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Finance & Banking Fund

Practice Test 1 - Set2 - Solution (Last


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Sameer is an investor who has three options. Which one should he choose?
1 A) Lend to a borrower who is willing to pay compound interest of 12%.
B) Buy property which will give a CAGR of 12%
Option 1 Both are the same
Option 2 (A)
Option 3 (B)
Option 4 Can't say as the investment amount is not given.

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

A company's sales revenue becomes five times, of what it was 4 years ago.
2 Calculate the CAGR for sales revenue of this company. What will happen to this
CAGR, if the revenue becomes 6.5 times of year 1, in the next year?
Option 1 49.53%, CAGR will decrease in the next year
Option 2 78.98%, CAGR will increase in the next year
Option 3 78.98% CAGR will decrease in the next year
Option 4 49.53% CAGR will increase in the next year

CAGR = (Final value/Initial value)1/n - 1.


= 5^(1/4) - 1
Solution = 49.53%.
In the 6th year CAGR will be = 6.5^(1/5) -1 = 43.09%
Hence, CAGR has decreased.

Anand has an FD which is yielding an annual interest of 8.5%. Now he is


planning to liquidate this FD and invest this money into a business which will
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also give him an expected return of 8.5%. Calculate the NPV and IRR for the
new project.
NPV=0
Option 1
IRR = 8.5%
NPV=1
Option 2
IRR = 8.5%
NPV=-1
Option 3
IRR = 4.25%
Option 4 Data insufficient
Anand is earning as much in his new business, as he was earning with his FD.
So the returns are equal to the comparison rate. Hence, NPV would be 0.
Solution
Also, IRR is that rate of interest at which NPV is equal to zero, hence in this
case IRR would be 8.5%.

The following data relates to three independent investment projects:

Assume a 10 percent required rate of return and rank these projects according
to Net Present value.
Option 1 A, C, B
Option 2 C, B, A
Option 3 A, B, C
Option 4 B, C, A

Year

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

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


Cilon Exporters in India are expecting a payment from a US client of USD 10
5
million. What are the risks that the company is facing?
Option 1 Operational Risk
Option 2 Credit Risk
Option 3 Market Risk
Option 4 Both b and c

The correct answer is option d. Cilon Exporters face both - credit risk (US client
Solution may default on the payment) and market risk (INR may appreciate against
USD).

Sumit wants to invest in an option in which risk is minimum. Which of the


following options should he choose?
A) Investment in shares of a company.
B) Investment in shares of different companies, in the same sector.
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C) Investment in shares of different companies, in different related sectors
(e.g. automotive and steel).
D) Investments in shares of different companies, in different sectors, which are
not co-related.
Option 1 Only (D)
Option 2 Both (A) & (D)
Option 3 Only (A)
Option 4 Only ( C )

Risk is specific to a particular industry/company. So, in order to diversify the


risk one should choose stocks of companies which are not correlated to each
Solution other.
If that be the case, the performance of one stock will not affect the other,
hence risk will be minimum.

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

Option 1 The amount of premium he would be paying for buying the options.
Option 2 The probability of the loss he may suffer.
Option 3 The amount he is investing.
Option 4 The amount of loss he may suffer
For measuring the risk, two most important things to be considered are :
The quantum (amount) of loss one may suffer, and
the probability of occurrence of such loss.
Solution
These two factors will help in deciding whether the premium paid for the
options is justified.

Hence,three of the given options are important for making this decision.

Mamta Steels has bought machinery for INR 5 crores in April, 2004. This
machine was intended to be utilized for 10 years in production. Also, the
salvage value for this machine after 10 years was estimated at INR 10 lakh, at
8
the time of purchase.
Calculate the amount of depreciation charged and amount considered under
the assets heading, for the year ending March, 2015.
Assets - 10 lakh
Option 1
Depreciation - 0 cr.
Assets - 10 cr.
Option 2
Depreciation - 1 cr.
Assets - 10 cr
Option 3
Depreciation - 1 lakh
Assets -1 cr
Option 4
Depreciation - 1 lakh

Since, the machine has completed 10 years, from next year onwards - that is,
2015 onwards - there will be no depreciation charged on this machine.
Solution

The salvage value will be considered in the assets of the company.

Rohit has an account with YMC bank. The bank pays the monthly interest on
9 the deposits, to his account on 1st April, 2014. What would be the accounting
entries in the books of the bank?
Rohit's account will be credited.
Option 1
Interest expense account will be debited.
Rohit's account will be credited.
Option 2
Cash account will be debited.
Rohit's account will be debited.
Option 3
Interest expense account will be credited.
Rohit's account will be debited.
Option 4
Cash account will be credited.

The account of Rohit with the bank will get credited as liabilities are increasing
for the bank.
Solution Interest expense account will be debited as expenses have increased for the
bank.
As, there is no transaction of cash account will not be affected.
Amanthar Co. has made plans for the next year to employ total assets of INR
8,00,000; 50% of the assets being financed by borrowed capital at an interest
cost of 8% p.a. The direct costs for the year are estimated at INR 4,80,000
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and all other operating expenses are estimated at INR 80,000. The goods will
be sold to customers at 150% of the direct costs. Tax rate is assumed to be
50%. What is EBT?
Option 1 INR 1,28,000
Option 2 INR 64,000
Option 3 INR 160,000
Option 4 INR 2,40,000

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

KDR Steels has reported a PAT of INR 200 cr for the last financial year (FY).
They have bought land for a new plant for INR 120 cr last year and have also
11 reported a depreciation of INR 10 cr. What would be the cash flow from
operations for the company? Assume all the income was from operating
activities.
Option 1 210 cr
Option 2 330 cr
Option 3 90 cr
Option 4 310 cr

CFO= PAT + Non-operating expenses - Noncash operating income + Noncash


expenses - Noncash incomes.
= (200+10) cr
= 210 cr.
Solution
Investments in new plant will not be a part of cash flow from operations, it will
be included seperately under cash flow from investment activities.
Also, since it is not included in PAT already so we will not consider it here for
CFO calculations.

If you start a window cleaning business and deposit INR 1,000 of your personal
12 money in a bank account for the business, what effects are there on the
balance sheet?
Option 1 Assets are increased and Owner's Equity is increased.
Option 2 Liabilities are decreased and Owner's Equity is increased.
Option 3 Assets are increased and Owner's Equity is decreased.
Option 4 Assets are decreased and Liabilities are decreased
As an owner, you are bringing in capital (i.e. owner's equity). Therefore,
owner's equity will increase.
Solution
The cash (asset) is coming into the business. Therefore, assets value will also
increase.
& Banking Fundementals India
et2 - Solution (Last updated 6th August 2014)
www.learnwithflip.com
A (Cash C (Cash
NPV B (Cash Flows) NPV NPV
Flows) Flows)
500000 -500000 -120000 -120000 -92000 -92000
125000 113636 12000 10909 15000 13636
125000 103306 12000 9917 15000 12397
125000 93914 12000 9016 15000 11270
125000 85377 12000 8196 15000 10245
125000 77615 12000 7451 15000 9314
125000 70559 12000 6774 15000 8467
125000 64145 12000 6158 15000 7697
125000 58313 12000 5598 15000 6998
12000 5089 15000 6361
12000 4627 15000 5783
12000 4206 15000 5257
12000 3824 15000 4779
12000 3476 15000 4345
12000 3160 15000 3950
12000 2873 15000 3591
15000 3264
15000 2968
15000 2698
15000 2453
15000 2230
166866 -28727 35703

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


In INR
800000
400000
32000
480000
80000
720000
128000