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Wednesday, April 17, 2013

MGT201 Current Quiz # 3 2011


MGT201 Current Quiz # 3



A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most
likely has                   . Select correct option:

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

Which of the following is called the tax savings of the firm derived from the deductibility of interest expense?
Select correct option:



Interest tax shield Depreciable basis Financing umbrella Current yield


The reduction in income taxes that results from the tax-deductibility of interest payments.

Tax benefits derived from creative structuring of a financing arrangement. For example, usingloan capital instead of equity capital because interest paid on the loans is generally tax deductible whereas the dividend paid on equity is not

Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:

Sales variability
Level of fixed operating costs
Closeness to its operating break-even point
Debt-to-equity ratio

Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account:
Select correct option:

Magnitude of expected cash flows
Timing of expected cash flows
Both timing and magnitude of cash flows
None of the given options

Ref It discounts the cash flow to take into the account the time value of money. Reference



Expected Portfolio Return =                      . Select correct option:

rP * = xA rA + xB rB rP * = xA rA - xB rB rP * = xA rA / xB rB rP * = xA rA * xB rB

What is the most important criteria in capital budgeting? Select correct option:

Return on investment Profitability index Net present value Pay back period

If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option:

0
0.5
1
-1

For most firms, P/E ratios and risk                  . Select correct option:

Will be directly related
Will have an inverse relationship
Will be unrelated
None of the above.

Which of the following is the cash required during a specific period to meet interest expenses and principal payments?
Select correct option:

Debt capacity
Debt-service burden Adequacy capacity Fixed-charge burden

Which of the following stipulate a relationship between expected return and risk? Select correct option:

APT stipulates
CAPM stipulates
Both CAPM and APT stipulate
Neither CAPM nor APT stipulate

=====
Which of the following factors might affect stock returns?
Select correct option:


Business cycle

Interest rate fluctuations

Inflation rates

All of the above

If all things equal, when diversification is most effective?
Select correct option:

Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high
Securities' returns are negatively correlated

Which of the followings expressed the proposition that the value of the firm is independent of its capital structure?
Select correct option:


The Capital Asset Pricing Model

M&M Proposition I M&M Proposition II The Law of One Price
Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows?
Select correct option:


Discount rate Profitability index Internal rate of return
Multiple Internal rate of return

Which of the following is related to the use Lower financial leverage?
Select correct option:


Fixed costs Variable costs Debt financing
Common equity financing

Why markets and market returns fluctuate?
Select correct option:


Because of political factors

Because of social factors

Because of socio-political factors

Because of macro systematic factors

Which of the following is NOT an example of hybrid equity
Select correct option:


Convertible Bonds Convertible Debenture Common shares Preferred shares
A project that tells us the number of years required to recover our initial cash investment based on the project’s expected cash flows is:
Select correct option:


Pay back period Internal rate of return Net present value Profitability index
A 5-year annuity due 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 equations?
Select correct option:


(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100
Can not be found from the given information

To increase a given future value, the discount rate should be adjusted                     .
Select correct option:


Upward

Downward

First upward and then downward

None of the given options

Which of the following is NOT the form of cash flow generated by the investments of the shareholders?
Select correct option:


Income Capital loss Capital gain
Operating income

According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of which of the following:
Select correct option:


Unique risk Reinvestment risk Market risk Unsystematic risk
What is the most important criteria in capital budgeting?
Select correct option:


Return on investment Profitability index Net present value Pay back period
If all things equal, when diversification is most effective?
Select correct option:


Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high
Securities' returns are negatively correlated

Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks 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.
Select correct option:


I, II, and III I only
III only

II and III only

As interest rates go up, the present value of a stream of fixed cash flows           .
Select correct option:


Goes down

Goes up

Stays the same

Can not be found from the given information

Which of the following could be taken same as minimizing the weighted average cost of capital?
Select correct option:


Maximizing the market value of the firm

Maximizing the market value of the firm only if MM's Proposition I Minimizing the market value of the firm only if MM's Proposition I holds Maximizing the profits of the firm
Which of the following formulas represents a correct calculation of the degree of operating leverage?
Select correct option:


(Q - QBE)/Q

(EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC]
The value of a bond is directly derived from which of the following?
Select correct option:





Cash flows

Coupon receipts

Par recovery at maturity

All of the given options

Which statement is NOT true regarding the market portfolio?
Select correct option:


It includes all publicly traded financial assets

It is the tangency point between the capital market line and the indifference curve

All securities in the market portfolio are held in proportion to their market values

It lies on the efficient frontier



In the dividend discount model, discount rate?
Select correct option: Real risk-free rate
Risk premium for stocks
Return on assets
Expected inflation rate

which of the following are not incorporated into the



Which of the following is NOT an example of hybrid equity
Select correct option: Convertible Bonds Convertible Debenture Common shares Preferred shares



For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure?
Select correct option:
Cost of debt
Cost of preferred stock Cost of common equity Cost of retained earnings

The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option:
Real assets of the business Liquid assets of the business Fixed assets of the business Lon term assets of the business


