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Thread: MGT201 Financial Management Paper 28 May 2010

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    99 MGT201 Financial Management Paper 28 May 2010

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    MIDTERM EXAMINATION
    Spring 2010
    MGT201 Financial Management (Session - 3)


    Question No: 1 ( 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: 2 ( Marks: 1 ) - Please choose one
    Which group of ratios measures a firm's ability to meet short-term obligations?


    ► Liquidity ratios
    ► Debt ratios
    ► Coverage ratios
    ► Profitability ratios

    Question No: 3 ( Marks: 1 ) - Please choose one
    Assume that the interest rate is greater than zero. Which of the following cash-inflow streams totaling Rs.1, 500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively.


    ► Rs.700 Rs.500 Rs.300
    ► Rs.300 Rs.500 Rs.700
    ► Rs.500 Rs.500 Rs.500
    ► Any of the above, since they each sum to Rs.1,500

    Question No: 4 ( Marks: 1 ) - Please choose one
    Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is often referred to as __________.


    ► Present value
    ► Simple interest
    ► Future value
    ► Compound interest


    Question No: 5 ( Marks: 1 ) - Please choose one
    You are going to invest Rs.12,500 into a certificate of deposit (CD) at a 6% annual rate (compounded annually) with a maturity of 30 months. How much money will you receive when the CD matures?


    ► Rs.14,491
    ► Rs.14,518
    ► Incomplete information
    ► Rs.14,460

    Question No: 6 ( Marks: 1 ) - Please choose one
    An 8-year annuity due has a future value of Rs.1,000. If the interest rate is 5 percent, the amount of each annuity payment is closest to which of the following?


    ► Rs.109.39
    ► Rs.147.36
    ► Rs.154.73
    ► Rs.99.74

    Question No: 7 ( Marks: 1 ) - Please choose one
    All of the following influence capital budgeting cash flows EXCEPT __________.


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    ► Choice of depreciation method for tax purposes
    ► Economic length of the project
    ► Projected sales (revenues) for the project
    ► Sunk costs of the project

    Question No: 8 ( Marks: 1 ) - Please choose one
    The basic capital budgeting principles involved in determining relevant after-tax incremental operating cash flows require us to __________.


    ► Include sunk costs, but ignore opportunity costs
    ► Include opportunity costs, but ignore sunk costs
    ► Ignore both opportunity costs and sunk costs
    ► Include both opportunity and sunk costs

    Question No: 9 ( Marks: 1 ) - Please choose one
    From which of the following category would be the cash flow received from sales revenue and other income during the life of the project?


    ► Cash flow from financing activity
    ► Cash flow from operating activity
    ► Cash flow from investing activity
    ► All of the given options

    Question No: 10 ( Marks: 1 ) - Please choose one
    Which one of the following selects the combination of investment proposals that will provide the greatest increase in the value of the firm within the budget ceiling constraint?


    ► Cash budgeting
    ► Capital budgeting
    ► Capital rationing
    ► Capital expenditure


    Question No: 11 ( Marks: 1 ) - Please choose one
    Who is responsible for the decisions relating capital budgeting and capital rationing?


    ► Chief executive officer
    ► Junior management
    ► Division heads
    ► All of the given option


    Question No: 12 ( Marks: 1 ) - Please choose one
    When coupon bonds are issued, they are typically sold at which of the following value?



    ► Below par
    ► Above par value
    ► At or near par value
    ► At a value unrelated to par

    Question No: 13 ( Marks: 1 ) - Please choose one
    Which of the following is NOT an example of hybrid equity?


    ► Convertible bonds
    ► Convertible debenture
    ► Common shares
    ► Preferred shares

    Question No: 14 ( 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: 15 ( Marks: 1 ) - Please choose one
    Which of the following is CORRECT, if a firm has a required rate of return equal to the ROE?


    ► The firm can increase market price and P/E by retaining more earnings
    ► The firm can increase market price and P/E by increasing the growth rate
    ► The amount of earnings retained by the firm does not affect market price or the P/E
    ► None of the given options

    Question No: 16 ( Marks: 1 ) - Please choose one
    When Investors want high plowback ratios?


    ► Whenever ROE > k
    ► Whenever k > ROE
    ► Only when they are in low tax brackets
    ► Whenever bank interest rates are high

    Question No: 17 ( Marks: 1 ) - Please choose one
    Which of the following statement about portfolio statistics is CORRECT?


    ► A portfolio's expected return is a simple weighted average of expected returns of the individual securities comprising the portfolio.
    ► A portfolio's standard deviation of return is a simple weighted average of individual security return standard deviations.
    ► The square root of a portfolio's standard deviation of return equals its variance.
    ► The square root of a portfolio's standard deviation of return equals its coefficient of variation.

    Question No: 18 ( Marks: 1 ) - Please choose one
    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: 19 ( Marks: 1 ) - Please choose one
    Diversification can reduce risk by spreading your money across many different ______________.


    ► Investments
    ► Markets
    ► Industries
    ► All of the given options

    Question No: 20 ( Marks: 1 ) - Please choose one
    Which of the following is NOT a major cause of unsystematic risk.


