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INSTRUCTIONS
Please read the following instructions carefully before attempting any question:
1. This exam consists of 5 Multiple Choice Questions (MCQs), 5 short questions and 1
descriptive question.
2. Each MCQ carries 2 Marks; each short question carries 5 Marks and Descriptive Question
carry 15 Marks.
3. The use of calculator is allowed.
4. The use of Financial Tables is allowed.
5. For each MCQ question, read the choices available and select the choice which you
consider is the correct answer, by clicking on the appropriate check box.
6. Save your answer before proceeding to the next question.
7. 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 at the end of your paper.
That means you have submitted your complete paper.
8. A clock is given in the exam software. Software will automatically be closed at the end of
90 minutes.
9. Remember not to spend too much time on any one MCQ. Since all MCQs carry equal
marks, it is important to manage your time and response to test questions effectively.
10. 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.
What is advocated by the bird in hand theory regarding the dividend policy?
Suppose you borrow $12 and promise to pay it back over twelve months in monthly
installments. If the interest rate were positive, your payment would be:
The firm's Market is stable, and it expects no growth, so all the earnings are paid out as
dividends. The debt consists of perpetual bonds.
a. What is the total market value of the firm's stock, S, its price per share Po and the firm's
total market value?
What is the difference between present value and net present value?
How can investors reduce the variability of returns in their investment portfolio?
What is the difference between the Pure MM model and traditionalist view?
What financial statement measures the amount of profits generated by a firm over a given
period of time?
1 Statement of cash flow
2 Balance sheet.
3 Income statement or profit and loss statement.
4 Operating Income Statement.
How would a firm use its calculated weighted average cost of capital of 12.5 percent?
FINALTERM EXAMINATION
FALL 2006 Marks: 60
MGT201 - FINANCIAL MANAGEMENT (Session - 2 ) Time: 120min
StudentID/LoginID: ______________________________
Please read the following instructions carefully before attempting any question:
• For each MCQ, read the choices available carefully and select the choice which you consider is the
most suitable.
• Do not ask any question about the contents of this examination from anyone.
• You may wish to pace yourself with your own watch, but the Supervisor will be the official
timekeeper 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.
► (B). Ratio analysis is a great tool, because it allows a firm to be fairly compared to
any other company.
► Price appreciation
► Annuity due
► Deferred annuity
► Perpetuity
► A building
► Bonds
► Inventories
► Equipment
Which of the following is not a factor that business risk is dependent upon?
Which of the following cost of capital factors, firms can NOT control?
► Investment policy
► Dividend policy
► Bank loans
► Accrued wages
► Accounts payable
According to the hedging approach to financing, seasonal variations in current assets should be
financed with:
► Short-term debt.
► Retained earnings.
► Common stock.
► Long-term debt.
The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is
called the:
► Financial risk.
► Operating leverage.
► Business risk.
Which of the following would appear as liability in the balance sheet of a company?
Suppose you know that your firm is facing relatively poor prospects but needs new capital. If you
also know that investors do not have this information, signaling theory would predict that you
would:
► (B). Issue equity to share the burden of decreased equity returns between old and new
shareholders.
► True
► False
► True
► False
The spot rate is simply the exchange rate between two currencies as determined by the respective
governments.
► True
► False
► True
► False
► True
► False
A ----------- merger takes place when firms operating in same industries combine together.
------------ refers to the amount of a company’s annual dividend expressed as a percentage of the
current price of the share of that company.
Optimal capital structure refers to the particular combination of debt and equity finances that
minimizes the ---------------while maximizing the----------.
A corporation just paid a dividend of Rs.2. Its stocks have a required rate of return of 13% and
investors expect the dividend to grow at a constant 5% rate in the future. Calculate the intrinsic
value (Present value) of the Corporation’s stocks.
An investor places 60% of his funds in Security A and the balance in Security B. The expected
returns on A and B are 15% and 20%, respectively. The standard deviations of returns on A and B
are 20% and 15% respectively. Calculate the expected return on the portfolio.
A firm may pursue an aggressive, moderate or a conservative working capital financing policy.
Discuss these three working capital financing policies briefly:
Suppose your firm is considering an investment project that has a cost of Rs.1 million and is
expected to generate an annual after-tax cash flow of Rs.250,000 for five years. You have already
spent Rs.50,000 in research and development costs for the project. If the firm's required rate of
return is 14 percent, what is the NPV and pay back period of this project? Comment on the
financial viability of the project.
Under the prevailing market conditions, financial analysts have estimated a risk free rate of return
β
of 10% and a market rate of return of 14%. The corporation’s common stocks have a beta ( ) of
1.5. Bonds carry an interest rate of 9.5%. Preferred stocks has a return of 10% p.a. corporate tax
rate is 40%. Compute the present weighted average cost of capital of the corporation.
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FINALTERM EXAMINATION
FALL 2007 Marks: 60
MGT201 - FINANCIAL MANAGEMENT (Session - 5 ) Time: 150min
StudentID/LoginID: ______________________________
► Ordinary Annuity
► Annuity Due
► Perpetuity
____________ is the amout of other goods and services that must be given up to get
something.
► Opportunity Cost
► Sunk Cost
► Administrative Cost
► Operating Cost
The term _______________ refers to the measure of the spread or dispersion of a set of
data.
► Variance
► Covariance
► Standard Deviation
Business risk stems from the operation and the assets of the firm. These may be caused
by:
Which of the following show(s) all possible risk-return combinations for all combinations
of stocks in the portfolio?
► Parachute Graph
► Efficient Frontier
► Financial Leverage
► The mix of the various types of debt and equity capital maintained by a firm
► Permanent; permanent
► Temporary; temporary
► Permanent; temporary
► Temporary; permanent
► Gordon’s Formula
► SML Equation
Question No: 11 ( Marks: 1 ) - Please choose one
► High; high
► Low; low
► High; low
► Low; high
► Technology Based
► Outsourcing
► Financial Lease
► Operating Lease
► Functional Lease
► True
► False
► True
► False
Business Risk is defined as the risk faced by common stockholders if firm takes debt.
► True
► False
Technology based inventory management policy states that supplies arrive just a few
hours before they are used.
► True
► False
► True
► False
_______________ is the discount or interest rate at which the net present value of an
investment is equal to zero.
Two common stocks A and B have beta ( β ) values of 0.70 and 1.50 respectively. Using
capital asset pricing model (CAPM) compute the required rate of return for both the
stocks if risk free rate is 9% and the market risk premium is 6%.
What is the relation between bond prices and interest rates ? Under what market
conditions a bond would be selling at premium, at par or at a discount ?
SNT Corporation has a bond issue outstanding with an annual coupon rate of 7 percent
and 4 years remaining until maturity. The par value of the bond is Rs. 1,000.
Required:
(i) Determine the current value of bond if present market conditions justify a 14
percent required rate of return. The bond pays interest annually.
(ii) What would be the current value at the same required rate of return if there are
10 years remaining until maturity?
Under the prevailing market conditions, financial analysts have estimated a risk free rate
of return of 12% and a market rate of return of 15%. The corporation’s common stocks
have a beta ( β ) of 1.25. Bonds carry an interest rate of 9.5%. Preferred stocks have a
return of 10% p.a. and corporate tax rate is 40%. Compute the present Weighted Average
Cost of Capital (WACC) for Sumi Inc.
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INSTRUCTIONS:
If interest expenses for a firm rise, we know that firm has taken on more
______________.
o Financial Leverage
o Operating Leverage
o Fixed Assets
o None of the given options
Question No. 2 Marks : 05
Capital _____________ is the term that means the size of the capital budget is
constrained.
o Fractioning
o Rationing
o Budgeting
o Cost
What are the General Advantages of Leasing from Lessee's (Borrower / user) Point
of View?
