MGT201 A Huge File For Quizzes 1140 Pages

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Question # 2 of 15 ( Start time: 11:44:56 PM ) Total Marks: 1 A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the future value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(FVIFA at 8% for 5 periods) (Rs.100)(FVIFA at 8% for 4 periods)(1.08) (Rs.100) (FVIFA at 8% for 5 periods)(1.08) (Rs.100)(FVIFA at 8% for 4 periods) + Rs.100 Question # 15 of 15 ( Start time: 10:52:13 PM ) Total Marks: 1 If a firm has a DOL of 5 at Q units, what would be the effect on sales and EBIT? Select correct option:
If sales rise by 5%, EBIT will rise by 5% If sales rise by 1%, EBIT will rise by 1% If sales rise by 5%, EBIT will fall by 25% If sales rise by 1%, EBIT will rise by 5%
Question # 5 of 15 ( Start time: 10:05:42 PM )
Total Marks: 1
Which of the following statistic measures the returns of two risky assets that move together? Select correct option: Correlation Standard deviation Square root Variance
Question # 1
Which of the following costs would be considered a fixed cost? Select correct option:
Raw materials Depreciation Bad-debt losses Production labor
Question # 2 Expected Portfolio Return = ___________. Select correct option:
rP * = xA rA + xB rB rP * = xA rA - xB rB rP * = xA rA / xB rB rP * = xA rA * xB rB
Question # 3 Why markets and market returns fluctuate? Select correct option:
Because of political factors Because of social factors Because of socio-political factors Because of macro systematic factors
Question # 4 Which of the following can be used to calculate the risk of the larger portfolio? Select correct option:
Standard deviation EPS approach Matrix approach Gordons Approach
Question # 5 Which of the following market in finance is referred to the market for short-term government and corporate debt securities? Select correct option: http://vustudents.ning.com
Money market Capital market Primary market Secondary market
Question # 6 Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option:
Cash outflow to the government for taxes
Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
Question # 8 A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? Select correct option:
(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information
Question # 9 Which of the following is correct regarding the opportunity cost of capital for a project? Select correct option:
The opportunity cost of capital is the return that investors give up by investing in the project rather than in securities of equivalent risk. Financial managers use the capital asset pricing model to estimate the opportunity cost of capital The company cost of capital is the expected rate of return demanded by investors in a company All of the given options
Question # 1 of 10 ( Start time: 10:15:03 AM ) Total Marks: 1 Which of the following is the stability of a firm's operating income? Select correct option: Financial leverage Weighted-average cost of capital Capital structure Business risk Question # 2 of 10 ( Start time: 10:15:43 AM ) Total Marks: 1 Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option: http://vustudents.ning.com Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden Question # 3 of 10 ( Start time: 10:16:18 AM ) Total Marks: 1 Which of the following is NOT an example of a financial intermediary? Select correct option:
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 # 4 of 10 ( Start time: 10:17:02 AM ) Total Marks: 1 How economic value is added (EVA) calculated? Select correct option: It is the difference between the market value of the firm and the book value of equity It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge It is the net income of the firm less a dollar cost that equals WAAC multiplied by the book value of liabilities and equities None of the given option Question # 5 of 10 ( Start time: 10:18:02 AM ) Total Marks: 1 An annuity due is always worth _____ a comparable annuity.
Select correct option: Less than More than Equal to Can not be found from the given information Question # 6 of 10 ( Start time: 10:18:51 AM ) Total Marks: 1 How dividend yield on a stock is similar to the current yield on a bond? Select correct option: Both represent how much each securitys price will increase in a year Both represent the securitys 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 are quarterly yields that must be annualized The statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? Select correct option: Operating, investing, and financing Investing, operating, and financing Financing, operating and investing Financing, investing, and operating Question # 8 of 10 ( Start time: 10:20:54 AM ) Total Marks: 1 Which of the following formula relates beta of the stock to the standard deviation? Select correct option: Covariance of stock with market * variance of the market Covariance of stock with market / variance of the market Variance of the market / Covariance of stock with market Slope of the regression line Question # 9 of 10 ( Start time: 10:21:39 AM ) Total Marks: 1 Which of the following is the maximum amount of debt (and other fixed-charge financing) that a firm can adequately service? Select correct option:
Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden What is the easiest method to diversify away firm-specific risks? Select correct option: To buy stocks with a beta of 1.0 To build a portfolio with 5-10 individual stocks To purchase the shares of a mutual fund To purchase stocks that plot above the security market line
Question # 1 of 10 Which of the following costs would be considered a fixed cost? Select correct option:
Raw materials Depreciation Bad-debt losses Production labor
Question # 2 of 10 Expected Portfolio Return = ___________. Select correct option:
Question # 3 of 10 Why markets and market returns fluctuate? Select correct option:
Question # 4 of 10 Which of the following can be used to calculate the risk of the larger portfolio? Select correct option:
Question # 5 of 10 Which of the following market in finance is referred to the market for short-term government and corporate debt securities? Select correct option: http://vustudents.ning.com
Question # 6 of 10 Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option:
Cash outflow to the government for taxes
Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
Question # 8 of 10 A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information
Question # 9 of 10 Which of the following is correct regarding the opportunity cost of capital for a project? Select correct option: The opportunity cost of capital is the return that investors give up by investing in the project rather than in securities of equivalent risk. Financial managers use the capital asset pricing model to estimate the opportunity cost of capital The company cost of capital is the expected rate of return demanded by investors in a company All of the given options
1. type of risk is avoidable through proper diversification.
portfolio risk systematic risk unsystematic risk total risk
2. A statistical measure of the degree to which two variables (e.g., securities' returns) move together.
coefficient of variation variance covariance certainty equivalent
3. An "aggressive" common stock would have a "beta"
equal to zero. greater than one. equal to one. less than one.
4. A line that describes the relationship between an individual security's returns and returns on the market portfolio.
characteristic line security market line capital market line beta
5. According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal to the risk-free rate plus a premium
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equal to the security's beta. based on the unsystematic risk of the security. based on the total risk of the security. based on the systematic risk of the security.
6. The risk-free security has a beta equal to, while the market portfolio's beta is equal to . one; more than one. one; less than one. zero; one. less than zero; more than zero.
7. Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than the gamble's expected value. Carrie shows
risk aversion. risk preference. risk indifference. a strange outlook on life.
8. Beta is the slope of
the security market line. the capital market line. a characteristic line. the CAPM.
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9. A measure of "risk per unit of expected return."
standard deviation coefficient of variation correlation coefficient beta
10. The greater the beta, the
of the security involved.
greater the unavoidable risk greater the avoidable risk less the unavoidable risk less the avoidable risk
11. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be, and the required return on Acme's common stock should be .
3.6 percent; 7.2 percent 9.6 percent; 13.2 percent 9.0 percent; 18.0 percent 14.0 percent; 23.0 percent
12. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The market beta is, of course, 1.00 and the beta of the industry of which the
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company is a part is 1.10. If Merrill Lych were to calculate an "adjusted beta" for Espinosa's common stock, that adjusted beta would most likely be
less than 0.75 more than 0.75, but less than 1.10 equal to 1.10 equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}
Question # 1 of 10 ( Start time: 06:51:11 PM ) Total Marks: 1 Total portfolio risk is a combination of: Select correct option: Systematic risk plus non-diversifiable risk Avoidable risk plus diversifiable risk Systematic risk plus unavoidable risk Systematic risk plus diversifiable risk Question # 2 of 10 ( Start time: 06:52:39 PM ) Total Marks: 1 For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure? Select correct option: Cost of debt Cost of preferred stock Cost of common equity Cost of retained earnings Question # 3 of 10 ( Start time: 06:53:57 PM ) Total Marks: 1 Which of the following techniques would be used for a project that has nonnormal cash flows? Select correct option: Internal rate of return Multiple internal rate of return Modified internal rate of return Net present value
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Question # 4 of 10 ( Start time: 06:55:09 PM ) Total Marks: 1 An annuity due is always worth _____ a comparable annuity. Select correct option: http://vustudents.ning.com Less than More than Equal to Can not be found from the given information Question # 5 of 10 ( Start time: 06:56:21 PM ) Total Marks: 1 Calculate the break-even point for sales revenues given the following information. The firm has Rs.1, 000,000 in fixed costs. The firm anticipates that variable costs will be Rs.1 for every Rs.5 in sales. Select correct option: Rs.1, 250,000 Rs.1, 000,000 Rs.250, 000 Rs.200, 000 Question # 6 of 10 ( Start time: 06:57:49 PM ) Total Marks: 1 If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows? Select correct option: An increase A decrease No change Incomplete information Question # 7 of 10 ( Start time: 06:59:08 PM ) Total Marks: 1 Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option: (Q - QBE)/Q (EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC]
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Question # 8 of 10 ( Start time: 07:00:36 PM ) Total Marks: 1 Who determine the market price of a share of common stock? Select correct option: The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the stock Question # 9 of 10 ( Start time: 07:02:01 PM ) Total Marks: 1 When the bond approaches its maturity, the market value of the bond approaches to which of the following? Select correct option: Intrinsic value Book value Par value Historic cost Question # 10 of 10 ( Start time: 07:03:25 PM ) Total Marks: 1 Which of the following portfolio statistics statements is correct? Select correct option: 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 # 1 of 10 ( Start time: 07:18:32 PM ) Total Marks: 1 What is the most important criteria in capital budgeting? Select correct option: Return on investment Profitability index Net present value Pay back period
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Question # 2 of 10 ( Start time: 07:19:54 PM ) Total Marks: 1 Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio Question # 3 of 10 ( Start time: 07:21:02 PM ) Total Marks: 1 What is the expected return of a zero-beta security? Select correct option: The risk-free rate Zero rate of return A negative rate of return The market rate of return Question # 4 of 10 ( Start time: 07:22:15 PM ) Total Marks: 1 The objective of financial management is to maximize _________ wealth. Select correct option: Stakeholders Shareholders Bondholders Directors Question # 5 of 10 ( Start time: 07:22:54 PM ) Total Marks: 1 Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option: (Q - QBE)/Q (EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC] Question # 6 of 10 ( Start time: 07:23:14 PM ) Total Marks: 1 Which of the following is a capital budgeting technique that is NOT considered as discounted cash flow method?
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Select correct option: Payback period Internal rate of return Net present value Profitability index Question # 7 of 10 ( Start time: 07:24:41 PM ) Total Marks: 1 When taxes are considered, the value of a levered firm equals the value of the________. Select correct option: Unlevered firm Unlevered firm plus the value of the debt Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield Question # 8 of 10 ( Start time: 07:25:51 PM ) Total Marks: 1 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. Select correct option: Indirect relationship Inverse relationship Direct relationship No relationship Question # 10 of 10 ( Start time: 07:28:23 PM ) Total Marks: 1 At the termination of project, which of the following needs to be considered relating to project assets? Select correct option: Salvage value Book value Intrinsic value Fair value Question # 1 of 10 ( Start time: 07:32:00 PM ) Total Marks: 1 What is the most important criteria in capital budgeting? Select correct option:
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Return on investment Profitability index Net present value Pay back period Question # 2 of 10 ( Start time: 07:32:37 PM ) Total Marks: 1 If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option: 0 0.5 1 -1
Question # 3 of 10 ( Start time: 07:34:01 PM ) Total Marks: 1 What is yield to maturity on a bond? Select correct option: http://vustudents.ning.com 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 Based on the assumption that any payments received are reinvested at the coupon rate None of the above Question # 4 of 10 ( Start time: 07:34:47 PM ) Total Marks: 1 Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option: Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden Question # 5 of 10 ( Start time: 07:35:59 PM ) Total Marks: 1 Which of the following is the maximum amount of debt (and other fixed-charge financing) that a firm can adequately service? Select correct option:
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Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden Question # 6 of 10 ( Start time: 07:37:32 PM ) Total Marks: 1 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%? Select correct option: Rs.105,000 Rs.1,500,000 Rs.3975,000 Rs.1,050 Question # 7 of 10 ( Start time: 07:39:00 PM ) Total Marks: 1 If 2 stocks move in the same direction together then what will be the correlation coefficient? Select correct option: 0 1.0 -1.0 1.5 Question # 8 of 10 ( Start time: 07:39:54 PM ) Total Marks: 1 Why a single, overall cost of capital is often used to evaluate projects? Select correct option: It avoids the problem of computing the required rate of return for each investment Proposal It is the only way to measure a firm's required return It acknowledges that most new investment projects have about the same degree of risk It acknowledges that most new investment projects offer about the same expected return Question # 9 of 10 ( Start time: 07:40:38 PM ) Total Marks: 1 Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An
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increase in the required return on a stock will decrease its market value, all else the same. Select correct option: I, II, and III I only III only II and III only Question # 10 of 10 ( Start time: 07:42:12 PM ) Total Marks: 1 Which of the following is correct, if a firm has a required rate of return equal to the ROE? Select correct option: 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 # 1 of 10 ( Start time: 08:27:20 PM ) Total Marks: 1 Which of the following shows ALL possible Risk Return combinations for All combinations of the stocks in the portfolio- whether efficient or not. Select correct option:
Parachute graph Capital market line Security market line All of the given options
Question # 2 of 10 ( Start time: 08:28:39 PM ) Total Marks: 1 Which of the following factors might affect stock returns? Select correct option:
Business cycle Interest rate fluctuations Inflation rates All of the above
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Question # 3 of 10 ( Start time: 08:29:27 PM ) Total Marks: 1 The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as __________. Select correct option:
Probability distribution Expected return Standard deviation Coefficient of variation Question # 4 of 10 ( Start time: 08:30:05 PM ) Total Marks: 1 Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option:
(Q - QBE)/Q (EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC]
Question # 5 of 10 ( Start time: 08:31:26 PM ) Total Marks: 1 Which of the following is as EBIT? Select correct option:
Funds provided by operations Earnings before taxes Net income Operating profit Question # 6 of 10 ( Start time: 08:32:27 PM ) Total Marks: 1 Total portfolio risk is a combination of: Select correct option:
Systematic risk plus non-diversifiable risk Avoidable risk plus diversifiable risk Systematic risk plus unavoidable risk Systematic risk plus diversifiable risk
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Question # 7 of 10 ( Start time: 08:33:44 PM ) Total Marks: 1 In which of the following approach you need to bring all the projects to the same length in time? Select correct option:
MIRR approach Going concern approach Common life approach Equivalent annual approach
Question # 8 of 10 ( Start time: 08:34:44 PM ) Total Marks: 1 Which of the following is NOT the form of cash flow generated by the investments of the shareholders? Select correct option: http://vustudents.ning.com
Income Capital loss Capital gain Operating income
Question # 9 of 10 ( Start time: 08:35:25 PM ) Total Marks: 1 What are two major areas of capital budgeting? Select correct option:
Net present value, profitability index Net present value; internal rate of return Net present value; payback period Pay back period; profitability index
Question # 10 of 10 ( Start time: 08:36:30 PM ) Total Marks: 1 What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? Select correct option:
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Indenture Debenture Bond Bond trustee
Question # 1 of 10 ( Start time: 11:08:17 PM ) Total Marks: 1 Which of the following factors might affect stock returns? Select correct option:
Question # 2 of 10 ( Start time: 11:09:10 PM ) Total Marks: 1 Which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option:
Depreciation Sunk cost Opportunity cost Non-cash item
Question # 3 of 10 ( Start time: 11:10:24 PM ) Total Marks: 1 Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following?
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Select correct option:
Life span of the project Validity of the project Cost of the capital Return on asset
Question # 4 of 10 ( Start time: 11:10:57 PM ) Total Marks: 1 Which of the following is correct, if a firm has a required rate of return equal to the ROE? Select correct option:
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 # 5 of 10 ( Start time: 11:11:40 PM ) Total Marks: 1 Which of the following is related to the use Lower financial leverage? Select correct option:
Fixed costs Variable costs Debt financing Common equity financing
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Question # 6 of 10 ( Start time: 11:12:21 PM ) Total Marks: 1 The overall (weighted average) cost of capital is composed of weighted averages of which of the following? Select correct option:
The cost of common equity and the cost of debt The cost of common equity and the cost of preferred stock The cost of preferred stock and the cost of debt The cost of common equity, the cost of preferred stock, and the cost of debt
Question # 7 of 10 ( Start time: 11:12:54 PM ) Total Marks: 1 Who determine the market price of a share of common stock? Select correct option:
The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the stock
Question # 8 of 10 ( Start time: 11:13:38 PM ) Total Marks: 1 Which groups of ratios measures a firm's ability to meet short-term obligations? Select correct option:
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Liquidity ratios Debt ratios Coverage ratios Profitability ratios
Question # 9 of 10 ( Start time: 11:13:58 PM ) Total Marks: 1 _________ is equal to (common shareholders' equity/common shares outstanding). Select correct option: http://vustudents.ning.com
Book value per share Liquidation value per share Market value per share None of the above
Question # 10 of 10 ( Start time: 11:14:16 PM ) Total Marks: 1 Where the efficient stock combination of risk and return in efficient market should lie? Select correct option:
On the SML Below the SML Above the SML It may lie anywhere for efficient combination
Question # 1 of 15 ( Start time: 12:09:58 AM ) Total Marks: 1
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An annuity due is always worth _____ a comparable annuity. Select correct option:
Less than More than Equal to Can not be found from the given information
Question # 2 of 15 ( Start time: 12:11:10 AM ) Total Marks: 1 Where the stock points will lie, if a stock is a part of totally diversified portfolio? Select correct option:
It will lie below the regression line It will line above the regression line It will line exactly on the regression line It will be tangent to the regression line
Question # 3 of 15 ( Start time: 12:11:47 AM ) Total Marks: 1 What is the easiest method to diversify away firm-specific risks? Select correct option:
To buy stocks with a beta of 1.0 To build a portfolio with 5-10 individual stocks To purchase the shares of a mutual fund To purchase stocks that plot above the security market line
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Question # 4 of 15 ( Start time: 12:12:23 AM ) Total Marks: 1 Nominal Interest Rate is also known as: Select correct option:
Effective interest Rate Annual percentage rate Periodic interest rate Required interest rate
Question # 5 of 15 ( Start time: 12:13:02 AM ) Total Marks: 1 When taxes are considered, the value of a levered firm equals the value of the________. Select correct option:
Unlevered firm Unlevered firm plus the value of the debt Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield
Question # 6 of 15 ( Start time: 12:14:15 AM ) Total Marks: 1 The __________ the coefficient of variation ________ the relative risk of the investment. Select correct option:
Larger; Larger Larger; Smaller
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Smaller; Larger Smaller; Smaller
Question # 7 of 15 ( Start time: 12:15:05 AM ) Total Marks: 1 Which of the following is correct regarding the opportunity cost of capital for a project? Select correct option:
Question # 8 of 15 ( Start time: 12:15:46 AM ) Total Marks: 1 For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure? Select correct option:
Cost of debt Cost of preferred stock Cost of common equity Cost of retained earnings
Question # 9 of 15 ( Start time: 12:16:51 AM ) Total Marks: 1 What is difference between shares and bonds?
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Bonds are representing ownership whereas shares are not Shares are representing ownership whereas bonds are not Shares and bonds both represent equity Shares and bond both represent liabilities
Question # 10 of 15 ( Start time: 12:17:16 AM ) Total Marks: 1 Which of the followings expressed the proposition that the cost of equity is a positive linear function of capital structure? Select correct option:
The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price
Question # 11 of 15 ( Start time: 12:17:57 AM ) Total Marks: 1 The current yield on a bond is equal to ________. Select correct option:
Annual interest divided by the current market price The yield to maturity Annual interest divided by the par value The internal rate of return
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Question # 12 of 15 ( Start time: 12:18:40 AM ) Total Marks: 1 When a bond will sell at a discount? Select correct option:
The coupon rate is greater than the current yield and the current yield is greater than yield to maturity The coupon rate is greater than yield to maturity The coupon rate is less than the current yield and the current yield is greater than the yield to maturity The coupon rate is less than the current yield and the current yield is less than yield to maturity
Question # 13 of 15 ( Start time: 12:19:17 AM ) Total Marks: 1 Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option:
Question # 14 of 15 ( Start time: 12:19:31 AM ) Total Marks: 1 What are the Direct claim securities? Select correct option: http://vustudents.ning.com
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The securities whose value depends on the cash flows generated by the underlying assets The securities whose value depends on the value of the underlying assets The securities that do not directly generate any returns for its investors All of the given options
Question # 15 of 15 ( Start time: 12:20:16 AM ) Total Marks: 1 Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following? Select correct option:
Life span of the project Cost of the capital Return on asset None of the given options
Question # 2 of 15 ( Start time: 12:31:43 AM ) Total Marks: 1 In the dividend discount model, _____ which of the following are not incorporated into the discount rate? Select correct option: Real risk-free rate Risk premium for stocks Return on assets Expected inflation rate
Question # 3 of 15 ( Start time: 12:32:17 AM ) Total Marks: 1 Which of the following could NOT be defined as the capital structure of the Company? Select correct option: The firm's mix of Assets and liabilities
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The firm's common stocks only The firm's debt-equity ratio All of the given options
Question # 4 of 15 ( Start time: 12:32:41 AM ) Total Marks: 1 An implicit cost of adding debt to the capital structure is that it: Select correct option: Adds interest expense to the operating statement Increases the required return on equity Reduces the expected return on assets Decreases the firm's beta
Question # 5 of 15 ( Start time: 12:33:07 AM ) Total Marks: 1 Why common stock of a company must provide a higher expected return than the debt of the same company? Select correct option: There is less demand for stock than for bonds There is greater demand for stock than for bonds There is more systematic risk involved for the common stock There is a market premium required for bonds
Question # 6 of 15 ( Start time: 12:33:38 AM ) Total Marks: 1 Which of the following is NOT an example of hybrid equity Select correct option: Convertible Bonds Convertible Debenture Common shares Preferred shares
Question # 7 of 15 ( Start time: 12:34:11 AM ) Total Marks: 1 A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred to as ________. Select correct option:
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Probability distribution The expected return The standard deviation Coefficient of variation
Question # 8 of 15 ( Start time: 12:34:40 AM ) Total Marks: 1 Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. Select correct option: I, II, and III I only III only II and III only
Question # 9 of 15 ( Start time: 12:35:13 AM ) Total Marks: 1 If 2 stocks move in the same direction together then what will be the correlation coefficient? Select correct option: 0 1.0 -1.0 1.5
Question # 10 of 15 ( Start time: 12:35:38 AM ) Total Marks: 1 Total portfolio risk is ________. Select correct option: 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
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Question # 11 of 15 ( Start time: 12:36:02 AM ) Total Marks: 1 Which of the following is related to the use Lower financial leverage? Select correct option: http://vustudents.ning.com Fixed costs Variable costs Debt financing Common equity financing
Question # 12 of 15 ( Start time: 12:36:28 AM ) Total Marks: 1 The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as ________. Select correct option: Probability distribution Expected return Standard deviation Coefficient of variation
Question # 13 of 15 ( Start time: 12:36:56 AM ) Total Marks: 1 The value of direct claim security is derived from which of the following? Select correct option: Fundamental analysis Underlying real asset Supply and demand of securities in the market All of the given options
Question # 14 of 15 ( Start time: 12:37:22 AM ) Total Marks: 1 What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Select correct option: The price should increase by the amount of the dividend The price should decrease by the amount of the dividend
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The price should decrease by one-half the amount of the dividend The price should remain constant
Question # 15 of 15 ( Start time: 12:38:07 AM ) Total Marks: 1 Which of the following would express the negative net worth of a firm? Select correct option: Experiencing a business failure In legal bankruptcy Experiencing technical insolvency Experiencing accounting insolvency
Question # 1 of 15 ( Start time: 12:43:28 AM ) Total Marks: 1 Which of the following is NOT the type of Hybrid organizations? Select correct option: S-Type Corporation Limited Liability Partnership Sole Proprietorship Professional Corporation
Question # 2 of 15 ( Start time: 12:44:16 AM ) Total Marks: 1 Which of the following costs would be considered a fixed cost? Select correct option: Raw materials Depreciation Bad-debt losses Production labor
Question # 3 of 15 ( Start time: 12:44:39 AM ) Total Marks: 1 What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? Select correct option: Indenture
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Debenture Bond Bond trustee
Question # 4 of 15 ( Start time: 12:45:03 AM ) Total Marks: 1 Which of the following is related to the use Lower financial leverage? Select correct option: Fixed costs Variable costs Debt financing Common equity financing
Question # 5 of 15 ( Start time: 12:45:30 AM ) Total Marks: 1 Which of the following is similar between Return on investment and Payback period techniques of Capital budgeting? Select correct option: Involvement of interest rate while making calculations Do not account for time value of money Tricky and complicated methods All of the given options
Question # 6 of 15 ( Start time: 12:45:59 AM ) Total Marks: 1 Which of the following statements regarding covariance is correct? Select correct option: 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 covariances among returns for different securities leads to high portfolio risk Covariances can take on positive, negative, or zero values
Question # 7 of 15 ( Start time: 12:46:26 AM ) Total Marks: 1 How dividend yield on a stock is similar to the current yield on a bond? Select correct option:
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Both represent how much each securitys price will increase in a year Both represent the securitys 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 are quarterly yields that must be annualized
Question # 8 of 15 ( Start time: 12:47:14 AM ) Total Marks: 1 If 2 stocks move in the same direction together then what will be the correlation coefficient? Select correct option: 0 1.0 -1.0 1.5
Question # 9 of 15 ( Start time: 12:47:38 AM ) Total Marks: 1 Which of the followings expressed the proposition that the cost of equity is a positive linear function of capital structure? Select correct option: The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price
Question # 10 of 15 ( Start time: 12:49:05 AM ) Total Marks: 1 _______ means expanding the number of investments which cover different kinds of stocks. Select correct option: Diversification Standard deviation Variance Covariance
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Question # 11 of 15 ( Start time: 12:49:41 AM ) Total Marks: 1 An implicit cost of adding debt to the capital structure is that it: Select correct option: Adds interest expense to the operating statement Increases the required return on equity Reduces the expected return on assets Decreases the firm's beta
Question # 13 of 15 ( Start time: 12:50:41 AM ) Total Marks: 1 Where there is single period capital rationing, what is the most sensible way of making investment decisions? Select correct option: 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 # 14 of 15 ( Start time: 12:51:15 AM ) Total Marks: 1 Which of the following is not a recognized approach for determining the cost of equity? Select correct option: Dividend discount model approach Before-tax cost of preferred stock plus risk premium approach
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Capital-asset pricing model approach Before-tax cost of debt plus risk premium approach
Question # 15 of 15 ( Start time: 12:52:03 AM ) Total Marks: 1 Which of the following is the characteristic of a well diversified portfolio? Select correct option: Its market risk is negligible Its unsystematic risk is negligible Its systematic risk is negligible All of the given options
Question # 1 of 15 ( Start time: 12:55:10 AM ) Total Marks: 1 Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option: Cash outflow to the government for taxes Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
Question # 2 of 15 ( Start time: 12:55:39 AM ) Total Marks: 1 Which of the following is an example of restructuring the firm? Select correct option: Dividends are increased from Rs.1 to Rs.2 per share A new investment increases the firm's business risk New equity is issued and the proceeds repay debt A new Board of Directors is elected to the firm
Question # 3 of 15 ( Start time: 12:56:20 AM ) Total Marks: 1 The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you deposit Rs.20, 000 you would expect to earn around ________ in interest. Select correct option:
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Rs.840 Rs.858 Rs.1,032 Rs.1,121
Question # 5 of 15 ( Start time: 12:57:23 AM ) Total Marks: 1 Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio
Question # 6 of 15 ( Start time: 12:57:53 AM ) Total Marks: 1 Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option: http://vustudents.ning.com Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden
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Question # 7 of 15 ( Start time: 12:58:21 AM ) Total Marks: 1 ______ are also known as Spontaneous Financing. Select correct option: Current liabilities Current assets Fixed assets Long-term liabilities
Question # 8 of 15 ( Start time: 12:58:48 AM ) Total Marks: 1 Which of the following is NOT the type of Hybrid organizations? Select correct option: S-Type Corporation Limited Liability Partnership Sole Proprietorship Professional Corporation
Question # 9 of 15 ( Start time: 12:59:12 AM ) Total Marks: 1 Which of the following factors might affect stock returns? Select correct option: Business cycle Interest rate fluctuations Inflation rates All of the above
Question # 10 of 15 ( Start time: 12:59:37 AM ) Total Marks: 1 Which of the following is/are the characteristic(s) of Perpetuity? Select correct option: It is an annuity It has no definite end It is a constant stream of identical cash flows All of the given options
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Question # 11 of 15 ( Start time: 01:00:09 AM ) Total Marks: 1 A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Select correct option: Payback period Internal rate of return Net present value Profitability index
Question # 12 of 15 ( Start time: 01:00:45 AM ) Total Marks: 1 Choose among the followings, the correct statement regarding every journal entry. Select correct option: Sum of Debits = Sum of Credits Sum of Debits >Sum of Credits Sum of Debits < Sum of Credits None of the given options
Question # 13 of 15 ( Start time: 01:01:11 AM ) Total Marks: 1 Which of the following is NOT a cash outflow for the firm? Select correct option: Depreciation Dividends Interest Taxes
Question # 14 of 15 ( Start time: 01:01:42 AM ) Total Marks: 1 Which of the following formula relates beta of the stock to the standard deviation? Select correct option: Covariance of stock with market * variance of the market Covariance of stock with market / variance of the market Variance of the market / Covariance of stock with market Slope of the regression line
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Question # 15 of 15 ( Start time: 01:02:44 AM ) Total Marks: 1 Which of the following is/are the component(s) of working capital management? Select correct option: Current assets Fixed assets Fixed assets and long-term liabilities Current assets and current liabilities
Question # 1 of 15 ( Start time: 01:08:11 AM ) Total Marks: 1 Where there is single period capital rationing, what is the most sensible way of making investment decisions? Select correct option: 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 # 2 of 15 ( Start time: 01:08:30 AM ) Total Marks: 1 Which of the following affects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options
Question # 3 of 15 ( Start time: 01:09:06 AM ) Total Marks: 1 Why a single, overall cost of capital is often used to evaluate projects? Select correct option: It avoids the problem of computing the required rate of return for each investment Proposal It is the only way to measure a firm's required return
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It acknowledges that most new investment projects have about the same degree of risk It acknowledges that most new investment projects offer about the same expected return
Question # 4 of 15 ( Start time: 01:10:30 AM ) Total Marks: 1 Security market line gives the relationship between _____ and _______. Select correct option: Market risk and the required return Systematic risk and the required return Non-diversified risk and the required return All of the given options
Question # 5 of 15 ( Start time: 01:11:00 AM ) Total Marks: 1 Above the breakeven EBIT, increased financial leverage will ________ EPS, all else the same. Assume there are no taxes Select correct option: Increase Decrease Either increase or decrease None of the given options
Question # 6 of 15 ( Start time: 01:11:40 AM ) Total Marks: 1 A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _______. Select correct option: An anticipated earnings growth rate which is less than that of the average firm A dividend yield which is less than that of the average firm Less predictable earnings growth than that of the average firm Greater cyclicality of earnings growth than that of the average firm
Question # 7 of 15 ( Start time: 01:12:59 AM ) Total Marks: 1 Which of the following is the cash required during a specific period to meet interest expenses and principal payments?
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Select correct option: Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden
Question # 8 of 15 ( Start time: 01:13:54 AM ) Total Marks: 1 ______ are also known as Spontaneous Financing. Select correct option: Current liabilities Current assets Fixed assets Long-term liabilities
Question # 9 of 15 ( Start time: 01:14:29 AM ) Total Marks: 1 When taxes are considered, the value of a levered firm equals the value of the______. Select correct option: http://vustudents.ning.com Unlevered firm Unlevered firm plus the value of the debt Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield
Question # 10 of 15 ( Start time: 01:14:58 AM ) Total Marks: 1 The ________ the coefficient of variation ______ the relative risk of the investment. Select correct option: Larger; Larger Larger; Smaller Smaller; Larger Smaller; Smaller
Question # 11 of 15 ( Start time: 01:15:20 AM ) Total Marks: 1 Which of the following is NOT a cash outflow for the firm?
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Select correct option: Depreciation Dividends Interest Taxes
Question # 12 of 15 ( Start time: 01:15:39 AM ) Total Marks: 1 Which of the following costs would be considered a fixed cost? Select correct option: Raw materials Depreciation Bad-debt losses Production labor
Question # 13 of 15 ( Start time: 01:16:04 AM ) Total Marks: 1 Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, __________. Select correct option: Both bonds will increase in value, but bond A will increase more than bond B Both bonds will increase in value, but bond B will increase more than bond A Both bonds will decrease in value, but bond A will decrease more than bond B Both bonds will decrease in value, but bond B will decrease more than bond A
Question # 14 of 15 ( Start time: 01:16:51 AM ) Total Marks: 1 Coefficient of variation is NOT the measure of ________. Select correct option: Risk Probability Relative dispersion Risk per unit of expected return
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Question # 15 of 15 ( Start time: 01:18:02 AM ) Total Marks: 1 The value of a bond is directly derived from which of the following? Select correct option: Cash flows Coupon receipts Par recovery at maturity All of the given options
Question # 1 of 15 ( Start time: 01:20:44 AM ) Total Marks: 1 Which of the following is as EBIT? Select correct option: Funds provided by operations Earnings before taxes Net income Operating profit
Question # 2 of 15 ( Start time: 01:21:10 AM ) Total Marks: 1 What is the difference between economic profit and accounting profit? Select correct option: Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt Economic profit covers the profit over the life of the firm, while accounting profit only covers the most recent accounting period Accounting profit is based on current accepted accounting rules while economic profit is based on cash flows All of the given options are correct
Question # 3 of 15 ( Start time: 01:21:52 AM ) Total Marks: 1 The overall (weighted average) cost of capital is composed of weighted averages of which of the following? Select correct option: The cost of common equity and the cost of debt The cost of common equity and the cost of preferred stock
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The cost of preferred stock and the cost of debt The cost of common equity, the cost of preferred stock, and the cost of debt
Question # 4 of 15 ( Start time: 01:22:32 AM ) Total Marks: 1 Which of the following refers to bringing the future cash flow to the present time? Select correct option: Net present value Discounting Opportunity cost Internal rate of return
Question # 5 of 15 ( Start time: 01:23:06 AM ) Total Marks: 1 What is the traditional approach towards the valuation of a company? Select correct option: The cost of capital is independent of the capital structure of the firm The firm maintains constant risk regardless of the type of financing employed There exists no optimal capital structure That management can increase the total value of the firm through the judicious use of financial leverage
Question # 6 of 15 ( Start time: 01:24:32 AM ) Total Marks: 1 Security market line gives the relationship between _____ and _______. Select correct option: Market risk and the required return Systematic risk and the required return Non-diversified risk and the required return All of the given options
Question # 7 of 15 ( Start time: 01:25:02 AM ) Total Marks: 1 Nominal Interest Rate is also known as: Select correct option: http://vustudents.ning.com Effective interest Rate
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Annual percentage rate Periodic interest rate Required interest rate
Question # 9 of 15 ( Start time: 01:26:10 AM ) Total Marks: 1 What is the expected return of a zero-beta security? Select correct option: The risk-free rate Zero rate of return A negative rate of return The market rate of return
Question # 10 of 15 ( Start time: 01:27:19 AM ) Total Marks: 1 What is yield to maturity on a bond? Select correct option: 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 Based on the assumption that any payments received are reinvested at the coupon rate None of the above
Question # 11 of 15 ( Start time: 01:27:48 AM ) Total Marks: 1 What is the present value of Rs.8,000 to be paid at the end of three years if interest rate
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is 11%? Select correct option: Rs.6,015 Rs.4,872 Rs.6,725 Rs.1,842
Question # 12 of 15 ( Start time: 01:28:08 AM ) Total Marks: 1 ______ is paid by companies with lower grade bonds like CC or C ratings. Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Question # 13 of 15 ( Start time: 01:28:43 AM ) Total Marks: 1 If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows? Select correct option: An increase A decrease No change Incomplete information
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Question # 15 of 15 ( Start time: 01:29:53 AM ) Total Marks: 1 What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option: Long-term debt Preferred stock Common stock None of the given options
Question # 2 of 15 ( Start time: 01:33:23 AM ) Total Marks: 1 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? Select correct option: Rs. 250.44 Rs. 231.91 Rs.181.62 Rs.184.08
Question # 3 of 15 ( Start time: 01:33:49 AM ) Total Marks: 1 A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred to as ________. Select correct option: Probability distribution The expected return
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The standard deviation Coefficient of variation
Question # 4 of 15 ( Start time: 01:34:17 AM ) Total Marks: 1 For most firms, P/E ratios and risk_______. Select correct option: Will be directly related Will have an inverse relationship Will be unrelated None of the above.
Question # 5 of 15 ( Start time: 01:34:43 AM ) Total Marks: 1 Which of the following is the expected cash dividend that is normally paid to shareholders? Select correct option: Stock split Stock dividend Extra dividend Regular dividend
Question # 6 of 15 ( Start time: 01:35:25 AM ) Total Marks: 1 In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas? Select correct option: Common stock Debt Preferred stock None of the above
Question # 7 of 15 ( Start time: 01:35:55 AM ) Total Marks: 1 Which of the following is NOT an example of a financial intermediary? Select correct option:
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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 # 8 of 15 ( Start time: 01:36:18 AM ) Total Marks: 1 Which of the following stipulate a relationship between expected return and risk? Select correct option: http://vustudents.ning.com APT stipulates CAPM stipulates Both CAPM and APT stipulate Neither CAPM nor APT stipulate
Question # 10 of 15 ( Start time: 01:36:59 AM ) Total Marks: 1 How "Shareholder wealth" is represented in a firm? Select correct option: The number of people employed in the firm The book value of the firm's assets less the book value of its liabilities The market price per share of the firm's common stock The amount of salary paid to its employees
Question # 11 of 15 ( Start time: 01:37:30 AM ) Total Marks: 1 The stock in your portfolio was selling for Rs.40 per share yesterday, but has today declared a three for two split. Which of the following statements seems to be true? Select correct option:
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There will be two-thirds as many shares outstanding, and they will sell for Rs.60.00 each There will be four times as many shares outstanding, and they will sell for Rs.160.00 each There will be 50 percent more shares outstanding and they will sell for Rs.26.67 each There will be one-and-one-half times as many shares outstanding, and they will sell for Rs.60.00 each
Question # 12 of 15 ( Start time: 01:38:17 AM ) Total Marks: 1 Which of the following refers to bringing the future cash flow to the present time? Select correct option: Net present value Discounting Opportunity cost Internal rate of return
Question # 13 of 15 ( Start time: 01:38:41 AM ) Total Marks: 1 For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure? Select correct option: Cost of debt Cost of preferred stock Cost of common equity Cost of retained earnings
Question # 14 of 15 ( Start time: 01:39:17 AM ) Total Marks: 1 How the beta of the stock could be calculated? Select correct option: By monitoring price of the stock By monitoring rate of return of the stock By comparing the changes in the stock market price to the changes in the stock market index All of the given options
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Question # 15 of 15 ( Start time: 01:39:42 AM ) Total Marks: 1 Which of the following refers to the cost of taking up one option while sacrificing the other? Select correct option: Opportunity cost Operating cost Sunk cost Floatation cost
Question # 1 of 15 ( Start time: 01:41:55 AM ) Total Marks: 1 Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio
Question # 2 of 15 ( Start time: 01:42:44 AM ) Total Marks: 1 What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Select correct option: The price should increase by the amount of the dividend The price should decrease by the amount of the dividend The price should decrease by one-half the amount of the dividend The price should remain constant Question # 3 of 15 ( Start time: 01:43:30 AM ) Total Marks: 1 The overall (weighted average) cost of capital is composed of weighted averages of which of the following? Select correct option: The cost of common equity and the cost of debt The cost of common equity and the cost of preferred stock The cost of preferred stock and the cost of debt The cost of common equity, the cost of preferred stock, and the cost of debt
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Question # 4 of 15 ( Start time: 01:44:11 AM ) Total Marks: 1 Which of the following stipulate a relationship between expected return and risk? Select correct option: APT stipulates CAPM stipulates Both CAPM and APT stipulate Neither CAPM nor APT stipulate Question # 5 of 15 ( Start time: 01:44:36 AM ) Total Marks: 1 Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option: (Q - QBE)/Q (EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC] Question # 6 of 15 ( Start time: 01:45:03 AM ) Total Marks: 1 _______ means expanding the number of investments which cover different kinds of stocks. Select correct option: Diversification Standard deviation Variance Covariance Question # 7 of 15 ( Start time: 01:45:28 AM ) Total Marks: 1 Which of the following is related to the use of higher operating leverage? Select correct option: Fixed costs Variable costs Debt financing Common equity financing Question # 8 of 15 ( Start time: 01:46:01 AM ) Total Marks: 1 Nominal Interest Rate is also known as:
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Select correct option: Effective interest Rate Annual percentage rate Periodic interest rate Required interest rate Question # 9 of 15 ( Start time: 01:46:27 AM ) Total Marks: 1 Which statement is NOT true regarding the market portfolio? Select correct option: It includes all publicly traded financial assets It is the tangency point between the capital market line and the indifference curve All securities in the market portfolio are held in proportion to their market values It lies on the efficient frontier Question # 10 of 15 ( Start time: 01:47:18 AM ) Total Marks: 1 Who determine the market price of a share of common stock? Select correct option: The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the stock Question # 11 of 15 ( Start time: 01:47:53 AM ) Total Marks: 1 Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following? Select correct option: Life span of the project Cost of the capital Return on asset None of the given options Question # 12 of 15 ( Start time: 01:48:19 AM ) Total Marks: 1 When the zero coupon bond approaches to its maturity, the market value of the bond approaches to which of the following? http://vustudents.ning.com Select correct option: Intrinsic value
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Book value Par value Historic cost Question # 13 of 15 ( Start time: 01:48:54 AM ) Total Marks: 1 Which of the following would express the negative net worth of a firm? Select correct option: Experiencing a business failure In legal bankruptcy Experiencing technical insolvency Experiencing accounting insolvency Question # 14 of 15 ( Start time: 01:49:35 AM ) Total Marks: 1 If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option: 0 0.5 1 -1 Question # 15 of 15 ( Start time: 01:50:30 AM ) Total Marks: 1 Choose among the followings, the correct statement regarding every journal entry. Select correct option: Sum of Debits = Sum of Credits Sum of Debits >Sum of Credits Sum of Debits < Sum of Credits None of the given options Question # 1 of 15 ( Start time: 01:51:32 AM ) Total Marks: 1 Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option:
Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden
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Question # 2 of 15 ( Start time: 01:51:59 AM ) Total Marks: 1 Nominal Interest Rate is also known as: Select correct option:
Question # 3 of 15 ( Start time: 01:52:42 AM ) Total Marks: 1 http://vustudents.ning.com The stock in your portfolio was selling for Rs.40 per share yesterday, but has today declared a three for two split. Which of the following statements seems to be true? Select correct option: There will be two-thirds as many shares outstanding, and they will sell for Rs.60.00 each There will be four times as many shares outstanding, and they will sell for Rs.160.00 each There will be 50 percent more shares outstanding and they will sell for Rs.26.67 each There will be one-and-one-half times as many shares outstanding, and they will sell for Rs.60.00 each
Question # 4 of 15 ( Start time: 01:53:46 AM ) Total Marks: 1 What is difference between shares and bonds? Select correct option:
Question # 5 of 15 ( Start time: 01:57:15 AM ) Total Marks: 1 Security market line gives the relationship between _______ and _________. Select correct option:
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Market risk and the required return Systematic risk and the required return Non-diversified risk and the required return All of the given options
Question # 6 of 15 ( Start time: 01:57:52 AM ) Total Marks: 1 If we invest in many securities which are ________to each other then it is possible to reduce overall risk for your investment. Select correct option:
Comparable Correlated Highly correlated Negatively correlated
Question # 7 of 15 ( Start time: 01:58:38 AM ) Total Marks: 1 Which of the following is the general assumption of Percent of Sales Forecasting? Select correct option:
Current Assets usually grow in proportion to Revenues Current Assets usually grow in proportion to Expenses Current Assets usually grow in proportion to Liabilities Current Assets usually grow in proportion to Sales
Question # 8 of 15 ( Start time: 01:59:22 AM ) Total Marks: 1 Which of the following is/are the component(s) of working capital management?
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Current assets Fixed assets Fixed assets and long-term liabilities Current assets and current liabilities
Question # 9 of 15 ( Start time: 01:59:52 AM ) Total Marks: 1 Which of the following is not a recognized approach for determining the cost of equity? Select correct option:
Dividend discount model approach Before-tax cost of preferred stock plus risk premium approach Capital-asset pricing model approach Before-tax cost of debt plus risk premium approach
Question # 10 of 15 ( Start time: 02:00:32 AM ) Total Marks: 1 When Investors want high plowback ratios? Select correct option:
Whenever ROE > k Whenever k > ROE Only when they are in low tax brackets Whenever bank interest rates are high
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Question # 11 of 15 ( Start time: 02:01:02 AM ) Total Marks: 1 Why a single, overall cost of capital is often used to evaluate projects? Select correct option:
It avoids the problem of computing the required rate of return for each investment Proposal It is the only way to measure a firm's required return It acknowledges that most new investment projects have about the same degree of risk It acknowledges that most new investment projects offer about the same expected return
Question # 12 of 15 ( Start time: 02:01:58 AM ) Total Marks: 1 The statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? Select correct option:
Operating, investing, and financing Investing, operating, and financing Financing, operating and investing Financing, investing, and operating
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Investors may be willing to pay a premium for stable dividends because of the informational content of __________, the desire of investors for __________, and certain __________. Select correct option:
Institutional considerations; dividends; current income Dividends; current income; institutional considerations Current income; dividends; institutional considerations Institutional considerations; current income; dividends
Question # 14 of 15 ( Start time: 02:03:21 AM ) Total Marks: 1 Which of the following statements is TRUE regarding Permanent Accounts? Select correct option:
Accounts that are found on Income Statement Accounts that are found on Statement of Retained Earnings Accounts that are found on Balance Sheet All of the given options
Question # 15 of 15 ( Start time: 02:03:58 AM ) Total Marks: 1 Which of the following is the percentage of interest charged at each compounding time? Select correct option:
Nominal interest Rate Effective interest Rate Annual percentage rate
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Periodic interest rate
Question # 7 of 15 ( Start time: 02:07:00 AM ) Total Marks: 1 Total portfolio risk is a combination of: Select correct option: Systematic risk plus non-diversifiable risk Avoidable risk plus diversifiable risk Systematic risk plus unavoidable risk Systematic risk plus diversifiable risk
Question # 8 of 15 ( Start time: 02:07:32 AM ) Total Marks: 1 Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option: Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden
Question # 9 of 15 ( Start time: 02:07:56 AM ) Total Marks: 1 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? Select correct option: Rs. 250.44 Rs. 231.91 Rs.181.62 Rs.184.08
Question # 10 of 15 ( Start time: 02:08:16 AM ) Total Marks: 1 Which of the following is NOT true regarding the capital market? Select correct option: Where long-term funds can be raised
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Money is invested for periods longer than a year Where TFCs and NIT are exchanged and traded Where overnight lending & borrowing takes place
Question # 11 of 15 ( Start time: 02:08:40 AM ) Total Marks: 1 Which of the following formula relates beta of the stock to the standard deviation? Select correct option: Covariance of stock with market * variance of the market Covariance of stock with market / variance of the market Variance of the market / Covariance of stock with market Slope of the regression line
Question # 12 of 15 ( Start time: 02:08:57 AM ) Total Marks: 1 Which of the following shows ALL possible Risk Return combinations for All combinations of the stocks in the portfolio- whether efficient or not. Select correct option: Parachute graph Capital market line Security market line All of the given options
Question # 13 of 15 ( Start time: 02:09:28 AM ) Total Marks: 1 For most firms, P/E ratios and risk_______. Select correct option: Will be directly related Will have an inverse relationship Will be unrelated None of the above.
Question # 14 of 15 ( Start time: 02:09:48 AM ) Total Marks: 1 What is the expected return of a zero-beta security? Select correct option:
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The risk-free rate Zero rate of return A negative rate of return The market rate of return
Question # 15 of 15 ( Start time: 02:10:08 AM ) Total Marks: 1 Which of the following statements (in general) is correct? Select correct option: 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 # 1 of 15 ( Start time: 04:44:56 AM ) Total Marks: 1 Which of the following is NOT The cost of equity? Select correct option:
The minimum rate that a firm should earn on the equity-financed part of an investment A return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged By far the most difficult component cost to estimate Generally lower than the before-tax cost of debt
Question # 2 of 15 ( Start time: 04:46:12 AM ) Total Marks: 1 Which of the following statements is true? Select correct option:
The financial risk of a firm decreases when it takes on a risky project
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The financial risk of a firm increases when it takes on more equity The business risk of a firm increases when it takes on a risky project The business risk of a firm increases when it takes on more debt
Question # 3 of 15 ( Start time: 04:47:15 AM ) Total Marks: 1 Why markets and market returns fluctuate? Select correct option:
Question # 4 of 15 ( Start time: 04:47:33 AM ) Total Marks: 1 When a bond will sell at a discount? Select correct option:
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Study the time line and accompanying 5-period cash-flow pattern below. 0 1 2 3 4 5 6 Time line |--------|--------|--------|--------|--------|--------| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash flows A B The present value of the 5-period annuity shown above as of Point A is the present value of a 5-period ______________ , whereas the future value of the same annuity as of Point B is the future value of a 5-period ______________ . Select correct option:
Ordinary annuity; ordinary annuity Ordinary annuity; annuity due Annuity due; annuity due Annuity due; ordinary annuity
Question # 6 of 15 ( Start time: 04:48:26 AM ) Total Marks: 1 Which group of ratios shows the extent to which the firm is financed with debt? Select correct option:
Question # 7 of 15 ( Start time: 04:48:42 AM ) Total Marks: 1 In which of the following approach you need to bring all the projects to the same length in time? Select correct option:
MIRR approach
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Going concern approach Common life approach Equivalent annual approach
Question # 8 of 15 ( Start time: 04:49:14 AM ) Total Marks: 1 Which of the following is NOT an example of hybrid equity Select correct option:
Convertible Bonds Convertible Debenture Common shares Preferred shares
Question # 10 of 15 ( Start time: 04:49:38 AM ) Total Marks: 1 Which of the following equation is NOT correct? Select correct option:
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Gross Revenue Admin & Operating Expenses = Operating Revenue Other Expenses + Other Revenue = EBIT EBIT Financial Charges & Interest = EBT Net Income Dividends = Retained Earning
Question # 11 of 15 ( Start time: 04:50:03 AM ) Total Marks: 1 If 2 stocks move in the same direction together then what will be the correlation coefficient? Select correct option:
0 1.0 -1.0 1.5
Question # 12 of 15 ( Start time: 04:50:11 AM ) Total Marks: 1 Which of the following is NOT true regarding the capital market? Select correct option:
Where long-term funds can be raised Money is invested for periods longer than a year Where TFCs and NIT are exchanged and traded Where overnight lending & borrowing takes place
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Which of the following is type a Temporary Account? Select correct option:
Asset Liability Reserves Revenue
Question # 14 of 15 ( Start time: 04:50:38 AM ) Total Marks: 1 Which of the following refers to the risk associated with interest rate uncertainty? Select correct option:
Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Question # 15 of 15 ( Start time: 04:50:53 AM ) Total Marks: 1 A statistical measure of the variability of a distribution around its mean is referred to as __________. Select correct option:
Probability distribution Expected return Standard deviation Coefficient of variation
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Question # 1 of 15 ( Start time: 04:57:29 AM ) Total Marks: 1 Which of the following is NOT the type of Hybrid organizations? Select correct option:
S-Type Corporation Limited Liability Partnership Sole Proprietorship Professional Corporation
Question # 2 of 15 ( Start time: 04:57:36 AM ) Total Marks: 1 An annuity due is always worth _____ a comparable annuity. Select correct option:
Question # 3 of 15 ( Start time: 04:57:42 AM ) Total Marks: 1 If all things equal, when diversification is most effective? Select correct option:
Securities' returns are positively correlated Securities' returns are uncorrelated
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Securities' returns are high Securities' returns are negatively correlated
Question # 4 of 15 ( Start time: 04:58:00 AM ) Total Marks: 1 How the beta of the stock could be calculated? Select correct option: http://vustudents.ning.com
By monitoring price of the stock By monitoring rate of return of the stock By comparing the changes in the stock market price to the changes in the stock market index All of the given options
Question # 5 of 15 ( Start time: 04:58:09 AM ) Total Marks: 1 Which of the following is called the tax savings of the firm derived from the deductibility of interest expense? Select correct option:
Interest tax shield Depreciable basis Financing umbrella Current yield
Question # 6 of 15 ( Start time: 04:59:34 AM ) Total Marks: 1 Above the breakeven EBIT, increased financial leverage will __________ EPS, all else the same. Assume there are no taxes Select correct option:
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Increase Decrease Either increase or decrease None of the given options
Question # 7 of 15 ( Start time: 04:59:53 AM ) Total Marks: 1 What is the easiest method to diversify away firm-specific risks? Select correct option:
To buy stocks with a beta of 1.0 To build a portfolio with 5-10 individual stocks To purchase the shares of a mutual fund To purchase stocks that plot above the security market line
Question # 8 of 15 ( Start time: 05:00:00 AM ) Total Marks: 1 If risk and return combination of any stock is above the SML, what does it mean? Select correct option:
It is offering lower rate of return as compared to the efficient stock It is offering higher rate of return as compared to the efficient stock Its rate of return is zero as compared to the efficient stock It is offering rate of return equal to the efficient stock
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Given no change in required returns, the price of a stock whose dividend is constant will__________. Select correct option:
Decrease over time at a rate of r% Remain unchanged Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate
Question # 10 of 15 ( Start time: 05:01:01 AM ) Total Marks: 1 Which of the following is the maximum amount of debt (and other fixed-charge financing) that a firm can adequately service? Select correct option:
Question # 11 of 15 ( Start time: 05:01:17 AM ) Total Marks: 1 Which of the following is related to the use Lower financial leverage? Select correct option:
Fixed costs Variable costs
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Debt financing Common equity financing
Question # 12 of 15 ( Start time: 05:01:24 AM ) Total Marks: 1 Which of the following is a payment of additional shares to shareholders in lieu of cash? Select correct option:
Stock split Stock dividend Extra dividend Regular dividend
Question # 13 of 15 ( Start time: 05:02:08 AM ) Total Marks: 1 According to MM II, what happens when a firm's debt-to-equity ratio increases? Select correct option:
Its financial risk increases Its operating risk increases The expected return on equity increases The expected return on equity decreases
Question # 14 of 15 ( Start time: 05:03:01 AM ) Total Marks: 1 Where there is single period capital rationing, what is the most sensible way of making investment decisions? Select correct option:
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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 # 15 of 15 ( Start time: 05:04:29 AM ) Total Marks: 1 Which of the following includes the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization? Select correct option:
Financial accounting Financial management Financial engineering Financial budgeting
Question # 1 of 15 ( Start time: 05:23:24 AM ) Total Marks: 1 __________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. Select correct option:
Systematic risk Standard deviation Unsystematic risk Coefficient of variation
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Which of the following is NOT the step of Percentage of sales to be used in Financial Forecasting? Select correct option:
Estimate year-by-year Sales Revenue and Expenses Estimate Levels of Investment Needs required to Meet Estimated Sales Estimate the Financing Needs Estimate the retained earnings
Question # 3 of 15 ( Start time: 05:24:24 AM ) Total Marks: 1 ________ is paid by companies with lower grade bonds like CC or C ratings. Select correct option:
Question # 4 of 15 ( Start time: 05:24:32 AM ) Total Marks: 1 In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas? Select correct option:
Common stock Debt Preferred stock
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None of the above
Question # 5 of 15 ( Start time: 05:24:40 AM ) Total Marks: 1 The stock in your portfolio was selling for Rs.40 per share yesterday, but has today declared a three for two split. Which of the following statements seems to be true? Select correct option:
There will be two-thirds as many shares outstanding, and they will sell for Rs.60.00 each There will be four times as many shares outstanding, and they will sell for Rs.160.00 each There will be 50 percent more shares outstanding and they will sell for Rs.26.67 each There will be one-and-one-half times as many shares outstanding, and they will sell for Rs.60.00 each
Question # 6 of 15 ( Start time: 05:24:47 AM ) Total Marks: 1 Which of the following can be used to calculate the risk of the larger portfolio? Select correct option:
Question # 7 of 15 ( Start time: 05:25:05 AM ) Total Marks: 1 The risk that covers events like unexpected changes in the economy refers to: Select correct option:
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Systematic risk Unsystematic risk Total risk All of the above
Question # 9 of 15 ( Start time: 05:25:27 AM ) Total Marks: 1 What is yield to maturity on a bond? Select correct option:
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 Based on the assumption that any payments received are reinvested at the coupon rate None of the above
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Question # 10 of 15 ( Start time: 05:25:49 AM ) Total Marks: 1 Which of the following is the percentage of interest charged at each compounding time? Select correct option:
Nominal interest Rate Effective interest Rate Annual percentage rate Periodic interest rate
Question # 11 of 15 ( Start time: 05:25:56 AM ) Total Marks: 1 Where there is single period capital rationing, what is the most sensible way of making investment decisions? Select correct option:
Question # 12 of 15 ( Start time: 05:26:03 AM ) Total Marks: 1 Which of the following would NOT be the part of the risk if the stock is a single stock investment? Select correct option:
Company specific risk
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Un-diversifiable risk Diversifiable risk Random risk
Question # 14 of 15 ( Start time: 05:26:38 AM ) Total Marks: 1 The explicit costs associated with corporate default, such as legal expenses, are the ___________ of the firm. Select correct option:
Flotation costs Default beta coefficients Direct bankruptcy costs Indirect bankruptcy costs
Question # 15 of 15 ( Start time: 05:27:45 AM ) Total Marks: 1 Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows?
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Discount rate Profitability index Internal rate of return Multiple Internal rate of return
Question # 1 of 15 ( Start time: 05:35:30 AM ) Total Marks: 1 Which of the following factors might affect stock returns? Select correct option:
Question # 2 of 15 ( Start time: 05:35:48 AM ) Total Marks: 1 What is the additional amount a borrower must pay to lender to compensate for assuming the risk associated with non-payment? Select correct option:
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Question # 4 of 15 ( Start time: 05:36:22 AM ) Total Marks: 1 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. Select correct option:
IRR MIRR PV NPV
Unlevered firm Unlevered firm plus the value of the debt
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Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield
Question # 6 of 15 ( Start time: 05:36:45 AM ) Total Marks: 1 What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? Select correct option:
Question # 7 of 15 ( Start time: 05:37:05 AM ) Total Marks: 1 Which if the following refers to capital budgeting? Select correct option:
Investment in long-term liabilities Investment in fixed assets Investment in current assets Investment in short-term liabilities
Question # 8 of 15 ( Start time: 05:37:23 AM ) Total Marks: 1 What is the most important criteria in capital budgeting? Select correct option:
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Return on investment Profitability index Net present value Pay back period
Question # 9 of 15 ( Start time: 05:37:43 AM ) Total Marks: 1 The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option:
Real assets of the business Liquid assets of the business Fixed assets of the business Long term assets of the business
Question # 10 of 15 ( Start time: 05:38:14 AM ) Total Marks: 1 For most firms, P/E ratios and risk_________. Select correct option:
Will be directly related Will have an inverse relationship Will be unrelated None of the above.
Question # 11 of 15 ( Start time: 05:38:21 AM ) Total Marks: 1 How can a company improve (lower) its debt-to-total asset ratio?
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By borrowing more By shifting short-term to long-term debt By shifting long-term to short-term debt By selling common stock
Question # 12 of 15 ( Start time: 05:38:37 AM ) Total Marks: 1 For Company A, plow back ratio is 30%. What will be its Pay-out ratio? Select correct option:
3.33% 30% 31% 70%
Question # 13 of 15 ( Start time: 05:38:57 AM ) Total Marks: 1 As interest rates go up, the present value of a stream of fixed cash flows _____. Select correct option:
Goes down Goes up Stays the same Can not be found from the given information
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Question # 14 of 15 ( Start time: 05:39:13 AM ) Total Marks: 1 Which of the following shows ALL possible Risk Return combinations for All combinations of the stocks in the portfolio- whether efficient or not. Select correct option:
Question # 15 of 15 ( Start time: 05:39:44 AM ) Total Marks: 1 All of the following are the financial statements used for the purpose of reporting and analysis EXCEPT: Select correct option:
Balance Sheet Income Statement Cash budget Statement of Retained Earnings
Question # 1 of 15 ( Start time: 05:48:12 AM ) Total Marks: 1 Who determine the market price of a share of common stock? Select correct option:
The board of directors of the firm The stock exchange on which the stock is listed
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The president of the company Individuals buying and selling the stock
Question # 2 of 15 ( Start time: 05:48:57 AM ) Total Marks: 1 Which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option:
Question # 3 of 15 ( Start time: 05:49:14 AM ) Total Marks: 1 Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares? Select correct option:
The new shares are worth less than the old shares The old shares drop in value to equal the new price The value of the firm is reduced by the amount of the dividend The value of the firm is unaffected
Question # 4 of 15 ( Start time: 05:50:22 AM ) Total Marks: 1 Which of the following would NOT be the part of the risk if the stock is a single stock investment? Select correct option:
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Company specific risk Un-diversifiable risk Diversifiable risk Random risk
Question # 5 of 15 ( Start time: 05:50:40 AM ) Total Marks: 1 Which of the following is the risk of investing funds in another country? Select correct option:
Question # 6 of 15 ( Start time: 05:51:08 AM ) Total Marks: 1 Which of the following stipulate a relationship between expected return and risk? Select correct option:
APT stipulates CAPM stipulates Both CAPM and APT stipulate Neither CAPM nor APT stipulate
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Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows? Select correct option:
Cash flow diagram Cash budget Cash flow statement None of the given options
Question # 8 of 15 ( Start time: 05:51:47 AM ) Total Marks: 1 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? Select correct option:
Rs. 250.44 Rs. 231.91 Rs.181.62 Rs.184.08
Question # 9 of 15 ( Start time: 05:52:04 AM ) Total Marks: 1 Investors may be willing to pay a premium for stable dividends because of the informational content of __________, the desire of investors for __________, and certain __________. Select correct option:
Institutional considerations; dividends; current income Dividends; current income; institutional considerations
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Current income; dividends; institutional considerations Institutional considerations; current income; dividends
Question # 10 of 15 ( Start time: 05:52:11 AM ) Total Marks: 1 The explicit costs associated with corporate default, such as legal expenses, are the ___________ of the firm. Select correct option:
Question # 11 of 15 ( Start time: 05:52:32 AM ) Total Marks: 1 How economic value is added (EVA) calculated? Select correct option:
It is the difference between the market value of the firm and the book value of equity It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge It is the net income of the firm less a dollar cost that equals WAAC multiplied by the book value of liabilities and equities None of the given option
Question # 12 of 15 ( Start time: 05:53:10 AM ) Total Marks: 1 ________ is paid by companies with lower grade bonds like CC or C ratings. Select correct option:
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Question # 13 of 15 ( Start time: 05:53:18 AM ) Total Marks: 1 In efficient market the stock price depends upon the required return which depends upon _________. Select correct option:
Market risk Total risk Diversified risk Non- systematic risk
Question # 14 of 15 ( Start time: 05:53:53 AM ) Total Marks: 1 Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option:
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Question # 15 of 15 ( Start time: 05:54:00 AM ) Total Marks: 1 Total portfolio risk is __________. Select correct option:
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 # 1 of 15 ( Start time: 06:02:09 AM ) Total Marks: 1 Which of the following is NOT an example of a financial intermediary? Select correct option: http://vustudents.ning.com
Question # 2 of 15 ( Start time: 06:02:17 AM ) Total Marks: 1 Which of the following are known as Discretionary Financing? Select correct option:
Current liabilities Current assets Fixed assets
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Long-term liabilities
Question # 3 of 15 ( Start time: 06:03:18 AM ) Total Marks: 1 Which of the following refers to a policy of dividend "smoothing"? Select correct option:
Maintaining a constant dividend payout ratio Keeping the regular dividend at the same level indefinitely Maintaining a steady progression of dividend increases over time Alternating cash dividends with stock dividends
Question # 4 of 15 ( Start time: 06:04:36 AM ) Total Marks: 1 Which of the following statements (in general) is correct? Select correct option:
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 # 5 of 15 ( Start time: 06:05:04 AM ) Total Marks: 1 Which of the following would generally have unlimited liability? Select correct option:
A limited partner in a partnership
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A shareholder in a corporation The owner of a sole proprietorship A member in a limited liability company (LLC)
Question # 6 of 15 ( Start time: 06:05:23 AM ) Total Marks: 1 Calculate the break-even point for sales revenues given the following information. The firm has Rs.1, 000,000 in fixed costs. The firm anticipates that variable costs will be Rs.1 for every Rs.5 in sales. Select correct option:
Rs.1, 250,000 Rs.1, 000,000 Rs.250, 000 Rs.200, 000
Question # 7 of 15 ( Start time: 06:05:39 AM ) Total Marks: 1 In efficient market the stock price depends upon the required return which depends upon _________. Select correct option:
Market risk Total risk Diversified risk Non- systematic risk
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Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:
Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio
Question # 9 of 15 ( Start time: 06:06:02 AM ) Total Marks: 1 Which of the following is correct regarding the opportunity cost of capital for a project? Select correct option:
Question # 10 of 15 ( Start time: 06:06:58 AM ) Total Marks: 1 A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________. Select correct option:
An anticipated earnings growth rate which is less than that of the average firm
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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 # 11 of 15 ( Start time: 06:07:19 AM ) Total Marks: 1 Which of the following is FALSE about Perpetuity? Select correct option:
It is a series of cash flows Cash flows occur for a specific time period Its cash flows are identical None of the given options
Question # 12 of 15 ( Start time: 06:07:39 AM ) Total Marks: 1 What does the law of conservation of value implies? Select correct option:
The mix of senior and subordinated debt does not affect the value of the firm The mix of convertible and non-convertible debt does not affect the value of the firm The mix of common stock and preferred stock does not affect the value of the firm All of the given options
Question # 13 of 15 ( Start time: 06:08:09 AM ) Total Marks: 1 Which of the following is called the tax savings of the firm derived from the deductibility of interest expense? Select correct option:
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Question # 14 of 15 ( Start time: 06:08:29 AM ) Total Marks: 1 What are the Direct claim securities? Select correct option:
Question # 15 of 15 ( Start time: 06:08:47 AM ) Total Marks: 1 An investment proposal should be judged in whether or not it provides: Select correct option:
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
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________ is paid by companies with lower grade bonds like CC or C ratings. Select correct option:
Question # 2 of 15 ( Start time: 06:14:54 AM ) Total Marks: 1 How "Shareholder wealth" is represented in a firm? Select correct option:
The number of people employed in the firm The book value of the firm's assets less the book value of its liabilities The market price per share of the firm's common stock The amount of salary paid to its employees
Question # 3 of 15 ( Start time: 06:15:13 AM ) Total Marks: 1 Which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option:
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Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated
Question # 5 of 15 ( Start time: 06:15:27 AM ) Total Marks: 1 Which of the following refers to financial risk? Select correct option:
Risk of owning equity securities Risk faced by equity holders when debt is used General business risk of the firm Possibility that interest rates will increase
Question # 6 of 15 ( Start time: 06:16:32 AM ) Total Marks: 1 An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. Select correct option:
Positive Negative
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Zero All of the above
Question # 7 of 15 ( Start time: 06:16:47 AM ) Total Marks: 1 Which of the following risk can be diversified away? Select correct option:
Systematic risk Beta Firm specific risk Market risk
Question # 8 of 15 ( Start time: 06:17:05 AM ) Total Marks: 1 Which of the followings are the propositions of Modigliani and Miller's? Select correct option:
The market value of a firm's common stock is independent of its capital structure The market value of a firm's debt is independent of its capital structure The market value of any firm is independent of its capital structure None of the given options
Question # 9 of 15 ( Start time: 06:17:25 AM ) Total Marks: 1 Which of the following statements is true? Select correct option:
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The financial risk of a firm decreases when it takes on a risky project The financial risk of a firm increases when it takes on more equity The business risk of a firm increases when it takes on a risky project The business risk of a firm increases when it takes on more debt
Question # 10 of 15 ( Start time: 06:17:47 AM ) Total Marks: 1 If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option:
0 0.5 1 -1
Question # 11 of 15 ( Start time: 06:18:04 AM ) Total Marks: 1 A statistical measure of the variability of a distribution around its mean is referred to as __________. Select correct option:
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Which of the following shows ALL possible Risk Return combinations for All combinations of the stocks in the portfolio- whether efficient or not. Select correct option:
Question # 13 of 15 ( Start time: 06:18:27 AM ) Total Marks: 1 Which of the following is a payment of additional shares to shareholders in lieu of cash? Select correct option:
Question # 14 of 15 ( Start time: 06:18:35 AM ) Total Marks: 1 What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option:
Long-term debt Preferred stock Common stock
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None of the given options
Question # 15 of 15 ( Start time: 06:19:03 AM ) Total Marks: 1 Which of the following is NOT true regarding the capital market? Select correct option:
Where long-term funds can be raised Money is invested for periods longer than a year Where TFCs and NIT are exchanged and traded Where overnight lending & borrowing takes place
Question # 1 of 15 ( Start time: 06:29:41 AM ) Total Marks: 1 The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = __________. Select correct option:
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
Question # 2 of 15 ( Start time: 06:30:01 AM ) Total Marks: 1 Which type of responsibilities are primarily assigned to Controller and Treasurer respectively? Select correct option:
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Operational; financial management Financial management; accounting Accounting; financial management Financial management; operations
Question # 4 of 15 ( Start time: 06:30:29 AM ) Total Marks: 1 Which of the following could be defined as the capital structure of the Company? Select correct option:
The firm's mix of different securities The firm's debt-equity ratio The market imperfection that the firm's manager can exploit All of the above
Question # 5 of 15 ( Start time: 06:31:23 AM ) Total Marks: 1 Why a single, overall cost of capital is often used to evaluate projects?
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It avoids the problem of computing the required rate of return for each investment Proposal It is the only way to measure a firm's required return It acknowledges that most new investment projects have about the same degree of risk It acknowledges that most new investment projects offer about the same expected return
Question # 6 of 15 ( Start time: 06:31:50 AM ) Total Marks: 1 Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows? Select correct option:
Question # 7 of 15 ( Start time: 06:31:57 AM ) Total Marks: 1 What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option:
Long-term debt Preferred stock
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Common stock None of the given options
Question # 8 of 15 ( Start time: 06:32:07 AM ) Total Marks: 1 Which of the following value of the shares changes with investors perception about the companys future and supply and demand situation? Select correct option:
Par value Market value Intrinsic value Face value
Question # 9 of 15 ( Start time: 06:32:33 AM ) Total Marks: 1 Which of the following affects price of the bond? Select correct option:
Market interest rate Required rate of return Interest rate risk All of the given options
Question # 10 of 15 ( Start time: 06:32:44 AM ) Total Marks: 1 Which of the followings expressed the proposition that the value of the firm is independent of its capital structure? Select correct option:
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Question # 11 of 15 ( Start time: 06:33:41 AM ) Total Marks: 1 Which of the following could NOT be defined as the capital structure of the Company? Select correct option:
The firm's mix of Assets and liabilities The firm's common stocks only The firm's debt-equity ratio All of the given options
Question # 12 of 15 ( Start time: 06:34:03 AM ) Total Marks: 1 According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of which of the following: Select correct option:
Unique risk Reinvestment risk Market risk Unsystematic risk
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If risk and return combination of any stock is above the SML, what does it mean? Select correct option:
Question # 14 of 15 ( Start time: 06:34:50 AM ) Total Marks: 1 Why common stock of a company must provide a higher expected return than the debt of the same company? Select correct option:
There is less demand for stock than for bonds There is greater demand for stock than for bonds There is more systematic risk involved for the common stock There is a market premium required for bonds
Question # 15 of 15 ( Start time: 06:35:11 AM ) Total Marks: 1 What is the present value of Rs.1,000 to be paid at the end of 5 years if the correct risk adjusted interest rate is 8%? Select correct option:
Rs.714 Rs.1,462 Rs.322.69
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Rs.401.98
Question # 1 of 15 ( Start time: 06:41:50 AM ) Total Marks: 1 Which of the following is the expected cash dividend that is normally paid to shareholders? Select correct option:
Question # 2 of 15 ( Start time: 06:41:58 AM ) Total Marks: 1 Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows? Select correct option:
Question # 3 of 15 ( Start time: 06:42:06 AM ) Total Marks: 1 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%? Select correct option:
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Rs.105,000 Rs.1,500,000 Rs.3975,000 Rs. 350,000
Question # 4 of 15 ( Start time: 06:42:12 AM ) Total Marks: 1 What is the difference between economic profit and accounting profit? Select correct option:
Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt Economic profit covers the profit over the life of the firm, while accounting profit only covers the most recent accounting period Accounting profit is based on current accepted accounting rules while economic profit is based on cash flows All of the given options are correct
Question # 5 of 15 ( Start time: 06:42:20 AM ) Total Marks: 1 With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option:
Rs.52,000 Rs.93,219 Rs.99,061 Rs.915,240
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Question # 6 of 15 ( Start time: 06:42:26 AM ) Total Marks: 1 The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as __________. Select correct option:
Question # 8 of 15 ( Start time: 06:42:48 AM ) Total Marks: 1 If we invest in many securities which are ________to each other then it is possible to reduce overall risk for your investment. Select correct option:
Comparable Correlated
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Highly correlated Negatively correlated
Question # 10 of 15 ( Start time: 06:44:04 AM ) Total Marks: 1 An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. Select correct option:
Positive Negative Zero All of the above
Question # 11 of 15 ( Start time: 06:44:14 AM ) Total Marks: 1 Which of the following is related to the use Lower financial leverage? Select correct option:
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Question # 12 of 15 ( Start time: 06:44:22 AM ) Total Marks: 1 Which statement is NOT true regarding the market portfolio? Select correct option:
It includes all publicly traded financial assets It is the tangency point between the capital market line and the indifference curve All securities in the market portfolio are held in proportion to their market values It lies on the efficient frontier
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The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = __________. Select correct option:
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
Question # 15 of 15 ( Start time: 06:44:49 AM ) Total Marks: 1 Where the efficient stock combination of risk and return in efficient market should lie? Select correct option:
Question # 1 of 15 ( Start time: 06:56:08 AM ) Total Marks: 1 Which of the following is NOT the type of Hybrid organizations? Select correct option:
S-Type Corporation Limited Liability Partnership Sole Proprietorship Professional Corporation
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Question # 2 of 15 ( Start time: 06:56:18 AM ) Total Marks: 1 Which of the following is correct, if a firm has a required rate of return equal to the ROE? Select correct option:
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 # 3 of 15 ( Start time: 06:57:13 AM ) Total Marks: 1 In which of the following approach you need to bring all the projects to the same length in time? Select correct option:
It is the difference between the market value of the firm and the book value of equity It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge
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It is the net income of the firm less a dollar cost that equals WAAC multiplied by the book value of liabilities and equities None of the given option
Balance Sheet Income Statement Cash budget Statement of Retained Earnings
Question # 6 of 15 ( Start time: 06:57:40 AM ) Total Marks: 1 Which of the following refers to a highly competitive market where good business ideas are taken up immediately? Select correct option:
Capital market Efficient market Money market Real asset market
Question # 7 of 15 ( Start time: 06:58:35 AM ) Total Marks: 1 As interest rates go up, the present value of a stream of fixed cash flows _____. Select correct option:
119
Goes down Goes up Stays the same Can not be found from the given information
Question # 9 of 15 ( Start time: 06:59:06 AM ) Total Marks: 1 What is the traditional approach towards the valuation of a company? Select correct option:
The cost of capital is independent of the capital structure of the firm The firm maintains constant risk regardless of the type of financing employed There exists no optimal capital structure That management can increase the total value of the firm through the judicious use of financial leverage
120
If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows? Select correct option:
An increase A decrease No change Incomplete information
Question # 11 of 15 ( Start time: 06:59:47 AM ) Total Marks: 1 According to ___________, the firm's cost of equity increases with greater debt financing, but the WACC remains unchanged. Select correct option:
M&M Proposition I with taxes M&M Proposition I without taxes M&M Proposition II without taxes M&M Proposition II with taxes
Question # 12 of 15 ( Start time: 07:00:24 AM ) Total Marks: 1 Which of the following is NOT an example of hybrid equity Select correct option:
Convertible Bonds Convertible Debenture Common shares
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Preferred shares
Question # 13 of 15 ( Start time: 07:00:33 AM ) Total Marks: 1 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. Select correct option:
Indirect relationship Inverse relationship Direct relationship No relationship
Question # 15 of 15 ( Start time: 07:00:59 AM ) Total Marks: 1 What would be the result when there is an increase in the number of shares outstanding by reducing the par value of stock? Select correct option:
122
Question # 1 of 15 ( Start time: 07:11:14 AM ) Total Marks: 1 An annuity due is always worth _____ a comparable annuity. Select correct option:
123
The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as __________. Select correct option:
Question # 5 of 15 ( Start time: 07:12:10 AM ) Total Marks: 1 Which of the followings are the propositions of Modigliani and Miller's? Select correct option: http://vustudents.ning.com
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Question # 6 of 15 ( Start time: 07:12:33 AM ) Total Marks: 1 Which of the following is simply the weighted average of the possible returns, with the weights being the probabilities of occurrence? Select correct option:
Question # 7 of 15 ( Start time: 07:13:35 AM ) Total Marks: 1 What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? Select correct option:
Balance Sheet
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Income Statement Cash budget Statement of Retained Earnings
Question # 9 of 15 ( Start time: 07:13:50 AM ) Total Marks: 1 A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred to as __________. Select correct option:
Question # 10 of 15 ( Start time: 07:14:10 AM ) Total Marks: 1 Which of the following statements (in general) is correct? Select correct option:
Question # 11 of 15 ( Start time: 07:14:17 AM ) Total Marks: 1 Which of the following formula relates beta of the stock to the standard deviation? Select correct option:
126
Covariance of stock with market * variance of the market Covariance of stock with market / variance of the market Variance of the market / Covariance of stock with market Slope of the regression line
Question # 12 of 15 ( Start time: 07:14:25 AM ) Total Marks: 1 In the dividend discount model, _______ which of the following are not incorporated into the discount rate? Select correct option:
Real risk-free rate Risk premium for stocks Return on assets Expected inflation rate
Question # 13 of 15 ( Start time: 07:14:35 AM ) Total Marks: 1 The overall (weighted average) cost of capital is composed of weighted averages of which of the following? Select correct option:
The cost of common equity and the cost of debt The cost of common equity and the cost of preferred stock The cost of preferred stock and the cost of debt The cost of common equity, the cost of preferred stock, and the cost of debt
127
Question # 1 of 15 ( Start time: 07:20:57 AM ) Total Marks: 1 A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Select correct option:
Payback period Internal rate of return
128
Net present value Profitability index
Question # 2 of 15 ( Start time: 07:21:24 AM ) Total Marks: 1 According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of which of the following: Select correct option:
Question # 3 of 15 ( Start time: 07:21:44 AM ) Total Marks: 1 What is the expected return of a zero-beta security? Select correct option:
The risk-free rate Zero rate of return A negative rate of return The market rate of return
Question # 4 of 15 ( Start time: 07:21:52 AM ) Total Marks: 1 What is the difference between economic profit and accounting profit? Select correct option:
129
Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt Economic profit covers the profit over the life of the firm, while accounting profit only covers the most recent accounting period Accounting profit is based on current accepted accounting rules while economic profit is based on cash flows All of the given options are correct
Question # 5 of 15 ( Start time: 07:21:59 AM ) Total Marks: 1 Investors may be willing to pay a premium for stable dividends because of the informational content of __________, the desire of investors for __________, and certain __________. Select correct option:
Question # 6 of 15 ( Start time: 07:22:08 AM ) Total Marks: 1 Which of the following is the expected cash dividend that is normally paid to shareholders? Select correct option:
130
Question # 7 of 15 ( Start time: 07:22:17 AM ) Total Marks: 1 For most firms, P/E ratios and risk_________. Select correct option:
Question # 8 of 15 ( Start time: 07:22:25 AM ) Total Marks: 1 Where the efficient stock combination of risk and return in efficient market should lie? Select correct option:
Liquidity ratios Debt ratios
131
Coverage ratios Profitability ratios
Question # 10 of 15 ( Start time: 07:22:58 AM ) Total Marks: 1 According to MM II, what happens when a firm's debt-to-equity ratio increases? Select correct option:
Question # 11 of 15 ( Start time: 07:23:18 AM ) Total Marks: 1 Why markets and market returns fluctuate? Select correct option:
132
Question # 14 of 15 ( Start time: 07:23:52 AM ) Total Marks: 1 An 8-year annuity due has a present 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? Select correct option:
Rs.154.73 Rs.147.36 Rs.109.39 Rs.104.72
133
When taxes are considered, the value of a levered firm equals the value of the________. Select correct option:
Question # 1 of 15 ( Start time: 07:34:43 AM ) Total Marks: 1 Which of the following is the main objective of Economics? Select correct option:
Profit maximization Maximization of shareholders wealth Collection of accurate, systematic, and timely financial data All of the given options
Question # 2 of 15 ( Start time: 07:34:51 AM ) Total Marks: 1 Market risk is measured in terms of the ___________ of the market portfolio or index. Select correct option:
Variance Covariance Standard deviation Correlation coefficient
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Question # 3 of 15 ( Start time: 07:35:10 AM ) Total Marks: 1 Why we need Capital rationing? ( Select correct option:
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 # 4 of 15 ( Start time: 07:35:34 AM ) Total Marks: 1 If risk and return combination of any stock is above the SML, what does it mean? Select correct option:
It is the difference between the market value of the firm and the book value of equity It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge
135
Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated
Question # 7 of 15 ( Start time: 07:36:12 AM ) Total Marks: 1 Which of the following is NOT the step of Percentage of sales to be used in Financial Forecasting? Select correct option:
Estimate year-by-year Sales Revenue and Expenses Estimate Levels of Investment Needs required to Meet Estimated Sales Estimate the Financing Needs Estimate the retained earnings
Question # 8 of 15 ( Start time: 07:36:21 AM ) Total Marks: 1 Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option:
136
Question # 9 of 15 ( Start time: 07:36:29 AM ) Total Marks: 1 Choose among the followings, the correct statement regarding every journal entry. Select correct option:
Sum of Debits = Sum of Credits Sum of Debits >Sum of Credits Sum of Debits < Sum of Credits None of the given options
Question # 10 of 15 ( Start time: 07:36:36 AM ) Total Marks: 1 Which of the following is an example of restructuring the firm? Select correct option:
Dividends are increased from Rs.1 to Rs.2 per share A new investment increases the firm's business risk New equity is issued and the proceeds repay debt A new Board of Directors is elected to the firm
137
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you deposit Rs.20, 000 you would expect to earn around __________ in interest. Select correct option:
Rs.840 Rs.858 Rs.1,032 Rs.1,121
Question # 13 of 15 ( Start time: 07:37:12 AM ) Total Marks: 1 Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:
Sales variability Level of fixed operating costs
138
Closeness to its operating break-even point Debt-to-equity ratio
Question # 14 of 15 ( Start time: 07:37:19 AM ) Total Marks: 1 Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:
139
Question # 12 of 15 ( Start time: 02:08:57 AM ) Total Marks: 1 Which of the following shows ALL possible Risk Return combinations for All combinations of the stocks in the portfolio- whether efficient or not. Select correct option: http://vustudents.ning.com Parachute graph Capital market line Security market line All of the given options Question # 15 of 15 ( Start time: 02:03:58 AM ) Total Marks: 1 Which of the following is the percentage of interest charged at each compounding time? Select correct option: Nominal interest Rate Effective interest Rate Annual percentage rate Periodic interest rate
Question # 5 of 15 ( Start time: 01:34:43 AM ) Total Marks: 1 Which of the following is the expected cash dividend that is normally paid to shareholders? Select correct option: Stock split Stock dividend Extra dividend Regular dividend Question # 11 of 15 ( Start time: 01:27:48 AM ) Total Marks: 1 What is the present value of Rs.8,000 to be paid at the end of three years if interest rate is 11%? Select correct option: Rs.6,015 Rs.4,872 Rs.6,725 Rs.1,842
140
Question # 9 of 15 ( Start time: 01:26:10 AM ) Total Marks: 1 What is the expected return of a zero-beta security? Select correct option: The risk-free rate Zero rate of return A negative rate of return The market rate of return Question # 6 of 15 ( Start time: 01:24:32 AM ) Total Marks: 1 Security market line gives the relationship between _____ and _______. Select correct option: Market risk and the required return Systematic risk and the required return Non-diversified risk and the required return All of the given options
Question # 3 of 15 ( Start time: 01:21:52 AM ) Total Marks: 1 The overall (weighted average) cost of capital is composed of weighted averages of which of the following? Select correct option: The cost of common equity and the cost of debt The cost of common equity and the cost of preferred stock The cost of preferred stock and the cost of debt The cost of common equity, the cost of preferred stock, and the cost of debt Question # 2 of 15 ( Start time: 01:21:10 AM ) Total Marks: 1 What is the difference between economic profit and accounting profit? Select correct option: Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt Economic profit covers the profit over the life of the firm, while accounting profit only covers the most recent accounting period Accounting profit is based on current accepted accounting rules while economic profit is based on cash flows All of the given options are correct
141
Question # 3 of 15 ( Start time: 01:09:06 AM ) Total Marks: 1 Why a single, overall cost of capital is often used to evaluate projects? Select correct option: It avoids the problem of computing the required rate of return for each investment Proposal It is the only way to measure a firm's required return It acknowledges that most new investment projects have about the same degree of risk It acknowledges that most new investment projects offer about the same expected return
Question # 14 of 15 ( Start time: 12:51:15 AM ) Total Marks: 1 Which of the following is not a recognized approach for determining the cost of equity? Select correct option: Dividend discount model approach Before-tax cost of preferred stock plus risk premium approach Capital-asset pricing model approach Before-tax cost of debt plus risk premium approach Question # 2 of 15 ( Start time: 12:44:16 AM ) Total Marks: 1 Which of the following costs would be considered a fixed cost? Select correct option: Raw materials Depreciation Bad-debt losses Production labor Question # 15 of 15 ( Start time: 12:38:07 AM ) Total Marks: 1 Which of the following would express the negative net worth of a firm? Select correct option: Experiencing a business failure In legal bankruptcy
142
Experiencing technical insolvency Experiencing accounting insolvency Question # 14 of 15 ( Start time: 12:37:22 AM ) Total Marks: 1 What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Select correct option: The price should increase by the amount of the dividend The price should decrease by the amount of the dividend The price should decrease by one-half the amount of the dividend The price should remain constant
Question # 7 of 15 ( Start time: 12:15:05 AM ) Total Marks: 1 Which of the following is correct regarding the opportunity cost of capital for a project? Select correct option: The opportunity cost of capital is the return that investors give up by investing in the project rather than in securities of equivalent risk. Financial managers use the capital asset pricing model to estimate the opportunity cost of capital The company cost of capital is the expected rate of return demanded by investors in a company All of the given options
Question # 3 of 15 ( Start time: 12:11:47 AM ) Total Marks: 1 What is the easiest method to diversify away firm-specific risks? Select correct option: To buy stocks with a beta of 1.0 To build a portfolio with 5-10 individual stocks To purchase the shares of a mutual fund To purchase stocks that plot above the security market line
MIDTERM EXAMINATION Spring 2010
143
MGT201- Financial Management (Session - 3) Time: 60 min Marks: 44
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?
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.
144
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
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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
146
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?
147
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

