Mgt201 Collection of Old Papers

Why EBIT is generally considered to be independent of financial leverage?

Question No. 2 Marks : 5

What is advocated by the bird in hand theory regarding the dividend policy?


Total Marks: 50 Total Questions: 11

10. Failure to comply with the Supervisor's directions will result in your test being cancelled. Please comply with supervisor's directions to avoid any unpleasant event.

9. Remember not to spend too much time on any one MCQ. Since all MCQs carry equal marks, it is important to manage your time and response to test questions effectively.

8. A clock is given in the exam software. Software will automatically be closed at the end of 90 minutes.

7. Do not click the "Finish button" while solving your paper. Once you clicked the "Finish" button, you will not be able to access your paper again. Click it at the end of your paper. That means you have submitted your complete paper.

6. Save your answer before proceeding to the next question.

5. For each MCQ question, read the choices available and select the choice which you consider is the correct answer, by clicking on the appropriate check box.

4. The use of Financial Tables is allowed. 3. The use of calculator is allowed.

2. Each MCQ carries 2 Marks; each short question carries 5 Marks and Descriptive Question carry 15 Marks.

1. This exam consists of 5 Multiple Choice Questions (MCQs), 5 short questions and 1 descriptive question.

Please read the following instructions carefully before attempting any question: INSTRUCTIONS

Time Allowed: 150 Minutes

Final Term Examination - February 2005 MGT201 Financial Management

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1 Additional variability in earnings available to the firm's common shareholders. What is the definition of operating leverage?


4 All of the given options. 3 By adding some mutual funds to their portfolio. 2 By adding securities to their portfolio that are not perfectly correlated. 1 By diversifying their investments.

How can investors reduce the variability of returns in their investment portfolio?


What is the difference between present value and net present value?


b. What is the firm's weighted average cost of capital?

a. What is the total market value of the firm's stock, S, its price per share Po and the firm's total market value?

The firm's Market is stable, and it expects no growth, so all the earnings are paid out as dividends. The debt consists of perpetual bonds.

Kd 10 % Value of debt D Rs 2 Million Tax rate, T (Federal plus state) 35% Shares outstanding, n 600,000 Cost of equity, 15% EBIT Rs 4 Million The ABC company is currently in this situation


4 More than one dollar a month. 3 Less than one dollar a month. 2 Twelve dollars a month. 1 One dollar a month.

Suppose you borrow $12 and promise to pay it back over twelve months in monthly installments. If the interest rate were positive, your payment would be:


8 To determine the expected rate of return on a potential project 7 To calculate the weights in the capital structure. 6 To determine how much of its earnings the firm should retain. 5 As a hurdle rate for decisions related to project acceptance or rejection.

How would a firm use its calculated weighted average cost of capital of 12.5 percent?


4 Operating Income Statement. 3 Income statement or profit and loss statement. 2 Balance sheet. 1 Statement of cash flow

What financial statement measures the amount of profits generated by a firm over a given period of time?


What is the difference between the Pure MM model and traditionalist view?


What is meant by Budget Constraints?


4 Concept of financing a portion of the firm's assets with securities bearing a variable rate of return.

3 Concept of financing a portion of the firm's assets with securities bearing a fixed rate of return.

2 Responsiveness of the firm's EBIT to fluctuations in sales.

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FINALTERM EXAMINATION

FALL 2006

MGT201 - FINANCIAL MANAGEMENT (Session - 2 )

Marks: 60

Time: 120min

StudentID/LoginID: ______________________________

Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Tuesday, February 06, 2007

Please read the following instructions carefully before attempting any question:

• All questions are compulsory.

• This exam consists of 15 Multiple Choice Questions (MCQ’s), 5 True/False Questions, 5 Fill in the

Blanks,5 Short Questions and 2 Numerical Questions.

• For each MCQ, read the choices available carefully and select the choice which you consider is the

most suitable.

• This examination is closed book, closed notes, closed neighbours.

• Do not ask any question about the contents of this examination from anyone.

• You are required to show the working of all Numerical questions.

• The use of calculator and financial tables is allowed.

• You may wish to pace yourself with your own watch, but the Supervisor will be the official

timekeeper of the test.

• Failure to comply with the supervisor’s directions will result in your test being cancelled. Please

comply with supervisor’s directions to avoid any unpleasant event.

For Teacher's use only Question 1 2 3 4 5 6 7 8 9 10 Total

Marks Question 11 12 13 14 15 16 17 18 19 20

Marks Question 21 22 23 24 25 26 27 28 29 30

Marks Question 31 32

Marks Question No: 1 ( Marks: 1 ) - Please choose one Which of the following is not the objective of capital budgeting techniques? ►

Financial viability of the project

►

To assess working capital requirement

►

To evaluate the value of investment

►

To measure durability of the project

Question No: 2 ( Marks: 1 ) - Please choose one Which of the following statements is correct? ►

(A). Ratio analysis can be distorted by seasonal factors.

►

(B). Ratio analysis is a great tool, because it allows a firm to be fairly compared to any other company.

►

(C). It is difficult to generalize financial ratios as being strictly good or bad.

►

Both A and C are correct

Question No: 3 ( Marks: 1 ) - Please choose one The buyer of a zero-coupon bond expects to receive: ►

Price appreciation

►

A rate of return equal to zero over the life of the bond.

►

Variable dividends instead of a fixed interest payment annually.

►

All interest payments in one lump sum at maturity

Question No: 4 ( Marks: 1 ) - Please choose one An ordinary annuity whose payments or receipts continue forever is called ------------. ►

Annuity due

►

Deferred annuity

►

Perpetuity

►

None of the given options

Question No: 5 ( Marks: 1 ) - Please choose one Which of the following is a financial asset? ►

A building

►

Bonds

►

Inventories

►

Equipment

Question No: 6 ( Marks: 1 ) - Please choose one Working capital management deals with all of the following, except: ►

The composition of current assets

►

The amount of current assets

►

The financing of current assets

►

The depreciation of current assets

Question No: 7 ( Marks: 1 ) - Please choose one Which of the following is not a factor that business risk is dependent upon? ►

Product/service demand variability

►

Sales price variability

►

Foreign risk exposure

►

Interest rate levels

Question No: 8 ( Marks: 1 ) - Please choose one Which of the following cost of capital factors, firms can NOT control? ►

Capital structure policy

►

Investment policy

►

Interest rate levels

►

Dividend policy

Question No: 9 ( Marks: 1 ) - Please choose one Which of the following is not a spontaneous source of financing?

►

Accrued taxes

►

Bank loans

►

Accrued wages

►

Accounts payable

Question No: 10 ( Marks: 1 ) - Please choose one According to the hedging approach to financing, seasonal variations in current assets should be financed with: ►

Short-term debt.

►

Retained earnings.

►

Common stock.

►

Long-term debt.

Question No: 11 ( Marks: 1 ) - Please choose one One difference between a financial lease and operating lease is that: ►

There is often a call option in a financial lease.

►

There is often an option to buy in an operating lease.

►

An operating lease is often cancelable by the lessee

►

A financial lease is often cancelable by the lessee.

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

Risk can be analyzed: ►

Only on a stand-alone basis

►

Only on a portfolio basis.

►

Both on a stand-alone and portfolio basis

►

Neither of the given option is correct.

Question No: 13 ( Marks: 1 ) - Please choose one The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the: ►

Financial risk.

►

Operating leverage.

►

Business risk.

►

Target capital structure.

Question No: 14 ( Marks: 1 ) - Please choose one Which of the following would appear as liability in the balance sheet of a company? ►

The value of Bonds purchased for investment purposes

►

The value of Bonds issued for raising capital

►

The value of Stocks purchased for investment purposes

►


Question No: 15 ( Marks: 1 ) - Please choose one Suppose you know that your firm is facing relatively poor prospects but needs new capital. If you also know that investors do not have this information, signaling theory would predict that you would: ►

(A). Issue debt to maintain the returns of equity holders.

►

(B). Issue equity to share the burden of decreased equity returns between old and new shareholders.

►

Both A and B are correct

►

None of the given option is correct

Question No: 16 ( Marks: 1 ) - Please choose one Market risk could be reduced through diversification. ►

True

►

False

Question No: 17 ( Marks: 1 ) - Please choose one A service company would be a good candidate for an LBO. ►

True

►

False

Question No: 18 ( Marks: 1 ) - Please choose one The spot rate is simply the exchange rate between two currencies as determined by the respective governments. ►

True

►

False


The expected return on a risk-free security is zero. ►

True

►

False

Question No: 20 ( Marks: 1 ) - Please choose one Preferred stock, like debt, could provide financial leverage to a firm. ►

True

►

False

Question No: 21 ( Marks: 1 ) Yield to maturity (YTM) of a Bond = -------------- + capital gain. Question No: 22 ( Marks: 1 ) A collection of securities held by an individual investor or an institution is called ----------. Question No: 23 ( Marks: 1 ) A ----------- merger takes place when firms operating in same industries combine together. Question No: 24 ( Marks: 1 ) ------------ refers to the amount of a company’s annual dividend expressed as a percentage of the current price of the share of that company. Question No: 25 ( Marks: 1 ) Optimal capital structure refers to the particular combination of debt and equity finances that minimizes the ---------------while maximizing the----------. Question No: 26 ( Marks: 3 ) A corporation just paid a dividend of Rs.2. Its stocks have a required rate of return of 13% and

investors expect the dividend to grow at a constant 5% rate in the future. Calculate the intrinsic

value (Present value) of the Corporation’s stocks.

Question No: 27 ( Marks: 3 ) Under what conditions leasing of an asset is better than buying it.

Question No: 28 ( Marks: 3 ) Differentiate between business risk and financial risk.

Question No: 29 ( Marks: 3 ) An investor places 60% of his funds in Security A and the balance in Security B. The expected returns on A and B are 15% and 20%, respectively. The standard deviations of returns on A and B are 20% and 15% respectively. Calculate the expected return on the portfolio. Question No: 30 ( Marks: 3 ) A firm may pursue an aggressive, moderate or a conservative working capital financing policy. Discuss these three working capital financing policies briefly: Question No: 31 ( Marks: 10 ) Suppose your firm is considering an investment project that has a cost of Rs.1 million and is

expected to generate an annual after-tax cash flow of Rs.250,000 for five years. You have already

spent Rs.50,000 in research and development costs for the project. If the firm's required rate of

return is 14 percent, what is the NPV and pay back period of this project? Comment on the

financial viability of the project.

Question No: 32 ( Marks: 10 ) A Corporation has the following Target capital structure:

Debentures = Rs. 3 Billion

Preferred shares = Rs. 0.48 Billion

Common shares = Rs. 6.52 Billion

Total = Rs.10 Billion

Under the prevailing market conditions, financial analysts have estimated a risk free rate of return

of 10% and a market rate of return of 14%. The corporation’s common stocks have a beta (β

) of

1.5. Bonds carry an interest rate of 9.5%. Preferred stocks has a return of 10% p.a. corporate tax

rate is 40%. Compute the present weighted average cost of capital of the corporation.

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FALL 2007


Marks: 60

Time: 150min


Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Thursday, March 13, 2008

Please read the following instructions carefully before attempting any question: All questions are compulsory.

