JAIIB Exam 2025 – AFM Important Questions MCQs Quiz-24

19/04/2025

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JAIIB Exam 2025 AFM Important Questions MCQs Quiz-24

JAIIB Exam Quiz 2025: The JAIIB exam is scheduled for 2025 by IIBF. Here, we are providing JAIIB AFM MCQ-based quizzes on a regular basis. You can attempt the quizzes regularly to prepare for the upcoming JAIIB exam. The quizzes will be provided module-wise and unit-wise. You can attempt the JAIIB AFM quizzes from the links below and improve your preparation by practicing regularly. These quizzes will help you boost your score in the JAIIB exam and guide you to clear the exam on your first attempt.

Q.1 Which of the following best defines Capital Structure?

A. The ratio of short-term borrowings to long-term borrowings used by a firm

B. The composition of a firm’s total assets including current and fixed assets

C. The proportion of debt and equity in the total long-term funds raised by a firm

D. The process of determining the market value of a company’s shares and bonds

Q.2 Which of the following statements accurately describes a highly leveraged (or highly geared) firm?

A. A firm that relies primarily on internal equity and reserves to fund operations

B. A firm with a high proportion of debt capital relative to equity in its capital structure

C. A firm that has issued both equity and preference shares in equal proportion

D. A firm that depends exclusively on short-term borrowings to finance its fixed asset

Q 3 Which of the following scenarios best illustrates the principle of trading on equity in capital structure decisions?

A. A company limits its equity issuance to retain voting control with promoters.

B. A firm borrows funds at an interest cost lower than the return generated from investing those funds.

C. A business increases debt financing to align with financial institution norms.

D. A firm reduces equity base due to regulatory complexities involved in share buybacks.

Q.4 According to the Net Income Approach proposed by David Durand, how can a firm increase its overall value?

A. By maintaining a constant debt-equity ratio to minimize risk

B. By increasing the proportion of equity to reduce cost of capital

C. By increasing the proportion of debt, thereby reducing overall cost of capital

D. By avoiding debt altogether to maintain financial flexibility

Q.5 XYZ Ltd has a capital structure consisting of 40% debt and 60% equity. The cost of debt is 9% and the cost of equity is 15%. What will be the WACC? Also, if the company shifts to 70% debt and 30% equity, what will be the new WACC and its likely impact on firm value?

A. WACC decreases from 12.6% to 10.8%; value of firm increases

B. WACC increases from 12.6% to 14.1%; value of firm decreases

C. WACC remains unchanged at 12%; value of firm remains constant

D. WACC increases from 11.4% to 13.2%; value of firm increases

Q.6 According to the Net Operating Income (NOI) Approach developed by David Durand, what happens to the value of a firm when the proportion of debt in its capital structure increases?

A. The value of the firm increases due to lower overall cost of capital

B. The value of the firm decreases due to rising financial risk

C. The value of the firm remains unchanged as WACC remains constant

D. The value of the firm increases only if the operating income increase

Q.7 . ABC Ltd has a capital structure of 50% debt and 50% equity. The cost of debt is 10%, and its Weighted Average Cost of Capital (WACC) is 13%. According to the Net Operating Income (NOI) approach, if the capital structure is changed to 60% debt and 40% equity and the WACC remains constant at 13%, what will be the new cost of equity?

A. 16%

B. 17%

C. 17.5%

D. 18%

Q.8 According to the Traditional Position theory of capital structure, how does the Weighted Average Cost of Capital (WACC) behave as a firm increases its financial leverage?

A. WACC continuously declines with increasing leverage due to lower cost of debt

B. WACC remains constant regardless of leverage because costs adjust proportionally

C. WACC first decreases, remains stable for a while, and then increases beyond a certain level of leverage

D. WACC continuously increases due to increasing financial risk and higher interest obligations

Q.9 Firm ABC has total capital of ₹2,00,000 and an EBIT of ₹1,00,000. The corporate tax rate is 25%, and the rate of interest on debt is 12% p.a. Based on the following scenarios, which capital structure likely results in the lowest WACC, assuming the Traditional Position holds true?

