

A company owns a machinery that costs ₹10,000 on 1st December 2012. The equipment’s estimated useful life was 10 years, and estimated scrap value was ₹1,000. What is the depreciation charge on this equipment for the year ended 30th November 2022, assuming the straight-line method of depreciation?

₹450
₹1,800
₹1,000
₹900

CB1004346

Question 275
Flag

Alex is the investment manager of Company P’s pension fund, which all employees are required to join. Ely has just joined Company P as a junior manager.
Ely plans to remain with the company for 40 years before retiring on a full pension.
Ely has strong moral objections to financing the activities of the oil industry.
Ely has emailed Alex, asking for details of the fund’s existing holding in oil companies and for an assurance that the pension fund will not make further investments in oil companies.
Which two statements are correct from an ethical point of view?

I. Alex should carry out Ely’s request not to invest further fund assets in oil shares
II. Alex should retain the fund’s existing oil holdings until it would be beneficial to sell
III. Alex should refuse Ely’s request for information about oil holdings
IV. Ely should resign if Alex refuses Ely’s requests concerning oil investments
V. Ely should withdraw the email on the grounds that Company P has many employees.

I & II
II & III
IV *V
II * IV

CB1004347

Question 276
Flag

Which of the following best describes the role of the stock market in motivating company directors to make sound decisions?

A badly managed company can be identified in comparison to other quoted companies.
A badly managed company may have its stock market quotation suspended.
A badly managed company will report poor profits and the shareholders will complain.
A badly managed company will have a low share price and it may be possible to buy a controlling interest and replace the board.

CB1004348

Question 277
Flag

Which of the following statements is CORRECT?

Shareholder’s wealth is expressed by director’s estimates
Shareholder’s wealth is expressed just by share price
Shareholder’s wealth is expressed by share price and dividends
Shareholder’s wealth is expressed by a survey of shareholders

CB1004350

Question 278
Flag

Jess is currently Company F’s Finance Director. Jess plans to retire, but the Board wishes Jess to remain with Company F as a non-executive director. In the event of such an appointment Jess will not be an independent non-executive director as she would have previously served on Company F’s Board.
If Jess accepts this role, it would be ________ for her to work closely with the replacement Finance Director.
Jess _____ require training for her new role, given the nature of her past employment with company F.
Company F’s external auditor will be ______ if Jess remains on the board as a non-executive director.

undesirable, will, reassured
desirable, will not, concerned
undesirable, will, concerned
desirable, will, reassured

CB1004351

Question 279
Flag

Choose the correct option
Match the following table:

a-I , b-II , c- III
a-II,b-I,c-III
a-I ,b-III , C-II
a-III, b-II , c-I

CB1004352

Question 280
Flag

Analyze the statements below and choose the correct option
Statement I: Between Executive Directors and Non-Executive Directors ,only Executive Directors are board members.
Statement II: Non-Executive Directors do not manage the company.
Statement III: Non-Executive and Executive directors are both permitted to hold shares in the company.

Only I is corect
Only II is correct
Only II and III are correct
Only III is correct

CB1004353

Question 281
Flag

Which of the following statements best describes the role of corporate governance in finance?

Corporate governance refers to the process of maximizing shareholder wealth through short- term financial decisions.
Effective corporate governance ensures transparency, accountability, and ethical conduct in the management of a company.
Corporate governance primarily focuses on maximizing employee benefits and welfare.
The main objective of corporate governance is to minimize stakeholder engagement and involvement in decision-making processes.

CB1004354

Question 282
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Which of the following statements are correct about Limited Liability Partnerships(LLP)-
I. Members of an LLP are not exposed to any risk or loss.
II. If the LLP itself failed it would cost each member his or her stake in the business
III. Each member is jointly and severally liable for the liabilities of the LLP
IV. Each member is personally liable for his or her share of the LLP’s liabilities
V. LLP’s (as with a limited company) are separate legal entities.

I & III
II & V
III & IV
IV & V

CB1004355

Question 283
Flag

A limited liability partnership (LLP) is facing bankruptcy because its managing partner had gone over and above the authority he had and taken a loan to invest in a new IT system for the LLP. The LLP is now struggling to service this loan. The LLP has three other partners who work in client-facing roles and take no active part in the LLP’s management.
Which of the following statements is correct?

Creditors have no further rights once the LLP’s assets have been exhausted.
Only the lender who financed the IT system can claim partners’ personal assets.
The four partners are jointly and severally liable for the LLP’s debts.
The LLP’s creditors have a strong claim against the managing partner’s personal assets.

CB1004356

Question 284
Flag

Which of the following statements best describes a partnership?
I A partnership is a business owned by multiple shareholders, with limited liability for all partners.
II. Partnerships are legal entities separate from their owners, providing limited liability protection to partners.
III. In a partnership it is generally easier to manage the business as compared the sole proprietorship because there are multiple heads who can look after different aspects of the business.
IV. In a partnership, partners have unlimited liability and all the losses are borne by them.

Statement I and II
Statement I and III
Statement II and III
Statement III and IV

CB1004357

Question 285
Flag

Choose the correct option by matching the following table:

I-A, II -B , III- C , IV- D
I-B,II -A , III- C , IV-D
I-A, II-B, III-D, IV-C
I-B,II-A,III-D,IV-C

CB1004358

Question 286
Flag

Which of the following is TRUE about a public company?

The ordinary shares must be quoted on the Stock Exchange.
Ordinary shareholders have one vote per share held.
The issued share capital can be less than £50000.
Shareholders have unlimited liability.

CB1004359

Question 287
Flag

Select ONE correct option.
Three individuals are considering starting a new business.
They have the following considerations:
$\bullet$ They want to protect themselves from personal liability to pay any debts owed in the event of the business becoming bankrupt
$\bullet$ Initially, they intend to raise £200 million from a combination of debt and equity financing
$\bullet$ They expect at least 40% of the funding to come from equity raised through a Stock Exchange.
Select the most appropriate capital structure for the business.

Limited Liability Partnership
Private Limited Company
Sole Trader
Public Limited Company

CB1004360

Question 288
Flag

Select the correct option by filling in the blanks:

It is______ for a limited liability company to raise capital than it is for a large partnership as investors will be _______ to become involved as a part owner of a large partnership since they will have to risk their entire personal wealth.

easier, reluctant
tougher, reluctant
easier, willing
tougher, willing

CB1004362

Question 289
Flag

You have been provided with this information about Person X in respect of a particular tax year:
$\bullet$ received £30,000 from their employment
$\bullet$ made a capital gain of £15,000
$\bullet$ bought shares for £20,000, then sold those shares for £22,000
$\bullet$ No dividends were received in respect of these shares
$\bullet$ the tax-free allowance was £10,000 for income and £5,000 for capital gains
Person X will be subject to income tax on ______ and capital gains tax on ______
Select the correct options to fill the blanks:

£20000, £12000
£20000, £10000
£30000, £12000
£22000, £15000

CB1004363

Question 290
Flag

A company has 100% ownership of an overseas subsidiary that consistently earns profit. The effect of Double Taxation Relief (DTR) on this group means that it will be taxed:

at the higher of the two countries’ tax rates.
at the lower of the two countries’ tax rates.
in whichever country it chooses.
on the net income received from the subsidiary.

CB1004364

Question 291
Flag

Investment Income often has TDS to:

To discourage companies from paying dividends.
To simplify collection of tax.
To ensure that taxpayers who have insufficient income to pay tax are required to pay tax on their investment income.
None of the above.

CB1004365

Question 292
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Which of the following will NOT be taxed under personal taxation?

Capital Gain of Rs.10000 from selling of shares.
Rs.8000 from agricultural income.
Wealth of Rs.40000 with an individual who just got it from the death of his father.
None of the above.

CB1004366

Question 293
Flag

TOYCO PLC (a UK company) has set up a new toys business in Japan. At the end of the year, it earns £10000 in Japan from the business. It has been subject to a 18% tax in Japan. The corporation tax in the UK is 20%. Japan and UK have a Double Taxation agreement. What are TOYCO’s post-tax earnings?

£8200
£6500
£10000
None of the above

CB1004367

Question 294
Flag

Choose ONE correct option
Which of the following statements is true about Debenture stocks as a source of long-term finance?
I: Debentures are generally secured on some or all assets of the company
II: Debentures pay fixed interest to the holders
III: Debenture holders have voting rights in the company
IV: Debentures represent ownership in the company

Only statement I is true
Only I and II are true
I, II and III are true
All statements are true

CB1004368

Question 295
Flag

Choose ONE correct option
Assertion: Long-term finance is typically used to fund capital expenditures and investments in assets with longer useful lives.
Reason: Long-term finance sources, such as bond issuance and equity financing, provide funds that are suitable for financing projects and acquisitions that yield benefits over an extended period.
Choose the correct option:

Both the assertion and the reason are true and the reason is a correct explanation of the assertion.
Both the assertion and the reason are true but the reason is an incorrect explanation of the assertion.
The assertion is false but the reason is true.
The assertion are reason are both false.