This exam consists of 15 Multiple Choice Questions (MCQs) carrying 1 mark each; 5 True/ False statements carrying 1 mark each; 5 Fill in the Blanks carrying 1 mark each; 3 Short Questions carrying 5 marks each; and 2 descriptive numerical questions carrying 10 marks each.

For each MCQ, read the available choices carefully and select the most appropriate choice which you consider is the correct answer, by clicking on the appropriate check box.

For a true/false statement, recognize the concept and answer accordingly.

For Fill in the Blank questions, provide the appropriate word(s) in the given blank.

Remember not to spend too much time on any one objective type question since all objective type questions carry equal marks; it is important to manage your time according to the marks allocated to each question.

Use of Calculators and Financial Tables is allowed.

You are required to show all the Necessary Calculations where needed as the necessary calculations carry considerable marks.

If you believe that some essential data or piece of information is missing, make an appropriate assumption and use it to solve the problem to the best of your knowledge.

Save your answer before proceeding to the next question.

Do not click the “Finish” button while solving your paper. Once you clicked the “Finish” button, you will not be able to access your paper again. Click it at the end of your paper. That means you have submitted your complete paper.

A clock is given in the exam software. Software will automatically close at the end of given time.

Use of mobile phone is strictly prohibited. Switch off your mobile phone during the exam.

Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please comply with supervisor’s directions to avoid any unpleasant event.

For Teacher's use only

Question 1 2 3 4 5 6 7 8 9 10 TotalMarks

Question 11 12 13 14 15 16 17 18 19 20 Marks

Question 21 22 23 24 25 26 27 28 29 30 Marks

Question No: 1 ( Marks: 1 ) - Please choose one A(n) __________________ is a stream of cash payments that continues forever. ►

Discounted Cash Flow

►

Ordinary Annuity

►

Annuity Due

►

Perpetuity

Question No: 2 ( Marks: 1 ) - Please choose one The stock is over-valued if : ►

Market Price < Fair Value

►

Market Price > Fair Value

►

Market Price = Fair Value

►


Question No: 3 ( Marks: 1 ) - Please choose one ____________ is the amout of other goods and services that must be given up to get something. ►

Opportunity Cost

► Sunk Cost

►

Administrative Cost

►

Operating Cost

Question No: 4 ( Marks: 1 ) - Please choose one The term _______________ refers to the measure of the spread or dispersion of a set of data. ►

Variance

►

Covariance

►

Standard Deviation

►


Question No: 5 ( Marks: 1 ) - Please choose one Business risk stems from the operation and the assets of the firm. These may be caused by: ►

Uncertainty and fluctuations in prices and costs

►

Specific business and market causes

►

Higher operating leverage

►

All of the given options

Question No: 6 ( Marks: 1 ) - Please choose one Which of the following show(s) all possible risk-return combinations for all combinations of stocks in the portfolio? ►

Parachute Graph

►

Efficient Frontier

►

Both Parachute Graph & Effiecient Frontier

►


Question No: 7 ( Marks: 1 ) - Please choose one _________________ is a measurement of the degree to which a firm or project relies on fixed rather than variable costs.

►

Operating Leverage

►

Financial Leverage

►

Net Present Value

►


Question No: 8 ( Marks: 1 ) - Please choose one The firm’s capital structure refers to : ►

The mix of the various types of debt and equity capital maintained by a firm

►

A company's financial framework, including long term debt, preferred stock and net worth

►

The mixture of debt and equity resulting from decisions on financing operations

►


Question No: 9 ( Marks: 1 ) - Please choose one Common stock is considered as ____________ financing and current liabilities are considered as _____________ financing. ►

Permanent; permanent

►

Temporary; temporary

►

Permanent; temporary

►

Temporary; permanent

Question No: 10 ( Marks: 1 ) - Please choose one rCE = (DIV1 / P0) + g is known as : ►

Total Risk Formula

►

Bond Pricing Equation

►

Gordon’s Formula

►

SML Equation

Question No: 11 ( Marks: 1 ) - Please choose one High current assets means _________ Liquidity but _________ Profitability ? ►

High; high

►

Low; low

►

High; low

►

Low; high

Question No: 12 ( Marks: 1 ) - Please choose one ______________ is an inventory management policy in which supplies arrive just a few hours before they are used. ►

Technology Based

►

Just in Time (JIT)

►

Outsourcing

►


Question No: 13 ( Marks: 1 ) - Please choose one Which of the following is NOT a type of Lease Finance? ►

Financial Lease

►

Operating Lease

►

Sale & Lease-Back

►

Functional Lease

Question No: 14 ( Marks: 1 ) - Please choose one Restricted Working Capital policy is also known as ___________. ►

Fat Cat Policy

►

Lean and Mean Policy

►

Bird in Hand Policy

► None of the given options

Question No: 15 ( Marks: 1 ) - Please choose one Which of the following is NOT a reason for multinational companies to do business internationally ? ►

To expand market share

►

To create distance from End Users

►

To bypass trade barriers

►

To diversify and reduce sovereign risk

Question No: 16 ( Marks: 1 ) - Please choose one The objective of Financial Management is to minimize the shareholders wealth. ►

True

►

False

Question No: 17 ( Marks: 1 ) - Please choose one Portfolio Diversification is a method of reducing the overall risk of an investment portfolio by holding a range of different types of assets. ►

True

►

False

Question No: 18 ( Marks: 1 ) - Please choose one Business Risk is defined as the risk faced by common stockholders if firm takes debt. ►

True

►

False

Question No: 19 ( Marks: 1 ) - Please choose one Technology based inventory management policy states that supplies arrive just a few hours before they are used. ►

True

►

False


Market Multiple Analysis (MMA) is an approach to Merger analysis and valuation. ►

True

►

False

Question No: 21 ( Marks: 1 ) _______________ is the discount or interest rate at which the net present value of an investment is equal to zero. Question No: 22 ( Marks: 1 ) CAPM stands for _______________________________. Question No: 23 ( Marks: 1 ) _________________ represents the relationship between required return and beta. Question No: 24 ( Marks: 1 ) ___________________ is the difference between current assets and current liabilities. Question No: 25 ( Marks: 1 ) Acquisition is the most common form of _________________. Question No: 26 ( Marks: 5 ) Two common stocks A and B have beta (β ) values of 0.70 and 1.50 respectively. Using capital asset pricing model (CAPM) compute the required rate of return for both the stocks if risk free rate is 9% and the market risk premium is 6%. Question No: 27 ( Marks: 5 ) Differentiate between business risk and financial risk. Question No: 28 ( Marks: 5 ) What is the relation between bond prices and interest rates ? Under what market conditions a bond would be selling at premium, at par or at a discount ? Question No: 29 ( Marks: 10 ) SNT Corporation has a bond issue outstanding with an annual coupon rate of 7 percent and 4 years remaining until maturity. The par value of the bond is Rs. 1,000. Required:

(i) Determine the current value of bond if present market conditions justify a 14 percent required rate of return. The bond pays interest annually.

(ii) What would be the current value at the same required rate of return if there are 10 years remaining until maturity?

Question No: 30 ( Marks: 10 ) Sumi Inc. has the following Target capital structure:

Debentures = Rs. 3.00 Billion Preferred shares = Rs. 1.45 Billion Common shares = Rs. 7.55 Billion Total = Rs. 12 Billion

Under the prevailing market conditions, financial analysts have estimated a risk free rate of return of 12% and a market rate of return of 15%. The corporation’s common stocks have a beta ( β ) of 1.25. Bonds carry an interest rate of 9.5%. Preferred stocks have a return of 10% p.a. and corporate tax rate is 40%. Compute the present Weighted Average Cost of Capital (WACC) for Sumi Inc.

o None of the given options o Fixed Assets o Operating Leverage o Financial Leverage

If interest expenses for a firm rise, we know that firm has taken on more ______________.



Failure to comply with the Supervisor's directions will result in your test being cancelled. Please comply with supervisor's directions to avoid any unpleasant event.

• You may wish to pace yourself with your own watch, but the Supervisor will be the official timekeeper of the test.

• The Use of Financial Tables is allowed. • The use of calculator is allowed. • Do not ask any questions about the contents of this examination from anyone. • This examination is closed book, closed notes, closed neighbors. • You are required to show all the working of short questions as well as descriptive question.

• This exam consists of 5 Multiple Choice Questions (MCQs) carrying 2 marks each, 5 Short questions carrying 5 marks each and 1 Descriptive questions carrying 15 marks.



INSTRUCTIONS:


Final Term Examination – Spring 2005

MGT201 Financial Management

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Variable Costs = Rs.50 per unit Operating Revenue = Rs.100 per unit You have the following information about a company for a year: Question No. 8 Marks : 15

o Debt = 80%; Equity = 20%; EPS = Rs.3.42; Stock price = Rs.30.40. o Debt = 60%; Equity = 40%; EPS = Rs.3.18; Stock price = Rs.31.20. o Debt = 50%; Equity = 50%; EPS = Rs.3.05; Stock price = Rs.28.90. o Debt = 40%; Equity = 60%; EPS = Rs.2.95; Stock price = Rs.26.50

From the given options, select the optimal capital structure for a company:


What is meant by the Capital Asset Pricing Model (CAPM)?


What are the General Advantages of Leasing from Lessee's (Borrower / user) Point of View?


o Cost o Budgeting o Rationing o Fractioning

Capital _____________ is the term that means the size of the capital budget is constrained.


What does IRR mean? Question No. 3 Marks : 05

What is meant by Budget Constraints?


o Forward Rate o Spot Rate o Exchange Rate o Euro

Worth of one currency in terms of another currency is called __________.


o Vertical o Horizontal o Co generic o Conglomerate

A __________ occurs when two firms in totally different industries combine.


Why do Multinationals do business internationally?


c. What will be operating leverage of the firm when fixed cost is Rs.500 and when fixed cost is Rs.600 at the breakeven quantity calculated in part (a), show all the calculations involved? What conclusion can you draw about the relationship between operating leverage and breakeven quantity from your answers?

b. What happens to the breakeven quantity if fixed cost of the company rises to Rs.600? Show the calculations and interpret the result.

a. Calculate breakeven quantity for the company if fixed cost is Rs.500 and interpret the result.

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FINAL TERM EXAMINATION SEMESTER SPRING 2005

MGT201-Financial Management(Paper 3)

Total Marks: 50 Duration: 120 min

INSTRUCTIONS: Please read the following instructions carefully before attempting any question:


• This exam consists of 5 Multiple Choice Questions (MCQs) carrying 2 marks each, 5 Short questions carrying 5 marks

each and 1 Descriptive questions carrying 15 marks.

• You are required to show all the working of short questions as well as Descriptive question.

• This examination is closed book, closed notes, closed neighbors.

• Do not ask any questions about the contents of this examination from anyone.

• The use of calculator is allowed.

• The Use of Financial Tables is allowed.

• You may wish to pace yourself with your own watch, but the Supervisor will be the official timekeeper of the test.

• Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please comply with

supervisor’s directions to avoid any unpleasant event.

For teacher’s use only.

Question Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Total

Marks

Student ID/Login ID

Name PVC Name/Code Date

Question No: 1 Marks: 2

If two projects are completely independent (or unrelated), the measure of correlation between them is:

a. 0 b. 0.5 c. 1 d. -1


The euro is the name for:

a. A currency deposited outside its country of origin. b. A bond sold internationally outside the country in whose currency the bond is denominated. c. A common European currency. d. A type of sandwich.

