Commerce & Accountancy

Q.1) Debit balance as per cash book is Rs 1500. Cheques deposited but not cleared amounts to Rs
100 and cheques issued but not presented of Rs 150. The bank allowed interest amounting Rs 50
and collected dividend Rs 50 on behalf of ABC Enterprises. Balance as per pass book should be

[a] Rs 1600

[b] Rs 1450

[c] Rs 1850

*[d] Rs 1650

[e] Rs 1500

Explanation:

Balance as per pass book = 1500 – 100 + 150 + 50 + 50 = Rs 1650

Q.2) Original cost is Rs 1,50,000 residual value is 10,000, depreciation for 3rd year @ 10% p.a. under
WDV method___

[a] 14,000

*[b] 12,150

[c] 11,340

[d] 12,240

[e] 10,000

Explanation:

First year depreciation = 10% * 1,50,000 = 15,000

Book value at the end of 1st year = 1,50,000 – 15,000 = 1,35,000

Second year depreciation = 1,35,000 * 10% = 13,500

Book value at the end of second year = 1,35,000 – 13,500 = 1,21,500

Third year depreciation = 1,21,500 * 10% = 12,150

Q.3) On August 01, 2011, ABC Travels Ltd. bought four Matador vans costing Rs 1,20,000 each. The
company expected to fetch a scrap value of 25% of the cost price of the vehicles after 10 years. The
vehicles were depreciated under the fixed instalment method up to 31st March 2014. The rate of
depreciation charged up to 31st March 2014 was
[a] 10%

[b] 9%

[c] 8.5%

[d] 12%

*[e] 7.5%

Explanation:

Scrap value = 25% * 1,20,000 = 30,000

Annual depreciation = (1,20,000 – 30,000)/10 = 9,000

Rate of depreciation = 9,000/1,20,000 * 100 = 7.5%

Q.4) ABC Ltd. purchased a machine on 1st January 2011 for Rs 1,20,000. Installation expenses were
Rs 10,000. Residual value after 5 years is Rs 5,000. On 1st July 2011, expenses for repairs were
incurred to the extent of Rs 2,000. Depreciation is provided under straight line method. Depreciation
rate = 10%. Annual depreciation is equal to

*[a] 13,000

[b] 17,000

[c] 15,000

[d] 25,000

[e] 21,000

Explanation:

Depreciation rate under SLM = (annual depreciation / cost of asset) * 100

10 = (annual depreciation / 1,30,000) * 100

annual depreciation = 13,000

Q.5) If the rate of gross profit is 25% on cost of goods sold and the sales are Rs 5,00,000, the amount
of gross profit will be __________.

*[a] Rs 1,00,000

[b] Rs 1,50,000

[c] Rs 1,25,000

[d] Rs 1,20,000

[e] Rs 1,10,000

Explanation:
Gross profit = Sales – COGS

Let COGS be x

0.25 x = 5,00,000 – x

x = 4,00,000

Gross profit = 25% of 4,00,000

Gross profit = Rs 1,00,000

Q.6) General Manager gets 5% commission on net profit after charging such commission. Gross
profit Rs 1,30,000 and other indirect expenses other than manager's commission are Rs 25,000.
Commission amount will be

[a] Rs 5,250

*[b] Rs 5,000

[c] Rs 7,380

[d] Rs 7,750

[e] Rs 3,500

Explanation:

Let net profit be x

x = 130000 – 25000 – 0.05x

x = 1,00,000

Commission = 5% of 1,00,000 = Rs 5,000

Q.7) When Sales = Rs 1,80,000, Purchase = Rs 1,60,000, Opening Stock = Rs 34,000 and rate of the
Gross Profit is 20% on cost, the Closing Stock would be

[a] Rs 50,000

[b] Rs 24,000

[c] Rs 46,000

[d] Rs 40,000

*[e] Rs 44,000

Explanation:

Opening stock + Purchase – Closing Stock = COGS

COGS + Gross profit = Sales

Let COGS be x

x + 0.2x = 1,80,000

x = 1,50,000

34,000 + 1,60,000 – Closing stock = 1,50,000

Closing stock = Rs 44,000

Q.8) Rent paid on 1st October 2010 for the year up to 30 September 2011 was Rs 1200 and rent paid
on 1st October 2011 for the year up to 30 September 2012 was Rs 1600. Rent payable, as shown in
the profit and loss account for the year ended 31 December 2011, would be:

[a] Rs 1200

[b] Rs 1500

[c] Rs 1600

*[d] Rs 1300

[e] Rs 1400

Explanation:

Rent from 1st January 2011 to 30th September 2011 = (1200/12)*9 = 900

Rent from 1st October 2011 to 31st December 2011 = (1600/12)*3 = 400

Total = 900 + 400 = 1300

Q.9) The profits of last three years are Rs 43,000; Rs 38,000 and Rs 45,000. Find out the goodwill if it
is valued at two years purchase of average profits.

[a] Rs 42,000

*[b] Rs 84,000

[c] Rs 1,26,000

[d] Rs 36,000

[e] Rs 90,000

Explanation:

Average profit = 42,000

Goodwill = 42,000 * 2 = 84,000

Q.10) Total capital employed by a partnership firm is Rs 1,00,000 and its average profit is Rs 25,000.
Normal rate of return is 20% in similar firms working under similar conditions. The firms earns super
profit of:

[a] Rs 3,000

*[b] Rs 5,000

[c] Rs 4,000

[d] Rs 2,000

[e] Rs 10,000

Explanation:

Normal profit = 1,00,000 * 20% = 20,000

Super profit = average profit – normal profit = 5,000

Q.11) Income and expenditure account shows subscriptions at Rs 20,000. Subscriptions accrued in
the beginning of the year and at the end of the year were Rs 1000 and Rs 1500 respectively. The
figure of subscription received appearing in receipts and payments account will be

[a] Rs 18,500

[b] Rs 21,000

[c] Rs 20,000

[d] Rs 20,500

*[e] Rs 19,500

Explanation:

Subscription received = 20,000 + 1,000 – 1,500 = 19,500

Q.12) A and B are partners in a firm sharing profit and loss in the ratio of 3 : 2. They admit C into
partnership for 1/8 share and the new ratio between A and B is 4 : 3. The sacrificing ratio is

[a] 1 : 1

[b] 2 : 1

*[c] 4 : 1

[d] 2 : 3

[e] 3 : 2

Explanation:
C’s share = 1/8

Remaining share = 7/8

A’s new share = 4/7 * 7/8 = 4/8

B’s new share = 3/7 * 7/8 = 3/8

A’s old share = 3/5

B’s old share = 2/5

Share sacrificed by A = old share – new share = 3/5 – 4/8 = 24/40 – 20/40 = 4/40

Share sacrificed by B = 2/5 – 3/8 = 16/40 – 15/40 = 1/40

Sacrificing ratio = 4 : 1

Q.13) A partner draws Rs 1,000 per month. Under the Partnership Deed, interest is to be charged @
15% p.a. Calculate interest that should be charged to the partner for the year if drawings are made
in the beginning of the month?

