08MIDTERM
EXAMINATION
Spring 2010
MGT201-
Financial Management (Session - 2
Question
No: 4 ( Marks: 1 ) - Please choose on
Which
of the following investment alternatives would provide the greatest future
value for your investment?
► 10% compounded
daily (360 days)
►
10.5% compounded annually
►
10.25% compounded quarterly
►
Incomplete information
Question
No: 6 ( Marks: 1 ) - Please choose one
A
5-year ordinary annuity has a present 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.250.44
► Rs.231.91
► Rs.181.62
► Rs.184.08
Question
No: 7 ( 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: 8 ( 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: 9 ( Marks: 1 ) - Please choose one
When
coupon bonds are issued, they are typically sold at which of the following
value?
► Below par
► Above par value
► At or near par value
► At a value unrelated to par
Question
No: 10 ( Marks: 1 ) - Please choose one
Which
of the following has NO effect when the financial health (cash flows and
income) of the company changes with time?
► Market value
► Price of the share
► Par value
► None of the given options
Reference:
As the financial health (cash flows and
income) of the company changes with time, the Market
Value (or Price) of the Share changes
(even though it’s Par Value is fixed).
Question
No: 11 ( Marks: 1 ) - Please choose one
The
value of dividend is derived from which of the following?
► Cash flow streams
► Capital gain /loss
► Difference between buying & selling price
► All of the given options
Question
No: 12 ( Marks: 1 ) - Please choose one
Which
of 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.
► I, II, and III
► I only
► III only
► II and III only
Question
No: 13 ( Marks: 1 ) - Please choose one
Diversification
can reduce risk by spreading your money across many different _______.
►Investments
►Markets
►Industries
►All of the given options
Question
No: 14 ( Marks: 1 ) - Please choose one
Assume
that the expected returns of the portfolios are the same but their standard
deviations are given in the options given below, which of the option represent
the most risky portfolio according to standard deviation?
►1.5%
►2.0%
►3.0%
►4.0%
Question
No: 15 ( Marks: 1 ) - Please choose one
When
bonds are issued, under which of the following category the value of the bond
appears?
►Equity
►Fixed
assets
►Short
term loan
►Long
term loan
Question
No: 16 ( Marks: 1 ) - Please choose one
_________
means expanding the number of investments which cover different kinds of
stocks.
►Diversification
►Standard
deviation
►Variance
►Covariance
Question
No: 17 ( Marks: 1 ) - Please choose one
What is
the present value of Rs.8,000 to be paid at the end of three years if the
interest rate is 11% compounded annually?
►Rs.5,850
►Rs.4,872
►Rs.6,725
►Rs.1,842
Question
No: 18 ( 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: 19 ( Marks: 1 ) - Please choose one
Which
of the following accounting equation is accurate?
►
Assets +Equity = Liabilities + Expenses
► Assets + Expenses = Liabilities +Expenses + Revenue
► Assets + Liabilities = Equity +
Expenses + Revenue
► Assets + Revenue + Liabilities =
Equity
Question
No: 20 ( Marks: 1 ) - Please choose one
Which
of the following equation can represent income statement in best way?
►Profit
– Expenses = sales revenue
►Sales
revenue – Expenses = Profit
►Assets
+ Liabilities= Equity
►Sales
revenue + Equity = Assets
Question
No: 21 ( 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: 22 ( Marks: 1 ) - Please choose one
All of
the following are the examples of annuity EXCEPT:
►Mortgage
payment
►Insurance
premium
►Monthly
rental payments
►Fixed
coupon payments
Question
No: 23 ( 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: 24 ( Marks: 1 ) - Please choose one
YTM is
equal to which of the following formula?
►Capital
gain + market
price
►Present
value + interest yield
►Market
price + interest
yield
►Interest
yield + capital gain yield
Question
No: 25 ( Marks: 1 ) - Please choose one
If
there is an increase in a firm’s expected growth rate then it will cause its
required rate of return to______.
