MGT201 Midterm Solved 8 Papers Quisses by Ali Khann

MGT201 (Financial Management)
8 Midterm Papers Solved and Some Quiz

Collected, Prepared and Solved by
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Paper # 1
Question No: 1 ( Marks: 1 ) - Please choose one
Why companies invest in projects with negative NPV?
Because there is hidden value in each project page 52

Because they have chance of rapid growth
Because they have invested a lot
All of the given options
Mutually exclusive means that you can invest in _________ project(s) and having chosen
______ you cannot choose another.
One; one page 47

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 probability distribution
The expected return Ref: http://wps.pearsoned.co.uk
The standard deviation
Coefficient of variation

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

The standard deviation Ref: http://wps.pearsoned.co.uk
Coefficient of variation

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 firm can increase market price and P/E by retaining more earnings
he 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 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

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
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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 into the discount
rate?
Real risk-free rate

Risk premium for stocks
Return on assets
Expected inflation 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
REF:
G = ROE*b = 0.065; b = 0.50
K = 0.12
(1 – b)/K – G = 0.50/0.055 = 9.09
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

Low
Tech Company has an expected ROE of 10%. The dividend growth rate will be ________ if the
firm follows a policy of paying 40% of earnings in the form of dividends.
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6.0%
4.8%
7.2%
3.0%

The
value of direct claim security is derived from which of the following?
Fundamental analysis
Underlying real asset page 63
Supply and demand of securities in the market
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 page 74
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 Ref: http://highered.mcgraw-
hill.com
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
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maturity
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% coupon bond is trading for Rs. 975 it has a current yield of _________ 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.
Interest rate risk

Market rate
Coupon rate page 68
Inflation rate
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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 page 68
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
Which of the following affects the price of the bond?
Market interest rate

Required rate of return
Interest rate risk
REF: http://www.mfea.com/NewsCommentary/fundfocus/BondFunds/Fidelity2.asp
Bond is a type of Direct Claim Security whose value is NOT secured by __________.
Tangible assets
Intangible assets page 64
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
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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 page 64
Debenture
Bond
Bond trustee
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 technique would be used for a project that has non-normal cash flows?
Internal rate of return

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

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
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
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Rs.147.36
Rs.154.73
Rs.99.74
REF: $1,000 = (R)(FVIFA at 5%
for 8 periods)(1.05) = (R)(9.549taken from table)(1.05) = (R)(10.026) =
($1,000)/(10.026) = 99.74

As
interest rates go up, the present value of a stream of fixed cash flows _____.
Goes down
Goes up
Stays the same
Can not be found
REF: http://www.financeprofessor.com/tests/timevalueofmoneytest1c.htm

An
annuity due is always worth _____ a comparable annuity.
Less than
More than
Equal to
Can not be found
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
REF:
1  (1  i )  n  1  0.5083 
PV = FV *    1,000*   100[7.024]  702.4
 i   0.07 
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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
Which group of ratios relates profits to sales and investment?

Liquidity ratios
Debt ratios
Coverage ratios
Profitability 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
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
Paper # 2
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
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Rs. 0.50
Rs. 6.50
REF:
Net income/ Number of common shared out standing
100,000/200,000 = 0.5
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
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
REF: http://en.wikipedia.org/wiki/Tax_rate
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
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Net sales or revenues; total assets

Total assets; net sales or revenues
Which group of ratios measures a firm's ability to meet short-term obligations?

Liquidity ratios
Debt ratios
Coverage ratios

Liquidity ratios
Debt ratios
Coverage ratios
Interest paid on the original principal borrowed is often referred to as __________.
Compound interest
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
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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
PV = FV/(1 + r)n
= 8,000/(1 + 0.11)3
= 5850
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate is 8%.
Rs.680.58
Rs.1,462.23
Rs.322.69
Rs.401.98
PV = FV/(1 + r)n
= 1,000/(1 + 0.08)5
= 680.58
As
interest rates go up, the present value of a stream of fixed cash flows _____.
Goes down
Goes up
Stays the same
Can not be found

The
benefit we expect from a project is expressed in terms of:
Cash in flows
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Cash out flows

Cash flows
None of the given options

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
► Insufficient information

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
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Net present value
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
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?
Profitability index (PI)
Net present value (NPV)
Internal rate of return (IRR)
Payback period (PBP)
Profitability index in descending order
payback period in ascending order
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?
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Call in
Call option
Call provision
Put option
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
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