Permanent working capital:

a. Varies with seasonal needs. b. Includes fixed assets. c. Is the amount of current assets required to meet a firm's long-term minimum needs. d. Includes accounts payable.



A company estimates that an average-risk project has a WACC of 10 percent, a below-average risk project has a WACC of 8 percent, and an above-average risk project has a WACC of 12 percent. Which of the given independent projects should the company accept?

a. Project A has average risk and a return of 9 percent. b. Project B has below-average risk and a return of 8.5 percent. c. Project C has above-average risk and a return of 11 percent. d. All of the given options of projects should be accepted.


Financial statements that forecast the company’s financial position and performance over a period of years are called:

a. Strategic mission financial statements. b. Pro forma financial statements. c. Corporate purpose financial statements. d. Realized financial statements.


Briefly explain MM Irrelevance (Miller Modigliani) Theory of dividend?

Question No: 7 Marks: 5 Why EBIT is generally considered to be independent of financial leverage? Question No: 8 Marks: 5

How might increasingly volatile inflation rates, interest rates and bond prices affect the optimal capital structure for corporations? Question No: 9 Marks: 5

How are the bonds classified in the balance sheets?


Define Payback period?


Descriptive Question Currently under consideration is a project with a beta of 1.50. At this time, the risk free rate of return is 7% and the return on the market portfolio of assets is 10%.The project is actually expected to earn an annual rate of return of 11%.

a. If the return on the market portfolio were to increase by 10%, what would be expected to happen to the project’s required return? What if the market return were to decline by 10%?

b. Use the CAPM to find the required return on this investment. c. On the basis of your calculations in b, would you recommend this investment? Why or why not? d. Assume that as a result of investors becoming less risk – averse, the market return drops by 1% to

9%.what impact would this change have on your response in b and c?

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SPRING 2007


Marks: 60

Time: 150min


Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Wednesday, July 04, 2007



• This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 True/False

questions of 1 mark each, 3 Short questions of 5 marks each and 3 long questions of 10 marks

each.

• For each Multiple Choice Question, read the choices available carefully and encircle the choice

which you consider is the most suitable on the question paper.

• You are required to show the working of all Numerical questions.

• Use of calculator and financial tables is allowed.

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

• Do not ask question about the contents of this examination from anyone.

• Use of mobile phones is strictly prohibited.

• You may wish to pace yourself with your own watch, but the Supervisor will be the official


• Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please comply with supervisor’s directions to avoid any unpleasant event.



Question 11 12 13 14 15 16 17 18 19 20 Marks

Question 21 Marks

Question No: 1 ( Marks: 1 ) - Please choose one The price of a share of common stock represents: ►

Earnings after tax divided by the number of shares outstanding

►

The board of directors' assessment of the intrinsic value of the firm

►

The book value of the firm's assets less the book value of its liabilities

►

The market's evaluation of a firm's present and future performance

Question No: 2 ( Marks: 1 ) - Please choose one An investor who is attempting to compare equally risky certificates of deposit (CD) investments with different compounding periods per year should compare the _________ interest rate for each investment. ►

Annual

►

Effective annual

►

Periodic

►

Nominal

Question No: 3 ( Marks: 1 ) - Please choose one Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in an account paying 12 percent compounded annually. You accumulate at the end of 10 years an amount closest to ►

Rs.22,456

►

Rs.35,098

►

Rs.28,324

►

Rs.20,324

Question No: 4 ( Marks: 1 ) - Please choose one If a company issues a preferred stock of Face Value Rs. 10 and the board of directors announce annual dividend of Rs. 2 per share. What would be the required rate of return?

►

20%

►

20.5%

►

19%

►

21%

Question No: 5 ( Marks: 1 ) - Please choose one Which of the following is not a cause of “Basic Business Risk”? ►

Large changes in customer demand

►

Unstable selling price

►

Uncertainty in input costs

►


Question No: 6 ( Marks: 1 ) - Please choose one In ____________ market stocks and bonds are traded. ►

Capital

►

Money

►

Real asset

►

Efficient

Question No: 7 ( Marks: 1 ) - Please choose one According to portfolio theory there is ______________ relation between risk and return. ►

No

►

Direct

►

Inverse

►


Question No: 8 ( Marks: 1 ) - Please choose one Which of the following problems, for a firm may emerge due to rumors of bankruptcy?

►

Suppliers will refuse to supply raw material

►

Banks will demand higher interest rates

►

Customers will cancel purchase orders

►


Question No: 9 ( Marks: 1 ) - Please choose one Maturity period of short term debt is ___________ one year. ►

Equal to

►

Less than

►

Greater than

►


Question No: 10 ( Marks: 1 ) - Please choose one The use of financial leverage ►

Reduces the variability of earnings available to common shareholders

►

Reduces the risk of bankruptcy

►

Increases the variation of operating earnings

►

Increases the variability of earnings per share

Question No: 11 ( Marks: 1 ) - Please choose one A major shortcoming of the payback method is that it ignores cash flows after the payback period. ►

True

►

False

Question No: 12 ( Marks: 1 ) - Please choose one Increase in dividend payout gives positive signal to investors. ►

True

►

False


The variable that most directly affects the cash budget is sales. ►

True

►

False

Question No: 14 ( Marks: 1 ) - Please choose one In general, the shorter the maturity schedule of a firm's debt, the lower the risk that it will be unable to meet its debt obligations. ►

True

►

False

Question No: 15 ( Marks: 1 ) - Please choose one Depreciation increases a firm's taxable income. ►

True

►

False

Question No: 16 ( Marks: 5 ) “Financial leverage and operating leverage have a similar effect on ROE (Return On Equity) of a firm”. Discuss? Question No: 17 ( Marks: 5 ) From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates? Question No: 18 ( Marks: 5 ) A Manufacturing concern has fixed costs (e.g., depreciation) of Rs 50,000 directly attributable to producing a particular product. The product sells for Rs 5 a unit and variable costs are Rs 2.00 per unit. What is the break-even point in units produced? Question No: 19 ( Marks: 10 ) You have an Rs 2,000,000 portfolio consisting of an Rs 100,000 investment in each of 20 different stocks. The portfolio has a beta equal to 1.1. You are considering selling Rs 100,000 worth of one stock which has a beta equal to 0.9 and using the proceeds to purchase another stock that has a beta equal to 1.4. What will be the new beta of your portfolio following this transaction? Question No: 20 ( Marks: 10 ) Suppose Ford Motor Company sold an issue of bonds with a 10 year maturity, an Rs 1,000 par

value, a 10% coupon rate, and annual interest payments. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell? Question No: 21 ( Marks: 10 ) A company has the following optimal capital structure: Debt = Rs 3 million

Preferred shares = Rs 1.5 million

Common shares = Rs 5.5 million

Total capital = Rs 10 million

Financial analysts have estimated a return of 13% p.a for common share of the company. Debt carries an interest rate of 9.5% p.a. Preferred stocks of the company has a return of 10% p.a. Corporate tax rate is 39%. Calculate Weighted Average Cost of Capital of the company.

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Spring 2009

MGT201- Financial Management (Session - 2)


What is the long-run objective of financial management?

► Maximize earnings per share

► Maximize the value of the firm's common stock

► Maximize return on investment

► Maximize market share

Question No: 2 ( Marks: 1 ) - Please choose one Which of the following statement (in general) is correct?

► A low receivables turnover is desirable

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

firm

► An increase in net profit margin with no change in sales or assets means a weaker

ROI

► The higher the tax rate for a firm, the lower the interest coverage ratio


What is the present value of a Rs.1,000 ordinary annuity that earns 8% annually for an

infinite number of periods?

► Rs.80

► Rs.800

► Rs.1,000

► Rs.12,500

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

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► 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

Question No: 6 ( Marks: 1 ) - Please choose one Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs.

1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond

B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to

10%, ____________.

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

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

A

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

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


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

Question No: 9 ( Marks: 1 ) - Please choose one Which of the following statement about portfolio statistics is CORRECT?

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

returns of the individual securities comprising the portfolio.

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► 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

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

► All of the given options

Question No: 13 ( Marks: 1 ) - Please choose one An investor was expecting a 18% return on his portfolio with beta of 1.25 before the

market risk premium increased from 8% to 10%. Based on this change, what return will

now be expected on the portfolio?

► 22.5%

► 20.0%

► 20.5%

► 26.0%


Which of the following is the characteristic of a well diversified portfolio?

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► 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


Question No: 16 ( Marks: 1 ) - Please choose one Which of the following formula relates beta of the stock to the standard deviation?

► Covariance of stock with market * variance of the market

► Covariance of stock with market / variance of the market

► Variance of the market / Covariance of stock with market

► Slope of the regression line


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


Question No: 18 ( Marks: 1 ) - Please choose one If stock is a part of totally diversified portfolio then its company risk must be equal to:

► 0

► 0.5

► 1

► -1


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


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An arbitrage opportunity exists if an investor can construct a __________ investment

portfolio that will yield a sure profit.

► Positive

► Negative

► Zero



Which of the following factors might affect stock returns?

► The business cycle

► Interest rate fluctuations

► Inflation rates


Question No: 22 ( Marks: 1 ) - Please choose one If arbitrage opportunities are to be ruled out, what would be the expected excess return

of each well-diversified portfolio?

► Inversely proportional to the risk-free rate

► Inversely proportional to its standard deviation

► Proportional to its standard deviation

► Proportional to its beta coefficient


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


Question No: 24 ( Marks: 1 ) - Please choose one What should be used to calculate the proportional amount of equity financing employed

by a firm?

► The common stock equity account on the firm's balance sheet

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

► The book value of the firm

► The current market price per share of common stock times the number of shares

Outstanding


Which of the following is the market for short term debt?

► Money market

► Capital market

► Real asset market

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► Equity market


Bonds are issued in the market at _________.

► Premium

► Discount

► Both premium and discount


Question No: 27 ( Marks: 1 ) - Please choose one Why debt is a less costly source of fund?

► Because additional interest creates a new form of tax shield

► Because additional money creates a new form of tax shield

► Because banks extend loan at lower interest rates



Which of the following is as EBIT?

► Funds provided by operations

► Earnings before taxes

► Net income

► Operating profit

Question No: 29 ( Marks: 1 ) - Please choose one Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The

firm has Rs.1, 000,000 in fixed costs. The firm anticipates selling each unit for Rs.25

with variable costs of Rs.5 per unit.

► 3.33

► 1.25

► 1.14

► There is not sufficient information provided to calculate the degree of operating

leverage (DOL).


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

► If sales rise by 3.5% at the firm, then EBIT will rise by 1%

► If EBIT rises by 3.5% at the firm, then EPS will rise by 1%

► If EBIT rises by 1% at the firm, then EPS will rise by 3.5%

► If sales rise by 1% at the firm, then EBIT will rise by 3.5%

Question No: 31 ( Marks: 1 ) - Please choose one Which of the following represents financial leverage?

► Use of more debt capital to increase profit

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► 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

Question No: 33 ( Marks: 1 ) - Please choose one Firm ABC has Rs.5 million in outstanding debt, currently has 200,000 shares

outstanding priced at Rs.60 a share, and has a borrowing rate of 10%. If the firm's return

on equity is 15%, what is the firm's WACC?

► 5.00%

► 3.23%

► 4.25%

► 2.16%


Which of the following statements regarding the M&M Propositions without taxes is

true?

