01
MIDTERM EXAMINATION
Spring
2010
MGT201-
Financial Management (Session - 5)
Question No: 1 ( Marks: 1 ) - Please
choose one
Which
of the following statements is correct for a sole proprietorship?
►
The sole proprietor has limited liability
►
The sole proprietor can easily dispose of their ownership position relative to
a shareholder in a corporation
►
The sole proprietorship can be created more quickly than a corporation
►
The owner of a sole proprietorship faces double taxation unlike the partners in
a partnership
Question No: 2 ( Marks: 1 ) - Please
choose one
Which
of the following market refers to the market for relatively long-term financial
instruments?
►
Secondary market
►
Primary market
►
Money market
►
Capital market
Question No: 3 ( Marks: 1 ) - Please
choose one
Felton
Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and
a net profit margin of 5 percent. What are its sales?
►
750,0Rs.3, 750,000
►
Rs.48Rs.480, 000 (correct)
► Rs.30Rs.300, 000
►
Rs.1, Rs.1, 500,000
Reference:
Since
ROI=8% on $300,000 of assets,
then
net profit is $24,000 (8% × $300,000).
Using
the net profit and given that the NPM=5%, sales equals $480,000 ($24,000 / 5%).
Question No: 4 ( 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: 5 ( Marks: 1 ) - Please
choose one
A
capital budgeting technique through which discount rate equates the present
value of the future net cash flows from an investment project with the
project’s initial cash outflow is known as:
►
Payback period
►
Internal rate of return
►
Net present value
►
Profitability index
Reference:
Page
43 & 44
Question No: 6 ( Marks: 1 ) - Please
choose one
A
capital budgeting technique that is NOT considered
as discounted cash flow method is:
►
Payback period
►
Internal rate of return
►
Net present value
►
Profitability index
Question No: 7 ( 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
Question No: 8 (
Marks: 1 ) - Please choose one
You are selecting a project from a
mix of projects, what would be your first selection in descending order to give
yourself the best chance to add most to the firm value, when operating under a
single-period capital-rationing constraint?
► Profitability index (PI)
► Net present value (NPV)
► Internal rate of return (IRR)
► Payback period (PBP)
Reference:
1.
Pay back period (ascending order)
2.
Return on investment (ROI)
3.
Net Present Value (NPV)
4.
Profitability Index (PI) (Descending order)
5.
Internal Rate of Return (IRR)
Question No: 9 ( 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: 10 ( 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
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: 11 ( Marks: 1 ) -
Please choose one
Which
of the following is designated by the individual investor's optimal portfolio?
►
The point of tangency with the opportunity set and the capital allocation line
►
The point of highest reward to variability ratio in the opportunity set
►
The point of tangency with the indifference curve and the capital allocation
line
►
The point of the highest reward to variability ratio in the indifference curve
Question No: 12 ( 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: 13 ( 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: 14 ( 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: 15 ( Marks: 1 ) -
Please choose one
Which
of the following is NOT an example
of a financial intermediary?
►
Wisconsin S&L, a savings and loan association
►
Strong Capital Appreciation, a mutual fund
►
Microsoft Corporation, a software firm
►
College Credit, a credit union
Question No: 16 (
Marks: 1 ) - Please choose one
An 8% coupon Treasury note pays interest on May 30 and
November 30 and is traded for settlement on August 15. What is the accrued interest on Rs. 100,000
face value of this note?
► Rs. 491.80
► Rs. 800.00
► Rs. 983.61
► Rs. 1,661.20
Reference:
76/183(4,000) = 1,661.20. Approximation:
.08/12*100,000=666.67 per month. 666.67/month * 2.5 months = 1.666.67.
Question No: 17 ( Marks: 1 ) -
Please choose one
A
preferred stock will pay a dividend of Rs. 3.50 in the upcoming year, and every
year thereafter, i.e., dividends are not expected to grow. You require a return
of 11% on this stock. Use the constant growth model to calculate the intrinsic
value of this preferred stock.
►
Rs. 0.39
►
Rs. 0.56
►
Rs. 31.82
►
Rs. 56.25
Reference:
PV
= DIV1/ rPE = 3.5 / 11% = 3.5/0.11 = Rs 31.82
Question No: 18 ( 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: 19 ( 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: 20 ( Marks: 1 ) -
Please choose one
“Do not compare apples with oranges” is the
concept in:
►
Discounting and Net present value
►
Risk & return
►
Insurance management
►
Time value of money
Question No: 21 ( Marks: 1 ) -
Please choose one
Which
of the following is NOT the interest rate used for discounting calculation?
►
Benchmark interest rate
►
Effective interest rate
►
Periodic interest rate
►
Nominal interest rate
Question No: 22 ( Marks: 1 ) -
Please choose one
Which
of the following is the formula to calculate the future value of perpetuity?
►
Constant cash flows × interest rate
►
Constant cash flows / interest rate
►
Constant cash flows + Constant cash flows × interest rate
►
Constant cash flows - Constant cash flows/ interest rate
Question No: 23 ( Marks: 1 ) -
Please choose one
Which
of the following interest rate keeps on moving and changing on daily basis?
►
Book value
►
Market value
►
Salvage value
►
Face value
Question No: 24 ( Marks: 1 ) -
Please choose one
From
which of the following formula we can calculate coupon rate?
►
Coupon receipt / market value
►
Coupon receipt / present value
►
Coupon receipt / salvage value
►
Coupon receipt / book value
Question No: 25 ( Marks: 1 ) -
Please choose one
Value
of “g” in the formula of constant growth rate can be calculated from which of
the following formula?
►
g = plowback ratio × ROE
►
g = plowback ratio × ROA
►
g = payout ratio + ROE
►
g = payout ratio + ROA
Question No: 26 ( Marks: 1 ) -
Please choose one
In
Gordon’s formula (rCE = DIV1 / Po + g), rCE is
considered as __________ and “g” is considered as __________.
►
Dividend yield, operating expenses
►
Dividend yield, operating income
►
Dividend yield, capital loss
►
Dividend yield, capital gain
Question No: 27 ( Marks: 1 ) -
Please choose one
To
calculate the annual rate of return for an investment, we require which of the
following(s)?
►
The income created
►
The gain or loss in value
►
The original value at the beginning of the year
►
All of the given options
Question No: 28 ( Marks: 1 ) -
Please choose one
This
is an example of which of the following?
