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Saturday, November 24, 2012

MGT201 OLD paper spring 2010


MIDTERM EXAMINATION
Spring 2010
MGT201- Financial Management

What should be the focal point of financial management in a firm?
_ The number and types of products or services provided by the firm
_ The minimization of the amount of taxes paid by the firm
_ The creation of value for shareholders
_ The dollars profits earned by the firm
Question No: 3 ( Marks: 1 ) - Please choose one
Which of the following financial market is referred to the market for short-term government and corporate debt securities?
_ Money market
_ Capital market
_ Primary market
_ Secondary market
Reference: Page 7
Money Markets
Money market generally is a market where there is buying and selling of short term liquid debt instruments. (Short term means one year or less). Liquid means something which isn easily en-cashable; an instrument that can be easily exchanged for cash. Following financial instruments are traded in money markets
Question No: 4 ( Marks: 1 ) - Please choose one
Which of the following would generally have unlimited liability?
_ A limited partner in a partnership
_ A shareholder in a corporation
_ The owner of a sole proprietorship
_ A member in a limited liability company (LLC)
Question No: 5 ( Marks: 1 ) - Please choose one
Which of the following is a major disadvantage of the corporate form of organization?
_ Double taxation of dividends
_ Inability of the firm to raise large sums of additional
_ Limited liability of shareholders
_ Limited life of the corporate form
Question No: 6 ( Marks: 1 ) - Please choose one
Which of the following statement is most accurate?
_ Coverage ratios also shed light on the "liquidity" of current ratios
_ Receivable- and inventory-based activity ratios also shed light on the "liquidity" of current assets
_ Receivable- and inventory-based activity ratios also shed light on the firm's use of financial leverage
_ Liquidity ratios also shed light on the firm's use of financial leverage
Question No: 7 ( Marks: 1 ) - Please choose one
In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would __________.
_ Incomplete information
_ Fall
_ Rise
_ Remain unchanged
Question No: 8 ( Marks: 1 ) - Please choose one
You are going to invest Rs.12,500 into a certificate of deposit (CD) at a 6% annual rate(compounded annually) with a maturity of 30 months. How much money will you receive when the CD matures?
_ Rs.14,491
_ Rs.14,518
_ Incomplete information
_ Rs.14,460
Reference:
FV = PV* (1+i)^n
FV = 12500(1.06)^2.5
FV= 14460
Where 30 months divided by 12 we get 2.5 years
Question No: 9 ( Marks: 1 ) - Please choose one
Which of the following would be considered a cash-flow item from a "financing" activity?
_ A cash outflow to the government for taxes
_ A cash outflow to repurchase the firm's own common stock
_ A cash outflow to lenders as interest
_ A cash outflow to purchase bonds issued by another company
Question No: 10 ( Marks: 1 ) - Please choose one
In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT __________.
_ Changes in costs due to a general appreciation in those costs
_The amount (net of taxes) that we could realize from selling a currently unused building
of ours that we intend to use for our project
_ Changes in working capital resulting from the project, net of spontaneous changes in current liabilities
_ Costs that have previously been incurred that are unrecoverable
Question No: 11 ( Marks: 1 ) - Please choose one
The basic capital budgeting principles involved in determining relevant after-tax incremental operating cash flows require us to __________.
_ Include sunk costs, but ignore opportunity costs
_Include opportunity costs, but ignore sunk costs
_ Ignore both opportunity costs and sunk costs
_ Include both opportunity and sunk costs
Question No: 12 ( Marks: 1 ) - Please choose one
Interest payments, principal payments, and cash dividends are __________ the typical budgeting cash-flow analysis because they are ________ cash flows.
_ Included in; financing
_ Excluded from; financing
_ Included in; operating
_ Excluded from; operating
Question No: 13 ( Marks: 1 ) - Please choose one
Why Payback period is a poor gauge of profitability?
_ It ignores the time value of money
_ It gives rough indication to the liquidity of the project
_ It does not consider cash flows after expiration of the payback period
_ All of the given options
Question No: 14 ( Marks: 1 ) - Please choose one
To estimate an unknown number that lies between two known numbers is knows as--------------
_Capital rationing
_ Capital budgeting
_ Interpolation
_ Amortization
Question No: 15 ( Marks: 1 ) - Please choose one
Which of the following make the calculation of NPV difficult?
