MIDTERM EXAMINATION
Spring
2010
MGT201-
Financial Management
Question
No: 1 ( Marks: 1 ) - Please choose one
Which
type of responsibilities are primarily assigned to Controller and Treasurer
respectively?
► Operational; financial management
► Financial management; accounting
► Accounting; financial management
► Financial management; operations
Question
No: 2 ( Marks: 1 ) - Please choose one
Which
of the following is equal to the average tax rate?
► Total tax
liability divided by taxable income
►
Rate that will be paid on the next dollar of taxable income
► Median marginal tax rate
►
Percentage increase in taxable income from the previous period
Question
No: 3 ( Marks: 1 ) - Please choose one
In
finance we refer to the market where existing securities are bought and sold as
the __________ market.
► Money ► Capital ► Primary ► Secondary
Question
No: 4 ( 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
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
A
5-year ordinary annuity 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?
► Rs.331.20
►Rs.399.30
► Rs.431.24
► Rs.486.65
Question
No: 7 ( Marks: 1 ) - Please choose one
In
proper capital budgeting analysis we evaluate incremental __________ cash
flows.
► Accounting ► Operating ► Before-tax ►
Financing
Question
No: 8 ( Marks: 1 ) - Please choose one
Mortgage
bonds are secured by real property whose value is generally _______ than that
of the value of the bonds issue?.
► Higher
► Lower
► Equal
► Higher or lower
Question
No: 9 ( Marks: 1 ) - Please choose one
If a 7%
coupon bond is trading for Rs. 975 it has a current yield of _________ percent.
► 7.00
► 6.53
► 8.53
►7.18
Question
No: 10 ( Marks: 1 ) - Please choose one
If a
company issues bonus shares, what will be its effect on the debt equity ratio?
► It will improve
► It will deteriorate
► No effect
► None of the given options
Question
No: 11 ( Marks: 1 ) - Please choose one
_________
is equal to (common shareholders' equity/common shares outstanding).
►Book value per share
► Liquidation value per share
► Market value per share
► None of the above
Question
No: 12 ( Marks: 1 ) - Please choose one
You
wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of Rs.
3 in the upcoming year while Stock Y is expected to pay a dividend of Rs. 4 in
the upcoming year. The expected growth
rate of dividends for both stocks is 7%. The intrinsic value of stock X:
► Will be greater than the intrinsic
value of stock Y
► Will be the same as the intrinsic
value of stock Y
► Will be less than the intrinsic value of stock Y
► Cannot be calculated without knowing
the market rate of return
Question
No: 13 ( Marks: 1 ) - Please choose one
You
wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a
dividend of Rs. 2 in the upcoming year.
The expected growth rate of dividends is 9% for stock A and 10% for
stock B. The intrinsic value of stock A:
► Will be greater than the intrinsic
value of stock B
► Will be the same as the intrinsic
value of stock B
►Will be less than the intrinsic value of stock B
► None of the given options
Question
No: 14 ( 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
Question
No: 15 ( 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: 16 ( Marks: 1 ) - Please choose one
When
Return is being estimated in % terms, the units of Standard Deviation will be
mention in _.
► Percentage (%)
► Times
► Number of days
► All of the given options
Question
No: 17 ( Marks: 1 ) - Please choose one
___________
is one of the most common techniques of financial analysis.
► Analyzing the statement of equity
► Preparing the cash budget
► scrutinizing of Financial statement
► Forecasting the income statement
Question
No: 18 ( Marks: 1 ) - Please choose one
Which
of the following formula is used to calculate the future value in simple
interest?
► FV = PV + (PV× i × n)
► FV / (PV×
i × n) = PV
► FV = PV -
(PV× i × n)
► FV = PV ×
(PV× i × n)
Question
No: 19 ( Marks: 1 ) - Please choose one
Which
of the following are the types of annuities?
► Perpetuity and discrete annuity
► Ordinary and discrete annuity
► Discrete and simple annuity
► Ordinary and annuity due
Question
No: 20 ( Marks: 1 ) - Please choose one
Value
of annuity depends upon which of the following factors?