Real
estate prices fell across the board because the market was glutted with surplus
pre-owned homes for sale.
►
Economic risk
►
Industry risk
►
Company risk
►
Market risk
02MIDTERM EXAMINATION
Spring
2010
MGT201-
Financial Management (Session - 3)
Question No: 1 ( 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: 2 ( 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: 3 ( Marks: 1 ) - Please
choose one
Assume
that the interest rate is greater than zero. Which of the following cash-inflow
streams totaling Rs.1, 500 would you prefer? The cash flows are listed in order
for Year 1, Year 2, and Year 3 respectively.
►
Rs.700 Rs.500 Rs.300
► Rs.300 Rs.500 Rs.700
►
Rs.500 Rs.500 Rs.500
►
Any of the above, since they each sum to Rs.1,500
Question No: 4 ( Marks: 1 ) - Please
choose one
Interest
paid (earned) on both the original principal borrowed (lent) and previous
interest earned is often referred to as __________.
►
Present value
►
Simple interest
►
Future value
► Compound interest
Question No: 5 ( 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
Question No: 6 ( 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
Question No: 7 ( Marks: 1 ) - Please
choose one
All
of the following influence capital budgeting cash flows EXCEPT__________.
► Choice of depreciation method for
tax purposes
►
Economic length of the project
►
Projected sales (revenues) for the project
►
Sunk costs of the project
Question No: 8 ( 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: 9 ( 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
Question No: 10 ( Marks: 1 ) -
Please choose one
Which
one of the following selects the combination of investment proposals that will
provide the greatest increase in the value of the firm within the budget
ceiling constraint?
►
Cash budgeting
►
Capital budgeting
► Capital rationing
►
Capital expenditure
Question No: 11 ( Marks: 1 ) -
Please choose one
Who
is responsible for the decisions relating capital budgeting and capital
rationing?
►
Chief executive officer
►
Junior management
►
Division heads
► All of the given option
Question No: 12 ( 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: 13 ( 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: 14 ( 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: 15 ( 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: 16 ( Marks: 1 ) -
Please choose one
When
Investors want high plowback ratios?
► Whenever ROE > k
►
Whenever k > ROE
►
Only when they are in low tax brackets
►
Whenever bank interest rates are high
Question No: 17 ( Marks: 1 ) -
Please choose one
Which
of the following statement about portfolio statistics is CORRECT?
► A portfolio's expected return is a
simple weighted average of expected returns of the individual securities
comprising the portfolio.
►
A portfolio's standard deviation of return is a simple weighted average of
individual security return standard deviations.
►
The square root of a portfolio's standard deviation of return equals its
variance.
►
The square root of a portfolio's standard deviation of return equals its
coefficient of variation.
Question No: 18 ( 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
Question No: 19 ( 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: 20 ( 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: 21 ( 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: 22 ( Marks: 1 ) -
Please choose one
Under
which concept it is said that “do not put all your eggs in one basket”?
►
Risk & return
► Portfolio diversification
►
Insurance management
►
Time value of money
Question No: 23 ( Marks: 1 ) -
Please choose one
All
of the following are the steps involved in financial planning processEXCEPT:
►
Assumptions are made about future levels of sales, costs, and interest rates
etc.
►
Ratios are projected and analyzed
► Projected financial statements are
developed
►
Comparison with key competitors about the prices to be charged
Question No: 24 ( Marks: 1 ) -
Please choose one
Which
of the following is NOT the interest rate used for discounting calculation?
► Benchmark interest rate
►
Effective interest rate
►
Periodic interest rate
►
Nominal interest rate
Question No: 25 ( Marks: 1 ) -
Please choose one
Suppose
you are going to sale an old asset and its market value is greater than its
book value it indicates that:
► Company is going to have capital
gain
►
Company will have to bear capital loss
►
Company is going to earn operating revenue
►
Company has to bear revenue expense
Question No: 26 ( Marks: 1 ) -
Please choose one
Which
of the following is not a type of problem in capital rationing?
►
Size difference of projects
►
Timing difference of projects
►
Different lives of different projects
► Different cash flow streams
Question No: 27 ( Marks: 1 ) -
Please choose one
In
Pakistan which of the following is assigned to bond rating and risk?
►
IMF
►
Moody’s
►
Standard & poor
► PACRA
Question No: 28 ( Marks: 1 ) -
Please choose one
Which
of the following statement defines the following events i.e Inflation,
recession, and high interest rates?
► Systematic risk factors that can
be diversified away
►
Company-specific risk factors that can be diversified away
►
Among the factors that are responsible for market risk
►
Irrelevant except to governmental authorities like the Federal Reserve
03MIDTERM
EXAMINATION
vumba2009.blogspot.com
Spring 2009
MGT201-
Financial Management (Session - 2)
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
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
MIDTERM EXAMINATION
Spring
2010
MGT201-
Financial Management
Question No: 1 (
Marks: 1 ) - Please choose one
Which type of responsibilities are
primarily assigned to Controller and Treasurer respectively?
► Operational; financial management
► Financial management; accounting
► Accounting; financial management
► Financial management; operations
Question No: 2 (
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: 3 (
Marks: 1 ) - Please choose one
In finance we refer to the market
where existing securities are bought and sold as the __________ market.
► Money ► Capital ► Primary ► Secondary
Question No: 4 (
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
Question No: 5 (
Marks: 1 ) - Please choose one
A 5-year ordinary annuity has a
future 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.231.91
► Rs.184.08
► Rs.181.62
► Rs.170.44
Question No: 6 (
Marks: 1 ) - Please choose one
A 5-year ordinary annuity 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?
► Rs.331.20
►Rs.399.30
► Rs.431.24
► Rs.486.65
Question No: 7 (
Marks: 1 ) - Please choose one
In proper capital budgeting analysis
we evaluate incremental __________ cash flows.
► Accounting ► Operating ► Before-tax ►
Financing
Question No: 8 (
Marks: 1 ) - Please choose one
Mortgage bonds are secured by real
property whose value is generally _______ than that of the value of the bonds
issue?.
► Higher
► Lower
► Equal
► Higher or lower
Question No: 9 (
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
Question No: 10 (
Marks: 1 ) - Please choose one
If a company issues bonus shares,
what will be its effect on the debt equity ratio?
