101. Consider cost of capital. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. WACC should use book values only.   No

2. Tax relief on interest lowers the effective cost of debt.   Yes

3. Cost of equity is higher than the cost of debt for the same company.   Yes

4. The dividend growth model assumes dividends grow at a constant rate.   Yes

5. Beta measures total risk, including diversifiable risk.   No

Correct: N, Y, Y, Y, N difficult Cost of capital

(1) No: market values are preferred. (2) Yes. (3) Yes. (4) Yes. (5) No: beta measures systematic risk.

102. Consider short-term finance. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. An overdraft has a fixed repayment date set at the outset.   No

2. A bank overdraft usually carries a floating rate.   Yes

3. Short-term finance exposes the firm to refinancing risk.   Yes

4. Invoice discounting is a form of long-term borrowing.   No

5. Trade credit is a source of short-term finance.   Yes

Correct: N, Y, Y, N, Y difficult Short-term finance

(1) No: an overdraft is repayable on demand. (2) Yes. (3) Yes. (4) No: it is short-term finance. (5) Yes.

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

Yes/No grid

1. Venture capital investors usually want an exit route.   Yes

2. Peer-to-peer lending matches borrowers and lenders online.   Yes

3. Crowdfunding raises small amounts from many investors.   Yes

4. Business angels never take an active interest in the businesses they fund.   No

5. Crowdfunding is always free of any regulation.   No

Correct: Y, Y, Y, N, N difficult Crowdfunding and angels

(1) Yes. (2) Yes. (3) Yes. (4) No: angels often provide advice and contacts. (5) No: platforms may be regulated.

104. Consider green bonds. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. External review can enhance credibility.   Yes

2. Green bond proceeds should be used for projects with environmental benefits.   Yes

3. Issuers of green bonds need not report on the use of proceeds.   No

4. Green bonds are a form of debt.   Yes

5. A green bond cannot be issued by a company.   No

Correct: Y, Y, N, Y, N difficult Green finance

(1) Yes. (2) Yes. (3) No: reporting on use of proceeds is a component of the principles. (4) Yes. (5) No: companies can issue.

105. A project costs Tk 360m and produces net cash inflows of Tk 100m at the end of each year for five years. The cost of capital is 12% (five-year annuity factor 3.605). What is the NPV and what does it indicate about the IRR?

A) About −Tk 0.5m, which indicates an IRR very slightly below 12%, so the project should be rejected because its NPV is negative
B) About +Tk 140m, which indicates an IRR of 28%, because the total of the undiscounted inflows is Tk 500m against a cost of Tk 360m
C) About +Tk 0.5m, which indicates an IRR very slightly above 12%
D) About +Tk 140m, which indicates an IRR far above 12%, so the project is clearly attractive without any further risk assessment

Correct: C complex Annuity NPV

PV = 100 × 3.605 = 360.5; NPV = +0.5. NPV close to zero at 12% means the IRR is about 12%. The sum of undiscounted inflows is 500, not a PV.

106. A project's cash flows are estimated in today's prices and are expected to rise with inflation of 8% a year. The real cost of capital is 6%. Which discount rate should be applied to the money cash flows, and why?

A) 14%, because the real rate and the inflation rate are added with no allowance for the interaction between them
B) 2%, because the real rate is found by subtracting the inflation rate from the nominal rate in all cases, because the real rate is the difference between the nominal rate and the inflation rate, and the interaction between them is small
C) About 14.5%, because the nominal rate is (1.06 × 1.08) − 1 and money cash flows must be discounted at a money rate
D) 6%, because real rates apply to all cash flows whether or not inflation has been included in the amounts

Correct: C complex Real and nominal

Nominal = 1.06 × 1.08 − 1 = 14.48%. Money flows should be discounted at the nominal rate; real flows at the real rate.

107. A firm has Tk 270m to invest. Indivisible projects: A costs Tk 200m (NPV Tk 40m), B costs Tk 120m (NPV Tk 36m), C costs Tk 150m (NPV Tk 30m). Which combination maximises NPV?

A) A and B, with NPV of Tk 76m, because the projects with the two highest NPVs should always be selected
B) A alone, with NPV of Tk 40m, because the project with the largest individual NPV must be selected first
C) A and C, with NPV of Tk 70m, because projects costing most should be chosen first when funds are limited
D) B and C, with total NPV of Tk 66m, because they use the Tk 270m budget fully

Correct: D complex Capital rationing

A + B costs 320, A + C costs 350, both exceed 270. B + C costs 270, NPV 66, beats A alone (40).

108. Irredeemable 8% preference shares with nominal value Tk 100 trade at Tk 80. What is their cost, and why is it not tax-adjusted?

A) 12.5%, because the cost is the price divided by the dividend and no tax effect is relevant
B) 7.5%, because dividends on preference shares are deductible in the same way as interest
C) 8%, because the cost of preference shares equals the coupon rate on their nominal value, because the dividend is a fixed percentage of nominal value and not related to the current market price at all
D) 10%, because dividends are paid out of post-tax profit and give no tax relief to the company

Correct: D difficult Cost of preference shares

Kp = 8/80 = 10%. Dividends are not tax deductible.