► The total value of the firm depends on how cash flows are divided up between

stockholders and bondholders, under M&M Proposition I.

► The firm's capital structure is relevant under M&M Proposition I.

► The cost of equity depends on the firm's business risk but not its financial risk,

under M&M Proposition II.

► The cost of equity rises as the firm increases its use of debt financing under

M&M Proposition II.

Question No: 35 ( Marks: 1 ) - Please choose one Which one of the following is correct for the spot exchange rate?

► This is the rate today for exchanging one currency for another for immediate

delivery

► This is the rate today for exchanging one currency for another at a specific

future date


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

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► 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

Question No: 38 ( Marks: 1 ) - Please choose one What is the economic order quantity for an automobile dealer selling 2,000 cars per year,

at a cost of Rs.750 per order, and a carrying cost of Rs.300 per automobile?

► 40 cars ► 71 cars ► 100 cars ► 126 cars Question No: 39 ( Marks: 1 ) - Please choose one

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

► Assets

Question No: 40 ( Marks: 1 ) - Please choose one Why the present value of the costs of financial distress increases with increases in the debt ratio? ► Expected return on assets increases

► Present value of the interest tax shield is greater

► Equity tax shield is depleted

► Probability of default and/or bankruptcy is greater

Question No: 41 ( Marks: 5 ) What are the real markets effects of leverage on WAAC? (Answer the question in bulleted form only). Answer: Real Markets Effects of leverage on WACC:

• Increase in leverage causes a a large increase in cost of equity

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• Increase in leverage causes relatively small increase in cost of debt as compared

to cost of equity

• As leverage increases WACC 1st falls because of tax saving shield.

• With further increase in leverage WACC fall to its minimum point which is the

optimal point for capital structure

• Further increase in leverage causes increase in WACC because of bankruptcy risk

Question No: 42 ( Marks: 5 ) Suppose a Firm ABC has Total Assets of Rs.1000 and is 100% Equity based (i.e. Un-levered). There were 10 equal Owners and 5 of them want to leave. So the Firm takes a Bank Loan of Rs.500 (at 10%pa Mark-up) and pays back the Equity Capital to the 5 Owners who are leaving. Now, half of the Equity Capital has been replaced with a Loan from a Bank (i.e. Debt). What impact does this have on ROE? Answer: As the firm replaces equity with debt it is increasing financial leverage which is a cause of financial risk. The impact of debt on ROE is that ROE will increase but with the greater uncertainty hence greater will be the risk.

Question No: 43 ( Marks: 10 )

Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has a beta of 1.25. The risk free rate is 10% and the expected market return is 18%.

a. 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 r = rRF + ( rM + rRF ) β

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= 10% + (18%-10%) 1.00 = 10% + 8% = 18%

c. rM = 18% rRF = 10% β = 1.25 r = rRF + ( rM + rRF ) β = 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

Question No: 44 ( Marks: 10 ) The ABC company is in the 35% marginal tax bracket. The current market value of the firm is Rs. 12 million. If there are no costs to bankruptcy:

�� What will be ABC’ annual tax savings from interest deductions be if it issues Rs. 2 million of five years bonds at 12 % interest rate? What will be the value of the firm?

ANSWER: Annual Coupon payment each yr = 12% of 2,000,000

= 2000000 x 12/100 = 24000 Tax saving for 5 yrs = 5(35 % of 24000) = 5(24000 x 35/100) = 5x8400 = 42000

�� What will ABC’ annual tax savings from interest deductions be if it issues Rs. 2 million of seven years bonds at 12 % interest rate? What will be the value of the firm?

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Answer: Annual Coupon payment each yr = 12% of 2,000,000 = 2000000 x 12/100 = 24000 Tax saving for 7 yrs = 7(35 % of 24000) = 7(24000 x 35/100) = 7x8400

= 58800


Using the Capital Asset Pricing Model (CAPM), determine the required return on equity for the following situations:

Situations

Expected return on market portfolio

Risk- free rate

Beta

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 r = rRF + ( rM + rRF ) β = 12% + (16%-12%)1.00 = 12% + 4% = 16% 2. rM = 18% rRF = 8% β = 0.80 r = rRF + ( rM + rRF ) β = 8% + (18%-8%)0.80 = 8% + 8% = 16% 3. rM = 15%

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rRF = 14% β = 0.70 r = rRF + ( rM + rRF ) β = 14% + (15%-14%)0.70 = 14% + 0.70 = 14.7% 4. rM = 17% rRF = 13% β = 1.20 r = rRF + ( rM + rRF ) β = 13% + (17%-13%)1.20 = 13% + 4.8% = 17.8% 5. rM = 20% rRF = 15% β = 1.60 r = rRF + ( rM + rRF ) β = 15% + (20%-15%) 1.60 = 15% + 8% = 23% GENERALIZATION: As beta of stock rises the return on stock also rises.

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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



Among the pairs given below select a(n) example of a principal and a(n) example of an agent

respectively.

► Shareholder; manager

► Manager; owner

► Accouor ntant; bondholder

► Shareholder; bondholder


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.717 to be paid at the end of 2 years if the interest rate is 9%?

► Rs.604

► Rs.417

► Rs.715

► Rs.556


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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


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


A

capital budgeting technique that is NOT considered as discounted cash flow method is:

► Payback period

► Internal rate of return

► Net present value

► Profitability index


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



The

value of a bond is directly derived from which of the following?

► Cash flows

► Coupon receipts

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► Par recovery at 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

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


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


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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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


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


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



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


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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%


Which of the following can be used to calculate the risk of the larger portfolio?


► EPS approach

► Matrix approach

► Gordon’s Approach


Market risk is measured in terms of the ___________ of the market portfolio or index.

► Variance

► Covariance


► Correlation coefficient


If 2

stocks move in the same direction together then what will be the correlation coefficient?

► 0

► 1.0

► -1.0

► 1.5


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

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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


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



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


A

firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?

► If sales rise by 3.5% at the firm, then EBIT will rise by 1%

► If EBIT rises by 3.5% at the firm, then EPS will rise by 1%

► If EBIT rises by 1% at the firm, then EPS will rise by 3.5%

► If sales rise by 1% at the firm, then EBIT will rise by 3.5%


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

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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%


Which of the following expressed the proposition that the value of the firm is independent of its

capital structure?

► The Capital Asset Pricing Model

► M&M Proposition I

► M&M Proposition II

► The Law of One Price


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

► All of the given option

► The firm's common stocks only


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

► Experiencing a business failure

► A legal bankruptcy

► Experiencing technical insolvency

► Experiencing accounting insolvency

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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


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


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





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%

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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

cartops, 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 payable Rs.35

Accounts receivable 50 Notes payable 10

Inventories 30 Accruals 5

Current Assets 110 Current liabilities 50

Net fixed assets 150 Mortgage loan (at

13%) 80

Common equity 130

Total liabilities &

Owner's equity

Total assets Rs.260 Rs.260

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)

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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%

�� If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the

WACCU of Un-levered Firm?

�� 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 Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the

WACCU of Un-levered Firm?

�� If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then what is the

WACCL of Levered Firm? (There is no change in return in equity)


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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

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3 Cash receipts 2 Sales 1 Depreciation charges

Which of the following items would NOT be included in the cash budget?



10. Failure to comply with the Supervisor's directions will result in your test being cancelled. Please comply with supervisor's directions to avoid any unpleasant event.

9. Remember not to spend too much time on any one MCQ. Since all MCQ's carry equal marks, it is important to manage your time and response to test questions effectively.

8. A clock is given in the exam software. Software will automatically be closed at the end of 90 minutes.

7. Do not click the "Finish button" while solving your paper. Once you clicked the "Finish" button, you will not be able to access your paper again. Click it at the end of your paper. That means you have submitted your complete paper.

6. Save your answer before proceeding to the next question.

5. For each MCQ question, read the choices available and select the choice which you consider is the correct answer, by clicking on the appropriate check box.

4. The use of Financial Tables is allowed. 3. The use of calculator is allowed.

2. Each MCQ carries 2 Marks; each short question carries 5 Marks and Descriptive Question carry 15 Marks.

1. This exam consists of 5 Multiple Choice Questions (MCQs), 5 short questions and 1 descriptive question.

Please read the following instructions carefully before attempting any question: INSTRUCTIONS


Mid Term Examination - November 2004 MGT201 Financial Management

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All of the following factors influence the investor's required rate of return except


b) On the basis of above calculations in which project do you invest? a) Calculate each projects payback and net present value. 4 1000 3500 3 3000 3500 2 3000 3500 1 6500 3500 0 (Rs 10,000) (Rs 10,000) Year Project X Project Y Expected net cash flow

You are a financial analyst for the AB Company. The director of capital budgeting has asked you to analyze the proposed capital investments, project X and Y. each project has cost of Rs 10, 000 and the cost of capital for both projects is 12%. The projects expected net cash flows are as follows;

Descriptive Question


What ratios would you calculate to measure the firm's profitability? Explain these

Question No. 5 Marks : 5 4 2.61 3 1.83 2 1.02 1 0.21

Calculate the Debt to Equity Ratio given that Total Assets = Rs 2401 and Total Owners' Equity = Rs 1977


Define bonds and what is meant by the convertible bonds?


Use the table or a financial calculator to find the value of initial Rs 600 compounded for 10 years at 6%


4 Interest on existing debt

Define percent of sale method?


4 2.60 years 3 4 years 2 3.13 years 1 2.17 years

3 100 2 65 1 325

Year Cash flows Rs

What is the payback period for a project with the following cash flows if the firm's discount rate is 12 percent and the project costs Rs 450


Suppose interest rates on Treasury bonds rose from 7 to 14 percent as a result of increased government borrowing. What effect would this have on the price of an average company's common stock?


4 Represents the difference between the firm's assets and liabilities 3 The three basic components are preferred stock, common stock, and retained earnings 2 It represents the combined total of the firm's current and long term assets

1 It represents the total contribution and ownership interest of preferred and common shareholders

All of the following are true of shareholders' equity except


4 The risk aversion factor 3 The risk premium 2 The inflation premium 1 The real required rate of return

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Largest Online Community of VU Students MIDTERM EXAMINATION

FALL 2006


Marks: 40

Time: 60min


Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Tuesday, November 28, 2006

INSTRUCTIONS: Please read the following instructions carefully before attempting any question:


• This exam consists of 10 Multiple Choice Questions (MCQ’s), 5 True/False Questions, 5 Short

Questions and 1 Numerical Question.

• Question No.1-10 are MCQs carrying 1 Mark each, Question No.11-15 are True/ False Questions

carrying 1 Mark each, Question No.16-20 are short questions carrying 3 Marks each and Question

No.21 is the numerical question carrying 10 Marks.


most suitable.

• You are required to show all the working of all numerical questions.


• carry equal marks, it is Remember do not spend too much time on any one MCQ. Since all MCQ’s

important to manage your time and responses to test questions effectively.

• our test being cancelled. Please Failure to comply with the supervisor’s directions will result in y


F ea 's u nlyor T cher se o Question 1 2 3 4 5 6 7 8 9 10 Total

Marks Question 11 12 13 14 15 16 17 18 19 20

Marks Question 21

Marks Question No: 1 ( Marks: 1 ) - Please choose one A major advantage of the corporation relative to other forms of business organization is: ►

Lower cost to organize.

