06MIDTERM
EXAMINATION
4m vumba2009.blogspot.com
4 papr Spring 2009
MGT201-
Financial Management (Session - 4)
Question
No: 1 ( Marks: 1 ) - Please choose one
What
are the earnings per share (EPS) for a company that earned Rs.100, 000 last
year in after-tax profits, has 200,000 common shares outstanding and Rs.1.2
million in retained earning at the year end?
► Rs.1.00
► Rs. 6.00
► Rs. 0.50
► Rs. 6.50
Reference:
Earning Per Share (EPS):
=
Net Income / Average Number of Common Shares Outstanding
=100000/200000
=0.50
Question
No: 2 ( 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
Question
No: 3 ( 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: 4 ( Marks: 1 ) - Please choose one
Which
of the following would be deductible as an expense on the corporation's income
statement?
► Interest paid on outstanding bonds
► Cash dividends paid on outstanding
common stock
► Cash dividends paid on outstanding
preferred stock
► All of the given options
Question
No: 5 ( Marks: 1 ) - Please choose one
In
conducting an index analysis every balance sheet item is divided by __________
and every income statement is divided by __________ respectively.
► Its corresponding base year balance
sheet item; its corresponding base year income statement item
► Its corresponding base year income
statement item; its corresponding base year balance sheet item
►
Net sales or revenues; total assets
► Total assets; net sales or revenues
Question
No: 6 ( Marks: 1 ) - Please choose one
Which
group of ratios measures a firm's ability to meet short-term obligations?
► Liquidity ratios
►
Debt ratios
►
Coverage ratios
►
Profitability ratios
Question
No: 7 ( 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: 8 ( Marks: 1 ) - Please choose one
Interest
paid on the original principal borrowed is often referred to as __________.
► Compound interest
► Present value
► Simple interest
► Future value
Reference:
Simple
interest incurs only on the principal. While calculating simple interest we
keep the interest and principal separately, i.e., the interest incurred in one
year is not added to the principal while calculating interest of the next
period. Simple interest can be calculated using the following
formula.
F V = PV + (PV x i x n)
Question
No: 9 ( Marks: 1 ) - Please choose one
If the
following are the balance sheet changes, which one of them would represent use
of funds by a company?
► Rs. 8,950 decrease in net fixed assets
► Rs. 5,005 decrease in accounts
receivable
► Rs. 10,001 increase in accounts
payable
► Rs. 12,012 decrease in notes payable
Question
No: 10 ( Marks: 1 ) - Please choose one
In
preparing a forecast balance sheet, it is likely that either cash or __________
will serve as a "plug figure" or balancing factor to ensure that
assets equal liabilities plus shareholders' equity.
►
Retained earnings
►
Accounts receivable
►
Shareholders' equity
► Notes payable (short-term
borrowings)
Question
No: 11 ( 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%?
►
Rs.5,850
►
Rs.4,872
►
Rs.6,725
►
Rs.1,842
Reference:
PV=FV/(1+i)^3
PV=8000/(1+.11)^3
Question
No: 12 ( 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%.
► Rs.680.58
► Rs.1,462.23
► Rs.322.69
► Rs.401.98
Same like above method
Question
No: 14 ( Marks: 1 ) - Please choose one
The
benefit we expect from a project is expressed in terms of:
► Cash in flows
► Cash out flows
► Cash flows
► None of the given options
Reference:
Capital Budgeting Topic
Question
No: 15 ( 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: 16 ( Marks: 1 ) - Please choose one
If a
project’s initial cash outflow of Rs. 100,000 is followed by four annual
receipts of 36,000 we can get the nearest discount factor by:
► Interpolation
► Dividing 100,000 by 36,000
► Dividing 36,000 by 100,000
► Insufficient information
Question
No: 17 ( Marks: 1 ) - Please choose one
In
which of the following situations you can expect multiple answers of IRR?
► More than one sign change taking place
in cash flow diagram
► There are two adjacent arrows one of
them is downward pointing & the other one is upward pointing
► During the life of project if you have
any net cash outflow
► All of the given options
Question
No: 18 ( 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: 19 ( Marks: 1 ) - Please choose one
What
is the advantage of a longer life of the asset?
► Cash flows from the asset becomes
non-predictable
► Cash flows from the asset becomes
more predictable
► Cash inflows from the asset becomes
more predictable
► Cash outflows from the asset becomes
more predictable
Question
No: 20 ( Marks: 1 ) - Please choose one
Which
one of the following is NOT the disadvantage of the asset with very
short life?
► Money has to be reinvested in some
other project with uncertain NPV
► Money has to be reinvested in some
other project with certain NPV
► Money has to be reinvested in some
other project with return so risky
► None of the given options
Reference:
Disadvantage of assets
with very short life:
The disadvantage is that the money will have to be reinvested in some
other project with an
uncertain
NPV and return so it is risky. If a good project is not available, the money will earn
only
a minimal return at the risk free interest rate.
Question
No: 22 ( Marks: 1 ) - Please choose one
Which
one of the following is the right of the issuer to call back or retire the bond
by paying off the bondholders before the maturity date?
► Call in
► Call option
► Call provision
► Put option
Reference:
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.
Question
No: 23 ( 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: 24 ( 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
Question
No: 25 ( Marks: 1 ) - Please choose one
An
investment opportunity set formed with two securities that are perfectly
negatively correlated. What will be standard deviation in the global minimum
variance portfolio?
► Equal to zero
► Greater than zero
► Equal to the sum of the securities'
standard deviations
►
Equal to -1
Question
No: 26 ( 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: 27 ( Marks: 1 ) - Please choose one
Which
of the following is NOT an example of hybrid equity?
► Convertible bonds
► Convertible debenture
► Common shares
► Preferred shares
Question
No: 28 ( 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
Reference:
The
Dividend Value derived from Dividend Cash Stream and Capital Gain /Loss from
Difference between Buying & Selling Price
Question
No: 29 ( 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: 30 ( Marks: 1 ) - Please choose one
The market capitalization rate on the stock
of Fast Growing Company is 20%. The
expected ROE is 22% and the expected EPS ia Rs. 6.10. If the firm's plowback ratio is 90%, the P/E
ratio will be ________.
►
8.33
►
50.0
►
9.09
►
7.69
Reference:
P/E=(1-b)/K-G
K=20%=.20
G=
plowback ratio x ROE.
G=0.9
x 0.22 = 0.198
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
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