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The Finance Aptitude Test is designed for students, job seekers, and professionals looking to assess their knowledge and skills in finance. This test covers a broad range of topics, including financial accounting, investment strategies, corporate finance, budgeting, risk management, and economic principles. It is an ideal tool for those preparing for interviews, exams, or certifications in finance and related fields.
With questions ranging from basic concepts to advanced financial analysis, this test helps you evaluate your understanding of key areas like financial markets, financial statements, and portfolio management. Take this test to boost your confidence, refine your skills, and Read morestay ahead in the competitive world of finance.
Finance Aptitude Test Questions and Answers
1.
"Shareholder wealth" in a firm is represented by
A.
The number of people employed in the firm
B.
The book value of the firm's assets less the book value of its liabilities
C.
The amount of salary paid to its employees
D.
The market price per share of the firm's common stock.
Correct Answer
D. The market price per share of the firm's common stock.
Explanation The market price per share of the firm's common stock represents the value of the company as perceived by the market. It reflects the collective expectations and opinions of investors regarding the company's financial performance, growth prospects, and overall worth. Shareholders' wealth is directly tied to the market price of the stock, as it determines the value of their investments. Therefore, the market price per share is a key indicator of shareholder wealth in a firm.
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2.
The long-run objective of financial management is to:
A.
Maximize earnings per share.
B.
Maximize the value of the firm's common stock
C.
Maximize return on investment.
D.
Maximize market share.
Correct Answer
B. Maximize the value of the firm's common stock
Explanation The long-run objective of financial management is to maximize the value of the firm's common stock. This means that the primary goal of financial management is to increase the value of the company's shares, which ultimately benefits the shareholders. By focusing on maximizing the value of the firm's common stock, financial managers aim to generate higher returns for investors and create wealth for the shareholders in the long term. This objective aligns with the overall goal of financial management, which is to enhance the financial well-being of the company and its owners.
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3.
The market price of a share of common stock is determined by:
A.
The board of directors of the firm
B.
The stock exchange on which the stock is listed.
C.
The president of the company
D.
Individuals buying and selling the stock
Correct Answer
D. Individuals buying and selling the stock
Explanation The market price of a share of common stock is determined by individuals buying and selling the stock. The price is influenced by the supply and demand dynamics in the market. When more people are willing to buy the stock, the price tends to increase. Conversely, when more people are willing to sell the stock, the price tends to decrease. The actions and decisions of the board of directors, the stock exchange, and the president of the company may indirectly impact the stock price, but they do not directly determine it.
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4.
Time value of money supports the comparison of cash flows recorded at different time period by
A.
Discounting all cash flows to a common point of time
B.
Compounding all cash flows to a common point of time
C.
Both Compounding & Discounting cash flows
D.
Deducting the differences in cash flows at different time period
Correct Answer
C. Both Compounding & Discounting cash flows
Explanation The time value of money refers to the concept that the value of money changes over time. It recognizes that receiving a certain amount of money in the future is not as valuable as receiving the same amount of money today. This is because money can be invested or earn interest over time. Therefore, in order to compare cash flows recorded at different time periods, it is necessary to either discount all cash flows to a common point of time (to account for the time value of money) or compound all cash flows to a common point of time (to factor in the interest earned). Both compounding and discounting are used to adjust cash flows to a common point in time for accurate comparison.
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5.
Risk of two securities with different expected return can be compared with
A.
Coefficient of variation
B.
Standard deviation of securities
C.
Variance of Securities
D.
Alpha of securities
Correct Answer
A. Coefficient of variation
Explanation The coefficient of variation is a measure of risk that allows for the comparison of securities with different expected returns. It is calculated by dividing the standard deviation of a security's returns by its expected return. This ratio provides a standardized measure of risk, taking into account both the variability of returns and the expected return. By comparing the coefficient of variation of different securities, investors can assess the level of risk associated with each security relative to its expected return.
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6.
____________ is defined as the length of time required to recover the initial cash out-lay.
A.
Payback-period
B.
Inventory conversion period
C.
Discounted payback-period
D.
