Indian Institute of Management Udaipur

One Year Master of Business Administration Programmes

Year : 2024-25 Quiz No :3

Term :I Total Marks : 15
Course : Corporate Finance Time : 40 minutes

Name Roll No

Programme

Instructions
1. This is a closed book quiz.
2. All questions are compulsory. Each question carries one mark.
3. In this quiz, each question is independent of the other questions.
4. Use of (non-financial) calculators is allowed. No other gadget may be used.
5. Write/indicate answers with PEN ONLY.
6. Answers are to be provided on the question paper itself, and the paper should be returned for evaluation.
Workings can be done in the blank spaces provided on the question paper.
7. Only the question paper will be provided. Use the blank parts of the question paper to do rough
calculations.
8. For multiple choice questions, circle the single most appropriate option from among those provided. Do
not circle more than one option. Answers with more than circle will not be awarded marks. If you need to
change your answer, then clearly cross out the incorrect option and circle the revised option.
9. No marks will be awarded for partly correct answers. There is no negative marking for incorrect answers.
10. Some formulae that may be useful for this quiz are provided below. Please note that this is not necessarily
an exhaustive list of formulae required for this quiz nor is every formula here necessarily required.
𝐶 𝑛
𝑃𝑉 𝑜𝑓 𝑎 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 = 𝐶𝑜𝑢𝑝𝑜𝑛 𝑀
𝑟 𝑃0 𝑜𝑓 𝑎 𝑏𝑜𝑛𝑑 = ∑ 𝑖
+
(1 + 𝑟𝐷 ) (1 + 𝑟𝐷 )𝑛
𝑖=1
𝐶1
𝑃𝑉 𝑜𝑓 𝑎 𝑔𝑟𝑜𝑤𝑖𝑛𝑔 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 = ∞
𝑟−𝑔 𝐷𝑖
𝑃0 𝑜𝑓𝑎 𝑠𝑡𝑜𝑐𝑘 = ∑
(1 + 𝑟𝐸 )𝑖
𝐶 1 𝑖=1
𝑃𝑉 𝑜𝑓 𝑎 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 = (1 − )
𝑟 (1 + 𝑟)𝑛 𝐷1
𝑃0 𝑜𝑓 𝑎 𝑠𝑡𝑜𝑐𝑘 𝑤𝑖𝑡ℎ 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑔𝑟𝑜𝑤𝑡ℎ =
𝐶1 (1 + 𝑔) 𝑛 𝑟𝐸 − 𝑔
𝑃𝑉 𝑜𝑓 𝑎 𝑔𝑟𝑜𝑤𝑖𝑛𝑔 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 = (1 − )
𝑟−𝑔 (1 + 𝑟)𝑛 𝑃0 𝑜𝑓 𝑎 𝑠𝑡𝑜𝑐𝑘 = 𝑁𝑜 − 𝐺𝑟𝑜𝑤𝑡ℎ 𝑉𝑎𝑙𝑢𝑒
𝐶 + 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐺𝑟𝑜𝑤𝑡ℎ 𝑂𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑖𝑒𝑠
𝐹𝑉 𝑜𝑓 𝑎 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 = ((1 + 𝑟)𝑛 − 1)
𝑟
𝐷1 𝑃1− 𝑃0
𝐹𝑉 𝑜𝑓 𝑎 𝑔𝑟𝑜𝑤𝑖𝑛𝑔 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑟𝐸 = +
𝑃0 𝑃0
𝐶1
= ((1 + 𝑟)𝑛 − (1 + 𝑔)𝑛 ) EBIAT = EBIT.(1 – t)
𝑟−𝑔
𝑛 𝐹𝑟𝑒𝑒 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑠
𝐶𝑖
𝑁𝑃𝑉 = 𝐶0 + ∑
(1 + 𝑟)𝑖 = 𝐸𝐵𝐼𝐴𝑇 + 𝑁𝑜𝑛 − 𝑐𝑎𝑠ℎ 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝑖=1