► It will improve
► It will deteriorate
► No effect
► None of the given options
Question No: 11 (
Marks: 1 ) - Please choose one
_________ is equal to (common
shareholders' equity/common shares outstanding).
►Book value per share
► Liquidation value per share
► Market value per share
► None of the above
Question No: 12 (
Marks: 1 ) - Please choose one
You
wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of Rs.
3 in the upcoming year while Stock Y is expected to pay a dividend of Rs. 4 in
the upcoming year. The expected growth
rate of dividends for both stocks is 7%. The intrinsic value of stock X:
► Will be greater than the intrinsic
value of stock Y
► Will be the same as the intrinsic
value of stock Y
► Will be less than the
intrinsic value of stock Y
► Cannot be calculated without knowing
the market rate of return
Question No: 13 (
Marks: 1 ) - Please choose one
You
wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a
dividend of Rs. 2 in the upcoming year.
The expected growth rate of dividends is 9% for stock A and 10% for
stock B. The intrinsic value of stock A:
► Will be greater than the intrinsic
value of stock B
► Will be the same as the intrinsic
value of stock B
►Will be less than the intrinsic
value of stock B
► None of the given options
Question No: 14 (
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: 15 (
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: 16 (
Marks: 1 ) - Please choose one
When Return is being estimated in %
terms, the units of Standard Deviation will be mention in _.
► Percentage (%)
► Times
► Number of days
► All of the given options
Question No: 17 (
Marks: 1 ) - Please choose one
___________ is one of the most
common techniques of financial analysis.
► Analyzing the statement of equity
► Preparing the cash budget
► scrutinizing of Financial
statement
► Forecasting the income statement
Question No: 18 (
Marks: 1 ) - Please choose one
Which of the following formula is
used to calculate the future value in simple interest?
► FV = PV + (PV× i × n)
► FV / (PV× i × n) = PV
► FV = PV - (PV× i × n)
► FV = PV × (PV× i × n)
Question No: 19 (
Marks: 1 ) - Please choose one
Which of the following are the types
of annuities?
► Perpetuity and discrete annuity
► Ordinary and discrete annuity
► Discrete and simple annuity
► Ordinary and annuity due
Question No: 20 (
Marks: 1 ) - Please choose one
Value of annuity depends upon which
of the following factors?
► Cash inflows & outflows
► Required rate of return & cash
flows
► Constant cash flows &
discount factor
► Constant cash flows & life of
investment
Question No: 21 (
Marks: 1 ) - Please choose one
Which of the following statement
best describes capital budgeting?
► It’s a tool which is used to evaluate
the projects and fixed assets of the company
► A technique used to assess the working
capital requirement
► It will help the management to decide
whether the new venture should be taken up or not.
► All of the given options are
correct
Question No: 22 (
Marks: 1 ) - Please choose one
IRR can be defined as:
► A discount rate that equates
the PV of a project’s expected cash inflows to the PV of project’s cost
► Present value of the stream of net
cash flows from project’s net investment
► It’s a cost & benefits ratio used
to assess the validity of a project
► The time period required to receive back
the initial investment.
Question No: 23 (
Marks: 1 ) - Please choose one
If the life of a project is 6 years
and the life of other project is 2 years then least common multiple will be:
► 2 years
► 6 years
► 8 years
► 12 years
Question No: 24 (
Marks: 1 ) - Please choose one
Which of the following is the price
which is mentioned on the bonds?
► Face value
► Salvage value
► Market value
► Book value
Question No: 25 (
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: 26 (
Marks: 1 ) - Please choose one
When you allocate capital, you
choose investments that are more beneficial and less
► Diversified
► Risky
► Costly
► Value based
Question No: 27 (
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 capital
► Limited liability of shareholders
► Limited life of the corporate form
Question No: 28 (
Marks: 1 ) - Please choose one
Which
of the following is NOT the form of
cash flow generated by the investments of the shareholders?
► Income
► Capital loss
► Capital gain
► Operating income
Question No: 29 (
Marks: 3 )
Define interest rate risk and
investment risk.
Interest rate risk
Interest
rate risk is the risk (variability in value) borne by an interest-bearing
asset, such as a loan or a bond, due to variability of interest rates. In
general, as rates rise, the price of a fixed rate bond will fall, and vice
versa. Interest rate risk is commonly measured by the bond's duration.
Investment Risk
The
uncertainties attached while making an investment that the investment may not
yield the expected returns.
OR
Possibility
of a reduction in value of an insurance instrument resulting from a decrease in
the value of the assets incorporated in the investment portfolio underlying the
insurance instrument. This reduction can also be effected by a change in the
interest rate.
Question No: 30 (
Marks: 3 )
What is risk averse assumption?
When
we talk in terms of risk averse, we know that most investors are
psychologically risk averse. In case of two investments offer with the same
prospective return most investor would choose the one with the lower risk or
standard deviation or spread or votality. In other words most of the investors
are not major gamblers. Gamblers would choose that project which appeals to
investors greed by offering upsite return of 30% plus 10% = 40%. The
consequences on the share price, the higher the risk of share the higher its
rate of return and the lower its market price, so any investor will choose
surely with the low risk and he will take care of very closely risk averse
assumption while finalizing any project.
Question No: 31 (
Marks: 5 )
How negatively correlated investments behave in a market?
Solution:
If Ro = - 1.0, it means that Investments are Perfectly Negatively
Correlated and the Returns (or Prices or Values) of the 2 Investments move in
Exactly Opposite directions. In this Ideal Case, All Risk can be diversified
away. For example, if the price of one stock increases by 50% then the price of
another stock goes down by 50%.
Question No: 32 (
Marks: 5 )
What types of shares are available in the market?
The following are the shares available normally in the
market;
1. Preferred Stock:
These stocks have regular Constant /
Fixed Future Dividends Certain for the Preferred Shareholders. Use old
Perpetuity Cash Flow Pattern and formulas to estimate theoretical Fair Stock
Price.
2. Common Stock:
Theses stocks have variable future
dividends expected by the common shareholders. Use Zero
& Constant Growth Models to
simplify future Dividend forecasts in estimated Theoretical Stock Price (or PV)
equation. There dividend depend upon the income earned by the company and also
upon the management decision regarding the dividend declaration.
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.
