MGT201 A Huge File For Quizzes 1140 Pages PDF

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MGT201-FM
Question # 2 of 15 ( Start time: 11:44:56 PM ) Total Marks: 1

A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8
percent, the future value of this annuity is closest to which of the following equations?
Select correct option:
(Rs.100)(FVIFA at 8% for 5 periods)
(Rs.100)(FVIFA at 8% for 4 periods)(1.08)
(Rs.100) (FVIFA at 8% for 5 periods)(1.08)
(Rs.100)(FVIFA at 8% for 4 periods) + Rs.100
If a firm has a DOL of 5 at Q units, what would be the effect on sales and EBIT?
If sales rise by 5%, EBIT will rise by 5%
If sales rise by 5%, EBIT will fall by 25%
Which of the following statistic measures the returns of two risky assets that move
together?
Correlation
Standard deviation
Square root
Variance
Question # 1
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MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank http://vustudents.ning.com
Which of the following costs would be considered a fixed cost?
Raw materials
Depreciation
Bad-debt losses
Production labor
Question # 2
Expected Portfolio Return = ___________.
rP * = xA rA + xB rB
rP * = xA rA - xB rB
rP * = xA rA / xB rB
rP * = xA rA * xB rB
Question # 3
Why markets and market returns fluctuate?
Because of political factors
Because of social factors
Because of socio-political factors
Because of macro systematic factors
Question # 4
Which of the following can be used to calculate the risk of the larger portfolio?
Standard deviation
EPS approach
Matrix approach
Gordon’s Approach
Question # 5
Which of the following market in finance is referred to the market for short-term
government and corporate debt securities?
Select correct option: http://vustudents.ning.com
Money market
Capital market
Primary market
Secondary market
Question # 6
Which of the following would be considered a cash-flow item from an "operating"

activity?
Cash outflow to the government for taxes
Cash outflow to shareholders as dividends
Cash inflow to the firm from selling new common equity shares
Cash outflow to purchase bonds issued by another company
Question # 8
percent, the present value of this annuity is closest to which of the following equations?
(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100
(Rs.100)(PVIFA at 8% for 4 periods)(1.08)
(Rs.100)(PVIFA at 8% for 6 periods) - Rs.100
Can not be found from the given information
Question # 9
Which of the following is correct regarding the opportunity cost of capital for a project?
The opportunity cost of capital is the return that investors give up by investing in the
project rather than in securities of equivalent risk.
Financial managers use the capital asset pricing model to estimate the opportunity
cost of capital
The company cost of capital is the expected rate of return demanded by investors in a
company
All of the given options
Question # 1 of 10 ( Start time: 10:15:03 AM ) Total Marks: 1

Which of the following is the stability of a firm's operating income?
Financial leverage
Weighted-average cost of capital
Capital structure
Business risk

Which of the following is the cash required during a specific period to meet interest
expenses and principal payments?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden

Which of the following is NOT an example of a financial intermediary?
Wisconsin S&L, a savings and loan association

Strong Capital Appreciation, a mutual fund
Microsoft Corporation, a software firm
College Credit, a credit union

How economic value is added (EVA) calculated?
It is the difference between the market value of the firm and the book value of equity
It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge
It is the net income of the firm less a dollar cost that equals WAAC multiplied by the
book value of liabilities and equities
None of the given option

An annuity due is always worth _____ a comparable annuity.
Less than
More than
Equal to

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 are quarterly yields that must be annualized
The statement of cash flows reports a firm's cash flows segregated into which of the
following categorical order?
Operating, investing, and financing

Investing, operating, and financing
Financing, operating and investing
Financing, investing, and operating

Which of the following formula relates beta of the stock to the standard deviation?
Covariance of stock with market * variance of the market

Covariance of stock with market / variance of the market
Variance of the market / Covariance of stock with market
Slope of the regression line

Which of the following is the maximum amount of debt (and other fixed-charge
financing) that a firm can adequately service?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
What is the easiest method to diversify away firm-specific risks?

To buy stocks with a beta of 1.0

To build a portfolio with 5-10 individual stocks
To purchase the shares of a mutual fund
To purchase stocks that plot above the security market line
Question # 1 of 10
Raw materials
Depreciation
Bad-debt losses
Production labor
Question # 2 of 10
Question # 3 of 10
Question # 4 of 10
Standard deviation
EPS approach
Matrix approach
Gordon’s Approach
Question # 5 of 10
Money market
Capital market
Primary market
Secondary market
Question # 6 of 10
activity?
Question # 8 of 10
percent, the present value of this annuity is closest to which of the following equations?
Question # 9 of 10
cost of capital
company
1. type of risk is avoidable through proper diversification.
portfolio risk
systematic risk
unsystematic risk
total risk
2. A statistical measure of the degree to which two variables (e.g., securities' returns)
move together.
coefficient of variation
variance
covariance
certainty equivalent
3. An "aggressive" common stock would have a "beta"
equal to zero.
greater than one.
equal to one.
less than one.
4. A line that describes the relationship between an individual security's returns and
returns on the market portfolio.
characteristic line
security market line
capital market line
beta
5. According to the capital-asset pricing model (CAPM), a security's expected

(required) return is equal to the risk-free rate plus a premium
equal to the security's beta.
based on the unsystematic risk of the security.
based on the total risk of the security.
based on the systematic risk of the security.
6. The risk-free security has a beta equal to, while the market portfolio's beta is equal
to .
one; more than one.
one; less than one.
zero; one.
less than zero; more than zero.
7. Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than
the gamble's expected value. Carrie shows
risk aversion.
risk preference.
risk indifference.
a strange outlook on life.
8. Beta is the slope of
the security market line.
the capital market line.
a characteristic line.
the CAPM.
9. A measure of "risk per unit of expected return."
standard deviation
correlation coefficient
beta
10. The greater the beta, the of the security involved.
greater the unavoidable risk
greater the avoidable risk
less the unavoidable risk
less the avoidable risk
11. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company
common stock has a beta of 1.80. The expected return on the market is 10 percent,
and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM)
and making use of the information above, the required return on Plaid Pants' common
stock should be, and the required return on Acme's common stock should be .
3.6 percent; 7.2 percent
12. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be
0.75. The market beta is, of course, 1.00 and the beta of the industry of which the
company is a part is 1.10. If Merrill Lych were to calculate an "adjusted beta" for
Espinosa's common stock, that adjusted beta would most likely be
less than 0.75
more than 0.75, but less than 1.10
equal to 1.10
equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}

Total portfolio risk is a combination of:
Systematic risk plus non-diversifiable risk

Avoidable risk plus diversifiable risk
Systematic risk plus unavoidable risk
Systematic risk plus diversifiable risk

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

Which of the following techniques would be used for a project that has non–normal
cash flows?
Internal rate of return

Multiple internal rate of return
Modified internal rate of return
Net present value

Less than
More than
Equal to

Calculate the break-even point for sales revenues given the following information. The
firm has Rs.1, 000,000 in fixed costs. The firm anticipates that variable costs will be Rs.1 for
every Rs.5 in sales.
Rs.1, 250,000
Rs.1, 000,000
Rs.250, 000
Rs.200, 000

If we were to increase ABC company cost of equity assumption, what would we expect
to happen to the present value of all future cash flows?
An increase
A decrease
No change
Incomplete information

Which of the following formulas represents a correct calculation of the degree of
operating leverage?
(Q - QBE)/Q
(EBIT) / (EBIT - FC)
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]

Who determine the market price of a share of common stock?
The board of directors of the firm

The stock exchange on which the stock is listed
The president of the company
Individuals buying and selling the stock

When the bond approaches its maturity, the market value of the bond approaches to
which of the following?
Intrinsic value
Book value
Par value
Historic cost

Which of the following portfolio statistics statements is correct?
A portfolio's expected return is a simple weighted average of expected returns of the

individual securities comprising the portfolio.
A portfolio's standard deviation of return is a simple weighted average of individual
security return standard deviations.
The square root of a portfolio's standard deviation of return equals its variance.
The square root of a portfolio's standard deviation of return equals its coefficient of
variation.

What is the most important criteria in capital budgeting?
Return on investment
Profitability index
Net present value
Pay back period

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

What is the expected return of a zero-beta security?
The risk-free rate

Zero rate of return
A negative rate of return
The market rate of return

The objective of financial management is to maximize _________ wealth.
Stakeholders
Shareholders
Bondholders
Directors

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]

Which of the following is a capital budgeting technique that is NOT considered as
discounted cash flow method?
Payback period
Net present value
Profitability index

When taxes are considered, the value of a levered firm equals the value of the________.
Unlevered firm
Unlevered firm plus the value of the debt
Unlevered firm plus the present value of the tax shield
Unlevered firm plus the value of the debt plus the value of the tax shield

If the probability is written on Y-axis and the rate of return is mentioned on the X-axis,
Which kind of relationship it shows when there is higher the standard deviation the
higher the risk.
Indirect relationship
Inverse relationship
Direct relationship
No relationship

At the termination of project, which of the following needs to be considered relating to
project assets?
Salvage value
Book value
Intrinsic value
Fair value

Profitability index
Net present value
Pay back period

If stock is a part of totally diversified portfolio then its company risk must be equal to:
0
0.5
1
-1

What is yield to maturity on a bond?
Below the coupon rate when the bond sells at a discount, and equal to the coupon
rate when the bond sells at a premium
The discount rate that will set the present value of the payments equal to the bond
price
Based on the assumption that any payments received are reinvested at the coupon
rate
None of the above

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

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

What is the present value of Rs. 3,500,000 to be paid at the end of 50 years if the correct
risk adjusted interest rate is 18%?
Rs.105,000
Rs.1,500,000
Rs.3975,000
Rs.1,050

If 2 stocks move in the same direction together then what will be the correlation
coefficient?
0
1.0
-1.0
1.5

Why a single, overall cost of capital is often used to evaluate projects?
It avoids the problem of computing the required rate of return for each investment
Proposal
It is the only way to measure a firm's required return
It acknowledges that most new investment projects have about the same degree of
risk
It acknowledges that most new investment projects offer about the same expected
return

Which if the following is (are) true? I. The dividend growth model holds if, at some point
in time, the dividend growth rate exceeds the stock’s required return. II. A decrease in
the dividend growth rate will increase a stock’s market value, all else the same. III. An
increase in the required return on a stock will decrease its market value, all else the
same.
I, II, and III

I only
III only
II and III only

Which of the following is correct, if a firm has a required rate of return equal to the ROE?
The firm can increase market price and P/E by retaining more earnings.
The firm can increase market price and P/E by increasing the growth rate.
The amount of earnings retained by the firm does not affect market price or the P/E.
None of the given options

Which of the following shows ALL possible Risk –Return combinations for All
combinations of the stocks in the portfolio- whether efficient or not.
Parachute graph
Capital market line
Security market line

Which of the following factors might affect stock returns?
Business cycle
Interest rate fluctuations
Inflation rates
All of the above

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

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]

Which of the following is as EBIT?
Funds provided by operations

Earnings before taxes
Net income
Operating profit



In which of the following approach you need to bring all the projects to the same
length in time?
MIRR approach
Going concern approach
Common life approach
Equivalent annual approach

Which of the following is NOT the form of cash flow generated by the investments of the
shareholders?
Income
Capital loss
Capital gain
Operating income

What are two major areas of capital budgeting?
Net present value, profitability index

Net present value; internal rate of return
Net present value; payback period
Pay back period; profitability index

What is a legal agreement, also called the deed of trust, between the corporation
issuing bonds and the bondholders that establish the terms of the bond issue?
Indenture
Debenture
Bond
Bond trustee
Business cycle
Inflation rates
All of the above
Which of the following needs to be excluded while we calculate the incremental cash
flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Companies and individuals running different types of businesses have to make the
choices of the asset according to which of the following?
Life span of the project
Validity of the project
Cost of the capital
Return on asset
Which of the following is related to the use Lower financial leverage?
Fixed costs
Variable costs
Debt financing
Common equity financing
The overall (weighted average) cost of capital is composed of weighted averages of

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
Which groups of ratios measures a firm's ability to meet short-term obligations?
Liquidity ratios
Debt ratios
Coverage ratios
Profitability ratios
_________ is equal to (common shareholders' equity/common shares outstanding).
Book value per share
Liquidation value per share
Market value per share
None of the above
Where the efficient stock combination of risk and return in efficient market should lie?
On the SML
Below the SML
Above the SML
It may lie anywhere for efficient combination
Less than
More than
Equal to
Where the stock points will lie, if a stock is a part of totally diversified portfolio?
It will lie below the regression line
It will line above the regression line
It will line exactly on the regression line
It will be tangent to the regression line
Nominal Interest Rate is also known as:
Effective interest Rate
Annual percentage rate
Periodic interest rate
Required interest rate
Unlevered firm
The __________ the coefficient of variation ________ the relative risk of the investment.
Larger; Larger
Larger; Smaller
Smaller; Larger
Smaller; Smaller
cost of capital
company
yield measure?
Cost of debt
What is difference between shares and bonds?
Bonds are representing ownership whereas shares are not
Shares are representing ownership whereas bonds are not
Shares and bonds both represent equity
Shares and bond both represent liabilities
Which of the followings expressed the proposition that the cost of equity is a positive
linear function of capital structure?
The Capital Asset Pricing Model
M&M Proposition I
M&M Proposition II
The Law of One Price
The current yield on a bond is equal to ________.
Annual interest divided by the current market price
The yield to maturity
Annual interest divided by the par value
The internal rate of return
When a bond will sell at a discount?
The coupon rate is greater than the current yield and the current yield is greater than
yield to maturity
The coupon rate is greater than yield to maturity
The coupon rate is less than the current yield and the current yield is greater than the
yield to maturity
The coupon rate is less than the current yield and the current yield is less than yield to
maturity

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]
What are the Direct claim securities?
The securities whose value depends on the cash flows generated by the underlying
assets
The securities whose value depends on the value of the underlying assets
The securities that do not directly generate any returns for its investors
Cost of the capital
Return on asset

In the dividend discount model, _____ which of the following are not incorporated into
the discount rate?
Real risk-free rate

Risk premium for stocks
Return on assets
Expected inflation rate

Which of the following could NOT be defined as the capital structure of the Company?
The firm's mix of Assets and liabilities
The firm's common stocks only

The firm's debt-equity ratio

An implicit cost of adding debt to the capital structure is that it:
Adds interest expense to the operating statement

Increases the required return on equity
Reduces the expected return on assets
Decreases the firm's beta

Why common stock of a company must provide a higher expected return than the
debt of the same company?
There is less demand for stock than for bonds

There is greater demand for stock than for bonds
There is more systematic risk involved for the common stock
There is a market premium required for bonds

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

A set of possible values that a random variable can assume and their associated
probabilities of occurrence are referred to as ________.
The expected return
The standard deviation

same.
I, II, and III

I only
III only
II and III only

coefficient?
0
1.0
-1.0
1.5

Total portfolio risk is ________.
Equal to systematic risk plus non-diversifiable risk

Equal to avoidable risk plus diversifiable risk
Equal to systematic risk plus unavoidable risk
Equal to systematic risk plus diversifiable risk

Fixed costs
Variable costs
Debt financing

occurrence is referred to as ________.
Expected return
Standard deviation

The value of direct claim security is derived from which of the following?
Fundamental analysis
Underlying real asset
Supply and demand of securities in the market

What would you expect to happen to the price of a share of stock on the day it goes
ex-dividend?
The price should increase by the amount of the dividend

The price should decrease by the amount of the dividend
The price should decrease by one-half the amount of the dividend

The price should remain constant

Which of the following would express the negative net worth of a firm?
Experiencing a business failure

In legal bankruptcy
Experiencing technical insolvency
Experiencing accounting insolvency

Which of the following is NOT the type of Hybrid organizations?
S-Type Corporation
Limited Liability Partnership
Sole Proprietorship
Professional Corporation

Raw materials
Depreciation
Bad-debt losses
Production labor

Indenture
Debenture
Bond
Bond trustee

Fixed costs
Variable costs
Debt financing

Which of the following is similar between Return on investment and Payback period
techniques of Capital budgeting?
Involvement of interest rate while making calculations

Do not account for time value of money
Tricky and complicated methods

Which of the following statements regarding covariance is correct?
Covariance always lies in the range -1 to +1

Covariance, because it involves a squared value, must always be a positive number (or
zero)
Low covariances among returns for different securities leads to high portfolio risk
Covariances can take on positive, negative, or zero values


coefficient?
0
1.0
-1.0
1.5


M&M Proposition I
M&M Proposition II

_______ means expanding the number of investments which cover different kinds of
stocks.
Diversification
Standard deviation
Variance
Covariance



the discount rate?
Real risk-free rate

Return on assets

Where there is single period capital rationing, what is the most sensible way of making
investment decisions?
Choose all projects with a positive NPV

Group projects together to allocate the funds available and select the group of
projects with the highest NPV
Choose the project with the highest NPV
Calculate IRR and select the projects with the highest IRRs

Which of the following is not a recognized approach for determining the cost of
equity?
Dividend discount model approach

Before-tax cost of preferred stock plus risk premium approach
Capital-asset pricing model approach

Before-tax cost of debt plus risk premium approach

Which of the following is the characteristic of a well diversified portfolio?
Its market risk is negligible

Its unsystematic risk is negligible
Its systematic risk is negligible

activity?


Which of the following is an example of restructuring the firm?
Dividends are increased from Rs.1 to Rs.2 per share

A new investment increases the firm's business risk
New equity is issued and the proceeds repay debt
A new Board of Directors is elected to the firm

The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate
of deposit, if you deposit Rs.20, 000 you would expect to earn around ________ in
interest.
Rs.840
Rs.858
Rs.1,032
Rs.1,121

Fixed costs
Variable costs
Debt financing

primarily?
Sales variability

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

______ are also known as Spontaneous Financing.
Current liabilities
Current assets
Fixed assets
Long-term liabilities

S-Type Corporation
Sole Proprietorship

Business cycle
Inflation rates
All of the above

Which of the following is/are the characteristic(s) of Perpetuity?
It is an annuity
It has no definite end
It is a constant stream of identical cash flows

A capital budgeting technique through which discount rate equates the present value
of the future net cash flows from an investment project with the project’s initial cash
outflow is known as:
Payback period
Net present value
Profitability index

Choose among the followings, the correct statement regarding every journal entry.
Sum of Debits = Sum of Credits

Sum of Debits >Sum of Credits
Sum of Debits < Sum of Credits

Which of the following is NOT a cash outflow for the firm?
Depreciation
Dividends
Interest
Taxes



Which of the following is/are the component(s) of working capital management?
Current assets
Fixed assets
Fixed assets and long-term liabilities
Current assets and current liabilities



Which of the following affects price of the bond?
Market interest rate

Required rate of return
Interest rate risk

Proposal
risk
return

Security market line gives the relationship between _____ and _______.
Market risk and the required return

Systematic risk and the required return
Non-diversified risk and the required return

Above the breakeven EBIT, increased financial leverage will ________ EPS, all else the
same. Assume there are no taxes
Increase
Decrease
Either increase or decrease

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

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

Current liabilities
Current assets
Fixed assets

When taxes are considered, the value of a levered firm equals the value of the______.
Unlevered firm

The ________ the coefficient of variation ______ the relative risk of the investment.
Larger; Larger
Larger; Smaller
Smaller; Larger
Smaller; Smaller

Depreciation
Dividends
Interest
Taxes

Raw materials
Depreciation
Bad-debt losses
Production labor

Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs.
1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B
will mature in 6 years. If the yields to maturity on the two bonds change from 12% to
10%, __________.
Both bonds will increase in value, but bond A will increase more than bond B
Both bonds will increase in value, but bond B will increase more than bond A
Both bonds will decrease in value, but bond A will decrease more than bond B
Both bonds will decrease in value, but bond B will decrease more than bond A

Coefficient of variation is NOT the measure of ________.
Risk
Probability
Relative dispersion
Risk per unit of expected return

The value of a bond is directly derived from which of the following?
Cash flows
Coupon receipts
Par recovery at maturity

Funds provided by operations

Earnings before taxes
Net income
Operating profit

What is the difference between economic profit and accounting profit?
Economic profit includes a charge for all providers of capital while accounting profit
includes only a charge for debt
Economic profit covers the profit over the life of the firm, while accounting profit only
covers the most recent accounting period
Accounting profit is based on current accepted accounting rules while economic profit
is based on cash flows
All of the given options are correct




Which of the following refers to bringing the future cash flow to the present time?
Net present value

Discounting
Opportunity cost

What is the traditional approach towards the valuation of a company?
The cost of capital is independent of the capital structure of the firm

The firm maintains constant risk regardless of the type of financing employed
There exists no optimal capital structure
That management can increase the total value of the firm through the judicious use of
financial leverage





Fixed costs
Variable costs
Debt financing

The risk-free rate

Zero rate of return

price
rate
None of the above

What is the present value of Rs.8,000 to be paid at the end of three years if interest rate
is 11%?
Rs.6,015
Rs.4,872
Rs.6,725
Rs.1,842

______ is paid by companies with lower grade bonds like CC or C ratings.
Default risk premium

Sovereign Risk Premium
Market risk premium
Maturity risk premium

An increase
A decrease
No change

the discount rate?
Real risk-free rate

Return on assets

What type of long-term financing most likely has the following features: 1) it has an
infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant
annuity stream?
Long-term debt
Preferred stock
Common stock

Fixed costs
Variable costs
Debt financing

A 5-year ordinary annuity has a present value of Rs.1,000. If the interest rate is 8 percent,
the amount of each annuity payment is closest to which of the following?
Rs. 250.44
Rs. 231.91
Rs.181.62
Rs.184.08

probabilities of occurrence are referred to as ________.
The expected return


For most firms, P/E ratios and risk_______.
Will be directly related

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

Which of the following is the expected cash dividend that is normally paid to
shareholders?
Stock split
Stock dividend
Extra dividend
Regular dividend

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



Which of the following stipulate a relationship between expected return and risk?
APT stipulates
CAPM stipulates
Both CAPM and APT stipulate
Neither CAPM nor APT stipulate

Fixed costs
Variable costs
Debt financing

How "Shareholder wealth" is represented in a firm?
The number of people employed in the firm

The book value of the firm's assets less the book value of its liabilities
The market price per share of the firm's common stock
The amount of salary paid to its employees

The stock in your portfolio was selling for Rs.40 per share yesterday, but has today
declared a three for two split. Which of the following statements seems to be true?
There will be two-thirds as many shares outstanding, and they will sell for Rs.60.00 each
There will be four times as many shares outstanding, and they will sell for Rs.160.00 each
There will be 50 percent more shares outstanding and they will sell for Rs.26.67 each
There will be one-and-one-half times as many shares outstanding, and they will sell for
Rs.60.00 each

Net present value

Discounting
Opportunity cost

yield measure?
Cost of debt

How the beta of the stock could be calculated?
By monitoring price of the stock

By monitoring rate of return of the stock
By comparing the changes in the stock market price to the changes in the stock
market index

Which of the following refers to the cost of taking up one option while sacrificing the
other?
Opportunity cost
Operating cost
Sunk cost
Floatation cost

primarily?
Sales variability

ex-dividend?




APT stipulates
CAPM stipulates

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]

_______ means expanding the number of investments which cover different kinds of
stocks.
Diversification
Standard deviation
Variance
Covariance

Which of the following is related to the use of higher operating leverage?
Fixed costs
Variable costs
Debt financing



Which statement is NOT true regarding the market portfolio?
It includes all publicly traded financial assets

It is the tangency point between the capital market line and the indifference curve
All securities in the market portfolio are held in proportion to their market values
It lies on the efficient frontier




Cost of the capital
Return on asset

When the zero coupon bond approaches to its maturity, the market value of the bond
approaches to which of the following? http://vustudents.ning.com
Intrinsic value
Book value
Par value
Historic cost


In legal bankruptcy

0
0.5
1
-1



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


Question # 3 of 15 ( Start time: 01:52:42 AM ) Total Marks: 1 http://vustudents.ning.com

Rs.60.00 each


Security market line gives the relationship between _______ and _________.
If we invest in many securities which are ________to each other then it is possible to
reduce overall risk for your investment.
Comparable
Correlated
Highly correlated
Negatively correlated
Which of the following is the general assumption of Percent of Sales Forecasting?
Current Assets usually grow in proportion to Revenues
Current Assets usually grow in proportion to Expenses
Current Assets usually grow in proportion to Liabilities
Current Assets usually grow in proportion to Sales
Current assets
Fixed assets
Which of the following is not a recognized approach for determining the cost of equity?
When Investors want high plowback ratios?
Whenever ROE > k
Whenever k > ROE
Only when they are in low tax brackets
Whenever bank interest rates are high
Proposal
risk
return
Investors may be willing to pay a premium for stable dividends because of the
informational content of __________, the desire of investors for __________, and certain
__________.
Institutional considerations; dividends; current income
Dividends; current income; institutional considerations
Current income; dividends; institutional considerations
Institutional considerations; current income; dividends
Which of the following statements is TRUE regarding Permanent Accounts?
Accounts that are found on Income Statement
Accounts that are found on Statement of Retained Earnings
Accounts that are found on Balance Sheet
Which of the following is the percentage of interest charged at each compounding

time?
Nominal interest Rate



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

Rs. 250.44
Rs. 231.91
Rs.181.62
Rs.184.08

Which of the following is NOT true regarding the capital market?
Where long-term funds can be raised
Money is invested for periods longer than a year

Where TFCs and NIT are exchanged and traded
Where overnight lending & borrowing takes place



Parachute graph
Capital market line


Will be unrelated
None of the above.

The risk-free rate

Zero rate of return

Which of the following statements (in general) is correct?
A low receivables turnover is desirable

The lower the total debt-to-equity ratio, the lower the financial risk for a firm
An increase in net profit margin with no change in sales or assets means a weaker ROI
The higher the tax rate for a firm, the lower the interest coverage ratio
Which of the following is NOT The cost of equity?
The minimum rate that a firm should earn on the equity-financed part of an investment
A return on the equity-financed portion of an investment that, at worst, leaves the

market
price of the stock unchanged
By far the most difficult component cost to estimate
Generally lower than the before-tax cost of debt
Which of the following statements is true?
The financial risk of a firm decreases when it takes on a risky project
The financial risk of a firm increases when it takes on more equity
The business risk of a firm increases when it takes on a risky project
The business risk of a firm increases when it takes on more debt
The coupon rate is greater than the current yield and the current yield is greater than
yield to maturity
The coupon rate is less than the current yield and the current yield is greater than the
yield to maturity
The coupon rate is less than the current yield and the current yield is less than yield to
maturity
Study the time line and accompanying 5-period cash-flow pattern below. 0 1 2 3 4 5 6
Time line |--------|--------|--------|--------|--------|--------| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash
flows ¦ ¦ A B The present value of the 5-period annuity shown above as of Point A is the
present value of a 5-period ______________ , whereas the future value of the same
annuity as of Point B is the future value of a 5-period ______________ .
Ordinary annuity; ordinary annuity
Ordinary annuity; annuity due
Annuity due; annuity due
Annuity due; ordinary annuity
Which group of ratios shows the extent to which the firm is financed with debt?
Liquidity ratios
Debt ratios
Coverage ratios
length in time?
MIRR approach
Convertible Bonds
Common shares
Preferred shares
Which of the following equation is NOT correct?
Gross Revenue – Admin & Operating Expenses = Operating Revenue
Other Expenses + Other Revenue = EBIT
EBIT – Financial Charges & Interest = EBT
Net Income – Dividends = Retained Earning
coefficient?
1.0
-1.0
1.5
Which of the following is type a Temporary Account?
Asset
Liability
Reserves
Revenue
Which of the following refers to the risk associated with interest rate uncertainty?
Market risk premium
A statistical measure of the variability of a distribution around its mean is referred to as

__________.
Expected return
Standard deviation
S-Type Corporation
Sole Proprietorship
Less than
More than
Equal to
If all things equal, when diversification is most effective?
Securities' returns are positively correlated
Securities' returns are uncorrelated
Securities' returns are high
Securities' returns are negatively correlated
By comparing the changes in the stock market price to the changes in the stock
market index
Which of the following is called the tax savings of the firm derived from the deductibility
of interest expense?
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
Above the breakeven EBIT, increased financial leverage will __________ EPS, all else the
Increase
Decrease
If risk and return combination of any stock is above the SML, what does it mean?
It is offering lower rate of return as compared to the efficient stock
It is offering higher rate of return as compared to the efficient stock
Its rate of return is zero as compared to the efficient stock
It is offering rate of return equal to the efficient stock
Given no change in required returns, the price of a stock whose dividend is constant
will__________.
Decrease over time at a rate of r%
Remain unchanged
Increase over time at a rate of r%
Decrease over time at a rate equal to the dividend growth rate
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Fixed costs
Variable costs
Debt financing
Which of the following is a payment of additional shares to shareholders in lieu of cash?
Stock split
Stock dividend
Extra dividend
Regular dividend
According to MM II, what happens when a firm's debt-to-equity ratio increases?
Its financial risk increases
Its operating risk increases
The expected return on equity increases
The expected return on equity decreases
Which of the following includes the planning, directing, monitoring, organizing, and
controlling of the monetary resources of an organization?
Financial accounting
Financial management
Financial engineering
Financial budgeting
__________ 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
Which of the following is NOT the step of Percentage of sales to be used in Financial
Forecasting?
Estimate year-by-year Sales Revenue and Expenses
Estimate Levels of Investment Needs required to Meet Estimated Sales
Estimate the Financing Needs
Estimate the retained earnings
________ is paid by companies with lower grade bonds like CC or C ratings.
Market risk premium

Common stock
Debt
Preferred stock
None of the above
Rs.60.00 each
Standard deviation
EPS approach
Matrix approach
Gordon’s Approach
The risk that covers events like unexpected changes in the economy refers to:
Systematic risk
Unsystematic risk
Total risk
All of the above
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
price
rate
None of the above

time?
Which of the following would NOT be the part of the risk if the stock is a single stock
investment?
Company specific risk
Un-diversifiable risk
Diversifiable risk
Random risk
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
The explicit costs associated with corporate default, such as legal expenses, are the
___________ of the firm.
Flotation costs
Default beta coefficients
Direct bankruptcy costs
Indirect bankruptcy costs
Which of the following will NOT equate the future value of cash inflows to the present
value of cash outflows?
Discount rate
Profitability index
Multiple Internal rate of return
Business cycle
Inflation rates
All of the above
What is the additional amount a borrower must pay to lender to compensate for
assuming the risk associated with non-payment?
Market risk premium

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]
The logic behind _________ is that instead of looking at net cash flows you look at cash
inflows and outflows separately for each point in time.
IRR
MIRR
PV
NPV
Unlevered firm
Indenture
Debenture
Bond
Bond trustee
Which if the following refers to capital budgeting?
Investment in long-term liabilities
Investment in fixed assets
Investment in current assets
Investment in short-term liabilities
Profitability index
Net present value
Pay back period
The value of the bond is NOT directly tied to the value of which of the following assets?
Real assets of the business
Liquid assets of the business
Fixed assets of the business
Long term assets of the business
For most firms, P/E ratios and risk_________.
Will be unrelated
None of the above.
How can a company improve (lower) its debt-to-total asset ratio?
By borrowing more
By shifting short-term to long-term debt
By shifting long-term to short-term debt
By selling common stock
For Company A, plow back ratio is 30%. What will be its Pay-out ratio?
3.33%
30%
31%
70%
As interest rates go up, the present value of a stream of fixed cash flows _____.
Goes down
Goes up
Stays the same
Parachute graph
Capital market line
All of the following are the financial statements used for the purpose of reporting and
analysis EXCEPT:
Balance Sheet
Income Statement
Cash budget
Statement of Retained Earnings
flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Under the idealized conditions of MM, which statement is correct when a firm issues
new stock in order to pay a cash dividend on existing shares?
The new shares are worth less than the old shares
The old shares drop in value to equal the new price
The value of the firm is reduced by the amount of the dividend
The value of the firm is unaffected
Which of the following would NOT be the part of the risk if the stock is a single stock
investment?
Company specific risk
Un-diversifiable risk
Diversifiable risk
Random risk
Which of the following is the risk of investing funds in another country?
Market risk premium
APT stipulates
CAPM stipulates
Which of the following allows to graphically depicting the timing of the cash flows as
well as their nature as either inflows or outflows?
Cash flow diagram
Cash budget
Cash flow statement
Rs. 250.44
Rs. 231.91
Rs.181.62
Rs.184.08
__________.
___________ of the firm.
Flotation costs
Market risk premium
In efficient market the stock price depends upon the required return which depends
upon _________.
Market risk
Total risk
Diversified risk
Non- systematic risk
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Total portfolio risk is __________.
Which of the following are known as Discretionary Financing?
Current liabilities
Current assets
Fixed assets
Which of the following refers to a policy of dividend "smoothing"?
Maintaining a constant dividend payout ratio
Keeping the regular dividend at the same level indefinitely
Maintaining a steady progression of dividend increases over time
Alternating cash dividends with stock dividends
Which of the following would generally have unlimited liability?
A limited partner in a partnership
A shareholder in a corporation
The owner of a sole proprietorship
A member in a limited liability company (LLC)
Calculate the break-even point for sales revenues given the following information. The
firm has Rs.1, 000,000 in fixed costs. The firm anticipates that variable costs will be Rs.1 for
every Rs.5 in sales.
Rs.1, 250,000
Rs.1, 000,000
Rs.250, 000
Rs.200, 000
In efficient market the stock price depends upon the required return which depends
upon _________.
Market risk
Total risk
Diversified risk
Non- systematic risk
primarily?
Sales variability
cost of capital
company
index most likely has _________.
Which of the following is FALSE about Perpetuity?
It is a series of cash flows
Cash flows occur for a specific time period
Its cash flows are identical
What does the law of conservation of value implies?
The mix of senior and subordinated debt does not affect the value of the firm
The mix of convertible and non-convertible debt does not affect the value of the firm
The mix of common stock and preferred stock does not affect the value of the firm
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
assets
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
Market risk premium
flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Which of the following refers to financial risk?
Risk of owning equity securities
Risk faced by equity holders when debt is used
General business risk of the firm
Possibility that interest rates will increase
An arbitrage opportunity exists if an investor can construct a __________ investment

portfolio that will yield a sure profit.
Positive
Negative
Zero
All of the above
Which of the following risk can be diversified away?
Systematic risk
Beta
Firm specific risk
Market risk
Which of the followings are the propositions of Modigliani and Miller's?
The market value of a firm's common stock is independent of its capital structure
The market value of a firm's debt is independent of its capital structure
The market value of any firm is independent of its capital structure
Which of the following statements is true?
The financial risk of a firm decreases when it takes on a risky project
The financial risk of a firm increases when it takes on more equity
The business risk of a firm increases when it takes on a risky project
The business risk of a firm increases when it takes on more debt
0.5
-1
A statistical measure of the variability of a distribution around its mean is referred to as

__________.
Expected return
Standard deviation
Parachute graph
Capital market line
Stock split
Stock dividend
Extra dividend
Regular dividend
annuity stream?
Long-term debt
Preferred stock
Common stock
The DuPont Approach breaks down the earning power on shareholders' book value
(ROE) as follows: ROE = __________.
Net profit margin × Total asset turnover × Equity multiplier
Total asset turnover × Gross profit margin × Debt ratio
Total asset turnover × Net profit margin
Total asset turnover × Gross profit margin × Equity multiplier
Which type of responsibilities are primarily assigned to Controller and Treasurer

respectively?
Operational; financial management
Financial management; accounting
Accounting; financial management
Financial management; operations
Financial budgeting
Which of the following could be defined as the capital structure of the Company?
The firm's mix of different securities
The market imperfection that the firm's manager can exploit
All of the above
Proposal
risk
return
Cash flow diagram
Cash budget
Cash flow statement
annuity stream?
Long-term debt
Preferred stock
Common stock
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
Interest rate risk
Which of the followings expressed the proposition that the value of the firm is
independent of its capital structure?
M&M Proposition I
M&M Proposition II
According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate
of return is a function of which of the following:
Unique risk
Reinvestment risk
Market risk
Unsystematic risk
What is the present value of Rs.1,000 to be paid at the end of 5 years if the correct risk
adjusted interest rate is 8%?
Rs.714
Rs.1,462
Rs.322.69
Rs.401.98
shareholders?
Stock split
Stock dividend
Extra dividend
Regular dividend
Cash flow diagram
Cash budget
Cash flow statement
Rs.105,000
Rs.1,500,000
Rs.3975,000
Rs. 350,000
Accounting profit is based on current accepted accounting rules while economic

profit is based on cash flows
With continuous compounding at 8 percent for 20 years, what is the approximate future
value of a Rs. 20,000 initial investment?
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Expected return
Standard deviation
Unlevered firm
Comparable
Correlated
Highly correlated
M&M Proposition I
M&M Proposition II
An arbitrage opportunity exists if an investor can construct a __________ investment

Positive
Negative
Zero
All of the above
Fixed costs
Variable costs
Debt financing
Financial budgeting
The DuPont Approach breaks down the earning power on shareholders' book value
(ROE) as follows: ROE = __________.
On the SML
Below the SML
Above the SML
S-Type Corporation
Sole Proprietorship
length in time?
MIRR approach
analysis EXCEPT:
Balance Sheet
Income Statement
Cash budget
Which of the following refers to a highly competitive market where good business ideas
are taken up immediately?
Capital market
Efficient market
Money market
Real asset market
Goes down
Goes up
Stays the same
What is the traditional approach towards the valuation of a company?
The cost of capital is independent of the capital structure of the firm
The firm maintains constant risk regardless of the type of financing employed
There exists no optimal capital structure
That management can increase the total value of the firm through the judicious use of
financial leverage
An increase
A decrease
No change
According to ___________, the firm's cost of equity increases with greater debt financing,
but the WACC remains unchanged.
M&M Proposition I with taxes
M&M Proposition I without taxes
M&M Proposition II without taxes
M&M Proposition II with taxes
Convertible Bonds
Common shares
Preferred shares
If the probability is written on Y-axis and the rate of return is mentioned on the X-axis,
Which kind of relationship it shows when there is higher the standard deviation the
higher the risk.
Indirect relationship
Inverse relationship
Direct relationship
No relationship
Unlevered firm
What would be the result when there is an increase in the number of shares outstanding
by reducing the par value of stock?
Stock split
Stock dividend
Extra dividend
Regular dividend
Less than
More than
Equal to

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]
Expected return
Standard deviation
Which of the following is simply the weighted average of the possible returns, with the
weights being the probabilities of occurrence?
Expected return
Standard deviation
Indenture
Debenture
Bond
Bond trustee
analysis EXCEPT:
Balance Sheet
Income Statement
Cash budget
probabilities of occurrence are referred to as __________.
The expected return
In the dividend discount model, _______ which of the following are not incorporated
into the discount rate?
Real risk-free rate
Return on assets

Liquidity ratios
Debt ratios
Coverage ratios
A capital budgeting technique through which discount rate equates the present value
of the future net cash flows from an investment project with the project’s initial cash
Payback period
Net present value
Profitability index
Unique risk
Reinvestment risk
Market risk
Unsystematic risk
The risk-free rate
Zero rate of return
Accounting profit is based on current accepted accounting rules while economic

profit is based on cash flows
__________.
shareholders?
Stock split
Stock dividend
Extra dividend
Regular dividend
Will be unrelated
None of the above.
On the SML
Below the SML
Above the SML
Liquidity ratios
Debt ratios
Coverage ratios

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]
M&M Proposition I
M&M Proposition II
An 8-year annuity due has a present value of Rs.1,000. If the interest rate is 5 percent,
Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
Unlevered firm
Which of the following is the main objective of ‘Economics’?
Profit maximization
Maximization of shareholders wealth
Collection of accurate, systematic, and timely financial data
Market risk is measured in terms of the ___________ of the market portfolio or index.
Variance
Covariance
Standard deviation
Correlation coefficient
Why we need Capital rationing? (
Because, there are not enough positive NPV projects
Because, companies do not always have access to all of the funds they could make
use of
Because, managers find it difficult to decide how to fund projects
Because, banks require very high returns on projects
Forecasting?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate
of deposit, if you deposit Rs.20, 000 you would expect to earn around __________ in
interest.
Rs.840
Rs.858
Rs.1,032
Rs.1,121
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
primarily?
Sales variability
primarily?
Sales variability

Parachute graph
Capital market line

time?


shareholders?
Stock split
Stock dividend
Extra dividend
Regular dividend

What is the present value of Rs.8,000 to be paid at the end of three years if interest rate
is 11%?
Rs.6,015
Rs.4,872
Rs.6,725
Rs.1,842

The risk-free rate

Zero rate of return





Accounting profit is based on current accepted accounting rules while economic profit
is based on cash flows

It avoids the problem of computing the required rate of return for each
investment Proposal
It acknowledges that most new investment projects have about the same
degree of risk
It acknowledges that most new investment projects offer about the same
expected return

Which of the following is not a recognized approach for determining the cost of
equity?


Raw materials
Depreciation
Bad-debt losses
Production labor


In legal bankruptcy


ex-dividend?


Which of the following is correct regarding the opportunity cost of capital for a
project?
cost of capital
The company cost of capital is the expected rate of return demanded by investors in
a company


MIDTERM EXAMINATION
Spring 2010
MGT201- Financial Management (Session - 3)
Time: 60 min
Marks: 44
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following is equal to the average tax rate?
► Total tax liability divided by taxable income
► Rate that will be paid on the next dollar of taxable income
► Median marginal tax rate
► Percentage increase in taxable income from the previous period
Which group of ratios measures a firm's ability to meet short-term obligations?
► Liquidity ratios
► Debt ratios
► Coverage ratios
► Profitability ratios
Assume that the interest rate is greater than zero. Which of the following cash-inflow streams
totaling Rs.1, 500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and
Year 3 respectively.
► Rs.700 Rs.500 Rs.300
► Rs.300 Rs.500 Rs.700
► Rs.500 Rs.500 Rs.500
► Any of the above, since they each sum to Rs.1,500
Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned
is often referred to as __________.
► Present value
► Simple interest
► Future value
► Compound interest
You
are going to invest Rs.12,500 into a certificate of deposit (CD) at a 6% annual rate
(compounded annually) with a maturity of 30 months. How much money will you receive when
the CD matures?
► Rs.14,491
► Rs.14,518
► Incomplete information
► Rs.14,460
An
8-year annuity due has a future value of Rs.1,000. If the interest rate is 5 percent, the amount
of each annuity payment is closest to which of the following?
► Rs.109.39
► Rs.147.36
► Rs.154.73
► Rs.99.74
All
of the following influence capital budgeting cash flows EXCEPT __________.
► Choice of depreciation method for tax purposes
► Economic length of the project
► Projected sales (revenues) for the project
► Sunk costs of the project
The
basic capital budgeting principles involved in determining relevant after-tax incremental
operating cash flows require us to __________.
► Include sunk costs, but ignore opportunity costs
► Include opportunity costs, but ignore sunk costs
► Ignore both opportunity costs and sunk costs
► Include both opportunity and sunk costs
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
Which one of the following selects the combination of investment proposals that will provide the
greatest increase in the value of the firm within the budget ceiling constraint?
► Cash budgeting
► Capital budgeting
► Capital rationing
► Capital expenditure
Who
is responsible for the decisions relating capital budgeting and capital rationing?
► Chief executive officer
► Junior management
► Division heads
► All of the given option
When coupon bonds are issued, they are typically sold at which of the following value?
► Below par
► Above par value
► At or near par value
► At a value unrelated to par
Which of the following is NOT an example of hybrid equity?
► Convertible bonds
► Convertible debenture
► Common shares
► Preferred shares
The
value of dividend is derived from which of the following?
► Cash flow streams
► Capital gain /loss
► Difference between buying & selling price
Which of the following is CORRECT, if a firm has a required rate of return equal to the ROE?
► The firm can increase market price and P/E by retaining more earnings
► The firm can increase market price and P/E by increasing the growth rate
► The amount of earnings retained by the firm does not affect market price or the P/E
► None of the given options
► Whenever ROE > k
► Whenever k > ROE
► Only when they are in low tax brackets
► Whenever bank interest rates are high
Which of the following statement about portfolio statistics is CORRECT?
► A portfolio's expected return is a simple weighted average of expected returns of the

individual securities comprising the portfolio.
► A portfolio's standard deviation of return is a simple weighted average of individual

security return standard deviations.
► The square root of a portfolio's standard deviation of return equals its variance.
► The square root of a portfolio's standard deviation of return equals its coefficient of
variation.
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
Diversification can reduce risk by spreading your money across many different
______________.
► Investments
► Markets
► Industries
Which of the following is NOT a major cause of unsystematic risk.
► New competitors
► New product management
► Worldwide inflation
► Strikes
Which of the following need to be excluded while we calculate the incremental cash flows?
► Depreciation
► Sunk cost
► Opportunity cost
► Non-cash item
Under which concept it is said that “do not put all your eggs in one basket”?
► Risk & return
► Portfolio diversification
► Insurance management
► Time value of money
All
of the following are the steps involved in financial planning process EXCEPT:
► Assumptions are made about future levels of sales, costs, and interest rates etc.
► Ratios are projected and analyzed
► Projected financial statements are developed
► Comparison with key competitors about the prices to be charged
Which of the following is NOT the interest rate used for discounting calculation?
► Benchmark interest rate
► Effective interest rate
► Periodic interest rate
► Nominal interest rate
Suppose you are going to sale an old asset and its market value is greater than its book value it
indicates that:
► Company is going to have capital gain
► Company will have to bear capital loss
► Company is going to earn operating revenue
► Company has to bear revenue expense
Which of the following is not a type of problem in capital rationing?
► Size difference of projects
► Timing difference of projects
► Different lives of different projects
► Different cash flow streams
In
Pakistan which of the following is assigned to bond rating and risk?
► IMF
► Moody’s
► Standard & poor
► PACRA
Which of the following statement defines the following events i.e Inflation, recession, and high
interest rates?
► Systematic risk factors that can be diversified away
► Company-specific risk factors that can be diversified away
► Among the factors that are responsible for market risk
► Irrelevant except to governmental authorities like the Federal Reserve
Question No: 29 ( Marks: 3 )
Differentiate the real assets and securities.
Solution:
Real assets are physical property such as Land, Machinery, equipments and Building etc. Where as
securities basically, are legal contractual piece of paper.
Kinds of securities:
We have discussed about two types of securities.
Direct claim securities:
Stocks (Shares):
It is defined as equity paper representing ownership, shareholding. Appears on Liabilities side of Balance
Sheet
Bonds:
It is a debt paper representing loan or borrowing. These are long term debt instruments.
A
security analyst has estimated the following returns on the stocks of 4 large companies:
Weightage Expected Returns
Company A 25% 12%
Company B 25% 11.5%
Company C 25% 10.%
Company D 25% 9.5%
You are required to calculate the expected return on this portfolio.
Solution:
Expected Portfolio Return Calculation:
rP * = rA xA + rB xB + rC xB + rD xD
= 12% (25/100) + 11.5 %( 25/100) + 10%(/25/100) + 9.5%(25/100)
= 3% + 2.8757% + 2.5 + 2.375
= 10.75%
Why a person should invest in shares? Give reasons.
Solution:
. Capital growth
Over the longer term, shares can produce significant capital gains through increases in share prices.
Some companies also issue free or bonus shares to their shareholders as another way of passing on
company profits or increases in their net worth.
Diversifying your investments

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

Compared to other investments like property, shares are very portable. They can be bought and sold
quickly, and the brokerage on the transactions is lower than for a property transaction. Unlike selling a
property, you can sell part of your share parcels.
H
Corporation’s stock currently sells for Rs.20 a share. The stock just paid a dividend of
Rs.2 a share (Do = Rs.2). the dividend is expected to grow at a constant rate of 11% a
year.
What stock price is expected 1 year from now?

