FINALTERM EXAMINATION
Fall 2009
FIN622- Corporate Finance


Time: 120 min
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following is an expected rate of return on a bond if bought at its current market price and held to maturity?

􀅹 Yield to maturity
􀅹 Current yield
􀅹 Coupon yield
􀅹 Capital gains yield

Question No: 2 ( Marks: 1 ) - Please choose one
A firm can lower its breakeven level by doing which of the following actions?

􀅹 Lowering direct cost
􀅹 Increasing variable cost
􀅹 Increasing direct cost
􀅹 Lowering sales price

Question No: 3 ( Marks: 1 ) - Please choose one
Which one of the following statements applies to Dividend Growth Model?

􀅹 It is difficult to understand and use
􀅹 It is used for non-listed companies
􀅹 It is used for debt securities also
􀅹 It do not consider risk level of a security

Question No: 4 ( Marks: 1 ) - Please choose one
Which of the following refers to a stock issuance process where a company offers its shares to a limited number of investor?

􀅹 Initial Public Offering
􀅹 Private Placement
􀅹 Direct Public Offering
􀅹 Primary Offering

Question No: 5 ( Marks: 1 ) - Please choose one
Which of the following is the principal advantage of high debt financing?

􀅹 Tax savings
􀅹 Low Bankruptcy costs
􀅹 Minimum financial risk
􀅹 Low financial leverage

Question No: 6 ( Marks: 1 ) - Please choose one
Which of the following firms would have the highest financial leverage?

􀅹 A firm having debt-to-equity ratio of 30:70
􀅹 A firm having debt-to-equity ratio of 40:60
􀅹 A firm having debt-to-equity ratio of 50:50
􀅹 A firm having debt-to-equity ratio of 60:40

Question No: 7 ( Marks: 1 ) - Please choose one
In which of the following dividend policies, the amount of dividend is relatively fixed?

􀅹 Constant payout ratio policy
􀅹 Hybrid dividend policy
􀅹 Residual dividend policy
􀅹 Stable dividend policy

Question No: 8 ( Marks: 1 ) - Please choose one
Which of the following serves as a starting point for preparing functional budgets of a firm?


􀅹 Sales budget
􀅹 Master budget
􀅹 Production cost budget
􀅹 Cash budget

Question No: 9 ( Marks: 1 ) - Please choose one
A company is holding cash as a buffer in case of an unexpected need with operations. This is an example of the ________ motive for holding cash.

􀅹 Precautionary
􀅹 Speculative
􀅹 Transactions
􀅹 Capital needs

Question No: 10 ( Marks: 1 ) - Please choose one
Which of the following is an "income based method" for share valuation of a target firm?

􀅹 Replacement cost method
􀅹 Break up value method
􀅹 Dividend valuation method
􀅹 Accumulated depreciation method

Question No: 11 ( Marks: 1 ) - Please choose one
Which of the following is a re-structuring strategy in which employees buy a majority share in their own firm?

􀅹 Employee Dividend Scheme
􀅹 Employee Buyout
􀅹 Employee Empowerment
􀅹 Leverage Buyout

Question No: 12 ( Marks: 1 ) - Please choose one
All of the following could be the reasons for a subsidiary buyout EXCEPT:

􀅹 The parent company is in financial distress
􀅹 The parent company needs cash
􀅹 The parent company prefers to sell the firm rather that liquidation
􀅹 The parent company wants liquidation

Question No: 13 ( Marks: 1 ) - Please choose one
A firm has to pay $10,000 to an American company after three months. The firm enters into a contract with a foreign exchange dealer to buy $10,000 after three months at Rs.61/US$. This contract would be beneficial for the firm if:

􀅹 After three months the exchange rate is Rs.60/US$
􀅹 After three months the exchange rate is Rs.61/US$
􀅹 After three months the exchange rate is Rs.62/US$
􀅹 After three months the exchange rate is Rs.59/US$

Question No: 14 ( Marks: 1 ) - Please choose one
A firm can fix effective interest rate on short-term borrowings by doing which of the following?

􀅹 Buying a forward rate agreement
􀅹 Selling a forward rate agreement
􀅹 Borrowing local currency
􀅹 Borrowing base currency

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Question No: 15 ( Marks: 1 ) - Please choose one
A firm can fix effective interest rate on its short-term investment to be made at some future date by doing which of the following?

􀅹 Borrowing local currency
􀅹 Borrowing base currency
􀅹 Selling a forward rate agreement
􀅹 Buying an forward rate agreement

Question No: 16 ( Marks: 1 ) - Please choose one
A company may create a hedge through interest rate futures if it intends to make some
investment for a short-term at some future date, because of:

􀅹 Fall in short-term interest rates
􀅹 Fall in short-term deposit rates
􀅹 Increase in short-term interest rates
􀅹 Increase in short-term deposit rates

Question No: 17 ( Marks: 1 ) - Please choose one
Which one of the following statements is CORRECT regarding Option?

􀅹 An option creates an obligation for the holder
􀅹 An option creates a right and not the obligation for the holder
􀅹 Option seller is the option holder
􀅹 Option writer is the option holder

Question No: 18 ( Marks: 1 ) - Please choose one
Which one of the following statements is CORRECT regarding Options Contacts?

􀅹 A put option gives the holder a right to sell underlying item at a specified price
􀅹 A put option gives its writer the right to sell underlying item at a specified price
􀅹 A call option gives its writer a right to sell underlying item
􀅹 A call option gives its holder a right to sell underlying item

Question No: 19 ( Marks: 1 ) - Please choose one
Which of the following could be used as a hedging tool against unfavorable movement in interest rate?

􀅹 Currency option
􀅹 Currency futures
􀅹 Interest rate option
􀅹 Currency SWAP

Question No: 20 ( Marks: 1 ) - Please choose one
The credit policy of a public company is 1/10, net 30. At present 25% of the customers take the discount. What would accounts receivable be if all customers took the cash discount?

􀅹 Account receivable would be lower than the present level
􀅹 No change from the present level
􀅹 Account receivable would be higher than the present level
􀅹 Unable to determine without more information

Question No: 21 ( Marks: 1 ) - Please choose one
In the long run, a successful acquisition is one that:

􀅹 Enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage
􀅹 Enables the acquirer to diversify its asset base
􀅹 Increases the market price of the acquirer's stock over what it would have been without the acquisition
􀅹 Increases the financial leverage of the firm

Question No: 22 ( Marks: 1 ) - Please choose one
The efficiency enhancing effect resulting from a strategic merger is called which of the following?

􀅹 Merger effect
􀅹 Acquisition effect
􀅹 Synergy effect
􀅹 Efficiency effect

Question No: 23 ( Marks: 1 ) - Please choose one
How much debt financing is used by a firm whose beta is un-geared?

􀅹 100% debt financed
􀅹 100% equity financed
􀅹 50% equity and 50% debt financed
􀅹 60% equity and 40% debt financed

Question No: 24 ( Marks: 1 ) - Please choose one
Which of the following is more appropriate to use while comparing investment alternatives with different compounding periods?

􀅹 Quoted Interest Rate
􀅹 Annual Percentage Rate
􀅹 Effective Annual Interest Rate
􀅹 Nominal Interest Rate

Question No: 25 ( Marks: 1 ) - Please choose one
An investor would be exposed to which of the following risks, if he may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased?

􀅹 The coupon effect risk
􀅹 Interest rate risk
􀅹 Inflation risk
􀅹 Unique risk

Question No: 26 ( Marks: 1 ) - Please choose one
Which of the following focuses on long-term investment decision-making process?

􀅹 Working Capital Management
􀅹 Capital Budgeting
􀅹 Cash Budgeting
􀅹 None of the given options

Question No: 27 ( Marks: 1 ) - Please choose one
According to the reinvestment rate assumption, which method of capital budgeting assumes that the cash flows are reinvested at the project's rate of return?


􀅹 Payback period
􀅹 Net present value
􀅹 Internal rate of return
􀅹 None of the given options

Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following statements is correct for a project with a positive Net Present Value
(NPV)?

􀅹 Internal rate of return (IRR) exceeds the cost of capital
􀅹 Accepting the project has an indeterminate effect on shareholders
􀅹 The discount rate exceeds the cost of capital
􀅹 The profitability index equals one

Question No: 29 ( Marks: 1 ) - Please choose one
While calculating cash flow from operating activities through indirect method, an increase in
current assets is __________ whereas an increase in current liabilities is ___________ net
income?

􀅹 added to; added to
􀅹 added to; deducted from
􀅹 deducted from; added to
􀅹 deducted from; deducted from

Question No: 30 ( Marks: 1 ) - Please choose one
Which of the following holds true regarding aggressive working capital policy?

􀅹 High liquidity; high profitability; high risk
􀅹 High liquidity; low profitability; low risk
􀅹 Low liquidity; low profitability; high risk
􀅹 Low liquidity; high profitability; high risk

Question No: 31 ( Marks: 1 ) - Please choose one
Which of the following holds TRUE regarding conservative working capital policy?