► Cash inflows & outflows
► Required rate of return & cash
flows
► Constant cash flows & discount factor
► Constant cash flows & life of
investment
Question
No: 21 ( Marks: 1 ) - Please choose one
Which
of the following statement best describes capital budgeting?
► It’s a tool which is used to evaluate
the projects and fixed assets of the company
► A technique used to assess the working
capital requirement
► It will help the management to decide
whether the new venture should be taken up or not.
► All of the given options are correct
Question
No: 22 ( Marks: 1 ) - Please choose one
IRR can
be defined as:
► A discount rate that equates the PV of a project’s
expected cash inflows to the PV of project’s cost
► Present value of the stream of net
cash flows from project’s net investment
► It’s a cost & benefits ratio used
to assess the validity of a project
► The time period required to receive
back the initial investment.
Question
No: 23 ( Marks: 1 ) - Please choose one
If the
life of a project is 6 years and the life of other project is 2 years then
least common multiple will be:
► 2 years
► 6 years
► 8 years
► 12 years
Question
No: 24 ( Marks: 1 ) - Please choose one
Which
of the following is the price which is mentioned on the bonds?
► Face value
► Salvage value
► Market value
► Book value
Question
No: 25 ( 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: 26 ( Marks: 1 ) - Please choose one
When
you allocate capital, you choose investments that are more beneficial and less
► Diversified
► Risky
► Costly
► Value based
Question
No: 27 ( 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 capital
► Limited liability of shareholders
► Limited life of the corporate form
Question
No: 28 ( Marks: 1 ) - Please choose one
Which
of the following is NOT the form of cash flow generated by the
investments of the shareholders?
► Income
► Capital loss
► Capital gain
► Operating income
Question
No: 29 ( Marks: 3 )
Define
interest rate risk and investment risk.
Interest
rate risk
Interest rate risk is the risk (variability in
value) borne by an interest-bearing asset, such as a loan or a bond, due to
variability of interest rates. In general, as rates rise, the price of a fixed
rate bond will fall, and vice versa. Interest rate risk is commonly measured by
the bond's duration.
Investment
Risk
The
uncertainties attached while making an investment that the investment may not
yield the expected returns.
OR
Possibility
of a reduction in value of an insurance instrument resulting from a decrease in
the value of the assets incorporated in the investment portfolio underlying the
insurance instrument. This reduction can also be effected by a change in the
interest rate.
Question
No: 30 ( Marks: 3 )
What is
risk averse assumption?
When
we talk in terms of risk averse, we know that most investors are
psychologically risk averse. In case of two investments offer with the same
prospective return most investor would choose the one with the lower risk or
standard deviation or spread or votality. In other words most of the investors
are not major gamblers. Gamblers would choose that project which appeals to
investors greed by offering upsite return of 30% plus 10% = 40%. The
consequences on the share price, the higher the risk of share the higher its
rate of return and the lower its market price, so any investor will choose
surely with the low risk and he will take care of very closely risk averse
assumption while finalizing any project.
Question
No: 31 ( Marks: 5 )
How
negatively correlated investments behave in a market?
Solution:
If Ro
= - 1.0, it means that Investments are Perfectly Negatively Correlated and
the Returns (or Prices or Values) of the 2 Investments move in Exactly Opposite
directions. In this Ideal Case, All Risk can be diversified away. For example,
if the price of one stock increases by 50% then the price of another stock goes
down by 50%.
Question
No: 32 ( Marks: 5 )
What
types of shares are available in the market?
The
following are the shares available normally in the market;
1.
Preferred Stock:
These
stocks have regular Constant / Fixed Future Dividends Certain for the Preferred
Shareholders. Use old Perpetuity Cash Flow Pattern and formulas to estimate
theoretical Fair Stock Price.
2.
Common Stock:
Theses
stocks have variable future dividends expected by the common shareholders. Use
Zero
&
Constant Growth Models to simplify future Dividend forecasts in estimated
Theoretical Stock Price (or PV) equation. There dividend depend upon the income
earned by the company and also upon the management decision regarding the
dividend declaration.
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