− ∆𝑁𝑊𝐶 (𝑒𝑥𝑐𝑙. 𝑐𝑎𝑠ℎ) − 𝐶𝑎𝑝𝑒𝑥

𝑟𝑖 = 𝑟𝑓 + 𝛽𝑖 (𝐸(𝑟𝑚 ) − 𝑟𝑓 ) = 𝑟𝑓 + 𝛽𝑖 . 𝑀𝑅𝑃

Corporate Finance, Quiz 3 Page 1 of 5

1. Consider two bonds – P & Q, having similar credit ratings, which are maturing one year from
today. Both bonds are repayable at face value in a single instalment on maturity. Bond P bears a
coupon rate of 7%, while Bond Q has a coupon rate of 9%. If the yield sought by investors for 1-
year bonds with such credit ratings is 8%,
a. Both bonds will trade at a discount to face value.
b. Both bonds will trade at a premium to face value.
c. Bond P will trade at a discount to face value while Bond Q will trade at a premium to face
value.
d. Bond P will trade at a premium to face value while Bond Q will trade at a discount to face
value.

Since bond P has a lower coupon rate than the yield sought by investors, it will trade at a
discount to face value. And since bond Q has a higher coupon rate than the yield sought by
investors, it will trade at a premium to face value

2. According to the capital asset pricing model, which of the following stocks should have the
highest required rate of return?

Stock Standard Deviation (σ) Beta (β)

Akkad 19% 1.8
Bakkad 28% 1.1
Bambe 8% 0.8

a. Akkad because its ratio of standard deviation to beta is the lowest.

b. Bakkad because its ratio of standard deviation to beta is the highest.
c. Bakkad because its standard deviation is the highest.
d. Akkad because its beta is the highest.

The CAPM indicates that investors seek higher returns from higher beta (i.e., higher market risk)
stocks. The ratio of standard deviation to beta is not relevant.

3. You are saving up to buy a car after three years. To this end, you plan to invest Rs. 100,000, Rs.
110,000 and Rs. 121,000 in each of the next three years. If your investments earn a return of 15%
p.a., what amount would you have accumulated by the end of three years?
a. Rs. 249,692.
b. Rs. 379,750.
c. Rs. 666,667.
d. Rs. 2,000,000.

This would be the future value of a 3-year growing annuity with initial cash flow of Rs. 100,000,
growth rate of 10% and rate of return of 15%. C1/(r-g) ((1+r)n-(1+g)n) =100,000/(15% - 10%) x
1.153/1.13 = Rs. 379,750. Alternatively, you can just compound the three cash flows for 2, 1 and 0
years respectively and sum up.

4. A firm’s dividend decision is also called the:

a. Payout decision.
b. Capital budgeting decision.
c. Capital structure decision.
d. Investment decision.

Corporate Finance, Quiz 3 Page 2 of 5

5. Suppose you are willing to pay Rs. 30 today for a share of stock which you expect to sell at the
end of one year for Rs. 32. If you require an annual rate of return of 12 percent, what must be the
amount of the annual dividend which you expect to receive at the end of Year 1?
a. Rs. 1.60
b. Rs. 1.84
c. Rs. 3.60
d. Rs. 0.24

You require a return of 12% of Rs. 30 i.e., Rs. 3.60. If you expect the capital gain to be Rs. (32 –
30) i.e., Rs. 2, you should be expecting the remaining Rs. 1.6 to be Year 1 dividend.

6. Which of the following is correct with respect to the NPV method in capital budgeting?
A. An NPV of zero signifies that the project's cash flows are just sufficient to repay the
invested capital and to provide the required rate of return on that capital.
B. A project whose NPV is positive will increase the value of the firm if that project is
accepted.
C. A project is considered acceptable if it has a positive NPV.

a. A&B
b. B&C
c. A, B & C
d. A&C

7. If a company uses the same discount rate for evaluating all projects, which of the following
results are likely?
A. Accepting high-risk projects which should not be accepted.
B. Accepting low-risk projects which should not be accepted.
C. Rejecting high-risk projects which should be accepted.
D. Rejecting low-risk projects which should be accepted.

a. A&C
b. B&C
c. B&D
d. A&D

8. What is the present value of the following cash flow stream? Assume a discount rate of 7%.

Period 1 2 3 4 5
Cash Flow 50 50 50 50 50

a. Rs. 205.01
b. Rs. 287.54
c. Rs. 714.29
d. Rs. 70.13

This is a constant annuity. PV of a constant annuity = C/r.(1 – 1/(1 + r)n) = 50/7% x (1 – 1/1.075)
= Rs. 205.01