►

Limited owner liability.

►

Higher credit ratings.

►

Reduction of double taxation.

Question No: 2 ( Marks: 1 ) - Please choose one The purpose of financial markets is to: ►

Increase the price of common stocks.

►

Lower the yield on bonds.

►

Allocate savings efficiently.

►

Control inflation.

Question No: 3 ( Marks: 1 ) - Please choose one Short-term creditors would be most interested in a firm's ►

Coverage ratios.

►

Liquidity ratios.

►

Profitability ratios.

►

Debt ratios.

Question No: 4 ( Marks: 1 ) - Please choose one Firm A has a total asset turnover ratio of 5, a net profit margin of 2 percent, and return on equity of 15 percent. Its return on assets is ►

3 percent.

►

10 percent.

►

6 percent.

►

2 percent.

Question No: 5 ( Marks: 1 ) - Please choose one Which of the following arrangements for a Rs.1,000 CD yields the largest terminal (future) value? ►

9.65% compounded daily

►

9.75% compounded monthly

►

10.00% compounded semiannually

►

10.2% compounded annually

Question No: 6 ( Marks: 1 ) - Please choose one A deb turen e ► Is an agreement between the trustee and the firm which guarantees the marketability

of the bond issue.

►

Is an unsecured bond.

►

May be changed by the firm if it gives the trustee 90 days written notice.

►

Contains the terms of a bond issue.

Question No: 7 ( Marks: 1 ) - Please choose one In the form a ke = (D1/P0) + g, what does g represent? ul ►

The expected price appreciation yield from a common stock.

►

The expected dividend yield from a common stock.

►

The dividend yield from a preferred stock.

►

The interest payment from a bond.

Question No: 8 ( Marks: 1 ) - Please choose one To increase a given present value, the discount rate should be adjusted ------------. ►

Upward.

►

Downward.

►

True.

►

Fred.


When m nal annual required rate of return for a particular bond is less than its the arket's nomicoupon rate, the bond will be selling at -------------. ►

A discount

►

A premium

►

Par value

►

An indeterminate price

Question No: 10 ( Marks: 1 ) - Please choose one Interest rates and bond prices ►

Move in the same direction.

►

Move in opposite directions.

►

Sometimes move in the same direction, sometimes in opposite directions.

►

Have no relationship with each other (i.e., they are independent).

Question No: 11 ( Marks: 1 ) - Please choose one T e p p tcoming of the sole proprietorship is the owner's legal liability for all obligations h rinci al shorof the business. ►

True

►

False

Question No: 12 ( Marks: 1 ) - Please choose one Shareholder wealth is best measured in terms of the market price of the firm's common stock. ►

True

►

False

Question No: 13 ( Marks: 1 ) - Please choose one The times interest earned ratio is the best measure of a firm's ability to service long-term debt. ►

True

►

False

Question No: 14 ( Marks: 1 ) - Please choose one The curren atio is never larger than the quick ratio. t r ►

True

►

False

Question No: 15 ( Marks: 1 ) - Please choose one An investm nt with a short payback period is almost certain to have a positive net present value. e ►

True

►

False

Question No: 16 ( Marks: 3 ) At the end of three years, how much is an initial Rs.100 deposit worth, assuming a quarterly compounded annual interest rate of 10%. Question No: 17 ( Marks: 3 ) Mathematically, net present value (NPV) and internal rate of return methods of capital budgeting always lead to the same acceptance/rejection decision for independent projects. Why? Question No: 18 ( Marks: 3 ) Suppose Ford Motor Company has outstanding bonds with 10-year maturity, Rs.1000 par value, a 10% coupon rate, with annual interest payment. If your required rate of return is 12%, what price would you place on these bonds? Question No: 19 ( Marks: 3 ) Differentiate between a sole proprietorship and a partnership.

Question No: 20 ( Marks: 3 ) What do you mean by the time value of money, explain briefly. Question No: 21 ( Marks: 10 ) (a) Ezzell Corporation issued preferred stock with a stated dividend of 10% of par value. Preferred stock of this type currently yields 8%, and the par value is Rs.100. Assume dividends are paid annually. What would be the value of Ezzell’s preferred stock? ( Assume a perpetual investment in preferred stocks) .(5)

(b) Your broker offers to sell you some shares of CIT corporation common stock that paid a dividend of Rs.2 yesterday. You expect the dividend to grow at rate of 5% per year. If you plan to buy the stock, hold it for three years, and then sell it for Rs.34.73, what would be the present value per share of this common stock? ( Assume a required rate of return of 12% p.a). (5)

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MIDTERM EXAMINATION

FALL 2007


Marks: 40

Time: 120min


Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Thursday, November 29, 2007

Please read the following instructions carefully before attempting any question: All questions are compulsory.

This exam consists of 10 Multiple Choice Questions (MCQs) carrying 1 mark each; 5 True/ False statements carrying 1 mark each; 3 Short Questions carrying 5 marks each; and 1 descriptive numerical question carrying 10 marks.

For each MCQ, read the available choices carefully and select the most appropriate choice which you consider is the correct answer, by clicking on the appropriate check box.

For a true/false statement, recognize the concept and answer accordingly.

Remember not to spend too much time on any one objective type question since all objective type questions carry equal marks; it is important to manage your time according to the marks allocated to each question.

Use of Calculators is allowed and you will be provided with Financial Tables by Campus administrator, if needed.

You are required to show all the Necessary Calculations where needed as the necessary calculations carry considerable marks.

If you believe that some essential data or piece of information is missing, make an appropriate assumption and use it to solve the problem to the best of your knowledge.

Save your answer before proceeding to the next question.

Do not click the “Finish” button while solving your paper. Once you clicked the “Finish” button, you will not be able to access your paper again. Click it at the end of your paper. That means you have submitted your complete paper.

A clock is given in the exam software. Software will automatically close at the end of

given time.

Use of mobile phone is strictly prohibited. Switch off your mobile phone during the exam.

Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please comply with supervisor’s directions to avoid any unpleasant event.



Question 11 12 13 14 15 16 17 18 19 Marks

Question Marks

Question No: 1 ( Marks: 1 ) - Please choose one Which of the following statement is snapshot of an organization’s financial health at a particular date ? ►

Income Statement

►

Balance Sheet

►

Stockholder’s Equity Statement

►

Cash Flow Statement

Question No: 2 ( Marks: 1 ) - Please choose one The statement “Don’t compare apples to oranges” refers to the concept of : ►

Risk & Return

►

Discounting & NPV

►

Portfolio Diversification

►

Hedging & Risk Management

Question No: 3 ( Marks: 1 ) - Please choose one SNT Corp. has a profit margin of 20 percent, whereas payout ratio is 45 percent. What will be the estimated retained earnings if estimated sales are Rs. 300,000 ? ►

Rs. 27,000

► Rs. 30,000

►

Rs. 33,000

►

Rs. 35,000

Question No: 4 ( Marks: 1 ) - Please choose one A project with an initial investment of Rs. 50,000 gives the cash flows of Rs. 20,000 for first three years and Rs. 10,000 for next two years. Payback period for the project will be : ►

2.0 Years

►

2.5 Years

►

3.0 Years

►

3.5 Years

Question No: 5 ( Marks: 1 ) - Please choose one A cost that has been incurred and cannot be reversed is called _____________. ►

Preliminary Cost

►

Operating Cost

►

Sunk Cost

►

Synergy Cost

Question No: 6 ( Marks: 1 ) - Please choose one Which of the following type of bonds is not secured by real property ? ►

Mortgage Bonds

►

Junk Bonds

►

Debentures

►

Eurobonds

Question No: 7 ( Marks: 1 ) - Please choose one If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion ? ► The stock has a low level of risk

►

The stock offers a high dividend payout ratio

►

The market is undervaluing the stock

►

The market is overvaluing the stock

Question No: 8 ( Marks: 1 ) - Please choose one Which of the following bonds are issued from foreign country. ►

Convertible Bonds

►

Eurobonds

►

Junk Bonds

►


Question No: 9 ( Marks: 1 ) - Please choose one Suppose you deposit in saving Rs. 100 at a nominal or stated 8% semiannual interest rate. The future value at the end of a year will exactly be : ►

Rs. 105.12

►

Rs. 108.00

►

RS. 108.16

►

Rs. 110.80

Question No: 10 ( Marks: 1 ) - Please choose one Which of the following statement is true : ►

Stocks are equity papers representing ownership

►

Common stockholders always get a preference over the preferred stockholders

►

A Limited Company cannot raise money by issuing equity in the form of shares

►

Common stockholders are the owners but do not have voting rights in management decision


Value of an asset shown on the Balance Sheet is known as book value. ►

True

►

False

Question No: 12 ( Marks: 1 ) - Please choose one An Indenture is an agreement between the trustee and the firm which guarantees the marketability. ►

True

►

False

Question No: 13 ( Marks: 1 ) - Please choose one In Common Life Approach, you need to bring all the projects to the same length in time. ►

True

►

False

Question No: 14 ( Marks: 1 ) - Please choose one The principal advantage of the sole proprietorship is the owner's limited liability. ►

True

►

False

Question No: 15 ( Marks: 1 ) - Please choose one When interest rates go up, the market price of a bond goes down. ►

True

►

False

Question No: 16 ( Marks: 5 ) Mr. Saeed has Rs. 1,200 today and he wants to invest the amount with a bank for five years. The bank is offering an annual interest rate of 8 percent.

a. What would be the future value of the investment if bank offers a simple interest ? b. What would be the future value of the investment if bank offers a compound

interest ? Question No: 17 ( Marks: 5 )

A project with an initial investment of Rs. 100 is followed by the cash flow of Rs. 40 in year 1, Rs. 50 in year 2 and Rs. 40 in year 3. Calculate the IRR for the project. Is the project feasible if the required rate of return is 12% ? Question No: 18 ( Marks: 5 ) Write down the two approaches that are used to rank the projects with different lives. Question No: 19 ( Marks: 10 ) SNT Corporation has a bond issue outstanding with an annual coupon rate of 7 percent and 4 years remaining until maturity. The par value of the bond is Rs. 1,000. Required:

(i) Determine the current value of bond if present market conditions justify a 14 percent required rate of return. The bond pays interest annually.

(ii) What would be the current value at the same required rate of return if the bond had a semiannual coupon?

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90 minutes.


A clock has b

question. You are r

• Save your answer before proceeding to the next question.

Do not click the “Finish button” while solving your paper. Once you clicked the “Finish”

button, you will not be able to access your paper again. Click it only at the end after

solving the whol

For each MCQ, read the choices available carefully and select the cho

You should try to complete MCQ’s in 10 - 15 minutes in order to avail 75 - 80 minutes for

descriptive questions.

• ice which you

consider is the most suitable, by clicking on the appropriate check box.

•

e paper, which will be an indication that you have submitted your

complete paper.

• equired to show all the working of short questions as well as descriptive

• een given in the exam software. Software will automatically be closed after

•

• Question No.1-10 are MCQs carrying 1 Mark each, Question No.11-15 are fill in the blanks

carrying 1 Mark each, Question No.16-20 are short questions carrying 3 Marks each and

Question No.21 is the numerical question carrying 10 Marks.

• This exam consists of 10 Multiple Choice Questions (MCQ’s), 5 Fill in the Blanks, 5 Short

Questions and 1 Descriptive Question.


