MIDTERM EXAMINATION
Spring 2010
MGT201- Financial Management
Question No: 1 ( Marks: 1 ) - Please choose one
Which type of responsibilities are primarily assigned to Controller and Treasurer respectively?
► Operational; financial management
► Financial management; accounting
► Accounting; financial management
► Financial management; operations
Question No: 2 ( 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: 3 ( Marks: 1 ) - Please choose one
In finance we refer to the market where existing securities are bought and sold as the __________ market.
► Money
► Capital
► Primary
► Secondary
Question No: 4 ( 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
Reference:
The firm has a preference for a high receivables turnover as it is more quickly turning
receivables into cash that the firm can use.
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
Question No: 6 ( Marks: 1 ) - Please choose one
A 5-year ordinary annuity has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following?
► Rs.331.20
►Rs.399.30
► Rs.431.24
► Rs.486.65
Question No: 7 ( Marks: 1 ) - Please choose one
In proper capital budgeting analysis we evaluate incremental __________ cash flows.
► Accounting
► Operating
► Before-tax
► Financing
Question No: 8 ( Marks: 1 ) - Please choose one
Mortgage bonds are secured by real property whose value is generally _______ than that of the value of the bonds issue?.
► Higher
► Lower
► Equal
► Higher or lower
Question No: 9 ( Marks: 1 ) - Please choose one
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
Formula:
Current yield = coupon / market price
Current Yield = 7%*1000/ 975
Current Yield = 70/ 975
Current Yield = 0.071*100
Current Yield = 7.18
Question No: 10 ( Marks: 1 ) - Please choose one
If a company issues bonus shares, what will be its effect on the debt equity ratio?
► It will improve
► It will deteriorate
► No effect
► None of the given options
Question No: 11 ( Marks: 1 ) - Please choose one
_________ is equal to (common shareholders' equity/common shares outstanding).
►Book value per share
► Liquidation value per share
► Market value per share
► None of the above
Question No: 12 ( Marks: 1 ) - Please choose one
You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of Rs. 3 in the upcoming year while Stock Y is expected to pay a dividend of Rs. 4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X:
► Will be greater than the intrinsic value of stock Y
► Will be the same as the intrinsic value of stock Y
► Will be less than the intrinsic value of stock Y
► Cannot be calculated without knowing the market rate of return
Question No: 13 ( Marks: 1 ) - Please choose one
You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of Rs. 2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A:
► Will be greater than the intrinsic value of stock B
► Will be the same as the intrinsic value of stock B
►Will be less than the intrinsic value of stock B
► None of the given options
Question No: 14 ( Marks: 1 ) - Please choose one
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
Reference:
Current Yield = Coupon / Market Price
Question No: 15 ( 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
Reference:
In times of high inflation, earnings are inflated; thus, P/E ratios decline
Question No: 16 ( Marks: 1 ) - Please choose one
When Return is being estimated in % terms, the units of Standard Deviation will be mention in __________.
► Percentage (%)
► Times
► Number of days
► All of the given options
Reference:
Standard Deviation Interpretation
What are the units of Standard Deviation?
For our example where Return is being estimated in % terms, the units of
Standard Deviation will also be %.
Question No: 17 ( Marks: 1 ) - Please choose one
___________ is one of the most common techniques of financial analysis.
► Analyzing the statement of equity
► Preparing the cash budget
► scrutinizing of Financial statement
► Forecasting the income statement
Question No: 18 ( Marks: 1 ) - Please choose one
Which of the following formula is used to calculate the future value in simple interest?
► FV = PV + (PV× i × n)
► FV / (PV× i × n) = PV
► FV = PV - (PV× i × n)
► FV = PV × (PV× i × n)
Question No: 19 ( Marks: 1 ) - Please choose one
Which of the following are the types of annuities?