Budget period
Correct Answer
A. Payback-period
Explanation The payback period is the length of time it takes for a company to recover the initial cash outlay or investment. This period indicates how long it will take for the company to recoup the money it has invested in a project or investment. It is a commonly used metric to assess the profitability and risk of an investment. The shorter the payback period, the better, as it indicates a quicker return on investment.
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7.
____________ is the length of time between the firm’s actual cash expenditure and its own cash receipt.
A.
Cash conversion cycle
B.
Net operating cycle
C.
Working capital cycle
D.
Gross operating cycle
Correct Answer
B. Net operating cycle
Explanation The net operating cycle refers to the length of time it takes for a firm to convert its investments in inventory and accounts receivable into cash. It includes the time it takes to sell inventory, collect payments from customers, and pay suppliers. This cycle represents the time between the firm's cash outflow and cash inflow, indicating how efficiently the firm manages its cash flow.
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8.
When goods are sent to the consignee‐ the journal entry passed
A.
Goods A/c Dr., Consignment A/c Cr.
B.
Consignment A/c Dr, Cash A/c Cr.
C.
Goods sent on Consignment A/c Dr., Consignment A/c. Cr.
D.
Consignment A/c Dr., Goods Sent on Consignment A/c Cr.
Correct Answer
D. Consignment A/c Dr., Goods Sent on Consignment A/c Cr.
Explanation The correct answer is "Consignment A/c Dr., Goods Sent on Consignment A/c Cr." This journal entry is used when goods are sent to the consignee. The Consignment A/c is debited to record the increase in the consignment stock, while the Goods Sent on Consignment A/c is credited to show that the goods have been sent out.
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9.
Which type of account is entered in profit & loss a/c?
A.
Nominal
B.
Personal
C.
Real
D.
Goodwill
Correct Answer
A. Nominal
Explanation The correct answer is "Nominal." In accounting, the profit and loss account is used to record all revenues and expenses of a business. These revenues and expenses are considered nominal accounts because they are temporary in nature and are closed at the end of each accounting period. Nominal accounts include items such as sales, salaries, rent, and other operating expenses. By entering these accounts in the profit and loss account, the business can determine its net profit or loss for the period.
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10.
A company can improve (lower) its debt-to-total assets ratio by doing which of the following?
A.
Borrow More
B.
Sell Common Stock
C.
Shift short term to long term
D.
Shift Long Term to Short Term
Correct Answer
B. Sell Common Stock
Explanation Selling common stock can improve a company's debt-to-total assets ratio because it increases the equity portion of the company's capital structure. By selling common stock, the company raises funds without incurring any additional debt. This increase in equity reduces the proportion of debt in relation to total assets, resulting in a lower debt-to-total assets ratio.
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11.
A profitability index of .85 for a project means that
A.
The present value of benefits is 85% greater than the project's costs
B.
The project's NPV is greater than zero
C.
The project returns 85 cents in present value for each current rupee invested.
D.
The payback period is less than one year
Correct Answer
C. The project returns 85 cents in present value for each current rupee invested.
Explanation A profitability index of 0.85 indicates that for every rupee invested in the project, it returns only 85 cents in present value. This suggests that the present value of future cash flows is less than the initial investment, implying that the project is not a favorable investment opportunity, as the net present value (NPV) is less than zero.
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12.
Which of the following statements is correct?
A.
If the NPV of a project is greater than 0, it’s PI will equal 0.
B.
If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.
C.
If the PI of a project is less than 1, its NPV should be less than 0
D.
NPV will be greater than 0
Correct Answer
C. If the PI of a project is less than 1, its NPV should be less than 0
Explanation The correct statement is: "If the PI of a project is less than 1, its NPV should be less than 0." This is because the Profitability Index (PI) measures the ratio of the present value of future cash inflows to the initial investment. A PI less than 1 indicates that the project's inflows are less than its cost, leading to a negative NPV. The other statements are incorrect: if NPV is greater than 0, PI will be greater than 1, not 0; if the IRR is 0%, NPV would be negative with a discount rate greater than 0; and "NPV will be greater than 0" is incomplete and cannot apply universally.
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13.
Which one of these not shown on profit & loss a/c?
A.
Rent
B.
Wages
C.
Bad Debt
D.