_ Estimated cash flows
_ Discount rate
_ Anticipated life of the business
_ All of the given options
Reference:
Page 41 & 42
Question No: 16 ( Marks: 1 ) - Please choose one
When there is single period capital rationing, what would be the most sensible way of making investment decisions?
_ Choose all projects with a positive NPV
_ Group projects together to allocate the funds available and select the group of projects with the highest NPV
_ Choose the project with the highest NPV
_ Calculate IRR and select the projects with the highest IRRs
Question No: 17 ( Marks: 1 ) - Please choose one
The sinking fund retirement of a bond issue takes __________.
_ Only one form -- the corporation purchases bonds in the open market and delivers a given number of bonds to the trustee
_ Only one form -- the corporation pays cash to the trustee, who in turn calls the bonds for redemption
_ Only one form -- bonds mature periodically and the corporation retires them in the order that they mature
_ Two forms -- (1) the corporation purchases bonds in the open market and delivers a given number of bonds to the trustee; or (2) the corporation pays cash to the trustee, who in turn calls the bonds for redemption
Question No: 18 ( Marks: 1 ) - Please choose one
Which of the following statements is correct in distinguishing between serial bonds and sinking-fund bonds?
_ Serial bonds mature at a variety of dates, but sinking-fund bonds mature at a single date
_ Serial bonds provide for the deliberate retirement of bonds prior to maturity, but sinking-fund bonds do not provide for the deliberate retirement of bonds prior to maturity
_ Serial bonds do not provide for the deliberate retirement of bonds prior to maturity, but sinking-fund bonds do provide for the deliberate retirement of bonds prior to maturity
_ None of the above are correct since a serial bond is identical to a sinking fund bond
Question No: 19 ( Marks: 1 ) - Please choose one
__________ is a long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt.
_ A subordinated debenture
_ A debenture
_ A junk bond
_ An income bond
Question No: 20 ( Marks: 1 ) - Please choose one
Bond is a type of Direct Claim Security whose value is NOT secured by __________.
_ Tangible assets
_ Intangible assets
_ Fixed assets
_ Real assets
Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following is NOT the present value of the bond?
_ Intrinsic value
_ Market price
_ Fair price
_ Theoretical price
Question No: 22 ( Marks: 1 ) - Please choose one
A coupon bond pays annual interest, has a par value of Rs.1,000, matures in 4 years, has
a coupon rate of 10%, and has a yield to maturity of 12%. What is the current yield on
this bond?
_ 10.65%
_ 10.45%
_ 10.95%
_ 10.52%
Reference:
Price of Bond =100*(1 + 0.12)^-1 + 100*(1 + 0.12)^-2 + 100*(1 + 0.12)^-3 +
1100*(1.12)^-4 = 939.25
Current Yield = Coupon / Market Price
Current Yield = 100 /939.35
Coupon payment 4 year @ 10% = 100*4 = 400
Current yield = 400/1000 = .1064 = 10.64%
Question No: 23 ( Marks: 1 ) - Please choose one
A coupon bond that pays interest annually is selling at par value of Rs.1,000, matures in 5 years, and has a coupon rate of 9%. What is the yield to maturity on this bond?
_8.0%
_8.3%
_9.0%
_10.0%
Question No: 24 ( Marks: 1 ) - Please choose one
What is yield to maturity on a bond?
_It is below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium
_The discount rate that will set the present value of the payments equal to the bond price
_It is based on the assumption that any payments received are reinvested at the coupon rate
_None of the given options
Reference:
The most common way to compare the Overall Rate of Return of different Bonds is to compare their YTM’s
Question No: 25 ( Marks: 1 ) - Please choose one
Which of the following value of the shares changes with investor’s perception about the company’s future and supply and demand situation?
_ Par value
_ Market value
_ Intrinsic value
_ Face value
Question No: 26 ( Marks: 1 ) - Please choose one
The value of direct claim security is derived from which of the following?
_ Fundamental analysis
_ Underlying real asset
_ Supply and demand of securities in the market
_ All of the given options
Question No: 27 ( Marks: 1 ) - Please choose one
Low Tech Company has an expected ROE of 10%. The dividend growth rate will be
________ if the firm follows a policy of paying 40% of earnings in the form of dividends.
_6.0%
_4.8%
_7.2%
_3.0%
Reference:
G= plowback ratio x ROE.
40% earning retained
60% remaining
G=0.60 x 0.10 = 0.06*100=6%
Question No: 28 ( Marks: 1 ) - Please choose one
How dividend yield on a stock is similar to the current yield on a bond?