What are two major areas of capital budgeting? Select correct option:
Net present value, profitability index
Net present value; internal rate of return
Net present value; payback period
Pay back period; profitability index




Which of the followings are the propositions of Modigliani and Miller's? Select correct option:
The market value of a firm's common stock is independent of its capital structure
The market value of a firm's debt is independent of its capital structure The market value of any firm is independent of its capital structure None of the given options




The weighted average of possible returns, with the weights being the probabilities of occurrence
is referred to as                 . Select correct option:
Probability distribution Expected return Standard deviation Coefficient of variation




In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?
Select correct option: Common stock Debt
Preferred stock
None of the above



A statistical measure of the variability of a distribution around its mean is referred to
as                 .
Select correct option: Probability distribution Expected return Standard deviation Coefficient of variation




How "Shareholder wealth" is represented in a firm? Select correct option:
The number of people employed in the firm
The book value of the firm's assets less the book value of its liabilities
The market price per share of the firm's common stock
The amount of salary paid to its employees




What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option:
Unlimited liability
Single tax filing
Difficult ownership resale
Raising capital


Total Marks: 1
The benefit we expect from a project is expressed in terms of: Select correct option:
Cash in flows Cash out flows Cash flows
None of the given option

Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:
Sales variability
Level of fixed operating costs
Closeness to its operating break-even point
Debt-to-equity ratio




Which of the following is the value of beta for the market portfolio? Select correct option:
0.25
-1.0
1.0
0.5




Which of the following is related to the use Lower financial leverage? Select correct option:
Fixed costs
Variable costs
Debt financing
Common equity financing




Why common stock of a company must provide a higher expected return than the debt of the same company?
Select correct option:
There is less demand for stock than for bonds
There is greater demand for stock than for bonds
There is more systematic risk involved for the common stock
There is a market premium required for bonds




              is equal to (common shareholders' equity/common shares outstanding). Select correct option:

Book value per share Liquidation value per share Market value per share None of the above



When a bond will sell at a discount? Select correct option:

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.




Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option:

Cash outflow to the government for taxes
Cash outflow to shareholders as dividends
Cash inflow to the firm from selling new common equity shares
Cash outflow to purchase bonds issued by another company




Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:

Sales variability
Level of fixed operating costs
Closeness to its operating break-even point
Debt-to-equity ratio



Which of the following is simply the weighted average of the possible returns, with the weights being the probabilities of occurrence?
Select correct option:

Probability distribution Expected return Standard deviation Coefficient of variation




Why companies invest in projects with negative NPV? Select correct option:

Because there is hidden value in each project Because there may be chance of rapid growth Because they have invested a lot
All of the given options

Cash budgets are prepared from past: Select correct option:

Balance sheets
Income statements
Income tax and depreciation data
None of the given options




The cash budget is prepared from forecasted cash collections and disbursements rather




If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows?
Select correct option:

An increase A decrease No change
Incomplete information




Which of the followings expressed the proposition that the cost of equity is a positive linear function of capital structure?
Select correct option:

The Capital Asset Pricing Model
M&M Proposition I
M&M Proposition II
The Law of One Price




The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option:
Real assets of the business
Liquid assets of the business Fixed assets of the business Lon term assets of the business




Question # 2 of 20 ( Start time: 04:01:59 PM )          Total Marks: 1
                is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification.
Select correct option: Systematic risk
Standard deviation
Unsystematic risk
Coefficient of variation




Unsystematic risk is the diversifiable portion of total risk and not a measure of total risk like standard deviation.




The presence of which of the following costs is not used as a major argument against the M&M arbitrage process?
Select correct option: Bankruptcy costs Agency costs Transactions costs Insurance costs




The presence of these costs is used as major argument against the M&M arbitrage process




What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream?
Select correct option: Long-term debt Preferred stock
Common stock
None of the given options




According to timing difference problem a good project might suffer from   IRR even though its NPV
is            .
Select correct option: Higher; lower Lower; Lower
Lower; higher
Higher; higher



Expected Portfolio Return =                 . Select correct option:
rP * = xA rA + xB rB rP * = xA rA - xB rB rP * = xA rA / xB rB
rP * = xA rA * xB rB



Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:
Sales variability
Level of fixed operating costs
Closeness to its operating break-even point
Debt-to-equity ratio




For most firms, P/E ratios and risk_          . Select correct option:
Will be directly related
Will have an inverse relationship
Will be unrelated
None of the above.




The                the coefficient of variation            the relative risk of the investment. Select correct option:
Larger; Larger Larger; Smaller Smaller; Larger Smaller; Smaller




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?
Select correct option:
Project A dominates project B Project B dominates project A
Neither project dominates the other in terms of risk and return
Incomplete information



The expected net present value of B is greater than the expected net present value of A and the risk of B exceeds the risk of A, so neither dominates the other.




            means expanding the number of investments which cover different kinds of stocks. Select correct option:
Diversification Standard deviation Variance
Covariance


                      

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