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
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
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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
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
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

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
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7.69
Ref:
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 = .0.198
by pluging the values in p/e formula
(1 – 0.90) / 0.20 – 0.198 = 50

In
the dividend discount model, which of the following is (are) NOT incorporated into the discount
rate?
Real risk-free rate

Return on assets
Expected inflation rate

A
An anticipated earnings growth rate which is less than that of the average firm
A dividend yield which is less than that of the average firm
Less predictable earnings growth than that of the average firm
Greater cyclicality of earnings growth than that of the average firm
Which of the following is 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

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When Return is being estimated in % terms, the units of Standard Deviation will be mention in
__________.
% page 87
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
Which of the following is NOT a major cause of unsystematic risk.
New competitors
New product management
Worldwide inflation
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
Incomplete information
Which of the following is a drawback of percentage of sales method?

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It is a rough approximation
There is change in fixed asset during the forecasted period
Lumpy assets are not taken into account
All of the given options page 27
Which of the following need to be excluded while we calculate the incremental cash flows?
Depreciation
Sunk cost Page 51
Opportunity cost
Non-cash item
Because there is hidden value in each project page 52

Because they have chance of rapid growth
PAPER # 3
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

Liquidity ratios
Debt ratios
Coverage ratios
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To
increase a given future value, the discount rate should be adjusted __________.
Upward
Downward
First upward and then downward
REF: wps.pearsoned.co.uk/ema_uk_he_wachowicz.../index.html
Cash budgets are prepared from past:

Income tax and depreciation data
Balance sheets
Income statements
REF: http://us.toluna.com/polls/1368289/Cash-budgets-prepared-from-past.htm

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
REF: 1,000 = (R)(FVIFA at 8% for 5 periods) = (R)(5.867)
R = 1000/5.867 = 170.44

Net present value
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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 page
59
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
REF: wps.pearsoned.co.uk/ema_uk_he_wachowicz.../index.html
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
An anticipated earnings growth rate which is less than that of the average firm
A dividend yield which is less than that of the average firm
Less predictable earnings growth than that of the average firm
Greater cyclicality of earnings growth than that of the average firm

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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
Which of the following factors might affect stock returns?
The business cycle

Interest rate fluctuations
Inflation rates
All of the above

____
____ are also known as Spontaneous Financing.
Select correct option:
Current liabilities
Current assets
Fixed assets
Long-term liabilities Discretionary Financing
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
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No relationship
Direct relationship
Insufficient information
REF: http://en.wikipedia.org/wiki/Direct_relationship

By
summing up the discounted cash flows we can calculate which of the following?
Liquidation value
Intrinsic value page 9
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 page 9
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

Time value of money page 19
Net present value
Portfolio diversification
Which of the following is a type of annuity in which no time span is involved?

Ordinary annuity
Annuity due
Perpetuity page 35
REF: Perpetuity:
“It is defined as an annuity with an infinite life making continual payments.”

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Which of the following is the formula to calculate the future value of perpetuity?
Constant cash flows × interest rate
Constant cash flows / interest rate page 35
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
REF: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/invfables/eva.htm
This connection between economic value added and NPV allows us to link the value of a
firm to the economic value added by that firm.

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
REF:
The amount of depreciation could also increase if the new asset has a high price, the amount of
depreciation charged to the asset would also be high. Since depreciation is a non-cash expense, it
has to be added back to the net profit to get the cash flows. If the new asset has replaced an
old one, the difference between the depreciation of the two would be added to the 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
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The
responsibility of research & development projects lie with which of the following authority?
Chief executive officer
Divisional heads page 59
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 page 80
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 page 17
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%
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Paper # 4
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

As interest rates go up, the present value of a stream of fixed cash flows _____.
Goes down
Goes up
Stays the same
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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
REF:
1,000 = (R)(PVIFA at 8% for 5 years)
1,000 = (R) 3.993
R = 1000/3.993 = 250.44

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

Net present value

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 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
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The value of dividend is derived from which of the following?
Cash flow streams
Capital gain /loss

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

Diversification can reduce risk by spreading your money across many different
______________.
Investments
Markets
Industries

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?
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Equity
Fixed assets
Short term loan
Long term loan