109. A company has irredeemable 9% debentures (nominal Tk 100) trading at Tk 90. Tax is 25%. What is the post-tax cost of debt?

A) 10.0%
B) 9.0%
C) 6.75%
D) 7.5%

Correct: D difficult Cost of irredeemable debt

Interest = 9; pre-tax cost = 9/90 = 10%; post-tax = 10% × 0.75 = 7.5%.

110. A firm has credit sales of Tk 360m with average collection of 60 days (receivables ≈ Tk 59.2m). A factor offers 80% advances at 11% interest and a 1.5% fee on turnover, saving administration costs of Tk 3.2m. The overdraft costs 13%. Which statement is correct?

A) Factoring costs about Tk 5.4m, the fee alone, so the saving over the overdraft is Tk 2.3m and the interest on advances is ignored, so the saving over the overdraft is Tk 2.3m and the interest on advances is ignored when comparing the two sources of finance
B) Factoring costs about Tk 10.6m against Tk 7.7m for the overdraft, so the firm should reject factoring at once
C) Factoring costs about Tk 7.7m, equal to the overdraft, so the firm is indifferent and no other considerations apply
D) Factoring costs about Tk 7.4m net against about Tk 7.7m for the overdraft

Correct: D complex Factoring

Factor cost = fee 5.4 + interest on advances (47.3 × 11% = 5.2) − admin saving 3.2 = 7.4. Overdraft = 59.2 × 13% = 7.7. The margin is narrow.

111. A company has profit after tax of Tk 120m and 40m shares (EPS Tk 3.00). It borrows Tk 180m at 10% (tax 25%) to buy back 4m shares at Tk 45. What is the new EPS, and what does this show?

A) About Tk 3.33, showing that a buy-back always raises EPS because the number of shares in issue is reduced
B) About Tk 2.66, showing that interest is not tax-deductible and so reduces earnings by the full amount
C) About Tk 2.96, showing that EPS can fall if the after-tax cost of the funds exceeds the earnings yield on the shares repurchased
D) About Tk 3.00, showing that a buy-back has no effect on EPS because shareholder wealth is not changed, because the earnings fall and the number of shares in issue falls by exactly the same proportion, leaving each share's earnings unchanged

Correct: C complex Share buy-back

Post-tax interest = 180 × 10% × 0.75 = 13.5; new PAT = 106.5; shares = 36m; EPS = 2.96. The earnings yield on the shares bought is 3.00/45 = 6.7%, below the post-tax cost of debt 7.5%.

112. A company has 30m shares trading at Tk 120. It makes a 1-for-5 bonus issue. What is the theoretical price after the issue, and what happens to the value of an investor's holding?

A) Tk 144, and the investor's holding rises because the company has received new funds
B) Tk 100, and the total value of each investor's holding is unchanged
C) Tk 96, and the investor's holding falls in value
D) Tk 120, and the investor's holding increases in value because more shares are held

Correct: B complex Bonus issue

30 × 120 = 3,600 total value; 36m shares → Tk 100. No cash is raised and ownership proportions are unchanged.

113. A Bangladeshi importer must pay US$200,000 in three months. Spot is Tk 118; the three-month forward is Tk 121. The US dollar deposit rate is 2% a year and the taka borrowing rate 12% a year. What is the approximate cost with a money market hedge, and how does it compare with the forward?

A) About Tk 23.6m, equal to the spot cost of the dollars
B) About Tk 24.2m, very close to the forward cost of Tk 24.2m
C) About Tk 25.0m, well above the forward cost of Tk 24.2m, because the dollar deposit earns no interest
D) About Tk 23.5m, well below the forward cost of Tk 24.2m,

Correct: B complex Money market hedge

Deposit US$200,000/1.005 = 199,005 now; cost at spot = Tk 23.48m; borrowed for three months at 3% → Tk 24.19m. Forward = 200,000 × 121 = Tk 24.2m.

114. A 10% annual-coupon bond (nominal Tk 100) is redeemable at par in five years and is priced at Tk 92. What is the approximate yield to maturity?

A) About 10.0%
B) About 8.0%
C) About 12.1%
D) About 10.9%

Correct: C difficult Yield to maturity

Approximation: (coupon + gain per year)/average price = (10 + 8/5)/((100 + 92)/2) = 11.6/96 = 12.1%. 10.9% is the current yield (10/92).

115. A company with 20m shares needs Tk 100m. Option A: 10m new shares at Tk 10. Option B: 10% debt. Expected EBIT is Tk 80m, tax 25%. Which option gives the higher EPS, and at what EBIT are they equal?