148
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
149
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 ) reduce
- Please choose one risk by spreading your money across many different
Diversification can ______________. Investments Markets Industries
All of the given options
Question No: 20
( Marks: 1 )
- Please choose one

150
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?
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

151
All of the following are the steps involved in financial planning process EXCEPT:
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
152
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 Moodys 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
153
Question No: 29
( Marks: 3 )
Differentiate the real assets and securities.
Solution: Real assets are physical property such as Land, Machinery, equipments and Building etc. Where as securities basically, are legal contractual piece of paper. Kinds of securities: We have discussed about two types of securities. Direct claim securities: Stocks (Shares): It is defined as equity paper representing ownership, shareholding. Appears on Liabilities side of Balance Sheet Bonds: It is a debt paper representing loan or borrowing. These are long term debt instruments.
Question No: 30
( Marks: 3 )
A security analyst has estimated the following returns on the stocks of 4 large companies:
Weightage Company A Company B Company C Company D 25% 25% 25% 25%
Expected Returns 12% 11.5% 10.% 9.5%
You are required to calculate the expected return on this portfolio.
154
Solution: Expected Portfolio Return Calculation: rP * = = 12% (25/100) rA xA + + rB xB + 11.5 %( 25/100) rC xB + rD xD
+ 10%(/25/100) + 9.5%(25/100)
= 3% + 2.8757% + 2.5 + 2.375 = 10.75%
Question No: 31
( Marks: 5 )
Why a person should invest in shares? Give reasons.
Solution:
. Capital growth
Over the longer term, shares can produce significant capital gains through increases in share prices. Some companies also issue free or bonus shares to their shareholders as another way of passing on company profits or increases in their net worth.
Diversifying your investments

in order to diversify your investment portfolio, you will probably have part of your money in the share market. You may buy shares directly or through managed funds or your superannuation.
Easy buying and selling

Compared to other investments like property, shares are very portable. They can be bought and sold quickly, and the brokerage on the transactions is lower than for a property transaction. Unlike selling a property, you can sell part of your share parcels.
155
Question No: 32
( Marks: 5 )
H Corporations 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 companys stock? Data: P0 = rs 20 D0 = 2. g = 11% P1 = ? rs = ?
Solution Part A: P1 = P0(1 + g) P1= 20(1.11) P1= 22.2
Solution part B: rs = D1 / P0 + g rs = (2 * 1.11/20) + 0.11 rs = (2.22/20) + 0.11 rs = 0.111 + 0.11 rs = 0.221*100 rs = 22.1%
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MIDTERM EXAMINATION Spring 2010 MGT201- Financial Management (Session - 6) 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
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

157
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 )
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
158
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 sinkingfund 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 )
value of a bond is directly derived from which of the following?
159
Cash flows
Coupon receipts
Par recovery at maturity
Question No: 9
( Marks: 1 )
- Please choose one
Which of the following affects the price of the bond?
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
160
Question No: 11
( Marks: 1 )
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 )
the dividend discount model, which of the following is (are) NOT incorporated into the discount 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
161
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
162
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 )
objective of ________ is to maximize the shareholders wealth. Financial economics Financial management Financial accounting Financial engineering
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

163
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: 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
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
164
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: 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

165
Finance consists of which of the following area(s)? Money and capital market Investment Financial management All of the given options
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 Project B Project C 1.66 2.66 3.66
Project A Project B Project C Project A & B
Question No: 29
( Marks: 3 )
Define interest rate risk and investment risk.
The Interest Rate Risk for Long Term Bonds ie. For the 10 years is more than the Interest Rate Risk for Short Term Bonds i.e. 1 year bonds; provided the coupon rate for the bonds is similar.
166
When investor buy a long term bond he is locked in investment for long term period there are more chances of fluctuation in interest rate and the inflation rate. So, the impact of interest rate changes on Long Term bonds is greater. Long Term Bond Prices fluctuate more because their Coupon Rates are fixed or locked for a long time even though Market Interest Rates are fluctuating daily; therefore the price of Long Bonds has to constantly keep adjusting. Price of the long term bond fluctuates more as compared to the short term bond. Because, you have a long term bond with fix coupon rate but the market interest rate is fluctuating in between the years.
When we talk about the investment this is different from the forecasted and this to represent risk. we need to keep in mind the distinction between Stand Alone Risk (or Single Investment Risk) as oppose to market or Portfolio Risk or collection of investments risk, which is a risk of particular investment compare to other investments you have made. In Portfolio risk we are interested in overall risk of entire collection of investments that made by the company.
Hence the interest rate risk is to the specific concern while the investment risk is to effect the whole business.
Question No: 30
( Marks: 3 )
A stock is expected to pay a dividend of Rs.0.75 at the end of the year. The required rate of return is ks = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
Data: P0 =? D1 = 0.75 g = 6.4% ROR = 10.5%
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Solution:P0 = D1 / (ror g) P0 = 0.75 / (0.105- 0.064) Po = 0.75/0.041 P0 = 18.29
Question No: 31
( Marks: 5 )
There are some risks (Unique Risk) that we can diversify but some of the risks (Market risks) are not diversifiable. Explain both types of risk.
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 firms 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 %
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No. of yrs, n = 2 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 http://vustudents.ning.com 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
MIDTERM EXAMINATION Spring 2010 MGT201- Financial Management (Session - 2 Question No: 1 ( Marks: 1 ) - Please choose on In finance we refer to the market where existing securities are bought and sold as the __________ market. http://vustudents.ning.com
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Money Capital Primary Secondary Question No: 2 ( 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: 3 ( Marks: 1 ) - Please choose on 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 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: 5 ( 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 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 http://vustudents.ning.com
170
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 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 stocks required return. http://vustudents.ning.com
171
II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. 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
172
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
173
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
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
174
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 firms 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>?
175
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 Corporations 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 Project B Project C 1.66 2.66 3.66
Project A Project B Project C
176
Project A & B
Question No: 29
( Marks: 3 )
By applying Common Life Approach calculate the NPV of the following projects:
Projects A B
Initial outflow 100 200
Inflow Yr 1 200 200
Inflow Yr 2 200
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 Stock A Stock B Expected rate of return 15% 20% Standard deviation 10% 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:
177
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 )
How risk affects the share price? (2.5) What does the meaning of standard deviation in finance? (2.5)
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 firms 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
178
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
179
MIDTERM 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
180
First upward and then downward
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 5year 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
181
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
182
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 Investors perception
Market price changes due to change in the interest rate
Question No: 10
( 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: 11
( Marks: 1 )
- Please choose one
Which of the following would tend to reduce a firm's P/E ratio?
183
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
184
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 )
value at which buyers and sellers are willing to buy and sell any asset is known as: Liquidation value Book value Intrinsic value
185
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
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
186
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 )
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 )
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 )
responsibility of research & development projects lie with which of the following authority? Chief executive officer
187
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
188
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 laksons stock sell for?
Data: P0 = ? D1V1 = 5
189
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 Corporations 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.
190
What stock price is expected 1 year from now? What would be the required rate of return on companys 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%
191
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
192
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 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 for a
Question No: 5
( Marks: 1 )
- Please choose one
A 5year 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 5year 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
193
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
194
8.53 7.18
Question No: 10
( Marks: 1 )
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).
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:
195
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 )
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 securitys price will increase in a year Both represent the securitys 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

196
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
197
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?
198
Its 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 can be defined as:
( Marks: 1 )
- Please choose one IRR
A discount rate that equates the PV of a projects expected cash inflows to the PV of projects cost Present value of the stream of net cash flows from projects net investment Its 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
199
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

200
Which of the following is NOT the form of cash flow generated by the investments of the shareholders?
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?
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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.
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: 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?
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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.
MIDTERM EXAMINATION Spring 2010 MGT201- Financial Management (Session - 5) Time: 60 min Marks: 44
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
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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 Rs.30Rs.300, 000 Rs.1, Rs.1, 500,000
Question No: 4
( Marks: 1 )
Question No: 5
( Marks: 1 )
- Please choose one
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A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Payback period Internal rate of return Net present value Profitability index
Question No: 6
( Marks: 1 )
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 )
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
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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 capitalrationing constraint? Profitability index (PI) Net present value (NPV) Internal rate of return (IRR) Payback period (PBP) Reference: http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6680/1710103. cw/content/index.html Question#8
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 )
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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 Reference: http://83.143.248.39/faculty/mmateev/Investment%20and%20Portfolio%20Management%20BUS%2041 5/docs/Chap007_Test%20Bank(1)_Solution.rtf Question#41
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
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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
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Question No: 15
( Marks: 1 )
- Please choose one
Which of the following is NOT an example of a financial intermediary? http://vustudents.ning.com 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
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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
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
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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
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
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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 )
Gordons 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
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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
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
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Question No: 30
( Marks: 3 )
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
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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 diversifible 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.
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Data: Par Value = Rs 1, 000,000 Maturity = 3 years Coupon Rate = 15% p.a, Security = Machinery
Solution: CF = Cash Flow = Coupon Value = Coupon Rate x Par Value CF = 15% x 1,000,000 CF = 150000
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 = 150000/ (1 + 0.10/12)12 + 150000/ (1 + 0.10/12)2x12 + 150000/ (1 + 0.10/12)3x12 + 1000000/(1 + 0.10/12)3x12 PV = 150000/ (1.00833)12 + 150000/ (1.00833)24 + 150000/ (1.00833)36 + 1000000/(1.00833)36
PV = 135787 + 122921 + 111274 + 741828 PV = 1111810
Solution #2 CF = Cash Flow = Coupon Value = Coupon Rate x Par Value CF = 15% x 1,000,000 CF = 150000/12 Monthly CF = 12500
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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)
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PV = 387410 + 741828 PV = 1129238
MGT201 Solved MCQ