_ Both represent how much each security’s price will increase in a year
_Both represent the security’s annual income divided by its price
_ Both are an accurate representation of the total annual return an investor can expect
to earn by owning the security
_ Both incorporate the par value in their calculation
Reference:
Current Yield = Coupon / Market Price
Question No: 29 ( Marks: 1 ) - Please choose one
In the dividend discount model, which of the following is (are) NOT incorporated into the discount rate?
_Real risk-free rate
_Risk premium for stocks
_Return on assets
_Expected inflation rate
Question No: 30 ( Marks: 1 ) - Please choose one
Total portfolio risk is __________.
_ Equal to systematic risk plus non-diversifiable risk
_ Equal to avoidable risk plus diversifiable risk
_ Equal to systematic risk plus unavoidable risk
_ Equal to systematic risk plus diversifiable risk
Question No: 31 ( Marks: 1 ) - Please choose one
The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as __________.
_ A probability distribution
_ The expected return
_ The standard deviation
_ Coefficient of variation
Question No: 32 ( Marks: 1 ) - Please choose one
A well-diversified portfolio is defined as:
_One that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero
_One that contains securities from at least three different industry sectors
_A portfolio whose factor beta equals 1.0
_A portfolio that is equally weighted
Question No: 33 ( Marks: 1 ) - Please choose one
If a company intends to start a new project, ________ technique are employed to assess the financial viability of the project.
_ Financial planning
_ Financial forecasting
_ Capital budgeting
_ Capital rationing
Question No: 34 ( Marks: 1 ) - Please choose one
Capital budgeting is a decentralized function assigned to:
_ Individuals
_ Departments
_ Teams
_All of the given options
Question No: 35 ( Marks: 1 ) - Please choose one
The biggest challenge in capital budgeting is to keep finding:
_ Valuable projects
_ Sources of funds
_ Blue chips
_ Fixed assets
Question No: 36 ( Marks: 1 ) - Please choose one
The objective of financial management is to maximize _________ wealth.
_ Stakeholders
_ Shareholders
_ Bondholders
_ Directors
Question No: 37 ( Marks: 1 ) - Please choose one
Information that goes into __________ can be used to prepare __________.
_ A forecast balance sheet; a forecast income statement
_ Forecast financial statements; a cash budget
_ Cash budget; forecast financial statements
_ A forecast income statement; a cash budget
Question No: 38 ( Marks: 1 ) - Please choose one
A proposal is accepted if payback period falls within the time period of 3 years. According to the given criteria which of the following project will be accepted?
Payback period
Project A 1.66
Project B 2.66
Project C 3.66
_ Project A
_ Project B
_ Project C
_ Project A & B
Question No: 39 ( Marks: 1 ) - Please choose one
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate is 8% compounded annually?
_ Rs.680.58
_ Rs.1,462.23
_ Rs.322.69
_ Rs.401.98
Reference:
PV=FV/(1+i)^n
PV=1000/(1+.08)^5
Question No: 40 ( Marks: 1 ) - Please choose one
What is the present value of Rs.6,500 to be paid at the end of 8 years if the interest rate is 10% compounded annually?
_ Rs.3,032
_ Rs.3,890
_ Rs.3,190
_ Rs.4,301
Reference:
PV=FV/(1+i)^n
PV=6500/(1+.10)^8
rgv �)o t 0� 0� t;line-height: normal;mso-layout-grid-align:none;text-autospace:none'>_ Life span of the project
_ Validity of the project
_ Cost of the capital
_ Return on asset
Reference:
Lecture 12 of handouts
Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following technique would be used for a project that has non-normal cash flows?
_Internal rate of return
_ Multiple internal rate of return
_ Modified internal rate of return
_ Net present value
Reference:
Lecture 10 of handouts
Question No: 29 ( Marks: 1 ) - Please choose one
Why net present value is the most important criteria for selecting the project in capital budgeting?
_Because it has a direct link with the shareholders dividends maximization
_Because it has direct link with shareholders wealth maximization
_Because it helps in quick judgment regarding the investment in real assets
_Because we have a simple formula to calculate the cash flows
Reference:
Lecture 8 of handouts
Question No: 30 ( Marks: 1 ) - Please choose one
From which of the following category would be the cash flow received from sales revenue and other income during the life of the project?
_ Cash flow from financing activity
_ Cash flow from operating activity
_ Cash flow from investing activity
_ All of the given options
Reference:
All three activities gives information about cash flow received from sales revenue and other income.
