FIN622-----MidTerm----Fall 2009---Question No: 1 ( Marks: 1 ) - Please choose oneWhich of the following is a transaction of a primary financial market?► Initial Public Offering► Buying Mutual Funds Certificates► Selling old shares► Buying Bonds issued in previous yearsQuestion No: 2 ( Marks: 1 ) - Please choose oneWhich of the following statements applies to intrinsic value of a security?► Intrinsic value of a security always exceeds its book value.► Intrinsic value of a security rises when the liquidation value falls.► Intrinsic value of a security is the price around which its market value should closely fluctuate.► Intrinsic value of a security is its closing market value when it is actively traded.Question No: 3 ( Marks: 1 ) - Please choose oneWhich of the following reflects the real cost of funds to the borrowers and the real yield to the lenders? ► Real interest rate► Nominal interest rate► Annual interest rate► Quarterly interest rateQuestion No: 4 ( Marks: 1 ) - Please choose oneA Company's common stock is currently selling at Rs.3.00 per share, its quarterly dividend is Rs.0.07, and the stock is expected to rise to Rs.3.30 in a year. What is its expected rate of return?► 9.3%► 19.3%► 10.0%► 11.0%Question No: 5 ( Marks: 1 ) - Please choose oneWhich of the following would lower a firm's operating break-even point?► An increase in the cost of goods sold► An increase in selling price► An increase in wages paid to employees► An increase in total salesQuestion No: 6 ( Marks: 1 ) - Please choose oneA project would be financially feasible in which of the following situations?► If Internal Rate of Return of a project is greater than zero► If Net Present Value of a project is less than zero► If the project has Profitability Index less than one► If the project has Profitability Index greater than oneQuestion No: 7 ( Marks: 1 ) - Please choose oneSuppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on this stock?► 2%► 3%► 4%► 5%Question No: 8 ( Marks: 1 ) - Please choose oneIf the common stocks of a company have beta value equal to 1, then such stocks refer to which of the following?► Normal stocks► Aggressive stocks► Defensive stocks► Income stocksQuestion No: 9 ( Marks: 1 ) - Please choose oneWhich of the following statements applies to capital asset pricing model?► It tells us about the changes in the stock market index► It tells us about specific risk of a security► It tells us about specific risk of a portfolio► It tells us that how risk is rewarded in the marketQuestion No: 10 ( Marks: 1 ) - Please choose oneWhich of the following is known as market portfolio?► A portfolio consists of all risk free securities available in the market► A portfolio consists of securities of the same industry► A portfolio consists of all aggressive securities available in the market► A portfolio consists of all securities available in the marketQuestion No: 11 ( Marks: 1 ) - Please choose oneIn which of the following conditions a stock is said to be undervalued?► If the stock has market value less than the expected value► If the stock has market value more than the expected value► If the stock has market value equal to the expect value► If the stock has market value more that intrinsic valueQuestion No: 12 ( Marks: 1 ) - Please choose oneWhich of the following is included in the cost of capital of a firm?► Cost of sales► Depreciation cost► Depletion cost► Cost of retained earningsQuestion No: 13 ( Marks: 1 ) - Please choose oneWhich of the following is a necessary condition for issuing shares through Initial Public Offerings (IPO’s)?► The firm must have a stable dividend policy► The firm must have a low cost of capital► The firm must have a low level of debt► The firm must be listed on the stock exchangeQuestion No: 14 ( Marks: 1 ) - Please choose oneWhich 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 OfferingQuestion No: 15 ( Marks: 1 ) - Please choose oneXYZ Airlines will pay a Rs.4.00 dividend next year on its common stock, which is currently selling at Rs.100 per share. What is the market’s required return on this investment if the dividend is expected to grow at 5% forever?► 9%► 4%► 5%► 7%Question No: 16 ( Marks: 1 ) - Please choose oneA firm had an interest expense of Rs.400,000 on its outstanding debt during the financial year 2006-2007. If the firm marginal tax rate is 40%, what was the total tax savings of the firm during the period 2006-2007?