07MIDTERM
EXAMINATION
Spring
2010
MGT201-
Financial Management (Session - 6)
Question No: 1 (
Marks: 1 ) - Please choose one
How a company can improve (lower)
its debt-to-total asset ratio?
► By borrowing more
► By shifting short-term to long-term
debt
► By shifting long-term to short-term
debt
► By selling common stock
Question No: 2 (
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: 3 (
Marks: 1 ) - Please choose one
To increase a given future value,
the discount rate should be adjusted __________.
► Upward
► Downward
► First upward and then downward
► None of the given options
Question No: 4 (
Marks: 1 ) - Please choose one
Cash budgets are prepared from past:
► Income tax and depreciation data
► None of the
given options
► Balance sheets
► Income statements
Question No: 5 (
Marks: 1 ) - Please choose one
A 5-year ordinary annuity has a
future 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.231.91
► Rs.184.08
► Rs.181.62
► Rs.170.44
Question No: 6 (
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: 7 (
Marks: 1 ) - Please choose one
Why we need Capital rationing?
► Because, there are not enough positive
NPV projects
► Because, companies do not always have access to all of
the funds they could make use of
► Because, managers find it difficult to
decide how to fund projects
► Because, banks require very high
returns on projects
Question No: 8 (
Marks: 1 ) - Please choose one
Which of the following is a person
or an institution designated by a bond issuer as the official representative of
the bondholders?
► Indenture
► Debenture
► Bond
► Bond trustee
Question No: 9 (
Marks: 1 ) - Please choose one
Market price of the bond changes
according to which of the following reasons?
► Market price changes due to the supply
–demand of the bond in the market
► Market price changes due to Investor’s
perception
► Market price changes due to change in
the interest rate
► All of the given options
Question No: 10 (
Marks: 1 ) - Please choose onA 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: 11 (
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: 12 (
Marks: 1 ) - Please choose one
Which of the following factors might
affect stock returns?
► The business cycle
► Interest rate fluctuations
► Inflation rates
► All of the above
Question No: 13 (
Marks: 1 ) - Please choose one
What is the present value of Rs.
3,500,000 to be paid at the end of 50 years if the correct risk adjusted
interest rate is 18%?
► Rs.105,000
► Rs.150,000
► Rs.395,000
► Rs.350,000
Question No: 14 (
Marks: 1 ) - Please choose one
While using capital budgeting
techniques, the benefits we expect from a project is expressed in terms of:
► Cash in flows
► Cash out flows
► Cash flows
► None of the given options
Question No: 15 (
Marks: 1 ) - Please choose one
If the probability is written on
Y-axis and the rate of return is mentioned on the X-axis, Which kind of
relationship it shows when there is higher the standard deviation the higher
the risk.
► Indirect relationship
► No relationship
► Direct relationship
► Insufficient information
Question No: 16 (
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: 17 (
Marks: 1 ) - Please choose one
The value at which buyers and
sellers are willing to buy and sell any asset is known as:
► Liquidation value
► Book value
► Intrinsic value
► Market value
Question No: 18 (
Marks: 1 ) - Please choose one
Which of the following concept says
that rupee in your hand today is better than the rupee you are going to get
tomorrow?
► Risk & return
► Time value of money
► Net present value
► Portfolio diversification
Question No: 19 (
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: 20 (
Marks: 1 ) - Please choose one
Which of the following is the
formula to calculate the future value of perpetuity?
► Constant cash flows × interest rate
► Constant cash flows / interest rate
► Constant cash flows + Constant cash
flows × interest rate
► Constant cash flows - Constant cash
flows/ interest rate
Question No: 21 (
Marks: 1 ) - Please choose one
There is _______ relationship
between NPV and Economic Value added.
► Direct
► Indirect
► No relationship
► Cannot be determined
Question No: 22 (
Marks: 1 ) - Please choose one
If
new asset is replaced with old one, the difference between the depreciation of
both assets would be:
► Useless and nothing to do with the
depreciation
► Take the percentage of depreciation
with new price of asset and then subtract it
► Subtracted from cash flows
► Added back to cash flows
Question No: 23 (
Marks: 1 ) - Please choose one
The formula which is used for the
calculation of equivalent annual annuity is:
► (1+i) n +1/ (1+i) n
► (1+i) n-1 / (1+i) n
► (1+i) n × (1+i) n
-1
► (1+i) n/ (1+i) n -1
Question No: 24 (
Marks: 1 ) - Please choose one
The responsibility of research &
development projects lie with which of the following authority?
► Chief executive officer
► Divisional heads
► Collaborative teams from all
departments
► Experts are hired to make such
decisions
Question No: 25 (
Marks: 1 ) - Please choose one
Market price of a share will be
determined from __________.
► Supply of share only
► Demand of share only
► Price of share of Benchmark Company
► From demand and supply in the market
Question No: 26 (
Marks: 1 ) - Please choose one
Which of the following is the
formula to calculate present value under zero growth model for common stock?
► DIV1 / rCE
► DIV1 × rCE
► DIV1 + rCE
► DIV1 - rCE
Question No: 27 (
Marks: 1 ) - Please choose one
Earning per share can be calculated
with the help of which of the following formula?
► Net income / number of shares outstanding
► Net income – dividend / number of
shares outstanding
► Operating income / number of
shares outstanding
► Earning before interest and taxes /
number of shares outstanding
Question No: 28 (
Marks: 1 ) - Please choose one
Which of the following statements is
correct relating to the following information?
Stocks A and B each have an expected
return of 15% and a standard deviation of 20%. You have a portfolio that
consists of 50% A and 50% B.
► The portfolio's beta is less than 1.2
► The portfolio's expected return is 15%
► The portfolio's beta is greater than
1.2
► The portfolio's standard deviation is
20%
Question No: 29 (
Marks: 3 )
Briefly explain what call provision is and in which case companies
use this option.
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. When market interest rates drop, Issuers (or Borrowers)
often call back the old bonds and issue new ones at lower interest rates
Question No: 30 (
Marks: 3 )
Lakson Corporation is a stagnant market and analysts foresee
a long period of zero growth of the firm. It is paying a yearly dividend of
Rs.5 for some time which is expected to continue indefinitely. The yield on the
stock of similar firm is 8%.
What should lakson’s stock sell for?
Data:
P0
= ?
D1V1
= 5
RCE
= 8%
Solution:
P0
= D1V1/RCE
P0
= 5/8%
P0
= 5/0.08
P0
= 62.5
Question No: 31 (
Marks: 5 )
What are different types of bonds?