[a] Rs 900

*[b] Rs 975

[c] Rs 825

[d] Rs 1800

[e] Rs 1125

Explanation:

Average period = (Time left after first drawing + time left after last drawing)/2

Average period = (12 + 1) / 2 = 6.5 months

Interest = 1000 * 15% * 6.5

Interest = 975

Q.14) X and Y are partners sharing profits in the ratio 2:1. They admit Z into the partnership for 1/4th
share in profits for which he brings in Rs 20,000 as his share of capital. Hence, the adjusted capital of
X and Y will be

[a] Rs 32,000 and Rs 16,000 respectively

[b] Rs 60,000 and Rs 30,000 respectively

*[c] Rs 40,000 and Rs 20,000 respectively

[d] Rs 30,000 and Rs 30,000 respectively

[e] Rs 35,000 and Rs 25,000 respectively

Explanation:

Total capital = 20,000 * 4/1 = Rs 80,000

New profit-sharing ratio = 2:1:1

Adjusted capital of X = 2/4 * 80,000 = 40,000

Adjusted capital of Y = 1/4 * 80,000 = 20,000

Q.15) A and B are partners in a firm sharing profits in the ratio of 4:3. They agreed to admit C in the
firm for 1/6th share in profit. The new profit-sharing ratio of A, B and C will be

[a] 4 : 3 : 1

[b] 3 : 2 : 1

*[c] 20 : 15 : 7

[d] 8 : 2 : 3

[e] 8 : 7 : 6

Explanation:

A’s new share = 4/7 * 5/6 = 20/42

B’s new share = 3/7 * 5/6 = 15/42

C’s share = 1/6 = 7/42

Q.16) When the Debt Turnover Ratio is 4, what is the average collection period?

[a] 5 months

[b] 4 months

*[c] 3 months

[d] 2 months

[e] 6 months

Explanation:

Average collection period (number of months) = 12 / debt turnover ratio

= 12 / 4
= 3 months

Q.17) If the current ratio is 2 : 1 and working capital is Rs 60,000, what is the value of the Current
Assets?

[a] Rs 60,000

[b] Rs 1,00,000

*[c] Rs 1,20,000

[d] Rs 1,80,000

[e] Rs 80,000

Explanation:

Current ratio = Current Assets / Current Liabilities

2 = CA / CL

CA = 2*CL

or CL = CA/2

Working capital = CA – CL

60,000 = CA – CA/2

60,000 = CA/2

CA = 1,20,000

Q.18) JK Ltd. has earned 8% return on total assets of Rs 50,00,000 and has a Net Profit Ratio of 5%.
Find out the sales of the firm.

[a] Rs 4,00,000

[b] Rs 2,80,000

*[c] Rs 80,00,000

[d] Rs 83,33,333

[e] Rs 40,00,000

Explanation:

Return on assets = Net income / Total Assets

0.08 = net income / 50,00,000

Net income (or net profit) = 4,00,000

Net profit ratio = net profit / Net sales

0.05 = 4,00,000 / net sales

Net sales = 80,00,000

Q.19) From the following information, calculate Net profit ratio:

Gross profit is 1/4th of cost and sales is Rs. 2,00,000

Indirect expenses is Rs. 12,000

[a] 19%

[b] 20%

*[c] 14%

[d] 25%

[e] 12%

Explanation:

Let cost be x

Sales – cost = gross profit

200000 – x = 0.25x

x = 1,60,000

Gross profit = 160000/4 = 40,000

Net profit = GP – indirect expenses = 28000

Net profit ratio = 28,000 / 2,00,000 = 14%

Q.20) Stock turnover ratio = 6 times

Average stock = Rs 8000

Selling price = 25% above cost

What is the amount of gross profit?

[a] Rs 2000

[b] Rs 4000

[c] Rs 10000

*[d] Rs 12000

[e] Rs 15000

Explanation: Stock turnover ratio = COGS / Avg stock

6 = COGS / 8000
COGS = 48000

COGS = Sales – Gross Profit

Sales = 1.25 * 48000

Sales = 60,000

Gross profit = Sales – COGS

Gross profit = 60,000 – 48,000 = 12,000

Q.21) The budgeted annual sales of a firm is Rs. 80 lakhs and 25% of the same is cash sale. If the
average amount of debtors of the company is Rs. 5 lakhs, the average collection period of credit
sales is

[a] 2 months

*[b] 1 month

[c] 15 days

[d] 3 months

[e] 45 days

Explanation:

Average collection period (number of months) = 12 / debtors turnover ratio

Debtors turnover ratio = Net credit sales / average trade receivable

Credit sales = 0.75*80 = 60 lakhs

Debtors turnover ratio = 60,00,000 / 5,00,000

Debtors turnover ratio = 12

Average collection period (in months) = 12 / 12 = 1 month

Q.22) Calculate EPS from the following information:

Net profit = Rs 1,50,000

Preferred dividend = Rs 25,000

Taxes paid to government = Rs 10,000

Number of equity shares = 1,00,000

[a] Rs 1.50

[b] Rs 1.25

[c] Rs 1.00

[d] Rs 1.40
*[e] Rs 1.15

Explanation:

Earnings available for equity shares = 1,50,000 – 25,000 – 10,000 = 1,15,000

EPS = 1,15,000 / 1,00,000 = 1.15

Q.23) XYZ Ltd issued 2000, 12% preference shares of Rs 100 each at par on 01-06-2021, which are
redeemable at a premium of 10%. For the purpose of redemption, the company issued 1,500 equity
shares of Rs 100 each at a premium of 20% per share. At the time of redemption of preference
shares, the amount to be transferred by the company to the Capital Redemption Reserve Account
will be

[a] Rs 20,000

[b] Rs 30,000

[c] Rs 40,000

*[d] Rs 50,000

[e] Rs 70,000

Explanation:

Face value of preference shares to be redeemed = 2000 * 100 = 2,00,000

Face value of equity shares issued = 1500 * 100 = 1,50,000

Remaining amount = 2,00,00 – 1,50,000 = 50,000

Q.24) A company offers new shares of Rs 100 each at 25% premium to existing shareholders on one
for four bases. The cum-right price of a share is Rs 150. Calculate the value of a right.

[a] Rs 15 per share

[b] Rs 10 per share

*[c] Rs 5 per share

[d] Rs 20 per share

[e] Rs 25 per share

Explanation:

Value of right = Cum-right value – Ex-right value

[Cum−right value of existing shares + (Rights shares ∗ issue price)]
Ex-right value =
existing number of shares + number of right shares

Ex-right value = [(150*4) + (1*125)] / (4 + 1)

Ex-right value = 725 / 5 = Rs 145

Value of right = 150 – 145 = Rs 5 per share

Q.25) Zebra Ltd. Invites applications for 50,000 shares for which Rs.2 per share is payable on
application. Applications were received for 80,000 shares and 50,000 shares are allotted on pro-rata
basis to the applications for 70,000 shares. Calculate the excess application money from X, who was
allotted 200 shares.

*[a] Rs 160

[b] Rs 240

[c] Rs 200

[d] Rs 100

[e] Rs 150

Explanation: Shares applied by X = 200 * (7/5) = 280

Excess shares = 280 – 200 = 80

Excess application money = 80*2 = Rs 160

Q.26) A company issued 10,000 shares of the value of Rs 10 each, payable Rs 3 on application, Rs 3
on allotment and Rs 4 on the first and final call. All amounts are duly received except the call money
on 100 shares. These shares are subsequently forfeited by Directors and are resold as fully paid-up
for Rs 500. How much amount will be transferred to Capital Reserve?

*[a] Rs 100

[b] Rs 400

[c] Rs 500

[d] Rs 300

[e] Rs 600

Explanation:

Amount forfeited per share = Rs 6

Discount given per share = Rs 5

Amount transferred to capital reserve = (6 – 5) * 100 = Rs 100

Q.27) The closing capital of Mr. B as on 31.3.2018 was Rs 4,00,000. On 1.4.2017, his capital was Rs
3,50,000. His net profit for the year ended 31.3.2018 was Rs 1,00,000. He introduced Rs 30,000 as
additional capital in January 2018. Find out the amount drawn by Mr. B for his domestic expenses.

[a] Rs 1,20,000

*[b] Rs 80,000

[c] Rs 1,00,000

[d] Rs 60,000

[e] Rs 40,000

Explanation:

Profit = Closing capital + drawings – additional capital – opening capital

1,00,000 = 4,00,000 + drawings – 30,000 – 3,50,000

Drawings = 80,000

Costing

Q.28) XYZ Co manufactures a single product G. Budgeted production output of product G during
June is 200 units. Each unit of product G requires 6 labour hours for completion and XYZ Co
anticipates 20 per cent idle time. Labour is paid at a rate of Rs 7 per hour. The direct labour cost
budget for June is

[a] Rs 6,720

[b] Rs 8,400

[c] Rs 10,080

*[d] Rs 10,500

[e] Rs 9,700

Explanation:

Let total time be x.

Then idle time = 0.2x

x – 0.2x = 6

0.8x = 6

x = 7.5 hours

Direct labour cost budget = 200 * 7.5 * 7 = 10,500

Q.29) A company sells its product at Rs 15 per unit. In a period if it produces and sells 8,000 units, it
incurs a loss of Rs 5 per unit. If the volume is raised to 20,000 units it earns a profit of Rs 4. Variable
cost per unit will be

[a] Rs 9 per unit

[b] Rs 4.5 per unit

[c] Rs 4 per unit

[d] Rs 6 per unit

*[e] Rs 5 per unit

Explanation:

Total cost of producing 8,000 units = 8000 * 20 = 1,60,000

Total cost of producing 20,000 units = 20,000 * 11 = 2,20,000

Difference in units = 20,000 – 8,000 = 12,000

Difference in cost = 2,20,000 – 1,60,000 = 60,000

Variable cost = 60,000 / 12,000 = Rs 5 per unit

Q.30) A company maintains a margin of safety of 25% on its current sales and earns a profit of Rs 30
lakhs per annum. If the company has a PV ratio of 40%, its current sales amount to:

[a] Rs 200 lakh

[b] Rs 250 lakh

[c] Rs 325 lakh

*[d] Rs 300 lakh

[e] Rs 75 lakh

Explanation:

Margin of safety = Profit / PV ratio

MOS = 30,00,000 / 40%

MOS = 75,00,000 = 25% of sales

Sales = 75,00,000 / 25%

Sales = Rs 3,00,00,000

Q.31) If sales are Rs 15,00,000; fixed cost is Rs 5,00,000 and P/V ratio is 40%, what would be the
profit?
*[a] Rs 1,00,000

[b] Rs 2,50,000

[c] Rs 2,00,000

[d] Rs 3,00,000

[e] Rs 1,50,000

Explanation:

Contribution = Sales * PV ratio

Contribution = 15,00,000 * 40%

Contribution = 6,00,000

Profit = contribution – fixed cost

profit = 6,00,000 – 5,00,000 = 1,00,000

Q.32) XYZ Ltd. has supplied you the following information in respect of one of its products:

Total fixed costs 18,000

Total variable costs 30,000

Total sales 60,000

Unit sold 20,000

Calculate the volume of sales to earn a profit of Rs 24,000.

[a] 14,000 units

[b] 21,000 units

*[c] 28,000 units

[d] 35,000 units

[e] 42,000 units

Explanation:

Sales = (Fixed cost + required profit) / Contribution per unit

Contribution = sales – VC

Contribution = 60,000 – 30,000 = 30,000

Contribution per unit = 30,000 / units sold

Contribution per unit = 30,000 / 20,000 = 1.5

Sales = (18,000 + 24,000) / 1.5

Sales = 42,000 / 1.5 = 28,000 units

Q.33) A company which has a margin of safety of Rs 4,00,000 makes a profit of Rs 80,000. Its fixed
cost is Rs 5,00,000, its break-even sales will be

[a] Rs 10 lakh

[b] Rs 15 lakh

[c] Rs 20 lakh

*[d] Rs 25 lakh

[e] Rs 30 lakh

Explanation:

Margin of safety = Profit / PV ratio

4,00,000 = 80,000 / PV ratio

PV ratio = 20%

Break-even sales = Fixed cost / PV ratio

Break-even sales = 5,00,000 / 20%

Break-even sales = 25,00,000

Q.34) Sales are Rs 3,20,000, fixed costs are Rs 80,000 and variable costs are Rs 1,20,000. What is the
safety margin?

[a] Rs 18,900

[b] Rs 20,000

*[c] Rs 1,92,000

[d] Rs 1,28,000

[e] Rs 1,31,000

Explanation:

PV ratio = (320000 – 120000) / 320000

PV ratio = 5/8

Break even sales = 80000 / (5/8)

Break even sales = 1,28,000

Safety margin = sales – break even sales

Safety margin = 320000 – 128000

Safety margin = 192000

Q.35) A company produces a product which is sold at a price of Rs 160. Its Variable cost is Rs 64. The
company’s Fixed cost is Rs 23,04,000 p.a. The company operates at a margin of safety of 40%. The
total sales of the company is:

[a] 42,000 units

*[b] 40,000 units

[c] 60,000 units

[d] 50,000 units

[e] 35,000 units

Explanation:

Contribution per unit = 160 – 64 = 96

Break-even point = Fixed cost / Contribution per unit

Break even point = 23,04,000 / 96 = 24,000 units

Let total sales be x

Margin of safety = actual sales – break even sales

0.4x = x – 24,000

x = 40,000 units

Q.36) Calculate contribution from the following information:

Contribution per unit = Rs 7

Profit = Rs 3000

Break-even point = 2000 units

[a] Rs 14,000

*[b] Rs 17,000

[c] Rs 15,000

[d] Rs 11,000

[e] Rs 21,000

Explanation:

Contribution = (BE point (units) * contribution per unit) + profit

Contribution = (2000 * 7) + 3000

Contribution = 17,000

Q.37) Standard time of a job is 60 hours and guaranteed time rate is Rs 0.30 per hour. What is the
amount of wages under Rowan plan if job is completed in 48 hours?

[a] Rs 16.20

*[b] Rs 17.28

[c] Rs 18.00

[d] Rs 14.40

[e] Rs 15.00

Explanation:

Wages as per Rowan plan = time taken * rate per hour + [(time saved/time allowed) * time taken *
rate per hour]

Wages = 48 * 0.30 + [(12/60) * 48 * 0.30]

Wages = 14.4 + (0.2 * 48 * 0.3)

Wages = 14.40 + 2.88

Wages = Rs 17.28

Q.38) Calculate the earnings of a worker under Halsey System. The relevant data is as below:

Time rate (per hour) = Rs 60

Time allowed = 8 hours

Time taken = 6 hours

[a] Rs 450

*[b] Rs 420

[c] Rs 400

[d] Rs 360

[e] Rs 350

Explanation:

Under Halsey Premium Plan,

Wages = Time taken * time rate + 50% of time saved * time rate

Wages = (6 * 60) + (50% * 2 * 60)

Wages = 360 + 60 = Rs 420

Q.39) A manufacturer used 400 units of a component every month and he buys them entirely from
an outside supplier @Rs 40 per unit. The order placing and receiving cost is Rs 100 and storage and
carrying cost is 15% of the value of stock. EOQ will be

[a] 300 units

*[b] 400 units

[c] 200 units

[d] 450 units

[e] 500 units

Explanation:

2∗𝐷∗𝑂
EOQ = √
𝑆

D = 400 * 12 = 4800

O = 100

S = 40 * 15/100 = 6

2 ∗ 4800 ∗ 100
EOQ = √
6

EOQ = √160000 = 400

Q.40) 100 units are processed at a total cost of Rs 160, normal loss is 10%, & scrap units are sold @
Rs 0.25 each. If the output is 80 units, then the value of abnormal loss is:

[a] Rs 16

[b] Rs 29.50

[c] Rs 17.75

[d] Rs 21.50

*[e] Rs 17.50

Explanation:

Value of abnormal loss = [(Total cost – realisable value of normal loss) / (Total input units – normal
loss units)] * abnormal loss units

= [(160 – 2.5) / (100 – 10)] * 10

= [157.5 / 90] * 10

= 17.50
Q.41) 12,000 kg of a material were input to a process in a period. The normal loss is 10% of input.
There is no opening or closing work-in-progress. Output in the period was 10,920 kg. What was the
abnormal gain/loss in the period?

*[a] Abnormal gain of 120 kg

[b] Abnormal loss of 120 kg

[c] Abnormal gain of 1,080 kg

[d] Abnormal loss of 1,080 kg

[e] Abnormal gain of 240 kg

Explanation:

Normal loss = 1200 kg

12000 – 1200 – 10920 = 120 kg abnormal gain

Q.42) A chemical process has normal wastage of 10% of input. In a period, 2,500 kg of material were
input and there was abnormal loss of 75 kg. What quantity of good production was achieved?

*[a] 2,175 kg

[b] 2,250 kg

[c] 2,425 kg

[d] 2,500 kg

[e] 1,975 kg

Explanation:

Quantity of good production = 2500 – 250 – 75 = 2175 kg

Q.43) In a process 4000 units are introduced during a period. 5% of input is normal loss. Closing
work-in-progress 60% complete is 500 units. 3300 completed units are transferred to next process.
Equivalent production for the period is

[a] 3800 units

*[b] 3600 units

[c] 3610 units

[d] 3420 units

[e] 3300 units

Explanation: Equivalent production = (60% * 500) + 3300 = 3600

Q.44) A company produces two joint products, P and V. In a year, further processing costs beyond
split-off point spent were Rs 8,000 and Rs 12,000 for 800 units of P and 400 units of V respectively. P
sells at Rs 25 and V sells at Rs 50 per unit. A sum of Rs 9,000 of joint cost were allocated to product P
based on the net realization method. What were the total joint cost in the year?

[a] Rs 20,000

[b] Rs 10,000

*[c] Rs 15,000

[d] Rs 22,500

[e] Rs 18,000

Explanation:

Products P V Total
Units 800 400
S.P. (Rs) 25 50
Sales (Rs) 20,000 20,000
Further 8,000 12,000
costs (Rs)
NRV (Rs) 12,000 8,000 20,000

Joint cost appropriated Rs 9,000

Total Joint Cost = (9,000/12,000) x 20,000 = Rs 15,000

Q.45) The following information is available for the W hotel for the latest thirty day period.

Number of rooms available per night = 40

Percentage occupancy achieved = 65%

Room servicing cost incurred = Rs. 3900

The room servicing cost per occupied room-night last period, to the nearest Rs, was:

[a] Rs 3.25

*[b] Rs 5.00

[c] Rs 97.50

[d] Rs 150.00

[e] Rs 10.00
Explanation:

Room servicing cost = 3900 / (40 * 65% * 30)

Room servicing cost = 3900 / 780 = Rs 5

Q.46) Empire Hotel has a capacity of 100 single rooms and 20 double rooms. Average occupancy is
70% for 365 days of the year. The rent for a double room is kept at 150% of a single room. The total
room occupancy days in a year in terms of single room is

[a] 32193

[b] 30660

[c] 31660

[d] 35685

*[e] 33215

Explanation:

1 double room = 1.5 single in terms of revenue.

Capacity = 100 + 1.5 × 20 = 100 + 30 = 130 equivalent single rooms.

Total Room Occupancy p.a. = 130× 365 × 70% = 33215 days.

Q.47) The budgeted standard hours of a factory 12,000. The capacity utilization ratio for April 2013
stood at 90% while the efficiency ratio for the month came to 120%. The actual production in
standard hours for April 2013 is:

[a] 10,800

*[b] 12,960

[c] 14,400

[d] 12,800

[e] 11,600

Explanation:

Capacity ratio = Actual hours worked / Budgeted hours * 100

0.9 = actual hours worked / 12,000

actual hours = 10,800

Efficiency ratio = actual production in standard hours / Actual hours worked * 100
1.2 = actual production in std hrs / 10,800

actual production in std hrs = 12,960

Q.48) Calculate labour efficiency variance from the following information:

Standard time for the job 1000 hours

Standard rate per hour Rs 50

Actual time taken 900 hours

Actual wages paid Rs 36,000

*[a] Rs 5,000 (F)

[b] Rs 5,000 (A)

[c] Rs 4,000 (F)

[d] Rs 4,000 (A)

[e] Rs 9,000 (F)

Explanation:

Labour efficiency variance = std rate per hr * (std time for actual output – actual time)

LEV = 50 * (1000 – 900)

LEV = 50 * 100

LEV = 5000

Since this is a positive figure, so variance is favourable.

Q.49) Calculate material usage variance from the below information:

Standard: Material for 70 kg finished products 100 kg

Price of material Rs 1 per kg
Actual: Output 2,10,000 kg
Material used 2,80,000 kg
Cost of materials Rs 2,52,000

[a] Rs 18,000 (F)

[b] Rs 18,000 (A)

*[c] Rs 20,000 (F)

[d] Rs 20,000 (A)

[e] Rs 28,000 (F)

Explanation:

Material usage variance = (std qty for actual output – actual qty) * std price

std qty of actual output = 2,10,000 * (100/70) = 3,00,000

MUV = (3,00,000 – 2,80,000) * 1

MUV = Rs 20,000 (F)

Q.50) A Ltd. used 4,538 kgs of material at a standard cost of Rs 2.50 per kg. The material usage
variance was Rs 280 (Favourable). The standard usage of material for the period is

[a] 4,700 kgs

*[b] 4,650 kgs

[c] 4,600 kgs

[d] 4,588 kgs

[e] 4,800 kgs

Explanation:

Material usage variance = (Standard quantity for actual output – Actual Quantity) * standard price

280 = (Standard usage – 4538) * 2.5

112 = Standard usage – 4538

Standard usage = 4650 kg

Q.51) Standard Price per kg of Material Rs 2, Actual Material used 2,000 kg, Actual cost of Material
Rs 3,000. Actual output 2,100 kg. Compute Material Price Variance.

[a] Rs 1050 (Favourable)

[b] Rs 1142 (Favourable)

*[c] Rs 1000 (Favourable)

[d] Rs 900 (Favourable)

[e] Rs 750 (Favourable)

Explanation:

Material Price Variance = (Standard Price – Actual Price) * Actual Quantity

Actual Price = 3000 / 2000 = 1.5 per kg

Material Price Variance = (2 – 1.5) * 2000 = Rs 1000 (favourable)

Q.52) If standard hours are 400 @ Rs 1 per hour and actual hours are 380 @ Rs 1.50 per hour, the
labour rate variance is:

[a] Rs 20 (Favorable)

[b] Rs 25 (Favorable)

[c] Rs 100 (Adverse)

*[d] Rs 190 (Adverse)

[e] Rs 150 (Adverse)

Explanation:

Labour rate variance = (Standard rate – Actual rate) * Actual hours

Labour rate variance = (1 – 1.5) * 380 = Rs 190 (adverse)

Economics

Q.53) A firm’s average fixed cost is Rs. 20 at 6 units of output. What will it be at 4 units of output?

[a] Rs 60

[b] Rs 40

[c] Rs 20

*[d] Rs 30

[e] Rs 50

Explanation:

Total fixed cost = 20 * 6 = 120

AFC at 4 units = 120/4 = 30

Q.54) The short-run cost function of a firm is as under:

TC = 200 + 5Q + 2Q2

What will be the level of output at which AC and MC will be equal?

[a] 20

[b] 15

*[c] 10
[d] 5

[e] 25

Explanation:

AC = TC/Q = 200/Q + 5 + 2Q

MC = change in TC / change in Q = 4Q + 5

So, 200/Q + 5 + 2Q = 4Q + 5

200/Q = 2Q

Q2 = 100

Q = 10

Q.55) The total cost C(x) of a firm is:

C(x) = 1500 + 30x + x2

Where x is the output. Determine the marginal cost when 20 units are produced.

*[a] 70

[b] 71

[c] 72

[d] 73

[e] 75

Explanation:

MC = 30 + 2x

Substituting the value of x

MC = 30 + 2(20)

MC = 30 + 40 = 70

Q.56) A firm’s average total cost is Rs 300 at 5 units of output and Rs 320 at 6 units of output. The
marginal cost of producing the 6th unit is:

[a] Rs 20

[b] Rs 120

[c] Rs 320

*[d] Rs 420

[e] Rs 100
Explanation:

TC of 5 units = 300 * 5 = 1500

TC of 6 units = 320 * 6 = 1920

MC = 1920 – 1500 = 420

Q.57) A firm has a variable cost of Rs 1000 at 5 units of output. If fixed costs are Rs 400, what will be
the average total cost at 5 units of output?

[a] Rs 60

[b] Rs 120

[c] Rs 1400

[d] Rs 1080

*[e] Rs 280

Explanation:

TVC of 5 units = 1000

FC = 400

TC of 5 units = 1400

ATC at 5 units = 1400/5 = 280

Q.58) If demand equation is given by D = 1000 – P and the supply equation is given by S = 100 + 4P,
equilibrium price will be

[a] 160

[b] 150

*[c] 180

[d] 170

[e] 200

Explanation:

At equilibrium, demand = supply

So, 1000 – P = 100 + 4P

5P = 900

P = 180
Q.59) If the price of samosa rises for Rs 12 per piece to Rs 20 per piece as a result of which the daily
sales decrease from 300 to 200 pieces per day. The price elasticity of demand can be estimated as

*[a] 0.5

[b] 0.8

[c] 0.25

[d] 2.10

[e] 1.5

Explanation:
dq p
PED = *q
dp

PED = (-100/8) * (12/300)

PED = -0.5

Q.60) The price of a commodity is Rs 20 and the quantity demanded at this price is 200 units. If the
price falls to Rs 16 and the quantity demanded increases to 280 units, calculate price (arc) elasticity.

[a] 1.6

*[b] 1.5

[c] 1.9

[d] 1.3

[e] 1.2

Explanation:

Elasticity = (36 / 480) * (80 / 4)

Elasticity = 1.5

Q.61) Find the marginal revenue of a firm that sells a product at a price of Rs 10 and the price
elasticity of demand for the product is (-)2.

*[a] Rs 5

[b] Rs 10

[c] Rs 15
[d] Rs 20

[e] Rs 25

Explanation:

MR = P (1 – 1/e)

MR = 10 (1 – 1/2)

MR = 10 * 1/2 = Rs 5

Q.62) If the quantity demanded of coffee increases by 5% when the price of tea increases by 20%,
the cross price elasticity of demand between coffee and tea is

[a] 4

[b] (-)4

*[c] 0.25

[d] (-)0.25

[e] 1

Explanation:

Cross price elasticity (x,y) = % change in quantity demanded of good X / % change in price of good Y

Cross price elasticity = 5% / 20% = 0.25

Q.63) The supply function is given as Q = -100 + 10P. Find the elasticity using point method, when
price is Rs 15.

[a] 4

[b] -3

[c] -5

*[d] 3

[e] 5

Explanation:

At P = 15, Q = -100 + 10(15) = 50

At P = 14, Q = -100 + 10(14) = 40

Change in P = -1

Change in Q = -10

Es = (-10/-1) * (15/50) = 3
Q.64) €/$ exchange rate goes from € 1 = $0.93 to €1 = $0.99. This indicates

[a] Dollar appreciation of 6.45%

[b] Dollar depreciation of 6.45%

[c] Dollar appreciation of 6.06%

*[d] Dollar depreciation of 6.06%

[e] Dollar appreciation of 6%

Explanation:

Dollar has depreciated since now we can buy more dollars from one euro.

To calculate appreciation/depreciation of dollars in %, we need to convert the quotes in terms of

value of one dollar.

Old rate: € 1 = $0.93

or, $ 1 = € 1/0.93

new rate: €1 = $0.99

or, $ 1 = € 1/0.99

depreciation (%) = (new rate – old rate) / old rate

1 1
−
0.99 0.93
= 1
0.93
−0.06
0.99∗0.93
= 1
0.93

= -0.06 / 0.99 * 100

= -6.06% (negative sign indicates depreciation)

Q.65) Suppose the purchasing power parity holds, and that the current exchange rate between the
dollar and the yen is 110 yen/$. If inflation in the US runs at 4 percent and inflation in Japan runs at 2
percent, next year we would expect the exchange rate to be roughly

[a] 112 yen/$

*[b] 108 yen/$

[c] 116 yen/$

[d] 102 yen/$

[e] 100 yen/$

Explanation:

Next year exchange rate = 110 * (1.02/1.04) = 108 (approx.)

Q.66) Given the consumption function, C = 0.8Y, and the investment function I = 102 – 0.2i, then the
IS-curve is

[a] Y = 500 – 10i

[b] Y = 450 – i

*[c] Y = 510 – i

[d] Y = 505 – 2i

[e] Y = 500 – 2i

Explanation:

At all points of IS curve, savings = investment

C = 0.8Y

So, S = 0.2Y

0.2Y = 102 – 0.2i

Y = 510 – i

Q.67) Suppose the demand and total cost function for a monopoly firm are as follows:

Q = 100 – 0.2P

P = 500 – 5Q

TC = 50 + 20Q + Q2

What will be the profit maximization output?

[a] 20

[b] 10

[c] 25

*[d] 40

[e] 50

Explanation:

At maximum profit, MR = MC
TR = P*Q

TR = (500 – 5Q) * Q

TR = 500Q – 5Q2

MR = 500 – 10Q

MC = 20 + 2Q

So, 500 – 10Q = 20 + 2Q

12Q = 480

Q = 40

Q.68) Total Revenue (TR) function and the Total Cost (TC) function of a perfectly competitive market
firm are as follows:

TR = 480Q – 8Q2

TC = 400 + 8Q2

The profit maximizing output would be:

[a] 60

*[b] 15

[c] 50

[d] 30

[e] 25

Explanation:

At profit maximizing output, MR = MC

MR = 480 – 16Q

MC = 16Q

480 – 16Q = 16Q

32Q = 480

Q = 15

Q.69) If marginal propensity to consume is equal to 0.8, with the increase in investment by Rs 100
crore the increase in income will be:

[a] Rs 80 crore

*[b] Rs 500 crore

[c] Rs 100 crore

[d] Rs 125 crore

[e] Rs 20 crore

Explanation:

Multiplier = 1 / MPS = 1 / 0.2 = 5

Increase in income = 5 * 100 = 500 crore

Q.70) For an economy which consist of single automobile maker and that in year 2020, 30000
vehicles are produced with an average price of Rs 5 lakh. For this economy what would be the
increase in the nominal GDP for 2021 compared with 2020 with the 4% greater automobile
production and 8% inflation.

[a] 4.0%

[b] 12.0%

[c] 6.0%

[d] 8.0%

*[e] 12.32%

Explanation:

GDP in 2020 = 30,000 * 5 lakh = Rs 1,50,000 lakh

GDP in 2021 = 30,000(1.04) * 5(1.08) lakh = Rs 1,68,480 lakh

Difference = Rs 18,480 lakh

Increase in nominal GDP (in %) = (18,480/1,50,000)*100 = 12.32%

Q.71) Suppose in an economy, autonomous investment (I) is Rs 600 crores and the following
consumption function is given:

C = 200 + 0.8Y

Given the above, find out the equilibrium level of income.

[a] Rs 2000 crore

[b] Rs 3000 crore

*[c] Rs 4000 crore

[d] Rs 5000 crore

[e] Rs 6000 crore

Explanation:
Y=C+I

Y = 200 + 0.8Y + 600

Y – 0.8Y = 200 + 600

0.2Y = 800

Y = 800 / 0.2 = 4000

Q.72) Suppose the level of autonomous investment in an economy is 200 crores. The following
saving function is given:

S = - 80 + 0.25Y

Find the equilibrium level of income.

[a] Rs 560 crore

[b] Rs 280 crore

[c] Rs 1000 crore

*[d] Rs 1120 crore

[e] Rs 2000 crore

Explanation:

At equilibrium, S = I

-80 + 0.25Y = 200

0.25Y = 280

Y = 280 / 0.25 = 1120

Q.73) Find the equilibrium national income from the following information:

C = 40 + 0.8Y

I = 50 crore

G = 40 crore

X = 11 crore

M = 5 + 0.2Y

[a] Rs 540 crore

[b] Rs 440 crore

[c] Rs 140 crore

[d] Rs 240 crore

*[e] Rs 340 crore

Explanation:

Y = C + I + G + (X – M)

Y = 40 + 0.8Y + 50 + 40 + 11 – (5 + 0.2Y)

Y = 340

Q.74) If by increasing the quantity of labour used by one unit, the firm can give up 2 units of capital
and still produce the same output, then the MRTS(L,K) is:

[a] 4

*[b] 2

[c] 0.5

[d] 1

[e] 2.5

Explanation:

MRTS (L,K) = 2/1 = 2

Q.75) Assume that when price is Rs 20, the quantity demanded is 9 units, and when price is Rs 19,
the quantity demanded is 10 units. Based on this information, what is the marginal revenue resulting
from an increase in output from 9 units to 10 units.

[a] Rs 20

[b] Rs 19

*[c] Rs 10

[d] Rs 1

[e] Rs 5

Explanation:

TR of 9 units = 20 * 9 = 180

TR of 10 units = 19 * 10 = 190

MR = 190 – 180 = 10
Q.76) If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by Rs 100
will result in an increase in consumer expenditure by

[a] Rs 100

[b] Rs 70

[c] Rs 20

[d] Rs 25

*[e] Rs 50

Explanation:

Rs 20 is the autonomous consumption which is not affected by change in income.

So, change in consumption = 100 * MPC = 100 * 0.5 = Rs 50

Finance

Q.77) A Rs 5,000 bond with a 10% coupon rate matures in 8 years. The required rate of return is
11%. Find out the present value of the bond.

PVAF(11%,8y) = 5.146

PVF(11%,8y) = 0.434

[a] Rs 5,000

[b] Rs 25,947

*[c] Rs 4,743

[d] Rs 2,170

[e] Rs 22,754

Explanation:

PV of bond = [Interest * PVAF(11%,8y)] + [Redemption value * PVF(11%,8y)]

PV of bond = (500 * 5.146) + (5000 * 0.434)

PV of bond = 2573 + 2170 = 4743

Q.78) Five years ago, XYZ Ltd issued 13% irredeemable debentures at Rs 104, at Rs 4 premium to
their par value of Rs 100. The current market price of these debentures is Rs 91. Calculate the
current cost of debenture capital if the company pays corporate tax at a rate of 30%.
[a] 14.28%

[b] 13%

*[c] 10%

[d] 8.75%

[e] 9.10%

Explanation:
I
For irredeemable debentures, Kd = NP * (1 – t)

I = annual interest

NP = net proceeds of debentures or current market price

13
Kd = 91 * (1 – 0.30)

Kd = 10%

Q.79) A bond of Rs 10,000 bearing coupon rate 12% and redeemable in 8 years at par is being traded
at Rs 10,600. Find out the approximate YTM.

*[a] 10.86%

[b] 12.31%

[c] 11.58%

[d] 17.37%

[e] 9.75%

Explanation:
RV−B0
Int + n
Approximate YTM =
0.4RV + 0.6BO
RV−B0
Int + n
Also, Approximate YTM =
(RV + BO)/2

Q.80) A 16% bond with a face value of Rs 250 is available for Rs 200 in the market. The yield on the
bond is

[a] 15%

[b] 16%

*[c] 20%

[d] 32%
[e] 80%

Explanation:

Current yield = interest / market price

Interest = 16% * 250 = Rs 40

Current yield = (40 / 200) * 100 = 20%

Q.81) A company issues Rs 10,00,000 18% debentures of Rs 100 each. The company is in 30% tax
bracket. You are required to calculate the cost of debt if debentures are issued at 10% discount?

*[a] 14%

[b] 18%

[c] 12.6%

[d] 15%

[e] 20%

Explanation:

Kd = I(1-t)/NP

Kd = 1,80,000(1-0.3)/9,00,000

Kd = 14%

Q.82) Suppose a project costs Rs 20,00,000 and yields annually a profit of Rs 3,00,000 after
depreciation @ 12.5% (straight line method) but before tax at 50%. Calculate payback period.

[a] 6.67 years

[b] 13.33 years

*[c] 5 years

[d] 4.44 years

[e] 3.64 years

Explanation:

Payback period = total initial capital investment / annual expected after-tax net cash flow

After-tax net cash flow = profit + depreciation – tax

Tax = 50% * 3,00,000 = 1,50,000

Depreciation = 12.5% * 20,00,000 = 2,50,000

After-tax net cash flow = 3,00,000 + 2,50,000 – 1,50,000 = 4,00,000

Payback period = 20,00,000 / 4,00,000 = 5 years

Q.83) Compute NPV for a project with a net investment of Rs 1,00,000 and net cash flows for year
one is Rs 55,000; for year two is 80,000 and for year three is Rs 15,000. Cost of capital is 10%. [PVF @
10% for three years are 0.909, 0.826 and 0.751]

[a] Rs 36,440

*[b] Rs 27,340

[c] Rs 50,000

[d] Rs 20,000

[e] Rs 22,540

Explanation:

NPV = (-)1,00,000 + 55,000(0.909) + 80,000(0.826) + 15,000(0.751)

NPV = 27,340

Q.84) Indicate the cost of equity capital, based on capital asset pricing model, with the following
information:

Beta coefficient = 1.40

Risk-free rate of interest = 9%

Expected Rate of Return on equity in the market = 16%

[a] 9.8%

[b] 18%

*[c] 18.8%

[d] 16%

[e] 14.4%

Explanation:

r = risk-free rate + beta * (average market return – risk-free rate)

r = 9 + 1.4(16 - 9)

r = 9 + 1.4*7

r = 9 + 9.8 = 18.8%

Q.85) A share is available today at a price of Rs 102. After one year, the company is expected to
declare a dividend of Rs 14 per share. You expect to sell the share for Rs 105 (ex-dividend). Find out
the holding period return from your investment.

[a] 2.94%
*[b] 16.67%

[c] 13.73%

[d] 16.19%

[e] 15.65%

Explanation:

Holding period return = (Income + Pn+1 – Pn) / Pn

Pn = value at the start of the holding period

Pn+1 = value at the end of the holding period

Income = dividend = Rs 14

HPR = [(14 + 105 – 102) / 102] * 100

HPR = (17 / 102) * 100

HPR = 16.67%

Q.86) A security has a standard deviation of 3%. The correlation coefficient of the security with the
market is 0.8 and market standard deviation is 1.5%. The return form government securities is 12%
and from the market portfolio is 18%. What is the value of beta?

*[a] 1.6

[b] 0.4

[c] 2.5

[d] 0.625

[e] 1.2

Explanation:

Beta = (std dev of security / std dev of market) * correlation coefficient of security with market

Beta = (0.03/0.015) * 0.8

Beta = 2 * 0.8 = 1.6

Q.87) XYZ Ltd. has invested Rs 50,000 in a portfolio of shares. It has invested 30% in shares of A Ltd
and balance in shares of B Ltd. The expected return from these two companies are 15% and 12%
respectively. Find out the expected return in percentage.

*[a] 12.90%

[b] 14.10%

[c] 12%
[d] 15%

[e] 13.50%

Explanation:

Expected return = (0.3 * 15%) + (0.7 * 12%)

Expected return = 4.5 + 8.4 = 12.90%

Q.88) A firm pays a dividend of 20% on the equity shares of face value of Rs 100 each. Find out the
value of the equity share given that the dividend rate is expected to remain same and the required
rate of return of the investor is 15%.

[a] Rs 100

[b] Rs 120

[c] Rs 115

[d] Rs 138

*[e] Rs 133.33

Explanation:

P0 = D / ke

P0 = value of share

ke = required rate of return

D = dividend

P0 = 20 / 0.15 = 133.33

Q.89) XYZ Ltd has just paid its annual dividend of Rs 3 per share on the equity shares having face
value of Rs 10. The dividend rate is expected to grow at the rate of 8% p.a. forever. The company
belongs to a risk-group for which the equity capitalisation rate of 14% is found to be consistent.
What is the intrinsic value of the share?

[a] Rs 50

*[b] Rs 54

[c] Rs 21.43

[d] Rs 23.14

[e] Rs 27

Explanation:

P0 = D1 / (ke – g)

P0 = intrinsic value of share

D1 = dividend at the end of year 1

ke = equity capitalisation rate

g = growth rate

D1 = 3 (1 + 0.08) = 3.24

P0 = 3.24 / (0.14 – 0.08)

P0 = 3.24 / 0.06

P0 = 54

Q.90) The earnings per share of XYZ Ltd is Rs 1.50. The investors expect that a PE ratio of 32 is
appropriate for this company. What should be the price of the share?

*[a] Rs 48

[b] Rs 33.50

[c] Rs 21.33

[d] Rs 72

[e] Rs 32

Explanation:

Price = EPS * PE ratio

Price = 1.50 * 32 = 48

Q.91) From the following information, calculate P/E ratio:

Equity share capital of Rs 10 each Rs 8,00,000

9% preference share capital of Rs 10 each Rs 3,00,000

Profit (after 35% tax) Rs 2,67,000

Depreciation Rs 67,000

Market price of equity share Rs 48

[a] 15 times

*[b] 16 times

[c] 17 times

[d] 18 times

[e] 20 times

Explanation:
P/E ratio = share price / EPS

Earnings = 2,67,000 – preference dividend

Earnings = 2,67,000 – 27,000 = 2,40,000

Number of equity shares = 80,000

EPS = 2,40,000 / 80,000 = 3

P/E ratio = 48/3 = 16

Q.92) Compute price per share as per Walter’s model from the following information:

Earnings per share = Rs 60

Capitalisation rate = 10%

Return on investment = 20%

Dividend payout ratio = 30%

*[a] Rs 1020

[b] Rs 390

[c] Rs 540

[d] Rs 510

[e] Rs 780

Explanation:
r
D+ (E − D)
ke
P=
ke
D = dividend = 30% * 60 = 18

r = 20%

ke = 10%
0.20
18 + (60 − 18)
0.10
P=
0.10
P = [18 + 2(42)] / 0.10

P = (18 + 84) / 0.10

P = 102 / 10 = 1020

Q.93) The covariance of the market’s returns with the stock’s returns is .008. The standard deviation
of the market’s returns is 8% and the standard deviation of the stock’s returns is 11%. What is the
correlation coefficient between the stock and market’s returns?
[a] + 0.50

*[b] + 0.91

[c] + 1

[d] + 1.25

[e] + 0.82

Explanation:

Corr. Coeff. = covariance / (std dev of security * std dev of market)

Corr. coeff. = 0.008 / (0.08 * 0.11)

Corr. coeff. = 0.008 / 0.0088 = 0.91

Q.94) The current market price of a company’s share is Rs 90 and the expected dividend per share
next year is Rs 4.5. If the dividend is expected to grow at a constant rate of 8%, the shareholder’s
required rate of return will be

[a] 8%

[b] 5%

[c] 20%

[d] 10%

*[e] 13%

Explanation:

P0 = D1 / (ke – g)

P0 = intrinsic value of share

D1 = dividend at the end of year 1

ke = equity capitalisation rate

g = growth rate

90 = 4.5 / (ke – 0.08)

ke – 0.08 = 4.5 / 90

ke – 0.08 = 0.05

ke = 0.13 or 13%

Q.95) A company issues 10% irredeemable preference shares. The face value per share is Rs 100, but
the issue price is Rs 95. What is the cost of preference share?

[a] 10.43%
*[b] 10.53%

[c] 10.63%

[d] 10.73%

[e] 10.83%

Explanation:

Cost of irredeemable preference share = Pref. dividend / net proceeds

= 10 / 95 = 10.53%

Q.96) ABC Ltd. has Rs 100 preference shares redeemable at a premium of 10% with 15 years
maturity. The coupon rate is 12%; floatation cost is 5% and sale price is Rs 95. Calculate the cost of
preference shares.

[a] 12%

[b] 15%

*[c] 13.33%

[d] 13%

[e] 10%

Explanation:
RV−NP
D+
N
Kp = RV+NP
2

RV = 110

NP = 95 – 5% of 100 = 90
110−90
12 +
15
Kp = 110+90
2

12+1.33
Kp =
100
Kp = 13.33%

Q.97) A company has issued equity share capital having a face value of Rs 10 at a premium of 50%,
incurring 20% of the issue price as cost of issue. The expected rate of dividend is 24%. What is the
cost of equity capital?

[a] 15%

*[b] 20%
[c] 25%

[d] 12%

[e] 24%

Explanation:

Face value = 10

Dividend (D1) = 2.4

Issue price = 10 + 5 = 15

NP = 15(1-0.2) = 12

Ke = D1/NP = 2.4/12 = 20%

Q.98) Calculate financial leverage from the following information:

EBIT Rs 12,00,000

interest Rs 2,00,000

corporate tax 30%

[a] 1.43

[b] 1.71

[c] 1.11

*[d] 1.20

[e] 0.83

Explanation:

Financial leverage = EBIT / PBT

PBT = EBIT – interest

PBT = 12,00,000 – 2,00,000 = 10,00,000

Financial leverage = 12,00,000 / 10,00,000 = 1.2

Q.99) A firm wants to know the Degree of Operating Leverage (DOL) with the following information:

Current level of sales : 6000 units

Break-even point sales : 4000 units

What would be the DOL?

[a] 1.50
[b] 0.67

*[c] 3.00

[d] 2.00

[e] 1.00

DOL = 1 / MOS(%)

MOS in units = Current level of sales – break-even point sales

MOS = 6000 – 4000 = 2000 units

MOS as a percentage of sales = 2000 / 6000 = 1/3

So, DOL = 3

Q.100) A company has a financial structure where equity is 70% of its total debt plus equity. Its cost
of equity is 10% and gross loan interest is 5%. Corporation tax is paid at 30%. What is the company’s
weighted average cost of capital (WACC)?

[a] 7.55%

[b] 8.70%

[c] 7.80%

*[d] 8.05%

[e] 6.40%

Explanation:

WACC = [0.7 * 10] + [0.3 * 5( 1 – 0.3)]

WACC = 7 + [0.3 * 3.5]

WACC = 7 + 1.05 = 8.05%