Question 1

The ideal situation is to have high financial leverage and low operating leverage.

Accepted Answer

B

Question 2

Composite leverage explains change in taxable income on account of change in sales

Accepted Answer

Composite leverage measures the sensitivity of taxable income to changes in sales, combining both operating and financial leverage effects.

Question 3

Dividend on preference share capital is ignored while calculating operating leverage.

Accepted Answer

B

Question 4

Trading on equity implies having a ------ debt-equity ratio.

Accepted Answer

Trading on equity implies utilizing a high proportion of debt to finance the operations of a business, aiming to increase the returns to equity shareholders. This strategy is based on the premise that if the firm can earn a higher rate of return on its investments than the interest rate on its debt, the excess will benefit the shareholders. Therefore, it involves having a high debt-equity ratio.

Question 5

………. on capital is called cost of capital.

Accepted Answer

The cost of capital refers to the minimum expected return on capital that is required to make a capital investment worthwhile. This is essentially the return that investors expect for providing capital to the company.

Question 6

Which among the following method is based on time value of money?

Accepted Answer

The Discounted Cash Flow (DCF) method considers the time value of money by discounting future cash flows to their present value.

Question 7

Under net present value criteria, a project is approved if ……

Accepted Answer

A positive NPV indicates that the project's returns exceed its costs, making it financially viable.

Question 8

The return available from the project after the pay-back period is not considered in the case of ……

Accepted Answer

The pay-back period method focuses solely on the time it takes for a project to recoup its initial investment, ignoring any returns that occur after this period.

Question 9

Internal rate of return and net present value are synonymous terms.

Accepted Answer

Internal rate of return (IRR) and net present value (NPV) are not synonymous; they are distinct financial metrics used to evaluate the profitability of investments. IRR is the discount rate that makes the NPV of all cash flows from a particular project equal to zero, while NPV calculates the difference between the present value of cash inflows and outflows over a period of time.

Question 10

Ind AS deals with Lease finance is ____

Accepted Answer

The answer of Ind AS deals with Lease finance is...

Question 11

……..is a long term lease and the lessee will be paying much more than the cost of the property or equipment to the lessor in the form of lease charges.

Accepted Answer

A financial lease is a type of lease where the lessee pays lease charges over a long period, often covering the full cost of the asset plus interest, effectively paying much more than the asset's initial cost.

Question 12

………is also known as dividend capitalisation model

Accepted Answer

Gordon's model is also known as the dividend capitalization model, which focuses on the relationship between a company's market value and its dividend policy.

Question 13

SVA stands for….

Accepted Answer

Shareholder Value Added (SVA) is a financial performance metric that measures the value a company has added to its shareholders.

Question 14

Financial risk arises when there is an involvement of ……in the capital structure

Accepted Answer

Financial risk arises due to the presence of debt in the capital structure, as it involves the commitment to pay interest regardless of the company's financial performance. Equity, right issues, and bonus issues do not inherently carry the same obligation and therefore do not contribute to financial risk in the same way.

Question 15

The concept of EVA has been developed by …….

Accepted Answer

The concept of Economic Value Added (EVA) has been developed by Stern Stewart & Co, a consulting firm. The term is often associated with the firm's founders, Joel Stern and G. Bennett Stewart III, hence option C is correct.

Question 16

Use of more debt capital rather than equity capital is called……

Accepted Answer

Financial leverage refers to the use of debt to acquire additional assets. It is the practice of using borrowed money to increase the potential return of an investment.

Question 17

The policy on quantum of dividend to be distributed as dividend is termed as ……

Accepted Answer

The term "Dividend policy" specifically refers to the policy a company uses to decide how much it will pay out to shareholders in the form of dividends.

Question 18

Operating leverage is not favourable when ………

Accepted Answer

Operating leverage is not favourable when fixed costs are more than the contribution because it indicates that the business is not generating enough revenue to cover its fixed costs, leading to potential losses.

Question 19

Stock dividend and bonus shares are synonymous terms.

Accepted Answer

Stock dividends and bonus shares essentially refer to the same financial concept, where a company issues additional shares to its shareholders at no extra cost, based on the number of shares they already own.

Quiz 6: Financial Leverage, Operating Leverage, and Investment Appraisal