►Increase
►Decrease
►Fluctuate more than before
►Possibly increase, decrease, or remain constant
Question
No: 26 ( Marks: 1 ) - Please choose one
Which
of the following formula could be used to calculate expected rate of return
<r>?
► Po / Po
× P1
► P1 + Po / Po
► P1 – Po / Po
► Po – P1 / Po
Question
No: 27 ( Marks: 1 ) - Please choose one
This is
an example of which of the following concept?
ABC
Corporation’s stock price has fallen because it was not able to meet its
production deadlines.
►Market
risk
►Company
specific risk
►Industry
risk
►Economic
risk
Question
No: 28 ( 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 is most
suitable to accept?
|
|
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: 29 ( Marks: 3 )
By
applying Common Life Approach calculate the NPV of the following projects:
Projects
Initial
outflow
Inflow Yr
1
Inflow Yr 2
A
100
200
-
B
200
200
200
Solution:
Project
A
NPV=-100+(200-100)/1.1)+200/(1.1)2
= 156
Project
B
NPV
=-200+200/1.1+200/(1.1)2 = 147
Question
No: 30 ( Marks: 3 )
There
are two stocks in the portfolio of Mr. N, Stock A and Stock B. the information
of this portfolio is as follows:
|
Common
stock
|
Expected
rate of return
|
Standard
deviation
|
|
Stock
A
|
15%
|
10%
|
|
Stock
B
|
20%
|
15%
|
Calculate
the expected rate of return on this portfolio assuming that Stock A consists of
75% of the total funds invested in the stocks and the remainder in Stock B.
Solution:
Apply
formula on page 93 of handouts
={(75/100)2(10/100)2+(25/100)2(15/100)2+2((75/100)(25/100)(10/100)(15/100)(.6)}(.5)
=
{(0.5625)(0.01)+(.0625)(0.0225)+2((.75)(.25)(.1)(.15)(.6))}(.5)
=(0.010406)*.5
=0.005203*100
=0.520313%
Question
No: 32 ( Marks: 5 )
Hammad
Inc. is considering two alternative, mutually exclusive projects. Both projects
require an initial investment of Rs. 10,000 and are typical, average-risk
projects for the firm. Project A has an expected life of 2 years with after-tax
cash inflow of Rs. 6,000 and Rs. 8,000 at the end of year 1 and 2,
respectively.
Project
B has an expected life of 4 years with after-tax cash inflow of Rs. 4,000 at
the end of each of next 4 years. The firm’s cost of capital is 10 percent.
If the
projects cannot be repeated, which project will be selected, and what is the
net present value?
Solution:
Net
Present Value:
Project
A:
Initial investment, I0 = Rs 10,000
Cash flow in yr 1, CF1
= Rs 6000
Cash flow in yr 2, CF2 =
Rs 8000
Discount rate, I = 10 %
No. of yrs, n = 4
NPV
= - I0 + CF1/(1+i)n
+ CF2/(1+i)n + CF3/(1+i) n +
CF4/(1+i) n
=
-10,000 + 6000/(1.10) + 8000/(1.12)2
=
-10,000 + 5454.54 + 6611.57
= - 10,000 +12066.11
= 2066.11
Project
B: Initial
investment, I0 = Rs 10,000
Cash flow in yr 1, CF1
= Rs 4000
Cash flow in yr 2, CF2 =
Rs 4000
Cash flow in yr 3, CF3
= Rs 4000
Cash flow in yr 4, CF4
= Rs 4000
Discount rate, I = 10 %
No. of yrs, n = 4
NPV
= - I0 + CF1/(1+i)n
+ CF2/(1+i)n + CF3/(1+i) n +
CF4/(1+i) n
=
-10,000 + 4000/(1.10) + 4000/(1.10)2+ 4000/(1.10)3+
4000/(1.10)4
=
-10,000 + 3636.36 + 3305.8 + 3005.25 + 2732.053
= -10,000 + 12679.463
= 2679.463
='�
:1sa0�
0�
'> 4507.88
Again
on 10%, project B is better tha project A.
e pres�
c1vl0�
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
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