Corporate Finance, Quiz 3 Page 3 of 5

9. Consider two bonds – A & B, having similar credit ratings, which are maturing one year from
today. Both bonds are repayable at face value in a single instalment on maturity. Bond A bears a
coupon rate of 10%, while Bond B has a coupon rate of 8%. If the yield sought by investors for 1-
year bonds with such credit ratings increases from 9% to 9.5%,
a. The prices of both bonds will increase.
b. The prices of both bonds will decrease.
c. The price of bond A will increase, while the price of bond B will decrease.
d. The price of bond B will increase, while the price of bond A will decrease.

When required yields increase, bond prices decrease. It doesn’t matter what the coupon rates are.

10. A stock is expected to pay a dividend of Rs. 10 per share one year from today, and this dividend is
expected to grow at 5% every year. If the required rate of return on equity is 14%, estimate its
value as of today.
a. Rs. 71.43
b. Rs. 200.00
c. Rs. 116.67
d. Rs. 111.11

P0 = D1/ (rE – g) = 10/(14% - 5%) = Rs. 111.11.

11. A company has issued callable bonds to investors. Which of the following is correct?
a. The investors can seek repayment of the bond before its scheduled maturity.
b. The bond can be repaid by the company before its scheduled maturity.
c. The company can defer repayment of the bond until after its scheduled maturity.
d. The investors can make the company defer repayment of the bond until after its scheduled
maturity.

12. A company has 10 million shares outstanding, all of which are held by the entrepreneur who
founded it. It now plans to raise Rs. 100 million by issuing shares at a price of Rs. 40 to a venture
capital fund. After the proposed issue, the shareholding pattern of the company will be:
a. Entrepreneur – 60%; Venture capital fund – 40%.
b. Entrepreneur – 75%; Venture capital fund – 25%.
c. Entrepreneur – 80%; Venture capital fund – 20%.
d. Entrepreneur – 100%; Venture capital fund – 25%.

The VCF will be issued Rs. 100 million/ Rs. 40 = 2.5 million shares. Thus the entrepreneur owns
10 million out of (10 + 2.5) million shares i.e., 80%. The remaining 20% is held by the VCF.

13. Which of the following statements is correct?

a. Total risk is measured using σ while market risk is measured using β.
b. Market risk is measured using σ while total risk is measured using β.
c. Market risk is measured using σ while unique risk is measured using β.
d. Unique risk is measured using σ while total risk is measured using β.

Corporate Finance, Quiz 3 Page 4 of 5

14. A company had annual sales of Rs. 15 crores and it extends 15 days credit to all its customers. By
increasing the credit period to 30 days, it expects to increase its sales next year to Rs. 18 crores.
Which of the following is correct? (Assume 360 days in a year)
a. The increase in credit period will result in a cash inflow of Rs. 0.88 crores.
b. The increase in credit period will result in a cash inflow of Rs. 1.50 crores.
c. The increase in credit period will result in a cash outflow of Rs. 0.88 crores.
d. The increase in credit period will result in a cash outflow of Rs. 1.50 crores.

Accounts receivable at the end of this year is Rs. 15 crores x 15 days/360 days = Rs. 0.625 crores.
Accounts receivable at the end of next year is expected to be Rs. 18 crores x 30 days/360 days =
Rs. 1.5 crores. So, this will result in a cash outflow (more money locked up) of Rs. (1.5 – 0.625)
crore = Rs. 0.875 crore, rounded to Rs. 0.88 crore.

15. The projected cash flows for a project are C0 = -1,000; Cl = 600; C2 = 720; and C3 = 2,000. The
payback period for the project is:
a. 1.44 years
b. 1.56 years
c. 1.00 years
d. 2.00 years

After Year 1, Rs. 400 is yet to be recovered. That will take 400/720 part of Year 2 to recover.
Therefore, payback period = 1 + 400/720 = 1.56 years.

Corporate Finance, Quiz 3 Page 5 of 5