MIDTERM EXAMINATION
Spring 2010
MGT201- Financial Management
What should
be the focal point of financial management in a firm?
_ The number and types of
products or services provided by the firm
_ The minimization of the
amount of taxes paid by the firm
_ The
creation of value for shareholders
_ The dollars profits earned
by the firm
Question No:
3 ( Marks: 1 ) - Please choose one
Which of the
following financial market is referred to the market for short-term government
and corporate debt securities?
_ Money
market
_ Capital market
_ Primary market
_ Secondary market
Reference: Page 7
Money Markets
Money market generally is a market where there is buying and selling of
short term liquid debt instruments. (Short term means one year or less). Liquid
means something which isn easily en-cashable; an instrument that can be easily
exchanged for cash. Following financial instruments are traded in money markets
Question No:
4 ( Marks: 1 ) - Please choose one
Which of the
following would generally have unlimited liability?
_ A limited partner in a
partnership
_ A shareholder in a
corporation
_ The owner
of a sole proprietorship
_ A member in a limited
liability company (LLC)
Question No:
5 ( 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
_ Limited liability of
shareholders
_ Limited life of the
corporate form
Question No:
6 ( Marks: 1 ) - Please choose one
Which of the
following statement is most accurate?
_ Coverage ratios also shed
light on the "liquidity" of current ratios
_ Receivable- and
inventory-based activity ratios also shed light on the "liquidity" of
current assets
_ Receivable- and
inventory-based activity ratios also shed light on the firm's use of financial
leverage
_ Liquidity
ratios also shed light on the firm's use of financial leverage
Question No:
7 ( Marks: 1 ) - Please choose one
In 2 years
you are to receive Rs.10,000. If the interest rate were to suddenly decrease,
the present value of that future amount to you would __________.
_ Incomplete information
_ Fall
_ Rise
_ Remain unchanged
Question No:
8 ( Marks: 1 ) - Please choose one
You are
going to invest Rs.12,500 into a certificate of deposit (CD) at a 6% annual
rate(compounded annually) with a maturity of 30 months. How much money will you
receive when the CD matures?
_ Rs.14,491
_ Rs.14,518
_ Incomplete information
_ Rs.14,460
Reference:
FV
= PV* (1+i)^n
FV
= 12500(1.06)^2.5
FV=
14460
Where
30 months divided by 12 we get 2.5 years
Question No:
9 ( 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:
10 ( Marks: 1 ) - Please choose one
In
estimating "after-tax incremental operating cash flows" for a
project, you should include all of the following EXCEPT __________.
_ Changes in costs due to a
general appreciation in those costs
_The amount (net of taxes)
that we could realize from selling a currently unused building
of ours that we intend to use
for our project
_ Changes in
working capital resulting from the project, net of spontaneous changes in
current liabilities
_ Costs that have previously
been incurred that are unrecoverable
Question No:
11 ( 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:
12 ( Marks: 1 ) - Please choose one
Interest
payments, principal payments, and cash dividends are __________ the typical budgeting cash-flow
analysis because they are ________ cash flows.
_ Included in; financing
_ Excluded from; financing
_ Included
in; operating
_ Excluded from; operating
Question No: 13 ( Marks: 1 )
- Please choose one
Why Payback period is a poor
gauge of profitability?
_ It ignores the time value
of money
_ It gives rough indication
to the liquidity of the project
_ It does not consider cash
flows after expiration of the payback period
_ All of the
given options
Question No: 14 ( Marks: 1 )
- Please choose one
To estimate an unknown number
that lies between two known numbers is knows as--------------
_Capital rationing
_ Capital budgeting
_
Interpolation
_ Amortization
Question No: 15 ( Marks: 1 )
- Please choose one
Which of the following make
the calculation of NPV difficult?
_ Estimated cash flows
_ Discount rate
_ Anticipated life of the
business
_ All of the
given options
Reference:
Page 41 & 42
Question No:
16 ( Marks: 1 ) - Please choose one
When there
is single period capital rationing, what would be the most sensible way of
making investment decisions?
_ Choose all projects with a
positive NPV
_ Group
projects together to allocate the funds available and select the group of
projects with the highest NPV
_ Choose the project with the
highest NPV
_ Calculate IRR and select
the projects with the highest IRRs
Question No:
17 ( Marks: 1 ) - Please choose one
The sinking
fund retirement of a bond issue takes __________.
_ Only one form -- the
corporation purchases bonds in the open market and delivers a given number of
bonds to the trustee
_ Only one form -- the
corporation pays cash to the trustee, who in turn calls the bonds for
redemption
_ Only one
form -- bonds mature periodically and the corporation retires them in the order
that they mature
_ Two forms -- (1) the
corporation purchases bonds in the open market and delivers a given number of
bonds to the trustee; or (2) the corporation pays cash to the trustee, who in
turn calls the bonds for redemption
Question No: 18 ( Marks: 1 )
- Please choose one
Which of the
following statements is correct in distinguishing between serial bonds and
sinking-fund bonds?