► Rs.150,000► Rs.160,000► Rs.170,000► Rs.180,000Question No: 17 ( Marks: 1 ) - Please choose oneA Pure Play method of selecting a discount rate is most suitable in which of the following situations?► When the intended investment project has a Non-conventional stream of cash flows► When the intended investment project is a replacement project► When the intended investment project belongs to industry other than the firms operating in► When the intended investment project has a conventional stream of cash flowsQuestion No: 18 ( Marks: 1 ) - Please choose oneWhich 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 60:40Question No: 19 ( Marks: 1 ) - Please choose oneWhich of the following is TRUE regarding optimal capital structure?► An optimal capital structure refers to the mix of debt and equity level where the firm has minimum cost of capital► An optimal capital structure refers to the mix of debt and equity level where the firm has minimum financial leverage► An optimal capital structure refers to the mix of debt and equity level where the firm has maximium cost of capital► An optimal capital structure refers to the mix of debt and equity level where the firm has high financial leverageQuestion No: 20 ( Marks: 1 ) - Please choose oneWhich of the following is a proposition of Miller and Modigliani theory of Capital structure?► Value of a firm is independent of its capital structure► Value of a firm is independent of its level of debt► Value of a firm is dependent of its cost of capital► Value of a firm is independent on its level of equity financesQuestion No: 21 ( Marks: 1 ) - Please choose oneWhich of the following companies may be considered as a Pure Play in the beverages industry in Pakistan?► Coca Cola► Pepsi► Shezan► NestléQuestion No: 22 ( Marks: 1 ) - Please choose oneWhich of the following shows the reward to risk ratio of a Security A?► Expected return of A (rA) – risk free return / beta of A► Expected return of A (rA) – risk free return / required return of A► Expected return of A (rA) – beta of A / risk free return► Risk free return - expected return of A (rA)/ beta of AQuestion No: 23 ( Marks: 1 ) - Please choose oneWhich of the following statements is TRUE regarding Balance Sheet of a firm?► It reports how much of the firm’s earnings were retained in the business rather than paid out in dividends.► It reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.► It shows the firm’s financial position at a specific point in time.► It summarizes the firm’s revenues and expenses over an accounting period.Question No: 24 ( Marks: 1 ) - Please choose oneMr. Jamil is starting a software writing company. He is the owner and has only 3 employees. He wants a simple inexpensive form of ownership that leaves him in control and that he can quickly dissolve if he decides to change to another business. Which of the following would be Mr. Jamil's best choice of ownership form?► S-corporation► Partnership► Corporation► Sole proprietorshipQuestion No: 25 ( Marks: 1 ) - Please choose oneWhich of the following statements best describes the Debt Management Ratios?► These ratios measure the amount of debt the firm uses► These ratios measure how effectively a firm is managing its assets► These ratios show the relationship of a firm’s cash and other current assets to its current liabilities► These ratios show the combined effects of all areas of the firm on operating resultsQuestion No: 26 ( Marks: 1 ) - Please choose oneThe gross profit margin is unchanged, but the net profit margin declined over same period. This could have happened due to which one of the following reasons?► Cost of goods sold increased relative to sales► Sales increased relative to expenses► The tax rate has been increased► Dividends were decreasedQuestion No: 27 ( Marks: 1 ) - Please choose oneWhat approximate annual interest rate would you have to earn in order to double your money in six years?► 10 percent► 12 percent► 16 percent► 7 percentQuestion No: 28 ( Marks: 1 ) - Please choose oneHow much interest rate a bank should offer for a thousand rupees deposited in a bank expected to grow Rs.1,210 by the end of two years?► 10 percent interest, compounded continuously► 10 percent interest, compounded annually► 6 percent simple interest.► 11 percent simple interest. Question No: 29 ( Marks: 1 ) - Please choose oneThe present value of Rs.100 per year received for 10 years discounted at 8 percent is closest to which of the following amounts?► Rs.177► Rs.362► Rs.425► Rs.671Question No: 30 ( Marks: 1 ) - Please choose oneHow many years will it take for Rs.152,000 to grow to be Rs. 405,000 if it is invested in an account with an annual interest rate of 10%?► 13.68► 8.23► 10.28► Cannot be calculated from the given dataQuestion No: 31 ( Marks: 1 ) - Please choose oneAn investor buys a bond that will pay the interest amount of Rs.60 annually, forever. Which of the following would be the present value of the bond if there is exactly one year remaining until the next interest payment and the investor's required annual return is 5 percent?► Rs. 1,200► Rs. 800► Rs. 600► Rs. 1,000Question No: 32 ( Marks: 1 ) - Please choose oneHow much should you pay for a bond with Rs.1,000 face value, a 10 percent coupon rate, and seven years to maturity if your appropriate discount rate is 8 percent and interest is paid annually? (Answers are rounded to the nearest dollar)► Rs.560► Rs.1,000► Rs.903► Rs.1,104Question No: 33 ( Marks: 1 ) - Please choose oneA person has invested some of its personal spare funds in the common stocks of a public limited company. Which of the following would be the total return for this person on his common stocks?► Dividend per share and market interest rate► Dividend yield and capital gains yield► Earning per share and dividend per share► Market interest rate and dividend yieldQuestion No: 34 ( Marks: 1 ) - Please choose oneABC Company will pay a dividend of Rs.2.40 per share at the end of this year. Its dividend yield is 8%. At what price is the stock selling?► 40► 35► 30► 25Question No: 35 ( Marks: 1 ) - Please choose oneWhich of the following refers to the profit that results when a financial asset is sold above its purchase price?► Capital gain► Capital dividend► Capital premium► Capital appreciationQuestion No: 36 ( Marks: 1 ) - Please choose oneWhich one of the following costs should be ignored while evaluating the financial viability of a project?► Initial cost► Equipment cost► Cost of capital► Sunk costQuestion No: 37 ( Marks: 1 ) - Please choose oneWhich of the following is a long-term source of financing for a firm?► Corporate bonds► Money market instruments► Trade credit► Accounts payablesQuestion No: 38 ( Marks: 1 ) - Please choose oneSince the capital budgeting techniques use cash flows instead of accounting flows, therefore, the financial manager must add back which one of the following to the analysis?► The cost of fixed assets► The cost of accounts payable► Investments► DepreciationQuestion No: 39 ( Marks: 1 ) - Please choose oneWhen faced with mutually exclusive options, which project should be accepted under the 'Payback Method'?► The one with the longest payback period► The one with the shortest Payback period► It doesn’t matter because the payback method is not theoretically correct► None of the given optionsQuestion No: 40 ( Marks: 1 ) - Please choose oneWhat is the Net Present Value (NPV) of a project that costs Rs.100,000 and returns Rs.45,000 annually for three years if the opportunity cost of capital is 14%?► Rs.35,000.00► Rs.3,397.57► Rs.4,473.44► Rs.16,100.00Question No: 41 ( Marks: 5 )How sensitivity analysis helps to identify the factor(s) that will have a major affect on an investment?It is a method used to study how variation in the output of a model can be distinguished qualitatively and quantitatively from different sources of variation. The most common method of sensitivity analysis is sampling method. Sampling method is used in which model is executed repeatedly to combinations of values sampled from the distribution of the input factors. Following are the steps followed1. A target function is specified and input of interest2. A distribution function is assigned to selected factors.3. A matrix is generated from inputs with that distribution4. the model is then evaluated and computed the distribution of target function5. then a method is selected for relative importance of each factor.Question No: 42 ( Marks: 5 )ABC manufacturer company produces a particular item for Rs.2.50 and sells it for Rs.3. Fixed costs associated with the item are Rs.10,000 a year. Suppose the firm is contemplating the addition of a new piece of equipment to reduce manufacturing costs. Variable costs will be reduced to Rs. 2.25, but fixed costs will be increased by Rs.2,000 a year. How will this proposed change in the manufacturing process influence the break-even point?Contribution margin befor change = Fixed cost before chang=Rs10,000Fixed cost after change=10000+2000=12000
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