Financial Management

✅ The correct answer is D.
The Modigliani-Miller theorem (M&M) states that the market value of a company is calculated using its earning power and the risk of its underlying assets and is independent of the way it finances investments or distributes dividends. There are three methods a firm can choose to finance: borrowing, spending profits (versus handing them out to shareholders in the form of dividends), and straight issuance of shares. While complicated, the theorem in its simplest form is based on the idea that with certain assumptions in place, there is no difference between a firm financing itself with debt or equity.

✅ The correct answer is D.
The cost of capital of a firm is the minimum rate of return it must earn on its investments to keep its investors satisfied.

✅ The correct answer is C.
One way to obtain earnings forecasts is the mechanical procedure known as time series analysis. Time series analysis is a statistical technique that deals with time series data, or trend analysis. Time series data means that data is in a series of particular time periods or intervals.

✅ The correct answer is B.
When changes in patents and industry competition occur, required rate of return does not change. The required rate of return is the minimum return an investor expects to achieve by investing in a project. An investor typically sets the required rate of return by adding a risk premium to the interest percentage that could be gained by investing excess funds in a risk-free investment.

✅ The correct answer is D.
Type of interest rates consist of nominal rates, periodic rates and effective annual rates.

✅ The correct answer is B.
Cost of equity which is raised by reinvesting earnings internally must be higher than the cost of new common equity. The cost of equity is the return a company requires to decide if an investment meets capital return requirements.

✅ The correct answer is B.
Shares or stocks which are protected against withdrawals of funds by an original stock owners are classified as founders shares. Founders stock refers to the shares issued to the originators of a company. Often, the stock does not receive any returns up to the point that a dividend is payable to the common stockholders. Founders stock comes with a vesting schedule, which determines when the shares are exercisable.

✅ The correct answer is A.
The use of preference share capital as against debt finance reduces DFL. A degree of financial leverage (DFL) is a leverage ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure.

✅ The correct answer is C.
According to exercise value and option price, market value of option will be zero when stock price is zero. The strike price is defined as the price at which the holder of an options can buy (in the case of a call option) or sell (in the case of a put option) the underlying security when the option is exercised. Hence, strike price is also known as exercise price.

✅ The correct answer is D.
Capital gains yeild = Beginning price / Capital gain
= 24 / 2 = 12.00%.