􀅹 High liquidity; high profitability; high risk
􀅹 High liquidity; low profitability; low risk
􀅹 Low liquidity; low profitability; high risk
􀅹 Low liquidity; high profitability; high risk

Question No: 32 ( Marks: 1 ) - Please choose one
“The firm has very little net working capital sometimes even negative net working capital that can be very risky.”
The above statement belongs to:

􀅹 Aggressive working capital policy
􀅹 Conservative working capital policy
􀅹 Moderate working capital policy
􀅹 The statement is not related to any of the working capital policies

Question No: 33 ( Marks: 1 ) - Please choose one
“The firm has a reasonable amount of net working capital that leads to a low-risk position”.

The above statement belongs to:
􀅹 Aggressive working capital policy
􀅹 Conservative working capital policy
􀅹 Moderate working capital policy
􀅹 The statement is not related to any of the working capital policies

Question No: 35 ( Marks: 1 ) - Please choose one
Which of the following is equal to Stock out cost?

􀅹 Carrying cost Safety stock
􀅹 Holding cost Carrying cost
􀅹 Reordering cost Safety stock
􀅹 Carrying cost Reordering cost

Question No: 36 ( Marks: 1 ) - Please choose one
Which of the following statement is INCORRECT regarding Just-In-Time (JIT)?

􀅹 The inventories are kept near zero level.
􀅹 The inventory is acquired in such quantity on daily basis that can support the daily production level.
􀅹 The entire inventory acquired move to the production hall.
􀅹 Inventory level is necessarily kept at zero level.

Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following type of mergers occurs when one firm purchases other firms that produce similar or competing products?

􀅹 Horizontal
􀅹 Vertical
􀅹 Financial
􀅹 Conglomerate

Question No: 38 ( Marks: 1 ) - Please choose one
Which of the following valuation approach allows for specific and direct estimation of future
benefits to the owners, which is consistent with the theory of value?

􀅹 Asset-based method
􀅹 Income-based method
􀅹 Hybrid method
􀅹 None of the given options

Question No: 39 ( Marks: 1 ) - Please choose one
The experts hired in evaluation stage of a public take over process DO NOT include which of the following?

􀅹 Legal consultants
􀅹 Accountants
􀅹 Shareholders
􀅹 Stock Brokers

Question No: 40 ( Marks: 1 ) - Please choose one
In which of the following forms of acquisition, a company's existing managers acquire a large part or all of the company?

􀅹 Management Buyout
􀅹 Management Buy-In
􀅹 Leverage Buyout
􀅹 None of the given options

Question No: 41 ( Marks: 1 ) - Please choose one
Recession in economy is related to which of the following levels of financial distress of a firm?

􀅹 Firm Level
􀅹 Industry Level
􀅹 Macro-Level
􀅹 All of the given options

Question No: 42 ( Marks: 1 ) - Please choose one
Which of the following would be the outcome if the fixed rate in the forward rate agreement (FRA) is lower than the reference rate?

􀅹 The seller of the FRA makes a cash payment to the buyer.
􀅹 Both buyer and seller make payments to each other.
􀅹 The buyer of the FRA makes a cash payment to the seller.
􀅹 Neither buyer nor seller makes any payment to each other.

Question No: 43 ( Marks: 1 ) - Please choose one
If the strike price and current market price are equal, an option would be termed as:

􀅹 In the money
􀅹 Out of money
􀅹 At the money
􀅹 None of the given options

Question No: 44 ( Marks: 1 ) - Please choose one
Which of the following theories states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries?

􀅹 M&M theory
􀅹 Purchasing Power Parity theory
􀅹 Fisher effect theory
􀅹 Interest rate risk theory

Question No: 45 ( Marks: 3 )
How firms analyze their credit policies? Explain briefly.

Question No: 46 ( Marks: 5 )
How Economic Order Quantity (EOQ) Model is helpful in the reduction of total inventory costs?
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Question No: 47 ( Marks: 5 )
Differentiate between Spot Rates and Forward Rates of currencies. Why forward rates are higher than spot rates?

Question No: 48 ( Marks: 5 )
How a firm can create a money market hedge against transaction exposure, when the firm has to make a payment at some future date?

Question No: 49 ( Marks: 10 )
A Firm sales 200,000 units per year of a particular Product, order size is for 5000 units and stock
out is 3000 units. The stock out probability acceptance level is set to 5% and per unit stock out
cost is Rs.7/-. Holding cost is estimated at Rs.3/- per unit. Being an inventory manager, determine
stock out cost and amount of safety stock to be kept in hand.

Question No: 50 ( Marks: 10 )
Why firms do business internationally? Explain in detail
.