FLIP Finance & Banking Fundam
Practice Test 2 - Solut
www.learnwithflip.com
Please click on the particular cell to see the calculation
1
Krishna owns 200 shares of XYZ technologies, which he decides to sell, at the market price, i.e. the best can get at that time in the market. Following were the five best quotes in the market, all in INR (part-fill Price 51.50 51.45 51.40 51.30 51.20
Quantity 105.00 45.00 90.00 50.00 300.00
What is the total sale amount that Krishna will take home, after paying a 1% commission to the broker? a) INR 10107.9 b) INR 10,189.8 c) INR 10,206.9 d) INR 10,263.0 Solution As part-fill is allowed, Krishna can sell Quantity 105 shares at 45 shares at 50 shares at
2
Price 51.50 51.45 51.40
The ABC Company has the following capital structure: Capital Component Common Shares
Cost 12%
Preference Shares
10%
Debentures
14%
What is the average cost of capital? a) 11.72 b) 12.25 c) 5.86 d) 2.72
Solution
3
Capital Component Common Shares
0.12
Preference Shares
0.10
Debentures Average cost of capital (Sum of Cost of Capital*Weightage)
0.14
A company Mirza & Daughters, is 5 years old with a turnover of INR 10 lakh. It has only equity capital, and 3 equal shareholders – Mr. Mirza and his two daughters. They now need INR 10 lakh more for expansion. Which would be the wisest choice to raise capital? a. INR 5 lakh for a quarter share of the company; INR 5 lakh bank loan @ 14 % b. INR 10 lakh for 2/3 share of the company c. INR 10 lakh bank loan @16% d. INR 2.5 lakh for 1/5th share of the company; INR 7.5 lakh loan @16%
Solution
Option a - Will be the wisest option, as it’s the most balanced one Option b - Will lead to a change in the ownership Option c – There is a high chance of default, as company's turnover is only INR 10 lakh Option d - The cost of debt (at 16%) is higher than the cost of debt available incase of option a.
4
If the 91-day T-bill auction in India had a cut off yield of 4.25%, for a face value of INR 100, what price bids would have been accepted by RBI? Note: T-bills are issued at a discount to face value and redeemed at face value a) 98.94 b) 98.95 c) 98.93 d) None of the above
Solution
Cost of Capital
The yield is given as 4.25% p.a. We need to find the price for 91 days.
Price for T-bills (91-days) = 100/(1+0.0425*91/365)=98.95
5
Solution
You bought units in a mutual fund at INR 12.25 per unit, one year ago. The mutual fund quotes its latest repurchase price and sale price as INR 15 and INR 15.50 respectively. What is the rate of return on your investment? a) 26.53% b) 22.45% c) 18.33% d) Depends on the entry and exit load You will be able to sell the fund, at the repurchase price quoted by the mutual fund. Hence, your rate of return ((15 - 12.25)/12.25) Please note that the purchase and sale price quoted by mutual fund will include the entry and exit load, if applicable
6
22.45%
A fund has a NAV of INR 10 per unit. It has an entry load of 2% and an exit load of 1%. What is the price at which, you can sell the units? a) INR 10 b) INR 10.20 c) INR 9.90 d) INR 10.10
Solution NAV = INR 10/unit If you sell the unit, you will get NAV less exit load charged. Price at which you can sell the units = 10*(1-0.01)
7
Which of the following is false regarding open ended mutual funds? a) The number of units and corpus can vary daily
INR 9.90/unit
b) The funds have a pre-defined investment objective c) The funds offer a guaranteed rate of return d) Both b & c
In case of an open-ended fund, investors can purchase the units of the fund from the fund company, and sell it back to the company, at any time. Hence, total corpus Solution and units varies daily. Also, the fund can have a predefined investment objective. However, it doesn't offer any guaranteed rate of return. Hence, option c is correct.
8
Catalyst Corporation has a capital of INR 100 Million, with a Debt-Equity ratio of 1:1. The interest rate on Debt Capital is 5% p.a. and the return on investment is 8% p.a. Assume a tax rate of 20%. What is the company’s return on equity? a) 11% b) 8.8% c) 5.5% d) 4.4%
Solution
Return on Investment (ROI) which includes both equity and debt, is 8%. EBIT (100*0.08) Less Interest ((100/2)*0.05)
2.5
EBT
5.5
Less Tax (20% of EBT)
1.1
PAT
4.4
Return on Equity (PAT/Equity Capital Employed)
9
In million 8.0
What is the price of a 5 year 6% annual coupon bond (FV 100), if the yield is 7.5%? a) 130.00 b) 90.55
8.80%
c) 93.93 d) 106.32 Solution Face Value Yield Coupon Year 1 2 3 4 5 Bond Price (Sum of the present value of all inflows)
10
Which of the following ratios best describes the capital structure of a company? a) EBIT/Debt b) PAT/Total Debt c) Debt/ Equity d) PAT/Total number of paid-up shares
Option c is correct. This ratio indicate the proportion in Solution which the company is using equity and debt tto finance its assets.