_ Serial bonds mature at a
variety of dates, but sinking-fund bonds mature at a single date
_ Serial bonds provide for
the deliberate retirement of bonds prior to maturity, but sinking-fund bonds do
not provide for the deliberate retirement of bonds prior to maturity
_ Serial bonds do not provide
for the deliberate retirement of bonds prior to maturity, but sinking-fund
bonds do provide for the deliberate retirement of bonds prior to maturity
_ None of
the above are correct since a serial bond is identical to a sinking fund bond
Question No:
19 ( 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:
20 ( 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
Question No:
21 ( Marks: 1 ) - Please choose one
Which of the
following is NOT the present value of the bond?
_ Intrinsic
value
_ Market price
_ Fair price
_ Theoretical price
Question No: 22 ( 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%
Reference:
Price
of Bond =100*(1 + 0.12)^-1 + 100*(1 + 0.12)^-2 + 100*(1 + 0.12)^-3 +
1100*(1.12)^-4
= 939.25
Current
Yield = Coupon / Market Price
Current
Yield = 100 /939.35
Coupon
payment 4 year @ 10% = 100*4 = 400
Current
yield = 400/1000 = .1064 = 10.64%
Question No:
23 ( Marks: 1 ) - Please choose one
A coupon
bond that pays interest annually is selling at par value of Rs.1,000, matures
in 5 years, and has a coupon rate of 9%. What is the yield to maturity on this
bond?
_8.0%
_8.3%
_9.0%
_10.0%
Question No:
24 ( Marks: 1 ) - Please choose one
What is
yield to maturity on a bond?
_It is below the coupon rate
when the bond sells at a discount, and equal to the coupon rate when the bond
sells at a premium
_The
discount rate that will set the present value of the payments equal to the bond
price
_It is based on the
assumption that any payments received are reinvested at the coupon rate
_None of the given options
Reference:
The
most common way to compare the Overall Rate of Return of different Bonds is to
compare their YTM’s
Question No:
25 ( 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:
26 ( 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:
27 ( 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%
Reference:
G=
plowback ratio x ROE.
40%
earning retained
60%
remaining
G=0.60
x 0.10 = 0.06*100=6%
Question No:
28 ( 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
Reference:
Current Yield = Coupon / Market Price
Question No:
29 ( 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:
30 ( Marks: 1 ) - Please choose one
Total
portfolio risk is __________.
_ Equal to systematic risk
plus non-diversifiable risk
_ Equal to avoidable risk
plus diversifiable risk
_ Equal to systematic risk
plus unavoidable risk
_ Equal to
systematic risk plus diversifiable risk
Question No: 31 ( Marks: 1 )
- Please choose one
The ratio of
the standard deviation of a distribution to the mean of that distribution is
referred to as __________.
_ A probability distribution
_ The expected return
_ The standard deviation
_
Coefficient of variation
Question No:
32 ( 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:
33 ( Marks: 1 ) - Please choose one
If a company
intends to start a new project, ________ technique are employed to assess the
financial viability of the project.
_ Financial planning
_ Financial forecasting
_ Capital
budgeting
_ Capital rationing
Question No:
34 ( Marks: 1 ) - Please choose one
Capital
budgeting is a decentralized function assigned to:
_ Individuals
_ Departments
_ Teams
_All of the
given options
Question No:
35 ( Marks: 1 ) - Please choose one
The biggest
challenge in capital budgeting is to keep finding:
_ Valuable
projects
_ Sources of funds
_ Blue chips
_ Fixed assets
Question No:
36 ( Marks: 1 ) - Please choose one
The
objective of financial management is to maximize _________ wealth.
_ Stakeholders
_
Shareholders
_ Bondholders
_ Directors
Question No:
37 ( Marks: 1 ) - Please choose one
Information
that goes into __________ can be used to prepare __________.
_ A forecast balance sheet; a
forecast income statement
_ Forecast financial
statements; a cash budget
_ Cash
budget; forecast financial statements
_ A forecast income
statement; a cash budget
Question No:
38 ( 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 will be
accepted?
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:
39 ( Marks: 1 ) - Please choose one
What is the
present value of Rs.1,000 to be paid at the end of 5 years if the interest rate
is 8% compounded annually?
_ Rs.680.58
_ Rs.1,462.23
_ Rs.322.69
_ Rs.401.98
Reference:
PV=FV/(1+i)^n
PV=1000/(1+.08)^5
Question No:
40 ( Marks: 1 ) - Please choose one
What is the
present value of Rs.6,500 to be paid at the end of 8 years if the interest rate
is 10% compounded annually?
_ Rs.3,032
_ Rs.3,890
_ Rs.3,190
_ Rs.4,301
Reference:
PV=FV/(1+i)^n
PV=6500/(1+.10)^8
rgv �)o t 0�
0�
t;line-height:
normal;mso-layout-grid-align:none;text-autospace:none'>_ 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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