What would be the required rate of return on company’s stock?
Data:
P0 = rs 20
D0 = 2.
g = 11%
P1 = ?
rs = ?
Solution Part A:
P1 = P0(1 + g)
P1= 20(1.11)
P1= 22.2
Solution part B:
rs = D1 / P0 + g
rs = (2 * 1.11/20) + 0.11
rs = (2.22/20) + 0.11
rs = 0.111 + 0.11
rs = 0.221*100
rs = 22.1%
MIDTERM EXAMINATION
Spring 2010
Among the pairs given below select a(n) example of a principal and a(n) example of an agent
respectively.
► Shareholder; manager
► Manager; owner
► Accountant; bondholder
► Shareholder; bondholder
► Debt ratios
► Coverage ratios
Which of the following would be considered a cash-flow item from an "investing" activity?
► Cash outflow to the government for taxes
► Cash outflow to shareholders as dividends
► Cash outflow to lenders as interest
► Cash outflow to purchase bonds issued by another company
All
of the following influence capital budgeting cash flows EXCEPT __________.
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
Which of the following technique would be used for a project that has non-normal cash flows?
► Internal rate of return
► Multiple internal rate of return
► Modified internal rate of return
► Net present value
Which of the following statements is correct in distinguishing between serial bonds and sinking-fund
bonds?
► Serial bonds mature at a variety of dates, but sinking-fund bonds mature at a single date
► Serial bonds provide for the deliberate retirement of bonds prior to maturity, but sinking-fund
bonds do not provide for the deliberate retirement of bonds prior to maturity
► Serial bonds do not provide for the deliberate retirement of bonds prior to maturity, but sinking-
fund bonds do provide for the deliberate retirement of bonds prior to maturity
► None of the above are correct since a serial bond is identical to a sinking fund bond
The
value of a bond is directly derived from which of the following?
► Cash flows
► Coupon receipts
► Par recovery at maturity
Which of the following affects the price of the bond?
► Market interest rate
► Required rate of return
► Interest rate risk
If all
things equal, when diversification is most effective?
► Securities' returns are positively correlated
► Securities' returns are uncorrelated
► Securities' returns are high
► Securities' returns are negatively correlated
You
wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a
dividend of Rs. 2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and
10% for stock B. The intrinsic value of stock A:
► Will be greater than the intrinsic value of stock B
► Will be the same as the intrinsic value of stock B
► Will be less than the intrinsic value of stock B
In
the dividend discount model, which of the following is (are) NOT incorporated into the discount rate?
► Real risk-free rate
► Risk premium for stocks
► Return on assets
► Expected inflation rate
Which of the following is NOT a major cause of systematic risk.
► A worldwide recession
► A world war
► World energy supply
► Company management change
Which of the following term may be defined as incidental cash flows that arise because of the effect of
new project on the running business?
► Sunk cost
► Externalities
► Contingencies
A
preferred stock will pay a dividend of Rs. 2.75 in the upcoming year, and every year thereafter, i.e.,
dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth
model to calculate the intrinsic value of this preferred stock.
► Rs. 0.275
► Rs. 27.50
► Rs. 31.82
► Rs. 56.25
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate is 8%
compounded annually?
► Rs.680.58
► Rs.1,462.23
► Rs.322.69
► Rs.401.98
What is the present value of Rs.53,000 to be paid at the end of 15 years if the interest rate is 9%
► Rs.25,300
► Rs.34,122
► Rs.14,549
► Rs.11,989
The
objective of ________ is to maximize the shareholder’s wealth.
► Financial economics
► Financial management
► Financial accounting
► Financial engineering
Which of the following accounting equation is accurate?
► Assets +Equity = Liabilities + Expenses
► Assets + Expenses = Liabilities +Expenses + Revenue
► Assets + Liabilities = Equity + Expenses + Revenue
► Assets + Revenue + Liabilities = Equity
Through which of the following formula desired growth rate can be calculated?
► Return on equity × (1- payout ratio)
► Return on equity / (1- payout ratio)
► Return on equity + (1+ payout ratio)
► Return on equity - (1/ payout ratio)
Which of the following is a type of annuity in which no time span is involved?
► Ordinary annuity
► Annuity due
► Perpetuity
Market price of a share will be determined from __________.
► Supply of share only
► Demand of share only
► Price of share of Benchmark Company
► From demand and supply in the market
Which of the following is called hybrid equity as it is the combination of both equity and debt factor?
► Common stocks
► Preferred stocks
► Bonds & securities
Which of the following can be used as measure of return?
► Forecasted selling price
► Forecasted purchase price
► Forecasted dividend
► Forecasted time span of project
Which of the following formula could be used to calculate expected rate of return <r>?
► Po / Po × P1
► P1 + Po / Po
► P1 – Po / Po
► Po – P1 / Po
Finance consists of which of the following area(s)?
► Money and capital market
► Investment
A
proposal is accepted if payback period falls within the time period of 3 years. According to the given
criteria, which of the following project is most suitable to accept?
Payback period
Project A 1.66
Project B 2.66
Project C 3.66
► Project A
► Project B
► Project C
► Project A & B
Define interest rate risk and investment risk.
The Interest Rate Risk for Long Term Bonds ie. For the 10 years is more than the Interest Rate Risk for
Short Term Bonds i.e. 1 year bonds; provided the coupon rate for the bonds is similar.
When investor buy a long term bond he is locked in investment for long term period there are more
chances of fluctuation in interest rate and the inflation rate. So, the impact of interest rate changes on
Long Term bonds is greater. Long Term Bond Prices fluctuate more because their Coupon Rates are fixed
or locked for a long time even though Market Interest Rates are fluctuating daily; therefore the price of
Long Bonds has to constantly keep adjusting.
Price of the long term bond fluctuates more as compared to the short term bond. Because, you
have a long term bond with fix coupon rate but the market interest rate is fluctuating in between the years.
When we talk about the investment this is different from the forecasted and this to represent risk. we need
to keep in mind the distinction between Stand Alone Risk (or Single Investment Risk) as oppose to
market or Portfolio Risk or collection of investments risk, which is a risk of particular investment
compare to other investments you have made. In Portfolio risk we are
interested in overall risk of entire collection of investments that made by the company.
Hence the interest rate risk is to the specific concern while the investment risk is to effect the whole
business.
A
stock is expected to pay a dividend of Rs.0.75 at the end of the year. The required rate of return is
ks = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
Data:
P0 =?
D1 = 0.75
g = 6.4%
ROR = 10.5%
Solution:-
P0 = D1 / (ror – g)
P0 = 0.75 / (0.105- 0.064)
Po = 0.75/0.041
P0 = 18.29
There are some risks (Unique Risk) that we can diversify but some of the risks (Market risks) are
not diversifiable. Explain both types of risk.
Hammad Inc. is considering two alternative, mutually exclusive projects. Both projects require an initial
investment of Rs. 10,000 and are typical, average-risk projects for the firm. Project A has an expected life
of 2 years with after-tax cash inflow of Rs. 6,000 and Rs. 8,000 at the end of year 1 and 2, respectively.
Project B has an expected life of 4 years with after-tax cash inflow of Rs. 4,000 at the end of each of next
4 years. The firm’s cost of capital is 10 percent.
If the projects cannot be repeated, which project will be selected, and what is the net present value?
Solution:
Net Present Value:
Project A: Initial investment, I0 = Rs 10,000
Cash flow in yr 1, CF1 = Rs 6000
Discount rate, I = 10 %
No. of yrs, n = 2
NPV = - I0 + CF1/(1+i)n + CF2/(1+i)n + CF3/(1+i) n + CF4/(1+i) n
= -10,000 + 6000/(1.10) + 8000/(1.12)2
= -10,000 + 5454.54 + 6611.57
= - 10,000 +12066.11
= 2066.11
Project B: Initial investment, I0 = Rs 10,000
No. of yrs, n = 4 http://vustudents.ning.com
= -10,000 + 4000/(1.10) + 4000/(1.10)2+ 4000/(1.10)3+ 4000/(1.10)4
= -10,000 + 3636.36 + 3305.8 + 3005.25 + 2732.053
= -10,000 + 12679.463
= 2679.463
MIDTERM EXAMINATION
Spring 2010
MGT201- Financial Management (Session - 2
Question No: 1 ( Marks: 1 ) - Please choose on

In finance we refer to the market where existing securities are bought and sold as the
__________ market.
► Money
► Capital
► Primary
► Secondary

In conducting an index analysis every balance sheet item is divided by __________ and every
income statement is divided by __________ respectively.
► Its corresponding base year balance sheet item; its corresponding base year
income statement item
► Its corresponding base year income statement item; its corresponding base year balance
sheet item
► Net sales or revenues; total assets
► Total assets; net sales or revenues

To increase a given future value, the discount rate should be adjusted __________.
► Upward
► Downward
► First upward and then downward

Which of the following investment alternatives would provide the greatest future value for your
investment?
► 10% compounded daily (360 days)
► 10.5% compounded annually

► 10.25% compounded quarterly

► Goes down
► Goes up
► Stays the same
► Can not be found

A 5-year ordinary annuity has a present value of Rs.1,000. If the interest rate is 8 percent, the
amount of each annuity payment is closest to which of the following?
► Rs.250.44
► Rs.231.91
► Rs.181.62
► Rs.184.08

The basic capital budgeting principles involved in determining relevant after-tax incremental
operating cash flows require us to __________.


► Below par
► Above par value

Which of the following has NO effect when the financial health (cash flows and income) of the
company changes with time?
► Market value
► Price of the share
► Par value

The value of dividend is derived from which of the following?


Which of the following is (are) true?
I. The dividend growth model holds if, at some point in time, the dividend
growth rate exceeds the stock’s required return.
II. A decrease in the dividend growth rate will increase a stock’s market
value, all else the same.
III. An increase in the required return on a stock will decrease its market
► I, II, and III
► I only
► III only
► II and III only

______________.
►Investments
►Markets
►Industries
►All of the given options
Assume that the expected returns of the portfolios are the same but their standard
deviations are given in the options given below, which of the option represent the most
risky portfolio according to standard deviation?
►1.5%
►2.0%
►3.0%
►4.0%
When bonds are issued, under which of the following category the value of the bond
appears?
►Equity
►Fixed assets
►Short term loan
►Long term loan
_________ means expanding the number of investments which cover different kinds of
stocks.
►Diversification
►Standard deviation
►Variance
►Covariance
What is the present value of Rs.8,000 to be paid at the end of three years if the interest
rate is 11% compounded annually?
►Rs.5,850
►Rs.4,872
►Rs.6,725
►Rs.1,842
By summing up the discounted cash flows we can calculate which of the following?
►Liquidation value
►Intrinsic value
►Book value
►Market value
Which of the following accounting equation is accurate?
► Assets +Equity = Liabilities + Expenses
► Assets + Expenses = Liabilities +Expenses + Revenue
► Assets + Liabilities = Equity + Expenses + Revenue
► Assets + Revenue + Liabilities = Equity
Which of the following equation can represent income statement in best way?
►Profit – Expenses = sales revenue
►Sales revenue – Expenses = Profit
►Assets + Liabilities= Equity

►Sales revenue + Equity = Assets
►Ordinary annuity
►Annuity due
►Perpetuity
►None of the given options
All of the following are the examples of annuity EXCEPT:
►Mortgage payment
►Insurance premium
►Monthly rental payments
►Fixed coupon payments
_________ is the value of bond, which we expect the bond to be.
►Fair value
►Book value
►Market value
►Maturity value
YTM is equal to which of the following formula?
►Capital gain + market price
►Present value + interest yield
►Market price + interest yield
►Interest yield + capital gain yield
If there is an increase in a firm’s expected growth rate then it will cause its required rate
of return to______.
►Increase
►Decrease
►Fluctuate more than before
►Possibly increase, decrease, or remain constant
Which
of the following formula could be used to calculate expected rate of return <r>?
► Po / Po × P1
► P1 + Po / Po
► P1 – Po / Po
► Po – P1 / Po
This is an example of which of the following concept?
ABC Corporation’s stock price has fallen because it was not able to meet its production
deadlines.
►Market risk
►Company specific risk
►Industry risk
►Economic risk
A proposal is accepted if payback period falls within the time period of 3 years.
According to the given criteria, which of the following project is most suitable to
accept?
Payback period
Project A 1.66
Project B 2.66
Project C 3.66
► Project A
► Project B
► Project C
► Project A & B
By applying Common Life Approach calculate the NPV of the following projects:
Projects Initial outflow Inflow Yr 1 Inflow Yr 2
A 100 200 -
B 200 200 200
Solution:
Project A
NPV=-100+(200-100)/1.1)+200/(1.1)2 = 156
Project B
NPV =-200+200/1.1+200/(1.1)2 = 147
There are two stocks in the portfolio of Mr. N, Stock A and Stock B. the information of this
portfolio is as follows:
Common stock Expected rate of return Standard deviation
Stock A 15% 10%
Stock B 20% 15%
Calculate the expected rate of return on this portfolio assuming that Stock A consists of
75% of the total funds invested in the stocks and the remainder in Stock B.
Solution:
Apply formula on page 93 of handouts
={(75/100)2(10/100)2+(25/100)2(15/100)2+2((75/100)(25/100)(10/100)(15/100)(.6)}(.5)
= {(0.5625)(0.01)+(.0625)(0.0225)+2((.75)(.25)(.1)(.15)(.6))}(.5)
=(0.010406)*.5
=0.005203*100
=0.520313%
How risk affects the share price? (2.5)
What does the meaning of standard deviation in finance? (2.5)
Hammad Inc. is considering two alternative, mutually exclusive projects. Both projects
require an initial investment of Rs. 10,000 and are typical, average-risk projects for the
firm. Project A has an expected life of 2 years with after-tax cash inflow of Rs. 6,000 and
Rs. 8,000 at the end of year 1 and 2, respectively.
Project B has an expected life of 4 years with after-tax cash inflow of Rs. 4,000 at the
end of each of next 4 years. The firm’s cost of capital is 10 percent.
If the projects cannot be repeated, which project will be selected, and what is the net
present value?
Solution:
Net Present Value:
Project A: Initial investment, I0 = Rs 10,000
No. of yrs, n = 4
= -10,000 + 6000/(1.10) + 8000/(1.12)2
= -10,000 + 5454.54 + 6611.57
= - 10,000 +12066.11
= 2066.11
Project B: Initial investment, I0 = Rs 10,000
No. of yrs, n = 4
= -10,000 + 4000/(1.10) + 4000/(1.10)2+ 4000/(1.10)3+ 4000/(1.10)4
= -10,000 + 3636.36 + 3305.8 + 3005.25 + 2732.053
= -10,000 + 12679.463
= 2679.463
MIDTERM EXAMINATION
Spring 2010
How
a company can improve (lower) its debt-to-total asset ratio?
► By borrowing more
► By shifting short-term to long-term debt
► By shifting long-term to short-term debt
► By selling common stock
Which group of ratios relates profits to sales and investment?
► Debt ratios
► Coverage ratios
To
increase a given future value, the discount rate should be adjusted __________.
► Upward
► Downward
► First upward and then downward
Cash
budgets are prepared from past:
► Income tax and depreciation data
► Balance sheets
► Income statements
A 5-
year ordinary annuity has a future value of Rs.1,000. If the interest rate is 8 percent, the amount of each
annuity payment is closest to which of the following?
► Rs.231.91
► Rs.184.08
► Rs.181.62
► Rs.170.44
Why
we need Capital rationing?
► Because, there are not enough positive NPV projects
► Because, companies do not always have access to all of the funds they could make use of
► Because, managers find it difficult to decide how to fund projects
► Because, banks require very high returns on projects
Which of the following is a person or an institution designated by a bond issuer as the official
representative of the bondholders?
► Indenture
► Debenture
► Bond
► Bond trustee
Market price of the bond changes according to which of the following reasons?
► Market price changes due to the supply –demand of the bond in the market
► Market price changes due to Investor’s perception
► Market price changes due to change in the interest rate
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
Which of the following would tend to reduce a firm's P/E ratio?
► The firm significantly decreases financial leverage
► The firm increases return on equity for the long term
► The level of inflation is expected to increase to double-digit levels
► The rate of return on Treasury bills decreases
► The business cycle
► Interest rate fluctuations
► Inflation rates
► All of the above
What is the present value of Rs. 3,500,000 to be paid at the end of 50 years if the correct risk adjusted
interest rate is 18%?
► Rs.105,000
► Rs.150,000
► Rs.395,000
► Rs.350,000
While using capital budgeting techniques, the benefits we expect from a project is expressed in terms of:
► Cash in flows
► Cash out flows
► Cash flows
If
the probability is written on Y-axis and the rate of return is mentioned on the X-axis, Which kind of
relationship it shows when there is higher the standard deviation the higher the risk.
► Indirect relationship
► No relationship
► Direct relationship
► Insufficient information
By
summing up the discounted cash flows we can calculate which of the following?
► Liquidation value
► Intrinsic value
► Book value
► Market value
The
value at which buyers and sellers are willing to buy and sell any asset is known as:
► Liquidation value
► Book value
► Intrinsic value
► Market value
Which of the following concept says that rupee in your hand today is better than the rupee you are going
to get tomorrow?
► Risk & return
► Ordinary annuity
► Annuity due
► Perpetuity
Which of the following is the formula to calculate the future value of perpetuity?
► Constant cash flows × interest rate
► Constant cash flows / interest rate
► Constant cash flows + Constant cash flows × interest rate
► Constant cash flows - Constant cash flows/ interest rate
There is _______ relationship between NPV and Economic Value added.
► Direct
► Indirect
► No relationship
► Cannot be determined
If
new asset is replaced with old one, the difference between the depreciation of both assets would be:
► Useless and nothing to do with the depreciation
► Take the percentage of depreciation with new price of asset and then subtract it
► Subtracted from cash flows
► Added back to cash flows
The
formula which is used for the calculation of equivalent annual annuity is:
► (1+i) n +1/ (1+i) n
► (1+i) n-1 / (1+i) n
► (1+i) n × (1+i) n -1
► (1+i) n/ (1+i) n -1
The
responsibility of research & development projects lie with which of the following authority?
► Divisional heads
► Collaborative teams from all departments
► Experts are hired to make such decisions
Market price of a share will be determined from __________.
► Supply of share only
► Demand of share only
► Price of share of Benchmark Company
► From demand and supply in the market
Which of the following is the formula to calculate present value under zero growth model for common
stock?
► DIV1 / rCE
► DIV1 × rCE
► DIV1 + rCE
► DIV1 - rCE
Earning per share can be calculated with the help of which of the following formula?
► Net income / number of shares outstanding
► Net income – dividend / number of shares outstanding
► Operating income / number of shares outstanding
► Earning before interest and taxes / number of shares outstanding
Which of the following statements is correct relating to the following information?
Stocks A and B each have an expected return of 15% and a standard deviation of 20%. You have a
portfolio that consists of 50% A and 50% B.
► The portfolio's beta is less than 1.2
► The portfolio's expected return is 15%
► The portfolio's beta is greater than 1.2
► The portfolio's standard deviation is 20%
Briefly explain what call provision is and in which case companies use this option.
Call Provision:
The right (or option) of the Issuer to call back (redeem) or retire the bond by paying-off the Bondholders
before the Maturity Date. When market interest rates drop, Issuers (or Borrowers) often call back the old
bonds and issue new ones at lower interest rates
Lakson Corporation is a stagnant market and analysts foresee a long period of zero growth of the
firm. It is paying a yearly dividend of Rs.5 for some time which is expected to continue indefinitely.
The yield on the stock of similar firm is 8%.
What should lakson’s stock sell for?
Data:
P0 = ?
D1V1 = 5
RCE = 8%
Solution:
P0 = D1V1/RCE
P0 = 5/8%
P0 = 5/0.08
P0 = 62.5
What are different types of bonds? (Give any five types)
Solution:
Types of Bonds:
Mortgage Bonds: backed & secured by real assets
Subordinated Debt and General Credit: lower rank and claim than Mortgage Bonds.
Debentures: These are not secured by real property, risky
Floating Rate Bond: It is defined as a type of bond bearing a yield that may rise and fall within a
specified range according to fluctuations in the market. The bond has been used in the housing bond
market
Eurobonds: it issued from a foreign country
Zero Bonds & Low Coupon Bonds: no regular interest payments (+ for lender), not callable (+ for
investor)
H
Corporation’s stock currently sells for Rs.20 a share. The stock just paid a dividend of Rs.2 a share
(Do = Rs.2). the dividend is expected to grow at a constant rate of 11% a year.

Data:
P0 = rs 20
D0 = 2.
g = 11%
P1 = ?
ROR = ?
Solution Part A:
P1 = P0(1 + g)
P1= 20(1.11)
P1= 22.2
Solution part B:
ROR = D1 / P0 + g
ROR = (2 * 1.11/20) + 0.11
ROR = (2.22/20) + 0.11
ROR = 0.111 + 0.11
ROR = 0.221*100
ROR = 22.1%
MIDTERM EXAMINATION
Spring 2010
MGT201- Financial Management
Which type of responsibilities are primarily assigned to Controller and Treasurer respectively?
► Operational; financial management
► Financial management; accounting
► Accounting; financial management
► Financial management; operations
In
finance we refer to the market where existing securities are bought and sold as the __________ market.
► Money
► Capital
► Primary
► Secondary
Which of the following statement (in general) is correct?
► A low receivables turnover is desirable
► The lower the total debt-to-equity ratio, the lower the financial risk for a
firm
► An increase in net profit margin with no change in sales or assets means a weaker ROI
► The higher the tax rate for a firm, the lower the interest coverage ratio
A 5-
year ordinary annuity has a future value of Rs.1,000. If the interest rate is 8 percent, the amount of each
annuity payment is closest to which of the following?
► Rs.231.91
► Rs.184.08
► Rs.181.62
► Rs.170.44
A 5-
year ordinary annuity has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the
present value of this annuity is closest to which of the following?
► Rs.331.20
►Rs.399.30
► Rs.431.24
► Rs.486.65
In
proper capital budgeting analysis we evaluate incremental __________ cash flows.
► Accounting
► Operating
► Before-tax
► Financing
Mortgage bonds are secured by real property whose value is generally _______ than that of the value of
the bonds issue?.
► Higher
► Lower
► Equal
► Higher or lower
If a
7% coupon bond is trading for Rs. 975 it has a current yield of _________ percent.
► 7.00
► 6.53
► 8.53
►7.18
If a
company issues bonus shares, what will be its effect on the debt equity ratio?
► It will improve
► It will deteriorate
► No effect
_________ is equal to (common shareholders' equity/common shares outstanding).
►Book value per share
► Liquidation value per share
► Market value per share
► None of the above
You
wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of
Rs. 3 in the upcoming year while Stock Y is expected to pay a dividend of Rs. 4 in the upcoming year.
The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X:
► Will be greater than the intrinsic value of stock Y
► Will be the same as the intrinsic value of stock Y
► Will be less than the intrinsic value of stock Y
► Cannot be calculated without knowing the market rate of return
You
wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a
dividend of Rs. 2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and
10% for stock B. The intrinsic value of stock A:
► Will be greater than the intrinsic value of stock B
► Will be the same as the intrinsic value of stock B
►Will be less than the intrinsic value of stock B
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
When Return is being estimated in % terms, the units of Standard Deviation will be mention in
__________.
► Percentage (%)
► Times
► Number of days
___________ is one of the most common techniques of financial analysis.
► Analyzing the statement of equity
► Preparing the cash budget
► scrutinizing of Financial statement
► Forecasting the income statement
Which of the following formula is used to calculate the future value in simple interest?
► FV = PV + (PV× i × n)
► FV / (PV× i × n) = PV
► FV = PV - (PV× i × n)
► FV = PV × (PV× i × n)
Which of the following are the types of annuities?
► Perpetuity and discrete annuity
► Ordinary and discrete annuity
► Discrete and simple annuity
► Ordinary and annuity due
Value of annuity depends upon which of the following factors?
► Cash inflows & outflows
► Required rate of return & cash flows
► Constant cash flows & discount factor
► Constant cash flows & life of investment
Which of the following statement best describes capital budgeting?
► It’s a tool which is used to evaluate the projects and fixed assets of the company
► A technique used to assess the working capital requirement
► It will help the management to decide whether the new venture should be taken up or not.
► All of the given options are correct
IRR
can be defined as:
► A discount rate that equates the PV of a project’s expected cash inflows to the PV of project’s
cost
► Present value of the stream of net cash flows from project’s net investment
► It’s a cost & benefits ratio used to assess the validity of a project
► The time period required to receive back the initial investment.
If
the life of a project is 6 years and the life of other project is 2 years then least common multiple will be:
► 2 years
► 6 years
► 8 years
► 12 years
Which of the following is the price which is mentioned on the bonds?
► Face value
► Salvage value
► Market value
► Book value
_________ is the value of bond, which we expect the bond to be.
► Fair value
►Book value
► Market value
► Maturity value
When you allocate capital, you choose investments that are more beneficial and less
► Diversified
► Risky
► Costly
► Value based
Which of the following is a major disadvantage of the corporate form of organization?
► Double taxation of dividends
► Inability of the firm to raise large sums of additional capital
► Limited liability of shareholders
► Limited life of the corporate form
Which of the following is NOT the form of cash flow generated by the investments of the shareholders?
► Income
► Capital loss
► Capital gain
► Operating income
Define interest rate risk and investment risk.
Interest rate risk
Interest rate risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan
or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will
fall, and vice versa. Interest rate risk is commonly measured by the bond's duration.
Investment Risk
The uncertainties attached while making an investment that the investment may not yield the
expected returns.
OR
Possibility of a reduction in value of an insurance instrument resulting from a decrease in the value of the
assets incorporated in the investment portfolio underlying the insurance instrument. This reduction can
also be effected by a change in the interest rate.
What is risk averse assumption?
When we talk in terms of risk averse, we know that most investors are psychologically risk averse. In case
of two investments offer with the same prospective return most investor would choose the one with the
lower risk or standard deviation or spread or votality. In other words most of the investors are not major
gamblers. Gamblers would choose that project which appeals to investors greed by offering upsite return
of 30% plus 10% = 40%. The consequences on the share price, the higher the risk of share the higher its
rate of return and the lower its market price, so any investor will choose surely with the low risk and he
will take care of very closely risk averse assumption while finalizing any project.
Q If the cash flow stream for a project is NOT a uniform series of inflows and initial outflow
occur at time 0. 15% discount rate produces a resulting present value of Rs. 104,000 that is
greater than the initial cash outflow of Rs. 100,000. Now if we want to calculate the best
discount rate:
► We need to try a higher discount rate

► We need to try a lower discount rate
► 15% is the best discount rate
► Interpolation is not required here
How
negatively correlated investments behave in a market?
Solution:
If Ro = - 1.0, it means that Investments are Perfectly Negatively Correlated and the Returns (or Prices or
Values) of the 2 Investments move in Exactly Opposite directions. In this Ideal Case, All Risk can be
diversified away. For example, if the price of one stock increases by 50% then the price of another stock
goes down by 50%.
What types of shares are available in the market?
The following are the shares available normally in the market;
1. Preferred Stock:
These stocks have regular Constant / Fixed Future Dividends Certain for the Preferred Shareholders. Use
old Perpetuity Cash Flow Pattern and formulas to estimate theoretical Fair Stock Price.
2. Common Stock:
Theses stocks have variable future dividends expected by the common shareholders. Use Zero
& Constant Growth Models to simplify future Dividend forecasts in estimated Theoretical Stock Price (or
PV) equation. There dividend depend upon the income earned by the company and also upon the
management decision regarding the dividend declaration.
MIDTERM EXAMINATION
Spring 2010
Time: 60 min
Marks: 44
Which of the following statements is correct for a sole proprietorship?
► The sole proprietor has limited liability
► The sole proprietor can easily dispose of their ownership position relative to a shareholder in a
corporation
► The sole proprietorship can be created more quickly than a corporation
► The owner of a sole proprietorship faces double taxation unlike the partners in a partnership
Which of the following market refers to the market for relatively long-term financial instruments?
► Secondary market
► Primary market
► Money market
► Capital market
Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and a net profit margin of
5 percent. What are its sales?
► 750,0Rs.3, 750,000
► Rs.48Rs.480, 000
► Rs.30Rs.300, 000
► Rs.1, Rs.1, 500,000
An
A
capital budgeting technique through which discount rate equates the present value of the future net cash
flows from an investment project with the project’s initial cash outflow is known as:
► Payback period
► Profitability index
A
capital budgeting technique that is NOT considered as discounted cash flow method is:
► Payback period
Why
net present value is the most important criteria for selecting the project in capital budgeting?
► Because it has a direct link with the shareholders dividends maximization
► Because it has direct link with shareholders wealth maximization
► Because it helps in quick judgment regarding the investment in real assets
► Because we have a simple formula to calculate the cash flows
You
are selecting a project from a mix of projects, what would be your first selection in descending order to
give yourself the best chance to add most to the firm value, when operating under a single-period capital-
rationing constraint?
► Profitability index (PI)
► Net present value (NPV)
► Internal rate of return (IRR)
► Payback period (PBP)
Reference:
http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6680/1710103.
cw/content/index.html
Question#8
Bond is a type of Direct Claim Security whose value is NOT secured by __________.
► Tangible assets
► Intangible assets
► Fixed assets
► Real assets
If a
► 7.00
► 6.53
► 8.53
► 7.18
Reference:
Current Yield = Coupon / Market Price
Current Yield = 7%*1000/ 975
Current Yield = 70/ 975
Current Yield = 0.071*100
Current Yield = 7.18
Which of the following is designated by the individual investor's optimal portfolio?
► The point of tangency with the opportunity set and the capital allocation line
► The point of highest reward to variability ratio in the opportunity set
► The point of tangency with the indifference curve and the capital allocation line
► The point of the highest reward to variability ratio in the indifference curve
Reference:
http://83.143.248.39/faculty/mmateev/Investment%20and%20Portfolio%20Management%20BUS%2041
5/docs/Chap007_Test%20Bank(1)_Solution.rtf
Question#41
Assume that the expected returns of the portfolios are the same but their standard deviations are given in
the options given below, which of the option represent the most risky portfolio according to standard
deviation?
► 1.5%
► 2.0%
► 3.0%
► 4.0%
Which of the following is a drawback of percentage of sales method?
► It is a rough approximation
► There is change in fixed asset during the forecasted period
► Lumpy assets are not taken into account
Which of the following need to be excluded while we calculate the incremental cash flows?
► Depreciation
► Sunk cost
► Non-cash item
Which of the following is NOT an example of a financial intermediary? http://vustudents.ning.com
► Wisconsin S&L, a savings and loan association
► Strong Capital Appreciation, a mutual fund
► Microsoft Corporation, a software firm
► College Credit, a credit union
An
8% coupon Treasury note pays interest on May 30 and November 30 and is traded for settlement on
August 15. What is the accrued interest on Rs. 100,000 face value of this note?
► Rs. 491.80
► Rs. 800.00
► Rs. 983.61
► Rs. 1,661.20
Reference:
76/183(4,000) = 1,661.20. Approximation: .08/12*100,000=666.67 per month. 666.67/month

* 2.5 months = 1.666.67.
A
preferred stock will pay a dividend of Rs. 3.50 in the upcoming year, and every year thereafter, i.e.,
dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth
► Rs. 0.39
► Rs. 0.56
► Rs. 31.82
► Rs. 56.25
Reference:
PV = DIV1/ rPE = 3.5 / 11% = 3.5/0.11 = Rs 31.82
Information that goes into __________ can be used to prepare __________.
► A forecast balance sheet; a forecast income statement
► Forecast financial statements; a cash budget
► Cash budget; forecast financial statements
► A forecast income statement; a cash budget
What is the present value of Rs.8,000 to be paid at the end of three years if the interest rate is 11%
► Rs.5,850
► Rs.4,872
► Rs.6,725
► Rs.1,842
“Do
not compare apples with oranges” is the concept in:
► Discounting and Net present value
► Risk & return
Which of the following is NOT the interest rate used for discounting calculation?
Which of the following is the formula to calculate the future value of perpetuity?
Which of the following interest rate keeps on moving and changing on daily basis?
► Book value
► Market value
► Salvage value
► Face value
From which of the following formula we can calculate coupon rate?
► Coupon receipt / market value
► Coupon receipt / present value
► Coupon receipt / salvage value
► Coupon receipt / book value
Value of “g” in the formula of constant growth rate can be calculated from which of the following
formula?
► g = plowback ratio × ROE
► g = plowback ratio × ROA
► g = payout ratio + ROE
► g = payout ratio + ROA
In
Gordon’s formula (rCE = DIV1 / Po + g), rCE is considered as __________ and “g” is considered as
__________.
► Dividend yield, operating expenses
► Dividend yield, operating income
► Dividend yield, capital loss
► Dividend yield, capital gain
To
calculate the annual rate of return for an investment, we require which of the following(s)?
► The income created
► The gain or loss in value
► The original value at the beginning of the year
This
is an example of which of the following?
Real estate prices fell across the board because the market was glutted with surplus pre-owned homes for
sale.
► Economic risk
► Industry risk
► Company risk
► Market risk
Briefly explain what call provision is and in which case companies use this option.
Call Provision:
The right (or option) of the Issuer to call back (redeem) or retire the bond by paying-off the Bondholders
before the Maturity Date. When market interest rates drop, Issuers (or Borrowers) often call back the old
bonds and issue new ones at lower interest rates
There are two stocks in the portfolio of Mr. N, Stock A and Stock B. the information of this
portfolio is as follows:
Common stock Expected rate of return Standard deviation
Stock A 15% 10%
Stock B 20% 15%
Calculate the expected rate of return on this portfolio assuming that Stock A consists of 75% of the
total funds invested in the stocks and the remainder in Stock B.
Solution:
Apply formula on page 93 of handouts.
={(75/100)2(10/100)2+(25/100)2(15/100)2+2((75/100)(25/100)(10/100)(15/100)(.6)}(.5)
= {(0.5625)(0.01)+(.0625)(0.0225)+2((.75)(.25)(.1)(.15)(.6))}(.5)
=(0.010406)*.5
=0.005203*100
=0.520313%
(a) What is correlation of coefficient?
Solution:
Correlation Coefficient ( AB or “Ro”):
Risk of a Portfolio of only 2 Stocks A & B depends on the Correlation between those 2 stocks.
The value of Ro is between -1.0 and +1.0
If Ro = 0 then Investments are Uncorrelated & Risk Formula simplifies to Weighted Average
Formula. If Ro = + 1.0 then Investments are Perfectly Positively Correlated and this means that
Diversification does not reduce Risk.
If Ro = - 1.0, it means that Investments are Perfectly Negatively Correlated and the Returns (or Prices or
Values) of the 2 Investments move in Exactly Opposite directions. In this Ideal Case, All Risk can be
diversified away. For example, if the price of one stock increases by 50% then the price of another stock
goes down by 50%.
In Reality, Overall Ro for most Stock Markets is about Ro = + 0.6.it is very rough rule of thumb. It
means that correlations are not completely perfect and you should remember that if the correlation
coefficient is +1.0 then it is not possible to reduce the diversifible risk.
This means that increasing the number of Investments in the Portfolio can reduce some amount of risk but
not all risk
(b) What are efficient portfolios?
Solution:
Efficient Portfolios are those whose Risk & Return values match the ones computed using Theoretical
Probability Formulas. The Incremental Risk Contribution of a New Stock to a Fully
Diversified Portfolio of 40 Un-Correlated Stocks will be the Market Risk Component of the New Stock
only. The Diversifiable Risk of the New Stock would be entirely offset by random movements in the
other 40 stocks. Adding a New Stock to the existing Portfolio will create more Efficient Portfolio Curves.
The New Stock will contribute its own Incremental Risk and Return to the Portfolio.
Suppose you approach a bank for getting loan. And the bank offers to lend you Rs.1, 000,000 and you
sign a bond paper. The bank asks you to issue a bond in their favor on the following terms required by the
bank: Par Value = Rs 1, 000,000, Maturity = 3 years
Coupon Rate = 15% p.a, Security = Machinery
You are required to calculate the cash flow of the bank which you will pay every month as well as
the present value of this option.
Data:
Par Value = Rs 1, 000,000
Maturity = 3 years
Coupon Rate = 15% p.a,
Security = Machinery
Solution:
CF = Cash Flow = Coupon Value = Coupon Rate x Par Value
CF = 15% x 1,000,000
CF = 150000
Assume that rD = 10%
PV = CF1/(1+rD/12)12+CFn/(1+rD/12)2x12 +..+CFn/ (1+rD/12) n +PAR/ (1+rD) n
PV = 150000/ (1 + 0.10/12)12 + 150000/ (1 + 0.10/12)2x12 + 150000/ (1 + 0.10/12)3x12 + 1000000/(1 +

0.10/12)3x12
PV = 150000/ (1.00833)12 + 150000/ (1.00833)24 + 150000/ (1.00833)36 + 1000000/(1.00833)36
PV = 135787 + 122921 + 111274 + 741828
PV = 1111810
Solution #2
CF = Cash Flow = Coupon Value = Coupon Rate x Par Value
CF = 15% x 1,000,000
CF = 150000/12
Monthly CF = 12500
Assume that rD = 10%
PV = CF1/(1+rD/12)12+CFn/(1+rD/12)2x12 +..+CFn/ (1+rD/12) n +PAR/ (1+rD) n
PV = 12500/ (1 + 0.10/12)12 + 12500/ (1 + 0.10/12)2x12 + 12500/ (1 + 0.10/12)3x12 + 1000000/(1 +

0.10/12)3x12
PV = 12500/ (1.00833)12 + 12500/ (1.00833)24 + 12500/ (1.00833)36 + 1000000/(1.00833)36
PV = 11315.60425 + 10243.43196 + 9272.849775 + 741828
PV = 772660
FV = CCF (1 + rD/m )nxm - 1/rD/m
FV = 12500 (1 + 10%/12)3x12 - 1 / 10%/12
FV = 12500 (41.779)
FV = 522237.5
PV (Coupons Annuity) = FV / (1 + rD/m) nxm
PV = 522237.5/(1 + 10%/12) 3x12
PV = 522237.5/1.348021407
PV = 387410
PV (Par) = 1,000,000 / (1.00833)36
PV (Par) = 741828
PV = PV (Coupons Annuity) + PV (Par)
PV = 387410 + 741828
PV = 1129238
MGT201 Solved MCQ

Question # 1

Question # 2

activity?
Question # 3
Which of the following refers to the cost of taking up one option while sacrificing the
other?
Opportunity cost
Operating cost
Sunk cost
Floatation cost
Question # 4
percent, the future value of this annuity is closest to which of the following equations?

Ref: http://web.utk.edu/~jwachowi/annuity3.html Check Question #7
Question # 5
When the bond approaches its maturity, the market value of the bond approaches to
Intrinsic value
Book value
Par value
Historic cost
Question #6
Who or what is a person or institution designated by a bond issuer as the official

Indenture
Debenture
Bond
Bond trustee
Reference: A trustee is a person or institution designated by a bond issuer as the official representative of the bondholders.
Question # 7
Which of the following term may be defined as incidental cash flows that arise because
of the effect of new project on the running business?
Sunk cost
Opportunity cost
Externalities (Page50)
Contingencies
Question #8

Question # 9
In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly decrease,
the present value of that future amount to you would ______.
Fall
Rise
Remain unchanged
Question # 10
An annuity due is always worth ___ a comparable annuity.

Less than
More than
Equal to
Question # 12
Indenture
Debenture
Bond
Bond trustee
Reference:
Indenture -- The legal agreement, also called the deed of trust, between the
corporation issuing bonds and the bondholders, establishing the terms of the bond issue
and naming the trustee.
Question # 13
Rs.105,000 (Doubted)
Rs.1,500,000
Rs.3975,000
Rs. 350,000
Question # 14
Current liabilities
Current assets
Fixed assets
Reference: Long Term Liabilities: Also, called Discretionary Financing does not grow in
proportion to Sales
Question # 15
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Reference:
20000/(1.08)^20 = 93129
Question # 16
Which of the following is the Double Entry Principle?
Assets + Liabilities = Shareholders’ Equity
Assets = Liabilities + Shareholders’ Equity
Liabilities = Assets + Shareholders’ Equity
Reference:
Fundamental Accounting Equation and Double Entry Principle.
• Assets +Expense = Liabilities + Shareholders’ Equity + Revenue
(Note: Expense & Revenue are Temporary P/L accounts – the others are Permanent
Balance Sheet
Accounts)
• Left Hand Items increase when debited. Right Hand items increase when credited.
• For every journal entry, the Sum of Debits = the Sum of Credits
Question # 17
assets
Reference: Page 82
Direct claim securities like bond and stocks the value of security can be calculated
from the cash flows of underlying assets
Question # 18
Which of the following is NOT true regarding an ordinary annuity?
It is a series of equal cash flows
Payments are made at the start of each period
It is also known as deferred annuity
Reference:
Ordinary Annuity
An ordinary annuity, also known as deferred annuity, consists of a series of equal

payments at the end of each period.
Question # 19
Double taxation of dividends
Inability of the firm to raise large sums of additional capital
Limited liability of shareholders
Limited life of the corporate form
Question # 20
Payback period
Net present value
Profitability index
Reference:
The payback method focuses on the payback period. The payback period is
the length of time that it takes for a project to recoup its initial cost
out of the cash receipts that it generates. This period is some times
referred to as" the time that it takes for an investment to pay for itself."
The basic premise of the payback method is that the more quickly the cost
of an investment can be recovered, the more desirable is the investment. The
payback period is expressed in years. When the net annual cash inflow is the
same every year, the following formula can be used to calculate the payback
period.
Question # 21
An increase
A decrease
No change
Question # 22
As interest rates go up, the present value of a stream of fixed cash flows ___.
Goes down
Goes up
Stays the same
Question # 23
Question # 24
_______ is equal to (common shareholders' equity/common shares outstanding).
None of the above
Reference:
http://www.investopedia.com/terms/b/bookvaluepercommon.asp
Question # 25
same.
I, II, and III
I only
III only
II and III only
Question # 26
Given no change in required returns, the price of a stock whose dividend is constant will
________.

Remain unchanged
Question # 27


Reference:
Page 29
Question # 28


Question # 29

Question # 30
When the zero coupon bond approaches to its maturity, the market value of the bond
approaches to which of the following?
Intrinsic value
Book value
Par value
Historic cost
Reference:
Page 64
Question # 31
What is potentially the biggest advantage of a small partnership over a sole

proprietorship?
Unlimited liability
Single tax filing

Difficult ownership resale
Raising capital
Question # 32

Current liabilities
Current assets
Fixed assets
Reference:
Current Liabilities: Also called Spontaneous Financing. Generally grow in proportion to

Sale.
Question # 33
______ is paid by companies with lower grade bonds like CC or C ratings.


Market risk premium
Reference:
Page 20 & 22
Question # 34
Financial budgeting
Question # 35
What is the long-run objective of financial management?

Maximize earnings per share

Maximize the value of the firm's common stock
Maximize return on investment
Maximize market share
Question # 36
Why companies invest in projects with negative NPV?

Because there is hidden value in each project

Because there may be chance of rapid growth
Because they have invested a lot
Question # 37
Forecasting?

Question # 38

S-Type Corporation
Sole Proprietorship
Question # 39
Which of the following techniques would be used for a project that has non–normal
cash flows?

Net present value
Question # 40
The logic behind _______ is that instead of looking at net cash flows you look at cash
inflows and outflows separately for each point in time.
IRR
MIRR
PV
NPV
Question # 41

By borrowing more
Question # 42
length in time?
MIRR approach
Question # 43

Reference:
It is a process of making investment decisions on viable projects where funds are

limited. Investments decisions are made given a fixed amount of capital to be invested
in viable projects. If a company doesn’t have sufficient funds to undertake all projects
with a positive NPV, this is a capital rationing situation.
Question # 44
Rs. 250.44
Rs. 231.91
Rs.181.62
Rs.184.08
Question # 45
Which of the following is similar between Return on investment and Payback period
techniques of Capital budgeting?

Question # 46
By borrowing more
Question # 47

Question # 48
Cash flows
Coupon receipts
Question # 49
Par value
Market value
Intrinsic value
Face value
Question # 50
According to timing difference problem a good project might suffer from ___ IRR even
though its NPV is ______.
Higher; lower
Lower; Lower
Lower; higher
Higher; higher
Reference:
A good project might suffer from a lower IRR even though its NPV is higher.
Question # 51
Which group of ratios shows the extent to which the firm is financed with debt

Liquidity ratios
Debt ratios
Coverage ratios
Question # 51
When bonds are issued, under which of the following category the value of the bond
appears

Equity
Fixed assets
Short term loan
Long term loan
Question # 52
Which of the following refers to bringing the future cash flow to the present time

Net present value
Discounting
Opportunity cost
Question # 53
Discounted cash flow methods provide a more objective basis for evaluating and
selecting an investment project. These methods take into account:

Magnitude of expected cash flows
Timing of expected cash flows
Both timing and magnitude of cash flows
Question # 54
Effective interest rate is different from nominal rate of interest because

Nominal interest rate ignores compounding
Nominal interest rate includes frequency of compounding
Periodic interest rate ignores the effect of inflation(Doubted)
Effective Interest Rate = i eff

It is very useful to compare securities and investments with different life or
compounding cycles but not used for Discounting and PV.
Question # 55
What are the Indirect securities

assets
The securities that indirectly generate returns for its investors
Reference: Indirect Securities: Indirect securities include derivatives, Futures and Options
The securities do not generate any cash flow; however, its value depends on the
value of the underlying asset.
Question # 56
choices of the asset according to which of the following

Cost of the capital
Return on asset
Reference:
Lecture 12
Question # 57
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 less than the current yield and the current yield is greater than
the yield to maturity
The coupon rate is less than the current yield and the current yield is less than yield
to maturity
Question # 58
well as their nature as either inflows or outflows

Cash flow diagram
Cash budget
Cash flow statement
Question # 59
capital budgeting technique through which discount rate equates the present value of
the future net cash flows from an investment project with the project’s initial cash
Payback period
Net present value

Profitability index
Question # 60
Which of the following is the general assumption of Percent of Sales Forecasting?
Question # 61

Current assets
Fixed assets
Question # 62
Which of the following is NOT true regarding an annuity due?


Question # 63
Above par value

Below par
At or near par value
At a value unrelated to par
Question # 64

Payback period
Net present value
Profitability index
Question # 65

Convertible Bonds
Common shares
Preferred shares
Question # 66
Why we need Capital rationing?


Because, companies do not always have access to all of the funds they could make
use of

Question # 67
flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Question # 68


Interest rate risk
All of the given options.
Question # 69

It is an annuity
Question # 70
A technique that tells us the number of years required to recover our initial cash
investment based on the project’s expected cash flows is:

Pay back period
Net present value
Profitability index
Question # 71
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Reference:
F V = PV x e^ i x n
FV = 20000 x 2.718(0.08x20)
FV = 20000 x 4.95221081
FV = 99044.2162
Question # 72

Which of the following is a limitation of a Corporation?
Easy to set up
Double-taxation
Inexpensive to maintain
Unlimited liability
Reference:
Limitations:
i. Double Taxation:
Corporate earnings may be subject to double taxation – the earnings of the
corporation are taxed at corporate level, and then any earnings paid out as
dividends are taxed again as income to the stockholders.
ii. Legal Formalities:
Setting up a corporation, and filing many official documents, is more complex
and time consuming than for a proprietor ship or a partnership
Question # 73
The return in excess to risk free rate that investors require for bearing the market risk is
known as:
Market risk premium
Question # 74
Study the time line and accompanying 5-period cash-flow pattern below. 0 1 2 3 4 5 6
Time line |--------|--------|--------|--------|--------|--------| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash
flows ¦ ¦ A B The present value of the 5-period annuity shown above as of Point A is the
present value of a 5-period ____________ , whereas the future value of the same annuity
as of Point B is the future value of a 5-period ____________ .
Question # 75
Reference: (Page63)
One form of the debt is bonds. Value of Direct Claim Security is directly will be
determined by the value of the underlying Real Asset.
Question # 76
Question # 77
An increase in net profit margin with no change in sales or assets means a weaker
ROI
Question # 78

Market risk premium
Question # 79
Reference: (Page14)
Operating Revenue – Other Expenses + Other Revenue = EBIT
Question # 80
Discount rate
Profitability index
Question # 81
Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
Reference:
FV = PMT* ((1+i)^n – 1)/i (formula use to calc fv of annuity)
PV= PMT *((1+i)^-n -1)/i (formula use to calc PV of annuity)
Try to remember above two formulas for calc of annuity
1000 = pmt * ((1.05)^-8 -1)/.05
1000 = PMT *6.46
PMT = 1000/6.46 = 154.73
Question # 82
annuity stream?
Long-term debt
Preferred stock
Common stock
Question # 83
Asset
Liability
Reserves
Revenue
Reference:
P/L Items or Accounts are ‘temporary’ accounts that need to be closed at the end of
the accounting cycle
Question # 84
Question # 85
10%, __________?
Both bonds will increase in value, but bond A will increase more than bond B
Both bonds will increase in value, but bond B will increase more than bond A
Both bonds will decrease in value, but bond A will decrease more than bond B
Both bonds will decrease in value, but bond B will decrease more than bond A
Question # 86
Which of the following can not be the drawback of using payback period technique of
capital budgeting?
It does not account for time value of money
It neglects cash flows after the payback period
It does not use interest rate while making calculations
It is a tricky and complicated method
REF: payback period is a simple and straightforward method for analyzing. Page 40
Question # 87
Which of the following refers to the risk associated with interest rate uncertain
ty?

