MGT201 Current Quiz #
3

A company whose stock is selling at
a P/E ratio greater than the P/E ratio of a market index most

likely has . Select correct option:

An anticipated
earnings growth rate which is less than that of the average firm

**A dividend yield which is less than that of the average firm**Less predictable earnings growth than that of the average firm Greater cyclicality of earnings growth than that of the average firm

Which
of the following is called the tax savings of the firm derived from the deductibility of interest expense?

Select correct
option:

**Interest tax shield**Depreciable basis Financing umbrella Current yield

The reduction in income taxes that results from the
tax-deductibility of interest payments.

__Tax__

__benefits__derived from

__creative__structuring of a

__financing__

__arrangement__. For example, using

__loan capital__instead of

__equity capital__because

__interest__

__paid__on the

__loans__is generally

__tax__

__deductible__whereas the

__dividend__paid on

__equity__is not

Upon which of the
following a firm's degree of operating
leverage (DOL) depends primarily?
Select correct option:

Sales variability

Level of fixed
operating costs

**Closeness to its operating break-even point**

Debt-to-equity
ratio

Discounted cash flow methods
provide a more objective basis for
evaluating and selecting an investment
project. These methods take into
account:

Select correct option:

Magnitude of expected
cash flows

**Timing of expected cash flows**

__Both timing and magnitude of cash flows__

None of the given
options

Ref
It discounts the cash flow to take into
the account the time value
of money.

__Reference__
Expected Portfolio Return = . Select correct option:

**rP * = xA rA + xB rB**rP * = xA rA - xB rB rP * = xA rA / xB rB rP * = xA rA * xB rB

What is the most important criteria
in capital budgeting? Select correct option:

Return on investment Profitability index

**Net present value**Pay back period
If stock is a part of
totally diversified portfolio then
its company risk must be equal to: Select correct option:

**0**

0.5

1

-1

For most firms, P/E ratios and risk . Select correct option:

Will
be directly related

**Will have an inverse relationship**

Will be unrelated

None of the above.

Which of the
following is the cash required
during a specific period to meet
interest expenses and principal payments?

Select correct
option:

Debt capacity

**Debt-service burden**Adequacy capacity Fixed-charge burden

Which of the
following stipulate a relationship between
expected return and risk? Select correct option:

APT stipulates

CAPM stipulates

**Both CAPM and APT stipulate**

Neither
CAPM nor APT stipulate

=====

Which of the
following factors might
affect stock returns?

**Select correct option:**

Business cycle

Interest rate fluctuations

Inflation rates

**All of the above**

If all things equal,
when diversification is most effective?

**Select correct option:**

Securities' returns are
positively correlated
Securities' returns are uncorrelated Securities' returns are
high

**Securities' returns are negatively correlated**

Which of the followings expressed the proposition that the value of the firm is independent of its
capital structure?

**Select correct option:**

The Capital Asset Pricing
Model

**M&M Proposition I**M&M Proposition II The Law of One Price

Which of the following will NOT equate the future value of cash inflows to the present value of
cash outflows?

**Select correct option:**

Discount
rate Profitability index Internal rate of return

**Multiple Internal rate of return**

Which
of the following is related
to the use Lower financial leverage?

**Select correct option:**

Fixed
costs Variable costs Debt financing

**Common equity financing**

Why markets and market returns fluctuate?

**Select correct option:**

Because of political
factors

Because of social factors

Because of socio-political factors

**Because of macro systematic factors**

Which of the
following is NOT an example of hybrid
equity

**Select correct option:**

Convertible Bonds Convertible Debenture

**Common shares**Preferred shares
A project that tells us the number of years required to recover our initial cash investment based on the project’s expected cash flows is:

**Select correct option:**

**Pay back period**Internal rate of return Net present value Profitability index

A 5-year annuity due
has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent,
the present value of this annuity
is closest to which of the following
equations?

**Select correct option:**

(Rs.100)(PVIFA
at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08)
(Rs.100)(PVIFA at 8% for 6 periods) - Rs.100

Can not be found from the given information

To
increase a given future value, the
discount rate should be adjusted

__.__**Select correct option:**

**Upward**

Downward

First upward and then
downward

None of the given options

Which of the following is NOT the form of cash flow generated by the investments of the shareholders?

**Select correct option:**

Income Capital
loss Capital gain

**Operating income**

According to the Capital
Asset Pricing Model (CAPM), a well-diversified portfolio's rate of
return is a function of which of the following:

**Select correct option:**

Unique
risk Reinvestment risk

**Market risk**Unsystematic risk
What is the most important
criteria in capital budgeting?

**Select correct option:**

Return
on investment Profitability index

**Net present value**Pay back period
If all things equal, when diversification
is most effective?

**Select correct option:**

Securities' returns are
positively correlated
Securities' returns are uncorrelated Securities' returns are
high

**Securities' returns are negatively correlated**

Which if 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.

**Select correct option:**

I,
II, and III I only

**III only**

II and III only

As
interest rates go up, the present value
of a stream of fixed cash flows

__.__**Select correct option:**

**Goes down**

Goes up

Stays the same

Can not be found from the given information

Which of the
following could be taken same as minimizing
the weighted average cost of
capital?

**Select correct option:**

Maximizing
the market value of the firm

Maximizing
the market value of the firm only if MM's Proposition I Minimizing the market
value of the firm only if MM's Proposition I holds

**Maximizing the profits of the firm**
Which of the following formulas represents a correct calculation of the degree of operating leverage?

**Select correct option:**

(Q - QBE)/Q

(EBIT)
/ (EBIT - FC) [Q(P-V) + FC]
/[Q(P-V)]

**Q(P-V) / [Q(P-V) - FC]**
The value of a bond
is directly derived from which of the following?

**Select correct option:**

Cash flows

Coupon receipts

Par recovery at
maturity

**All of the given options**

Which statement is NOT true regarding the market portfolio?

**Select correct option:**

It includes all
publicly traded financial assets

**It is the tangency point between the capital market line and the indifference curve**

All securities in the
market portfolio are held in proportion to their market values

It lies on the efficient frontier

In the dividend discount
model, discount rate?

Select correct option: Real risk-free rate

Risk
premium for stocks

**Return on assets**

Expected inflation rate

which of the
following are not incorporated into
the

Which of the
following is NOT an example of hybrid
equity

Select
correct option: Convertible Bonds Convertible Debenture

**Common shares**Preferred shares
For which of the following
costs is it generally necessary to apply a tax adjustment to a yield measure?

Select correct
option:

**Cost of debt**

Cost of preferred
stock Cost of common equity Cost of retained earnings

The value of the bond
is NOT directly tied to the value of
which of the following assets? Select correct option:

Real assets of the
business

**Liquid assets of the business**Fixed assets of the business Lon term assets of the business
What are two major
areas of capital budgeting? Select correct option:

Net present value,
profitability index

**Net present value; internal rate of return**

Net present value;
payback period

Pay back period; profitability index

Which
of the followings are the propositions of Modigliani
and Miller's? Select correct option:

The market
value of a firm's common stock is independent of its capital
structure

The market
value of a firm's debt is independent of its capital
structure

**The market value of any firm is independent of its capital structure**None of the given options
The weighted average of possible returns, with the weights being the probabilities of occurrence

is
referred to as .
Select correct option:

Probability distribution

**Expected return**Standard deviation Coefficient of variation
In calculating the
costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?

Select
correct option: Common stock

**Debt**
Preferred stock

None of the above

A statistical measure of the variability of a distribution around its mean is referred to

as .

Select
correct option: Probability distribution
Expected return

**Standard deviation**Coefficient of variation
How "Shareholder
wealth" is represented in a firm?
Select correct option:

The number of people employed
in the firm

The book value of the firm's
assets less the book value of its
liabilities

**The market price per share of the firm's common stock**

The amount of salary paid to its employees

What is potentially
the biggest advantage of a small
partnership over a sole
proprietorship? Select correct option:

Unlimited liability

Single tax filing

Difficult ownership resale

**Raising capital**

Total Marks:
1

The benefit we expect
from a project is expressed in terms of: Select correct option:

**Cash in flows**Cash out flows Cash flows

None of the given option

Upon which of the following a firm's degree of operating leverage (DOL) depends primarily?
Select correct option:

Sales variability

Level of
fixed operating costs

**Closeness to its operating break-even point**

Debt-to-equity ratio

Which of
the following is the value
of beta for the market portfolio?
Select correct option:

0.25

-1.0

**1.0**

0.5

Which
of the following is related to
the use Lower financial
leverage? Select correct option:

Fixed costs

Variable costs

Debt financing

**Common equity financing**

Why common stock
of a company must provide a higher expected return than the debt of the same company?