A) Option B at Tk 2.63 against Tk 2.00 for A
B) Option A at Tk 2.00 against Tk 1.88 for B, and they give equal EPS at an EBIT of Tk 10m
C) Option B at Tk 2.63 against Tk 2.00 for A, and they give equal EPS at an EBIT of Tk 10m
D) Option A at Tk 2.00 against Tk 2.63 for B, and they give equal EPS at an EBIT of Tk 30m

Correct: A complex Gearing and EPS

A: 80 × 0.75/30 = 2.00. B: (80 − 10) × 0.75/20 = 2.625. Equality: E/30 = (E − 10)/20, so E = 30.

116. A Bangladeshi garment exporter is selling to a new buyer in a country with political risk. Which method best reduces the risk of non-payment?

A) Shipment before any documents are prepared, because speed of delivery removes the risk of buyer default
B) Open account terms with 90 days' credit,
C) Payment after delivery by cheque, because cheques issued overseas are always honoured by the buyer's bank
D) A confirmed documentary letter of credit,

Correct: D difficult Letters of credit

A confirmed LC transfers payment risk to banks, subject to compliant documents.

117. A supplier offers a customer 1.5% discount for paying in 10 days instead of 60 days. The customer's overdraft rate is 13%. What is the approximate annual cost to the supplier, and should the offer be made?

A) About 1.5%, which is below 13%, so it is worthwhile because the discount is a small percentage of the invoice
B) About 11.1%, which is below the 13% overdraft rate, so it is worthwhile if the funds released reduce the overdraft
C) About 13.9%, which is above 13%, so it is not worthwhile because the supplier loses money on every invoice
D) About 27%, which is above 13%, so it is not worthwhile because the days gained are 50 and the discount is compounded

Correct: B complex Settlement discount decision

Cost = 1.5/98.5 × 365/50 = 11.1% per year. Because this is below the overdraft cost, collecting early and cutting the overdraft is cheaper.

118. A manufacturer sells its factory for Tk 800m and leases it back for 15 years. Which statement describes the likely advantages and disadvantages?

A) It increases the company's ownership of the factory, but reduces its ability to use the premises for production
B) It releases capital for other uses but removes ownership of an appreciating asset and creates ongoing lease commitments
C) It reduces the company's risk to zero, but requires the lessor to take all operating decisions at the factory
D) It avoids any ongoing payments, but prevents the company from using the funds for any investment projects

Correct: B difficult Sale and leaseback

Sale and leaseback raises cash but converts ownership to rental obligations.

119. A board uses several appraisal methods. Which THREE statements are correct? (Select THREE.)

Multiple response
A) IRR can give multiple answers where cash flows change sign more than once
B) Payback is the best measure of overall profitability
C) NPV measures the absolute increase in wealth
D) Payback ignores cash flows after the cut-off period
E) ARR is based on discounted cash flows

Correct: A, C, D complex Appraisal methods

The first three are correct. ARR uses accounting profits and payback does not measure profitability.

120. A company is estimating its WACC. Which TWO are correct? (Select TWO.)

Multiple response
A) Retained earnings are a free source of finance
B) The cost of equity is always lower than the cost of debt
C) Weights should reflect market values where available
D) The cost of debt should be after tax

Correct: C, D difficult Cost of capital

Use post-tax debt cost and market-value weights. Equity is riskier and costs more, and retained earnings have an opportunity cost.

121. A company plans an equity raise. Which TWO statements are correct? (Select TWO.)

Multiple response
A) A bonus issue raises new cash
B) Shareholders who do not wish to subscribe may sell their rights
C) A rights issue must be offered at a premium to the market price
D) A rights issue offers new shares to existing shareholders in proportion to holdings

Correct: B, D difficult Equity issues

A rights issue is pro rata and rights are tradable. A bonus issue raises no cash, and rights are normally at a discount.

122. An exporter wants to protect its receipts. Which THREE methods are available? (Select THREE.)

Multiple response
A) Forward contract
B) Currency option
C) Invoicing in taka
D) Waiting to see how rates move
E) Money market hedge

Correct: A, B, E difficult Currency hedging

Forwards, money market hedges and options hedge. Invoicing in taka shifts the risk to the buyer, and waiting is speculation.

123. A firm needs temporary funds. Which TWO are sources of short-term finance? (Select TWO.)

Multiple response
A) Ordinary share issue
B) Bank overdraft
C) Trade credit
D) Redeemable debentures with 15 years to maturity

Correct: B, C difficult Short-term funding

Overdraft and trade credit are short-term. The others are long-term.

124. A treasurer invests surplus cash. Which THREE are money market instruments? (Select THREE.)

Multiple response
A) Certificates of deposit
B) Treasury bills
C) Ordinary shares
D) Commercial paper
E) Redeemable debentures issued for 20 years

Correct: A, B, D difficult Money markets

Money market instruments are short term.

125. A board reviews its dividend policy. Which TWO statements are correct? (Select TWO.)

Multiple response
A) Companies must pay out all earnings each year
B) Dividends are tax-deductible expenses for the company
C) Signalling theory suggests dividend changes convey management's expectations
D) Residual dividend policies pay dividends from earnings left after funding positive-NPV projects

Correct: C, D difficult Dividend policy

Signalling and residual policies are valid. Dividends are discretionary and not deductible.