Market risk premium (doubted)
Question # 88
Depreciation
Dividends
Interest
Taxes
Question # 89
Below the coupon rate when the bond sells at a discount, and equal to the
coupon rate when the bond sells at a premium
price
Based on the assumption that any payments received are reinvested at the
coupon rate
None of the above
Question # 90
What should be the focal point of financial management in a firm?
The number and types of products or services provided by the firm
The minimization of the amount of taxes paid by the firm
The creation of value for shareholders
The dollars profits earned by the firm
Question # 91
Question # 92
Question # 93
For Company A, plow back ratio is 30%. What will be its Pay-out ratio?
3.33%
30%
31%
70%
Reference:
Plowback=1-Payout
Plowback + Payout=1
Payout = 1 – Plowback
Payout = 1 – 30%
Payout = 1 – 0.3
Payout = 0.07*100
Payout = 70%
Question # 94
Which of the following is the risk of investing funds in another country?
Market risk premium
Question # 95
Which of the following would be considered a cash-flow item from an "investing"

activity?
Cash outflow to lenders as interest
Question # 96
MIRR (discount rate) equates which of the following?
Future value of cash inflows to the present value of cash outflows
Future value of cash flows to the present value of cash flows
Future value of all cash flows to zero
Present value of all cash flows to zero
Question # 97
Profit maximization
Question # 98
Question # 99
Which of the following refers to time value of money concept?
A rupee in one’s hand at present is worth less than the rupee that one is going to
receive tomorrow
A rupee in one’s hand at present is worth more than the rupee that one is going to
receive tomorrow
A rupee in one’s hand at present is worth same as the rupee that one is going to
receive tomorrow
Question # 100





Upward
Downward
First upward and then downward

In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly decrease, the present value
of that future amount to you would __________.
Fall
Rise
Remain unchanged

A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the
present value of this annuity is closest to which of the following equations?

At the termination of project, which of the following needs to be considered relating to project assets?
Salvage value
Book value
Intrinsic value
Fair value


What is potentially the biggest advantage of a small partnership over a sole proprietorship?
Unlimited liability
Single tax filing
Raising capital

Which of the following effects price of the bond?
Interest rate risk
uestion # 9 of 10 ( Start time: 04:10:31 PM ) Total Marks: 1

Less than
More than
Equal to

A capital budgeting technique through which discount rate equates the present value of the future net
cash flows from an investment project with the project’s initial cash outflow is known as:
Payback period
Net present value
Profitability index
\Which group of ratios measures a firm's ability to meet short-term obligations?
Liquidity ratios
Debt ratios
Coverage ratios
Which one of the following selects the combination of investment proposals that
will provide the greatest increase in the value of the firm within the budget ceiling
constraint?
Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Reference
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Amount = P*(1+i/n)^n
Its not multiple compounding otherwise use this forumal
P*(i+i/m/n)^m*n
A project that tells us the number of years required to recover our initial cash investment
based on the project’s expected cash flows is:
Pay back period
Net present value
Profitability index
A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is
8 percent, the present value of this annuity is closest to which of the following
equations?
annuity stream?
Long-term debt
Preferred stock
Common stock
Lon term assets of the business
the current yield on a bond is equal to ________.
Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
1000 = pmt * ((1.05)^-8 -1)/.05
1000 = PMT *6.46
PMT = 1000/6.46 = 154.73
Now from above two ann
MGT201 Solved MCQ3 from Quiz
Stakeholders
Shareholders
Bondholders
Directors
Where there is single period capital rationing, what the most sensible way of making investment
decisions?
Group projects together to allocate the funds available and select the group of projects with the
highest NPV
The logic behind _________ is that instead of looking at net cash flows you look at cash inflows and
outflows separately for each point in time.
IRR
MIRR
PV
NPV
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you
deposit Rs.20, 000 you would expect to earn around __________ in interest.
Rs.840
Rs.858
Rs.1,032
Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) = $857.82.
Individuals buying and selling the
Salvage value
Book value
Intrinsic value
Fair value
With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs.
20,000 initial investment?
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Upward
Downward
What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the
bondholders that establish the terms of the bond issue?
Indenture
Debenture
Bond
Bond trustee
Question # 1 of 10
Less than
More than
Equal to

activity?
Interest rate risk
Where there is single period capital rationing, what the most sensible way of making
Which of the following statements is correct in distinguishing between serial bonds and
sinking-fund bonds?
Serial bonds mature at a variety of dates, but sinking-fund bonds mature at a

single date.
Serial bonds provide for the deliberate retirement of bonds prior to maturity, but sinking-
fund bonds do not provide for the deliberate retirement of bonds prior to maturity
Serial bonds do not provide for the deliberate retirement of bonds prior to maturity, but
sinking-fund bonds do provide for the deliberate retirement of bonds prior to maturity.
None of the above are correct since
Liquidity ratios
Debt ratios
Coverage ratios
Debt ratios show the extent to which the firm is financed with debt.
flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Pay back period
Net present value
Profitability index
MGT201 Current Quiz # 3
Interest tax shield

Depreciable basis
Financing umbrella
Current yield
The reduction in income taxes that results from the tax-deductibility of interest
payments.
Tax benefits derived from creative structuring of a financing arrangement. For example,
usingloan capital instead of equity capital because interest paid on the loans is
generally tax deductible whereas the dividend paid on equity is not
primarily?
Sales variability

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


Profitability index
Net present value
Pay back period
0
0.5
1
-1


Will be unrelated
None of the above.
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
APT stipulates
CAPM stipulates
=====
Business cycle
Inflation rates
All of the above

M&M Proposition I
M&M Proposition II
Discount rate
Profitability index

Fixed costs
Variable costs
Debt financing


Convertible Bonds
Common shares
Preferred shares
Pay back period
Net present value
Profitability index
equations?
Upward
Downward
shareholders?
Income
Capital loss
Capital gain
Operating income
Unique risk
Reinvestment risk
Market risk
Unsystematic risk

Profitability index
Net present value
Pay back period

same.
I, II, and III
I only
III only
II and III only
Goes down
Goes up
Stays the same
Which of the following could be taken same as minimizing the weighted average cost of
capital?
Maximizing the market value of the firm
Maximizing the market value of the firm only if MM's Proposition I
Minimizing the market value of the firm only if MM's Proposition I holds
Maximizing the profits of the firm

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]
Cash flows
Coupon receipts

It is the tangency point between the capital market line and the indifference
curve
In the dividend discount model, _____ which of the following are not incorporated into the discount rate?
Real risk-free rate
Return on assets

Convertible Bonds
Common shares
Preferred shares
For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure?
Cost of debt
http://vustudents.ning.com


The weighted average of possible returns, with the weights being the probabilities of occurrence is
referred to as ________.
Expected return
Standard deviation
In calculating the costs of the individual components of a firm's financing, the corporate tax rate is
important to which of the following component cost formulas?
Common stock
Debt
Preferred stock
None of the above
A statistical measure of the variability of a distribution around its mean is referred to as ________.
Expected return
Standard deviation

Unlimited liability
Single tax filing
Raising capital
Total Marks: 1
The benefit we expect from a project is expressed in terms of:
Cash in flows
Cash out flows
Cash flows
Upon which of the following a firm's degree of operating leverage (DOL) depends primarily?
Sales variability
Which of the following is the value of beta for the market portfolio?
0.25
-1.0
1.0
0.5

Fixed costs
Variable costs
Debt financing
Why common stock of a company must provide a higher expected return than the debt of the same
company?


None of the above

The coupon rate is greater than the current yield and the current yield is greater than yield to maturity
The coupon rate is less than the current yield and the current yield is greater than the yield to
maturity
The coupon rate is less than the current yield and the current yield is less than yield to maturity
In order for the investor to earn more than the current yield the bond must be selling for a discount. Yield
to maturity will be greater than current yield as investor will have purchased the bond at discount and will
be receiving the coupon payments over the life of the bond.
Which of the following would be considered a cash-flow item from an "operating" activity?

Sales variability
Which of the following is simply the weighted average of the possible returns, with the weights being the
probabilities of occurrence?
Expected return
Standard deviation


Cash budgets are prepared from past:

Balance sheets
Income statements
Income tax and depreciation data
The cash budget is prepared from forecasted cash collections and disbursements rather
If we were to increase ABC company cost of equity assumption, what would we expect to happen to the
present value of all future cash flows?
An increase
A decrease
No change
Which of the followings expressed the proposition that the cost of equity is a positive linear function of
capital structure?

M&M Proposition I
M&M Proposition II

________ 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
Unsystematic risk is the diversifiable portion of total risk and not a measure of total risk like standard
deviation.
The presence of which of the following costs is not used as a major argument against the M&M arbitrage
process?
Bankruptcy costs
Agency costs
Transactions costs
Insurance costs
The presence of these costs is used as major argument against the M&M arbitrage process
What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays
dividends, and 3) its cash flows are expected to be a constant annuity stream?
Long-term debt
Preferred stock
Common stock
According to timing difference problem a good project might suffer from ___ IRR even though its NPV
is ______.
Higher; lower
Lower; Lower
Lower; higher
Higher; higher
Expected Portfolio Return = _________.

Sales variability

Will be unrelated
None of the above.
Larger; Larger
Larger; Smaller
Smaller; Larger
Smaller; Smaller
You are considering two investment proposals, project A and project B. B's expected net present value is
Rs. 1,000 greater than that for A and A's dispersion of net present value is less than that for B. On the
basis of risk and return, what would be your conclusion?
Project A dominates project B
Project B dominates project A
Neither project dominates the other in terms of risk and return
The expected net present value of B is greater than the expected net present value of A and the risk of B
exceeds the risk of A, so neither dominates the other.
______ means expanding the number of investments which cover different kinds of stocks.
Diversification
Standard deviation
Variance
Covariance
What should be used to calculate the proportional amount of equity financing employed by a firm?
The common stock equity account on the firm's balance sheet
The sum of common stock and preferred stock on the balance sheet
The book value of the firm
The current market price per share of common stock times the number of shares Outstanding

__________are analysts who use information concerning current and prospective profitability of firms to
assess the firm's fair market value.
Credit analysts
Fundamental analysts
Systems analysts
Technical analysts
Total Marks: 1
Which of the followings expressed the proposition that the value of the firm is independent of its capital
structure?
M&M Proposition I
M&M Proposition II
The statement of cash flows reports a firm's cash flows segregated into which of the following categorical
order?
A project that tells us the number of years required to recover our initial cash investment based on the
project’s expected cash flows is:
Pay back period
Net present value
Profitability index
If 2 stocks move in the same direction together then what will be the correlation coefficient?
1.0
-1.0
1.5
which of the following needs to be excluded while we calculate the incremental cash flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Which of the following techniques would be used for a project that has non–normal cash flows?
Net present value

Depreciation
Dividends
Interest
Taxes
Which of the following statements is correct for a firm that currently has total costs of carrying and
ordering inventory that is 50% higher than total carrying costs?
Current order size is greater than optimal
Current order size is less than optimal
Per unit carrying costs are too high
The optimal order size is currently being used
When a firm needs guaranteed, short-term funds available for a variety purposes, the bank loan will likely
be a ________.
Compensating balance arrangement
Revolving credit agreement
Transaction loan
Line of credit
Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the
dividend growth rate exceeds the stock’s required return. II. A decrease in the dividend growth rate
will increase a stock’s market value, all else the same. III. An increase in the required return on a
stock will decrease its market value, all else the same
I, II, and III not sure

I only
III only
II and III only

hich of the following statements regarding covariance is correct?

Covariance, because it involves a squared value, must always be a positive number (or zero)
Which of the following is not a form of short-term, spontaneous credit?

Accrued wages
Trade credit
Commercial paper
Accrued taxes
Which of the following has the same meaning as the working capital to financial analyst?
Total assets
Fixed assets
Current assets
Current assets minus current liabilities
Increase
Decrease

Convertible Bonds
Common shares
Preferred shares
Comparable
Correlated
Highly correlated
The objective of financial management is to maximize _______ wealth.

Stakeholders
Shareholders
Bondholders
Directors
There will be two-thirds as many shares outstanding, and they will sell for Rs.60.00
each
There will be four times as many shares outstanding, and they will sell for
Rs.160.00 each
There will be 50 percent more shares outstanding and they will sell for
Rs.26.67 each
There will be one-and-one-half times as many shares outstanding, and they will sell
for Rs.60.00 each


________ is the variability of return on stocks or portfolios not explained by general

Systematic risk
Standard deviation
Unsystematic risk
Unlevered firm
Which of the following would be consistent with an aggressive approach to financing

working capital?
Financing short-term needs with short-term funds
Financing permanent inventory buildup with long-term debt
Financing seasonal needs with short-term funds
Financing some long-term needs with short-term funds
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Which of the following terms best applies to the short-term interest rate charged by
banks to large, creditworthy customers?
Discount basis interest rate
Long-term bond rate
Prime rate
Fed funds rate
According to _________, the firm's cost of equity increases with greater debt financing,
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden

Expected return
Standard deviation
Cash in flows
Cash out flows
Cash flows
Long-term debt
Preferred stock
Common stock
What is the economic order quantity for the following situation? A firm sells 32,000 cases of microwave
popcorn per year. The cost per order is Rs.20 per case and the firm experiences a carrying cost of 8.0%.
2,000 cases
4,000 cases
8,000 cases
16,000 cases
Total assets
Fixed assets
Current assets
Sales variability
of that future amount to you would ________.
Fall
Rise
Remain unchanged
Which of the following is called the tax savings of the firm derived from the deductibility of interest
expense?
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
Less than
More than
Equal to
Which of the following would be consistent with an aggressive approach to financing working capital?
According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a
function of which of the following:
Unique risk
Reinvestment risk
Market risk
Unsystematic risk
By borrowing more
Who or what is a person or institution designated by a bond issuer as the official representative of the
bondholders?
Indenture
Debenture
Bond
Bond trustee
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should
be done by the firm?
The firm has minimized its total carrying costs
The firm should increase its order size
The firm should decrease its order size
The firm has maximized
Which of the following will NOT equate the future value of cash inflows to the present value of cash
outflows?
Discount rate
Profitability index
By comparing the changes in the stock market price to the changes in the stock market index
Stock split
Stock dividend
Extra dividend
Regular dividend
Unlimited liability
Single tax filing
Raising capital
Fixed costs
Variable costs
Debt financing
Liquidity ratios
Debt ratios
Coverage ratios
Which of the following is the cash required during a specific period to meet interest expenses and
principal payments?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Profitability index
Net present value
Pay back period
Fixed costs
Variable costs
Debt financing
be a ________.
Transaction loan
Line of credit
Which of the following terms best applies to the short-term interest rate charged by banks to large,
creditworthy customers?
Long-term bond rate
Prime rate
Fed funds rate
The explicit costs associated with corporate default, such as legal expenses, are the _________ of the
firm.
Flotation costs
Which of the following factor(s) do NOT affects the movements in the market index?
Macroeconomic factors
Socio political factors
Social factors
Fall
Rise
Remain unchanged
Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment
project. These methods take into account:
Expected return
Standard deviation
Cash in flows
Cash out flows
Cash flows
Long-term debt
Preferred stock
Common stock
2,000 cases
4,000 cases
8,000 cases
16,000 cases
Total assets
Fixed assets
Current assets
Sales variability
Fall
Rise
Remain unchanged
expense?
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
Less than
More than
Equal to
Unique risk
Reinvestment risk
Market risk
Unsystematic risk
By borrowing more

Whenever ROE > k
Whenever k > ROE
Whenever bank interest rates are high]

Which of the following would NOT improve the current ratio?

Borrow short term to finance additional fixed assets
Issue long-term debt to buy inventory
Sell common stock to reduce current liabilities
Sell fixed assets to reduce accounts payable
When bonds are issued, under which of the following category the value of the bond appears?
Equity
Fixed assets
Short term loan
Long term loan
Cost of debt
Which of the following could be taken same as minimizing the weighted average cost of capital?
Total assets
Fixed assets
Current assets



Fall
Rise
Remain unchanged






expense?
Interest tax shield

Depreciable basis
Financing umbrella
Current yield
An annuity due is always worth ___a comparable annuity.

Less than
More than
Equal to


By borrowing more
Social factors
Upward
Downward
Investors may be willing to pay a premium for stable dividends because of the informational content of
__________, the desire of investors for __________, and certain __________.
Financial leverage
Capital structure
Business risk
Expected return
Standard deviation
Coefficient of variation is NOT the measure of __________.
Risk
Probability
Relative dispersion
becuase its dispersion of probability
If Deen Muhammad Suppliers receive an invoice for purchases dated 12/12/2002 subject to credit terms
of "2/10, net 30", what is the last possible day the discount can be taken?
January 11
January 22
January 30
December 30
The term "2/10" refers to a firm that can take the discount for only 10 days from the date of the invoice.
Thus, goods shipped on the 12th are due no later than the 22nd if the discount is taken
Fixed costs
Variable costs
Debt financing
Which of the following is a basic principle of finance as it relates to the management of working capital?
Profitability varies inversely with risk
Liquidity moves together with risk
Profitability moves together with risk
Profitability moves together with liquidity
Interest rate risk
__________ 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
outflows?
Discount rate
Profitability index
The firm has maximized its order costs
What is the present value of Rs.8,000 to be paid at the end of three years if the correct risk adjusted
Rs.5,850 (6015)
Rs.4,872
Rs.6,725
Rs.1,842
Which of the following is a capital budgeting technique that is NOT considered as discounted cash flow
method?
Payback period
Net present value
Profitability index
Which one of the following selects the combination of investment proposals that will provide the greatest
increase in the value of the firm within the budget ceiling constraint?
Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Which of the following market in finance is referred to the market for short-term government and corporate
debt securities?
Money market
Capital market
Primary market
Secondary market
It is the net income of the firm less a dollar cost that equals WAAC multiplied by the book value of
liabilities and equities
of that future amount to you would __________. http://vustudents.ning.com
Fall
Rise
Remain unchanged
http://highered.mcgraw-hill.com/sites/0073012386/student_view0/chapter15/multiple_choice_quiz.html
Long-term debt
Preferred stock
Common stock
Both are an accurate representation of the total annual return an investor can expect to earn by owning
the security
Liquidity ratios
Debt ratios
Coverage ratios
Salvage value
Book value
Intrinsic value
Fair value
All of the above
It will line exactly on the regression line not sure
A portfolio's expected return is a simple weighted average of expected returns of the individual
securities comprising the portfolio.
A portfolio's standard deviation of return is a simple weighted average of individual security return
standard deviations.
The square root of a portfolio's standard deviation of return equals its coefficient of variation
Cash flows
Coupon receipts
1. Juan is starting a software writing company. He is the owner and has only 3
employees. He wants a simple inexpensive form of ownership that leaves him in
control and that he can quickly dissolve if he decides to change to another
business.
His best choice of form of ownership would be:
a. S-corporation
b. Partnership
c. Corporation
d. Sole proprietorship
2. A tool that identifies the strengths, weaknesses, opportunities and threats of

an
organization is know as:
a. SWOT Analysis
b. Trend Analysis
c. Fundamental Analysis
d. Technical Analysis
3. When the market's required rate of return for a particular bond is much less
than
its coupon rate, the bond is selling at:
a. A premium
b. A discount
c. Cannot be determined without more information
d. Face value
4. Which of the following statements best describe the ‘Balance Sheet’?
a. Summarizes the firm’s revenues and expenses over an accounting period
b. Reports how much of the firm’s earnings were retained in the business rather
than paid out in dividends
c. Reports the impact of a firm’s operating, investing, and financing activities on
cash flows over an accounting period
d. States the firm’s financial position at a specific point in time
5. Which of the following is the purpose of the Debt management ratios?
a. They measure the amount of debt the firm uses
b. They measure how effectively a firm is managing its assets
c. They show the relationship of a firm’s cash and other current assets to its current
liabilities
d. They show the combined effects of all areas of the firm on operating results
6. In which of the following situations a project is acceptable?

a. When a project has conventional cash flows patterns
b. When a project has a non-conventional cash flow pattern
c. When a project has a discounted rate higher than the inflation rate
d. When a project has a positive net present value
7. The gross profit margin is unchanged, but the net profit margin declined over
the
same period. This could have happened if:
a. Cost of goods sold increased relative to sales.
b. Sales increased relative to expenses.
c. The tax rate has been increased
d. Dividends were decreased.
8. Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry
average
of 1.4. This means that the company
a. Will not experience any difficulty with its creditors.
b. Has less liquidity than other firms in the industry.
c. Will be viewed as having high creditworthiness.
d. Has greater than average financial risk when compared to other firms in its
industry.
9. For purposes of financial statements, the accounting value of fixed assets is:
a. Based on their estimated liquidation value
b. Based on their relative importance to the company
c. Based on their actual purchase price
d. Based on their current market price
10. Which of the following transactions affects the acid-test ratio?
a. Receivables are collected.
b. Inventory is liquidated for cash.
c. New common stock is sold and used to retire a debt issue.
d. A new common stock issue is sold and equipment purchased
11. The rate of return on the best available investment of equal risk is called:
a. Discounting
b. Compounding
c. The opportunity cost rate
d. Time lines
12. An annuity whose payments occur at the end of each period is called:
a. An opportunity cost annuity.
b. An ordinary annuity
c. An annuity due
d. An outflow annuity
13. Which of the following is the rate of return earned on a bond if it is held until
maturity?
a. Yield-to-call
b. Coupon payment
c. Yield-to-maturity
d. Sinking fund yield
14. Keeping other things constant, if a bond’s yield-to-maturity increases:

a. Its price will rise
b. Its price will remain unchanged
c. Its price will fall.
d. Can not be determined
15. A 30-year corporate bond issued in year 1985 would now trade in which of the
following markets?
a. Primary capital market
b. Primary money market
c. Secondary money market
d. Secondary capital market
16. When the market's nominal annual required rate of return for a particular bond
is
less than its coupon rate, the bond will be selling at ________.
a. A discount
b. A premium
c. Par value
d. An indeterminate price
17. The buyer of a zero-coupon bond expects to receive:
a. Price appreciation.
b. A rate of return equal to zero over the life of the bond.
c. Variable dividends instead of a fixed interest payment annually.
d. All interest payments in one lump sum at maturity.
18. The intrinsic value of a share of common stock:
a. Is the discounted value of all future cash dividends
b. Increases when the required rate of return increases, if the dividend is held
constant.
c. Is zero if the company pays no dividends
d. Is the discounted capital gain expected on the stock
19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this year.
Its
dividend yield is 8%. At what price is the stock selling?
a. Rs.40
b. Rs.35
c. Rs.30
d. Rs.25
20. Which of the following stock would provide a regular income to the investor?
a. Growth stock
b. Income stock
c. Aggressive stock
d. Defensive stock
FINAL TERM EXAMINATION
Spring 2009
► Maximize earnings per share
► Maximize the value of the firm's common stock
► Maximize return on investment
► Maximize market share
► The lower the total debt-to-equity ratio, the lower the financial risk for a firm
► An increase in net profit margin with no change in sales or assets means a

weaker ROI
What is the present value of a Rs.1,000 ordinary annuity that earns 8% annually for an
infinite number of periods?
► Rs.80
► Rs.800
► Rs.1,000
► Rs.12,500
► Life span of the project
► Validity of the project
► Cost of the capital
► Return on asset
What is the advantage of a longer life of the asset?
► Cash flows from the asset becomes non-predictable
► Cash flows from the asset becomes more predictable
► Cash inflows from the asset becomes more predictable
► Cash outflows from the asset becomes more predictable
10%, ____________.
► Both bonds will increase in value, but bond A will increase more than bond B
► Both bonds will increase in value, but bond B will increase more than bond A
► Both bonds will decrease in value, but bond A will decrease more than bond B
► Both bonds will decrease in value, but bond B will decrease more than bond A
Given no change in required returns, the price of a stock whose dividend is constant
will__________.
► Remain unchanged
► Decrease over time at a rate of r%
► Increase over time at a rate of r%
► Decrease over time at a rate equal to the dividend growth rate
For
most firms, P/E ratios and risk_________.
► Will be directly related
► Will have an inverse relationship
► Will be unrelated
► Will both increase as inflation increases
► A portfolio's expected return is a simple weighted average of expected returns of

the individual securities comprising the portfolio.
► A portfolio's standard deviation of return is a simple weighted average of

individual security return standard deviations.
► The square root of a portfolio's standard deviation of return equals its variance.
► The square root of a portfolio's standard deviation of return equals its coefficient
of variation.
Which of the following is simply the weighted average of the possible returns, with the
weights being the probabilities of occurrence?
► A probability distribution
► The expected return
► The standard deviation
► Coefficient of variation
The
square of the standard deviation is known as the ________.
► Beta
► Expected return
► Variance
Why
companies invest in projects with negative NPV?
► Because there is hidden value in each project
► Because they have chance of rapid growth
► Because they have invested a lot
An
investor was expecting a 18% return on his portfolio with beta of 1.25 before the market
risk premium increased from 8% to 10%. Based on this change, what return will now be
expected on the portfolio?
► 22.5%
► 20.0%
► 20.5%
► 26.0%
► Its market risk is negligible
► Its unsystematic risk is negligible
► Its systematic risk is negligible
How the beta of a stock can be calculated?
► By monitoring price of the stock
► By monitoring rate of return of the stock
► By comparing the changes in the stock market price to the changes in the stock
market index
► Covariance of stock with market * variance of the market
► Covariance of stock with market / variance of the market
► Variance of the market / Covariance of stock with market
► Slope of the regression line
A
beta greater than 1 for a stock shows:
► Stock is relatively more risky than the market
► If the market moves up by 10% the stock will move up by 12%
► As the market moves the stock will move in the same direction
If
stock is a part of totally diversified portfolio then its company risk must be equal to:
►0
► 0.5
►1
► -1
If
risk and return combination of any stock is above the SML, what does it mean?
► It is offering lower rate of return as compared to the efficient stock
► It is offering higher rate of return as compared to the efficient stock
► Its rate of return is zero as compared to the efficient stock
► It is offering rate of return equal to the efficient stock
An
arbitrage opportunity exists if an investor can construct a __________ investment
► Positive
► Negative
► Zero
► Inflation rates
If
arbitrage opportunities are to be ruled out, what would be the expected excess return
of each well-diversified portfolio?
► Inversely proportional to the risk-free rate
► Inversely proportional to its standard deviation
► Proportional to its standard deviation
► Proportional to its beta coefficient
Which of the following represent all Risk –Return Combinations for the efficient portfolios
in the capital market?
► Parachute graph
► CML straight line equation
► Security market line
What should be used to calculate the proportional amount of equity financing

employed by a firm?
► The common stock equity account on the firm's balance sheet
► The sum of common stock and preferred stock on the balance sheet
► The book value of the firm
► The current market price per share of common stock times the number of shares
Outstanding
Which of the following is the market for short term debt?
► Money market
► Capital market
► Real asset market
► Equity market
Bonds are issued in the market at _________.
► Premium
► Discount
► Both premium and discount
Why
debt is a less costly source of fund?
► Because additional interest creates a new form of tax shield
► Because additional money creates a new form of tax shield
► Because banks extend loan at lower interest rates
► Funds provided by operations
► Earnings before taxes
► Net income
► Operating profit
Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The
firm has Rs.1, 000,000 in fixed costs. The firm anticipates selling each unit for Rs.25 with
variable costs of Rs.5 per unit.
► 3.33
► 1.25
► 1.14
► There is not sufficient information provided to calculate the degree of operating

leverage (DOL).
A
firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
► If sales rise by 3.5% at the firm, then EBIT will rise by 1%
► If EBIT rises by 3.5% at the firm, then EPS will rise by 1%
► If EBIT rises by 1% at the firm, then EPS will rise by 3.5%
► If sales rise by 1% at the firm, then EBIT will rise by 3.5%
Which of the following represents financial leverage?
► Use of more debt capital to increase profit
► Debt is not used in capital to increase profit
► High degree of solvency
► Low degree of solvency
Which of the following best describes the statement; “The value of an asset is preserved
regardless of the nature of the claims against it”?
► Law of diminishing marginal returns
► Law of conservation of value
► Law of return on equity
► Law of return on assets
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%
Which of the following statements regarding the M&M Propositions without taxes is true?
► The total value of the firm depends on how cash flows are divided up between
stockholders and bondholders, under M&M Proposition I.
► The firm's capital structure is relevant under M&M Proposition I.
► The cost of equity depends on the firm's business risk but not its financial risk,
under M&M Proposition II.
► The cost of equity rises as the firm increases its use of debt financing under M&M
Proposition II.
Which one of the following is correct for the spot exchange rate?
► This is the rate today for exchanging one currency for another for immediate
delivery
► This is the rate today for exchanging one currency for another at a specific future
date
► This is the rate today for exchanging one currency for another at a specific
location on a specific future date
location for immediate delivery
The
restructuring of a firm should be undertaken, when:
► The restructuring is expected to create value for shareholders
► The restructuring is expected to increase earnings per share next year
► The restructuring is expected to increase the firm's market share power in industry
► The current employees will receive additional stock options to align employee
interest
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
What is the economic order quantity for an automobile dealer selling 2,000 cars per
year, at a cost of Rs.750 per order, and a carrying cost of Rs.300 per automobile?
► 40 cars
► 71 cars
► 100 cars
► 126 cars
As
the amount of __________ increases the present value of net tax-shield benefits of debt
increases.
► Debt
► Common equity
► Preffered equity
► Assets
Why
the present value of the costs of financial distress increases with increases in the debt ratio?
► Expected return on assets increases
► Present value of the interest tax shield is greater
► Equity tax shield is depleted
► Probability of default and/or bankruptcy is greater
What are the real markets effects of leverage on WAAC? (Answer the question in
bulleted form only).
Answer: Real Markets Effects of leverage on WACC:
• Increase in leverage causes a a large increase in cost of equity

• Increase in leverage causes relatively small increase in cost of debt as
compared to cost of equity
• As leverage increases WACC 1st falls because of tax saving shield.
• With further increase in leverage WACC fall to its minimum point which is the
optimal point for capital structure
• Further increase in leverage causes increase in WACC because of bankruptcy
risk
Suppose a Firm ABC has Total Assets of Rs.1000 and is 100% Equity based (i.e. Un-levered).
There were 10 equal Owners and 5 of them want to leave. So the Firm takes a Bank Loan of
Rs.500 (at 10%pa Mark-up) and pays back the Equity Capital to the 5 Owners who are leaving.
Now, half of the Equity Capital has been replaced with a Loan from a Bank (i.e. Debt). What
impact does this have on ROE?
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.
Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has a beta of 1.25. The
risk free rate is 10% and the expected market return is 18%.
a. Find the expected return on stock X

b. Find the expected return on stock Y
c. Find the expected return on stock Z
d. Suppose that you construct a portfolio consisting of 40% X, 20% Y and 40% Z.
What is the beta of the portfolio? http://vustudents.ning.com
Answer:
a. rM = 18%
rRF = 10%
β = 0.5
r = rRF + ( rM + rRF ) β
= 10% + (18%-10%) 0.5
= 10% + 4%
= 14%
b. rM = 18%
rRF = 10%
β = 1.00
= 10% + (18%-10%) 1.00
= 10% + 8%
= 18%
c. rM = 18%
rRF = 10%
β = 1.25
= 10% + (18%-10%) 1.25
= 10% + 10%
= 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
= 0.9
The
ABC company is in the 35% marginal tax bracket. The current market value of the firm is Rs. 12
million. If there are no costs to bankruptcy:
H What will be ABC’ annual tax savings from interest deductions be if it issues Rs.
2 million of five years bonds at 12 % interest rate? What will be the value of the firm?
ANSWER: Annual Coupon payment each yr = 12% of 2,000,000
= 2000000 x 12/100
= 24000
Tax saving for 5 yrs = 5(35 % of 24000)
= 5(24000 x 35/100)
= 5x8400
= 42000
I What will ABC’ annual tax savings from interest deductions be if it issues Rs. 2
million of seven years bonds at 12 % interest rate? What will be the value of the firm?
Answer: Annual Coupon payment each yr = 12% of 2,000,000
= 2000000 x 12/100
= 24000
= 7(24000 x 35/100)
= 7x8400
= 58800
Using the Capital Asset Pricing Model (CAPM), determine the required return on equity for the
following situations:
Situations Expected return on Risk- free rate Beta

market portfolio
1 16% 12% 1.00
2 18 8 0.80
3 15 14 0.70
4 17 13 1.20
5 20 15 1.60
What generalization can you make?
ANSWER: Required return= r = rRF + ( rM + rRF ) β
Where rRF = risk free return
rM = expected return on market
β = beta of stock
1. rM = 16%
rRF = 12%
β = 1.00
= 12% + (16%-12%)1.00
= 12% + 4%
= 16%
2. rM = 18%
rRF = 8%
β = 0.80
= 8% + (18%-8%)0.80
= 8% + 8%
= 16%
3. rM = 15%
rRF = 14%
β = 0.70
= 14% + (15%-14%)0.70
= 14% + 0.70
= 14.7%
4. rM = 17%
rRF = 13%
β = 1.20
= 13% + (17%-13%)1.20
= 13% + 4.8%
= 17.8%
5. rM = 20%
rRF = 15%
β = 1.60
= 15% + (20%-15%) 1.60
= 15% + 8%
= 23%
GENERALIZATION: As beta of stock rises the return on stock also rises.
MIDTERM EXAMINATION
Spring 2009
Why
Mutually exclusive means that you can invest in _________ project(s) and having chosen
______ you cannot choose another.
► One; one
► Two; two
► Two; one
► Three; one
The
weighted average of possible returns, with the weights being the probabilities of
A
set of possible values that a random variable can assume and their associated
► Probability distribution
The
present value of growth opportunities (PVGO) is equal to
I) The difference between a stock's price and its no-growth value per share
II) The stock's price
III) Zero if its return on equity equals the discount rate
IV) The net present value of favorable investment opportunities
► I and IV
► II and IV
► I, III, and IV
► II, III, and IV
Which of the following is CORRECT, if a firm has a required rate of return equal to the
ROE?
► The amount of earnings retained by the firm does not affect market price
or the P/E
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
In
the dividend discount model, which of the following is (are) NOT incorporated into the
discount rate?
The
market capitalization rate on the stock of Steel Company is 12%. The expected ROE is
13% and the expected EPS are Rs. 3.60. If the firm's plowback ratio is 50%, what will be
the P/E ratio?
► 7.69
► 8.33
► 9.09
► 11.11
► Both are an accurate representation of the total annual return an investor

can expect to earn by owning the security
Low
Tech Company has an expected ROE of 10%. The dividend growth rate will be ________
if the firm follows a policy of paying 40% of earnings in the form of dividends.
► 6.0%
► 4.8%
► 7.2%
► 3.0%
The
value of direct claim security is derived from which of the following?
► Fundamental analysis
► Underlying real asset
► Supply and demand of securities in the market
► Par value
► Market value
► Intrinsic value
► Face value
How efficient portfolios of "N" risky securities are formed?
► These are formed with the securities that have the highest rates of return
regardless of their standard deviations
► They have the highest risk and rates of return and the highest standard deviations
► They are selected from those securities with the lowest standard deviations
regardless of their returns
► They have the highest rates of return for a given level of risk
► The coupon rate is greater than the current yield and the current yield is greater
► 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 coupon rate is less than the current yield and the current yield is less than
yield to maturity
Which of the following is a characteristic of a coupon bond?
► Pays interest on a regular basis (typically every six months)
► Does not pay interest on a regular basis but pays a lump sum at maturity
► Can always be converted into a specific number of shares of common stock in

the issuing company
► Always sells at par
A
coupon bond pays annual interest, has a par value of Rs.1,000, matures in 4 years, has
a coupon rate of 10%, and has a yield to maturity of 12%. What is the current yield on
this bond?
► 10.65%
► 10.45%
► 10.95%
► 10.52%
If a
► 7.00
► 6.53
► 8.53
► 7.18
Interest rate risk for long term bonds is more than the interest rate risk for short term
bonds provided the _________ for the bonds is similar.
► Market rate
► Coupon rate
► Inflation rate
When market is offering lower rate of return than the bond, the bond becomes
valuable, with respect to the given scenario which of the following is correct?
► Market interest rate < coupon interest rate, market value of bond is > par value
► Market interest rate > coupon interest rate, market value of bond is > par value
► Market interest rate < coupon interest rate, market value of bond is < par value
► Market interest rate = coupon interest rate, market value of bond is > par value
Bond is a type of Direct Claim Security whose value is NOT secured by __________.
► Tangible assets
► Fixed assets
► Real assets
__________ is a long-term, unsecured debt instrument with a lower claim on assets and
income than other classes of debt.
► A subordinated debenture
► A debenture
► A junk bond
► An income bond
A
12% coupon rate, Rs.1,000 par bond currently trades at 90 one year after issuance.
Which of the following is the most likely call price?
► Rs. 87
► Rs. 90
► Rs. 102
► Rs. 112
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
► Debenture
► Bond
► Bond trustee
► Return on asset
Which of the following technique would be used for a project that has non-normal cash
flows? http://vustudents.ning.com
Why
net present value is the most important criteria for selecting the project in capital
budgeting?
From which of the following category would be the cash flow received from sales
revenue and other income during the life of the project?
An
ABC Co. will earn Rs. 350 million in cash flow in four years from now. Assuming an 8.5%
weighted average cost of capital, what is that cash flow worth today?
► Rs.253 million
► Rs.323 million
► Rs.380 million
► Rs.180 million
An
8-year annuity due has a future value of Rs.1,000. If the interest rate is 5 percent, the
amount of each annuity payment is closest to which of the following?
► Rs.109.39
► Rs.147.36
► Rs.154.73
► Rs.99.74
As
interest rates go up, the present value of a stream of fixed cash flows _____.
► Goes down
► Goes up
► Stays the same
An
annuity due is always worth _____ a comparable annuity.
► Less than
► More than
► Equal to
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
Which of the following would be considered a cash-flow item from a "financing"

activity?
► A cash outflow to the government for taxes
► A cash outflow to repurchase the firm's own common stock
► A cash outflow to lenders as interest
► A cash outflow to purchase bonds issued by another company
► Debt ratios
► Coverage ratios
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
► The lower the total debt-to-equity ratio, the lower the financial risk for a firm

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

Payback period is the time required by the project to recover its costs.
Year 1 the project will recover Rs. 6,500
Year 2 the project will recover Rs 3000
Year 3 project will recover the remaining Rs. 500 in 1st month of 3rd yr.
So payback period for Project X is 2 yrs and 1 month.
PROJECT Y: Cost of project= Rs 10,000
Year 1 project will recover Rs 3,500
Year 3 project will recover remaining Rs 3000 in approximately 11 months of 3rd yr.
So payback period of project Y is 2 yrs and 11 months.
2. Net Present Value:
Project X: Initial investment, I0 = Rs 10,000
No. of yrs, n = 4
= -10,000 + 6500/(1.12) + 3000/(1.12)2+ 3000/(1.12)3+ 1000/(1.12)4
= Rs 966
Project Y: Initial investment, I0 = Rs 10,000
No. of yrs, n = 4
= -10,000 + 3500/(1.12) + 3500/(1.12)2+ 3500/(1.12)3+ 3500/(1.12)4
= Rs 631
3. IRR: Project X: Put NPV = 0

NPV = - 10000 + 6500/(1+i) + 3000(1+i)2+ 3000(1+i) 3+ 1000/(1+i) 4
4. Profitability Index:
Project X: PI= Sum(CFt/(1+i)t)/Io
= 10,966/10000 = 1.096
Project Y : PI= Sum(CFt/(1+i)t)/Io
= 10631/10000 = 1.0631
Result: Since NPV and PI of project X are higher than that of project Y so Project X
will be accepted.
MIDTERM EXAMINATION
Spring 2009
Time: 60 min
Marks: 50
What are the earnings per share (EPS) for a company that earned Rs.100, 000 last year
in after-tax profits, has 200,000 common shares outstanding and Rs.1.2 million in retained
earning at the year end?
► Rs.1.00
► Rs. 6.00
► Rs. 0.50
► Rs. 6.50
Among the pairs given below select a(n) example of a principal and a(n) example of
an agent respectively.
► Manager; owner
Which of the following would be deductible as an expense on the corporation's income

statement?
► Interest paid on outstanding bonds
► Cash dividends paid on outstanding common stock
► Cash dividends paid on outstanding preferred stock
In
conducting an index analysis every balance sheet item is divided by __________ and
every income statement is divided by __________ respectively.
► Its corresponding base year income statement item; its corresponding base year
balance sheet item
► Debt ratios
► Coverage ratios
► Debt ratios
► Coverage ratios
Interest paid on the original principal borrowed is often referred to as __________.
► Present value
► Simple interest
► Future value
If
the following are the balance sheet changes, which one of them would represent use
of funds by a company?
► Rs. 8,950 decrease in net fixed assets
► Rs. 5,005 decrease in accounts receivable
► Rs. 10,001 increase in accounts payable
► Rs. 12,012 decrease in notes payable
In
preparing a forecast balance sheet, it is likely that either cash or __________ will serve as
a "plug figure" or balancing factor to ensure that assets equal liabilities plus
shareholders' equity.
► Retained earnings
► Accounts receivable
► Shareholders' equity
► Notes payable (short-term borrowings)
What is the present value of Rs.8,000 to be paid at the end of three years if the interest
rate is 11%?
► Rs.5,850
► Rs.4,872
► Rs.6,725
► Rs.1,842
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate
is 8%.
► Rs.680.58 (714)
► Rs.1,462.23
► Rs.322.69
► Rs.401.98
As
interest rates go up, the present value of a stream of fixed cash flows _____.
► Goes down
► Goes up
► Stays the same
The
benefit we expect from a project is expressed in terms of:
► Cash in flows
► Cash out flows
► Cash flows
A
proposal is accepted if payback period falls within the time period of 3 years.
According to the given criteria which of the following project will be accepted?
Payback period
Project A 1.66
Project B 2.66
Project C 3.66
► Project A
► Project B
► Project C
► Project A & B
If a
project’s initial cash outflow of Rs. 100,000 is followed by four annual receipts of 36,000
we can get the nearest discount factor by:
► Interpolation
► Dividing 100,000 by 36,000
► Dividing 36,000 by 100,000
In
which of the following situations you can expect multiple answers of IRR?
► More than one sign change taking place in cash flow diagram
► There are two adjacent arrows one of them is downward pointing & the other
one is upward pointing
► During the life of project if you have any net cash outflow
Which of the following technique would be used for a project that has non-normal cash
flows?
Which one of the following is NOT the disadvantage of the asset with very short life?
► Money has to be reinvested in some other project with uncertain NPV
► Money has to be reinvested in some other project with certain NPV
► Money has to be reinvested in some other project with return so risky
You
are selecting a project from a mix of projects, what would be your first selection in
descending order to give yourself the best chance to add most to the firm value, when
operating under a single-period capital-rationing constraint?
Which one of the following is the right of the issuer to call back or retire the bond by
paying off the bondholders before the maturity date?
► Call in
► Call option
► Call provision
► Put option
► Can always be converted into a specific number of shares of common stock

in the issuing company
► The coupon rate is greater than the current yield and the current yield is greater
► The coupon rate is less than the current yield and the current yield is greater than
► The coupon rate is less than the current yield and the current yield is less than
yield to maturity
An
investment opportunity set formed with two securities that are perfectly negatively
correlated. What will be standard deviation in the global minimum variance portfolio?
► Equal to zero
► Greater than zero
► Equal to the sum of the securities' standard deviations
► Equal to -1
► They have the highest risk and rates of return and the highest standard deviations
► Common shares
The
value of dividend is derived from which of the following?
► Both are an accurate representation of the total annual return an investor can
expect to earn by owning the security
The
market capitalization rate on the stock of Fast Growing Company is 20%. The expected
ROE is 22% and the expected EPS ia Rs. 6.10. If the firm's plowback ratio is 90%, the P/E
ratio will be ________.
► 8.33
► 50.0
► 9.09
► 7.69
In
the dividend discount model, which of the following is (are) NOT incorporated into the
discount rate?
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
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
► Financial risk
When Return is being estimated in % terms, the units of Standard Deviation will be
mention in __________.
►%
► Times
► Number of days
A
well-diversified portfolio is defined as:
► One that is diversified over a large enough number of securities that the
nonsystematic variance is essentially zero
► One that contains securities from at least three different industry sectors
► A portfolio whose factor beta equals 1.0
► A portfolio that is equally weighted
► New competitors
► Strikes
You
are considering two investment proposals, project A and project B. B's expected net
present value is Rs. 1,000 greater than that for A and A's dispersion of net present value
is less than that for B. On the basis of risk and return, what would be your conclusion?
► Project A dominates project B
► Project B dominates project A
► Neither project dominates the other in terms of risk and return
Which of the following need to be excluded while we calculate the incremental cash
flows?
► Depreciation
► Sunk cost
► Non-cash item
Why
Choose the correct option among the choices given below:

1. Who determine the market price of a share of common stock?
a. The board of directors of the firm
b. The stock exchange on which the stock is listed
c. The president of the company
d. Individuals buying and selling the stock
2. What should be the focal point of financial management in a firm?
a. The number and types of products or services provided by the firm
b. The minimization of the amount of taxes paid by the firm
c. The creation of value for shareholders
d. The dollars profits earned by the firm
3. Which of the following would generally have unlimited liability?
a. A limited partner in a partnership
b. A shareholder in a corporation
c. The owner of a sole proprietorship
d. A member in a limited liability company (LLC)
4. Which of the following is equal to the average tax rate?
a. Total tax liability divided by taxable income
b. Rate that will be paid on the next dollar of taxable income
c. Median marginal tax rate
d. Percentage increase in taxable income from the previous period
5. Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and
a net profit margin of 5 percent. What are its sales?
a. Rs.3, 750,000
b. Rs.480, 000
c. Rs.300, 000
d. Rs.1, 500,000
Since ROI=8% on $300,000 of assets, then net profit is Rs.24,000 (8% ×
Rs.300,000). Using the net profit and given that the NPM=5%, sales equals
Rs.480,000 (Rs.24,000 / 5%).
6. Which of the following would not improve the current ratio?
a. Borrow short term to finance additional fixed assets
b. Issue long-term debt to buy inventory
c. Sell common stock to reduce current liabilities
d. Sell fixed assets to reduce accounts payable
7. With continuous compounding at 8 percent for 20 years, what is the approximate
future value of a Rs.20,000 initial investment?
a. Rs.52,000
b. Rs.93,219
c. Rs.99,061
d. Rs.915,240
Rs.20,000[ e(.08 × 20) ] = Rs.20,000(4.9530324) = Rs.99,061.
8. In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly
decrease, the present value of that future amount to you would __________.
a. Fall
b. Rise
c. Remain unchanged
d. Incomplete information
9. Cash budgets are prepared from past:
a. Balance sheets
b. Income statements
c. Income tax and depreciation data
d. None of the given options
10. Which of the following is part of an examination of the sources and uses of funds?
a. A forecasting technique
b. A funds flow analysis
c. A ratio analysis
d. Calculations for preparing the balance sheet
11. An annuity due is always worth _____ a comparable annuity.
a. Less than
b. More than
c. Equal to
d. Can not be found
12. As interest rates go up, the present value of a stream of fixed cash flows _____.
a. Goes down
b. Goes up
c. Stays the same
d. Can not be found
13. ABC company is expected to generate Rs.125 million per year over the next three
years in free cash flow. Assuming a discount rate of 10%, what is the present value
of that cash flow stream?
a. Rs.375 million
b. Rs.338 million
c. Rs.311 million
d. Rs. 211 million
$311 million. The The cash flow stream would look like this: 125.00 x 0.9090 =
113.63; 125.00 x 0.8264 = 103.30; 125.00 x 0.7513 = 93.91. The sum of the three is
$310.84, or $311 million.
14. If we were to increase ABC company cost of equity assumption, what would we
expect to happen to the present value of all future cash flows?
a. An increase
b. A decrease
c. No change
d. Incomplete information
15. In proper capital budgeting analysis we evaluate incremental __________ cash
flows.
a. Accounting
b. Operating
c. Before-tax
d. Financing
16. A capital budgeting technique through which discount rate equates the present value
of the future net cash flows from an investment project with the project’s initial
cash outflow is known as:
a. Payback period
b. Internal rate of return
c. Net present value
d. Profitability index
17. Discounted cash flow methods provide a more objective basis for evaluating and
a. Magnitude of expected cash flows
b. Timing of expected cash flows
c. Both timing and magnitude of cash flows
d. None of the given options
18. Which of the followings make the calculation of NPV difficult?
a. Estimated cash flows
b. Discount rate
c. Anticipated life of the business
d. All of the given options
19. From which of the following category would be the cash flow received from sales
a. Financing activity
b. Operating activity
c. Investing activity
20. Which of the following technique would be used for a project that has non –normal
cash flows?
a. Multiple internal rate of return
b. Modified internal arte of return
c. Net present value
d. Internal rate of return
1. Why net present value is the most important criteria for selecting the project in
capital budgeting?
a. Because it has a direct link with the shareholders dividends maximization
b. Because it helps in quick judgment regarding the investment in real assets
c. Because we have a simple formula to calculate the cash flows
d. Because it has direct link with shareholders wealth maximization
2. In which of the following situations you can expect multiple answers of IRR?
a. More than one sign change taking place in cash flow diagram
b. There are two adjacent arrows one of them is downward pointing & the
other one is upward pointing
c. During the life of project if you have any net cash outflow
3. Which one of the following selects the combination of investment proposals that
constraint?
a. Cash budgeting
b. Capital budgeting
c. Capital expenditure
d. Capital rationing
4. Who is responsible for the decisions relating capital budgeting and capital
rationing?
a. Chief executive officer
b. Junior management
c. Division heads
d. All of the given option
5. What is a legal agreement, also called the deed of trust, between the corporation
a. Indenture
b. Debenture
c. Bond
d. Bond trustee
6. __________ is a high-risk, high-yield bond rated below investment grade; while
a/ (an) __________ bond has its interest payment contingent on sufficient
earnings of the firm.
a. A junk bond; income
b. A subordinated debenture; mortgage
c. A debenture; subordinated debenture
d. An income bond; mortgage
7. __________ is a long-term, unsecured debt instrument with a lower claim on
assets and income than other classes of debt; while a/(an) __________ bond issue
is secured by the issuer's property.
a. A subordinated debenture; mortgage
b. A debenture; subordinated debenture
c. A junk bond; income
d. An income bond; junk
8. The value of the bond is NOT directly tied to the value of which of the following
assets?
a. Liquid assets of the business
b. Fixed assets of the business
c. Lon term assets of the business
d. Real assets of the business
9. The value of a bond is directly derived from which of the following?
a. Cash flows
b. Coupon receipts
c. Par recovery at maturity
10. Which of the following is not the present value of the bond?
a. Intrinsic value
b. Fair price
c. Theoretical price
d. Market price
11. The current yield on a bond is equal to ________.
a. The yield to maturity
b. Annual interest divided by the par value
c. Annual interest divided by the current market price
d. The internal rate of return
12. A coupon bond pays annual interest, has a par value of Rs.1,000 matures in 4
years, has a coupon rate of 10%, and has a yield to maturity of 12%. What is the
current yield on this bond is?
a. 10.45%
b. 10.95%
c. 10.65%
d. 10.52%
13. Which of the following is a characteristic of a coupon bond?
a. Does not pay interest on a regular basis but pays a lump sum at maturity
b. Can always be converted into a specific number of shares of common
stock in the issuing company
c. Pays interest on a regular basis (typically every six months)
d. Always sells at par
14. Which of the following value of the shares changes with investor’s perception
about the company’s future and supply and demand situation? (Comprehension)
a. Par value
b. Intrinsic value
c. Market value
d. Face value
15. The value of direct claim security is derived from which of the following?
a. Fundamental analysis
b. Underlying real asset
c. Supply and demand of securities in the market
16. _________ is equal to (common shareholders' equity/common shares
outstanding).
a. Liquidation value per share
b. Book value per share
c. Market value per share
d. None of the above
17. Low Tech Company has an expected ROE of 10%. The dividend growth rate will
be ________ if the firm follows a policy of paying 40% of earnings in the form of
dividends.
a. 4.8%
b. 6.0%
c. 7.2%
d. 3.0%
18. High Tech Chip Company is expected to have EPS in the coming year of Rs.
2.50. The expected ROE is 12.5%. An appropriate required return on the stock is
11%. If the firm has a plowback ratio of 70%, what would be the growth rate of
dividends?
a. 6.25%
b. 8.75%
c. 6.60%
d. 7.50%
19. In the dividend discount model, _______ which of the following are not
incorporated into the discount rate?
a. Real risk-free rate
b. Risk premium for stocks
c. Return on assets
d. Expected inflation rate
20. Bond is a type of Direct Claim Security whose value is NOT secured by
__________.
a. Tangible assets
b. Fixed assets
c. Intangible assets
d. Real assets

Upward
Downward
Fall
Rise
Remain unchanged
A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the
present value of this annuity is closest to which of the following equations?

