MIDTERM EXAMINATION
Spring 2009
MGT201- Financial Management (Session - 4)
Time: 60 min
Marks: 50
Question No: 1 ( Marks: 1 ) - Please choose one
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
► Shareholder; bondholder
Question No: 3 ( 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: 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. ► 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
Question No: 8 ( Marks: 1 ) - Please choose one
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
Question No: 10 ( Marks: 1 ) - Please choose one
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
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
► During the life of project if you have any net cash outflow
► All of the given options
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? ► Internal rate of return
► Multiple internal rate of return
► Modified internal rate of return
► Net present value
Question No: 19 ( Marks: 1 ) - Please choose one
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: 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
► None of the given options
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
Question No: 23 ( Marks: 1 ) - Please choose one
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
Question No: 24 ( Marks: 1 ) - Please choose one
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
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
Question No: 28 ( 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: 29 ( 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
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
Question No: 33 ( 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
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
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"
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?
A) We have 2 project A , B
Project A, Io= - Rs20000, Yr 1 = +Rs10000, Yr2= Rs8000, Yr3= Rs6000
Project B, Io= -Rs24000, Yr1= +Rs10000, Yr2=Rs10000, yr3=Rs10000
In simple NPV=
Project A= -20000+10000+8000+6000/(1.15)^3
Rs= 2630.19
Project B= -24000+10000+10000+10000/(1.15)^3
Rs= 3945.29
The firm will decide to take the 2nd project B. becz its NPV is greater tha project A.
B)
Project A= -20000+10000+8000+6000/(1.10)^3
Rs= 3005.25
Project B= -24000+10000+10000+10000/(1.10)^3
Rs= 4507.88
Again on 10%, project B is better tha project A.