Net working capital is calculated as:
It measures short-term liquidity.
Accounting and Finance MCQs
Inventory days are 60, receivable days are 45 and payable days are 30. The cash conversion cycle is:
CCC = 60 + 45 - 30 = 75 days.
Annual demand is 3,600 units, ordering cost is Rs. 100 per order and holding cost is Rs. 8 per unit per year. The EOQ is:
EOQ = square root of (2 x 3,600 x 100 / 8) = square root of 90,000 = 300.
Accounts receivable are Rs. 100,000 and annual credit sales are Rs. 730,000. Average collection period (365-day year) is:
Days = 100,000 / 730,000 x 365 = 50.
The pre-tax cost of debt is 10% and the tax rate is 30%. The after-tax cost of debt is:
After-tax cost = 10% x (1 - 0.30) = 7%.
Beta measures:
Beta shows sensitivity of a security's returns to market returns.
Diversification can eliminate:
Company-specific risk can be reduced by holding a diversified portfolio; market risk remains.
Standard deviation of returns is a measure of:
A higher standard deviation indicates greater dispersion of returns.
According to Modigliani and Miller (no taxes), the value of a firm:
MM Proposition I in a perfect market without taxes says capital structure does not affect firm value.
The tax shield on debt arises because:
Deductibility of interest reduces taxable income and tax paid.
EBIT is Rs. 200,000 and interest is Rs. 50,000. The degree of financial leverage is approximately:
DFL = EBIT / (EBIT - interest) = 200,000 / 150,000 = 1.33.
An investment of Rs. 100,000 generates equal annual cash inflows of Rs. 25,000. The payback period is:
Payback = 100,000 / 25,000 = 4 years.
A major limitation of the payback period method is that it:
Simple payback is easy but ignores timing and later cash flows.
The present value of future cash flows is Rs. 150,000 and the initial investment is Rs. 100,000. The profitability index is:
PI = PV of future cash flows / initial investment = 150,000 / 100,000 = 1.5.
The weighted average cost of capital (WACC) is:
WACC is used as the discount rate for projects of average risk.
Risk-free rate is 5%, beta is 1.2 and expected market return is 10%. The cost of equity under CAPM is:
Ke = 5% + 1.2 x (10% - 5%) = 11%.
According to the NPV rule, an independent project should be accepted if its NPV is:
A positive NPV adds value to shareholders.
The internal rate of return (IRR) is the discount rate at which:
IRR equates the present value of inflows to the present value of outflows.
The agency problem arises from a conflict of interest between:
Managers (agents) may not always act in the best interests of shareholders (principals).
The time value of money means that:
Money today can be invested to earn a return.
The future value of Rs. 10,000 invested for 2 years at 10% compound interest is:
FV = 10,000 x (1.10)^2 = Rs. 12,100.
The present value of Rs. 11,000 to be received after 1 year at a discount rate of 10% is:
PV = 11,000 / 1.10 = Rs. 10,000.
The present value of a perpetuity paying Rs. 5,000 per year at a discount rate of 10% is:
PV of perpetuity = cash flow / rate = 5,000 / 0.10 = Rs. 50,000.
An annuity due is an annuity in which payments are made:
An ordinary annuity pays at the end of each period.
When shares are issued at a price above their par value, the excess is credited to:
Share premium is a capital reserve arising from issue price above nominal value.