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26. M-M Hypothesis for a capital structure is based on which code of the following assumptions?
(a) Capital markets are perfect
(b) Firms belonging to equal risk class
(c) There is 100% dividend payout ratio
(d) There are nominal corporate taxes
Select the correct code.

  • Option : B
  • Explanation : Assumptions: The M-M hypothesis of the irrelevance of dividends is based on the following critical assumptions:
    1. Perfect capital markets in which all investors are rational, Information is available to all free of cost, there are no transactions costs; securities are infinitely divisible, no investor is large enough to influence the market price of securities; there are no flotation costs.
    2. There are no taxes. Alternatively, there are no differences in tax rates applicable to capital gains and dividends.
    3. A firm has a given investment policy which does not change. The operational implication of this assumption is that financing of new investments out of retained earnings will not change the business risk complexion of the firm and, therefore, there would be no change in the required rate of return.
    4. There is a perfect certainty by every investor as to future investments and profits of the firm. In other words, investors are able to forecast future prices and dividends with certainty. This assumption is dropped by MM later.
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27. The formula

(Where P0 is the market price of shares, E is earning per share, D is the dividend per share, R is the Rate of Return and K is the cost of equity) for determining the dividend of the firm has been given by:

  • Option : B
  • Explanation :

    Walter’s formula to calculate the market price per share (P) is:
    P = D/K + {R × (E – D)/K}/K, where
    P = market price per share
    D = dividend per share
    E = earnings per share
    R = internal rate of return of the firm
    K = cost of capital of the firm
    The mathematical equation indicates that the market price of the company’s share is the total of the present values of:
    An infinite flow of dividends, and
    l An infinite flow of gains on investments from retained earnings.
    The formula can be used to calculate the price of the share if the values of other variables are available.
    Assumptions of Walter’s Model
    Walter’s model is based on the following assumptions:
    Internal Financing: All the investments are financed by the firm through retained earnings. No new equity or debt is issued for the same.
    Constant IRR and Cost of Capital: The internal rate of return (r) and the cost of capital (k) of the firm are constant. The business risks remain same for all the investment decisions.
    Constant EPS and DPS: Beginning earnings and dividends of the firm never change. Though different values of EPS and DPS may be used in the model, but they are assumed to remain constant while determining a value. 100% Retention/Payout: All the earnings of the company are either reinvested internally or distributed as dividends. Infinite Life: The company has an infinite or very long life.

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29. Which one of the following expresses the tendency of consumers to interpret information in a way that fits one’s preconceptions in the consumer buying behaviour?

  • Option : B
  • Explanation : Selective attention: The tendency for people to screen out most of the information to which they are exposed–means that marketers have to work especially hard to attract the consumer’s attention.
    Selective distortion: Selective distortion describes the tendency of people to interpret information in a way that will support what they already believe. Anna Flores may hear a salesperson mention some good and bad points about a competing camera brand. Because she already has a strong leaning toward Nikon, she is likely to distort those points in order to conclude that Nikon is the better camera. Selective distortion means that marketers must try to understand the mindsets of consumers and how these will affect interpretations of advertising and sales information.
    Selective retention: People also will forget much that they learn. They tend to retain information that supports their attitudes and beliefs. Because of selective retention, Anna is likely to remember good points made about the Nikon and to forget good points made about competing cameras. Because of selective exposure, distortion, and retention, marketers have to work hard to get their messages through. This fact explains why marketers use so much drama and repetition in sending messages to their market.
    Subliminal: Interestingly, although most marketers worry about whether their offers will be perceived at all, some consumers worry that they will be affected by marketing messages without even knowing it—through subliminal advertising.
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