Cost of Capital

30 original test MCQs, 2 marks each. Practice and separate-test stems differ. T001-T010 use one shared case below; T011-T030 stand alone.

Original practice, not official ICAI questions or suggested answers. Scores are temporary and not synced to Study Hub. Contract/current-rule/accounting/tax boundaries are included in the review pack.

Not scored yet.

Orchid Components: shared case for T001-T010

Shared case: Orchid Components, T001-T010 All funding amounts are Rs lakh. New target financing is debt 30%, preference 10%, ordinary equity 60%. Rates apply only to additional funds in each tier, not retroactively. First Rs 12 lakh of new debt costs 7% after tax; further debt costs 9% after tax. Preference cost 10% throughout, with no additional tax adjustment. Retained earnings available Rs 18 lakh cost 12%; external new equity costs 14%. Treat all these costs as case-supplied annualised opportunity-cost rates, not live quotes or current tax advice. The planned programme raises Rs 50 lakh of net funds. Maintain target proportions at every stage. Total-funding breakpoints divide a source limit by that source's weight. Programme average weights actual tranches; marginal cost means the cost of the next rupee. No project cash flows or investment-opportunity schedule are supplied. Each question is independently scored; the case does not authorise an issue, purchase or project acceptance.

Funding item	Rs lakh
Programme net funding	50
Low-cost debt limit	12
Retained funds limit	18

FM-C04-T001 · 2 marks

Read shared case

Orchid retained-equity total-funding breakpoint?

A. Rs 18 lakh. B. Rs 60 lakh. C. Rs 30 lakh. D. Rs 10.8 lakh.

FM-C04-T002 · 2 marks

Read shared case

Orchid low-debt-rate total-funding breakpoint?

A. Rs 40 lakh. B. Rs 3.6 lakh. C. Rs 12 lakh. D. Rs 30 lakh.

FM-C04-T003 · 2 marks

Read shared case

MCC before the first breakpoint?

A. 10.3%. B. 29%. C. 12.1%. D. 11.5%.

FM-C04-T004 · 2 marks

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MCC for additional total funds above 30 through 40 lakh?

A. 11.5%. B. 10.9%. C. 10.3%. D. 12.1%.

FM-C04-T005 · 2 marks

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MCC above 40 lakh?

A. 11.5%. B. 33%. C. 12.1%. D. 10.3%.

FM-C04-T006 · 2 marks

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Debt in 50 lakh programme?

A. 30 lakh total. B. 12 lakh total. C. 15 lakh all at 9% retroactively. D. 15 lakh: 12 at 7%, 3 at 9%.

FM-C04-T007 · 2 marks

Read shared case

Equity in 50 lakh programme?

A. 30 all external. B. 30 lakh: 18 retained, 12 external. C. 30 all retained. D. 18 total equity.

FM-C04-T008 · 2 marks

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Preference finance in 50 lakh programme?

A. Rs 5 lakh. B. Rs 10 lakh. C. Rs 15 lakh. D. Rs 50 lakh.

FM-C04-T009 · 2 marks

Read shared case

Overall annualised cost proxy/programme funds?

A. 11.5% middle band only. B. 10.9%. C. 10.3% lowest band only. D. 12.1% next-rupee applied to all.

FM-C04-T010 · 2 marks

Read shared case

After 50 lakh, next-rupee cost under unchanged target and tiers?

A. 12.1%, not programme average 10.9%. B. 10.9% by definition. C. 7% debt cost only. D. 0% because retained funds exist.

FM-C04-T011 · 2 marks

Existing current equity price 80, D1=4.2, g 5%, no new issue. Current equity cost?

A. 5.25%. B. 5%. C. 10.25%. D. 10.5263% deducting nonexistent flotation 4.

FM-C04-T012 · 2 marks

Coupon-only tax shield permitted; redemption difference not deductible. Which step is wrong?

A. Using net proceeds. B. Tax-adjusting coupon. C. Tax-adjusting the entire approximate numerator. D. Including nondeductible annual redemption difference.

FM-C04-T013 · 2 marks

NP 95; payments 8, 8, 8, 113 at year ends 1-4. Exact IRR?

A. 8.1% with invented shield. B. About 10.67%. C. Exactly 10.5% approximation. D. 8%.

FM-C04-T014 · 2 marks

NP 94; payments 7 at years 1-4 and 107 at year 5. Exact IRR?

