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
PV = 8000/(1+.11)^3
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
PV= 1000/(1+.08)^5
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
If the cash-flow stream is a uniform series of inflows (an annuity) and the initial outflow occurs at time 0, there is no need for a trial and error approach. We simply divide the initial cash outflow by the periodic receipt and search for the nearest discount factor in a table of present value interest factors of an annuity (PVIFAs).
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
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: 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
Rationale: A coupon bond will pay the coupon rate of interest on a semiannual basis unless the firm defaults on the bond. Convertible bonds are specific types of bonds.
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
Rationale: In order for the investor to earn more than the current yield the bond must be selling for a discount. Yield to maturity will be greater than current yield as investor will have purchased the bond at discount and will be receiving the coupon payments over the life of the bond.
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
A security that combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics. The most common example is a convertible bond that has features of an ordinary bond, but is heavily influenced by the price movements of the stock into which it is convertible.
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
Rationale option 2 can not because it represents capital gain/loss which has nothing to do with dividends
option 3 also represent capital gain/loss
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
market capitalization rate A rate of return on investment based on the expected income.
P/E The most common measure of how expensive a stock is. The P/E ratio is equal to astock'smarket capitalization divided by its after-tax earnings
K = Capitalization Rate = 20%
Price over earning ratio:
Here is formula for {P/E}
P/E = (1-b) / K-G
G = growth Rate
where G = ROE * b
b = ploy back ratio. Or retained earning (money which is reinvested in company)
g = ROE * b = .22 * .9 = .198
by plugging the values in p/e formula
(1 - .9) / (.20 - .198) = 50
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
Rationale: A, B, and D are incorporated into the discount rate used in the dividend discount model.
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
Rationale: Firms with lower than average dividend yields are usually growth firms, which have a higher P/E ratio than average.
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
Systematic risk is not avoidable through diversification
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
Rationale: A well-diversified portfolio is one that contains a large number of securities, each having a small (but not necessarily equal) weight, so thatnonsystematic variance is negligibl
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
The expected net present value of B is greater than the expected net present value of A and the risk of B exceeds the risk of A, so neither dominates the other.
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?
Calculate the NPVs
Project A: -$20,000 + $10,000/(1.15)^1 + $8,000/(1.15)2 + $6,000/(1.15)3 = -$1,310.10.
Project B: -$24,000 + $10,000/(1.15)1 + $10,000/(1.15)2 + $10,000/(1.15)3 = -$1,167.75.
Reject BOTH projects as decreasing shareholder wealth.
Part b: Calculate the NPVs
Project A: -$20,000 + $10,000/(1.1)1 + $8,000/(1.1)2 + $6,000/(1.1)3 = $210.37.
Project B: -$24,000 + $10,000/(1.1)1 + $10,000/(1.1)2 + $10,000/(1.1)3 = $868.52.
Accept project "B" as it increases shareholder wealth the greatest.
for more solutions visit
www.forum.ysapak.com