Salvage value
Book value
Intrinsic value
Fair value

Unlimited liability
Single tax filing
Raising capital

Interest rate risk
Less than
More than
Equal to
A capital budgeting technique through which discount rate equates the present value of the future net
cash flows from an investment project with the project’s initial cash outflow is known as:
Payback period
Net present value
Profitability index
\Which group of ratios measures a firm's ability to meet short-term obligations?
Liquidity ratios
Debt ratios
Coverage ratios
constraint?
Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Reference
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
P*(i+i/m/n)^m*n
Pay back period
Net present value
Profitability index
equations?
annuity stream?
Long-term debt
Preferred stock
Common stock
Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
1000 = pmt * ((1.05)^-8 -1)/.05
1000 = PMT *6.46
PMT = 1000/6.46 = 154.73
Stakeholders
Shareholders
Bondholders
Directors
Where there is single period capital rationing, what the most sensible way of making investment
decisions?
Group projects together to allocate the funds available and select the group of projects with the
highest NPV
The logic behind _________ is that instead of looking at net cash flows you look at cash inflows and
outflows separately for each point in time.
IRR
MIRR
PV
NPV
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you
deposit Rs.20, 000 you would expect to earn around __________ in interest.
Rs.840
Rs.858
Rs.1,032
Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) = $857.82.
Salvage value
Book value
Intrinsic value
Fair value
With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs.
20,000 initial investment?
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Upward
Downward
What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the
bondholders that establish the terms of the bond issue?
Indenture
Debenture
Bond
Bond trustee
Less than
More than
Equal to

activity?
Interest rate risk
Where there is single period capital rationing, what the most sensible way of making
Which of the following statements is correct in distinguishing between serial bonds and
sinking-fund bonds?

single date.
Serial bonds provide for the deliberate retirement of bonds prior to maturity, but sinking-
fund bonds do not provide for the deliberate retirement of bonds prior to maturity
Serial bonds do not provide for the deliberate retirement of bonds prior to maturity, but
sinking-fund bonds do provide for the deliberate retirement of bonds prior to maturity.
Liquidity ratios
Debt ratios
Coverage ratios
flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Pay back period
Net present value
Profitability index
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
payments.
Tax benefits derived from creative structuring of a financing arrangement. For example,
usingloan capital instead of equity capital because interest paid on the loans is
generally tax deductible whereas the dividend paid on equity is not
primarily?
Sales variability
Reference
Profitability index
Net present value
Pay back period
0.5
-1
Will be unrelated
None of the above.
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
APT stipulates
CAPM stipulates
=====

Business cycle
Inflation rates
All of the above

M&M Proposition I
M&M Proposition II
Discount rate
Profitability index

Fixed costs
Variable costs
Debt financing


Convertible Bonds
Common shares
Preferred shares
Pay back period
Net present value
Profitability index
equations?
Upward
Downward
shareholders?
Income
Capital loss
Capital gain
Operating income
Unique risk
Reinvestment risk
Market risk
Unsystematic risk

Profitability index
Net present value
Pay back period

same.
I, II, and III
I only
III only
II and III only
Goes down
Goes up
Stays the same
Which of the following could be taken same as minimizing the weighted average cost of
capital?

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]

Cash flows
Coupon receipts
curve
In the dividend discount model, _____ which of the following are not incorporated into the discount rate?
Real risk-free rate
Return on assets

Convertible Bonds
Common shares
Preferred shares
Cost of debt


The weighted average of possible returns, with the weights being the probabilities of occurrence is
referred to as ________.
Expected return
Standard deviation
In calculating the costs of the individual components of a firm's financing, the corporate tax rate is
important to which of the following component cost formulas?
Common stock
Debt
Preferred stock
None of the above
Expected return
Standard deviation

Unlimited liability
Single tax filing
Raising capital
Total Marks: 1
Cash in flows
Cash out flows
Cash flows
Sales variability
0.25
-1.0
1.0
0.5

Fixed costs
Variable costs
Debt financing
Why common stock of a company must provide a higher expected return than the debt of the same
company?



None of the above

The coupon rate is greater than the current yield and the current yield is greater than yield to maturity
The coupon rate is less than the current yield and the current yield is greater than the yield to
maturity
The coupon rate is less than the current yield and the current yield is less than yield to maturity
In order for the investor to earn more than the current yield the bond must be selling for a discount. Yield
to maturity will be greater than current yield as investor will have purchased the bond at discount and will
be receiving the coupon payments over the life of the bond.

Sales variability
Expected return
Standard deviation



Balance sheets
Income statements
The cash budget is prepared from forecasted cash collections and disbursements rather
If we were to increase ABC company cost of equity assumption, what would we expect to happen to the
present value of all future cash flows?
An increase
A decrease
No change
Which of the followings expressed the proposition that the cost of equity is a positive linear function of
capital structure?

M&M Proposition I
M&M Proposition II

________ 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
Unsystematic risk is the diversifiable portion of total risk and not a measure of total risk like standard
deviation.
The presence of which of the following costs is not used as a major argument against the M&M arbitrage
process?
Bankruptcy costs
Agency costs
Transactions costs
Insurance costs
The presence of these costs is used as major argument against the M&M arbitrage process
Long-term debt
Preferred stock
Common stock
According to timing difference problem a good project might suffer from ___ IRR even though its NPV
is ______.
Higher; lower
Lower; Lower
Lower; higher
Higher; higher

Sales variability

Will be unrelated
None of the above.
Larger; Larger
Larger; Smaller
Smaller; Larger
Smaller; Smaller
You are considering two investment proposals, project A and project B. B's expected net present value is
Rs. 1,000 greater than that for A and A's dispersion of net present value is less than that for B. On the

The expected net present value of B is greater than the expected net present value of A and the risk of B
exceeds the risk of A, so neither dominates the other.
______ means expanding the number of investments which cover different kinds of stocks.
Diversification
Standard deviation
Variance
Covariance

__________are analysts who use information concerning current and prospective profitability of firms to
assess the firm's fair market value.
Credit analysts
Systems analysts
Technical analysts
Total Marks: 1
Which of the followings expressed the proposition that the value of the firm is independent of its capital
structure?
M&M Proposition I
M&M Proposition II
The statement of cash flows reports a firm's cash flows segregated into which of the following categorical
order?
A project that tells us the number of years required to recover our initial cash investment based on the
project’s expected cash flows is:
Pay back period
Net present value
Profitability index
If 2 stocks move in the same direction together then what will be the correlation coefficient?
1.0
-1.0
1.5
which of the following needs to be excluded while we calculate the incremental cash flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Which of the following techniques would be used for a project that has non–normal cash flows?
Net present value

Depreciation
Dividends
Interest
Taxes
Which of the following statements is correct for a firm that currently has total costs of carrying and
ordering inventory that is 50% higher than total carrying costs?

be a ________.
Transaction loan
Line of credit
Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the
dividend growth rate exceeds the stock’s required return. II. A decrease in the dividend growth rate
will increase a stock’s market value, all else the same. III. An increase in the required return on a
stock will decrease its market value, all else the same

I only
III only
II and III only


Covariance, because it involves a squared value, must always be a positive number (or zero)

Accrued wages
Trade credit
Commercial paper
Accrued taxes
Total assets
Fixed assets
Current assets
Increase
Decrease

Convertible Bonds
Common shares
Preferred shares
Comparable
Correlated
Highly correlated

Stakeholders
Shareholders
Bondholders
Directors
There will be two-thirds as many shares outstanding, and they will sell for Rs.60.00
each
Rs.160.00 each
Rs.26.67 each
There will be one-and-one-half times as many shares outstanding, and they will sell
for Rs.60.00 each

________ is the variability of return on stocks or portfolios not explained by general

Systematic risk
Standard deviation
Unsystematic risk
Unlevered firm
Which of the following would be consistent with an aggressive approach to financing

working capital?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Long-term bond rate
Prime rate
Fed funds rate
According to _________, the firm's cost of equity increases with greater debt financing,

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

Expected return
Standard deviation
Cash in flows
Cash out flows
Cash flows
Long-term debt
Preferred stock
Common stock
2,000 cases
4,000 cases
8,000 cases
16,000 cases
Total assets
Fixed assets
Current assets
Sales variability
Fall
Rise
Remain unchanged
expense?
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
Less than
More than
Equal to
Unique risk
Reinvestment risk
Market risk
Unsystematic risk
By borrowing more
Who or what is a person or institution designated by a bond issuer as the official representative of the
bondholders?
Indenture
Debenture
Bond
Bond trustee
outflows?
Discount rate
Profitability index
By comparing the changes in the stock market price to the changes in the stock market index
Stock split
Stock dividend
Extra dividend
Regular dividend
Unlimited liability
Single tax filing
Raising capital
Fixed costs
Variable costs
Debt financing
Liquidity ratios
Debt ratios
Coverage ratios
Which of the following is the cash required during a specific period to meet interest expenses and
principal payments?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Profitability index
Net present value
Pay back period
Fixed costs
Variable costs
Debt financing
be a ________.
Transaction loan
Line of credit
Which of the following terms best applies to the short-term interest rate charged by banks to large,
creditworthy customers?
Long-term bond rate
Prime rate
Fed funds rate
The explicit costs associated with corporate default, such as legal expenses, are the _________ of the
firm.
Flotation costs
Social factors
Fall
Rise
Remain unchanged
Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment
project. These methods take into account:
Expected return
Standard deviation
Cash in flows
Cash out flows
Cash flows
Long-term debt
Preferred stock
Common stock
2,000 cases
4,000 cases
8,000 cases
16,000 cases
Total assets
Fixed assets
Current assets
Sales variability
Fall
Rise
Remain unchanged
expense?
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
Less than
More than
Equal to
Unique risk
Reinvestment risk
Market risk
Unsystematic risk
By borrowing more

Whenever ROE > k
Whenever k > ROE



When bonds are issued, under which of the following category the value of the bond appears?
Equity
Fixed assets
Short term loan
Long term loan
Cost of debt
Which of the following could be taken same as minimizing the weighted average cost of capital?
Total assets
Fixed assets
Current assets



Fall
Rise
Remain unchanged






expense?
Interest tax shield

Depreciable basis
Financing umbrella
Current yield

Less than
More than
Equal to


By borrowing more

Social factors
Upward
Downward
Investors may be willing to pay a premium for stable dividends because of the informational content of
__________, the desire of investors for __________, and certain __________.
Financial leverage
Capital structure
Business risk
Expected return
Standard deviation
Risk
Probability
Relative dispersion
If Deen Muhammad Suppliers receive an invoice for purchases dated 12/12/2002 subject to credit terms
of "2/10, net 30", what is the last possible day the discount can be taken?
January 11
January 22
January 30
December 30
The term "2/10" refers to a firm that can take the discount for only 10 days from the date of the invoice.
Thus, goods shipped on the 12th are due no later than the 22nd if the discount is taken
Fixed costs
Variable costs
Debt financing
Which of the following is a basic principle of finance as it relates to the management of working capital?
Interest rate risk
__________ 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
outflows?
Discount rate
Profitability index
What is the present value of Rs.8,000 to be paid at the end of three years if the correct risk adjusted
Rs.5,850
Rs.4,872
Rs.6,725
Rs.1,842
Which of the following is a capital budgeting technique that is NOT considered as discounted cash flow
method?
Payback period
Net present value
Profitability index
Which one of the following selects the combination of investment proposals that will provide the greatest
increase in the value of the firm within the budget ceiling constraint?
Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Which of the following market in finance is referred to the market for short-term government and corporate
debt securities?
Money market
Capital market
Primary market
Secondary market
It is the net income of the firm less a dollar cost that equals WAAC multiplied by the book value of
liabilities and equities
Fall
Rise
Remain unchanged
http://highered.mcgraw-hill.com/sites/0073012386/student_view0/chapter15/multiple_choice_quiz.html
Long-term debt
Preferred stock
Common stock
Both are an accurate representation of the total annual return an investor can expect to earn by owning
the security
Liquidity ratios
Debt ratios
Coverage ratios
Salvage value
Book value
Intrinsic value
Fair value
All of the above
A portfolio's expected return is a simple weighted average of expected returns of the individual
securities comprising the portfolio.
A portfolio's standard deviation of return is a simple weighted average of individual security return
standard deviations.
The square root of a portfolio's standard deviation of return equals its coefficient of variation
Cash flows
Coupon receipts
employees. He wants a simple inexpensive form of ownership that leaves him in

business.
a. S-corporation
b. Partnership
c. Corporation

an
a. SWOT Analysis
b. Trend Analysis
3. When the market's required rate of return for a particular bond is much less
than
a. A premium
b. A discount
d. Face value
liabilities
7. The gross profit margin is unchanged, but the net profit margin declined over
the
average
industry.
a. Discounting
b. Compounding
d. Time lines
c. An annuity due
13. Which of the following is the rate of return earned on a bond if it is held until
maturity?
a. Yield-to-call
b. Coupon payment
15. A 30-year corporate bond issued in year 1985 would now trade in which of the
following markets?
16. When the market's nominal annual required rate of return for a particular bond
is
a. A discount
b. A premium
c. Par value
constant.
19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this year.
Its
a. Rs.40
b. Rs.35
c. Rs.30
d. Rs.25
20. Which of the following stock would provide a regular income to the investor?
a. Growth stock
b. Income stock
c. Aggressive stock
d. Defensive stock



Which of the following refers to a highly competitive market where good business ideas are
taken up immediately?
Capital market
Efficient market
Money market
Real asset market

The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as
follows: ROE = ________.


Total portfolio risk is ________.

Which type of responsibilities are primarily assigned to Controller and Treasurer respectively?
If Net Present Value technique is used, what is the minimum acceptance criterion for a project?
NPV<0
NPV=0
NPV>0
NPV<=0

Market risk premium
FINALTERM EXAMINATION
Spring 2009
► The lower the total debt-to-equity ratio, the lower the financial
risk for a firm
► An increase in net profit margin with no change in sales or

assets means a weaker ROI
► The higher the tax rate for a firm, the lower the interest
coverage ratio
What is the present value of a Rs.1,000 ordinary annuity that earns 8%

annually for an infinite number of periods?
► Rs.80
► Rs.800
► Rs.1,000
► Rs.12,500
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
Consider two bonds, A and B. Both bonds presently are selling at

their par value of Rs. 1,000. Each pays interest of Rs. 120 annually.
Bond A will mature in 5 years while bond B will mature in 6 years. If
the yields to maturity on the two bonds change from 12% to 10%,
____________.
► Both bonds will increase in value, but bond A will increase

more than bond B
► Both bonds will increase in value, but bond B will increase

more than bond A
► Both bonds will decrease in value, but bond A will decrease

more than bond B
► Both bonds will decrease in value, but bond B will decrease

more than bond A
Given no change in required returns, the price of a stock whose

dividend is constant will__________.
► Decrease over time at a rate equal to the dividend growth

rate
For
most firms, P/E ratios and risk_________.
Which of the following statement about portfolio statistics is

CORRECT?
► A portfolio's expected return is a simple weighted average of

expected returns of the individual securities comprising the portfolio.
► A portfolio's standard deviation of return is a simple weighted

average of individual security return standard deviations.
► The square root of a portfolio's standard deviation of return

equals its variance.

equals its coefficient of variation.
Which of the following is simply the weighted average of the possible

returns, with the weights being the probabilities of occurrence?
The square of the standard deviation is known as the ________.
► Beta
► Expected return
► Variance
An
investor was expecting a 18% return on his portfolio with beta of 1.25
before the market risk premium increased from 8% to 10%. Based on
this change, what return will now be expected on the portfolio?
► 22.5%
► 20.0%
► 20.5%
► 26.0%
Which of the following is the characteristic of a well diversified

portfolio?
► By comparing the changes in the stock market price to the

changes in the stock market index
Which of the following formula relates beta of the stock to the

standard deviation?
A
beta greater than 1 for a stock shows:
If
stock is a part of totally diversified portfolio then its company risk
must be equal to:
►0
► 0.5
►1
► -1
If
risk and return combination of any stock is above the SML, what
does it mean?
► It is offering lower rate of return as compared to the efficient

stock
► It is offering higher rate of return as compared to the efficient

stock
An
arbitrage opportunity exists if an investor can construct a __________
investment portfolio that will yield a sure profit.
► Positive
► Negative
► Zero
► Inflation rates
If
arbitrage opportunities are to be ruled out, what would be the
expected excess return of each well-diversified portfolio?
Which of the following represent all Risk –Return Combinations for the
efficient portfolios in the capital market?
► Parachute graph
What should be used to calculate the proportional amount of equity

financing employed by a firm?
► The common stock equity account on the firm's balance

sheet
► The sum of common stock and preferred stock on the

balance sheet
► The current market price per share of common stock times the
number of shares
Outstanding
► Money market
► Capital market
► Equity market
► Premium
► Discount
Why debt is a less costly source of fund?
► Net income
Calculate the degree of operating leverage (DOL) at 400,000 units

of quantity sold. The firm has Rs.1, 000,000 in fixed costs. The firm
anticipates selling each unit for Rs.25 with variable costs of Rs.5 per
unit.
► 3.33
► 1.25
► 1.14
► There is not sufficient information provided to calculate the

degree of operating leverage (DOL).
A
firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
Which of the following best describes the statement; “The value of

an asset is preserved regardless of the nature of the claims against
it”?
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%
Which of the following statements regarding the M&M Propositions

without taxes is true?
► The total value of the firm depends on how cash flows are
divided up between stockholders and bondholders, under M&M
Proposition I.
► The cost of equity depends on the firm's business risk but not its
financial risk, under M&M Proposition II.
► The cost of equity rises as the firm increases its use of debt
financing under M&M Proposition II.
► This is the rate today for exchanging one currency for another
for immediate delivery
at a specific future date
at a specific location on a specific future date
at a specific location for immediate delivery
The restructuring of a firm should be undertaken, when:
► The restructuring is expected to increase earnings per share

next year
► The restructuring is expected to increase the firm's market

share power in industry
► The current employees will receive additional stock options to

align employee interest
Which of the following term is used when the firm can independently
control considerable assets with a very limited amount of equity?
► Joint venture
► Spin-off
► Consolidation
What is the economic order quantity for an automobile dealer selling

2,000 cars per year, at a cost of Rs.750 per order, and a carrying cost
of Rs.300 per automobile?
► 40 cars
► 71 cars
► 100 cars
► 126 cars
As
the amount of __________ increases the present value of net tax-
shield benefits of debt increases.
► Debt
► Common equity
► Assets
Why the present value of the costs of financial distress increases with
increases in the debt ratio?
What are the real markets effects of leverage on WAAC? (Answer

the question in bulleted form only).

• Increase in leverage causes relatively small increase in cost of
debt as compared to cost of equity
• As leverage increases WACC 1st falls because of tax saving
shield.
• With further increase in leverage WACC fall to its minimum
point which is the optimal point for capital structure
• Further increase in leverage causes increase in WACC because
of bankruptcy risk
Suppose a Firm ABC has Total Assets of Rs.1000 and is 100% Equity
based (i.e. Un-levered). There were 10 equal Owners and 5 of them
want to leave. So the Firm takes a Bank Loan of Rs.500 (at 10%pa
Mark-up) and pays back the Equity Capital to the 5 Owners who are
leaving. Now, half of the Equity Capital has been replaced with a
Loan from a Bank (i.e. Debt). What impact does this have on ROE?
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.
Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has
a beta of 1.25. The risk free rate is 10% and the expected market
return is 18%.
e. Find the expected return on stock X

f. Find the expected return on stock Y
g. Find the expected return on stock Z
h. Suppose that you construct a portfolio consisting of 40% X, 20%
Y and 40% Z. What is the beta of the portfolio?
Answer:
a. rM = 18%
rRF = 10%
β = 0.5
= 10% + (18%-10%) 0.5
= 10% + 4%
= 14%
b. rM = 18%
rRF = 10%
β = 1.00
= 10% + (18%-10%) 1.00
= 10% + 8%
= 18%
d. rM = 18%
rRF = 10%
β = 1.25
= 10% + (18%-10%) 1.25
= 10% + 10%
= 20%
= (40/100)0.5 + (20/100)1.0 + (40/100)1.25
= 0.4x0.5 + 0.2x1.0 + 0.4x1.25
= 0.2 + 0.2 + 0.5
= 0.9
The ABC company is in the 35% marginal tax bracket. The current
market value of the firm is Rs. 12 million. If there are no costs to
bankruptcy:
J What will be ABC’ annual tax savings from interest

deductions be if it issues Rs. 2 million of five years bonds at 12 %
interest rate? What will be the value of the firm?
= 2000000 x 12/100
= 24000
= 5(24000 x 35/100)
= 5x8400
= 42000
K What will ABC’ annual tax savings from interest deductions

be if it issues Rs. 2 million of seven years bonds at 12 % interest
rate? What will be the value of the firm?
= 2000000 x 12/100
= 24000
= 7(24000 x 35/100)
= 7x8400
= 58800
Using the Capital Asset Pricing Model (CAPM), determine the

required return on equity for the following situations:
Situation Expected return Risk- free Beta

s on market rate
portfolio
1 16% 12% 1.00
2 18 8 0.80
3 15 14 0.70
4 17 13 1.20
5 20 15 1.60
ANSWER: Required return= r = rRF + ( rM + rRF ) β
β = beta of stock
1. rM = 16%
rRF = 12%
β = 1.00
= 12% + (16%-12%)1.00
= 12% + 4%
= 16%
2. rM = 18%
rRF = 8%
β = 0.80
= 8% + (18%-8%)0.80
= 8% + 8%
= 16%
3. rM = 15%
rRF = 14%
β = 0.70
= 14% + (15%-14%)0.70
= 14% + 0.70
= 14.7%
4. rM = 17%
rRF = 13%
β = 1.20
= 13% + (17%-13%)1.20
= 13% + 4.8%
= 17.8%
5. rM = 20%
rRF = 15%
β = 1.60
= 15% + (20%-15%) 1.60
= 15% + 8%
= 23%
FINALTERM EXAMINATION Spring 2009
Which of the following type of lease is a long-term lease that is not cancelable and
its life often matches the useful life of the asset?
► A financial
► An operating
► Both financial & operating lease
An operating lease refers to a short-term lease that is often cancelable. For

example, a lease for office space represents this type of lease where the lease life is
less than the useful life of the asset
Among the pairs given below select a(n) example of a principal and a(n) example
of an agent respectively.
► Manager; owner
► Accouor ntant; bondholder
What is the present value of Rs.8,000 to be paid at the end of three years if the
► Rs.5,850
► Rs.4,872
► Rs.6,725
► Rs.1,842
8000/(1.11)^3
What is the present value of Rs.717 to be paid at the end of 2 years if the interest
rate is 9%?
► Rs.604
► Rs.417
► Rs.715
► Rs.556
717/(1.09)^2
► Goes down
► Goes up
► Stays the same
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
1000 = pmt * ((1.05)^-8 -1)/.05
1000 = PMT *6.46
PMT = 1000/6.46 = 154.73
A capital budgeting technique that is NOT considered as discounted cash flow

method is:
► Payback period
While the payback period is a simple and straightforward method for analyzing
a capital budgeting proposal, it has certain limitations. First and the foremost
problem is that it does not take into account the concept of time value of money.
The cash flows are considered regardless of the time in which they are occurring.
You must have noticed that we have not used any interest rate while making
calculation.
In which of the following situations you can expect multiple answers of IRR?
► There are two adjacent arrows one of them is downward pointing & the
► Cash flows
► Coupon receipts
► Pays interest on a regular basis (typically every six months) sure

A zero-coupon bond has a yield to maturity of 9% and a par value of Rs.1,000. If

the bond matures in 8 years, the bond should sell for a price of _______ today.
► Rs. 422.41
► Rs. 501.87
► Rs. 513.16
► Rs. 483.49
price of bond = pv of coup pyament + pv of face vlue
= 1000/ (1.09)^8
► The coupon rate is greater than the current yield and the current yield is
greater than yield to maturity
► The coupon rate is less than the current yield and the current yield is
greater than the yield to maturity
► The coupon rate is less than the current yield and the current yield is less
The coupon rate is less than the current yield and the current yield is less than
yield to maturity
In order for the investor to earn more than the current yield the bond must be
selling for a discount. Yield to maturity will be greater than current yield as
investor will have purchased the bond at discount and will be receiving the coupon
payments over the life of the bond
Which of the following is the variability of return on stocks or portfolios not

explained by general market movements. It is avoidable through diversification?
► Systematic risk
► Financial risk
Systematic risk is not avoidable through diversification
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
► The risk-free rate
► Zero rate of return
► A negative rate of return
► The market rate of return
► By comparing the changes in the stock market price to the changes in

the stock market index
If stock is a part of totally diversified portfolio then its company risk must be
equal to:
►0
► 0.5
►1
► -1
How can you limit company-specific risks?
► Invest in that company's bonds
► Invest in a variety of stocks
► Invest in securities that do well in a recession
► Invest in securities that do well in a boom
Rationale: Company-specific risks. Operating risk and price risk are two factors
contributing to short-term volatility of individual stocks. Operating risk is the risk
to the company as a business and includes anything that might adversely affect the
company's profitability. Price risk, meanwhile, has more to do with the company's
stock than with its business: How expensive is the stock compared with the
company's earnings, cash flow, or sales?
To limit company-specific risk, own a collection of stocks rather than just a few.
Find the Risk-Free Rate given that the Expected Return on Stock is 12.44%, the
Expected Return on the Market Portfolio is 13.4%, and the Beta for Stock is 0.9.
► 3.8%
► 4.9%
► 5.34%
► 6.38%
Working:
rj = rf + b(rm-rf)
► EPS approach
► Matrix approach
► Gordon’s Approach
we can calculate the risk of larger portfolio using the
matrix approach Question No: 21 ( Marks: 1 ) - Please choose one
Market risk is measured in terms of the ___________ of the market portfolio or

index.
► Variance
► Covariance
► Correlation coefficient
Ref. Page No.102: Market Risk is measured in terms of the Standard Deviation (or
Volatility) of the Market Portfolio or Index
coefficient?
►0
► 1.0
► -1.0
► 1.5
Rationale:The strength of the correlation between two variables such as two stock
prices is measured by the correlation coefficient. If two stock prices have perfect
positive correlation, their correlation coefficient will have the value of +1.
Which of the following is NOT the cost of equity?
► The minimum rate that a firm should earn on the equity-financed part of an
investment
► Generally lower than the before-tax cost of debt
► It is the most difficult cost component to estimate
Assume management is looking at a set of possible projects with regards to their

expected NPV, standard deviation, and management's risk attitude. The firm
should attempt to take the set of projects __________.
► That falls on the lowest indifference curve
► That falls on the highest indifference curve
► That has the lowest standard deviation
► That has the highest standard deviation
Rationale: The lowest indifference curve generates the lowest satisfaction by

management with that set of projects.
The overall (weighted average) cost of capital is composed of weighted averages

of which of the following?
► The cost of common equity and the cost of debt
► The cost of common equity and the cost of preferred stock
► The cost of preferred stock and the cost of debt
► The cost of common equity, the cost of preferred stock, and the cost of
debt
How economic value added (EVA) is calculated?
► It is the difference between the market value of the firm and the book value
of equity
► It is the firm's net operating profit after tax (NOPAT) less a dollar cost
of capital charge
► It is the net income of the firm less a dollar cost that equals the WAAC only
primarily?
► Sales variability
► Level of fixed operating costs
► Closeness to its operating break-even point
► Debt-to-equity ratio
A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?
For an all-equity firm, what is the effect of EBIT on the EPS?
► As earnings before interest and taxes (EBIT) increases, the earnings

per share (EPS) increases by the same percent
► As EBIT increases, the EPS increases by a larger percent
► As EBIT increases, the EPS decreases
The beta of an all-equity firm is 1.2. If the firm changes its capital structure to
50% debt and 50% equity using 8% debt financing, what will be the beta of the
levered firm? The beta of debt is 0.2. (Assume no taxes.)
► 1.2
► 2.4
► 2.2
► 1.8
The Serfraz Company is financed by Rs. 2 million (market value) in debt and Rs. 3
million (market value) in equity. The cost of debt is 10% and the cost of equity is
15%. Calculate the weighted average cost of capital. (Assume no taxes.)
► 10%
► 15%
► 13%
► 8%
V= 2M+3M = 10M
WCCA = 2/5*10% + 3/5*15% = 13%
Which of the following expressed the proposition that the value of the firm is
► The Capital Asset Pricing Model
► M&M Proposition I
► M&M Proposition II
► The Law of One Price
According to M&M’s Proposition I, the value of a firm is independent of the

financing mix of the firm. Thus, managers cannot alter firm value by their choice
of the relative amounts of debt and equity financing. According to M&M, the value
of the firm is determined by the size and riskiness of the real cash flows generated
by the firm’s assets, and not by how these cash flows are divided between the debt
and equity stakeholders of the firm. These results hold under the assumption of
perfect capital markets with no corporate or personal taxes. Under perfect capital
markets, investors face no transactions costs and are symmetrically informed. In
addition, firms can borrow and lend at the risk-free rate and can issue securities
with no issuance costs
Which of the following could NOT be defined as the capital structure of the
Company?
► The firm's mix of Assets and liabilities
► The firm's debt-equity ratio

► The firm's common stocks only
Capital structure refers to the way a corporation finances its assets through some
combination of equity, debt, or hybrid securities
► Experiencing a business failure
► A legal bankruptcy
► Experiencing technical insolvency
► Experiencing accounting insolvency
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
► Joint venture
► Spin-off
► Consolidation
Ref: The acquisition of another company using a significant amount of

borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets
of the company being acquired are used as collateral for the loans in addition to the
assets of the acquiring company. The purpose of leveraged buyouts is to allow
companies to make large acquisitions without having to commit a lot of capital.
Which of the following is NOT a reason that DeStore.com would prefer to pay a
stock dividend rather than a regular cash dividend?
► It decreases the supply of shares and enhances shareholder wealth
► It may conserve cash for other firm needs
► It will reduce the stock price
► The investors anticipates that it cannot convey credibly otherwise
After the payment of a 25% stock dividend, an investor has 500 shares of stock
and Rs. 400 total value. What did the investor have prior to the stock dividend?
► 375 shares of stock and Rs. 375 total value
because stock dividend did not increase the value. It only increases the number
of stocks.
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
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 car tops,
what is the level of fixed costs?
How working capital affects performance of a business?
Hoskins Hiking Boot Company is trying to devise an appropriate working capital

policy. Their most recent balance sheet is as follows:
ASSETS LIABILITIES AND OWNER'S

EQUITY
Cash Rs.30 Accounts
Rs.35
payable
Accounts 50 Notes payable 10
receivable
Inventories 30 Accruals 5
Current Assets 110 Current liabilities 50
Net fixed assets 150 Mortgage loan
80
(at 13%)
Common equity 130
Total liabilities &
Total assets Rs.260 Rs.260
Owner's equity
You know that net profits in 2004 were Rs.28, 000.
a. What is Hoskin's current level of gross and net working capital? (Marks 2)
b. What percentage of total assets is invested in gross working capital? (Marks 1)
c. Calculate Hoskins' return on investment. (Marks 2)
d. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and
uses the proceeds to pay off some of its accounts payable. Now, assuming all other
items remain the same, answer a, b, and c above using these new figures. (Marks
5)
ANS
a. What is Hoskin's current level of gross and net working capital? (Marks 2)
b. What percentage of total assets is invested in gross working capital? (Marks 1)
c. Calculate Hoskins' return on investment. (Marks 2)
= [Net Income / Total Assets] X 100
d. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and
uses the proceeds to pay off some of its accounts payable. Now, assuming all other
items remain the same, answer a, b, and c above using these new figures.
(Marks 5)
b. What percentage of total assets is invested in gross working capital?
Earnings before interest and taxes (EBIT) of Firm is Rs.1000 and Corporate Tax
Rate, Tc is 30%
a. If the Firm is 100% Equity (or Un-Levered) and rE = 30% then

what is the
WACCU of Un-levered Firm?
b. If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then

what is the
WACCL of Levered Firm? (There is no change in return in equity)
c. If the Firm is 100% Equity (or Un-Levered) and rE = 30% then

what is the
WACCU of Un-levered Firm?
d. If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then

what is the
WACCL of Levered Firm? (There is no change in return in equity)
If the capital-asset pricing model approach is appropriate, compute the required

rate of return for each of the following stocks: Assume a risk-free rate of .09 and
an expected return for the market portfolio of .12.
Stock A B C D E
Beta 2.0 1.5 1.0 0.7 0.2
Spring 2009


► The lower the total debt-to-equity ratio, the lower the financial risk for
a firm
weaker ROI

What is the present value of a Rs.1,000 ordinary annuity that earns 8% annually
for an infinite number of periods?
► Rs.80
► Rs.800
► Rs.1,000
► Rs.12,500
It will be treated as perpetuity, Formula is as under:

PV= PMT/i
= 1000/.08
= 12,500


► Return on asset


Ref. Page No.58

Consider two bonds, A and B. Both bonds presently are selling at their par value
of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5
years while bond B will mature in 6 years. If the yields to maturity on the two
bonds change from 12% to 10%, ____________.
► Both bonds will increase in value, but bond A will increase more than bond
B
► Both bonds will increase in value, but bond B will increase more than bond
A
► Both bonds will decrease in value, but bond A will decrease more than
bond B
► Both bonds will decrease in value, but bond B will decrease more than
bond A

Given no change in required returns, the price of a stock whose dividend is
constant will__________.
► Decrease over time at a rate equal to the dividend growth rate



► A portfolio's expected return is a simple weighted average of expected

returns of the individual securities comprising the portfolio.
► The square root of a portfolio's standard deviation of return equals its
variance.
coefficient of variation.
Ref.
Which of the following is simply the weighted average of the possible returns,
with the weights being the probabilities of occurrence?
Ref.
► Beta
► Expected return
► Variance
Reference



An investor was expecting a 18% return on his portfolio with beta of 1.25 before
the market risk premium increased from 8% to 10%. Based on this change, what
return will now be expected on the portfolio?
► 22.5%
► 20.0%
► 20.5%
► 26.0%
Working: 2% rise in market risk premium rise in expected return will be 2*beta =
(2*1.25 = 2.50)
18%+2.50 = 20.5



► By comparing the changes in the stock market price to the changes in
the stock market index

The formula for the beta can be written as:
Beta = Covariance (stock versus market returns) / Variance of the Stock Market
http://www.money-zine.com/Investing/Stocks/Stock-Beta-and-Volatility/

A beta greater than 1 for a stock shows:


equal to:
►0
► 0.5
►1
► -1


Any Stock whose (Risk, Return) Pair lies ABOVE THE SML is offering Excessive
Return (above the Market). So, all rational investors will rush to Buy it. The
present Price would Rise and the Return (as measured by Capital Gain Yield = ( Pn
-Po) / Po) would Fall until it comes back on SML Any Stock whose (Risk, Return)
Pair lies BELOW THE SML is offering a Return that is lower than the Market. So,
Rational Investors will rush to sell it. The Stock Price would Fall and the Return
would Rise until it comes back on the SML.
An arbitrage opportunity exists if an investor can construct a __________

investment portfolio that will yield a sure profit.
► Positive
► Negative
► Zero
If the investor can construct a portfolio without the use of the investor's own
funds and the portfolio yields a positive profit, arbitrage opportunities exist.

► Inflation rates

If arbitrage opportunities are to be ruled out, what would be the expected excess
return of each well-diversified portfolio?
Rationale: For each well-diversified portfolio (P and Q, for example), it

must be true that [E(rp)-rf]/βp = [E(rQ)-rf]/ βQ.

Which of the following represent all Risk –Return Combinations for the efficient
portfolios in the capital market?
► Parachute graph
The CML gives the risk/return relationship for efficient portfolios.

employed by a firm?
► The current market price per share of common stock times the number
of shares
Outstanding
http://web.utk.edu/~jwachowi/mcquiz/mc15.html

► Money market
► Capital market
► Equity market

► Premium
► Discount

Why debt is a less costly source of fund?



► Net income

Calculate the degree of operating leverage (DOL) at 400,000 units of quantity
sold. The firm has Rs.1, 000,000 in fixed costs. The firm anticipates selling each
unit for Rs.25 with variable costs of Rs.5 per unit.
► 3.33
► 1.25
► 1.14
► There is not sufficient information provided to calculate the degree of
operating leverage (DOL).
Sales = 400,000 * 25 = 10M

VC = 400,000 * 5 = 2M
The DOL is (S - VC)/(S - VC - FC) = (10M - 2M)/(10M - 2M - 1M) = 1.14

A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?


Which of the following best describes the statement; “The value of an asset is
preserved regardless of the nature of the claims against it”?
Reference

Firm ABC has Rs.5 million in outstanding debt, currently has 200,000 shares
outstanding priced at Rs.60 a share, and has a borrowing rate of 10%. If the firm's
return on equity is 15%, what is the firm's WACC?
► 5.00%
► 3.23%
► 4.25%
► 2.16%
Note: we are not sure about answer of this Question it seems options are not
framed properly.
We try to solve it here
In absence of Tax Rate. Values are as follow
D = 5M
E = 200,000 *60 = 12 M
D+ E = 5+12= 17M
WCCA = (5/17)*(10%) + (12/17)*(15%) = .1350 = 13.50%

Which of the following statements regarding the M&M Propositions without taxes
is true?
► The total value of the firm depends on how cash flows are divided up
between stockholders and bondholders, under M&M Proposition I.
► The cost of equity depends on the firm's business risk but not its financial
risk, under M&M Proposition II.
► The cost of equity rises as the firm increases its use of debt financing
under M&M Proposition II.

► This is the rate today for exchanging one currency for another for
immediate delivery
future date
location on a specific future date
location for immediate delivery
The rate of a foreign-exchange contract for immediate delivery. Also known as

"benchmark rates", "straightforward rates" or "outright rates", spot rates represent
the price that a buyer expects to pay for a foreign currency in another currency.

The restructuring of a firm should be undertaken, when:
► The restructuring is expected to increase earnings per share next year
► The restructuring is expected to increase the firm's market share power in
industry
► The current employees will receive additional stock options to align
employee interest

► Joint venture
► Spin-off
► Consolidation
Ref: The acquisition of another company using a significant amount of borrowed
money (bonds or loans) to meet the cost of acquisition. Often, the assets of the
company being acquired are used as collateral for the loans in addition to the assets
of the acquiring company. The purpose of leveraged buyouts is to allow companies
to make large acquisitions without having to commit a lot of capital.

What is the economic order quantity for an automobile dealer selling 2,000 cars
per year, at a cost of Rs.750 per order, and a carrying cost of Rs.300 per
automobile?
► 40 cars
► 71 cars
► 100 cars
► 126 cars
EOQ=square root of 2*2000*750 / 300

= 100
EOQ = square root of (2*annual QTY * Cost of order )/carrying cost per unit for
whole year

As the amount of __________ increases the present value of net tax-shield
benefits of debt increases.
► Debt
► Common equity
► Assets

Why the present value of the costs of financial distress increases with increases in
the debt ratio?
What are the real markets effects of leverage on WAAC? (Answer the
question in bulleted form only).