Question No: 31 ( Marks: 1 ) - Please choose one
An investment proposal should be judged in whether or not it provides:
_A return equal to the return require by the investor
_A return more than required by investor
_ A return less than required by investor
_ A return equal to or more than required by investor
Question No: 32 ( Marks: 1 ) - Please choose one
ABC Co. will earn Rs. 350 million in cash flow in four years from now. Assuming an 8.5% weighted average cost of capital, what is that cash flow worth today?
_ Rs.253 million
_ Rs.323 million
_ Rs.380 million
_ Rs.180 million
PV = (350/*1.085)^4= 252.55 or 253)
Question No: 33 ( Marks: 1 ) - Please choose one
An 8-year annuity due has a future value of Rs.1,000. If the interest rate is 5 percent, the amount of each annuity payment is closest to which of the following?
_ Rs.109.39
_ Rs.147.36
_ Rs.154.73
_ Rs.99.74
PIFV * (1+i) as its due annuity so we have to add one extra (1+i)
(PV=(R) (PVIFA at 5% for 8 periods)*(1.05) = by plugging into value of PIFV = [ (1+i)^n -1 ]/i
* (1.05 )
= (1.05^8 - 1/.05 * [(1.05)] = 10.02
=1000/10.02 = 99.74
Point to note this is due annuity so we have to multiple extra (1+i) in formula of
calculating PIFV
Question No: 34 ( Marks: 1 ) - Please choose one
As interest rates go up, the present value of a stream of fixed cash flows _____.
_ Goes down
_Goes up
_Stays the same
_Can not be found
Reference:
For Example
PV=FV/(1+i)^n
PV=1000/(1+.08)^5
PV=680.58
PV=FV/(1+i)^n
PV=1000/(1+.09)^5
PV=650
Question No: 35 ( Marks: 1 ) - Please choose one
An annuity due is always worth _____ a comparable annuity.
_ Less than
_ More than
_ Equal to
_Can not be found
(It's worth (1+i) times the value of the ordinary annuity with the same terms
Annuity due means you get the money at the beginning of the period, rather than the end, hence the times 1+i value is considered.
Question No: 36 ( Marks: 1 ) - Please choose one
What is the present value of an annuity that pays 100 per year for 10 years if the required rate of return is 7%?
_ Rs.1000
_ Rs.702.40
_ Rs.545.45
_ Rs.13,816
Working
PV = PMT * (1+i)^-n -1/i
Putting the values in formula:
PV=100{1-(1+.07)-10/.07}
=100{1-(1.07)-10/.07}
=100{1-.5083/.07}
=100(0.4916/.07)
=100(7.024)
= Rs.702.40
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following would be considered a cash-flow item from a "financing" activity?
_ A cash outflow to the government for taxes
_ A cash outflow to repurchase the firm's own common stock
_ A cash outflow to lenders as interest
_ A cash outflow to purchase bonds issued by another company
Question No: 38 ( Marks: 1 ) - Please choose one
Which group of ratios relates profits to sales and investment?
_ Liquidity ratios
_ Debt ratios
_ Coverage ratios
_ Profitability ratios
Question No: 39 ( Marks: 1 ) - Please choose one
Which of the following statements is the least likely to be correct?
_A firm that has a high degree of business risk is less likely to want to incur financial risk
_ There exists little or no negotiation with suppliers of capital regarding the financing needs of the firm
_Financial ratios are relevant for making internal comparisons
_It is important to make external comparisons or financial ratios
Question No: 40 ( Marks: 1 ) - Please choose one
Which of the following statement (in general) is correct?
_ A low receivables turnover is desirable
_The lower the total debt-to-equity ratio, the lower the financial risk for a firm
_ An increase in net profit margin with no change in sales or assets means a weaker
ROI
_The higher the tax rate for a firm, the lower the interest coverage ratio
(low or declining accounts receivable turnover ratio indicates a collection problem, part of which may be due to bad debts. A low receivables turnover ratio means that the business should reexamine its credit policies to ensure the timely collection of imparted credit, which will help in earning interest for the firm.)
Question No: 1 ( Marks: 1 ) - Please choose one
Among the pairs given below select a(n) example of a principal and a(n) example of an agent respectively.
_ Shareholder; manager
_ Manager; owner
_ Accountant; bondholder
_ Shareholder; bondholder

               

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