Question # 1 Which if the following refers to capital budgeting? Select correct option: Investment in long-term liabilities Investment in fixed assets Investment in current assets Investment in short-term liabilities
Question # 2 Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option: Cash outflow to the government for taxes Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
Question # 3 Which of the following refers to the cost of taking up one option while sacrificing the other? Select correct option: Opportunity cost Operating cost Sunk cost Floatation cost
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Question # 4 A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the future value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(FVIFA at 8% for 5 periods) (Rs.100)(FVIFA at 8% for 4 periods)(1.08) (Rs.100) (FVIFA at 8% for 5 periods)(1.08) (Rs.100)(FVIFA at 8% for 4 periods) + Rs.100
Ref: http://web.utk.edu/~jwachowi/annuity3.html Check Question #7
Question # 5 When the bond approaches its maturity, the market value of the bond approaches to which of the following? Select correct option: Intrinsic value Book value Par value Historic cost
Question #6 Who or what is a person or institution designated by a bond issuer as the official representative of the bondholders? Select correct option: Indenture Debenture Bond Bond trustee
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Reference: A trustee is a person or institution designated by a bond issuer as the official representative of the bondholders.
Question # 7 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? Select correct option: Sunk cost Opportunity cost Externalities (Page50) Contingencies
Question #8 How dividend yield on a stock is similar to the current yield on a bond? Select correct option: Both represent how much each securitys price will increase in a year Both represent the securitys 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 are quarterly yields that must be annualized
Question # 9 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 ______. Select correct option: Fall Rise Remain unchanged Incomplete information
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Question # 10 An annuity due is always worth ___ a comparable annuity. Select correct option: Less than More than Equal to Can not be found from the given information
Question # 12 What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? Select correct option: Indenture Debenture Bond Bond trustee
Reference: Indenture -- The legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders, establishing the terms of the bond issue and naming the trustee.
Question # 13 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%? Select correct option: Rs.105,000 (Doubted) Rs.1,500,000 Rs.3975,000 Rs. 350,000
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Question # 14 Which of the following are known as Discretionary Financing? Select correct option: Current liabilities Current assets Fixed assets Long-term liabilities
Reference: Long Term Liabilities: Also, called Discretionary Financing does not grow in proportion to Sales
Question # 15 With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option: Rs.52,000 Rs.93,219 Rs.99,061 Rs.915,240
Reference: 20000/(1.08)^20 = 93129
Question # 16 Which of the following is the Double Entry Principle? Select correct option: Assets + Liabilities = Shareholders Equity Assets = Liabilities + Shareholders Equity Liabilities = Assets + Shareholders Equity None of the given option
Reference: Fundamental Accounting Equation and Double Entry Principle.
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Assets +Expense = Liabilities + Shareholders Equity + Revenue (Note: Expense & Revenue are Temporary P/L accounts the others are Permanent Balance Sheet Accounts) Left Hand Items increase when debited. Right Hand items increase when credited. For every journal entry, the Sum of Debits = the Sum of Credits
Question # 17 What are the Direct claim securities? Select correct option: The securities whose value depends on the cash flows generated by the underlying assets The securities whose value depends on the value of the underlying assets The securities that do not directly generate any returns for its investors All of the given options
Reference: Page 82 Direct claim securities like bond and stocks the value of security can be calculated from the cash flows of underlying assets
Question # 18 Which of the following is NOT true regarding an ordinary annuity? Select correct option: It is a series of equal cash flows Cash flows occur for a specific time period Payments are made at the start of each period It is also known as deferred annuity
Reference: Ordinary Annuity An ordinary annuity, also known as deferred annuity, consists of a series of equal payments at the end of each period.
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Question # 19 Which of the following is a major disadvantage of the corporate form of organization? Select correct option: 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 # 20 Which of the following is a capital budgeting technique that is NOT considered as discounted cash flow method? Select correct option: Payback period Internal rate of return Net present value Profitability index
Reference: The payback method focuses on the payback period. The payback period is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates. This period is some times referred to as" the time that it takes for an investment to pay for itself." The basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more desirable is the investment. The payback period is expressed in years. When the net annual cash inflow is the same every year, the following formula can be used to calculate the payback period.
Question # 21 If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows? Select correct option: An increase A decrease
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No change Incomplete information
Question # 22 As interest rates go up, the present value of a stream of fixed cash flows ___. Select correct option: Goes down Goes up Stays the same Can not be found from the given information
Question # 23 How "Shareholder wealth" is represented in a firm? Select correct option: The number of people employed in the firm The book value of the firm's assets less the book value of its liabilities The market price per share of the firm's common stock The amount of salary paid to its employees
Question # 24 _______ is equal to (common shareholders' equity/common shares outstanding). Select correct option: Book value per share Liquidation value per share Market value per share None of the above
Reference: http://www.investopedia.com/terms/b/bookvaluepercommon.asp
Question # 25 Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An
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increase in the required return on a stock will decrease its market value, all else the same. Select correct option: I, II, and III I only III only II and III only
Question # 26 Given no change in required returns, the price of a stock whose dividend is constant will ________. Select correct option: Decrease over time at a rate of r% Remain unchanged Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate
Question # 27 Nominal Interest Rate is also known as: Select correct option: Effective interest Rate Annual percentage rate Periodic interest rate Required interest rate
Reference: Page 29
Question # 28 What is difference between shares and bonds? Select correct option:
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Question # 29 The statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? Select correct option: Operating, investing, and financing Investing, operating, and financing Financing, operating and investing Financing, investing, and operating
Question # 30 When the zero coupon bond approaches to its maturity, the market value of the bond approaches to which of the following? Select correct option: Intrinsic value Book value Par value Historic cost
Reference: Page 64
Question # 31 What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option: Unlimited liability
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Single tax filing Difficult ownership resale Raising capital
Question # 32 ______ are also known as Spontaneous Financing. Select correct option: Current liabilities Current assets Fixed assets Long-term liabilities
Reference: Current Liabilities: Also called Spontaneous Financing. Generally grow in proportion to Sale.
Question # 33 ______ is paid by companies with lower grade bonds like CC or C ratings. Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Reference: Page 20 & 22
Question # 34 Which of the following includes the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization?
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Select correct option: Financial accounting Financial management Financial engineering Financial budgeting
Question # 35 What is the long-run objective of financial management? Select correct option: Maximize earnings per share Maximize the value of the firm's common stock Maximize return on investment Maximize market share
Question # 36 Why companies invest in projects with negative NPV? Select correct option: Because there is hidden value in each project Because there may be chance of rapid growth Because they have invested a lot All of the given options
Question # 37 Which of the following is NOT the step of Percentage of sales to be used in Financial Forecasting? Select correct option: Estimate year-by-year Sales Revenue and Expenses Estimate Levels of Investment Needs required to Meet Estimated Sales Estimate the Financing Needs Estimate the retained earnings
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Question # 38 Which of the following is NOT the type of Hybrid organizations? Select correct option: S-Type Corporation Limited Liability Partnership Sole Proprietorship Professional Corporation
Question # 39 Which of the following techniques would be used for a project that has nonnormal cash flows? Select correct option: Internal rate of return Multiple internal rate of return Modified internal rate of return Net present value
Question # 40 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. Select correct option: IRR MIRR PV NPV
Question # 41 How can a company improve (lower) its debt-to-total asset ratio? Select correct option:
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Question # 42 In which of the following approach you need to bring all the projects to the same length in time? Select correct option: MIRR approach Going concern approach Common life approach Equivalent annual approach
Question # 43 Where there is single period capital rationing, what is the most sensible way of making investment decisions? Select correct option: 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
Reference: It is a process of making investment decisions on viable projects where funds are limited. Investments decisions are made given a fixed amount of capital to be invested in viable projects. If a company doesnt have sufficient funds to undertake all projects with a positive NPV, this is a capital rationing situation.
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Question # 44 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? Select correct option: Rs. 250.44 Rs. 231.91 Rs.181.62 Rs.184.08
Question # 45 Which of the following is similar between Return on investment and Payback period techniques of Capital budgeting? Involvement of interest rate while making calculations Do not account for time value of money Tricky and complicated methods All of the given options
Question # 46 How can a company 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 # 47 The value of the bond is NOT directly tied to the value of which of the following assets? Real assets of the business Liquid assets of the business Fixed assets of the business Long term assets of the business
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Question # 48 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 # 49 Which of the following value of the shares changes with investors perception about the companys future and supply and demand situation?
Par value Market value Intrinsic value Face value Question # 50 According 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 # 51 Which group of ratios shows the extent to which the firm is financed with debt Select correct option: Liquidity ratios Debt ratios
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Coverage ratios Profitability ratios
Question # 51 When bonds are issued, under which of the following category the value of the bond appears Select correct option: Equity Fixed assets Short term loan Long term loan
Question # 52 Which of the following refers to bringing the future cash flow to the present time Select correct option: Net present value Discounting Opportunity cost Internal rate of return
Question # 53 Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: Select correct option: Magnitude of expected cash flows Timing of expected cash flows Both timing and magnitude of cash flows None of the given options
Question # 54 Effective interest rate is different from nominal rate of interest because
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Select correct option: Nominal interest rate ignores compounding Nominal interest rate includes frequency of compounding Periodic interest rate ignores the effect of inflation(Doubted) All of the given options
Effective Interest Rate = i eff It is very useful to compare securities and investments with different life or compounding cycles but not used for Discounting and PV.
Question # 55 What are the Indirect securities Select correct option: The securities whose value depends on the cash flows generated by the underlying assets The securities whose value depends on the value of the underlying assets The securities that indirectly generate returns for its investors All of the given options
Reference: Indirect Securities: Indirect securities include derivatives, Futures and Options The securities do not generate any cash flow; however, its value depends on the value of the underlying asset.
Question # 56 Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following Select correct option: Life span of the project Cost of the capital Return on asset None of the given options
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Reference: Lecture 12
Question # 57 When a bond will sell at a discount Select correct option: The coupon rate is greater than the current yield and the current yield is greater than yield to maturity The coupon rate is greater than yield to maturity The coupon rate is less than the current yield and the current yield is greater than the yield to maturity The coupon rate is less than the current yield and the current yield is less than yield to maturity
Question # 58 Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows Select correct option: Cash flow diagram Cash budget Cash flow statement None of the given options
Question # 59 capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Select correct option: Payback period Internal rate of return
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Net present value Profitability index
Question # 60 Which of the following is the general assumption of Percent of Sales Forecasting? Select correct option: Current Assets usually grow in proportion to Revenues Current Assets usually grow in proportion to Expenses Current Assets usually grow in proportion to Liabilities Current Assets usually grow in proportion to Sales
Question # 61 Which of the following is/are the component(s) of working capital management? Select correct option: Current assets Fixed assets Fixed assets and long-term liabilities Current assets and current liabilities
Question # 62 Which of the following is NOT true regarding an annuity due? Select correct option: It is a series of equal cash flows It is also known as deferred annuity Cash flows occur for a specific time period Payments are made at the start of each period
Question # 63
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When coupon bonds are issued, they are typically sold at which of the following value? Select correct option: Above par value Below par At or near par value At a value unrelated to par
Question # 65 Which of the following is NOT an example of hybrid equity Select correct option: Convertible Bonds Convertible Debenture Common shares Preferred shares
Question # 66 Why we need Capital rationing? Select correct option: 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
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Because, managers find it difficult to decide how to fund projects Because, banks require very high returns on projects
Question # 67 Which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option: Depreciation Sunk cost Opportunity cost Non-cash item
Question # 68 Which of the following affects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options.
Question # 69 Which of the following is/are the characteristic(s) of Perpetuity? Select correct option: It is an annuity It has no definite end It is a constant stream of identical cash flows All of the given options
Question # 70 A technique that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is:
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Select correct option: Pay back period Internal rate of return Net present value Profitability index
Reference: F V = PV x e^ i x n FV = 20000 x 2.718(0.08x20) FV = 20000 x 4.95221081 FV = 99044.2162
Question # 72 Question # 3 of 15 ( Start time: 10:32:12 PM ) Total Marks: 1 Which of the following is a limitation of a Corporation? Select correct option: Easy to set up Double-taxation Inexpensive to maintain Unlimited liability
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Reference: Limitations: i. Double Taxation: Corporate earnings may be subject to double taxation the earnings of the corporation are taxed at corporate level, and then any earnings paid out as dividends are taxed again as income to the stockholders. ii. Legal Formalities: Setting up a corporation, and filing many official documents, is more complex and time consuming than for a proprietor ship or a partnership
Question # 73 The return in excess to risk free rate that investors require for bearing the market risk is known as: Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Question # 74 Study the time line and accompanying 5-period cash-flow pattern below. 0 1 2 3 4 5 6 Time line |--------|--------|--------|--------|--------|--------| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash flows A B The present value of the 5-period annuity shown above as of Point A is the present value of a 5-period ____________ , whereas the future value of the same annuity as of Point B is the future value of a 5-period ____________ . Select correct option: Ordinary annuity; ordinary annuity Ordinary annuity; annuity due Annuity due; annuity due Annuity due; ordinary annuity
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Question # 75 The value of direct claim security is derived from which of the following? Select correct option: Fundamental analysis Underlying real asset Supply and demand of securities in the market All of the given options
Reference: (Page63) One form of the debt is bonds. Value of Direct Claim Security is directly will be determined by the value of the underlying Real Asset.
Question # 76 Who determine the market price of a share of common stock? Select correct option: The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the stock
Question # 77 Which of the following statements (in general) is correct? Select correct option: 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 # 78 What is the additional amount a borrower must pay to lender to compensate for
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assuming the risk associated with non-payment? Select correct option: http://vustudents.ning.com Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Question # 79 Which of the following equation is NOT correct? Select correct option: Gross Revenue Admin & Operating Expenses = Operating Revenue Other Expenses + Other Revenue = EBIT EBIT Financial Charges & Interest = EBT Net Income Dividends = Retained Earning
Reference: (Page14) Operating Revenue Other Expenses + Other Revenue = EBIT
Question # 80 Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option: Discount rate Profitability index Internal rate of return Multiple Internal rate of return
Question # 81 An 8-year annuity due has a present 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? Select correct option: Rs.154.73
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Rs.147.36 Rs.109.39 Rs.104.72
Reference: FV = PMT* ((1+i)^n 1)/i (formula use to calc fv of annuity) PV= PMT *((1+i)^-n -1)/i (formula use to calc PV of annuity) Try to remember above two formulas for calc of annuity 1000 = pmt * ((1.05)^-8 -1)/.05 1000 = PMT *6.46 PMT = 1000/6.46 = 154.73
Question # 82 What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option: Long-term debt Preferred stock Common stock None of the given options
Question # 83 Which of the following is type a Temporary Account? Select correct option: Asset Liability Reserves Revenue
Reference:
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P/L Items or Accounts are temporary accounts that need to be closed at the end of the accounting cycle
Question # 84 Which of the following is NOT an example of a financial intermediary? Select correct option: 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 # 85 Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, __________? Select correct option: Both bonds will increase in value, but bond A will increase more than bond B Both bonds will increase in value, but bond B will increase more than bond A Both bonds will decrease in value, but bond A will decrease more than bond B Both bonds will decrease in value, but bond B will decrease more than bond A
Question # 86 Which of the following can not be the drawback of using payback period technique of capital budgeting? Select correct option: It does not account for time value of money It neglects cash flows after the payback period It does not use interest rate while making calculations It is a tricky and complicated method REF: payback period is a simple and straightforward method for analyzing. Page 40
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Question # 87 Which of the following refers to the risk associated with interest rate uncertain ty? Select correct option: Default risk premium Sovereign Risk Premium Market risk premium (doubted) Maturity risk premium
Question # 88 Which of the following is NOT a cash outflow for the firm? Select correct option: Depreciation Dividends Interest Taxes
Question # 89 What is yield to maturity on a bond? Select correct option: 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 Based on the assumption that any payments received are reinvested at the coupon rate None of the above
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Question # 90 What should be the focal point of financial management in a firm? Select correct option: 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 # 91 Which of the following statements is TRUE regarding Permanent Accounts? Select correct option: Accounts that are found on Income Statement Accounts that are found on Statement of Retained Earnings Accounts that are found on Balance Sheet All of the given options
Question # 92 Which of the following is FALSE about Perpetuity? Select correct option: It is a series of cash flows Cash flows occur for a specific time period Its cash flows are identical None of the given options
Question # 93 For Company A, plow back ratio is 30%. What will be its Pay-out ratio?
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Select correct option: 3.33% 30% 31% 70% Reference: Plowback=1-Payout Plowback + Payout=1 Payout = 1 Plowback Payout = 1 30% Payout = 1 0.3 Payout = 0.07*100 Payout = 70%
Question # 94 Which of the following is the risk of investing funds in another country? Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Question # 95 Which of the following would be considered a cash-flow item from an "investing" activity? Select correct option:
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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 # 96 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 # 97 Which of the following is the main objective of Economics? Select correct option: Profit maximization Maximization of shareholders wealth Collection of accurate, systematic, and timely financial data All of the given options
Question # 98 An investment proposal should be judged in whether or not it provides: Select correct option: A return equal to the return require by the investor
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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 # 99 Which of the following refers to time value of money concept? Select correct option:
A rupee in ones hand at present is worth less than the rupee that one is going to receive tomorrow A rupee in ones hand at present is worth more than the rupee that one is going to receive tomorrow A rupee in ones hand at present is worth same as the rupee that one is going to receive tomorrow All of the given options
Question # 100 Which of the following is NOT true regarding the capital market? Select correct option: Where long-term funds can be raised Money is invested for periods longer than a year Where TFCs and NIT are exchanged and traded Where overnight lending & borrowing takes place
Why companies invest in projects with negative NPV? Select correct option:
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Because there is hidden value in each project Because there may be chance of rapid growth Because they have invested a lot All of the given options Question # 2 of 10 ( Start time: 04:05:43 PM ) Total Marks: 1 To increase a given future value, the discount rate should be adjusted __________. Select correct option: Upward Downward First upward and then downward None of the given options Question # 3 of 10 ( Start time: 04:06:35 PM ) Total Marks: 1 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 __________. Select correct option: Fall Rise Remain unchanged Incomplete information
Question # 4 of 10 ( Start time: 04:07:25 PM ) Total Marks: 1 A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information
Question # 5 of 10 ( Start time: 04:08:40 PM ) Total Marks: 1 At the termination of project, which of the following needs to be considered relating to project assets? Select correct option: Salvage value Book value Intrinsic value Fair value Question # 6 of 10 ( Start time: 04:09:27 PM ) Total Marks: 1
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What is the long-run objective of financial management? Select correct option: Maximize earnings per share Maximize the value of the firm's common stock Maximize return on investment Maximize market share Question # 7 of 10 ( Start time: 04:09:56 PM ) Total Marks: 1 What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option: Unlimited liability Single tax filing Difficult ownership resale Raising capital Question # 8 of 10 ( Start time: 04:10:16 PM ) Total Marks: 1 Which of the following effects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options
uestion # 9 of 10 ( Start time: 04:10:31 PM ) Total Marks: 1 An annuity due is always worth _____ a comparable annuity. Select correct option: Less than More than Equal to Can not be found from the given information Question # 10 of 10 ( Start time: 04:10:53 PM ) Total Marks: 1 A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Select correct option: Payback period Internal rate of return Net present value Profitability index
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\Which group of ratios measures a firm's ability to meet short-term obligations? Select correct option:
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? Select correct option:
Cash budgeting Capital budgeting Capital rationing Capital expenditure Reference
With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option:
Rs.52,000 http://vustudents.ning.com
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Rs.93,219 Rs.99,061 Rs.915,240 Amount = P*(1+i/n)^n
Its not multiple compounding otherwise use this forumal P*(i+i/m/n)^m*n
A project that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option:
Pay back period Internal rate of return Net present value Profitability index
A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? Select correct option:
(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 http://vustudents.ning.com

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(Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information
What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option:
Long-term debt Preferred stock Common stock None of the given options
The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option: Real assets of the business Liquid assets of the business Fixed assets of the business Lon term assets of the business
Which of the following is a major disadvantage of the corporate form of organization? Select correct option:
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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
the current yield on a bond is equal to ________.
An 8-year annuity due has a present 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? Select correct option:
Rs.154.73 Rs.147.36 Rs.109.39 Rs.104.72
FV = PMT* ((1+i)^n 1)/i (formula use to calc fv of annuity) http://vustudents.ning.com

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PV= PMT *((1+i)^-n -1)/i (formula use to calc PV of annuity)
Try to remember above two formulas for calc of annuity
1000 = pmt * ((1.05)^-8 -1)/.05 1000 = PMT *6.46 PMT = 1000/6.46 = 154.73
Now from above two ann
MGT201 Solved MCQ3 from Quiz
The objective of financial management is to maximize _________ wealth. Select correct option: Stakeholders Shareholders Bondholders Directors
Where there is single period capital rationing, what the most sensible way of making investment decisions? Select correct option: Choose all projects with a positive NPV
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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
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. Select correct option: IRR MIRR PV NPV
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you deposit Rs.20, 000 you would expect to earn around __________ in interest. Select correct option: Rs.840 Rs.858 Rs.1,032 Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) = $857.82.
Who determine the market price of a share of common stock? Select correct option: The board of directors of the firm
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The stock exchange on which the stock is listed The president of the company Individuals buying and selling the
At the termination of project, which of the following needs to be considered relating to project assets? Select correct option: Salvage value Book value Intrinsic value Fair value
With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option: Rs.52,000 Rs.93,219 Rs.99,061 Rs.915,240 Amount = P*(1+i/n)^n
To increase a given future value, the discount rate should be adjusted __________. Select correct option: Upward Downward
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First upward and then downward None of the given options
What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? Select correct option: Indenture Debenture Bond Bond trustee
Question # 1 of 10 An annuity due is always worth _____ a comparable annuity. Select correct option:
Question # 2 of 10 ( Start time: 04:11:40 PM ) Total Marks: 1 http://vustudents.ning.com

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Which of the following would be considered a cash-flow item from an "investing" activity? Select correct option:
Question # 3 of 10 ( Start time: 04:13:04 PM ) Total Marks: 1 Which of the following effects price of the bond? Select correct option:
Question # 4 of 10 ( Start time: 04:13:54 PM ) Total Marks: 1 Where there is single period capital rationing, what the most sensible way of making investment decisions? Select correct option:
Choose all projects with a positive NPV
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Question # 5 of 10 ( Start time: 04:15:07 PM ) Total Marks: 1 Which of the following statements is correct in distinguishing between serial bonds and sinking-fund bonds? Select correct option:
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 sinkingfund 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
Question # 6 of 10 ( Start time: 04:16:37 PM ) Total Marks: 1 Which group of ratios measures a firm's ability to meet short-term obligations? Select correct option:
Liquidity ratios Debt ratios Coverage ratios http://vustudents.ning.com

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Profitability ratios
Debt ratios show the extent to which the firm is financed with debt.
Question # 7 of 10 ( Start time: 04:17:10 PM ) Total Marks: 1 Why companies invest in projects with negative NPV? Select correct option:
Because there is hidden value in each project Because there may be chance of rapid growth Because they have invested a lot All of the given options
Question # 9 of 10 ( Start time: 04:19:01 PM ) Total Marks: 1
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MGT201 Current Quiz # 3

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________. Select correct option: An anticipated earnings growth rate which is less than that of the average firm A dividend yield which is less than that of the average firm Less predictable earnings growth than that of the average firm Greater cyclicality of earnings growth than that of the average firm Which of the following is called the tax savings of the firm derived from the deductibility of interest expense? Select correct option:
Interest tax shield Depreciable basis Financing umbrella Current yield The reduction in income taxes that results from the tax-deductibility of interest payments. Tax benefits derived from creative structuring of a financing arrangement. For example, usingloan capital instead of equity capital because interest paid on the loans is generally tax deductible whereas the dividend paid on equity is not http://vustudents.ning.com
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Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: Select correct option: Magnitude of expected cash flows Timing of expected cash flows Both timing and magnitude of cash flows None of the given options Ref It discounts the cash flow to take into the account the time value of money. Reference Expected Portfolio Return = ___________. Select correct option: rP * = xA rA + xB rB rP * = xA rA - xB rB rP * = xA rA / xB rB rP * = xA rA * xB rB What is the most important criteria in capital budgeting? Select correct option: Return on investment Profitability index Net present value Pay back period If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option: 0 0.5 1 -1
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For most firms, P/E ratios and risk_________. Select correct option: Will be directly related Will have an inverse relationship Will be unrelated None of the above. Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option: Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden Which of the following stipulate a relationship between expected return and risk? Select correct option: APT stipulates CAPM stipulates Both CAPM and APT stipulate Neither CAPM nor APT stipulate ===== Which of the following factors might affect stock returns? Select correct option: Business cycle Interest rate fluctuations Inflation rates All of the above If all things equal, when diversification is most effective? Select correct option: Securities' returns are positively correlated
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Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated Which of the followings expressed the proposition that the value of the firm is independent of its capital structure? Select correct option:
The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option:
Discount rate Profitability index Internal rate of return Multiple Internal rate of return Which of the following is related to the use Lower financial leverage? Select correct option:
Fixed costs Variable costs Debt financing
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Common equity financing Why markets and market returns fluctuate? Select correct option:
Because of political factors Because of social factors Because of socio-political factors Because of macro systematic factors Which of the following is NOT an example of hybrid equity Select correct option:
Convertible Bonds Convertible Debenture Common shares Preferred shares A project that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option:
Pay back period Internal rate of return Net present value Profitability index A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? http://vustudents.ning.com
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Select correct option: (Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information To increase a given future value, the discount rate should be adjusted __________. Select correct option:
Upward Downward First upward and then downward None of the given options Which of the following is NOT the form of cash flow generated by the investments of the shareholders? Select correct option: Income Capital loss Capital gain Operating income According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of which of the following: Select correct option: Unique risk
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Reinvestment risk Market risk Unsystematic risk What is the most important criteria in capital budgeting? Select correct option: Return on investment Profitability index Net present value Pay back period If all things equal, when diversification is most effective? Select correct option:
Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. Select correct option: I, II, and III I only
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III only II and III only As interest rates go up, the present value of a stream of fixed cash flows _____. Select correct option:
Goes down Goes up Stays the same Can not be found from the given information Which of the following could be taken same as minimizing the weighted average cost of capital? Select correct option:
Maximizing the market value of the firm Maximizing the market value of the firm only if MM's Proposition I Minimizing the market value of the firm only if MM's Proposition I holds Maximizing the profits of the firm Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option: (Q - QBE)/Q (EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC] The value of a bond is directly derived from which of the following? http://vustudents.ning.com
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Select correct option: Cash flows Coupon receipts Par recovery at maturity All of the given options Which statement is NOT true regarding the market portfolio? Select correct option: It includes all publicly traded financial assets It is the tangency point between the capital market line and the indifference curve All securities in the market portfolio are held in proportion to their market values It lies on the efficient frontier
In the dividend discount model, _____ which of the following are not incorporated into the discount rate? Select correct option: Real risk-free rate Risk premium for stocks Return on assets Expected inflation rate
Which of the following is NOT an example of hybrid equity Select correct option: Convertible Bonds Convertible Debenture Common shares Preferred shares
For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure? Select correct option: Cost of debt Cost of preferred stock Cost of common equity Cost of retained earnings
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The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option: Real assets of the business Liquid assets of the business Fixed assets of the business Lon term assets of the business http://vustudents.ning.com
What are two major areas of capital budgeting? Select correct option: Net present value, profitability index Net present value; internal rate of return Net present value; payback period Pay back period; profitability index
Which of the followings are the propositions of Modigliani and Miller's? Select correct option: The market value of a firm's common stock is independent of its capital structure The market value of a firm's debt is independent of its capital structure The market value of any firm is independent of its capital structure None of the given options
The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as ________. Select correct option: Probability distribution Expected return Standard deviation Coefficient of variation
In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas? Select correct option: Common stock Debt Preferred stock None of the above
A statistical measure of the variability of a distribution around its mean is referred to as ________. Select correct option:
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How "Shareholder wealth" is represented in a firm? Select correct option: The number of people employed in the firm The book value of the firm's assets less the book value of its liabilities The market price per share of the firm's common stock The amount of salary paid to its employees
What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option: Unlimited liability Single tax filing Difficult ownership resale Raising capital
Total Marks: 1 The benefit we expect from a project is expressed in terms of: Select correct option: Cash in flows Cash out flows Cash flows None of the given option Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio
Which of the following is the value of beta for the market portfolio? Select correct option: 0.25 -1.0 1.0 0.5
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Which of the following is related to the use Lower financial leverage? Select correct option: Fixed costs Variable costs Debt financing Common equity financing
Why common stock of a company must provide a higher expected return than the debt of the same company? Select correct option: There is less demand for stock than for bonds There is greater demand for stock than for bonds There is more systematic risk involved for the common stock There is a market premium required for bonds
_______ is equal to (common shareholders' equity/common shares outstanding). Select correct option: Book value per share Liquidation value per share Market value per share None of the above
When a bond will sell at a discount? Select correct option: The coupon rate is greater than the current yield and the current yield is greater than yield to maturity The coupon rate is greater than yield to maturity The coupon rate is less than the current yield and the current yield is greater than the yield to maturity
The coupon rate is less than the current yield and the current yield is less than yield to maturity In order for the investor to earn more than the current yield the bond must be selling for a discount. Yield to maturity will be greater than current yield as investor will have purchased the bond at discount and will be receiving the coupon payments over the life of the bond.
Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option: Cash outflow to the government for taxes Cash outflow to shareholders as dividends
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Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio
Which of the following is simply the weighted average of the possible returns, with the weights being the probabilities of occurrence? Select correct option: Probability distribution Expected return Standard deviation Coefficient of variation
Why companies invest in projects with negative NPV? Select correct option: Because there is hidden value in each project Because there may be chance of rapid growth Because they have invested a lot All of the given options
Cash budgets are prepared from past: Select correct option: Balance sheets Income statements Income tax and depreciation data None of the given options
The cash budget is prepared from forecasted cash collections and disbursements rather
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If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows? Select correct option: An increase A decrease No change Incomplete information
Which of the followings expressed the proposition that the cost of equity is a positive linear function of capital structure? Select correct option: The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price
Question # 2 of 20 ( Start time: 04:01:59 PM ) Total Marks: 1 ________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. Select correct option: Systematic risk Standard deviation Unsystematic risk Coefficient of variation
Unsystematic risk is the diversifiable portion of total risk and not a measure of total risk like standard deviation.
The presence of which of the following costs is not used as a major argument against the M&M arbitrage process? Select correct option: Bankruptcy costs Agency costs
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Transactions costs Insurance costs
The presence of these costs is used as major argument against the M&M arbitrage process
What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option: Long-term debt Preferred stock Common stock None of the given options
According to timing difference problem a good project might suffer from ___ IRR even though its NPV is ______. Select correct option: Higher; lower Lower; Lower Lower; higher Higher; higher
Expected Portfolio Return = _________. Select correct option: rP * = xA rA + xB rB rP * = xA rA - xB rB rP * = xA rA / xB rB rP * = xA rA * xB rB Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio
For most firms, P/E ratios and risk_______. Select correct option: Will be directly related Will have an inverse relationship Will be unrelated None of the above.
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The ________ the coefficient of variation ______ the relative risk of the investment. Select correct option: Larger; Larger Larger; Smaller Smaller; Larger Smaller; Smaller
You are considering two investment proposals, project A and project B. B's expected net present value is Rs. 1,000 greater than that for A and A's dispersion of net present value is less than that for B. On the basis of risk and return, what would be your conclusion? Select correct option: Project A dominates project B Project B dominates project A Neither project dominates the other in terms of risk and return Incomplete information
The expected net present value of B is greater than the expected net present value of A and the risk of B exceeds the risk of A, so neither dominates the other.
______ means expanding the number of investments which cover different kinds of stocks. Select correct option: Diversification Standard deviation Variance Covariance
What should be used to calculate the proportional amount of equity financing employed by a firm? Select correct option: The common stock equity account on the firm's balance sheet The sum of common stock and preferred stock on the balance sheet The book value of the firm The current market price per share of common stock times the number of shares Outstanding
What is the long-run objective of financial management? Select correct option: Maximize earnings per share Maximize the value of the firm's common stock Maximize return on investment Maximize market share
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__________are analysts who use information concerning current and prospective profitability of firms to assess the firm's fair market value. Select correct option: Credit analysts Fundamental analysts Systems analysts Technical analysts
Total Marks: 1 Which of the followings expressed the proposition that the value of the firm is independent of its capital structure? Select correct option: The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price
The statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? Select correct option: Operating, investing, and financing Investing, operating, and financing Financing, operating and investing Financing, investing, and operating
A project that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option: Pay back period Internal rate of return Net present value Profitability index
Which of the following would generally have unlimited liability? Select correct option: A limited partner in a partnership A shareholder in a corporation The owner of a sole proprietorship
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A member in a limited liability company (LLC)
If 2 stocks move in the same direction together then what will be the correlation coefficient? Select correct option: 0 1.0 -1.0 1.5
which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option: Depreciation Sunk cost Opportunity cost Non-cash item
If risk and return combination of any stock is above the SML, what does it mean? Select correct option: It is offering lower rate of return as compared to the efficient stock It is offering higher rate of return as compared to the efficient stock Its rate of return is zero as compared to the efficient stock It is offering rate of return equal to the efficient stock
Which of the following techniques would be used for a project that has nonnormal cash flows? Select correct option: Internal rate of return Multiple internal rate of return Modified internal rate of return Net present value
Which of the following is NOT a cash outflow for the firm? Select correct option: Depreciation Dividends Interest Taxes
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Which of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that is 50% higher than total carrying costs? Select correct option: Current order size is greater than optimal Current order size is less than optimal Per unit carrying costs are too high The optimal order size is currently being used
When a firm needs guaranteed, short-term funds available for a variety purposes, the bank loan will likely be a ________. Select correct option: Compensating balance arrangement Revolving credit agreement Transaction loan Line of credit
Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same I, II, and III not sure I only III only II and III only
An implicit cost of adding debt to the capital structure is that it: Select correct option: Adds interest expense to the operating statement Increases the required return on equity Reduces the expected return on assets Decreases the firm's beta
hich of the following statements regarding covariance is correct? Select correct option: Covariance always lies in the range -1 to +1 Covariance, because it involves a squared value, must always be a positive number (or zero)
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Low covariances among returns for different securities leads to high portfolio risk Covariances can take on positive, negative, or zero values
Which of the following is not a form of short-term, spontaneous credit? Select correct option: Accrued wages Trade credit Commercial paper Accrued taxes
Which of the following has the same meaning as the working capital to financial analyst? Select correct option: Total assets Fixed assets Current assets Current assets minus current liabilities
Above the breakeven EBIT, increased financial leverage will ________ EPS, all else the same. Assume there are no taxes Select correct option: Increase Decrease Either increase or decrease None of the given options
If we invest in many securities which are ________to each other then it is possible to reduce overall risk for your investment. Select correct option: Comparable Correlated http://vustudents.ning.com
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The objective of financial management is to maximize _______ wealth. Select correct option: Stakeholders Shareholders Bondholders Directors
A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _______. Select correct option: An anticipated earnings growth rate which is less than that of the average firm A dividend yield which is less than that of the average firm Less predictable earnings growth than that of the average firm Greater cyclicality of earnings growth than that of the average firm
The stock in your portfolio was selling for Rs.40 per share yesterday, but has today declared a three for two split. Which of the following statements seems to be true? Select correct option: There will be two-thirds as many shares outstanding, and they will sell for Rs.60.00 each There will be four times as many shares outstanding, and they will sell for Rs.160.00 each There will be 50 percent more shares outstanding and they will sell for Rs.26.67 each There will be one-and-one-half times as many shares outstanding, and they will sell for Rs.60.00 each
Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares? Select correct option: The new shares are worth less than the old shares The old shares drop in value to equal the new price http://vustudents.ning.com
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The value of the firm is reduced by the amount of the dividend The value of the firm is unaffected ________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. Select correct option: Systematic risk Standard deviation Unsystematic risk Coefficient of variation When taxes are considered, the value of a levered firm equals the value of the______. Select correct option: Unlevered firm Unlevered firm plus the value of the debt Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield
Which of the following would be consistent with an aggressive approach to financing working capital? Select correct option: Financing short-term needs with short-term funds Financing permanent inventory buildup with long-term debt Financing seasonal needs with short-term funds Financing some long-term needs with short-term funds
Which of the following is the maximum amount of debt (and other fixed-charge financing) that a firm can adequately service? Select correct option: Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden
Which of the following terms best applies to the short-term interest rate charged by banks to large, creditworthy customers? Select correct option: Discount basis interest rate Long-term bond rate Prime rate Fed funds rate http://vustudents.ning.com
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According to _________, the firm's cost of equity increases with greater debt financing, but the WACC remains unchanged. Select correct option: M&M Proposition I with taxes M&M Proposition I without taxes M&M Proposition II without taxes M&M Proposition II with taxes
Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option: Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden
The benefit we expect from a project is expressed in terms of:
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Cash in flows Cash out flows Cash flows None of the given option
What is the economic order quantity for the following situation? A firm sells 32,000 cases of microwave popcorn per year. The cost per order is Rs.20 per case and the firm experiences a carrying cost of 8.0%. Select correct option:
2,000 cases 4,000 cases 8,000 cases 16,000 cases
Which of the following has the same meaning as the working capital to financial analyst?
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Total assets Fixed assets Current assets Current assets minus current liabilities
Which of the followings are the propositions of Modigliani and Miller's? Select correct option:
How "Shareholder wealth" is represented in a firm? Select correct option:
The value of direct claim security is derived from which of the following? Select correct option:
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Fundamental analysis Underlying real asset Supply and demand of securities in the market All of the given options
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 ________. Select correct option:
Fall Rise Remain unchanged Incomplete information
Which of the following is an example of restructuring the firm? Select correct option:
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Which of the following refers to financial risk? Select correct option:
Which of the following is called the tax savings of the firm derived from the deductibility of interest expense? Select correct option:
Interest tax shield
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Depreciable basis Financing umbrella Current yield
An annuity due is always worth ___ a comparable annuity. Select correct option:
Which of the following would be consistent with an aggressive approach to financing working capital? Select correct option:
Financing short-term needs with short-term funds Financing permanent inventory buildup with long-term debt Financing seasonal needs with short-term funds Financing some long-term needs with short-term funds
According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of which of the following: Select correct option:
Unique risk Reinvestment risk
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Market risk Unsystematic risk
How can a company improve (lower) its debt-to-total asset ratio? Select correct option:
Who or what is a person or institution designated by a bond issuer as the official representative of the bondholders? Select correct option:
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should be done by the firm? Select correct option:
The firm has minimized its total carrying costs
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The firm should increase its order size The firm should decrease its order size The firm has maximized
Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option:
How the beta of the stock could be calculated? Select correct option:
Which of the following is a payment of additional shares to shareholders in lieu of cash? Select correct option:
Stock split Stock dividend
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Extra dividend Regular dividend
What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option:
Unlimited liability Single tax filing Difficult ownership resale Raising capital
Which of the following would generally have unlimited liability? Select correct option:
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)
Which of the following is related to the use Lower financial leverage? Select correct option:
Fixed costs Variable costs Debt financing
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Common equity financing
Which group of ratios measures a firm's ability to meet short-term obligations? Select correct option:
Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option:
What is the most important criteria in capital budgeting? Select correct option:
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When a firm needs guaranteed, short-term funds available for a variety purposes, the bank loan will likely be a ________. Select correct option:
Compensating balance arrangement Revolving credit agreement Transaction loan Line of credit
Which of the following terms best applies to the short-term interest rate charged by banks to large, creditworthy customers? Select correct option:
Discount basis interest rate Long-term bond rate Prime rate Fed funds rate
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The explicit costs associated with corporate default, such as legal expenses, are the _________ of the firm. Select correct option:
According to MM II, what happens when a firm's debt-to-equity ratio increases? Select correct option:
Which statement is NOT true regarding the market portfolio? Select correct option:
Which of the following factor(s) do NOT affects the movements in the market index?
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Macroeconomic factors Socio political factors Social factors All of the given options
Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: Select correct option:
Magnitude of expected cash flows Timing of expected cash flows Both timing and magnitude of cash flows None of the given options
A statistical measure of the variability of a distribution around its mean is referred to as ________.
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The benefit we expect from a project is expressed in terms of: Select correct option:
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Which of the following has the same meaning as the working capital to financial analyst? Select correct option:
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301
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Financing short-term needs with short-term funds
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Financing permanent inventory buildup with long-term debt Financing seasonal needs with short-term funds Financing some long-term needs with short-term funds
When Investors want high plowback ratios? Select correct option: Whenever ROE > k Whenever k > ROE Only when they are in low tax brackets Whenever bank interest rates are high]
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According to MM II, what happens when a firm's debt-to-equity ratio increases? Select correct option: Its financial risk increases Its operating risk increases The expected return on equity increases The expected return on equity decreases
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
When bonds are issued, under which of the following category the value of the bond appears? Select correct option: Equity Fixed assets Short term loan Long term loan
For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure? Select correct option: Cost of debt Cost of preferred stock Cost of common equity Cost of retained earnings Which of the following could be taken same as minimizing the weighted average cost of capital? Select correct option: Maximizing the market value of the firm Maximizing the market value of the firm only if MM's Proposition I Minimizing the market value of the firm only if MM's Proposition I holds Maximizing the profits of the firm
Which of the following has the same meaning as the working capital to financial analyst? Select correct option: Total assets Fixed assets
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Current assets Current assets minus current liabilities
The value of direct claim security is derived from which of the following? Select correct option: Fundamental analysis Underlying real asset Supply and demand of securities in the market All of the given options
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 ________. Select correct option: Fall Rise Remain unchanged Incomplete information
Which of the following is an example of restructuring the firm? Select correct option: Dividends are increased from Rs.1 to Rs.2 per share A new investment increases the firm's business risk New equity is issued and the proceeds repay debt A new Board of Directors is elected to the firm
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Which of the following refers to financial risk? Select correct option: Risk of owning equity securities Risk faced by equity holders when debt is used General business risk of the firm Possibility that interest rates will increase
Which of the following is called the tax savings of the firm derived from the deductibility of interest expense? Select correct option: Interest tax shield Depreciable basis Financing umbrella Current yield
An annuity due is always worth ___a comparable annuity. Select correct option: Less than More than Equal to Can not be found from the given information
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How can a company improve (lower) its debt-to-total asset ratio? Select correct option: By borrowing more By shifting short-term to long-term debt By shifting long-term to short-term debt By selling common stock
Which of the following factor(s) do NOT affects the movements in the market index? Select correct option:
To increase a given future value, the discount rate should be adjusted __________. Select correct option:
Upward
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Downward First upward and then downward None of the given options
Which of the following is the stability of a firm's operating income? Select correct option:
Financial leverage Weighted-average cost of capital Capital structure Business risk
Risk of owning equity securities Risk faced by equity holders when debt is used
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General business risk of the firm Possibility that interest rates will increase
Which of the following is simply the weighted average of the possible returns, with the weights being the probabilities of occurrence? Select correct option:
Coefficient of variation is NOT the measure of __________. Select correct option:
Risk Probability Relative dispersion Risk per unit of expected return
becuase its dispersion of probability
If Deen Muhammad Suppliers receive an invoice for purchases dated 12/12/2002 subject to credit terms of "2/10, net 30", what is the last possible day the discount can be taken? Select correct option:
January 11
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January 22 January 30 December 30
The term "2/10" refers to a firm that can take the discount for only 10 days from the date of the invoice. Thus, goods shipped on the 12th are due no later than the 22nd if the discount is taken
Which of the following is a basic principle of finance as it relates to the management of working capital? Select correct option: Profitability varies inversely with risk Liquidity moves together with risk Profitability moves together with risk Profitability moves together with liquidity
Which of the following effects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk
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__________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. Select correct option: Systematic risk Standard deviation Unsystematic risk Coefficient of variation
Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option: Discount rate Profitability index Internal rate of return Multiple Internal rate of return
What does the law of conservation of value implies? Select correct option: The mix of senior and subordinated debt does not affect the value of the firm The mix of convertible and non-convertible debt does not affect the value of the firm The mix of common stock and preferred stock does not affect the value of the firm All of the given options
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should be done by the firm?
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Select correct option: The firm has minimized its total carrying costs The firm should increase its order size The firm should decrease its order size The firm has maximized its order costs
What is the present value of Rs.8,000 to be paid at the end of three years if the correct risk adjusted interest rate is 11%? Select correct option: Rs.5,850 (6015) Rs.4,872 Rs.6,725 Rs.1,842
Which of the following is a capital budgeting technique that is NOT considered as discounted cash flow method? Select correct option: Payback period Internal rate of return Net present value Profitability index
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? Select correct option: Cash budgeting Capital budgeting
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Capital rationing Capital expenditure
Which of the following market in finance is referred to the market for short-term government and corporate debt securities? Select correct option: Money market Capital market Primary market Secondary market
How economic value is added (EVA) calculated? Select correct option: It is the difference between the market value of the firm and the book value of equity It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge It is the net income of the firm less a dollar cost that equals WAAC multiplied by the book value of liabilities and equities None of the given option
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 __________. http://vustudents.ning.com Select correct option: Fall Rise Remain unchanged Incomplete information
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http://highered.mcgraw-hill.com/sites/0073012386/student_view0/chapter15/multiple_choice_quiz.html
How dividend yield on a stock is similar to the current yield on a bond? Select correct option: Both represent how much each securitys price will increase in a year Both represent the securitys 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 are quarterly yields that must be annualized
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Which group of ratios shows the extent to which the firm is financed with debt? Select correct option:
At the termination of project, which of the following needs to be considered relating to project assets? Select correct option:
Salvage value Book value Intrinsic value Fair value
Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option:
Cash outflow to the government for taxes Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
Which of the following could be defined as the capital structure of the Company?
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Which of the following could NOT be defined as the capital structure of the Company? Select correct option:
Which of the following refers to a policy of dividend "smoothing"? Select correct option:
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Where the stock points will lie, if a stock is a part of totally diversified portfolio? Select correct option:
It will lie below the regression line It will line above the regression line It will line exactly on the regression line not sure It will be tangent to the regression line
Which of the following is the characteristic of a well diversified portfolio? Select correct option:
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Its market risk is negligible Its unsystematic risk is negligible Its systematic risk is negligible All of the given options
Which of the following portfolio statistics statements is correct? Select correct option:
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
What should be used to calculate the proportional amount of equity financing employed by a firm? Select correct option:
The common stock equity account on the firm's balance sheet The sum of common stock and preferred stock on the balance sheet The book value of the firm The current market price per share of common stock times the number of shares Outstanding
The value of a bond is directly derived from which of the following? Select correct option:
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Cash flows Coupon receipts Par recovery at maturity All of the given options
1. Juan is starting a software writing company. He is the owner and has only 3 employees. He wants a simple inexpensive form of ownership that leaves him in control and that he can quickly dissolve if he decides to change to another business. His best choice of form of ownership would be: a. S-corporation b. Partnership c. Corporation d. Sole proprietorship 2. A tool that identifies the strengths, weaknesses, opportunities and threats of an organization is know as: a. SWOT Analysis b. Trend Analysis c. Fundamental Analysis d. Technical Analysis 3. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at: a. A premium b. A discount c. Cannot be determined without more information d. Face value 4. Which of the following statements best describe the Balance Sheet? a. Summarizes the firms revenues and expenses over an accounting period b. Reports how much of the firms earnings were retained in the business rather than paid out in dividends c. Reports the impact of a firms operating, investing, and financing activities on cash flows over an accounting period d. States the firms financial position at a specific point in time 5. Which of the following is the purpose of the Debt management ratios? a. They measure the amount of debt the firm uses b. They measure how effectively a firm is managing its assets c. They show the relationship of a firms cash and other current assets to its current liabilities d. They show the combined effects of all areas of the firm on operating results http://vustudents.ning.com
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6. In which of the following situations a project is acceptable? a. When a project has conventional cash flows patterns b. When a project has a non-conventional cash flow pattern c. When a project has a discounted rate higher than the inflation rate d. When a project has a positive net present value 7. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if: a. Cost of goods sold increased relative to sales. b. Sales increased relative to expenses. c. The tax rate has been increased d. Dividends were decreased. 8. Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company a. Will not experience any difficulty with its creditors. b. Has less liquidity than other firms in the industry. c. Will be viewed as having high creditworthiness. d. Has greater than average financial risk when compared to other firms in its industry. 9. For purposes of financial statements, the accounting value of fixed assets is: a. Based on their estimated liquidation value b. Based on their relative importance to the company c. Based on their actual purchase price d. Based on their current market price 10. Which of the following transactions affects the acid-test ratio? a. Receivables are collected. b. Inventory is liquidated for cash. c. New common stock is sold and used to retire a debt issue. d. A new common stock issue is sold and equipment purchased 11. The rate of return on the best available investment of equal risk is called: a. Discounting b. Compounding c. The opportunity cost rate d. Time lines 12. An annuity whose payments occur at the end of each period is called: a. An opportunity cost annuity. b. An ordinary annuity c. An annuity due d. An outflow annuity 13. Which of the following is the rate of return earned on a bond if it is held until maturity? a. Yield-to-call b. Coupon payment c. Yield-to-maturity d. Sinking fund yield http://vustudents.ning.com
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14. Keeping other things constant, if a bonds yield-to-maturity increases: a. Its price will rise b. Its price will remain unchanged c. Its price will fall. d. Can not be determined 15. A 30-year corporate bond issued in year 1985 would now trade in which of the following markets? a. Primary capital market b. Primary money market c. Secondary money market d. Secondary capital market 16. When the market's nominal annual required rate of return for a particular bond is less than its coupon rate, the bond will be selling at ________. a. A discount b. A premium c. Par value d. An indeterminate price 17. The buyer of a zero-coupon bond expects to receive: a. Price appreciation. b. A rate of return equal to zero over the life of the bond. c. Variable dividends instead of a fixed interest payment annually. d. All interest payments in one lump sum at maturity. 18. The intrinsic value of a share of common stock: a. Is the discounted value of all future cash dividends b. Increases when the required rate of return increases, if the dividend is held constant. c. Is zero if the company pays no dividends d. Is the discounted capital gain expected on the stock 19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this year. Its dividend yield is 8%. At what price is the stock selling? a. Rs.40 b. Rs.35 c. Rs.30 d. Rs.25 20. Which of the following stock would provide a regular income to the investor? a. Growth stock b. Income stock c. Aggressive stock d. Defensive stock
FINAL TERM EXAMINATION Spring 2009
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MGT201- Financial Management (Session - 2)
Question No: 1
( Marks: 1 )
- Please choose one
What is the long-run objective of financial management? Maximize earnings per share
Maximize the value of the firm's common stock
Maximize return on investment
Maximize market share
Question No: 2
( 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: 3
( Marks: 1 )
- Please choose one
What is the present value of a Rs.1,000 ordinary annuity that earns 8% annually for an infinite number of periods?
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Rs.80
Rs.800
Rs.1,000
Rs.12,500
Question No: 4
( 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
Question No: 5
( Marks: 1 )
- Please choose one
What is the advantage of a longer life of the asset?
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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: 6
( Marks: 1 )
- Please choose one
Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, ____________.
Both bonds will increase in value, but bond A will increase more than bond B Both bonds will increase in value, but bond B will increase more than bond A Both bonds will decrease in value, but bond A will decrease more than bond B Both bonds will decrease in value, but bond B will decrease more than bond A
Question No: 7
( Marks: 1 )
- Please choose one
Given no change in required returns, the price of a stock whose dividend is constant will__________.
Remain unchanged Decrease over time at a rate of r% Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate
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Question No: 8
( Marks: 1 )
- Please choose one For
most firms, P/E ratios and risk_________.
Will be directly related Will have an inverse relationship Will be unrelated Will both increase as inflation increases
Question No: 9
( Marks: 1 )
- Please choose one
Question No: 10
( 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
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The standard deviation Coefficient of variation
Question No: 11
( Marks: 1 )
square of the standard deviation is known as the ________.
Beta Expected return Coefficient of variation Variance
Question No: 12
( Marks: 1 )
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: 13
( Marks: 1 )
- Please choose one

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An investor was expecting a 18% return on his portfolio with beta of 1.25 before the market risk premium increased from 8% to 10%. Based on this change, what return will now be expected on the portfolio? 22.5% 20.0% 20.5% 26.0%
Question No: 14
( Marks: 1 )
- Please choose one
Which of the following is the characteristic of a well diversified portfolio? Its market risk is negligible Its unsystematic risk is negligible Its systematic risk is negligible All of the given options
Question No: 15
( Marks: 1 )
- Please choose one
How the beta of a stock can be calculated?
Question No: 16
( Marks: 1 )
- Please choose one

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Which of the following formula relates beta of the stock to the standard deviation? Covariance of stock with market * variance of the market Covariance of stock with market / variance of the market Variance of the market / Covariance of stock with market Slope of the regression line
Question No: 17
( Marks: 1 )
beta greater than 1 for a stock shows:
Stock is relatively more risky than the market If the market moves up by 10% the stock will move up by 12% As the market moves the stock will move in the same direction All of the given options
Question No: 18
( Marks: 1 )
stock is a part of totally diversified portfolio then its company risk must be equal to:
0 0.5 1 -1
Question No: 19
( Marks: 1 )
- Please choose one
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If risk and return combination of any stock is above the SML, what does it mean?
Question No: 20
( Marks: 1 )
arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. Positive Negative Zero All of the given options
Question No: 21
( 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 given options
Question No: 22
( Marks: 1 )
- Please choose one
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If arbitrage opportunities are to be ruled out, what would be the expected excess return of each well-diversified portfolio? Inversely proportional to the risk-free rate Inversely proportional to its standard deviation Proportional to its standard deviation Proportional to its beta coefficient
Question No: 23
( Marks: 1 )
- Please choose one
Which of the following represent all Risk Return Combinations for the efficient portfolios in the capital market?
Parachute graph CML straight line equation Security market line All of the given options
Question No: 24
( Marks: 1 )
- Please choose one
What should be used to calculate the proportional amount of equity financing employed by a firm? The common stock equity account on the firm's balance sheet The sum of common stock and preferred stock on the balance sheet The book value of the firm The current market price per share of common stock times the number of shares Outstanding
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Question No: 25
( Marks: 1 )
- Please choose one
Which of the following is the market for short term debt?
Money market Capital market Real asset market Equity market
Question No: 26
( Marks: 1 )
- Please choose one
Bonds are issued in the market at _________.
Premium Discount Both premium and discount None of the given options
Question No: 27
( Marks: 1 )
debt is a less costly source of fund?
Because additional interest creates a new form of tax shield Because additional money creates a new form of tax shield Because banks extend loan at lower interest rates None of the given options
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Question No: 28
( Marks: 1 )
- Please choose one
Which of the following is as EBIT?
Funds provided by operations Earnings before taxes Net income Operating profit
Question No: 29
( Marks: 1 )
- Please choose one
Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The firm has Rs.1, 000,000 in fixed costs. The firm anticipates selling each unit for Rs.25 with variable costs of Rs.5 per unit. 3.33 1.25 1.14 There is not sufficient information provided to calculate the degree of operating leverage (DOL).
Question No: 30
( Marks: 1 )
firm has a DOL of 3.5 at Q units. What does this tell us about the firm? If sales rise by 3.5% at the firm, then EBIT will rise by 1% If EBIT rises by 3.5% at the firm, then EPS will rise by 1% If EBIT rises by 1% at the firm, then EPS will rise by 3.5% If sales rise by 1% at the firm, then EBIT will rise by 3.5%
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Question No: 31
( Marks: 1 )
- Please choose one
Which of the following represents financial leverage? Use of more debt capital to increase profit Debt is not used in capital to increase profit High degree of solvency Low degree of solvency
Question No: 32
( Marks: 1 )
- Please choose one
Which of the following best describes the statement; The value of an asset is preserved regardless of the nature of the claims against it? Law of diminishing marginal returns Law of conservation of value Law of return on equity Law of return on assets
Question No: 33
( Marks: 1 )
- Please choose one
Firm ABC has Rs.5 million in outstanding debt, currently has 200,000 shares outstanding priced at Rs.60 a share, and has a borrowing rate of 10%. If the firm's return on equity is 15%, what is the firm's WACC? 5.00% 3.23% 4.25% 2.16%
Question No: 34
( Marks: 1 )
- Please choose one

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Which of the following statements regarding the M&M Propositions without taxes is true? The total value of the firm depends on how cash flows are divided up between stockholders and bondholders, under M&M Proposition I. The firm's capital structure is relevant under M&M Proposition I. The cost of equity depends on the firm's business risk but not its financial risk, under M&M Proposition II. The cost of equity rises as the firm increases its use of debt financing under M&M Proposition II.
Question No: 35
( Marks: 1 )
- Please choose one
Which one of the following is correct for the spot exchange rate? This is the rate today for exchanging one currency for another for immediate delivery This is the rate today for exchanging one currency for another at a specific future date This is the rate today for exchanging one currency for another at a specific location on a specific future date This is the rate today for exchanging one currency for another at a specific location for immediate delivery
Question No: 36
( Marks: 1 )
restructuring of a firm should be undertaken, when: The restructuring is expected to create value for shareholders The restructuring is expected to increase earnings per share next year The restructuring is expected to increase the firm's market share power in industry The current employees will receive additional stock options to align employee interest
335
Question No: 37
( Marks: 1 )
- Please choose one
Which of the following term is used when the firm can independently control considerable assets with a very limited amount of equity? Joint venture Leveraged buyout (LBO) Spin-off Consolidation
Question No: 38
( Marks: 1 )
- Please choose one
What is the economic order quantity for an automobile dealer selling 2,000 cars per year, at a cost of Rs.750 per order, and a carrying cost of Rs.300 per automobile?
40 cars 71 cars 100 cars 126 cars
Question No: 39
( Marks: 1 )
- Please choose one
As the amount of __________ increases the present value of net tax-shield benefits of debt increases.
Debt
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Common equity Preffered equity Assets
Question No: 40
( Marks: 1 )
- Please choose one
Why the present value of the costs of financial distress increases with increases in the debt ratio? Expected return on assets increases Present value of the interest tax shield is greater Equity tax shield is depleted Probability of default and/or bankruptcy is greater
Question No: 41
( Marks: 5 )
What are the real markets effects of leverage on WAAC? (Answer the question in bulleted form only). Answer: Real Markets Effects of leverage on WACC: Increase in leverage causes a a large increase in cost of equity Increase in leverage causes relatively small increase in cost of debt as compared to cost of equity As leverage increases WACC 1st falls because of tax saving shield. With further increase in leverage WACC fall to its minimum point which is the optimal point for capital structure Further increase in leverage causes increase in WACC because of bankruptcy risk ( Marks: 5 )
Question No: 42
Suppose a Firm ABC has Total Assets of Rs.1000 and is 100% Equity based (i.e. Un-levered). There were 10 equal Owners and 5 of them want to leave. So the Firm takes a Bank Loan of Rs.500 (at 10%pa Mark-up) and pays back the Equity Capital to the 5 Owners who are leaving. Now, half of the Equity Capital has been replaced with a Loan from a Bank (i.e. Debt). What impact does this have on ROE?
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Answer: As the firm replaces equity with debt it is increasing financial leverage which is a cause of financial risk. The impact of debt on ROE is that ROE will increase but with the greater uncertainty hence greater will be the risk.
Question No: 43
( Marks: 10 )
Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has a beta of 1.25. The risk free rate is 10% and the expected market return is 18%.
a. b. c. d.
Find the expected return on stock X Find the expected return on stock Y Find the expected return on stock Z Suppose that you construct a portfolio consisting of 40% X, 20% Y and 40% Z. What is the beta of the portfolio? http://vustudents.ning.com
Answer: a. rM = 18% rRF = 10% = 0.5
r = rRF + ( rM + rRF ) = 10% + (18%-10%) 0.5 = 10% + 4% = 14%
b.
rM = 18% rRF = 10% = 1.00
r = rRF + ( rM + rRF )
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= 10% + (18%-10%) 1.00 = 10% + 8% = 18%
c.
rM = 18% rRF = 10% = 1.25
r = rRF + ( rM + rRF ) = 10% + (18%-10%) 1.25 = 10% + 10% = 20%
d. Beta of portfolio = P = X X + Y Y + Z Z = (40/100)0.5 + (20/100)1.0 + (40/100)1.25 = 0.4x0.5 + 0.2x1.0 + 0.4x1.25 = 0.2 + 0.2 + 0.5 = 0.9
Question No: 44
( Marks: 10 )
The ABC company is in the 35% marginal tax bracket. The current market value of the firm is Rs. 12 million. If there are no costs to bankruptcy:
339
What will be ABC annual tax savings from interest deductions be if it issues Rs. 2 million of five years bonds at 12 % interest rate? What will be the value of the firm? ANSWER: Annual Coupon payment each yr = 12% of 2,000,000 = 2000000 x 12/100 = 24000 Tax saving for 5 yrs = 5(35 % of 24000) = 5(24000 x 35/100) = 5x8400 = 42000
What will ABC annual tax savings from interest deductions be if it issues Rs. 2 million of seven years bonds at 12 % interest rate? What will be the value of the firm? Answer: Annual Coupon payment each yr = 12% of 2,000,000 = 2000000 x 12/100 = 24000 Tax saving for 7 yrs = 7(35 % of 24000) = 7(24000 x 35/100) = 7x8400 = 58800
Question No: 45
( Marks: 10 )
Using the Capital Asset Pricing Model (CAPM), determine the required return on equity for the following situations:
340
Situations 1 2 3 4 5
Expected return on market portfolio 16% 18 15 17 20
Risk- free rate 12% 8 14 13 15
Beta 1.00 0.80 0.70 1.20 1.60
What generalization can you make?
ANSWER: Required return= r = rRF + ( rM + rRF ) Where rRF = risk free return rM = expected return on market = beta of stock
1.
rM = 16% rRF = 12% = 1.00
r = rRF + ( rM + rRF ) = 12% + (16%-12%)1.00 = 12% + 4% = 16%
2.
rM = 18% rRF = 8% = 0.80
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= 8% + (18%-8%)0.80 = 8% + 8% = 16%
3.
rM = 15% rRF = 14% = 0.70
r = rRF + ( rM + rRF ) = 14% + (15%-14%)0.70 = 14% + 0.70 = 14.7%
4.
rM = 17% rRF = 13% = 1.20
r = rRF + ( rM + rRF ) = 13% + (17%-13%)1.20 = 13% + 4.8% = 17.8%
5.
rM = 20% rRF = 15% = 1.60
r = rRF + ( rM + rRF ) = 15% + (20%-15%) 1.60 = 15% + 8% = 23% GENERALIZATION: As beta of stock rises the return on stock also rises.
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MGT201- Financial Management (Session - 2) Question No: 1 ( Marks: 1 ) - Please choose one Why companies invest in projects with negative NPV?
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
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Three; one
Question No: 3
( Marks: 1 )
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
Question No: 4
( Marks: 1 )
set of possible values that a random variable can assume and their associated probabilities of occurrence are referred to as __________.
Question No: 5
( Marks: 1 )
present value of growth opportunities (PVGO) is equal to
345
I) II) III) IV)
The difference between a stock's price and its no-growth value per share The stock's price Zero if its return on equity equals the discount rate 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
Question No: 7
( Marks: 1 )
- Please choose one
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
346
The rate of return on Treasury bills decreases
Question No: 8
( Marks: 1 )
- Please choose one
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?
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?
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7.69 8.33 9.09 11.11
Question No: 11
( Marks: 1 )
- Please choose one
How dividend yield on a stock is similar to the current yield on a bond?
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%
Question No: 13
( Marks: 1 )
- Please choose one

