76. A 91-day treasury bill with face value Tk 1,000 is purchased at Tk 975. What is the approximate annualised yield (365-day basis), and why can it be treated as low risk?

A) About 9.4%, and the risk is low because the discount is divided by face value and annualised
B) About 2.5%, and the risk is high because bills are repayable only if the central bank makes a profit
C) About 10.3%, and the risk is low because it is a government obligation with a short maturity
D) About 2.6%, and the risk is low because the discount is divided by the price without annualising

Correct: C complex Treasury bills

Return for 91 days = 25/975 = 2.56%. Annualised = 2.56% × 365/91 = 10.3%. Treasury bills are government debt with short maturity.

77. A Bangladeshi exporter will receive US$250,000 in three months. The current spot rate is Tk 120.00 per US$; the three-month forward rate is Tk 122.40. Which statement about a forward contract is correct?

A) It gives the exporter the right but not the obligation to sell dollars at Tk 122.40, so any favourable move is kept
B) It fixes the taka receipt at Tk 30.6m whatever the spot rate becomes, removing both the downside and the upside
C) It fixes the taka receipt at Tk 30.6m but the exporter can cancel the contract without cost if the spot rate improves
D) It fixes the taka receipt at Tk 30.0m, and the exporter keeps the benefit if the dollar strengthens

Correct: B complex Currency hedging

250,000 × 122.40 = Tk 30.6m. A forward is binding, so it removes exposure and the chance of gain. An option would give a right but not an obligation.

78. Convertible loan stock of Tk 100 nominal may be converted into 25 ordinary shares in two years. The shares now trade at Tk 3.60 and are expected to grow by 10% a year. What is the expected conversion value at the conversion date, and what decision does it suggest if redemption is at par?

A) About Tk 108.9, so holders would redeem, because the conversion value is higher than the redemption value
B) About Tk 99.0, so holders would redeem, because the conversion value is lower than the nominal value
C) About Tk 90.0, so holders would convert, because the conversion value is at a premium to the par value
D) About Tk 108.9, so holders would convert, because conversion value exceeds the redemption value

Correct: D complex Convertible loan stock

Share price in two years = 3.60 × 1.21 = 4.356. Conversion value = 25 × 4.356 = 108.9 > 100, so conversion is preferred. Today's value is 25 × 3.60 = 90.

79. A company uses long-term finance for all fixed assets and permanent current assets, and short-term overdraft finance for the fluctuating part of current assets only. How is this policy described, and what is its main trade-off?

A) A matching policy, which balances cost and risk by funding assets for as long as they are needed
B) A conservative policy, which funds fluctuating current assets with long-term finance and so reduces risk but raises costs
C) An aggressive policy, which funds part of the permanent current assets with overdraft and so increases refinancing risk
D) A hedging policy, which uses derivatives to fix the cost of all short-term borrowing for the full financial year

Correct: A complex Working capital financing

Matching funds permanent assets with long-term finance and temporary needs with short-term finance. Aggressive uses more short-term, conservative more long-term.

80. A venture capital firm invests Tk 40m for 30% of a start-up and plans to exit through a flotation in five years when the start-up's value is expected to be Tk 400m. Ignoring dilution and costs, what is the expected annual return, and what makes flotation attractive to the investor?

A) About 24.6% a year, because the stake would be worth Tk 120m, and a flotation provides a market in which to sell shares
B) About 30.0% a year, because the stake is 30% of the business, and flotation requires no regulatory approval
C) About 3.0% a year, because the stake would be worth Tk 120m, and flotation removes all investment risk, with the investor having no need to consider the exit route at the outset of the investment
D) About 24.6% a year, because the stake would be worth Tk 400m, and flotation guarantees the sale price

Correct: A complex Venture capital

Stake value = 30% × 400 = 120. Return: (120/40)^(1/5) − 1 = 3^0.2 − 1 = 24.6%. Flotation gives a public market for exit but does not guarantee price.

81. A company replaces some of its equity by cheaper debt. Initially cost of capital falls, but at high gearing it rises. Which explanation is most consistent with the traditional view of capital structure?

A) Debt is more expensive than equity at every level of gearing, but the interest is tax deductible and so lowers the average cost until a limit is reached
B) Equity holders accept lower returns as gearing rises, because the lenders guarantee the dividends and so remove the risk borne by shareholders
C) The cost of capital is unaffected by gearing at all levels, which is the conclusion of the traditional view when taxes are ignored by the analyst
D) Debt is cheaper than equity and has a tax advantage, but at high gearing financial risk raises the cost of both debt and equity

Correct: D complex Gearing and cost

The traditional view says WACC initially falls as cheap debt is introduced, then rises as financial risk increases the required returns. Modigliani and Miller (no tax) argue that gearing is irrelevant.