•Scenario A: 100% Debt, 0% Equity

•Scenario B: 50% Debt, 50% Equity

•Scenario C: 0% Debt, 100% Equity

A. Scenario A – due to full tax shield on interest and lower capital cost

B. Scenario B – due to optimal mix of debt and equity balancing risk and cost

C. Scenario C – due to absence of financial risk

D. All three scenarios result in the same WACC under the traditional theory

Q.10 A firm issues debentures with a face value of ₹200, a coupon rate of 8% p.a., and the debentures are currently priced at ₹190. The debentures will mature in 5 years. What is the cost of debt capital for the firm using the Yield to Maturity (YTM) formula?

A. 9.0%

B. 9.2%

C. 10.2%

D. 10.8%

Q.11 According to the Capital Asset Pricing Model (CAPM), which of the following factors directly influence the required rate of return on the equity of a company?

A. The risk-free rate, Beta of the company’s shares, and the expected return on a portfolio of equity shares

B. The company’s dividend payout, Beta of the company’s shares, and the expected return on treasury bills

C. The risk-free rate, market risk premium, and the current inflation rate

D. The company’s earnings growth rate, Beta of the company’s shares, and the prevailing market risk-free rate

Q.12 If the risk-free rate of return is 12% p.a. and the expected return on the market portfolio is 16%, what will be the required rate of return on a company’s equity capital, assuming the company has a Beta of 1.50?

A. 14%

B. 16%

C. 18%

D. 20%

Q.13 Which of the following equations represents the required rate of return according to the Dividend Growth Model approach?

A) Required rate of return = (Dividend in first year / Present market value) + growth rate per year

B) Required rate of return = (Present market value / Dividend in first year) + growth rate per year

C) Required rate of return = (Dividend in first year * growth rate per year) / Present market value

D) Required rate of return = Present market value / (Dividend in first year * growth rate per year)

Q.14 Which of the following is a key assumption of the Dividend Growth Model approach?

A) The market price of the firm’s equity is equal to the sum of all dividends expected to be paid in the future.

B) The dividends paid by the firm will grow at a steady rate every year.

C) The required rate of return is not impacted by the growth rate of dividends.

D) The present market value of the firm’s equity is independent of the expected future dividends.

Q.15 Which of the following statements is true about the concept of the Weighted Marginal Cost of Capital (WMCC)?

A) The rate of return required by investors remains constant as more capital is raised by the firm.

B) The cost of capital increases continuously as the firm raises more capital.

C) The breaking point is the level at which the cost of capital rises and remains the same thereafter.

D) The Weighted Marginal Cost of Capital is used to evaluate the overall capital cost of individual projects.

Q.16 Which of the following is NOT an internal factor affecting the Weighted Average Cost of Capital (WACC)?

A) Capital structure policy

B) Capital investment policy

C) Dividend policy

D) Prevailing interest rates in the market

Q.17 If the present market value of a firm’s equity shares is ₹100, and the expected earnings per share for the next year is ₹15, what is the required rate of return on the firm’s equity capital, assuming zero dividend growth?

A) 10%

B) 12%

C) 15%

D) 20%

Q.18 How should the flotation cost be accounted for when calculating the Weighted Average Cost of Capital (WACC)?

A) The flotation cost should be added to the WACC.

B) The flotation cost should be subtracted from the WACC.

C) The WACC should be revised by dividing it by (1−floatation cost)

D) The flotation cost should be ignored while calculating WACC

Q.19 Which of the following statements is true regarding the optimal capital budget of a firm?

A) A firm should take on projects with an IRR lower than the weighted marginal cost of capital.

B) The optimal capital budget occurs when the IRR of an additional project is equal to the weighted marginal cost of capital.

C) The firm’s capital budget is optimal when all projects have the same IRR.

D) The firm should continue taking projects until the IRR of the next project is higher than the weighted marginal cost of capital.

Answer:

Q1: C
Q2: B
Q3: B
Q4: C
Q5: A
Q6: C
Q7: C
Q8: C
Q9: B
Q10: B
Q11: A
Q12: C
Q13: B
Q14: B
Q15: C
Q16: D
Q17: C
Q18: C
Q19: B
For a Detailed solution with an explanation watch the below video