Business Finance - Study Mode

[#251] Which of the following statement is false?
Correct Answer

(B) Capital budgeting decisions are reversible in nature

[#252] Which of the following is an assumption of the APT?
Correct Answer

(D) All investors hold the market portfolio

[#253] Which of the following are the examples of systematical risk. 1. Elimination of Government Subsidy 2. Increase in bank rate 3. Labour problem 4. High levered fund Select the correct answer:
Correct Answer

(C) Both 1 and 2

[#254] A company has issued 10% perpetual debt of Rs. 1,00,000 at 5% premium. If tax rate is 30%, then the cost of debt will be
Correct Answer

(C) 6.66%

Explanation

Solution: What is a perpetual debt? A perpetual debt is a loan that never needs to be repaid. The company keeps paying interest forever. Premium on debt: The company issued the debt at a 5% premium. This means the company actually received Rs. 1,00,000 + (5% of Rs. 1,00,000) = Rs. 1,05,000. Tax effect: The interest the company pays on its debt is tax-deductible. This means the company can reduce its tax bill by the amount of interest it pays. The tax rate is 30%. Calculating the cost of debt: The cost of debt is the effective interest rate after considering the tax savings. It's calculated as follows: 1. Interest payment: 10% of Rs. 1,00,000 = Rs. 10,000 2. Tax saving: 30% of Rs. 10,000 = Rs. 3,000 3. Net interest payment: Rs. 10,000 - Rs. 3,000 = Rs. 7,000 4. Cost of debt: (Net interest payment / Amount received) * 100 = (Rs. 7,000 / Rs. 1,05,000) * 100 = 6.66% Therefore, the correct answer is C: 6.66%

[#255] Which one of the following is the most popular method for estimating the cost of equity?
Correct Answer

(A) Capital asset pricing model