Please read the following instructions carefully before attempting any question: INSTRUCTIONS:


Mid Term Examination – Spring 2006 MGT201 Financial Management

The stock has a low level of risk. options is a reasonable conclusion? If the intrinsic value of a stock is gre

Question No. 3

Remains unchanged Non of the a

Decreases The level of r

Q

ry Agency theo

Financial management assets with some ove__________ is concerne

Question No. 1

• Failure to comply with the supervisor’s directions will result in your test being cancelled.

Please comply with supervisor’s directions to avoid any unpleasant event.

Marks : 1

d with the acquisition, financing and management of rall goal in mind.

Profit maximization

Social responsibility

uestion No. 2 Marks : 1

isk generally reduces as the size of the portfolio _________.

Increases

bove

Marks : 1

ater than its market value, which of the given

The stock offers a high dividend payout ratio. The market is undervaluing the stock.

• Remember do not spend too much time on any one MCQ. Since all MCQ’s carry equal

marks, it is important to manage your time and responses to test questions effectively.

I

Question No. 10 M

elate profits to sales and investment are known as ____________The ratios that r Q called _______

he variation in the market price of a security caused by changes in interest rate is T


N Q

ax rate Increase in t

Cost of goods sold increase Sales increased relative to expenses

period. This could be the result of: The gross profit margin is unchanged, but the n

Question No. 6

iven options Non of the g

Project A Project B

these projectTwo projects

s

Question No. 5

A


market where new securities are bought and sold for the first time is called_________

Marks : 1

A & B have payback periods of 4 years and 5 years respectively. Which of would be more attractive to an investor?

Both the projects A&B

Marks : 1

et profit margin declined over the same

d relative to sales

Dividends were decreased


et working capital is equal to _____________.

____.


arks : 1

nterest paid (earned) on both the original principal borrowed (lent) and

Q

is overvaluing the stock The market

Question No. 17

ond prices movB

e inversely to changes in __________ Q D Q W

Q

nually at 10%? compounded anW Q

uestion No. 13

an by fair price of a share? Explain hat do you meW

Q

Rs.3,380,000 Rs.2,250,000

Rs.2,908,000 Assets would be Rs.631,000.If theA

Question No. 11 Mar

Compound interest

S

Present value _________

st earned on that principal amount is often referred to as

imple interest Future value

ks : 1

company reported current liabilities of Rs.823,000 and long-term liabilities of company had a Debt-Assets ratio of 0.50 : 1, the value of its total ________

Rs.3,270,000


Marks : 3

hat would be the future value of an initial investment of $1000 after 5 years, if


hat does double taxation of corporate income mean? Explain.


efine systematic Risk. How can we reduce this Risk?


Marks : 1

previous intere

A premium. A

coupon rate, theWhen the marke

Question No. 21

ernal rate of return). How would we analyze a project by usingefine IRR (Int IRR Dm

Question N

Liquidation value Book value

Intrinsic valu cash flows is calleIn financial manag

Question No. 19

le or not? project acceptab

reth

Question No. 18 A manufacturing concern is considering a new product line to supplement its range line. It is anticipated that the new product line will involve cash investment of Rs.700,000 at year 0 and Rs.1.0 million in year 1. After tax cash inflows of Rs.250,00are expected in year 2, Rs.300,000 in year 3, Rs.350,000 in year 4, and Rs.400,000 eyear thereafter through yea

anged Remain unch The correct an

RFall

present

are to receive $10,000. If the interest rate decreases, the value of that future amount to you would __________

ise

swer cannot be determined without more information

Marks : 10

0 ach

r 10. Though the product line might be viable after year 10, e company prefers to be conservative and end all calculations at that time. If the quired rate of return is 15%, what is the net present value of the project? Is the

Marks : 1

ement, the value calculated by summing up the discounted future d __________.

e Market value

o. 20 Marks : 3

ethod?

Marks : 1

t's required rate of return for a particular bond is much less than its bond is selling at

discount.

In 2 years, you

Cannot be determined without more information Face value.

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SPRING 2007


Marks: 40

Time: 60min


Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Wednesday, May 16, 2007

INSTRUCTIONS:


All questions are compulsory.

This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 True/False

questions of 1 mark each, 5 Short questions of 3 marks each and one long question of 10 marks.

For each Multiple Choice Question, read the choices available carefully and select the choice which

you consider is the most suitable.

You are required to show the working of all Numerical questions.

Use of calculator and financial tables is allowed.

This examination is closed book, closed notes and closed neighbours.

Do not ask question about the contents of this examination from anyone.

You may wish to pace yourself with your own watch, but the Supervisor will be the official


Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please

comply with supervisor’s directions to avoid any unpleasant event


Marks Question 11 12 13 14 15 16 17 18 19 20

Marks Question 21

Marks Question No: 1 ( Marks: 1 ) - Please choose one When the intrinsic value of an asset is less than its ______, the asset is perceived as “undervalued”. ► Book Value ► Market Value ► Liquidation Value ► None of the given options

Question No: 2 ( Marks: 1 ) - Please choose one When current liabilities rise faster than current assets, the current ratio will _______. ► Fall ► Rise ► Remain same ► None of the given options

Question No: 3 ( Marks: 1 ) - Please choose one Yield to Maturity (YTM) of a bond = Interest yield + _________ ► Annual coupon interest ► Market price ► Capital gain ► None of the given options

Question No: 4 ( Marks: 1 ) - Please choose one _________ are also known as Hybrid equity. ► Common shares ► Preferred shares ► Bonds ► All of the given options

Question No: 5 ( Marks: 1 ) - Please choose one __________ is a measure of risk. ► Standard Deviation ► Mean ► Mode ► None of the given options

Question No: 6 ( Marks: 1 ) - Please choose one An annuity whose payments are made at the end of each period is called _________. ► Ordinary Annuity ► Annuity Due ► Perpetuity ► None of the given options

Question No: 7 ( Marks: 1 ) - Please choose one A bond that pays no annual interest but is sold at a discount below the par value is called: ► An original maturity bond ► A floating rate bond ► A fixed maturity date bond ► A zero coupon bond

Question No: 8 ( Marks: 1 ) - Please choose one The present value of Rs. 5,000 received at the end of 5 years, discounted at 10 percent, is closest to__________. ► Rs.3,105 ► Rs.823 ► Rs.620 ► Rs.3,403

Question No: 9 ( Marks: 1 ) - Please choose one Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing: ► A zero growth common stock ► A positive growth common stock ► A short-term bond ► An option

Question No: 10 ( Marks: 1 ) - Please choose one You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of Rs. 7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you want an annual return of 24.0%, what is the most you should pay for the stock now? ► Rs.52.00 ► Rs.56.68 ► Rs.32.50 ► Rs.35.43

Question No: 11 ( Marks: 1 ) - Please choose one The yield on common stock comes from two sources: the dividend yield and the capital gains yield.

► True ► False

Question No: 12 ( Marks: 1 ) - Please choose one A saving account at Bank A pays 6 percent interest, compounded annually. Bank B's savings account pays 6 percent compounded semiannually. Bank B is paying twice as much interest. ► True ► False

Question No: 13 ( Marks: 1 ) - Please choose one An investment with a short payback period is almost certain to have a positive net present value. ► True ► False

Question No: 14 ( Marks: 1 ) - Please choose one The liquidation value of a firm is based on its future cash flows. ► True ► False

Question No: 15 ( Marks: 1 ) - Please choose one Combining securities that are not perfectly positively correlated helps to reduce the risk of a portfolio. ► True ► False

Question No: 16 ( Marks: 3 ) A public limited company has sales of Rs. 6 million, a total asset turnover ratio of 6 for the year, and a net profit of Rs. 120,000. What is the company’s return on assets? Question No: 17 ( Marks: 3 ) Project K has a cost of capital of Rs. 52,125, its expected net cash inflows are Rs. 12,000 per year for 8 years, and its cost of capital is 12 percent. What is the project’s payback period? Question No: 18 ( Marks: 3 ) If interest rates in an economy rise after a bond have been issued, what will happen to the bond’s market price? Explain briefly. Question No: 19 ( Marks: 3 ) Differentiate between Systematic risk (Market Risk) and Non-systematic risk (Diversifiable Risk). Question No: 20 ( Marks: 3 ) A bond that pays interest forever and has no maturity date is a perpetual bond. In what respect is a perpetual bond similar to a no-growth common stock, and to a share of preferred stock? Question No: 21 ( Marks: 10 ) Assume that it is now January 1, 2001. On January 1, 2002, you will deposit Rs. 1,000 into a savings account that pays 8 percent.

a. If the bank compounds interest annually, how much will you have in your account on January 1, 2005?

b. What would your January 1, 2005, balance be if the bank used quarterly compounding rather than annual compounding?

c. Suppose you deposited the Rs. 1,000 in 4 payments of Rs. 250 each on January 1 of 2002,

2003, 2004, and 2005. How much would you have in your account on January 1, 2005, based on 8 percent annual compounding?

d. Suppose you deposited 4 equal payments in your account on January 1 of 2002, 2003, 2004, and 2005. Assuming an 8 percent interest rate, how large would each of your payments have to be for you to obtain the same ending balance as you calculated in part a?

WWW.vujannat.ning.comhttp://vujannat.ning.com


SPRING 2007


Marks: 40

Time: 90min


Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Wednesday, May 16, 2007

INSTRUCTIONS:


All questions are compulsory.

This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 True/False

questions of 1 mark each, 5 Short questions of 3 marks each and one long question of 10 marks.

For each Multiple Choice Question, read the choices available carefully and select the choice which

you consider is the most suitable.

You are required to show the working of all Numerical questions.

Use of calculator and financial tables is allowed.

This examination is closed book, closed notes and closed neighbours.

Do not ask question about the contents of this examination from anyone.

You may wish to pace yourself with your own watch, but the Supervisor will be the official


Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please

comply with supervisor’s directions to avoid any unpleasant event


Marks

Question 11 12 13 14 15 16 17 18 19 20 Marks

Question 21 Marks

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

Question No: 2 ( Marks: 1 ) - Please choose one “Don’t put all eggs in one basket” explains _____________ concept of finance. ►

Time value of money

►

Risk and Return

►

Discounting and NPV

►

Portfolio Diversification

Question No: 3 ( Marks: 1 ) - Please choose one _________ is equal to risk per unit return. ► Standard Deviation

►

Variance

►

Coefficient of Variation

►


Question No: 4 ( Marks: 1 ) - Please choose one A bond that pays no annual interest but is sold at a discount below the par value is called: ►

An original maturity bond

►

A floating rate bond

►

A fixed maturity date bond

►

A zero coupon bond

Question No: 5 ( Marks: 1 ) - Please choose one Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing: ►

A zero growth common stock

►

A positive growth common stock

►

A short-term bond

►

An option

Question No: 6 ( Marks: 1 ) - Please choose one An unincorporated business owned by one individual is called _________. ►

Partnership

►

Company

►

Sole proprietorship

►

None of given options

Question No: 7 ( Marks: 1 ) - Please choose one _______ is a ratio of the present value of future cash flows to the initial investment. ►

Return on Investment

►

NPV

►

Payback Period

►

Profitability Index

Question No: 8 ( Marks: 1 ) - Please choose one _______ is the actual price at which share is bought or sold. ►

Fair price

►

Par value

►

Market price

►

Written down value

Question No: 9 ( Marks: 1 ) - Please choose one _____ ratio gives an indication how equity investors regard the company’s value. ►

Price / Earning

►

Market / Book

►

Earning / Share

►

Price / Cash flow

Question No: 10 ( Marks: 1 ) - Please choose one In the formula rCE = (D1V1/Po) + g, what does (D1V1/Po) represent? ►

The expected dividend yield from a common stock

►

The expected price appreciation yield from a common stock

►

The dividend yield from a preferred stock

►

The interest payment from a bond

Question No: 11 ( Marks: 1 ) - Please choose one For a given nominal interest rate, the more numerous the compounding periods, the less the effective annual interest rate.