82. Which TWO statements about investment appraisal methods are correct? (Select TWO.)

Multiple response
A) IRR is the discount rate at which the NPV of a project is zero
B) ARR is based on cash flows rather than accounting profits
C) Payback is the best measure of shareholder wealth creation
D) NPV considers the time value of money and the whole life of the project
E) Payback considers cash flows after the payback period

Correct: A, D difficult Investment appraisal

NPV discounts all cash flows and IRR gives zero NPV. Payback ignores later flows, ARR uses accounting profit and payback does not measure wealth.

83. Which THREE statements about cost of capital are correct? (Select THREE.)

Multiple response
A) Interest on debt is generally tax deductible, reducing the cost of debt
B) Debt is usually cheaper than equity because it ranks first for repayment
C) Using book values is always more appropriate than market values
D) WACC can be used as a discount rate for projects with similar risk to the company
E) The cost of equity ignores shareholders' risk

Correct: A, B, D difficult Cost of capital

Debt is cheaper and tax-deductible; WACC suits projects of average risk. Cost of equity reflects risk, and market values are preferred.

84. Which TWO are features of a rights issue? (Select TWO.)

Multiple response
A) Shares are offered to the public at a premium to the market price
B) The company must repay the proceeds on a fixed date
C) Existing shareholders are offered the right to subscribe in proportion to their holdings
D) It is a form of short-term borrowing
E) New shares are normally offered at a discount to the current market price

Correct: C, E difficult Sources of finance

A rights issue is pro rata and normally at a discount. It is permanent equity, not borrowing.

85. Which THREE are methods of managing credit risk on receivables? (Select THREE.)

Multiple response
A) Ignoring overdue accounts until year-end
B) Credit limits for each customer
C) Credit checks before granting credit
D) Extending credit terms to all customers to encourage sales
E) Regular ageing analysis of receivables

Correct: B, C, E difficult Receivables

Vetting, limits and monitoring reduce credit risk. Extending terms and ignoring arrears raise it.

86. Which TWO are money market instruments? (Select TWO.)

Multiple response
A) Treasury bills
B) Certificates of deposit
C) Ordinary shares
D) Debentures redeemable in 15 years

Correct: A, B difficult Money markets

Money markets deal with short-term instruments. Shares and long-dated bonds are capital market instruments.

87. Which THREE statements about dividend policy are correct? (Select THREE.)

Multiple response
A) Share buy-backs are one alternative way of returning cash
B) A company with profitable investment opportunities may retain more earnings
C) Dividends are an expense that reduces profit before tax
D) Dividends can signal management's expectations of future earnings
E) Shareholders always prefer high dividends to capital gains

Correct: A, B, D difficult Dividend policy

Signalling, retention and buy-backs are valid. Dividends are a distribution, and preferences differ.

88. Which TWO are ways to reduce credit risk in exporting? (Select TWO.)

Multiple response
A) Selling on open account to unknown buyers
B) Export credit insurance
C) Letters of credit
D) Granting longer credit with no security

Correct: B, C difficult Export finance

Letters of credit and insurance reduce non-payment risk. Open account sales and longer credit increase it.

89. Which TWO are components of the Green Bond Principles? (Select TWO.)

Multiple response
A) Exemption from reporting
B) Guaranteed return to investors
C) Use of proceeds
D) Process for project evaluation and selection

Correct: C, D difficult Green finance

GBP components are use of proceeds, evaluation and selection, management of proceeds, and reporting.

90. Which THREE are ways of hedging currency exposure? (Select THREE.)

Multiple response
A) Invoicing in the home currency
B) Forward contracts
C) Money market hedge
D) Ignoring exposure on small transactions
E) Delaying payment until rates move favourably

Correct: A, B, C difficult Currency risk

Forwards, money market hedges and home-currency invoicing hedge risk. Delaying is speculation.

91. Which TWO are advantages of a stock exchange listing? (Select TWO.)

Multiple response
A) Freedom from regulatory oversight
B) Reduced disclosure requirements
C) Access to a wider pool of capital
D) Improved marketability of shares

Correct: C, D difficult Stock markets

Listing improves capital access and liquidity but increases disclosure and regulation.