348
The value of direct claim security is derived from which of the following?
Question No: 14
( Marks: 1 )
- Please choose one
Which of the following value of the shares changes with investors perception about the companys 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

349
When a bond will sell at a discount?
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%
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10.95% 10.52%
Question No: 19
( Marks: 1 )
7.00 6.53 8.53 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?
351
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
Question No: 22
( Marks: 1 )
- Please choose one
Question No: 23
( Marks: 1 )
- Please choose one
Tangible assets
Intangible assets
Fixed assets
Real assets
352
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 )
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 and the bondholders that establish the terms of the bond issue?
Indenture
353
Debenture
Bond
Bond trustee
Question No: 27
( Marks: 1 )
- Please choose one
Cost of the capital
Return on asset
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? http://vustudents.ning.com
354
Net present value
Question No: 29
( Marks: 1 )
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
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
355
Cash flow from investing activity All of the given options
Question No: 31
( Marks: 1 )
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
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
356
Rs.99.74
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
Question No: 35
( Marks: 1 )
annuity due is always worth _____ a comparable annuity.
Less than More than Equal to Can not be found
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
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Rs.545.45 Rs.13,816
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
Question No: 39
( Marks: 1 )
- Please choose one
Which of the following statements is the least likely to be correct?
358
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
Question No: 41
( Marks: 10 )
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments Project X and Project Y. Each project has a cost of Rs. 10,000 and the cost of capital for both projects is 12%. The projects expected cash flows are as follows:
Expected net cash flows Year 0 1 Project X (10,000) 6,500 Project Y (10,000) 3,500
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2 3 4
3,000 3,000 1,000
3,500 3,500 3,500
i. Calculate each projects payback, net present value (NPV), internal rate of
return (IRR), and profitability index (PI).
ii. Which project or projects should be accepted if they are independent? iii. Which project should be accepted if they are mutually exclusive?
ANSWER: 1. Payback: PROJECT X: Cost of project = Rs. 10,000 Payback period is the time required by the project to recover its costs. Year 1 the project will recover Rs. 6,500 Year 2 the project will recover Rs 3000 Year 3 project will recover the remaining Rs. 500 in 1st month of 3rd yr. So payback period for Project X is 2 yrs and 1 month.
PROJECT Y: Cost of project= Rs 10,000 Year 1 project will recover Rs 3,500 Year 2 project will recover Rs 3,500 Year 3 project will recover remaining Rs 3000 in approximately 11 months of 3rd yr. So payback period of project Y is 2 yrs and 11 months.
2. Net Present Value: Project X: Initial investment, I0 = Rs 10,000 Cash flow in yr 1, CF1 = Rs 6500 Cash flow in yr 2, CF2 = Rs 3000
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Cash flow in yr 3, CF3 = Rs 3000 Cash flow in yr 4, CF4 = Rs 1000 Discount rate, I = 12 % 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 + 6500/(1.12) + 3000/(1.12)2+ 3000/(1.12)3+ 1000/(1.12)4
= Rs 966
Project Y: Initial investment, I0 = Rs 10,000 Cash flow in yr 1, CF1 = Rs 3500 Cash flow in yr 2, CF2 = Rs 3500 Cash flow in yr 3, CF3 = Rs 3500 Cash flow in yr 4, CF4 = Rs 3500 Discount rate, I = 12 % 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 + 3500/(1.12) + 3500/(1.12)2+ 3500/(1.12)3+ 3500/(1.12)4 = Rs 631
3. IRR: Project X: Put NPV = 0 NPV = - 10000 + 6500/(1+i) + 3000(1+i)2+ 3000(1+i) 3+ 1000/(1+i) 4
4. Profitability Index:
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Project X: PI= Sum(CFt/(1+i)t)/Io = 10,966/10000 = 1.096 Project Y : PI= Sum(CFt/(1+i)t)/Io = 10631/10000 = 1.0631
Result: Since NPV and PI of project X are higher than that of project Y so Project X will be accepted.
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MIDTERM EXAMINATION Spring 2009 MGT201- Financial Management (Session - 4) Time: 60 min Marks: 50 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
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
363
Question No: 3
( Marks: 1 )
- Please choose one
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
364
Question No: 6
( Marks: 1 )
- Please choose one
Question No: 7
( Marks: 1 )
- Please choose one
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
365
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
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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
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 (714) Rs.1,462.23 Rs.322.69 Rs.401.98
Question No: 13
( 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
367
Can not be found
Question No: 14
( Marks: 1 )
benefit 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 )
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 Project B Project C 1.66 2.66 3.66
Question No: 16
( Marks: 1 )
- Please choose one

368
If a projects 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 )
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
Question No: 18
( Marks: 1 )
- Please choose one
369
Net present value
Question No: 19
( Marks: 1 )
- Please choose one
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
370
Question No: 21
( 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)
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
371
Question No: 23
( Marks: 1 )
- Please choose one
Question No: 24
( Marks: 1 )
- Please choose one
Question No: 25
( Marks: 1 )
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
372
Greater than zero Equal to the sum of the securities' standard deviations Equal to -1
Question No: 26
( Marks: 1 )
- Please choose one
Question No: 27
( Marks: 1 )
- Please choose one
Question No: 28
( Marks: 1 )
value of dividend is derived from which of the following?
Cash flow streams
373
Capital gain /loss Difference between buying & selling price All of the given options
Question No: 29
( Marks: 1 )
- Please choose one
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
Question No: 31
( Marks: 1 )
- Please choose one
374
Question No: 32
( Marks: 1 )
- Please choose one
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
375
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
Question No: 35
( Marks: 1 )
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
New competitors New product management Worldwide inflation
376
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
377
Question No: 39
( Marks: 1 )
- Please choose one
Question No: 40
( Marks: 1 )
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
378
379
Choose the correct option among the choices given below:

1. Who determine the market price of a share of common stock? a. The board of directors of the firm b. The stock exchange on which the stock is listed c. The president of the company d. Individuals buying and selling the stock 2. What should be the focal point of financial management in a firm? a. The number and types of products or services provided by the firm b. The minimization of the amount of taxes paid by the firm c. The creation of value for shareholders d. The dollars profits earned by the firm 3. Which of the following would generally have unlimited liability? a. A limited partner in a partnership b. A shareholder in a corporation c. The owner of a sole proprietorship d. A member in a limited liability company (LLC) 4. Which of the following is equal to the average tax rate? a. Total tax liability divided by taxable income b. Rate that will be paid on the next dollar of taxable income c. Median marginal tax rate d. Percentage increase in taxable income from the previous period 5. 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? a. Rs.3, 750,000 b. Rs.480, 000 c. Rs.300, 000
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d. Rs.1, 500,000 Since ROI=8% on $300,000 of assets, then net profit is Rs.24,000 (8% Rs.300,000). Using the net profit and given that the NPM=5%, sales equals Rs.480,000 (Rs.24,000 / 5%). 6. Which of the following would not improve the current ratio? a. Borrow short term to finance additional fixed assets b. Issue long-term debt to buy inventory c. Sell common stock to reduce current liabilities d. Sell fixed assets to reduce accounts payable 7. With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs.20,000 initial investment? a. Rs.52,000 b. Rs.93,219 c. Rs.99,061 d. Rs.915,240 Rs.20,000[ e(.08 20) ] = Rs.20,000(4.9530324) = Rs.99,061. 8. 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 __________. a. Fall b. Rise c. Remain unchanged d. Incomplete information 9. Cash budgets are prepared from past: a. Balance sheets b. Income statements c. Income tax and depreciation data
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d. None of the given options 10. Which of the following is part of an examination of the sources and uses of funds? a. A forecasting technique b. A funds flow analysis c. A ratio analysis d. Calculations for preparing the balance sheet 11. An annuity due is always worth _____ a comparable annuity. a. Less than b. More than c. Equal to d. Can not be found 12. As interest rates go up, the present value of a stream of fixed cash flows _____. a. Goes down b. Goes up c. Stays the same d. Can not be found 13. ABC company is expected to generate Rs.125 million per year over the next three years in free cash flow. Assuming a discount rate of 10%, what is the present value of that cash flow stream? a. Rs.375 million b. Rs.338 million c. Rs.311 million d. Rs. 211 million $311 million. The The cash flow stream would look like this: 125.00 x 0.9090 = 113.63; 125.00 x 0.8264 = 103.30; 125.00 x 0.7513 = 93.91. The sum of the three is $310.84, or $311 million.
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14. If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows? a. An increase b. A decrease c. No change d. Incomplete information 15. In proper capital budgeting analysis we evaluate incremental __________ cash flows. a. Accounting b. Operating c. Before-tax d. Financing 16. A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: a. Payback period b. Internal rate of return c. Net present value d. Profitability index 17. Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: a. Magnitude of expected cash flows b. Timing of expected cash flows c. Both timing and magnitude of cash flows d. None of the given options 18. Which of the followings make the calculation of NPV difficult?
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a. Estimated cash flows b. Discount rate c. Anticipated life of the business d. All of the given options 19. From which of the following category would be the cash flow received from sales revenue and other income during the life of the project? a. Financing activity b. Operating activity c. Investing activity d. All of the given options 20. Which of the following technique would be used for a project that has non normal cash flows? a. Multiple internal rate of return b. Modified internal arte of return c. Net present value d. Internal rate of return 1. Why net present value is the most important criteria for selecting the project in capital budgeting? a. Because it has a direct link with the shareholders dividends maximization b. Because it helps in quick judgment regarding the investment in real assets c. Because we have a simple formula to calculate the cash flows d. Because it has direct link with shareholders wealth maximization 2. In which of the following situations you can expect multiple answers of IRR? a. More than one sign change taking place in cash flow diagram b. There are two adjacent arrows one of them is downward pointing & the other one is upward pointing
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c. During the life of project if you have any net cash outflow d. All of the given options 3. 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? a. Cash budgeting b. Capital budgeting c. Capital expenditure d. Capital rationing 4. Who is responsible for the decisions relating capital budgeting and capital rationing? a. Chief executive officer b. Junior management c. Division heads d. All of the given option 5. What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? a. Indenture b. Debenture c. Bond d. Bond trustee 6. __________ is a high-risk, high-yield bond rated below investment grade; while a/ (an) __________ bond has its interest payment contingent on sufficient earnings of the firm. a. A junk bond; income b. A subordinated debenture; mortgage
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c. A debenture; subordinated debenture d. An income bond; mortgage 7. __________ is a long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; while a/(an) __________ bond issue is secured by the issuer's property. a. A subordinated debenture; mortgage b. A debenture; subordinated debenture c. A junk bond; income d. An income bond; junk 8. The value of the bond is NOT directly tied to the value of which of the following assets? a. Liquid assets of the business b. Fixed assets of the business c. Lon term assets of the business d. Real assets of the business 9. The value of a bond is directly derived from which of the following? a. Cash flows b. Coupon receipts c. Par recovery at maturity d. All of the given options 10. Which of the following is not the present value of the bond? a. Intrinsic value b. Fair price c. Theoretical price d. Market price 11. The current yield on a bond is equal to ________.
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a. The yield to maturity b. Annual interest divided by the par value c. Annual interest divided by the current market price d. The internal rate of return 12. 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 is? a. 10.45% b. 10.95% c. 10.65% d. 10.52% 13. Which of the following is a characteristic of a coupon bond? a. Does not pay interest on a regular basis but pays a lump sum at maturity b. Can always be converted into a specific number of shares of common stock in the issuing company c. Pays interest on a regular basis (typically every six months) d. Always sells at par 14. Which of the following value of the shares changes with investors perception about the companys future and supply and demand situation? (Comprehension) a. Par value b. Intrinsic value c. Market value d. Face value 15. The value of direct claim security is derived from which of the following? a. Fundamental analysis b. Underlying real asset
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c. Supply and demand of securities in the market d. All of the given options 16. _________ is equal to (common shareholders' equity/common shares outstanding). a. Liquidation value per share b. Book value per share c. Market value per share d. None of the above 17. 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. a. 4.8% b. 6.0% c. 7.2% d. 3.0% 18. High Tech Chip Company is expected to have EPS in the coming year of Rs. 2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, what would be the growth rate of dividends? a. 6.25% b. 8.75% c. 6.60% d. 7.50% 19. In the dividend discount model, _______ which of the following are not incorporated into the discount rate? a. Real risk-free rate
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b. Risk premium for stocks c. Return on assets d. Expected inflation rate 20. Bond is a type of Direct Claim Security whose value is NOT secured by __________. a. Tangible assets b. Fixed assets c. Intangible assets d. Real assets
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Question # 2 of 10 ( Start time: 04:05:43 PM ) Total Marks: 1 To increase a given future value, the discount rate should be adjusted __________. Select correct option: Upward Downward First upward and then downward None of the given options
Question # 3 of 10 ( Start time: 04:06:35 PM ) Total Marks: 1 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 __________. Select correct option: Fall Rise Remain unchanged Incomplete information
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A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information
Question # 5 of 10 ( Start time: 04:08:40 PM ) Total Marks: 1 At the termination of project, which of the following needs to be considered relating to project assets? Select correct option: Salvage value Book value Intrinsic value Fair value
Question # 6 of 10 ( Start time: 04:09:27 PM ) Total Marks: 1 What is the long-run objective of financial management? Select correct option: Maximize earnings per share Maximize the value of the firm's common stock Maximize return on investment Maximize market share
Question # 7 of 10 ( Start time: 04:09:56 PM ) Total Marks: 1 What is potentially the biggest advantage of a small partnership over a sole proprietorship?
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Select correct option: Unlimited liability Single tax filing Difficult ownership resale Raising capital
Question # 8 of 10 ( Start time: 04:10:16 PM ) Total Marks: 1 Which of the following effects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options
uestion # 9 of 10 ( Start time: 04:10:31 PM ) Total Marks: 1 An annuity due is always worth _____ a comparable annuity. Select correct option: http://vustudents.ning.com Less than More than Equal to Can not be found from the given information
Question # 10 of 10 ( Start time: 04:10:53 PM ) Total Marks: 1 A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Select correct option:
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\Which group of ratios measures a firm's ability to meet short-term obligations? Select correct option:
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Rs.52,000 Rs.93,219 Rs.99,061 Rs.915,240 Amount = P*(1+i/n)^n
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The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option: Real assets of the business Liquid assets of the business Fixed assets of the business
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Lon term assets of the business
Rs.154.73 http://vustudents.ning.com
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Rs.147.36 Rs.109.39 Rs.104.72
FV = PMT* ((1+i)^n 1)/i (formula use to calc fv of annuity) PV= PMT *((1+i)^-n -1)/i (formula use to calc PV of annuity)
1000 = pmt * ((1.05)^-8 -1)/.05 1000 = PMT *6.46 PMT = 1000/6.46 = 154.73
Where there is single period capital rationing, what the most sensible way of making investment decisions? Select correct option:
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{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) = $857.82.
Who determine the market price of a share of common stock? Select correct option:
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The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the
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Upward Downward First upward and then downward None of the given options
An annuity due is always worth _____ a comparable annuity. Select correct option:
Question # 2 of 10 ( Start time: 04:11:40 PM ) Total Marks: 1 Which of the following would be considered a cash-flow item from an "investing" activity? Select correct option: http://vustudents.ning.com
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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
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Calculate IRR and select the projects with the highest IRRs
Question # 5 of 10 ( Start time: 04:15:07 PM ) Total Marks: 1 Which of the following statements is correct in distinguishing between serial bonds and sinking-fund bonds? Select correct option:
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 sinkingfund 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

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Question # 9 of 10 ( Start time: 04:19:01 PM ) Total Marks: 1 A project that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option:
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A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________. Select correct option:
Interest tax shield Depreciable basis Financing umbrella
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Current yield
The reduction in income taxes that results from the tax-deductibility of interest payments.
Tax benefits derived from creative structuring of a financing arrangement. For example, usingloan capital instead of equity capital because interest paid on the loans is generally tax deductible whereas the dividend paid on equity is not
Magnitude of expected cash flows Timing of expected cash flows Both timing and magnitude of cash flows None of the given options http://vustudents.ning.com
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Ref It discounts the cash flow to take into the account the time value of money. Reference
Expected Portfolio Return = ___________. Select correct option:
If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option:
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0 0.5 1 -1
For most firms, P/E ratios and risk_________. Select correct option:
Which of the following stipulate a relationship between expected return and risk? http://vustudents.ning.com
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===== Which of the following factors might affect stock returns? Select correct option: Business cycle Interest rate fluctuations Inflation rates All of the above If all things equal, when diversification is most effective? Select correct option: Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated Which of the followings expressed the proposition that the value of the firm is independent of its capital structure? Select correct option:
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The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option: Discount rate Profitability index Internal rate of return Multiple Internal rate of return Which of the following is related to the use Lower financial leverage? Select correct option:
Fixed costs Variable costs Debt financing Common equity financing Why markets and market returns fluctuate? Select correct option:
Because of political factors Because of social factors Because of socio-political factors http://vustudents.ning.com
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Because of macro systematic factors Which of the following is NOT an example of hybrid equity Select correct option:
Pay back period Internal rate of return Net present value Profitability index A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information To increase a given future value, the discount rate should be adjusted __________. http://vustudents.ning.com
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Upward Downward First upward and then downward None of the given options Which of the following is NOT the form of cash flow generated by the investments of the shareholders? Select correct option: Income Capital loss Capital gain Operating income According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of which of the following: Select correct option: Unique risk Reinvestment risk Market risk Unsystematic risk What is the most important criteria in capital budgeting? Select correct option: Return on investment
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Profitability index Net present value Pay back period If all things equal, when diversification is most effective? Select correct option: Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. Select correct option:
I, II, and III I only III only II and III only As interest rates go up, the present value of a stream of fixed cash flows _____. Select correct option:
Goes down Goes up
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Stays the same Can not be found from the given information Which of the following could be taken same as minimizing the weighted average cost of capital? Select correct option:
Maximizing the market value of the firm Maximizing the market value of the firm only if MM's Proposition I Minimizing the market value of the firm only if MM's Proposition I holds Maximizing the profits of the firm Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option:
(Q - QBE)/Q (EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC] The value of a bond is directly derived from which of the following? Select correct option: Cash flows Coupon receipts Par recovery at maturity All of the given options Which statement is NOT true regarding the market portfolio? http://vustudents.ning.com
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Select correct option: It includes all publicly traded financial assets It is the tangency point between the capital market line and the indifference curve All securities in the market portfolio are held in proportion to their market values It lies on the efficient frontier
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A statistical measure of the variability of a distribution around its mean is referred to as ________. Select correct option: Probability distribution Expected return Standard deviation Coefficient of variation
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Why common stock of a company must provide a higher expected return than the debt of the same company? Select correct option: There is less demand for stock than for bonds There is greater demand for stock than for bonds
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There is more systematic risk involved for the common stock There is a market premium required for bonds
Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option: Cash outflow to the government for taxes Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
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Which of the followings expressed the proposition that the cost of equity is a positive linear function of capital structure? Select correct option:
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The presence of which of the following costs is not used as a major argument against the M&M arbitrage process? Select correct option: Bankruptcy costs Agency costs Transactions costs Insurance costs
What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option: Long-term debt Preferred stock
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Common stock None of the given options
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
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basis of risk and return, what would be your conclusion? Select correct option: Project A dominates project B Project B dominates project A Neither project dominates the other in terms of risk and return Incomplete information
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Which of the following would generally have unlimited liability? Select correct option: 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)
If 2 stocks move in the same direction together then what will be the correlation coefficient? Select correct option: 0
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1.0 -1.0 1.5
which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option: Depreciation Sunk cost Opportunity cost Non-cash item
Which of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that is 50% higher than total carrying costs? Select correct option: Current order size is greater than optimal Current order size is less than optimal
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Per unit carrying costs are too high The optimal order size is currently being used
hich of the following statements regarding covariance is correct? Select correct option: 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 covariances among returns for different securities leads to high portfolio risk Covariances can take on positive, negative, or zero values
Which of the following is not a form of short-term, spontaneous credit? Select correct option:
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Accrued wages Trade credit Commercial paper Accrued taxes
If we invest in many securities which are ________to each other then it is possible to reduce overall risk for your investment. Select correct option: Comparable Correlated Highly correlated Negatively correlated
The objective of financial management is to maximize _______ wealth. Select correct option: Stakeholders http://vustudents.ning.com
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Shareholders Bondholders Directors
Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares? Select correct option: The new shares are worth less than the old shares The old shares drop in value to equal the new price The value of the firm is reduced by the amount of the dividend The value of the firm is unaffected ________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. Select correct option: Systematic risk Standard deviation http://vustudents.ning.com
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Unsystematic risk Coefficient of variation When taxes are considered, the value of a levered firm equals the value of the______. Select correct option: Unlevered firm Unlevered firm plus the value of the debt Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield
Which of the following terms best applies to the short-term interest rate charged by banks to large, creditworthy customers? Select correct option: Discount basis interest rate Long-term bond rate Prime rate Fed funds rate
According to _________, the firm's cost of equity increases with greater debt financing, but the WACC remains unchanged. Select correct option: M&M Proposition I with taxes http://vustudents.ning.com
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M&M Proposition I without taxes M&M Proposition II without taxes M&M Proposition II with taxes
Cash in flows
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Cash out flows Cash flows None of the given option
Total assets
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Fixed assets Current assets Current assets minus current liabilities
Fundamental analysis Underlying real asset
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Supply and demand of securities in the market All of the given options
Dividends are increased from Rs.1 to Rs.2 per share A new investment increases the firm's business risk New equity is issued and the proceeds repay debt
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A new Board of Directors is elected to the firm
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The firm has minimized its total carrying costs The firm should increase its order size The firm should decrease its order size The firm has maximized
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436
437
438
439
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2,000 cases
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4,000 cases 8,000 cases 16,000 cases
The number of people employed in the firm
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The book value of the firm's assets less the book value of its liabilities The market price per share of the firm's common stock The amount of salary paid to its employees
Fall
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Rise Remain unchanged Incomplete information
Because there is hidden value in each project Because there may be chance of rapid growth
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Because they have invested a lot All of the given options
Financing short-term needs with short-term funds Financing permanent inventory buildup with long-term debt Financing seasonal needs with short-term funds
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Financing some long-term needs with short-term funds
According to MM II, what happens when a firm's debt-to-equity ratio increases? Select correct option: Its financial risk increases
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Its operating risk increases The expected return on equity increases The expected return on equity decreases
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Which of the following is an example of restructuring the firm? Select correct option: Dividends are increased from Rs.1 to Rs.2 per share A new investment increases the firm's business risk New equity is issued and the proceeds repay debt A new Board of Directors is elected to the firm
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How can a company improve (lower) its debt-to-total asset ratio? Select correct option: By borrowing more By shifting short-term to long-term debt
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By shifting long-term to short-term debt By selling common stock
Upward Downward First upward and then downward
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January 11 January 22 January 30
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December 30
Which of the following effects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options
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Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option: Discount rate Profitability index Internal rate of return Multiple Internal rate of return
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should be done by the firm? Select correct option: The firm has minimized its total carrying costs
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The firm should increase its order size The firm should decrease its order size The firm has maximized its order costs
What is the present value of Rs.8,000 to be paid at the end of three years if the correct risk adjusted interest rate is 11%? Select correct option: Rs.5,850 Rs.4,872 Rs.6,725 Rs.1,842
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? Select correct option: Cash budgeting Capital budgeting Capital rationing Capital expenditure
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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 __________. Select correct option: Fall Rise Remain unchanged Incomplete information
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http://highered.mcgraw-hill.com/sites/0073012386/student_view0/chapter15/multiple_choice_quiz.html
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Which of the following could be defined as the capital structure of the Company? Select correct option:
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Maintaining a constant dividend payout ratio
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Keeping the regular dividend at the same level indefinitely Maintaining a steady progression of dividend increases over time Alternating cash dividends with stock dividends
Its market risk is negligible Its unsystematic risk is negligible
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Its systematic risk is negligible All of the given options
Cash flows Coupon receipts
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Par recovery at maturity All of the given options
1. Juan is starting a software writing company. He is the owner and has only 3 employees. He wants a simple inexpensive form of ownership that leaves him in control and that he can quickly dissolve if he decides to change to another business. His best choice of form of ownership would be: a. S-corporation b. Partnership c. Corporation d. Sole proprietorship 2. A tool that identifies the strengths, weaknesses, opportunities and threats of an organization is know as: a. SWOT Analysis b. Trend Analysis c. Fundamental Analysis d. Technical Analysis 3. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at: a. A premium b. A discount c. Cannot be determined without more information http://vustudents.ning.com
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d. Face value 4. Which of the following statements best describe the Balance Sheet? a. Summarizes the firms revenues and expenses over an accounting period b. Reports how much of the firms earnings were retained in the business rather than paid out in dividends c. Reports the impact of a firms operating, investing, and financing activities on cash flows over an accounting period d. States the firms financial position at a specific point in time 5. Which of the following is the purpose of the Debt management ratios? a. They measure the amount of debt the firm uses b. They measure how effectively a firm is managing its assets c. They show the relationship of a firms cash and other current assets to its current liabilities d. They show the combined effects of all areas of the firm on operating results 6. In which of the following situations a project is acceptable? a. When a project has conventional cash flows patterns b. When a project has a non-conventional cash flow pattern c. When a project has a discounted rate higher than the inflation rate d. When a project has a positive net present value 7. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if: a. Cost of goods sold increased relative to sales. b. Sales increased relative to expenses. http://vustudents.ning.com
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c. The tax rate has been increased d. Dividends were decreased. 8. Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company a. Will not experience any difficulty with its creditors. b. Has less liquidity than other firms in the industry. c. Will be viewed as having high creditworthiness. d. Has greater than average financial risk when compared to other firms in its industry. 9. For purposes of financial statements, the accounting value of fixed assets is: a. Based on their estimated liquidation value b. Based on their relative importance to the company c. Based on their actual purchase price d. Based on their current market price 10. Which of the following transactions affects the acid-test ratio? a. Receivables are collected. b. Inventory is liquidated for cash. c. New common stock is sold and used to retire a debt issue. d. A new common stock issue is sold and equipment purchased 11. The rate of return on the best available investment of equal risk is called: a. Discounting b. Compounding c. The opportunity cost rate http://vustudents.ning.com
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d. Time lines 12. An annuity whose payments occur at the end of each period is called: a. An opportunity cost annuity. b. An ordinary annuity c. An annuity due d. An outflow annuity 13. Which of the following is the rate of return earned on a bond if it is held until maturity? a. Yield-to-call b. Coupon payment c. Yield-to-maturity d. Sinking fund yield 14. Keeping other things constant, if a bonds yield-to-maturity increases: a. Its price will rise b. Its price will remain unchanged c. Its price will fall. d. Can not be determined 15. A 30-year corporate bond issued in year 1985 would now trade in which of the following markets? a. Primary capital market b. Primary money market c. Secondary money market d. Secondary capital market
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16. When the market's nominal annual required rate of return for a particular bond is less than its coupon rate, the bond will be selling at ________. a. A discount b. A premium c. Par value d. An indeterminate price 17. The buyer of a zero-coupon bond expects to receive: a. Price appreciation. b. A rate of return equal to zero over the life of the bond. c. Variable dividends instead of a fixed interest payment annually. d. All interest payments in one lump sum at maturity. 18. The intrinsic value of a share of common stock: a. Is the discounted value of all future cash dividends b. Increases when the required rate of return increases, if the dividend is held constant. c. Is zero if the company pays no dividends d. Is the discounted capital gain expected on the stock 19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this year. Its dividend yield is 8%. At what price is the stock selling? a. Rs.40 b. Rs.35 c. Rs.30
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d. Rs.25 20. Which of the following stock would provide a regular income to the investor? a. Growth stock b. Income stock c. Aggressive stock d. Defensive stock Question # 15 of 15 ( Start time: 04:21:27 PM ) Total Marks: 1 Which of the following is a major disadvantage of the corporate form of organization? Select correct option: 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
Choose among the followings, the correct statement regarding every journal entry. Select correct option: Sum of Debits = Sum of Credits Sum of Debits >Sum of Credits Sum of Debits < Sum of Credits None of the given options Question # 9 of 15 ( Start time: 05:19:40 PM ) Total Marks: 1 Which of the following refers to a highly competitive market where good business ideas are taken up immediately? Select correct option: Capital market Efficient market Money market Real asset market Question # 2 of 15 ( Start time: 05:26:44 PM ) Total Marks: 1 The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = ________. Select correct option: Net profit margin Total asset turnover Equity multiplier http://vustudents.ning.com
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Total asset turnover Gross profit margin Debt ratio Total asset turnover Net profit margin Total asset turnover Gross profit margin Equity multiplier Question # 8 of 15 ( Start time: 06:19:14 PM ) Total Marks: 1 Total portfolio risk is ________. Select correct option: 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 Which type of responsibilities are primarily assigned to Controller and Treasurer respectively? Select correct option: Operational; financial management Financial management; accounting Accounting; financial management Financial management; operations
If Net Present Value technique is used, what is the minimum acceptance criterion for a project? Select correct option: NPV<0 NPV=0 NPV>0 NPV<=0
Question # 14 of 15 ( Start time: 09:23:53 PM ) Total Marks: 1 Which of the following refers to the risk associated with interest rate uncertainty? Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
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FINALTERM EXAMINATION Spring 2009 MGT201- Financial Management (Session - 2)
Question No: 1
( Marks: 1 )
- Please choose one
What is the long-run objective of financial management? Maximize earnings per share
Maximize the value of the firm's common stock
Maximize return on investment
Maximize market share
Question No: 2
( 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
469
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: 3
( Marks: 1 )
- Please choose one
What is the present value of a Rs.1,000 ordinary annuity that earns 8% annually for an infinite number of periods? Rs.80
Rs.800
Rs.1,000
Rs.12,500
Question No: 4
( Marks: 1 )
- Please choose one
470
Cost of the capital
Return on asset
Question No: 5
( Marks: 1 )
- Please choose one
Question No: 6
( Marks: 1 )
- Please choose one
Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If
471
the yields to maturity on the two bonds change from 12% to 10%, ____________.
Question No: 7
( Marks: 1 )
- Please choose one
Given no change in required returns, the price of a stock whose dividend is constant will__________.
Remain unchanged Decrease over time at a rate of r% Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate
472
Question No: 8
( Marks: 1 )
- Please choose one For
most firms, P/E ratios and risk_________.
Will be directly related Will have an inverse relationship Will be unrelated Will both increase as inflation increases
Question No: 9
( Marks: 1 )
- Please choose one
Question No: 10
( Marks: 1 )
- Please choose one

473
Which of the following is simply the weighted average of the possible returns, with the weights being the probabilities of occurrence?
Question No: 11
( Marks: 1 )
- Please choose one
The square of the standard deviation is known as the ________.
Beta Expected return Coefficient of variation Variance
Question No: 12
( Marks: 1 )
- Please choose one
Why companies invest in projects with negative NPV?
474
Question No: 13
( Marks: 1 )
- Please choose one
An investor was expecting a 18% return on his portfolio with beta of 1.25 before the market risk premium increased from 8% to 10%. Based on this change, what return will now be expected on the portfolio? 22.5% 20.0% 20.5% 26.0%
Question No: 14
( Marks: 1 )
- Please choose one
Which of the following is the characteristic of a well diversified portfolio? Its market risk is negligible
475
Its unsystematic risk is negligible Its systematic risk is negligible All of the given options
Question No: 15
( Marks: 1 )
- Please choose one
How the beta of a stock can be calculated?
Question No: 16
( Marks: 1 )
- Please choose one
Which of the following formula relates beta of the stock to the standard deviation? Covariance of stock with market * variance of the market Covariance of stock with market / variance of the market Variance of the market / Covariance of stock with market Slope of the regression line
476
Question No: 17
( Marks: 1 )
beta greater than 1 for a stock shows:
Stock is relatively more risky than the market If the market moves up by 10% the stock will move up by 12% As the market moves the stock will move in the same direction All of the given options
Question No: 18
( Marks: 1 )
stock is a part of totally diversified portfolio then its company risk must be equal to:
0 0.5 1 -1
Question No: 19
( Marks: 1 )
- Please choose one
If risk and return combination of any stock is above the SML, what does it mean?
477
Question No: 20
( Marks: 1 )
- Please choose one
An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. Positive Negative Zero All of the given options
Question No: 21
( Marks: 1 )
- Please choose one
Which of the following factors might affect stock returns? The business cycle Interest rate fluctuations Inflation rates
478
Question No: 22
( Marks: 1 )
arbitrage opportunities are to be ruled out, what would be the expected excess return of each well-diversified portfolio? Inversely proportional to the risk-free rate Inversely proportional to its standard deviation Proportional to its standard deviation Proportional to its beta coefficient
Question No: 23
( Marks: 1 )
- Please choose one
Which of the following represent all Risk Return Combinations for the efficient portfolios in the capital market?
Question No: 24
( Marks: 1 )
- Please choose one
479
What should be used to calculate the proportional amount of equity financing employed by a firm? The common stock equity account on the firm's balance sheet The sum of common stock and preferred stock on the balance sheet The book value of the firm The current market price per share of common stock times the number of shares Outstanding
Question No: 25
( Marks: 1 )
- Please choose one
Which of the following is the market for short term debt?
Question No: 26
( Marks: 1 )
- Please choose one
Bonds are issued in the market at _________.

480
Premium Discount Both premium and discount None of the given options
Question No: 27
( Marks: 1 )
- Please choose one
Why debt is a less costly source of fund?
Because additional interest creates a new form of tax shield Because additional money creates a new form of tax shield Because banks extend loan at lower interest rates None of the given options
Question No: 28
( Marks: 1 )
- Please choose one
Which of the following is as EBIT?
Funds provided by operations Earnings before taxes Net income

481
Operating profit
Question No: 29
( Marks: 1 )
- Please choose one
Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The firm has Rs.1, 000,000 in fixed costs. The firm anticipates selling each unit for Rs.25 with variable costs of Rs.5 per unit. 3.33 1.25 1.14 There is not sufficient information provided to calculate the degree of operating leverage (DOL).
Question No: 30
( Marks: 1 )
- Please choose one
A firm has a DOL of 3.5 at Q units. What does this tell us about the firm? If sales rise by 3.5% at the firm, then EBIT will rise by 1% If EBIT rises by 3.5% at the firm, then EPS will rise by 1% If EBIT rises by 1% at the firm, then EPS will rise by 3.5% If sales rise by 1% at the firm, then EBIT will rise by 3.5%
Question No: 31
( Marks: 1 )
- Please choose one
482
Which of the following represents financial leverage? Use of more debt capital to increase profit Debt is not used in capital to increase profit High degree of solvency Low degree of solvency
Question No: 32
( Marks: 1 )
- Please choose one
Which of the following best describes the statement; The value of an asset is preserved regardless of the nature of the claims against it? Law of diminishing marginal returns Law of conservation of value Law of return on equity Law of return on assets
Question No: 33
( Marks: 1 )
- Please choose one
Firm ABC has Rs.5 million in outstanding debt, currently has 200,000 shares outstanding priced at Rs.60 a share, and has a borrowing rate of 10%. If the firm's return on equity is 15%, what is the firm's WACC? 5.00% 3.23%
483
4.25% 2.16%
Question No: 34
( Marks: 1 )
- Please choose one
Which of the following statements regarding the M&M Propositions without taxes is true? The total value of the firm depends on how cash flows are divided up between stockholders and bondholders, under M&M Proposition I. The firm's capital structure is relevant under M&M Proposition I. The cost of equity depends on the firm's business risk but not its financial risk, under M&M Proposition II. The cost of equity rises as the firm increases its use of debt financing under M&M Proposition II.
Question No: 35
( Marks: 1 )
- Please choose one
Which one of the following is correct for the spot exchange rate? This is the rate today for exchanging one currency for another for immediate delivery This is the rate today for exchanging one currency for another at a specific future date This is the rate today for exchanging one currency for another at a specific location on a specific future date
484
This is the rate today for exchanging one currency for another at a specific location for immediate delivery
Question No: 36
( Marks: 1 )
- Please choose one
The restructuring of a firm should be undertaken, when: The restructuring is expected to create value for shareholders The restructuring is expected to increase earnings per share next year The restructuring is expected to increase the firm's market share power in industry The current employees will receive additional stock options to align employee interest
Question No: 37
( Marks: 1 )
- Please choose one
Which of the following term is used when the firm can independently control considerable assets with a very limited amount of equity? Joint venture Leveraged buyout (LBO) Spin-off Consolidation
Question No: 38
( Marks: 1 )
- Please choose one

485
What is the economic order quantity for an automobile dealer selling 2,000 cars per year, at a cost of Rs.750 per order, and a carrying cost of Rs.300 per automobile?
Question No: 39
( Marks: 1 )
- Please choose one
As the amount of __________ increases the present value of net taxshield benefits of debt increases.
Debt Common equity Preffered equity Assets
Question No: 40
( Marks: 1 )
- Please choose one
486
Why the present value of the costs of financial distress increases with increases in the debt ratio? Expected return on assets increases Present value of the interest tax shield is greater Equity tax shield is depleted Probability of default and/or bankruptcy is greater
Question No: 41
( Marks: 5 )
What are the real markets effects of leverage on WAAC? (Answer the question in bulleted form only). Answer: Real Markets Effects of leverage on WACC: Increase in leverage causes a a large increase in cost of equity Increase in leverage causes relatively small increase in cost of debt as compared to cost of equity As leverage increases WACC 1st falls because of tax saving shield. With further increase in leverage WACC fall to its minimum point which is the optimal point for capital structure Further increase in leverage causes increase in WACC because of bankruptcy risk Question No: 42 ( Marks: 5 )
Suppose a Firm ABC has Total Assets of Rs.1000 and is 100% Equity based (i.e. Un-levered). There were 10 equal Owners and 5 of them want to leave. So the Firm takes a Bank Loan of Rs.500 (at 10%pa
487
Mark-up) and pays back the Equity Capital to the 5 Owners who are leaving. Now, half of the Equity Capital has been replaced with a Loan from a Bank (i.e. Debt). What impact does this have on ROE?
Question No: 43
( Marks: 10 )
Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has a beta of 1.25. The risk free rate is 10% and the expected market return is 18%.
e. f. g. h.
Find the expected return on stock X Find the expected return on stock Y Find the expected return on stock Z Suppose that you construct a portfolio consisting of 40% X, 20% Y and 40% Z. What is the beta of the portfolio?
Answer: a. rM = 18% rRF = 10% = 0.5
488
= 10% + (18%-10%) 0.5 = 10% + 4% = 14%
b.
rM = 18% rRF = 10% = 1.00
r = rRF + ( rM + rRF ) = 10% + (18%-10%) 1.00 = 10% + 8% = 18%
d. rM = 18% rRF = 10% = 1.25
r = rRF + ( rM + rRF ) = 10% + (18%-10%) 1.25 = 10% + 10% = 20%
d. Beta of portfolio = P = X X + Y Y + Z Z
489
= (40/100)0.5 + (20/100)1.0 + (40/100)1.25 = 0.4x0.5 + 0.2x1.0 + 0.4x1.25 = 0.2 + 0.2 + 0.5 = 0.9
Question No: 44
( Marks: 10 )
The ABC company is in the 35% marginal tax bracket. The current market value of the firm is Rs. 12 million. If there are no costs to bankruptcy:
What will be ABC annual tax savings from interest deductions be if it issues Rs. 2 million of five years bonds at 12 % interest rate? What will be the value of the firm? ANSWER: Annual Coupon payment each yr = 12% of 2,000,000 = 2000000 x 12/100 = 24000 Tax saving for 5 yrs = 5(35 % of 24000) = 5(24000 x 35/100) = 5x8400
490
= 42000
What will ABC annual tax savings from interest deductions be if it issues Rs. 2 million of seven years bonds at 12 % interest rate? What will be the value of the firm? Answer: Annual Coupon payment each yr = 12% of 2,000,000 = 2000000 x 12/100 = 24000 Tax saving for 7 yrs = 7(35 % of 24000) = 7(24000 x 35/100) = 7x8400 = 58800
Question No: 45
( Marks: 10 )
Using the Capital Asset Pricing Model (CAPM), determine the required return on equity for the following situations:
Situation s
Expected return on market portfolio
Risk- free rate
Beta
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1 2 3 4 5
16% 18 15 17 20
12% 8 14 13 15
1.00 0.80 0.70 1.20 1.60
ANSWER: Required return= r = rRF + ( rM + rRF ) Where rRF = risk free return rM = expected return on market = beta of stock
1.
rM = 16% rRF = 12% = 1.00
r = rRF + ( rM + rRF ) = 12% + (16%-12%)1.00 = 12% + 4% = 16%
492
2.
rM = 18% rRF = 8% = 0.80
r = rRF + ( rM + rRF ) = 8% + (18%-8%)0.80 = 8% + 8% = 16%
3.
rM = 15% rRF = 14% = 0.70
r = rRF + ( rM + rRF ) = 14% + (15%-14%)0.70 = 14% + 0.70 = 14.7%
4.
rM = 17% rRF = 13% = 1.20
r = rRF + ( rM + rRF ) = 13% + (17%-13%)1.20 = 13% + 4.8% = 17.8%

493
5.
rM = 20% rRF = 15% = 1.60
r = rRF + ( rM + rRF ) = 15% + (20%-15%) 1.60 = 15% + 8% = 23% GENERALIZATION: As beta of stock rises the return on stock also rises.
FINALTERM EXAMINATION Spring 2009 MGT201- Financial Management (Session - 3)
Question No: 1 ( Marks: 1 )
- Please choose one
Which of the following type of lease is a long-term lease that is not cancelable and its life often matches the useful life of the asset? A financial An operating Both financial & operating lease None of the given options
494
An operating lease refers to a short-term lease that is often cancelable. For example, a lease for office space represents this type of lease where the lease life is less than the useful life of the asset
- 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 Accouor ntant; bondholder Shareholder; bondholder
- 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 8000/(1.11)^3
495
- Please choose one
What is the present value of Rs.717 to be paid at the end of 2 years if the interest rate is 9%?
Rs.604 Rs.417 Rs.715 Rs.556 717/(1.09)^2 Question No: 5 ( Marks: 1 ) - Please choose one
As interest rates go up, the present value of a stream of fixed cash flows _____.
- Please choose one
An 8-year annuity due has a present 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.154.73 Rs.147.36
496
Rs.109.39 Rs.104.72 FV = PMT* ((1+i)^n 1)/i (formula use to calc fv of annuity) PV= PMT *((1+i)^-n -1)/i (formula use to calc PV of annuity) Try to remember above two formulas for calc of annuity
1000 = pmt * ((1.05)^-8 -1)/.05 1000 = PMT *6.46 PMT = 1000/6.46 = 154.73
- 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 While the payback period is a simple and straightforward method for analyzing a capital budgeting proposal, it has certain limitations. First and the foremost problem is that it does not take into account the concept of time value of money. The cash flows are considered regardless of the time in which they are occurring.
497
You must have noticed that we have not used any interest rate while making calculation. Question No: 8 ( 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
- Please choose one
The value of a bond is directly derived from which of the following?
Question No: 10 ( Marks: 1 ) - Please choose one
498
Pays interest on a regular basis (typically every six months) sure 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: 11 ( Marks: 1 ) - Please choose one A zero-coupon bond has a yield to maturity of 9% and a par value of Rs.1,000. If the bond matures in 8 years, the bond should sell for a price of _______ today.
Rs. 422.41 Rs. 501.87 Rs. 513.16 Rs. 483.49 price of bond = pv of coup pyament + pv of face vlue = 1000/ (1.09)^8
499
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 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: 13 ( 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 Systematic risk is not avoidable through diversification
500
Question No: 14 ( Marks: 1 ) - Please choose one According to the Capital Asset Pricing Model (CAPM), which of the following combination is equal to the expected rate of return on any security? Rf + ?[E(RM)] Rf + ?[E(RM - Rf] Rf + ?[E(RM) - Rf] E(RM) + Rf
Question No: 15 ( Marks: 1 ) - Please choose one What is the expected return of a zero-beta security? The risk-free rate Zero rate of return A negative rate of return The market rate of return
Question No: 16 ( Marks: 1 ) - Please choose one How the beta of a stock can be calculated?
By monitoring price of the stock By monitoring rate of return of the stock By comparing the changes in the stock market price to the changes in the stock market index
501
Question No: 17 ( Marks: 1 ) - Please choose one If stock is a part of totally diversified portfolio then its company risk must be equal to:
0 0.5 1 -1
Question No: 18 ( Marks: 1 ) - Please choose one How can you limit company-specific risks? Invest in that company's bonds Invest in a variety of stocks Invest in securities that do well in a recession Invest in securities that do well in a boom Rationale: Company-specific risks. Operating risk and price risk are two factors contributing to short-term volatility of individual stocks. Operating risk is the risk to the company as a business and includes anything that might adversely affect the company's profitability. Price risk, meanwhile, has more to do with the company's stock than with its business: How expensive is the stock compared with the company's earnings, cash flow, or sales? To limit company-specific risk, own a collection of stocks rather than just a few.
502
Question No: 19 ( Marks: 1 ) - Please choose one Find the Risk-Free Rate given that the Expected Return on Stock is 12.44%, the Expected Return on the Market Portfolio is 13.4%, and the Beta for Stock is 0.9. 3.8% 4.9% 5.34% 6.38% Working:
rj = rf + b(rm-rf)
Question No: 20 ( Marks: 1 ) - Please choose one Which of the following can be used to calculate the risk of the larger portfolio? Standard deviation EPS approach Matrix approach Gordons Approach we can calculate the risk of larger portfolio using the
matrix approach Question No: 21 ( Marks: 1 )
- Please choose one
503
Market risk is measured in terms of the ___________ of the market portfolio or index. Variance Covariance Standard deviation Correlation coefficient Ref. Page No.102: Market Risk is measured in terms of the Standard Deviation (or Volatility) of the Market Portfolio or Index
Question No: 22 ( Marks: 1 ) - Please choose one If 2 stocks move in the same direction together then what will be the correlation coefficient? 0 1.0 -1.0 1.5 Rationale:The strength of the correlation between two variables such as two stock prices is measured by the correlation coefficient. If two stock prices have perfect positive correlation, their correlation coefficient will have the value of +1.
Question No: 23 ( Marks: 1 ) - Please choose one Which of the following is NOT the cost of equity? The minimum rate that a firm should earn on the equity-financed part of an investment
504
Generally lower than the before-tax cost of debt It is the most difficult cost component to estimate None of the given options
Question No: 24 ( Marks: 1 ) - Please choose one Assume management is looking at a set of possible projects with regards to their expected NPV, standard deviation, and management's risk attitude. The firm should attempt to take the set of projects __________. That falls on the lowest indifference curve That falls on the highest indifference curve That has the lowest standard deviation That has the highest standard deviation Rationale: The lowest indifference curve generates the lowest satisfaction by management with that set of projects.
Question No: 25 ( Marks: 1 ) - Please choose one The overall (weighted average) cost of capital is composed of weighted averages of which of the following? The cost of common equity and the cost of debt The cost of common equity and the cost of preferred stock The cost of preferred stock and the cost of debt The cost of common equity, the cost of preferred stock, and the cost of debt Question No: 26 ( Marks: 1 ) - Please choose one
505
How economic value added (EVA) is calculated? It is the difference between the market value of the firm and the book value of equity It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge It is the net income of the firm less a dollar cost that equals the WAAC only None of the given options
Question No: 27 ( Marks: 1 ) - Please choose one Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio
Question No: 28 ( Marks: 1 ) - Please choose one A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm? If sales rise by 3.5% at the firm, then EBIT will rise by 1% If EBIT rises by 3.5% at the firm, then EPS will rise by 1% If EBIT rises by 1% at the firm, then EPS will rise by 3.5% If sales rise by 1% at the firm, then EBIT will rise by 3.5%
506
Question No: 29 ( Marks: 1 ) - Please choose one For an all-equity firm, what is the effect of EBIT on the EPS? As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent As EBIT increases, the EPS increases by a larger percent As EBIT increases, the EPS decreases None of the given options
Question No: 30 ( Marks: 1 ) - Please choose one The beta of an all-equity firm is 1.2. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing, what will be the beta of the levered firm? The beta of debt is 0.2. (Assume no taxes.) 1.2 2.4 2.2 1.8
Question No: 31 ( Marks: 1 ) - Please choose one The Serfraz Company is financed by Rs. 2 million (market value) in debt and Rs. 3 million (market value) in equity. The cost of debt is 10% and the cost of equity is 15%. Calculate the weighted average cost of capital. (Assume no taxes.) 10% 15% 13%
507
8% V= 2M+3M = 10M WCCA = 2/5*10% + 3/5*15% = 13%
Question No: 32 ( Marks: 1 ) - Please choose one Which of the following expressed the proposition that the value of the firm is independent of its capital structure? The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price According to M&Ms Proposition I, the value of a firm is independent of the financing mix of the firm. Thus, managers cannot alter firm value by their choice of the relative amounts of debt and equity financing. According to M&M, the value of the firm is determined by the size and riskiness of the real cash flows generated by the firms assets, and not by how these cash flows are divided between the debt and equity stakeholders of the firm. These results hold under the assumption of perfect capital markets with no corporate or personal taxes. Under perfect capital markets, investors face no transactions costs and are symmetrically informed. In addition, firms can borrow and lend at the risk-free rate and can issue securities with no issuance costs
Question No: 33 ( Marks: 1 ) - Please choose one Which of the following could NOT be defined as the capital structure of the Company? The firm's mix of Assets and liabilities The firm's debt-equity ratio
508
All of the given option The firm's common stocks only Capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities
Question No: 34 ( Marks: 1 ) - Please choose one Which of the following would express the negative net worth of a firm? Experiencing a business failure A legal bankruptcy Experiencing technical insolvency Experiencing accounting insolvency
Question No: 35 ( Marks: 1 ) - Please choose one Suppose that the Euro is selling at a forward discount in the forward-exchange market. This implies that most likely __________. The Euro has low exchange-rate risk The Euro is gaining strength in relation to the dollar Interest rates are higher in Euroland than in the United States Interest rates are declining in Europe
509
Which of the following term is used when the firm can independently control considerable assets with a very limited amount of equity? Joint venture Leveraged buyout (LBO) Spin-off Consolidation Ref: The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
Question No: 37 ( Marks: 1 ) - Please choose one Which of the following is NOT a reason that DeStore.com would prefer to pay a stock dividend rather than a regular cash dividend? It decreases the supply of shares and enhances shareholder wealth It may conserve cash for other firm needs It will reduce the stock price The investors anticipates that it cannot convey credibly otherwise
Question No: 38 ( Marks: 1 ) - Please choose one After the payment of a 25% stock dividend, an investor has 500 shares of stock and Rs. 400 total value. What did the investor have prior to the stock dividend? 375 shares of stock and Rs. 375 total value 400 shares of stock and Rs. 400 total value
510
400 shares of stock and Rs. 500 total value 625 shares of stock and Rs. 400 total value because stock dividend did not increase the value. It only increases the number of stocks.
Question No: 39 ( Marks: 1 ) - Please choose one What is the proportion of assets in debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes. 54.0% 60.0% 66.7% 75.0%
Question No: 40 ( Marks: 1 ) - Please choose one When financial disaster is looming, why management may borrow to invest in projects having a negative expected NPV? The firm's beta is now negative Taxes are no longer a concern The interest tax shield will cover the loan costs The lender bears all the risk
511
Zee Zee Tops Inc., manufacturers plaid vinyl and chenille cartops for convertibles. These roofs sell for Rs. 200 each and have an associated variable cost per unit of Rs. 120. Management fully expects next years sales and NOI to drop sharply, by 20% and 50%, respectively, due to lack of demand (i.e., consumer resistance). If Zee Zees current level of production and sales is 112 car tops, what is the level of fixed costs?
Question No: 42 ( Marks: 5 ) How working capital affects performance of a business?
Question No: 43 ( Marks: 10 ) Hoskins Hiking Boot Company is trying to devise an appropriate working capital policy. Their most recent balance sheet is as follows:
ASSETS Cash Accounts receivable Inventories Current Assets Net fixed assets Rs.30 50 30 110 150
LIABILITIES AND OWNER'S EQUITY Accounts Rs.35 payable Notes payable 10 Accruals Current liabilities Mortgage loan (at 13%) Common equity Total liabilities & Owner's equity 5 50 80 130 Rs.260
Total assets
Rs.260
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You know that net profits in 2004 were Rs.28, 000.
a. What is Hoskin's current level of gross and net working capital? (Marks 2) b. What percentage of total assets is invested in gross working capital? (Marks 1) c. Calculate Hoskins' return on investment. (Marks 2) d. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the proceeds to pay off some of its accounts payable. Now, assuming all other items remain the same, answer a, b, and c above using these new figures. (Marks 5)
ANS a. What is Hoskin's current level of gross and net working capital? (Marks 2)
b. What percentage of total assets is invested in gross working capital? (Marks 1)
c. Calculate Hoskins' return on investment. (Marks 2) = [Net Income / Total Assets] X 100
d. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the proceeds to pay off some of its accounts payable. Now, assuming all other items remain the same, answer a, b, and c above using these new figures. (Marks 5)
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b. What percentage of total assets is invested in gross working capital?
Question No: 44 ( Marks: 10 ) Earnings before interest and taxes (EBIT) of Firm is Rs.1000 and Corporate Tax Rate, Tc is 30%
a. If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the WACCU of Un-levered Firm? b. If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then what is the WACCL of Levered Firm? (There is no change in return in equity)
c. If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the WACCU of Un-levered Firm?
d. If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then what is the
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WACCL of Levered Firm? (There is no change in return in equity)
If the capital-asset pricing model approach is appropriate, compute the required rate of return for each of the following stocks: Assume a risk-free rate of .09 and an expected return for the market portfolio of .12. Stock Beta A 2.0 B 1.5 C 1.0 D E 0.7 0.2
FINALTERM EXAMINATION Spring 2009
- Please choose one
What is the long-run objective of financial management? Maximize earnings per share Maximize the value of the firm's common stock Maximize return on investment Maximize market share
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Question No: 2 ( 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: 3 ( Marks: 1 ) - Please choose one What is the present value of a Rs.1,000 ordinary annuity that earns 8% annually for an infinite number of periods? Rs.80 Rs.800 Rs.1,000 Rs.12,500 It will be treated as perpetuity, Formula is as under: PV= PMT/i = 1000/.08 = 12,500 Question No: 4 ( 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 Question No: 5 ( Marks: 1 ) - Please choose one What is the advantage of a longer life of the asset?
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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 Ref. Page No.58 Question No: 6 ( Marks: 1 ) - Please choose one Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, ____________. Both bonds will increase in value, but bond A will increase more than bond B Both bonds will increase in value, but bond B will increase more than bond A Both bonds will decrease in value, but bond A will decrease more than bond B Both bonds will decrease in value, but bond B will decrease more than bond A Question No: 7 ( Marks: 1 ) - Please choose one Given no change in required returns, the price of a stock whose dividend is constant will__________. Remain unchanged Decrease over time at a rate of r% Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate Question No: 8 ( Marks: 1 ) - Please choose one For most firms, P/E ratios and risk_________. Will be directly related Will have an inverse relationship Will be unrelated Will both increase as inflation increases
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Question No: 9 ( 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. Ref. Question No: 10 ( 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 Ref. Question No: 11 ( Marks: 1 ) - Please choose one The square of the standard deviation is known as the ________. Beta Expected return Coefficient of variation Variance Reference Question No: 12 ( 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: 13 ( Marks: 1 )
- Please choose one

