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Saturday, November 24, 2012

MGT201 old paper spring 2010


08MIDTERM  EXAMINATION
Spring 2010
MGT201- Financial Management (Session - 2

Question No: 4    ( Marks: 1 )    - Please choose on
Which of the following investment alternatives would provide the greatest future value for your investment?
       ►  10% compounded daily (360 days)    
         10.5% compounded annually
         10.25% compounded quarterly
         Incomplete information
Question No: 6    ( Marks: 1 )    - Please choose one
A 5-year ordinary annuity has a present value of Rs.1,000.  If the interest rate is 8 percent, the amount of each annuity payment is closest to which of the following?
       ► Rs.250.44
       Rs.231.91
       Rs.181.62
       Rs.184.08
Question No: 7    ( 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: 8    ( 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
 Question No: 9    ( Marks: 1 )    - Please choose one
When coupon bonds are issued, they are typically sold at which of the following value?
       Below par
       Above par value
       ► At or near par value
       At a value unrelated to par
Question No: 10    ( Marks: 1 )    - Please choose one
Which of the following has NO effect when the financial health (cash flows and income) of the company changes with time?
       Market value
       Price of the share
       ► Par value
       None of the given options
Reference:
As the financial health (cash flows and income) of the company changes with time, the Market
Value (or Price) of the Share changes (even though it’s Par Value is fixed).
Question No: 11    ( Marks: 1 )    - Please choose one
The value of dividend is derived from which of the following?
       ► Cash flow streams
       Capital gain /loss
       Difference between buying & selling price
       All of the given options
Question No: 12    ( Marks: 1 )    - Please choose one
Which of the following is (are) true?
I.                    The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stock’s required return.
II.                 A decrease in the dividend growth rate will increase a stock’s market value, all else the same.
III.               An increase in the required return on a stock will decrease its market value, all else the same.
       I, II, and III
       I only
       III only
       ► II and III only
Question No: 13    ( Marks: 1 )    - Please choose one
Diversification can reduce risk by spreading your money across many different _______.
        ►Investments
        ►Markets       
        ►Industries       
        ►All of the given options
Question No: 14    ( Marks: 1 )    - Please choose one
Assume that the expected returns of the portfolios are the same but their standard deviations are given in the options given below, which of the option represent the most risky portfolio according to standard deviation?
►1.5%        
►2.0%        
►3.0%        
►4.0%
Question No: 15    ( Marks: 1 )    - Please choose one
When bonds are issued, under which of the following category the value of the bond appears?
►Equity
►Fixed assets
►Short term loan
                ►Long term loan
Question No: 16    ( Marks: 1 )    - Please choose one
_________ means expanding the number of investments which cover different kinds of stocks.
►Diversification
►Standard deviation       
►Variance       
►Covariance       
Question No: 17    ( Marks: 1 )    - Please choose one
What is the present value of Rs.8,000 to be paid at the end of three years if the interest rate is 11% compounded annually?
                ►Rs.5,850 
►Rs.4,872        
                ►Rs.6,725       
                ►Rs.1,842        
Question No: 18    ( Marks: 1 )    - Please choose one
By summing up the discounted cash flows we can calculate which of the following?
►Liquidation value        
►Intrinsic value
►Book value        
                ►Market value
Question No: 19    ( Marks: 1 )    - Please choose one
Which of the following accounting equation is accurate?
       ► Assets +Equity = Liabilities + Expenses
       ► Assets + Expenses = Liabilities +Expenses + Revenue
       ► Assets + Liabilities = Equity + Expenses + Revenue
       ► Assets + Revenue + Liabilities = Equity
Question No: 20    ( Marks: 1 )    - Please choose one
Which of the following equation can represent income statement in best way?
Profit – Expenses = sales revenue
                ►Sales revenue – Expenses = Profit
Assets + Liabilities= Equity
Sales revenue + Equity = Assets   
Question No: 21    ( Marks: 1 )    - Please choose one
Which of the following is a type of annuity in which no time span is involved?
►Ordinary annuity        
                ►Annuity due
►Perpetuity
►None of the given options
Question No: 22    ( Marks: 1 )    - Please choose one
All of the following are the examples of annuity EXCEPT:
►Mortgage payment        
►Insurance premium       
►Monthly rental payments
                ►Fixed coupon payments
Question No: 23    ( Marks: 1 )    - Please choose one
_________ is the value of bond, which we expect the bond to be.
                ►Fair value
►Book value        
►Market value       
►Maturity value       
   