_________ means expanding the number of investments which cover different kinds of stocks.
Diversification page 94
Standard deviation
Variance
Covariance

11% ?
Rs.5,850
Rs.4,872
Rs.6,725
Rs.1,842
REF: 8000/(1.11)3 = 5,850

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
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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 page 34

_________ 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 page 72

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>?
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Po / Po × P1
P 1 + Po / P o
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
REF: tryfinance.com/2/index.html

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
Paper # 5
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
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Liquidity ratios
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 __________.
Choice of depreciation method for tax purposes

Economic length of the project
Projected sales (revenues) for the project
Sunk costs of the project
An investment proposal should be judged in whether or not it provides:

Which of the following technique would be used for a project that has non-normal cash
flows?

Net present value
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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?

Interest rate risk
If all things equal, when diversification is most effective?

Securities' returns are positively correlated
Securities' returns are uncorrelated
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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

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
Opportunity cost
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Externalities
Contingencies
REF:
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.
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% compounded annually?
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
REF:
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The objective of financial Management, specifically, is to maximize the

shareholders wealth in the present terms.
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)
REF:
G (Desired Growth Rate) = return on equity x (1- pay out ratio)

Ordinary annuity
Annuity due
Perpetuity
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
REF:
3 Types of Problems in Capital Rationing:
1. Size Difference of cash flows
2. Timing Difference of cash flows
3. Different (or Unequal) Lives of different projects
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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
REF:
This kind of Equity is rare. Preferred Shareholders get a preference (or priority) over
the Common Shareholders in recovering their money if the company goes bankrupt.
Although Preferred Shareholders are owners, they may not get voting rights. It is also known
as Hybrid Equity. As it is a Mix of Bond and Share.
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
P 1 + Po / P o
P1 – Po / Po
Po – P1 / Po
Finance consists of which of the following area(s)?

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Money and capital market

Investment
Financial management
REF:
1) Money & Capital markets, which deals with securities markets & financial institutions.
2) Investments, which focuses on the decisions of both individual and institutional investors
as they choose assets for their investment portfolios.
3) Financial Management, or business finance which involves the actual management of
firms.
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
Paper # 6
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
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Liquidity ratios
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
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
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
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Rs.109.39
Rs.147.36
Rs.154.73
Rs.99.74
REF: $1,000 = (R)(FVIFA at 5%

for 8 periods)(1.05) = (R)(9.549taken from table)(1.05) = (R)(10.026) =
($1,000)/(10.026) = 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 __________.
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
REF:
The relevant cash flows for the period would be the operating cash flows, in the form of cash
receipts from sales revenue and other income, as well as cash expenses or payments in the form
of operating, marketing and administrative costs.

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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
Below par
Above par value
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?
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Cash flow streams

Capital gain /loss
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
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
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
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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
Depreciation
Sunk cost
Opportunity cost
Non-cash item
REF:
Sunk costs need to be excluded while calculating the incremental cash flows. Sunk costs are
the costs that have already incurred in the past.
Under which concept it is said that “do not put all your eggs in one basket”?
Risk & return A safe rupee is worth more than a risky rupee.
Portfolio diversification do not put all your eggs in one basket
Insurance management Get insurance because you will break some eggs.
Time value of money A rupee today is worth more than a rupee tomorrow.
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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 = i eff = [1 + ( i nom / m )]m
Periodic interest rate = i per
Nominal interest rate = I nom
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?
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IMF
Moody’s
Standard & poor
PACRA
REF:
Bond Ratings & Risk:
Bonds are rated by various Rating Agencies:
Internationally: Moody’s, S&P.
In Pakistan: Pacra, VIS.
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 page 91
Irrelevant except to governmental authorities like the Federal Reserve
Paper # 7
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
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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?
Rs.750Rs.750,000
Rs.48Rs.480, 000
Rs.30Rs.300, 000
Rs.1, Rs.1, 500,000
REF:
(ROI)return on investment / (NPM)net profit margin = (TAT ) Total Assets Turnover
(.08) / (.05) = 1.6
(TAT) (TA) = Sales
(1.6) ($300,000) = $480,000

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
Net present value
Profitability index

A
capital budgeting technique that is NOT considered as discounted cash flow method is:
Payback period
Net present value
Profitability index
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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 page 55
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)
Bond is a type of Direct Claim Security whose value is NOT secured by __________.
Tangible assets
Intangible assets page 63
Fixed assets
Real assets

