AS 03 Finance & Economics for Actuarial Mock Test 06
These questions cover essential concepts in finance, economics, investment appraisal, and microeconomics. Key topics include cardinal utility theory, combined leverage, law of supply, Net Present Value (NPV), profitability index (PI), gearing, convertible securities, consumer budget constraints, national income multiplier, and international trade through GATT. The set evaluates understanding of investment decision-making, shareholder wealth maximisation, capital structure, demand and supply analysis, and macroeconomic principles. Candidates are expected to apply both theoretical and numerical concepts, making these questions valuable for AS 03 – Finance & Economics for Actuarial preparation and strengthening analytical skills required in actuarial examinations.
1. The cardinal measurement approach to utility (associated with Marshall) assumes:
A. Utility can only be ranked, not measured
B. Utility can be measured in absolute numbers called utils
C. Utility cannot be compared between consumers
D. Utility is based only on ordinal preferences
E. Utility can only be measured in monetary terms
2. Combined Leverage = Contribution / EBIT × EBIT / PBT simplifies to what?
A. Contribution / Sales
B. EBIT / Sales
C. Contribution / PBT
D. Sales / PBT
E. Fixed Costs / PBT
3. How does price affect the supply of a product?
A. Higher price makes supply less attractive
B. Price has no direct effect on supply decisions
C. Lower prices always lead to greater supply
D. Price only affects demand, not supply
E. Other things being equal, higher the price, the firm tends to supply more quantity as it becomes more attractive to produce; economists refer to the phenomenon as quantity supplied increasing as price increases
4. What are 'value destroyers' in the context of NPV analysis?
A. Projects with very high risk
B. Projects that require large capital investment
C. Projects that employ too many people
D. Opportunities that display a negative present value, which should be avoided as they reduce shareholders' wealth
E. Projects that have long payback periods
5. The General Agreement on Tariffs and Trade (GATT) was signed in which year?
A. 1947
B. 1929
C. 1955
D. 1965
E. 1975
6. Which of the following is a Limitation of the Profitability Index (PI) method?
A. It is too simple and misses important information
B. It fails as a guide in resolving capital rationing where projects are indivisible; once a single large project with high NPV is selected, the possibility of accepting several small projects which together may have higher NPV is excluded
C. It cannot handle projects with large cash flows
D. It overstates the NPV of small projects
E. It ignores the cost of capital
7. Gearing refers to:
A. The profitability of a company
B. The liquidity position of a company
C. The efficiency of asset utilisation
D. The proportions of long-term debt and equity finance in a company
E. The revenue generation capacity
8. What happens to a shareholder's income after the conversion of a convertible security?
A. Continues to receive fixed dividends
B. Stops receiving preference dividends or interest payments and starts receiving ordinary share dividends
C. Receives both ordinary and preference dividends
D. Loses all income rights
E. Receives government bond interest
9. If consumer's income is ₹100 and the price of B is ₹20, how many units of B can be bought if all income is spent on B?
A. 10 units
B. 2 units
C. 5 units
D. 20 units
E. 15 units
10. Which statement correctly describes the national income multiplier effect?
A. The ratio of a country's total imports to its total exports in a given year
B. The effect whereby an initial change in government spending leads to a larger final change in national income—the larger the multiplier, the greater the change in national income
C. The rate at which the central bank increases the money supply annually
D. The ratio of total tax revenues to total government spending in the budget
E. The effect of changes in interest rates on household savings and investment