Select correct option:

There is less demand
for stock than for bonds

There is greater
demand for stock than for bonds

**There is more systematic risk involved for the common stock**

There is a market premium required for bonds

__is equal to (common shareholders' equity/common shares outstanding). Select correct option:__

**Book value per share**Liquidation value per share Market value per share None of the above

When a bond
will sell at a discount? Select correct option:

The coupon
rate is greater than the current yield and the
current yield is greater than
yield to maturity

The coupon
rate is greater than yield to maturity

**The coupon rate is less than the current yield and the current yield is greater than the yield to maturity**

The coupon rate is less than the current yield and the current yield
is less than yield to maturity

In order
for the investor to earn more
than the current yield the bond
must be selling for a discount.
Yield to maturity will be greater than current yield as investor
will have purchased the bond at discount and
will be receiving the coupon payments
over the life of the bond.

Which of the following would be considered a cash-flow item from an "operating" activity?
Select correct option:

**Cash outflow to the government for taxes**

Cash outflow
to shareholders as dividends

Cash inflow to the firm from selling new common equity shares

Cash outflow
to purchase bonds issued
by another company

Upon which of the following a firm's degree of operating
leverage (DOL) depends primarily?
Select correct option:

Sales variability

Level of fixed operating costs

**Closeness to its operating break-even point**

Debt-to-equity ratio

Which
of the following is simply the weighted average of the
possible returns, with the weights
being the probabilities of
occurrence?

Select correct option:

Probability distribution

**Expected return**Standard deviation Coefficient of variation
Why companies
invest in projects
with negative NPV? Select correct option:

**Because there is hidden value in each project**Because there may be chance of rapid growth Because they have invested a lot

All of the given options

Cash budgets are prepared
from past: Select correct option:

Balance sheets

Income statements

Income tax and depreciation
data

**None of the given options**

The cash budget is prepared
from forecasted cash collections
and disbursements rather

If we were to increase
ABC company cost of equity assumption,
what would we expect to happen to
the present value of all future cash
flows?

Select correct option:

An increase

**A decrease**No change
Incomplete information

Which of the followings expressed the proposition that the cost
of equity is a positive
linear function of capital structure?

Select correct option:

The Capital Asset Pricing Model

M&M Proposition
I

**M&M Proposition II**

The Law of One
Price

The value
of the bond is NOT directly tied to the value of which
of the following assets?
Select correct option:

Real assets of the business

**Liquid assets of the business**Fixed assets of the business Lon term assets of the business

Question
# 2 of 20 ( Start time: 04:01:59 PM ) Total Marks: 1

__is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification.__

Select correct option: Systematic
risk

Standard deviation

**Unsystematic risk**

Coefficient of variation

Unsystematic risk is the diversifiable portion
of total risk and not a measure of total risk like
standard deviation.

The presence of which of the
following costs is not
used as a major argument against
the M&M arbitrage process?

Select correct option:
Bankruptcy costs Agency costs
Transactions costs

**Insurance costs**
The presence of
these costs is used as major
argument
against the M&M arbitrage process

What type of long-term financing most likely has the following features: 1) it has an infinite life, 2)
it pays dividends, and 3) its cash flows are expected to be a constant annuity
stream?

Select correct option: Long-term debt

**Preferred stock**
Common stock

None of the given options

According
to timing difference problem
a good project might suffer from

__IRR even though its NPV__
is

__.__
Select correct option: Higher; lower Lower; Lower

**Lower; higher**

Higher; higher

Expected Portfolio Return =

__. Select correct option:__**rP * = xA rA + xB rB**rP * = xA rA - xB rB rP * = xA rA / xB rB

rP * = xA rA * xB rB

Sales variability

Level of fixed operating
costs

**Closeness to its operating break-even point**

Debt-to-equity ratio

For most firms,
P/E ratios and risk_

__. Select correct option:__
Will be directly
related

**Will have an inverse relationship**

Will be unrelated

None of the above.

The

__the coefficient of variation____the relative risk of the investment. Select correct option:__**Larger; Larger**Larger; Smaller Smaller; Larger Smaller; Smaller

You are considering two investment
proposals, project A and
project B. B's expected net present value is Rs. 1,000 greater than that for A and A's dispersion of
net present value
is less than that for B. On the basis of risk and return, what
would be your conclusion?

Select correct option:

Project A dominates project B Project B dominates project A

**Neither project dominates the other in terms of risk and return**

Incomplete information

The expected net present value of B is greater than the expected net present value of A
and the risk of B exceeds the risk of A, so neither dominates the other.

__means expanding the number of investments which cover different kinds of stocks. Select correct option:__

**Diversification**Standard deviation Variance

Covariance

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