**MIDTERM EXAMINATION **

Spring 2010

MGT201- Financial Management (Session – 4)

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

In finance we refer to the market where existing securities are bought and sold as the __________ market.

► Money

► Capital

► Primary

► Secondary

Question No: 2 ( 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.

► 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: 3 ( Marks: 1 ) - Please choose on

To increase a given future value, the discount rate should be adjusted __________.

► Upward

► Downward

► First upward and then downward

► None of the given options

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

Which of the following investment alternatives would provide the greatest future value for your investment?

► 10% compounded daily (360 days)

► 10.5% compounded annually

► 10.25% compounded quarterly

► Incomplete information

Question No: 5 ( 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

Reference:

For Example

PV=FV/(1+i)^n

PV=1000/(1+.08)^5

PV=680.58

PV=FV/(1+i)^n

PV=1000/(1+.09)^5

PV=650

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

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

► Rs.250.44

► Rs.231.91

► Rs.181.62

► Rs.184.08

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

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

► Include sunk costs, but ignore opportunity costs

► Include opportunity costs, but ignore sunk costs

► Ignore both opportunity costs and sunk costs

► Include both opportunity and sunk costs

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

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

► Internal rate of return

► Multiple internal rate of return

► Modified internal rate of return

► Net present value

Reference:

Page 53

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

When coupon bonds are issued, they are typically sold at which of the following value?

► Below par

► Above par value

► At or near par value

► At a value unrelated to par

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

Which of the following has NO effect when the financial health (cash flows and income) of the company changes with time?

► Market value

► Price of the share

► Par value

► None of the given options

Reference:

As the financial health (cash flows and income) of the company changes with time, the Market Value (or Price) of the Share changes (even though it’s Par Value is fixed).

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

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

Reference:

The Dividend Value derived from Dividend Cash Stream and Capital Gain /Loss from Difference between Buying & Selling Price

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

Which of the following is (are) true?

I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stock’s required return.

II. A decrease in the dividend growth rate will increase a stock’s market value, all else the same.

III. An increase in the required return on a stock will decrease its market value, all else the same.

► I, II, and III

► I only

► III only

► II and III only

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

Diversification can reduce risk by spreading your money across many different ______________.

►Investments

►Markets

►Industries

►All of the given options

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

Assume that the expected returns of the portfolios are the same but their standard deviations are given in the options given below, which of the option represent the most risky portfolio according to standard deviation?

►1.5%

►2.0%

►3.0%

►4.0%

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

When bonds are issued, under which of the following category the value of the bond appears?

►Equity

►Fixed assets

►Short term loan

►Long term loan

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

_________ means expanding the number of investments which cover different kinds of stocks.

►Diversification

►Standard deviation

►Variance

►Covariance

Question No: 17 ( 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% compounded annually?

►Rs.5,850

►Rs.4,872

►Rs.6,725

►Rs.1,842

Formula:

FV = PV x (1+i)^n

PV = 8,000/(1+0.11)^3

PV = 5,850

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

By summing up the discounted cash flows we can calculate which of the following?

►Liquidation value

►Intrinsic value

►Book value

►Market value

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

Which of the following accounting equation is accurate?

► Assets +Equity = Liabilities + Expenses

► Assets + Expenses = Liabilities +Expenses + Revenue

► Assets + Liabilities = Equity + Expenses + Revenue

► Assets + Revenue + Liabilities = Equity

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

Which of the following equation can represent income statement in best way?

►Profit –Expenses = sales revenue

►Sales revenue – Expenses = Profit

►Assets +Liabilities= Equity

►Sales revenue + Equity = Assets

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

Which of the following is a type of annuity in which no time span is involved?

►Ordinary annuity

►Annuity due

►Perpetuity

►None of the givenoptions

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

All of the following are the examples of annuity EXCEPT:

►Mortgage payment

►Insurance premium

►Monthly rental payments

►Fixed coupon payments

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

_________ is the value of bond, which we expect the bond to be.

►Fair value

►Book value

►Market value

►Maturity value

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

YTM is equal to which of the following formula?