Salaries
Correct Answer
C. Bad Debt
Explanation The item not shown on the profit & loss account (P&L) is Bad Debt. Bad debts are usually recorded under the "Provision for Bad Debts" or "Allowance for Doubtful Accounts" in the balance sheet as a provision or an adjustment to accounts receivable. Rent, wages, and salaries, on the other hand, are all operating expenses and are included in the profit & loss account.
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14.
Capital market line is
A.
Capital allocation line of a market portfolio
B.
Capital allocation line of a risk free asset
C.
Capital allocation line of risk & market portfolio
D.
Capital allocation line of return & market portfolio
Correct Answer
C. Capital allocation line of risk & market portfolio
Explanation The correct answer is "Capital allocation line of risk & market portfolio." The capital market line represents the combination of a risk-free asset and a risky asset (market portfolio) in a portfolio. It shows the trade-off between risk and return for different portfolio allocations. By combining the risk-free asset and the market portfolio, investors can create a portfolio that maximizes return for a given level of risk. The capital market line is a key concept in modern portfolio theory and is used to determine optimal portfolio allocations.
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15.
If required rate of return > Coupon rate, the bond will be valued at
A.
Premium
B.
Par
C.
Discount
D.
Zero
Correct Answer
C. Discount
Explanation If the required rate of return is greater than the coupon rate, it means that investors can earn a higher return by investing in other securities with similar risk profiles. As a result, the value of the bond decreases, and it is considered to be trading at a discount. This is because the bond's coupon payments are less attractive compared to the returns offered by other investments. Investors would be willing to pay less for the bond in order to achieve their desired rate of return.
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16.
There is no difference between the capital market line and the security market line as both the terms are the same.
A.
True
B.
False
Correct Answer
B. False
Explanation The statement is false because there is a difference between the capital market line (CML) and the security market line (SML). The CML represents the relationship between risk and return for a diversified portfolio, taking into account the risk-free rate and the market risk premium. On the other hand, the SML represents the relationship between the expected return and the systematic risk of an individual security or portfolio. While both lines are used in finance to analyze investments, they have distinct purposes and factors that they consider.
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17.
If the coupon rate is constant, the value of bond when close to maturity will be
A.
Issue Price
B.
Par Value
C.
Redemption Value
D.
Discount Value
Correct Answer
C. Redemption Value
Explanation The value of a bond when it is close to maturity will be its redemption value. The redemption value is the amount that the bond issuer has agreed to pay the bondholder when the bond reaches its maturity date. This value is typically equal to the bond's par value, which is the face value of the bond that was initially set when it was issued. Therefore, as the bond approaches its maturity date, the value of the bond will converge towards its redemption value, which is the amount that the bondholder will receive upon maturity.
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18.
Type of contract which involves future exchange of assets between independent parties at a specified price is classified as
A.
Futures Contract
B.
Spot Contract
C.
Swap Contract
D.
Forward Contract
Correct Answer
D. Forward Contract
Explanation A forward contract is a type of contract that involves the future exchange of assets between independent parties at a specified price. Unlike a futures contract, which is standardized and traded on an exchange, a forward contract is customized and traded over-the-counter. In a forward contract, the buyer and seller agree to buy or sell a specific asset at a predetermined price and date in the future. This type of contract is commonly used in financial markets to hedge against price fluctuations or to speculate on future price movements.
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19.
Beta reflects stock risk for investors which is usually
A.
Individual
B.
Collective
C.
Weighted
D.
Linear
Correct Answer
A. Individual
Explanation The correct answer is "Individual" because beta measures the volatility or risk of a stock relative to the overall market. It shows how much the stock's price is likely to move compared to the market as a whole. An individual beta reflects the specific risk of the stock itself, independent of other stocks or investments.
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20.
By definition, currency appreciation occurs when
A.
The value of all currencies fall relative to gold
B.
The value of all currencies rise relative to gold
C.
The value of one currency rises relative to another currency
D.
The value of one currency falls relative to another currency.
Correct Answer
C. The value of one currency rises relative to another currency
Explanation Currency appreciation refers to the increase in the value of one currency compared to another currency. This means that one currency becomes stronger or more valuable in relation to another currency. This can occur due to various factors such as economic growth, higher interest rates, or increased demand for a particular currency. When a currency appreciates, it means that it can buy more of another currency or goods and services in international markets.