• Increase in leverage causes relatively small increase in cost of debt as
compared to cost of equity
• As leverage increases WACC 1st falls because of tax saving shield.
• With further increase in leverage WACC fall to its minimum point which is
the optimal point for capital structure
• Further increase in leverage causes increase in WACC because of
bankruptcy risk
Suppose a Firm ABC has Total Assets of Rs.1000 and is 100% Equity based (i.e.
Un-levered). There were 10 equal Owners and 5 of them want to leave. So the
Firm takes a Bank Loan of Rs.500 (at 10%pa Mark-up) and pays back the Equity
Capital to the 5 Owners who are leaving. Now, half of the Equity Capital has been
replaced with a Loan from a Bank (i.e. Debt). What impact does this have on
ROE?
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.
Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has a beta of
1.25. The risk free rate is 10% and the expected market return is 18%.
a. Find the expected return on stock X
b. Find the expected return on stock Y
c. Find the expected return on stock Z
d. Suppose that you construct a portfolio consisting of 40% X, 20% Y

and 40% Z. What is the beta of the portfolio?
Answer:
a. rM = 18%
rRF = 10%
β = 0.5
r = rRF + ( rM - rRF ) β
= 10% + (18%-10%) 0.5
= 10% + 4%
= 14%
b. rM = 18%
rRF = 10%
β = 1.00
= 10% + (18%-10%) 1.00
= 10% + 8%
= 18%
1. rM = 18%
rRF = 10%
β = 1.25
= 10% + (18%-10%) 1.25
= 10% + 10%
= 20%
= (40/100)0.5 + (20/100)1.0 + (40/100)1.25
= 0.4x0.5 + 0.2x1.0 + 0.4x1.25
= 0.2 + 0.2 + 0.5
= 0.9
The ABC company is in the 35% marginal tax bracket. The current market value
of the firm is Rs. 12 million. If there are no costs to bankruptcy:
a. What will be ABC’ annual tax savings from interest deductions

be if it issues Rs. 2 million of five years bonds at 12 % interest rate? What
will be the value of the firm?
= 2000000 x 12/100
= 24000
= 5(24000 x 35/100)
= 5x8400
= 42000
b. What will ABC’ annual tax savings from interest deductions be

if it issues Rs. 2 million of seven years bonds at 12 % interest rate? What
will be the value of the firm?
= 2000000 x 12/100
= 24000
= 7(24000 x 35/100)
= 7x8400
= 58800
Using the Capital Asset Pricing Model (CAPM), determine the required return on
equity for the following situations:
Situations Expected return on Risk- free Beta

market portfolio rate
1 16% 12% 1.00
2 18 8 0.80
3 15 14 0.70
4 17 13 1.20
5 20 15 1.60
ANSWER: Required return= r = rRF + ( rM - rRF ) β
β = beta of stock
1. rM = 16%
rRF = 12%
β = 1.00
= 12% + (16%-12%)1.00
= 12% + 4%
= 16%
2. rM = 18%
rRF = 8%
β = 0.80
= 8% + (18%-8%)0.80
= 8% + 8%
= 16%
3. rM = 15%
rRF = 14%
β = 0.70
= 14% + (15%-14%)0.70
= 14% + 0.70
= 14.7%
4. rM = 17%
rRF = 13%
β = 1.20
= 13% + (17%-13%)1.20
= 13% + 4.8%
= 17.8%
5. rM = 20%
rRF = 15%
β = 1.60
= 15% + (20%-15%) 1.60
= 15% + 8%
= 23%
Fall 2009
The DuPont Approach breaks down the earning power on shareholders' book
value (ROE) as follows: ROE = __________.
► Net profit margin × Total asset turnover × Equity multiplier
► Total asset turnover × Gross profit margin × Debt ratio
► Total asset turnover × Net profit margin
► Total asset turnover × Gross profit margin × Equity multiplier
ROE = (Profit margin)*(Asset turnover)*(Equity multiplier) = (Net

profit/Sales)*(Sales/Assets)*(Assets/Equity)
► Debt ratios
► Coverage ratios
A ratio that indicates what proportion of debt a company has relative to its assets.
The measure gives an idea to the leverage of the company along with the potential
risks the company faces in terms of its debt-load.
Interest paid (earned) on both the original principal borrowed (lent) and previous
interest earned is often referred to as __________.
► Present value
► Simple interest
► Future value
When the compound interest calculation is used, interest is calculated on the

original principal plus all interest accrued to that point in time. Since interest is
paid on interest as well as on the amount borrowed, the effective interest rate is
greater than the nominal interest rate. The compound interest rate method is often
used by banks and savings institutions in determining interest they pay on savings
deposits "loaned" to the institutions by the depositors.
A capital budgeting technique that is NOT considered as discounted cash flow

method is:
► Payback period
Payback cannot be calculated if the positive cash inflows do not eventually

outweigh the cash outflows. That is why payback (like IRR) is of little use when
used with a pure "costs only" it does not take into account the concept of time
value of money. The cash flows are considered regardless of the time in which they
are occurring. You must have noticed that we have not used any interest rate while
making calculation
You are selecting a project from a mix of projects, what would be your first
selection in descending order to give yourself the best chance to add most to the
firm value, when operating under a single-period capital-rationing constraint?
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
► Debenture
► Bond
► Bond trustee
Indenture”: Long Legal Agreement between the Issuer (or Borrower) and the
Bond Trustee (Generally a bank of financial institution that acts as the
representative for all Bondholders). Basically protects Bondholders from mis-
management by the bond issuer, default, other security holders, etc.
► It is below the coupon rate when the bond sells at a discount, and equal to the
coupon rate when the bond sells at a premium
► The discount rate that will set the present value of the payments equal to
the bond price
► It is based on the assumption that any payments received are reinvested at

the coupon rate
_________ is equal to (common shareholders' equity/common shares

outstanding).
► Book value per share
► Liquidation value per share
► Market value per share
► None of the above
The present value of growth opportunities (PVGO) is equal to
I) The difference between a stock's price and its no-growth

value per share
► I and IV
► II and IV
► I, III, and IV
► II, III, and IV
A portfolio's expected return is a simple ► weighted average of expected

A► portfolio's standard deviation of return is a simple weighted average of

The ► square root of a portfolio's standard deviation of return equals its

variance.
The ► square root of a portfolio's standard deviation of return equals its

New competitors ►
New product management ►
Worldwide inflation ►
Strikes ►
Its ► market risk is negligible
Its unsystematic risk is ► negligible
Its ► systematic risk is negligible
All ► of the given options
Which of the following factor(s) do NOT affects the movements in the market
index?
Macroeconomic factors ►
Socio ► political factors
Social factors ►
All ► of the given options

equal to:
0►
0.5 ►
1►
-1 ►
How much return would be offered by the stock whose (risk and return) pair lies
below the SML?
►No return
►Lower return
►Average return
►Excessive return
Any Stock whose (Risk, Return) Pair lies BELOW THE SML is offering a Return
that is lower than the Market.

index.
►Variance
►Covariance
►Standard deviation
►Correlation coefficient
Ref. Page No.102: Market Risk is measured in terms of the Standard Deviation (or
Volatility) of the Market Portfolio or Index
What is the meaning of the term “arbitrage”?
►Buying low and selling high
►Earning risk-free economic profits
►Negotiating for favorable brokerage fees
►Hedging your portfolio through the use of options
Arbitrage is exploiting security mispricings by the simultaneous purchase and sale

to gain economic profits without taking any risk. A capital market in equilibrium
rules out arbitrage opportunities..
Which of the following is the market where tangible or physical asset change
hand?
►Money market
►Capital market
►Real asset market
►Equity market
Real Assets Markets:
The real asset market where the real or tangible asset or physical asset change hand
.for example, you have cotton exchange where raw bales of cotton change hands
.computer hardware and many other examples are available. For example, Cotton
Exchange, Gold Market, Kapra Market Property (land, house, apartment,
warehouse) ,Computer hardware, Used Cars, Wheat, Sugar, Vegetables, etc.
►Fixed cost
►Variable cost
►Debt financing
►Common equity financing
Which of the following will be confronted by the management in deciding the

optimal level of current assets for the firm?
►A trade-off between profitability and risk
►A trade-off between liquidity and risk
►A trade-off between equity and debt
►A trade-off between short-term versus long-term borrowing
Which of the following is an example of a natural hedge?
►The prices and costs are both determined in the global market place.
►The prices are determined in the global market place and costs are determined in
the domestic market place.
►The costs are determined in the global market place and prices are determined in
the domestic market place.
►None of the given options is correct
Natural hedges are generated when both prices and costs are determined in similar
market places.
For which of the following strategy; economies of scale, market share dominance,
and technological advances are reasons most likely to be offered to justify?
►Financial acquisition
►Strategic acquisition
►Divestiture
►Supermajority merger approval provision
Which of the following is incorrect regarding the costs and benefits of holding
inventories and cash?
►The benefit of higher inventory levels is the reduction in order costs associated
with restocking and the reduced chances of running out of material.
►The costs of higher inventory levels are the carrying costs, which include the
cost of space, insurance, spoilage, and the opportunity cost of the capital tied up in
inventory.
►Cash provides liquidity, but it doesn't pay interest. Securities pay interest, but
you can't use them to buy things.
►As financial manager you want to hold cash up to the point where the
incremental or marginal benefit of liquidity is 25% higher than the cost of
holding cash, that is, the interest that you could earn on securities.
Which of the following is the dividend that is normally paid to shareholders?
► Stock split
► Stock dividend
► Extra dividend
► Regular dividend
► Pay back period
In this technique, we try to figure out how long it would take to recover the
invested capital through positive cash flows of the business.
Payback period
Project A 1.66
Project B 2.66
Project C 3.66
► Project A
► Project B
► Project C
► Project A & B
Assume a company had Rs.1 billion in free cash flow last year, and it is expected
to grow that cash flow at 3% into perpetuity. Assuming a 9% cost of equity, what
is the present value of the company?
► Rs.12.08 billion
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest
► Rs.680.58
► Rs.1,462.23
► Rs.322.69
► Rs.401.98
F V = PV × (1 + i )n
PV = FV / (1 + i )n
= 1000 / (1 + 0.08)5
= 680.27
What will be the market risk premium for stock C if the average share of stock C
has a required return of 15% and treasury bonds yield is 10%?
► 5%
► 10%
► 15%
► 25%
15%-10%= 5%
The difference between the expected return on a market portfolio and the risk-free
rate.
All of the following are used in calculation of required return on a particular stock
using SML equation EXCEPT:
► Risk free rate
► Market risk premium
► Stock’s beta
► Stock’s price
Ref: SML Equation (assumes Efficient Stock Pricing, Risk, and Return)
rA = rRF + (rM - rRF ) β A .
On which of the following ground, the Arbitrage Pricing Model is different from
the Capital Asset Pricing Model?
► It places more emphasis on market risk
► It minimizes the importance of diversification
► It recognizes multiple systematic risk factors
► It recognizes multiple unsystematic risk factors
According to Traditionalist Theory, when a 100% Equity Firm takes on more and
more debt, which of the following phenomenon is observed?
► Share Price first falls, then reaches minimum and finally rises
► Share Price first rises, then reaches minimum and finally falls
► Share Price first rises, then reaches maximum and finally falls
Ref: Total Market Value of Firm (V = D + E = Market Value of Debt + Market

Value of Equity) first rises (because of Interest Tax Shield savings), then reaches a
maximum point (optimal capital structure), and finally falls (because of excessive
fall in Net Income and Equity value because of interest payments).
Which of the following formula represents the yield to maturity?
► Interest yield + Market price
► Capital gain yield + Book value
► Interest yield + Capital gain yield
► Market price + Capital gain yield
Ref: YTM= interest yield +capital gain yield and it is representative of over all
cost of debt in the form of bond.
Bird-in-the-hand dividend theory was proposed by which of the following?
► Miller Modigliani
► Myron Gordon and John Lintner
► Henry Fayol
► William John and Lehman
Ref: Bird in the Hand (Gordon & Lintner) Theory: from handouts
XYZ Corporation has offered its shareholders the option that their dividends will
be used to purchase additional shares of this corporation. This offer of XYZ
Corporation is referred as:
► Stock repurchases
► Dividend reinvestment
► Stock dividends
► Stock splits
Dividend Reinvestment Plans (DRIP)
– Firms give stockholders option to automatically reinvest cash dividends by

buying more
of the same stock
When IRR < WACC it means that:
► Investment is acceptable as required rate of return is less then cost of

capital
► Investment is not acceptable as required rate of return is less then cost

of capital
► Investment is acceptable as required rate of return is equal to the cost of

capital
► None of the given options is true
Ref:
http://www.google.com.pk/url?sa=t&source=web&ct=res&cd=2&ved=0CAoQFjA
B&url=https%3A%2F%2Ffanyv88.com%3A443%2Fhttp%2Fwww.cob.sfasu.edu%2Fkjones%2FF333%2FLecture%2
520Notes%2FBasics%2520of%2520Capital%2520Budgeting.ppt&rct=j&q=%22I
RR%3CWACC%22&ei=UxSIS4qZMc_l8Qbg6vWXDw&usg=AFQjCNFrI6KU6
H1PTjdaZBcu0zpr0DKnPw
Which of the following statement depicts the disadvantage of issuing debt?
► Debt financing leads toward unlimited liability
► If company doesn’t pay interest, it can be close down
► It can improve the return on equity
► Not fixed payment of interest is required by investors
Ref: Disadvantage of Too Much Debt: Firm becomes more Risky so Lenders and
Banks Charge Higher Interest Rates and Greater Chance of Bankruptcy
The decisions regarding capital structure of a firm are mainly concerned with
► Assets side of balance sheet
► Liabilities side of balance sheet
► Expense side of profit and loss account
► Incomes side of profit and loss account
Ref: Capital Structure and Corporate Financing - Long Term LIABILITIES Side of
Balance Sheet
If Current assets = Rs. 16,000,
Current liabilities= Rs. 10,000
Inventory= Rs. 2500
Calculate quick ratio for the firm?
► 1.35
► 6.0
► 1.60
► 0.25
Ref: A desirable quick ratio can range from (0.8:1) to (1.5:1) depending on the
nature of the business.
= (Current Assets – Inventory) / Current Liabilities
= (16000-2500)/10000
= 1.35
If an investor is risk averse, then which of the following options best suits him?
► Debentures
► Common stock
► T –Bills
► Preferred stock
Ref: It is important to remember that we have the option of investing in the T-bill
portfolio which offers a risk free rate of return
Capital structure theory is presented by which of the following?
► Robert Alan Hill
► Modigliani & Miller
► Brigham & Houston
► Van Horne & Gittman
Ref: Answer provided by Capital Structure Theory.
Modigliani - Miller:
• Fathers of Corporate Finance
Which of the following is true regarding financial leverage?
► Whenever a firm's equity increases faster than its debt, financial leverage
increases
► Investors can undo the effects of the firm's capital structure by using
home-made leverage
► Increasing financial leverage will always increase the EPS for stockholders
► The level of financial leverage that produces the minimum firm value is the
most beneficial to stockholders
Ref:
http://www.google.com.pk/url?sa=t&source=web&ct=res&cd=1&ved=0CAYQFj
AA&url=https%3A%2F%2Ffanyv88.com%3A443%2Fhttp%2Fwww.cbpp.uaa.alaska.edu%2Fafrc2%2F325%2Frwje4
ch13.rtf&rct=j&q=%22Which+of+the+following+is+true+regarding+financial+lev
erage%22&ei=sReIS__kLMjR8Abr-
5yzDw&usg=AFQjCNHvAT9YesJTLn_T3Eng8LcyMmDGjA
If a firm wants to use short-term bank loan to finance its temporary current assets
and even to buy some of its permanent current inventory, then which of the
following policy it is going to adopt?
► Moderate working capital policy
► Conservative working capital policy
► Aggressive working capital policy
► Any of the given policy
Ref: Moderate
• Balance of Long and Short-term Financing.
• Long Term Financing for Fixed and Permanent Current Assets. Use Short Term
Financing for Permanent Current Assets. Use Spontaneous Current Liability
Financing for Temporary Current Assets
Which of the following statements depicts the trade-off theory in a better way?
► It states a tradeoff between the costs and benefits of debt financing
► It states the tradeoff between the debt financing and equity financing
► There is tradeoff between assets and liabilities of the firm
► There is tradeoff between revenues and expenses of the firm
Modigliani and Miller presented capital structure theory in which of the following
years?
► 1950
► 1958
► 1963
► 1965
Ref: Cost of Capital, Corporate Finance and the Theory of Investment”

Revolutionary Article Published by Professors Modigliani & Miller in American
Economic Review in June 1958. Won Nobel Prize
In which of the following, synergies are not expected?
► Operating merger
► Financial merger
► Vertical Merger
► Horizontal Merger
Ref: 2 Broad Categories of Mergers:
• Pure Financial Merger - Operations remain independent
• Operating Merger - Operations are Integrated & Changed & Synergies Expected
“Company X wants to merge with Company Y but Company X’s management is

resisting the merger. Company X asks the shareholders of Company Y to tender
their shares in exchange the offered price.” This statement refers to which of the
following?
► Vertical Merger
► Hostile Merger
► Conglomerate Merger
Reference 4 Specific Types of Mergers:
• Horizontal Merger: merger of 2 competitors - can lead to Monopoly
• Vertical Merger: merger of a supplier with a buyer
• Co generic Merger: merger of firms in same industry
• Conglomerate Merger: merger of firms in unrelated industries
What happens to the total risk when leverage increases at a slow rate?
► Total risk increases with slow rate than the leverage
► Total risk increases with decreasing rate
► Total risk remains the same
► Total risk increases faster than the leverage
According to ___________, the firm's cost of equity increases with greater debt
financing, while the WACC first decreases and then increases.
► M&M Proposition I with taxes
► M&M Proposition I without taxes
► The traditional theory of capital structure
► M&M Proposition II without taxes
Which of the following is incorrect regarding Modigliani and Miller's (MM's)

famous debt irrelevance proposition?
► It states that firm value can't be increased by changing capital structure
► MM show that the extra return and extra risk balance out, leaving
shareholders no better or worse off
► MM's argument rests on simplifying assumptions i.e. efficient capital

markets and ignores taxes and costs of financial distress
► Firm value increases when more debt is used
Ref: As companies take more debt they are exposed to more financial risk.
Which of the following refers to a unique type of Japanese corporate organization

based on a close partnership between government and businesses?
► Keiretsu
► Chaebols
► Lean and mean
► Options
Ref: A grouping of Japanese firms through historic associations and equity

interlocks such that each firm maintains its operational independence (definition of
keiretsu)
Calculate the Forward Rate for Rupee if the interest on 1 Year Maturity in
Pakistan is 10% and in Australia is 6% and the current spot rate is Rs.76/ AUD.
► Rs. 6 per AUD
► Rs. 76 per AUD
► Rs. 79 per AUD
► Rs. 456 per AUD
Ref: F = S (Rs. /AUD$) (1+ i Rs.) / (1+ i AUD$)
= 76(1+0.1)/ (1+0.06)
=78.87
Calculate the Forward Rate for Rupee using Interest Rate Parity if the interest on 1
Year Maturity in Pakistan is 10% and on Euro is 6% and the forward rate is
Rs.124/ EUR.
► Rs. 6 per EUR
► Rs. 120 per EUR
► Rs. 124 per EUR
► Rs. 1240 per EUR
Ref: F = S (Rs. /AUD$) (1+ i Rs.) / (1+ i AUD$)
There some technical problem with question
This Question has some technical problem. It should give spot rate if they wanted
to calculate forward rate. If we assume 124 as spot rate then its answer for forward
rate should be 128.67
How it can be possible with parity of 10% and 6% after one year euro has the same
value of 124Rs.
= F = S (Rs. ) (1+ i Rs.) / (1+ i euro)
= (124) (1+0.1) / (1+0.06) = 128.6792
or if we assume it ask us to calculate the spot Rate and 124 is assumed as forward
rate in that case answer could be 120
comments from:
Tax shield for the calculation of cost of debt but not for the calculation of the
equity stock. Why? Give reason.
Because you can get tax exemption on the interest payment, in case of debt
financing. But you are not entitled for any Tax shield in case of equity.
Rd (1- T)
Comments Solution Team
Ahsan Enterprises, an all-equity firm, is considering a proposal of new capital

investment. Analysis has indicated that the proposed investment has a beta of 0.5
and will generate an expected return of 7%. The firm currently has a required
return of 10.75% and a beta of 1.25. The investment, if undertaken, will double
the firm's total assets.
Requirement:
If rRF is 7% and the market risk premium is 3%, should the firm undertake
the investment?
Beta = .5
Expected Rate of return = 7%
Required rate of return = 10.75
Beta = 1.25%
Ahsan Enterprises uses only equity capital, so its cost of equity is also its
corporate cost of capital, or WACC.
WACC = 10.75 %
“The investment, if undertaken, will double the firm's total assets” tells us that
exactly same amount will be injected
So after the injection of new investment with beta of .5, impact on overall beta will
be
.5 * (1.25) + .5*(.5) = .875
Now we will calculate the Required Rate of return with new beta
RR = WACC = risk free rate of return + (Market rate of return - risk free rate of
return)*beta
WACC = 7% + (7% - 3%)*.875 = 10.50%
= .5*10.50 + .5*7 =
Due to new investment cost of capital reduced from 10.75% to 10.50%
Overall expected rate of return must be more then 10.50% but new investment is
giving us the expected rate of return of 7%
Now we will see expected return after injection of new investment
.5(10.75)+ .5(7) = 8.87%
as it is less then 10.50 so we should drop it.
Comments Team: we have given more steps just to clear the concept you can
short the answer also.
Mergers can be classified in two broad categories i.e. Financial and

Operating merger. Differentiate between these two.
Financial Merger Operating Merger
The operations remains independent The operations are integrated and

changed and synergies expected.
Using the Capital Asset Pricing Model (CAPM), determine the required return on
equity for the following situations:
Situations Expected return Risk- free Beta

on market rate
portfolio
1 16% 12% 1.00
2 18% 8% 0.80
3 15% 14% 0.70
Required Rate of return = risk free rate of return + (market return- risk free rate)*
beta
1. = 12% + (16%-12%)*1 = 16%
2. = 8% + (18%-8%)*.8 = 16%
3. = 14% + (15%-14%)*.7 = 14.7%
Generalization: as beta of 1 in case of our security No.1 It is fully diversified and

its return is 16% which exactly equal to market portfolio return. Any value of beta
above the 1 can increase the rate of return but same it will increase the Risk as
well.
Comments Team
What are stock dividends and stock splits? Explain with the help of examples
and how do these affect stock prices?
(3+3+4 marks)
Stock Dividend: They are used to control the share price if it rises too fast. They
bring share price down to within an optimal price range so that more investors can
afford to trade in it and trading volume rises.
Example: Company offers 10% stock dividend to all shareholders. It means that if
you own 100 shares than company will give you 10 more shares free of cost.
Number of shares increases but total value of firm is unchanged.
Stock Split: They are used to share price if it rises too fast. Number of share
outstanding increase. They are used to increase Float.
Example: Company with 1000 shares outstanding to outside shareholders declares

2-for-1 stock split. Means that the number of shares outstanding will increase to
2000 shares (i.e. 100% increase). Number of shares rises but firm value
unchanged.
Effect of Stock Dividend and Stock Splits on prices:
Prices rises immediately afterwards because investors take them to be positive

signals about the company’s future. But if company does not declares higher
earnings and dividends in near future, price will come back down again.
Fall 2009
Marks: 87
► Borrow short term to finance additional fixed assets
► Issue long-term debt to buy inventory
► Sell common stock to reduce current liabilities
► Sell fixed assets to reduce accounts payable
Which group of ratios measures how effectively the firm is using its assets?
► Debt ratios
► Coverage ratios
► Activity ratios
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month
certificate of deposit, if you deposit Rs. 20, 000 you would expect to earn around
__________ in interest.
► Rs.840
► Rs.858
► Rs.1,032
► Rs.1,121
Assume that the interest rate is greater than zero. Which of the following cash-
inflow streams totaling Rs.1, 500 would you prefer? The cash flows are listed in
order for Year 1, Year 2, and Year 3 respectively.
► Rs.700 Rs.500 Rs.300
► Rs.300 Rs.500 Rs.700
► Rs.500 Rs.500 Rs.500
Which of the following would be considered a cash-flow item from an "operating

activity"?
► Cash inflow to the firm from selling new common equity shares
Which of the following will NOT equate the future value of cash inflows to the
present value of cash outflows?
► Discount rate
► Multiple Internal rate of return

► Indenture
► Debenture
► Bond
► Bond trustee
__________ is a high-risk, high-yield bond.
► Zero coupon bond
► Mortgage bond
► Junk bond
► Income bond
A coupon bond pays annual interest, has a par value of Rs.1,000, matures in 4
current yield on this bond?
► 10.65%
► 10.45%
► 10.95%
► 10.52%
► The coupon rate is less than the current yield and the current yield is greater
than the yield to maturity
less than yield to maturity
What is the price of a stock?
► The future value of all expected future dividends, discounted at the

dividend growth rate
► The present value of all expected future dividends, discounted at the

dividend growth rate
► The future value of all expected future dividends, discounted at the

investor’s required return
► The present value of all expected future dividends, discounted at the

investor’s required return
Ref: http://www.wattpad.com/73486
Which of the following combinations will produce the highest growth rate?
Assume that the firm's projects offer a higher expected return than the market
capitalization rate.
► A high plowback ratio and a high P/E ratio
► A high plowback ratio and a low P/E ratio
► A low plowback ratio and a low P/E ratio
► A low plowback ratio and a high P/E ratio
Ref:
http://74.125.113.132/search?q=cache:yToYf6zHkDgJ:www2.cob.ilstu.edu/gnnaid
u/Tb/Chap018.RTF+%22A+high+plowback+ratio+and+a+high+P/E+ratio%22&c
d=1&hl=en&ct=clnk&gl=pk
______________.
► Investments
► Markets
► Industries
Ref: Diversification:
It states that don’t put all your eggs in one basket. Diversification can reduce risk.
By spreading your money across many different Investments, Markets, Industries,
Countries you can avoid the weakness of each.
► Beta
► Expected return
► Variance
Ref: /web/Spring+2009_FinalTerm_MGT201_s2_solved
► A world war
_________ means expanding the number of investments which cover different

kinds of stocks.
► Diversification
► Variance
► Covariance
Ref: /web/mgt201-current-quiz4
Which of the following would NOT be the part of the risk if the stock is a single
stock investment?
► Company specific risk
► Un-diversifiable risk
► Diversifiable risk
► Random risk
Ref: In case of portfolio risk we can further made distinction between Diversifiable
Risk and Market risk
To limit volatility what should be the appropriate action?
► To diversify
► To check the stocks prices daily
► To own just a few securities
► Not to invest in risky securities
In efficient market the stock price depends upon the required return which
depends upon _________.
► Market risk
► Total risk
► Diversified risk
► Non- Systematic risk
Ref: In Perfect Markets and Efficient Markets where Rational Investors have
Diversified Away ALL Company Specific Risk, Value (and Stock Price) depends
on Required Return which depends on Market Risk (and not Total Risk).
► Because of political factors
► Because of social factors
► Because of socio-political factors
► Because of macro systematic factors
The overall (weighted average) cost of capital is composed of weighted averages

of which of the following?
► The cost of common equity and the cost of debt
► The cost of common equity and the cost of preferred stock
► The cost of preferred stock and the cost of debt
► The cost of common equity, the cost of preferred stock, and the cost of
debt
► Raw materials
► Depreciation
► Bad-debt losses
► Production labor
Assume the nominal interest rates (annual) in the country of Freedonia and the
United States are 6% and 12% respectively. What is the implied 90-day forward
rate if the current spot rate is 5 Freedonian marks (FM) per U.S. dollar?
► 4.732
► 4.927
► 5.074
► 5.283 .
1+(.12/4) = 1.03; 1+(.06/4) = 1.015; FM / 5 = (1.015 / 1/03); FM = 4.927.
A firm that acquires another firm as part of its strategy to sell off assets, cut costs,
and operates the remaining assets more efficiently is engaging in __________.
► A strategic acquisition
► A financial acquisition
► Two-tier tender offer
► Shark repellent
When a firm can acquire another firm?
► Only by purchasing the assets of the target firm
► Only by purchasing the common stock of the target firm
► By either purchasing the assets or the common equity of the target

firm
Which of the following is NOT a type of financial lease arrangement?
► Sale and leaseback
► Indirect leasing
► Leveraged leasing
The Board of Directors announces the amount and date of the next dividend on the
__________ date; while the __________ date is the first date on which the
purchaser of a stock is no longer entitled to the recently declared dividend.
► Declaration; record
► Ex-dividend; record
► Declaration; ex-dividend
► Payment; record
What would you expect to happen to the price of a share of stock on the day it
goes ex-dividend?
► The price should increase by the amount of the dividend
► The price should decrease by the amount of the dividend
► The price should decrease by one-half the amount of the dividend
► The price should remain constant
What is the amount of the annual interest tax shield for a firm with Rs. 3 million in
debt that pays 12% interest if the firm is in the 35% tax bracket?
► Rs.126, 000
► Rs.234, 000
► Rs.360, 000
► Rs.1, 050,000
Tax Shield =(income-(debt*interest rate))*tax rate
=( 3000000)*12%*35%
While calculating the Stock Portfolio Risk using 3x3 Matrix Approach, non-
diagonal terms shown in Boxes are called:
► Variance
► Coefficient
► Covariance
► Correlation
Terms in all other (or NON-DIAGONAL) Boxes are called “COVARIANCE”

terms which account for affect of one stock’s movement on another stock’s
movement
While calculating the stock beta graphically, the formula to calculate the beta
coefficient for stock B is:
► (rM* - rRF) / (rB* - rRF)
► (rB* - rRF) / (rM* - rRF)
► (rB* - rRF) / rRF
► (rB* - rRF) / rM*
Slope = Beta = ∆ Y / ∆ X = % ∆ rA* / % ∆ rM*
= A =Risk Relative to Market = (rA* - rRF) / (rM* - rRF)
While analyzing any portfolio the value of “r” represents which of the following?
► Expected rate of return
► Assumed rate of return
If a stock is part of totally diversified portfolio then which of the following is

TRUE for that stock?
► Stock's total Risk = Company Risk
► Stock's total Risk = Market Risk
► Stock's total Risk = Market Risk + Company Risk
High uncertainty is associated with which of the following?
► Preferred stock
► Common stock
► Bonds
► T –Bills
The date on which the names of stockholders in the Stock Transfer Register of
firm are documented is referred as:
► Declaration Date
► Holder-of-record Date
► Ex-Dividend Date
► Payment Date
Firm records names of shareholders in the Stock Transfer Register i.e. Feb 28th
2003.
About 1 month after Declaration Date
Operating revenue can be calculated from which of the following formulas?
► Operating Revenue = Fixed cost * Quantity + Variable cost
► Operating Revenue = Price / Quantity +Variable cost
► Operating Revenue = Sale price * Quantity
► Operating Revenue = Variable cost * Quantity / Fixed cost
In accounting and finance, earnings before interest and taxes (EBIT)

or operating income is a measure of a firm's profitability that excludes interest and
income tax expenses.[1]
EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating

Income
Operating Income = Operating Revenue – Operating Expenses[1]
Operating income is the difference between operating revenues and operating
expenses, but it is also sometimes used as a synonym for EBIT and operating
profit.[2] This is true if the firm has no non-operating income.
Which of the following statements is TRUE about an aggressive approach to

finance working capital?
► Financing seasonal requirements of current assets with short-term debt and

permanent requirement of current assets with long term debt
► Financing permanent requirements of current assets with short-term debt

and seasonal requirement of current assets with long term debt
► Financing seasonal as well as permanent requirements of current

assets with short-term debt
► Financing seasonal as well as permanent requirements of current assets

with long term debt
Financing some long-term needs with short-term funds.
this is a maturity matching approach and is neither aggressive nor conservative in

nature Rather, it is a moderate approach.
All of the following are the examples of permanent financing EXCEPT:
► Common Equity
► Current Liabilities
► Long-term Loans
► Bonds
Which of the followings proposes that the value of the firm is independent of its
capital structure?
► The Capital Asset Pricing Model
► M&M capital structure theory
► The law of variable proportion
► The Law of One Price
What Rubinstein generalized, was the most basic of the M&M propositions: The
proposition on the irrelevance of capital structure.
Proposition I: “The market value of any firm is independent of its capital structure
and is given by capitalizing its expected return at the rate ρ appropriate to its
class”, Modigliani and Miller [1958, page 268]. In modern terms, capital structure
is irrelevant, and firm value is equal to the present value of the free cash flow
discounted at the relevant cost of capital.
Value of the firm can be calculated with the help of which of the following
formulas?
► Price of a share x No. of shares outstanding
► Price of a share x debt / equity
► Price of a share / No. of shares outstanding
► Price of a share x earnings after tax / equity
If the sales are expected to be poor in future than management wants to raise
capital through which of the following:
► Debt financing
► Equity financing (common & preferred stock)
► Term finance certificates
► National saving certificates
Company A has to purchase another company. How do Company A pay for

buying the other company?
► In Cash
► In Shares
► Bank Borrowing
Which of the following mathematical expressions depicts divestiture?
► 5-1=4
► 5-1=6
► 5+1=6
Ref:
“Divestiture” = Reverse Merger. Benefit of Efficient Reallocation of Resources:
5 - 1 = 5!
It means by selling an inefficient or unproductive unit of the company you can

have more value as it saves costs
Under efficient market, the effect of debt on WACC can be represented with the
help of which of the following?
► Straight line
► U shaped curve
► Concave
► Time to time fluctuation
Ref: Effect under Pure MM View (Ideal Efficient Markets): Its assumptions are
No
Taxes and No Bankruptcy Costs so Debt increases Risk BUT is also cheaper than
Equity. Change in Debt has no effect on WACC and Value of the firm. WACC
curve is flat.
Under traditional view, the effect of debt on WACC can be represented with the
► Straight line
► U shaped curve
► Concave
Ref: Effect under Traditionalist View (Tradeoff Theorists, Real Markets):

Combined
Effects of Taxes and Financial Distress / Bankruptcy Costs are a Flat U-Shaped
WACC
Curve with a Minimum Point which represents the Optimal Capital Structure (i.e.
Best Debt Ratio for the Firm).
According to the trade off theory, value of the firm rises as a result of
____________.
► Tax saving
► Increase in EPS
► Increase in EBIT
► Saving in cost of debt
Ref: This is the case of pure MM theory where there are no taxes and bankruptcy
costs. But in case of trade off theory in reality initially value of the firm rises as
there is interest tax saving but with excessive leverage, value of the firm starts
declining as interest cost goes very high due to bankruptcy risk.
Which of the following statements is true about business risk?
► The financial risk of a firm decreases when it takes on a risky project
► The financial risk of a firm increases when it takes on more equity
► The business risk of a firm increases when it takes on a risky project
► The business risk of a firm increases when it takes on more debt
Ref: http://74.125.113.132/search?q=cache:JR-
lcbO4yXQJ:www.cbpp.uaa.alaska.edu/afrc2/325/rwje4ch13.rtf+%22The+financial
+risk+of+a+firm+decreases+when+it+takes+on+a+risky+project%22&cd=1&hl=e
n&ct=clnk&gl=pk
Under Net income approach, which of the following is a correct sequence of

calculating cost of capital?
► Net income – Total firm’s market value – WACC
► Net income – WACC – total firm’s market value
► WACC – Net income – market value of equity
► Market value of firm – WACC – Net income
From which of the following equations, net income can be calculated?
► NI = (EBIT - xD rD) (1 - Tc)
► NI = (EAT - xD rD) (1 - Tc)
► NI = (EBIT + xD rD) (1 - Tc)
► NI = (EBIT - xD rD) / (1 - Tc)
Ref: E = Net Income (NI)/ Cost of Equity for levered firm (rE,L)
Note that NI = EBIT - Interest - Tax = EBT – Tax
NI = (EBIT - xD rD) (1 - Tc)
Which of the following refers to a unique type of Japanese corporate organization

based on a close partnership between government and businesses?
► Keiretsu
► Chaebols
► Lean and mean
► Options
Ref: www.qualitysolutions.ca/key-quality-terms.htm
Which of the following is a South Korea type business in that is a conglomerate

with Monopoly power?
► Keiretsu
► Chaebols
► Lean and mean
► Options
Ref: Chaebol (alternatively Jaebol, Jaebeol; ) refers to a South Korean form of

business conglomerate. (form definition of chaebols)
What is bid rate for currency?
► Buying rate for currency
► Selling rate of currency
► Forward rate of currency
► Ask rate of currency\
Ref: BID Rate = Buying Price for Currency. Example: Bid Rs.60 / US$1 Means
Bank
or Money Changer will Buy (or Bid) one US$ from you for Rs.60. This also means
that
you (the Customer) are Selling Dollar to the Bank. Bid Rs.60 / US$1 means Bid
Rs60 /
Ask US$1
What is the primary principle for money changers?
► Ask rate should be less than bid rate
► Ask rate should be greater than bid rate
► Ask rate should be equal to bid rate
► Bid rate should be greater than ask rate
Ref: Fundamental Principle for F/x Traders and “Money Changers”: Buy Low and
Sell
High. So, ASK > BID Rate
Calculate tax shield from the given information.
Corporate tax rate is 35% and amount of debt is Rs. 20, 000 and rate of return is
8%.
Tax Shield =(income-(debt*interest rate))*tax rate
Tax shield = (20,000 * 8%)* 35%
= 560 Rs
How can a manager calculate the opportunity cost of capital for a project? Give
answer in bulleted form only.
Suppose you are a financial manager of XYZ Corporation and you have been
assigned the task to calculate the numerical value of your firm’s WACC
(Weighted Average Cost of Capital), what procedure would you follow
keeping in mind that the firm is using NOI (Net Operating Income)
approach?
Suppose that the risk free rate is 12% and the expected market return is
20%. The FM Corporation has a beta of 0.75 and the Gord Corporation has a
beta of 1.25.
a. Find the expected return on the FM Corporation.
b. Find the expected return on the Gord Corporation.
c. Suppose that because of a suddenly unanticipated increase in

inflation, the risk free rate raises to 16% and the market risk premium
remains at 8%. Find the expected return on of FM and Gord.
Ammar Watch Company is the renowned ladies watch manufacturers. They are
offering watch in the market at a price of Rs. 30. They have estimated that they
will manufacture and sale almost 30, 000 watches. Fixed cost for the preparation of
these watches is Rs.150, 000. Variable cost associated with the preparation of these
watches is Rs. 20 per watch.
From the above information you are required to calculate the followings:
· What is the profit or loss for the units of 8, 000 or 18, 000?
· Calculate the break even point? (in units and sales)
Fall 2009
Time: 120 min

Marks: 87
Which type of responsibilities are primarily assigned to Controller and Treasurer
respectively?
► Operational; financial management

► Financial management; accounting
► Accounting; financial management
► Financial management; operations

► The lower the total debt-to-equity ratio, the lower the financial risk for
a firm
weaker ROI

► Debt ratios
► Coverage ratios

Which group of ratios measures how effectively the firm is using its assets?
► Debt ratios
► Coverage ratios
► Activity ratios

► Debt ratios
► Coverage ratios

Interest payments, principal payments, and cash dividends are __________ the
typical budgeting cash-flow analysis because they are ________ cash flows.
► Included in; financing

► Excluded from; financing
► Included in; operating
► Excluded from; operating

Which of the following make the calculation of NPV difficult?
► Estimated cash flows
► Discount rate
► Anticipated life of the business

If a company issues bonus shares, what will be its effect on the debt equity ratio?
► It will improve
► It will deteriorate
► No effect



► Systematic risk
► Financial risk

The wider the range of possible outcomes i.e.________.
► The greater the variability in potential Returns that can occur, the
greater the Risk
► The greater the variability in potential Returns that can occur, the lesser the
Risk
► The greater the variability in potential Returns that can occur, the level of
risk remain constant

deviations are given in the options given below, which of the option represent the
most risky portfolio according to standard deviation?
► 1.5%
► 2.0%
► 3.0%
► 4.0%


► Stakeholders
► Shareholders
► Bondholders
► Directors

Which of the following is correct regarding the opportunity cost of capital for a
project?
► The opportunity cost of capital is the return that investors give up by
investing in the project rather than in securities of equivalent risk.
► Financial managers use the capital asset pricing model to estimate the
opportunity cost of capital
► The company cost of capital is the expected rate of return demanded by
investors in a company.

Which of the following is equal to the market risk, beta, of a security?
► The covariance between the security's return and the market return
divided by the variance of the market's returns
► The covariance between the security and market returns divided by the
standard deviation of the market's returns
► The variance of the security's returns divided by the covariance between the
security and market returns
► The variance of the security's returns divided by the variance of the
market's returns



If we invest in many securities which are ________to each other then it is possible
to reduce overall risk for your investment.
► Comparable
► Parallel
► Highly correlated
► Negatively correlated

► There is less demand for stock than for bonds
► There is greater demand for stock than for bonds
► There is more systematic risk involved for the common stock
► There is a market premium required for bonds
The ABC Company relies on preferred stock, bonds, and common stock for its
long-term financing. Rank in ascending order (i.e., 1 = lowest, while 3 = highest)
the likely after-tax component costs of the ABC's long-term financing.
► 1 = bonds; 2 = common stock; 3 = preferred stock
► 1 = bonds; 2 = preferred stock; 3 = common stock
► 1 = common stock; 2 = preferred stock; 3 = bonds
► 1 = preferred stock; 2 = common stock; 3 = bonds

Which of the following is NOT a recognized approach for determining the cost of
equity?
► Dividend discount model approach
► Before-tax cost of preferred stock plus risk premium approach
► Capital-asset pricing model approach
► Before-tax cost of debt plus risk premium approach

Which of the following will be confronted by the management in deciding the
optimal level of current assets for the firm?
► A trade-off between profitability and risk
► A trade-off between liquidity and risk
► A trade-off between equity and debt
► A trade-off between short-term versus long-term borrowing

Your firm has a philosophy that is analogous to the hedging (maturity matching)
approach. Which of the following is the most appropriate non-spontaneous form
for financing the excess seasonal current asset needs?
► Trade credit
► 6-month bank notes
► Accounts payable
► Common stock equity

Which of the following is the common currency created by the group of European
countries?
► The EU currency
► The European Union
► The EMU
► The Euro

Which of the following statements is most correct as it relates to the recording of a
capital lease?
► The capital lease is shown on the lessee's balance sheet as an asset and
amortized over the asset's useful life.
► The capital lease is listed as an asset on the lessor's balance sheet and
amortized over lease term.
► A capital lease is listed as an asset on the lessee's balance sheet and must be
amortized over the lease period.

Which of the following is the dividend that is normally paid to shareholders?
► Stock split
► Stock dividend
► Extra dividend

Which of the following signals is most likely to elicit a decrease in share price for
slow growth utility company that currently pays a small dividend?
► A repurchase of 5% of the firm's stock
► An unexpected increase in the regular quarterly dividend
► An unexpected decrease in the regular quarterly dividend
► Borrowing funds in order to pay a cash dividend

The presence of which of the following costs is NOT used as a major argument
against the M&M arbitrage process?
► Transaction costs
► Insurance costs
► Bankruptcy costs
► Agency costs

Which term would most likely be associated with the phrase "actions speak louder
than words?"
► Incentive signaling
► Shareholder wealth maximization
► Financial signaling
► Optimal capital structure

When taxes are considered, the value of a levered firm equals the value of
the________.
► Unlevered firm
► Unlevered firm plus the value of the debt
► Unlevered firm plus the present value of the tax shield
► Unlevered firm plus the value of the debt plus the value of the tax shield


► Rs.3,032
► Rs.3,890
► Rs.3,190
► Rs.4,301

What is the present value of Rs.717 to be paid at the end of 2 years if the interest
► Rs.604
► Rs.417
► Rs.715
► Rs.556

All of the following are the components of CML (capital market line) eqaution
EXCEPT:
► Risk free rate of return
► Risk of the market
► Risk of stock portfolio

In NPV (Net Present Value) calculations, which of the following is used?
► Excepted rate of return
► Both expected rate of return and Required rate of return

If Share A’s Beta = +2.0 then it represents which of the following?
► Share is twice as risky (or volatile) as the KSE market
► Share is exactly as risky (or volatile) as the KSE market
► Share is half as risky (or volatile) as the KSE market
► Share would be exactly as volatile as the KSE market BUT in the opposite
way

Beta coefficient is actually the slope of the line that shows the relationship
between which of the following?
► Stock required rate of return on x-axis and market rate of return on y-axis
► Stock required rate of return on y-axis and market rate of return on x-axis
► Stock expected rate of return on y-axis and market rate of return on x-
axis
► Stock required rate of return on y-axis and stock expected rate of return on
x-axis

Which of the following is/are ideal source(s) of capital for profitable firms
because of no transaction costs?
► Sizeable Cash
► Retained Earnings
► Both Sizeable Cash and Retained Earnings

According to Traditionalist Theory, when an un-leveraged firm takes on more and
► Cost of Capital increases, reaches a minimum point, and then falls
► Cost of Capital decreases, reaches a minimum point, and then rises
► Cost of Capital increases, reaches a maximum point, and then rises

In the WACC equation (rDxD + rExE + rPxP), xE represents which of the following?
► Weight or Fraction of Total Capital value raised from bonds

► Weight or Fraction of Total Capital value raised from preferred stock
► Weight or Fraction of Total Capital value raised from common stock
► Weight or Fraction of Total Capital value raised from debentures

In the WACC equation (rDxD + rExE + rPxP), xD represents which of the following?

► Weight or Fraction of Total Capital value raised from retained earnings

Which of the following represents the tax shield?
► Interest on capital
► Dividends to shareholders
► Establishment expenses
On declaration date of dividend, if ABC Company announces dividend higher

than the previous years, which of the following phenomenon is likely to be
observe?
► Stock price falls
► Stock price rises
► Stock price remains the same

capital
of capital
capital

ABC Company moves from a "conservative" working capital policy to an
"aggressive" policy. Which of the following results it should expect to achieve?
► Liquidity to decrease, whereas expected profitability would increase
► Expected profitability to increase, whereas risk would decrease
► Liquidity would increase, whereas risk would also increase
► Risk as well as profitability to decrease

Mr. A, a sole proprietor has purchased the raw material on credit; this transaction
has generated which of the following?
► Permanent Financing
► Spontaneous Financing
► Short-term Loan
Capital structure that minimizes the WACC is also a structure that maximizes the
firm’s_________.
► Earnings before interest & taxes (EBIT)
► Earning after tax (EAT)
► Earning per share (EPS)
► Return on equity (ROE)

In calculations regarding lease, net advantage of leasing is the difference between
► Present value of net cash flows and present value of cost of leasing
► Present value of cost of owning the asset and present value of cost of
leasing
► Present value of cost of owning the asset and present value of net cash
flows

A car manufacturing firm buys steel from a steel mill. Both these entities
combined together to form a new firm. It is referred to which of the following?
► Vertical Merger
► Congeneric Merger

Which of the following is a form of divestiture in which a subsidiary or division
becomes an independent company?
► Sell-off
► Spin-off
► Liquidation
► Merger

► NI = (EAT - xD rD) (1 - Tc)
► NI = (EBIT - xD rD) / (1 - Tc)

Which of the following is the formula to calculate the tax shield?
► Corporate tax rate x Market value of debt

► Corporate tax rate / Market value of debt
► Corporate tax rate + Market value of debt
► Corporate tax rate - Market value of debt

► It is the effective exchange rate for a foreign currency for delivery at a
specific location on a specific future date
► It is the effective exchange rate for a foreign currency for immediate
delivery at a specific location
► It is the effective exchange rate for a foreign currency for delivery at a
specific future date
► It is the effective exchange rate for a foreign currency for delivery on the
current day

What is the primary principle for money changers?
► Ask rate should be less than bid rate
► Ask rate should be greater than bid rate
► Ask rate should be equal to bid rate
► Bid rate should be greater than ask rate

If interest tax shields are valuable, why don't all taxpaying firms borrow as much
as possible?
A. Tax shield give us benefit up to certain level but as leverage increases

Firm becomes more Risky so Lenders and Banks Charge Higher Interest
Rates and Greater Chance of Bankruptcy.

There are different methods to raise capital within the organization. Briefly
explain the advantages of equity financing into the business.
A. Equity financing gives the flexibility we don’t need to pay fix amount.
In case of bond or debt we need to pay fixed interest in case of failure there
is threat of Defaulter. Mostly the advantages of equity finance are reaped by

the small business enterprises. In some case debt rate is too high that time
equity help you to get cheaper capital financing.

What is long-term financing? Explain the factors that can affect the decision
of a manager while deciding about long term financing?
Long term financing is a kind of financing which is provided for a period of more
than one year.
Permanent Financing comes in two forms:
• Long-term Loans - Bonds It has Low Risk for Firm but has High Cost normally
more than one year.
• Common Equity or Stock its Less Risk for Firm but Highest Cost.
If a company is using long-term financing it has higher cost of financing due high
interest cost of long term loans despite high cost we have low risk, due to surety of
access to money for a longer period. Current liabilities as a source of financing are
not reliable as you have no surety whether you will have same amount of money
available next month for financing or not.

What is a credit policy and what factors an organization should consider
while designing its credit policy and how can a firm use 5/10, net 30 basis and
carrying charges in its credit policy?
Credit Policy: It is the credit adjusted given to customer based upon payment
history.
Factors considered for credit:

Assessment of Credit-worthiness of each credit customer
Minimize duration of credit and Value.
Give incentives to Customers to pay cash and to pay quickly
Suppose if someone pays later then last date of payment he/she will pay extra 1%
etc.
“Sell on 5/10.net 30 basis”
30 basis Means customer will pay full cash value within 30 days. 5/10.net means
5% discount for customers who will pay within 10 days. It will be like incentive to
customer who will pay early.
Impost some extra charge in the form of carry charges in case of later payment

Firms A and B are identical except their use of debt and the interest rates they pay.
Firm A has more debt and thus must pay a higher interest rate.
Requirement:
Based on the data given below, how much higher or lower will be the A's ROE
that of B, i.e., what is ROEA - ROEB?
Applicable to Both Firms Firm A's Data Firm LD's Data

Assets Rs. 3,000,000 Debt ratio 70% Debt ratio 20%
EBIT Rs.500, 000 Int. rate 12% Int. rate 10%
Tax rate 35%
For company A 20% leverage so equity will be 30% of 3,000,000 = 900000

EBIT = 500,000
Interest (12% of 500,000) = (6000)
EBT 494,000
Tax (35% of EBT) (148200)
Net income 345,800
Expected ROE (=NI/Equity) 345,800/ (900000) = 38.42%
For company B 20% leverage so equity will be 80% of 3,000,000 = 2400000
EBIT = 500,000
Interest (10% of 500,000) = (5000)
EBT 495,000
Tax (35% of EBT) (148500)
Net income 346,500
Expected ROE (=NI/Equity) 346500/ (2400000) = 14.43%
ROEA – ROEB = 38.42 – 14.43

=23.99
Fall 2009
MGT201- Financial Management (Session - 3) Marks: 87
ABC’s and XYZ’s debt-to-total assets ratio is 0.4. What is its debt-to-equity ratio?
► 0 .2
► 0 .77
► 0.667
► 0.333
► Goes down
► Goes up
► Stays the same
A 5-year ordinary annuity has a future value of Rs.1,000. If the interest rate is 8
► Rs.231.91
► Rs.184.08
► Rs.181.62
► Rs.170.44
Managers prefer IRR over net present value because they evaluate investments:
► In terms of dollars
► In terms of Percentages
► Intuitively
► Logically
When there is single period capital rationing, what would be the most sensible
way of making investment decisions?
► Choose all projects with a positive NPV
► Group projects together to allocate the funds available and select the
group of projects with the highest NPV
► Choose the project with the highest NPV
► Calculate IRR and select the projects with the highest IRRs
Time: 120 min
Which of the following is the value of bond that we expect the bond to be?
► Intrinsic value
► Fair value
► Both intrinsic and fair value
► Market price
An investment opportunity set formed with two securities that are perfectly
negatively correlated. What will be standard deviation in the global minimum
variance portfolio?
► Equal to zero
► Equal to -1
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
► A portfolio's expected return is a simple weighted average of expected



variance.