From the given options, select the optimal capital structure for a company:
b. What happens to the breakeven quantity if fixed cost of the company rises to
Rs.600? Show the calculations and interpret the result.
c. What will be operating leverage of the firm when fixed cost is Rs.500 and when fixed
cost is Rs.600 at the breakeven quantity calculated in part (a), show all the
calculations involved? What conclusion can you draw about the relationship between
operating leverage and breakeven quantity from your answers?
o Conglomerate
o Co generic
o Horizontal
o Vertical
o Euro
o Exchange Rate
o Spot Rate
o Forward Rate
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Connecting VU Students
FINAL TERM EXAMINATION
Total Marks: 50
SEMESTER SPRING 2005
MGT201-Financial Management(Paper 3) Duration: 120 min
Student ID/Login
ID
Name
PVC Name/Code
Date
INSTRUCTIONS:
Please read the following instructions carefully before attempting any question:
• This exam consists of 5 Multiple Choice Questions (MCQs) carrying 2 marks each, 5 Short questions carrying 5 marks
each and 1 Descriptive questions carrying 15 marks.
• You are required to show all the working of short questions as well as Descriptive question.
• Do not ask any questions about the contents of this examination from anyone.
• You may wish to pace yourself with your own watch, but the Supervisor will be the official timekeeper 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.
If two projects are completely independent (or unrelated), the measure of correlation between them is:
a. 0
b. 0.5
c. 1
d. -1
A company estimates that an average-risk project has a WACC of 10 percent, a below-average risk project
has a WACC of 8 percent, and an above-average risk project has a WACC of 12 percent. Which of the given
independent projects should the company accept?
a. Project A has average risk and a return of 9 percent.
b. Project B has below-average risk and a return of 8.5 percent.
c. Project C has above-average risk and a return of 11 percent.
d. All of the given options of projects should be accepted.
Financial statements that forecast the company’s financial position and performance over a period of years
are called:
a. Strategic mission financial statements.
b. Pro forma financial statements.
c. Corporate purpose financial statements.
d. Realized financial statements.
How might increasingly volatile inflation rates, interest rates and bond prices affect the optimal capital
structure for corporations?
Descriptive Question
Currently under consideration is a project with a beta of 1.50. At this time, the risk free rate of return is 7% and the
return on the market portfolio of assets is 10%.The project is actually expected to earn an annual rate of return of
11%.
a. If the return on the market portfolio were to increase by 10%, what would be expected to happen to the
project’s required return? What if the market return were to decline by 10%?
b. Use the CAPM to find the required return on this investment.
c. On the basis of your calculations in b, would you recommend this investment? Why or why not?
d. Assume that as a result of investors becoming less risk – averse, the market return drops by 1% to
9%.what impact would this change have on your response in b and c?
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FINALTERM EXAMINATION
SPRING 2007 Marks: 60
MGT201 - FINANCIAL MANAGEMENT (Session - 3 ) Time: 150min
StudentID/LoginID: ______________________________
Please read the following instructions carefully before attempting any question:
• Do not ask question about the contents of this examination from anyone.
• You may wish to pace yourself with your own watch, but the Supervisor will be the official
timekeeper 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.
► The book value of the firm's assets less the book value of its liabilities
An investor who is attempting to compare equally risky certificates of deposit (CD) investments
with different compounding periods per year should compare the _________ interest rate for each
investment.
► Annual
► Effective annual
► Periodic
► Nominal
Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in an account paying
12 percent compounded annually. You accumulate at the end of 10 years an amount closest to
► Rs.22,456
► Rs.35,098
► Rs.28,324
► Rs.20,324
If a company issues a preferred stock of Face Value Rs. 10 and the board of directors announce
annual dividend of Rs. 2 per share. What would be the required rate of return?
► 20%
► 20.5%
► 19%
► 21%
► Capital
► Money
► Real asset
► Efficient
According to portfolio theory there is ______________ relation between risk and return.
► No
► Direct
► Inverse
Which of the following problems, for a firm may emerge due to rumors of bankruptcy?
► Suppliers will refuse to supply raw material
► Equal to
► Less than
► Greater than
A major shortcoming of the payback method is that it ignores cash flows after the payback period.
► True
► False
► True
► False
► True
► False
In general, the shorter the maturity schedule of a firm's debt, the lower the risk that it will be
unable to meet its debt obligations.
► True
► False
► True
► False
“Financial leverage and operating leverage have a similar effect on ROE (Return On Equity) of a
firm”. Discuss?
From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it
ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?
A Manufacturing concern has fixed costs (e.g., depreciation) of Rs 50,000 directly attributable to
producing a particular product. The product sells for Rs 5 a unit and variable costs are Rs 2.00 per
unit. What is the break-even point in units produced?
Suppose Ford Motor Company sold an issue of bonds with a 10 year maturity, an Rs 1,000 par
value, a 10% coupon rate, and annual interest payments. Two years after the bonds were issued, the
going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?
► Rs.800
► Rs.1,000
► Rs.12,500
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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
o m
► Both bonds will decrease in value, but bond A will decrease more than bond B
c
► Both bonds will decrease in value, but bond B will decrease more than bond A
.
ng
Question No: 7 ( Marks: 1 ) - Please choose one
i
Given no change in required returns, the price of a stock whose dividend is constant
.t n
will__________.
► Remain unchanged
n a
► Decrease over time at a rate of r%
a n
► Increase over time at a rate of r%
► Decrease over time at a rate equal to the dividend growth rate
u j
Question No: 8 ( Marks: 1 ) - Please choose one
/ v
For most firms, P/E ratios and risk_________.
:/
► Will be directly related
tt p
► Will have an inverse relationship
► Will be unrelated
h
► Will both increase as inflation increases
► A probability distribution
► The expected return
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► The standard deviation
► Coefficient of variation
► Beta
► Expected return
/
► Coefficient of variation
► Variance
o m
Question No: 12 ( Marks: 1 ) - Please choose one
. c
ng
Why companies invest in projects with negative NPV?
i
.t n
n a
a n
► Because there is hidden value in each project
► Because they have chance of rapid growth
u
► All of the given options j
► Because they have invested a lot
/ v
:/
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
tt p
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%
h
► 26.0%
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► All of the given options
i
► If the market moves up by 10% the stock will move up by 12%
.t n
► As the market moves the stock will move in the same direction
► All of the given options
n a
Question No: 18 ( Marks: 1 ) - Please choose one
n
If stock is a part of totally diversified portfolio then its company risk must be equal to:
a
►0
► 0.5
u j
►1
/ v
:/
► -1
tt p
Question No: 19 ( Marks: 1 ) - Please choose one
If risk and return combination of any stock is above the SML, what does it mean?
h
► 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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► Inversely proportional to its standard deviation
discussions and many more.
► Proportional to its standard deviation
/
► Proportional to its beta coefficient
o m
.c
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?
n g
i
.t n
► Parachute graph
► CML straight line equation
► Security market line
► All of the given options
na
a n
Question No: 24 ( Marks: 1 ) - Please choose one
by a firm?
u j
What should be used to calculate the proportional amount of equity financing employed
/ v
► 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
tt p
► The current market price per share of common stock times the number of shares
Outstanding
h
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
► Premium
► Discount
► Both premium and discount
► None of the given options
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► 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
i
.t n
Question No: 29 ( Marks: 1 ) - Please choose one
Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The
► 3.33
► 1.25
a n
► 1.14
u j
► There is not sufficient information provided to calculate the degree of operating
leverage (DOL).
/ v
:/
Question No: 30 ( Marks: 1 ) - Please choose one
tt p
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%
h
► 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: 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
o m
true?
. c
Which of the following statements regarding the M&M Propositions without taxes is
ng
► The total value of the firm depends on how cash flows are divided up between
i
stockholders and bondholders, under M&M Proposition I.
.t n
► 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.
n a
► The cost of equity rises as the firm increases its use of debt financing under
M&M Proposition II.
a n
u j
Question No: 35 ( Marks: 1 ) - Please choose one
Which one of the following is correct for the spot exchange rate?