    ► New competitors
    ► New product management
    ► Worldwide inflation
    ► Strikes


    Question No: 21 ( Marks: 1 ) - Please choose one
    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: 22 ( Marks: 1 ) - Please choose one
    Under which concept it is said that “do not put all your eggs in one basket”?


    ► Risk & return
    ► Portfolio diversification
    ► Insurance management
    ► Time value of money

    Question No: 23 ( Marks: 1 ) - Please choose one
    All of the following are the steps involved in financial planning process EXCEPT:


    ► Assumptions are made about future levels of sales, costs, and interest rates etc.
    ► Ratios are projected and analyzed
    ► Projected financial statements are developed
    ► Comparison with key competitors about the prices to be charged

    Question No: 24 ( Marks: 1 ) - Please choose one
    Which of the following is NOT the interest rate used for discounting calculation?


    ► Benchmark interest rate
    ► Effective interest rate
    ► Periodic interest rate
    ► Nominal interest rate



    Question No: 25 ( Marks: 1 ) - Please choose one
    Suppose you are going to sale an old asset and its market value is greater than its book value it indicates that:


    ► Company is going to have capital gain
    ► Company will have to bear capital loss
    ► Company is going to earn operating revenue
    ► Company has to bear revenue expense

    Question No: 26 ( Marks: 1 ) - Please choose one
    Which of the following is not a type of problem in capital rationing?


    ► Size difference of projects
    ► Timing difference of projects
    ► Different lives of different projects
    ► Different cash flow streams

    Question No: 27 ( Marks: 1 ) - Please choose one
    In Pakistan which of the following is assigned to bond rating and risk?


    ► IMF
    ► Moody’s
    ► Standard & poor
    ► PACRA

    Question No: 28 ( Marks: 1 ) - Please choose one
    Which of the following statement defines the following events i.e Inflation, recession, and high interest rates?

    ► Systematic risk factors that can be diversified away
    ► Company-specific risk factors that can be diversified away
    ► Among the factors that are responsible for market risk
    ► Irrelevant except to governmental authorities like the Federal Reserve

    Question No: 29 ( Marks: 3 )
    Differentiate the real assets and securities.



    Question No: 30 ( Marks: 3 )
    A security analyst has estimated the following returns on the stocks of 4 large companies:


    Weightage Expected Returns
    Company A 25% 12%
    Company B 25% 11.5%
    Company C 25% 10.%
    Company D 25% 9.5%
    You are required to calculate the expected return on this portfolio.


    Question No: 31 ( Marks: 5 )
    Why a person should invest in shares? Give reasons.



    Question No: 32 ( Marks: 5 )
    H Corporation’s stock currently sells for Rs.20 a share. The stock just paid a dividend of Rs.2 a share (Do = Rs.2). the dividend is expected to grow at a constant rate of 11% a year.

    • What stock price is expected 1 year from now?
    • What would be the required rate of return on company’s stock?

  2. #2
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    MGT201 Midterm Paper

    MIDTERM EXAMINATION
    Spring 2010
    MGT201- Financial Management (Session - 5)


    Question No: 1 ( 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: 2 ( 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: 3 ( 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: 4 ( Marks: 1 ) - Please choose one
    An investment proposal should be judged in whether or not it provides:

    ► A return equal to the return require by the investor
    ► A return more than required by investor
    ► A return less than required by investor
    ► A return equal to or more than required by investor

    Question No: 5 ( 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: 6 ( Marks: 1 ) - Please choose one
    A capital budgeting technique that is NOT considered as discounted cash flow method is:


    ► Payback period

    ► Internal rate of return
    ► Net present value
    ► Profitability index

    Question No: 7 ( Marks: 1 ) - Please choose one
    Why net present value is the most important criteria for selecting the project in capital budgeting?

    ► Because it has a direct link with the shareholders dividends maximization
    ► Because it has direct link with shareholders wealth maximization

    ► Because it helps in quick judgment regarding the investment in real assets

    ► Because we have a simple formula to calculate the cash flows


    Question No: 8 ( 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: 9 ( Marks: 1 ) - Please choose one
    Bond is a type of Direct Claim Security whose value is NOT secured by __________.


    ► Tangible assets
    ► Intangible assets
    ► Fixed assets
    ► Real assets


    Question No: 10 ( 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: 11 ( Marks: 1 ) - Please choose one
    Which of the following is designated by the individual investor's optimal portfolio?

    ► The point of tangency with the opportunity set and the capital allocation line
    ► The point of highest reward to variability ratio in the opportunity set
    ► The point of tangency with the indifference curve and the capital allocation line
    ► The point of the highest reward to variability ratio in the indifference curve

    Question No: 12 ( Marks: 1 ) - Please choose one
    Assume that the expected returns of the portfolios are the same but their standard deviations are given in the options given below, which of the option represent the most risky portfolio according to standard deviation?