(Give any five types)
Solution:
Types of Bonds:
Mortgage Bonds: backed & secured by real assets
Subordinated Debt and General Credit: lower rank and claim than Mortgage
Bonds.
Debentures: These are not secured by real property, risky
Floating Rate Bond: It is defined as a type of bond bearing a yield that may
rise and fall within a specified range according to fluctuations in the market.
The bond has been used in the housing bond market
Eurobonds: it issued from a foreign country
Zero Bonds & Low Coupon Bonds: no regular interest payments (+ for
lender), not callable (+ for investor)
Question No: 32 (
Marks: 5 )
H Corporation’s stock currently
sells for Rs.20 a share. The stock just paid a dividend of Rs.2 a share (Do
= Rs.2). the dividend is expected to grow at a constant rate of 11% a year.
●
What stock price is expected 1 year from now?
●
What would be the required rate of return on company’s
stock?
Data:
P0 = rs 20
D0 = 2.
g = 11%
P1 = ?
ROR = ?
Solution
Part A:
P1 = P0(1 + g)
P1= 20(1.11)
P1= 22.2
Solution
part B:
ROR = D1 / P0 + g
ROR = (2 * 1.11/20) + 0.11
ROR = (2.22/20) + 0.11
ROR = 0.111 + 0.11
ROR = 0.221*100
ROR = 22.1%
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
09MIDTERM
EXAMINATION
Spring
2010
MGT201-
Financial Management (Session - 6)
Question No: 2 (
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: 3 (
Marks: 1 ) - Please choose one
Which of the following would be
considered a cash-flow item from an "investing" activity?
► Cash outflow to the government for
taxes
► Cash outflow to shareholders as
dividends
► Cash outflow to lenders as interest
► Cash outflow to purchase bonds issued by another
company
Question No: 4 (
Marks: 1 ) - Please choose one
All of the following influence
capital budgeting cash flows EXCEPT
__________.
►
Choice of depreciation method for tax purposes
► Economic length of the project
►
Projected sales (revenues) for the project
► Sunk costs of
the project
Question No: 5 (
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: 6 (
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: 7 (
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: 8 (
Marks: 1 ) - Please choose one
The
value of a bond is directly derived from which of the following?
► Cash flows
► Coupon receipts
► Par recovery at maturity
► All of the given options
Question No: 9 (
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
Question No: 10 (
Marks: 1 ) - Please choose one
If all things equal, when
diversification is most effective?
► Securities' returns are positively
correlated
► Securities' returns are uncorrelated
► Securities' returns are high
► Securities' returns are negatively correlated
Reference:
If
Ro = - 1.0, it means that
Investments are Perfectly Negatively Correlated and the Returns (or Prices or
Values) of the 2 Investments move in Exactly Opposite directions.
In
this Ideal Case, All Risk can be diversified away. For example, if the price of
one stock increases by 50% then the price of another stock goes down by 50%.
Question No: 11 (
Marks: 1 ) - Please choose one
You
wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a
dividend of Rs. 2 in the upcoming year.
The expected growth rate of dividends is 9% for stock A and 10% for
stock B. The intrinsic value of stock A:
► Will be greater than the intrinsic
value of stock B
► Will be the same as the intrinsic
value of stock B
► Will be less than the intrinsic value of stock B
► None of the given options
Question No: 12 (
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: 13 (
Marks: 1 ) - Please choose one
Which
of the following is NOT a major cause of systematic risk.
► A worldwide
recession
► A world war
► World energy supply
► Company management change
Question No: 14 (
Marks: 1 ) - Please choose one
Which
of the following term may be defined as incidental cash flows that arise
because of the effect of new project on the running business?
► Sunk cost
► Opportunity cost
► Externalities
► Contingencies
Question No: 15 ( Marks:
1 ) - Please choose one
A preferred stock will pay a
dividend of Rs. 2.75 in the upcoming year, and every year thereafter, i.e.,
dividends are not expected to grow. You
require a return of 10% on this stock.
Use the constant growth model to calculate the intrinsic value of this
preferred stock.
► Rs. 0.275
► Rs. 27.50
► Rs. 31.82
► Rs. 56.25
Question No: 16 (
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
Question No: 17 (
Marks: 1 ) - Please choose one
What is the present value of
Rs.53,000 to be paid at the end of 15 years if the interest rate is 9%
compounded annually?
► Rs.25,300
► Rs.34,122
► Rs.14,549
► Rs.11,989
Question No: 18 (
Marks: 1 ) - Please choose one
The objective of ________ is to
maximize the shareholder’s wealth.
► Financial economics
► Financial management
► Financial accounting
► Financial engineering
Question No: 20 (
Marks: 1 ) - Please choose one
Through which of the following
formula desired growth rate can be calculated?
► Return on equity × (1- payout
ratio)
► Return on equity / (1- payout ratio)
► Return on equity + (1+ payout ratio)
► Return on equity - (1/ payout ratio)
Question No: 22 (
Marks: 1 ) - Please choose one
Which of the following is not a type
of problem in capital rationing?
► Size difference of projects
► Timing difference of projects
► Different lives of different projects
► Different cash flow streams
Question No: 23 (
Marks: 1 ) - Please choose one
Market price of a share will be
determined from __________.
► Supply of share only
► Demand of share only
► Price of share of Benchmark Company
► From demand and supply in the market
Question No: 24 (
Marks: 1 ) - Please choose one
Which of the following is called
hybrid equity as it is the combination of both equity and debt factor?
► Common stocks
► Preferred stocks
► Bonds & securities
► All of the given options
Question No: 25 (
Marks: 1 ) - Please choose one
Which of the following can be used
as measure of return?
► Forecasted selling price
► Forecasted purchase price
► Forecasted dividend
► Forecasted time span of project
Question No: 27 (
Marks: 1 ) - Please choose one
Finance consists of which of the
following area(s)?
► Money and capital market
► Investment
► Financial management
► All of the given options
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: 31 (
Marks: 5 )
(a) What is correlation of coefficient?
Solution:
Correlation Coefficient ( AB or “Ro”):
Risk of a Portfolio of only 2 Stocks
A & B depends on the Correlation between those 2 stocks.