/ v
► 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
tt p
► This is the rate today for exchanging one currency for another at a specific
h
location on a specific future date
► This is the rate today for exchanging one currency for another at a specific
location for immediate delivery
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► Leveraged buyout (LBO)
► Spin-off
► Consolidation
M
► 40 cars
► 71 cars O
► 100 cars
► 126 cars
g .C
Question No: 39 ( Marks: 1 ) - Please choose one
i n
.t n
As the amount of __________ increases the present value of net tax-shield
benefits of debt increases.
► Debt
n a
► Common equity
an
► Preffered equity
► Assets
u j
. v
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?
W
► Expected return on assets increases
W
► Present value of the interest tax shield is greater
► Equity tax shield is depleted
W
► Probability of default and/or bankruptcy is greater
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(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?
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.
M
O
Question No: 43 ( Marks: 10 )
g .C
Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has a beta
n
of 1.25. The risk free rate is 10% and the expected market return is 18%.
i
a. Find the expected return on stock X
.t n
b. Find the expected return on stock Y
n a
c. Find the expected return on stock Z
an
u j
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% . v
rRF = 10%
β = 0.5 W
W
r = rRF + ( rM + rRF ) β
= 10% + (18%-10%) 0.5
W
= 10% + 4%
= 14%
b. rM = 18%
rRF = 10%
β = 1.00
r = rRF + ( rM + rRF ) β
c. rM = 18%
rRF = 10%
β = 1.25
r = rRF + ( rM + rRF ) β
= 10% + (18%-10%) 1.25
= 10% + 10%
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= 20%
d. Beta of portfolio = βP = X βX + Y βY + Z βZ
= (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 M
= 0.9 O
g .C
i n
Question No: 44 ( Marks: 10 )
.t n
The ABC company is in the 35% marginal tax bracket. The current market value
a
of the firm is Rs. 12 million. If there are no costs to bankruptcy:
n
n
What will be ABC’ annual tax savings from interest deductions be if
a
be the value of the firm?
u j
it issues Rs. 2 million of five years bonds at 12 % interest rate? What will
. v
ANSWER: Annual Coupon payment each yr = 12% of 2,000,000
= 2000000 x 12/100
W
Tax saving for 5 yrs = 5(35 % of 24000)
= 24000
W
= 5(24000 x 35/100)
= 5x8400
W= 42000
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Question No: 45 ( Marks: 10 )
Using the Capital Asset Pricing Model (CAPM), determine the required return on
equity for the following situations:
g .C
ANSWER: Required return= r = rRF + ( rM + rRF ) β
Where rRF = risk free return
i n
rM = expected return on market
β = beta of stock .t n
1. rM = 16%
n a
rRF = 12%
an
β = 1.00
r = rRF + ( rM + rRF ) β
u j
= 12% + (16%-12%)1.00
= 12% + 4%
= 16% . v
W
2.
W
rM = 18%
rRF = 8%
W
β = 0.80
r = rRF + ( rM + rRF ) β
= 8% + (18%-8%)0.80
= 8% + 8%
= 16%
3. rM = 15%
4. rM = 17%
rRF = 13%
β = 1.20
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r = rRF + ( rM + rRF ) β
= 13% + (17%-13%)1.20
= 13% + 4.8%
= 17.8%
5. rM = 20%
rRF = 15%
β = 1.60
r = rRF + ( rM + rRF ) β
= 15% + (20%-15%) 1.60 M
= 15% + 8% O
= 23%
g .C
GENERALIZATION: As beta of stock rises the return on stock also rises.
i n
.t n
n a
an
u j
. v
W
W
W
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
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► An operating
► Both financial & operating lease
► None of the given options
Among the pairs given below select a(n) example of a principal and a(n) example of an agent
respectively.
► Shareholder; manager
► Manager; owner M
O
► Accouor ntant; bondholder
► Shareholder; bondholder g .C
i n
Question No: 3 ( Marks: 1 ) - Please choose one
.t n
n a
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
an
► Rs.4,872
► Rs.6,725
u j
► Rs.1,842 . v
Question No: 4 W
( Marks: 1 ) - Please choose one
W
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
W
► Rs.715
► Rs.556
► Goes down
► Goes up
► Stays the same
► Can not be found
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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
► Rs.109.39
► Rs.104.72
M
capital budgeting technique that is NOT considered as discounted cash flow method is:
A
O
► Payback period
► Internal rate of return
► Net present value g .C
► Profitability index
i n
Question No: 8 ( Marks: 1 ) - Please choose one
.t n
n a
which of the following situations you can expect multiple answers of IRR?
In
an
► 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
u j
. v
► During the life of project if you have any net cash outflow
W
► All of the given options
W
value of a bond is directly derived from which of the following?
The
► Cash flows
► Coupon receipts
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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
. v
► The coupon rate is less than the current yield and the current yield is greater than the
yield to maturity
W
► The coupon rate is less than the current yield and the current yield is less than yield to
maturity
W
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
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
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Question No: 15 ( Marks: 1 ) - Please choose one
.t n
index
► All of the given options
an
stock is a part of totally diversified portfolio then its company risk must be equal to:
If
►0
u j
► 0.5
►1 . v
► -1
W
Question No: 18
W ( Marks: 1 ) - Please choose one
W
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
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Which of the following can be used to calculate the risk of the larger portfolio?
► Standard deviation
► EPS approach
► Matrix approach
► Gordon’s Approach
M
Market risk is measured in terms of the ___________ of the market portfolio or index.
► Variance
► Covariance
O
► Standard deviation
► Correlation coefficient
g .C
Question No: 22 ( Marks: 1 ) - Please choose one
i n
.t n
If 2
stocks move in the same direction together then what will be the correlation coefficient?
n a
►0
► 1.0
an
► -1.0
► 1.5
u j
Question No: 23 ( Marks: 1 ). v- Please choose one
W
Which of the following is NOT the cost of equity?
W
► The minimum rate that a firm should earn on the equity-financed part of an investment
► Generally lower than the before-tax cost of debt
W
► It is the most difficult cost component to estimate
► None of the given options
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
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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
M
► 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
O
► It is the net income of the firm less a dollar cost that equals the WAAC only
► None of the given options
g .C
Question No: 27 ( Marks: 1 ) - Please choose one
i n
.t n
Upon which of the following a firm's degree of operating leverage (DOL) depends primarily?
► Sales variability
► Level of fixed operating costs
n
► Closeness to its operating break-even pointa
► Debt-to-equity ratio
an
Question No: 28 ( Marks: 1 )
j
- Please choose one
vu
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%
W
► 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%
W
► If sales rise by 1% at the firm, then EBIT will rise by 3.5%
Question No: 29
W ( Marks: 1 ) - Please choose one
► 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
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► 2.2
► 1.8
.t n
capital structure?
► The Capital Asset Pricing Model
► M&M Proposition I
► M&M Proposition II
n a
► The Law of One Price
an
Question No: 33 ( Marks: 1 )
j
- Please choose one
u
. v
Which of the following could NOT be defined as the capital structure of the Company?
► The firm's mix of Assets and liabilities
W
► The firm's debt-equity ratio
► All of the given option
W
► The firm's common stocks only
Question No: 34
W ( 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
OM
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
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Question No: 36 ( 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
M
Question No: 37 ( Marks: 1 ) - Please choose one
O
g .C
Which of the following is NOT a reason that DeStore.com would prefer to pay a stock dividend
rather than a regular cash dividend?
i n
► It decreases the supply of shares and enhances shareholder wealth
.t n
► It may conserve cash for other firm needs
► It will reduce the stock price
a
► The investors anticipates that it cannot convey credibly otherwise
n
Question No: 38 ( Marks: 1 )
n
- Please choose one
a
u j
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?