CB1004369

Question 296
Flag

Choose ONE correct option

Match the following:

I-A , II-B,III-C,IV-D
I-A, II-D, III-B,IV-C
I-A, II-C, III-D, IV-B
I-B, II-A, III-C, IV-D

CB1004370

Question 297
Flag

Which of the following is NOT a source of long-term finance for a company?

Issuing bonds
Equity financing
Bank overdraft
Venture capital investment

CB1004371

Question 298
Flag

Which of the following is a characteristic of Eurobonds?

They have tax deducted at source
They are generally secured loans
These are bearer bonds
None of the above

CB1004372

Question 299
Flag

Which of the following ranks lowest if a company is would up?

Eurobonds
Mortgage debentures
Floating-charge debentures
Preference shares

CB1004373

Question 300
Flag

Which statement best describes the characteristics of debenture loans?

Interest payments depend upon the profitability of borrowers
The holder’s only remedy is to sue the borrower in the event of default
They are secured on some or all of the borrower’s assets
They are used to raise short-term finance for the borrower.

CB1004374

Question 301
Flag

What does ‘crystallizing’ mean in debentures?

When a company fails to make one of the coupon payment or the capital repayment, the stockholder may appoint a receiver to intercept income from the secured asset(s).
When a company fails to make one of the coupon payments or the capital repayment, the stockholder may take possession of the secured asset to sell it in order to meet their debt.
When a company fails to make an interest or capital payment, the company can sell or make major alterations to the secured asset only with the mortgage debenture holder’s permission.
When a company fails to make an interest or capital payment, the debenture holders can apply to the courts to convert the floating charge to a fixed charge.

CB1004375

Question 302
Flag

Which of the following is NOT true about preference shares?

Preference shares usually carry voting rights.
Preference shareholders have a preferential right to either dividends or a return to capital compared with ordinary shareholders.
Preference shareholders rank below debt (bonds) but above ordinary shares in priority for repayment in case of company liquidation.
None of the above.

CB1004502

Question 303
Flag

Company LMN, a growing technology startup, is planning to finance its research and development for a breakthrough product. The company needs to raise additional capital and is considering two options: issuing ____________ (1) or ____________ (2) .
(1) These are long-term debt instruments issued by corporations to raise funds from investors, typically offering fixed interest payments and secured by specific assets of the company. They represent a form of borrowing for the issuing company and are considered as a form of debt capital in the company’s capital structure.
(2) represents ownership in the company and entitles those who hold this form to voting rights and dividends based on the company’s profitability. They carry higher risk but offer better potential for capital appreciation.
Based on the above case study answer the following question:
Choose the correct option to fill in the blanks (1) and (2)

Convertibles, Ordinary Shares
Debentures, Preference shares
Debentures, Ordinary shares
Ordinary shares, Debentures

CB1004503

Question 304
Flag

Company LMN, a growing technology startup, is planning to finance its research and development for a breakthrough product. The company needs to raise additional capital and is considering two options: issuing ____________ (1) or ____________ (2) .
(1) These are long-term debt instruments issued by corporations to raise funds from investors, typically offering fixed interest payments and secured by specific assets of the company. They represent a form of borrowing for the issuing company and are considered as a form of debt capital in the company’s capital structure.
(2) represents ownership in the company and entitles those who hold this form to voting rights and dividends based on the company’s profitability. They carry higher risk but offer better potential for capital appreciation.
Based on the above case study answer the following question:-
Which of the following highlights the potential advantage of issuing (1) compared to issuing (2) for the company’s research and development?

Issuing (1) allows Company ABC to retain voting control and decision-making power.
Issuing (2) provides fixed interest payments, reducing financial risk during economic downturns.
Issuing(2) does not create long-term debt obligations on the company's balance sheet.
Issuing(2) offers tax advantages as dividends paid to shareholders are tax-deductible expenses.

CB1004504

Question 305
Flag

Company LMN, a growing technology startup, is planning to finance its research and development for a breakthrough product. The company needs to raise additional capital and is considering two options: issuing ____________ (1) or ____________ (2) .
(1) – These are long-term debt instruments issued by corporations to raise funds from investors, typically offering fixed interest payments and secured by specific assets of the company. They represent a form of borrowing for the issuing company and are considered as a form of debt capital in the company’s capital structure.
(2) – represents ownership in the company and entitles those who hold this form to voting rights and dividends based on the company’s profitability. They carry higher risk but offer better potential for capital appreciation.

What is the advantage of issuing (2) over issuing (1) in terms of ownership and control of the company?

Issuing (2) increases leverage and financial risk for the company.
Issuing (1) allows Company LMN to retain ownership and control without diluting voting rights.
Selling (2) reduces the company's ability to attract equity investors in the future.
Issuing (1) results in dilution of ownership but provides tax benefits.

CB1004505

Question 306
Flag

Company LMN, a growing technology startup, is planning to finance its research and development for a breakthrough product. The company needs to raise additional capital and is considering two options: issuing ____________ (1) or ____________ (2) .
(1) These are long-term debt instruments issued by corporations to raise funds from investors, typically offering fixed interest payments and secured by specific assets of the company. They represent a form of borrowing for the issuing company and are considered as a form of debt capital in the company’s capital structure.

(2) represents ownership in the company and entitles those who hold this form to voting rights and dividends based on the company’s profitability. They carry higher risk but offer better potential for capital appreciation.

Considering the investor perspective, which financing option is likely to appeal more to risk- averse investors seeking stable returns?

Issuing debentures with fixed interest payments.
Selling ordinary shares with potential for capital gains.
Issuing preference shares with voting rights.
Selling convertible bonds with flexibility to convert into ordinary shares.

CB1004506

Question 307
Flag

Company LMN, a growing technology startup, is planning to finance its research and development for a breakthrough product. The company needs to raise additional capital and is considering two options: issuing ____________ (1) or ____________ (2) . The company wants a financer who is there with the company through hard times and good times.
(1) These are long-term debt instruments issued by corporations to raise funds from investors, typically offering fixed interest payments and secured by specific assets of the company. They represent a form of borrowing for the issuing company and are considered as a form of debt capital in the company’s capital structure.
(2) represents ownership in the company and entitles those who hold this form to voting rights and dividends based on the company’s profitability. They carry higher risk but offer better potential for capital appreciation.

Considering firm LMN’s growth trajectory and investor risk appetite, which financing option is likely to align best with the company’s long-term objectives?

Issuing debentures to secure fixed interest payments and reduce financial risk.
Selling ordinary shares to attract equity investors and align interests with long-term growth prospects.
Issuing preference shares to provide voting rights and priority in dividend payments.
Selling convertible bonds to offer flexibility for future conversion into ordinary shares.

CB1004507

Question 308
Flag

Which of the following could NOT result in a company obtaining a stock exchange listing?

A rights issue
An introduction
An offer for subscription
A placing

CB1004508

Question 309
Flag

Which of the following statements accurately describes the role of underwriting in an offer for sale?

Underwriting involves selling shares directly to the public without the involvement of financial intermediaries.
Underwriting guarantees that all shares offered will be sold at a price that company wants.
Underwriting provides a guarantee to the issuing company that the shares will be fully subscribed, even if investors do not fully take up the offer.
Underwriting allows shareholders to buy additional shares at a discounted price during the offer period.

CB1004509

Question 310
Flag

A quoted company has 100 million $1.00 shares in issue that have a market price of $11.00 per share. The board plans to raise $270 million through a $9.00 rights issue in order to finance a project that has an estimated net present value of $140 million.
What is the company’s expected share price after the rights issue?

$10.54
$13.70
$15.10
None of the above.

CB1004510

Question 311
Flag

What advantage does a company gain from having its shares listed on a stock exchange in terms of access to capital?

It allows the company to issue additional shares at a premium to existing shareholders.
It provides a platform for the company to attract venture capital investments.
It enables the company to raise funds by issuing new shares to the public via various methods.
It ensures that existing shareholders receive priority in dividend payments.

CB1004511

Question 312
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Company F’s authorized share capital is 5 million £0.25 shares.
Company F’s issued share capital is 2 million shares.
The current market price per share is £0.65.
What is the maximum amount of additional equity capital that Company F can raise?

£0.75 million
£1.3 million
£1.95 million
£3.25 million

CB1004512

Question 313
Flag

What is a potential advantage of remaining a private company rather than becoming a public company?

Access to a larger pool of capital from public investors.
Enhanced liquidity and marketability of shares.
Greater control and flexibility over company operations and decision-making.
Ability to issue corporate bonds and debt securities to raise funds.