The value of Ro is between -1.0 and
+1.0
If Ro = 0 then Investments are Uncorrelated
& Risk Formula simplifies to Weighted Average
Formula. If Ro = + 1.0 then
Investments are Perfectly Positively Correlated and this means that
Diversification does not reduce
Risk.
If Ro = - 1.0, it means that Investments are Perfectly Negatively
Correlated and the Returns (or Prices or Values) of the 2 Investments move in
Exactly Opposite directions. In this Ideal Case, All Risk can be diversified
away. For example, if the price of one stock increases by 50% then the price of
another stock goes down by 50%.
In Reality, Overall Ro for most Stock Markets is about Ro =
+ 0.6.it is very
rough rule of thumb. It means that correlations are not completely perfect and
you should remember that if the correlation coefficient is +1.0 then it is not
possible to reduce the diversifiable risk.
This means that increasing the
number of Investments in the Portfolio can reduce some amount of risk but not
all risk
(b) What are efficient portfolios?
Solution:
Efficient Portfolios are those whose
Risk & Return values match the ones computed using Theoretical Probability
Formulas. The Incremental Risk Contribution of a New Stock to a Fully
Diversified Portfolio of 40
Un-Correlated Stocks will be the Market Risk Component of the New Stock only.
The Diversifiable Risk of the New Stock would be entirely offset by random
movements in the other 40 stocks. Adding a New Stock to the existing Portfolio
will create more Efficient Portfolio Curves. The New Stock will contribute its
own Incremental Risk and Return to the Portfolio.
Question No: 32 (
Marks: 5 )
Suppose you approach a bank for
getting loan. And the bank offers to
lend you Rs.1, 000,000 and you sign a bond paper. The bank asks you to issue a
bond in their favor on the following terms required by the bank: Par Value = Rs
1, 000,000, Maturity = 3 years
Coupon Rate = 15% p.a, Security =
Machinery
You are required to calculate the cash flow of the bank
which you will pay every month as well as the present value of this option.
Data:
Par
Value = Rs 1, 000,000
Maturity
= 3 years
Coupon
Rate = 15% p.a,
Security
= Machinery
Solution #2
CF = Cash Flow = Coupon Value =
Coupon Rate x Par Value
CF = 15% x 1,000,000
CF = 150000/12
Monthly CF = 12500
Assume that rD = 10%
PV = CF1/(1+rD/12)12+CFn/(1+rD/12)2x12 +..+CFn/ (1+rD/12) n +PAR/ (1+rD) n
PV
= 12500/ (1 + 0.10/12)12 + 12500/ (1 + 0.10/12)2x12 + 12500/ (1 + 0.10/12)3x12
+ 1000000/(1 + 0.10/12)3x12
PV
= 12500/ (1.00833)12 + 12500/ (1.00833)24 + 12500/ (1.00833)36 +
1000000/(1.00833)36
PV
= 11315.60425 + 10243.43196 +
9272.849775 + 741828
PV = 772660
FV = CCF (1 + rD/m )nxm - 1/rD/m
FV = 12500 (1 + 10%/12)3x12 - 1 /
10%/12
FV = 12500 (41.779)
FV = 522237.5
PV (Coupons Annuity) = FV / (1 + rD/m) nxm
PV = 522237.5/(1 + 10%/12) 3x12
PV = 522237.5/1.348021407
PV = 387410
PV (Par) = 1,000,000 / (1.00833)36
PV (Par) = 741828
PV = PV (Coupons Annuity) + PV (Par)
PV = 387410 + 741828
PV = 1129238
11 MIDTERM EXAMINATION
Spring 2011
MGT201- Financial Management (Session - 2)
Question No: 1 ( Marks: 1 ) - Please choose one
In finance we refer to
the market where existing securities are bought and sold as the __________
market.
► Money
► Capital
► Primary
► Secondary
Question No: 2 ( Marks: 1 ) - Please choose one
Which of the following would NOT
improve the current ratio?
Select correct option:
► Borrow short
term to finance additional fixed assets
► Issue long-term debt to buy inventory
► Sell common stock to reduce current
liabilities
► Sell fixed assets to reduce accounts
payable
Question No: 3 ( Marks: 1 ) - Please choose one
What
will be the approximate future value of a RS. 20,000 initial investment at 8%
continuous compound interest rate for 20 year?
► Rs.52,000
► Rs.93,219
►
Rs.99,061
► Rs.915,240
Rs.20,000[ e(.08 × 20) ] = Rs.20,000(4.9530324) =
Rs.99,061.
Question No: 4 ( 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: 5 ( Marks: 1 ) - Please choose one
Which of
the following is NOT a cash outflow for the firm?
Select correct option:
► Depreciation
► Dividends
► Interest
► Taxes
Question No: 6 ( 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
Question No: 7 ( Marks: 1 ) - Please choose one
If the cash flow stream for a
project is NOT a uniform series of inflows and initial outflow occur at time 0.
15% discount rate produces a resulting present value of Rs. 104,000 that is
greater than the initial cash outflow of Rs. 100,000. Now if we want to
calculate the best discount rate:
► We need to try a higher
discount rate
► We
need to try a lower discount rate
► 15% is the best discount rate
► Interpolation is not required here
Question No: 8 ( Marks: 1 ) - Please choose one
Who is responsible for the decisions relating capital
budgeting and capital rationing?
► Chief executive officer
► Junior management
► Division heads
► All of the given option
Question No: 9 ( Marks: 1 ) - Please choose one
MIRR (discount rate) equates which
of the following?
Select correct option:
►Future value of cash
inflows to the present value of cash outflows
► Future value of cash flows
to the present value of cash flows
► Future value of all cash
flows to zero
► Present value of all cash
flows to zero
Question No: 10 ( Marks: 1 ) - Please choose one
_________ is equal to (common
shareholders' equity/common shares outstanding).
►Book value per share
► Liquidation value per share
► Market value per share
► None of the above
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
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: 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
Which of the following can be
described as highly competitive market where goods business ideas are taken up
immediately?
► Capital Market
► Efficient market
► Perfect market
► Imperfect Market
Question No: 15 ( Marks: 1
) - Please choose one
The logic behind _________ is that
instead of looking at net cash flows you look at cash inflows and outflows separately
for each point in time.
► IRR
► MIRR
► PV
► NPV
Question No: 16 ( Marks: 1 ) - Please choose one
A proffered stock will pay a
dividend of Rs. 2.75 in upcoming year, and every year thereafter, i.e,
dividends are not expected to grow. You require a return of 10% on this stock.
