03MIDTERM
EXAMINATION
vumba2009.blogspot.com
Spring 2009
MGT201-
Financial Management (Session - 4)
Question No: 1 ( 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: 2 ( Marks:
1 ) - Please choose one
Mutually exclusive means
that you can invest in _________ project(s) and having chosen
______ you cannot choose
another.
_ One; one
_ Two; two
_ Two; one
_ Three; one
Reference:
Mutually Exclusive: means that you can invest in ONE of the
investment choices and having chosen one you cannot choose another.
Question No: 3 ( Marks:
1 ) - Please choose one
The weighted average of
possible returns, with the weights being the probabilities of occurrence is
referred to as __________.
_ A probability distribution
_ The expected return
_ The standard deviation
_ Coefficient of variation
Reference:
Average Formula and
Probabilities (what we have been calculating so far).It is basically the
weighted average or mean of the expected return of the individual investments
in the portfolio.
Question No: 4 ( Marks: 1 ) - Please
choose one
A set of possible values that a random
variable can assume and their associated probabilities of occurrence are
referred to as __________.
_ Probability
distribution
_ The expected return
_ The standard deviation
_ Coefficient of variation
Question No: 5 ( Marks:
1 ) - Please choose one
The present value of
growth opportunities (PVGO) is equal to
I) The difference
between a stock's price and its no-growth value per
share
II) The stock's price
III) Zero if its return
on equity equals the discount rate
IV) The
net present value of favorable investment opportunities
_ I and IV
_ II and IV
_ I, III, and IV
_ II, III, and IV
Question No: 6 ( Marks: 1 ) - Please
choose one
Which of the following is CORRECT, if a
firm has a required rate of return equal to the ROE?
·
The
firm can increase market price and P/E by retaining more earnings _
·
The
firm can increase market price and P/E by increasing the growth rate _
·
The amount of earnings retained by the firm does not affect
market price or the P/E _
·
None
of the given options _
Question No: 7 ( 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: 8 ( Marks:
1 ) - Please choose one
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: 9 ( 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 _
·
(no idea) Answer requested
Question No: 10 ( Marks:
1 ) - Please choose one
The market
capitalization rate on the stock of Steel Company is 12%. The expected ROE is
13% and the expected EPS
are Rs. 3.60. If the firm's plowback ratio is 50%, what will be the P/E ratio?
·
7.69
_
·
8.33
_
·
9.09 _
·
11.11
_
Reference:
P/E=(1-b)/K-G
K=12%=.12
G=
plowback ratio x ROE.
G=0.5 x 0.13 = 0.065
Put
the values in formula.
P/E=(1-.05)/0.12-0.065
P/E=0.5/0.055
P/E=9.09
Question No: 11 ( 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: 12 ( 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% _
Growth
= ROE * plow back ratio
Plowback
ratio ratio that measures the amount of earnings retained after dividends
have
been paid out (100%-40% = 60%)
Let
us plug in the value into above formula
10%
* .60 = 6%
Question No: 13 ( 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: 14 ( 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: 15 ( Marks:
1 ) - Please choose one
How efficient portfolios
of "N" risky securities are formed?
_These are formed with the securities
that have the highest rates of return regardless of their standard deviations
_They have the highest risk and rates of
return and the highest standard deviations
_They are selected from those securities
with the lowest standard deviations regardless of their returns
_They have the highest
rates of return for a given level of risk
Question No: 16 ( Marks:
1 ) - Please choose one
When a bond will sell at
a discount?
_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
Question No: 17 ( Marks:
1 ) - Please choose one
Which of the following
is a characteristic of a coupon bond?
_ Pays interest on a regular basis (typically every six
months)
_Does not pay interest on a regular basis
but pays a lump sum at maturity
_Can always be converted into a specific
number of shares of common stock in the issuing company
_Always sells at par
Question
No: 18 ( 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%
In this we have to first calculate the price of bond
first
=100*(1 + 0.12)^-1+100*(1 + 0.12)^-2+100*(1 +
0.12)^-3+1100*(1.12)^-4 = 939.25
Current yield = coupon amount /Price of bond
100/939.25 =
So coupon payment for 4 year @ 10% = 100*4 = 400
Plug the values in Current yield formula = 400/1000 =
.1064 = 10.64%
Question No: 19 ( 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
Current yield = annual interest payment/market price
(7%*1000)/975 = 70/975 = 0.0719*100 = 7.18
Reference:
Current Yield = Coupon / Market Price
Current Yield = 7%*1000/ 975
Current Yield = 70/ 975
Current Yield = 0.071*100
Current Yield = 7.18
Question No: 20 ( Marks:
1 ) - Please choose one
Interest rate risk for
long term bonds is more than the interest rate risk for short term bonds
provided the _________ for the bonds is similar.
_ Interest rate risk
_ Market rate
_ Coupon rate
_ Inflation rate
Question No: 21 ( Marks:
1 ) - Please choose one
When market is offering
lower rate of return than the bond, the bond becomes valuable, with respect to
the given scenario which of the following is correct?
_ Market interest rate < coupon interest rate, market
value of bond is > par value
_ Market interest rate > coupon
interest rate, market value of bond is > par value
_ Market interest rate < coupon
interest rate, market value of bond is < par value
_
Market interest rate = coupon interest rate, market value of bond is > par
value
Reference:
So,
When Market Interest Rate < Coupon Interest Rate, Market Value (or Price) of
Bond > Par
Value
Page 68
Question No: 22 ( Marks:
1 ) - Please choose one
Which of the following
affects the price of the bond?
_ Market interest rate
_Required rate of return
_ Interest rate risk
_ All of the given
options
Reference:
Lecture 14 of handouts
Question No: 23 ( 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
Reference:
It can’t be real asset as it’s written in the handout.
Real asset are also includes fixed asset and the fixed asset are tangible
assets. Therefore only intangible asset are left. Intangible asset means
something of value not physical, but for security of a bond, a physical asset
is required.
Question No: 24 ( 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: 25 ( Marks:
1 ) - Please choose one
A 12% coupon rate,
Rs.1,000 par bond currently trades at 90 one year after issuance.
Which of the following
is the most likely call price?
_Rs. 87
_Rs. 90
_Rs. 102
_Rs. 112
Question No: 26 ( Marks:
1 ) - Please choose one
Which of the following
is a legal agreement between the corporation issuing bonds andthe bondholders
that establish the terms of the bond issue?
_ Indenture
_ Debenture
_ Bond
_ Bond trustee
Reference:
Lecture 13 of handouts
Question No: 27 ( Marks:
1 ) - Please choose one
Companies and
individuals running different types of businesses have to make the choices of
the asset according to which of the following?
_ 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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