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An investor was expecting a 18% return on his portfolio with beta of 1.25 before the market risk premium increased from 8% to 10%. Based on this change, what return will now be expected on the portfolio? 22.5% 20.0% 20.5% 26.0% Working: 2% rise in market risk premium rise in expected return will be 2*beta = (2*1.25 = 2.50) 18%+2.50 = 20.5 Question No: 14 ( Marks: 1 ) - Please choose one Which of the following is the characteristic of a well diversified portfolio? Its market risk is negligible Its unsystematic risk is negligible Its systematic risk is negligible All of the given options Question No: 15 ( Marks: 1 ) - Please choose one How the beta of a stock can be calculated? By monitoring price of the stock By monitoring rate of return of the stock By comparing the changes in the stock market price to the changes in the stock market index All of the given options Question No: 16 ( Marks: 1 ) - Please choose one Which of the following formula relates beta of the stock to the standard deviation? Covariance of stock with market * variance of the market Covariance of stock with market / variance of the market Variance of the market / Covariance of stock with market Slope of the regression line The formula for the beta can be written as: Beta = Covariance (stock versus market returns) / Variance of the Stock Market
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http://www.money-zine.com/Investing/Stocks/Stock-Beta-and-Volatility/ Question No: 17 ( Marks: 1 ) - Please choose one A beta greater than 1 for a stock shows: Stock is relatively more risky than the market If the market moves up by 10% the stock will move up by 12% As the market moves the stock will move in the same direction All of the given options Question No: 18 ( Marks: 1 ) - Please choose one If stock is a part of totally diversified portfolio then its company risk must be equal to: 0 0.5 1 -1 Question No: 19 ( Marks: 1 ) - Please choose one If risk and return combination of any stock is above the SML, what does it mean? It is offering lower rate of return as compared to the efficient stock It is offering higher rate of return as compared to the efficient stock Its rate of return is zero as compared to the efficient stock It is offering rate of return equal to the efficient stock Any Stock whose (Risk, Return) Pair lies ABOVE THE SML is offering Excessive Return (above the Market). So, all rational investors will rush to Buy it. The present Price would Rise and the Return (as measured by Capital Gain Yield = ( Pn -Po) / Po) would Fall until it comes back on SML Any Stock whose (Risk, Return) Pair lies BELOW THE SML is offering a Return that is lower than the Market. So, Rational Investors will rush to sell it. The Stock Price would Fall and the Return would Rise until it comes back on the SML. Question No: 20 ( Marks: 1 ) - Please choose one
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An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. Positive Negative Zero All of the given options If the investor can construct a portfolio without the use of the investor's own funds and the portfolio yields a positive profit, arbitrage opportunities exist.
Question No: 21 ( 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 given options Question No: 22 ( Marks: 1 ) - Please choose one If arbitrage opportunities are to be ruled out, what would be the expected excess return of each well-diversified portfolio? Inversely proportional to the risk-free rate Inversely proportional to its standard deviation Proportional to its standard deviation Proportional to its beta coefficient Rationale: For each well-diversified portfolio (P and Q, for example), it must be true that [E(rp)-rf]/p = [E(rQ)-rf]/ Q.
Question No: 23 ( Marks: 1 ) - Please choose one Which of the following represent all Risk Return Combinations for the efficient portfolios in the capital market? Parachute graph CML straight line equation Security market line
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All of the given options The CML gives the risk/return relationship for efficient portfolios.
Question No: 24 ( Marks: 1 ) - Please choose one What should be used to calculate the proportional amount of equity financing employed by a firm? The common stock equity account on the firm's balance sheet The sum of common stock and preferred stock on the balance sheet The book value of the firm The current market price per share of common stock times the number of shares Outstanding http://web.utk.edu/~jwachowi/mcquiz/mc15.html Question No: 25 ( Marks: 1 ) - Please choose one Which of the following is the market for short term debt? Money market Capital market Real asset market Equity market Question No: 26 ( Marks: 1 ) - Please choose one Bonds are issued in the market at _________. Premium Discount Both premium and discount None of the given options
Question No: 27 ( Marks: 1 ) - Please choose one Why debt is a less costly source of fund? Because additional interest creates a new form of tax shield
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Because additional money creates a new form of tax shield Because banks extend loan at lower interest rates None of the given options Question No: 28 ( Marks: 1 ) - Please choose one Which of the following is as EBIT? Funds provided by operations Earnings before taxes Net income Operating profit Question No: 29 ( Marks: 1 ) - Please choose one Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The firm has Rs.1, 000,000 in fixed costs. The firm anticipates selling each unit for Rs.25 with variable costs of Rs.5 per unit. 3.33 1.25 1.14 There is not sufficient information provided to calculate the degree of operating leverage (DOL). Sales = 400,000 * 25 = 10M VC = 400,000 * 5 = 2M The DOL is (S - VC)/(S - VC - FC) = (10M - 2M)/(10M - 2M - 1M) = 1.14 Question No: 30 ( Marks: 1 ) - Please choose one A firm has a DOL of 3.5 at Q units. What does this tell us about the firm? If sales rise by 3.5% at the firm, then EBIT will rise by 1% If EBIT rises by 3.5% at the firm, then EPS will rise by 1% If EBIT rises by 1% at the firm, then EPS will rise by 3.5% If sales rise by 1% at the firm, then EBIT will rise by 3.5% Question No: 31 ( Marks: 1 ) - Please choose one Which of the following represents financial leverage? Use of more debt capital to increase profit Debt is not used in capital to increase profit High degree of solvency Low degree of solvency
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Question No: 32 ( Marks: 1 ) - Please choose one Which of the following best describes the statement; The value of an asset is preserved regardless of the nature of the claims against it? Law of diminishing marginal returns Law of conservation of value Law of return on equity Law of return on assets Reference Question No: 33 ( Marks: 1 ) - Please choose one Firm ABC has Rs.5 million in outstanding debt, currently has 200,000 shares outstanding priced at Rs.60 a share, and has a borrowing rate of 10%. If the firm's return on equity is 15%, what is the firm's WACC? 5.00% 3.23% 4.25% 2.16% Note: we are not sure about answer of this Question it seems options are not framed properly. We try to solve it here In absence of Tax Rate. Values are as follow D = 5M E = 200,000 *60 = 12 M D+ E = 5+12= 17M WCCA = (5/17)*(10%) + (12/17)*(15%) = .1350 = 13.50% Question No: 34 ( Marks: 1 ) - Please choose one Which of the following statements regarding the M&M Propositions without taxes is true? The total value of the firm depends on how cash flows are divided up between stockholders and bondholders, under M&M Proposition I. The firm's capital structure is relevant under M&M Proposition I. The cost of equity depends on the firm's business risk but not its financial risk, under M&M Proposition II. The cost of equity rises as the firm increases its use of debt financing under M&M Proposition II.
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Question No: 35 ( Marks: 1 ) - Please choose one Which one of the following is correct for the spot exchange rate? This is the rate today for exchanging one currency for another for immediate delivery This is the rate today for exchanging one currency for another at a specific future date This is the rate today for exchanging one currency for another at a specific location on a specific future date This is the rate today for exchanging one currency for another at a specific location for immediate delivery The rate of a foreign-exchange contract for immediate delivery. Also known as "benchmark rates", "straightforward rates" or "outright rates", spot rates represent the price that a buyer expects to pay for a foreign currency in another currency.
Question No: 36 ( Marks: 1 ) - Please choose one The restructuring of a firm should be undertaken, when: The restructuring is expected to create value for shareholders The restructuring is expected to increase earnings per share next year The restructuring is expected to increase the firm's market share power in industry The current employees will receive additional stock options to align employee interest Question No: 37 ( Marks: 1 ) - Please choose one Which of the following term is used when the firm can independently control considerable assets with a very limited amount of equity? Joint venture Leveraged buyout (LBO) Spin-off Consolidation Ref: The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
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Question No: 38 ( Marks: 1 ) - Please choose one What is the economic order quantity for an automobile dealer selling 2,000 cars per year, at a cost of Rs.750 per order, and a carrying cost of Rs.300 per automobile?
EOQ=square root of 2*2000*750 / 300 = 100 EOQ = square root of (2*annual QTY * Cost of order )/carrying cost per unit for whole year Question No: 39 ( Marks: 1 ) - Please choose one As the amount of __________ increases the present value of net tax-shield benefits of debt increases. Debt Common equity Preffered equity Assets Question No: 40 ( Marks: 1 ) - Please choose one Why the present value of the costs of financial distress increases with increases in the debt ratio? Expected return on assets increases Present value of the interest tax shield is greater Equity tax shield is depleted Probability of default and/or bankruptcy is greater

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What are the real markets effects of leverage on WAAC? (Answer the question in bulleted form only). Answer: Real Markets Effects of leverage on WACC:

Increase in leverage causes a a large increase in cost of equity Increase in leverage causes relatively small increase in cost of debt as compared to cost of equity As leverage increases WACC 1st falls because of tax saving shield. With further increase in leverage WACC fall to its minimum point which is the optimal point for capital structure Further increase in leverage causes increase in WACC because of bankruptcy risk
Question No: 42 ( Marks: 5 ) Suppose a Firm ABC has Total Assets of Rs.1000 and is 100% Equity based (i.e. Un-levered). There were 10 equal Owners and 5 of them want to leave. So the Firm takes a Bank Loan of Rs.500 (at 10%pa Mark-up) and pays back the Equity Capital to the 5 Owners who are leaving. Now, half of the Equity Capital has been replaced with a Loan from a Bank (i.e. Debt). What impact does this have on ROE?
Question No: 43 ( Marks: 10 ) Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has a beta of 1.25. The risk free rate is 10% and the expected market return is 18%.
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a. b. c.
Find the expected return on stock X Find the expected return on stock Y Find the expected return on stock Z
d. Suppose that you construct a portfolio consisting of 40% X, 20% Y and 40% Z. What is the beta of the portfolio? Answer: a. rM = 18% rRF = 10% = 0.5
r = rRF + ( rM - rRF ) = 10% + (18%-10%) 0.5 = 10% + 4% = 14%
b.
rM = 18% rRF = 10% = 1.00
r = rRF + ( rM - rRF ) = 10% + (18%-10%) 1.00 = 10% + 8% = 18%
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1. rM = 18% rRF = 10% = 1.25
r = rRF + ( rM - rRF ) = 10% + (18%-10%) 1.25 = 10% + 10% = 20%
d. Beta of portfolio = P = X X + Y Y + Z Z = (40/100)0.5 + (20/100)1.0 + (40/100)1.25 = 0.4x0.5 + 0.2x1.0 + 0.4x1.25 = 0.2 + 0.2 + 0.5 = 0.9
Question No: 44 ( Marks: 10 ) The ABC company is in the 35% marginal tax bracket. The current market value of the firm is Rs. 12 million. If there are no costs to bankruptcy:
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a. What will be ABC annual tax savings from interest deductions be if it issues Rs. 2 million of five years bonds at 12 % interest rate? What will be the value of the firm?
ANSWER: Annual Coupon payment each yr = 12% of 2,000,000 = 2000000 x 12/100 = 24000 Tax saving for 5 yrs = 5(35 % of 24000) = 5(24000 x 35/100) = 5x8400 = 42000
b. What will ABC annual tax savings from interest deductions be if it issues Rs. 2 million of seven years bonds at 12 % interest rate? What will be the value of the firm?
Answer: Annual Coupon payment each yr = 12% of 2,000,000 = 2000000 x 12/100 = 24000 Tax saving for 7 yrs = 7(35 % of 24000) = 7(24000 x 35/100) = 7x8400
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= 58800
Question No: 45 ( Marks: 10 ) Using the Capital Asset Pricing Model (CAPM), determine the required return on equity for the following situations:
Situations 1 2 3 4 5
Expected return on market portfolio 16% 18 15 17 20
Risk- free rate 12% 8 14 13 15
Beta 1.00 0.80 0.70 1.20 1.60
ANSWER: Required return= r = rRF + ( rM - rRF ) Where rRF = risk free return rM = expected return on market = beta of stock
1.
rM = 16% rRF = 12%
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= 1.00
r = rRF + ( rM - rRF ) = 12% + (16%-12%)1.00 = 12% + 4% = 16%
2.
rM = 18% rRF = 8% = 0.80
r = rRF + ( rM - rRF ) = 8% + (18%-8%)0.80 = 8% + 8% = 16%
3.
rM = 15% rRF = 14% = 0.70
r = rRF + ( rM - rRF ) = 14% + (15%-14%)0.70 = 14% + 0.70
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= 14.7%
4.
rM = 17% rRF = 13% = 1.20
r = rRF + ( rM + rRF ) = 13% + (17%-13%)1.20 = 13% + 4.8% = 17.8%
5.
rM = 20% rRF = 15% = 1.60
r = rRF + ( rM - rRF ) = 15% + (20%-15%) 1.60 = 15% + 8% = 23% GENERALIZATION: As beta of stock rises the return on stock also rises.
FINALTERM EXAMINATION
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Fall 2009 MGT201- Financial Management (Session - 3)
- 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 ROE = (Profit margin)*(Asset turnover)*(Equity multiplier) = (Net profit/Sales)*(Sales/Assets)*(Assets/Equity) Question No: 2 ( 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 A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.
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- Please choose one
Present value Simple interest Future value Compound interest When the compound interest calculation is used, interest is calculated on the original principal plus all interest accrued to that point in time. Since interest is paid on interest as well as on the amount borrowed, the effective interest rate is greater than the nominal interest rate. The compound interest rate method is often used by banks and savings institutions in determining interest they pay on savings deposits "loaned" to the institutions by the depositors.
- Please choose one
Payback period Internal rate of return

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Net present value Profitability index Payback cannot be calculated if the positive cash inflows do not eventually outweigh the cash outflows. That is why payback (like IRR) is of little use when used with a pure "costs only" it does not take into account the concept of time value of money. The cash flows are considered regardless of the time in which they are occurring. You must have noticed that we have not used any interest rate while making calculation
- Please choose one
- Please choose one
Indenture
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Debenture Bond Bond trustee Indenture: Long Legal Agreement between the Issuer (or Borrower) and the Bond Trustee (Generally a bank of financial institution that acts as the representative for all Bondholders). Basically protects Bondholders from mismanagement by the bond issuer, default, other security holders, etc.
- 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
- Please choose one
Fundamental analysis Underlying real asset

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Supply and demand of securities in the market All of the given options
- Please choose one
_________ is equal to (common shareholders' equity/common shares outstanding).
Question No: 10 ( 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) III) IV) The stock's price Zero if its return on equity equals the discount rate The net present value of favorable investment opportunities
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I and IV
Question No: 11 ( 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 variance. square root of a portfolio's standard deviation of return equals its
The square root of a portfolio's standard deviation of return equals its coefficient of variation.
Question No: 12 ( Marks: 1 ) - Please choose one Which of the following is NOT a major cause of unsystematic risk.
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Question No: 13 ( Marks: 1 ) - Please choose one Which of the following is the characteristic of a well diversified portfolio? Its market risk is negligible negligible
Its unsystematic risk is Its All
systematic risk is negligible of the given options
Question No: 14 ( Marks: 1 ) - Please choose one Which of the following factor(s) do NOT affects the movements in the market index?
Macroeconomic factors Socio political factors
Social factors All of the given options

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Question No: 15 ( Marks: 1 ) - Please choose one If stock is a part of totally diversified portfolio then its company risk must be equal to:
0 0.5 1 -1
Question No: 16 ( Marks: 1 ) - Please choose one How much return would be offered by the stock whose (risk and return) pair lies below the SML?
No return Lower return Average return Excessive return
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Any Stock whose (Risk, Return) Pair lies BELOW THE SML is offering a Return that is lower than the Market.
Question No: 17 ( Marks: 1 ) - Please choose one Market risk is measured in terms of the ___________ of the market portfolio or index. Variance Covariance Standard deviation Correlation coefficient
Ref. Page No.102: Market Risk is measured in terms of the Standard Deviation (or Volatility) of the Market Portfolio or Index Question No: 18 ( Marks: 1 ) - Please choose one What is the meaning of the term arbitrage? Buying low and selling high Earning risk-free economic profits Negotiating for favorable brokerage fees Hedging your portfolio through the use of options
Arbitrage is exploiting security mispricings by the simultaneous purchase and sale to gain economic profits without taking any risk. A capital market in equilibrium rules out arbitrage opportunities.. Question No: 19 ( Marks: 1 ) - Please choose one
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Which of the following is the market where tangible or physical asset change hand?
Real Assets Markets: The real asset market where the real or tangible asset or physical asset change hand .for example, you have cotton exchange where raw bales of cotton change hands .computer hardware and many other examples are available. For example, Cotton Exchange, Gold Market, Kapra Market Property (land, house, apartment, warehouse) ,Computer hardware, Used Cars, Wheat, Sugar, Vegetables, etc.
Question No: 20 ( Marks: 1 ) - Please choose one Which of the following is related to the use Lower financial leverage? Fixed cost Variable cost Debt financing Common equity financing

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Which of the following will be confronted by the management in deciding the optimal level of current assets for the firm? A trade-off between profitability and risk A trade-off between liquidity and risk A trade-off between equity and debt A trade-off between short-term versus long-term borrowing
Question No: 22 ( Marks: 1 ) - Please choose one Which of the following is an example of a natural hedge? The prices and costs are both determined in the global market place. The prices are determined in the global market place and costs are determined in the domestic market place. The costs are determined in the global market place and prices are determined in the domestic market place. None of the given options is correct
Natural hedges are generated when both prices and costs are determined in similar market places.
Question No: 23 ( Marks: 1 ) - Please choose one For which of the following strategy; economies of scale, market share dominance, and technological advances are reasons most likely to be offered to justify? Financial acquisition Strategic acquisition
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Divestiture Supermajority merger approval provision
Question No: 24 ( Marks: 1 ) - Please choose one Which of the following is incorrect regarding the costs and benefits of holding inventories and cash?
The benefit of higher inventory levels is the reduction in order costs associated with restocking and the reduced chances of running out of material. The costs of higher inventory levels are the carrying costs, which include the cost of space, insurance, spoilage, and the opportunity cost of the capital tied up in inventory. Cash provides liquidity, but it doesn't pay interest. Securities pay interest, but you can't use them to buy things. As financial manager you want to hold cash up to the point where the incremental or marginal benefit of liquidity is 25% higher than the cost of holding cash, that is, the interest that you could earn on securities.
Question No: 25 ( Marks: 1 ) - Please choose one Which of the following is the dividend that is normally paid to shareholders? Stock split Stock dividend Extra dividend Regular dividend
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Question No: 26 ( Marks: 1 ) - Please choose one A technique that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Pay back period Internal rate of return Net present value Profitability index
In this technique, we try to figure out how long it would take to recover the invested capital through positive cash flows of the business.
Question No: 27 ( 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 1.66 2.66 3.66
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Question No: 28 ( 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: 29 ( 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
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F V = PV (1 + i )n PV = FV / (1 + i )n = 1000 / (1 + 0.08)5 = 680.27
Question No: 30 ( Marks: 1 ) - Please choose one What will be the market risk premium for stock C if the average share of stock C has a required return of 15% and treasury bonds yield is 10%? 5% 10% 15% 25% 15%-10%= 5% The difference between the expected return on a market portfolio and the risk-free rate.
Question No: 31 ( Marks: 1 ) - Please choose one All of the following are used in calculation of required return on a particular stock using SML equation EXCEPT: Risk free rate Market risk premium Stocks beta Stocks price
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Ref: SML Equation (assumes Efficient Stock Pricing, Risk, and Return) rA = rRF + (rM - rRF ) A .
Question No: 32 ( Marks: 1 ) - Please choose one On which of the following ground, the Arbitrage Pricing Model is different from the Capital Asset Pricing Model? It places more emphasis on market risk It minimizes the importance of diversification It recognizes multiple systematic risk factors It recognizes multiple unsystematic risk factors
Question No: 33 ( Marks: 1 ) - Please choose one According to Traditionalist Theory, when a 100% Equity Firm takes on more and more debt, which of the following phenomenon is observed? Share Price first falls, then reaches minimum and finally rises Share Price first rises, then reaches minimum and finally falls Share Price first rises, then reaches maximum and finally falls None of the given options Ref: Total Market Value of Firm (V = D + E = Market Value of Debt + Market Value of Equity) first rises (because of Interest Tax Shield savings), then reaches a maximum point (optimal capital structure), and finally falls (because of excessive fall in Net Income and Equity value because of interest payments).
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Question No: 34 ( Marks: 1 ) - Please choose one Which of the following formula represents the yield to maturity? Interest yield + Market price Capital gain yield + Book value Interest yield + Capital gain yield Market price + Capital gain yield Ref: YTM= interest yield +capital gain yield and it is representative of over all cost of debt in the form of bond.
Question No: 35 ( Marks: 1 ) - Please choose one Bird-in-the-hand dividend theory was proposed by which of the following? Miller Modigliani Myron Gordon and John Lintner Henry Fayol William John and Lehman Ref: Bird in the Hand (Gordon & Lintner) Theory: from handouts
Question No: 36 ( Marks: 1 ) - Please choose one XYZ Corporation has offered its shareholders the option that their dividends will be used to purchase additional shares of this corporation. This offer of XYZ Corporation is referred as: Stock repurchases Dividend reinvestment
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Stock dividends Stock splits Dividend Reinvestment Plans (DRIP) Firms give stockholders option to automatically reinvest cash dividends by buying more of the same stock
Question No: 37 ( Marks: 1 ) - Please choose one When IRR < WACC it means that: Investment is acceptable as required rate of return is less then cost of capital Investment is not acceptable as required rate of return is less then cost of capital Investment is acceptable as required rate of return is equal to the cost of capital None of the given options is true Ref: http://www.google.com.pk/url?sa=t&source=web&ct=res&cd=2&ved=0CAoQFjA B&url=http%3A%2F%2Fwww.cob.sfasu.edu%2Fkjones%2FF333%2FLecture%2 520Notes%2FBasics%2520of%2520Capital%2520Budgeting.ppt&rct=j&q=%22I RR%3CWACC%22&ei=UxSIS4qZMc_l8Qbg6vWXDw&usg=AFQjCNFrI6KU6 H1PTjdaZBcu0zpr0DKnPw
Question No: 38 ( Marks: 1 ) - Please choose one Which of the following statement depicts the disadvantage of issuing debt?
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Debt financing leads toward unlimited liability If company doesnt pay interest, it can be close down It can improve the return on equity Not fixed payment of interest is required by investors Ref: Disadvantage of Too Much Debt: Firm becomes more Risky so Lenders and Banks Charge Higher Interest Rates and Greater Chance of Bankruptcy
Question No: 39 ( Marks: 1 ) - Please choose one The decisions regarding capital structure of a firm are mainly concerned with which of the following? Assets side of balance sheet Liabilities side of balance sheet Expense side of profit and loss account Incomes side of profit and loss account Ref: Capital Structure and Corporate Financing - Long Term LIABILITIES Side of Balance Sheet
Question No: 40 ( Marks: 1 ) - Please choose one If Current assets = Rs. 16,000, Current liabilities= Rs. 10,000 Inventory= Rs. 2500
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Calculate quick ratio for the firm? 1.35 6.0 1.60 0.25 Ref: A desirable quick ratio can range from (0.8:1) to (1.5:1) depending on the nature of the business. = (Current Assets Inventory) / Current Liabilities = (16000-2500)/10000 = 1.35
Question No: 41 ( Marks: 1 ) - Please choose one If an investor is risk averse, then which of the following options best suits him? Debentures Common stock T Bills Preferred stock Ref: It is important to remember that we have the option of investing in the T-bill portfolio which offers a risk free rate of return
Question No: 42 ( Marks: 1 ) - Please choose one Capital structure theory is presented by which of the following?
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Robert Alan Hill Modigliani & Miller Brigham & Houston Van Horne & Gittman Ref: Answer provided by Capital Structure Theory. Modigliani - Miller: Fathers of Corporate Finance
Question No: 43 ( Marks: 1 ) - Please choose one Which of the following is true regarding financial leverage? Whenever a firm's equity increases faster than its debt, financial leverage increases Investors can undo the effects of the firm's capital structure by using home-made leverage Increasing financial leverage will always increase the EPS for stockholders The level of financial leverage that produces the minimum firm value is the most beneficial to stockholders Ref: http://www.google.com.pk/url?sa=t&source=web&ct=res&cd=1&ved=0CAYQFj AA&url=http%3A%2F%2Fwww.cbpp.uaa.alaska.edu%2Fafrc2%2F325%2Frwje4 ch13.rtf&rct=j&q=%22Which+of+the+following+is+true+regarding+financial+lev erage%22&ei=sReIS__kLMjR8Abr5yzDw&usg=AFQjCNHvAT9YesJTLn_T3Eng8LcyMmDGjA

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If a firm wants to use short-term bank loan to finance its temporary current assets and even to buy some of its permanent current inventory, then which of the following policy it is going to adopt? Moderate working capital policy Conservative working capital policy Aggressive working capital policy Any of the given policy Ref: Moderate Balance of Long and Short-term Financing. Long Term Financing for Fixed and Permanent Current Assets. Use Short Term Financing for Permanent Current Assets. Use Spontaneous Current Liability Financing for Temporary Current Assets
Question No: 45 ( Marks: 1 ) - Please choose one Which of the following statements depicts the trade-off theory in a better way? It states a tradeoff between the costs and benefits of debt financing It states the tradeoff between the debt financing and equity financing There is tradeoff between assets and liabilities of the firm There is tradeoff between revenues and expenses of the firm
Question No: 46 ( Marks: 1 ) - Please choose one Modigliani and Miller presented capital structure theory in which of the following years?
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1950 1958 1963 1965 Ref: Cost of Capital, Corporate Finance and the Theory of Investment Revolutionary Article Published by Professors Modigliani & Miller in American Economic Review in June 1958. Won Nobel Prize
Question No: 47 ( Marks: 1 ) - Please choose one In which of the following, synergies are not expected? Operating merger Financial merger Vertical Merger Horizontal Merger Ref: 2 Broad Categories of Mergers: Pure Financial Merger - Operations remain independent Operating Merger - Operations are Integrated & Changed & Synergies Expected
Question No: 48 ( Marks: 1 ) - Please choose one Company X wants to merge with Company Y but Company Xs management is resisting the merger. Company X asks the shareholders of Company Y to tender their shares in exchange the offered price. This statement refers to which of the following? Horizontal Merger
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Vertical Merger Hostile Merger Conglomerate Merger Reference 4 Specific Types of Mergers: Horizontal Merger: merger of 2 competitors - can lead to Monopoly Vertical Merger: merger of a supplier with a buyer Co generic Merger: merger of firms in same industry Conglomerate Merger: merger of firms in unrelated industries
Question No: 49 ( Marks: 1 ) - Please choose one What happens to the total risk when leverage increases at a slow rate?
Total risk increases with slow rate than the leverage Total risk increases with decreasing rate Total risk remains the same Total risk increases faster than the leverage
Question No: 50 ( Marks: 1 ) - Please choose one According to ___________, the firm's cost of equity increases with greater debt financing, while the WACC first decreases and then increases. M&M Proposition I with taxes M&M Proposition I without taxes
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The traditional theory of capital structure M&M Proposition II without taxes
Question No: 51 ( Marks: 1 ) - Please choose one Which of the following is incorrect regarding Modigliani and Miller's (MM's) famous debt irrelevance proposition? It states that firm value can't be increased by changing capital structure MM show that the extra return and extra risk balance out, leaving shareholders no better or worse off MM's argument rests on simplifying assumptions i.e. efficient capital markets and ignores taxes and costs of financial distress Firm value increases when more debt is used Ref: As companies take more debt they are exposed to more financial risk.
Question No: 52 ( Marks: 1 ) - Please choose one Which of the following refers to a unique type of Japanese corporate organization based on a close partnership between government and businesses? Keiretsu Chaebols Lean and mean Options Ref: A grouping of Japanese firms through historic associations and equity interlocks such that each firm maintains its operational independence (definition of keiretsu)
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Question No: 53 ( Marks: 1 ) - Please choose one Calculate the Forward Rate for Rupee if the interest on 1 Year Maturity in Pakistan is 10% and in Australia is 6% and the current spot rate is Rs.76/ AUD. Rs. 6 per AUD Rs. 76 per AUD Rs. 79 per AUD Rs. 456 per AUD Ref: F = S (Rs. /AUD$) (1+ i Rs.) / (1+ i AUD$) = 76(1+0.1)/ (1+0.06) =78.87
Question No: 54 ( Marks: 1 ) - Please choose one Calculate the Forward Rate for Rupee using Interest Rate Parity if the interest on 1 Year Maturity in Pakistan is 10% and on Euro is 6% and the forward rate is Rs.124/ EUR. Rs. 6 per EUR Rs. 120 per EUR Rs. 124 per EUR Rs. 1240 per EUR Ref: F = S (Rs. /AUD$) (1+ i Rs.) / (1+ i AUD$) There some technical problem with question
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This Question has some technical problem. It should give spot rate if they wanted to calculate forward rate. If we assume 124 as spot rate then its answer for forward rate should be 128.67
How it can be possible with parity of 10% and 6% after one year euro has the same value of 124Rs.
= F = S (Rs. ) (1+ i Rs.) / (1+ i euro) = (124) (1+0.1) / (1+0.06) = 128.6792
or if we assume it ask us to calculate the spot Rate and 124 is assumed as forward rate in that case answer could be 120
comments from:
Question No: 55 ( Marks: 3 ) Tax shield for the calculation of cost of debt but not for the calculation of the equity stock. Why? Give reason.
Because you can get tax exemption on the interest payment, in case of debt financing. But you are not entitled for any Tax shield in case of equity.
560
Rd (1- T)
Comments Solution Team
Question No: 56 ( Marks: 5 ) Ahsan Enterprises, an all-equity firm, is considering a proposal of new capital investment. Analysis has indicated that the proposed investment has a beta of 0.5 and will generate an expected return of 7%. The firm currently has a required return of 10.75% and a beta of 1.25. The investment, if undertaken, will double the firm's total assets. Requirement: If rRF is 7% and the market risk premium is 3%, should the firm undertake the investment?
Beta = .5 Expected Rate of return = 7% Required rate of return = 10.75 Beta = 1.25% Ahsan Enterprises uses only equity capital, so its cost of equity is also its corporate cost of capital, or WACC. WACC = 10.75 %
The investment, if undertaken, will double the firm's total assets tells us that exactly same amount will be injected
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So after the injection of new investment with beta of .5, impact on overall beta will be
.5 * (1.25) + .5*(.5) = .875
Now we will calculate the Required Rate of return with new beta RR = WACC = risk free rate of return + (Market rate of return - risk free rate of return)*beta
WACC = 7% + (7% - 3%)*.875 = 10.50%
= .5*10.50 + .5*7 =
Due to new investment cost of capital reduced from 10.75% to 10.50%
Overall expected rate of return must be more then 10.50% but new investment is giving us the expected rate of return of 7%
Now we will see expected return after injection of new investment .5(10.75)+ .5(7) = 8.87% as it is less then 10.50 so we should drop it.
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Comments Team: we have given more steps just to clear the concept you can short the answer also.
Question No: 57 ( Marks: 5 ) Mergers can be classified in two broad categories i.e. Financial and Operating merger. Differentiate between these two.
Financial Merger The operations remains independent
Operating Merger The operations are integrated and changed and synergies expected.
Question No: 58 ( Marks: 10 ) Using the Capital Asset Pricing Model (CAPM), determine the required return on equity for the following situations:
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Situations 1 2 3
Expected return on market portfolio 16% 18% 15%
Risk- free rate 12% 8% 14%
Beta 1.00 0.80 0.70
What generalization can you make? Required Rate of return = risk free rate of return + (market return- risk free rate)* beta
1. 2. 3.
= 12% + (16%-12%)*1 = 16% = 8% + (18%-8%)*.8 = 16% = 14% + (15%-14%)*.7 = 14.7%
Generalization: as beta of 1 in case of our security No.1 It is fully diversified and its return is 16% which exactly equal to market portfolio return. Any value of beta above the 1 can increase the rate of return but same it will increase the Risk as well.
Comments Team
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Question No: 59 ( Marks: 10 ) What are stock dividends and stock splits? Explain with the help of examples and how do these affect stock prices? (3+3+4 marks)
Stock Dividend: They are used to control the share price if it rises too fast. They bring share price down to within an optimal price range so that more investors can afford to trade in it and trading volume rises.
Example: Company offers 10% stock dividend to all shareholders. It means that if you own 100 shares than company will give you 10 more shares free of cost. Number of shares increases but total value of firm is unchanged.
Stock Split: They are used to share price if it rises too fast. Number of share outstanding increase. They are used to increase Float.
Example: Company with 1000 shares outstanding to outside shareholders declares 2-for-1 stock split. Means that the number of shares outstanding will increase to 2000 shares (i.e. 100% increase). Number of shares rises but firm value unchanged.
Effect of Stock Dividend and Stock Splits on prices:
Prices rises immediately afterwards because investors take them to be positive signals about the companys future. But if company does not declares higher earnings and dividends in near future, price will come back down again.
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FINALTERM EXAMINATION Fall 2009 MGT201- Financial Management (Session - 3) Marks: 87
- Please choose one
Which of the following would NOT improve the current ratio? 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
- Please choose one
Which group of ratios measures how effectively the firm is using its assets?
Liquidity ratios Debt ratios Coverage ratios

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Activity ratios
- Please choose one
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you deposit Rs. 20, 000 you would expect to earn around __________ in interest. Rs.840
Rs.858
Rs.1,032
Rs.1,121
- Please choose one
Assume that the interest rate is greater than zero. Which of the following cashinflow 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
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Rs.500 Rs.500 Rs.500
Any of the above, since they each sum to Rs.1,500
- 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
- Please choose one
Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Discount rate
Profitability index
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Multiple Internal rate of return
- Please choose one
Indenture
Debenture
Bond
Bond trustee

- Please choose one

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__________ is a high-risk, high-yield bond. Zero coupon bond
Mortgage bond Junk bond Income bond
- Please choose one
10.65% 10.45% 10.95% 10.52%
Question No: 10 ( 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
570
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: 11 ( Marks: 1 ) - Please choose one What is the price of a stock?
The future value of all expected future dividends, discounted at the dividend growth rate The present value of all expected future dividends, discounted at the dividend growth rate The future value of all expected future dividends, discounted at the investors required return The present value of all expected future dividends, discounted at the investors required return Ref: http://www.wattpad.com/73486
Question No: 12 ( Marks: 1 ) - Please choose one Which of the following combinations will produce the highest growth rate? Assume that the firm's projects offer a higher expected return than the market capitalization rate.
571
A high plowback ratio and a high P/E ratio A high plowback ratio and a low P/E ratio A low plowback ratio and a low P/E ratio A low plowback ratio and a high P/E ratio Ref: http://74.125.113.132/search?q=cache:yToYf6zHkDgJ:www2.cob.ilstu.edu/gnnaid u/Tb/Chap018.RTF+%22A+high+plowback+ratio+and+a+high+P/E+ratio%22&c d=1&hl=en&ct=clnk&gl=pk
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 Ref: Diversification: It states that dont put all your eggs in one basket. Diversification can reduce risk. By spreading your money across many different Investments, Markets, Industries, Countries you can avoid the weakness of each.
Question No: 14 ( Marks: 1 ) - Please choose one The square of the standard deviation is known as the ________.
572
Beta Expected return Coefficient of variation Variance Ref: /web/Spring+2009_FinalTerm_MGT201_s2_solved
Question No: 15 ( 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: 16 ( Marks: 1 ) - Please choose one _________ means expanding the number of investments which cover different kinds of stocks.
Diversification Standard deviation Variance

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Covariance Ref: /web/mgt201-current-quiz4
Question No: 17 ( Marks: 1 ) - Please choose one Which of the following would NOT be the part of the risk if the stock is a single stock investment?
Company specific risk Un-diversifiable risk Diversifiable risk Random risk Ref: In case of portfolio risk we can further made distinction between Diversifiable Risk and Market risk
Question No: 18 ( Marks: 1 ) - Please choose one To limit volatility what should be the appropriate action? To diversify To check the stocks prices daily To own just a few securities Not to invest in risky securities
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In efficient market the stock price depends upon the required return which depends upon _________.
Market risk Total risk Diversified risk Non- Systematic risk Ref: In Perfect Markets and Efficient Markets where Rational Investors have Diversified Away ALL Company Specific Risk, Value (and Stock Price) depends on Required Return which depends on Market Risk (and not Total Risk).
Question No: 20 ( Marks: 1 ) - Please choose one Why markets and market returns fluctuate?
Question No: 21 ( Marks: 1 ) - Please choose one The overall (weighted average) cost of capital is composed of weighted averages of which of the following? The cost of common equity and the cost of debt
575
The cost of common equity and the cost of preferred stock The cost of preferred stock and the cost of debt The cost of common equity, the cost of preferred stock, and the cost of debt
Question No: 22 ( Marks: 1 ) - Please choose one Which of the following costs would be considered a fixed cost? Raw materials Depreciation Bad-debt losses Production labor
Question No: 23 ( Marks: 1 ) - Please choose one Assume the nominal interest rates (annual) in the country of Freedonia and the United States are 6% and 12% respectively. What is the implied 90-day forward rate if the current spot rate is 5 Freedonian marks (FM) per U.S. dollar? 4.732 4.927 5.074 5.283 . 1+(.12/4) = 1.03; 1+(.06/4) = 1.015; FM / 5 = (1.015 / 1/03); FM = 4.927.

