MIDTERM EXAMINATION
Spring 2009
MGT201- Financial Management (Session - 4)
Time: 60 min
Marks: 50
Question No: 1 ( Marks: 1 ) - Please choose one
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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 )
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif[/IMG] 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.