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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
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
Sponsored Links
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?
PAGE # 14
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.
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