Tag: trend analysis

Questions Related to trend analysis

Real rate of return is equal to__________.

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  1. Nominal Rate x Inflation Rate

  2. Nominal Rate $\div$ Inflation Rate

  3. Nominal Rate - Inflation Rate

  4. Nominal Rate + Inflation Rate

Show answer
Correct Option: B
Explanation:

The real rate of return formula is the sum of one plus the nominal rate divided by the sum of one plus the inflation rate which then is subtracted by one. The formula for the real rate of return can be used to determine the effective return on an investment after adjusting for inflation.

Risk in capital budgeting implies that the decision-maker knows _______ of the cash flows.

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  1. Variability

  2. Probability

  3. Certainty

  4. None of the Above

Show answer
Correct Option: B
Explanation:

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. The decision maker after analysing the risk will have of fair idea of the cash flows that might arise from the decision that is made. 

A proposal is not a capital budgeting proposal if it____________.

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  1. Is related to fixed assets

  2. Brings long-term benefits

  3. Brings short-term benefits Only

  4. Has very large investment

Show answer
Correct Option: C
Explanation:

A proposal is not a capital budgeting proposal if it brings short-term benefits only. Capital budgeting decisions involve huge funds and are long term decisions, it benefits the firm in long term. As they involve huge costs one wrong decision would have a big effect on the business.

Profitability Index, when applied to Divisible Projects, impliedly assumes that_____________.

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  1. Project cannot be taken in parts

  2. NPV is linearly proportionate to part of the project taken up

  3. NPV is additive in nature

  4. Both B and C

Show answer
Correct Option: D
Explanation:

Profitability index is an index that identifies the relationship between cost and profitability of a project. Profitability Index. when applied to divisible projects impliedly assumes that project cannot be taken in parts has to be accepted fully, NPV is linearly proportionate to part of the project taken up and NPV is additive in nature. 

Evaluation of capital budgeting proposals is based on cash flows because_____________.

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  1. Cash rows are easy to calculate

  2. Cash flows are suggested by SEBI

  3. Cash is more important than profit

  4. None of the above

Show answer
Correct Option: C
Explanation:

Capital budgeting is based on cash flows because there is discounting and other factors used which can be done only on cash. Moreover, cash can be spent and not profit. Cash is more important than profit as the company has to focus on many costs. As in the long run the company will succeed if it focuses mote on cash flow statement. 

NPV of a proposal, as calculated under Risk Adjusted Discount Rate(RADR) & Real Certainty Equivalent(CE) Approach will be __________.

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  1. Same

  2. Unequal

  3. Both A and B

  4. None of A and B

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Correct Option: B

What factors increase the riskiness of  a Capital budgeting Project?

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  1. Industry specific risk factors

  2. Competition risk factors

  3. Project specific risk factors

  4. All of the above

Show answer
Correct Option: D
Explanation:

The factors that increase riskiness of a capital budgeting project are industry specific risk, competition risk and project risk. Industry specific risk/market risk are the risks that might occur due to change in the industry, competition risks are the risk that can occur because of the competitors strategy and lastlyt project risk are the risk that are associated with the project as whether or not the project will be profitable or not. 

Risk-aversion of an investor can be measured by______________.

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  1. Market Rate of Return

  2. Risk-free Rate of Return

  3. Portfolio Return

  4. None of the above

Show answer
Correct Option: D
Explanation:

Risk aversion means the tendency of a person to avoid a decision/investment when there is risk involved. Risk aversion is a personal trait of a person. Risk-aversion of an investor cannot be measured by market rate of return, risk free rate of return or portfolio profit. 

For calculating trend percentage, which of the following formula is used? 

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  1. (Present year value/Base year value) x 100

  2. (Base year value/Present year value) x 100

  3. (Present year value/100) x Base year value

  4. (Base year value/100) x Present year value

Show answer
Correct Option: A
Explanation:

Generally the first year is taken as the base year. The figure of base year is taken as 100. Trend percentage is calculated by following formula:

(Present year value/Base year value) x 100

The most commonly used tools for financial analysis are _______________.

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  1. Horizontal analysis

  2. Vertical analysis

  3. Ratio analysis

  4. All of the above

Show answer
Correct Option: D
Explanation:

Commonly used tools of financial analysis are: Comparative statements, Common size statements, trend analysis, ratio analysis, funds flow analysis, and cash flow analysis.