The ratio of the standard deviation of a distribution to the mean of that distribution
is referred to as __________.
The Higher the Risk of a Share, the ___________ its Rate of Return and the _____
its Market Price.
Time: 120 min
► Higher; Lower
► Lower; Higher
► Higher; Higher
► Lower; Lower
If a company intends to start a new project, ________ technique are employed to

assess the financial viability of the project.
► Financial planning
► Financial forecasting
The logic behind _________ is that instead of looking at net cash flows you look
at cash inflows and outflows separately for each point in time.
► IRR
► MIRR
► PV
► NPV
Expected Portfolio Return = ___________
► rP * = xA rA + xB rB
► rP * = xA rA - xB rB
► rP * = xA rA / xB rB
► rP * = xA rA * xB rB

index.
► Variance
► Covariance
► Parachute graph
Generally companies want to keep the balance in the form of:
► Debt
► Equity
► Hybrid security
► Both debt and equity
A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?
► Debt capacity
► Debt-service burden
► Adequacy capacity
► Fixed-charge burden
Time: 120 min
Which of the following statements regarding leverage is true?
► The ultimate effect of leverage depends on the firm's EBIT
► If things go poorly for the firm, increased leverage provides greater returns
to shareholders.
► As a firm lever up, shareholders are exposed to less risk
► The benefits of leverage always outweigh the costs of financial distress
Your firm has a philosophy that is analogous to the hedging (maturity matching)
approach. Which of the following is the most appropriate form for financing a new
capital investment in plant and equipment?
► 6-month bank notes
► Accounts payable
► Common stock equity
► Trade credit
► Joint venture
► Spin-off
► Consolidation
Which of the following is NOT a form of short-term, spontaneous credit?
► Accrued wages
► Trade credit
► Commercial paper
► Accrued taxes
Which of the following would NOT be included in inventory carrying cost?
► Insurance expense for the inventory
► Opportunity cost of capital for inventory investment
► Cost of inventory
► Cost of shelf space
What would be the result when there is an increase in the number of shares
outstanding by reducing the par value of stock?
► Stock split
► Stock dividend
► Extra dividend
What would you expect to happen to the price of a share of stock on the day it
goes ex-dividend?
► The price should increase by the amount of the dividend
► The price should decrease by the amount of the dividend
► The price should decrease by one-half the amount of the dividend
► The price should remain constant
Which of the following add up to the costs of financial distress?
► Direct bankruptcy costs, primarily legal and administrative costs
► Indirect bankruptcy costs, reflecting the difficulty of managing a company

when it is in bankruptcy proceedings
► Costs of the threat of bankruptcy, such as poor investment decisions

resulting from conflicts of interest between debtholders and stockholders
► All of the given options are correct
► Pay back period
Which is the best measure of risk for a single asset held in an isolation, and which
is the best measure for an asset held in a diversified portfolio?
► Variance, correlation coefficient
► Standard deviation, correlation coefficient
► Beta, variance
► Coefficient of variation, beta
► Risk free rate
► Stock’s beta
► Stock’s price
What will be the Stock Y’s risk premium if the average share of stock Y has a
required return of 20% and beta for that stock is 1.0? In addition, treasury bonds
yield is 10%?
► 5%
► 10%
► 20%
► 30%

employed by a firm?
► The current market price per share of common stock times the number
of shares outstanding
According to Traditionalist Theory, when an un-leveraged firm takes on more and

► Cost of Capital increases, reaches a minimum point, and then falls
► Cost of Capital decreases, reaches a minimum point, and then rises
► Cost of Capital increases, reaches a maximum point, and then rises
In the WACC equation (rDxD + rExE + rPxP), xD represents which of the following?
► Weight or Fraction of Total Capital value raised from retained earnings
In residual dividend model, what does the term ‘Conservatism‘ refer?
► Overvaluation of free cash flows
► Underestimation of free cash flows
► Overestimation of free cash flows
► None of the given option
The date on which the names of stockholders in the Stock Transfer Register of
firm are documented is referred as:
► Declaration Date
► Holder-of-record Date
► Ex-Dividend Date
► Payment Date
XYZ Corporation has offered its shareholders the option that their dividends will
be used to purchase additional shares of this corporation. This offer of XYZ
Corporation is referred as:
► Stock repurchases
► Dividend reinvestment
► Stock dividends
► Stock splits

capital

of capital

capital
Which of the following statement depicts the advantage of raising capital through
debt?
► Debt adds to company specific risk
► If company does not pay interest it can be close down
► It can improve the return on equity
► Not required to pay fixed amount of interest
Which of the following can be defined as “additional risk faced by common

stockholders if firms take debt.”?
► Systematic risk
► Business risk
► Financial risk
The decisions regarding working capital management of a firm are mainly

concerned with which of the following?
► Current assets & long-term liabilities of balance sheet
► Current assets & current liabilities of balance sheet
► Fixed assets & current liabilities of balance sheet
► Fixed assets & long-term liabilities of balance sheet
If Current assets = Rs. 16,000,
Current liabilities= Rs. 10,000
Inventory= Rs. 2500
Calculate quick ratio for the firm?
► 1.35
► 6.0
► 1.60
► 0.25
Which of the following states that “Cash is King and only Cash can pay the bills”?
► Fat cat working capital policy
► Lean & Mean perspective
► Balance Sheet Perspective
Which of the following depicts the break even point in best way?
► EBIT = 0
► EBIT < 0
► EBIT > 0
Financial leverage is considered good in which of the following?
► Earning after interest & tax / Total asset > Interest cost
► Earning after interest & tax / Total asset < Interest cost
► Earning before interest & tax / Total asset < Interest cost
► Earning before interest & tax / Total asset > Interest cost
Suppose that there is no personal or corporate income tax and that the firm's
WACC is not affected by its capital structure, then which of the following
statements is true?
► A firm's cost of equity depends on the firm's business and financial

risks
► The value of the firm is dependent on its capital structure
► The cost of equity increases as the firm's leverage decreases
► The greater the financial leverage, the more valuable is the firm

► In Cash
► In Shares
► Bank Borrowing
A car manufacturing firm buys steel from a steel mill. Both these entities
combined together to form a new firm. It is referred to which of the following?
► Vertical Merger
Under efficient market, the effect of debt on WACC can be represented with the
► Straight line
► U shaped curve
► Concave
What is the effect on WACC if debt increases under pure M&M theory model?
► It will increase
► It will decrease
► It remains unchanged
Most of the firms wish to maintain their capital structure in the form of which of
the following?
► 100% equity
► 100% debt
► Mix of debt and equity
► 100% from the personal savings
Under Net income approach, which of the following is a correct sequence of

calculating cost of capital?
► Net income – Total firm’s market value – WACC
► Net income – WACC – total firm’s market value
► WACC – Net income – market value of equity
► Market value of firm – WACC – Net income
If capital structure changes from equity to debt then what will be the effect
on capital structure.
How are dividends paid, and how do companies decide on dividend payments?
ANS:
Write a note on capital structure of organizations and cost of capital.
Why is stock price volatility more likely to imply risk than earnings
volatility? Explain with the help of some examples.
Explain the following conditions:
· IRR <WACC
· IRR >WACC> SML
· IRR <SML
· IRR <WACC< SML
FINALTERM EXAMINATION MGT201- Financial Management (Session -

3)
Time: 120 min
Which of the following type of lease is a long-term lease that is not cancelable and
its life often matches the useful life of the asset?
► A financial
► An operating
► Both financial & operating lease
Which of the following would cause the gross profit margin to remain unchanged,
but the net profit margin declined over the same period?
► Cost Cost of goods sold increased relative to sales
► Sales increased relative to expenses
► Govt. increased the tax rate
► Di DiDividends were decreased
The accounting statement of cash flows reports a firm's cash flows segregated into
which of the following categorical order?
► Operating, investing, and financing
► Investing, operating, and financing
► Financing, operating and investing
► Financing, investing, and operating
► Intuitively
► Logically
Bond is a type of Direct Claim Security whose value is NOT secured by

__________.
► Tangible assets
► Fixed assets
► Real assets
Which one of the following is the right of the issuer to call back or retire the bond
by paying off the bondholders before the maturity date?
► Call in
► Call option
► Call provision
► Put option
Which of the following is designated by the individual investor's optimal

portfolio?
► The point of tangency with the opportunity set and the capital allocation
line
► The point of highest reward to variability ratio in the opportunity set
► The point of tangency with the indifference curve and the capital allocation
line
► The point of the highest reward to variability ratio in the indifference curve
Which of the following is NOT the form of cash flow generated by the
investments of the shareholders?
► Income
► Capital loss
► Capital gain
► Operating income
You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is
expected to pay a dividend of Rs. 3 in the upcoming year while Stock Y is
expected to pay a dividend of Rs. 4 in the upcoming year. The expected growth
rate of dividends for both stocks is 7%. The intrinsic value of stock X:
Which of the following is CORRECT, if a firm has a required rate of return equal
to the ROE?
► The amount of earnings retained by the firm does not affect market price or
the P/E
► New competitors
► Strikes
deviations are given in the options given below, which of the option represent the
most risky portfolio according to standard deviation?
► 1.5%
► 2.0%
► 3.0%
► 4.0%
The logic behind _________ is that instead of looking at net cash flows you look
at cash inflows and outflows separately for each point in time.
► IRR
► MIRR
► PV
► NPV
length in time?
► MIRR approach
► Going concern approach
► Common life approach
► Equivalent annual approach
Which of the following is equal to the market risk, beta, of a security?
► The covariance between the security's return and the market return divided
by the variance of the market's returns
► The covariance between the security and market returns divided by the
standard deviation of the market's returns
► The variance of the security's returns divided by the covariance between the
security and market returns
► The variance of the security's returns divided by the variance of the

market's returns
If you become more aggressive with your investments, which one of the following
is likely to occur? http://vustudents.ning.com
► Your risk will decrease
► Your risk will increase
► Your risk will stay the same
► Your return will be lower
In efficient market the stock price depends upon the required return which
depends upon _________.
► Market risk
► Total risk
► Diversified risk
► Non- Systematic risk
How much return would be offered by the stock whose (risk and return) pair lies
above the SML?
► No return
► Lower return
► Average return
► Excessive return
Find the Expected Return on the Market Portfolio given that the Expected Return
on Stock is 17%, the Risk-Free Rate is 1.1%, and the Beta for Stock is 1.5.
► 11.7%
► 12.14%
► 13.23%
► 13.82%
► Parachute graph
Assume the nominal interest rates (annual) in the country of Freedonia and
the United States are 6% and 12% respectively. What is the implied 90-day
forward rate if the current spot rate is 5 Freedonian marks (FM) per U.S. dollar?
► 4.732
► 4.927
► 5.074
► 5.283
Which of the following statements is most correct as it relates to the recording of a

capital lease?
► The capital lease is shown on the lessee's balance sheet as an asset and
► The capital lease is listed as an asset on the lessor's balance sheet and
amortized over lease term.
amortized over the lease period.
The trade terms "1/10, net 45" indicate that __________.
► A 45% discount is permitted if payment is made within 10 days
When the buyer purchases securities through a brokerage house, it is called as:
► Dutch-auction operation
► Fixed-price operation
► Open-market operation
► Fair-warning operation
The presence of which of the following costs is NOT used as a major argument
► Transaction costs
► Insurance costs
► Bankruptcy costs
► Agency costs
► Adds interest expense to the operating statement
► Increases the required return on equity
► Reduces the expected return on assets
► Decreases the firm's beta

► Bonds represent ownership whereas shares do not
► Shares represent ownership whereas bonds do not
► Shares and bonds both represent equity
► Bonds represent equity whereas shares do not
What is the present value of Rs.53,000 to be paid at the end of 15 years if the
interest rate is 9% compounded annually?
► Rs.25,300
► Rs.34,122
► Rs.14,549
► Rs.11,989
Market portion of risk can be represented through which of the following?
► Beta coefficient
► Variance
The KSE (Karachi Stock Exchange) 100 Index represents what?
► The value of Portfolio of Highest volume stocks
► The value of Portfolio of all Stocks
► The value of Portfolio of lowest volume stocks
► Risk free rate
► Stock’s beta
► Stock’s price
What will be the Stock Y’s risk premium if the average share of stock Y has a
required return of 20% and beta for that stock is 1.0? In addition, treasury bonds
yield is 10%?
► 5%
► 10%
► 20%
► 30%
Which of the following represents the tax shield?
► Interest on capital
► Dividends to shareholders
► Establishment expenses
Which of the following theory suggests that shareholder wealth is maximized by a

low Dividend Payout?
► MM Irrelevance Theory
► Bird in the Hand Theory
► Tax Preference Theory
► Signaling Theory
In residual dividend model, what does the term ‘Conservatism‘ refer?
► Overvaluation of free cash flows
► Underestimation of free cash flows
► Overestimation of free cash flows
Which of the following states that dividends can not exceed retained earnings
which are shown in balance sheet?
► Irrelevance theory
► Impairment of Capital Rule
► Bird-in-the-hand rule
► Tax preference theory
Mr. X is going to purchase the stock of ABC Company. Mr. X should purchase
the stock on which date so that he can be entitled to receive the dividend, keeping
in mind the ex-dividend date is December 7?
► December 6
► December 7
► December 8
► December 9
Which of the following statement shows the total stand alone risk of a firm?
► Unique risk + Market risk
► Diversified risk + Financial risk
► Business risk + Financial risk
► Business risk + Market risk
Which of the following best matches this statement: “A policy under which
relatively large amount of cash, marketable securities, and inventories are carried
and under which sales are stimulated by a liberal credit policy, resulting in a high
level of receivable”?
► Fat cat working capital policy
► Lean & Mean working capital policy
Calculate the return on equity (ROE) of ABC Company using Du Pont equation
and the data given below:
Profit Margin= 30%
Asset Turnover= 50%
Leverage Factor = 60%
► 3.6%
► 9%
► 14%
► 33%
Which of the following is the total cost formula?
► Fixed cost * Quantity + Variable cost
► Variable cost * Quantity - Fixed cost
► Variable cost * Quantity + Fixed cost
► Fixed cost * Quantity - Variable cost
Which of the following statements is correct regarding an aggressive financing

policy for a firm relative to a previous conservative policy?
► The firm will use long-term financing to finance all fixed and current assets
► The firm will see an increase in its expected profits than before
► The firm will see a decline in its overall risk profile
► The firm will need to issue additional common stock this period to finance
the assets
Under which of the following conditions, suppliers may refuse to supply the raw
material?
► When there is rumor of bankruptcy of the firm
► When firms are financed through debt
► When firms are financed through equity
► Under uncertain market conditions
Which of the following is also known as service lease?
► Capital Lease
► Financial Lease
► Operating Lease
► Sale & Lease-Back

► In Cash
► In Shares
► Bank Borrowing
Two businesses at the same level of production are merging together. It is referred
as:
► Vertical Merger
Under pure M&M theory, WACC does not change with __________.
► Change of debt in capital structure
► Change in EPS
► Change financial expenses
► Change in business risk
According to the trade off theory, value of the firm rises as a result of
____________.
► Tax saving
► Increase in EPS
► Increase in EBIT
► Saving in cost of debt
► NI = (EAT - xD rD) (1 - Tc)
► NI = (EBIT - xD rD) / (1 - Tc)
Calculate the Forward Rate for Rupee using Interest Rate Parity if the interest on 1
Year Maturity in Pakistan is 10% and on Euro is 6% and the forward rate is
Rs.124/ EUR.
► Rs. 6 per EUR
► Rs. 120 per EUR
► Rs. 124 per EUR
► Rs. 1240 per EUR
Which of the following is known as selling price for currency?
► Bid rate
► Ask rate
► Forward rate
► Spot rate
Write a short note on real asset markets and also give some examples.
The real asset market where the real physical asset are traded .for example, you
have wheat market, cotton market, where real material change hands.
Examples: Gold Market, Property (land, house)
Company XYZ wants to issue more Common Stock of Face Value Rs 12. Next
Year the Dividend is expected to be Rs. 3 per share assuming a Dividend Growth
Rate of 10% pa.
The Lawyer’s fee and Stock Brokers’ Commissions will cost Rs 1 per share.
Investors are confident about Company ABC so the Common Share is floated at a
Market Price of Rs 18 (i.e. Premium of Rs 6).
If the Capital Structure of Company ABC is entirely Common Equity, then what is
the Company’s WACC? Use New Stock Issuance Approach to calculate the
results.
Answer
DIV1 = 2
G= 10%
Lawyer fee and comm. = 1 Rs
Po = 16
Capital structure is equity base 100%
As company is 100 equity it means unlevearged company so its wacc will be

required rate of return on equity.
Required ROR for Common Stock using Gordon’s Formula
r = (DIV1/Po) + g
Po = market price = 18
Div1 = Next Dividend = 3
G = growth rate = 10%
r = (3/18)+10% = 26.66%
Now If company wanted to issue the stock via new float then it has to pay the
lawyer fee and broker commission which 1 Rs.
Net proceed = 18 – 1 = 17
r = (3/17)+10% = 27.64%
Why may payout decisions be used by management to signal the prospects of the
firm? Give answer in bulleted form.
• If a company selected the high pay out policy without the

cash flow to back it up.
• They will find that it ultimately has to
either reduce the investments or turn to capital markets for
additional debt or equity financing.
• As it is costly, managers will not increase dividends unless

they are confident that the firm will get enough cash to pay
them.
• It is main reason that we say that there is an information signal

attached to dividends payout policy.
• So any change in the dividend payout policy send signals of a

change in the firm's prospects.
• Investors take it positively that a company plans to repurchase

its stock.
• If they are worried that the company has more cash than it can
profitably employ, they may be pleased to see the cash given
back to the shareholders.
What are the factors affecting signaling theory?
(Give the answer in bulleted form only with brief description)
• This theory consider that all Investors not have equal amount of
information.
• All investors are not rational.
• Insider have more information compare to general public
• A Firm’s Owners & Managers (Insiders)know more about it than

Ordinary outside Investors.
• When manage or owner knows that there are better chances

of high cash flow or some project which can bring good profit
or earning. They try to finance the capital via debt or bond.
They avoid use the equity issuance. Because they don’t
wanted to share the profit with number share holders. They take
capital via debt by paying small amount of interest by this they
can earn huge profits.
• When Firm’s Outlook looks bad or some risky project, then

Managers will choose to raise capital by Issuing Equity by doing
this they will be able to share the Likely Losses amongst more
Shareholders. If they took Debt and couldn’t repay it, they
might Default and be forced to go Bankrupt.
• By doing this investor also get signal that if companies is

financing its capital via debt then likely it will be some good
prospect in the company.
• By looking at these practices by management we can so

mangers are in a better position to decide about the firm.
Explain the following conditions:
· IRR <WACC
· IRR >WACC> SML
· IRR <SML
· IRR <WACC< SML
IRR <WACC
you should not invest in this project as rate of return is less then WACC. In other
words your returns are less the cost of capital.
IRR >WACC> SML
we should take this project as its rate of rerun is higher then the WACC and it
offers better return then an efficient market offers. Due to IRR is higher then SML
IRR <SML
It is showing rate of return which is lower than SML we should not invest in such
project because it is not giving as much return as efficient market is returns
IRR <WACC< SML
IRR lower than WACC and SML company should not invest as IRR is not enough
to cover the WACC ( not enough to cover the cost of capital) plus its returns are
lower then returns offered by efficient market.
MGT201-FM
MGT201 Solved MCQ
Question # 1

Question # 2
Which of the following would be considered a cash-flow item from

an "operating" activity?
Question # 3
Which of the following refers to the cost of taking up one option

while sacrificing the other?
Opportunity cost
Operating cost
Sunk cost
Floatation cost
Question # 4
A 5-year annuity due has periodic cash flows of Rs.100 each year. If
the interest rate is 8 percent, the future value of this annuity is closest
to which of the following equations?

Ref: http://web.utk.edu/~jwachowi/annuity3.html Check Question

#7
Question # 5
When the bond approaches its maturity, the market value of the
bond approaches to which of the following?
Intrinsic value
Book value
Par value
Historic cost
Question #6
Who or what is a person or institution designated by a bond issuer as

the official representative of the bondholders?
Indenture
Debenture
Bond
Bond trustee
Reference: A trustee is a person or institution designated by a bond issuer as the

official representative of the bondholders.
Question # 7
Which of the following term may be defined as incidental cash flows

that arise because of the effect of new project on the running
business?
Sunk cost
Opportunity cost
Externalities (Page50)
Contingencies
Question #8
How dividend yield on a stock is similar to the current yield on a

bond?
Both are an accurate representation of the total annual return an
investor can expect to earn by owning the security
Question # 9
In 2 years you are to receive Rs.10,000. If the interest rate were to

suddenly decrease, the present value of that future amount to you
would ______.
Fall
Rise
Remain unchanged
Question # 10

Less than
More than
Equal to
Question # 12
What is a legal agreement, also called the deed of trust, between
the corporation issuing bonds and the bondholders that establish the
terms of the bond issue?
Indenture
Debenture
Bond
Bond trustee
Reference:
Indenture -- The legal agreement, also called the deed of trust,

between the corporation issuing bonds and the bondholders,
establishing the terms of the bond issue and naming the trustee.
Question # 13
What is the present value of Rs. 3,500,000 to be paid at the end of 50
years if the correct risk adjusted interest rate is 18%?
Rs.105,000 (Doubted)
Rs.1,500,000
Rs.3975,000
Rs. 350,000
Question # 14
Current liabilities
Current assets
Fixed assets
Reference: Long Term Liabilities: Also, called Discretionary Financing

does not grow in proportion to Sales
Question # 15
With continuous compounding at 8 percent for 20 years, what is the

approximate future value of a Rs. 20,000 initial investment?
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Reference:
20000/(1.08)^20 = 93129
Question # 16
Liabilities = Assets + Shareholders’ Equity
Reference:
Fundamental Accounting Equation and Double Entry Principle.
• Assets +Expense = Liabilities + Shareholders’ Equity + Revenue
(Note: Expense & Revenue are Temporary P/L accounts – the others
are Permanent Balance Sheet
Accounts)
• Left Hand Items increase when debited. Right Hand items increase
when credited.
• For every journal entry, the Sum of Debits = the Sum of Credits
Question # 17
The securities whose value depends on the cash flows generated by
the underlying assets
The securities whose value depends on the value of the underlying
assets
The securities that do not directly generate any returns for its
investors
Reference: Page 82
Direct claim securities like bond and stocks the value of security can
be calculated from the cash flows of underlying assets
Question # 18
Reference:
Ordinary Annuity
An ordinary annuity, also known as deferred annuity, consists of a

series of equal payments at the end of each period.
Question # 19
Which of the following is a major disadvantage of the corporate
form of organization?
Question # 20
Which of the following is a capital budgeting technique that is NOT
considered as discounted cash flow method?
Payback period
Net present value
Profitability index
Reference:
The payback method focuses on the payback period. The payback

period is
the length of time that it takes for a project to recoup its initial cost
out of the cash receipts that it generates. This period is some times
referred to as" the time that it takes for an investment to pay for
itself."
The basic premise of the payback method is that the more quickly
the cost
of an investment can be recovered, the more desirable is the
investment. The
payback period is expressed in years. When the net annual cash
inflow is the
same every year, the following formula can be used to calculate the
payback
period.
Question # 21
If we were to increase ABC company cost of equity assumption,
what would we expect to happen to the present value of all future
cash flows?
An increase
A decrease
No change
Question # 22
As interest rates go up, the present value of a stream of fixed cash

flows ___.
Goes down
Goes up
Stays the same
Question # 23
Question # 24
_______ is equal to (common shareholders' equity/common shares
outstanding).
None of the above
Reference:
http://www.investopedia.com/terms/b/bookvaluepercommon.asp
Question # 25
Which if the following is (are) true? I. The dividend growth model
holds if, at some point in time, the dividend growth rate exceeds the
stock’s required return. II. A decrease in the dividend growth rate will
increase a stock’s market value, all else the same. III. An increase in
the required return on a stock will decrease its market value, all else
the same.

I, II, and III
I only
III only
II and III only
Question # 26

dividend is constant will ________.

Remain unchanged
Question # 27


Reference:
Page 29
Question # 28


Question # 29
The statement of cash flows reports a firm's cash flows segregated

into which of the following categorical order?

Question # 30
When the zero coupon bond approaches to its maturity, the market
value of the bond approaches to which of the following?
Intrinsic value
Book value
Par value
Historic cost
Reference:
Page 64
Question # 31
What is potentially the biggest advantage of a small partnership

over a sole proprietorship?
Unlimited liability
Single tax filing
Raising capital
Question # 32

Current liabilities
Current assets
Fixed assets
Reference:
Current Liabilities: Also called Spontaneous Financing. Generally

grow in proportion to Sale.
Question # 33
______ is paid by companies with lower grade bonds like CC or C

ratings.

Market risk premium
Reference:
Page 20 & 22
Question # 34
Which of the following includes the planning, directing, monitoring,

organizing, and controlling of the monetary resources of an
organization?
Financial budgeting
Question # 35


Question # 36


Question # 37
Which of the following is NOT the step of Percentage of sales to be

used in Financial Forecasting?

Estimate Levels of Investment Needs required to Meet Estimated
Sales

Question # 38

S-Type Corporation
Sole Proprietorship
Question # 39
Which of the following techniques would be used for a project that

has non–normal cash flows?

Net present value
Question # 40
The logic behind _______ is that instead of looking at net cash flows
you look at cash inflows and outflows separately for each point in
time.
IRR
MIRR
PV
NPV
Question # 41

By borrowing more
Question # 42
In which of the following approach you need to bring all the projects
to the same length in time?
MIRR approach
Question # 43
Where there is single period capital rationing, what is the most

sensible way of making investment decisions?

Group projects together to allocate the funds available and select
the group of projects with the highest NPV
Reference:
It is a process of making investment decisions on viable projects

where funds are limited. Investments decisions are made given a
fixed amount of capital to be invested in viable projects. If a
company doesn’t have sufficient funds to undertake all projects with
a positive NPV, this is a capital rationing situation.
Question # 44
A 5-year ordinary annuity has a present value of Rs.1,000. If the
interest rate is 8 percent, the amount of each annuity payment is
closest to which of the following?
Rs. 250.44
Rs. 231.91
Rs.181.62
Rs.184.08
Question # 45
Which of the following is similar between Return on investment and

Payback period techniques of Capital budgeting?

Question # 46
By borrowing more
Question # 47
The value of the bond is NOT directly tied to the value of which of
the following assets?

Question # 48
Cash flows
Coupon receipts
Question # 49
Which of the following value of the shares changes with investor’s

perception about the company’s future and supply and demand
situation?
Par value
Market value
Intrinsic value
Face value
Question # 50
According to timing difference problem a good project might suffer

from ___ IRR even though its NPV is ______.
Higher; lower
Lower; Lower
Lower; higher
Higher; higher
Reference:
A good project might suffer from a lower IRR even though its NPV is
higher.
Question # 51
Which group of ratios shows the extent to which the firm is financed
with debt

Liquidity ratios
Debt ratios
Coverage ratios
Question # 51
When bonds are issued, under which of the following category the
value of the bond appears

Equity
Fixed assets
Short term loan
Long term loan
Question # 52
Which of the following refers to bringing the future cash flow to the
present time

Net present value
Discounting
Opportunity cost
Question # 53
Discounted cash flow methods provide a more objective basis for

evaluating and selecting an investment project. These methods take
into account:

Question # 54
Effective interest rate is different from nominal rate of interest

because

Periodic interest rate ignores the effect of inflation(Doubted)
Effective Interest Rate = i eff

It is very useful to compare securities and investments with different
life or
compounding cycles but not used for Discounting and PV.
Question # 55
What are the Indirect securities

The securities whose value depends on the cash flows
generated by the underlying assets
The securities whose value depends on the value of the
underlying assets
Reference: Indirect Securities: Indirect securities include derivatives,

Futures and Options
The securities do not generate any cash flow; however, its value
depends on the
value of the underlying asset.
Question # 56

following

Cost of the capital
Return on asset
Reference:
Lecture 12
Question # 57
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 less than the current yield and the current
yield is greater than the yield to maturity
The coupon rate is less than the current yield and the current
yield is less than yield to maturity
Question # 58
Which of the following allows to graphically depicting the timing of

the cash flows as well as their nature as either inflows or outflows

Cash flow diagram
Cash budget
Cash flow statement
Question # 59
capital budgeting technique through which discount rate equates

the present value of the future net cash flows from an investment
project with the project’s initial cash outflow is known as:
Payback period
Net present value
Profitability index
Question # 60
Which of the following is the general assumption of Percent of Sales

Forecasting?
Question # 61
Which of the following is/are the component(s) of working capital

management?
Current assets
Fixed assets
Question # 62


Question # 63
When coupon bonds are issued, they are typically sold at which of
the following value?
Above par value

Below par
Question # 64

Payback period
Net present value
Profitability index
Question # 65

Convertible Bonds
Common shares
Preferred shares
Question # 66


Because, companies do not always have access to all of the funds
they could make use of Because, managers find it difficult to decide
how to fund projects
Question # 67
Which of the following needs to be excluded while we calculate the

incremental cash flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Question # 68


Interest rate risk
All of the given options.
Question # 69

It is an annuity
Question # 70
A technique that tells us the number of years required to recover our

initial cash investment based on the project’s expected cash flows is:
Pay back period
Net present value
Profitability index
Question # 71
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Reference:
F V = PV x e^ i x n
FV = 20000 x 2.718(0.08x20)
FV = 20000 x 4.95221081
FV = 99044.2162
Question # 72

Easy to set up
Double-taxation
Unlimited liability
Reference:
Limitations:
i. Double Taxation:
Corporate earnings may be subject to double taxation – the

earnings of the
corporation are taxed at corporate level, and then any earnings

paid out as
dividends are taxed again as income to the stockholders.
ii. Legal Formalities:
Setting up a corporation, and filing many official documents, is more

complex
and time consuming than for a proprietor ship or a partnership
Question # 73
The return in excess to risk free rate that investors require for bearing
the market risk is known as:
Market risk premium
Question # 74
Study the time line and accompanying 5-period cash-flow pattern
below. 0 1 2 3 4 5 6 Time line |--------|--------|--------|--------|--------|------
--| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash flows ¦ ¦ A B The present value
of the 5-period annuity shown above as of Point A is the present
value of a 5-period ____________ , whereas the future value of the
same annuity as of Point B is the future value of a 5-period
____________ .
Question # 75
The value of direct claim security is derived from which of the
following?
Reference: (Page63)
One form of the debt is bonds. Value of Direct Claim Security is

directly will be determined by the value of the underlying Real Asset.
Question # 76
Question # 77
The lower the total debt-to-equity ratio, the lower the financial risk
for a firm(Doubted)
An increase in net profit margin with no change in sales or assets
means a weaker ROI
The higher the tax rate for a firm, the lower the interest coverage
ratio
Question # 78
What is the additional amount a borrower must pay to lender to
compensate for assuming the risk associated with non-payment?
Market risk premium
Question # 79
Reference: (Page14)
Question # 80
Which of the following will NOT equate the future value of cash
inflows to the present value of cash outflows?
Discount rate
Profitability index
Question # 81
An 8-year annuity due has a present value of Rs.1,000. If the interest
rate is 5 percent, the amount of each annuity payment is closest to
Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
Reference:
1000 = pmt * ((1.05)^-8 -1)/.05
1000 = PMT *6.46
PMT = 1000/6.46 = 154.73
Question # 82
What type of long-term financing most likely has the following
features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash
flows are expected to be a constant annuity stream?
Long-term debt
Preferred stock
Common stock
Question # 83
Asset
Liability
Reserves
Revenue
Reference:
P/L Items or Accounts are ‘temporary’ accounts that need to be

closed at the end of the accounting cycle
Question # 84
Which of the following is NOT an example of a financial
intermediary?
Question # 85

the yields to maturity on the two bonds change from 12% to 10%,
__________?
Both bonds will increase in value, but bond A will increase more than
bond B
Both bonds will increase in value, but bond B will increase more than
bond A
Both bonds will decrease in value, but bond A will decrease more
than bond B
Both bonds will decrease in value, but bond B will decrease more
than bond A
Question # 86
Which of the following can not be the drawback of using payback

period technique of capital budgeting?
Question # 87
Which of the following refers to the risk associated with interest rate
uncertainty?

Market risk premium (doubted)
Question # 88
Depreciation
Dividends
Interest
Taxes
Question # 89
Below the coupon rate when the bond sells at a discount, and
equal to the coupon rate when the bond sells at a premium
The discount rate that will set the present value of the payments
equal to the bond price
Based on the assumption that any payments received are

reinvested at the coupon rate
None of the above
Question # 90
The number and types of products or services provided by the

firm
Question # 91
Which of the following statements is TRUE regarding Permanent

Accounts?
Question # 92
Question # 93
For Company A, plow back ratio is 30%. What will be its Pay-out
ratio?
3.33%
30%
31%
70%
Reference:
Plowback=1-Payout
Plowback + Payout=1
Payout = 1 – Plowback
Payout = 1 – 30%
Payout = 1 – 0.3
Payout = 0.07*100
Payout = 70%
Question # 94
Which of the following is the risk of investing funds in another

country?
Market risk premium
Question # 95

an "investing" activity?
Question # 96
Question # 97
Profit maximization
Question # 98
An investment proposal should be judged in whether or not it

provides:
Question # 99
A rupee in one’s hand at present is worth less than the rupee that
one is going to receive tomorrow
A rupee in one’s hand at present is worth more than the rupee that
A rupee in one’s hand at present is worth same as the rupee that

Question # 100


MIDTERM EXAMINATION
Spring 2010
Time: 60 min
Marks: 44
► The sole proprietor can easily dispose of their ownership

position relative to a shareholder in a corporation
► The sole proprietorship can be created more quickly than a

corporation
► The owner of a sole proprietorship faces double taxation

unlike the partners in a partnership
Which of the following market refers to the market for relatively long-
term financial instruments?
► Primary market
► Money market
► Capital market
Felton Farm Supplies, Inc., has an 8 percent return on total assets of

Rs.300,000 and a net profit margin of 5 percent. What are its sales?
► 750,0Rs.3, 750,000
► Rs.48Rs.480, 000
► Rs.30Rs.300, 000
► Rs.1, Rs.1, 500,000
An
A
capital budgeting technique through which discount rate equates
► Payback period
A
capital budgeting technique that is NOT considered as discounted
cash flow method is:
► Payback period
Why net present value is the most important criteria for selecting the
project in capital budgeting?
► Because it has a direct link with the shareholders dividends

maximization
► Because it has direct link with shareholders wealth

maximization
► Because it helps in quick judgment regarding the investment

in real assets
► Because we have a simple formula to calculate the cash

flows
You are selecting a project from a mix of projects, what would be

your first selection in descending order to give yourself the best
chance to add most to the firm value, when operating under a
single-period capital-rationing constraint?
Bond is a type of Direct Claim Security whose value is NOT secured

by __________.
► Tangible assets
► Fixed assets
► Real assets
If a
7% coupon bond is trading for Rs. 975 it has a current yield of
_________ percent.
► 7.00
► 6.53
► 8.53
► 7.18
Which of the following is designated by the individual investor's

optimal portfolio?
► The point of tangency with the opportunity set and the

capital allocation line
► The point of highest reward to variability ratio in the

opportunity set
► The point of tangency with the indifference curve and the

capital allocation line
► The point of the highest reward to variability ratio in the

indifference curve
Assume that the expected returns of the portfolios are the same but
their standard deviations are given in the options given below, which
of the option represent the most risky portfolio according to standard
deviation?
► 1.5%
► 2.0%
► 3.0%
► 4.0%
Which of the following is a drawback of percentage of sales

method?
Which of the following need to be excluded while we calculate the

► Depreciation
► Sunk cost
► Non-cash item

intermediary?
► Wisconsin S&L, a savings and loan association
► Strong Capital Appreciation, a mutual fund
► Microsoft Corporation, a software firm
► College Credit, a credit union
An
8% coupon Treasury note pays interest on May 30 and November 30
and is traded for settlement on August 15. What is the accrued
interest on Rs. 100,000 face value of this note?
► Rs. 491.80
► Rs. 800.00
► Rs. 983.61
► Rs. 1,661.20
A
preferred stock will pay a dividend of Rs. 3.50 in the upcoming year,
and every year thereafter, i.e., dividends are not expected to grow.
You require a return of 11% on this stock. Use the constant growth
► Rs. 0.39
► Rs. 0.56
► Rs. 31.82
► Rs. 56.25
Information that goes into __________ can be used to prepare

__________.
What is the present value of Rs.8,000 to be paid at the end of three

years if the interest rate is 11% compounded annually?
► Rs.5,850
► Rs.4,872
► Rs.6,725
► Rs.1,842
“Do not compare apples with oranges” is the concept in:
► Discounting and Net present value
► Risk & return
Which of the following is NOT the interest rate used for discounting
calculation?
Which of the following is the formula to calculate the future value of

perpetuity?
Which of the following interest rate keeps on moving and changing

on daily basis?
► Book value
► Market value
► Salvage value
► Face value
From which of the following formula we can calculate coupon rate?
► Coupon receipt / market value
► Coupon receipt / present value
► Coupon receipt / salvage value
► Coupon receipt / book value
Value of “g” in the formula of constant growth rate can be

calculated from which of the following formula?
► g = plowback ratio × ROE
► g = plowback ratio × ROA
► g = payout ratio + ROE
► g = payout ratio + ROA
In
Gordon’s formula (rCE = DIV1 / Po + g), rCE is considered as __________
and “g” is considered as __________.
► Dividend yield, operating expenses
► Dividend yield, operating income
► Dividend yield, capital loss
► Dividend yield, capital gain
To
calculate the annual rate of return for an investment, we require
which of the following(s)?
► The income created
► The gain or loss in value
► The original value at the beginning of the year
This is an example of which of the following?
Real estate prices fell across the board because the market was
glutted with surplus pre-owned homes for sale.
► Economic risk
► Industry risk
► Company risk
► Market risk
Briefly explain what call provision is and in which case companies

use this option.
There are two stocks in the portfolio of Mr. N, Stock A and Stock B. the
information of this portfolio is as follows:
Common Expected rate of Standard

stock return deviation
Stock A 15% 10%
Stock B 20% 15%
Calculate the expected rate of return on this portfolio assuming that

Stock A consists of 75% of the total funds invested in the stocks and
the remainder in Stock B.
(a) What is correlation of coefficient?
(b) What are efficient portfolios?
Suppose you approach a bank for getting loan. And the bank offers
to lend you Rs.1, 000,000 and you sign a bond paper. The bank asks
you to issue a bond in their favor on the following terms required by
the bank: Par Value = Rs 1, 000,000, Maturity = 3 years
Coupon Rate = 15% p.a, Security = Machinery
You are required to calculate the cash flow of the bank which you
will pay every month as well as the present value of this option.
MIDTERM EXAMINATION
Spring 2010
Time: 60 min
Marks: 44
► Percentage increase in taxable income from the previous

period
Which group of ratios measures a firm's ability to meet short-term

obligations?
► Debt ratios
► Coverage ratios
Assume that the interest rate is greater than zero. Which of the
following cash-inflow streams totaling Rs.1, 500 would you prefer? The
cash flows are listed in order for Year 1, Year 2, and Year 3
respectively.
► Rs.700 Rs.500 Rs.300
► Rs.300 Rs.500 Rs.700
► Rs.500 Rs.500 Rs.500
Interest paid (earned) on both the original principal borrowed (lent)

and previous interest earned is often referred to as __________.
► Present value
► Simple interest
► Future value
You are going to invest Rs.12,500 into a certificate of deposit (CD) at

a 6% annual rate (compounded annually) with a maturity of 30
months. How much money will you receive when the CD matures?
► Rs.14,491
► Rs.14,518
► Rs.14,460
An
8-year annuity due has a future value of Rs.1,000. If the interest rate
is 5 percent, the amount of each annuity payment is closest to which
of the following?
► Rs.109.39
► Rs.147.36
► Rs.154.73
► Rs.99.74
All
of the following influence capital budgeting cash flows EXCEPT
__________.
The basic capital budgeting principles involved in determining

relevant after-tax incremental operating cash flows require us to
__________.
From which of the following category would be the cash flow

received from sales revenue and other income during the life of the
project?
Which one of the following selects the combination of investment

proposals that will provide the greatest increase in the value of the
firm within the budget ceiling constraint?
► Cash budgeting
► Capital expenditure
Who is responsible for the decisions relating capital budgeting and

capital rationing?
► Junior management
► Division heads
When coupon bonds are issued, they are typically sold at which of
the following value?
► Below par
► Above par value
► Common shares
► Cash flow stream
Which of the following is CORRECT, if a firm has a required rate of

return equal to the ROE?
► The firm can increase market price and P/E by retaining more
earnings
► The firm can increase market price and P/E by increasing the
growth rate
► The amount of earnings retained by the firm does not affect

market price or the P/E
► Whenever ROE > k
► Whenever k > ROE
► Only when they are in low tax brackets
► Whenever bank interest rates are high
Which of the following statement about portfolio statistics is

CORRECT?
► A portfolio's expected return is a simple weighted average of

► A portfolio's standard deviation of return is a simple weighted


equals its variance.

equals its coefficient of variation.
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
► Financial risk
Diversification can reduce risk by spreading your money across

many different ______________.
► Investments
► Markets
► Industries
► New competitors
► Strikes
Which of the following need to be excluded while we calculate the

► Depreciation
► Sunk cost
► Non-cash item
Under which concept it is said that “do not put all your eggs in one
basket”?
► Risk & return
All
of the following are the steps involved in financial planning process
EXCEPT:
► Assumptions are made about future levels of sales, costs, and

interest rates etc.
► Ratios are projected and analyzed
► Projected financial statements are developed
► Comparison with key competitors about the prices to be

charged
Which of the following is NOT the interest rate used for discounting
calculation?
Suppose you are going to sale an old asset and its market value is
greater than its book value it indicates that:
► Company is going to have capital gain
► Company will have to bear capital loss
► Company is going to earn operating revenue
► Company has to bear revenue expense
In
Pakistan which of the following is assigned to bond rating and risk?
► IMF
► Moody’s
► Standard & poor
► PACRA
Which of the following statement defines the following events i.e

Inflation, recession, and high interest rates?
► Systematic risk factors that can be diversified away
► Company-specific risk factors that can be diversified away
► Among the factors that are responsible for market risk
► Irrelevant except to governmental authorities like the Federal

Reserve
Differentiate the real assets and securities.
A
security analyst has estimated the following returns on the stocks of 4
large companies:
Weightage Expected
Returns
Compan 25% 12%

yA
Compan 25% 11.5%

yB
Compan 25% 10.%

yC
Compan 25% 9.5%

yD
You are required to calculate the expected return on this portfolio.
Why a person should invest in shares? Give reasons.
H
Corporation’s stock currently sells for Rs.20 a share. The stock just
paid a dividend of Rs.2 a share (Do = Rs.2). the dividend is expected
to grow at a constant rate of 11% a year.

MIDTERM EXAMINATION
Spring 2009
Mutually exclusive means that you can invest in _________ project(s)

and having chosen ______ you cannot choose another.
► One; one
► Two; two
► Two; one
► Three; one
The weighted average of possible returns, with the weights being the
probabilities of occurrence is referred to as __________.
A
set of possible values that a random variable can assume and their
associated probabilities of occurrence are referred to as __________.
V) The difference between a stock's price and its no-growth

value per share
VI) The stock's price
VII) Zero if its return on equity equals the discount rate
VIII) The net present value of favorable investment opportunities
► I and IV
► II and IV
► I, III, and IV
► II, III, and IV

► The firm can increase market price and P/E by

retaining more earnings

increasing the growth rate
► The amount of earnings retained by the firm does not

affect market price or the P/E
► The level of inflation is expected to increase to

double-digit levels
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
In
the dividend discount model, which of the following is (are) NOT
The market capitalization rate on the stock of Steel Company is 12%.

The expected ROE is 13% and the expected EPS are Rs. 3.60. If the
firm's plowback ratio is 50%, what will be the P/E ratio?
► 7.69
► 8.33
► 9.09
► 11.11

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
Low Tech Company has an expected ROE of 10%. The dividend

growth rate will be ________ if the firm follows a policy of paying 40%
of earnings in the form of dividends.
► 6.0%
► 4.8%
► 7.2%
► 3.0%

following?

situation?
► Par value
► Market value
► Intrinsic value
► Face value
► These are formed with the securities that have the highest
rates of return regardless of their standard deviations
► They have the highest risk and rates of return and the highest
standard deviations
► They are selected from those securities with the lowest

standard deviations regardless of their returns
► The coupon rate is greater than the current yield and the
current yield is greater than yield to maturity
► The coupon rate is less than the current yield and the current
► 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
A
coupon bond pays annual interest, has a par value of Rs.1,000,
matures in 4 years, has a coupon rate of 10%, and has a yield to
maturity of 12%. What is the current yield on this bond?
► 10.65%
► 10.45%
► 10.95%
► 10.52%
If a
_________ percent.
► 7.00
► 6.53
► 8.53
► 7.18
Interest rate risk for long term bonds is more than the interest rate risk
for short term bonds provided the _________ for the bonds is similar.
► Market rate
► Coupon rate
► Inflation rate
When market is offering lower rate of return than the bond, the bond
becomes valuable, with respect to the given scenario which of the
following is correct?
► Market interest rate < coupon interest rate, market value of

bond is > par value
► Market interest rate > coupon interest rate, market value of

bond is > par value

bond is < par value
► Market interest rate = coupon interest rate, market value of

bond is > par value

by __________.
► Tangible assets
► Fixed assets
► Real assets
__________ is a long-term, unsecured debt instrument with a lower

claim on assets and income than other classes of debt.
► A debenture
► A junk bond
► An income bond
A
12% coupon rate, Rs.1,000 par bond currently trades at 90 one year
after issuance. Which of the following is the most likely call price?
► Rs. 87
► Rs. 90
► Rs. 102
► Rs. 112
Which of the following is a legal agreement between the

corporation issuing bonds and the bondholders that establish the
► Indenture
► Debenture
► Bond
► Bond trustee

following?
► Return on asset
Which of the following technique would be used for a project that

has non-normal cash flows?

maximization

maximization

in real assets

flows

project?
An
ABC Co. will earn Rs. 350 million in cash flow in four years from now.
Assuming an 8.5% weighted average cost of capital, what is that
cash flow worth today?
► Rs.253 million
► Rs.323 million
► Rs.380 million
► Rs.180 million
An
of the following?
► Rs.109.39
► Rs.147.36
► Rs.154.73
► Rs.99.74
As
interest rates go up, the present value of a stream of fixed cash flows
_____.
► Goes down
► Goes up
► Stays the same
An
► Less than
► More than
► Equal to
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
Which of the following would be considered a cash-flow item from a

"financing" activity?
► A cash outflow to purchase bonds issued by another

company
► Debt ratios
► Coverage ratios
► 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
risk for a firm

coverage ratio
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:
Yea Project X Project Y

r
0 (10,000) (10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
iv. Calculate each project’s payback, net present value (NPV),

internal rate of return (IRR), and profitability index (PI).
v. Which project or projects should be accepted if they are

independent?
vi. Which project should be accepted if they are mutually
exclusive?
ANSWER:

Payback period is the time required by the project to recover
its costs.
Year 3 project will recover the remaining Rs. 500 in 1st month
of 3rd yr. So payback period for Project X is 2
yrs and 1 month.
Year 3 project will recover remaining Rs 3000 in approximately 11

months of 3rd yr.
No. of yrs, n = 4
= -10,000 + 6500/(1.12) + 3000/(1.12)2+ 3000/(1.12)3+ 1000/(1.12)4
= Rs 966
No. of yrs, n = 4
= -10,000 + 3500/(1.12) + 3500/(1.12)2+ 3500/(1.12)3+ 3500/(1.12)4
= Rs 631

NPV = - 10000 + 6500/(1+i) + 3000(1+i)2+ 3000(1+i) 3+ 1000/(1+i) 4
= 10,966/10000 = 1.096
= 10631/10000 = 1.0631
Result: Since NPV and PI of project X are higher than that of

project Y so Project X will be accepted.
MIDTERM EXAMINATION
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.
► Risk and Return
► Discounting and NPV
► Portfolio Diversification

_________ is equal to risk per unit return.
► Standard Deviation
► Variance
► Coefficient of Variation
Ref:
http://74.125.153.132/search?q=cache:57jrkpN0nqkJ:www.pitt.edu/~sc
hlinge/fall99/l9.doc+"is+equal+to+risk+per+unit+return"&cd=7&hl=en
&ct=clnk&lr=lang_en
A bond that pays no annual interest but is sold at a discount below the
par value is called:
► An original maturity bond
► A floating rate bond
► A fixed maturity date bond
► A zero coupon bond
Since preferred stock dividends are fixed, valuing preferred stock is

roughly equivalent to valuing:
► A zero growth common stock
► A positive growth common stock
► A short-term bond
► An option
An unincorporated business owned by one individual is called

_________.
► Partnership
► Company
► Sole proprietorship
► None of given options
_______ is a ratio of the present value of future cash flows to the initial
investment.
► Return on Investment
► NPV
► Payback Period
► Profitability Index
_______ is the actual price at which share is bought or sold.
► Fair price
► Par value
► Market price
► Written down value
_____ ratio gives an indication how equity investors regard the

company’s value.
► Price / Earning
► Market / Book
► Earning / Share
► Price / Cash flow
http://www.fiu.edu/~keysj/Financial_Statement_Analysis.doc
In the formula rCE = (D1V1/Po) + g, what does (D1V1/Po) represent?