. v
► 375 shares of stock and Rs. 375 total value
► 400 shares of stock and Rs. 400 total value
W
► 400 shares of stock and Rs. 500 total value
► 625 shares of stock and Rs. 400 total value
W
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%
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
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Question No: 41 ( Marks: 5 )
Zee
Zee Tops Inc., manufacturer’s 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 year’s sales and NOI to drop sharply, by 20% and 50%, respectively, due to lack of
demand (i.e., “consumer resistance”). If Zee Zee‘s current level of production and sales is 112
cartops, what is the level of fixed costs?
.t n
most recent balance sheet is as follows:
ASSETS
n a LIABILITIES AND OWNER'S
Cash Rs.30
an Accounts payable
EQUITY
Rs.35
Accounts receivable
Inventories
50
30 u j Notes payable
Accruals
10
5
Current Assets
Net fixed assets .
110
150
v Current liabilities
Mortgage loan (at
50
W 13%)
Common equity
80
130
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)
ANS
a. What is Hoskin's current level of gross and net working capital? (Marks 2)
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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)
.t n
If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the
WACCU of Un-levered Firm?
n a
If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then what is the
n
WACCL of Levered Firm? (There is no change in return in equity)
a
u j
If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the
WACCU of Un-levered Firm?
. v
W
W
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)
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M
O
g .C
i n
.t n
n a
an
u j
. v
W
W
W
INSTRUCTIONS
Please read the following instructions carefully before attempting any question:
1. This exam consists of 5 Multiple Choice Questions (MCQs), 5 short questions and 1
descriptive question.
2. Each MCQ carries 2 Marks; each short question carries 5 Marks and Descriptive Question
carry 15 Marks.
3. The use of calculator is allowed.
4. The use of Financial Tables is allowed.
5. For each MCQ question, read the choices available and select the choice which you
consider is the correct answer, by clicking on the appropriate check box.
6. Save your answer before proceeding to the next question.
7. 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 at the end of your paper.
That means you have submitted your complete paper.
8. A clock is given in the exam software. Software will automatically be closed at the end of
90 minutes.
9. Remember not to spend too much time on any one MCQ. Since all MCQ's carry equal
marks, it is important to manage your time and response to test questions effectively.
10. 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.
Which of the following items would NOT be included in the cash budget?
1 Depreciation charges
2 Sales
3 Cash receipts
4 Interest on existing debt
Use the table or a financial calculator to find the value of initial Rs 600 compounded for 10
years at 6%
Calculate the Debt to Equity Ratio given that Total Assets = Rs 2401 and Total Owners'
Equity = Rs 1977
1 0.21
2 1.02
3 1.83
4 2.61
What ratios would you calculate to measure the firm's profitability? Explain these
Descriptive Question
You are a financial analyst for the AB Company. The director of capital budgeting has asked
you to analyze the proposed capital investments, project X and Y. each project has cost of Rs
10, 000 and the cost of capital for both projects is 12%. The projects expected net cash flows
are as follows;
All of the following factors influence the investor's required rate of return except
1 The real required rate of return
2 The inflation premium
3 The risk premium
4 The risk aversion factor
1 It represents the total contribution and ownership interest of preferred and common
shareholders
2 It represents the combined total of the firm's current and long term assets
3 The three basic components are preferred stock, common stock, and retained earnings
4 Represents the difference between the firm's assets and liabilities
Suppose interest rates on Treasury bonds rose from 7 to 14 percent as a result of increased
government borrowing. What effect would this have on the price of an average company's
common stock?
What is the payback period for a project with the following cash flows if the firm's discount
rate is 12 percent and the project costs Rs 450
1 2.17 years
2 3.13 years
3 4 years
4 2.60 years
MIDTERM EXAMINATION
FALL 2006 Marks: 40
MGT201 - FINANCIAL MANAGEMENT (Session - 3 ) Time: 60min
StudentID/LoginID: ______________________________
INSTRUCTIONS:
Please read the following instructions carefully before attempting any question:
• For each MCQ, read the choices available carefully and select the choice which you consider is the
most suitable.
• You are required to show all the working of all numerical questions.
• 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.
• 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
Marks
A major advantage of the corporation relative to other forms of business organization is:
► Control inflation.
► Coverage ratios.
► Liquidity ratios.
► Profitability ratios.
► Debt ratios.
Firm A has a total asset turnover ratio of 5, a net profit margin of 2 percent, and return on equity of
15 percent. Its return on assets is
► 3 percent.
► 10 percent.
► 6 percent.
► 2 percent.
Which of the following arrangements for a Rs.1,000 CD yields the largest terminal (future) value?
A debenture
► Is an agreement between the trustee and the firm which guarantees the marketability
of the bond issue.
► Is an unsecured bond.
► May be changed by the firm if it gives the trustee 90 days written notice.
To increase a given present value, the discount rate should be adjusted ------------.
► Upward.
► Downward.
► True.
► Fred.
► A discount
► A premium
► Par value
► An indeterminate price
The principal shortcoming of the sole proprietorship is the owner's legal liability for all obligations
of the business.
► True
► False
Shareholder wealth is best measured in terms of the market price of the firm's common stock.
► True
► False
The times interest earned ratio is the best measure of a firm's ability to service long-term debt.
► True
► False
► True
► False
An investment with a short payback period is almost certain to have a positive net present value.
► True
► False
At the end of three years, how much is an initial Rs.100 deposit worth, assuming a quarterly
compounded annual interest rate of 10%.
Mathematically, net present value (NPV) and internal rate of return methods of capital budgeting
always lead to the same acceptance/rejection decision for independent projects. Why?
Suppose Ford Motor Company has outstanding bonds with 10-year maturity, Rs.1000 par value, a
10% coupon rate, with annual interest payment. If your required rate of return is 12%, what price
would you place on these bonds?
(a)
Ezzell Corporation issued preferred stock with a stated dividend of 10% of par value. Preferred
stock of this type currently yields 8%, and the par value is Rs.100. Assume dividends are paid
annually. What would be the value of Ezzell’s preferred stock? ( Assume a perpetual investment in
preferred stocks) .(5)
(b)
Your broker offers to sell you some shares of CIT corporation common stock that paid a dividend
of Rs.2 yesterday. You expect the dividend to grow at rate of 5% per year. If you plan to buy the
stock, hold it for three years, and then sell it for Rs.34.73, what would be the present value per
share of this common stock? ( Assume a required rate of return of 12% p.a). (5)
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Connecting VU Students
MIDTERM EXAMINATION
FALL 2007 Marks: 40
MGT201 - FINANCIAL MANAGEMENT (Session - 7 ) Time: 120min
StudentID/LoginID: ______________________________
► Income Statement
► Balance Sheet
► Portfolio Diversification
SNT Corp. has a profit margin of 20 percent, whereas payout ratio is 45 percent. What
will be the estimated retained earnings if estimated sales are Rs. 300,000 ?
► Rs. 27,000
► Rs. 30,000
► Rs. 33,000
► Rs. 35,000
A project with an initial investment of Rs. 50,000 gives the cash flows of Rs. 20,000 for first
three years and Rs. 10,000 for next two years. Payback period for the project will be :
► 2.0 Years
► 2.5 Years
► 3.0 Years
► 3.5 Years
A cost that has been incurred and cannot be reversed is called _____________.
► Preliminary Cost
► Operating Cost
► Sunk Cost
► Synergy Cost
► Mortgage Bonds
► Junk Bonds
► Debentures
► Eurobonds
If the intrinsic value of a stock is greater than its market value, which of the following is a
reasonable conclusion ?
► Convertible Bonds
► Eurobonds
► Junk Bonds
Suppose you deposit in saving Rs. 100 at a nominal or stated 8% semiannual interest rate.
The future value at the end of a year will exactly be :
► Rs. 105.12
► Rs. 108.00
► RS. 108.16
► Rs. 110.80
► Common stockholders are the owners but do not have voting rights in
management decision
► True
► False
An Indenture is an agreement between the trustee and the firm which guarantees the
marketability.
► True
► False
In Common Life Approach, you need to bring all the projects to the same length in time.