►Capital gain +market price

►Present value + interest yield

►Market price +interest yield

►Interest yield + capital gain yield

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

If there is an increase in a firm’s expected growth rate then it will cause its required rate of return to______.

►Increase

►Decrease

►Fluctuate more than before

►Possibly increase, decrease, or remain constant

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

Which of the following formula could be used to calculate expected rate of return

?

► Po / Po × P1

► P1 + Po / Po

► P1 – Po / Po

► Po – P1 / Po

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

This is an example of which of the following concept?

ABC Corporation’s stock price has fallen because it was not able to meet its production deadlines.

►Market risk

►Company specific risk

►Industry risk

►Economic risk

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

A proposal is accepted if payback period falls within the time period of 3 years. According to the given criteria, which of the following project is most suitable to accept?

Payback period

Project A 1.66

Project B 2.66

Project C 3.66

► Project A

► Project B

► Project C

► Project A & B

Question No: 29 ( Marks: 3 )

By applying Common Life Approach calculate the NPV of the following projects:

Projects Initial outflow Inflow Yr 1 Inflow Yr 2

A 100 200 -

B 200 200 200

Solution:

Project A

NPV=-100+(200-100)/1.1)+200/(1.1)2 = 156

Project B

NPV =-200+200/1.1+200/(1.1)2 = 147

Question No: 30 ( Marks: 3 )

There are two stocks in the portfolio of Mr. N, Stock A and Stock B. the information of this portfolio is as follows:

Common stock Expected rate of return Standard deviation

Stock A 15% 10%

Stock B 20% 15%

Calculate the expected rate of return on this portfolio assuming that Stock A consists of 75% of the total funds invested in the stocks and the remainder in Stock B.

Solution:

Apply formula on page 93 of handouts

={(75/100)2(10/100)2+(25/100)2(15/100)2+2((75/100)(25/100)(10/100)(15/100)(.6)}(.5)

= {(0.5625)(0.01)+(.0625)(0.0225)+2((.75)(.25)(.1)(.15)(.6))}(.5)

=(0.010406)*.5

=0.005203*100

=0.520313%

Question No: 31 ( Marks: 5 )

How risk affects the share price? (2.5)

What does the meaning of standard deviation in finance? (2.5)

Question No: 32 ( Marks: 5 )

Hammad Inc. is considering two alternative, mutually exclusive projects. Both projects require an initial investment of Rs. 10,000 and are typical, average-risk projects for the firm. Project A has an expected life of 2 years with after-tax cash inflow of Rs. 6,000 and Rs. 8,000 at the end of year 1 and 2, respectively.

Project B has an expected life of 4 years with after-tax cash inflow of Rs. 4,000 at the end of each of next 4 years. The firm’s cost of capital is 10 percent.

If the projects cannot be repeated, which project will be selected, and what is the net present value?

Solution:

Net Present Value:

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

Cash flow in yr 1, CF1 = Rs 6000

Cash flow in yr 2, CF2 = Rs 8000

Discount rate, I = 10 %

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 + 6000/(1.10) + 8000/(1.12)2

= -10,000 + 5454.54 + 6611.57

= - 10,000 +12066.11

= 2066.11

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

Cash flow in yr 1, CF1 = Rs 4000

Cash flow in yr 2, CF2 = Rs 4000

Cash flow in yr 3, CF3 = Rs 4000

Cash flow in yr 4, CF¬4 = Rs 4000

Discount rate, I = 10 %

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 + 4000/(1.10) + 4000/(1.10)2+ 4000/(1.10)3+ 4000/(1.10)4

= -10,000 + 3636.36 + 3305.8 + 3005.25 + 2732.053

= -10,000 + 12679.463

= 2679.463