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A firm that acquires another firm as part of its strategy to sell off assets, cut costs, and operates the remaining assets more efficiently is engaging in __________. A strategic acquisition A financial acquisition Two-tier tender offer Shark repellent
Question No: 25 ( Marks: 1 ) - Please choose one When a firm can acquire another firm? Only by purchasing the assets of the target firm Only by purchasing the common stock of the target firm By either purchasing the assets or the common equity of the target firm None of the given options
Question No: 26 ( Marks: 1 ) - Please choose one Which of the following is NOT a type of financial lease arrangement? Sale and leaseback Indirect leasing Leveraged leasing All of the given options
577
Question No: 27 ( Marks: 1 ) - Please choose one The Board of Directors announces the amount and date of the next dividend on the __________ date; while the __________ date is the first date on which the purchaser of a stock is no longer entitled to the recently declared dividend. Declaration; record Ex-dividend; record Declaration; ex-dividend Payment; record
Question No: 28 ( Marks: 1 ) - Please choose one What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? The price should increase by the amount of the dividend The price should decrease by the amount of the dividend The price should decrease by one-half the amount of the dividend The price should remain constant
Question No: 29 ( Marks: 1 ) - Please choose one What is the amount of the annual interest tax shield for a firm with Rs. 3 million in debt that pays 12% interest if the firm is in the 35% tax bracket? Rs.126, 000 Rs.234, 000
578
Rs.360, 000 Rs.1, 050,000 Tax Shield =(income-(debt*interest rate))*tax rate =( 3000000)*12%*35%
Question No: 30 ( Marks: 1 ) - Please choose one While calculating the Stock Portfolio Risk using 3x3 Matrix Approach, nondiagonal terms shown in Boxes are called: Variance Coefficient Covariance Correlation Terms in all other (or NON-DIAGONAL) Boxes are called COVARIANCE terms which account for affect of one stocks movement on another stocks movement Question No: 31 ( Marks: 1 ) - Please choose one While calculating the stock beta graphically, the formula to calculate the beta coefficient for stock B is: (rM* - rRF) / (rB* - rRF) (rB* - rRF) / (rM* - rRF) (rB* - rRF) / rRF (rB* - rRF) / rM* Slope = Beta = Y / X = % rA* / % rM*
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= A =Risk Relative to Market = (rA* - rRF) / (rM* - rRF)
Question No: 32 ( Marks: 1 ) - Please choose one While analyzing any portfolio the value of r represents which of the following?
Internal rate of return Expected rate of return Required rate of return Assumed rate of return
Question No: 33 ( Marks: 1 ) - Please choose one If a stock is part of totally diversified portfolio then which of the following is TRUE for that stock? Stock's total Risk = Company Risk Stock's total Risk = Market Risk Stock's total Risk = Market Risk + Company Risk All of the given options
Question No: 34 ( Marks: 1 ) - Please choose one High uncertainty is associated with which of the following? Preferred stock Common stock
580
Bonds T Bills
Question No: 35 ( Marks: 1 ) - Please choose one The date on which the names of stockholders in the Stock Transfer Register of firm are documented is referred as: Declaration Date Holder-of-record Date Ex-Dividend Date Payment Date Firm records names of shareholders in the Stock Transfer Register i.e. Feb 28th 2003. About 1 month after Declaration Date Question No: 36 ( Marks: 1 ) - Please choose one Operating revenue can be calculated from which of the following formulas? Operating Revenue = Fixed cost * Quantity + Variable cost Operating Revenue = Price / Quantity +Variable cost Operating Revenue = Sale price * Quantity Operating Revenue = Variable cost * Quantity / Fixed cost
In accounting and finance, earnings before interest and taxes (EBIT) or operating income is a measure of a firm's profitability that excludes interest and income tax expenses.[1]
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EBIT = Operating Revenue Operating Expenses (OPEX) + Non-operating Income Operating Income = Operating Revenue Operating Expenses[1] Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[2] This is true if the firm has no non-operating income.
Question No: 37 ( Marks: 1 ) - Please choose one Which of the following statements is TRUE about an aggressive approach to finance working capital? Financing seasonal requirements of current assets with short-term debt and permanent requirement of current assets with long term debt Financing permanent requirements of current assets with short-term debt and seasonal requirement of current assets with long term debt Financing seasonal as well as permanent requirements of current assets with short-term debt Financing seasonal as well as permanent requirements of current assets with long term debt Financing some long-term needs with short-term funds. this is a maturity matching approach and is neither aggressive nor conservative in nature Rather, it is a moderate approach.
Question No: 38 ( Marks: 1 ) - Please choose one Capital structure theory is presented by which of the following? Robert Alan Hill
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Modigliani & Miller Brigham & Houston Van Horne & Gittman
Question No: 39 ( Marks: 1 ) - Please choose one All of the following are the examples of permanent financing EXCEPT: Common Equity Current Liabilities Long-term Loans Bonds
Question No: 40 ( Marks: 1 ) - Please choose one Which of the followings proposes that the value of the firm is independent of its capital structure? The Capital Asset Pricing Model M&M capital structure theory The law of variable proportion The Law of One Price
What Rubinstein generalized, was the most basic of the M&M propositions: The proposition on the irrelevance of capital structure.
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Proposition I: The market value of any firm is independent of its capital structure and is given by capitalizing its expected return at the rate appropriate to its class, Modigliani and Miller [1958, page 268]. In modern terms, capital structure is irrelevant, and firm value is equal to the present value of the free cash flow discounted at the relevant cost of capital.
Question No: 41 ( Marks: 1 ) - Please choose one Value of the firm can be calculated with the help of which of the following formulas? Price of a share x No. of shares outstanding Price of a share x debt / equity Price of a share / No. of shares outstanding Price of a share x earnings after tax / equity
Question No: 42 ( Marks: 1 ) - Please choose one If the sales are expected to be poor in future than management wants to raise capital through which of the following: Debt financing Equity financing (common & preferred stock) Term finance certificates National saving certificates
Question No: 43 ( Marks: 1 ) - Please choose one Company A has to purchase another company. How do Company A pay for buying the other company?
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In Cash In Shares Bank Borrowing All of the given options
Question No: 44 ( Marks: 1 ) - Please choose one Which of the following mathematical expressions depicts divestiture? 5-1=4 5-1=6 5+1=6 None of the given options Ref: Divestiture = Reverse Merger. Benefit of Efficient Reallocation of Resources: 5 - 1 = 5! It means by selling an inefficient or unproductive unit of the company you can have more value as it saves costs
Question No: 45 ( Marks: 1 ) - Please choose one Under efficient market, the effect of debt on WACC can be represented with the help of which of the following? Straight line U shaped curve
585
Concave Time to time fluctuation Ref: Effect under Pure MM View (Ideal Efficient Markets): Its assumptions are No Taxes and No Bankruptcy Costs so Debt increases Risk BUT is also cheaper than Equity. Change in Debt has no effect on WACC and Value of the firm. WACC curve is flat.
Question No: 46 ( Marks: 1 ) - Please choose one Under traditional view, the effect of debt on WACC can be represented with the help of which of the following? Straight line U shaped curve Concave Time to time fluctuation Ref: Effect under Traditionalist View (Tradeoff Theorists, Real Markets): Combined Effects of Taxes and Financial Distress / Bankruptcy Costs are a Flat U-Shaped WACC Curve with a Minimum Point which represents the Optimal Capital Structure (i.e. Best Debt Ratio for the Firm).
Question No: 47 ( Marks: 1 ) - Please choose one According to the trade off theory, value of the firm rises as a result of ____________.
586
Tax saving Increase in EPS Increase in EBIT Saving in cost of debt Ref: This is the case of pure MM theory where there are no taxes and bankruptcy costs. But in case of trade off theory in reality initially value of the firm rises as there is interest tax saving but with excessive leverage, value of the firm starts declining as interest cost goes very high due to bankruptcy risk.
Question No: 48 ( Marks: 1 ) - Please choose one Which of the following statements is true about business risk? The financial risk of a firm decreases when it takes on a risky project The financial risk of a firm increases when it takes on more equity The business risk of a firm increases when it takes on a risky project The business risk of a firm increases when it takes on more debt Ref: http://74.125.113.132/search?q=cache:JRlcbO4yXQJ:www.cbpp.uaa.alaska.edu/afrc2/325/rwje4ch13.rtf+%22The+financial +risk+of+a+firm+decreases+when+it+takes+on+a+risky+project%22&cd=1&hl=e n&ct=clnk&gl=pk
Question No: 49 ( Marks: 1 ) - Please choose one Under Net income approach, which of the following is a correct sequence of calculating cost of capital?
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Net income Total firms market value WACC Net income WACC total firms market value WACC Net income market value of equity Market value of firm WACC Net income
Question No: 50 ( Marks: 1 ) - Please choose one From which of the following equations, net income can be calculated? NI = (EBIT - xD rD) (1 - Tc) NI = (EAT - xD rD) (1 - Tc) NI = (EBIT + xD rD) (1 - Tc) NI = (EBIT - xD rD) / (1 - Tc) Ref: E = Net Income (NI)/ Cost of Equity for levered firm (rE,L) Note that NI = EBIT - Interest - Tax = EBT Tax NI = (EBIT - xD rD) (1 - Tc)
Question No: 51 ( Marks: 1 ) - Please choose one Which of the following refers to a unique type of Japanese corporate organization based on a close partnership between government and businesses? Keiretsu Chaebols Lean and mean Options
588
Ref: www.qualitysolutions.ca/key-quality-terms.htm
Question No: 52 ( Marks: 1 ) - Please choose one Which of the following is a South Korea type business in that is a conglomerate with Monopoly power? Keiretsu Chaebols Lean and mean Options Ref: Chaebol (alternatively Jaebol, Jaebeol; ) refers to a South Korean form of business conglomerate. (form definition of chaebols)
Question No: 53 ( Marks: 1 ) - Please choose one What is bid rate for currency? Buying rate for currency Selling rate of currency Forward rate of currency Ask rate of currency\ Ref: BID Rate = Buying Price for Currency. Example: Bid Rs.60 / US$1 Means Bank or Money Changer will Buy (or Bid) one US$ from you for Rs.60. This also means that you (the Customer) are Selling Dollar to the Bank. Bid Rs.60 / US$1 means Bid Rs60 /
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Ask US$1
Question No: 54 ( Marks: 1 ) - Please choose one What is the primary principle for money changers? Ask rate should be less than bid rate Ask rate should be greater than bid rate Ask rate should be equal to bid rate Bid rate should be greater than ask rate Ref: Fundamental Principle for F/x Traders and Money Changers: Buy Low and Sell High. So, ASK > BID Rate Question No: 55 ( Marks: 3 ) Calculate tax shield from the given information. Corporate tax rate is 35% and amount of debt is Rs. 20, 000 and rate of return is 8%.
Tax Shield =(income-(debt*interest rate))*tax rate Tax shield = (20,000 * 8%)* 35% = 560 Rs
Question No: 56 ( Marks: 5 ) How can a manager calculate the opportunity cost of capital for a project? Give answer in bulleted form only.
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Question No: 57 ( Marks: 5 ) Suppose you are a financial manager of XYZ Corporation and you have been assigned the task to calculate the numerical value of your firms WACC (Weighted Average Cost of Capital), what procedure would you follow keeping in mind that the firm is using NOI (Net Operating Income) approach?
Question No: 58 ( Marks: 10 ) Suppose that the risk free rate is 12% and the expected market return is 20%. The FM Corporation has a beta of 0.75 and the Gord Corporation has a beta of 1.25.
a. b.
Find the expected return on the FM Corporation. Find the expected return on the Gord Corporation.
c. Suppose that because of a suddenly unanticipated increase in inflation, the risk free rate raises to 16% and the market risk premium remains at 8%. Find the expected return on of FM and Gord.
Question No: 59 ( Marks: 10 ) Ammar Watch Company is the renowned ladies watch manufacturers. They are offering watch in the market at a price of Rs. 30. They have estimated that they will manufacture and sale almost 30, 000 watches. Fixed cost for the preparation of
591
these watches is Rs.150, 000. Variable cost associated with the preparation of these watches is Rs. 20 per watch. From the above information you are required to calculate the followings: What is the profit or loss for the units of 8, 000 or 18, 000? Calculate the break even point? (in units and sales)
FINALTERM EXAMINATION Fall 2009 Time: 120 min Marks: 87 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 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: 3 ( 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
592
Profitability ratios Question No: 4 ( Marks: 1 ) - Please choose one Which group of ratios measures how effectively the firm is using its assets? Liquidity ratios Debt ratios Coverage ratios Activity ratios Question No: 5 ( 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: 6 ( 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: 7 ( 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 Question No: 8 ( Marks: 1 ) - Please choose one If a company issues bonus shares, what will be its effect on the debt equity ratio? It will improve
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It will deteriorate No effect None of the given options Question No: 9 ( Marks: 1 ) - Please choose one For most firms, P/E ratios and risk_________. Will be directly related Will have an inverse relationship Will be unrelated Will both increase as inflation increases Question No: 10 ( 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: 11 ( 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 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%
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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 The objective of financial management is to maximize _________ wealth.
Stakeholders Shareholders Bondholders Directors Question No: 15 ( Marks: 1 ) - Please choose one Which of the following is correct regarding the opportunity cost of capital for a project? The opportunity cost of capital is the return that investors give up by investing in the project rather than in securities of equivalent risk. Financial managers use the capital asset pricing model to estimate the opportunity cost of capital The company cost of capital is the expected rate of return demanded by investors in a company. All of the given options Question No: 16 ( Marks: 1 ) - Please choose one Which of the following is equal to the market risk, beta, of a security?
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The covariance between the security's return and the market return divided by the variance of the market's returns The covariance between the security and market returns divided by the standard deviation of the market's returns The variance of the security's returns divided by the covariance between the security and market returns The variance of the security's returns divided by the variance of the market's returns Question No: 17 ( Marks: 1 ) - Please choose one If risk and return combination of any stock is above the SML, what does it mean? It is offering lower rate of return as compared to the efficient stock It is offering higher rate of return as compared to the efficient stock Its rate of return is zero as compared to the efficient stock It is offering rate of return equal to the efficient stock Question No: 18 ( Marks: 1 ) - Please choose one If we invest in many securities which are ________to each other then it is possible to reduce overall risk for your investment. Comparable Parallel Highly correlated Negatively correlated
Question No: 19 ( Marks: 1 ) - Please choose one Why common stock of a company must provide a higher expected return than the debt of the same company? There is less demand for stock than for bonds There is greater demand for stock than for bonds There is more systematic risk involved for the common stock There is a market premium required for bonds Question No: 20 ( Marks: 1 ) - Please choose one
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The ABC Company relies on preferred stock, bonds, and common stock for its long-term financing. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax component costs of the ABC's long-term financing. 1 = bonds; 2 = common stock; 3 = preferred stock 1 = bonds; 2 = preferred stock; 3 = common stock 1 = common stock; 2 = preferred stock; 3 = bonds 1 = preferred stock; 2 = common stock; 3 = bonds Question No: 21 ( Marks: 1 ) - Please choose one Which of the following is NOT a recognized approach for determining the cost of equity? Dividend discount model approach Before-tax cost of preferred stock plus risk premium approach Capital-asset pricing model approach Before-tax cost of debt plus risk premium approach Question No: 22 ( Marks: 1 ) - Please choose one Which of the following will be confronted by the management in deciding the optimal level of current assets for the firm? A trade-off between profitability and risk A trade-off between liquidity and risk A trade-off between equity and debt A trade-off between short-term versus long-term borrowing Question No: 23 ( Marks: 1 ) - Please choose one Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate non-spontaneous form for financing the excess seasonal current asset needs? Trade credit 6-month bank notes Accounts payable Common stock equity Question No: 24 ( Marks: 1 ) - Please choose one Which of the following is the common currency created by the group of European countries? The EU currency The European Union The EMU The Euro
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Question No: 25 ( Marks: 1 ) - Please choose one Which of the following statements is most correct as it relates to the recording of a capital lease? The capital lease is shown on the lessee's balance sheet as an asset and amortized over the asset's useful life. The capital lease is listed as an asset on the lessor's balance sheet and amortized over lease term. A capital lease is listed as an asset on the lessee's balance sheet and must be amortized over the lease period. A capital lease is listed as an asset on the lessee's balance sheet and must be amortized over the asset's useful life. Question No: 26 ( Marks: 1 ) - Please choose one Which of the following is the dividend that is normally paid to shareholders? Stock split Stock dividend Extra dividend Regular dividend Question No: 27 ( Marks: 1 ) - Please choose one Which of the following signals is most likely to elicit a decrease in share price for slow growth utility company that currently pays a small dividend? A repurchase of 5% of the firm's stock An unexpected increase in the regular quarterly dividend An unexpected decrease in the regular quarterly dividend Borrowing funds in order to pay a cash dividend Question No: 28 ( Marks: 1 ) - Please choose one The presence of which of the following costs is NOT used as a major argument against the M&M arbitrage process? Transaction costs Insurance costs Bankruptcy costs Agency costs Question No: 29 ( Marks: 1 ) - Please choose one Which term would most likely be associated with the phrase "actions speak louder than words?"
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Incentive signaling Shareholder wealth maximization Financial signaling Optimal capital structure Question No: 30 ( Marks: 1 ) - Please choose one When taxes are considered, the value of a levered firm equals the value of the________. Unlevered firm Unlevered firm plus the value of the debt Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield Question No: 31 ( Marks: 1 ) - Please choose one When financial disaster is looming, why management may borrow to invest in projects having a negative expected NPV? The firm's beta is now negative Taxes are no longer a concern The interest tax shield will cover the loan costs The lender bears all the risk Question No: 32 ( 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
Question No: 33 ( Marks: 1 ) - Please choose one What is the present value of Rs.717 to be paid at the end of 2 years if the interest rate is 9% compounded annually? Rs.604 Rs.417
599
Rs.715 Rs.556 Question No: 34 ( Marks: 1 ) - Please choose one All of the following are the components of CML (capital market line) eqaution EXCEPT: Risk free rate of return Risk of the market Risk of stock portfolio Net present value Question No: 35 ( Marks: 1 ) - Please choose one In NPV (Net Present Value) calculations, which of the following is used? Excepted rate of return Required rate of return Both expected rate of return and Required rate of return None of the given options Question No: 36 ( Marks: 1 ) - Please choose one If Share As Beta = +2.0 then it represents which of the following? Share is twice as risky (or volatile) as the KSE market Share is exactly as risky (or volatile) as the KSE market Share is half as risky (or volatile) as the KSE market Share would be exactly as volatile as the KSE market BUT in the opposite way Question No: 37 ( Marks: 1 ) - Please choose one Beta coefficient is actually the slope of the line that shows the relationship between which of the following? Stock required rate of return on x-axis and market rate of return on y-axis Stock required rate of return on y-axis and market rate of return on x-axis Stock expected rate of return on y-axis and market rate of return on xaxis Stock required rate of return on y-axis and stock expected rate of return on x-axis Question No: 38 ( Marks: 1 ) - Please choose one Which of the following is/are ideal source(s) of capital for profitable firms because of no transaction costs? Sizeable Cash
600
Retained Earnings Both Sizeable Cash and Retained Earnings None of the given options Question No: 39 ( Marks: 1 ) - Please choose one According to Traditionalist Theory, when an un-leveraged firm takes on more and more debt, which of the following phenomenon is observed? Cost of Capital increases, reaches a minimum point, and then falls Cost of Capital decreases, reaches a minimum point, and then rises Cost of Capital increases, reaches a maximum point, and then rises None of the given options Question No: 40 ( Marks: 1 ) - Please choose one In the WACC equation (rDxD + rExE + rPxP), xE represents which of the following? Weight or Fraction of Total Capital value raised from bonds Weight or Fraction of Total Capital value raised from preferred stock Weight or Fraction of Total Capital value raised from common stock Weight or Fraction of Total Capital value raised from debentures Question No: 41 ( Marks: 1 ) - Please choose one In the WACC equation (rDxD + rExE + rPxP), xD represents which of the following? Weight or Fraction of Total Capital value raised from bonds Weight or Fraction of Total Capital value raised from preferred stock Weight or Fraction of Total Capital value raised from common stock Weight or Fraction of Total Capital value raised from retained earnings Question No: 42 ( Marks: 1 ) - Please choose one Which of the following represents the tax shield? Interest on capital Dividends to shareholders Retained earnings Establishment expenses Question No: 43 ( Marks: 1 ) - Please choose one
601
On declaration date of dividend, if ABC Company announces dividend higher than the previous years, which of the following phenomenon is likely to be observe? Stock price falls Stock price rises Stock price remains the same None of the given options Question No: 44 ( Marks: 1 ) - Please choose one When IRR < WACC it means that: Investment is acceptable as required rate of return is less then cost of capital Investment is not acceptable as required rate of return is less then cost of capital Investment is acceptable as required rate of return is equal to the cost of capital None of the given options is true Question No: 45 ( Marks: 1 ) - Please choose one ABC Company moves from a "conservative" working capital policy to an "aggressive" policy. Which of the following results it should expect to achieve? Liquidity to decrease, whereas expected profitability would increase Expected profitability to increase, whereas risk would decrease Liquidity would increase, whereas risk would also increase Risk as well as profitability to decrease
Question No: 46 ( Marks: 1 ) - Please choose one Mr. A, a sole proprietor has purchased the raw material on credit; this transaction has generated which of the following? Permanent Financing Spontaneous Financing Short-term Loan All of the given options Question No: 47 ( Marks: 1 ) - Please choose one
602
Capital structure that minimizes the WACC is also a structure that maximizes the firms_________. Earnings before interest & taxes (EBIT) Earning after tax (EAT) Earning per share (EPS) Return on equity (ROE) Question No: 48 ( Marks: 1 ) - Please choose one In calculations regarding lease, net advantage of leasing is the difference between which of the following? Present value of net cash flows and present value of cost of leasing Present value of cost of owning the asset and present value of cost of leasing Present value of cost of owning the asset and present value of net cash flows None of the given options Question No: 49 ( Marks: 1 ) - Please choose one A car manufacturing firm buys steel from a steel mill. Both these entities combined together to form a new firm. It is referred to which of the following? Horizontal Merger Vertical Merger Congeneric Merger Conglomerate Merger Question No: 50 ( Marks: 1 ) - Please choose one Which of the following is a form of divestiture in which a subsidiary or division becomes an independent company? Sell-off Spin-off Liquidation Merger Question No: 51 ( Marks: 1 ) - Please choose one From which of the following equations, net income can be calculated? NI = (EBIT - xD rD) (1 - Tc) NI = (EAT - xD rD) (1 - Tc) NI = (EBIT + xD rD) (1 - Tc) NI = (EBIT - xD rD) / (1 - Tc)
603
Question No: 52 ( Marks: 1 ) - Please choose one Which of the following is the formula to calculate the tax shield? Corporate tax rate x Market value of debt Corporate tax rate / Market value of debt Corporate tax rate + Market value of debt Corporate tax rate - Market value of debt Question No: 53 ( Marks: 1 ) - Please choose one Which one of the following is correct for the spot exchange rate? It is the effective exchange rate for a foreign currency for delivery at a specific location on a specific future date It is the effective exchange rate for a foreign currency for immediate delivery at a specific location It is the effective exchange rate for a foreign currency for delivery at a specific future date It is the effective exchange rate for a foreign currency for delivery on the current day Question No: 54 ( Marks: 1 ) - Please choose one What is the primary principle for money changers? Ask rate should be less than bid rate Ask rate should be greater than bid rate Ask rate should be equal to bid rate Bid rate should be greater than ask rate Question No: 55 ( Marks: 3 ) If interest tax shields are valuable, why don't all taxpaying firms borrow as much as possible? A. Tax shield give us benefit up to certain level but as leverage increases Firm becomes more Risky so Lenders and Banks Charge Higher Interest Rates and Greater Chance of Bankruptcy. Question No: 56 ( Marks: 5 ) There are different methods to raise capital within the organization. Briefly explain the advantages of equity financing into the business. A. Equity financing gives the flexibility we dont need to pay fix amount. In case of bond or debt we need to pay fixed interest in case of failure there
604
is threat of Defaulter. Mostly the advantages of equity finance are reaped by the small business enterprises. In some case debt rate is too high that time equity help you to get cheaper capital financing. Question No: 57 ( Marks: 5 ) What is long-term financing? Explain the factors that can affect the decision of a manager while deciding about long term financing? Long term financing is a kind of financing which is provided for a period of more than one year. Permanent Financing comes in two forms: Long-term Loans - Bonds It has Low Risk for Firm but has High Cost normally more than one year. Common Equity or Stock its Less Risk for Firm but Highest Cost. If a company is using long-term financing it has higher cost of financing due high interest cost of long term loans despite high cost we have low risk, due to surety of access to money for a longer period. Current liabilities as a source of financing are not reliable as you have no surety whether you will have same amount of money available next month for financing or not. Question No: 58 ( Marks: 10 ) What is a credit policy and what factors an organization should consider while designing its credit policy and how can a firm use 5/10, net 30 basis and carrying charges in its credit policy? Credit Policy: It is the credit adjusted given to customer based upon payment history. Factors considered for credit: Assessment of Credit-worthiness of each credit customer Minimize duration of credit and Value. Give incentives to Customers to pay cash and to pay quickly Suppose if someone pays later then last date of payment he/she will pay extra 1% etc. Sell on 5/10.net 30 basis
605
30 basis Means customer will pay full cash value within 30 days. 5/10.net means 5% discount for customers who will pay within 10 days. It will be like incentive to customer who will pay early. Impost some extra charge in the form of carry charges in case of later payment Question No: 59 ( Marks: 10 ) Firms A and B are identical except their use of debt and the interest rates they pay. Firm A has more debt and thus must pay a higher interest rate. Requirement: Based on the data given below, how much higher or lower will be the A's ROE that of B, i.e., what is ROEA - ROEB? Applicable to Both Firms Assets Rs. 3,000,000 EBIT Rs.500, 000 Tax rate 35% Firm A's Data Debt ratio 70% Int. rate 12% Firm LD's Data Debt ratio 20% Int. rate 10%
For company A 20% leverage so equity will be 30% of 3,000,000 = 900000 EBIT = 500,000 Interest (12% of 500,000) = (6000) EBT 494,000 Tax (35% of EBT) (148200) Net income 345,800 Expected ROE (=NI/Equity) 345,800/ (900000) = 38.42%
For company B 20% leverage so equity will be 80% of 3,000,000 = 2400000 EBIT = 500,000 Interest (10% of 500,000) = (5000) EBT 495,000 Tax (35% of EBT) (148500) Net income 346,500 Expected ROE (=NI/Equity) 346500/ (2400000) = 14.43% ROEA ROEB = 38.42 14.43 =23.99
606
FINALTERM EXAMINATION Fall 2009 MGT201- Financial Management (Session - 3) Marks: 87
- Please choose one
ABCs and XYZs debt-to-total assets ratio is 0.4. What is its debt-to-equity ratio? 0 .2 0 .77 0.667 0.333
- Please choose one
- Please choose one
607
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
- Please choose one
Managers prefer IRR over net present value because they evaluate investments: In terms of dollars In terms of Percentages Intuitively Logically
- 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
608
Choose the project with the highest NPV
Time: 120 min
- Please choose one
Which of the following is the value of bond that we expect the bond to be?
Intrinsic value Fair value Both intrinsic and fair value Market price
- 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
609
- Please choose one
- Please choose one
Question No: 10 ( 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?
610
Question No: 11 ( Marks: 1 ) - Please choose one The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as __________.
Question No: 12 ( Marks: 1 ) - Please choose one The Higher the Risk of a Share, the ___________ its Rate of Return and the _____ its Market Price.
Time: 120 min
Higher; Lower
611
Lower; Higher Higher; Higher Lower; Lower
Question No: 13 ( 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: 14 ( 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.
612
IRR MIRR PV NPV
Question No: 15 ( Marks: 1 ) - Please choose one Expected Portfolio Return = ___________
rP * = xA rA + xB rB rP * = xA rA - xB rB rP * = xA rA / xB rB
613
rP * = xA rA * xB rB
Question No: 16 ( Marks: 1 ) - Please choose one Market risk is measured in terms of the ___________ of the market portfolio or index. Variance Covariance Standard deviation Correlation coefficient
Question No: 17 ( Marks: 1 ) - Please choose one Which of the following represent all Risk Return Combinations for the efficient portfolios in the capital market?
Question No: 18 ( Marks: 1 ) - Please choose one Generally companies want to keep the balance in the form of:
614
Debt Equity Hybrid security Both debt and equity
Question No: 19 ( Marks: 1 ) - Please choose one A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm? If sales rise by 3.5% at the firm, then EBIT will rise by 1% If EBIT rises by 3.5% at the firm, then EPS will rise by 1% If EBIT rises by 1% at the firm, then EPS will rise by 3.5% If sales rise by 1% at the firm, then EBIT will rise by 3.5%
Question No: 20 ( Marks: 1 ) - Please choose one Which of the following is the maximum amount of debt (and other fixed-charge financing) that a firm can adequately service? Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden
Time: 120 min
615
Question No: 21 ( Marks: 1 ) - Please choose one Which of the following represents financial leverage? Use of more debt capital to increase profit Debt is not used in capital to increase profit High degree of solvency Low degree of solvency
Question No: 22 ( Marks: 1 ) - Please choose one Which of the following statements regarding leverage is true? The ultimate effect of leverage depends on the firm's EBIT If things go poorly for the firm, increased leverage provides greater returns to shareholders. As a firm lever up, shareholders are exposed to less risk The benefits of leverage always outweigh the costs of financial distress
Question No: 23 ( Marks: 1 ) - Please choose one Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate form for financing a new capital investment in plant and equipment? 6-month bank notes Accounts payable Common stock equity Trade credit
616
Question No: 24 ( Marks: 1 ) - Please choose one Which of the following term is used when the firm can independently control considerable assets with a very limited amount of equity? Joint venture Leveraged buyout (LBO) Spin-off Consolidation
Question No: 25 ( Marks: 1 ) - Please choose one Which of the following is NOT a form of short-term, spontaneous credit? Accrued wages Trade credit Commercial paper Accrued taxes
Question No: 26 ( Marks: 1 ) - Please choose one Which of the following would NOT be included in inventory carrying cost? Insurance expense for the inventory Opportunity cost of capital for inventory investment Cost of inventory Cost of shelf space
617
Question No: 27 ( Marks: 1 ) - Please choose one What would be the result when there is an increase in the number of shares outstanding by reducing the par value of stock? Stock split Stock dividend Extra dividend Regular dividend
Question No: 28 ( Marks: 1 ) - Please choose one What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? The price should increase by the amount of the dividend The price should decrease by the amount of the dividend The price should decrease by one-half the amount of the dividend The price should remain constant
Question No: 29 ( Marks: 1 ) - Please choose one Which of the following add up to the costs of financial distress? Direct bankruptcy costs, primarily legal and administrative costs Indirect bankruptcy costs, reflecting the difficulty of managing a company when it is in bankruptcy proceedings
618
Costs of the threat of bankruptcy, such as poor investment decisions resulting from conflicts of interest between debtholders and stockholders All of the given options are correct
Question No: 30 ( Marks: 1 ) - Please choose one A technique that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Pay back period Internal rate of return Net present value Profitability index
Question No: 31 ( Marks: 1 ) - Please choose one Which is the best measure of risk for a single asset held in an isolation, and which is the best measure for an asset held in a diversified portfolio?
Variance, correlation coefficient Standard deviation, correlation coefficient Beta, variance Coefficient of variation, beta
619
All of the following are used in calculation of required return on a particular stock using SML equation EXCEPT: Risk free rate Market risk premium Stocks beta Stocks price
Question No: 33 ( Marks: 1 ) - Please choose one What will be the Stock Ys risk premium if the average share of stock Y has a required return of 20% and beta for that stock is 1.0? In addition, treasury bonds yield is 10%? 5% 10% 20% 30%
Question No: 34 ( Marks: 1 ) - Please choose one What should be used to calculate the proportional amount of equity financing employed by a firm? The book value of the firm The sum of common stock and preferred stock on the balance sheet The current market price per share of common stock times the number of shares outstanding The common stock equity account on the firm's balance sheet
620
Question No: 35 ( Marks: 1 ) - Please choose one According to Traditionalist Theory, when an un-leveraged firm takes on more and more debt, which of the following phenomenon is observed? Cost of Capital increases, reaches a minimum point, and then falls Cost of Capital decreases, reaches a minimum point, and then rises Cost of Capital increases, reaches a maximum point, and then rises None of the given options
Question No: 36 ( Marks: 1 ) - Please choose one In the WACC equation (rDxD + rExE + rPxP), xD represents which of the following?
Weight or Fraction of Total Capital value raised from bonds Weight or Fraction of Total Capital value raised from preferred stock Weight or Fraction of Total Capital value raised from common stock Weight or Fraction of Total Capital value raised from retained earnings
Question No: 37 ( Marks: 1 ) - Please choose one In residual dividend model, what does the term Conservatism refer? Overvaluation of free cash flows Underestimation of free cash flows
621
Overestimation of free cash flows None of the given option
Question No: 38 ( Marks: 1 ) - Please choose one The date on which the names of stockholders in the Stock Transfer Register of firm are documented is referred as: Declaration Date Holder-of-record Date Ex-Dividend Date Payment Date
Question No: 39 ( Marks: 1 ) - Please choose one XYZ Corporation has offered its shareholders the option that their dividends will be used to purchase additional shares of this corporation. This offer of XYZ Corporation is referred as: Stock repurchases Dividend reinvestment Stock dividends Stock splits
Question No: 40 ( Marks: 1 ) - Please choose one When IRR < WACC it means that:
622
Investment is acceptable as required rate of return is less then cost of capital Investment is not acceptable as required rate of return is less then cost of capital Investment is acceptable as required rate of return is equal to the cost of capital None of the given options is true
Question No: 41 ( Marks: 1 ) - Please choose one Which of the following statement depicts the advantage of raising capital through debt? Debt adds to company specific risk If company does not pay interest it can be close down It can improve the return on equity Not required to pay fixed amount of interest
Question No: 42 ( Marks: 1 ) - Please choose one Which of the following can be defined as additional risk faced by common stockholders if firms take debt.? Unsystematic risk Systematic risk Business risk Financial risk
623
Question No: 43 ( Marks: 1 ) - Please choose one The decisions regarding working capital management of a firm are mainly concerned with which of the following? Current assets & long-term liabilities of balance sheet Current assets & current liabilities of balance sheet Fixed assets & current liabilities of balance sheet Fixed assets & long-term liabilities of balance sheet
Question No: 44 ( Marks: 1 ) - Please choose one If Current assets = Rs. 16,000, Current liabilities= Rs. 10,000 Inventory= Rs. 2500 Calculate quick ratio for the firm? 1.35 6.0 1.60 0.25
Question No: 45 ( Marks: 1 ) - Please choose one Which of the following states that Cash is King and only Cash can pay the bills? Fat cat working capital policy Lean & Mean perspective
624
Balance Sheet Perspective Moderate working capital policy
Question No: 46 ( Marks: 1 ) - Please choose one Which of the following depicts the break even point in best way? EBIT = 0 EBIT < 0 EBIT > 0 None of the given options
Question No: 47 ( Marks: 1 ) - Please choose one Financial leverage is considered good in which of the following? Earning after interest & tax / Total asset > Interest cost Earning after interest & tax / Total asset < Interest cost Earning before interest & tax / Total asset < Interest cost Earning before interest & tax / Total asset > Interest cost
Question No: 48 ( Marks: 1 ) - Please choose one Suppose that there is no personal or corporate income tax and that the firm's WACC is not affected by its capital structure, then which of the following statements is true? A firm's cost of equity depends on the firm's business and financial risks
625
The value of the firm is dependent on its capital structure The cost of equity increases as the firm's leverage decreases The greater the financial leverage, the more valuable is the firm
Question No: 49 ( Marks: 1 ) - Please choose one Company A has to purchase another company. How do Company A pay for buying the other company? In Cash In Shares Bank Borrowing All of the given options
Question No: 50 ( Marks: 1 ) - Please choose one A car manufacturing firm buys steel from a steel mill. Both these entities combined together to form a new firm. It is referred to which of the following? Horizontal Merger Vertical Merger Congeneric Merger Conglomerate Merger
Question No: 51 ( Marks: 1 ) - Please choose one Under efficient market, the effect of debt on WACC can be represented with the help of which of the following?
626
Straight line U shaped curve Concave Time to time fluctuation
Question No: 52 ( Marks: 1 ) - Please choose one What is the effect on WACC if debt increases under pure M&M theory model? It will increase It will decrease It remains unchanged None of the given options
Question No: 53 ( Marks: 1 ) - Please choose one Most of the firms wish to maintain their capital structure in the form of which of the following? 100% equity 100% debt Mix of debt and equity 100% from the personal savings
627
Under Net income approach, which of the following is a correct sequence of calculating cost of capital? Net income Total firms market value WACC Net income WACC total firms market value WACC Net income market value of equity Market value of firm WACC Net income
Question No: 55 ( Marks: 3 ) If capital structure changes from equity to debt then what will be the effect on capital structure.
Question No: 56 ( Marks: 5 ) How are dividends paid, and how do companies decide on dividend payments? ANS:
Question No: 57 ( Marks: 5 ) Write a note on capital structure of organizations and cost of capital.
Question No: 58 ( Marks: 10 ) Why is stock price volatility more likely to imply risk than earnings volatility? Explain with the help of some examples.
628
Question No: 59 ( Marks: 10 ) Explain the following conditions: IRR <WACC IRR >WACC> SML IRR <SML IRR <WACC< SML
FINALTERM EXAMINATION MGT201- Financial Management (Session 3)
Time: 120 min Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following type of lease is a long-term lease that is not cancelable and its life often matches the useful life of the asset? A financial An operating Both financial & operating lease None of the given options
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- Please choose one
Which of the following would cause the gross profit margin to remain unchanged, but the net profit margin declined over the same period? Cost Cost of goods sold increased relative to sales Sales increased relative to expenses Govt. increased the tax rate Di DiDividends were decreased
- Please choose one
The accounting statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? Operating, investing, and financing
Investing, operating, and financing
Financing, operating and investing Financing, investing, and operating
- Please choose one
Managers prefer IRR over net present value because they evaluate investments: In terms of dollars
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In terms of Percentages Intuitively Logically
- 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
- Please choose one
Tangible assets
Intangible assets
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Fixed assets
Real assets
- 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
- Please choose one
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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
- Please choose one
Which of the following is NOT the form of cash flow generated by the investments of the shareholders?
Question No: 10 ( 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:
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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: 11 ( Marks: 1 ) - Please choose one Which of the following is CORRECT, if a firm has a required rate of return equal to the ROE?
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Question No: 13 ( 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: 14 ( 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
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NPV
Question No: 15 ( Marks: 1 ) - Please choose one In which of the following approach you need to bring all the projects to the same length in time?
Question No: 16 ( Marks: 1 ) - Please choose one Which of the following is equal to the market risk, beta, of a security? The covariance between the security's return and the market return divided by the variance of the market's returns The covariance between the security and market returns divided by the standard deviation of the market's returns The variance of the security's returns divided by the covariance between the security and market returns
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The variance of the security's returns divided by the variance of the market's returns
Question No: 17 ( Marks: 1 ) - Please choose one If you become more aggressive with your investments, which one of the following is likely to occur? http://vustudents.ning.com Your risk will decrease Your risk will increase Your risk will stay the same Your return will be lower
Question No: 18 ( Marks: 1 ) - Please choose one In efficient market the stock price depends upon the required return which depends upon _________.
Market risk Total risk Diversified risk Non- Systematic risk
Question No: 19 ( Marks: 1 ) - Please choose one How much return would be offered by the stock whose (risk and return) pair lies above the SML?
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No return Lower return Average return Excessive return
Question No: 20 ( Marks: 1 ) - Please choose one Find the Expected Return on the Market Portfolio given that the Expected Return on Stock is 17%, the Risk-Free Rate is 1.1%, and the Beta for Stock is 1.5. 11.7% 12.14% 13.23% 13.82%
Question No: 21 ( Marks: 1 ) - Please choose one Which of the following represent all Risk Return Combinations for the efficient portfolios in the capital market?
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Question No: 22 ( Marks: 1 ) - Please choose one Assume the nominal interest rates (annual) in the country of Freedonia and the United States are 6% and 12% respectively. What is the implied 90-day forward rate if the current spot rate is 5 Freedonian marks (FM) per U.S. dollar? 4.732 4.927 5.074 5.283
Question No: 23 ( Marks: 1 ) - Please choose one Which of the following statements is most correct as it relates to the recording of a capital lease? The capital lease is shown on the lessee's balance sheet as an asset and amortized over the asset's useful life. The capital lease is listed as an asset on the lessor's balance sheet and amortized over lease term. A capital lease is listed as an asset on the lessee's balance sheet and must be amortized over the lease period. A capital lease is listed as an asset on the lessee's balance sheet and must be amortized over the asset's useful life.
Question No: 24 ( Marks: 1 ) - Please choose one The trade terms "1/10, net 45" indicate that __________. A 45% discount is permitted if payment is made within 10 days
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A 1% discount is permitted if payment is made within 10 days A 10% discount is permitted if payment is made within 45 days A 1% discount is permitted if payment is made within 45 days
Question No: 25 ( Marks: 1 ) - Please choose one When the buyer purchases securities through a brokerage house, it is called as: Dutch-auction operation Fixed-price operation Open-market operation Fair-warning operation
Question No: 26 ( Marks: 1 ) - Please choose one The presence of which of the following costs is NOT used as a major argument against the M&M arbitrage process? Transaction costs Insurance costs Bankruptcy costs Agency costs
Question No: 27 ( Marks: 1 ) - Please choose one An implicit cost of adding debt to the capital structure is that it: Adds interest expense to the operating statement
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Increases the required return on equity Reduces the expected return on assets Decreases the firm's beta
Question No: 28 ( Marks: 1 ) - Please choose one When financial disaster is looming, why management may borrow to invest in projects having a negative expected NPV? The firm's beta is now negative Taxes are no longer a concern The interest tax shield will cover the loan costs The lender bears all the risk
Question No: 29 ( Marks: 1 ) - Please choose one What is difference between shares and bonds? Bonds represent ownership whereas shares do not Shares represent ownership whereas bonds do not Shares and bonds both represent equity Bonds represent equity whereas shares do not
Question No: 30 ( 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?
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Rs.25,300 Rs.34,122 Rs.14,549 Rs.11,989
Question No: 31 ( Marks: 1 ) - Please choose one Market portion of risk can be represented through which of the following? Standard deviation Beta coefficient Correlation coefficient Variance
Question No: 32 ( Marks: 1 ) - Please choose one The KSE (Karachi Stock Exchange) 100 Index represents what? The value of Portfolio of Highest volume stocks The value of Portfolio of all Stocks The value of Portfolio of lowest volume stocks None of the given options
Question No: 33 ( Marks: 1 ) - Please choose one All of the following are used in calculation of required return on a particular stock using SML equation EXCEPT:
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Risk free rate Market risk premium Stocks beta Stocks price
Question No: 34 ( Marks: 1 ) - Please choose one What will be the Stock Ys risk premium if the average share of stock Y has a required return of 20% and beta for that stock is 1.0? In addition, treasury bonds yield is 10%? 5% 10% 20% 30%
Question No: 35 ( Marks: 1 ) - Please choose one Which of the following represents the tax shield?
Interest on capital Dividends to shareholders Retained earnings Establishment expenses
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Question No: 36 ( Marks: 1 ) - Please choose one Which of the following theory suggests that shareholder wealth is maximized by a low Dividend Payout? MM Irrelevance Theory Bird in the Hand Theory Tax Preference Theory Signaling Theory
Question No: 37 ( Marks: 1 ) - Please choose one In residual dividend model, what does the term Conservatism refer? Overvaluation of free cash flows Underestimation of free cash flows Overestimation of free cash flows None of the given option
Question No: 38 ( Marks: 1 ) - Please choose one Which of the following states that dividends can not exceed retained earnings which are shown in balance sheet? Irrelevance theory Impairment of Capital Rule Bird-in-the-hand rule Tax preference theory
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Question No: 39 ( Marks: 1 ) - Please choose one Mr. X is going to purchase the stock of ABC Company. Mr. X should purchase the stock on which date so that he can be entitled to receive the dividend, keeping in mind the ex-dividend date is December 7? December 6 December 7 December 8 December 9
Question No: 40 ( Marks: 1 ) - Please choose one Which of the following statement shows the total stand alone risk of a firm?
Unique risk + Market risk Diversified risk + Financial risk Business risk + Financial risk Business risk + Market risk
Question No: 41 ( Marks: 1 ) - Please choose one Which of the following best matches this statement: A policy under which relatively large amount of cash, marketable securities, and inventories are carried and under which sales are stimulated by a liberal credit policy, resulting in a high level of receivable?
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Fat cat working capital policy Lean & Mean working capital policy Moderate working capital policy None of the given options
Question No: 42 ( Marks: 1 ) - Please choose one Calculate the return on equity (ROE) of ABC Company using Du Pont equation and the data given below: Profit Margin= 30% Asset Turnover= 50% Leverage Factor = 60% 3.6% 9% 14% 33%
Question No: 43 ( Marks: 1 ) - Please choose one Which of the following is the total cost formula? Fixed cost * Quantity + Variable cost Variable cost * Quantity - Fixed cost Variable cost * Quantity + Fixed cost Fixed cost * Quantity - Variable cost
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Question No: 44 ( Marks: 1 ) - Please choose one Capital structure theory is presented by which of the following? Robert Alan Hill Modigliani & Miller Brigham & Houston Van Horne & Gittman
Question No: 45 ( Marks: 1 ) - Please choose one Which of the following statements is correct regarding an aggressive financing policy for a firm relative to a previous conservative policy? The firm will use long-term financing to finance all fixed and current assets The firm will see an increase in its expected profits than before The firm will see a decline in its overall risk profile The firm will need to issue additional common stock this period to finance the assets
Question No: 46 ( Marks: 1 ) - Please choose one Under which of the following conditions, suppliers may refuse to supply the raw material? When there is rumor of bankruptcy of the firm When firms are financed through debt When firms are financed through equity
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Under uncertain market conditions
Question No: 47 ( Marks: 1 ) - Please choose one Which of the following is also known as service lease? Capital Lease Financial Lease Operating Lease Sale & Lease-Back
Question No: 48 ( Marks: 1 ) - Please choose one Company A has to purchase another company. How do Company A pay for buying the other company? In Cash In Shares Bank Borrowing All of the given options
Question No: 49 ( Marks: 1 ) - Please choose one Two businesses at the same level of production are merging together. It is referred as: Horizontal Merger Vertical Merger
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Congeneric Merger Conglomerate Merger
Question No: 50 ( Marks: 1 ) - Please choose one Under pure M&M theory, WACC does not change with __________. Change of debt in capital structure Change in EPS Change financial expenses Change in business risk
Question No: 51 ( Marks: 1 ) - Please choose one According to the trade off theory, value of the firm rises as a result of ____________. Tax saving Increase in EPS Increase in EBIT Saving in cost of debt
Question No: 52 ( Marks: 1 ) - Please choose one From which of the following equations, net income can be calculated? NI = (EBIT - xD rD) (1 - Tc) NI = (EAT - xD rD) (1 - Tc)
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NI = (EBIT + xD rD) (1 - Tc) NI = (EBIT - xD rD) / (1 - Tc)
Question No: 53 ( Marks: 1 ) - Please choose one Calculate the Forward Rate for Rupee using Interest Rate Parity if the interest on 1 Year Maturity in Pakistan is 10% and on Euro is 6% and the forward rate is Rs.124/ EUR. Rs. 6 per EUR Rs. 120 per EUR Rs. 124 per EUR Rs. 1240 per EUR
Question No: 54 ( Marks: 1 ) - Please choose one Which of the following is known as selling price for currency? Bid rate Ask rate Forward rate Spot rate
Question No: 55 ( Marks: 3 ) Write a short note on real asset markets and also give some examples. The real asset market where the real physical asset are traded .for example, you have wheat market, cotton market, where real material change hands.
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Examples: Gold Market, Property (land, house)
Question No: 56 ( Marks: 5 ) Company XYZ wants to issue more Common Stock of Face Value Rs 12. Next Year the Dividend is expected to be Rs. 3 per share assuming a Dividend Growth Rate of 10% pa. The Lawyers fee and Stock Brokers Commissions will cost Rs 1 per share. Investors are confident about Company ABC so the Common Share is floated at a Market Price of Rs 18 (i.e. Premium of Rs 6).
If the Capital Structure of Company ABC is entirely Common Equity, then what is the Companys WACC? Use New Stock Issuance Approach to calculate the results.
Answer
DIV1 = 2 G= 10% Lawyer fee and comm. = 1 Rs Po = 16 Capital structure is equity base 100%
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As company is 100 equity it means unlevearged company so its wacc will be required rate of return on equity.
Required ROR for Common Stock using Gordons Formula r = (DIV1/Po) + g Po = market price = 18 Div1 = Next Dividend = 3 G = growth rate = 10% r = (3/18)+10% = 26.66%
Now If company wanted to issue the stock via new float then it has to pay the lawyer fee and broker commission which 1 Rs.
Net proceed = 18 1 = 17 r = (3/17)+10% = 27.64%
Question No: 57 ( Marks: 5 ) Why may payout decisions be used by management to signal the prospects of the firm? Give answer in bulleted form.
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If a company selected the high pay out policy without the cash flow to back it up. They will find that it ultimately has to either reduce the investments or turn to capital markets for additional debt or equity financing.
As it is costly, managers will not increase dividends unless they are confident that the firm will get enough cash to pay them.
It is main reason that we say that there is an information signal attached to dividends payout policy.
So any change in the dividend payout policy send signals of a change in the firm's prospects.
Investors take it positively that a company plans to repurchase its stock. If they are worried that the company has more cash than it can profitably employ, they may be pleased to see the cash given back to the shareholders.
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Question No: 58 ( Marks: 10 ) What are the factors affecting signaling theory? (Give the answer in bulleted form only with brief description)
This theory consider that all Investors not have equal amount of information.
All investors are not rational.
Insider have more information compare to general public
A Firms Owners & Managers (Insiders)know more about it than Ordinary outside Investors.
When manage or owner knows that there are better chances of high cash flow or some project which can bring good profit or earning. They try to finance the capital via debt or bond. They avoid use the equity issuance. Because they dont wanted to share the profit with number share holders. They take capital via debt by paying small amount of interest by this they can earn huge profits.
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When Firms Outlook looks bad or some risky project, then Managers will choose to raise capital by Issuing Equity by doing this they will be able to share the Likely Losses amongst more Shareholders. If they took Debt and couldnt repay it, they might Default and be forced to go Bankrupt.
By doing this investor also get signal that if companies is financing its capital via debt then likely it will be some good prospect in the company.
By looking at these practices by management we can so mangers are in a better position to decide about the firm.
Question No: 59 ( Marks: 10 ) Explain the following conditions: IRR <WACC IRR >WACC> SML IRR <SML IRR <WACC< SML
IRR <WACC you should not invest in this project as rate of return is less then WACC. In other words your returns are less the cost of capital.
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IRR >WACC> SML we should take this project as its rate of rerun is higher then the WACC and it offers better return then an efficient market offers. Due to IRR is higher then SML
IRR <SML It is showing rate of return which is lower than SML we should not invest in such project because it is not giving as much return as efficient market is returns
IRR <WACC< SML IRR lower than WACC and SML company should not invest as IRR is not enough to cover the WACC ( not enough to cover the cost of capital) plus its returns are lower then returns offered by efficient market.
MGT201-FM MGT201 Solved MCQ Question # 1 Which if the following refers to capital budgeting? Select correct option: Investment in long-term liabilities Investment in fixed assets Investment in current assets Investment in short-term liabilities
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Question # 2 Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option: Cash outflow to the government for taxes Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
Question # 3 Which of the following refers to the cost of taking up one option while sacrificing the other? Select correct option: Opportunity cost Operating cost Sunk cost Floatation cost
Question # 4 A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the future value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(FVIFA at 8% for 5 periods) (Rs.100)(FVIFA at 8% for 4 periods)(1.08) (Rs.100) (FVIFA at 8% for 5 periods)(1.08) (Rs.100)(FVIFA at 8% for 4 periods) + Rs.100
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Ref: http://web.utk.edu/~jwachowi/annuity3.html Check Question #7
Question # 5 When the bond approaches its maturity, the market value of the bond approaches to which of the following? Select correct option: Intrinsic value Book value Par value Historic cost
Question #6 Who or what is a person or institution designated by a bond issuer as the official representative of the bondholders? Select correct option: Indenture Debenture Bond Bond trustee
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Reference: A trustee is a person or institution designated by a bond issuer as the official representative of the bondholders.
Question # 7 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? Select correct option: Sunk cost Opportunity cost Externalities (Page50) Contingencies
Question #8 How dividend yield on a stock is similar to the current yield on a bond? Select correct option: Both represent how much each securitys price will increase in a year Both represent the securitys 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 are quarterly yields that must be annualized
Question # 9 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 ______.
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Select correct option: Fall Rise Remain unchanged Incomplete information
Question # 10 An annuity due is always worth ___ a comparable annuity. Select correct option: Less than More than Equal to Can not be found from the given information
Question # 12 What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? Select correct option: Indenture Debenture Bond Bond trustee
Reference:
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Indenture -- The legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders, establishing the terms of the bond issue and naming the trustee.
Question # 13 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%? Select correct option: Rs.105,000 (Doubted) Rs.1,500,000 Rs.3975,000 Rs. 350,000
Question # 14 Which of the following are known as Discretionary Financing? Select correct option: Current liabilities Current assets Fixed assets Long-term liabilities
Reference: Long Term Liabilities: Also, called Discretionary Financing does not grow in proportion to Sales
Question # 15
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With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option: Rs.52,000 Rs.93,219 Rs.99,061 Rs.915,240
Reference: 20000/(1.08)^20 = 93129
Question # 16 Which of the following is the Double Entry Principle? Select correct option: Assets + Liabilities = Shareholders Equity Assets = Liabilities + Shareholders Equity Liabilities = Assets + Shareholders Equity None of the given option
Reference: Fundamental Accounting Equation and Double Entry Principle. Assets +Expense = Liabilities + Shareholders Equity + Revenue (Note: Expense & Revenue are Temporary P/L accounts the others are Permanent Balance Sheet Accounts)
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Left Hand Items increase when debited. Right Hand items increase when credited. For every journal entry, the Sum of Debits = the Sum of Credits
Question # 17 What are the Direct claim securities? Select correct option: The securities whose value depends on the cash flows generated by the underlying assets The securities whose value depends on the value of the underlying assets The securities that do not directly generate any returns for its investors All of the given options
Reference: Page 82 Direct claim securities like bond and stocks the value of security can be calculated from the cash flows of underlying assets
Question # 18 Which of the following is NOT true regarding an ordinary annuity? Select correct option: It is a series of equal cash flows Cash flows occur for a specific time period Payments are made at the start of each period It is also known as deferred annuity
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Reference: Ordinary Annuity An ordinary annuity, also known as deferred annuity, consists of a series of equal payments at the end of each period.
Question # 19 Which of the following is a major disadvantage of the corporate form of organization? Select correct option: 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
Reference: The payback method focuses on the payback period. The payback period is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates. This period is some times
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referred to as" the time that it takes for an investment to pay for itself." The basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more desirable is the investment. The payback period is expressed in years. When the net annual cash inflow is the same every year, the following formula can be used to calculate the payback period.
Question # 21 If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows? Select correct option: An increase A decrease No change Incomplete information
Question # 22 As interest rates go up, the present value of a stream of fixed cash flows ___. Select correct option: Goes down Goes up Stays the same Can not be found from the given information
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Question # 23 How "Shareholder wealth" is represented in a firm? Select correct option: The number of people employed in the firm The book value of the firm's assets less the book value of its liabilities The market price per share of the firm's common stock The amount of salary paid to its employees
Question # 24 _______ is equal to (common shareholders' equity/common shares outstanding). Select correct option: Book value per share Liquidation value per share Market value per share None of the above
Reference: http://www.investopedia.com/terms/b/bookvaluepercommon.asp
Question # 25 Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same.
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Select correct option: I, II, and III I only III only II and III only
Question # 26 Given no change in required returns, the price of a stock whose dividend is constant will ________. Select correct option: Decrease over time at a rate of r% Remain unchanged Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate
Question # 27 Nominal Interest Rate is also known as: Select correct option: Effective interest Rate Annual percentage rate Periodic interest rate Required interest rate
Reference: Page 29
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Question # 28 What is difference between shares and bonds? Select correct option: Bonds are representing ownership whereas shares are not Shares are representing ownership whereas bonds are not Shares and bonds both represent equity Shares and bond both represent liabilities
Question # 29 The statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? Select correct option: Operating, investing, and financing Investing, operating, and financing Financing, operating and investing Financing, investing, and operating
Question # 30 When the zero coupon bond approaches to its maturity, the market value of the bond approaches to which of the following? Select correct option: Intrinsic value Book value
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Par value Historic cost
Reference: Page 64
Question # 31 What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option: Unlimited liability Single tax filing Difficult ownership resale Raising capital
Question # 32 ______ are also known as Spontaneous Financing. Select correct option: Current liabilities Current assets Fixed assets Long-term liabilities
Reference:
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Current Liabilities: Also called Spontaneous Financing. Generally grow in proportion to Sale.
Question # 33 ______ is paid by companies with lower grade bonds like CC or C ratings. Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Reference: Page 20 & 22
Question # 34 Which of the following includes the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization? Select correct option: Financial accounting Financial management Financial engineering Financial budgeting
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Question # 35 What is the long-run objective of financial management? Select correct option: Maximize earnings per share Maximize the value of the firm's common stock Maximize return on investment Maximize market share
Question # 36 Why companies invest in projects with negative NPV? Select correct option: Because there is hidden value in each project Because there may be chance of rapid growth Because they have invested a lot All of the given options
Question # 37 Which of the following is NOT the step of Percentage of sales to be used in Financial Forecasting? Select correct option: Estimate year-by-year Sales Revenue and Expenses Estimate Levels of Investment Needs required to Meet Estimated Sales
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Estimate the Financing Needs Estimate the retained earnings
Question # 38 Which of the following is NOT the type of Hybrid organizations? Select correct option: S-Type Corporation Limited Liability Partnership Sole Proprietorship Professional Corporation
Question # 39 Which of the following techniques would be used for a project that has nonnormal cash flows? Select correct option: Internal rate of return Multiple internal rate of return Modified internal rate of return Net present value
Question # 40 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. Select correct option:
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IRR MIRR PV NPV
Question # 41 How can a company improve (lower) its debt-to-total asset ratio? Select correct option: By borrowing more By shifting short-term to long-term debt By shifting long-term to short-term debt By selling common stock
Question # 42 In which of the following approach you need to bring all the projects to the same length in time? Select correct option: MIRR approach Going concern approach Common life approach Equivalent annual approach
Question # 43 Where there is single period capital rationing, what is the most sensible way of making investment decisions? Select correct option:
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Reference: It is a process of making investment decisions on viable projects where funds are limited. Investments decisions are made given a fixed amount of capital to be invested in viable projects. If a company doesnt have sufficient funds to undertake all projects with a positive NPV, this is a capital rationing situation.
Question # 44 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? Select correct option: Rs. 250.44 Rs. 231.91 Rs.181.62 Rs.184.08
Question # 45
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Which of the following is similar between Return on investment and Payback period techniques of Capital budgeting? Involvement of interest rate while making calculations Do not account for time value of money Tricky and complicated methods All of the given options
Question # 46 How can a company 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 # 47 The value of the bond is NOT directly tied to the value of which of the following assets? Real assets of the business Liquid assets of the business Fixed assets of the business Long term assets of the business
Question # 48 The value of a bond is directly derived from which of the following?
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Question # 49 Which of the following value of the shares changes with investors perception about the companys future and supply and demand situation?
Par value Market value Intrinsic value Face value Question # 50 According 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.
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Question # 51 Which group of ratios shows the extent to which the firm is financed with debt Select correct option: Liquidity ratios Debt ratios Coverage ratios Profitability ratios
Question # 51 When bonds are issued, under which of the following category the value of the bond appears Select correct option: Equity Fixed assets Short term loan Long term loan
Question # 52 Which of the following refers to bringing the future cash flow to the present time Select correct option: Net present value Discounting Opportunity cost Internal rate of return
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Question # 53 Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: Select correct option: Magnitude of expected cash flows Timing of expected cash flows Both timing and magnitude of cash flows None of the given options
Question # 54 Effective interest rate is different from nominal rate of interest because Select correct option: Nominal interest rate ignores compounding Nominal interest rate includes frequency of compounding Periodic interest rate ignores the effect of inflation(Doubted) All of the given options
Effective Interest Rate = i eff It is very useful to compare securities and investments with different life or compounding cycles but not used for Discounting and PV.
Question # 55 What are the Indirect securities
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Select correct option: The securities whose value depends on the cash flows generated by the underlying assets The securities whose value depends on the value of the underlying assets The securities that indirectly generate returns for its investors All of the given options
Reference: Indirect Securities: Indirect securities include derivatives, Futures and Options The securities do not generate any cash flow; however, its value depends on the value of the underlying asset.
Question # 56 Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following Select correct option: Life span of the project Cost of the capital Return on asset None of the given options
Reference: Lecture 12
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Question # 57 When a bond will sell at a discount Select correct option: The coupon rate is greater than the current yield and the current yield is greater than yield to maturity The coupon rate is greater than yield to maturity The coupon rate is less than the current yield and the current yield is greater than the yield to maturity The coupon rate is less than the current yield and the current yield is less than yield to maturity
Question # 58 Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows Select correct option: Cash flow diagram Cash budget Cash flow statement None of the given options
Question # 59 capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Select correct option:
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Question # 60 Which of the following is the general assumption of Percent of Sales Forecasting? Select correct option: Current Assets usually grow in proportion to Revenues Current Assets usually grow in proportion to Expenses Current Assets usually grow in proportion to Liabilities Current Assets usually grow in proportion to Sales
Question # 61 Which of the following is/are the component(s) of working capital management? Select correct option: Current assets Fixed assets Fixed assets and long-term liabilities Current assets and current liabilities
Question # 62
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Which of the following is NOT true regarding an annuity due? Select correct option: It is a series of equal cash flows It is also known as deferred annuity Cash flows occur for a specific time period Payments are made at the start of each period
Question # 63 When coupon bonds are issued, they are typically sold at which of the following value? Select correct option: Above par value Below par At or near par value At a value unrelated to par
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Question # 65 Which of the following is NOT an example of hybrid equity Select correct option: Convertible Bonds Convertible Debenture Common shares Preferred shares
Question # 66 Why we need Capital rationing? Select correct option: 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 # 67 Which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option: Depreciation Sunk cost Opportunity cost Non-cash item
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Question # 68 Which of the following affects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options.
Question # 69 Which of the following is/are the characteristic(s) of Perpetuity? Select correct option: It is an annuity It has no definite end It is a constant stream of identical cash flows All of the given options
Question # 70 A technique that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option: Pay back period Internal rate of return Net present value Profitability index
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Reference: F V = PV x e^ i x n FV = 20000 x 2.718(0.08x20) FV = 20000 x 4.95221081 FV = 99044.2162
Question # 72 Question # 3 of 15 ( Start time: 10:32:12 PM ) Total Marks: 1 Which of the following is a limitation of a Corporation? Select correct option: Easy to set up Double-taxation Inexpensive to maintain Unlimited liability
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Reference: Limitations: i. Double Taxation: Corporate earnings may be subject to double taxation the earnings of the corporation are taxed at corporate level, and then any earnings paid out as dividends are taxed again as income to the stockholders. ii. Legal Formalities: Setting up a corporation, and filing many official documents, is more complex and time consuming than for a proprietor ship or a partnership
Question # 73 The return in excess to risk free rate that investors require for bearing the market risk is known as: Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
686
Question # 74 Study the time line and accompanying 5-period cash-flow pattern below. 0 1 2 3 4 5 6 Time line |--------|--------|--------|--------|--------|-------| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash flows A B The present value of the 5-period annuity shown above as of Point A is the present value of a 5-period ____________ , whereas the future value of the same annuity as of Point B is the future value of a 5-period ____________ . Select correct option: Ordinary annuity; ordinary annuity Ordinary annuity; annuity due Annuity due; annuity due Annuity due; ordinary annuity
Question # 75 The value of direct claim security is derived from which of the following? Select correct option: Fundamental analysis Underlying real asset Supply and demand of securities in the market All of the given options
Reference: (Page63) One form of the debt is bonds. Value of Direct Claim Security is directly will be determined by the value of the underlying Real Asset.
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Question # 76 Who determine the market price of a share of common stock? Select correct option: The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the stock
Question # 77 Which of the following statements (in general) is correct? Select correct option: A low receivables turnover is desirable The lower the total debt-to-equity ratio, the lower the financial risk for a firm(Doubted) 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 # 78 What is the additional amount a borrower must pay to lender to compensate for assuming the risk associated with non-payment? Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
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Question # 79 Which of the following equation is NOT correct? Select correct option: Gross Revenue Admin & Operating Expenses = Operating Revenue Other Expenses + Other Revenue = EBIT EBIT Financial Charges & Interest = EBT Net Income Dividends = Retained Earning
Reference: (Page14) Operating Revenue Other Expenses + Other Revenue = EBIT
Question # 80 Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option: Discount rate Profitability index Internal rate of return Multiple Internal rate of return
Question # 81 An 8-year annuity due has a present 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? Select correct option: Rs.154.73
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Rs.147.36 Rs.109.39 Rs.104.72
Reference: FV = PMT* ((1+i)^n 1)/i (formula use to calc fv of annuity) PV= PMT *((1+i)^-n -1)/i (formula use to calc PV of annuity) Try to remember above two formulas for calc of annuity 1000 = pmt * ((1.05)^-8 -1)/.05 1000 = PMT *6.46 PMT = 1000/6.46 = 154.73
Question # 82 What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option: Long-term debt Preferred stock Common stock None of the given options
Question # 83 Which of the following is type a Temporary Account? Select correct option: Asset
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Liability Reserves Revenue
Reference: P/L Items or Accounts are temporary accounts that need to be closed at the end of the accounting cycle
Question # 84 Which of the following is NOT an example of a financial intermediary? Select correct option: 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 # 85 Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, __________? Select correct option:
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Question # 86 Which of the following can not be the drawback of using payback period technique of capital budgeting? Select correct option: It does not account for time value of money It neglects cash flows after the payback period It does not use interest rate while making calculations It is a tricky and complicated method
Question # 87 Which of the following refers to the risk associated with interest rate uncertainty? Select correct option: Default risk premium Sovereign Risk Premium Market risk premium (doubted) Maturity risk premium
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Question # 88 Which of the following is NOT a cash outflow for the firm? Select correct option: Depreciation Dividends Interest Taxes
Question # 89 What is yield to maturity on a bond? Select correct option: 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 Based on the assumption that any payments received are reinvested at the coupon rate None of the above
Question # 90 What should be the focal point of financial management in a firm? Select correct option:
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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 # 91 Which of the following statements is TRUE regarding Permanent Accounts? Select correct option: Accounts that are found on Income Statement Accounts that are found on Statement of Retained Earnings Accounts that are found on Balance Sheet All of the given options
Question # 92 Which of the following is FALSE about Perpetuity? Select correct option: It is a series of cash flows Cash flows occur for a specific time period Its cash flows are identical None of the given options
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Question # 93 For Company A, plow back ratio is 30%. What will be its Pay-out ratio? Select correct option: 3.33% 30% 31% 70% Reference: Plowback=1-Payout Plowback + Payout=1 Payout = 1 Plowback Payout = 1 30% Payout = 1 0.3 Payout = 0.07*100 Payout = 70%
Question # 94 Which of the following is the risk of investing funds in another country? Select correct option: Default risk premium
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Sovereign Risk Premium Market risk premium Maturity risk premium
Question # 95 Which of the following would be considered a cash-flow item from an "investing" activity? Select correct option: 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 # 96 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 # 97
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Which of the following is the main objective of Economics? Select correct option: Profit maximization Maximization of shareholders wealth Collection of accurate, systematic, and timely financial data All of the given options
Question # 98 An investment proposal should be judged in whether or not it provides: Select correct option: 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 # 99 Which of the following refers to time value of money concept? Select correct option:
A rupee in ones hand at present is worth less than the rupee that one is going to receive tomorrow
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A rupee in ones hand at present is worth more than the rupee that one is going to receive tomorrow A rupee in ones hand at present is worth same as the rupee that one is going to receive tomorrow All of the given options
Question # 100 Which of the following is NOT true regarding the capital market? Select correct option: Where long-term funds can be raised Money is invested for periods longer than a year Where TFCs and NIT are exchanged and traded Where overnight lending & borrowing takes place
Question No: 1
( Marks: 1 )
- Please choose one
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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 longterm 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
699
Rs.48Rs.480, 000 Rs.30Rs.300, 000 Rs.1, Rs.1, 500,000
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 projects initial cash outflow is known as: Payback period Internal rate of return Net present value Profitability index
Question No: 6
( Marks: 1 )
- Please choose one