► True
► False
The principal advantage of the sole proprietorship is the owner's limited liability.
► True
► False
When interest rates go up, the market price of a bond goes down.
► True
► False
Mr. Saeed has Rs. 1,200 today and he wants to invest the amount with a bank for five
years. The bank is offering an annual interest rate of 8 percent.
a. What would be the future value of the investment if bank offers a simple interest ?
b. What would be the future value of the investment if bank offers a compound
interest ?
Write down the two approaches that are used to rank the projects with different lives.
SNT Corporation has a bond issue outstanding with an annual coupon rate of 7 percent
and 4 years remaining until maturity. The par value of the bond is Rs. 1,000.
Required:
(i) Determine the current value of bond if present market conditions justify a 14
percent required rate of return. The bond pays interest annually.
(ii) What would be the current value at the same required rate of return if the bond
had a semiannual coupon?
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INSTRUCTIONS:
Please read the following instructions carefully before attempting any 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 check box.
• You are required to show all the working of short questions as well as descriptive
question.
• A clock has been given in the exam software. Software will automatically be closed after
90 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.
• 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.
Financial management
Profit maximization
Agency theory
Social responsibility
The level of risk generally reduces as the size of the portfolio _________.
Decreases
Increases
Remains unchanged
Non of the above
If the intrinsic value of a stock is greater than its market value, which of the given
options is a reasonable conclusion?
A market where new securities are bought and sold for the first time is called_________
Two projects A & B have payback periods of 4 years and 5 years respectively. Which of
these projects would be more attractive to an investor?
Project A
Project B
Both the projects A&B
Non of the given options
The gross profit margin is unchanged, but the net profit margin declined over the same
period. This could be the result of:
The variation in the market price of a security caused by changes in interest rate is
called ___________.
The ratios that relate profits to sales and investment are known as ____________
Interest paid (earned) on both the original principal borrowed (lent) and
previous interest earned on that principal amount is often referred to as
_________
Present value
Simple interest
Future value
Compound interest
Rs.2,908,000
Rs.3,270,000
Rs.3,380,000
Rs.2,250,000
What would be the future value of an initial investment of $1000 after 5 years, if
compounded annually at 10%?
Fall
Rise
Remain unchanged
The correct answer cannot be determined without more information
Intrinsic value
Market value
Liquidation value
Book value
Define IRR (Internal rate of return). How would we analyze a project by using IRR
method?
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 premium.
A discount.
Cannot be determined without more information
Face value.
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MIDTERM EXAMINATION
SPRING 2007 Marks: 40
MGT201 - FINANCIAL MANAGEMENT (Session - 1 ) Time: 60min
StudentID/LoginID: ______________________________
INSTRUCTIONS:
Please read the following instructions carefully before attempting any question:
Do not ask question about the contents of this examination from anyone.
You may wish to pace yourself with your own watch, but the Supervisor will be the official
timekeeper 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
Marks
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
Question No: 2 ( Marks: 1 ) - Please choose one
When current liabilities rise faster than current assets, the current ratio will _______.
► Fall
► Rise
► Remain same
► None of the given options
Question No: 3 ( Marks: 1 ) - Please choose one
► Common shares
► Preferred shares
► Bonds
► All of the given options
Question No: 5 ( Marks: 1 ) - Please choose one
► Standard Deviation
► Mean
► Mode
► None of the given options
Question No: 6 ( Marks: 1 ) - Please choose one
An annuity whose payments are made at the end of each period is called _________.
► Ordinary Annuity
► Annuity Due
► Perpetuity
► None of the given options
Question No: 7 ( Marks: 1 ) - Please choose one
A bond that pays no annual interest but is sold at a discount below the par value is called:
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
► Rs.3,403
Question No: 9 ( Marks: 1 ) - Please choose one
Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing:
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
Question No: 11 ( Marks: 1 ) - Please choose one
The yield on common stock comes from two sources: the dividend yield and the capital gains
yield.
► True
► False
Question No: 12 ( Marks: 1 ) - Please choose one
A saving account at Bank A pays 6 percent interest, compounded annually. Bank B's savings
account pays 6 percent compounded semiannually. Bank B is paying twice as much interest.
► True
► False
Question No: 13 ( Marks: 1 ) - Please choose one
An investment with a short payback period is almost certain to have a positive net present value.
► True
► False
Question No: 14 ( Marks: 1 ) - Please choose one
► True
► False
Question No: 15 ( Marks: 1 ) - Please choose one
Combining securities that are not perfectly positively correlated helps to reduce the risk of a
portfolio.
► True
► False
Question No: 16 ( Marks: 3 )
A public limited company has sales of Rs. 6 million, a total asset turnover ratio of 6 for the year,
and a net profit of Rs. 120,000. What is the company’s return on assets?
Question No: 17 ( Marks: 3 )
Project K has a cost of capital of Rs. 52,125, its expected net cash inflows are Rs. 12,000 per year
for 8 years, and its cost of capital is 12 percent. What is the project’s payback period?
Question No: 18 ( Marks: 3 )
If interest rates in an economy rise after a bond have been issued, what will happen to the bond’s
market price? Explain briefly.
Question No: 19 ( Marks: 3 )
Differentiate between Systematic risk (Market Risk) and Non-systematic risk (Diversifiable Risk).
Question No: 20 ( Marks: 3 )
A bond that pays interest forever and has no maturity date is a perpetual bond. In what respect is a
perpetual bond similar to a no-growth common stock, and to a share of preferred stock?
Question No: 21 ( Marks: 10 )
Assume that it is now January 1, 2001. On January 1, 2002, you will deposit Rs. 1,000 into a
savings account that pays 8 percent.
a. If the bank compounds interest annually, how much will you have in your account on
January 1, 2005?
b. What would your January 1, 2005, balance be if the bank used quarterly compounding
rather than annual compounding?
c. Suppose you deposited the Rs. 1,000 in 4 payments of Rs. 250 each on January 1 of 2002,
2003, 2004, and 2005. How much would you have in your account on January 1, 2005,
based on 8 percent annual compounding?
d. Suppose you deposited 4 equal payments in your account on January 1 of 2002, 2003,
2004, and 2005. Assuming an 8 percent interest rate, how large would each of your
payments have to be for you to obtain the same ending balance as you calculated in part a?
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MIDTERM EXAMINATION
SPRING 2007 Marks: 40
MGT201 - FINANCIAL MANAGEMENT (Session - 3 ) Time: 90min
StudentID/LoginID: ______________________________
INSTRUCTIONS:
Please read the following instructions carefully before attempting any question:
All questions are compulsory.
This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 True/False
questions of 1 mark each, 5 Short questions of 3 marks each and one long question of 10 marks.
For each Multiple Choice Question, read the choices available carefully and select the choice which
you consider is the most suitable.
You are required to show the working of all Numerical questions.
Use of calculator and financial tables is allowed.
This examination is closed book, closed notes and closed neighbours.
Do not ask question about the contents of this examination from anyone.
You may wish to pace yourself with your own watch, but the Supervisor will be the official
timekeeper 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
An initial investment of Rs. 200,000 is required to start the business; Rs. 9,000 per month is
expected to be earned for the first year and Rs. 20,000 would be earned every month in the second
year. How many months will it take to recover your initial investment?
► 14 months
► 16 months
► 18 months
► 20 months
“Don’t put all eggs in one basket” explains _____________ concept of finance.
► Portfolio Diversification
► Standard Deviation
► Variance
► Coefficient of Variation
A bond that pays no annual interest but is sold at a discount below the par value is called:
Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing:
► A short-term bond
► An option
Question No: 6 ( Marks: 1 ) - Please choose one
► Partnership
► Company
► Sole proprietorship
_______ is a ratio of the present value of future cash flows to the initial investment.
► Return on Investment
► NPV
► Payback Period
► Profitability Index
► Fair price
► Par value
► Market price
_____ ratio gives an indication how equity investors regard the company’s value.
► Price / Earning
► Market / Book
► Earning / Share
For a given nominal interest rate, the more numerous the compounding periods, the less the
effective annual interest rate.