If a
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
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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
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
Depreciation
Sunk cost
Opportunity cost
Non-cash item
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

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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 model to calculate the intrinsic value of this preferred stock.
Rs. 0.39
Rs. 0.56
Rs. 31.82
Rs. 56.25
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
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 page 19
Risk & return
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Insurance management
Time value of money
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
Which of the following is the formula to calculate the future value of perpetuity?
Constant cash flows × interest rate
Constant cash flows / interest rate page 35
Constant cash flows + Constant cash flows × interest rate
Constant cash flows - Constant cash flows/ interest rate
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
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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 page 81

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
Paper # 8
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?
Rs.750,Rs.750,000
Rs.48Rs.480, 000
Rs.30Rs.300, 000
Rs.1, Rs.1, 500,000
REF:
(ROI)return on investment / (NPM)net profit margin = (TAT ) Total Assets Turnover
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(.08) / (.05) = 1.6

(TAT) (TA) = Sales
(1.6) ($300,000) = $480,000
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
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

An
8-year annuity due has a present value of Rs.1,000. If the interest rate is 5 percent, the amount of
Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72
REF: here the word is used "closest" so +R
$1,000 = (R)(PVIFA
at 5% for 7 periods) + R = (R)(5.786) + R = (R)(6.786)
R =($1,000)/(6.786) = 147.36
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
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Rs.180 million

All
of the following influence capital budgeting cash flows EXCEPT __________.


An

In
case of mutually exclusive projects, if two projects are of equal size and have the same life, then:
NPV and MIRR will create the conflict
NPV and MIRR will lead to the same decision
NPV will give the best solution
MIRR will give the best solution

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?
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Long-term debt
Preferred stock
Common stock
None of the given option

If a
7.00
6.53
8.53
7.18
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

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
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1.5%
2.0%
3.0%
4.0%
REF:
S.D is the measure of Risk

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 page 56
Equivalent annual approach
Rs.680.58
Rs.1, 462.23
Rs.322.69
Rs.401.98
PV = FV/(1 + r)n
= 1,000/(1 + 0.08)5
= 680.58
Rs.25,300
Rs.34,122
Rs.14,549
Rs.11,989
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TFC
is the abbreviation of which of the following?
Termination for Convenience
Test for Completion
Term finance certificate
Transport Format Combination

One
way to increase the shareholder’s wealth is to __________.
Increase the stock price
Improve goodwill
Increase amount of debt
Increase fixed assets
Which of the following is used to assess the financial position of a company?

Financial statements
Stock price in the market
Credit worthiness of the company
Capital structure of the company
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 project should be accepted?

Project A: Io Rs.2, 000, Return in Yr 1= 850, NPV= 3, 500, IRR = 50%
Project B: Io Rs.1, 500, Return in Yr 1= 1000, NPV= 450, IRR = 40%
Project C: Io Rs.200, Return in Yr 1= 150, NPV= 73, IRR = 55%
Project D: Io Rs.1, 000, Return in Yr 1= 750, NPV= 250, IRR = 55%
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Which of the following formula is used to calculate the perpetual investment of preferred stock
with fixed dividend?
Po = DIV1 / rPE
Po = DIV1 × rPE
Po × rPE = DIV1
Po – DIV1 = rPE
REF:
Perpetual Investment & Constant Div
PV = Present Price = Po= DIV1 / r.
Which of the following should be kept in mind while investing in direct claim securities?
Standalone & portfolio risk
Goodwill of the company
Political instability
Rate of return of similar shares
Portfolio risk can be defined as:

Overall risk of entire collection of investments
Risk of particular investment as compare to other investment
Risk of political instability within country
Risk of bankruptcy of company making investment
REF:
When we talk about risk in investing in direct claim securities then 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).
When you allocate capital, you choose investments that are more beneficial and less
Diversified
Risky
Costly
Value based
With the help of which of the following formula we can calculate coefficient of variation?
Range / variance
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Expected return / standard deviation

Variance / standard deviation
Standard deviation / expected return

In a
portfolio of three randomly selected stocks, which of the following statement is not correct?
Risk of the overall portfolio is less than the risk of each of the stocks if they were held in
isolation
The risk of the portfolio is greater than the risk of one or two of the stocks
The beta of the portfolio is lower than the lowest of the three betas
The beta of the portfolio is higher than the highest of the three betas
Some Quizzes
What is the Future Value of Rs. 10,000 invested under continuous compounding for 6 years,
assuming the interest rate of 5% per annum? (e= 2.718)
Rs. 11,498
Rs. 12,580
Rs. 13,498
Rs. 14,699
REF:
PV * (e1*n) = 10,000 * (2.7180.3) = 13,498……..
Which of the following is type a Temporary Account?

