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 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 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 securitys price will increase in a year Both represent the securitys 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: 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 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 ( Marks: 1 ) - Please choose one

Question No: 17

___________ 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? Its 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 projects expected cash inflows to the PV of projects cost Present value of the stream of net cash flows from projects net investment Its 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 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.
Long Bond - Risk Theory: The Interest Rate Risk for Long Term Bonds ie. For the 10 years is more than the Interest Rate Risk for Short Term Bonds i.e. 1 year bonds; provided the coupon rate for the bonds is similar. When investor buy a long term bond he is locked in investment for long term period there are more chances of fluctuation in interest rate and the inflation rate. So, the impact of interest rate changes on Long Term bonds is greater. Long Term Bond Prices fluctuate more because their Coupon Rates are fixed or locked for a long time even though Market Interest Rates are fluctuating daily; therefore the price of Long Bonds has to constantly keep adjusting. Price of the long term bond fluctuates more as compared to the short term bond. Because, you have a long term bond with fix coupon rate but the market interest rate is fluctuating in between the years. When we talk about the investement this is different from the forecasted and this to represent risk. we need to keep in mind the distinction between Stand Alone Risk (or Single Investment Risk) as oppose to market or Portfolio Risk or collection of investments risk, which is a risk of particular investment compare to other investments you have made. In Portfolio risk we are interested in overall risk of entire collection of investments that made by the company. Hence the interest rate risk is to the specific concern while the investement risk is to effect the whole business.

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.