► The expected dividend yield from a common stock
► The expected price appreciation yield from a common stock
► The dividend yield from a preferred stock
► The interest payment from a bond
For a given nominal interest rate, the more numerous the

compounding periods, the less the effective annual interest
rate.
► True
► False
The current ratio is never larger than the quick ratio.

► True
► False
if firm has more inventory it will be having large current ratio
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
Assume that one year from now; you will deposit Rs. 1,000
into a saving account that pays 8% interest. If the bank
compounds interest semi-annually, how much will you have
in your account four years from now?
FV = PV(1+i/m)^mn
FV = 1000 (1.04)^6 ( m*n = 2*3 as we are depositing after
one year so total years will be 3)
FV = 1265
How much should you pay for the preferred stock of the PST
Corporation, if it has $ 50 par value, pays $20 a share in
annual dividends, and your required rate of return is 15%.
=20/.15 = 133.33
What is a portfolio? Why an investor should invest his/her

funds in a portfolio rather than in the stocks of a single
corporation.
What do you mean by yield to maturity (YTM) of a bond? Explain

briefly.
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.
MIDTERM EXAMINATION
Spring 2009
Time: 60 min
Marks: 50
Mutually exclusive means that you can invest in _________ project(s) and having
chosen ______ you cannot choose another.
► One; one
► Two; two
► Two; one
► Three; one
The weighted average of possible returns, with the weights being the probabilities
of occurrence is referred to as __________.
I) The difference between a stock's price and its no-growth

value per share
► I and IV
► II and IV
► I, III, and IV
► II, III, and IV
Which of the following is CORRECT, if a firm has a required rate of return equal
to the ROE?
The firm can increase market price ► and P/E by retaining more earnings
The firm can increase market price ► and P/E by increasing the growth rate
The amount of earnings retained by ► the firm does not affect market
price or the P/E
None of ► the given options
The firm ► significantly decreases financial leverage
The firm ► increases return on equity for the long term
The ► level of inflation is expected to increase to double-digit levels
The rate ► of return on Treasury bills decreases
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
In the dividend discount model, which of the following is (are) NOT incorporated
Real ► risk-free rate
Risk ► premium for stocks
Return on ► assets
Expected ► inflation rate
(no idea) Answer requested
The market capitalization rate on the stock of Steel Company is 12%. The
expected ROE is 13% and the expected EPS are Rs. 3.60. If the firm's plowback
ratio is 50%, what will be the P/E ratio?
7.69 ►
8.33 ►
9.09 ►
11.11 ►
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

Both incorporate the par value in ► their calculation
Low Tech Company has an expected ROE of 10%. The dividend growth rate will
dividends.
6.0% ►
4.8% ►
7.2% ►
3.0% ►
Growth = ROE * plow back ratio
Plowback ratio ratio that measures the amount of earnings retained

after dividends have been paid out (100%-40% = 60%)
Let us plug in the value into above formula
10% * .60 = 6%
► Par value
► Market value
► Intrinsic value
► Face value
► They have the highest risk and rates of return and the highest standard
deviations
payments over the life of the bond

► 10.65%
► 10.45%
► 10.95%
► 10.52%
In this we have to first calculate the price of bond first
=100*(1 + 0.12)^-1+100*(1 + 0.12)^-2+100*(1 + 0.12)^-3+1100*(1.12)^-4 =

939.25
Current yield = coupon amount /Price of bond
100/939.25 =
So coupon payment for 4 year @ 10% = 100*4 = 400
Plug the values in Current yield formula = 400/1000 = .1064 = 10.64%
If a 7% coupon bond is trading for Rs. 975 it has a current yield of _________
percent.
► 7.00
► 6.53
► 8.53
► 7.18
Current yield = annual interest payment/market price
(7%*1000)/975 = 70/975 = 0.0719*100 = 7.18
Interest rate risk for long term bonds is more than the interest rate risk for short
term bonds provided the _________ for the bonds is similar.
► Market rate
► Coupon rate
► Inflation rate
When market is offering lower rate of return than the bond, the bond becomes
valuable, with respect to the given scenario which of the following is correct?
► Market interest rate < coupon interest rate, market value of bond is >
par value
► Market interest rate > coupon interest rate, market value of bond is > par
value
► Market interest rate < coupon interest rate, market value of bond is < par
value
► Market interest rate = coupon interest rate, market value of bond is > par
value
Reference:
Lecture 14 of handouts
Reference:
Visit

__________.
► Tangible assets
► Fixed assets
► Real assets
Reference:
It can’t be real asset as it’s written in the handout. Real asset are also includes fixed
asset and the fixed asset are tangible assets. Therefore only intangible asset are left.
Intangible asset means something of value not physical, but for security of a bond,
a physical asset is required.
__________ is a long-term, unsecured debt instrument with a lower claim on

assets and income than other classes of debt.
► A debenture
► A junk bond
► An income bond
Reference:
http://wps.pearsoned.co.uk/wps/media/objects/1670/1710353/0273685988_ch20.p
pt
Slide no. 7
A 12% coupon rate, Rs.1,000 par bond currently trades at 90 one year after
issuance. Which of the following is the most likely call price?
► Rs. 87
► Rs. 90 (doubt)
► Rs. 102
► Rs. 112

► Indenture
► Debenture
► Bond
► Bond trustee
Reference:
► Return on asset
Reference:
Which of the following technique would be used for a project that has non-normal
cash flows?
Reference:
Why net present value is the most important criteria for selecting the project in
capital budgeting?
Reference:
Reference:
All three activities gives information about cash flow received from sales revenue
and other income.
ABC Co. will earn Rs. 350 million in cash flow in four years from now. Assuming
an 8.5% weighted average cost of capital, what is that cash flow worth today?
► Rs.253 million
► Rs.323 million
► Rs.380 million
► Rs.180 million
PV = (350/*1.085)^4= 252.55 or 253)
An 8-year annuity due has a future value of Rs.1,000. If the interest rate is 5
► Rs.109.39
► Rs.147.36
► Rs.154.73
► Rs.99.74
PIFV * (1+i) as its due annuity so we have to add one extra (1+i)
(PV=(R) (PVIFA at 5% for 8 periods)*(1.05) = by plugging into value of PIFV = [

(1+i)^n -1 ]/i * (1.05 )
= (1.05^8 - 1/.05 * [(1.05)] = 10.02
=1000/10.02 = 99.74
Point to note this is due annuity so we have to multiple extra (1+i) in formula of
calculating PIFV
► Goes down
► Goes up
► Stays the same
► Less than
► More than
► Equal to
(It's worth (1+i) times the value of the ordinary annuity with the same terms
Annuity due means you get the money at the beginning of the period, rather than
the end, hence the times 1+i value is considered.
What is the present value of an annuity that pays 100 per year for 10 years if the
required rate of return is 7%?
► Rs.1000
► Rs.702.40
► Rs.545.45
► Rs.13,816
Working
PV = PMT * (1+i)^-n -1
Putting the values in formula:
PV=100{1-(1+.07)-10/.07}
=100{1-(1.07)-10/.07}
=100{1-.5083/.07}
=100(0.4916/.07)
=100(7.024)
= Rs.702.40

activity?
► Debt ratios
► Coverage ratios
► 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
► The lower the total debt-to-equity ratio, the lower the financial risk for a
firm

weaker ROI
(low or declining accounts receivable turnover ratio indicates a collection problem,

part of which may be due to bad debts. A low receivables turnover ratio means that
the business should reexamine its credit policies to ensure the timely collection of
imparted credit, which will help in earning interest for the firm.)
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:

Project X Project Y
Year
0 (10,000) (10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
i. Calculate each project’s payback, net present value (NPV), internal

rate of return (IRR), and profitability index (PI).
ii. Which project or projects should be accepted if they are independent?
iii. Which project should be accepted if they are mutually exclusive?
Solution
Pay back of project X:
PP = Cost of project / Annual cash inflows
= 10,000 / 3,375
=2.96 or 3
Payback period of project Y
PP =Cost of project / Annual cash inflows
= 10,000 / 3500
=2.85
NPV of project X
NPV= -Io + CF/ (1+i) + CF2/(1+i)2 + CF3/(1+i)3 +CF4/(1+i)4
= -10000+6500/(1+.12)+3000/(1+.12)2+3000/(1+.12)3+1000/(1+.12)4
=-1000+5804+2392+2135+635.53
= -1000+10966.53
= 966.53
NPV for project Y
NPV= -Io+CF1/(1+i)+CF2/(1+i)2+CF3/(1+i)3+Cf4/(1+i)4
=-10000+3500/(1+.12)+3500/(1+.12)2+3500/(1+.12)3+3500/(1+.12)4
=-10000+3125+2790+2492+2224
=-10000+10631
= 631
IRR of project X
Same formula of NPV replacing “I” with “IRR” And Assuming NPV equal to
zero.
NPV=-Io+CF1/(1+IRR)+CF2/(1+IRR)2+CF3/(1+IRR)3+Cf4/(1+IRR)4
0=-10000+6500/(1+.18)+3000/(1+.18)2+3000/(1+.18)3+1000/(1+.18)4
0=-10000+10000
Left hand side =Right hand side
So 18% is IRR rate where NPV becomes zero
Profitability Index for Project X
PI =ΣCF/(1+i)/Io
= 10699.53/10000
=109.7 >1.0
Profitablility index for Project Y
PI = ΣCF/(1+i)/Io
=10631/10000
=1.06 >1.0
MIDTERM EXAMINATION
Spring 2009
Time: 60 min
Marks: 50
What are the earnings per share (EPS) for a company that earned Rs.100, 000 last
year in after-tax profits, has 200,000 common shares outstanding and Rs.1.2 million
in retained earning at the year end?
► Rs.1.00
► Rs. 6.00
► Rs. 0.50
► Rs. 6.50
► Manager; owner
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Which of the following would be deductible as an expense on the corporation's

income statement?
► Interest paid on outstanding bonds
► Cash dividends paid on outstanding common stock
► Cash dividends paid on outstanding preferred stock
In conducting an index analysis every balance sheet item is divided by

__________ and every income statement is divided by __________ respectively.
► Its corresponding base year balance sheet item; its corresponding base
year income statement item
► Its corresponding base year income statement item; its corresponding base
year balance sheet item
► Debt ratios
► Coverage ratios
► Debt ratios
► Coverage ratios
Interest paid on the original principal borrowed is often referred to as __________.
► Present value
► Simple interest
► Future value
If the following are the balance sheet changes, which one of them would represent
use of funds by a company?
► Rs. 8,950 decrease in net fixed assets
► Rs. 5,005 decrease in accounts receivable
► Rs. 10,001 increase in accounts payable
► Rs. 12,012 decrease in notes payable
In preparing a forecast balance sheet, it is likely that either cash or __________

will serve as a "plug figure" or balancing factor to ensure that assets equal liabilities
plus shareholders' equity.
► Accounts receivable
► Shareholders' equity
► Notes payable (short-term borrowings)
► Rs.5,850
► Rs.4,872
► Rs.6,725
► Rs.1,842
PV = 8000/(1+.11)^3
rate is 8%.
► Rs.680.58
► Rs.1,462.23
► Rs.322.69
► Rs.401.98
PV= 1000/(1+.08)^5
► Goes down
► Goes up
► Stays the same
► Cash in flows
► Cash out flows
► Cash flows
Payback period
Project A 1.66
Project B 2.66
Project C 3.66
► Project A
► Project B
► Project C
► Project A & B
If a project’s initial cash outflow of Rs. 100,000 is followed by four annual receipts
of 36,000 we can get the nearest discount factor by:
► Interpolation
► Dividing 100,000 by 36,000
► Dividing 36,000 by 100,000
If the cash-flow stream is a uniform series of inflows (an annuity) and the initial
outflow occurs at time 0, there is no need for a trial and error approach. We simply
divide the initial cash outflow by the periodic receipt and search for the nearest
discount factor in a table of present value interest factors of an annuity (PVIFAs).
In which of the following situations you can expect multiple answers of IRR?
► There are two adjacent arrows one of them is downward pointing & the
Which of the following technique would be used for a project that has non-normal
cash flows?
Which one of the following is NOT the disadvantage of the asset with very short
life?
► Money has to be reinvested in some other project with uncertain NPV
► Money has to be reinvested in some other project with certain NPV
► Money has to be reinvested in some other project with return so risky
► Call in
► Call option
► Call provision
► Put option
Call Provision:
The right (or option) of the Issuer to call back (redeem) or retire the bond by
paying-off the Bondholders before the Maturity Date. When market interest rates
drop, Issuers (or Borrowers) often call back the old bonds and issue new ones at
lower interest rates.

Rationale: A coupon bond will pay the coupon rate of interest on a

semiannual basis unless the firm defaults on the bond. Convertible bonds are
specific types of bonds.
Rationale: In order for the investor to earn more than the current yield the bond
must be selling for a discount. Yield to maturity will be greater than current yield
as investor will have purchased the bond at discount and will be receiving the
coupon payments over the life of the bond.
An investment opportunity set formed with two securities that are perfectly
negatively correlated. What will be standard deviation in the global minimum
variance portfolio?
► Equal to zero
► Equal to -1
► They have the highest risk and rates of return and the highest standard
deviations
► Common shares
A security that combines two or more different financial instruments. Hybrid

securities generally combine both debt and equity characteristics. The most
common example is a convertible bond that has features of an ordinary bond, but is
heavily influenced by the price movements of the stock into which it is convertible.
Rationale option 2 can not because it represents capital gain/loss which has nothing
to do with dividends
option 3 also represent capital gain/loss
► Both are an accurate representation of the total annual return an investor can
expect to earn by owning the security
The market capitalization rate on the stock of Fast Growing Company is 20%. The
expected ROE is 22% and the expected EPS ia Rs. 6.10. If the firm's plowback
ratio is 90%, the P/E ratio will be ________.
► 8.33
► 50.0
► 9.09
► 7.69
market capitalization rate A rate of return on investment based on the expected

income.
P/E The most common measure of how expensive a stock is. The P/E ratio is equal
to astock'smarket capitalization divided by its after-tax earnings
K = Capitalization Rate = 20%

Price over earning ratio:
Here is formula for {P/E}
P/E = (1-b) / K-G
G = growth Rate
where G = ROE * b
b = ploy back ratio. Or retained earning (money which is reinvested in company)
g = ROE * b = .22 * .9 = .198
by plugging the values in p/e formula

(1 - .9) / (.20 - .198) = 50
into the discount rate? http://vustudents.ning.com
Rationale: A, B, and D are incorporated into the discount rate used in the dividend
discount model.
market index, most likely has _________.
► An anticipated earnings growth rate which is less than that of the average
firm
Rationale: Firms with lower than average dividend yields are usually growth firms,
which have a higher P/E ratio than average.

► Systematic risk
► Financial risk
Systematic risk is not avoidable through diversification
When Return is being estimated in % terms, the units of Standard Deviation will
be mention in __________.
►%
► Times
► Number of days
A well-diversified portfolio is defined as:
Rationale: A well-diversified portfolio is one that contains

a large number of securities, each having a small (but not necessarily equal) weight,
so thatnonsystematic variance is negligibl
► New competitors
► Strikes
You are considering two investment proposals, project A and project B. B's
expected net present value is Rs. 1,000 greater than that for A and A's dispersion of
net present value is less than that for B. On the basis of risk and return, what would
be your conclusion?
► Project A dominates project B
► Project B dominates project A
► Neither project dominates the other in terms of risk and return
The expected net present value of B is greater than the expected net present value
of A and the risk of B exceeds the risk of A, so neither dominates the other.
Which of the following need to be excluded while we calculate the incremental

cash flows?
► Depreciation
► Sunk cost
► Non-cash item
ICO Company must decide between two mutually exclusive projects. The
following information describes the cash flows of each project.
Year Project "A" Project "B"
0 Rs. (20,000) Rs. 24,000
1 10,000 10,000
2 8,000 10,000
3 6,000 10,000
a. Assume that 15% is the appropriate required rate of return. What

decision should the firm make about these two projects?
b. If the firm reevaluated these projects at 10%, what decision should the
firm make about these two projects?
Part a:
Calculate the NPVs
Project A: -$20,000 + $10,000/(1.15)^1 + $8,000/(1.15)2 + $6,000/(1.15)3 = -

$1,310.10.
Project B: -$24,000 + $10,000/(1.15)1 + $10,000/(1.15)2 + $10,000/(1.15)3 = -

$1,167.75.
Reject BOTH projects as decreasing shareholder wealth.
Part b: Calculate the NPVs
Project A: -$20,000 + $10,000/(1.1)1 + $8,000/(1.1)2 + $6,000/(1.1)3 = $210.37.
Project B: -$24,000 + $10,000/(1.1)1 + $10,000/(1.1)2 + $10,000/(1.1)3 = $868.52.
Accept project "B" as it increases shareholder wealth the greatest.
MIDTERM EXAMINATION
Fall 2009
► Manager; owner
► The number and types of products or services provided by the firm
► The minimization of the amount of taxes paid by the firm
► The creation of value for shareholders
► The dollars profits earned by the firm
Which of the following financial market is referred to the market for short-term
► Money market
► Capital market
► Primary market
► A limited partner in a partnership
► A shareholder in a corporation
► The owner of a sole proprietorship
► A member in a limited liability company (LLC)
Which of the following is a major disadvantage of the corporate form of

organization?
► Double taxation of dividends
► Inability of the firm to raise large sums of additional
► Limited liability of shareholders
► Limited life of the corporate form
Which of the following statement is most accurate?
► Coverage ratios also shed light on the "liquidity" of current ratios
► Receivable- and inventory-based activity ratios also shed light on the

"liquidity" of current assets
► Receivable- and inventory-based activity ratios also shed light on the firm's
use of financial leverage
► Liquidity ratios also shed light on the firm's use of financial leverage
In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly
► Fall
► Rise
You are going to invest Rs.12,500 into a certificate of deposit (CD) at a 6% annual
rate (compounded annually) with a maturity of 30 months. How much money will
you receive when the CD matures?
► Rs.14,491
► Rs.14,518
► Rs.14,460
Rationale:
30months = 2.5 year

FV = amt * (1+i)^n = 12500(1.06)^2.5 = 14460

activity?
In estimating "after-tax incremental operating cash flows" for a project, you

should include all of the following EXCEPT __________.
► Changes in costs due to a general appreciation in those costs
► The amount (net of taxes) that we could realize from selling a currently
unused building of ours that we intend to use for our project
► Changes in working capital resulting from the project, net of spontaneous

changes in current liabilities
► Costs that have previously been incurred that are unrecoverable
The basic capital budgeting principles involved in determining relevant after-tax

incremental operating cash flows require us to __________.
Interest payments, principal payments, and cash dividends are __________ the
typical budgeting cash-flow analysis because they are ________ cash flows.
► Included in; financing
► Excluded from; financing
► Included in; operating
► Excluded from; operating
Why Payback period is a poor gauge of profitability?
► It ignores the time value of money
► It gives rough indication to the liquidity of the project
► It does not consider cash flows after expiration of the payback period
To estimate an unknown number that lies between two known numbers is knows
as ___________.
► Interpolation
► Amortization
In the mathematical subfield of numerical analysis, interpolation is a method of

constructing new data points within the range of a discrete set of known data
points.
► Discount rate
► Choose all projects with a positive NPV crrrrrr
► Group projects together to allocate the funds available and select the group
of projects with the highest NPV
The sinking fund retirement of a bond issue takes __________.
► Only one form -- the corporation purchases bonds in the open market and
delivers a given number of bonds to the trustee
► Only one form -- the corporation pays cash to the trustee, who in turn calls
the bonds for redemption
► Only one form -- bonds mature periodically and the corporation retires
them in the order that they mature
► Two forms -- (1) the corporation purchases bonds in the open market and
delivers a given number of bonds to the trustee; or (2) the corporation pays cash to
the trustee, who in turn calls the bonds for redemption
Which of the following statements is correct in distinguishing between serial

bonds and sinking-fund bonds?
► Serial bonds mature at a variety of dates, but sinking-fund bonds mature at

a single date
► Serial bonds provide for the deliberate retirement of bonds prior to

maturity, but sinking-fund bonds do not provide for the deliberate retirement of
bonds prior to maturity
► Serial bonds do not provide for the deliberate retirement of bonds prior to
maturity, but sinking-fund bonds do provide for the deliberate retirement of bonds
prior to maturity
► None of the above are correct since a serial bond is identical to a sinking
fund bond
__________ is a long-term, unsecured debt instrument with a lower claim on

assets and income than other classes of debt.
► A debenture
► A junk bond
► An income bond

__________.
► Tangible assets
► Fixed assets
► Real assets
Which of the following is NOT the present value of the bond?
► Intrinsic value
► Market price
► Fair price
► Theoretical price
not sure about this answer.
► 10.65%
► 10.45%
► 10.95%
► 10.52%
In this we have to first calculate the price of bond first

=100*(1 + 0.12)^-1+100*(1 + 0.12)^-2+100*(1 + 0.12)^-3+1100*(1.12)^-4 =
939.25
Current yield = coupon amount /Price of bond

100/939.25 =
So coupon payment for 4 year @ 10% = 100*4 = 400
Plug the values in Current yield formula = 400/1000 = .1064 = 10.64%
A coupon bond that pays interest annually is selling at par value of Rs.1,000,
matures in 5 years, and has a coupon rate of 9%. What is the yield to maturity on
this bond?
► 8.0%
► 8.3%
► 9.0%
► 10.0%
Rationale: When a bond sells at par value, the coupon rate is equal to the yield to
maturity
► It is below the coupon rate when the bond sells at a discount, and equal to
the coupon rate when the bond sells at a premium
► The discount rate that will set the present value of the payments equal to the
bond price

the coupon rate
► Par value
► Market value
► Intrinsic value
► Face value
Low Tech Company has an expected ROE of 10%. The dividend growth rate will
dividends.
► 6.0%
► 4.8%
► 7.2%
► 3.0%
Growth = ROE * plow back ratio
Plowback ratio ratio that measures the amount of earnings retained

after dividends have been paid out (100%-40% = 60%)
Let us plug in the value into above formula
10% * .60 = 6%
► Both are an accurate representation of the total annual return an investor

not sure about this
► Equal to systematic risk plus non-diversifiable risk
► Equal to avoidable risk plus diversifiable risk
► Equal to systematic risk plus unavoidable risk
► Equal to systematic risk plus diversifiable risk
The ratio of the standard deviation of a distribution to the mean of that distribution
is referred to as __________.
A well-diversified portfolio is defined as:
If a company intends to start a new project, ________ technique are employed to

assess the financial viability of the project.
► Financial planning
► Financial forecasting
from handouts
if a company intends to start a new project, Capital Budgeting techniques are

employed to assess the financial viability of the project.
Capital budgeting is a decentralized function assigned to:
► Individuals
► Departments
► Teams
Not sure about the answer
Question is bit ambiguous, if we take Dept. correct option, then “team” option is
violated.
from handouts
Capital budgeting is a decentralized function. In big corporations, this function is

not an individual’s job, rather, different departments and teams are assigned to
work on different aspects of capital budgeting.
The biggest challenge in capital budgeting is to keep finding:
► Valuable projects
► Sources of funds
► Blue chips
► Fixed assets
from handouts
The biggest challenge in capital budgeting is to keep finding the valuable projects,
i.e., projects that may add to the value of the firm. You must be familiar with the
basic objective of financial management
► Stakeholders
► Shareholders
► Bondholders
► Directors
Information that goes into __________ can be used to prepare __________.
Payback period
Project A 1.66
Project B 2.66
Project C 3.66
► Project A
► Project B
► Project C
► Project A & B
► Rs.680.58
► Rs.1,462.23
► Rs.322.69
► Rs.401.98
PV = amt / (1+i)^n
PV = 1000/(1+.08)^5 = 680.53
► Rs.3,032
► Rs.3,890
► Rs.3,190
► Rs.4,301
PV = amt / (1+i)^n
PV = 6500/(1+.10)^8 = 3032.29
Suppose Ali Inc. issues ten-year bonds (par Rs. 1,000) with an annual coupon of
8.6%. Similar ten-year bonds are paying 8.0% interest. What is the value of one
Ali's new bonds that is, what should be its price?
Bond Price = PV(all inflows) + PV(face value)
So in this case
Bond Price = PV(of all coupon payments) +PV(1000)
as bond will pay same amount for the next 10 year assume it annuity so we use
annuity formula if some done get this formula he/she can try manually PV for
every year for ten years.
8.6% of one thousand = 1000*.086 = 86
Which he gets every year as coupon payment
PV = Amt * PVIF = [1 - (1+i)^-n ]/i
i = 8%
price = 86* [( 1 – (1.08)^-10) ]/.08 + (1000/1.08)^10
price = 577.0670003 + 463.1934881 = 1040.260488
= 1040.26
Draw a three year time line which illustrates the following situation:
i. An outflow of Rs. 10,000 occurs at time 0
ii. Inflows of Rs. 5,000 occur at the end of year 1, 2 and 3.
iii. The interest rate during the three year is 10%.
MIDTERM EXAMINATION MGT201- Financial Management (Session - 3)

What are the earnings per share (EPS) for a company that earned Rs.100, 000 last
year in after-tax profits, has 200,000 common shares outstanding and Rs.1.2
million in retained earning at the year end?
► Rs.1.00
► Rs. 6.00
► Rs. 0.50
► Rs. 6.50

Who determines the market price of a share of common stock?
► Individuals buying and selling the stock

► The board of directors of the firm
► The stock exchange on which the stock is listed
► The president of the company

► The sole proprietor can easily dispose of their ownership position relative
to a shareholder in a corporation
► The sole proprietorship can be created more quickly than a corporation
► The owner of a sole proprietorship faces double taxation unlike the partners
in a partnership

Which of the following market refers to the market for relatively long-term
financial instruments?
► Primary market
► Money market
► Capital market
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Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000
and a net profit margin of 5 percent. What are its sales?
► 750,0Rs.3, 750,000
► Rs.48Rs.480, 000
► Rs.30Rs.300, 000
► Rs.1, Rs.1, 500,000

The DuPont Approach breaks down the earning power on shareholders' book
value (ROE) as follows: ROE = __________.
► Net profit margin × Total asset turnover × Equity multiplier
► Total asset turnover × Gross profit margin × Debt ratio
► Total asset turnover × Net profit margin
► Total asset turnover × Gross profit margin × Equity multiplier

In conducting an index analysis every balance sheet item is divided by
__________ and every income statement is divided by __________ respectively.
► Its corresponding base year income statement item; its corresponding base
year balance sheet item

► Debt ratios
► Coverage ratios

Which of the following would be considered a cash-flow item from an "operating
activity"?
► Cash inflow to the firm from selling new common equity shares

► Less than
► More than
► Equal to

A capital budgeting technique through which discount rate equates the present
value of the future net cash flows from an investment project with the project’s
initial cash outflow is known as:
► Payback period

If the cash flow stream for a project is NOT a uniform series of inflows and initial
outflow occur at time 0. 15% discount rate produces a resulting present value of
Rs. 104,000 that is greater than the initial cash outflow of Rs. 100,000. Now if we
want to calculate the best discount rate:
► We need to try a higher discount rate
► We need to try a lower discount rate
► 15% is the best discount rate
► Interpolation is not required here

► Intuitively
► Logically

► Discount rate

► Choose all projects with a positive NPV
► Group projects together to allocate the funds available and select the group
of projects with the highest NPV


Due to timing difference problem, a good project might suffer from _____ IRR
even though its NPV is ________.
► Higher; Lower
► Lower; Lower
► Lower; Higher
► Higher; Higher

What type of long-term financing most likely has the following features: 1) it has
an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a
constant annuity stream?
► Long-term debt
► Preferred stock
► Common stock

Market price of the bond changes according to which of the following reasons?
► Market price changes due to the supply –demand of the bond in the market
► Market price changes due to Investor’s perception
► Market price changes due to change in the interest rate

► Call in
► Call option
► Call provision
► Put option

► Cash flows
► Coupon receipts

When the bond approaches its maturity, the market value of the bond approaches
to which of the following?
► Intrinsic value
► Book value
► Par value
► Historic cost

► It is below the coupon rate when the bond sells at a discount, and equal to
the coupon rate when the bond sells at a premium
► The discount rate that will set the present value of the payments equal to the
bond price
the coupon rate

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of
8%. If interest rates remain constant, one year from now, what will be the price of
this bond?
► Higher
► Lower
► The same
► Rs. 1,000

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

► Par value
► Market value
► Intrinsic value
► Face value

Which of the following has NO effect when the financial health (cash flows and
income) of the company changes with time?
► Market value
► Price of the share
► Par value



You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is
expected to pay a dividend of Rs. 3 in the upcoming year while Stock Y is
expected to pay a dividend of Rs. 4 in the upcoming year. The expected growth
rate of dividends for both stocks is 7%. The intrinsic value of stock X:


► Equal to systematic risk plus non-diversifiable risk

► Equal to avoidable risk plus diversifiable risk
► Equal to systematic risk plus unavoidable risk
► Equal to systematic risk plus diversifiable risk

The wider the range of possible outcomes i.e.________.
► The greater the variability in potential Returns that can occur, the greater
the Risk
► The greater the variability in potential Returns that can occur, the lesser the
Risk
► The greater the variability in potential Returns that can occur, the level of
risk remain constant


Which of the following statements regarding covariance is CORRECT?
► Covariance always lies in the range -1 to +1

► Covariance, because it involves a squared value, must always be a positive
number (or zero)
► Low covariances among returns for different securities leads to high
portfolio risk
► Covariances can take on positive, negative, or zero values

► A world war

Finance consists of three interrelated areas:
► Money and capital market
► Investment

Mutually exclusive means that you can invest in _________ project(s) and having
chosen ______ you cannot choose another.
► One; one
► Two; two
► Two; one
► Three; one

At the termination of the project we need to take into account:
► Salvage value
► Book value
► Intrinsic value
► Fair value

length in time?
► MIRR approach
► Going concern approach
► Common life approach
► Equivalent annual approach

Assume a company had Rs.1 billion in free cash flow last year, and it is expected
to grow that cash flow at 3% into perpetuity. Assuming a 9% cost of equity, what
is the present value of the company?

► Pay back period
► Return on investment

Explain why financial planning is important to today’s chief executives?

How risk and expected return is compared in two distributions?
MIDTERM EXAMINATION
Companies invest in projects with negative NPV because there is a

hidden value in each project
pg52
Mutually exclusive means that you can invest in _________ project(s)

and having chosen ______ you cannot choose another.
► One; one
► Two; two
► Two; one
► Three; one
Mutually Exclusive: means that you can invest in ONE of the

investment choices and having chosen
one you cannot choose another
47
probabilities of occurrence is referred to as __________.
It is basically the weighted average or mean of the expected return

of the individual investments in the portfolio.
105
A
set of possible values that a random variable can assume and their
associated probabilities of occurrence are referred to as __________.
► the expected return
IX) The difference between a stock's price and its no-growth

value per share
X) The stock's price
XI) Zero if its return on equity equals the discount rate
XII) The net present value of favorable investment opportunities
► I and IV
► II and IV
► I, III, and IV
► II, III, and IV


retaining more earnings

increasing the growth rate
► The amount of earnings retained by the firm does not

affect market price or the P/E
► The level of inflation is expected to increase to

double-digit levels
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
In
the dividend discount model, which of the following is (are) NOT
The market capitalization rate on the stock of Steel Company is 12%.

The expected ROE is 13% and the expected EPS are Rs. 3.60. If the
firm's plowback ratio is 50%, what will be the P/E ratio?
► 7.69
► 8.33
► 9.09
► 11.11

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
Low Tech Company has an expected ROE of 10%. The dividend

growth rate will be ________ if the firm follows a policy of paying 40%
of earnings in the form of dividends.
► 6.0%
► 4.8%
► 7.2%
► 3.0%
G (Desired Growth Rate) = return on equity x (1- pay out ratio)
27

following?
Direct Claim Security is directly tied to the value of the underlying

Real Asset
74

situation?
► Par value
► Market value
► Intrinsic value
► Face value
► These are formed with the securities that have the highest
rates of return regardless of their standard deviations
► They have the highest risk and rates of return and the highest
standard deviations
► They are selected from those securities with the lowest

standard deviations regardless of their returns
► The coupon rate is greater than the current yield and the
current yield is greater than yield to maturity
► 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
A
coupon bond pays annual interest, has a par value of Rs.1,000,
matures in 4 years, has a coupon rate of 10%, and has a yield to
maturity of 12%. What is the current yield on this bond?
► 10.65%
► 10.45%
► 10.95%
► 10.52%
If a
_________ percent.
► 7.00
► 6.53
► 8.53
► 7.18
Interest rate risk for long term bonds is more than the interest rate risk
for short term bonds provided the _________ for the bonds is similar.
► Market rate
► Coupon rate
► Inflation rate
When market is offering lower rate of return than the bond, the bond
becomes valuable, with respect to the given scenario which of the
following is correct?

bond is > par value
► Market interest rate > coupon interest rate, market value of

bond is > par value

bond is < par value
► Market interest rate = coupon interest rate, market value of

bond is > par value

by __________.
► Tangible assets
► Fixed assets
► Real assets
__________ is a long-term, unsecured debt instrument with a lower

claim on assets and income than other classes of debt.
► A debenture
► A junk bond
► An income bond
A
12% coupon rate, Rs.1,000 par bond currently trades at 90 one year
after issuance. Which of the following is the most likely call price?
► Rs. 87
► Rs. 90
► Rs. 102
► Rs. 112
Which of the following is a legal agreement between the

corporation issuing bonds and the bondholders that establish the
► Indenture
► Debenture
► Bond
► Bond trustee

following?
► Return on asset
Which of the following technique would be used for a project that

has non-normal cash flows?

maximization

maximization

in real assets

flows

project?
An
ABC Co. will earn Rs. 350 million in cash flow in four years from now.
Assuming an 8.5% weighted average cost of capital, what is that
cash flow worth today?
► Rs.253 million
► Rs.323 million
► Rs.380 million
► Rs.180 million
An
of the following?
► Rs.109.39
► Rs.147.36
► Rs.154.73
► Rs.99.74
As
interest rates go up, the present value of a stream of fixed cash flows
_____.
► Goes down
► Goes up
► Stays the same
An
► Less than
► More than
► Equal to
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
Which of the following would be considered a cash-flow item from a

"financing" activity?
► A cash outflow to purchase bonds issued by another

company
► Debt ratios
► Coverage ratios
► 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
risk for a firm

coverage ratio
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:
Yea Project X Project Y

r
0 (10,000) (10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
vii. Calculate each project’s payback, net present value (NPV),

internal rate of return (IRR), and profitability index (PI).
viii. Which project or projects should be accepted if they are

independent?
ix. Which project should be accepted if they are mutually
exclusive?
ANSWER:

Payback period is the time required by the project to recover
its costs.
Year 3 project will recover the remaining Rs. 500 in 1st month
of 3rd yr. So payback period for Project X is 2
yrs and 1 month.
Year 3 project will recover remaining Rs 3000 in approximately 11

months of 3rd yr.
No. of yrs, n = 4
= -10,000 + 6500/(1.12) + 3000/(1.12)2+ 3000/(1.12)3+ 1000/(1.12)4
= Rs 966
No. of yrs, n = 4
= -10,000 + 3500/(1.12) + 3500/(1.12)2+ 3500/(1.12)3+ 3500/(1.12)4
= Rs 631

NPV = - 10000 + 6500/(1+i) + 3000(1+i)2+ 3000(1+i) 3+ 1000/(1+i) 4
= 10,966/10000 = 1.096
= 10631/10000 = 1.0631
Result: Since NPV and PI of project X are higher than that of

project Y so Project X will be accepted.
Liquidity ratios
Debt ratios
Coverage ratios
A class of financial metrics that is used to determine a company's ability to pay off
its short-terms debts obligations. Generally, the higher the value of the ratio, the
larger the margin of safety that the company possesses to cover short-term debts.
Liquidity Ratios
Common liquidity ratios include the current ratio, the quick ratio and the operating
cash flow ratio. Different analysts consider different assets to be relevant in
calculating liquidity. Some analysts will calculate only the sum of cash and
equivalents divided by current liabilities because they feel that they are the most
liquid assets, and would be the most likely to be used to cover short-term debts in
an emergency.
A company's ability to turn short-term assets into cash to cover debts is of the
utmost importance when creditors are seeking payment. Bankruptcy analysts and
mortgage originators frequently use the liquidity ratios to determine whether a
company will be able to continue as a going concern
Which one of the following selects the combination of investment proposals

that will provide the greatest increase in the value of the firm within the
budget ceiling constraint?
Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Reference
With continuous compounding at 8 percent for 20 years, what is the approximate

future value of a Rs. 20,000 initial investment?
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
P*(i+i/m/n)^m*n
A project that tells us the number of years required to recover our initial cash
Pay back period
Net present value
Profitability index
A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest
rate is 8 percent, the present value of this annuity is closest to which of the
following equations?
Long-term debt
Preferred stock
Common stock
The value of the bond is NOT directly tied to the value of which of the following
assets?

organization?
An 8-year annuity due has a present value of Rs.1,000. If the interest rate is 5
Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
1000 = pmt * ((1.05)^-8 -1)/.05
1000 = PMT *6.46
PMT = 1000/6.46 = 154.73


Upward
Downward

Fall
Rise
Remain unchanged


At the termination of project, which of the following needs to be considered
relating to project assets?
Salvage value
Book value
Intrinsic value
Fair value



proprietorship?
Unlimited liability
Single tax filing
Raising capital

Interest rate risk

Less than
More than
Equal to
A capital budgeting technique through which discount rate equates the present
value of the future net cash flows from an investment project with the project’s
initial cash outflow is known as:
Payback period
Net present value
Profitability index
Stakeholders
Shareholders
Bondholders
Directors
Where there is single period capital rationing, what the most sensible way of
making investment decisions?
The logic behind _________ is that instead of looking at net cash flows you look at
cash inflows and outflows separately for each point in time.
IRR
MIRR
PV
NPV
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month
certificate of deposit, if you deposit Rs.20, 000 you would expect to earn around
__________ in interest.
Rs.840
Rs.858
Rs.1,032
Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) =

$857.82.

Salvage value
Book value
Intrinsic value
Fair value

Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
Upward
Downward
Indenture
Debenture
Bond
Bond trustee
Question # 1 of 10
Less than
More than
Equal to

activity?
Interest rate risk
Where there is single period capital rationing, what the most sensible way of
making investment decisions?
Which of the following statements is correct in distinguishing between serial bonds

and sinking-fund bonds?

single date.
Serial bonds provide for the deliberate retirement of bonds prior to maturity, but
sinking-fund bonds do not provide for the deliberate retirement of bonds prior to
maturity
Serial bonds do not provide for the deliberate retirement of bonds prior to maturity,
but sinking-fund bonds do provide for the deliberate retirement of bonds prior to
maturity.
Liquidity ratios
Debt ratios
Coverage ratios
Which of the following needs to be excluded while we calculate the incremental

cash flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Pay back period
Net present value
Profitability index
market index most likely has _________.
Which of the following is called the tax savings of the firm derived from the
deductibility of interest expense?
Interest tax shield

Depreciable basis
Financing umbrella
Current yield
payments.
Tax benefits derived from creative structuring of a financing arrangement. For

example, usingloan capital instead of equity capital because interest paid on
the loans is generally tax deductible whereas the dividend paid on equity is not
primarily?
Sales variability

Reference


Profitability index
Net present value
Pay back period
If stock is a part of totally diversified portfolio then its company risk must be equal
to:
0
0.5
1
-1


Will be unrelated
None of the above.
Which of the following is the cash required during a specific period to meet
interest expenses and principal payments?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
APT stipulates
CAPM stipulates
=====

Business cycle
Inflation rates
All of the above

M&M Proposition I
M&M Proposition II
Discount rate
Profitability index

Fixed costs
Variable costs
Debt financing


Convertible Bonds
Common shares
Preferred shares
Pay back period
Net present value
Profitability index
Upward
Downward
Which of the following is NOT the form of cash flow generated by the investments
of the shareholders?
Income
Capital loss
Capital gain
Operating income
According to the Capital Asset Pricing Model (CAPM), a well-diversified

portfolio's rate of return is a function of which of the following:
Unique risk
Reinvestment risk
Market risk
Unsystematic risk

Profitability index
Net present value
Pay back period

Which if the following is (are) true? I. The dividend growth model holds if, at
some point in time, the dividend growth rate exceeds the stock’s required return. II.
A decrease in the dividend growth rate will increase a stock’s market value, all else
the same. III. An increase in the required return on a stock will decrease its market
I, II, and III
I only
III only
II and III only
Goes down
Goes up
Stays the same
Which of the following could be taken same as minimizing the weighted average
cost of capital?

operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]

Cash flows
Coupon receipts

It is the tangency point between the capital market line and the
indifference curve
All securities in the market portfolio are held in proportion to their market
values
In the dividend discount model, _____ which of the following are not incorporated
Real risk-free rate
Return on assets

Convertible Bonds
Common shares
Preferred shares
For which of the following costs is it generally necessary to apply a tax adjustment
to a yield measure?
Cost of debt
assets?



The market value of a firm's common stock is independent of its capital
structure
The weighted average of possible returns, with the weights being the probabilities
of occurrence is referred to as ________.
Expected return
Standard deviation

Common stock
Debt
Preferred stock
None of the above
A statistical measure of the variability of a distribution around its mean is referred

to as ________.
Expected return
Standard deviation


proprietorship?
Unlimited liability
Single tax filing
Raising capital
Total Marks: 1
Cash in flows
Cash out flows
Cash flows
primarily?
Sales variability
0.25
-1.0
1.0
0.5

Fixed costs
Variable costs
Debt financing


None of the above

The coupon rate is less than the current yield and the current yield is greater
to maturity
payments over the life of the bond.

activity?

primarily?
Sales variability
Which of the following is simply the weighted average of the possible returns, with
the weights being the probabilities of occurrence?
Expected return
Standard deviation



Balance sheets
Income statements
The cash budget is prepared from forecasted cash collections and disbursements
rather
If we were to increase ABC company cost of equity assumption, what would we

expect to happen to the present value of all future cash flows?
An increase
A decrease
No change
Which of the followings expressed the proposition that the cost of equity is a
positive linear function of capital structure?

M&M Proposition I
M&M Proposition II
assets?


________ 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
Unsystematic risk is the diversifiable portion of total risk and not a measure of
total risk like standard deviation.
The presence of which of the following costs is not used as a major argument
Bankruptcy costs
Agency costs
Transactions costs
Insurance costs
The presence of these costs is used as major argument against the M&M arbitrage
process
Long-term debt
Preferred stock
Common stock
According to timing difference problem a good project might suffer from ___ IRR
even though its NPV is ______.
Higher; lower
Lower; Lower
Lower; higher
Higher; higher

primarily?
Sales variability

Will be unrelated
None of the above.
The ________ the coefficient of variation ______ the relative risk of the
investment.
Larger; Larger
Larger; Smaller
Smaller; Larger
Smaller; Smaller
You are considering two investment proposals, project A and project B. B's
expected net present value is Rs. 1,000 greater than that for A and A's dispersion of
net present value is less than that for B. On the basis of risk and return, what would
be your conclusion?
The expected net present value of B is greater than the expected net present value
of A and the risk of B exceeds the risk of A, so neither dominates the other.
______ means expanding the number of investments which cover different kinds
of stocks.
Diversification
Standard deviation
Variance
Covariance

employed by a firm?
The current market price per share of common stock times the number of
shares Outstanding

__________are analysts who use information concerning current and prospective

profitability of firms to assess the firm's fair market value.
Credit analysts
Systems analysts
Technical analysts
Total Marks: 1
M&M Proposition I
M&M Proposition II
The statement of cash flows reports a firm's cash flows segregated into which of
the following categorical order?
Pay back period
Net present value
Profitability index
coefficient?
1.0
-1.0
1.5
which of the following needs to be excluded while we calculate the incremental

cash flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Which of the following techniques would be used for a project that has non–
normal cash flows?
Net present value

Depreciation
Dividends
Interest
Taxes
Which of the following statements is correct for a firm that currently has total
costs of carrying and ordering inventory that is 50% higher than total carrying
costs?
When a firm needs guaranteed, short-term funds available for a variety purposes,
the bank loan will likely be a ________.
Transaction loan
Line of credit
Which if the following is (are) true? I. The dividend growth model holds if, at
some point in time, the dividend growth rate exceeds the stock’s required return. II.
A decrease in the dividend growth rate will increase a stock’s market value, all
else the same. III. An increase in the required return on a stock will decrease
its market value, all else the same

I only
III only
II and III only


Covariance, because it involves a squared value, must always be a positive
number (or zero)
Low covariances among returns for different securities leads to high portfolio
risk

Accrued wages
Trade credit
Commercial paper
Accrued taxes
Which of the following has the same meaning as the working capital to financial
analyst?
Total assets
Fixed assets
Current assets
Above the breakeven EBIT, increased financial leverage will ________ EPS, all
else the same. Assume there are no taxes
Increase
Decrease

Convertible Bonds
Common shares
Preferred shares
If we invest in many securities which are ________to each other then it is possible
to reduce overall risk for your investment.
Comparable
Correlated
Highly correlated

Stakeholders
Shareholders
Bondholders
Directors
market index most likely has _______.
There will be two-thirds as many shares outstanding, and they will sell for
Rs.60.00 each
Rs.160.00 each
Rs.26.67 each
There will be one-and-one-half times as many shares outstanding, and they
will sell for Rs.60.00 each
Under the idealized conditions of MM, which statement is correct when a firm
issues new stock in order to pay a cash dividend on existing shares?

________ is the variability of return on stocks or portfolios not explained by

Systematic risk
Standard deviation
Unsystematic risk
When taxes are considered, the value of a levered firm equals the value of
the______.
Unlevered firm
Which of the following would be consistent with an aggressive approach to

financing working capital?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden

Long-term bond rate
Prime rate
Fed funds rate
According to _________, the firm's cost of equity increases with greater debt
financing, but the WACC remains unchanged.
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden


to as ________.
Expected return
Standard deviation
Cash in flows
Cash out flows
Cash flows
Long-term debt
Preferred stock
Common stock
What is the economic order quantity for the following situation? A firm sells
32,000 cases of microwave popcorn per year. The cost per order is Rs.20 per case
and the firm experiences a carrying cost of 8.0%.
2,000 cases
4,000 cases
8,000 cases
16,000 cases
analyst?
Total assets
Fixed assets
Current assets
primarily?
Sales variability
decrease, the present value of that future amount to you would ________.
Fall
Rise
Remain unchanged
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
Less than
More than
Equal to


Unique risk
Reinvestment risk
Market risk
Unsystematic risk
By borrowing more

Indenture
Debenture
Bond
Bond trustee
If the marginal reduction in order costs exceeds the marginal carrying cost of
inventory, then what should be done by the firm?
Discount rate
Profitability index
By comparing the changes in the stock market price to the changes in the
stock market index
Which of the following is a payment of additional shares to shareholders in lieu of

cash?
Stock split
Stock dividend
Extra dividend
Regular dividend

proprietorship?
Unlimited liability
Single tax filing
Raising capital
Fixed costs
Variable costs
Debt financing
Liquidity ratios
Debt ratios
Coverage ratios
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Profitability index
Net present value
Pay back period
Fixed costs
Variable costs
Debt financing
When a firm needs guaranteed, short-term funds available for a variety purposes,
the bank loan will likely be a ________.
Transaction loan
Line of credit
Long-term bond rate
Prime rate
Fed funds rate
_________ of the firm.
Flotation costs
curve
index?
Social factors
Fall
Rise
Remain unchanged

to as ________.
Expected return
Standard deviation
Cash in flows
Cash out flows
Cash flows
Long-term debt
Preferred stock
Common stock
What is the economic order quantity for the following situation? A firm sells
32,000 cases of microwave popcorn per year. The cost per order is Rs.20 per case
and the firm experiences a carrying cost of 8.0%.
2,000 cases
4,000 cases
8,000 cases
16,000 cases
analyst?
Total assets
Fixed assets
Current assets
primarily?
Sales variability
Fall
Rise
Remain unchanged
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
Less than
More than
Equal to


Unique risk
Reinvestment risk
Market risk
Unsystematic risk
By borrowing more

Whenever ROE > k
Whenever k > ROE


When bonds are issued, under which of the following category the value of the
bond appears?

Equity
Fixed assets
Short term loan
Long term loan
For which of the following costs is it generally necessary to apply a tax adjustment
to a yield measure?
Cost of debt
Which of the following could be taken same as minimizing the weighted average
cost of capital?
analyst?
Total assets
Fixed assets
Current assets



Fall
Rise
Remain unchanged






Interest tax shield

Depreciable basis
Financing umbrella
Current yield

Less than
More than
Equal to



By borrowing more
index?
Social factors

organization?
Upward
Downward
informational content of __________, the desire of investors for __________, and
certain __________.
Financial leverage
Capital structure
Business risk
Which of the following is simply the weighted average of the possible returns, with
the weights being the probabilities of occurrence?
Expected return
Standard deviation
Risk
Probability
Relative dispersion
If Deen Muhammad Suppliers receive an invoice for purchases dated 12/12/2002

subject to credit terms of "2/10, net 30", what is the last possible day the discount
can be taken?
January 11
January 22
January 30
December 30
The term "2/10" refers to a firm that can take the discount for only 10 days from
the date of the invoice. Thus, goods shipped on the 12th are due no later than the
22nd if the discount is taken
Fixed costs
Variable costs
Debt financing
Which of the following is a basic principle of finance as it relates to the

management of working capital?
Interest rate risk
__________ is the variability of return on stocks or portfolios not explained by

Systematic risk
Standard deviation
Unsystematic risk
Discount rate
Profitability index
The mix of convertible and non-convertible debt does not affect the value of the
firm
If the marginal reduction in order costs exceeds the marginal carrying cost of
inventory, then what should be done by the firm?
correct risk adjusted interest rate is 11%?
Rs.5,850
Rs.4,872
Rs.6,725
Rs.1,842

Payback period
Net present value
Profitability index
constraint?
Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Money market
Capital market
Primary market
Secondary market
It is the difference between the market value of the firm and the book value of
equity
It is the firm's net operating profit after tax (NOPAT) less a dollar cost of
capital charge
It is the net income of the firm less a dollar cost that equals WAAC multiplied by
the book value of liabilities and equities
Fall
Rise
Remain unchanged
http://highered.mcgraw-
hill.com/sites/0073012386/student_view0/chapter15/multiple_choice_quiz.html
Long-term debt
Preferred stock
Common stock
Liquidity ratios
Debt ratios
Coverage ratios

Salvage value
Book value
Intrinsic value
Fair value

activity?
All of the above
curve
Which of the following could NOT be defined as the capital structure of the
Company?
A portfolio's expected return is a simple weighted average of expected returns

of the individual securities comprising the portfolio.
A portfolio's standard deviation of return is a simple weighted average of

The square root of a portfolio's standard deviation of return equals its coefficient of
variation

employed by a firm?
The current market price per share of common stock times the number of
shares Outstanding
Cash flows
Coupon receipts
employees. He wants a simple inexpensive form of ownership that leaves him
in
business.
a. S-corporation
b. Partnership
c. Corporation
an
a. SWOT Analysis
b. Trend Analysis
3. When the market's required rate of return for a particular bond is much
less than
a. A premium
b. A discount
d. Face value
liabilities
7. The gross profit margin is unchanged, but the net profit margin declined
over the
average

industry.
a. Discounting
b. Compounding
d. Time lines
c. An annuity due
13. Which of the following is the rate of return earned on a bond if it is
held until
maturity?
a. Yield-to-call
b. Coupon payment
15. A 30-year corporate bond issued in year 1985 would now trade in which of
the
following markets?

16. When the market's nominal annual required rate of return for a
particular bond is
a. A discount
b. A premium
c. Par value
constant.
19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this
year. Its
a. Rs.40
b. Rs.35
c. Rs.30
d. Rs.25
20. Which of the following stock would provide a regular income to the
investor?
a. Growth stock
b. Income stock
c. Aggressive stock
d. Defensive stock
To increase a given future value, the discount rate should be

adjusted __________.
Upward
Downward

would __________.
Fall
Rise
Remain unchanged
the interest rate is 8 percent, the present value of this annuity is
closest to which of the following equations?
At the termination of project, which of the following needs to be

considered relating to project assets?
Salvage value
Book value
Intrinsic value
Fair value

Unlimited liability
Single tax filing
Raising capital
Interest rate risk
Less than
More than
Equal to
A capital budgeting technique through which discount rate equates

Payback period
Net present value
Profitability index
The objective of financial management is to maximize _________

wealth.
Stakeholders
Shareholders
Bondholders
Directors
Where there is single period capital rationing, what the most sensible

The logic behind _________ is that instead of looking at net cash flows
time.
IRR
MIRR
PV
NPV
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-

month certificate of deposit, if you deposit Rs.20, 000 you would
expect to earn around __________ in interest.
Rs.840
Rs.858
Rs.1,032
Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000

(.042891) = $857.82.

Salvage value
Book value
Intrinsic value
Fair value

Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240

Upward
Downward

the corporation issuing bonds and the bondholders that establish the
Indenture
Debenture
Bond
Bond trustee
Question # 1 of 10
Less than
More than
Equal to


Interest rate risk
Where there is single period capital rationing, what the most sensible

Which of the following statements is correct in distinguishing

between serial bonds and sinking-fund bonds?
Serial bonds mature at a variety of dates, but sinking-fund bonds

mature at a single date.
Serial bonds provide for the deliberate retirement of bonds prior to

maturity, but sinking-fund bonds do not provide for the deliberate
retirement of bonds prior to maturity
Serial bonds do not provide for the deliberate retirement of bonds

prior to maturity, but sinking-fund bonds do provide for the
deliberate retirement of bonds prior to maturity.

obligations?
Liquidity ratios
Debt ratios
Coverage ratios
Which of the following needs to be excluded while we calculate the

Depreciation
Sunk cost
Opportunity cost
Non-cash item
A project that tells us the number of years required to recover our

initial cash investment based on the project’s expected cash flows
is:
Pay back period
Net present value
Profitability index
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
Which of the following is called the tax savings of the firm derived
from the deductibility of interest expense?
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
The reduction in income taxes that results from the tax-deductibility

of interest payments.
Tax benefits derived from creative structuring of

a financing arrangement. For example, usingloan capital instead
of equity capital because interest paid on the loans is generally tax
deductible whereas the dividend paid on equity is not
Upon which of the following a firm's degree of operating leverage

(DOL) depends primarily?
Sales variability

into account:
Ref It discounts the cash flow to take into the account the time value
of money.
Reference
Profitability index
Net present value
Pay back period
If stock is a part of totally diversified portfolio then its company risk

must be equal to:
0.5
-1
Will be unrelated
None of the above.
Which of the following is the cash required during a specific period

to meet interest expenses and principal payments?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Which of the following stipulate a relationship between expected

return and risk?
APT stipulates
CAPM stipulates
=====

Business cycle
Inflation rates
All of the above

Which of the followings expressed the proposition that the value of
the firm is independent of its capital structure?

M&M Proposition I
M&M Proposition II
Discount rate
Profitability index

Fixed costs
Variable costs
Debt financing


Convertible Bonds
Common shares
Preferred shares

Pay back period
Net present value
Profitability index

Upward
Downward
Which of the following is NOT the form of cash flow generated by the
investments of the shareholders?
Income
Capital loss
Capital gain
Operating income
According to the Capital Asset Pricing Model (CAPM), a well-

diversified portfolio's rate of return is a function of which of the
following:
Unique risk
Reinvestment risk
Market risk
Unsystematic risk

Profitability index
Net present value
Pay back period


stock’s required return. II. A decrease in the dividend growth rate will
increase a stock’s market value, all else the same. III. An increase in
the required return on a stock will decrease its market value, all else
the same.
I, II, and III
I only
III only
II and III only

flows _____.
Goes down
Goes up
Stays the same
Which of the following could be taken same as minimizing the

weighted average cost of capital?
Minimizing the market value of the firm only if MM's Proposition I

holds
Which of the following formulas represents a correct calculation of

the degree of operating leverage?
(Q - QBE)/Q
[Q(P-V) + FC] /[Q(P-V)]
Q(P-V) / [Q(P-V) - FC]

Cash flows
Coupon receipts

indifference curve
All securities in the market portfolio are held in proportion to their
market values
In the dividend discount model, _____ which of the following are not
Real risk-free rate
Return on assets

Convertible Bonds
Common shares
Preferred shares
For which of the following costs is it generally necessary to apply a

tax adjustment to a yield measure?
Cost of debt


Which of the followings are the propositions of Modigliani and

Miller's?
The market value of a firm's common stock is independent of its
capital structure
The market value of a firm's debt is independent of its capital
structure
The market value of any firm is independent of its capital
structure
probabilities of occurrence is referred to as ________.
Expected return
Standard deviation
In calculating the costs of the individual components of a firm's

financing, the corporate tax rate is important to which of the
following component cost formulas?
Common stock
Debt
Preferred stock
None of the above
A statistical measure of the variability of a distribution around its

mean is referred to as ________.
Expected return
Standard deviation

The book value of the firm's assets less the book value of its
liabilities

Unlimited liability
Single tax filing
Raising capital
Total Marks: 1
Cash in flows
Cash out flows
Cash flows

Sales variability
0.25
-1.0
1.0
0.5

Fixed costs
Variable costs
Debt financing
Why common stock of a company must provide a higher expected

return than the debt of the same company?
_______ is equal to (common shareholders' equity/common shares

outstanding).

None of the above

The coupon rate is less than the current yield and the current yield is
greater than the yield to maturity
The coupon rate is less than the current yield and the current yield is
In order for the investor to earn more than the current yield the bond
must be selling for a discount. Yield to maturity will be greater than
current yield as investor will have purchased the bond at discount
and will be receiving the coupon payments over the life of the
bond.



Sales variability

Expected return
Standard deviation




Balance sheets
Income statements
The cash budget is prepared from forecasted cash collections and

disbursements rather
If we were to increase ABC company cost of equity assumption,

what would we expect to happen to the present value of all future
cash flows?
An increase
A decrease
No change
Which of the followings expressed the proposition that the cost of

equity is a positive linear function of capital structure?

M&M Proposition I
M&M Proposition II
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________ 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
Unsystematic risk is the diversifiable portion of total risk and not a

measure of total risk like standard deviation.
The presence of which of the following costs is not used as a major

argument against the M&M arbitrage process?
Bankruptcy costs
Agency costs
Transactions costs
Insurance costs
The presence of these costs is used as major argument against the

M&M arbitrage process

Long-term debt
Preferred stock
Common stock
According to timing difference problem a good project might suffer

from ___ IRR even though its NPV is ______.
Higher; lower
Lower; Lower
Lower; higher
Higher; higher


Sales variability

Will be unrelated
None of the above.
The ________ the coefficient of variation ______ the relative risk of the
investment.

Larger; Larger
Larger; Smaller
Smaller; Larger
Smaller; Smaller
You are considering two investment proposals, project A and project

B. B's expected net present value is Rs. 1,000 greater than that for A
and A's dispersion of net present value is less than that for B. On the
The expected net present value of B is greater than the expected

net present value of A and the risk of B exceeds the risk of A, so
neither dominates the other.
______ means expanding the number of investments which cover

different kinds of stocks.
Diversification
Standard deviation
Variance
Covariance

The sum of common stock and preferred stock on the balance
sheet
The current market price per share of common stock times the
number of shares Outstanding

__________are analysts who use information concerning current and

prospective profitability of firms to assess the firm's fair market value.
Credit analysts
Systems analysts
Technical analysts
Total Marks: 1
Which of the followings expressed the proposition that the value of
the firm is independent of its capital structure?
M&M Proposition I
M&M Proposition II
The statement of cash flows reports a firm's cash flows segregated

into which of the following categorical order?

Pay back period
Net present value
Profitability index
If 2 stocks move in the same direction together then what will be the
correlation coefficient?
1.0
-1.0
1.5
which of the following needs to be excluded while we calculate the

Depreciation
Sunk cost
Opportunity cost
Non-cash item
If risk and return combination of any stock is above the SML, what
does it mean?
It is offering lower rate of return as compared to the efficient
stock
It is offering higher rate of return as compared to the efficient
stock

Net present value

Depreciation
Dividends
Interest
Taxes
Which of the following statements is correct for a firm that currently

has total costs of carrying and ordering inventory that is 50% higher
than total carrying costs?
When a firm needs guaranteed, short-term funds available for a

variety purposes, the bank loan will likely be a ________.
Transaction loan
Line of credit

stock’s required return. II. A decrease in the dividend growth rate
will increase a stock’s market value, all else the same. III. An
increase in the required return on a stock will decrease its market
value, all else the same

I only
III only
II and III only


Covariance, because it involves a squared value, must always
be a positive number (or zero)
Low covariances among returns for different securities leads to
high portfolio risk
Which of the following is not a form of short-term, spontaneous

credit?
Accrued wages
Trade credit
Commercial paper
Accrued taxes
Which of the following has the same meaning as the working capital
to financial analyst?
Total assets
Fixed assets
Current assets
Above the breakeven EBIT, increased financial leverage

will ________ EPS, all else the same. Assume there are no taxes
Increase
Decrease

Convertible Bonds
Common shares
Preferred shares
If we invest in many securities which are ________to each other then

it is possible to reduce overall risk for your investment.
Comparable
Correlated
Highly correlated
The objective of financial management is to

maximize _______ wealth.
Stakeholders
Shareholders
Bondholders
Directors
A company whose stock is selling at a P/E ratio greater than the P/E
ratio of a market index most likely has _______.
An anticipated earnings growth rate which is less than that of
the average firm
Greater cyclicality of earnings growth than that of the average
firm
The stock in your portfolio was selling for Rs.40 per share yesterday,
but has today declared a three for two split. Which of the following
statements seems to be true?
There will be two-thirds as many shares outstanding, and they will
sell for Rs.60.00 each

There will be four times as many shares outstanding, and they will
There will be 50 percent more shares outstanding and they will
There will be one-and-one-half times as many shares
outstanding, and they will sell for Rs.60.00 each
Under the idealized conditions of MM, which statement is correct

when a firm issues new stock in order to pay a cash dividend on
existing shares?

________ is the variability of return on stocks or portfolios not

diversification.
Systematic risk
Standard deviation
Unsystematic risk
When taxes are considered, the value of a levered firm equals the
value of the______.
Unlevered firm

Unlevered firm plus the value of the debt plus the value of the
tax shield
Which of the following would be consistent with an aggressive

approach to financing working capital?
Which of the following is the maximum amount of debt (and other

fixed-charge financing) that a firm can adequately service?
Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Which of the following terms best applies to the short-term interest

rate charged by banks to large, creditworthy customers?
Long-term bond rate
Prime rate
Fed funds rate
According to _________, the firm's cost of equity increases with

greater debt financing, but the WACC remains unchanged.

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


Expected return
Standard deviation
Cash in flows
Cash out flows
Cash flows

Long-term debt
Preferred stock
Common stock
What is the economic order quantity for the following situation? A

firm sells 32,000 cases of microwave popcorn per year. The cost per
order is Rs.20 per case and the firm experiences a carrying cost of
8.0%.
2,000 cases
4,000 cases
8,000 cases
16,000 cases
Total assets
Fixed assets
Current assets

Miller's?

capital structure

structure

following?

Sales variability

would ________.
Fall
Rise
Remain unchanged
Interest tax shield

Depreciable basis
Financing umbrella
Current yield
Less than
More than
Equal to



following:
Unique risk
Reinvestment risk
Market risk
Unsystematic risk
By borrowing more
Who or what is a person or institution designated by a bond issuer as

the official representative of the bondholders?
Indenture
Debenture
Bond
Bond trustee
If the marginal reduction in order costs exceeds the marginal

carrying cost of inventory, then what should be done by the firm?
Discount rate
Profitability index
By comparing the changes in the stock market price to the changes

in the stock market index
Which of the following is a payment of additional shares to

shareholders in lieu of cash?
Stock split
Stock dividend
Extra dividend
Regular dividend

Unlimited liability
Single tax filing
Raising capital

Which of the following is related to the use Lower financial

leverage?
Fixed costs
Variable costs
Debt financing

obligations?
Liquidity ratios
Debt ratios
Coverage ratios

Debt capacity
Debt-service burden
Adequacy capacity
Fixed-charge burden
Profitability index
Net present value
Pay back period
Which of the following is related to the use Lower financial

leverage?
Fixed costs
Variable costs
Debt financing
When a firm needs guaranteed, short-term funds available for a

variety purposes, the bank loan will likely be a ________.
Transaction loan
Line of credit
Which of the following terms best applies to the short-term interest

rate charged by banks to large, creditworthy customers?
Long-term bond rate
Prime rate
Fed funds rate
The explicit costs associated with corporate default, such as legal

expenses, are the _________ of the firm.
Flotation costs
According to MM II, what happens when a firm's debt-to-equity ratio

increases?
indifference curve

market values
Which of the following factor(s) do NOT affects the movements in

the market index?
Social factors

would ________.
Fall
Rise
Remain unchanged

into account:

Expected return
Standard deviation
Cash in flows
Cash out flows
Cash flows


Long-term debt
Preferred stock
Common stock
What is the economic order quantity for the following situation? A

firm sells 32,000 cases of microwave popcorn per year. The cost per
order is Rs.20 per case and the firm experiences a carrying cost of
8.0%.
2,000 cases
4,000 cases
8,000 cases
16,000 cases
Total assets
Fixed assets
Current assets

Miller's?

capital structure

structure

following?

Sales variability

would ________.
Fall
Rise
Remain unchanged
Interest tax shield
Depreciable basis
Financing umbrella
Current yield
Less than
More than
Equal to


following:
Unique risk
Reinvestment risk
Market risk
Unsystematic risk
By borrowing more

Whenever ROE > k
Whenever k > ROE
According to MM II, what happens when a firm's debt-to-equity

ratio increases?

When bonds are issued, under which of the following category the
value of the bond appears?
Equity
Fixed assets
Short term loan
Long term loan
For which of the following costs is it generally necessary to apply a

tax adjustment to a yield measure?
Cost of debt
Which of the following could be taken same as minimizing the

weighted average cost of capital?
Minimizing the market value of the firm only if MM's Proposition I

holds
Total assets
Fixed assets
Current assets

Miller's?

capital structure
structure


following?

would ________.
Fall
Rise
Remain unchanged







Interest tax shield

Depreciable basis
Financing umbrella
Current yield

Less than
More than
Equal to



By borrowing more
Which of the following factor(s) do NOT affects the movements in the

market index?
Social factors


Upward
Downward
Investors may be willing to pay a premium for stable dividends

because of the informational content of __________, the desire of
investors for __________, and certain __________.
Financial leverage
Capital structure
Business risk

Expected return
Standard deviation
Risk
Probability
Relative dispersion
If Deen Muhammad Suppliers receive an invoice for purchases

dated 12/12/2002 subject to credit terms of "2/10, net 30", what is the
last possible day the discount can be taken?
January 11
January 22
January 30
December 30
The term "2/10" refers to a firm that can take the discount for only 10
days from the date of the invoice. Thus, goods shipped on the 12th
are due no later than the 22nd if the discount is taken
Fixed costs
Variable costs
Debt financing
Which of the following is a basic principle of finance as it relates to

the management of working capital?
Interest rate risk
__________ is the variability of return on stocks or portfolios not

diversification.
Systematic risk
Standard deviation
Unsystematic risk
Discount rate
Profitability index
The mix of senior and subordinated debt does not affect the value of
the firm
The mix of convertible and non-convertible debt does not affect the
value of the firm
The mix of common stock and preferred stock does not affect the
value of the firm
If the marginal reduction in order costs exceeds the marginal

carrying cost of inventory, then what should be done by the firm?
What is the present value of Rs.8,000 to be paid at the end of three

Rs.5,850
Rs.4,872
Rs.6,725
Rs.1,842

Payback period
Net present value
Profitability index

Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Which of the following market in finance is referred to the market for

short-term government and corporate debt securities?
Money market
Capital market
Primary market
Secondary market
It is the difference between the market value of the firm and the
book value of equity
It is the firm's net operating profit after tax (NOPAT) less a dollar cost
of capital charge
It is the net income of the firm less a dollar cost that equals WAAC
multiplied by the book value of liabilities and equities

would __________.
Fall
Rise
Remain unchanged
According to MM II, what happens when a firm's debt-to-equity ratio

increases?
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Long-term debt
Preferred stock
Common stock

bond?

Which group of ratios shows the extent to which the firm is financed
with debt?
Liquidity ratios
Debt ratios
Coverage ratios

Salvage value
Book value
Intrinsic value
Fair value

Which of the following could be defined as the capital structure of

the Company?
All of the above
indifference curve

market values
Which of the following could NOT be defined as the capital structure

of the Company?
Where the stock points will lie, if a stock is a part of totally diversified
portfolio?
Where the stock points will lie, if a stock is a part of totally diversified
portfolio?
Which of the following is the characteristic of a well diversified

portfolio?
A portfolio's expected return is a simple weighted average of

A portfolio's standard deviation of return is a simple weighted

The square root of a portfolio's standard deviation of return equals its

variance.
The square root of a portfolio's standard deviation of return equals its


The current market price per share of common stock times the
number of shares Outstanding
Cash flows
Coupon receipts
employees. He wants a simple inexpensive form of ownership that leaves him
in
business.
a. S-corporation
b. Partnership
c. Corporation
an
a. SWOT Analysis
b. Trend Analysis
3. When the market's required rate of return for a particular bond is much
less than
a. A premium
b. A discount
d. Face value

liabilities
7. The gross profit margin is unchanged, but the net profit margin declined
over the
average
industry.
a. Discounting
b. Compounding
d. Time lines

c. An annuity due
13. Which of the following is the rate of return earned on a bond if it is
held until
maturity?
a. Yield-to-call
b. Coupon payment
15. A 30-year corporate bond issued in year 1985 would now trade in which of
the
following markets?
16. When the market's nominal annual required rate of return for a
particular bond is
a. A discount
b. A premium
c. Par value
constant.

19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this
year. Its
a. Rs.40
b. Rs.35
c. Rs.30
d. Rs.25
20. Which of the following stock would provide a regular income to the
investor?
a. Growth stock
b. Income stock
c. Aggressive stock
d. Defensive stock
MGT201 Financial Management
When the intrinsic value of an asset is less than its ______, the asset is
perceived as “undervalued”.
►Book Value
►Market Value
►Liquidation Value
If the intrinsic value of an asset is less than its market value, the asset
among investors is perceived as “undervalued”.
When current liabilities rise faster than current assets, the current ratio
will _______.
►Fall
►Rise
►Remain same
Yield to Maturity (YTM) of a bond = Interest yield + _________
►Annual coupon interest
►Market price
►Capital gain
_________ are also known as Hybrid equity.
►Common shares
►Preferred shares
►Bonds
►All of the given options
__________ is a measure of risk.
►Standard Deviation
►Mean
►Mode
Risk is measured in terms of the standard deviation or variance.
An annuity whose payments are made at the end of each period is

called _________.
►Ordinary Annuity
►Annuity Due
►Perpetuity

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.3,40
PV = FV/(1 + I)^n
=5000/(1+10/100)^5
=3104.606615
You are considering buying common stock in Grow On, Inc. The firm
yesterday paid a dividend of Rs. 7.80. You have projected that
dividends will grow at a rate of 9.0% per year indefinitely. If you want
an annual return of 24.0%, what is the most you should pay for the
stock now?
►Rs.52.00
►Rs.56.68
►Rs.32.50
►Rs.35.43
PV = Po* = DIV1 / (rCE -g)
= 7.80(1+.09)/(.24-.09)= 56.68
The current yield on a bond is equal to ______.




Market risk premium
The default premium is paid by companies with lower grade bonds

or by individuals with poor credit. As an illustration, companies with
poor financials will tend to compensate investors for the additional
risk by issuing bonds with high yields. Individuals with poor credit must
pay higher interest rates in order to borrow money from the bank.

flows ___.
Goes down
Goes up
Stays the same


Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
The DuPont Approach breaks down the earning power on

shareholders' book value (ROE) as follows: ROE = ________.




Which of the following is the main objective of ‘Financial

Accounting’?
Profit maximization
To collect accurate, systematic, and timely financial data
Which of the following is/are the component(s) of working capital

management?
Current assets
Fixed assets

Asset
Liability
Reserves
Revenue
Temporary Account does not appear on the balance sheet; also

called Nominal Account. Revenue and expense accounts, along
with income distribution accounts (such as dividend) are temporary
accounts.
In which of the following approach you need to bring all the projects
to the same length in time? Select correct option:
MIRR approach


_____ is paid by companies with lower grade bonds like CC or C

ratings.

Market risk premium



Unlimited liability
Single tax filing
Raising capital


The lower the total debt-to-equity ratio, the lower the financial risk for
a firm
An increase in net profit margin with no change in sales or assets
means a weaker ROI
The higher the tax rate for a firm, the lower the interest coverage
ratio
Which of the following refers to the cost of taking up one option

while sacrificing the other?
Opportunity cost
Operating cost
Sunk cost
Floatation cost

the yields to maturity on the two bonds change from 12% to
10%, __________.
Both bonds will increase in value, but bond A will increase more than
bond B
Both bonds will increase in value, but bond B will increase more than
bond A
Both bonds will decrease in value, but bond A will decrease more
than bond B
Both bonds will decrease in value, but bond B will decrease more
than bond A
Discount rate
Profitability index
Which of the following refers to the risk associated with interest rate
uncertainty?

Market risk premium

Salvage value
Book value
Intrinsic value
Fair value

Current liabilities
Current assets
Fixed assets
Which of the following is the percentage of interest charged at each

compounding time?


following?

Cost of the capital
Return on asset
Which of the following can not be the drawback of using payback

period technique of capital budgeting?



Below the coupon rate when the bond sells at a discount, and
equal to the coupon rate when the bond sells at a premium
The discount rate that will set the present value of the payments
equal to the bond price
Based on the assumption that any payments received are
reinvested at the coupon rate


Financial Management
What is the present value of Rs.1,000 to be paid at the end of 5 years

if the correct risk adjusted interest rate is 8%?
Rs.714
Rs.1,462
Rs.322.69
Rs.401.98

dividend is constant will________.

Remain unchanged

Depreciation
Dividends
Interest
Taxes
The logic behind _______ is that instead of looking at net cash flows
time.
IRR
MIRR
PV
NPV
All of the following are the financial statements used for the purpose
of reporting and analysis EXCEPT:

Balance Sheet
Income Statement
Cash budget


The book value of the firm's assets less the book value of its
liabilities

Cash flows
Coupon receipts

The number and types of products or services provided by the

firm





Net present value
Which of the following is the general assumption of Percent of Sales

Forecasting?

Which type of responsibilities are primarily assigned to Controller and

Treasurer respectively?



Perpetuity:
“It is defined as an annuity with an infinite life making continual

payments.”




A rupee in one’s hand at present is worth less than the rupee

that one is going to receive tomorrow
A rupee in one’s hand at present is worth more than the rupee
that one is going to receive tomorrow
A rupee in one’s hand at present is worth same as the rupee that


What are the Indirect securities?

The securities whose value depends on the cash flows

generated by the underlying assets
underlying assets
Indirect Securities: Indirect securities include derivatives, Futures and

Options. The securities do not generate any cash flow; however, its
value depends on the value of the underlying asset.


A technique that tells us the number of years required to recover our

Pay back period

Net present value
Profitability index
By borrowing more
Current liabilities
Current assets
Fixed assets

situation?
Par value
Market value
Intrinsic value
Face value
According to timing difference problem a good project might
suffer from ___ IRR even though its NPV is ______.
Higher; lower
Lower; Lower
Lower; higher
Higher; higher
Which of the following statements is TRUE regarding Permanent

Accounts?
Which group of ratios shows the extent to which the firm is

financed with debt? Select correct option:
Liquidity ratios
Debt ratios
Coverage ratios
Which of the following is NOT the type of Hybrid organizations.

S-Type Corporation
Sole Proprietorship
When bonds are issued, under which of the following category

the value of the bond appears. Select correct option:
Equity
Fixed assets
Short term loan
Long term loan

suddenly decrease, the present value of that future amount to
you would ________. Select correct option:
Fall
Rise
Remain unchanged
present timeSelect correct option:
Net present value

Discounting
Opportunity cost

evaluating and selecting an investment project. These methods
take into account: Select correct option:

Effective interest rate is different from nominal rate of interest

because. Select correct option:

Periodic interest rate ignores the effect of inflation
What are the Indirect securities? Select correct option:
The securities whose value depends on the cash flows generated

by the underlying assets
underlying assets
A 5-year annuity due has periodic cash flows of Rs.100 each year.
If the interest rate is 8 percent, the future value of this annuity is
closest to which of the following equations? Select correct option:


dividend is constant will__________Select correct option:

Remain unchanged

following. Select correct option:

Cost of the capital
Return on asset
When a bond will sell at a discount. Select correct option:
The coupon rate is less than the current yield and the current yield
is greater than the yield to maturity
is less than yield to maturity
Which of the following allows to graphically depicting the timing

of the cash flows as well as their nature as either inflows or
outflows. Select correct option:
Cash flow diagram

Cash budget
Cash flow statement
Which of the following is NOT the step of Percentage of sales to

be used in Financial Forecasting. Select correct option:

Estimate Levels of Investment Needs required to Meet Estimated
Sales

Percentage of sales:
Step 1: Estimate year-by-year Sales Revenue and Expenses
Step 2: Estimate Levels of Investment Needs (in Assets) required

meeting estimated sales (using
Financial Ratios). That how the Assets of the company changes

with the change in
Step 3: Estimate the Financing Needs (Liabilities)


When coupon bonds are issued, they are typically sold at which
of the following value?
Above par value

Below par
Where there is single period capital rationing, what is the most

sensible way of making investment decisions?

Which of the following is not the present value of the bond?
Intrinsic value
Market price
Fair price
Theoretical price
Which is the present value of Rs.1,000 to be paid at the end of 5

Rs.714
Rs.1,462
Rs.322.69
Rs.401.98
PV=1000*(1.08)^5

proposals that will provide the greatest increase in the value of
the firm within the budget ceiling constraint?
Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Which of the following is a capital budgeting technique that is

NOT considered as discounted cash flow method?
Payback period
Net present value
Profitability index


Which of the following is the risk of investing funds in another

country?

Market risk premium

Convertible Bonds
Common shares
Preferred shares
Which of the following needs to be excluded while we calculate

the incremental cash flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Sunk costs need to be excluded while calculating the incremental

cash flows.


Interest rate risk

It is an annuity
With continuous compounding at 8 percent for 20 years, what is

the approximate future value of a Rs. 20,000 initial investment?
Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
F V = PV x e i x n
=20000*(2.718)^1.6

Easy to set up
Double-taxation
Unlimited liability


Interest rate risk



The return in excess to risk free rate that investors require for
bearing the market risk is known as:

Market risk premium
When the bond approaches its maturity, the market value of the
Intrinsic value
Book value
Par value
Historic cost
Study the time line and accompanying 5-period cash-flow pattern

below. 0 1 2 3 4 5 6 Time line |--------|--------|--------|--------|--------|---
-----| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash flows ¦ ¦ A B The present
value of the 5-period annuity shown above as of Point A is the

present value of a 5-period ____________ , whereas the future
value of the same annuity as of Point B is the future value of a 5-
period ____________ .


following?





Because, companies do not always have access to all of the
funds they could make use of
When the zero coupon bond approaches to its maturity, the

market value of the bond approaches to which of the following?
Intrinsic value
Book value
Par value
Historic cost


Market risk premium

Gross Revenue – Admin & Operating Expenses = Operating

Revenue
Discount rate
Profitability index

is greater than the yield to maturity
is less than yield to maturity

Long-term debt
Preferred stock
Common stock

Asset
Liability
Reserves
Revenue


underlying assets
The securities that do not directly generate any returns for its
investors
Hand outs, page 121
Which of the following term may be defined as incidental cash

flows that arise because of the effect of new project on the
running business?
Sunk cost
Opportunity cost
Externalities
Contingencies
Externalities in financial terms may be defined as incidental cash

flows that arise because of the effect of new project on the
existing or running business.
Which of the following allows to graphically depicting the timing

of the cash flows as well as their nature as either inflows or
outflows?
Cash flow diagram

Cash budget
Cash flow statement

flows ___.
Goes down
Goes up
Stays the same

Current liabilities
Current assets
Fixed assets
Spontaneous Financing is Trade credit, and other payables and

accruals, that arise spontaneously in the firm’s day-to-day
operations.

bond?
Both represent how much each security’s price will increase in a

year
Who or what is a person or institution designated by a bond issuer

as the official representative of the bondholders?
Indenture
Debenture
Bond
Bond trustee
The objective of financial management is to

maximize _______ wealth.
Stakeholders
Shareholders
Bondholders
Directors
What are the Indirect securities?


underlying assets

intermediary?

Which of the following refers to the risk associated with interest

rate uncertainty?

Market risk premium

______ is equal to (common shareholders' equity/common shares

outstanding).
None of the above
Which of the following can not be the drawback of using

payback period technique of capital budgeting?

Which if the following is (are) true?
I. The dividend growth model holds if, at some point in time, the
dividend growth rate exceeds the stock’s required return. II. A
decrease in the dividend growth rate will increase a stock’s
market value, all else the same. III. An increase in the required
return on a stock will decrease its market value, all else the same.
I, II, and III

I only
III only
II and III only
Which group of ratios shows the extent to which the firm is

financed with debt?
Liquidity ratios
Debt ratios
Coverage ratios
What is the present value of Rs.8,000 to be paid at the end of

three years if interest rate is 11%?
Rs. 5,850
Rs.4,872
Rs.6,725
Rs.1,842
Which type of responsibilities are primarily assigned to Controller

and Treasurer respectively? Select correct option:



The nominal interest rate is the periodic interest rate times the
number of periods per year.

Less than
More than
Equal to
present time?
Net present value

Discounting
Opportunity cost
Which of the following market in finance is referred to the market

for short-term government and corporate debt securities?
Money market
Capital market
Primary market
Secondary market






When bonds are issued, under which of the following category

the value of the bond appears?
Equity
Fixed assets
Short term loan
Long term loan

By borrowing more
A 5-year ordinary annuity has a present value of Rs.1,000. If the

interest rate is 8 percent, the amount of each annuity payment is
closest to which of the following?
Rs. 250.44
Rs. 231.91
Rs.181.62
Rs.184.08
The logic behind _______ is that instead of looking at net cash

flows you look at cash inflows and outflows separately for each
point in time.
IRR
MIRR
PV
NPV
Handouts Lecture 11
Which of the following refers to a highly competitive market where

good business ideas are taken up immediately?
Capital market
Efficient market
Money market
Real asset market
Handouts Lecture 08
For Company A, plow back ratio is 30%. What will be its Pay-out
ratio?
3.33%
30%
31%
70%

the corporation issuing bonds and the bondholders that establish
the terms of the bond issue?
Indenture
Debenture
Bond
Bond trustee


Which of the following needs to be excluded while we calculate

the incremental cash flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item

Which of the following would be considered a cash-flow item

from an "investing" activity?

An investment proposal should be judged in whether or not it

provides:

A 5-year annuity due has periodic cash flows of Rs.100 each year.
If the interest rate is 8 percent, the future value of this annuity is

The RBS pays 5.60%, compounded daily (based on 360 days), on a

9-month certificate of deposit, if you deposit Rs.20, 000 you would
expect to earn around ________ in interest.
Rs.840
Rs.858
Rs.1,032
Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000

(.042891) =$857.82.
Which of the following is similar between Return on investment

and Payback period techniques of Capital budgeting?

Which of the following would be considered a cash-flow item

from an "operating" activity?

Liquidity ratios
Debt ratios
Coverage ratios
A class of financial metrics that is used to determine a company's

ability to pay off its short-terms debts obligations. Generally, the
higher the value of the ratio, the larger the margin of safety that the
company possesses to cover short-term debts.
Liquidity Ratios
Common liquidity ratios include the current ratio, the quick ratio and
the operating cash flow ratio. Different analysts consider different
assets to be relevant in calculating liquidity. Some analysts will
calculate only the sum of cash and equivalents divided by current
liabilities because they feel that they are the most liquid assets, and
would be the most likely to be used to cover short-term debts in an
emergency.
A company's ability to turn short-term assets into cash to cover debts

is of the utmost importance when creditors are seeking payment.
Bankruptcy analysts and mortgage originators frequently use the
liquidity ratios to determine whether a company will be able to
continue as a going concern

Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure
Reference

Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
F V = PV x e
ixn
FV= 20,000*2.718(.08*20)

Pay back period
Net present value
Profitability index

Long-term debt
Preferred stock
Common stock


Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
MGT201 Five Online Quizzes (Almost 70 Mcqs) 2010
Covering lecture No 1-18
Solved by dua ,virtual ,saad ,famous,gorgeous,sahar
Answers are not 100% sure
When the bond approaches its maturity, the market value of the bond approaches
to which of the following?
Intrinsic value
Book value
Par value (Correct)
Historic cost
Default risk premium (Correct)
Market risk premium
When the zero coupon bond approaches to its maturity, the market value of the
Intrinsic value
Book value (Correct)
Par value
Historic cost
Shares are representing ownership whereas bonds are not (Correct)
mc090401219: Question # 5 of 15 ( Start time: 09:18:04 PM ) Total Marks: 1
Effective interest rate is different from nominal rate of interest because:
Nominal interest rate includes frequency of compounding (Correct)
Which of the following refers to a highly competitive market where good business
ideas are taken up immediately?
Capital market
Efficient market (Correct)
Money market
Real asset market
Pay back period (Correct)
Net present value
Profitability index
Which of the following can not be the drawback of using payback period technique
of capital budgeting?
It does not account for time value of money (Correct)
Which of the following allows to graphically depicting the timing of the cash flows
as well as their nature as either inflows or outflows?
Cash flow diagram (Correct)
Cash budget
Cash flow statement
Investing, operating, and financing (Correct)
Which of the following needs to be excluded while we calculate the incremental

cash flows?
Depreciation
Sunk cost (Correct)
Opportunity cost
Non-cash item

Payback period (Correct)
Net present value
Profitability index
Cash flows
Coupon receipts (Correct)
Cash flows
Coupon receipts (Correct)
--------------------------------------------------------------------------
Pay back period (Correct)
Net present value
Profitability index
Microsoft Corporation, a software firm (Correct)
to maturity (Correct)
When bonds are issued, under which of the following category the value of the
bond appears?
Equity
Fixed assets
Short term loan
Long term loan (Correct)
Which of the following can not be the drawback of using payback period technique
of capital budgeting?
It is a tricky and complicated method (Correct)
A return more than required by investor (Correct)

organization?
Double taxation of dividends (Correct)
Convertible Bonds
Common shares (Correct)
Preferred shares
Current assets (Correct)
Fixed assets
(Correct)
An increase in net profit margin with no change in sales or assets means a weaker
ROI
The number and types of products or services provided by the firm
The dollars profits earned by the firm(Correct)

Rs.52,000
Rs.93,219 (Correct)
Rs.99,061
Rs.915,240

Indenture
Debenture
Bond
Bond trustee (Correct)
Its cash flows are identical (Correct)
Net present value
Discounting (Correct)
Opportunity cost
----------------------------------------------------------------------------------------------------
------
Given no change in required returns, the price of a stock whose dividend is

constant will________.
Remain unchanged (Correct)
Which of the following refers to a highly competitive market where good business
ideas are taken up immediately?
Capital market
Efficient market (Correct)
Money market
Real asset market
Virtual: 2
zahid.famous: 2
saadkhan545: Question # 3 of 15 ( Start time: 09:50:40 PM ) Total Marks: 1
Liabilities = Assets + Shareholders’ Equity (Correct)
Other Expenses + Other Revenue = EBIT (Correct)

Rs.52,000
Rs.93,219 (Correct)
Rs.99,061
Rs.915,240
5:53 PM
To increase a given future value, the discount rate should be adjusted ________.
Upward
Downward (Correct)
Par value
Market value (Correct)
Intrinsic value
Face value
A rupee in one’s hand at present is worth less than the rupee that one is going to
receive tomorrow (Correct)
A rupee in one’s hand at present is worth more than the rupee that one is going to
receive tomorrow
A rupee in one’s hand at present is worth same as the rupee that one is going to
receive tomorrow
Cash flows occur for a specific time period (Correct)
Which of the following includes the planning, directing, monitoring, organizing,

and controlling of the monetary resources of an organization?
Financial management (Correct)
Financial budgeting
5:59 PM
Which of the following term may be defined as incidental cash flows that arise
because of the effect of new project on the running business?
Sunk cost
Opportunity cost
Externalities (Correct)
Contingencies
What is the present value of Rs. 3,500,000 to be paid at the end of 50 years if the
correct risk adjusted interest rate is 18%?
Rs.105,000
Rs.1,500,000
Rs.3975,000
Rs. 350,000
saadkhan545: Question # 14 of 15 ( Start time: 10:02:19 PM ) Total Marks: 1
Investment in long-term liabilities (Correct)
Less than
More than (Correct)
Equal to
----------------------------------------------------------------------------------------------------
------
Investing, operating, and financing (Correct)
to maturity (Correct)
If Net Present Value technique is used, what is the minimum acceptance criterion
for a project?
NPV<0
NPV=0
NPV>0
NPV<=0 (Correct)
Investment in fixed assets (Correct)
---------------------------------------------------------------------------------------
What are the three classes of factors that influence perception?
Factors in the setting, factors in the environment and factors in the motives
Factors in the perceiver, factors in the target and factors in the situation
Factors in the character, factors in knowledge and factors in experience
Factors in the personality, factors in the character and factors in the values
Characteristics such as age, gender and marital status are known as

_______________
Psychographic characteristics
Biographical characteristics
Geographical characteristics
Behavioral characteristics
What is the term used for a general impression about an individual based on a
single characteristic such as intelligence, sociability, or appearance?
The contrast effect
Personal bias
The halo effect (Correct)
Projection
Ability to understand what is read or heard and the relationship of words to each
other is called ___________
Verbal comprehension (Correct)
Non verbal comprehension
Perceptual speed
Memory
Which of the following is true of people with a Type A personality?
They are generally content with their place in the world
They generally feel little need to discuss their achievements
They are easy going and relaxed that’s why take no tension of work
They have an intense desire to achieve and are extremely competitive (Correct)
A person or group with a direct interest, involvement, or investment in

organization is called ____________.
Shareholder (Correct)
Stakeholder
Stockholder
Patron
If a person responds the same way over time, attribution theory states that the
behavior shows:
Distinctiveness
Consensus
Consistency (Correct)
Continuity
_________ focuses on the study of people in relation to their social environment.
Psychology
Sociology (Correct)
Corporate strategy
Political science
Which of the following term is used to describe broad range of feelings that people
experience?
Mood (Correct)
Affect
Emotion
Emotional Intelligence
Hanif is dissatisfied with his job but believes that his supervisor is a good man who
will do the right thing. Hanif has decided that if he just waits, conditions will
improve. Henry’s approach to this problem is termed as:
Exit
Voice
Loyalty
Neglect (Correct)
Job satisfaction is best described as __________.
A result
A value
An attitude (Correct)
A discipline
Which of the following theory is proposed by Clayton Alderfer?
Theory X and Theory Y
Hierarchy of Needs
ERG Theory (Correct)
Theory Z
Robert Katz identified three essential skills that managers need to have in order to
reach their goals. What are these skills?
Technical, decisional and interpersonal (Correct)
Technical, human, and conceptual
Interpersonal, informational and decisional
Conceptual, communication and networking
One of the shortcuts used to judge others involves evaluating a person based on
how he/she compares to other individuals on the same characteristic. What is this
shortcut called?
Selective perception
The contrast effect
The halo effect (Correct)
Stereotyping
Which of the following factors make it imperative that organizations be fast and
flexible?
Temporariness
Corporate excess
Advances in corporate strategy
Globalization
When Job satisfaction is increased, absenteeism tends to:
Increase
Decrease
Have no effect
None of the above
Difficulty in expressing emotions by an individual and understanding other's

emotions is termed as:
Anemia
Thalassemia
Alexithymia
Myopia
----------------------------------------------------------------------------------------------------
--
What is the present value of Rs.8,000 to be paid at the end of three years if interest
rate is 11%?
Rs.6,015
Rs.4,872
Rs.6,725
Rs.1,842
6:59 PM
The logic behind _______ is that instead of looking at net cash flows you look at
cash inflows and outflows separately for each point in time.
IRR
MIRR (Correct)
PV
NPV
Liquidation value per share (Correct)
None of the above
Which of the following allows to graphically depicting the timing of the cash flows
as well as their nature as either inflows or outflows?
Cash flow diagram
Cash budget
Cash flow statement
None of the given options (Correct)
It is an annuity
It has no definite end (Correct)
Long-term debt
Preferred stock
Common stock
None of the given options (Correct)
Profitability index (Correct)
Net present value
Pay back period
mehak: Question # 12 of 15 ( Start time: 11:08:07 PM ) Total Marks: 1
Sovereign Risk Premium (Correct)
Market risk premium
What is the present value of Rs.1,000 to be paid at the end of 5 years if the correct
Rs.714
Rs.1,462
Rs.322.69
Rs.401.98
Current liabilities
Current assets (Correct)
Fixed assets
Effective interest rate is different from nominal rate of interest because:
Nominal interest rate includes frequency of compounding (Correct)
All of the given option

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MGT201 Solved MCQs + Solved Past Papers+ MCQs Bank http://vustudents.ning.

Question # 2 of 15 ( Start time: 11:44:56 PM ) Total Marks: 1

Question # 15 of 15 ( Start time: 10:52:13 PM ) Total Marks: 1

Select correct option:

If sales rise by 5%, EBIT will rise by 5%

If sales rise by 1%, EBIT will rise by 1%

If sales rise by 5%, EBIT will fall by 25%

If sales rise by 1%, EBIT will rise by 5%

Question # 5 of 15 ( Start time: 10:05:42 PM ) Total Marks: 1

Select correct option:

Which of the following costs would be considered a fixed cost?

Select correct option:

Expected Portfolio Return = ___________.

Select correct option:

Why markets and market returns fluctuate?

Select correct option:

Because of political factors

Because of social factors

Because of socio-political factors

Because of macro systematic factors

Select correct option:

Select correct option: http://vustudents.ning.com

Which of the following would be considered a cash-flow item from an "operating"

Select correct option:

Cash outflow to the government for taxes

Cash outflow to shareholders as dividends

Cash outflow to purchase bonds issued by another company

Select correct option:

(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100

(Rs.100)(PVIFA at 8% for 4 periods)(1.08)

(Rs.100)(PVIFA at 8% for 6 periods) - Rs.100

Can not be found from the given information

Select correct option:

All of the given options

Question # 1 of 10 ( Start time: 10:15:03 AM ) Total Marks: 1

Question # 2 of 10 ( Start time: 10:15:43 AM ) Total Marks: 1

Question # 3 of 10 ( Start time: 10:16:18 AM ) Total Marks: 1

Wisconsin S&L, a savings and loan association

Question # 4 of 10 ( Start time: 10:17:02 AM ) Total Marks: 1

Question # 5 of 10 ( Start time: 10:18:02 AM ) Total Marks: 1

Select correct option:

Question # 6 of 10 ( Start time: 10:18:51 AM ) Total Marks: 1

Operating, investing, and financing

Question # 8 of 10 ( Start time: 10:20:54 AM ) Total Marks: 1

Covariance of stock with market * variance of the market

Question # 9 of 10 ( Start time: 10:21:39 AM ) Total Marks: 1

What is the easiest method to diversify away firm-specific risks?

To buy stocks with a beta of 1.0

Because of political factors

Because of social factors

Because of socio-political factors

Because of macro systematic factors

Cash outflow to the government for taxes

Cash outflow to shareholders as dividends

Cash outflow to purchase bonds issued by another company

(Rs.100)(PVIFA at 8% for 4 periods)(1.08)

(Rs.100)(PVIFA at 8% for 6 periods) - Rs.100

Can not be found from the given information

All of the given options