Attempt CAIIB ABFM Case Study Practice Quiz & Download PDF

Q1. Vidarbha Infrastructure Ltd. has the following capital structure: • 10,000 equity shares of ₹100 each • 12% Debentures of ₹5,00,000 • Current EBIT = ₹1,80,000 • Tax rate = 30% Calculate the Degree of Financial Leverage (DFL) and interpret what it implies for shareholder risk.

Q2. A project manager at Global Exports Ltd. is evaluating a capital project. He presents the following two risk analysis approaches to the board: • Approach A: Changes one variable at a time (e.g., sales volume, price, cost) while keeping all others constant, to assess the impact on NPV. • Approach B: Simultaneously changes all key variables in the same direction (optimistic, base, or pessimistic scenario) to evaluate NPV under different states of the world. Identify the CORRECT names for Approach A and Approach B respectively, and explain the key difference.

Q3. Pratham Pharmaceuticals Ltd. is evaluating Project Falcon with the following details: • Initial Investment: ₹50 lakhs • Annual Cash Inflows: ₹12 lakhs for 6 years • Discount Rate: 10% • PV Annuity Factor @ 10% for 6 years = 4.355 Calculate the NPV and determine whether the project should be accepted.

Q4. Consider the following four capital budgeting techniques and their defining characteristics: 1. Payback Period (PBP) 2. Accounting Rate of Return (ARR) 3. Net Present Value (NPV) 4. Internal Rate of Return (IRR) Which of the following statements is CORRECT regarding their treatment of the time value of money (TVM)?

Q5. The risk management team of Bharat Bank is evaluating an international loan portfolio. The portfolio includes loans to borrowers in countries with political instability, foreign currency restrictions, and sovereign default history. Which of the following BEST describes the types of risk the bank is specifically exposed to in this scenario?

Q6. The finance team of Mahesh Industries is evaluating Project Alpha with the following data: • Fixed Costs = ₹9,00,000 • Selling Price per unit = ₹150 • Variable Cost per unit = ₹90 Calculate the Break-Even Point (BEP) in units and in sales value, and identify the correct option.

Q7. A company has: • Sales = ₹80 lakh • Variable Cost = 60% of Sales • Fixed Cost = ₹12 lakh • EBIT = ? • Interest = ₹4 lakh Calculate: (i) Contribution, (ii) EBIT, (iii) Degree of Operating Leverage (DOL), and (iv) Degree of Financial Leverage (DFL).

Q8. According to the Capital Asset Pricing Model (CAPM), which of the following statements is/are CORRECT? Statement 1: The beta (β) of the market portfolio is always equal to 1. Statement 2: A security with β > 1 is more volatile than the market and commands a higher risk premium than the market portfolio. Statement 3: In CAPM, the total risk of a security is measured by beta, which includes both systematic and unsystematic risk.

Q9. Activity-Based Costing (ABC) was implemented at Precision Auto Parts Ltd. to improve cost accuracy. Before ABC, overhead was allocated based on direct labour hours. After ABC, the company found that Product A — a low-volume, complex part — was significantly UNDERCOSTED under the traditional system, while Product B — a high-volume, standard part — was OVERCOSTED. Which of the following BEST explains why this distortion occurred under the traditional costing system?

Q10. A financial analyst is evaluating an international capital budgeting project. The project generates cash flows in USD, but the parent company reports in INR. The analyst must decide whether to use foreign currency cash flows with a foreign currency discount rate, or convert cash flows to home currency. Which of the following approaches is theoretically CORRECT and why?

Q11. Consider the following statements about Relevant Costs in decision-making: Statement 1: Future incremental cash costs that differ between alternatives are relevant costs. Statement 2: Depreciation on an existing asset is always a relevant cost because it represents the annual cost of using the asset. Statement 3: Opportunity costs — the value of the next best alternative foregone — are relevant even though they are not recorded in accounting books. Which statement(s) is/are correct?

Q12. Assertion (A): The Modified Internal Rate of Return (MIRR) is considered a more reliable investment decision criterion than the traditional IRR method. Reason (R): MIRR corrects the reinvestment rate assumption of IRR by explicitly specifying a reinvestment rate (typically the cost of capital) for positive cash flows, avoiding the multiple IRR problem and providing a single, realistic return measure. Choose the correct answer:

Q13. A decision tree is being used to evaluate a new product launch. The product development team identifies two decision nodes and three chance nodes. The expected monetary value (EMV) at a terminal node is ₹40 lakhs with probability 0.6 and ₹(-10) lakhs with probability 0.4. What is the EMV of this chance node, and what does a NEGATIVE EMV at a decision node imply?

Q14. Kaveri Textiles Ltd. is evaluating whether to replace an old machine with a new, more efficient one. The old machine was purchased 3 years ago for ₹20 lakhs and has a book value of ₹12 lakhs. Its current market value is ₹8 lakhs. The new machine costs ₹30 lakhs. For the purpose of capital budgeting, which of the following correctly identifies the RELEVANT costs/values in this replacement decision?

Q15. Sigma Corp has the following details for the current year: • Sales: ₹1,00,00,000 • Variable Costs: ₹65,00,000 • Fixed Costs: ₹20,00,000 • Interest on Debt: ₹3,00,000 • Number of Equity Shares: 1,00,000 • Tax Rate: 30% Calculate the Degree of Combined Leverage (DCL) and the % change in EPS if sales increase by 5%.

Q16. A project requires an initial investment of ₹60 lakhs. The project generates uncertain cash flows described as follows: • Best Case: ₹25 lakhs p.a. for 4 years (probability 30%) • Base Case: ₹18 lakhs p.a. for 4 years (probability 50%) • Worst Case: ₹10 lakhs p.a. for 4 years (probability 20%) • Discount Rate: 12%; PV factor annuity 4 years @12% = 3.037 Using Scenario Analysis, what is the expected NPV?

Q17. Which of the following best describes the DIFFERENCE between Transaction Exposure and Economic Exposure in foreign exchange risk management?

Q18. The following data is provided for Arjun Manufacturing Ltd.: • EBIT = ₹10,00,000 • Tax Rate = 40% • Depreciation = ₹1,50,000 • Capital Expenditure = ₹2,50,000 • Increase in Working Capital = ₹50,000 Calculate Free Cash Flow to Firm (FCFF).

Q19. Which of the following correctly explains the REINVESTMENT RATE ASSUMPTION inherent in the IRR method, and why it can be a limitation in capital budgeting?

Q20. Consider the following comparative data for two mutually exclusive projects evaluated at a 12% discount rate: Project X: Initial Investment ₹40L, Annual Cash Flows ₹13L for 4 years; PV Annuity Factor @12%, 4 years = 3.037 Project Y: Initial Investment ₹60L, Annual Cash Flows ₹20L for 4 years; PV Annuity Factor @12%, 4 years = 3.037 Project X has a higher IRR (approximately 13.1%) while Project Y has a higher NPV. Which project should be selected to maximise shareholder value?