Question No: 24    ( Marks: 1 )    - Please choose one
YTM is equal to which of the following formula?
►Capital gain + market price
►Present value + interest yield
►Market price + interest yield
                ►Interest yield + capital gain yield
Question No: 25    ( Marks: 1 )    - Please choose one
If there is an increase in a firm’s expected growth rate then it will cause its required rate of return to______.
►Increase
                ►Decrease            
                ►Fluctuate more than before
                ►Possibly increase, decrease, or remain constant
Question No: 26    ( Marks: 1 )    - Please choose one
Which of the following formula could be used to calculate expected rate of return <r>?
       ► Po / Po × P1
       ► P1 + Po / Po
       ► P1 – Po / Po
       ► Po – P1 / Po
Question No: 27    ( Marks: 1 )    - Please choose one
This is an example of which of the following concept?
ABC Corporation’s stock price has fallen because it was not able to meet its production deadlines.
►Market risk       
►Company specific risk                   
►Industry risk        
►Economic risk   
Question No: 28    ( 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 is most suitable to accept?

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: 29    ( Marks: 3 )
By applying Common Life Approach calculate the NPV of the following projects:

Projects           Initial outflow             Inflow Yr 1                  Inflow Yr 2
A                     100                              200                              -
B                      200                              200                              200

Solution:
Project A
NPV=-100+(200-100)/1.1)+200/(1.1)2 = 156
Project B
NPV =-200+200/1.1+200/(1.1)2 = 147
Question No: 30    ( Marks: 3 )
There are two stocks in the portfolio of Mr. N, Stock A and Stock B. the information of this portfolio is as follows:
Common stock
Expected rate of return
Standard deviation
Stock A
15%
10%
Stock B
20%
15%
Calculate the expected rate of return on this portfolio assuming that Stock A consists of 75% of the total funds invested in the stocks and the remainder in Stock B.
Solution:
Apply formula on page 93 of handouts
={(75/100)2(10/100)2+(25/100)2(15/100)2+2((75/100)(25/100)(10/100)(15/100)(.6)}(.5)
=  {(0.5625)(0.01)+(.0625)(0.0225)+2((.75)(.25)(.1)(.15)(.6))}(.5)
=(0.010406)*.5
=0.005203*100
=0.520313%
Question No: 32    ( Marks: 5 )
Hammad Inc. is considering two alternative, mutually exclusive projects. Both projects require an initial investment of Rs. 10,000 and are typical, average-risk projects for the firm. Project A has an expected life of 2 years with after-tax cash inflow of Rs. 6,000 and Rs. 8,000 at the end of year 1 and 2, respectively.
Project B has an expected life of 4 years with after-tax cash inflow of Rs. 4,000 at the end of each of next 4 years. The firm’s cost of capital is 10 percent.
If the projects cannot be repeated, which project will be selected, and what is the net present value?
Solution:
Net Present Value:
Project A: Initial investment, I0 = Rs 10,000
                  Cash flow in yr 1, CF1 = Rs 6000
                  Cash flow in yr 2, CF2 = Rs 8000
                  Discount rate, I = 10 %
                  No. of yrs, n = 4
NPV = - I0 +  CF1/(1+i)n + CF2/(1+i)n + CF3/(1+i) n + CF4/(1+i) n
             = -10,000 + 6000/(1.10) + 8000/(1.12)2
         =  -10,000 + 5454.54 + 6611.57
                = - 10,000 +12066.11
                = 2066.11
Project B: Initial investment, I0 = Rs 10,000
                  Cash flow in yr 1, CF1 = Rs 4000
                  Cash flow in yr 2, CF2 = Rs 4000
                  Cash flow in yr 3, CF3 = Rs 4000
                  Cash flow in yr 4, CF­4 = Rs 4000
                  Discount rate, I = 10 %
                  No. of yrs, n = 4
NPV = - I0 +  CF1/(1+i)n + CF2/(1+i)n + CF3/(1+i) n + CF4/(1+i) n
             = -10,000 + 4000/(1.10) + 4000/(1.10)2+ 4000/(1.10)3+ 4000/(1.10)4
         =  -10,000 + 3636.36 + 3305.8 + 3005.25 + 2732.053
         = -10,000 + 12679.463
         = 2679.463
='� :1sa0� 0� '>  4507.88
Again on 10%, project B is better tha project A.
e pres� c1vl0� 0� tream 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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