MIDTERM EXAMINATION
Spring 2010
MGT201- Financial Management (Session - 1)
Question No: 1 ( Marks: 1 ) - Please choose one
How a company can improve (lower) its debt-to-total asset ratio?
► By borrowing more
► By shifting short-term to long-term debt
► By shifting long-term to short-term debt
► By selling common stock
Question No: 2 ( Marks: 1 ) - Please choose one
Which group of ratios relates profits to sales and investment?
► Liquidity ratios
► Debt ratios
► Coverage ratios
► Profitability ratios
Question No: 3 ( Marks: 1 ) - Please choose one
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 one
Cash budgets are prepared from past:
► Income tax and depreciation data
► None of the given options
► Balance sheets
► Income statements
Question No: 5 ( Marks: 1 ) - Please choose one
A 5-year ordinary annuity has a future value of Rs.1,000. If the interest rate is 8 percent, the amount of each annuity payment is closest to which of the following?
► Rs.231.91
► Rs.184.08
► Rs.181.62
► Rs.170.44
Solution:
FV = CCP (1+ i)^n/i
Question No: 6 ( 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
Question No: 7 ( Marks: 1 ) - Please choose one
Why we need Capital rationing?
► Because, there are not enough positive NPV projects
► Because, companies do not always have access to all of the funds they could make use of
► Because, managers find it difficult to decide how to fund projects
► Because, banks require very high returns on projects
Question No: 8 ( Marks: 1 ) - Please choose one
Which of the following is a person or an institution designated by a bond issuer as the official representative of the bondholders?
► Indenture
► Debenture
► Bond
► Bond trustee
Question No: 9 ( Marks: 1 ) - Please choose one
Market price of the bond changes according to which of the following reasons?
► Market price changes due to the supply –demand of the bond in the market
► Market price changes due to Investor’s perception
► Market price changes due to change in the interest rate
► All of the given options
Question No: 10 ( 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
Question No: 11 ( Marks: 1 ) - Please choose one
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
Question No: 12 ( Marks: 1 ) - Please choose one
Which of the following factors might affect stock returns?
► The business cycle
► Interest rate fluctuations
► Inflation rates
► All of the above
Question No: 13 ( Marks: 1 ) - Please choose one
What is the present value of Rs. 3,500,000 to be paid at the end of 50 years if the correct risk adjusted interest rate is 18%?
► Rs.105,000
► Rs.150,000
► Rs.395,000
► Rs.350,000
Question No: 14 ( Marks: 1 ) - Please choose one
While using capital budgeting techniques, the benefits we expect from a project is expressed in terms of:
► Cash in flows
► Cash out flows
► Cash flows
► None of the given options
Question No: 15 ( Marks: 1 ) - Please choose one
If the probability is written on Y-axis and the rate of return is mentioned on the X-axis, Which kind of relationship it shows when there is higher the standard deviation the higher the risk.
► Indirect relationship
► No relationship
► Direct relationship
► Insufficient information
Question No: 16 ( 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: 17 ( Marks: 1 ) - Please choose one
The value at which buyers and sellers are willing to buy and sell any asset is known as:
► Liquidation value
► Book value
► Intrinsic value
► Market value
Question No: 18 ( Marks: 1 ) - Please choose one
Which of the following concept says that rupee in your hand today is better than the rupee you are going to get tomorrow?
► Risk & return
► Time value of money
► Net present value
► Portfolio diversification
Question No: 19 ( 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 given options
Question No: 20 ( Marks: 1 ) - Please choose one
Which of the following is the formula to calculate the future value of perpetuity?
► Constant cash flows × interest rate
► Constant cash flows / interest rate
► Constant cash flows + Constant cash flows × interest rate
► Constant cash flows - Constant cash flows/ interest rate
Question No: 21 ( Marks: 1 ) - Please choose one
There is _______ relationship between NPV and Economic Value added.
► Direct
► Indirect
► No relationship
► Cannot be determined
Question No: 22 ( Marks: 1 ) - Please choose one
If new asset is replaced with old one, the difference between the depreciation of both assets would be:
► Useless and nothing to do with the depreciation
► Take the percentage of depreciation with new price of asset and then subtract it
► Subtracted from cash flows
► Added back to cash flows
Question No: 23 ( Marks: 1 ) - Please choose one
The formula which is used for the calculation of equivalent annual annuity is:
► (1+i) n +1/ (1+i) n
► (1+i) n-1 / (1+i) n
► (1+i) n × (1+i) n -1
► (1+i) n/ (1+i) n -1
Question No: 24 ( Marks: 1 ) - Please choose one
The responsibility of research & development projects lie with which of the following authority?
► Chief executive officer
► Divisional heads
► Collaborative teams from all departments
► Experts are hired to make such decisions
Question No: 25 ( Marks: 1 ) - Please choose one
Market price of a share will be determined from __________.
► Supply of share only
► Demand of share only
► Price of share of Benchmark Company
► From demand and supply in the market
Question No: 26 ( Marks: 1 ) - Please choose one
Which of the following is the formula to calculate present value under zero growth model for common stock?
► DIV1 / rCE
► DIV1 × rCE
► DIV1 + rCE
► DIV1 - rCE
Question No: 27 ( Marks: 1 ) - Please choose one
Earning per share can be calculated with the help of which of the following formula?
► Net income / number of shares outstanding
► Net income – dividend / number of shares outstanding
► Operating income / number of shares outstanding
► Earning before interest and taxes / number of shares outstanding
Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following statements is correct relating to the following information?
Stocks A and B each have an expected return of 15% and a standard deviation of 20%. You have a portfolio that consists of 50% A and 50% B.
► The portfolio's beta is less than 1.2
► The portfolio's expected return is 15%
► The portfolio's beta is greater than 1.2
► The portfolio's standard deviation is 20%
Question No: 29 ( Marks: 3 )
Briefly explain what call provision is and in which case companies use this option.
Call Provision:
The right (or option) of the Issuer to call back (redeem) or retire the bond by paying-off the Bondholders before the Maturity Date. When market interest rates drop, Issuers (or Borrowers) often call back the old bonds and issue new ones at lower interest rates
Question No: 30 ( Marks: 3 )
Lakson Corporation is a stagnant market and analysts foresee a long period of zero growth of the firm. It is paying a yearly dividend of Rs.5 for some time which is expected to continue indefinitely. The yield on the stock of similar firm is 8%.
What should lakson’s stock sell for?
Data:
P0 = ?
D1V1 = 5
RCE = 8%
Solution:
P0 = D1V1/RCE
P0 = 5/8%
P0 = 5/0.08
P0 = 62.5
Question No: 31 ( Marks: 5 )
What are different types of bonds? (Give any five types)
Solution:
Types of Bonds:
Mortgage Bonds: backed & secured by real assets
Subordinated Debt and General Credit: lower rank and claim than Mortgage Bonds.
Debentures: These are not secured by real property, risky
Floating Rate Bond: It is defined as a type of bond bearing a yield that may rise and fall within a specified range according to fluctuations in the market. The bond has been used in the housing bond market
Eurobonds: it issued from a foreign country
Zero Bonds & Low Coupon Bonds: no regular interest payments (+ for lender), not callable (+ for investor)
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?
Data:
P0 = rs 20
D0 = 2.
g = 11%
P1 = ?
ROR = ?
Solution Part A:
P1 = P0(1 + g)
P1= 20(1.11)
P1= 22.2
Solution part B:
ROR = D1 / P0 + g
ROR = (2 * 1.11/20) + 0.11
ROR = (2.22/20) + 0.11
ROR = 0.111 + 0.11
ROR = 0.221*100
ROR = 22.1%