11
Election results are going to be announced tomorrow. The trader expects a hung parliament. This analysis is part of : a) Trading Stage b) Pre-trade Stage c) Post trade Stage d) Asset Servicing Stage
Option b is correct. At Pre-trade stage, the investor look Solution for the information related to the instruments and markets, to take invesment decision
100 0.075 0.060 Inflows 6 6 6 6 106
12
Rate scenario: USD 1 = MYR 3.8700 - 50; GBP 1 = USD 1.6320 - 30; A Malaysian importer wants to buy GBP and sell Malaysian ringgitt. What will be his break-even rate? a) 3.8750*1.6330 = 6.3279 b) 3.8700*1.6230 = 6.2810 c) 3.8700*1.6330 = 6.3197 d) 3.8750*1.6320 = 6.3240
Solution
We will need to calculate the cross rate between GBP and MYR. The offer rate for USD 1 = MYR 3.8750 The offer rate for GBP 1 = USD 1.6330 Therefore, GBP 1 = 1.6330*3.8750 = MYR 6.3279
13
What is the yield of a 5 year 6% annual coupon bond (FV 100), if the market price is 105? a) 6% b) 4.85% c) 7.5% d) None of the above
We have used hit and trial method to get the answer. You Solution will find that the bond price is INR 105, when the yield is 4.85%. You can also use goal-seek function. Year
CashFlow
1
6
2
6
3
6
4
6
5
106
Bond Price (Summation of all the cash flows)
14
You are given two-way (bid/offer) prices for various currency pairs against a range of counter-currencies. Both direct and indirect quotes are included. Dealers Dealer A Dealer B Dealer C Dealer D To which dealer would you sell GBP? a) Dealer A b) Dealer B c) Dealer D d) Dealer C
Correct option is Dealer B. Here, the base currency is GBP. Solution As I have to sell GBP, I will choose the dealer having the highest bid rate.
GBP:USD 1.7905/15 1.7907/17 1.7900/10 1.7902/12
Bid Rate
Dealer A
1.7905
Dealer B
1.7907
Dealer C
1.79
Dealer D
1.7902
As we see, the bid rate is highest for Dealer B. Hence, I will sell GBP to Dealer B.
15
You are given two-way (bid/offer) prices for various currency pairs against a range of counter-currencies. Both direct and indirect quotes are included. Dealers Dealer A
USD:CHF 1.2639/44
Dealer B
1.2640/45
Dealer C
1.2638/43
Dealer D
1.2641/46
From which dealer would you buy USD? a) Dealer B b) Dealer C c) Dealer A d) Dealer D
Correct option is Dealer C. Here, the base currency is Solution USD. As I have to buy USD, I will choose the dealer having the lowest offer rate.
Offer Rate
Dealer A
1.2644
Dealer B
1.2645
Dealer C
1.2643
Dealer D
1.2646
As we see, the offer rate is lowest for Dealer C. Hence, I will buy USD from Dealer C.
nance & Banking Fundamentals - India Practice Test 2 - Solution www.learnwithflip.com
n
ell, at the market price, i.e. the best price that he es in the market, all in INR (part-fill is allowed).
ng a 1% commission to the broker?
Amount 5407.50 2315.25 2570.00
Amount 3750000 312500 937500
Brokerage 54.08 23.15 25.70 Total amount
Amount Realized 5353.4 2292.1 2544.3 10189.8
Amount
Weightage
3750000
0.75
Cost of Capital * Weightage 0.09
312500
0.06
0.00625
937500
0.19
0.02625
5000000
10 lakh. It has only equity They now need INR 10 lakh al?
12.25%
Present Value 5.58 5.19 4.83 4.49 73.84 93.93
Present Value (Assuming yield as 6%)
Present Value (Assuming yield as 4.85%)
Present Value (Assuming yield as 7.5%)
5.660377
5.722461
5.581395
5.339979
5.457759
5.191996
5.037716
5.205302
4.829763
4.752562
4.964523
4.492803
79.209366
83.649566
73.835215
100.00
105.00
93.93