A. 7%. B. 10% coupon. C. Exactly 8.45% approximation. D. About 8.52%.

FM-C04-T015 · 2 marks

Past shareholder IRR is proposed as certain future cost. Which assumption needs scrutiny?

A. No sale proceeds ever matter. B. Unchanged risk, expectations and reinvestment opportunities. C. Equity cannot have an opportunity cost. D. Historic prices alone guarantee the future.

FM-C04-T016 · 2 marks

D0=3, retention 40%, reinvestment return 15%, price 60. Ke via stable growth?

A. 6% only. B. 11% using D0. C. 21%. D. 11.3%.

FM-C04-T017 · 2 marks

Rf 5%, premium 8%; beta changes 1.1 to 1.4. Required-return change?

A. No change because Rf constant. B. 8 percentage points. C. 0.3 percentage points. D. 2.4 percentage points.

FM-C04-T018 · 2 marks

Market equity 100 allocated 60/40 between paid-up/retained costs 14%/12%; debt 50 cost 6%. WACC?

A. 16.2% without dividing total. B. 12.8% ignoring debt. C. Add retained 20 again. D. 10.8%.

FM-C04-T019 · 2 marks

D1=4, price 100, g 6%; CAPM Rf 5%, Rm 11%, beta 1.2. Dividend growth versus CAPM?

A. 4% versus 7.2%. B. Choose lowest automatically. C. 10% versus 12.2%, based on different assumptions. D. Both guaranteed 10%.

FM-C04-T020 · 2 marks

For marginal financing, which weights apply when target proportions are explicitly supplied?

A. Historic book values always. B. Intended proportions of new funds. C. Equal weights since all costs are percentages. D. Market values always regardless of request.

FM-C04-T021 · 2 marks

Annual coupon 10% on face 100, net proceeds 95. Coupon equals financing cost necessarily?

A. Only face value matters. B. Yes in all cases. C. No; proceeds, tax and redemption timing can differ. D. Cost always zero at par.

FM-C04-T022 · 2 marks

Semiannual case gross coupon 5, tax 30%, principal 100 redeemed after 4 half years. Final net payment?

A. Rs 107.00. B. Rs 100 alone. C. Rs 73.50 after shielding principal. D. Rs 103.50.

FM-C04-T023 · 2 marks

Two conversion shares forecast 45 each versus redemption 100. Higher-value terminal convention?

A. 90 regardless of cash option. B. Guaranteed 120. C. 100, before final coupon. D. 190 summing choices.

FM-C04-T024 · 2 marks

D1=5, price 50, g 12%. Ke derived from D1/P+g?

A. 22%. B. 12%. C. 10%. D. -2%.

FM-C04-T025 · 2 marks

Hypothetical perpetual preference formula establishes current permission to issue such shares?

A. Yes by definition. B. No, mathematical cost is not an issuance-law verification. C. Any fixed payout is debt legally. D. Tax rate alone grants permission.

FM-C04-T026 · 2 marks

30 lakh at 9.6% plus 10 lakh at 10.8%. Average cost of 40 lakh?

A. 20.4%. B. 9.6%. C. 10.8% for whole programme. D. 9.9%.

FM-C04-T027 · 2 marks

Debt limit 15 at weight 50%, retention 20 at weight 50%. First total funding break?

A. 30 lakh debt tier, then 40 lakh retention. B. 40 then 30. C. Both 50 lakh. D. 15 then 20 lakh un scaled.

FM-C04-T028 · 2 marks

Nominal cost is applied to real project cash flows without adjustment. What is needed?

A. Nothing ever. B. Add flotation cost again. C. Replace cash flows with accounting profit. D. Consistent inflation, currency and timing conventions.

FM-C04-T029 · 2 marks

Company has cash but retained earnings cost is claimed zero. Relevant correction?

A. Only debt investors require return. B. Internal funds still have shareholder opportunity cost. C. All internal funds free. D. Accounting reserves guarantee liquid cash.

FM-C04-T030 · 2 marks

Numerical IRR root solves PV against net proceeds. What verifies computation?

A. A nun labelled approximation. B. Coupon rate alone. C. Near-zero NPV residual using the stated flows and periods. D. Word count of the answer.