07MIDTERM
EXAMINATION
Spring
2010
MGT201-
Financial Management (Session - 6)
Question
No: 1 ( Marks: 1 ) - Please choose one
How a
company can improve (lower) its debt-to-total asset ratio?
► By borrowing more
► By shifting short-term to long-term
debt
► By shifting long-term to short-term
debt
► By selling common stock
Question
No: 2 ( 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: 3 ( Marks: 1 ) - Please choose one
To
increase a given future value, the discount rate should be adjusted __________.
► Upward
► Downward
► First upward and then downward
► None of the given options
Question
No: 4 ( Marks: 1 ) - Please choose one
Cash
budgets are prepared from past:
► Income tax and depreciation data
► None of the
given options
► Balance sheets
► Income statements
Question
No: 5 ( Marks: 1 ) - Please choose one
A
5-year ordinary annuity has a future 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.231.91
► Rs.184.08
► Rs.181.62
► Rs.170.44
Question
No: 6 ( 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: 7 ( Marks: 1 ) - Please choose one
Why we
need Capital rationing?
► Because, there are not enough positive
NPV projects
► Because, companies do not always have access to all of
the funds they could make use of
► Because, managers find it difficult to
decide how to fund projects
► Because, banks require very high
returns on projects
Question
No: 8 ( Marks: 1 ) - Please choose one
Which
of the following is a person or an institution designated by a bond issuer as
the official representative of the bondholders?
► Indenture
► Debenture
► Bond
► Bond trustee
Question
No: 9 ( Marks: 1 ) - Please choose one
Market
price of the bond changes according to which of the following reasons?
► Market price changes due to the supply
–demand of the bond in the market
► Market price changes due to Investor’s
perception
► Market price changes due to change in
the interest rate
► All of the given options
Question
No: 10 ( Marks: 1 ) - Please choose onA
company whose stock is selling at a P/E ratio greater than the P/E ratio of a
market index, most likely has _________.
►
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
Question
No: 11 ( Marks: 1 ) - Please choose one
Which of the following would tend to reduce a
firm's P/E ratio?
►
The firm significantly decreases financial leverage
►
The firm increases return on equity for the long term
► The level of inflation is
expected to increase to double-digit levels
►
The rate of return on Treasury bills decreases
Question
No: 12 ( Marks: 1 ) - Please choose one
Which
of the following factors might affect stock returns?
► The business cycle
► Interest rate fluctuations
► Inflation rates
► All of the above
Question
No: 13 ( Marks: 1 ) - Please choose one
What is
the present value of Rs. 3,500,000 to be paid at the end of 50 years if the
correct risk adjusted interest rate is 18%?
► Rs.105,000
► Rs.150,000
► Rs.395,000
► Rs.350,000
Question
No: 14 ( Marks: 1 ) - Please choose one
While
using capital budgeting techniques, the benefits we expect from a project is
expressed in terms of:
► Cash in flows
► Cash out flows
► Cash flows
► None of the given options
Question
No: 15 ( Marks: 1 ) - Please choose one
If the
probability is written on Y-axis and the rate of return is mentioned on the
X-axis, Which kind of relationship it shows when there is higher the standard
deviation the higher the risk.
► Indirect relationship
► No relationship
► Direct relationship
► Insufficient information
Question
No: 16 ( 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: 17 ( Marks: 1 ) - Please choose one
The
value at which buyers and sellers are willing to buy and sell any asset is
known as:
► Liquidation value
► Book value
► Intrinsic value
► Market value
Question
No: 18 ( Marks: 1 ) - Please choose one
Which
of the following concept says that rupee in your hand today is better than the
rupee you are going to get tomorrow?
► Risk & return
► Time value of money
► Net present value
► Portfolio diversification
Question
No: 19 ( 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: 20 ( Marks: 1 ) - Please choose one
Which
of the following is the formula to calculate the future value of perpetuity?
► Constant cash flows × interest rate
► Constant cash flows / interest rate
► Constant cash flows + Constant cash
flows × interest rate
► Constant cash flows - Constant cash
flows/ interest rate
Question
No: 21 ( Marks: 1 ) - Please choose one
There
is _______ relationship between NPV and Economic Value added.
