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FINALTERM EXAMINATION
FALL 2006 Marks: 60
ACC501 - BUSINESS FINANCE (Session - 1 ) Time: 120min
StudentID/LoginID:
Student Name:
Center Name/Code:
Exam Date: Saturday, February 03, 2007
Please read the following instructions carefully before attempting any question:
• All questions are compulsory.

• This exam consists of 15 Multiple Choice Questions (MCQ’s), 5 True/False Questions, 5 Fill in the
Blanks,5 Short Questions and 2 Numerical Questions.
• Question No.1-15 are MCQs carrying 1 Mark each, Question No.16-20 are True/False Questions
carrying 1 Mark each, Question No.21-25 are fill in the blanks carrying 1 Mark each, Question
No.26-30 are short questions carrying 3 Marks each and Question No.31-32 are numerical
questions carrying 10 Marks each.
• For each MCQ, read the choices available carefully and select the choice which you consider is the
most suitable, by clicking on the appropriate check box.
• You are required to show all the working of short questions as well as Numerical questions.
• This examination is closed book, closed notes and closed neighbour.
• Do not ask questions about the contents of this examination from anyone.
• The use of calculator and financial tables is allowed.
• You may wish to pace yourself with your own watch, but the Supervisor will be the official time-
keeper of the test.
• Failure to comply with the supervisor’s directions will result in your test being cancelled. Please
comply with supervisor’s directions to avoid any unpleasant event.
For Teacher's use only
Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21 22 23 24 25 26 27 28 29 30
Marks
Question 31 32
Marks
Question No: 1 ( Marks: 1 ) - Please choose one
A series of constant, or level, cash flows that occur at the end of each period for some fixed
number of periods is called a/an:
► Present Value
► Future Value
► Ordinary Annuity
► Ordinary Share
The Ratios showing the ability of a firm to pay its bills in short-run are called:
► Leverage Ratios
► Liquidity Ratios
► Profitability Ratios
► Market Value Ratios
GAAP stands for:
► Generally Accepted Accounting Principles
► Generally All-rounder Accounting Principles
► General Accepting Accounts Principles
► None of the given options

A contract between the bond issuer and bond holder is called:
► Bond Indenture
► Bond Debenture
► Bond Value
Suppose you have a portfolio comprised of two securities X and Y. In the portfolio, 60 shares are
of stock X valued at Rs.10 per share and 40 shares are of stock Y valued at Rs.3 per share. What is
the approximate weight of stock X in the portfolio?
► 23 %
► 40 %
► 60 %
► 83 %
In which market, previously issued securities are traded among investors?
► Primary Market
► Secondary Market
► Tertiary Market
Which of the following is the present value of a series of future net cash flows that will result from
an investment, minus the amount of the original investment?
► Present Value
► Future Value
► Net Present Value
► Terminal Value
You earn a 5 percent real return. If the inflation rate is 4 percent, what is your nominal return?
► 8.96 %
► 9.05 %
► 9.20 %
► 9.92 %
Fee paid to the consultant for evaluating the option of launching a new product will be considered
as:
► Sunk Cost
► Opportunity Cost
► Financing Cost
► Operating Cost
A risk that affects a single or at most a small number of assets is called:
► Unsystematic Risk
► Unique Risk
► Diversifiable Risk
► All of the given options
What will be the payback period of a Rs.70,000 investment with the following cash inflows?
Years Cash flows

1 Rs. 15,000
2 Rs. 20,000
3 Rs. 25,000
4 Rs. 15,000
5 Rs. 5,000
► 3.57 years
► 3.67 years
► 4.57 years
► 4.67 years
Which of the following is the required return on a firm's debt by its creditors?
► Cost of Equity
► Cost of Debt
► Cost of Preferred Stock
► Cost of Capital
Which one of the followings is the overall required return the firm must earn on its existing assets
to maintain the value of the stock?
► AAR (Average Accounting Return)
► IRR (Internal Rate of Return)
► MIRR (Modified Internal Rate of Return)
► WACC (Weighted Average Cost of Capital)
The costs to store and finance the assets are known as:
► Carrying Costs
► Shortage Costs
► Manufacturing Costs
The minimum level of inventory that a firm keeps on hand is called:

► Common stock
► Safety Stock
► Preferred Stock
► Dangerous Stock
Realization Principle is one of the basic principles of GAAP.
► True
► False
Whenever the word Dividend is used, it always refers to a long-term loan.
► True
► False
A preferred dividend is exactly like interest on bond.
► True
► False
By IRR rule, take a project when its IRR exceeds the required return.
► True
► False
Diversification is the group of assets such as stocks and bonds held by investor.
► True
► False
Question No: 21 ( Marks: 1 )

is a special case of Annuity, where the stream of cash flows continues
forever.
is the value of a present amount at a certain date in the future based on a

determined rate of return.
The amount of time required for an investment to generate cash flows sufficient to recover its
initial cost is called its .
refers to the extent to which a firm relies on its debt.
The difference between the return on a risky investment and that on a risk free investment is called
.
What is the difference between Flexible Policy and Restrictive Policy regarding size of investment
in current assets while making short-term financial policy?
Differentiate between Systematic Risk and Unsystematic Risk. Which of them can be eliminated
by diversification?
Suppose common stocks of a company are currently selling for Rs.30 per share. Stock market
analysts estimated a dividend of Rs.2 per share for the next year and it is expected that the dividend
will grow by 10% more or less indefinitely. What return does this stock offer?
A bank is offering 12% interest rate compounded quarterly on its saving account. What would be
the Effective Annual Rate (EAR) ?
“An investment is acceptable if the IRR exceeds the required return. It should be rejected
otherwise.” Explain.

Sumi Inc. has outstanding Rs.1, 000- face –value bond with a 16 percent coupon rate and 6 years
remaining until final maturity. Interest payments are made quarterly. What would be the value of
this bond if your nominal annual required rate of return is : (i) 13 %, (ii) 19 %.
S&T Company just paid a dividend of Rs.2 per share and has a share price of Rs.30. The dividends
are expected to grow @ 10% forever. S&T Company has Rs.75 million in equity and Rs.75 million
in debt in its total capital. The tax rate for the firm is 35% and the Cost of debt is 8%. What will be
the Weighted Average Cost of Capital (WACC) for S&T Company ?
Business finance Virtual University
ACC501-Business Finance
Final Term Special 2006
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1. What is effective annual rate of 9% compounded monthly?

ƒ 9.53%
ƒ 9.38%
ƒ 9.32%
ƒ 9.00%
1. An investment is acceptable if its calculated is less than some

specified number of years.
2. The net credit period for a company with terms of 3/10 net 60 is : ?
3. The main difference between a positive and negative covenant is (are): ?
4. Assume that Younas Corporation, which operates a fleet of ships, is considering

replacing them with a new model. The data in table below are available for the old
and new ships.
Items Old ships New ships

1. cash inflows Rs 120 million p.a Rs 135 millions
2. cash outflows 55 millions p.a 60 millions
3. estimated life 5 years 8 years
Disposal value:
a) at present Rs 20 millions
b) in 8 years time Nill 8 millions
Cost of new ships 175 millions
Required rate of return 15% pa 15% pa
Management is considering two proposals:
A. Replace the old ships now and assume that the new ships are operated for 8 years
and replaced in perpetuity.
B. Replace the old ships in 5 years time and assume that the new ships are operated
for 8 years and replaced in perpetuity.
Which of these proposals should management accept?
Created by
5. The difference between the return on a risky investment and that on a risk free
investment is called………..
6. Which one is an inventory control method?
7. Ntu Corporation has just paid a dividend of Rs 5 per share. The dividend of this
company grows at a steady rate of 12 % per share. Based on the above
information what would be the amount of dividend in 4 years?
8. Cheques written by a firm generates , causing a decrease in the

firm’s book balance but no change in its available balance.
9. Working capital management includes, in part, the administration of cash,

marketable securities, receivables and inventories.(true , false)
10. An agent who arranges securities transaction among investors (matching investors
wishing to buy securities with investors wishing to sell securities) is a: ?
11. Briefly describe the role of finance manager?
12. When analyzing a project one should include sunk costs in the analysis.(true ,
false)
13. Suppose project A has average net income of Rs 150,000 where as its average
book value is Rs 500,000. The average accounting return would be .
14. the project cash flows from a proposed investment are:
Year Cash flow