CB1004513

Question 314
Flag

Choose the correct option
Match the following:

I – D, II – A, III – B, IV-C
I-D, II-A, III-C, IV-B
I-A, II-D, III-B, IV-C
I-A, II-B, III-C, IV-D

CB1004514

Question 315
Flag

A company has 10 million shares in issue. The company’s share price is $4 per share. The directors are considering a one for five rights issue at $3.50 per share. Issue costs have been estimated at $800,000.

Calculate the expected share price after the rights issue

$3.85
$3.92
$4.62
$4.70

CB1004515

Question 316
Flag

Which of the following statements is NOT true about credit sales?

Credit sales allow customers to defer payment for goods or service.
Credit sales typically involve extending credit terms to customers beyond immediate payment upon purchase.
Credit sales are recorded as revenue on the income statement at the time of when payment is received.
Credit sales do not impact accounts receivable until payment is received from customers.

CB1004625

Question 317
Flag

What is a key criterion for classifying a lease as a finance lease rather than an operating lease?

The lease term is short relative to the economic life of the asset.
The present value of lease payments equals or exceeds substantially the fair value of the asset.
The lessor retains ownership of the asset throughout the lease term.
The lease payments are recorded as a straight-line expense.

CB1004626

Question 318
Flag

Which of the following statements is true regarding a bank overdraft?

A bank overdraft represents a long-term borrowing arrangement between a bank and a borrower.
Interest is charged on the entire overdraft limit
A bank overdraft is recorded as a liability on the borrower's balance sheet.
Bank overdrafts are typically secured by collateral provided by the borrower.

CB1004627

Question 319
Flag

Which of the following is a potential advantage of non-recourse factoring for the seller?

Lower factoring fees compared to recourse factoring.
Reduced administrative burden in managing collections.
Full protection against bad debts and customer defaults.
Ability to maintain control over the collection process.

CB1004628

Question 320
Flag

Which of the following actions can the payee take with a bill of exchange to receive immediate payment?

Endorse the bill to another party.
Present the bill to the drawee for acceptance.
Discount the bill with a financial institution.
None of the above.

CB1004629

Question 321
Flag

Which aspect highlights an advantage of traditional banks over shadow banking in terms of risk management?

Emphasis on speculative trading and high-risk investments.
Implementation of stringent credit risk assessment and monitoring
Availability of government bailouts in times of financial distress.
Greater reliance on short-term funding and leverage.

CB1004630

Question 322
Flag

Emma is a small business owner looking to secure £30,000 to expand her bakery business by purchasing new equipment and renovating her premises. She is exploring different financing options and considering crowdfunding and peer-to-peer (P2P) lending.

Crowdfunding:

Emma plans to create a crowdfunding campaign to raise funds from supporters and customers.

She intends to offer rewards such as exclusive bakery items, discounts, or special events to bakers.

Crowdfunding will help engage her community and generate buzz for her bakery expansion.

Peer-to-Peer (P2P) Lending:

Emma can apply for a P2P loan through an online lending platform.

P2P lending offers a straightforward loan arrangement with fixed monthly payments based on her creditworthiness.

The loan terms can be customized to suit Emma’s financial needs and repayment capabilities.

Considering Emma’s need for £30,000 to expand her bakery business, which alternate source of finance (crowdfunding or P2P lending) would you recommend for her?

Crowdfunding
Peer-to-Peer (P2P) Lending
Both could be viable options depending on Emma's preferences and circumstances.
Neither option is suitable for raising the required amount.

CB1004632

Question 323
Flag

Which of the following projects would be most suitable for financing through a Special Purpose Vehicle (SPV)?

A government-funded public infrastructure project, such as building a new highway.
Establishing a new retail store chain in multiple cities.
Developing a renewable energy project, such as a solar power plant.
Launching a marketing campaign for a new consumer product.

CB1004633

Question 324
Flag

Company U’s home currency is GBP.
It has a large receivable in USD that is due for payment in six(6) months.
Which is the best choice for minimizing risk to the company associated with GBP/USD risk?

Currency future
Call Option
Put Option
Currency Swap

CB1004634

Question 325
Flag

A call option is:

Right to sell an asset at a specified price
Obligation to buy an asset at a specified price
Right to buy an asset at a specified price
Obligation to sell an asset at a specified price

CB1004635

Question 326
Flag

Choose ONE correct option by analyzing the statements below:
I : Currency swaps involve the exchange of both principal and interest payments in different currencies
II : Currency swaps are typically customized agreements between counterparties.
III : Currency swaps can be used to hedge against interest rate risk.
IV :Currency swaps are standardized contracts traded on organized exchanges.

All statements are correct
Only I and II are correct
I, III and IV are correct
I, II and III are correct

CB1004636

Question 327
Flag

Choose ONE correct option
Assertion: Futures contracts require initial margin deposits to mitigate counterparty credit risk and ensure performance of contractual obligations.
Reason: Initial margin requirements for futures contracts help protect against potential losses arising from adverse price movements in the underlying assets.

Both the assertion and reason are true, and the reason is a correct explanation of the assertion.
Both the assertion and reason are true, but the reason is NOT a correct explanation of the assertion.
The assertion is true, but the reason is false.
The assertion is false, but the reason is true.

CB1004637

Question 328
Flag

Which of the following is a possible reason to enter into an interest rate swap?

Leveraging investments in real estate
Protecting against fluctuations in commodity prices
Managing interest rate exposure
Managing interest rate exposure

CB1004638

Question 329
Flag

Which of the following describes a key difference between futures and forwards?

Futures contracts are traded on organized exchanges, while forwards are customized agreements traded over-the-counter (OTC).
Futures contracts involve delivery of the underlying asset, while forwards are settled financially without physical delivery.
Futures contracts have flexible terms and non-standardized specifications, while forwards have fixed terms tailored to the needs of counterparties.
Futures contracts are used for speculation, while forwards are used primarily for hedging against price fluctuations.

CB1004959

Question 330
Flag

A business made a loss during the financial year just ended but has more cash at the end of the year than it did at the beginning. Which of the following could be a reason for this?

Dividends were lower this year than last year.
Some fixed assets were sold during the year.
Debtors took longer to pay this year than last.
Creditors were lower at the end of this year.

CB1004960

Question 331
Flag

A company expects to have net current liabilities at the financial year end. Raising funds by taking out a short term loan would:

increase the current ratio
reduce the current ratio
have no effect on the current ratio
either increase or decrease the current ratio depending on the balances involved and the extra funds raised

CB1004961

Question 332
Flag

Sales revenue should be recognized when goods and services have been supplied; costs are incurred when goods and services have been received.
The accounting concept which governs the above is the:

accruals and rationalization concept
materiality and realization concept
accruals and realization concept
dual aspect concept

CB1004963

Question 333
Flag

A bond has a value of $£ 1,000$ printed on its face. Its current open market value is $£ 980$. Analysts expect the value of the bond to rise to $£ 985$ within the next seven days. In your personal opinion it will rise to $£ 982$. What is the nominal value of this bond?

$\quad £ 980$
$\quad £ 982$
$\quad £ 985$
$\quad £ 1,000$

CB1004964

Question 334
Flag

Preference shares are often thought of as being more like debt than equity. Which of the following best explains this?

the tax treatment of preference dividends
the ability to buy and sell preference shares
the fixed nature of participation in profits
the ability to make capital gains or losses

CB1004966

Question 335
Flag

A business has decided to acquire a specialized piece of machinery using a finance lease. A bank has agreed to buy the asset on the business’ behalf and will lease the asset for the whole of its useful life. When will the asset become the property of the business?

On delivery of the asset.
On the first lease payment.
Once the final lease payment has been made.
Never

CB1004967

Question 336
Flag

A company has $500,000 £ 1.00$ ordinary shares in issue. The current market price is $£ 1.80$. The company will make a rights issue later today, issuing 50,000 new shares at a price of $£ 1.50$. What is the theoretical ex-rights price of the company’s shares?

$\quad £ 1.50$
$\quad £ 1.65$
$\quad £ 1.77$
$\quad £ 1.80$

CB1004968

Question 337
Flag

Which of the following best describes the purpose of the depreciation charge?

An adjustment to the balance sheet value to reflect market values.
An adjustment to the balance sheet value to avoid overvaluing assets.
An adjustment to the profit and loss account to reflect the use of the asset during the year.
An adjustment to the profit and loss account to reflect the decline in values during the year.

CB1004970

Question 338
Flag

Which of the following best describes the purpose of the cash flow statement?

To show how much cash is available at the end of the accounting period.
To explain any increase or decrease in the business's working capital.
To establish the ability of the business to pay its liabilities.
To explain what cash has been generated by operations, and how that cash has been utilized.

