MIDTERM EXAMINATION
Fall 2009
MGT201- Financial Management (Session - 3)
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
Who determines the market price of a share of common stock?
► Individuals buying and selling the stock
► The board of directors of the firm
► The stock exchange on which the stock is listed
► The president of the company
Question No: 3 ( Marks: 1 ) - Please choose one
Which of the following statements is correct for a sole proprietorship?
► The sole proprietor has limited liability
► The sole proprietor can easily dispose of their ownership position relative to a shareholder in a corporation
► The sole proprietorship can be created more quickly than a corporation
► The owner of a sole proprietorship faces double taxation unlike the partners in a partnership
Question No: 4 ( Marks: 1 ) - Please choose one
Which of the following market refers to the market for relatively long-term financial instruments?
► Secondary market
► Primary market
► Money market
► Capital market
Question No: 5 ( Marks: 1 ) - Please choose one
Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and a net profit margin of 5 percent. What are its sales?
► 750,0Rs.3, 750,000
► Rs.48Rs.480, 000
► Rs.30Rs.300, 000
► Rs.1, Rs.1, 500,000
Question No: 6 ( Marks: 1 ) - Please choose one
The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = __________.
► Net profit margin × Total asset turnover × Equity multiplier
► Total asset turnover × Gross profit margin × Debt ratio
► Total asset turnover × Net profit margin
► Total asset turnover × Gross profit margin × Equity multiplier
Question No: 7 ( 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: 8 ( Marks: 1 ) - Please choose one
Which group of ratios shows the extent to which the firm is financed with debt?
► Liquidity ratios
► Debt ratios
► Coverage ratios
► Profitability ratios
Question No: 9 ( Marks: 1 ) - Please choose one
Which of the following would be considered a cash-flow item from an "operating activity"?
► Cash outflow to the government for taxes
► Cash outflow to shareholders as dividends
► Cash inflow to the firm from selling new common equity shares
► Cash outflow to purchase bonds issued by another company
Question No: 10 ( Marks: 1 ) - Please choose one
An annuity due is always worth _____ a comparable annuity.
► Less than
► More than
► Equal to
► Can not be found
Question No: 11 ( Marks: 1 ) - Please choose one
A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow is known as:
► Payback period
► Internal rate of return
► Net present value
► Profitability index
Question No: 12 ( Marks: 1 ) - Please choose one
If the cash flow stream for a project is NOT a uniform series of inflows and initial outflow occur at time 0. 15% discount rate produces a resulting present value of Rs. 104,000 that is greater than the initial cash outflow of Rs. 100,000. Now if we want to calculate the best discount rate:
► We need to try a higher discount rate
► We need to try a lower discount rate
► 15% is the best discount rate
► Interpolation is not required here
Question No: 13 ( Marks: 1 ) - Please choose one
Managers prefer IRR over net present value because they evaluate investments:
► In terms of dollars
► In terms of Percentages
► Intuitively
► Logically
Question No: 14 ( Marks: 1 ) - Please choose one
Which of the following make the calculation of NPV difficult?
► Estimated cash flows
► Discount rate
► Anticipated life of the business
► All of the given options
Question No: 15 ( Marks: 1 ) - Please choose one
When there is single period capital rationing, what would be the most sensible way of making investment decisions?
► Choose all projects with a positive NPV
► Group projects together to allocate the funds available and select the group of projects with the highest NPV
► Choose the project with the highest NPV
► Calculate IRR and select the projects with the highest IRRs
Question No: 16 ( 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: 17 ( Marks: 1 ) - Please choose one
Due to timing difference problem, a good project might suffer from _____ IRR even though its NPV is ________.
► Higher; Lower
► Lower; Lower
► Lower; Higher
► Higher; Higher
Question No: 18 ( Marks: 1 ) - Please choose one
What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream?
► Long-term debt
► Preferred stock
► Common stock
► None of the given option
Question No: 19 ( 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: 20 ( 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: 21 ( Marks: 1 ) - Please choose one
The value of a bond is directly derived from which of the following?
► Cash flows
► Coupon receipts
► Par recovery at maturity
► All of the given options
Question No: 22 ( Marks: 1 ) - Please choose one
When the bond approaches its maturity, the market value of the bond approaches to which of the following?