1 20,000
2 30,000
3 70,000
The project costs Rs 80,000. What is the payback period for this investment?
15. Short term financing is oftenly called the networking capital management.
16. Suppose Mehran Corporation is running a project who’s EBIT are rs 300,000
where as depreciation expense for the year is rs 150,000. Net operating cash flow
from the project is rs 330,000. The total amount of taxes paid during the year
is ?
17. Suppose Mr. Imran khan buy some stock for Rs35 per share. At the end of the
year, the price is Rs 40 per share. During the year, Mr. Imran khan gets an Rs 6
dividend per share. What would be the dividend and capital gains yield and also
the total %age return?
Created by
18. the expression 3/10, net 55 means that customers receive a 10% discount if they
pay within 3 days; otherwise they must pay in full in 55 days.(true , false)
19. Suppose Aslam corporation stock has a dividend yield of 13% whereas it’s total
income return is 28%. The capital gain yield would be ?
20. Rahim Inc. paid Rs 30,000 as tax in 2006. If the tax rate was 40%, what was the
taxable income of the corporation during 2005?
21. consider the following choronological events
Day Activity Cash effect

0 Acquired inventory on credit ……….
30 Pay for inventory Rs 25000
45 Sell inventory on credit ………..
70 Collect on sale Rs 33000
What would be the operating and cash cycle for the organization?
22. Concentration banking is a method of slowing up the collection of checks written

by a firm.(true, false)
23. Suppose you have a portfolio compromised of two securities. You have 60 shares
of the stock X valued at Rs 10 per share and 40 shares of stock Y valued at Rs 3
per share. What is the approximate weight of stock X in the portfolio?
24. Ammar is running a company Ammar and Co. he has asked you to evaluate his
company’s ability to pay bills over the short run without undue stress. For this
purpose you will study which category of ratios of the company?
25. Briefly describe the components of credit policy?
26. are competing projects among which only one can be selected.
27. Suppose BT Corporation has issued preferred stock which paid Rs 25 annually
and sold for RS 200 per share. The cost of preferred stock would be ?
28. You will receive Rs 150,000 after 13 years. What would be the present value of
this amount if the discount rate is 5.75% compounded semi annually?
29. A firm sells 9000 units per month is trying to determine how many units to keep
in inventory. The finance manger has determined that its costs Rs 280 to replace a
new order. The cost of holding inventory is 6 cents per average unit.
• Determine the optimal quantity to be ordered.
• Calculate the total cost, total carrying cost and total restocking cost.
30. is a grant of authority by a shareholder to someone else to vote the

shareholders share.
31. Suppose Mt Corporation has a weighted average cost of capital of 18%. The
financial institutions are ready to lend it a loan at 12%. It has a target capital
structure of 70% equity and 30%debt. The cost of equity would be ?
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FINALTERM EXAMINATION
SPRING 2007 Marks: 60
StudentID/LoginID:
Student Name:
Center Name/Code:
Exam Date: Wednesday, July 11, 2007

• This exam consists of 10 Multiple Choice Questions (MCQ’s), 5 True/False Questions, 3 Short
Questions and 3 Numerical Questions.
• Question No. 1-10 are MCQs carrying 1 Mark each, Question No. 11-15 are True/False
Questions carrying 1 Mark each, Question No.16-18 are short questions carrying 5 Marks each
and Question No. 19-21 are numerical questions carrying 10 Marks each.
• For each MCQ, read the choices available carefully and select the choice which you consider is the
correct one.
• You are required to show all the working of short questions as well as Numerical questions.
• The use of mobile phones in exam center is strictly prohibited.
• A clock has been given in the exam software. Software will automatically be closed after 150
minutes.
• Remember do not spend too much time on any one MCQ. Since all MCQ’s carry equal marks, it is
important to manage your time and responses to test questions effectively.
• This Examination is closed book, closed notes and closed neighbours.
• Failure to comply with the supervisor’s directions will result in your test being cancelled. Please
comply with supervisor’s directions to avoid any unpleasant event.