► Direct
► Indirect
► No relationship
► Cannot be determined
Question
No: 22 ( Marks: 1 ) - Please choose one
If
new asset is replaced with old one, the difference between the depreciation of
both assets would be:
► Useless and nothing to do with the
depreciation
► Take the percentage of depreciation
with new price of asset and then subtract it
►
Subtracted from cash flows
► Added back to cash flows
Question
No: 23 ( Marks: 1 ) - Please choose one
The
formula which is used for the calculation of equivalent annual annuity is:
► (1+i) n +1/ (1+i) n
► (1+i) n-1 / (1+i) n
► (1+i) n × (1+i) n
-1
► (1+i) n/ (1+i) n -1
Question
No: 24 ( Marks: 1 ) - Please choose one
The
responsibility of research & development projects lie with which of the
following authority?
► Chief executive officer
► Divisional heads
► Collaborative teams from all
departments
► Experts are hired to make such
decisions
Question
No: 25 ( Marks: 1 ) - Please choose one
Market
price of a share will be determined from __________.
► Supply of share only
► Demand of share only
► Price of share of Benchmark Company
► From demand and supply in the market
Question
No: 26 ( Marks: 1 ) - Please choose one
Which
of the following is the formula to calculate present value under zero growth
model for common stock?
► DIV1 / rCE
► DIV1 × rCE
► DIV1 + rCE
► DIV1 - rCE
Question
No: 27 ( Marks: 1 ) - Please choose one
Earning
per share can be calculated with the help of which of the following formula?
► Net income / number of shares outstanding
► Net income – dividend / number of
shares outstanding
► Operating income / number of shares
outstanding
► Earning before interest and taxes /
number of shares outstanding
Question
No: 28 ( Marks: 1 ) - Please choose one
Which
of the following statements is correct relating to the following information?
Stocks
A and B each have an expected return of 15% and a standard deviation of 20%.
You have a portfolio that consists of 50% A and 50% B.
► The portfolio's beta is less than 1.2
► The portfolio's expected return is 15%
► The portfolio's beta is greater than
1.2
► The portfolio's standard deviation is
20%
Question
No: 29 ( Marks: 3 )
Briefly
explain what call provision is and in which case companies use this option.
Call
Provision:
The
right (or option) of the Issuer to call back (redeem) or retire the bond by
paying-off the Bondholders before the Maturity Date. When market interest rates
drop, Issuers (or Borrowers) often call back the old bonds and issue new ones
at lower interest rates
Question
No: 30 ( Marks: 3 )
Lakson
Corporation is a stagnant market and analysts foresee a long period of zero
growth of the firm. It is paying a yearly dividend of Rs.5 for some time which
is expected to continue indefinitely. The yield on the stock of similar firm is
8%.
What should lakson’s stock sell for?
Data:
P0
= ?
D1V1
= 5
RCE
= 8%
Solution:
P0
= D1V1/RCE
P0
= 5/8%
P0
= 5/0.08
P0
= 62.5
Question
No: 31 ( Marks: 5 )
What
are different types of bonds? (Give any five types)
Solution:
Types
of Bonds:
Mortgage
Bonds: backed & secured by real assets
Subordinated
Debt and General Credit: lower rank and claim than Mortgage Bonds.
Debentures:
These
are not secured by real property, risky
Floating
Rate Bond: It is defined as a type of bond bearing a yield that may
rise and fall within a specified range according to fluctuations in the market.
The bond has been used in the housing bond market
Eurobonds: it
issued from a foreign country
Zero
Bonds & Low Coupon Bonds: no regular interest payments (+
for lender), not callable (+ for investor)
Question
No: 32 ( Marks: 5 )
H Corporation’s stock currently sells for Rs.20
a share. The stock just paid a dividend of Rs.2 a share (Do = Rs.2).
the dividend is expected to grow at a constant rate of 11% a year.
What stock price is expected 1 year from now?
What would be the
required rate of return on company’s stock?
Data:
P0 = rs 20
D0 = 2.
g = 11%
P1 = ?
ROR = ?