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21.
During the accounting period, sales revenue is Rs. 25,000 and accounts receivable increases by Rs. 8,000. What will be the amount of cash received from customers for the period?
A.
Rs. 33,000
B.
Rs. 25,000
C.
Rs. 17,000
D.
Rs. 8,000
Correct Answer
C. Rs. 17,000
Explanation The amount of cash received from customers for the period can be calculated by subtracting the increase in accounts receivable from the sales revenue. In this case, the increase in accounts receivable is Rs. 8,000. Therefore, the cash received from customers would be Rs. 25,000 - Rs. 8,000 = Rs. 17,000.
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22.
You need Rs.10,000 to buy a new television. If you have Rs. 6,000 to invest at 5 percent compounded annually, how long will you have to wait to buy the television?
A.
8.42 Years
B.
10.51 Years
C.
15.75 Years
D.
18.78 Years
Correct Answer
B. 10.51 Years
Explanation To calculate how long it will take to reach Rs. 10,000, we can use the formula for compound interest: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal amount, r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years. In this case, P is Rs. 6,000, r is 5% (or 0.05), n is 1 (compounded annually), and A is Rs. 10,000. By rearranging the formula and solving for t, we find that t is approximately 10.51 years.
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23.
How many years will it take to pay off a Rs. 11,000 loan with an Rs. 1,241.08 annual payment and a 5% interest rate?
A.
6
B.
12
C.
24
D.
48
Correct Answer
B. 12
Explanation We need to calculate how many years (n) it will take to pay off an Rs. 11,000 loan with an annual payment of Rs. 1,241.08 and a 5% interest rate.
Step-by-step formula:
The formula to find the number of years (n) is:
n = [ln(A / (A - P * r))] / ln(1 + r)
Where:
A = Rs. 1,241.08 (annual payment)
P = Rs. 11,000 (loan amount)
r = 5% = 0.05 (interest rate)
Step 1: Calculate (A - P * r)
P * r = 11,000 * 0.05 = 550
A - P * r = 1,241.08 - 550 = 691.08
Step 2: Calculate A / (A - P * r)
A / (A - P * r) = 1,241.08 / 691.08 ≈ 1.7958
Step 3: Apply natural logarithms (ln)
ln(1.7958) ≈ 0.5854
ln(1 + r) = ln(1.05) ≈ 0.04879
Step 4: Calculate n
n = 0.5854 / 0.04879 ≈ 12 years
Conclusion:
It will take approximately 12 years to pay off the Rs. 11,000 loan with an annual payment of Rs. 1,241.08 and a 5% interest rate.
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24.
A firm has paid out Rs. 150,000 as dividends from its net income of Rs. 250,000. What is the retention ratio for the firm?
A.
12%
B.
25%
C.
40%
D.
60%
Correct Answer
C. 40%
Explanation The retention ratio is calculated by subtracting the dividends paid out from the net income and then dividing it by the net income. In this case, the dividends paid out is Rs. 150,000 and the net income is Rs. 250,000. Subtracting the dividends paid out from the net income gives us Rs. 100,000. Dividing Rs. 100,000 by the net income of Rs. 250,000 and multiplying by 100 gives us 40%. Therefore, the retention ratio for the firm is 40%.
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25.
If you have Rs. 850 and you plan to save it for 4 years with an interest rate of 10%, what will be the future value of your savings?
A.
Rs. 1,000
B.
Rs. 1,244
C.
Rs. 1,331
D.
Rs. 1,464
Correct Answer
B. Rs. 1,244
Explanation The future value of the savings can be calculated using the formula for compound interest: FV = PV * (1 + r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of periods. In this case, the present value (PV) is Rs. 850, the interest rate (r) is 10%, and the number of periods (n) is 4 years. Plugging in these values into the formula, we get FV = 850 * (1 + 0.10)^4 = Rs. 1,244. Therefore, the future value of the savings will be Rs. 1,244.
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26.
In order to obtain an income of Rs. 650 from 10% stock at Rs. 96, one must make an investment of
A.
Rs. 3,100
B.
Rs. 6,240
C.
Rs. 6,500
D.
Rs. 9,600
Correct Answer
B. Rs. 6,240
Explanation To obtain an income of Rs. 650 from a 10% stock at Rs. 96, we can use the formula: Investment = (Income / Rate) * 100. Plugging in the values, we get (650 / 10) * 100 = 6500. However, this is the total investment required. To find the initial investment, we need to subtract the income from the total investment, which gives us 6500 - 650 = Rs. 6,240. Therefore, the correct answer is Rs. 6,240.
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27.
A 6% stock yields 8%. The market value of the stock is
A.
48
B.
75
C.
96
D.
133.33
Correct Answer
B. 75
Explanation A 6% stock yielding 8% means that the stock is giving an annual return of 8% on its market value. To calculate the market value, we can use the formula: Market Value = Annual Return / Yield. Plugging in the values, we get Market Value = 8% / 6% = 1.33. Multiplying this by the given stock yield of 6%, we get 1.33 * 6% = 7.98%. Therefore, the market value of the stock is closest to 8%, which corresponds to the answer of 75.
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28.
A man invested Rs. 4455 in Rs. 10 shares quoted at Rs. 8.25. If the rate of dividend be 12%, his annual income is
A.
207.5
B.
534.6
C.
648.0
D.
655.6
Correct Answer
C. 648.0
Explanation The man invested Rs. 4455 in Rs. 10 shares quoted at Rs. 8.25. To calculate the number of shares he bought, we divide the total investment amount by the cost per share: 4455 / 8.25 = 540 shares.
The annual income from these shares can be calculated by multiplying the number of shares by the rate of dividend and the face value of each share: 540 * 12% * Rs. 10 = Rs. 648.0. Therefore, the correct answer is 648.0.
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29.
Peter invests a part of Rs. 12,000 in 12% stock at Rs. 120 and the remainder in 15% stock at Rs. 125. If his total dividend p.a. is Rs. 1360, how much does he invest in 12% stock at Rs. 120?
A.
Rs. 14,000
B.
Rs. 14,500
C.
Rs. 14,666
D.
Rs. 15,500
Correct Answer
C. Rs. 14,666
Explanation 1. Set up variables:
Let 'x' be the amount invested in the 12% stock at Rs. 120.
The remainder, Rs. 12,000 - x, is invested in the 15% stock at Rs. 125.
2. Calculate dividends:
Dividend from the 12% stock: (x / 120) * 0.12 * 120 = 0.12x
Dividend from the 15% stock: ((12,000 - x) / 125) * 0.15 * 125 = 0.15(12,000 - x)
3. Formulate the equation:
Total dividend = Dividend from 12% stock + Dividend from 15% stock
1360 = 0.12x + 0.15(12,000 - x)
4. Solve for 'x':
1360 = 0.12x + 1800 - 0.15x
0.03x = 440
x = 440 / 0.03
x = 14,666.67
Therefore, Peter invests Rs. 14,666.67 in the 12% stock at Rs. 120.
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30.
What are the earnings per share for a company that earned Rs? 100,000 last year in after-tax profits, has 200,000 common shares outstanding and Rs. 1.2 million in retained earnings at the year-end?
A.
5.0
B.
6.0
C.
0.5
D.
6.5
Correct Answer
C. 0.5
Explanation The earnings per share (EPS) is calculated by dividing the company's after-tax profits by the number of common shares outstanding. In this case, the company earned Rs. 100,000 in after-tax profits and has 200,000 common shares outstanding. Therefore, the EPS would be Rs. 100,000 / 200,000 = 0.5.
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31.
A man invested Rs. 1552 in a stock at 97 to obtain an income of Rs. 128. The dividend from the stock is approximately
A.
7.5%
B.
8.0%
C.
9.7%
D.
8.7%
Correct Answer
B. 8.0%
Explanation The dividend from the stock can be calculated by dividing the income obtained by the amount invested and then multiplying by 100. In this case, the income obtained is Rs. 128 and the amount invested is Rs. 1552. Dividing Rs. 128 by Rs. 1552 gives approximately 0.0826. Multiplying this by 100 gives approximately 8.26%. Therefore, the dividend from the stock is approximately 8.0%.
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32.
Kanji Company had sales last year of Rs. 265 million, including cash sales of Rs. 25 million. If its average collection period was 36 days, it’s ending accounts receivable balance is closest to. (Assume a 365-day year.)
A.
Rs. 26.1 million
B.
Rs. 23.7 million
C.
Rs. 7.4 million
D.
Rs. 18.7 million
Correct Answer
B. Rs. 23.7 million
Explanation The average collection period is the average number of days it takes for a company to collect its accounts receivable. To calculate the ending accounts receivable balance, we need to find the average daily sales. The formula for average daily sales is total sales divided by the number of days in the year. In this case, the average daily sales would be Rs. 265 million divided by 365 days, which is approximately Rs. 726,027.40. Multiplying this by the average collection period of 36 days gives us an ending accounts receivable balance of approximately Rs. 26.1 million. Therefore, the closest answer is Rs. 23.7 million.
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33.
A firm's inventory turnover ratio (ITR) is 5 times the cost of goods sold (COGS) of Rs. 800,000. If the ITR is improved to 8 times while the COGS remains the same, a substantial amount of funds are released from or additionally invested in inventory. In fact
A.
Rs. 1,60,000 is released
B.
Rs. 100,000 is additionally invested
C.
Rs. 60,000 is additionally invested
D.
Rs. 60,000 is released
Correct Answer
D. Rs. 60,000 is released
Explanation When the inventory turnover ratio (ITR) improves from 5 times to 8 times, it means that the firm is able to sell its inventory more quickly. This implies that the firm is holding less inventory on average, resulting in a release of funds that were previously tied up in inventory. Since the cost of goods sold (COGS) remains the same at Rs. 800,000, the difference between the old and new ITR (8 - 5 = 3) represents the additional times the COGS can be sold with the same inventory value. Therefore, the released funds would be equal to 3 times the COGS, which is Rs. 60,000.
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34.
Ninety-percent of X company's total sales of Rs. 600,000 is on credit. If its year-end receivables turnover is 5, the average collection period (based on a 365-day year) and the year-end receivables are, respectively.
A.
365 days and Rs. 108,000
B.
73 days and Rs. 120,000
C.
73 days and Rs. 108,000
D.
81 days and Rs. 108,000
Correct Answer
C. 73 days and Rs. 108,000
Explanation The average collection period can be calculated by dividing the number of days in a year (365) by the receivables turnover ratio. In this case, the receivables turnover ratio is given as 5, so the average collection period would be 365/5 = 73 days.
To find the year-end receivables, we can multiply the total sales by the percentage of sales on credit. In this case, 90% of Rs. 600,000 is on credit, so the year-end receivables would be 0.9 * Rs. 600,000 = Rs. 540,000.
Therefore, the correct answer is 73 days and Rs. 108,000.
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35.
If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is 15% that of debt is 10% and the corporate tax rate is 32%, what is the Weighted Average Cost of Capital (WACC)?
A.
10.53%
B.
7.53%
C.
9.53%
D.
11.35%
Correct Answer
C. 9.53%
Explanation 1. Calculate the after-tax cost of debt:
Cost of debt (pre-tax) = 10%
Corporate tax rate = 32%
After-tax cost of debt = 10% * (1 - 32%) = 6.8%
2. Calculate the weighted average cost of capital (WACC):
Weight of equity = 1/3
Cost of equity = 15%
Weight of debt = 2/3
After-tax cost of debt = 6.8%
WACC = (Weight of equity * Cost of equity) + (Weight of debt * After-tax cost of debt) WACC = (1/3 * 15%) + (2/3 * 6.8%) WACC = 5% + 4.53% WACC = 9.53%
Therefore, the Weighted Average Cost of Capital (WACC) is 9.53%.
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36.
Debt Equity Ratio is 3:1, the amount of total assets Rs.20 lac, current ratio is 1.5:1 and owned funds Rs.3 lac. What is the amount of current asset?
A.
Rs. 14.00 Lakhs
B.
Rs. 13.00 Lakhs
C.
Rs. 12.00 Lakhs
D.
Rs. 11.00 Lakhs
Correct Answer
C. Rs. 12.00 Lakhs
Explanation The debt equity ratio of 3:1 means that for every 3 units of debt, there is 1 unit of equity. Since the owned funds are Rs. 3 lac, the debt would be 3 times that amount, which is Rs. 9 lac. Therefore, the total liabilities would be Rs. 12 lac (Rs. 9 lac of debt + Rs. 3 lac of owned funds). The total assets are given as Rs. 20 lac, and the current ratio is 1.5:1, which means that for every 1.5 units of current assets, there is 1 unit of current liabilities. Using this information, we can calculate that the current assets would be Rs. 12 lac.
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37.
ABC Company manufactures and sells trucks at Rs. 75,000 each made up of Direct Materials Rs. 30,000, Direct Labor Rs. 8,000 Variable Overheads is Rs. 12,000, Fixed overheads is Rs. 6,000, Variable selling expenses is Rs. 3,000 Royalty is Rs. 4,000 Profit is Rs. 7,000. There is enough idle capacity. If the company decides to sell 4 trucks to ABC Company under the same management, what should be the minimum price to be charged?
A.
Rs. 86,000
B.
Rs. 75,000
C.
Rs. 68,000
D.
Rs. 57,000
Correct Answer
D. Rs. 57,000
Explanation Here's a breakdown of the costs to produce one truck:
Direct Materials (Rs. 30,000): Always relevant, as these are directly used to make the truck.
Direct Labor (Rs. 8,000): Always relevant.
Variable Overheads (Rs. 12,000): Relevant, as these vary with production volume.
Fixed Overheads (Rs. 6,000): Not relevant. These don't change with production volume, and the company has idle capacity.
Variable Selling Expenses (Rs. 3,000): Likely not relevant for an internal transfer, as these are associated with selling to external customers.
Royalty (Rs. 4,000): Possibly not relevant for an internal transfer, depending on the company's internal royalty agreements.
Calculating the Minimum Price
The minimum price should cover the relevant costs. There are two possible scenarios:
Scenario 1: Including Selling Expenses and Royalty
If these costs still apply, the minimum price is:
Rs. 30,000 + Rs. 8,000 + Rs. 12,000 + Rs. 3,000 + Rs. 4,000 = Rs. 57,000
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38.
ABC Ltd manufactures a single product and sells for Rs. 30 per unit. There is an increased demand for the product. The Direct Material is Rs. 8, Direct labor (2 hours) is Rs. 4, and Variable overheads are Rs. 4. The labor force is working at full capacity and no extra time is available. Mr. X has approached ABC Ltd with a request for the manufacture special order at Rs. 8,000. Also, 600 hours of labor will be required and the cost of the order will be Rs. 3000 for Direct Material. Variable overhead per hour will be Rs. 2. Should the order be accepted? Why?
A.
Yes, Net Profit Rs. 1,600
B.
No, Net loss Rs. 1,600
C.
No, Net loss Rs. 2,000
D.
Yes, Net Profit Rs. 2,000
Correct Answer
B. No, Net loss Rs. 1,600
Explanation Here's the breakdown:
1. Calculate the contribution margin per unit of regular production:
Selling price per unit: Rs. 30
Direct material cost per unit: Rs. 8
Direct labor cost per unit (2 hours * Rs. 2/hour): Rs. 4
Variable overhead per unit: Rs. 4
Contribution margin per unit: Rs. 30 - Rs. 8 - Rs. 4 - Rs. 4 = Rs. 14
2. Calculate the contribution margin per labor hour:
Contribution margin per unit: Rs. 14
Labor hours per unit: 2 hours
Contribution margin per labor hour: Rs. 14 / 2 hours = Rs. 7/hour
3. Calculate the opportunity cost of accepting the special order:
Labor hours required for the special order: 600 hours
Contribution margin per labor hour: Rs. 7/hour
Opportunity cost (lost contribution from regular production): 600 hours * Rs. 7/hour = Rs. 4,200
4. Calculate the total cost of the special order:
Direct material cost: Rs. 3,000
Direct labor cost (600 hours * Rs. 2/hour): Rs. 1,200
Variable overhead cost (600 hours * Rs. 2/hour): Rs. 1,200
Total cost: Rs. 3,000 + Rs. 1,200 + Rs. 1,200 = Rs. 5,400
5. Calculate the net profit/loss from the special order:
Revenue from the special order: Rs. 8,000
Total cost of the special order: Rs. 5,400
Apparent profit: Rs. 8,000 - Rs. 5,400 = Rs. 2,600
Net profit/loss: Rs. 2,600 (Apparent profit) - Rs. 4,200 (Opportunity cost) = - Rs. 1,600 (Net Loss)
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39.
Rahul has an amount of Rs. 3,00,000 which is invested in a business. He desires a 15% return on his fund. It is known from the past cost data analysis that fixed costs are Rs. 1,50,000 per annum and variable costs of operation are 60% of sales. Determine sales volume to get a 15% return. Also tell shut down point of the business, if he would spend Rs 50,000 even if a business has to be closed
A.
Rs. 2,50,000 and Rs. 4,00,000
B.
Rs. 2,50,000 and Rs. 4,87,500
C.
Rs. 4,87,500 and Rs. 3,75,000
D.
Rs. 4,00,000 and Rs. 2,00,000
Correct Answer
C. Rs. 4,87,500 and Rs. 3,75,000
Explanation The correct answer is Rs. 4,87,500 and Rs. 3,75,000.
Here's the breakdown:
1. Calculate the desired profit:
Rahul wants a 15% return on his Rs. 3,00,000 investment.
Desired profit = 0.15 * Rs. 3,00,000 = Rs. 45,000
2. Calculate the contribution margin:
Contribution margin is the difference between sales revenue and variable costs. It's the amount that contributes towards covering fixed costs and generating profit.
Since variable costs are 60% of sales, the contribution margin is 40% of sales (100% - 60% = 40%).
3. Determine the sales volume to achieve the desired return:
Let 'S' be the sales volume.
The equation is: 0.4S (Contribution Margin) - Rs. 1,50,000 (Fixed Costs) = Rs. 45,000 (Desired Profit)
Solving for S: 0.4S = Rs. 1,95,000
S = Rs. 1,95,000 / 0.4 = Rs. 4,87,500
4. Determine the shutdown point:
The shutdown point is the level of sales where the business generates just enough revenue to cover its variable costs. Below this point, it's better to shut down and avoid further losses.
Let 'SP' be the shutdown point (sales volume at shutdown).
The equation is: 0.4SP (Contribution Margin) = Rs. 1,50,000 (Fixed Costs) + Rs. 50,000 (Shutdown Costs)
Solving for SP: 0.4SP = Rs. 2,00,000
SP = Rs. 2,00,000 / 0.4 = Rs. 5,00,000
However, the question asks for the shutdown point if Rahul would spend Rs. 50,000 even if the business has to be closed. This implies that the Rs. 50,000 is an unavoidable cost, regardless of whether the business operates or not. Therefore, it should not be included in the shutdown point calculation.
The correct shutdown point calculation is: 0.4SP = Rs. 1,50,000
SP = Rs. 1,50,000 / 0.4 = Rs. 3,75,000
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40.
In two periods total costs amount to Rs. 50,000 and Rs. 40,000 against the production of 20,000 and 15,000 units respectively. Determine the marginal cost per unit and fixed cost
A.
Rs. 2 and Rs. 10,000
B.
Rs. 4 and Rs. 8,000
C.
Rs. 10 and Rs. 4,000
D.
Rs. 6 and Rs. 6,000
Correct Answer
A. Rs. 2 and Rs. 10,000
Explanation The correct answer is Rs. 2 and Rs. 10,000.
Here's how to calculate the marginal cost and fixed cost:
1. Calculate the change in cost and output:
Change in total cost: Rs. 50,000 - Rs. 40,000 = Rs. 10,000
Change in output: 20,000 units - 15,000 units = 5,000 units
2. Calculate the marginal cost:
Marginal cost is the change in total cost divided by the change in output.
Marginal cost per unit = Rs. 10,000 / 5,000 units = Rs. 2 per unit
3. Calculate the fixed cost:
We can use the total cost equation for either period to calculate the fixed cost. The equation is: Total Cost = (Variable Cost per Unit * Number of Units) + Fixed Cost
Using the first period: Rs. 50,000 = (Rs. 2 * 20,000 units) + Fixed Cost
Solving for Fixed Cost: Rs. 50,000 - Rs. 40,000 = Rs. 10,000
Therefore:
Marginal cost per unit = Rs. 2
Fixed cost = Rs. 10,000
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