► True
► False
► True
► False
When interest rates go up, the market price of a bond goes up.
► True
► False
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
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?
How much should you pay for the preferred stock of the PST Corporation, if it has Rs. 50 par
value, pays Rs. 20 a share in annual dividends, and your required rate of return is 15%.
What is a portfolio? Why an investor should invest his/her funds in a portfolio rather than in the
stocks of a single corporation.
Explain briefly the Constant Growth Dividends Model of common stocks valuation.
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.
Snyder’s 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.
W
MIDTERM EXAMINATION
Spring 2009
MGT201- Financial Management (Session - 2)
Question No: 1 ( Marks: 1 ) - Please choose one
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► 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
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Mutually exclusive means that you can invest in _________ project(s) and having chosen
______ you cannot choose another.
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g .C
i n
► One; one
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► Two; two
► Two; one
n a
► Three; one
an
Question No: 3 ( Marks: 1 )
u j
- Please choose one
. v The
weighted average of possible returns, with the weights being the probabilities of occurrence is
referred to as __________.
W
►
► W
A probability distribution
The expected return
►
► W
The standard deviation
Coefficient of variation
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I) The difference between a stock's price and its no-growth value per share
II) The stock's price
III) Zero if its return on equity equals the discount rate
IV) The net present value of favorable investment opportunities
► I and IV
► II and IV
► I, III, and IV
► II, III, and IV M
O
Question No: 6 ( Marks: 1 ) - Please choose one
g .C
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Which of the following is CORRECT, if a firm has a required rate of return equal to the ROE?
i
.t n
► 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
P/E
n a
►The amount of earnings retained by the firm does not affect market price or the
an
Question No: 7 ( Marks: 1 )
j
- Please choose one
u
. v
Which of the following would tend to reduce a firm's P/E ratio?
W
►The firm significantly decreases financial leverage
►The firm increases return on equity for the long term
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► The level of inflation is expected to increase to double-digit levels
►The rate of return on Treasury bills decreases
►An anticipated earnings growth rate which is less than that of the average firm
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►Real risk-free rate
►Risk premium for stocks
►Return on assets
►Expected inflation rate
M
the expected EPS are Rs. 3.60. If the firm's plowback ratio is 50%, what will be the P/E ratio?
►7.69
O
►8.33
►9.09
►11.11 g .C
i n
.t n
Question No: 11 ( Marks: 1 ) - Please choose one
a
How dividend yield on a stock is similar to the current yield on a bond?
n
an
►Both represent how much each security’s price will increase in a year
►Both represent the security’s annual income divided by its price
u
can expect to earn by owning the security
j
► Both are an accurate representation of the total annual return an investor
. v
►Both incorporate the par value in their calculation
Question No: 12
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( Marks: 1 ) - Please choose one
Low
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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%
W
►7.2%
►3.0%
► Fundamental analysis
► Underlying real asset
► Supply and demand of securities in the market
► All of the given options
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Which of the following value of the shares changes with investor’s perception about the
company’s future and supply and demand situation?
► Par value
► Market value
► Intrinsic value
► Face value
g .C
► 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
i n
.t n
► They have the highest rates of return for a given level of risk
n
When a bond will sell at a discount?
an
than yield to maturity
u j
► The coupon rate is greater than the current yield and the current yield is greater
. v
► 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
W
► The coupon rate is less than the current yield and the current yield is less than yield to
maturity
W
Question No: 17
W ( Marks: 1 ) - Please choose one
► 10.65%
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► 10.45%
► 10.95%
► 10.52%
► 7.00
► 6.53
► 8.53 M
► 7.18
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Question No: 20 ( Marks: 1 ) - Please choose one
g .C
i n
Interest rate risk for long term bonds is more than the interest rate risk for short term bonds
.t n
provided the _________ for the bonds is similar.
. v
When market is offering lower rate of return than the bond, the bond becomes valuable, with
W
respect to the given scenario which of the following is correct?
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► 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
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► 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
Bond is a type of Direct Claim Security whose value is NOT secured by __________.
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► Tangible assets
► Intangible assets
► Fixed assets
► Real assets
► A debenture
i n
.t n
► A junk bond
► An income bond
an 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?
u j
► Rs. 87
► Rs. 90 . v
► Rs. 102
► Rs. 112 W
Question No: 26 W ( Marks: 1 ) - Please choose one
W
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
► Bond
► Bond trustee
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Companies and individuals running different types of businesses have to make the choices of the
asset according to which of the following?
► Return on asset
M
O
Question No: 28 ( Marks: 1 ) - Please choose one
g .C
n
Which of the following technique would be used for a project that has non-normal cash flows?
i
► Internal rate of return
.t n
► Multiple internal rate of return
n a
► Modified internal rate of return
an
► Net present value
u j
. v
Question No: 29
W
( Marks: 1 ) - Please choose one
W
Why net present value is the most important criteria for selecting the project in capital
budgeting?
W
► Because it has a direct link with the shareholders dividends maximization
► Because it has direct link with shareholders wealth maximization
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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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
M
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?
O
► Rs.253 million
► Rs.323 million
► Rs.380 million g .C
► Rs.180 million
i n
Question No: 33 ( Marks: 1 )
.t n
- Please choose one
n a An
8-year annuity due has a future value of Rs.1,000. If the interest rate is 5 percent, the amount of
► Rs.109.39
an
each annuity payment is closest to which of the following?
► Rs.147.36
► Rs.154.73
u j
► Rs.99.74
. v
Question No: 34
W
( Marks: 1 ) - Please choose one
As
W
interest rates go up, the present value of a stream of fixed cash flows _____.
► Goes down
► Goes up W
► Stays the same
► Can not be found
► Less than
► More than
► Equal to
► Can not be found
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What is the present value of an annuity that pays 100 per year for 10 years if the required rate of
return is 7%?
► Rs.1000
► Rs.702.40
► Rs.545.45
► Rs.13,816
a
► A cash outflow to purchase bonds issued by another company
n
Question No: 38 ( Marks: 1 )
an
- Please choose one
u j
Which group of ratios relates profits to sales and investment?
► Liquidity ratios
► Debt ratios . v
► Coverage ratios
► Profitability ratios W
Question No: 39 W ( Marks: 1 ) - Please choose one
W
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
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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:
t . n
i. Calculate each project’s payback, net present value (NPV), internal rate of return (IRR),
and profitability index (PI).
n a
ii. Which project or projects should be accepted if they are independent?
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iii. Which project should be accepted if they are mutually exclusive?
a
ANSWER:
u j
1.
. v
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
W
Year 2 the project will recover Rs 3000
Year 3 project will recover the remaining Rs. 500 in 1st month of 3rd yr.
W
So payback period for Project X is 2 yrs and 1 month.
W
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.
= Rs 966
i n
.t n
= 0 vujannat.ning.Com For Video Lectures ,previous assi
3. IRR: Project X: Put NPVVisit
NPV = - 10000 + 6500/(1+i) + 3000(1+i)2+ 3000(1+i) 3+ 1000/(1+i) discussions
4
and many more.
4. Profitability Index:
n a
Project X: PI= Sum(CFt/(1+i)t)/Io
= 10,966/10000 = 1.096
an
Project Y : PI= Sum(CFt/(1+i)t)/Io
u
= 10631/10000 = 1.0631
j
. v
Result: Since NPV and PI of project X are higher than that of project Y so Project X
will be accepted.
W
W
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MIDTERM EXAMINATION
Spring 2009
MGT201- Financial Management (Session - 4)
Time: 60 min
Marks: 50
M
O
g.C
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Visit vujannat.ningi.Com For Video Lectures ,previous assi
.t n discussions and many more.
n a
an
u j
. v
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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
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► Rs. 6.50
Among the pairs given below select a(n) example of a principal and a(n) example of an agent
respectively.