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21
Marks
The process of planning and managing a firm’s long-term investments is called :
► Planning Process
► Capital Structure
► Capital Budgeting
► Managing Process
Return on Equity (ROE) = x Total Assets Turnover x Equity Multiplier
► Profit Margin
► Total Sales
► Net Income
► Total Equity
If a bank loans out Rs. 10,000 for 90 days at 8% simple interest, the Present Value (PV) will
be :
► Rs. 9,105
► Rs. 9,807
► Rs. 10,325
► Rs. 10,765
The is the rate where NPV (Net Present Value) equals to zero.
► WACC (Weighted Average Cost of Capital)
► IRR (Internal Rate of Return)
► MIRR (Modified Internal Rate of Return)

► AAR (Average Accounting Return)
is adopted to permit minority participation.
► Cumulative Voting
► Straight Voting
► Proxy Voting
► Staggering
Which one of the following statements projects future years’ operations in a summarized
format ?
► Income Statement
► Cash Flow Statement
► Pro Forma Financial Statement

The direct and indirect costs associated with going bankrupt or experiencing financial
distress, are known as :
► Direct Bankruptcy Costs
► Indirect Bankruptcy Costs
► Financial Distress Costs
► All of the given options
Suppose you bought 1,500 shares of a corporation at Rs. 25 each. After a year, you
received Rs. 3,000 (Rs. 2 per share) in dividends. The dividend yield will be :
► 5.00 %
► 8.00%
► 10.00%
► 12.00%
You earn a 7% real return. If the inflation rate is 5 percent, what is your nominal return ?
► 8.96 %
► 9.05 %
► 11.65 %
► 12.35%
The projected cash flows from a project are :
Years Cash flows
1 Rs. 100
2 Rs. 300
3 Rs. 600
4 Rs. 800
The project costs Rs. 1,000. What would be the payback period for the project ?
► 2.00 Years
► 2.67 Years
► 3.00 Years
► 3.67 Years
Sole Proprietorship is a business created as a distinct legal entity owned by one or more
individuals or entities.
► True
► False
The term discounting is associated with Future Value concept whereas the term
compounding is associated with Present Value concept.
► True
► False
Constant Growth Stock is a share of common stock in a company with a constant rate of
dividend.
► True
► False
Portfolio is the group of assets (stocks and bonds) held by an investor.
► True
► False
The difference between bank cash and book cash, representing the net effect of cheques in
the process of clearing is called float.
► True
► False
Following are given cash inflows of a project. Assume that all cash flows are received at
the end of the period.
Period Cash Flows
1 Rs.10,000
2 Rs.15,000
3 Rs.20,000
4 Rs.30,000
5 Rs.35,000
Calculate the future value of cash flows stream at the end of year 5 with a compound
annual interest rate of 10%.
Write down the statements for the followings:

a. NPV (Net Present Value) Rule
b. IRR (Internal Rate of Return) Rule
c. Payback Rule
d. PI (Profitability Index) Rule
e. AAR (Average Accounting Return) Rule
What do M&M Proposition I and Proposition II state ?
Mr. Jamil has Rs. 70,000 that he can deposit in savings accounts of any of three banks A, B
or C for a three years period. Bank A compounds interest on annual basis; Bank B
compounds interest semi-annually (twice each year); and Bank C compounds interest
quarterly (four times each year). All three banks have a stated annual interest rate of 12%.
1. How much Mr. Jamil will have in his account after three years if he deposits
his money in Bank A ?
2. How much He will have in his account after three years if he deposits his
money in Bank B ?
3. How much He will have in his account after three years if he deposits his
money in Bank C ?
4. On the basis of your findings in above parts, describe which bank should
Mr. Jamil deal with and why ?
SNT Company presently paid a dividend of Rs.1.5 per share and has a share price of
Rs.25. The dividends are expected to grow @ 15% forever. SNT Company has Rs.100
million in equity and Rs.75 million in debt in its total capital. The tax rate for the firm is
35% and the Cost of debt is 12%. Calculate the Weighted Average Cost of Capital
(WACC) for SNT Company?
Magi Inc. specializes in toys and receives all income from sales.
Quarters * 1 2 3 4 1 (next year)

Sales (Rs.) 500,000 600,000 650,000 800,000 550,000
* Each quarter consists of 3 months (90 days)
• Accounts Receivable:
o Beginning receivables = Rs. 250,000
o Average Collection Period = 30 days
• Accounts Payable:
o Purchases = 50 % of next quarter’s sales
o Beginning payables = Rs. 125,000
o Accounts Payable Period is 45 days
• Other expenses:
o Wages, taxes and other expenses are 25% of sales
o Interest and dividend payments are Rs. 50,000
o A major capital expenditure of Rs. 200,000 is expected in the second quarter
You are just required to calculate the Cash Collections (Receipts) and Cash Disbursements
(Payments) for four Quarters.
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MIDTERM EXAMINATION
FALL 2006 Marks: 40
StudentID/LoginID:
Student Name:
Center Name/Code:
Exam Date: Wednesday, December 06, 2006

• This exam consists of 10 Multiple Choice Questions (MCQ’s), 5 Fill in the Blanks, 5
Short Questions and 1 Numerical Question.
• You should try to complete MCQ’s in 10 - 15 minutes in order to avail 75 - 80
minutes for the Numerical question.
• For each MCQ, read the choices available carefully and select the choice which you
consider is the most suitable, by clicking on the appropriate circle.
• Save your answer before proceeding to the next question.

• Do not click the “Finish button” while solving your paper. Once you clicked the
“Finish” button, you will not be able to access your paper again. Click it only at
the end after attempting the whole paper, which will be an indication that you
have submitted your complete paper.
• You are required to show all the working of short questions as well as numerical
question in your answers.

• A clock has been given in the exam software. Software will automatically be closed
after 90 minutes.
• It is your responsibility to manage time and responses to test questions effectively.
• Failure to comply with the supervisor’s directions will result in your test being
cancelled. Please comply with supervisor’s directions to avoid any unpleasant
event.

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21
Marks
A major disadvantage of the corporate form of organization is the .
►
Inability of the firm to raise large sums of additional capital
► Double taxation of dividends
► Limited liability of shareholders
► Limited life of the corporate firm
Which one of the following current asset is not treated as a cash flow from operating activities?
► Trade receivable
► Cash and cash equivalent
► Inventory
► Short term investment
Suppose you can earn a 7.2 percent interest rate per year. According to the rule of 72, it will take
approximately years to double your money.
► 5.00
► 7.20
► 10.00
► 100.0
Rahim Corporation has a cash coverage ratio of 7 times. It’s earning before interest and tax is
Rs.900 million. It has total assets of Rs.3 billion. The company has a policy of charging 5 % annual
depreciation. By using the above information, what would be the interest expense for the year?
► 90 million
► 120 million
► 140 million
► 150 million
Suppose ZM Corporation has a debt to equity ratio of 1.50 times. It has the return on assets of
14%. The return on equity would be .
► 25%
► 30%
► 35%
► 40%
Lets Tulips Corporation has return on assets for the year is 14 % .The Corporation has a policy to
retain 40 percent of their income. Then the Corporations internal growth rate would be
.
► 5.246 %
► 5.754 %
► 5.932 %
► 6.589 %
If the interest rate is 24 % compounded quarterly, what would be the 5-year discount factor?
► 3.10585
► 3.20714
► 3.50152
► 3.80153
Suppose you expect to receive Rs.3,000 per year forever. The opportunity rate is 12 %.The present
value of this would be .
► Rs.20,000
►
Rs.23,000
► Rs.25,000
► Rs.28,000
The bonds are classified as if the maturity of the bond is less than 10 years when
issued.
► Term finance certificate
► Debentures
► Notes

is a kind of bond that allows the holder to force the issuer to buy the bond back at a
stated price.
► Convertible bond
► Floating rate bond
► Income bond
► Put bond
A is responsible for managing cash and raising finances for the business.
Current ratio and quick ratio of a firm will be equal if its current assets do not contain
.
Coupon rate has a floor and a ceiling. These upper and lower rates are also called
.
is that part of the indenture or loan agreement that limits certain actions which a
company might wish to take during the term of the loan.
The relationship between the real and nominal returns is described by the .
Discuss the significance of financial statements.
What is underwriting contract? Discuss in detail.
How much an investor has to invest a lump sum amount in order to have Rs.3 million in 20 years
from now if the rate of interest is 16 % compounded quarterly?
Draw a time line for the annuity due of Rs.900 for 6 years. Also, describe the relationship between
an ordinary annuity and annuity due with the help of equation.
Mr. Martin is considering the purchase of land for Rs.650, 000, which may be sold for Rs.850, 000
in 7 years. If the discount rate is 16% compounded quarterly, will this be a good investment?
Mr. Imran has Rs.150, 000 in cash that he can deposit in any of four savings accounts in four
different banks for a 7 year period. Bank A compounds interest on an annual basis; Bank B
compounds interest twice each year; Bank C compounds interest each quarter and Bank D
compounds interest on daily basis. All four banks have a stated annual interest rate of 12%.
Required:
a. What amount would Mr. Imran have at the end of 7th year in each bank?
b. What effective annual interest rate would he earn in each of the four banks?
c. On the basis of your findings in a and b, which bank should Mr. Imran deal with? and
Why?
ACC501 Business Finance

Mid Term Examination – Spring 2006
Time Allowed: 90 Minutes
Please read the following instructions carefully before attempting any

question:
• This exam consists of 10 Multiple Choice Questions (MCQ’s), 5 Fill in the Blanks, 5 Short
Questions and 1 Descriptive Question.
• You should try to complete MCQ’s in 10 - 15 minutes in order to avail 75 - 80 minutes for
the descriptive questions.
• For each MCQ, read the choices available carefully and select the choice which you
consider is the most suitable, by clicking on the appropriate circle.
• Save your answer before proceeding to the next question.
• Do not click the “Finish button” while solving your paper. Once you clicked the “Finish”
button, you will not be able to access your paper again. Click it only at the end after
attempting the whole paper, which will be an indication that you have submitted your
complete paper.
• You are required to show all the working of short questions as well as descriptive question
in your answers.
• A clock has been given in the exam software. Software will automatically be closed after
90 minutes.
• It is your responsibility to manage time and responses to test questions effectively.

• Failure to comply with the supervisor’s directions will result in your test being cancelled.
Please comply with supervisor’s directions to avoid any unpleasant event.
Question No. 1 Marks : 1
The ratio is the same as the ratio

except inventories and "other current assets" are dropped from the numerator.
The growth that can be financed without resorting to any external equity financing is
called the
Financial institutions facilitate individuals and firms in:
Borrowing
Lending
pooling of risks
all of the given options
are issued by state and local governments.
Treasury bonds
Municipal bonds
Corporate bonds
Personal bonds
You are expecting to receive Rs.5000 in 3 years. If the interest rate increases, the
present value of that future amount to you would:
Fall
Rise
remain unchanged
cannot be determined without more information
is not the function of the treasurer:
Preparation of financial statements

Investor relationships
Cash management
Obtaining finances
Sara is interested in purchasing Tom's factory. Since Sara is a poor negotiator, she
hires Maria to negotiate a purchase price. Identify the parties to this transaction from
the given options, according to agency theory:
Sara is the agent.

Maria is the principal.
Tom is the agent and Maria is the principal
Sara is the principal and Maria is the agent.
Purchasing new machinery for expanding production capacity by a corporation is
CVP Corporation has a policy of paying a $10 per share dividend every year. This
policy is to continue indefinitely. What is the value of a share of stock if the required
rate of return is 20%?
A constant stream of cash flows for a limited number of years coming at regular
intervals is called a (an) .
is not an advantage of separation of ownership and

management of corporations.
Corporations can exist forever.
Facilitate transfer of ownership without affecting the operations of the firm
Hire professional managers
Incur agency costs
Mr. Martin has $20,000 that he can deposit in savings accounts of any of three banks
for a three year period. Bank A compounds on an annual basis; Bank B compounds
interest twice each year; Bank C compounds interest each quarter. All three banks
have a stated annual interest rate of 4%.
Required:
a. What amount would Mr. Martin have at the end of 3rd year in each bank?
(Marks: 08)
b. On the basis of your findings in part a, describe which bank should Mr. Martin
deal with and why? (Marks: 02)

A firm is having difficulty in controlling its operating expenses. Which ratio category
in given options will most directly reflect this problem?
Liquidity
Profitability
Market value
Turnover
A firm's investment decision is also called the:

financing decision
capital budgeting decision
liquidity decision
debt financing
Why would you prefer corporate form of organization over other forms of business
organizations? Discuss giving at least three arguments.

What is an agency relationship? Describe the reason that results in agency problem.
Suppose a Corporation has a taxable income of Rs.50000 and the tax amount
calculated is as given below:
Rs.30000 x 5% = Rs.1500
(Rs.40000 – 30000) x 10% = 1000
(Rs.50000 – 40000) x 15% = 1500
Rs.4000
Total tax amount is Rs.4000. Average tax rate is Rs.4000 / 50000 = 8.0%. Marginal tax
rate will be:
D 39%
D 34%
D 15%
D 25%
What do you understand by seniority in a bond indenture?
What are the three factors that affect Return on Equity, according to Du Pont Identity?
In context of inflation and returns, the relationship between real and nominal returns
is described by:
Fisher Effect
Ricardo Effect
Robbins Effect
Fredrick Effect
Debt securities issued by corporations are called .

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MIDTERM EXAMINATION
SPRING 2007 Marks: 40
StudentID/LoginID:
Student Name:
Center Name/Code:
Exam Date: Saturday, May 12, 2007
ƒ All questions are compulsory.
ƒ This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 True/False of 1
mark each, 3 Short questions of 5 marks each and 1 comprehensive Numerical of 10 marks.
ƒ For each Multiple Choice Question, read the options available and select which you consider is the
correct one.
ƒ You are required to show all the working of short as well as practical question.
ƒ Use of calculator is allowed.
ƒ This examination is closed book, closed notes and closed neighbours.
ƒ Do not ask question about the contents of this examination from anyone.
ƒ You may wish to pace yourself with your own watch, but the Supervisor will be the official
timekeeper of the test.
ƒ Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please
comply with supervisor’s directions to avoid any unpleasant event

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19
Marks
Question
Marks
The Ratios showing the ability of a firm to pay its bills in short-run are called:
► Leverage Ratios
► Liquidity Ratios
► Profitability Ratios
► Market Value Ratios
Evaluating the size, timing and risk of future cash flows is the essence of :
► Capital Budgeting
► Capital Structure
► Inventory Control
Sumi Corporation is dealing in furniture industry. It has an equity multiplier of 1.78

times. The debt to equity ratio would be:
► 0.38 times
► 0.58 times
► 0.78 times
► 0.98 times
involves the sale of used securities from one investor to another.
► Primary Market
► Secondary Market
► Tertiary Market

SNT Corporation paid Rs. 28,900 as tax in 2006. If the tax rate was 34%, what was the
taxable income of the corporation during 2006?
► Rs. 90,000
► Rs. 85,000
► Rs. 65,000
► Rs. 77,000
pays no coupon at all and is offered at a price that is much lower than its
stated value.
► Government Bond
► Floating Rate Bond
► Zero Growth Bond
Which of the following statement provides a financial summary of the firm’s operating
results during a specified period.
► Balance Sheet
► Income Statement
► Cash Flow Statement
► Retained Earning Statement

Depreciation expense does not reflect a cash outflow but still shown as an expense on the
income statement to serve as a:
► Cash inflow
► Cash outflow
► Tax Shield
► Interest Shield
Investors demand extra yield on a taxable bond as a compensation for the unfavorable tax
treatment, known as:
► Taxability premium
► Inflation premium
► Interest Rate Risk Premium

If you invest Rs. 150 in a bank on an interest rate of 14%. How much will you have in
your account after 5 years ?
► Rs. 78
► Rs.163
► Rs. 207
► Rs. 289
A series of constant, or level, cash flows that occur at the end of each period for some
fixed number of periods is called Perpetuity.
► True
► False
A dollar in hand today is worth more than a dollar promised at some time in future.
► True
► False
Profit Margin is calculated by dividing Net Income over Sales.
► True
► False
While making Common Size Statements, Balance sheet items are shown as a percentage
of total liabilities.
► True
► False
Present value of all the cash inflows can be calculated by compounding each cash flow
separately.
► True
► False
Cash Flows for a project are given below:
Period Cash Flows

1 Rs.8,000
2 Rs.12,000
3 Rs.20,000
4 Rs.35,000
5 Rs.40,000
Compute the Future Value of cash flow stream of project at the end of year 5 with a
compound annual interest rate of 14%.
Explain the difference between Simple Interest & Compound Interest with the help of
example.