    ► 1.5%
    ► 2.0%
    ► 3.0%
    ► 4.0%

    Question No: 13 ( Marks: 1 ) - Please choose one
    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: 14 ( Marks: 1 ) - Please choose one
    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: 15 ( Marks: 1 ) - Please choose one
    Which of the following is NOT an example of a financial intermediary?

    ► Wisconsin S&L, a savings and loan association
    ► Strong Capital Appreciation, a mutual fund
    ► Microsoft Corporation, a software firm
    ► College Credit, a credit union

    Question No: 16 ( Marks: 1 ) - Please choose one
    An 8% coupon Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15. What is the accrued interest on Rs. 100,000 face value of this note?


    ► Rs. 491.80
    ► Rs. 800.00
    ► Rs. 983.61
    ► Rs. 1,661.20

    Question No: 17 ( Marks: 1 ) - Please choose one
    A preferred stock will pay a dividend of Rs. 3.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth model to calculate the intrinsic value of this preferred stock.


    ► Rs. 0.39
    ► Rs. 0.56
    ► Rs. 31.82
    ► Rs. 56.25

    Question No: 18 ( Marks: 1 ) - Please choose one
    Information that goes into __________ can be used to prepare __________.

    ► A forecast balance sheet; a forecast income statement
    ► Forecast financial statements; a cash budget
    ► Cash budget; forecast financial statements
    ► A forecast income statement; a cash budget

    Question No: 19 ( Marks: 1 ) - Please choose one
    What is the present value of Rs.8,000 to be paid at the end of three years if the interest rate is 11% compounded annually?

    ► Rs.5,850
    ► Rs.4,872
    ► Rs.6,725
    ► Rs.1,842

    Question No: 20 ( Marks: 1 ) - Please choose one
    “Do not compare apples with oranges” is the concept in:

    ► Discounting and Net present value
    ► Risk & return
    ► Insurance management
    ► Time value of money

    Question No: 21 ( Marks: 1 ) - Please choose one
    Which of the following is NOT the interest rate used for discounting calculation?

    ► Benchmark interest rate
    ► Effective interest rate
    ► Periodic interest rate
    ► Nominal interest rate

    Question No: 22 ( Marks: 1 ) - Please choose one
    Which of the following is the formula to calculate the future value of perpetuity?

    ► Constant cash flows × interest rate
    ► Constant cash flows / interest rate
    ► Constant cash flows + Constant cash flows × interest rate
    ► Constant cash flows - Constant cash flows/ interest rate

    Question No: 23 ( Marks: 1 ) - Please choose one
    Which of the following interest rate keeps on moving and changing on daily basis?

    ► Book value
    ► Market value
    ► Salvage value
    ► Face value

    Question No: 24 ( Marks: 1 ) - Please choose one
    From which of the following formula we can calculate coupon rate?

    ► Coupon receipt / market value
    ► Coupon receipt / present value
    ► Coupon receipt / salvage value
    ► Coupon receipt / book value

    Question No: 25 ( Marks: 1 ) - Please choose one
    Value of “g” in the formula of constant growth rate can be calculated from which of the following formula?

    ► g = plowback ratio × ROE
    ► g = plowback ratio × ROA
    ► g = payout ratio + ROE
    ► g = payout ratio + ROA

    Question No: 26 ( Marks: 1 ) - Please choose one
    In Gordon’s formula (rCE = DIV1 / Po + g), rCE is considered as __________ and “g” is considered as __________.

    ► Dividend yield, operating expenses
    ► Dividend yield, operating income
    ► Dividend yield, capital loss
    ► Dividend yield, capital gain

    Question No: 27 ( Marks: 1 ) - Please choose one
    To calculate the annual rate of return for an investment, we require which of the following(s)?

    ► The income created
    ► The gain or loss in value
    ► The original value at the beginning of the year
    ► All of the given options

    Question No: 28 ( Marks: 1 ) - Please choose one
    This is an example of which of the following?
    Real estate prices fell across the board because the market was glutted with surplus pre-owned homes for sale
    .
    ► Economic risk
    ► Industry risk
    ► Company risk
    ► Market risk

    Question No: 29 ( Marks: 3 )
    Briefly explain what call provision is and in which case companies use this option.



    Question No: 30 ( Marks: 3 )
    There are two stocks in the portfolio of Mr. N, Stock A and Stock B. the information of this portfolio is as follows:

    Common stock Expected rate of return Standard deviation
    Stock A 15% 10%
    Stock B 20% 15%
    Calculate the expected rate of return on this portfolio assuming that Stock A consists of 75% of the total funds invested in the stocks and the remainder in Stock B.

    Question No: 31 ( Marks: 5 )

    (a) What is correlation of coefficient?
    (b) What are efficient portfolios?



    Question No: 32 ( Marks: 5 )
    Suppose you approach a bank for getting loan. And the bank offers to lend you Rs.1, 000,000 and you sign a bond paper. The bank asks you to issue a bond in their favor on the following terms required by the bank: Par Value = Rs 1, 000,000, Maturity = 3 years
    Coupon Rate = 15% p.a, Security = Machinery
    You are required to calculate the cash flow of the bank which you will pay every month as well as the present value of this option.

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