► Shareholder; manager
► Manager; owner
M
► Accountant; bondholder
O
► Shareholder; bondholder
g .C
Question No: 3 ( Marks: 1 ) i n
- Please choose one
.t n
Which of the following is equal to the average tax rate?
n a
► Total tax liability divided by taxable income
► Rate that will be paid on the next dollar of taxable income
► Median marginal tax rate
an
j
► Percentage increase in taxable income from the previous period
u
Question No: 4
v
( Marks: 1 )
. - Please choose one
W
Which of the following would be deductible as an expense on the corporation's income
statement?
W
► Interest paid on outstanding bonds
► Cash dividends paid on outstanding common stock
W
► Cash dividends paid on outstanding preferred stock
► All of the given options
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Which group of ratios measures a firm's ability to meet short-term obligations?
► Liquidity ratios
► Debt ratios
► Coverage ratios
► Profitability ratios
g .C
Question No: 8 ( Marks: 1 )
n
- Please choose one
i
.t n
Interest paid on the original principal borrowed is often referred to as __________.
► Compound interest
► Present value
n a
an
► Simple interest
u j
► Future value
. v
Question No: 9 W
( Marks: 1 ) - Please choose one
W If
the following are the balance sheet changes, which one of them would represent use of funds by
a company?
W
► Rs. 8,950 decrease in net fixed assets
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► Accounts receivable
► Shareholders' equity
What is the present value of Rs.8,000 to be paid at the end of three years if the interest rate is
11%?
M
► Rs.5,850
► Rs.4,872 O
► Rs.6,725
g .C
► Rs.1,842
i n
Question No: 12 ( Marks: 1 )
.t n
- Please choose one
► Rs.680.58
n a
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.1,462.23
an
► Rs.322.69
► Rs.401.98
u j
Question No: 13
.
( Marks: 1 )v - Please choose one
As
W
interest rates go up, the present value of a stream of fixed cash flows _____.
►
►
W
Goes down
Goes up
►
►
W
Stays the same
Can not be found
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Payback period
Project A 1.66
Project B 2.66
Project C 3.66
► Project A
► Project B
► Project C
► Project A & B
M
O
.C
Question No: 16 ( Marks: 1 ) - Please choose one
If a
► Interpolation
i
► Dividing 100,000 by 36,000
► Dividing 36,000 by 100,000 .t n
► Insufficient information
n a
Question No: 17 ( Marks: 1 )
n
- Please choose one
a
u j
which of the following situations you can expect multiple answers of IRR?
In
. v
► 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
W
W
► During the life of project if you have any net cash outflow
W
► All of the given options
Which of the following technique would be used for a project that has non-normal cash flows?
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Question No: 19 ( Marks: 1 ) - Please choose one
g .C
n
► Money has to be reinvested in some other project with uncertain NPV
i
.t n
► Money has to be reinvested in some other project with certain NPV
a
► Money has to be reinvested in some other project with return so risky
n
► None of the given options
an
u j
Question No: 21 ( Marks: 1 )
. v - Please choose one
You
W
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
W
single-period capital-rationing constraint?
► Profitability index (PI)
W
► Net present value (NPV)
► Internal rate of return (IRR)
► Payback period (PBP)
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 option
► Call provision
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► Put option
an
► 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
u j
► The coupon rate is less than the current yield and the current yield is less than yield to
maturity
.v
Question No: 25
W
( Marks: 1 ) - Please choose one
An
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investment opportunity set formed with two securities that are perfectly negatively correlated.
What will be standard deviation in the global minimum variance portfolio?
W
► Equal to zero
► Greater than zero
► Equal to the sum of the securities' standard deviations
► Equal to -1
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Which of the following is NOT an example of hybrid equity?
► Convertible bonds
► Convertible debenture
► Common shares
► Preferred shares
i n
Question No: 29 ( Marks: 1 )
.t n
- Please choose one
a
How dividend yield on a stock is similar to the current yield on a bond?
n
an
► Both represent how much each security’s price will increase in a year
u j
► Both represent the security’s annual income divided by its price
► Both are an accurate representation of the total annual return an investor can expect to
.v
earn by owning the security
► Both incorporate the par value in their calculation
Question No: 30
W
( Marks: 1 ) - Please choose one
The
W
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
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► 50.0
► 9.09
► 7.69
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► Expected inflation rate
► 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
►
M
Less predictable earnings growth than that of the average firm
►
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Greater cyclicality of earnings growth than that of the average firm
C
Question No: 33 ( Marks: 1 ) - Please choose one
g .
i n
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 .t n
► Unsystematic risk
► Financial risk
n a
Question No: 34 ( Marks: 1 )
j an
- Please choose one
u
When Return is being estimated in % terms, the units of Standard Deviation will be mention in
__________.
.v
►
►
%
Times W
►
► W
Number of days
All of the given options
► One that is diversified over a large enough number of securities that the nonsystematic
variance is essentially zero
► New competitors
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► New product management
► Worldwide inflation
► Strikes
C O
Neither project dominates the other in terms of risk and return
► Incomplete information
g .
Question No: 38 ( Marks: 1 )
i
- Please choose one
n
. n
Which of the following is a drawback of percentage of sales method?
t
n na
ja
►
► vu
It is a rough approximation
There is change in fixed asset during the forecasted period
►
► W
Lumpy assets are not taken into account
All of the given options
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Why companies invest in projects with negative NPV?
i n
Year Project "A" Project "B" .t n
0 Rs. (20,000)
n
Rs. 24,000 a
an
1 10,000 10,000
2
3
8,000
6,000
u j
10,000
10,000
.v
a. Assume that 15% is the appropriate required rate of return. What decision should the firm
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make about these two projects?
b. If the firm reevaluated these projects at 10%, what decision should the firm make about
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these two projects?
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► Rs.1.00
► Rs. 6.00
► Rs. 0.50
► Rs. 6.50
.t n
n a
Question No: 3 ( Marks: 1 ) - Please choose one
Which of the following is equal to the average tax rate?
an
► Total tax liability divided by taxable income
► Rate that will be paid on the next dollar of taxable income
► Median marginal tax rate
u j
► Percentage increase in taxable income from the previous period
.v
Question No: 4 ( Marks: 1 ) - Please choose one
W
Which of the following would be deductible as an expense on the corporation's income
statement?
W
► Interest paid on outstanding bonds
► Cash dividends paid on outstanding common stock
W
► Cash dividends paid on outstanding preferred stock
► All of the given options
WWW.vujannat.ning.cOM
► Debt ratios
► Coverage ratios
► Profitability ratios
C O
Question No: 8 ( Marks: 1 ) - Please choose one
g .
Interest paid on the original principal borrowed is often referred to as __________.
i n
► Compound interest
► Present value
t. n
► Simple interest
n a
► Future value
a n
u j
.V
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?
W
W
► Rs. 8,950 decrease in net fixed assets
W
► Rs. 5,005 decrease in accounts receivable
► Accounts receivable
► Shareholders' equity
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► Notes payable (short-term borrowings)
C O
Question No: 12 ( Marks: 1 ) - Please choose one
g .
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate is
8%.
i n
► Rs.680.58
► Rs.1,462.23
t. n
► Rs.322.69
► Rs.401.98
n a
a n
Question No: 13 ( Marks: 1 ) - Please choose one
j
As interest rates go up, the present value of a stream of fixed cash flows _____.
u
.V
► Goes down
► Goes up
► Stays the same
W
► Can not be found
W
Question No: 14 ( Marks: 1 ) - Please choose one
W
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
Payback period
Project A 1.66
Project B 2.66
Project C 3.66
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► Project A
► Project B
► Project C
► Project A & B
C O
► Insufficient information
g .