Solution Part A:
P1 = P0(1 + g)
P1= 20(1.11)
P1= 22.2
Solution part B:
ROR = D1 / P0 + g
ROR = (2 * 1.11/20) + 0.11
ROR = (2.22/20) + 0.11
ROR = 0.111 + 0.11
ROR = 0.221*100
ROR = 22.1%
Z �!
0�
0�
=MsoNormal style='margin-bottom:0in;margin-bottom:.0001pt;line-height:
normal;mso-layout-grid-align:none;text-autospace:none'>Put
the values in formula.
P/E=(1-.09)/0.20-0.198
P/E=0.1/0.002
P/E=50
Question
No: 31 ( 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: 32 ( Marks: 1 ) - Please choose on A
company whose stock is selling at a P/E ratio greater than the P/E ratio of a
market index, most likely has _________.
►
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
Question
No: 33 ( Marks: 1 ) - Please choose one
Which
of the following is the variability of return on stocks or portfolios not
explained by general market movements. It is avoidable through diversification?
► Systematic risk
► Standard deviation
►
Unsystematic risk
► Financial risk
Reference:
o Systematic Risk is the
variability of return on stocks or portfolios associated with
changes in return on the
market as a whole.
o Unsystematic Risk is the
variability of return on stocks or portfolios not explained by
general market movements. It is avoidable through
diversification
Question
No: 34 ( Marks: 1 ) - Please choose one
When
Return is being estimated in % terms, the units of Standard Deviation will be
mention in _______.
► %
► Times
► Number of days
► All of the given options
Reference:
Standard Deviation Interpretation
What
are the units of Standard Deviation?
For
our example where Return is being estimated in % terms, the units of
Standard Deviation will also be %.
Question
No: 35 ( 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: 36 ( Marks: 1 ) - Please choose one
Which of the following is NOT a major cause of
unsystematic risk.
►
New competitors
►
New product management
►
Worldwide inflation
► Strikes
Question
No: 37 ( Marks: 1 ) - Please choose one
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?
► Project A dominates project B
► Project B dominates project A
► Neither project dominates the other in
terms of risk and return
► Incomplete information
Question
No: 38 ( Marks: 1 ) - Please choose one
Which
of the following is a drawback of percentage of sales method?
► It is a rough approximation
► There is change in fixed asset during
the forecasted period
► Lumpy assets are not taken into
account
► All of the given options
Question
No: 39 ( Marks: 1 ) - Please choose one
Which
of the following need to be excluded while we calculate the incremental cash
flows?
► Depreciation
► Sunk cost
► Opportunity
cost
► Non-cash item
Question
No: 40 ( Marks: 1 ) - Please choose one
Why
companies invest in projects with negative NPV?
► Because there is hidden value in each
project
► Because they have chance of rapid
growth
► Because they have invested a lot
►
All of the given options
Question
No: 41 ( Marks: 10 )
ICO
Company must decide between two mutually exclusive projects. The following
information describes the cash flows of each project.
Year
Project
"A" Project
"B"
0
Rs. (20,000) Rs. 24,000
1
10,000 10,000
2
8,000 10,000
3
6,000 10,000
a.
Assume
that 15% is the appropriate required rate of return. What decision should the
firm make about these two projects?
b.
If the firm reevaluated these projects at 10%, what decision
should the firm make about these two projects?
A) We have 2 project A , B
Project
A, Io= - Rs20000, Yr 1 = +Rs10000, Yr2=
Rs8000, Yr3= Rs6000
Project
B, Io= -Rs24000, Yr1= +Rs10000, Yr2=Rs10000,
yr3=Rs10000
In
simple NPV=
Project
A= -20000+10000+8000+6000/(1.15)^3
Rs= 2630.19
Project
B= -24000+10000+10000+10000/(1.15)^3
Rs= 3945.29
The
firm will decide to take the 2nd project B. becz its NPV is greater
tha project A.
B)
Project
A= -20000+10000+8000+6000/(1.10)^3
Rs= 3005.25
Project
B= -24000+10000+10000+10000/(1.10)^3
Rs= 4507.88
Again
on 10%, project B is better tha project A.
e pres�
c1v l 0�
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
No comments:
Post a Comment