CB1004973

Question 339
Flag

An investor sold a holding of a stock with the intention of buying an identical holding of the same stock a few weeks later at roughly the same price. What possibility best explains the likely reason for this behavior?

The investor is keen to develop a relationship with a new broker.
The investor is trying to realize a capital gain in order to utilize an annual tax allowance that will be lost otherwise.
The investor is trying to stimulate the market's interest in the shares by generating trading volume.
The investor wishes to confirm the liquidity of the stock's market.

CB1004978

Question 340
Flag

Which of the following is NOT true of the Internal Rate of Return (IRR) method of project appraisal?

IRR can sometimes have multiple solutions.
IRR is less popular than Net Present Value as a measure of project worth.
IRR has the benefit of highlighting the return achieved by the project.
IRR is the most reliable means of choosing between mutually exclusive projects.

CB1004979

Question 341
Flag

You have a diversified portfolio. You are offered an opportunity to invest in an oil exploration venture in the South Atlantic. Which of the following risks associated with this project is a systematic risk?

Bad weather might hamper operations until the cash runs out.
The geological surveys which suggest the existence of oil might be wrong.
The price of crude oil on the world markets might fall, making any finds uneconomic.
Interest rates might rise, pushing up the costs of borrowing for the enterprise.

CB1004980

Question 342
Flag

During the year ended 30 September 2002 a company bought a fixed asset for $£ 125,000$. The company charges depreciation at the rate of $20 \%$ per annum on the reducing balance basis, with a full year’s depreciation in the year of acquisition and none in the year of disposal. During the year ended 30 September 2005 the asset was sold for $£ 45,000$.

What was the loss on sale of the asset?

$\quad £ 5,000$
$\quad £ 6,200$
$\quad £ 19,000$
$\quad £ 35,000$

CB1004981

Question 343
Flag

The purchase of a business for more than the aggregate of the fair value of its separate identifiable assets less liabilities results in the creation of a:

share premium account
reserve account
suspense account
goodwill account

CB1004982

Question 344
Flag

Q Ltd has a stock turnover of 40 days, debtors’ turnover of 45 days and creditors’ turnover of 47 days. How long, on average, does each $£ 1$ invested in working capital stay tied up?

38 days
$\quad 42$ days
$\quad 85$ days
$\quad 132$ days

CB1004983

Question 345
Flag

Which of the following is NOT a valid ratio for the calculation of return on capital employed?

$\frac{\text { Net profit before tax and interest }}{\text { Share capital + reserves + long term debt }}$
$\quad \frac{\text { Net profit before tax }}{\text { Share capital + reserves }}$
$\frac{\text { Net profit before tax }}{\text { Share capital + reserves + long term debt }}$
$\frac{\text { Net profit before tax and interest }}{\text { Total assets }}$

CB1004984

Question 346
Flag

A company has had a substantial overdraft for several years. When is this loan likely to become repayable in full?

At the end of the period specified in the overdraft facility.
At the bank's discretion.
At the company's discretion.
Never.

CB1004996

Question 347
Flag

A project has an internal rate of return of $12 \%$. It has a positive net present value at $10 \%$. The project will be funded by means of the issue of loan stock, which has already been arranged and to which the company is committed. The finance raised from the loan stock issue will cost $8 \%$ per annum. If the company does not invest in the project then it will invest the proceeds in a financial instrument which carries a rate of return of $6 \%$ per annum. What is the opportunity cost of investing in this project?

6%
8%
10%
12%

CB1004997

Question 348
Flag

Which of the following is the best measure of the cost of retained profits in a business?

Retained earnings are a cost-free source of finance.
The cost of retained earnings is the same as that of the weighted average cost of capital (WACC).
The cost of retained earnings is the same as that of ordinary share capital.
The cost of retained earnings is the same as that of secured loan stock.

CB1004998

Question 349
Flag

Which of the following is the most correct summary of the reasons behind Modigliani and Miller’s argument that capital markets are indifferent to a company’s financial structure?

Tax effects undermine the cost of different sources of finance in different ways.
Shareholders can adjust gearing at minimal cost.
Companies must always follow the optimal gearing strategy in order to attract finance.
Institutional investors can "see through" the effects of different financing strategies.

CB1004999

Question 350
Flag

Which of the following is an economically sound reason for a company to enter into a share repurchase?

Earnings per share tends to be inflated.
Share repurchases can be efficient from a tax point of view.
Share repurchases are a powerful signal of confidence to the stock market.
A repurchase is simpler than increasing the dividend.

CB1005000

Question 351
Flag

Which of the following is the most appropriate basis for determining the required rate of return on a major project being considered by a quoted company?

The company's weighted average cost of capital (WACC).
The interest rate on the bank loan raised in order to finance the project.
A specific rate for the project determined according to the project's total risk.
A specific rate for the project determined according to the project's systematic risk.

CB1005002

Question 352
Flag

An external auditor is preparing the audit report on a company’s financial statements. The auditor believes that the financial statements are potentially misleading unless readers pay close attention to one of the notes to the accounts. Which form of audit report is likely to be most appropriate in these circumstances?

Unqualified opinion.
Unqualified opinion with emphasis of matter.
Qualified opinion.
Disclaimer of opinion.

CB1005009

Question 353
Flag

Which of the following is true of limited liability partnerships (LLPs) in the UK?

They have no separate legal identity.
They are taxed as companies
They are profit seeking ventures
Members have joint and several liability

CB1005011

Question 354
Flag

Who bears the responsibility for the preparation of a company’s financial statements?

The shareholders.
The finance director.
The board of directors.
The external auditor.

CB1005013

Question 355
Flag

Which of the following would NOT be removed from the calculation of a UK company’s accounting profits in order to arrive at the taxable profit for corporation tax purposes?

Overseas earnings.
Franked investment income.
Depreciation.
Entertaining costs and similar expenses that are not allowable for tax.

CB1005014

Question 356
Flag

Finance theory suggests that individuals who own shares often find the tax treatment of capital gains on shares preferable to the tax treatment of a dividend of the same amount. Which of the following is NOT a potential reason for this preference?

Capital gains are not taxed until they are realised.
Income on dividends is typically taxed in its entirety for taxpayers who have income from other sources.
Taxpayers who do not report capital gains are unlikely to be discovered by the authorities.
Capital gains are sometimes adjusted by reliefs that take length of ownership into account.

CB1005018

Question 357
Flag

A company has a low current ratio. Which of the following would best explain why
this is not a matter for concern?

Shareholders are only ever interested in profit.
The current ratio has been high in previous years.
The company has a good credit rating.
The company’s current ratio has always been low.

CB1005019

Question 358
Flag

Which of the following would explain the need to publish a figure for diluted earnings
per share?

There is an active market in traded options on the company’s shares.
The company has convertible loan stock in issue
The company’s profit is declining
The company made a rights issue during the year

CB1005020

Question 359
Flag

A company’s operating profit was £2.5m. Interest paid was £0.3m. Tax was £0.6m. Dividends paid were £1.4m. The company is financed by £10.0m of ordinary shares, £12.4m of reserves and £5.0m of long term loans. To calculate return on capital employed using £27.4m as the figure for capital employed, what figure would be used for return?

£0.8m
£2.2m
£2.5m
£2.8m

CB1005021

Question 360
Flag

Which of the following best explains the need to depreciate buildings, even though their market value may be rising year on year?

Depreciation is an accounting concept.
Buildings have finite useful lives
Historically, buildings have always been depreciated
The depreciation charge is part of the cost structure

CB1005022

Question 361
Flag

Which of the following explains why insurance companies’ financial statements are normally produced in a conservative way?

Insurance companies are naturally conservative institutions
The underlying liabilities are generally both long term and difficult to predict
The asset base is composed largely of long term investments
The tax liability is reduced if profit is depressed

CB1005023

Question 362
Flag

A holding company has a 60% shareholding in a subsidiary. If the subsidiary fails, which of the following would be a valid reason for the holding company to pay the subsidiary’s creditors the amounts owed to them?

Action by the subsidiary’s minority shareholders
Avoid adverse publicity for the group
The holding company is legally obliged to pay
Holding companies routinely guarantee all their subsidiaries’ debts

CB1005024

Question 363
Flag

A company has a very high gross profit margin. Which of the following is the only statement which is definitely true?

The company has a low cost-base.
The company is over-pricing its sales.
The company is highly profitable.
The company makes a large percentage profit from a typical sale.

CB1005025

Question 364
Flag

A shareholder owns 5,000 ordinary shares of 25p, of which 20p per share has been paid. The shares were originally issued at a premium of 15p per share. The company has just gone into liquidation. What is the maximum amount the shareholder would have to pay towards the company’s liabilities?

£250
£1,000
£1,250
£2,000

CB1005026

Question 365
Flag

Investment analysts often base their analysis of profitability on earnings before interest, taxation, depreciation and amortization (EBITDA). Which of the following is NOT a valid reason for using EBITDA in preference to net profit?

It gives an insight into cash generated from operations.
It is more objective than net profit.
It gives a clearer insight into future net profit.
It is more difficult to manipulate than net profit.

CB1005027

Question 366
Flag

It has been suggested that capital markets can motivate directors to maximize the financial performance of their companies. Which of the following is likely to have the most immediate effect on directors motivation?

Companies with poor performance might pay more interest on new borrowings.
Poor performance can lead to lower credit ratings.
All companies are in competition for limited investment funds.
Declining share price makes the company vulnerable to takeover.

CB1005028

Question 367
Flag

Bank overdrafts can remain outstanding for many years. When does a bank overdraft normally become repayable?

At the request of the bank.
At the conclusion of the term agreed when the overdraft facility was first granted.
After five years.
When the company's gearing ratio exceeds agreed limits.

CB1005029

Question 368
Flag

A limited liability partnership (LLP) was founded by four members, but subsequently admitted two additional partners. The partnership has become insolvent and has been wound up owing net debts of £600,000. What is the personal liability of T, one of the founder partners?

nil
£100,000
£150,000
£600,000

CB1005030

Question 369
Flag

A company is considering raising a loan, which would increase the company’s gearing ratio to a significant level, rather than issuing equity. In which of the following situations would such a decision be most appropriate?

Interest rates are low.
The company owns valuable land and buildings that can be pledged as security.
The company's operating revenues and costs are relatively stable.
The company has a good relationship with its principal lender.

CB1005032

Question 370
Flag

A company evaluates all potential investment projects by ensuring that the internal rate of return exceeds the company’s weighted average cost of capital. Which of the following reasons is the soundest justification for such a policy?

Rejects unacceptable proposals.
Incorporates stock market sentiments.
Most consistent with finance theory.
Provides a simple decision rule.

CB1005034

Question 371
Flag

Which of the following is not required by Companies Act 2013 disclosure requirements for all the companies?

Balance sheet
Profit and loss account
Cash flow statement
Directors report

CB1005037

Question 372
Flag

A company’s balance sheet excludes the value of a major patent that was registered after a research breakthrough by its own employees. Which of the following accounting concepts best justifies the exclusion of this patent?

Money measurement
Going concern
Business entity
Realisation

CB1005038

Question 373
Flag

Company B has 1,000 shares in issue. An investment bank holds 999 of these. The remaining share is held by Company A. Company A’s share is in a special category that carries 51% of the voting rights. Which of the following best describes the relationship between Company A and Company B for consolidation purposes?

The relationship is immaterial
Company B is an investment of Company A
Company B is an associate of Company A
Company B is a subsidiary of Company A

CB1005040

Question 374
Flag

Which of the following problems is most likely to be overlooked by a ratio analysis of a company’s financial statements?

Poor profitability
Liquidity problems
High gearing
Substantial contingent liabilities

CB1005075

Question 375
Flag

ABC Ltd started trading on 1 January 2005 and has a gross profit margin of 24%. It made sales of £184,650 during the year to 31 December 2005 and made purchases of £178,600.What is ABC Ltd’s closing stock?

£38,266
£40,316
£138,488
£142,334

CB1005076

Question 376
Flag

If the auditor of a company cannot obtain sufficient evidence to give an opinion on whether or not the company s financial statements give a true and fair view, the auditor should issue:

an adverse opinion
a disclaimer of opinion
an unqualified opinion, but include a reference to this matter in the audit report
an unqualified opinion

CB1005077

Question 377
Flag

Agency theory identifies certain types of cost as agency costs:
I – Directors salaries
II – Directors bonuses
III- The auditors’ fees
IV – Employees’ pay rise
Which of the above would be an agency cost

I and II only
I, II and III only
II and III only
All of the above

CB1005078

Question 378
Flag

Which of the following is NOT true of Eurobonds?

They are issued in Euros
They can be issued by a company or government
They are traded through banks
They are international bonds.

CB1005079

Question 379
Flag

Project XYZ requires an initial cash outlay of £50m. It was initially believed that this investment would create cash inflows of £16m in each of the following three years, and £12m in each of the next two years, after which the project would be complete. The payback period and internal rate of return of the project were calculated for the project. A further review of project cash flows indicated that the final cash flow in year five had been overestimated, and would probably be only £4m. What effect would this have on the two calculations?

Payback period would remain unchanged and IRR would decrease.
Payback period would remain unchanged and IRR would increase.
Payback period would increase and IRR would decrease.
Payback period would increase and IRR would increase.

CB1005081

Question 380
Flag

A business made a loss during the financial year just ended but has more cash at the end of the year than it did at the beginning. Which of the following could be a reason for this?

Dividends were lower this year than last year.
Some fixed assets were sold during the year.
Debtors took longer to pay this year than last.
Creditors were lower at the end of this year.

CB1005082

Question 381
Flag

Which of the following is NOT true in relation to company taxation?

Interest payments are tax deductible
Capital allowances are added to the company s accounting profit.
Lease of plant and equipment attracts tax relief.
Companies with overseas income may be able to offset tax paid overseas against their liability to UK corporation tax.

CB1005083

Question 382
Flag

Which of the following is a component of the weighted average cost of capital (WACC)?

Cost of debt
Cost of equity
Both A and B
None of the above

CB1005084

Question 383
Flag

If a project has the same degree of systematic risk as the company’s existing projects, which discount rate should be used to value the project?

The company's WACC
A higher rate than the WACC
A lower rate than the WACC
None of the above

CB1005085

Question 384
Flag

A company has a high return on capital employed but a low gross profit percentage. Which of the following is the best interpretation of these results?

The company is profitable because it prices its sales aggressively.
The company should increase its selling prices.
The company is unprofitable despite a high return on capital employed.
Gross profit is a very straightforward measure, so the company should disregard the return on capital employed.

CB1005086

Question 385
Flag

Which of the following is NOT a way to mitigate risk in a capital project?

Avoiding the risk
Reducing the risk
Transferring the risk
Ignoring the risk

CB1005087

Question 386
Flag

What is the aim of Risk mitigation strategies?

To reduce the probability of risk event occurring
To reduce the financial impact of risk event
Both A and B
None of the above

CB1005088

Question 387
Flag

A company has a high price earnings (P/E) ratio. Which of the following is the most likely explanation for this?

The current share price is too high.
The current share price is too low.
If the directors could increase reported earnings then the share price would be even higher.
The stock market is confident in the company.

CB1005089

Question 388
Flag

Which of the following is NOT a step in effective risk identification for a capital project?

Holding a brainstorming session
Carrying out a desktop analysis
Setting out identified risks in a risk register
Ignoring unlikely risks

CB1005090

Question 389
Flag

What is the purpose of a risk matrix in capital project appraisal

To identify risks
To mitigate risks
To calculate the WACC
Both A and B

CB1005091

Question 390
Flag

A company’s board of directors is considering an approach by a competitor who wishes to offer the shareholders an attractive price for their shares so that it can take the business over. Which of the following responses is most compatible with agency theory?

The directors will probably recommend the acceptance of the offer because it will maximise the shareholders’ wealth.
The directors will probably recommend the rejection of the offer because it would threaten their job security.
The directors will probably recommend the rejection of the offer because they have no desire to maximise the wealth of a competitor’s shareholders.
The directors will probably recommend the acceptance of the offer because the amount offered is greater than that set by market forces.

CB1005092

Question 391
Flag

Which of the following is NOT a cause of risk that can be included in a risk matrix?

Political
Economic
Project-specific
Diversifiable

CB1005093

Question 392
Flag

A company is planning to issue subordinated bonds. What rate of interest will have to be offered on them relative to that on the company’s existing debt?

zero interest
lower than existing debt
the same as existing debt
higher than existing debt

CB1005094

Question 393
Flag

Which of the following is a systematic risk that cannot be diversified away?

Inflation risk
Construction risk
Credit risk
Operational risk

CB1005095

Question 394
Flag

What is the purpose of using certainty equivalents in capital project appraisal?

To calculate the WACC
To identify risks
To mitigate risks
To adjust for risk in cash flow projections

CB1005096

Question 395
Flag

Which of the following is a way to mitigate risk in a capital project?

Transferring risk through insurance
Sharing risk with another party
Reducing uncertainty through further research
All of the above

CB1005097

Question 396
Flag

A company has 500,000 warrants outstanding with a strike price of £2.00. The current share price is £1.90. The warrants are about to expire. How much money is the company likely to receive from the exercise of these warrants?

nil
£50,000
£950,000
£1,000,000

CB1005098

Question 397
Flag

Which factor would suggest a higher value for beta should be used for a project?

Low cyclicality
Low operating leverage
High cyclicality
Low fixed costs

CB1005099

Question 398
Flag

What is the purpose of using the capital asset pricing model (CAPM) in capital project appraisal?

To calculate the WACC
To estimate the required rate of return for a project
To identify risks
To mitigate risks

CB1005100

Question 399
Flag

Which of the following is a potential issue with using different discount rates for different projects within a company?

It can lead to internal friction
It can lead to incorrect acceptance of risky projects
It can lead to incorrect rejection of low-risk projects
All of the above

CB1005101

Question 400
Flag

What is the purpose of a risk register in capital project appraisal?

To only identify risks
To only mitigate risks
To document identified risks and their characteristics
To calculate the WACC

CB1005102

Question 401
Flag

Which of the following is a potential issue with using a very high discount rate in capital project appraisal?

It can lead to incorrect acceptance of risky projects
It can lead to incorrect rejection of low-risk projects
It can distort the relative weights placed on short-term and long-term cash flows
All of the above

CB1005103

Question 402
Flag

A project has a positive net present value when the cash flows are discounted at 10%. The project has two internal rates of return of 8% and 15%. What is the most likely explanation for this set of figures?

The project should be accepted if the required rate of return is more than 8%
The project should be accepted if the required rate of return is more than 15%.
The project should be accepted if the required rate of return is between 8% and 15%.
The project should be accepted if the required rate of return is less than 8% or more than 15%.

CB1005104

Question 403
Flag

Which of the following is a potential benefit of diversifying a company’s portfolio by undertaking multiple projects?

Reducing the volatility of portfolio returns
Increasing the expected return
Both A and B
None of the above

CB1005105

Question 404
Flag

To whom does the external auditor report?

users of financial statements
the shareholders
providers of finance
shareholders and regulatory bodies

CB1005106

Question 405
Flag

Which of the following is a specific risk that can be diversified away by investing in a well-diversified portfolio?

Interest rate risk
Weather risk for a construction project
Inflation risk
Currency risk

CB1005107

Question 406
Flag

Which of the following is a potential issue with using a single discount rate for all projects within a company?

It can lead to internal friction
It can lead to incorrect acceptance of risky projects
It can lead to incorrect rejection of low-risk projects
All of the above

CB1005108

Question 407
Flag

Which of the following is a potential advantage of using certainty equivalents in capital project appraisal?

It simplifies the analysis by using a uniform discount rate
It reduces the need for risk analysis
It eliminates the need for risk mitigation
All of the above

CB1005109

Question 408
Flag

A company has 2,000,000 ordinary shares of £1 in issue. The current market price is £4.00 per share. The directors are about to make a scrip issue of 500,000 shares. What is the expected market price per share after the scrip issue?

£0.80
£1.00
£3.20
£4.00

CB1005110

Question 409
Flag

The WACC represents the rate of return that should be used to discount the future cash flows generated by a company’s projects.

True
False

CB1005111

Question 410
Flag

If a project has a higher degree of systematic risk than the company’s existing projects, the discount rate used should be lower than the company’s WACC.

True
False

CB1005112

Question 411
Flag

Certainty equivalents replace individual risky projected cash flows with their risk-adjusted values, which can then be discounted at the risk-free rate.

True
False

CB1005113

Question 412
Flag

Using the same discount rate to evaluate all projects, regardless of risk differences, will lead to optimal capital budgeting decisions.

True
False

CB1005114

Question 413
Flag

The WACC is calculated as a weighted average of the cost of _________ and the cost of _________, weighted by their respective market values.

Debt and equity.
Equity and liquidity.
Debt and debentures
Debentures and Shares.

CB1005115

Question 414
Flag

If a project has a _________ degree of systematic risk than the company’s existing projects, the discount rate used should be adjusted upwards.

Lower
Mediocre
Higher
None of the above

CB1005116

Question 415
Flag

A _________ can be used to systematically identify risks in a capital project, categorized by cause of risk and stage of the project.

Risk portfolio
Risk matrix
Risk square
None of the above

CB1005117

Question 416
Flag

The ______ represents the rate of return a company must achieve on its projects to leave the investors no better or worse off, this rate would not necessarily satisfy the investor.

Simple average of Cost of capital
Harmonic cost of cost of capital
Required rate of return
Weighted average cost of capital

CB1005118

Question 417
Flag

Risk ______ strategies aim to reduce either the probability a risk event occurs, the financial impact if it does occur, or both.

Impact
Frequency
Causation
Mitigation

CB1005119

Question 418
Flag

Assertion: The weighted average cost of capital (WACC) is an appropriate discount rate for a project with the same risk profile as the company’s typical project.
Reasoning: The WACC represents the blended cost of the company’s debt and equity financing and thus the return that must be earned to satisfy suppliers of capital.

Both Assertion and Reasoning are true and Reasoning is the correct explanation for Assertion.
Both Assertion and Reasoning are true but Reasoning is not the correct explanation of Assertion.
Assertion is true but Reasoning is false.
Assertion is false but Reasoning is true.

CB1005120

Question 419
Flag

Assertion: A project’s beta measures its systematic risk exposure.
Reasoning: Higher beta projects are more sensitive to broad market movements and therefore have higher systematic risk based on the CAPM framework.

Both Assertion and Reasoning are true and Reasoning is the correct explanation for Assertion.
Both Assertion and Reasoning are true but Reasoning is not the correct explanation of Assertion.
Assertion is true but Reasoning is false.
Assertion is false but Reasoning is true.

CB1005121

Question 420
Flag

A company’s debentures have a face value of £1,000 and a market price of £900. Which of the following is NOT a potentially valid explanation for this difference?

The debentures are close to redemption.
The markets lack confidence in the company.
The interest rates available on similar instruments are higher than the debenture coupon rate.
The debentures were issued at a discount with an artificially low coupon rate

CB1005122

Question 421
Flag

Assertion: Diversification can eliminate a project’s exposure to systematic risk factors.
Reasoning: Investing in a broad portfolio of projects, including the same type multiple times, will diversify away systematic risk.

Both Assertion and Reasoning are true and Reasoning is the correct explanation for Assertion.
Both Assertion and Reasoning are true but Reasoning is not the correct explanation of Assertion.
Assertion is true but Reasoning is false.
Both Assertion and reasoning are false

CB1005123

Question 422
Flag

Assertion: Risk mitigation efforts focus on reducing either the likelihood a risk event happens, the severity of impact if it does happen, or both.
Reasoning: The cost of implementing a risk mitigation strategy will typically increase a project’s expected NPV.

Both Assertion and Reasoning are true and Reasoning is the correct explanation for Assertion.
Both Assertion and Reasoning are true but Reasoning is not the correct explanation of Assertion.
Assertion is true but Reasoning is false.
Assertion is false but Reasoning is true.

CB1005124

Question 423
Flag

Assertion: A positive NPV project, discounted at the company’s WACC, will increase shareholder value.
Reasoning: The project’s expected return exceeds the cost of capital, given its risk profile, and therefore creates value.

Both Assertion and Reasoning are true and Reasoning is the correct explanation for Assertion.
Both Assertion and Reasoning are true but Reasoning is not the correct explanation of Assertion.
Assertion is true but Reasoning is false.
Assertion is false but Reasoning is true.

CB1005130

Question 424
Flag

Which of the following best explains why an excessively high current ratio is undesirable?

the business might run out of cash
too much cash will encourage overspending
there is a cost associated with holding assets that do not generate a return
too much working capital will lead to calls for higher dividends

CB1005181

Question 425
Flag

A company’s shares are trading at 20p on the open market. The shares have a par value of 25p. The directors wish to raise additional share capital, but have been told that this would be impossible at the moment. Why is the company unable to issue fresh shares?

the company is obviously out of favor with the market
the directors would have to offer too big a discount on the sale
companies are not permitted to sell shares at a discount to their par value
issuing shares when the price is depressed would dilute shareholders’ holdings

CB1005182

Question 426
Flag

A company has ordinary shares and preference shares in issue. If the company is wound up, how would the funds released from the liquidation be distributed?

to all providers of finance in proportion to their holdings
to lenders first, then to all shareholders
to lenders first, then to preference shareholders, then to ordinary shareholders
to preference shareholders, then to lenders, then to ordinary shareholders

CB1005194

Question 427
Flag

Which of the following best describes the purpose of margin payments associated with futures contracts?

to ensure that there can be never be any default in a contract
to offset the clearing house’s exposure to defaults
to remind the parties to the contract of their potential exposure
to keep track of gains and losses on contracts

CB1005196

Question 428
Flag

A company issued 1m shares by tender. The tender offers received were as follows:
> 500,000 at £1.00
> 400,000 at £1.20
> 250,000 at £1.30
How much would you expect this issue to raise?

£1,000,000
£1,155,000
£1,200,000
£1,300,000

CB1005198

Question 429
Flag

A company wishes to raise additional funds. Which of the following is most likely to reduce the company’s weighted average cost of capital?

debenture stock
ordinary shares
preference shares
subordinated loan stock

CB1005199

Question 430
Flag

Which of the following best explains why a company might borrow cash in order to maintain its dividend payments after a bad year?

the company will be able to obtain tax relief on the loan interest
shareholders with a particular set of tax circumstances are attracted to companies that provide income rather than capital gains
the directors are concerned with maintaining the shareholders’ wealth
shareholders might overreact to a reduction or suspension of the dividend payment

CB1005200

Question 431
Flag

A project has a very short payback period but a negative net present value. Which of the following best describes the action that should be taken?

the project should be accepted
the project should be rejected
the project should be accepted only if the company has limited funds for investment
the project should be accepted only if it is necessary for some other reason, such as meeting mandatory health and safety requirements.

CB1005206

Question 432
Flag

A company has 5m ordinary shares in existence and 2m 7% convertible preference shares. Both categories of shares have a par value of 25p. The convertible shares can be exchanged for ordinary shares on a 1 for 1 basis. The company’s net profit was £800,000. What is the company’s diluted earnings per share?

10.9p
11.4p
15.3p
16.0p

CB1005262

Question 433
Flag

A company’s ordinary shares have a nominal value of 25p. The current market price of a share is 90p. The directors are planning to issue new shares. Which of the following statements best describes the restrictions on the issue price for the new shares?

The directors are not permitted to issue the shares for less than 25p or for more than 90p.
The directors are not permitted to issue the shares for less than 25p and are unlikely to be able to sell them for more than 90p.
The directors are not permitted to issue the shares for more than 90p, but can sell them for any amount below that.
The directors are not permitted to sell the shares for less than 90p.

CB1005264

Question 434
Flag

A company renews its bank overdraft facility in September of every year and last renewed it in September 2008. The company went overdrawn in February 2009 by an amount that was less than the overdraft facility. The finance director gave the bank manager a cash forecast that indicates that the overdraft is likely to be repaid in June 2009.
Which of the following is the earliest that the bank would be permitted to demand settlement of the amount borrowed on overdraft?

immediately
June 2009
September 2009
never, so long as the company remains within agreed overdraft limits

CB1005265

Question 435
Flag

A UK manufacturing company has entered into a futures contract that requires it to deliver an agreed sum of dollar US to a counterparty at an agreed date in the future. Which of the following best describes the likely impact on the manufacturing company’s margin on the contract if the value of the dollar US rises against the company’s home currency?

Some of the margin paid to date will be returned to the company.
The margin will remain unchanged.
An additional margin will have to be deposited by the manufacturing company.
The margin will have to be renegotiated between the two parties to the contract.

CB1005266

Question 436
Flag

An actuarial consultancy is due to receive a substantial payment in dollar US from an
overseas client on 31 July 2009. It has decided to purchase an option to protect itself
from fluctuations in the value of the dollar US. Which of the following attributes is the
most important aspect of the option contract?

It should be an American option.
It should be a European option
It should be a call option to buy dollars.
It should be a put option to sell dollars.

CB1005270

Question 437
Flag

Which of the following is a realistic “worst case” scenario for an issuing house that
has underwritten a share issue?

There are no risks associated with underwriting share issues.
The underwriter may not receive the agreed fee in full.
The underwriter may have to purchase some shares and either hold them or resell them at a loss.
The underwriter may be exposed to a potentially unrestricted loss.

CB1005271

Question 438
Flag

Which of the following is NOT a potentially valid interpretation of the fact that the
creditors’ turnover period based on figures from a company’s annual report is very
rapid?

The company wishes to maintain an excellent relationship with its suppliers.
There are limitations in the relevance of the figures in the annual report.
The company is having difficulty in obtaining trade credit.
The company has no liquidity problems.

CB1005275

Question 439
Flag

A company has asked a potential supplier to provide trade credit and has submitted its
most recent set of audited financial statements to demonstrate its liquidity position.
Which of the following is the most likely limitation of the financial statements for this
purpose?

It is impossible to assess liquidity from published financial statements.
The statements are liable to have been distorted.
The statements have been prepared by the directors and lack credibility.
The statements will be out of date for this purpose.

CB1005276

Question 440
Flag

Which of the following is likely to cause the greatest concern for a shareholder who
wishes to analyse the liquidity position of a company?

an increasing current ratio
an increasing quick ratio
a declining current ratio
a declining quick ratio

CB1005279

Question 441
Flag

Which of the following best describes the responsibility of an external auditor?

to express an opinion on the financial statements
to certify the accuracy of the financial statements
to eliminate agency problems
to express an opinion on corporate governance matters

CB1005281

Question 442
Flag

A company has inventories of £500,000, trade receivables of £600,000, a bank
overdraft of £200,000 and trade payables of £450,000. What is the company’s quick
ratio?

0.8:1
0.9:1
1.3:1
1.7:1

CB1005286

Question 443
Flag

While valuing the assets of insurance companies for solvency purpose, regulators stipulate
that the fair value change (if positive) is taken as zero. This is an example of concept of

Materiality
Prudence
Matching
Accruals

CB1005289

Question 444
Flag

Beyond budgeting implies:

Approach where each activity is re-evaluated each time a budget is produced.
Approach where actuals results always exceeding budgeted results.
Approach which compares various units of business based on actual results.
Approach which starts with unit level and builds up to organization level

CB1005290

Question 445
Flag

Which of the following is not a problem with forecasting?

There is no major change in external environment / company specific issues in the future year.
Availability of unsuitable data for forecasting.
Entry of new competitor unexpectedly into the market with disruptive technology.
Inflation and sales revenue are correlated from the data observed.

CB1005292

Question 446
Flag

Preference shares are generally considered as being more like debt than equity. Which of
the following appropriately explains this?

The tax treatment of preference dividends
The marketability of preference shares
The fixed nature of participation in profits
The ability to make capital gains or losses

CB1005294

Question 447
Flag

Which of the following statements is NOT true about Internal Rate of Return (IRR) method
of project appraisal

IRR may give multiple solutions.
IRR is less popular than Net Present Value as a measure of project worth
IRR has the benefit of highlighting the return achieved by the project.
IRR is the most reliable means of choosing between mutually exclusive projects.

CB1005296

Question 448
Flag

Value of Options increases with:

Volatility of share price
Uncertainty of interest rate
Relativity of share price
Risk

CB1005297

Question 449
Flag

Which of the following investors in the derivatives market may find that the contract (they
have entered into) is a liability at expiry?
I. Buyer of a call option
II. Writer of a put option
III.Buyer of a put option

I only
II only
III only
I and III

CB1005298

Question 450
Flag

A Zero Coupon bond:

Does not earn interest on the money invested.
Is issued at a discount and redeemed at par.
Earns interest at regular intervals
None of the above.

CB1005331

Question 451
Flag

The distinction between an American Option and European Option is that

Under American Option right can be exercised at any time while European right can be exercised on a specific date
Under American Option right can be exercised on a specific date while European right can be exercised at any time
Under both the options rights can be exercised only at a specific time
Under both the options rights can be exercised on any date

CB1005332

Question 452
Flag

Peer to Peer Lending is a type of

Shadow Banking
Project Financing
Non-Recourse Financing
Crowdfunding

CB1005333

Question 453
Flag

Recognition of a lease as a finance lease as opposed to an operating lease by the lessee will
most likely result in a higher:

Debt‐to‐assets ratio
Return on assets
Current ratio
Acid Test Ratio

CB1005334

Question 454
Flag

Statement 1: Apart from normal dividends, cumulative preference shares get an additional
dividend if the company’s profits exceed a pre-specified level.

Statement 2: From the investor’s perspective, callable common shares are more risky than
puttable common shares.

Which of the following is most likely?

Only Statement 1 is incorrect.
Only Statement 2 is incorrect
Both statements are correct.
Both Statements are incorrect

CB1005335

Question 455
Flag

How might the interest of the company’s management be NOT aligned with those of
shareholders

Linking the management remuneration to the company’s earning
Linking the management remuneration to the company’s share price
Linking the management bonus to the company’s share price
Linking the management bonus to the company’s Credit Rating

CB1005336

Question 456
Flag

A health insurance company allows an inward and outward reinsurance in its business. Which
amongst the following in revenue account will be directly impacted.

Net Earned Premium
Net Incurred Claims
Share Capital
Option (A) and (B)

CB1005338

Question 457
Flag

Which of the option is correct using as an approach to forecasting?

Time series analysis.
Seeking an expert's opinion
Delphi technique
All of the above

CB1005339

Question 458
Flag

The cash-flow position can be improved by?

Deferring trade receivables payments
Fast payment of trade payables
Disposing of an asset
All of the above

CB1005340

Question 459
Flag

A company has INR 500,000 line of credit at 10.0% pa with a 1.0% pa commitment fee on
the full amount available. The company draws down INR 100,000 for 6 months. The annual
financing cost of this arrangement is:

7.5%
15.0%
12.5%
10.0%

CB1005341

Question 460
Flag

Which of the following is not true about taxation in India?

Indian Income Tax laws tax individuals as per different slab rates of income.
Goods and Services Tax (GST) became effective in 2017.
Long term capital gains are taxed.
Insurance companies are exempt from taxation

CB1005342

Question 461
Flag

Which of the following best describes the possibility of an agency relationship between
company directors and debenture holders?

There is no agency relationship because the debenture holders are protected by the terms of their debenture
The directors could indulge in risky behavior that threatens the value of the debenture holders’ stake in the company.
The debenture holders do not appoint the directors and so the directors are not the debenture holders’ agents.
The debenture holders bear exactly the same agency risks as the shareholders.

CB1005343

Question 462
Flag

A project that has been under review for some time has been modified so that the cash
receipts will remain the same, but their timing will be brought forward throughout the length
of the project. How will this affect the project’s internal rate of return and net present value
(using a positive risk discount rate)?

The internal rate of return and net present value will both decrease.
The internal rate of return and net present value will both increase
The internal rate of return will increase and the net present value will decrease
The internal rate of return will decrease and the net present value will increase.

CB1005344

Question 463
Flag

India Pvt. Ltd. has 2 lakh shares outstanding priced at Rs.50 a share. A rights issue will allow
one share to be purchased for every five shares currently held by shareholders for Rs.30
each. Which of the following will be true post the rights issue?

The number of shares outstanding will fall to 16 million.
The firm will raise Rs.15 lakhs.
The stock price will fall to Rs.46.67
The company’s total value will decrease to Rs.88 lakhs

CB1005345

Question 464
Flag

Which accounting ratio is generally not used to measure profitability?

Profit Margin
Asset Utilization Ratio
Quick Ratio
Return on Capital employed

CB1005376

Question 465
Flag

Cost of equity is

The risk free rate plus equity risk premium
The opportunity cost of capital
One of the determinants of weighted average cost of capital
All of the above

CB1005377

Question 466
Flag

What is the primary goal of the financial manager of an organization?

To avoid volatility in returns
To increase the market value of each shareholder’s stake
To comply with various internal and regulatory requirements
To maximize dividend payouts

CB1005382

Question 467
Flag

An Australian company entered into a futures contract to exchange Australian dollars for
one million US dollars on 31 December 2017. Which of the following will happen if the US
dollar strengthens against the Australian dollar?

The Australian company will have to pay an additional margin to the counterparty
The Australian company will have to pay an additional margin to the futures clearing house
The Australian company will receive a partial refund of its margin payment from the counterparty
The Australian company will receive a partial refund of its margin payment from the futures clearing house.

CB1005383

Question 468
Flag

Company X based in the UK has an overseas subsidiary, which makes gross profits of Rs 10m. These profits are taxed at 15% tax in the overseas territory. Assuming that the corporation tax rate is 20% in the UK and that a double taxation agreement is in force with the overseas territory, Company X will have to pay:

No further tax on the £8.5m profit net of tax.
A further 5% tax on the £10m gross profits
A further 5% tax on the £8.5m profits net of tax.
A further 20% tax on the £10m gross profits

CB1005384

Question 469
Flag

Which one of the following is the correct formula for the price earnings ratio?

Market price of share/ Earning per share
Issue price of share/ Earning per share
Market price of share* Earning per share
Issue price of share* Earning per share

CB1005385

Question 470
Flag

While calculating Inventory turnover period, Inventories include

Finished goods
Work-in-progress
Raw material
All of the above

CB1005387

Question 471
Flag

Which of the following leases would least likely be classified as an operating lease by the
lessee?

The lease term is 5 years and the economic life of the leased asset is 8 years.
Ownership of the leased asset reverts to the lessor at the end of the lease term.
The agreement permits the lessee to buy the leased asset for one rupee at the end of the lease term
The fair value of the leased asset is Rupees 20 million and the present value of the lease payments is Rupees 13 million

CB1005389

Question 472
Flag

The following figures are given for A Ltd.
Cost of debt = 12%
Cost of equity = 18%
Value of debt = 2 lakhs
Value of equity = 2 lakhs
Find the cost of capital and changed cost of capital if debt equity proportion changes to 3: 1 assuming that beta does not change.

15% and 13.5%
15% and 16.5%
15% and 15%
16% and 16%

CB1005393

Question 473
Flag

Why is accounting profit not a true measure of shareholder value in life insurance
business?

As insurance products are long-term in nature, profits are expected to emerge over the entire lifetime of policies.
The figures are likely to be based on historical costs
The figures are likely to be manipulated by creative accounting.
All of the above

CB1005396

Question 474
Flag

Which of these can be classified as a systemic risk?

Bond defaults in the company’s asset portfolio
Demonetization
Reputational damage / bad publicity
High operating costs

CB1005397

Question 475
Flag

Which of the following could cause a company’s earnings per share figure to be diluted?

A decline in revenues
A loss on the revaluation of an asset
The correction of an accounting estimate
The issue of a convertible bond

CB1005401

Question 476
Flag

Groupon is a holding company that has two subsidiaries, ABC and XYZ. During the year,
Groupon recorded sales of Rs 10 crores, including sales of Rs 2 crores to ABC. ABC
recorded sales of Rs 5 crores, including sales of Rs 3 crores to XYZ. XYZ recorded sales
of Rs 4 crores including sales of Rs1.5 crores to Groupon.
What is the value of the total group sales of Groupon?

10 crores
8 crores
12.5 crores
19 crores

CB1005438

Question 477
Flag

Why does tax legislation not usually allow depreciation recorded in the books as an
expense, but grants capital allowances instead for companies?

The tax structure is based on cashflow concept and not accrual basis of accounting.
To bring consistency in tax assessment for all companies, it is important to grant capital allowances in a consistently defined way.
Tax legislation does not cover expenses which are only estimated, such as depreciation
The Tax regulations do not consider depreciation as a revenue item available for deduction

CB1005439

Question 478
Flag

Which of the following best explains why a falling share price is thought to impose some
discipline on weak directors of a company?

The shareholders and other investors will withdraw their money from the company
The cost of capital will go up.
The value of share options held by directors will decline
The company will be vulnerable to a take-over.

CB1005440

Question 479
Flag

ABC Ltd has 1,00,000 shares outstanding at a price of Rs 120 per share. A rights issue will
allow 1 share for every 5 currently held by the shareholders for Rs 90 each. Which of the
following is true?

The share price will fall to Rs 115 per share
The company’s total value will decrease to Rs 11,000,000
The firm will raise Rs 9,00,000
The number of shares outstanding will fall to 90,000

CB1005485

Question 480
Flag

A company purchased an item of inventory for Rs 1500 and sold it for Rs 2000. Due to
rising prices, the inventory item’s replacement cost is Rs 2100. Which of the following
statements best describes the impact of the sale and replacement of this inventory?

The company will recognize a loss of Rs 100 under historical cost accounting, and has suffered a real loss of Rs 100
The company will recognize a loss of Rs 100 under historical cost accounting, and has made a real profit of Rs 500
The company will recognize a profit of Rs 500 under historical cost accounting, and has suffered a real loss of Rs 100.
The company will recognize a profit of Rs 500 under historical cost accounting, and has made a real profit of Rs 500.

CB1005488

Question 481
Flag

Which of the following is true regarding underwriting a security?
I. Underwriting means the financial intermediaries arrange to sell securities to the public
or to other institutions for a fee
II. The underwriters agree to take up any securities not sold at the pre-agreed price.
III. Underwriting assures the entity requiring funds that the full amount of money sought
will be obtained.
IV. It creates confidence in the securities being issued.

I,II,III
II,III
II,III,IV
All of the above

CB1005489

Question 482
Flag

A Company has issued the following:
I. Subordinated Loan stock
II. Ordinary Shares
III. Preference Shares
IV. Floating Charge Debentures
State the order of priority in the event of winding up of the business.

I,IV,III,II
IV,I,III,II
IV,I,II,III
I,IV,II,III

CB1005491

Question 483
Flag

A project having a life of one year is started with initial investment of 100 lakhs with 10%
cost of capital. It’s NPV and IRR is found to be 10 lakhs and 21%. If cost of capital is
changed to 11% then which of the following is true?

NPV = 9 Lakhs and IRR = 21%
NPV = 10 Lakhs and IRR = 23%

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