MGT201- Financial Management (Session - 00)
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following is equal to the average tax rate?
► Total tax liability divided by taxable income
► Rate that will be paid on the next dollar of taxable income
► Median marginal tax rate
► Percentage increase in taxable income from the previous period
Question No: 2 ( 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: 3 ( Marks: 1 ) - Please choose one
Assume that the interest rate is greater than zero. Which of the following cash-inflow streams totaling Rs.1, 500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively.
► Rs.700 Rs.500 Rs.300
► Rs.300 Rs.500 Rs.700
► Rs.500 Rs.500 Rs.500
► Any of the above, since they each sum to Rs.1,500
Question No: 4 ( Marks: 1 ) - Please choose one
Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is often referred to as __________.
► Present value
► Simple interest
► Future value
► Compound interest
Question No: 5 ( Marks: 1 ) - Please choose one
You are going to invest Rs.12,500 into a certificate of deposit (CD) at a 6% annual rate (compounded annually) with a maturity of 30 months. How much money will you receive when the CD matures?
► Incomplete information
FV = PV* (1+i)^n
FV = 12500(1.06)^2.5
Where 30 months divided by 12 we get 2.5 years
Question No: 6 ( Marks: 1 ) - Please choose one
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?
Question No: 7 ( Marks: 1 ) - Please choose one
All of the following influence capital budgeting cash flows EXCEPT __________.
► Choice of depreciation method for tax purposes
► Economic length of the project
► Projected sales (revenues) for the project
► Sunk costs of the project
Question No: 8 ( 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: 9 ( Marks: 1 ) - Please choose one
From which of the following category would be the cash flow received from sales revenue and other income during the life of the project?
► Cash flow from financing activity
► Cash flow from operating activity
► Cash flow from investing activity
► All of the given options
Question No: 10 ( Marks: 1 ) - Please choose one
Which one of the following selects the combination of investment proposals that will provide the greatest increase in the value of the firm within the budget ceiling constraint?
► Cash budgeting
► Capital budgeting
► Capital rationing
► Capital expenditure
Question No: 11 ( Marks: 1 ) - Please choose one
Who is responsible for the decisions relating capital budgeting and capital rationing?
► Chief executive officer
► Junior management
► Division heads
► All of the given option
Question No: 12 ( 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: 13 ( Marks: 1 ) - Please choose one
Which of the following is NOT an example of hybrid equity?
► Convertible bonds
► Convertible debenture
► Common shares
► Preferred shares
Question No: 14 ( 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
Question No: 15 ( Marks: 1 ) - Please choose one
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
IF REQUIRED RETURN and ROE are EQUAL , investors are indifferent as to whether the firm retains more earnings or increases dividends. Thus, retention rates and growth rates do not affect market price and P/E./E.
Question No: 16 ( Marks: 1 ) - Please choose one
When Investors want high plowback ratios?
► Whenever ROE > k
► Whenever k > ROE
► Only when they are in low tax brackets
► Whenever bank interest rates are high
Question No: 17 ( 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.
► 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.
Question No: 18 ( Marks: 1 ) - Please choose one
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
o Systematic Risk is the variability of return on stocks or portfolios associated with
changes in return on the market as a whole.
o Unsystematic Risk is the variability of return on stocks or portfolios not explained by
general market movements. It is avoidable through diversification
Question No: 19 ( Marks: 1 ) - Please choose one
Diversification can reduce risk by spreading your money across many different ______________.
► All of the given options
Question No: 20 ( Marks: 1 ) - Please choose one
Which of the following is NOT a major cause of unsystematic risk.
► New competitors
► New product management
► Worldwide inflation
Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following need to be excluded while we calculate the incremental cash flows?
► Sunk cost
► Opportunity cost
► Non-cash item
Sunk costs need to be excluded while calculating the incremental cash flows. Sunk costs are the
costs that have already incurred in the past.
Question No: 22 ( Marks: 1 ) - Please choose one
Under which concept it is said that “do not put all your eggs in one basket”?
► Risk & return
► Portfolio diversification
► Insurance management
► Time value of money
Question No: 23 ( Marks: 1 ) - Please choose one
All of the following are the steps involved in financial planning process EXCEPT:
► Assumptions are made about future levels of sales, costs, and interest rates etc.
► Ratios are projected and analyzed
► Projected financial statements are developed
► Comparison with key competitors about the prices to be charged
Question No: 24 ( Marks: 1 ) - Please choose one
Which of the following is NOT the interest rate used for discounting calculation?
► Benchmark interest rate
► Effective interest rate
► Periodic interest rate
► Nominal interest rate
Question No: 25 ( Marks: 1 ) - Please choose one
Suppose you are going to sale an old asset and its market value is greater than its book value it indicates that:
► Company is going to have capital gain
► Company will have to bear capital loss
► Company is going to earn operating revenue
► Company has to bear revenue expense
Question No: 26 ( Marks: 1 ) - Please choose one
Which of the following is not a type of problem in capital rationing?
► Size difference of projects
► Timing difference of projects
► Different lives of different projects
► Different cash flow streams
Question No: 27 ( Marks: 1 ) - Please choose one
In Pakistan which of the following is assigned to bond rating and risk?
► Standard & poor
Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following statement defines the following events i.e Inflation, recession, and high interest rates?
► Systematic risk factors that can be diversified away
► Company-specific risk factors that can be diversified away
► Among the factors that are responsible for market risk
► Irrelevant except to governmental authorities like the Federal Reserve
Question No: 29 ( Marks: 3 )
Differentiate the real assets and securities.
Real assets are physical property such as Land, Machinery, equipments and Building etc. Where as securities basically, are legal contractual piece of paper.
Kinds of securities:
We have discussed about two types of securities.
Direct claim securities:
It is defined as equity paper representing ownership, shareholding. Appears on Liabilities side of Balance Sheet
It is a debt paper representing loan or borrowing. These are long term debt instruments.
Question No: 30 ( Marks: 3 )
A security analyst has estimated the following returns on the stocks of 4 large companies:
Weightage Expected Returns
Company A 25% 12%
Company B 25% 11.5%
Company C 25% 10.%
Company D 25% 9.5%
You are required to calculate the expected return on this portfolio.
Expected Portfolio Return Calculation:
rP * = rA xA + rB xB + rC xB + rD xD
= 12% (25/100) + 11.5 %( 25/100) + 10%(/25/100) + 9.5%(25/100)
= 3% + 2.8757% + 2.5 + 2.375
Question No: 31 ( Marks: 5 )
Why a person should invest in shares? Give reasons.
. Capital growth
Over the longer term, shares can produce significant capital gains through increases in share prices. Some companies also issue free or bonus shares to their shareholders as another way of passing on company profits or increases in their net worth.
Diversifying your investments
in order to diversify your investment portfolio, you will probably have part of your money in the share market. You may buy shares directly or through managed funds or your superannuation.
Easy buying and selling
Compared to other investments like property, shares are very portable. They can be bought and sold quickly, and the brokerage on the transactions is lower than for a property transaction. Unlike selling a property, you can sell part of your share parcels.
Question No: 32 ( Marks: 5 )
H Corporation’s stock currently sells for Rs.20 a share. The stock just paid a dividend of Rs.2 a share (Do = Rs.2). the dividend is expected to grow at a constant rate of 11% a year.
• What stock price is expected 1 year from now?
• What would be the required rate of return on company’s stock?
P0 = rs 20
D0 = 2.
g = 11%
P1 = ?
rs = ?
Solution Part A:
P1 = P0(1 + g)
Solution part B:
rs = D1 / P0 + g
rs = (2 * 1.11/20) + 0.11
rs = (2.22/20) + 0.11
rs = 0.111 + 0.11
rs = 0.221*100
rs = 22.1%