► Perpetuity and discrete annuity
► Ordinary and discrete annuity
► Discrete and simple annuity
► Ordinary and annuity due
Question No: 20 ( Marks: 1 ) - Please choose one
Value of annuity depends upon which of the following factors?
► Cash inflows & outflows
► Required rate of return & cash flows
► Constant cash flows & discount factor
► Constant cash flows & life of investment
Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following statement best describes capital budgeting?
► It’s a tool which is used to evaluate the projects and fixed assets of the company
► A technique used to assess the working capital requirement
► It will help the management to decide whether the new venture should be taken up or not.
► All of the given options are correct
Question No: 22 ( Marks: 1 ) - Please choose one
IRR can be defined as:
► A discount rate that equates the PV of a project’s expected cash inflows to the PV of project’s cost
► Present value of the stream of net cash flows from project’s net investment
► It’s a cost & benefits ratio used to assess the validity of a project
► The time period required to receive back the initial investment.
Question No: 23 ( Marks: 1 ) - Please choose one
If the life of a project is 6 years and the life of other project is 2 years then least common multiple will be:
► 2 years
► 6 years
► 8 years
► 12 years
Question No: 24 ( Marks: 1 ) - Please choose one
Which of the following is the price which is mentioned on the bonds?
► Face value
► Salvage value
► Market value
► Book value
Question No: 25 ( 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: 26 ( Marks: 1 ) - Please choose one
When you allocate capital, you choose investments that are more beneficial and less
► Diversified
► Risky
► Costly
► Value based
Question No: 27 ( Marks: 1 ) - Please choose one
Which of the following is a major disadvantage of the corporate form of organization?
► Double taxation of dividends
► Inability of the firm to raise large sums of additional capital
► Limited liability of shareholders
► Limited life of the corporate form
Reference:
Page 4
Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following is NOT the form of cash flow generated by the investments of the shareholders?
► Income
► Capital loss
► Capital gain
► Operating income
Question No: 29 ( Marks: 3 )
Define interest rate risk and investment risk.
Interest rate risk
Interest rate risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa. Interest rate risk is commonly measured by the bond's duration.
Investment Risk
The uncertainties attached while making an investment that the investment may not yield the expected returns.
OR
Possibility of a reduction in value of an insurance instrument resulting from a decrease in the value of the assets incorporated in the investment portfolio underlying the insurance instrument. This reduction can also be effected by a change in the interest rate.
Question No: 30 ( Marks: 3 )
What is risk averse assumption?
When we talk in terms of risk averse, we know that most investors are psychologically risk averse. In case of two investments offer with the same prospective return most investor would choose the one with the lower risk or standard deviation or spread or votality. In other words most of the investors are not major gamblers. Gamblers would choose that project which appeals to investors greed by offering upsite return of 30% plus 10% = 40%. The consequences on the share price, the higher the risk of share the higher its rate of return and the lower its market price, so any investor will choose surely with the low risk and he will take care of very closely risk averse assumption while finalizing any project.
Question No: 31 ( Marks: 5 )
How negatively correlated investments behave in a market?
Solution:
If Ro = - 1.0, it means that Investments are Perfectly Negatively Correlated and the Returns (or Prices or Values) of the 2 Investments move in Exactly Opposite directions. In this Ideal Case, All Risk can be diversified away. For example, if the price of one stock increases by 50% then the price of another stock goes down by 50%.
Question No: 32 ( Marks: 5 )
What types of shares are available in the market?
The following are the shares available normally in the market;
1. Preferred Stock:
These stocks have regular Constant / Fixed Future Dividends Certain for the Preferred Shareholders. Use old Perpetuity Cash Flow Pattern and formulas to estimate theoretical Fair Stock Price.
2. Common Stock:
Theses stocks have variable future dividends expected by the common shareholders. Use Zero
& Constant Growth Models to simplify future Dividend forecasts in estimated Theoretical Stock Price (or PV) equation. There dividend depend upon the income earned by the company and also upon the management decision regarding the dividend declaration.