A company has total annual sales (25% on cash basis) of Rs.3,000,000 and a gross profit
margin of 20 %. Its current assets are Rs. 500,000; current liabilities are Rs. 340,000;
inventories are Rs. 260,000; and cash is Rs. 60,000.
Calculate:
(a) How much average inventory should be carried if management wants the inventory
turnover to be 5 times? and
(b) How rapidly (in how many days) must accounts receivable be collected if
management wants to have an average of Rs.240,000 invested in receivables? (Assume a
365-day year.)
ST manufacturing company is offering the following bonds for issue. Calculate the value
of each bond.
Bond Par Value Coupon Rate Years to Maturity Req. Stated

(Rs.) (%) (Years) Return (%)
A 1,000 7 12 8
B 500 12 15 10
C 100 16 20 12
Note :
>> In case of Bond A, interest payments are made annually
>> In case of Bond B, interest payments are made semi-annually
>> In case of Bond C, interest payments are made quarterly

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Exam Date: Saturday, February 03, 2007

• All questions are compulsory.

• This examination is closed book, closed notes and closed neighbour.

• The use of calculator and financial tables is allowed.

Question No: 1 ( Marks: 1 ) - Please choose one

Question No: 2 ( Marks: 1 ) - Please choose one

► Market Value Ratios

Question No: 3 ( Marks: 1 ) - Please choose one

GAAP stands for:

► Generally Accepted Accounting Principles

► Generally All-rounder Accounting Principles

► General Accepting Accounts Principles

► None of the given options

Question No: 4 ( Marks: 1 ) - Please choose one

► None of the given options

Question No: 5 ( Marks: 1 ) - Please choose one

Question No: 6 ( Marks: 1 ) - Please choose one

In which market, previously issued securities are traded among investors?

► None of the given options

Question No: 7 ( Marks: 1 ) - Please choose one

► Net Present Value

Question No: 9 ( Marks: 1 ) - Please choose one

Question No: 10 ( Marks: 1 ) - Please choose one

A risk that affects a single or at most a small number of assets is called:

► All of the given options

Question No: 11 ( Marks: 1 ) - Please choose one

Years Cash flows

Question No: 12 ( Marks: 1 ) - Please choose one

► Cost of Preferred Stock

Question No: 13 ( Marks: 1 ) - Please choose one

► AAR (Average Accounting Return)

► IRR (Internal Rate of Return)

► MIRR (Modified Internal Rate of Return)

► WACC (Weighted Average Cost of Capital)

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

► None of the given options

Question No: 15 ( Marks: 1 ) - Please choose one

The minimum level of inventory that a firm keeps on hand is called:

Question No: 16 ( Marks: 1 ) - Please choose one

Realization Principle is one of the basic principles of GAAP.

Question No: 17 ( Marks: 1 ) - Please choose one

Whenever the word Dividend is used, it always refers to a long-term loan.

Question No: 18 ( Marks: 1 ) - Please choose one

A preferred dividend is exactly like interest on bond.

Question No: 19 ( Marks: 1 ) - Please choose one

Question No: 20 ( Marks: 1 ) - Please choose one

Question No: 21 ( Marks: 1 )

Question No: 22 ( Marks: 1 )

is the value of a present amount at a certain date in the future based on a

Question No: 23 ( Marks: 1 )

Question No: 24 ( Marks: 1 )

refers to the extent to which a firm relies on its debt.

Question No: 25 ( Marks: 1 )

Question No: 26 ( Marks: 3 )

Question No: 27 ( Marks: 3 )

Question No: 28 ( Marks: 3 )

Question No: 29 ( Marks: 3 )

Question No: 30 ( Marks: 3 )

Question No: 31 ( Marks: 10 )

Question No: 32 ( Marks: 10 )

1. What is effective annual rate of 9% compounded monthly?

1. An investment is acceptable if its calculated is less than some

3. The main difference between a positive and negative covenant is (are): ?