Use the constant growth model to calculate the intrinsic value of this preferred
stock.
► Rs. 0.275
► Rs. 27.50
► Rs. 31.82
► Rs. 56.25
Question No: 17 ( Marks: 1
) - Please choose one
A preferred stock will
pay a dividend of Rs. 3.50 in the upcoming year, and every year thereafter,
i.e., dividends are not expected to grow. You require a return of
11% on this stock. Use the constant growth model to calculate the
intrinsic value of this preferred stock.
► Rs. 0.39
► Rs. 0.56
► Rs. 31.82
► Rs. 56.25
Question No: 18 ( Marks: 1 ) - Please choose one
If the probability is written on
Y-axis and the rate of return is mentioned on the X-axis, Which kind of
relationship it shows when there is higher the standard deviation the higher
the risk.
►Indirect
relationship
►No
relationship
►Direct relationship
►Insufficient
information
Question No: 19 ( Marks: 1
) - Please choose one
When a company invests in _______,
they increase the economic value added and market value added.
► Projects with positive NPV
►
Projects with negative NPV
►
Any project
►
Large projects only
Question No: 20 ( Marks: 1 ) - Please choose one
Which
of the following is not an example of physical asset market?
►Gold
market
►Computer
hardware
►Insurance Companies
►Sports
industry
Question No: 21 ( Marks: 1 ) - Please choose one
All
of the following are example of annuity EXCEPT:
►Mortgage
payment
►Insurance premium
►Monthly
rental payments
►Fixed
coupon payments
Question No: 22 ( Marks: 1
) - Please choose one
One way to increase the
shareholder’s wealth is to __________.
► Increase the stock price
►
Improve goodwill
►
Increase amount of debt
► Increase fixed assets
Question No: 23 ( Marks: 1 ) - Please choose one
The
method in which we discount all the outflows to the present and compounded all
inflows to the termination date is called as:
►Internal
rate of return
►Multiple
internal rate of return
►Modified internal rate of
return
►Net
present value
Question No: 24 ( Marks: 1 ) - Please choose one
The formula which is used for the
calculation of equivalent annual annuity is:
► (1+i) n +1/ (1+i) n
► (1+i) n-1 / (1+i) n
► (1+i) n × (1+i) n
-1
► (1+i) n/
(1+i) n -1
Question No: 25 ( Marks: 1 ) - Please choose one
A
bond is easily convertible to stock is called:
►Junk bond
►Euro
bond
►Mortgage
bond
►Convertible
bonds
Question No: 26 ( Marks: 1 ) - Please choose one
If
share value in the market in Rs. 10 and intrinsic value is Rs. 11 then its
worth is ___to you.
►More
►Less
►Equal
►Useless
information
Question No: 27 ( Marks: 1
) - Please choose one
Which of the following statement is
correct in case when dividend of a stock is expected to grow at a constant rate
of 5% p.a.?
►
The expected return on the stock is 5% a year.
►
The stock’s dividend yield is 5%.
►
The stock’s required return must be equal to or less than 5%.
► The
stock’s price one year from now is expected to be 5% above the current price
Question No: 28 ( Marks: 1 ) - Please choose one
Portfolio
risk can be defined as:
►Overall
risk of entire collection of investments
►Risk of particular
investment as compare to other investment
►Risk
of political instability within country
►Risk
of bankruptcy of company making investment
Mixed
taking from vumba2009.blogspot.com.
Question No: 2 ( Marks: 1 ) - Please choose one
Who determines the market price of a
share of common stock?
_ Individuals buying and selling the stock
_ The board of directors of the firm
_ The stock exchange on which the
stock is listed
_ The president of the company
Question No: 6 ( Marks: 1 ) - Please choose one
The DuPont Approach breaks down the
earning power on shareholders' book value
(ROE) as follows: ROE = __________.
_ Net profit margin × Total asset turnover × Equity multiplier
_ Total asset turnover × Gross
profit margin × Debt ratio
_ Total asset turnover × Net profit
margin
_ Total asset turnover × Gross
profit margin × Equity multiplier
Reference:
•
DuPont = Profit Margin x Asset Turnover x (Assets/Equity),
Question No: 7 ( 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: 8 ( Marks: 1 ) - Please choose one
Which group of ratios shows the
extent to which the firm is financed with debt?
_ Liquidity ratios
_ Debt ratios
_ Coverage ratios
_ Profitability ratios
Question No: 9 ( Marks: 1 ) - Please choose one
Which of the following would be
considered a cash-flow item from an "operating activity"?
_ 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
Question No: 13 ( Marks: 1 ) - Please choose one
Managers prefer IRR over net present
value because they evaluate investments:
_ In terms of dollars
_ In terms of Percentages
_ Intuitively
_ Logically
Question No: 17 ( Marks: 1 ) - Please choose one
Due to timing difference problem, a
good project might suffer from _____ IRR even
though its NPV is ________.
_ Higher; Lower
_ Lower; Lower
_ Lower; Higher
_ Higher; Higher
Reference:
A
good project might suffer from a lower IRR even though its NPV is higher
Question No: 18 ( Marks: 1 ) - Please choose one
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?
_ Long-term debt
_ Preferred stock
_ Common stock
_ None of the given option
Question No: 22 ( Marks: 1 ) - Please choose one
When the bond approaches its
maturity, the market value of the bond approaches to
which of the following?
_ Intrinsic value
_ Book value
_ Par value
_ Historic cost
Question No: 24 ( Marks: 1 ) - Please choose one
Consider a 5-year bond with a 10%
coupon that has a present yield to maturity of 8%. If
interest rates remain constant, one
year from now, what will be the price of this bond?
_ Higher
_ Lower
_ The same
_ Rs. 1,000
Question No: 29 ( Marks: 1 ) - Please choose one
You wish to earn a return of 13% on
each of two stocks, X and Y. Stock X is expected
to pay a dividend of Rs. 3 in the
upcoming year while Stock Y is expected to pay a
dividend of Rs. 4 in the upcoming
year. The expected growth rate of dividends for both
stocks is 7%. The intrinsic value of
stock X:
_ Will be greater than the intrinsic
value of stock Y
_ Will be the same as the intrinsic
value of stock Y
_ Will be less than the intrinsic value of stock Y
_ Cannot be calculated without
knowing the market rate of return
Question No: 31 ( Marks: 1 ) - Please choose one
The wider the range of possible
outcomes i.e.________.
_ The greater the variability in potential Returns that can occur, the
greater the
Risk
_ The greater the variability in
potential Returns that can occur, the lesser the Risk
_ The greater the variability in
potential Returns that can occur, the level of risk
remain constant
_ None of the given options
Reference:
The
wider the range of Possible Outcomes that can occur, the greater the Risk
Question No: 32 ( Marks: 1 ) - Please choose one
Which of the following is simply the
weighted average of the possible returns, with the
weights being the probabilities of
occurrence?
_ 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: 33 ( Marks: 1 ) - Please choose one
Which of the following statements regarding
covariance is CORRECT?
_ Covariance always lies in the
range -1 to +1
_ Covariance, because it involves a
squared value, must always be a positive number (or zero)
_ Low covariance’s among returns for
different securities leads to high portfolio risk
_ Covariance’s can take on positive, negative, or zero values
Question No: 34 ( Marks: 1 ) - Please choose one
Which of the following is NOT a major cause of systematic risk.
_ A worldwide recession
_ A world war
_ World energy supply
_ Company management change
Question No: 35 ( Marks: 1 ) - Please choose one
Finance consists of three
interrelated areas:
_ Money and capital market
_ Investment
_ Financial management
_ All of the given options
Reference:
Page
1
Question No: 37 ( Marks: 1 ) - Please choose one
At the termination of the project we
need to take into account:
_ Salvage value
_ Book value
_ Intrinsic value
_ Fair value
Reference:
Termination
of the project refers to the period when the project life ends. At this time,
we need
to
take into account the salvage value of the project assets,
Question No: 38 ( Marks: 1 ) - Please choose one
In which of the following approach
you need to bring all the projects to the same length in time?
_ MIRR approach
_ Going concern approach
_ Common life approach
_ Equivalent annual approach
Reference:
Page 54
Question No: 39 ( Marks: 1 ) - Please choose one
Assume a company had Rs.1 billion in
free cash flow last year, and it is expected to grow that cash flow at 3% into
perpetuity. Assuming a 9% cost of equity, what is the present value of the
company?
_ Rs.12.08 billion
_ Rs.18.15 billion
_ Rs.14.16 billion
_ Rs.16.67 billion
Question No: 40 ( Marks: 1 ) - Please choose one
What is the most important criteria
in capital budgeting?
_ Profitability index
_ Net present value
_ Pay back period
_ Return on investment
12 MIDTERM EXAMINATION
MGT201-
Financial Management (Session - 4)
An initial investment of Rs. 200,000 is required to
start the business; Rs. 9,000 per month is
expected to be earned for the first year and Rs.
20,000 would be earned every month in the second
year. How many months will it take to recover your initial investment?
► 14
months
► 16 months
► 18
months
► 20
months
Question No:
2 ( Marks: 1
) - Please choose one
“Don’t put all eggs in one
basket” explains _____________ concept of finance.
► Time
value of money
► Risk
and Return
► Discounting
and NPV
► Portfolio Diversification
Question No:
3 ( Marks: 1
) - Please choose one
_________ is
equal to risk per unit return.
► Standard Deviation
► Variance
► Coefficient of Variation
► None of
the given options
Question No:
4 ( Marks: 1
) - Please choose one
A bond that pays no annual interest but is sold at a discount
below the par value is called:
► An
original maturity bond
► A
floating rate bond
► A fixed
maturity date bond
► A zero coupon bond
Question No:
5 ( Marks: 1
) - Please choose one
Since preferred stock dividends are fixed, valuing preferred stock
is roughly equivalent to valuing:
► A zero
growth common stock
► A
positive growth common stock
► A short-term bond
► An
option
Question No:
6 ( Marks: 1
) - Please choose one
An unincorporated business owned by one individual is called
_________.
► Partnership
► Company
► Sole proprietorship
► None of
given options
Question No:
7 ( Marks: 1
) - Please choose one
_______ is a ratio of the present value of future cash flows to
the initial investment.
► Return
on Investment
► NPV
► Payback
Period
► Profitability Index
Question No:
8 ( Marks: 1 ) - Please
choose one
_______ is the actual price at which share is bought or sold.
► Fair
price
► Par
value
► Market price
► Written
down value
Question No:
9 ( Marks: 1
) - Please choose one
_____ ratio
gives an indication how equity investors regard the company’s value.
► Price /
Earning
► Market / Book
► Earning
/ Share
► Price /
Cash flow
Question No:
10 ( Marks: 1
) - Please choose one
In the formula rCE = (D1V1/Po) + g, what
does (D1V1/Po) represent?
► The expected dividend yield from a common
stock
► The
expected price appreciation yield from a common stock
► The
dividend yield from a preferred stock
► The
interest payment from a bond
Question No:
11 ( Marks: 1
) - Please choose one
For a given
nominal interest rate, the more numerous the compounding periods, the less the
effective annual interest rate.
► True
► False
Question No:
12 ( Marks: 1
) - Please choose one
The current ratio is never larger than the quick ratio.
► True
► False
if firm has more inventory it will be having large
current ratio
Question No:
13 ( Marks: 1
) - Please choose one
When interest rates go up, the market price of a bond goes up.
► True
► False
Question No:
14 ( Marks: 1
) - Please choose one
Maximizing the price of a share of the firm's common stock is the
equivalent of maximizing the wealth of the firm's present owners.
► True
► False
Question No:
15 ( Marks: 1
) - Please choose one
You can reduce systematic risk by adding more common stocks to
your portfolio.
► True
► False
Question No:
16 ( Marks: 3 )
Assume that one year from now; you will deposit Rs. 1,000 into a
saving account that pays 8%interest. If the bank compounds interest
semi-annually, how much will you have in your account four years from now?
ANSWER:
FV = PV(1+i/m)^mn
FV = 1000 (1.04)^6 ( m*n = 2*3 as we are
depositing after one year so total years will be 3)
FV = 1265
Question No:
17 ( Marks: 3 )
How much should you pay for the preferred stock of the PST
Corporation, if it has $ 50 par value, pays $20 a share in annual
dividends, and your required rate of return is 15%.
=20/.15
No comments:
Post a Comment