92. Which THREE are features of secured debt? (Select THREE.)

Multiple response
A) The charge may be fixed or floating
B) Covenants can never be attached to a loan that is secured
C) The lender has a charge over specified assets
D) Interest rates are usually lower than on unsecured debt
E) The borrower has no obligation to repay

Correct: A, C, D difficult Debt finance

Security reduces lender risk, so interest is usually lower, and charges can be fixed or floating. Covenants can attach to secured loans, and the borrower must repay.

93. Consider discounting. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. The cost of capital can be used as the discount rate.   Yes

2. A taka received today is worth more than a taka received in a year.   Yes

3. NPV ignores risk.   No

4. Annuity factors can be used where equal cash flows occur each year.   Yes

5. A higher discount rate increases the present value of future cash flows.   No

Correct: Y, Y, N, Y, N difficult Time value of money

(1) Yes. (2) Yes. (3) No: risk is reflected in the rate. (4) Yes. (5) No: a higher rate reduces present value.

94. Consider ordinary shares. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. Dividends on ordinary shares are a contractual obligation.   No

2. Ordinary shares carry voting rights.   Yes

3. Ordinary shareholders bear residual risk.   Yes

4. A bonus issue raises new cash.   No

5. A rights issue raises new cash.   Yes

Correct: N, Y, Y, N, Y difficult Equity finance

(1) No: dividends are discretionary. (2) Yes. (3) Yes. (4) No: bonus issues capitalise reserves. (5) Yes.

95. Consider debt finance. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. Covenants protect shareholders against the claims of lenders.   No

2. Floating-rate debt exposes the borrower to interest rate changes.   Yes

3. Debt always has a higher cost than equity.   No

4. Bonds issued at a discount to par have a yield above their coupon rate.   Yes

5. Interest is generally tax deductible.   Yes

Correct: N, Y, N, Y, Y difficult Debt

(1) No: covenants protect lenders. (2) Yes. (3) No: debt is normally cheaper. (4) Yes. (5) Yes.

96. Consider forward contracts and options. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. A forward contract is binding.   Yes

2. An option has a cost in the form of a premium.   Yes

3. A forward contract allows the holder to benefit from favourable movements.   No

4. Hedging can reduce uncertainty.   Yes

5. An option obliges the holder to exercise it at the agreed rate.   No

Correct: Y, Y, N, Y, N difficult Hedging

(1) Yes. (2) Yes. (3) No: it locks the rate. (4) Yes. (5) No: an option gives a right, not an obligation.

97. Consider trade credit. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. Late payment to suppliers may damage relationships.   Yes

2. Factoring removes all credit risk in every type of arrangement.   No

3. Credit control should include monitoring of overdue accounts.   Yes

4. Offering discounts for early payment can speed up cash collection.   Yes

5. Extending credit to customers always improves cash flow.   No

Correct: Y, N, Y, Y, N difficult Receivables and payables

(1) Yes. (2) No: with recourse, the risk remains with the seller. (3) Yes. (4) Yes. (5) No: it delays cash receipts.

98. Consider financial markets. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. The money market deals in long-term securities.   No

2. Capital markets deal mainly in short-term finance.   No

3. Liquidity is the ease of converting an asset to cash.   Yes

4. The primary market is where new securities are issued.   Yes

5. The secondary market allows existing securities to be traded.   Yes

Correct: N, N, Y, Y, Y difficult Financial markets

(1) No: it deals in short-term securities. (2) No: capital markets deal in long-term finance. (3) Yes. (4) Yes. (5) Yes.

99. Consider appraisal techniques. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. IRR can give conflicting rankings with NPV for mutually exclusive projects.   Yes

2. ARR is based on discounted cash flows.   No

3. Discounted payback considers the time value of money.   Yes

4. The NPV decision rule is to accept projects with a positive NPV.   Yes

5. Payback takes account of cash flows beyond the payback period.   No

Correct: Y, N, Y, Y, N difficult Investment appraisal

(1) Yes. (2) No: ARR uses accounting profits. (3) Yes. (4) Yes. (5) No: it ignores later flows.

100. Consider dividend decisions. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. Dividends paid reduce retained earnings.   Yes

2. Companies must pay a dividend every year.   No

3. A stable dividend can signal confidence.   Yes

4. Retained earnings are a source of finance.   Yes

5. A share buy-back increases the number of shares in issue.   No

Correct: Y, N, Y, Y, N difficult Dividends

(1) Yes. (2) No: dividends are discretionary. (3) Yes. (4) Yes. (5) No: a buy-back reduces the number of shares.