700
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 maximization it has direct link with shareholders wealth
701
Question No: 8
( Marks: 1 )
- Please choose one
Question No: 9
( Marks: 1 )
- Please choose one
Question No: 10
( Marks: 1 )
- Please choose one

702
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: 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
703
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
Question No: 14
( Marks: 1 )
- Please choose one
704
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

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Rs. 983.61 Rs. 1,661.20
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
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
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Question No: 19
( Marks: 1 )
- Please choose one
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
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Periodic interest rate Nominal interest rate
Question No: 22
( Marks: 1 )
- Please choose one
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
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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 Gordons 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
709
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
Question No: 29
( Marks: 3 )
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Briefly explain what call provision is and in which case companies use this option.
Question No: 30
( Marks: 3 )
Question No: 31
( Marks: 5 )
(a) What is correlation of coefficient? (b) What are efficient portfolios?
Question No: 32
( Marks: 5 )
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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.
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
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Percentage increase in taxable income from the previous period
Question No: 2
( Marks: 1 )
- Please choose one
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
713
Question No: 4
( Marks: 1 )
- Please choose one
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
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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 )
Choice of depreciation method for tax purposes Economic length of the project Projected sales (revenues) for the project
715
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
716
Question No: 10
( Marks: 1 )
- Please choose one
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
717
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
Question No: 14
( Marks: 1 )
- Please choose one
The value of dividend is derived from which of the following?

718
Cash flow stream Capital gain /loss Difference between buying & selling price All of the given options
Question No: 15
( Marks: 1 )
- Please choose one
Question No: 16
( Marks: 1 )
- Please choose one
When Investors want high plowback ratios?
Whenever ROE > k

719
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
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
720
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
Question No: 21
( Marks: 1 )
- Please choose one

721
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 process EXCEPT:
722
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:
723
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 Moodys Standard & poor PACRA

724
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
Question No: 29
( Marks: 3 )
Differentiate the real assets and securities.
725
Question No: 30
( Marks: 3 )
A security analyst has estimated the following returns on the stocks of 4 large companies:
Weightage Compan yA Compan yB Compan yC Compan yD 25% 25% 25% 25%
Expected Returns 12% 11.5% 10.% 9.5%
You are required to calculate the expected return on this portfolio.
Question No: 31
( Marks: 5 )
Why a person should invest in shares? Give reasons.
726
Question No: 32
( Marks: 5 ) H
Corporations 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 companys stock? MIDTERM EXAMINATION Spring 2009 MGT201- Financial Management (Session - 2) Question No: 1 ( Marks: 1 ) - Please choose one
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Question No: 2
( Marks: 1 )
- Please choose one
One; one Two; two Two; one
Three; one
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
728
The expected return The standard deviation Coefficient of variation
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 __________.
Question No: 5
( Marks: 1 )
- Please choose one
The present value of growth opportunities (PVGO) is equal to
The difference between a stock's price and its no-growth value per share VI) The stock's price VII) Zero if its return on equity equals the discount rate VIII) The net present value of favorable investment opportunities
V)
I and IV
729
Question No: 6
( Marks: 1 )
- Please choose one
Question No: 7
( Marks: 1 )
- Please choose one
The firm significantly decreases financial leverage The firm increases return on equity for the long term
730
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
Question No: 9
( Marks: 1 )
- Please choose one
Real risk-free rate

731
Risk premium for stocks Return on assets Expected inflation rate
Question No: 10
( Marks: 1 )
- Please choose one
7.69 8.33 9.09 11.11
Question No: 11
( Marks: 1 )
- Please choose one
Both represent how much each securitys price will increase in a year Both represent the securitys annual income divided by its price
732
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
6.0% 4.8% 7.2% 3.0%
Question No: 13
( Marks: 1 )
- Please choose one
733
Question No: 14
( Marks: 1 )
- Please choose one
Question No: 15
( Marks: 1 )
- Please choose one
Question No: 16
( Marks: 1 )
- Please choose one
734
Question No: 17
( Marks: 1 )
- Please choose one
Question No: 18
( Marks: 1 )
- Please choose one
735
10.65% 10.45% 10.95% 10.52%
Question No: 19
( Marks: 1 )
7.00 6.53 8.53 7.18
Question No: 20
( Marks: 1 )
- Please choose one
736
Question No: 21
( Marks: 1 )
- Please choose one
Question No: 22
( Marks: 1 )
- Please choose one

737
Question No: 23
( Marks: 1 )
- Please choose one
Tangible assets
Intangible assets
Fixed assets
Real assets
Question No: 24
( Marks: 1 )
- Please choose one
738
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
739
Indenture
Debenture
Bond
Bond trustee
Question No: 27
( Marks: 1 )
- Please choose one
Cost of the capital
Return on asset
740
Question No: 28
( Marks: 1 )
- Please choose one
Net present value
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
741
Because maximization
it
has
direct
link
with
shareholders
wealth
Question No: 30
( Marks: 1 )
- Please choose one
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
742
Question No: 32
( Marks: 1 )
- Please choose one
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
743
Question No: 34
( Marks: 1 )
- Please choose one
Question No: 35
( Marks: 1 )
Question No: 36
( Marks: 1 )
- Please choose one
744
Rs.1000 Rs.702.40 Rs.545.45 Rs.13,816
Question No: 37
( Marks: 1 )
- Please choose one
Question No: 38
( Marks: 1 )
- Please choose one
Which group of ratios relates profits to sales and investment?

745
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
746
The higher the tax rate for a firm, the lower the interest coverage ratio
Question No: 41
( Marks: 10 )
Expected net cash flows Yea r 0 1 2 3 4 Project X (10,000) 6,500 3,000 3,000 1,000 Project Y (10,000) 3,500 3,500 3,500 3,500
iv. Calculate each projects payback, net present value (NPV),
internal rate of return (IRR), and profitability index (PI).

747
v. Which project or projects should be accepted if they are
independent? vi. Which project should be accepted if they are mutually exclusive? ANSWER: Payback: PROJECT X: Cost of project = Rs. 10,000 Payback period is the time required by the project to recover its costs. Year 1 the project will recover Rs. 6,500 Year 2 the project will recover Rs 3000 Year 3 project will recover the remaining Rs. 500 in 1st month of 3rd yr. So payback period for Project X is 2 yrs and 1 month. 1.
2. Net Present Value: Project X: Initial investment, I0 = Rs 10,000 Cash flow in yr 1, CF1 = Rs 6500
748
Cash flow in yr 2, CF2 = Rs 3000 Cash flow in yr 3, CF3 = Rs 3000 Cash flow in yr 4, CF4 = Rs 1000 Discount rate, I = 12 % 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 + 6500/(1.12) + 3000/(1.12)2+ 3000/(1.12)3+ 1000/(1.12)4
= Rs 966
= -10,000 + 3500/(1.12) + 3500/(1.12)2+ 3500/(1.12)3+ 3500/(1.12)4 = Rs 631

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6. Profitability Index: Project X: PI= Sum(CFt/(1+i)t)/Io = 10,966/10000 = 1.096 Project Y : PI= Sum(CFt/(1+i)t)/Io = 10631/10000 = 1.0631
MIDTERM EXAMINATION
An initial investment of Rs. 200,000 is required to start the business; Rs. 9,000 per month is
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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
Dont 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
Ref: http://74.125.153.132/search?q=cache:57jrkpN0nqkJ:www.pitt.edu/~sc hlinge/fall99/l9.doc+"is+equal+to+risk+per+unit+return"&cd=7&hl=en &ct=clnk&lr=lang_en

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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
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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
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Question No: 9
( Marks: 1 )
- Please choose one
_____ ratio gives an indication how equity investors regard the companys value. Price / Earning Market / Book Earning / Share Price / Cash flow
http://www.fiu.edu/~keysj/Financial_Statement_Analysis.doc
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
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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
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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? 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
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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 = 133.33
Question No: 18
( Marks: 3 )
What is a portfolio? Why an investor should invest his/her funds in a portfolio rather than in the stocks of a single corporation.
Question No: 19
( Marks: 3 )
What do you mean by yield to maturity (YTM) of a bond? Explain briefly.
Question No: 20
( Marks: 3 )
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Explain briefly the Constant Growth Dividends Model of common stocks valuation.
Question No: 21
( Marks: 10 )
Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% in the third year, and at a constant rate of 6% thereafter. Snyders last dividend was Rs. 1.15, and the required rate of return on the stock is 12%. Required: I. Calculate the expected dividends of the firm in the first three years. II. Calculate the fair value per share of these stocks at the end of third year.
MIDTERM EXAMINATION Spring 2009 MGT201- Financial Management (Session - 2)
Time: 60 min Marks: 50
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- Please choose one
- Please choose one
One; one Two; two Two; one Three; one
- Please choose one
A probability distribution
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The expected return The standard deviation Coefficient of variation
- Please choose one
- Please choose one
I) The difference between a stock's price and its no-growth value per share II) III) IV) The stock's price Zero if its return on equity equals the discount rate The net present value of favorable investment opportunities
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I and IV
- Please choose one
The firm can increase market price The firm can increase market price The amount of earnings retained by price or the P/E None of the given options
and P/E by retaining more earnings and P/E by increasing the growth rate the firm does not affect market
- Please choose one
The firm The firm The
significantly decreases financial leverage increases return on equity for the long term level of inflation is expected to increase to double-digit levels
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The rate
of return on Treasury bills decreases
- Please choose one
An firm A Less
anticipated earnings growth rate which is less than that of the average dividend yield which is less than that of the average firm predictable earnings growth than that of the average firm growth than that of the average firm
Greater cyclicality of earnings
- Please choose one
Real Risk
risk-free rate premium for stocks assets inflation rate
Return on Expected
(no idea) Answer requested
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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
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 Both represent the securitys
securitys price will increase in a year 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.
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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?
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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
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
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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?
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%
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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
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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.
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?
Reference:
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Lecture 14 of handouts
Question No: 22 ( Marks: 1 ) - Please choose one Which of the following affects the price of the bond?
Reference: Lecture 14 of handouts
Visit Question No: 23 ( Marks: 1 ) - Please choose one Bond is a type of Direct Claim Security whose value is NOT secured by __________.
Tangible assets
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Intangible assets Fixed assets Real assets
Reference: It cant be real asset as its 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
Reference: http://wps.pearsoned.co.uk/wps/media/objects/1670/1710353/0273685988_ch20.p pt Slide no. 7 Question No: 25 ( Marks: 1 ) - Please choose one
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Rs. 87 Rs. 90 (doubt) 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 and the bondholders that establish the terms of the bond issue?
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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
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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
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
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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)
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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
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Goes up Stays the same Can not be found
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

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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
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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?
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(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: 41 ( Marks: 10 ) You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments Project X and Project Y. Each project has a cost of Rs. 10,000 and the cost of capital for both projects is 12%. The projects expected cash flows are as follows:
Year 0 1 2 3 4
Expected net cash flows Project X Project Y (10,000) 6,500 3,000 3,000 1,000 (10,000) 3,500 3,500 3,500 3,500
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i. Calculate each projects payback, net present value (NPV), internal rate of return (IRR), and profitability index (PI). ii. Which project or projects should be accepted if they are independent?
iii. Which project should be accepted if they are mutually exclusive?
Solution
Pay back of project X:
PP = Cost of project / Annual cash inflows = 10,000 / 3,375
=2.96 or 3
Payback period of project Y

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PP =Cost of project / Annual cash inflows = 10,000 / 3500 =2.85
NPV of project X
NPV= -Io + CF/ (1+i) + CF2/(1+i)2 + CF3/(1+i)3 +CF4/(1+i)4
= -10000+6500/(1+.12)+3000/(1+.12)2+3000/(1+.12)3+1000/(1+.12)4
=-1000+5804+2392+2135+635.53 = -1000+10966.53 = 966.53
NPV for project Y
NPV= -Io+CF1/(1+i)+CF2/(1+i)2+CF3/(1+i)3+Cf4/(1+i)4 =-10000+3500/(1+.12)+3500/(1+.12)2+3500/(1+.12)3+3500/(1+.12)4
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=-10000+3125+2790+2492+2224 =-10000+10631 = 631
IRR of project X
Same formula of NPV replacing I with IRR And Assuming NPV equal to zero.
NPV=-Io+CF1/(1+IRR)+CF2/(1+IRR)2+CF3/(1+IRR)3+Cf4/(1+IRR)4
0=-10000+6500/(1+.18)+3000/(1+.18)2+3000/(1+.18)3+1000/(1+.18)4 0=-10000+10000 Left hand side =Right hand side So 18% is IRR rate where NPV becomes zero
Profitability Index for Project X
PI =CF/(1+i)/Io
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= 10699.53/10000 =109.7 >1.0 Profitablility index for Project Y
PI = CF/(1+i)/Io
=10631/10000 =1.06 >1.0
MIDTERM EXAMINATION Spring 2009 MGT201- Financial Management (Session - 4)
Time: 60 min Marks: 50
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- 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
- 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
for more contents visit
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- Please choose one
- 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
- 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
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year balance sheet item Net sales or revenues; total assets Total assets; net sales or revenues
- Please choose one
- Please choose one
- Please choose one
Interest paid on the original principal borrowed is often referred to as __________.
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Compound interest Present value Simple interest Future value
- 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
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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 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 PV= 1000/(1+.08)^5

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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


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Question No: 16 ( Marks: 1 ) - Please choose one If a projects 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
If the cash-flow stream is a uniform series of inflows (an annuity) and the initial outflow occurs at time 0, there is no need for a trial and error approach. We simply divide the initial cash outflow by the periodic receipt and search for the nearest discount factor in a table of present value interest factors of an annuity (PVIFAs).
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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

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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
Question No: 21 ( 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)
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Payback period (PBP)
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
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: 23 ( Marks: 1 ) - Please choose one Which of the following is a characteristic of a coupon bond?
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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 Rationale: A coupon bond will pay the coupon rate of interest on a semiannual basis unless the firm defaults on the bond. Convertible bonds are specific types of bonds.
Rationale: 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.
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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
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Convertible debenture Common shares Preferred shares A security that combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics. The most common example is a convertible bond that has features of an ordinary bond, but is heavily influenced by the price movements of the stock into which it is convertible.
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 Rationale option 2 can not because it represents capital gain/loss which has nothing to do with dividends option 3 also represent capital gain/loss
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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 market capitalization rate A rate of return on investment based on the expected income. P/E The most common measure of how expensive a stock is. The P/E ratio is equal to astock'smarket capitalization divided by its after-tax earnings K = Capitalization Rate = 20% Price over earning ratio: Here is formula for {P/E} P/E = (1-b) / K-G G = growth Rate where G = ROE * b b = ploy back ratio. Or retained earning (money which is reinvested in company) g = ROE * b = .22 * .9 = .198
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by plugging the values in p/e formula (1 - .9) / (.20 - .198) = 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? http://vustudents.ning.com
Real risk-free rate Risk premium for stocks Return on assets Expected inflation rate Rationale: A, B, and D are incorporated into the discount rate used in the dividend discount model.
Question No: 32 ( 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 _________.
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Rationale: Firms with lower than average dividend yields are usually growth firms, which have a higher P/E ratio than average.
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 Systematic risk is not 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
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Question No: 35 ( Marks: 1 ) - Please choose one A well-diversified portfolio is defined as:
Rationale: A well-diversified portfolio is one that contains a large number of securities, each having a small (but not necessarily equal) weight, so thatnonsystematic variance is negligibl
Question No: 37 ( Marks: 1 ) - Please choose one You are considering two investment proposals, project A and project B. B's
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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?
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Question No: 40 ( Marks: 1 ) - Please choose one Why companies invest in projects with negative NPV?
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"
Rs. (20,000)
Rs. 24,000
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1 2 3
10,000 8,000 6,000
10,000 10,000 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?
Part a: Calculate the NPVs Project A: -$20,000 + $10,000/(1.15)^1 + $8,000/(1.15)2 + $6,000/(1.15)3 = $1,310.10. Project B: -$24,000 + $10,000/(1.15)1 + $10,000/(1.15)2 + $10,000/(1.15)3 = $1,167.75. Reject BOTH projects as decreasing shareholder wealth.
Part b: Calculate the NPVs Project A: -$20,000 + $10,000/(1.1)1 + $8,000/(1.1)2 + $6,000/(1.1)3 = $210.37. Project B: -$24,000 + $10,000/(1.1)1 + $10,000/(1.1)2 + $10,000/(1.1)3 = $868.52. Accept project "B" as it increases shareholder wealth the greatest.
803
MIDTERM EXAMINATION Fall 2009 MGT201- Financial Management (Session - 4)
- 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
- Please choose one
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
804
- 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
- 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)
- Please choose one
Which of the following is a major disadvantage of the corporate form of organization? Double taxation of dividends
805
Inability of the firm to raise large sums of additional Limited liability of shareholders Limited life of the corporate form
- 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
- 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

- Please choose one

806
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
Rationale: 30months = 2.5 year FV = amt * (1+i)^n = 12500(1.06)^2.5 = 14460
- 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 __________.
807
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

808
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 In the mathematical subfield of numerical analysis, interpolation is a method of constructing new data points within the range of a discrete set of known data points.

809
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
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 crrrrrr 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
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
810
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
811
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 __________.
Question No: 21 ( Marks: 1 ) - Please choose one Which of the following is NOT the present value of the bond?
812
Intrinsic value Market price Fair price Theoretical price
not sure about this answer.
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% 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%
813
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% Rationale: When a bond sells at par value, the coupon rate is equal to the yield to maturity
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
814
Question No: 25 ( Marks: 1 ) - Please choose one Which of the following value of the shares changes with investors perception about the companys 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?
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%
815
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: 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

816
Risk premium for stocks Return on assets Expected inflation rate
not sure about this
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 __________.
817
Question No: 32 ( Marks: 1 ) - Please choose one A well-diversified portfolio is defined as:
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
from handouts if a company intends to start a new project, Capital Budgeting techniques are employed to assess the financial viability of the project.
818
Question No: 34 ( Marks: 1 ) - Please choose one Capital budgeting is a decentralized function assigned to:
Individuals Departments Teams All of the given options
Not sure about the answer
Question is bit ambiguous, if we take Dept. correct option, then team option is violated.
from handouts Capital budgeting is a decentralized function. In big corporations, this function is not an individuals job, rather, different departments and teams are assigned to work on different aspects of capital budgeting.
Question No: 35 ( Marks: 1 ) - Please choose one The biggest challenge in capital budgeting is to keep finding:
Valuable projects Sources of funds

819
Blue chips Fixed assets from handouts The biggest challenge in capital budgeting is to keep finding the valuable projects, i.e., projects that may add to the value of the firm. You must be familiar with the basic objective of financial management
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
820
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
PV = amt / (1+i)^n
821
PV = 1000/(1+.08)^5 = 680.53
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 PV = amt / (1+i)^n PV = 6500/(1+.10)^8 = 3032.29
Question No: 41 ( Marks: 5 ) Suppose Ali Inc. issues ten-year bonds (par Rs. 1,000) with an annual coupon of 8.6%. Similar ten-year bonds are paying 8.0% interest. What is the value of one Ali's new bonds that is, what should be its price? Bond Price = PV(all inflows) + PV(face value)
So in this case
822
Bond Price = PV(of all coupon payments) +PV(1000)
as bond will pay same amount for the next 10 year assume it annuity so we use annuity formula if some done get this formula he/she can try manually PV for every year for ten years.
8.6% of one thousand = 1000*.086 = 86 Which he gets every year as coupon payment
PV = Amt * PVIF = [1 - (1+i)^-n ]/i
i = 8%
price = 86* [( 1 (1.08)^-10) ]/.08 + (1000/1.08)^10
price = 577.0670003 + 463.1934881 = 1040.260488
= 1040.26 Question No: 42 ( Marks: 5 ) Draw a three year time line which illustrates the following situation: i. ii. An outflow of Rs. 10,000 occurs at time 0 Inflows of Rs. 5,000 occur at the end of year 1, 2 and 3.
823
iii. The interest rate during the three year is 10%.
MIDTERM EXAMINATION MGT201- Financial Management (Session - 3)
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 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: 3 ( 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
824
Question No: 4 ( 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 for more contents visit
Question No: 5 ( 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 Rs.30Rs.300, 000 Rs.1, Rs.1, 500,000 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 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
825
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: 10 ( Marks: 1 ) - Please choose one An annuity due is always worth _____ a comparable annuity. Less than More than Equal to Can not be found Question No: 11 ( 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 projects initial cash outflow is known as: Payback period Internal rate of return Net present value Profitability index Question No: 12 ( 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
826
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: 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: 14 ( 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 Question No: 15 ( 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: 16 ( 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)
827
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 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: 19 ( 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 Investors perception Market price changes due to change in the interest rate All of the given options Question No: 20 ( 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
828
Put option Question No: 21 ( 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: 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: 23 ( 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 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?
829
Higher Lower The same Rs. 1,000 Question No: 25 ( 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 Question No: 26 ( Marks: 1 ) - Please choose one Which of the following value of the shares changes with investors perception about the companys future and supply and demand situation? Par value Market value Intrinsic value Face value Question No: 27 ( 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 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
830
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: 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 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 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
831
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 covariances among returns for different securities leads to high portfolio risk Covariances 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 Question No: 36 ( 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 Question No: 37 ( Marks: 1 ) - Please choose one At the termination of the project we need to take into account: Salvage value Book value
832
Intrinsic value Fair value 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 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 Question No: 41 ( Marks: 5 ) Explain why financial planning is important to todays chief executives? Question No: 42 ( Marks: 5 ) How risk and expected return is compared in two distributions?
MIDTERM EXAMINATION MGT201- Financial Management (Session - 2)

833
Question No: 1
( Marks: 1 )
- Please choose one
Companies invest in projects with negative NPV because there is a hidden value in each project pg52
Question No: 2
( Marks: 1 )
- Please choose one
One; one Two; two Two; one Three; one

834
Mutually Exclusive: means that you can invest in ONE of the investment choices and having chosen one you cannot choose another 47
Question No: 3
( Marks: 1 )
- Please choose one
It is basically the weighted average or mean of the expected return of the individual investments in the portfolio. 105
Question No: 4
( Marks: 1 )
- Please choose one
835
Probability distribution the expected return The standard deviation Coefficient of variation
Question No: 5
( Marks: 1 )
- Please choose one
IX) The difference between a stock's price and its no-growth
value per share X) The stock's price XI) Zero if its return on equity equals the discount rate XII) The net present value of favorable investment opportunities I and IV
836
Question No: 6
( Marks: 1 )
- Please choose one
Question No: 7
( Marks: 1 )
- Please choose one
Question No: 8
( Marks: 1 )
- Please choose one

837
Question No: 9
( Marks: 1 )
- Please choose one
Question No: 10
( Marks: 1 )
- Please choose one
838
7.69 8.33 9.09 11.11
Question No: 11
( Marks: 1 )
- Please choose one
Question No: 12
( Marks: 1 )
- Please choose one
839
6.0% 4.8% 7.2% 3.0%
G (Desired Growth Rate) = return on equity x (1- pay out ratio) 27
Question No: 13
( Marks: 1 )
- Please choose one
840
Direct Claim Security is directly tied to the value of the underlying Real Asset 74
Question No: 14
( Marks: 1 )
- Please choose one
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
841
They have the highest rates of return for a given level of risk
Question No: 16
( Marks: 1 )
- Please choose one
Question No: 17
( Marks: 1 )
- Please choose one
842
Question No: 18
( Marks: 1 )
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%
Question No: 19
( Marks: 1 )
7.00 6.53 8.53 7.18
Question No: 20
( Marks: 1 )
- Please choose one
843
Question No: 21
( Marks: 1 )
- Please choose one
Question No: 22
( Marks: 1 )
- Please choose one

844
Question No: 23
( Marks: 1 )
- Please choose one
Tangible assets
Intangible assets
Fixed assets
Real assets
845
Question No: 24
( Marks: 1 )
- Please choose one
Question No: 25
( Marks: 1 )
- Please choose one
Rs. 87 Rs. 90 Rs. 102 Rs. 112
Question No: 26
( Marks: 1 )
- Please choose one
846
Indenture
Debenture
Bond
Bond trustee
Question No: 27
( Marks: 1 )
- Please choose one
Cost of the capital
847
Return on asset
Question No: 28
( Marks: 1 )
- Please choose one
Net present value
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
848
Because maximization
it
has
direct
link
with
shareholders
wealth
Question No: 30
( Marks: 1 )
- Please choose one
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
849
Question No: 32
( Marks: 1 )
- Please choose one
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
850
Question No: 34
( Marks: 1 )
- Please choose one
Question No: 35
( Marks: 1 )
Question No: 36
( Marks: 1 )
- Please choose one
851
Rs.1000 Rs.702.40 Rs.545.45 Rs.13,816
Question No: 37
( Marks: 1 )
- Please choose one
Question No: 38
( Marks: 1 )
- Please choose one
Which group of ratios relates profits to sales and investment?

852
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
853
The higher the tax rate for a firm, the lower the interest coverage ratio
Question No: 41
( Marks: 10 )
Expected net cash flows Yea r 0 1 2 3 4 Project X (10,000) 6,500 3,000 3,000 1,000 Project Y (10,000) 3,500 3,500 3,500 3,500
vii. Calculate each projects payback, net present value (NPV),
internal rate of return (IRR), and profitability index (PI).

854
viii.
Which project or projects should be accepted if they are independent? ix. Which project should be accepted if they are mutually exclusive?
ANSWER: Payback: PROJECT X: Cost of project = Rs. 10,000 Payback period is the time required by the project to recover its costs. Year 1 the project will recover Rs. 6,500 Year 2 the project will recover Rs 3000 Year 3 project will recover the remaining Rs. 500 in 1st month of 3rd yr. So payback period for Project X is 2 yrs and 1 month. 1.
2. Net Present Value: Project X: Initial investment, I0 = Rs 10,000 Cash flow in yr 1, CF1 = Rs 6500
855
Cash flow in yr 2, CF2 = Rs 3000 Cash flow in yr 3, CF3 = Rs 3000 Cash flow in yr 4, CF4 = Rs 1000 Discount rate, I = 12 % 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 + 6500/(1.12) + 3000/(1.12)2+ 3000/(1.12)3+ 1000/(1.12)4
= Rs 966
= -10,000 + 3500/(1.12) + 3500/(1.12)2+ 3500/(1.12)3+ 3500/(1.12)4 = Rs 631

856
8. Profitability Index: Project X: PI= Sum(CFt/(1+i)t)/Io = 10,966/10000 = 1.096 Project Y : PI= Sum(CFt/(1+i)t)/Io = 10631/10000 = 1.0631
857
A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. Liquidity Ratios Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.
A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern
858
Rs.52,000 Rs.93,219 Rs.99,061 Rs.915,240 Amount = P*(1+i/n)^n
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860
861
Rs.154.73 Rs.147.36 Rs.109.39 Rs.104.72
FV = PMT* ((1+i)^n 1)/i (formula use to calc fv of annuity) PV= PMT *((1+i)^-n -1)/i (formula use to calc PV of annuity)
862
1000 = pmt * ((1.05)^-8 -1)/.05 1000 = PMT *6.46 PMT = 1000/6.46 = 154.73
Why companies invest in projects with negative NPV? Select correct option: Because there is hidden value in each project Because there may be chance of rapid growth Because they have invested a lot All of the given options Question # 2 of 10 ( Start time: 04:05:43 PM ) Total Marks: 1 To increase a given future value, the discount rate should be adjusted __________. Select correct option: Upward Downward First upward and then downward None of the given options
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Question # 3 of 10 ( Start time: 04:06:35 PM ) Total Marks: 1 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 __________. Select correct option: Fall Rise Remain unchanged Incomplete information
Question # 5 of 10 ( Start time: 04:08:40 PM ) Total Marks: 1 At the termination of project, which of the following needs to be considered relating to project assets? Select correct option: Salvage value Book value Intrinsic value Fair value Question # 6 of 10 ( Start time: 04:09:27 PM ) Total Marks: 1 What is the long-run objective of financial management? Select correct option: Maximize earnings per share
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Maximize the value of the firm's common stock Maximize return on investment Maximize market share Question # 7 of 10 ( Start time: 04:09:56 PM ) Total Marks: 1 What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option: Unlimited liability Single tax filing Difficult ownership resale Raising capital Question # 8 of 10 ( Start time: 04:10:16 PM ) Total Marks: 1 Which of the following effects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options
uestion # 9 of 10 ( Start time: 04:10:31 PM ) Total Marks: 1 An annuity due is always worth _____ a comparable annuity. Select correct option: Less than More than Equal to Can not be found from the given information Question # 10 of 10 ( Start time: 04:10:53 PM ) Total Marks: 1
865
A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Select correct option: Payback period Internal rate of return Net present value Profitability index MGT201 Solved MCQ3 from Quiz
Where there is single period capital rationing, what the most sensible way of making investment decisions? Select correct option: Choose all projects with a positive NPV
866
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) = $857.82.

867
Who determine the market price of a share of common stock? Select correct option: The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the
With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option: Rs.52,000
868
Rs.93,219 Rs.99,061 Rs.915,240 Amount = P*(1+i/n)^n
To increase a given future value, the discount rate should be adjusted __________. Select correct option: Upward Downward First upward and then downward None of the given options
869
Question # 1 of 10 An annuity due is always worth _____ a comparable annuity. Select correct option:
Question # 2 of 10 ( Start time: 04:11:40 PM ) Total Marks: 1 Which of the following would be considered a cash-flow item from an "investing" activity? Select correct option:
870
871
Which of the following statements is correct in distinguishing between serial bonds and sinking-fund bonds? Select correct option:
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
Liquidity ratios Debt ratios Coverage ratios Profitability ratios Debt ratios show the extent to which the firm is financed with debt.
872
873
MGT201 Current Quiz # 3 A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________. Select correct option: An anticipated earnings growth rate which is less than that of the average firm A dividend yield which is less than that of the average firm Less predictable earnings growth than that of the average firm Greater cyclicality of earnings growth than that of the average firm Which of the following is called the tax savings of the firm derived from the deductibility of interest expense? Select correct option:
874
The reduction in income taxes that results from the tax-deductibility of interest payments. Tax benefits derived from creative structuring of a financing arrangement. For example, usingloan capital instead of equity capital because interest paid on the loans is generally tax deductible whereas the dividend paid on equity is not Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: Select correct option: Magnitude of expected cash flows Timing of expected cash flows Both timing and magnitude of cash flows None of the given options Ref It discounts the cash flow to take into the account the time value of money. Reference Expected Portfolio Return = ___________. Select correct option: rP * = xA rA + xB rB rP * = xA rA - xB rB rP * = xA rA / xB rB rP * = xA rA * xB rB What is the most important criteria in capital budgeting? Select correct option:
875
Return on investment Profitability index Net present value Pay back period If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option: 0 0.5 1 -1 For most firms, P/E ratios and risk_________. Select correct option: Will be directly related Will have an inverse relationship Will be unrelated None of the above. Which of the following is the cash required during a specific period to meet interest expenses and principal payments? Select correct option: Debt capacity Debt-service burden Adequacy capacity Fixed-charge burden Which of the following stipulate a relationship between expected return and risk? Select correct option: APT stipulates CAPM stipulates Both CAPM and APT stipulate Neither CAPM nor APT stipulate =====
876
Which of the following factors might affect stock returns? Select correct option: Business cycle Interest rate fluctuations Inflation rates All of the above If all things equal, when diversification is most effective? Select correct option: Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated Which of the followings expressed the proposition that the value of the firm is independent of its capital structure? Select correct option: The Capital Asset Pricing Model M&M Proposition I M&M Proposition II
877
The Law of One Price Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option: Discount rate Profitability index Internal rate of return Multiple Internal rate of return Which of the following is related to the use Lower financial leverage? Select correct option: Fixed costs Variable costs Debt financing Common equity financing Why markets and market returns fluctuate? Select correct option: Because of political factors Because of social factors
878
Because of socio-political factors Because of macro systematic factors Which of the following is NOT an example of hybrid equity Select correct option: Convertible Bonds Convertible Debenture Common shares Preferred shares A project that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option: Pay back period Internal rate of return Net present value Profitability index A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? Select correct option:
879
(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information To increase a given future value, the discount rate should be adjusted __________. Select correct option: Upward Downward First upward and then downward None of the given options Which of the following is NOT the form of cash flow generated by the investments of the shareholders? Select correct option: Income Capital loss Capital gain Operating income According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of which of the following:
880
Select correct option: Unique risk Reinvestment risk Market risk Unsystematic risk What is the most important criteria in capital budgeting? Select correct option: Return on investment Profitability index Net present value Pay back period If all things equal, when diversification is most effective? Select correct option: Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated Which if the following is (are) true? I. The dividend growth model holds if, at
881
some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. Select correct option: I, II, and III I only III only II and III only As interest rates go up, the present value of a stream of fixed cash flows _____. Select correct option: Goes down Goes up Stays the same Can not be found from the given information Which of the following could be taken same as minimizing the weighted average cost of capital? Select correct option: Maximizing the market value of the firm Maximizing the market value of the firm only if MM's Proposition I
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Minimizing the market value of the firm only if MM's Proposition I holds Maximizing the profits of the firm Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option: (Q - QBE)/Q (EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC] The value of a bond is directly derived from which of the following? Select correct option: Cash flows Coupon receipts Par recovery at maturity All of the given options Which statement is NOT true regarding the market portfolio? Select correct option: It includes all publicly traded financial assets
883
It is the tangency point between the capital market line and the indifference curve All securities in the market portfolio are held in proportion to their market values It lies on the efficient frontier In the dividend discount model, _____ which of the following are not incorporated into the discount rate? Select correct option: Real risk-free rate Risk premium for stocks Return on assets Expected inflation rate
The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option:
884
Real assets of the business Liquid assets of the business Fixed assets of the business Lon term assets of the business
In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas? Select correct option:
885
Common stock Debt Preferred stock None of the above
Total Marks: 1 The benefit we expect from a project is expressed in terms of: Select correct option:
886
Cash in flows Cash out flows Cash flows None of the given option Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option: Sales variability Level of fixed operating costs Closeness to its operating break-even point Debt-to-equity ratio
887
When a bond will sell at a discount? Select correct option: The coupon rate is greater than the current yield and the current yield is greater than yield to maturity The coupon rate is greater than yield to maturity The coupon rate is less than the current yield and the current yield is greater than the yield to maturity The coupon rate is less than the current yield and the current yield is less than yield to maturity In order for the investor to earn more than the current yield the bond must be selling for a discount. Yield to maturity will be greater than current yield as investor will have purchased the bond at discount and will be receiving the coupon payments over the life of the bond.
Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option: Cash outflow to the government for taxes Cash outflow to shareholders as dividends
888
Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
889
Which of the followings expressed the proposition that the cost of equity is a positive linear function of capital structure? Select correct option: The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price
The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option: Real assets of the business
890
Liquid assets of the business Fixed assets of the business Lon term assets of the business
891
For most firms, P/E ratios and risk_______. Select correct option: Will be directly related Will have an inverse relationship
892
Will be unrelated None of the above.
893
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If 2 stocks move in the same direction together then what will be the correlation coefficient? Select correct option:
895
0 1.0 -1.0 1.5 which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option: Depreciation Sunk cost Opportunity cost Non-cash item
Which of the following techniques would be used for a project that has non normal cash flows? Select correct option: Internal rate of return Multiple internal rate of return Modified internal rate of return Net present value
896
Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same
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I, II, and III not sure I only III only II and III only
898
If we invest in many securities which are ________to each other then it is possible to reduce overall risk for your investment. Select correct option: Comparable Correlated Highly correlated Negatively correlated
The objective of financial management is to maximize _______ wealth. Select correct option:
899
Stakeholders Shareholders Bondholders Directors
Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares? Select correct option: The new shares are worth less than the old shares The old shares drop in value to equal the new price The value of the firm is reduced by the amount of the dividend The value of the firm is unaffected
900
________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. Select correct option: Systematic risk Standard deviation Unsystematic risk Coefficient of variation When taxes are considered, the value of a levered firm equals the value of the______. Select correct option: Unlevered firm Unlevered firm plus the value of the debt Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield
901
902
Long-term debt Preferred stock Common stock
903
Which of the followings are the propositions of Modigliani and Miller's?

904
Fundamental analysis Underlying real asset Supply and demand of securities in the market
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909
910
Stock split Stock dividend Extra dividend
911
Regular dividend
912
913
Compensating balance arrangement Revolving credit agreement

914
Transaction loan Line of credit
According to MM II, what happens when a firm's debt-to-equity ratio increases?
915
916
917
Long-term debt
918
Preferred stock Common stock None of the given options
919
Fundamental analysis
920
Underlying real asset Supply and demand of securities in the market All of the given options
921
Because there is hidden value in each project
922
Because there may be chance of rapid growth Because they have invested a lot All of the given options
923
By borrowing more
924
By shifting short-term to long-term debt By shifting long-term to short-term debt By selling common stock
When bonds are issued, under which of the following category the value of the bond appears?
925
Select correct option: Equity Fixed assets Short term loan Long term loan
926
927
An annuity due is always worth ___a comparable annuity. Select correct option:
928

929
Investors may be willing to pay a premium for stable dividends because of the informational content of __________, the desire of investors for __________, and certain __________.
930
Risk of owning equity securities Risk faced by equity holders when debt is used General business risk of the firm
931
Possibility that interest rates will increase
932
January 11 January 22 January 30 December 30
Which of the following is a basic principle of finance as it relates to the management of working capital? Select correct option:
933
Profitability varies inversely with risk Liquidity moves together with risk Profitability moves together with risk Profitability moves together with liquidity
Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows?
934
Select correct option: Discount rate Profitability index Internal rate of return Multiple Internal rate of return
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should be done by the firm? Select correct option: The firm has minimized its total carrying costs The firm should increase its order size The firm should decrease its order size The firm has maximized its order costs
935
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? Select correct option: Cash budgeting Capital budgeting Capital rationing
936
Capital expenditure
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 __________. Select correct option: Fall
937
Rise Remain unchanged Incomplete information
http://highered.mcgrawhill.com/sites/0073012386/student_view0/chapter15/multiple_choice_quiz.html
938
939
940
Maintaining a constant dividend payout ratio
941
Keeping the regular dividend at the same level indefinitely Maintaining a steady progression of dividend increases over time Alternating cash dividends with stock dividends
Which of the following is the characteristic of a well diversified portfolio?
942
943
1. Juan is starting a software writing company. He is the owner and has only 3 employees. He wants a simple inexpensive form of ownership that leaves him in control and that he can quickly dissolve if he decides to change to another business. His best choice of form of ownership would be: a. S-corporation b. Partnership c. Corporation d. Sole proprietorship 2. A tool that identifies the strengths, weaknesses, opportunities and threats of an organization is know as: a. SWOT Analysis
944
b. Trend Analysis c. Fundamental Analysis d. Technical Analysis 3. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at: a. A premium b. A discount c. Cannot be determined without more information d. Face value 4. Which of the following statements best describe the Balance Sheet? a. Summarizes the firms revenues and expenses over an accounting period b. Reports how much of the firms earnings were retained in the business rather than paid out in dividends c. Reports the impact of a firms operating, investing, and financing activities on cash flows over an accounting period d. States the firms financial position at a specific point in time 5. Which of the following is the purpose of the Debt management ratios? a. They measure the amount of debt the firm uses b. They measure how effectively a firm is managing its assets c. They show the relationship of a firms cash and other current assets to its current liabilities d. They show the combined effects of all areas of the firm on operating results 6. In which of the following situations a project is acceptable? a. When a project has conventional cash flows patterns b. When a project has a non-conventional cash flow pattern c. When a project has a discounted rate higher than the inflation rate d. When a project has a positive net present value 7. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if: a. Cost of goods sold increased relative to sales. b. Sales increased relative to expenses. c. The tax rate has been increased d. Dividends were decreased. 8. Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company a. Will not experience any difficulty with its creditors. b. Has less liquidity than other firms in the industry.
945
c. Will be viewed as having high creditworthiness. d. Has greater than average financial risk when compared to other firms in its industry. 9. For purposes of financial statements, the accounting value of fixed assets is: a. Based on their estimated liquidation value b. Based on their relative importance to the company c. Based on their actual purchase price d. Based on their current market price 10. Which of the following transactions affects the acid-test ratio? a. Receivables are collected. b. Inventory is liquidated for cash. c. New common stock is sold and used to retire a debt issue. d. A new common stock issue is sold and equipment purchased 11. The rate of return on the best available investment of equal risk is called: a. Discounting b. Compounding c. The opportunity cost rate d. Time lines 12. An annuity whose payments occur at the end of each period is called: a. An opportunity cost annuity. b. An ordinary annuity c. An annuity due d. An outflow annuity 13. Which of the following is the rate of return earned on a bond if it is held until maturity? a. Yield-to-call b. Coupon payment c. Yield-to-maturity d. Sinking fund yield 14. Keeping other things constant, if a bonds yield-to-maturity increases: a. Its price will rise b. Its price will remain unchanged c. Its price will fall. d. Can not be determined 15. A 30-year corporate bond issued in year 1985 would now trade in which of the following markets? a. Primary capital market b. Primary money market
946
c. Secondary money market d. Secondary capital market 16. When the market's nominal annual required rate of return for a particular bond is less than its coupon rate, the bond will be selling at ________. a. A discount b. A premium c. Par value d. An indeterminate price 17. The buyer of a zero-coupon bond expects to receive: a. Price appreciation. b. A rate of return equal to zero over the life of the bond. c. Variable dividends instead of a fixed interest payment annually. d. All interest payments in one lump sum at maturity. 18. The intrinsic value of a share of common stock: a. Is the discounted value of all future cash dividends b. Increases when the required rate of return increases, if the dividend is held constant. c. Is zero if the company pays no dividends d. Is the discounted capital gain expected on the stock 19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this year. Its dividend yield is 8%. At what price is the stock selling? a. Rs.40 b. Rs.35 c. Rs.30 d. Rs.25 20. Which of the following stock would provide a regular income to the investor? a. Growth stock b. Income stock c. Aggressive stock d. Defensive stock MGT201 Solved MCQ2 from Quiz
947
Question # 2 of 10 ( Start time: 04:05:43 PM ) Total Marks: 1 To increase a given future value, the discount rate should be adjusted __________. Select correct option: Upward Downward First upward and then downward None of the given options
Question # 3 of 10 ( Start time: 04:06:35 PM ) Total Marks: 1 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 __________. Select correct option:
948
Question # 5 of 10 ( Start time: 04:08:40 PM ) Total Marks: 1 At the termination of project, which of the following needs to be considered relating to project assets? Select correct option:
949
Question # 6 of 10 ( Start time: 04:09:27 PM ) Total Marks: 1 What is the long-run objective of financial management? Select correct option: Maximize earnings per share Maximize the value of the firm's common stock Maximize return on investment Maximize market share
Question # 7 of 10 ( Start time: 04:09:56 PM ) Total Marks: 1 What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option: Unlimited liability Single tax filing
950
Difficult ownership resale Raising capital
Question # 8 of 10 ( Start time: 04:10:16 PM ) Total Marks: 1 Which of the following effects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options
uestion # 9 of 10 ( Start time: 04:10:31 PM ) Total Marks: 1 An annuity due is always worth _____ a comparable annuity. Select correct option: Less than More than Equal to Can not be found from the given information
951
Question # 10 of 10 ( Start time: 04:10:53 PM ) Total Marks: 1 A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Select correct option: Payback period Internal rate of return Net present value Profitability index
The objective of financial management is to maximize _________ wealth. Select correct option: Stakeholders Shareholders Bondholders
952
Directors
Where there is single period capital rationing, what the most sensible way of making investment decisions? Select correct option: 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
953
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9month certificate of deposit, if you deposit Rs.20, 000 you would expect to earn around __________ in interest. Select correct option: Rs.840 Rs.858 Rs.1,032 Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) = $857.82.
Who determine the market price of a share of common stock? Select correct option: The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the
954
955
To increase a given future value, the discount rate should be adjusted __________. Select correct option: Upward Downward First upward and then downward None of the given options
MGT201 Solved MCQ4 from Quiz Question # 1 of 10 An annuity due is always worth _____ a comparable annuity.
956
Question # 2 of 10 ( Start time: 04:11:40 PM ) Total Marks: 1 Which of the following would be considered a cash-flow item from an "investing" activity? Select correct option:
957
Question # 5 of 10 ( Start time: 04:15:07 PM ) Total Marks: 1 Which of the following statements is correct in distinguishing between serial bonds and sinking-fund bonds?
958
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

959

960
Question # 9 of 10 ( Start time: 04:19:01 PM ) Total Marks: 1 A project that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option:
MGT201 Current Quiz # 3
A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________. Select correct option:
An anticipated earnings growth rate which is less than that of the average firm A dividend yield which is less than that of the average firm
961
Less predictable earnings growth than that of the average firm Greater cyclicality of earnings growth than that of the average firm
The reduction in income taxes that results from the tax-deductibility of interest payments.
Tax benefits derived from creative structuring of a financing arrangement. For example, usingloan capital instead of equity capital because interest paid on the loans is generally tax deductible whereas the dividend paid on equity is not
962
Ref It discounts the cash flow to take into the account the time value of money. Reference
Expected Portfolio Return = ___________. Select correct option:

963
If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option:
0 0.5 1 -1
964
For most firms, P/E ratios and risk_________. Select correct option:
Which of the following stipulate a relationship between expected return and risk? Select correct option:
965
===== Which of the following factors might affect stock returns? Select correct option: Business cycle Interest rate fluctuations Inflation rates All of the above If all things equal, when diversification is most effective? Select correct option:
Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated Which of the followings expressed the proposition that the value of
966
the firm is independent of its capital structure? Select correct option:
The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option:
Discount rate Profitability index Internal rate of return Multiple Internal rate of return Which of the following is related to the use Lower financial leverage? Select correct option:
Fixed costs Variable costs
967
Debt financing Common equity financing Why markets and market returns fluctuate? Select correct option:
Because of political factors Because of social factors Because of socio-political factors Because of macro systematic factors Which of the following is NOT an example of hybrid equity Select correct option:
968
Pay back period Internal rate of return Net present value Profitability index A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations? Select correct option:
(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100 Can not be found from the given information To increase a given future value, the discount rate should be adjusted __________. Select correct option:
Upward Downward First upward and then downward
969
None of the given options Which of the following is NOT the form of cash flow generated by the investments of the shareholders? Select correct option:
Income Capital loss Capital gain Operating income According to the Capital Asset Pricing Model (CAPM), a welldiversified portfolio's rate of return is a function of which of the following: Select correct option:
Unique risk Reinvestment risk Market risk Unsystematic risk What is the most important criteria in capital budgeting? Select correct option:
970
Return on investment Profitability index Net present value Pay back period If all things equal, when diversification is most effective? Select correct option:
Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high Securities' returns are negatively correlated Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. Select correct option:
I, II, and III I only
971
III only II and III only As interest rates go up, the present value of a stream of fixed cash flows _____. Select correct option:
Goes down Goes up Stays the same Can not be found from the given information Which of the following could be taken same as minimizing the weighted average cost of capital? Select correct option:
Maximizing the market value of the firm Maximizing the market value of the firm only if MM's Proposition I Minimizing the market value of the firm only if MM's Proposition I holds Maximizing the profits of the firm Which of the following formulas represents a correct calculation of the degree of operating leverage? Select correct option:
972
(Q - QBE)/Q (EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC] The value of a bond is directly derived from which of the following? Select correct option:
Cash flows Coupon receipts Par recovery at maturity All of the given options Which statement is NOT true regarding the market portfolio? Select correct option:
973
The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option: Real assets of the business Liquid assets of the business
974
Fixed assets of the business Lon term assets of the business
The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as ________. Select correct option: Probability distribution Expected return
975
Standard deviation Coefficient of variation
976
Which of the following is the value of beta for the market portfolio? Select correct option:
977
0.25 -1.0 1.0 0.5
978
Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option: Cash outflow to the government for taxes Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
979
Why companies invest in projects with negative NPV? Select correct option: Because there is hidden value in each project Because there may be chance of rapid growth
980
Which of the followings expressed the proposition that the cost of equity is a positive linear function of capital structure? Select correct option:
981
The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price http://www.financescholar.com/modigliani-miller-propositions.html
982
According to timing difference problem a good project might suffer from ___ IRR even though its NPV is ______. Select correct option: Higher; lower Lower; Lower
983
Lower; higher Higher; higher
The ________ the coefficient of variation ______ the relative risk of the investment.
984
Select correct option: Larger; Larger Larger; Smaller Smaller; Larger Smaller; Smaller
______ means expanding the number of investments which cover different kinds of stocks. Select correct option: Diversification Standard deviation
985
Variance Covariance
986
Which of the following would generally have unlimited liability?