►

True

►

False

Question No: 12 ( Marks: 1 ) - Please choose one The current ratio is never larger than the quick ratio. ►

True

►

False

Question No: 13 ( Marks: 1 ) - Please choose one When interest rates go up, the market price of a bond goes up. ►

True

►

False

Question No: 14 ( Marks: 1 ) - Please choose one Maximizing the price of a share of the firm's common stock is the equivalent of maximizing the wealth of the firm's present owners. ►

True

►

False

Question No: 15 ( Marks: 1 ) - Please choose one You can reduce systematic risk by adding more common stocks to your portfolio. ►

True

►

False

Question No: 16 ( Marks: 3 ) Assume that one year from now; you will deposit Rs. 1,000 into a saving account that pays 8% interest. If the bank compounds interest semi-annually, how much will you have in your account four years from now? Question No: 17 ( Marks: 3 ) How much should you pay for the preferred stock of the PST Corporation, if it has Rs. 50 par value, pays Rs. 20 a share in annual dividends, and your required rate of return is 15%. Question No: 18 ( Marks: 3 ) What is a portfolio? Why an investor should invest his/her funds in a portfolio rather than in the stocks of a single corporation. Question No: 19 ( Marks: 3 ) What do you mean by yield to maturity (YTM) of a bond? Explain briefly. Question No: 20 ( Marks: 3 ) Explain briefly the Constant Growth Dividends Model of common stocks valuation. Question No: 21 ( Marks: 10 ) Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% in the third year, and at a constant rate of 6% thereafter. 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.

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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 probability distribution





A

set of possible values that a random variable can assume and their associated probabilities of

occurrence are referred to as __________.

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► 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 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 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

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►A dividend yield which is less than that of the average firm

��►�Less predictable earnings growth than that of the average firm

►Greater cyclicality of earnings growth than that of the average firm


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


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.

��►�6.0%

►4.8%

►7.2%

►3.0%


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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



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


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

► These are formed with the securities that have the highest rates of return regardless of

their standard deviations

► They have the highest risk and rates of return and the highest standard deviations

► They are selected from those securities with the lowest standard deviations regardless of

their returns

► They have the highest rates of return for a given level of risk



► The coupon rate is greater than the current yield and the current yield is greater

than yield to maturity



yield to maturity


maturity





► Can always be converted into a specific number of shares of common stock in the issuing

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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

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

► 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


Which of the following affects the price of the bond?

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► Market interest rate

► Required rate of return

► Interest rate risk



Bond is a type of Direct Claim Security whose value is NOT secured by __________.

► Tangible assets

► Intangible 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

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► 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?


► Multiple internal rate of return

► Modified internal rate of return



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

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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

► Rs.147.36

► Rs.154.73

► Rs.99.74


As


► Goes down

► Goes up

► Stays the same



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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


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

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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


You

are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to

analyze two proposed capital investments Project X and Project Y. Each project has a cost of Rs.

10,000 and the cost of capital for both projects is 12%. The projects’ expected cash flows are as

follows:

Year

Expected net cash flows

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 3

rd yr.

So payback period for Project X is 2 yrs and 1 month.

PROJECT Y: Cost of project= Rs 10,000

Year 1 project will recover Rs 3,500

Year 2 project will recover Rs 3,500

Year 3 project will recover remaining Rs 3000 in approximately 11 months of 3rd

yr.

So payback period of project Y is 2 yrs and 11 months.

2. Net Present Value:

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Project X: Initial investment, I0 = Rs 10,000

Cash flow in yr 1, CF1 = Rs 6500




Discount rate, I = 12 %

No. of yrs, n = 4

NPV = - I0 + CF1/(1+i)n + CF2/(1+i)

n + CF3/(1+i)

n + CF4/(1+i)

n

= -10,000 + 6500/(1.12) + 3000/(1.12)

2+ 3000/(1.12)

3+ 1000/(1.12)

4

= Rs 966

Project Y: Initial investment, I0 = Rs 10,000





Discount rate, I = 12 %

No. of yrs, n = 4

NPV = - I0 + CF1/(1+i)n + CF2/(1+i)

n + CF3/(1+i)

n + CF4/(1+i)

n

= -10,000 + 3500/(1.12) + 3500/(1.12)

2+ 3500/(1.12)

3+ 3500/(1.12)

4

= Rs 631

3. IRR: Project X: Put NPV = 0

NPV = - 10000 + 6500/(1+i) + 3000(1+i)2+ 3000(1+i)

3+ 1000/(1+i)

4

4. Profitability Index:

Project X: PI= Sum(CFt/(1+i)t)/Io

= 10,966/10000 = 1.096

Project Y : PI= Sum(CFt/(1+i)t)/Io

= 10631/10000 = 1.0631

Result: Since NPV and PI of project X are higher than that of project Y so Project X

will be accepted.

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MIDTERM EXAMINATION

Spring 2009


Time: 60 min

Marks: 50

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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.

► Shareholder; manager

► Manager; owner

► Accountant; 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


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.

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Visitvujannat.ning.Com For Video Lectures ,previous assigmnets ,Papers,Chat, Study discussions and many more.

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► 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


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


► Debt ratios

► Coverage ratios



Which group of ratios relates profits to sales and investment?


► 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

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► 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

► Rs.1,462.23

► Rs.322.69

► Rs.401.98


As


► Goes down

► Goes up

► Stays the same



The

benefit we expect from a project is expressed in terms of:

► Cash in flows

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► 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

► 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




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

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► Cash flows from the asset becomes non-predictable

► Cash flows from the asset becomes more predictable

► Cash inflows from the asset becomes more predictable

► Cash outflows from the asset becomes more predictable


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)


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





► 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 than

yield to maturity



yield to maturity


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?

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► 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


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




► 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

► 7.69

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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


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

general market movements. It is avoidable through diversification?

► Systematic risk


► Unsystematic 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

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► 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?

► 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?

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► Depreciation

► Sunk cost

► Opportunity 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?

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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

Question No: 2 ( Marks: 1 ) - Please choose one Among the pairs given below select a(n) example of a principal and a(n) example of an

agent respectively. ► Shareholder; manager

► Manager; owner

► Accountant; bondholder



Which of the following is equal to the average tax rate? ► Total tax liability divided by taxable income ► Rate that will be paid on the next dollar of taxable income ► Median marginal tax rate ► Percentage increase in taxable income from the previous period

Question No: 4 ( Marks: 1 ) - Please choose one Which of the following would be deductible as an expense on the corporation's income

statement? ► Interest paid on outstanding bonds ► Cash dividends paid on outstanding common stock ► Cash dividends paid on outstanding preferred stock ► All of the given options

Question No: 5 ( Marks: 1 ) - Please choose one In conducting an index analysis every balance sheet item is divided by __________ and

every income statement is divided by __________ respectively.

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► Its corresponding base year balance sheet item; its corresponding base year

income statement item ► Its corresponding base year income statement item; its corresponding base year

balance sheet item ► Net sales or revenues; total assets ► Total assets; net sales or revenues

Question No: 6 ( Marks: 1 ) - Please choose one Which group of ratios measures a firm's ability to meet short-term obligations? ► Liquidity ratios ► Debt ratios ► Coverage ratios ► Profitability ratios

Question No: 7 ( Marks: 1 ) - Please choose one Which group of ratios relates profits to sales and investment? ► Liquidity ratios ► Debt ratios ► Coverage ratios ► Profitability ratios


Interest paid on the original principal borrowed is often referred to as __________.

► Compound interest ► Present value

► Simple interest

► Future value

Question No: 9 ( Marks: 1 ) - Please choose one If the following are the balance sheet changes, which one of them would represent use of

funds by a company?

► Rs. 8,950 decrease in net fixed assets

► Rs. 5,005 decrease in accounts receivable

► Rs. 10,001 increase in accounts payable

► Rs. 12,012 decrease in notes payable

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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) Question No: 11 ( Marks: 1 ) - Please choose one What is the present value of Rs.8,000 to be paid at the end of three years if the interest

rate is 11%? ► Rs.5,850 ► Rs.4,872 ► Rs.6,725

► Rs.1,842 Question No: 12 ( Marks: 1 ) - Please choose one

What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate is

8%. ► Rs.680.58 ► Rs.1,462.23 ► Rs.322.69 ► Rs.401.98 Question No: 13 ( Marks: 1 ) - Please choose one

As interest rates go up, the present value of a stream of fixed cash flows _____.

► Goes down ► Goes up ► Stays the same ► Can not be found Question No: 14 ( Marks: 1 ) - Please choose one

The benefit we expect from a project is expressed in terms of: ► Cash in flows ► Cash out flows ► Cash flows ► None of the given options Question No: 15 ( Marks: 1 ) - Please choose one

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

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

In which of the following situations you can expect multiple answers of IRR? ► More than one sign change taking place in cash flow diagram ► There are two adjacent arrows one of them is downward pointing & the other

one is upward pointing



Question No: 18 ( Marks: 1 ) - Please choose one Which of the following technique would be used for a project that has non-normal cash

flows?





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► Cash flows from the asset becomes non-predictable ► Cash flows from the asset becomes more predictable ► Cash inflows from the asset becomes more predictable ► Cash outflows from the asset becomes more predictable Question No: 20 ( Marks: 1 ) - Please choose one

Which one of the following is NOT the disadvantage of the asset with very short life?

► Money has to be reinvested in some other project with uncertain NPV

► Money has to be reinvested in some other project with certain NPV

► Money has to be reinvested in some other project with return so risky


Question No: 21 ( Marks: 1 ) - Please choose one You are selecting a project from a mix of projects, what would be your first selection in

descending order to give yourself the best chance to add most to the firm value, when

operating under a single-period capital-rationing constraint? ► Profitability index (PI) ► Net present value (NPV) ► Internal rate of return (IRR) ► Payback period (PBP) Question No: 22 ( Marks: 1 ) - Please choose one Which one of the following is the right of the issuer to call back or retire the bond by

paying off the bondholders before the maturity date?

► Call in

► Call option

► Call provision

► Put option

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► Pays interest on a regular basis (typically every six months) ► Does not pay interest on a regular basis but pays a lump sum at

maturity ► Can always be converted into a specific number of shares of common stock

in the issuing company ► Always sells at par



► The coupon rate is greater than the current yield and the current yield is greater

than yield to maturity ► The coupon rate is greater than yield to maturity ► The coupon rate is less than the current yield and the current yield is greater

than the yield to maturity ► The coupon rate is less than the current yield and the current yield is less

than yield to maturity Question No: 25 ( Marks: 1 ) - Please choose one An investment opportunity set formed with two securities that are perfectly negatively

correlated. What will be standard deviation in the global minimum variance portfolio? ► Equal to zero ► Greater than zero ► Equal to the sum of the securities' standard deviations ► Equal to -1 Question No: 26 ( Marks: 1 ) - Please choose one How efficient portfolios of "N" risky securities are formed? ► These are formed with the securities that have the highest rates of return

regardless of their standard deviations ► They have the highest risk and rates of return and the highest standard

deviations ► They are selected from those securities with the lowest standard deviations

regardless of their returns ► They have the highest rates of return for a given level of risk Question No: 27 ( Marks: 1 ) - Please choose one Which of the following is NOT an example of hybrid equity?