Question No: 17 ( Marks: 1 ) - Please choose one
i n
In which of the following situations you can expect multiple answers of IRR?
t. n
► 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
n a
n
► During the life of project if you have any net cash outflow
a
► All of the given options
u j
Question No: 18 .V
( Marks: 1 ) - Please choose one
W
Which of the following technique would be used for a project that has non-normal cash
flows?
W
W
► Internal rate of return
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Question No: 20 ( Marks: 1 ) - Please choose one
Which one of the following is NOT the disadvantage of the asset with very short life?
C O
Question No: 21 ( Marks: 1 ) - Please choose one
g .
i n
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
.t n
operating under a single-period capital-rationing constraint?
► Profitability index (PI)
► Net present value (NPV)
► Internal rate of return (IRR)
n a
► Payback period (PBP)
j an
u
Question No: 22 ( Marks: 1 ) - Please choose one
.v
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?
W
W
► Call in
W
► Call option
► Call provision
► Put option
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Question No: 24 ( Marks: 1 ) - Please choose one
When a bond will sell at a discount?
► The coupon rate is greater than the current yield and the current yield is greater
than yield to maturity
► The coupon rate is greater than yield to maturity
► The coupon rate is less than the current yield and the current yield is greater
than the yield to maturity
M
► The coupon rate is less than the current yield and the current yield is less
than yield to maturity
C O
Question No: 25 ( Marks: 1 ) - Please choose one
g .
An investment opportunity set formed with two securities that are perfectly negatively
i n
correlated. What will be standard deviation in the global minimum variance portfolio?
► Equal to zero
► Greater than zero
t. n
► Equal to -1
n a
► Equal to the sum of the securities' standard deviations
a n
Question No: 26 ( Marks: 1 ) - Please choose one
u j
How efficient portfolios of "N" risky securities are formed?
► These are formed with the securities that have the highest rates of return
.V
regardless of their standard deviations
► They have the highest risk and rates of return and the highest standard
deviations
W
► They are selected from those securities with the lowest standard deviations
W
regardless of their returns
► They have the highest rates of return for a given level of risk
W
Question No: 27 ( Marks: 1 ) - Please choose one
Which of the following is NOT an example of hybrid equity?
► Convertible bonds
► Convertible debenture
► Common shares
► Preferred shares
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Question No: 29 ( Marks: 1 ) - Please choose one
How dividend yield on a stock is similar to the current yield on a bond?
► Both represent how much each security’s price will increase in a year
► Both represent the security’s annual income divided by its price
► Both are an accurate representation of the total annual return an investor can
expect to earn by owning the security
► Both incorporate the par value in their calculation
om
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 ________.
g .c
► 8.33
► 50.0
i n
► 9.09
► 7.69 .t n
n a
Question No: 31 ( Marks: 1 ) - Please choose one
an
In the dividend discount model, which of the following is (are) NOT incorporated into
the discount rate?
u j
► Real risk-free rate
.v
► Risk premium for stocks
W
► Return on assets
► Expected inflation rate
W
Question No: 32 ( Marks: 1 ) - Please choose one
W
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
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Question No: 34 ( Marks: 1 ) - Please choose one
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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
C O
nonsystematic variance is essentially zero
g .
► One that is diversified over a large enough number of securities that the
► New competitors
j an
► New product management
u
.v
► Worldwide inflation
► Strikes
W
Question No: 37 ( Marks: 1 ) - Please choose one
You are considering two investment proposals, project A and project B. B's expected net
W
present value is Rs. 1,000 greater than that for A and A's dispersion of net present value
►
W
is less than that for B. On the basis of risk and return, what would be your conclusion?
► It is a rough approximation
► There is change in fixed asset during the forecasted period
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► Lumpy assets are not taken into account
► All of the given options
M
C O
► Depreciation
g .
► Sunk cost
► Opportunity cost
i n
► Non-cash item
.t n
n a
Question No: 40 ( Marks: 1 ) - Please choose one
Why companies invest in projects with negative NPV?
j an
u
► .v
Because there is hidden value in each project
►
► W
Because they have chance of rapid growth
Because they have invested a lot
►
W
All of the given options
W
Question No: 41 ( Marks: 10 )
ICO Company must decide between two mutually exclusive projects. The following
information describes the cash flows of each project.
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Please read the following instructions carefully before attempting any 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 check box.
• You are required to show all the working of short questions as well as Numerical questions.
• 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
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important to manage your 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.
► Net income.
► Operating profit
► Legal restrictions.
► Ease of organization
► The present value of benefits is 85% greater than the project's costs.
► The project returns 85 cents in present value for each current dollar invested.
► With management
► With bondholders
---------------- refers to the financial projection of cash disbursements and receipts during the next
planning period.
► Cash budget
► Capital budgeting
An arrangement whereby a firm sells land, buildings, or equipment and simultaneously leases the
property back for a specified period under specific terms is called a:
► Service lease
► Capital lease.
► Lessor agreement.
The controller's responsibilities are primarily ________ in nature, while the treasurer's
responsibilities are primarily related to __________.
Current assets that a firm must carry even at the trough of sales are _____________, while current
assets that fluctuate with seasonal or cyclical variations in sales are _____________.
An expression of creditworthiness of a firm based on its present financial condition and past credit
history is called ----------------.
► Credit rating
► Trade credit
► Liquidity
A stock split:
Syndicated Loan is a large loan arranged by a group of ------------ that form a syndicate, headed by
the lead manager.
► Bond holders
► Individuals
► Brokers
► Banks
--------------------merger takes place when firms operating in different industries combine together.
► Conglomerate
► Vertical
► Co generic
► Horizontal
In breakeven analysis, if fixed costs rise, then the breakeven point will --------.
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► Fall
► Rise
► Spot corporation.
► Future Corporation.
► Domestic Corporation.
► A multinational corporation
A portfolio that offers the highest possible yield for a given level of risk, or the lowest possible risk
for a given yield level is know as -----------.
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In finance, the costs associated with buying or selling of financial instruments are called ------------
---------.
In ----------- plan firms give stockholders option to automatically reinvest cash dividends by buying
more of the same stock.
► True
► False
All other things being the same, if the firm raises funds by selling common stock, it will increase
its degree of financial leverage.
► True
► False
The hedging approach to financing involves matching maturities of debt with specific financing
needs.
► True
► False
Generally, a greater margin of safety would be provided by more current assets and fewer current
liabilities.
Connecting VU Students
► True
► False
► True
► False
According to signaling theory if a firm’s future genuinely looks good then management will
choose to raise financing through Debt. Why?
Why spontaneous financing is a cheap source of financing for a firm? Name some sources of
spontaneous financing.
Company A Company B
Bonds = Rs.5.6 Billion Debenture = Rs.1.3 Billion
Preferred stocks = 3.4 Billion Preferred stocks = 1.7 Billion
Common stocks = 1 Billion Common stocks = 7 Billion
Total = Rs.10 Billion Total = Rs.10 Billion
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Analyze capital structures of both the companies and identity that which Company has high degree
of financial leverage, and why?
An individual is considering two different savings plans. The first plan would have her deposit
Rs.500 every six months, and she would receive interest at a 7% annual rate, compounded semi-
annually.
Under the second plan she would deposit Rs.1000 every year with a rate of interest 8%,
compounded annually. The initial deposit of the first plan would be made six months from now
and that of second plan one year hence.
Required: Calculate future value of both the saving plans at the end of 10 years.(5+5)
Suppose you are working as a financial analyst in an investment bank. Currently your bank is
considering to invest in the common stocks of Pak Cement Company Limited. Following
information is available to you.
The pak cement company limited common stocks have a beta of 1.45. The risk free rate is 8% and
the expected return on the market portfolio is 13%. The company presently pays a dividend of Rs.2
a share, and it is expected that it will grow at 10% per annum for many years to come. What
required rate of return would you suggest for this investment? The company policy is to use capital
asset pricing model (CAPM) to calculate required rate of return on stocks. Based on your required
rate of return what present market price would you place on each share, using perpetual dividend
growth model? (5+5)