► Intrinsic value
► Book value
► Par value
► Historic cost
Question No: 23 ( Marks: 1 ) - Please choose one
What is yield to maturity on a bond?
► It is below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium
► The discount rate that will set the present value of the payments equal to the bond price
► It is based on the assumption that any payments received are reinvested at the coupon rate
► None of the given options
Question No: 24 ( Marks: 1 ) - Please choose one
Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now, what will be the price of this bond?
► Higher
► Lower
► The same
► Rs. 1,000
Question No: 25 ( Marks: 1 ) - Please choose one
If all things equal, when diversification is most effective?
► Securities' returns are positively correlated
► Securities' returns are uncorrelated
► Securities' returns are high
► Securities' returns are negatively correlated
Question No: 26 ( Marks: 1 ) - Please choose one
Which of the following value of the shares changes with investor’s perception about the company’s future and supply and demand situation?
► Par value
► Market value
► Intrinsic value
► Face value
Question No: 27 ( Marks: 1 ) - Please choose one
Which of the following has NO effect when the financial health (cash flows and income) of the company changes with time?
► Market value
► Price of the share
► Par value
► None of the given options
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
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: 30 ( Marks: 1 ) - Please choose one
Total portfolio risk is __________.
► Equal to systematic risk plus non-diversifiable risk
► Equal to avoidable risk plus diversifiable risk
► Equal to systematic risk plus unavoidable risk
► Equal to systematic risk plus diversifiable risk
Question No: 31 ( Marks: 1 ) - Please choose one
The wider the range of possible outcomes i.e.________.
► The greater the variability in potential Returns that can occur, the greater the Risk
► The greater the variability in potential Returns that can occur, the lesser the Risk
► The greater the variability in potential Returns that can occur, the level of risk remain constant
► None of the given options
Question No: 32 ( Marks: 1 ) - Please choose one
Which of the following is simply the weighted average of the possible returns, with the weights being the probabilities of occurrence?
► A probability distribution
► The expected return
► The standard deviation
► Coefficient of variation
Question No: 33 ( Marks: 1 ) - Please choose one
Which of the following statements regarding covariance is CORRECT?
► Covariance always lies in the range -1 to +1
► Covariance, because it involves a squared value, must always be a positive number (or zero)
► Low covariances among returns for different securities leads to high portfolio risk
► Covariances can take on positive, negative, or zero values
Question No: 34 ( Marks: 1 ) - Please choose one
Which of the following is NOT a major cause of systematic risk.
► A worldwide recession
► A world war
► World energy supply
► Company management change
Question No: 35 ( Marks: 1 ) - Please choose one
Finance consists of three interrelated areas:
► Money and capital market
► Investment
► Financial management
► All of the given options
Question No: 36 ( Marks: 1 ) - Please choose one
Mutually exclusive means that you can invest in _________ project(s) and having chosen ______ you cannot choose another.
► One; one
► Two; two
► Two; one
► Three; one
Question No: 37 ( Marks: 1 ) - Please choose one
At the termination of the project we need to take into account:
► Salvage value
► Book value
► Intrinsic value
► Fair value
Question No: 38 ( Marks: 1 ) - Please choose one
In which of the following approach you need to bring all the projects to the same length in time?
► MIRR approach
► Going concern approach
► Common life approach
► Equivalent annual approach
Question No: 39 ( Marks: 1 ) - Please choose one
Assume a company had Rs.1 billion in free cash flow last year, and it is expected to grow that cash flow at 3% into perpetuity. Assuming a 9% cost of equity, what is the present value of the company?
► Rs.12.08 billion
► Rs.18.15 billion
► Rs.14.16 billion
► Rs.16.67 billion
Question No: 40 ( Marks: 1 ) - Please choose one
What is the most important criteria in capital budgeting?
► Profitability index
► Net present value
► Pay back period
► Return on investment
Question No: 41 ( Marks: 5 )
Explain why financial planning is important to today’s chief executives?
Question No: 42 ( Marks: 5 )
How risk and expected return is compared in two distributions?
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