► Convertible bonds ► Convertible debenture ► Common shares ► Preferred shares

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

► Cash flow streams ► Capital gain /loss ► Difference between buying & selling price ► All of the given options Question No: 29 ( Marks: 1 ) - Please choose one


► 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

Question No: 30 ( Marks: 1 ) - Please choose one The market capitalization rate on the stock of Fast Growing Company is 20%. The

expected ROE is 22% and the expected EPS ia Rs. 6.10. If the firm's plowback ratio is

90%, the P/E ratio will be ________.

► 8.33 ► 50.0 ► 9.09 ► 7.69 Question No: 31 ( Marks: 1 ) - Please choose one 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 Question No: 32 ( Marks: 1 ) - Please choose one A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market

index, most likely has _________.

► 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 is the variability of return on stocks or portfolios not explained

by general market movements. It is avoidable through diversification? ► Systematic risk ► Standard deviation ► Unsystematic risk ► Financial risk Question No: 34 ( Marks: 1 ) - Please choose one When Return is being estimated in % terms, the units of Standard Deviation will be

mention in __________.

► % ► Times ► Number of days ► All of the given options Question No: 35 ( Marks: 1 ) - Please choose one

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

Which of the following is NOT a major cause of unsystematic risk.

► New competitors ► New product management ► Worldwide inflation ► Strikes Question No: 37 ( Marks: 1 ) - Please choose one You are considering two investment proposals, project A and project B. B's expected net

present value is Rs. 1,000 greater than that for A and A's dispersion of net present value

is less than that for B. On the basis of risk and return, what would be your conclusion?

► Project A dominates project B ► Project B dominates project A ► Neither project dominates the other in terms of risk and return ► Incomplete information Question No: 38 ( Marks: 1 ) - Please choose one

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Which of the following is a drawback of percentage of sales method?

► It is a rough approximation ► There is change in fixed asset during the forecasted period ► Lumpy assets are not taken into account ► All of the given options Question No: 39 ( Marks: 1 ) - Please choose one

Which of the following need to be excluded while we calculate the incremental cash

flows?

► Depreciation ► Sunk cost ► Opportunity cost ► Non-cash item Question No: 40 ( Marks: 1 ) - Please choose one Why companies invest in projects with negative NPV?

► Because there is hidden value in each project ► Because they have chance of rapid growth ► Because they have invested a lot ► All of the given options Question No: 41 ( Marks: 10 ) ICO Company must decide between two mutually exclusive projects. The following

information describes the cash flows of each project.

Year Project "A" Project "B"

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Connecting VU Students

FINALTERM EXAMINATION SPRING 2006


Marks: 60

Time: 120min


Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Tuesday, August 22, 2006



• This exam consists of 15 Multiple Choice Questions (MCQ’s), 5 True/False Questions, 5 Fill in the

Blanks,5 Short Questions and 2 Numerical Questions.

• Question No.1-15 are MCQs carrying 1 Mark each, Question No.16-20 are fill in the blanks carrying

1 Mark each, Question No.21-25 True/False Questions carrying 1 Mark each, Question No.26-30

are short questions carrying 3 Marks each and Question No.31-32 are numerical questions

carrying 10 Marks each.


most suitable, by clicking on the appropriate check box.

• Save your answer before proceeding to the next question.

• Do not click the “Finish button” while solving your paper. Once you clicked the “Finish” button, you

will not be able to access your paper again. Click it only at the end after solving the whole paper,

which will be an indication that you have submitted your complete paper.

• You are required to show all the working of short questions as well as Numerical questions.


• as been given in the exam software. Software will automatically be closed after 150 A clock h

minutes.

• carry equal marks, it is Remember do not spend too much time on any one MCQ. Since all MCQ’s

ww Connecting VU Students

important to manage your time and responses to test questions effectively.

• Failure to comply with the supervisor’s directions will result in your test being cancelled. Please



Marks Question 11 12 13 14 15 16 17 18 19 20

Marks Question 21 22 23 24 25 26 27 28 29 30

Marks Question 31 32

Marks Question No: 1 ( Marks: 1 ) - Please choose one EBIT is usually the same thing as: ►

Funds provided by operations.

►

Earnings before taxes.

►

Net income.

►

Operating profit

Question No: 2 ( Marks: 1 ) - Please choose one A major advantage of the corporate form of organization is: ►

Reduction of double taxation.


►

Limited owner's liability.

►

Legal restrictions.

►

Ease of organization

Question No: 3 ( Marks: 1 ) - Please choose one A profitability index of 0.85 for a project means that: ►

The present value of benefits is 85% greater than the project's costs.

►

The project's NPV is greater than zero.

►

The project returns 85 cents in present value for each current dollar invested.

►

The payback period is less than one year.

Question No: 4 ( Marks: 1 ) - Please choose one The ultimate ownership of the firm resides: ►

With management

►

With common shareholders

►

With preferred shareholders


►

With bondholders

Question No: 5 ( Marks: 1 ) - Please choose one ---------------- refers to the financial projection of cash disbursements and receipts during the next planning period. ►

Cash investment plan

►

Cash budget

►

Capital budgeting

►

None of the given options.

Question No: 6 ( Marks: 1 ) - Please choose one An arrangement whereby a firm sells land, buildings, or equipment and simultaneously leases the property back for a specified period under specific terms is called a: ►

Service lease

►

Capital lease.

►

Sale and leaseback.

►

Lessor agreement.



The m rket price of a share of common stock is determined by: a ►

The board of directors of the firm.

►

The stock exchange on which the stock is listed.

►

The president of the company.

►

Individuals buying and selling the stock.

Question No: 8 ( Marks: 1 ) - Please choose one The controller's responsibilities are primarily ________ in nature, while the treasurer's responsibilities are primarily related to __________. ►

Operational; financial management

►

Financial management; accounting

►

Accounting; financial management

►

Financial management; operations

Question No: 9 ( Marks: 1 ) - Please choose one Current assets that a firm must carry even at the trough of sales are _____________, while current assets that fluctuate with seasonal or cyclical variations in sales are _____________. ►

Temporary assets; permanent assets


►

Permanent assets; temporary assets

►

Matched assets; non-matched assets

►

Non-matched assets; matched assets

Question No: 10 ( Marks: 1 ) - Please choose one An expression of creditworthiness of a firm based on its present financial condition and past credit history is c ----------------. alled ►

Credit rating

►

Trade credit

►

Liquidity

►


Question No: 11 ( Marks: 1 ) - Please choose one A stock split: ►

Does not change the amount in the common stock account

►

Is treated by accountants just like a stock dividend

►

Reduces retained earnings



Question No: 12 ( Marks: 1 ) - Please choose one Syndicated Loan is a large loan arranged by a group of ------------ that form a syndicate, headed by the lead ma ager. n ►

Bond holders

►

Individuals

►

Brokers

►

Banks

Question No: 13 ( Marks: 1 ) - Please choose one --------------------merger takes place when firms operating in different industries combine together. ►

Conglomerate

►

Vertical

►

Co generic

►

Horizontal

Question No: 14 ( Marks: 1 ) - Please choose one In breakeven analysis, if fixed costs rise, then the breakeven point will --------.


►

Fall

►

Rise

►

Stay the same

►


Question No: 15 ( Marks: 1 ) - Please choose one A firm ion in a number of countries is called a: that operates in an integrated fash ►

Spot corporation.

►

Future Corporation.

►

Domestic Corporation.

►

A multinational corporation

Question No: 16 ( Marks: 1 ) --------------- is the graphical representation of the linear relationship between a security‘s systematic risk and its expected return in a financial market. Question No: 17 ( Marks: 1 ) ------------- refers to the mixture of debt and equity maintained by a company. Question No: 18 ( Marks: 1 ) A portfolio that offers the highest possible yield for a given level of risk, or the lowest possible risk for a given yield level is know as -----------.


Question No: 19 ( Marks: 1 ) In finance, the costs associated with buying or selling of financial instruments are called ---------------------. Question No: 20 ( Marks: 1 ) In ----------- plan firms give stockholders option to automatically reinvest cash dividends by buying more of the same stock. Question No: 21 ( Marks: 1 ) - Please choose one The m type of spontaneous financing is a commercial bank loan. ost common ►

True

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False

Question No: 22 ( Marks: 1 ) - Please choose one All other things being the same, if the firm raises funds by selling common stock, it will increase i deg o cial leverage. ts ree f finan ►

True

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False

Question No: 23 ( Marks: 1 ) - Please choose one The hedging approach to financing involves matching maturities of debt with specific financing n edse . ►

True

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False

Question No: 24 ( Marks: 1 ) - Please choose one Generally, a greater margin of safety would be provided by more current assets and fewer current liabili ties.


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True

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False

Question No: 25 ( Marks: 1 ) - Please choose one A service company would be a good candidate for an LBO. ►

True

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False

Question No: 26 ( Marks: 3 ) Differentiate between intrinsic value and market value of a common share. Question No: 27 ( Marks: 3 ) According to signaling theory if a firm’s future genuinely looks good then management will choose to raise financing through Debt. Why? Question No: 28 ( Marks: 3 ) Why spontaneous financing is a cheap source of financing for a firm? Name some sources of spontaneous financing. Question No: 29 ( Marks: 3 ) In which ways financial lease is different from operating lease? Explain. Question No: 30 ( Marks: 3 ) Following are given the capital structures of two companies A and B.

Company A Company B Bonds = Rs.5.6 Billion Debenture = Rs.1.3 Billion Preferred stocks = 3.4 Billion Preferred stocks = 1.7 Billion Common stocks = 1 Billion Common stocks = 7 Billion Total = Rs.10 Billion Total = Rs.10 Billion


Analyze capital structures of both the companies and identity that which Company has high degree of financial leverage, and why? Question No: 31 ( Marks: 10 ) An individual is considering two different savings plans. The first plan would have her deposit Rs.500 every six months, and she would receive interest at a 7% annual rate, compounded semi-annually. Under the second plan she would deposit Rs.1000 every year with a rate of interest 8%, compounded annually. The initial deposit of the first plan would be made six months from now and that of second plan one year hence. Required: Calculate future value of both the saving plans at the end of 10 years.(5+5) Question No: 32 ( Marks: 10 ) Suppose you are working as a financial analyst in an investment bank. Currently your bank is considering to invest in the common stocks of Pak Cement Company Limited. Following information is available to you. The pak cement company limited common stocks have a beta of 1.45. The risk free rate is 8% and the expected return on the market portfolio is 13%. The company presently pays a dividend of Rs.2 a share, and it is expected that it will grow at 10% per annum for many years to come. What required rate of return would you suggest for this investment? The company policy is to use capital asset pricing model (CAPM) to calculate required rate of return on stocks. Based on your required rate of return what present market price would you place on each share, using perpetual dividend growth model? (5+5)

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