Asset
Liability
Reserves
Revenue
REF:
http://www.answers.com/topic/temporary-account
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
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Identify the option that best describes the simple rule of a journal entry.
Sum of Debits = Sum of Credits
Sum of Debits > Sum of Credits
Sum of Debits < Sum of Credits
Which of the following are the approaches used to make two projects with different life spans
comparable?
Modified internal rate of return and equivalent annual annuity
Common life and equivalent annual annuity
Common life and modified internal rate of return
The main objective of ‘Financial Accounting’is:

To maximize profit
To collect accurate & timely the financial data
To maximize shareholders' wealth
To increase sales
Which of the following is NOT a cash outflow for the firm?

Depreciation
Dividends
Interest
Taxes
Independent projects refer to:

One can invest in one of the projects and not in both
Cash flows of the two projects are not linked to each other
Cash flows of the two projects are linked to each other
Ref:
Independent: implies that the cash flows of the two investments are not linked to each other.
With continuous compounding at 8 percent for 20 years, what is the approximate future value of
a Rs. 20,000 initial investment?
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Rs.52,000
Rs.93,219
Rs.99,061
Rs.915,240
REF:
PV*(ei*n) = 20,000 * (2.7181.6)
What is the Future value of 3 payments of Rs. 1,000 when i=4%?

Rs. 1,121.60
Rs. 2,121.60
Rs. 3,121.60
Rs. 4,121.60
REF:
FV = PV*(FVIFA 3 years)
= 1,000 (3.1216) =3121
Which of the following is TRUE about IRR (Internal Rate of Return)?

It changes for each and every year over the life of the project
It remains same for each and every year over the life of the project
It increases over the life of the project
It decreases over the life of the project
Which of the following is the Double Entry Principle?

Assets + Liabilities = Shareholders’ Equity
Assets = Liabilities + Shareholders’ Equity
Liabilities = Assets + Shareholders’ Equity
In financial accounting, assets are recorded on the basis of ________ in the balance sheet.
Market value
Historical value
Fair value
Liquidation value
Which of the following equations is the correct one?

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 Net incremental after tax cash flows = net operating income + depreciation +Tax savings
from depreciation + net working capital + other cash flow
 Net incremental after tax cash flows = net operating income - depreciation +Tax savings
from depreciation + net working capital + other cash flow
 Net incremental after tax cash flows = net operating income + depreciation -Tax savings
from depreciation - net working capital + other cash flow
 Net incremental after tax cash flows = net operating income + depreciation +Tax savings
from depreciation + net working capital - other cash flow
REF: page 50
Net incremental after tax cash flows = net operating income + depreciation +
Tax savings from depreciation + net working capital + other cash flows
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
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
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
Analyze which of the following statements is true regarding characteristic(s) of Perpetuity.

Select the best possible answer in this regard.
It is an annuity
It has no definite end
It is a constant stream of identical cash flows
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______ are also known as Spontaneous Financing.

Current liabilities
Current assets
Fixed assets
Long-term liabilities Discretionary Financing
The main objective of Financial Accounting is:

To maximize profit
To collect accurate & timely the financial data
To maximize shareholders' wealth
To increase sales
Which of the following project you will select based on IRR criteria?
IRR= 10%
IRR= 12%
IRR= 14%
IRR= 16%
ABC Company has launched a new product which has negatively influenced the sales
performance of its existing related products. This phenomenon is known as:
Acquisition
Cannibalization
Re-engineering
Restructuring
REF:
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. For instance, if a company adds a new
product to its produce line, the launching of the new product can adversely affect the
sales revenue of the existing product line. This phenomenon of competition among the brands of
the same company is also known as cannibalization.
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You are required to identify amount of preferred dividend paid by ABC Company if net income
Rs. 1 million; Dividend paid to preferred stockholder 30% of Net Income and number of
outstanding common shareholder were 50,000.
Rs. 300,000
Rs. 700,000
Rs. 1,000,000
Rs. 400,000
REF:
Preferred Stock:
It is the stock with a predetermined or fixed dividend. In case, the board of directors
announces dividends, the preferred stockholders would have a priority claim on them, i.e.,
they would be paid dividends before any dividends are paid to the common stockholders.
However, if the board opts to retain earnings, the preferred stock would not yield a dividend, and
thus cash flows from a preferred dividend are not as certain as income of the bondholders.
So, 1,000,000 * 0.30 = 300,000
Now, 1,000,000 – 300,000 = 700,000

Which of the following refers to the risk associated with interest rate uncertainty?
Default risk premium

Sovereign Risk Premium
Market risk premium
Maturity risk premium
Which of the following refers to the cost of taking up one option while sacrificing the other?
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Opportunity cost
Operating cost
Sunk cost
Floatation cost
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
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
Identify the component(s) of working capital management.

Fixed assets
Current assets and current liabilities
Fixed assets and long-term liabilities
Shareholder's equity
The major difference between floating bond and zero bond is:
Zero bond is sold on discount where as floating bond is not sold on discount
Both can be sold on discount
Price of floating bond is always greater then the price of zero rate bond
None of these
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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
REF:
Termination of the project refers to the period when the project life ends. At this time, we need to
take into account the salvage value of the project assets, the price at which the assets can be sold
out.
Which of the following affects price of the bond?


Interest rate risk
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 is NOT the type of Hybrid organizations?

S-Type Corporation
Limited Liability Partnership
Sole Proprietorship
Professional Corporation
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For Company A, plow back ratio is 30%. What will be its Pay-out ratio?
3.33%
30%
31%
70%
Which of the following is NOT an example of hybrid equity

Convertible Bonds
Convertible Debenture
Common shares
Preferred shares
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?
(Rs.100)(FVIFA at 8% for 5 periods)

(Rs.100)(FVIFA at 8% for 4 periods)(1.08)
(Rs.100) (FVIFA at 8% for 5 periods)(1.08)
(Rs.100)(FVIFA at 8% for 4 periods) + Rs.100
The 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
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Financing, investing, and operating
The major difference between floating bond and zero bond is:
Zero bond is sold on discount where as floating bond is not sold on discount
Both can be sold on discount
Price of floating bond is always greater then the price of zero rate bond
None of these
Which of the following refers to bringing the future cash flow to the present time?
Net present value
Discounting
Opportunity cost
Which of the following is an asset in which the possibility of an economic benefit depends solely
upon future events that can't be controlled by the company?
Current asset
Long term asset
Contingent asset
Tangible asset
Miss Hamna purchased government bonds of Rs. 2,000 which guaranteed 2% interest annually.
It means there is no risk because there is:
No variability in risk
Higher variability in risk
No variability in return
Higher variability in return
Which of the following is NOT the type of Hybrid organizations?

S-Type Corporation
Limited Liability Partnership
Sole Proprietorship
Professional Corporation
Which of the following are known as Discretionary Financing?

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Current liabilities
Current assets
Fixed assets
Long-term liabilities
While calculating the YTM, bond that sells at price other then par, YTM is equal to interest yield
plus
Negative or positive capital margin
Negative or Positive capital gain
Negative or Positive capital premium
Negative or Positive capital discount
Above par value
Below par
Which of the following is calculated by summing up the discounted future cash flows?
Market value
Historical value
Fair value
Liquidation value
The pay out ratio of XYZ Company is 30%. What is its Plow back ratio?
100%
70%
30%
130%
If Net Present Value technique is used, what is the minimum acceptance criterion for a project?
NPV<0
NPV=0
NPV>0
NPV<=0

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Because there is hidden value in each project
Because there may be chance of rapid growth
Which of the following is NOT an example of hybrid equity

Convertible Bonds
Convertible Debenture
Common shares
Preferred shares
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
You are required to identify the Earning per share of Bin Shafiq if net income Rs. 1 million;
dividend paid to preferred stockholder 30 % of net income and number of outstanding common
shareholder were 50,000.
Rs. 14.00
Rs. 6.00
Rs. 41.00
Required more information
Ref:
1,000,000 = 1 million
(1,000,000/50,000)*0.30 = 6
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
Mutually Exclusive projects refer to what?

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One can invest in one of the projects and not in both

One can invest in both projects
Cash flows of the two projects are not linked to each other
Cash flows of the two projects are linked to each other
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
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
REF:
The MIRR represents the discount rate, which will equate the Future Value of cash inflows to
Present Value of cash outflows.
Formula:
(1+k)n-t
=CF in*
CF out /(1+k)t
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
Which of the following refers to a highly competitive market where good business ideas are
taken up immediately?
Capital market
Efficient market
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Money market
Real asset market
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
If ABC Company is taking legal action against a third party for breach of contract and its
lawyers are confident of winning this case as well as receiving compensation, then this would be
reported as __________ by ABC Company.
Current asset
Long term asset
Contingent asset
Tangible asset
REF:
There are also long-term assets (property, loans given) and contingent assets, the value of
which can only be assessed in future (legal claim pending, option).
Which of the following is NOT true regarding an annuity due?

It is a series of equal cash flows (this is annuity due)
It is also known as deferred annuity
Cash flows occur for a specific time period (this is annuity due)
Payments are made at the start of each period (this is annuity due)
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
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In percentage of sales method, which of the following current assets do not generally grow in
proportion to Sales?
Accounts receivable and inventory
Marketable securities and prepaid expenses Current Assets
Cash and accounts receivable
Accounts receivable and prepaid expenses
What is the value of Rs. 2,000 discounted back for 2 years at 4 percent compounded annually?
Rs.1,849
Rs.2,163
Rs.2,160
PV = 1849
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
Why the treasury bonds are not riskless?

Government can default during the maturity of bond
Sometimes due to insurgency government doesn’t pay the coupon
Because bond prices decline when rate of interest increases
There is a positive relationship between bond prices and interest rate
Balance Sheet of a company reflects:

Operating efficiency or profitability of a company
Organization’s financial health at a specific point of time
Cash movement during operations in an accounting period
Share of the owners in the business
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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
REF:
Operating Revenue – Other Expenses + Other Revenue = EBIT
What additional risk exists if investor invests in foreign bonds?

Additional cost involve due to cross boundaries arrangements
Bonds are dominated in currency other then investor’s home currency
Foreign governments are not much reliable due to different laws
Market risk of foreign government is fluctuating drastically
Which of the following is not a Real asset?

Equipments
Wheat
Computers
Bonds
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MGT201 (Financial Management)

8 Midterm Papers Solved and Some Quiz

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

Why companies invest in projects with negative NPV?

Because there is hidden value in each project page 52

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

One; one page 47

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

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

The expected return

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

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

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

The firm significantly decreases financial leverage

Question No: 8 ( Marks: 1 ) - Please choose one

Less predictable earnings growth than that of the average firm

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

Real risk-free rate

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

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

How dividend yield on a stock is similar to the current yield on a bond?

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

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

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

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

How efficient portfolios of "N" risky securities are formed?

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

When a bond will sell at a discount?

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

Which of the following is a characteristic of a coupon bond?

Pays interest on a regular basis (typically every six months)

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

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

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

Interest rate risk

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

Question No: 22 ( Marks: 1 ) - Please choose one

Which of the following affects the price of the bond?

Market interest rate

Question No: 23 ( Marks: 1 ) - Please choose one

Question No: 24 ( Marks: 1 ) - Please choose one

Question No: 25 ( Marks: 1 ) - Please choose one

Question No: 26 ( Marks: 1 ) - Please choose one

Question No: 27 ( Marks: 1 ) - Please choose one

Life span of the project

Question No: 28 ( Marks: 1 ) - Please choose one

Internal rate of return

Question No: 29 ( Marks: 1 ) - Please choose one

Question No: 30 ( Marks: 1 ) - Please choose one

Question No: 31 ( Marks: 1 ) - Please choose one

Question No: 32 ( Marks: 1 ) - Please choose one

Question No: 33 ( Marks: 1 ) - Please choose one

Question No: 34 ( Marks: 1 ) - Please choose one

Question No: 35 ( Marks: 1 ) - Please choose one

Question No: 36 ( Marks: 1 ) - Please choose one

Question No: 37 ( Marks: 1 ) - Please choose one

Question No: 38 ( Marks: 1 ) - Please choose one

Which group of ratios relates profits to sales and investment?

Question No: 39 ( Marks: 1 ) - Please choose one