987
Select correct option: 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)
If 2 stocks move in the same direction together then what will be the correlation coefficient? Select correct option: 0 1.0 -1.0 1.5 which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option: Depreciation Sunk cost Opportunity cost Non-cash item
988
989
990
991
If we invest in many securities which are ________to each other then it is possible to reduce overall risk for your investment. Select correct option: Comparable Correlated
992
The objective of financial management is to maximize _______ wealth. Select correct option: Stakeholders Shareholders Bondholders Directors
The stock in your portfolio was selling for Rs.40 per share yesterday, but has today declared a three for two split. Which of the following statements seems to be true? Select correct option: There will be two-thirds as many shares outstanding, and they will
993
sell for Rs.60.00 each There will be four times as many shares outstanding, and they will sell for Rs.160.00 each There will be 50 percent more shares outstanding and they will sell for Rs.26.67 each There will be one-and-one-half times as many shares outstanding, and they will sell for Rs.60.00 each
Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares? Select correct option: The new shares are worth less than the old shares The old shares drop in value to equal the new price The value of the firm is reduced by the amount of the dividend The value of the firm is unaffected ________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. Select correct option: Systematic risk Standard deviation Unsystematic risk Coefficient of variation When taxes are considered, the value of a levered firm equals the value of the______. Select correct option: Unlevered firm Unlevered firm plus the value of the debt
994
Unlevered firm plus the present value of the tax shield Unlevered firm plus the value of the debt plus the value of the tax shield
Which of the following terms best applies to the short-term interest rate charged by banks to large, creditworthy customers? Select correct option: Discount basis interest rate Long-term bond rate Prime rate Fed funds rate
995
996
Long-term debt
997
Preferred stock Common stock None of the given options
Total assets
998
Fixed assets Current assets Current assets minus current liabilities
The number of people employed in the firm The book value of the firm's assets less the book value of its liabilities
999
The market price per share of the firm's common stock The amount of salary paid to its employees
1000
Which of the following refers to financial risk?

1001
Interest tax shield

1002
Depreciable basis Financing umbrella Current yield
1003
According to the Capital Asset Pricing Model (CAPM), a welldiversified portfolio's rate of return is a function of which of the following: Select correct option:
1004
1005
Which of the following is a payment of additional shares to shareholders in lieu of cash?
1006
A limited partner in a partnership

1007
A shareholder in a corporation The owner of a sole proprietorship A member in a limited liability company (LLC)
Liquidity ratios Debt ratios Coverage ratios

1008
Profitability ratios
1009
Which of the following terms best applies to the short-term interest rate charged by banks to large, creditworthy customers?
1010
1011
Macroeconomic factors
1012
Socio political factors Social factors All of the given options
Magnitude of expected cash flows Timing of expected cash flows

1013
Both timing and magnitude of cash flows None of the given options
1014

1015
Which of the following has the same meaning as the working capital to financial analyst? Select correct option: http://vustudents.ning.com
1016
Upon which of the following a firm's degree of operating leverage (DOL) depends primarily?
1017
1018
Because there is hidden value in each project Because there may be chance of rapid growth
1019
1020
According to the Capital Asset Pricing Model (CAPM), a welldiversified portfolio's rate of return is a function of which of the following: Select correct option:
How can a company improve (lower) its debt-to-total asset ratio?
1021
1022
For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure? Select correct option: Cost of debt Cost of preferred stock Cost of common equity Cost of retained earnings Which of the following could be taken same as minimizing the weighted average cost of capital? Select correct option: Maximizing the market value of the firm Maximizing the market value of the firm only if MM's Proposition I
1023
Minimizing the market value of the firm only if MM's Proposition I holds Maximizing the profits of the firm
How "Shareholder wealth" is represented in a firm? Select correct option: The number of people employed in the firm
1024
The book value of the firm's assets less the book value of its liabilities The market price per share of the firm's common stock The amount of salary paid to its employees
Which of the following is an example of restructuring the firm? Select correct option: Dividends are increased from Rs.1 to Rs.2 per share A new investment increases the firm's business risk
1025
New equity is issued and the proceeds repay debt A new Board of Directors is elected to the firm
1026
1027
To increase a given future value, the discount rate should be adjusted __________.
1028
1029
Probability distribution Expected return Standard deviation

1030
Coefficient of variation
January 11 January 22 January 30

1031
December 30
1032
1033
Discount rate Profitability index Internal rate of return Multiple Internal rate of return http://vustudents.ning.com What does the law of conservation of value implies? Select correct option: The mix of senior and subordinated debt does not affect the value of the firm The mix of convertible and non-convertible debt does not affect the value of the firm The mix of common stock and preferred stock does not affect the value of the firm All of the given options
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should be done by the firm? Select correct option: The firm has minimized its total carrying costs The firm should increase its order size The firm should decrease its order size
1034
The firm has maximized its order costs
1035
Select correct option: Cash budgeting Capital budgeting Capital rationing Capital expenditure
How economic value is added (EVA) calculated? Select correct option: It is the difference between the market value of the firm and the book value of equity It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge
1036
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 __________. Select correct option: Fall Rise Remain unchanged Incomplete information
1037
http://highered.mcgrawhill.com/sites/0073012386/student_view0/chapter15/multiple_choice _quiz.html
1038
1039
1040
1041
It will lie below the regression line It will line above the regression line
1042
It will line exactly on the regression line It will be tangent to the regression line
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.
1043
The square root of a portfolio's standard deviation of return equals its coefficient of variation
Cash flows Coupon receipts Par recovery at maturity
1044
1. Juan is starting a software writing company. He is the owner and has only 3 employees. He wants a simple inexpensive form of ownership that leaves him in control and that he can quickly dissolve if he decides to change to another business. His best choice of form of ownership would be: a. S-corporation b. Partnership c. Corporation d. Sole proprietorship 2. A tool that identifies the strengths, weaknesses, opportunities and threats of an organization is know as: a. SWOT Analysis b. Trend Analysis c. Fundamental Analysis d. Technical Analysis 3. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at: a. A premium b. A discount c. Cannot be determined without more information d. Face value 4. Which of the following statements best describe the Balance Sheet? a. Summarizes the firms revenues and expenses over an accounting period b. Reports how much of the firms earnings were retained in the business rather than paid out in dividends c. Reports the impact of a firms operating, investing, and financing activities on cash flows over an accounting period d. States the firms financial position at a specific point in time 5. Which of the following is the purpose of the Debt management ratios? a. They measure the amount of debt the firm uses
1045
b. They measure how effectively a firm is managing its assets c. They show the relationship of a firms cash and other current assets to its current liabilities d. They show the combined effects of all areas of the firm on operating results 6. In which of the following situations a project is acceptable? a. When a project has conventional cash flows patterns b. When a project has a non-conventional cash flow pattern c. When a project has a discounted rate higher than the inflation rate d. When a project has a positive net present value 7. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if: a. Cost of goods sold increased relative to sales. b. Sales increased relative to expenses. c. The tax rate has been increased d. Dividends were decreased. 8. Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company a. Will not experience any difficulty with its creditors. b. Has less liquidity than other firms in the industry. c. Will be viewed as having high creditworthiness. d. Has greater than average financial risk when compared to other firms in its industry. 9. For purposes of financial statements, the accounting value of fixed assets is: a. Based on their estimated liquidation value b. Based on their relative importance to the company c. Based on their actual purchase price d. Based on their current market price 10. Which of the following transactions affects the acid-test ratio? a. Receivables are collected. b. Inventory is liquidated for cash. c. New common stock is sold and used to retire a debt issue. d. A new common stock issue is sold and equipment purchased 11. The rate of return on the best available investment of equal risk is called: a. Discounting b. Compounding c. The opportunity cost rate d. Time lines 12. An annuity whose payments occur at the end of each period is called:
1046
a. An opportunity cost annuity. b. An ordinary annuity c. An annuity due d. An outflow annuity 13. Which of the following is the rate of return earned on a bond if it is held until maturity? a. Yield-to-call b. Coupon payment c. Yield-to-maturity d. Sinking fund yield 14. Keeping other things constant, if a bonds yield-to-maturity increases: a. Its price will rise b. Its price will remain unchanged c. Its price will fall. d. Can not be determined 15. A 30-year corporate bond issued in year 1985 would now trade in which of the following markets? a. Primary capital market b. Primary money market c. Secondary money market d. Secondary capital market 16. When the market's nominal annual required rate of return for a particular bond is less than its coupon rate, the bond will be selling at ________. a. A discount b. A premium c. Par value d. An indeterminate price 17. The buyer of a zero-coupon bond expects to receive: a. Price appreciation. b. A rate of return equal to zero over the life of the bond. c. Variable dividends instead of a fixed interest payment annually. d. All interest payments in one lump sum at maturity. 18. The intrinsic value of a share of common stock: a. Is the discounted value of all future cash dividends b. Increases when the required rate of return increases, if the dividend is held constant. c. Is zero if the company pays no dividends
1047
d. Is the discounted capital gain expected on the stock 19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this year. Its dividend yield is 8%. At what price is the stock selling? a. Rs.40 b. Rs.35 c. Rs.30 d. Rs.25 20. Which of the following stock would provide a regular income to the investor? a. Growth stock b. Income stock c. Aggressive stock d. Defensive stock MGT201 Financial Management
When the intrinsic value of an asset is less than its ______, the asset is perceived as undervalued. Book Value Market Value Liquidation Value None of the given options
If the intrinsic value of an asset is less than its market value, the asset among investors is perceived as undervalued.
1048
When current liabilities rise faster than current assets, the current ratio will _______. Fall Rise Remain same None of the given options
Yield to Maturity (YTM) of a bond = Interest yield + _________ Annual coupon interest Market price Capital gain None of the given options
_________ are also known as Hybrid equity. Common shares Preferred shares Bonds All of the given options
__________ is a measure of risk. Standard Deviation

1049
Mean Mode None of the given options
Risk is measured in terms of the standard deviation or variance.
An annuity whose payments are made at the end of each period is called _________. Ordinary Annuity Annuity Due Perpetuity None of the given options
An ordinary annuity, also known as deferred annuity, consists of a series of equal payments at the end of each period.
The present value of Rs. 5,000 received at the end of 5 years, discounted at 10 percent, is closest to__________.
Rs.3,105 Rs.823 Rs.620

1050
Rs.3,40
PV = FV/(1 + I)^n =5000/(1+10/100)^5 =3104.606615
You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of Rs. 7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you want an annual return of 24.0%, what is the most you should pay for the stock now?
Rs.52.00 Rs.56.68 Rs.32.50 Rs.35.43
PV = Po* = DIV1 / (rCE -g) = 7.80(1+.09)/(.24-.09)= 56.68
The current yield on a bond is equal to ______. Select correct option: Annual interest divided by the current market price
1051
The yield to maturity Annual interest divided by the par value The internal rate of return What is the additional amount a borrower must pay to lender to compensate for assuming the risk associated with non-payment? Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
The default premium is paid by companies with lower grade bonds or by individuals with poor credit. As an illustration, companies with poor financials will tend to compensate investors for the additional risk by issuing bonds with high yields. Individuals with poor credit must pay higher interest rates in order to borrow money from the bank.
As interest rates go up, the present value of a stream of fixed cash flows ___. Select correct option: Goes down Goes up Stays the same Can not be found from the given information
An 8-year annuity due has a present value of Rs.1,000. If the interest rate is 5 percent, the amount of each annuity payment is closest to
1052
which of the following? Select correct option: Rs.154.73 Rs.147.36 Rs.109.39 Rs.104.72
The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = ________. Select correct option: 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
Which of the following is NOT true regarding an ordinary annuity? Select correct option: It is a series of equal cash flows Cash flows occur for a specific time period Payments are made at the start of each period It is also known as deferred annuity
1053
Which of the following is the main objective of Financial Accounting? Select correct option: Profit maximization Maximization of shareholders wealth To collect accurate, systematic, and timely financial data All of the given options
Which of the following is/are the component(s) of working capital management? Select correct option: Current assets Fixed assets Fixed assets and long-term liabilities Current assets and current liabilities
Which of the following is type a Temporary Account? Select correct option: Asset Liability Reserves Revenue
1054
Temporary Account does not appear on the balance sheet; also called Nominal Account. Revenue and expense accounts, along with income distribution accounts (such as dividend) are temporary accounts.
In which of the following approach you need to bring all the projects to the same length in time? Select correct option: MIRR approach Going concern approach Common life approach Equivalent annual approach
_____ is paid by companies with lower grade bonds like CC or C ratings. Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
1055
Which of the following would be considered a cash-flow item from an "investing" activity? Select correct option: 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 What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option: Unlimited liability Single tax filing Difficult ownership resale Raising capital
Which of the following statements (in general) is correct? Select correct option: 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
1056
Which of the following refers to the cost of taking up one option while sacrificing the other? Select correct option: Opportunity cost Operating cost Sunk cost Floatation cost
Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, __________. Select correct option: Both bonds will increase in value, but bond A will increase more than bond B Both bonds will increase in value, but bond B will increase more than bond A Both bonds will decrease in value, but bond A will decrease more than bond B Both bonds will decrease in value, but bond B will decrease more than bond A
1057
Which of the following refers to the risk associated with interest rate uncertainty? Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Which of the following are known as Discretionary Financing? Select correct option: Current liabilities Current assets
1058
Fixed assets Long-term liabilities
Which of the following is the percentage of interest charged at each compounding time? Select correct option: Nominal interest Rate Effective interest Rate Annual percentage rate Periodic interest rate
Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following? Select correct option: Life span of the project Cost of the capital Return on asset None of the given options
Which of the following can not be the drawback of using payback period technique of capital budgeting? Select correct option: It does not account for time value of money It neglects cash flows after the payback period
1059
It does not use interest rate while making calculations It is a tricky and complicated method
What is yield to maturity on a bond? Select correct option: 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 Based on the assumption that any payments received are reinvested at the coupon rate
Financial Management
1060
What is the present value of Rs.1,000 to be paid at the end of 5 years if the correct risk adjusted interest rate is 8%? Select correct option: Rs.714 Rs.1,462 Rs.322.69 Rs.401.98
Given no change in required returns, the price of a stock whose dividend is constant will________. Select correct option: Decrease over time at a rate of r% Remain unchanged Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate
1061
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. Select correct option: IRR MIRR PV NPV
All of the following are the financial statements used for the purpose of reporting and analysis EXCEPT: Select correct option: Balance Sheet Income Statement Cash budget Statement of Retained Earnings
1062
The value of a bond is directly derived from which of the following? Select correct option: Cash flows Coupon receipts Par recovery at maturity All of the given options
What should be the focal point of financial management in a firm? Select correct option: 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
What is difference between shares and bonds? Select correct option: Bonds are representing ownership whereas shares are not Shares are representing ownership whereas bonds are not Shares and bonds both represent equity Shares and bond both represent liabilities
Which of the following is NOT true regarding an annuity due? Select correct option:
1063
It is a series of equal cash flows It is also known as deferred annuity Cash flows occur for a specific time period Payments are made at the start of each period
Which of the following is the general assumption of Percent of Sales Forecasting? Select correct option: Current Assets usually grow in proportion to Revenues Current Assets usually grow in proportion to Expenses Current Assets usually grow in proportion to Liabilities Current Assets usually grow in proportion to Sales
Which type of responsibilities are primarily assigned to Controller and Treasurer respectively? Select correct option: Operational; financial management
1064
Financial management; accounting Accounting; financial management Financial management; operations
Which of the following is FALSE about Perpetuity? Select correct option: It is a series of cash flows Cash flows occur for a specific time period Its cash flows are identical None of the given options
Perpetuity: It is defined as an annuity with an infinite life making continual payments.
The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option: Real assets of the business Liquid assets of the business Fixed assets of the business Long term assets of the business
Nominal Interest Rate is also known as: Select correct option:

1065
Which of the following refers to time value of money concept? Select correct option: A rupee in ones hand at present is worth less than the rupee that one is going to receive tomorrow A rupee in ones hand at present is worth more than the rupee that one is going to receive tomorrow A rupee in ones hand at present is worth same as the rupee that one is going to receive tomorrow All of the given options
Which of the following is a major disadvantage of the corporate form of organization? Select correct option: 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
What are the Indirect securities? Select correct option:

1066
The securities whose value depends on the cash flows generated by the underlying assets The securities whose value depends on the value of the underlying assets The securities that indirectly generate returns for its investors All of the given options
Indirect Securities: Indirect securities include derivatives, Futures and Options. The securities do not generate any cash flow; however, its value depends on the value of the underlying asset.
Which if the following refers to capital budgeting? Select correct option: Investment in long-term liabilities Investment in fixed assets Investment in current assets Investment in short-term liabilities
A technique that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option: Pay back period Internal rate of return Net present value Profitability index
1067
How can a company 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
Which of the following are known as Discretionary Financing? Current liabilities Current assets Fixed assets Long-term liabilities
According to timing difference problem a good project might

1068
suffer from ___ IRR even though its NPV is ______. Higher; lower Lower; Lower Lower; higher Higher; higher
Which of the following statements is TRUE regarding Permanent Accounts? Select correct option: Accounts that are found on Income Statement Accounts that are found on Statement of Retained Earnings Accounts that are found on Balance Sheet All of the given options
Which group of ratios shows the extent to which the firm is financed with debt? Select correct option: Liquidity ratios Debt ratios Coverage ratios Profitability ratios
Which of the following is NOT the type of Hybrid organizations. Select correct option: S-Type Corporation Limited Liability Partnership
1069
Sole Proprietorship Professional Corporation
When bonds are issued, under which of the following category the value of the bond appears. Select correct option: Equity Fixed assets Short term loan Long term loan
Which of the following refers to bringing the future cash flow to the present timeSelect correct option: Net present value Discounting Opportunity cost
1070
Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: Select correct option: Magnitude of expected cash flows Timing of expected cash flows Both timing and magnitude of cash flows None of the given options
Effective interest rate is different from nominal rate of interest because. Select correct option: Nominal interest rate ignores compounding Nominal interest rate includes frequency of compounding Periodic interest rate ignores the effect of inflation All of the given options
What are the Indirect securities? Select correct option: The securities whose value depends on the cash flows generated by the underlying assets The securities whose value depends on the value of the underlying assets The securities that indirectly generate returns for its investors
1071
A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the future value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(FVIFA at 8% for 5 periods) (Rs.100)(FVIFA at 8% for 4 periods)(1.08) (Rs.100) (FVIFA at 8% for 5 periods)(1.08) (Rs.100)(FVIFA at 8% for 4 periods) + Rs.100
Given no change in required returns, the price of a stock whose dividend is constant will__________Select correct option: Decrease over time at a rate of r% Remain unchanged Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate
Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following. Select correct option: Life span of the project Cost of the capital Return on asset
1072
When a bond will sell at a discount. Select correct option: The coupon rate is greater than the current yield and the current yield is greater than yield to maturity The coupon rate is greater than yield to maturity The coupon rate is less than the current yield and the current yield is greater than the yield to maturity The coupon rate is less than the current yield and the current yield is less than yield to maturity
Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows. Select correct option: Cash flow diagram Cash budget Cash flow statement None of the given options
Which of the following is NOT the step of Percentage of sales to be used in Financial Forecasting. Select correct option: Estimate year-by-year Sales Revenue and Expenses Estimate Levels of Investment Needs required to Meet Estimated Sales
1073
Estimate the Financing Needs Estimate the retained earnings
Percentage of sales: Step 1: Estimate year-by-year Sales Revenue and Expenses Step 2: Estimate Levels of Investment Needs (in Assets) required meeting estimated sales (using Financial Ratios). That how the Assets of the company changes with the change in Step 3: Estimate the Financing Needs (Liabilities)
Which of the following is NOT true regarding an annuity due? Select correct option: It is a series of equal cash flows It is also known as deferred annuity Cash flows occur for a specific time period Payments are made at the start of each period
When coupon bonds are issued, they are typically sold at which of the following value? Select correct option: Above par value Below par At or near par value
1074
At a value unrelated to par
Where there is single period capital rationing, what is the most sensible way of making investment decisions? Select correct option: 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
Which of the following is not the present value of the bond? Intrinsic value Market price Fair price Theoretical price
Which is the present value of Rs.1,000 to be paid at the end of 5 years if the correct risk adjusted interest rate is 8%?
Rs.714 Rs.1,462 Rs.322.69 Rs.401.98
1075
PV=1000*(1.08)^5
Which of the following is a major disadvantage of the corporate form of organization? Select correct option: Double taxation of dividends Inability of the firm to raise large sums of additional capital Limited liability of shareholders
1076
Limited life of the corporate form
Which of the following is the risk of investing funds in another country? Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
Which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option: Depreciation Sunk cost Opportunity cost Non-cash item
1077
Sunk costs need to be excluded while calculating the incremental cash flows.
Which of the following affects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options
Which of the following is/are the characteristic(s) of Perpetuity? Select correct option: It is an annuity It has no definite end It is a constant stream of identical cash flows All of the given options
With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option: Rs.52,000 Rs.93,219 Rs.99,061
1078
Rs.915,240
F V = PV x e i x n =20000*(2.718)^1.6 Which of the following is a limitation of a Corporation? Select correct option: Easy to set up Double-taxation Inexpensive to maintain Unlimited liability
Which of the following affects price of the bond? Select correct option: Market interest rate Required rate of return Interest rate risk All of the given options
Which of the following is NOT true regarding an ordinary annuity? Select correct option: It is a series of equal cash flows Cash flows occur for a specific time period Payments are made at the start of each period
1079
It is also known as deferred annuity
The return in excess to risk free rate that investors require for bearing the market risk is known as: Select correct option: Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium
When the bond approaches its maturity, the market value of the bond approaches to which of the following? Select correct option: Intrinsic value Book value Par value Historic cost
Study the time line and accompanying 5-period cash-flow pattern below. 0 1 2 3 4 5 6 Time line |--------|--------|--------|--------|--------|-------| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash flows A B The present
1080
value of the 5-period annuity shown above as of Point A is the present value of a 5-period ____________ , whereas the future value of the same annuity as of Point B is the future value of a 5period ____________ . Select correct option: Ordinary annuity; ordinary annuity Ordinary annuity; annuity due Annuity due; annuity due Annuity due; ordinary annuity The value of direct claim security is derived from which of the following? Select correct option: Fundamental analysis Underlying real asset Supply and demand of securities in the market All of the given options Who determine the market price of a share of common stock? Select correct option: The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the stock
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The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option: Real assets of the business Liquid assets of the business Fixed assets of the business Long term assets of the business Why we need Capital rationing? Select correct option: 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
When the zero coupon bond approaches to its maturity, the market value of the bond approaches to which of the following? Select correct option: Intrinsic value Book value Par value Historic cost What is the additional amount a borrower must pay to lender to compensate for assuming the risk associated with non-payment? Select correct option:
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Default risk premium Sovereign Risk Premium Market risk premium Maturity risk premium Which of the following equation is NOT correct? Select correct option: Gross Revenue Admin & Operating Expenses = Operating Revenue Other Expenses + Other Revenue = EBIT EBIT Financial Charges & Interest = EBT Net Income Dividends = Retained Earning
Operating Revenue Other Expenses + Other Revenue = EBIT Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? Select correct option: Discount rate Profitability index Internal rate of return Multiple Internal rate of return
When a bond will sell at a discount? Select correct option:
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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 What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option: Long-term debt Preferred stock Common stock None of the given options
Which of the following is type a Temporary Account? Select correct option: Asset Liability Reserves Revenue What are the Direct claim securities? Select correct option:
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Hand outs, page 121
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? Select correct option: Sunk cost Opportunity cost Externalities Contingencies
Externalities in financial terms may be defined as incidental cash flows that arise because of the effect of new project on the existing or running business.
Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or
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outflows? Select correct option: Cash flow diagram Cash budget Cash flow statement None of the given options
As interest rates go up, the present value of a stream of fixed cash flows ___. Select correct option: Goes down Goes up Stays the same Can not be found from the given information ______ are also known as Spontaneous Financing. Select correct option: Current liabilities Current assets Fixed assets Long-term liabilities
Spontaneous Financing is Trade credit, and other payables and accruals, that arise spontaneously in the firms day-to-day operations.
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Who or what is a person or institution designated by a bond issuer as the official representative of the bondholders? Select correct option: Indenture Debenture Bond Bond trustee
The objective of financial management is to maximize _______ wealth. Select correct option: Stakeholders Shareholders Bondholders
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Directors
What are the Indirect securities? Select correct option: The securities whose value depends on the cash flows generated by the underlying assets The securities whose value depends on the value of the underlying assets The securities that indirectly generate returns for its investors All of the given options
Which of the following is NOT an example of a financial intermediary? Select correct option: Wisconsin S&L, a savings and loan association Strong Capital Appreciation, a mutual fund Microsoft Corporation, a software firm College Credit, a credit union
Which of the following refers to the risk associated with interest rate uncertainty? Select correct option: Default risk premium Sovereign Risk Premium
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Market risk premium Maturity risk premium
______ is equal to (common shareholders' equity/common shares outstanding). Select correct option: Book value per share Liquidation value per share Market value per share None of the above
Which of the following can not be the drawback of using payback period technique of capital budgeting? Select correct option: It does not account for time value of money It neglects cash flows after the payback period It does not use interest rate while making calculations It is a tricky and complicated method
Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stocks required return. II. A decrease in the dividend growth rate will increase a stocks market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. Select correct option:
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I, II, and III I only III only II and III only Which group of ratios shows the extent to which the firm is financed with debt? Select correct option: Liquidity ratios Debt ratios Coverage ratios Profitability ratios
What is the present value of Rs.8,000 to be paid at the end of three years if interest rate is 11%? Select correct option: Rs. 5,850 Rs.4,872 Rs.6,725 Rs.1,842 Which type of responsibilities are primarily assigned to Controller and Treasurer respectively? Select correct option: Operational; financial management Financial management; accounting Accounting; financial management Financial management; operations
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Nominal Interest Rate is also known as: Select correct option: Effective interest Rate Annual percentage rate Periodic interest rate Required interest rate
The nominal interest rate is the periodic interest rate times the number of periods per year. An annuity due is always worth ___ a comparable annuity. Less than More than Equal to Can not be found from the given information Which of the following refers to bringing the future cash flow to the present time? Select correct option: Net present value Discounting Opportunity cost Internal rate of return
Which of the following market in finance is referred to the market for short-term government and corporate debt securities? Select correct option:
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Which of the following is NOT true regarding the capital market? Select correct option: Where long-term funds can be raised Money is invested for periods longer than a year Where TFCs and NIT are exchanged and traded Where overnight lending & borrowing takes place
What is difference between shares and bonds? Select correct option: Bonds are representing ownership whereas shares are not Shares are representing ownership whereas bonds are not Shares and bonds both represent equity Shares and bond both represent liabilities
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
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Sell fixed assets to reduce accounts payable
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? Select correct option: Rs. 250.44 Rs. 231.91 Rs.181.62 Rs.184.08
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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. Select correct option: IRR MIRR PV NPV
Handouts Lecture 11 Which of the following refers to a highly competitive market where good business ideas are taken up immediately? Select correct option: Capital market Efficient market Money market Real asset market
Handouts Lecture 08
For Company A, plow back ratio is 30%. What will be its Pay-out ratio?
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Select correct option: 3.33% 30% 31% 70%
What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? Indenture Debenture Bond Bond trustee
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
Which of the following needs to be excluded while we calculate the incremental cash flows? Select correct option:
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Which of the following would generally have unlimited liability? Select correct option: 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) Which of the following would be considered a cash-flow item from an "investing" activity? Select correct option: 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
An investment proposal should be judged in whether or not it provides: Select correct option: A return equal to the return require by the investor A return more than required by investor A return less than required by investor
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A return equal to or more than required by investor
A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the future value of this annuity is closest to which of the following equations? Select correct option: (Rs.100)(FVIFA at 8% for 5 periods) (Rs.100)(FVIFA at 8% for 4 periods)(1.08) (Rs.100) (FVIFA at 8% for 5 periods)(1.08) (Rs.100)(FVIFA at 8% for 4 periods) + Rs.100
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you deposit Rs.20, 000 you would expect to earn around ________ in interest. Select correct option: Rs.840 Rs.858 Rs.1,032 Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) =$857.82.
Which of the following is similar between Return on investment and Payback period techniques of Capital budgeting?
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Involvement of interest rate while making calculations Do not account for time value of money Tricky and complicated methods All of the given options Which of the following would be considered a cash-flow item from an "operating" activity? Select correct option: Cash outflow to the government for taxes Cash outflow to shareholders as dividends Cash inflow to the firm from selling new common equity shares Cash outflow to purchase bonds issued by another company
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A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. Liquidity Ratios Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.
A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern
Cash budgeting
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Capital budgeting Capital rationing Capital expenditure Reference
Rs.52,000 Rs.93,219 Rs.99,061 Rs.915,240 F V = PV x e ixn FV= 20,000*2.718(.08*20)
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Double taxation of dividends Inability of the firm to raise large sums of additional capital Limited liability of shareholders
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Limited life of the corporate form
Rs.154.73 Rs.147.36 Rs.109.39 Rs.104.72

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MGT201 Five Online Quizzes (Almost 70 Mcqs) 2010 Covering lecture No 1-18 Solved by dua ,virtual ,saad ,famous,gorgeous,sahar Answers are not 100% sure
Question # 1 of 15 ( Start time: 09:14:05 PM ) Total Marks: 1 When the bond approaches its maturity, the market value of the bond approaches to which of the following? Select correct option:
Intrinsic value Book value Par value (Correct) Historic cost
Question # 2 of 15 ( Start time: 09:14:35 PM ) Total Marks: 1 Which of the following refers to the risk associated with interest rate uncertainty?
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Default risk premium (Correct) Sovereign Risk Premium Market risk premium Maturity risk premium
Question # 3 of 15 ( Start time: 09:15:38 PM ) Total Marks: 1 When the zero coupon bond approaches to its maturity, the market value of the bond approaches to which of the following? Select correct option:
Intrinsic value Book value (Correct) Par value Historic cost
Question # 4 of 15 ( Start time: 09:17:00 PM ) Total Marks: 1 What is difference between shares and bonds?
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Bonds are representing ownership whereas shares are not Shares are representing ownership whereas bonds are not (Correct) Shares and bonds both represent equity Shares and bond both represent liabilities
mc090401219: Question # 5 of 15 ( Start time: 09:18:04 PM ) Total Marks: 1 Effective interest rate is different from nominal rate of interest because: Select correct option:
Nominal interest rate ignores compounding Nominal interest rate includes frequency of compounding (Correct) Periodic interest rate ignores the effect of inflation All of the given options
Question # 6 of 15 ( Start time: 09:18:48 PM ) Total Marks: 1 Which of the following refers to a highly competitive market where good business ideas are taken up immediately? Select correct option:
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Capital market Efficient market (Correct) Money market Real asset market
Question # 7 of 15 ( Start time: 09:20:10 PM ) Total Marks: 1 A technique that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option:
Pay back period (Correct) Internal rate of return Net present value Profitability index
Question # 8 of 15 ( Start time: 09:21:01 PM ) Total Marks: 1 Which of the following can not be the drawback of using payback period technique of capital budgeting? Select correct option:
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It does not account for time value of money (Correct) It neglects cash flows after the payback period It does not use interest rate while making calculations It is a tricky and complicated method
Question # 9 of 15 ( Start time: 09:22:03 PM ) Total Marks: 1 Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows? Select correct option:
Cash flow diagram (Correct) Cash budget Cash flow statement None of the given options
Question # 10 of 15 ( Start time: 09:22:45 PM ) Total Marks: 1 Which of the following statements is TRUE regarding Permanent Accounts? Select correct option:
Accounts that are found on Income Statement Accounts that are found on Statement of Retained Earnings
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Accounts that are found on Balance Sheet All of the given options
Question # 11 of 15 ( Start time: 09:24:06 PM ) Total Marks: 1 The statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? Select correct option:
Operating, investing, and financing Investing, operating, and financing (Correct) Financing, operating and investing Financing, investing, and operating
Depreciation Sunk cost (Correct) Opportunity cost
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Non-cash item
Question # 13 of 15 ( Start time: 09:26:33 PM ) Total Marks: 1 Which of the following is a capital budgeting technique that is NOT considered as discounted cash flow method? Select correct option:
Payback period (Correct) Internal rate of return Net present value Profitability index
Question # 14 of 15 ( Start time: 09:27:40 PM ) Total Marks: 1 The value of a bond is directly derived from which of the following? Select correct option:
Cash flows Coupon receipts (Correct) Par recovery at maturity All of the given options

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Cash flows Coupon receipts (Correct) Par recovery at maturity All of the given options --------------------------------------------------------------------------
Question # 1 of 15 ( Start time: 09:32:06 PM ) Total Marks: 1 A technique that tells us the number of years required to recover our initial cash investment based on the projects expected cash flows is: Select correct option: Pay back period (Correct) Internal rate of return Net present value Profitability index
Question # 2 of 15 ( Start time: 09:33:11 PM ) Total Marks: 1 Which of the following is NOT an example of a financial intermediary?
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Select correct option: Wisconsin S&L, a savings and loan association Strong Capital Appreciation, a mutual fund Microsoft Corporation, a software firm (Correct) College Credit, a credit union
Question # 3 of 15 ( Start time: 09:33:49 PM ) Total Marks: 1 When a bond will sell at a discount? Select correct option: The coupon rate is greater than the current yield and the current yield is greater than yield to maturity The coupon rate is greater than yield to maturity The coupon rate is less than the current yield and the current yield is greater than the yield to maturity The coupon rate is less than the current yield and the current yield is less than yield to maturity (Correct)
Question # 4 of 15 ( Start time: 09:34:34 PM ) Total Marks: 1 When bonds are issued, under which of the following category the value of the bond appears? Select correct option:
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Equity Fixed assets Short term loan Long term loan (Correct)
Question # 5 of 15 ( Start time: 09:35:06 PM ) Total Marks: 1 Which of the following can not be the drawback of using payback period technique of capital budgeting? Select correct option: It does not account for time value of money It neglects cash flows after the payback period It does not use interest rate while making calculations It is a tricky and complicated method (Correct)
Question # 6 of 15 ( Start time: 09:35:46 PM ) Total Marks: 1 An investment proposal should be judged in whether or not it provides: Select correct option: A return equal to the return require by the investor A return more than required by investor (Correct) A return less than required by investor A return equal to or more than required by investor
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Question # 7 of 15 ( Start time: 09:36:51 PM ) Total Marks: 1 Which of the following is a major disadvantage of the corporate form of organization? Select correct option: Double taxation of dividends (Correct) Inability of the firm to raise large sums of additional capital Limited liability of shareholders Limited life of the corporate form
Question # 8 of 15 ( Start time: 09:37:49 PM ) Total Marks: 1 Which of the following is NOT an example of hybrid equity Select correct option: Convertible Bonds Convertible Debenture Common shares (Correct) Preferred shares
Question # 9 of 15 ( Start time: 09:38:55 PM ) Total Marks: 1 Which of the following is/are the component(s) of working capital management?
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Select correct option: Current assets (Correct) Fixed assets Fixed assets and long-term liabilities Current assets and current liabilities
Question # 10 of 15 ( Start time: 09:40:18 PM ) Total Marks: 1 Which of the following statements (in general) is correct? Select correct option: A low receivables turnover is desirable The lower the total debt-to-equity ratio, the lower the financial risk for a firm (Correct) 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 # 11 of 15 ( Start time: 09:41:43 PM ) Total Marks: 1 What should be the focal point of financial management in a firm? Select correct option: The number and types of products or services provided by the firm
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The minimization of the amount of taxes paid by the firm The creation of value for shareholders The dollars profits earned by the firm(Correct)
Question # 12 of 15 ( Start time: 09:42:43 PM ) Total Marks: 1 With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option: Rs.52,000 Rs.93,219 (Correct) Rs.99,061 Rs.915,240
Question # 13 of 15 ( Start time: 09:43:14 PM ) Total Marks: 1 Who or what is a person or institution designated by a bond issuer as the official representative of the bondholders? Select correct option: Indenture Debenture Bond Bond trustee (Correct)
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Question # 14 of 15 ( Start time: 09:44:04 PM ) Total Marks: 1 Which of the following is FALSE about Perpetuity? Select correct option: It is a series of cash flows Cash flows occur for a specific time period Its cash flows are identical (Correct) None of the given options
Question # 15 of 15 ( Start time: 09:45:14 PM ) Total Marks: 1 Which of the following refers to bringing the future cash flow to the present time? Select correct option: Net present value Discounting (Correct) Opportunity cost Internal rate of return
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Question # 1 of 15 ( Start time: 09:49:12 PM ) Total Marks: 1 Given no change in required returns, the price of a stock whose dividend is constant will________. Select correct option: Decrease over time at a rate of r% Remain unchanged (Correct) Increase over time at a rate of r% Decrease over time at a rate equal to the dividend growth rate
Question # 2 of 15 ( Start time: 09:50:02 PM ) Total Marks: 1 Which of the following refers to a highly competitive market where good business ideas are taken up immediately? Select correct option: Capital market Efficient market (Correct) Money market Real asset market
Virtual: 2
zahid.famous: 2
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saadkhan545: Question # 3 of 15 ( Start time: 09:50:40 PM ) Total Marks: 1 Which of the following is the Double Entry Principle? Select correct option: Assets + Liabilities = Shareholders Equity Assets = Liabilities + Shareholders Equity Liabilities = Assets + Shareholders Equity (Correct) None of the given options
Question # 4 of 15 ( Start time: 09:51:21 PM ) Total Marks: 1 Which of the following equation is NOT correct? Select correct option: Gross Revenue Admin & Operating Expenses = Operating Revenue Other Expenses + Other Revenue = EBIT (Correct) EBIT Financial Charges & Interest = EBT Net Income Dividends = Retained Earning
Question # 5 of 15 ( Start time: 09:52:38 PM ) Total Marks: 1 With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? Select correct option: Rs.52,000 Rs.93,219 (Correct)
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Rs.99,061 Rs.915,240 5:53 PM
Question # 6 of 15 ( Start time: 09:54:01 PM ) Total Marks: 1 To increase a given future value, the discount rate should be adjusted ________. Select correct option: Upward Downward (Correct) First upward and then downward None of the given options
Question # 7 of 15 ( Start time: 09:55:36 PM ) Total Marks: 1 Which of the following value of the shares changes with investors perception about the companys future and supply and demand situation? Select correct option: Par value Market value (Correct) Intrinsic value Face value

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Which of the following refers to time value of money concept? Select correct option: A rupee in ones hand at present is worth less than the rupee that one is going to receive tomorrow (Correct) A rupee in ones hand at present is worth more than the rupee that one is going to receive tomorrow A rupee in ones hand at present is worth same as the rupee that one is going to receive tomorrow All of the given options
Question # 9 of 15 ( Start time: 09:57:59 PM ) Total Marks: 1 Which of the following is NOT true regarding an ordinary annuity? Select correct option: It is a series of equal cash flows Cash flows occur for a specific time period (Correct) Payments are made at the start of each period It is also known as deferred annuity
Question # 10 of 15 ( Start time: 09:58:47 PM ) Total Marks: 1 Which of the following includes the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization? Select correct option:
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Financial accounting Financial management (Correct) Financial engineering Financial budgeting 5:59 PM
Question # 12 of 15 ( Start time: 10:00:31 PM ) Total Marks: 1 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? Select correct option: Sunk cost Opportunity cost Externalities (Correct) Contingencies
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Question # 13 of 15 ( Start time: 10:01:09 PM ) Total Marks: 1 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%? Select correct option: Rs.105,000 Rs.1,500,000 Rs.3975,000 Rs. 350,000
saadkhan545: Question # 14 of 15 ( Start time: 10:02:19 PM ) Total Marks: 1 Which if the following refers to capital budgeting? Select correct option: Investment in long-term liabilities (Correct) Investment in fixed assets Investment in current assets Investment in short-term liabilities
Question # 15 of 15 ( Start time: 10:03:16 PM ) Total Marks: 1 An annuity due is always worth ___ a comparable annuity. Select correct option:
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Less than More than (Correct) Equal to Can not be found from the given information
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Question # 1 of 15 ( Start time: 10:22:47 PM ) Total Marks: 1 The statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? Select correct option: Operating, investing, and financing Investing, operating, and financing (Correct) Financing, operating and investing Financing, investing, and operating
Question # 2 of 15 ( Start time: 10:23:52 PM ) Total Marks: 1 When a bond will sell at a discount? Select correct option: The coupon rate is greater than the current yield and the current yield is greater than yield to maturity
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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 (Correct)
Question # 3 of 15 ( Start time: 10:24:25 PM ) Total Marks: 1 If Net Present Value technique is used, what is the minimum acceptance criterion for a project? Select correct option: NPV<0 NPV=0 NPV>0 NPV<=0 (Correct)
Question # 4 of 15 ( Start time: 10:25:44 PM ) Total Marks: 1 Which if the following refers to capital budgeting? Select correct option: Investment in long-term liabilities Investment in fixed assets (Correct) Investment in current assets Investment in short-term liabilities
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Question # 1 of 15 ( Start time: 10:37:35 PM ) Total Marks: 1 What are the three classes of factors that influence perception? Select correct option: Factors in the setting, factors in the environment and factors in the motives Factors in the perceiver, factors in the target and factors in the situation Factors in the character, factors in knowledge and factors in experience Factors in the personality, factors in the character and factors in the values
Question # 6 of 15 ( Start time: 10:39:02 PM ) Total Marks: 1 Characteristics such as age, gender and marital status are known as _______________
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Psychographic characteristics Biographical characteristics Geographical characteristics Behavioral characteristics
Question # 2 of 15 ( Start time: 10:39:05 PM ) Total Marks: 1 What is the term used for a general impression about an individual based on a single characteristic such as intelligence, sociability, or appearance? Select correct option: The contrast effect Personal bias The halo effect (Correct) Projection
Question # 3 of 15 ( Start time: 10:40:25 PM ) Total Marks: 1 Ability to understand what is read or heard and the relationship of words to each other is called ___________ Select correct option:
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Verbal comprehension (Correct) Non verbal comprehension Perceptual speed Memory
Question # 8 of 15 ( Start time: 10:40:50 PM ) Total Marks: 1 Which of the following is true of people with a Type A personality? Select correct option:
They are generally content with their place in the world They generally feel little need to discuss their achievements They are easy going and relaxed thats why take no tension of work They have an intense desire to achieve and are extremely competitive (Correct)
Question # 4 of 15 ( Start time: 10:41:19 PM ) Total Marks: 1 A person or group with a direct interest, involvement, or investment in organization is called ____________. Select correct option: Shareholder (Correct) Stakeholder
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Stockholder Patron
Question # 5 of 15 ( Start time: 10:42:18 PM ) Total Marks: 1 If a person responds the same way over time, attribution theory states that the behavior shows: Select correct option: Distinctiveness Consensus Consistency (Correct) Continuity
Question # 6 of 15 ( Start time: 10:43:45 PM ) Total Marks: 1 _________ focuses on the study of people in relation to their social environment. Select correct option: Psychology Sociology (Correct) Corporate strategy Political science

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Which of the following term is used to describe broad range of feelings that people experience? Select correct option: Mood (Correct) Affect Emotion Emotional Intelligence
Question # 8 of 15 ( Start time: 10:46:41 PM ) Total Marks: 1 Hanif is dissatisfied with his job but believes that his supervisor is a good man who will do the right thing. Hanif has decided that if he just waits, conditions will improve. Henrys approach to this problem is termed as: Select correct option: Exit Voice Loyalty Neglect (Correct)
Question # 9 of 15 ( Start time: 10:48:11 PM ) Total Marks: 1 Job satisfaction is best described as __________. Select correct option: A result
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A value An attitude (Correct) A discipline
Question # 10 of 15 ( Start time: 10:49:37 PM ) Total Marks: 1 Which of the following theory is proposed by Clayton Alderfer? Select correct option: Theory X and Theory Y Hierarchy of Needs ERG Theory (Correct) Theory Z
Question # 11 of 15 ( Start time: 10:50:24 PM ) Total Marks: 1 Robert Katz identified three essential skills that managers need to have in order to reach their goals. What are these skills? Select correct option: Technical, decisional and interpersonal (Correct) Technical, human, and conceptual Interpersonal, informational and decisional Conceptual, communication and networking
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Question # 12 of 15 ( Start time: 10:51:47 PM ) Total Marks: 1 One of the shortcuts used to judge others involves evaluating a person based on how he/she compares to other individuals on the same characteristic. What is this shortcut called? Select correct option: Selective perception The contrast effect The halo effect (Correct) Stereotyping
Question # 13 of 15 ( Start time: 10:52:24 PM ) Total Marks: 1 Which of the following factors make it imperative that organizations be fast and flexible? Select correct option: Temporariness Corporate excess Advances in corporate strategy Globalization
Question # 14 of 15 ( Start time: 10:53:58 PM ) Total Marks: 1 When Job satisfaction is increased, absenteeism tends to:
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Select correct option: Increase Decrease Have no effect None of the above
Question # 15 of 15 ( Start time: 10:54:48 PM ) Total Marks: 1 Difficulty in expressing emotions by an individual and understanding other's emotions is termed as: Select correct option: Anemia Thalassemia Alexithymia Myopia
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Question # 1 of 15 ( Start time: 10:58:08 PM ) Total Marks: 1 What is the present value of Rs.8,000 to be paid at the end of three years if interest rate is 11%? Select correct option:
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Rs.6,015 Rs.4,872 Rs.6,725 Rs.1,842 6:59 PM
Question # 3 of 15 ( Start time: 11:00:17 PM ) Total Marks: 1 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. Select correct option:
IRR MIRR (Correct) PV NPV
Question # 5 of 15 ( Start time: 11:02:10 PM ) Total Marks: 1 _______ is equal to (common shareholders' equity/common shares outstanding). Select correct option:
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Book value per share Liquidation value per share (Correct) Market value per share None of the above
Question # 7 of 15 ( Start time: 11:03:42 PM ) Total Marks: 1 Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: Select correct option:
Question # 7 of 15 ( Start time: 11:03:42 PM ) Total Marks: 1 Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account: Select correct option:
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Question # 8 of 15 ( Start time: 11:04:28 PM ) Total Marks: 1 Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows? Select correct option: http://vustudents.ning.com Cash flow diagram Cash budget Cash flow statement None of the given options (Correct)
Question # 9 of 15 ( Start time: 11:05:08 PM ) Total Marks: 1 Which of the following is/are the characteristic(s) of Perpetuity? Select correct option:
It is an annuity
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It has no definite end (Correct) It is a constant stream of identical cash flows All of the given options
Question # 10 of 15 ( Start time: 11:06:02 PM ) Total Marks: 1 What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? Select correct option:
Long-term debt Preferred stock Common stock None of the given options (Correct)
Question # 11 of 15 ( Start time: 11:06:58 PM ) Total Marks: 1 What is the most important criteria in capital budgeting? Select correct option:
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Return on investment Profitability index (Correct) Net present value Pay back period
mehak: Question # 12 of 15 ( Start time: 11:08:07 PM ) Total Marks: 1 What is the additional amount a borrower must pay to lender to compensate for assuming the risk associated with non-payment? Select correct option:
Default risk premium Sovereign Risk Premium (Correct) Market risk premium Maturity risk premium
Question # 13 of 15 ( Start time: 11:08:46 PM ) Total Marks: 1 What is the present value of Rs.1,000 to be paid at the end of 5 years if the correct risk adjusted interest rate is 8%? Select correct option:
Rs.714
1138
Rs.1,462 Rs.322.69 Rs.401.98
Question # 14 of 15 ( Start time: 11:10:09 PM ) Total Marks: 1 ______ are also known as Spontaneous Financing. Select correct option:
Current liabilities Current assets (Correct) Fixed assets Long-term liabilities
Question # 15 of 15 ( Start time: 11:11:06 PM ) Total Marks: 1 Effective interest rate is different from nominal rate of interest because: Select correct option:
Nominal interest rate ignores compounding
1139
Nominal interest rate includes frequency of compounding (Correct) Periodic interest rate ignores the effect of inflation All of the given option
1140

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MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Question # 5 of 15 ( Start time: 10:05:42 PM )

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Raw materials Depreciation Bad-debt losses Production labor

Question # 2 Expected Portfolio Return = ___________. Select correct option:

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Standard deviation EPS approach Matrix approach Gordons Approach

Money market Capital market Primary market Secondary market

Cash outflow to the government for taxes

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Raw materials Depreciation Bad-debt losses Production labor

Question # 2 of 10 Expected Portfolio Return = ___________. Select correct option:

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Standard deviation EPS approach Matrix approach Gordons Approach

Money market Capital market Primary market Secondary market

Cash outflow to the government for taxes

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

1. type of risk is avoidable through proper diversification.

portfolio risk systematic risk unsystematic risk total risk

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

coefficient of variation variance covariance certainty equivalent

3. An "aggressive" common stock would have a "beta"

characteristic line security market line capital market line beta

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

risk aversion. risk preference. risk indifference. a strange outlook on life.

8. Beta is the slope of

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

9. A measure of "risk per unit of expected return."

standard deviation coefficient of variation correlation coefficient beta

10. The greater the beta, the

of the security involved.

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Income Capital loss Capital gain Operating income

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Indenture Debenture Bond Bond trustee

Depreciation Sunk cost Opportunity cost Non-cash item

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Select correct option:

Fixed costs Variable costs Debt financing Common equity financing

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Liquidity ratios Debt ratios Coverage ratios Profitability ratios

Question # 1 of 15 ( Start time: 12:09:58 AM ) Total Marks: 1

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank

Larger; Larger Larger; Smaller

MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank