FINALTERM EXAMINATION
Fall 2009
MGT201- Financial Management (Session - 3)
Time: 120 min
Marks: 87
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following would NOT improve the current ratio? ► Borrow short term to finance additional fixed assets
► Issue long-term debt to buy inventory
► Sell common stock to reduce current liabilities
► Sell fixed assets to reduce accounts payable
Question No: 2 ( Marks: 1 ) - Please choose one
Which group of ratios measures how effectively the firm is using its assets? ► Liquidity ratios
► Debt ratios
► Coverage ratios
► Activity ratios
Question No: 3 ( Marks: 1 ) - Please choose one
The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you deposit Rs. 20, 000 you would expect to earn around __________ in interest. ► Rs.840
► Rs.858
► Rs.1,032
► Rs.1,121
Question No: 4 ( 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: 5 ( Marks: 1 ) - Please choose one
Which of the following would be considered a cash-flow item from an "operating activity"? ► Cash outflow to the government for taxes
► Cash outflow to shareholders as dividends
► Cash inflow to the firm from selling new common equity shares
► Cash outflow to purchase bonds issued by another company
Question No: 6 ( Marks: 1 ) - Please choose one
Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? ► Discount rate
► Profitability index
► Internal rate of return
► Multiple Internal rate of return
Question No: 7 ( Marks: 1 ) - Please choose one
Which of the following is a legal agreement between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? ► Indenture
► Debenture
► Bond
► Bond trustee
Question No: 8 ( Marks: 1 ) - Please choose one
__________ is a high-risk, high-yield bond. ► Zero coupon bond
► Mortgage bond
► Junk bond
► Income bond
Question No: 9 ( Marks: 1 ) - Please choose one
A coupon bond pays annual interest, has a par value of Rs.1,000, matures in 4 years, has a coupon rate of 10%, and has a yield to maturity of 12%. What is the current yield on this bond? ► 10.65%
► 10.45%
► 10.95%
► 10.52%
Question No: 10 ( Marks: 1 ) - Please choose one
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: 11 ( Marks: 1 ) - Please choose one
What is the price of a stock? ► The future value of all expected future dividends, discounted at the dividend growth rate
► The present value of all expected future dividends, discounted at the dividend growth rate
► The future value of all expected future dividends, discounted at the investor’s required return
► The present value of all expected future dividends, discounted at the investor’s required return
Question No: 12 ( Marks: 1 ) - Please choose one
Which of the following combinations will produce the highest growth rate? Assume that the firm's projects offer a higher expected return than the market capitalization rate. ► A high plowback ratio and a high P/E ratio
► A high plowback ratio and a low P/E ratio
► A low plowback ratio and a low P/E ratio
► A low plowback ratio and a high P/E ratio
Question No: 13 ( 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: 14 ( Marks: 1 ) - Please choose one
The square of the standard deviation is known as the ________. ► Beta
► Expected return
► Coefficient of variation
► Variance
Question No: 15 ( Marks: 1 ) - Please choose one
Which of the following is NOT a major cause of systematic risk. ► A worldwide recession
► A world war
► World energy supply
► Company management change
Question No: 16 ( Marks: 1 ) - Please choose one
_________ means expanding the number of investments which cover different kinds of stocks. ► Diversification
► Standard deviation
► Variance
► Covariance
Question No: 17 ( Marks: 1 ) - Please choose one
Which of the following would NOT be the part of the risk if the stock is a single stock investment? ► Company specific risk
► Un-diversifiable risk
► Diversifiable risk
► Random risk
Question No: 18 ( Marks: 1 ) - Please choose one
To limit volatility what should be the appropriate action? ► To diversify
► To check the stocks prices daily
► To own just a few securities
► Not to invest in risky securities
Question No: 19 ( Marks: 1 ) - Please choose one
In efficient market the stock price depends upon the required return which depends upon _________. ► Market risk
► Total risk
► Diversified risk
► Non- Systematic risk
Question No: 20 ( Marks: 1 ) - Please choose one
Why markets and market returns fluctuate? ► Because of political factors
► Because of social factors
► Because of socio-political factors
► Because of macro systematic factors
Question No: 21 ( Marks: 1 ) - Please choose one
The overall (weighted average) cost of capital is composed of weighted averages of which of the following? ► The cost of common equity and the cost of debt
► The cost of common equity and the cost of preferred stock
► The cost of preferred stock and the cost of debt
► The cost of common equity, the cost of preferred stock, and the cost of debt
Question No: 22 ( Marks: 1 ) - Please choose one
Which of the following costs would be considered a fixed cost? ► Raw materials
► Depreciation
► Bad-debt losses
► Production labor
Question No: 23 ( Marks: 1 ) - Please choose one
Assume the nominal interest rates (annual) in the country of Freedonia and the United States are 6% and 12% respectively. What is the implied 90-day forward rate if the current spot rate is 5 Freedonian marks (FM) per U.S. dollar? ► 4.732
► 4.927
► 5.074
► 5.283
Question No: 24 ( Marks: 1 ) - Please choose one
A firm that acquires another firm as part of its strategy to sell off assets, cut costs, and operates the remaining assets more efficiently is engaging in __________. ► A strategic acquisition
► A financial acquisition
► Two-tier tender offer
► Shark repellent
Question No: 25 ( Marks: 1 ) - Please choose one
When a firm can acquire another firm? ► Only by purchasing the assets of the target firm
► Only by purchasing the common stock of the target firm
► By either purchasing the assets or the common equity of the target firm
► None of the given options
Question No: 26 ( Marks: 1 ) - Please choose one
Which of the following is NOT a type of financial lease arrangement? ► Sale and leaseback
► Indirect leasing
► Leveraged leasing
► All of the given options
Question No: 27 ( Marks: 1 ) - Please choose one
The Board of Directors announces the amount and date of the next dividend on the __________ date; while the __________ date is the first date on which the purchaser of a stock is no longer entitled to the recently declared dividend. ► Declaration; record
► Ex-dividend; record
► Declaration; ex-dividend
► Payment; record
Question No: 28 ( Marks: 1 ) - Please choose one
What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? ► The price should increase by the amount of the dividend
► The price should decrease by the amount of the dividend
► The price should decrease by one-half the amount of the dividend
► The price should remain constant
Question No: 29 ( Marks: 1 ) - Please choose one
What is the amount of the annual interest tax shield for a firm with Rs. 3 million in debt that pays 12% interest if the firm is in the 35% tax bracket? ► Rs.126, 000
► Rs.234, 000
► Rs.360, 000
► Rs.1, 050,000
Question No: 30 ( Marks: 1 ) - Please choose one
While calculating the Stock Portfolio Risk using 3x3 Matrix Approach, non-diagonal terms shown in Boxes are called: ► Variance
► Coefficient
► Covariance
► Correlation
Question No: 31 ( Marks: 1 ) - Please choose one
While calculating the stock beta graphically, the formula to calculate the beta coefficient for stock B is: ► (rM* - rRF) / (rB* - rRF)
► (rB* - rRF) / (rM* - rRF)
► (rB* - rRF) / rRF
► (rB* - rRF) / rM*
Question No: 32 ( Marks: 1 ) - Please choose one
While analyzing any portfolio the value of “r” represents which of the following? ► Internal rate of return
► Expected rate of return
► Required rate of return
► Assumed rate of return
Question No: 33 ( Marks: 1 ) - Please choose one
If a stock is part of totally diversified portfolio then which of the following is TRUE for that stock? ► Stock's total Risk = Company Risk
► Stock's total Risk = Market Risk
► Stock's total Risk = Market Risk + Company Risk
► All of the given options
Question No: 34 ( Marks: 1 ) - Please choose one
High uncertainty is associated with which of the following? ► Preferred stock
► Common stock
► Bonds
► T –Bills
Question No: 35 ( Marks: 1 ) - Please choose one
The date on which the names of stockholders in the Stock Transfer Register of firm are documented is referred as: ► Declaration Date
► Holder-of-record Date
► Ex-Dividend Date
► Payment Date
Question No: 36 ( Marks: 1 ) - Please choose one
Operating revenue can be calculated from which of the following formulas? ► Operating Revenue = Fixed cost * Quantity + Variable cost
► Operating Revenue = Price / Quantity +Variable cost
► Operating Revenue = Sale price * Quantity
► Operating Revenue = Variable cost * Quantity / Fixed cost
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following statements is TRUE about an aggressive approach to finance working capital? ► Financing seasonal requirements of current assets with short-term debt and permanent requirement of current assets with long term debt
► Financing permanent requirements of current assets with short-term debt and seasonal requirement of current assets with long term debt
► Financing seasonal as well as permanent requirements of current assets with short-term debt
► Financing seasonal as well as permanent requirements of current assets with long term debt
Question No: 38 ( Marks: 1 ) - Please choose one
Capital structure theory is presented by which of the following? ► Robert Alan Hill
► Modigliani & Miller
► Brigham & Houston
► Van Horne & Gittman
Question No: 39 ( Marks: 1 ) - Please choose one
All of the following are the examples of permanent financing EXCEPT: ► Common Equity
► Current Liabilities
► Long-term Loans
► Bonds
Question No: 40 ( Marks: 1 ) - Please choose one
Which of the followings proposes that the value of the firm is independent of its capital structure? ► The Capital Asset Pricing Model
► M&M capital structure theory
► The law of variable proportion
► The Law of One Price
Question No: 41 ( Marks: 1 ) - Please choose one
Value of the firm can be calculated with the help of which of the following formulas? ► Price of a share x No. of shares outstanding
► Price of a share x debt / equity
► Price of a share / No. of shares outstanding
► Price of a share x earnings after tax / equity
Question No: 42 ( Marks: 1 ) - Please choose one
If the sales are expected to be poor in future than management wants to raise capital through which of the following: ► Debt financing
► Equity financing (common & preferred stock)
► Term finance certificates
► National saving certificates
Question No: 43 ( Marks: 1 ) - Please choose one
Company A has to purchase another company. How do Company A pay for buying the other company? ► In Cash
► In Shares
► Bank Borrowing
► All of the given options
Question No: 44 ( Marks: 1 ) - Please choose one
Which of the following mathematical expressions depicts divestiture? ► 5-1=4
► 5-1=6
► 5+1=6
► None of the given options
Question No: 45 ( Marks: 1 ) - Please choose one
Under efficient market, the effect of debt on WACC can be represented with the help of which of the following? ► Straight line
► U shaped curve
► Concave
► Time to time fluctuation
Question No: 46 ( Marks: 1 ) - Please choose one
Under traditional view, the effect of debt on WACC can be represented with the help of which of the following? ► Straight line
► U shaped curve
► Concave
► Time to time fluctuation
Question No: 47 ( Marks: 1 ) - Please choose one
According to the trade off theory, value of the firm rises as a result of ____________. ► Tax saving
► Increase in EPS
► Increase in EBIT
► Saving in cost of debt
Question No: 48 ( Marks: 1 ) - Please choose one
Which of the following statements is true about business risk? ► The financial risk of a firm decreases when it takes on a risky project
► The financial risk of a firm increases when it takes on more equity
► The business risk of a firm increases when it takes on a risky project
► The business risk of a firm increases when it takes on more debt
Question No: 49 ( Marks: 1 ) - Please choose one
Under Net income approach, which of the following is a correct sequence of calculating cost of capital? ► Net income – Total firm’s market value – WACC
► Net income – WACC – total firm’s market value
► WACC – Net income – market value of equity
► Market value of firm – WACC – Net income
Question No: 50 ( Marks: 1 ) - Please choose one
From which of the following equations, net income can be calculated? ► NI = (EBIT - xD rD) (1 - Tc)
► NI = (EAT - xD rD) (1 - Tc)
► NI = (EBIT + xD rD) (1 - Tc)
► NI = (EBIT - xD rD) / (1 - Tc)
Question No: 51 ( Marks: 1 ) - Please choose one
Which of the following refers to a unique type of Japanese corporate organization based on a close partnership between government and businesses? ► Keiretsu
► Chaebols
► Lean and mean
► Options
Question No: 52 ( Marks: 1 ) - Please choose one
Which of the following is a South Korea type business in that is a conglomerate with Monopoly power? ► Keiretsu
► Chaebols
► Lean and mean
► Options
Question No: 53 ( Marks: 1 ) - Please choose one
What is bid rate for currency? ► Buying rate for currency
► Selling rate of currency
► Forward rate of currency
► Ask rate of currency
Question No: 54 ( Marks: 1 ) - Please choose one
What is the primary principle for money changers? ► Ask rate should be less than bid rate
► Ask rate should be greater than bid rate
► Ask rate should be equal to bid rate
► Bid rate should be greater than ask rate
Question No: 55 ( Marks: 3 )
Calculate tax shield from the given information.Corporate tax rate is 35% and amount of debt is Rs. 20, 000 and rate of return is 8%.
Question No: 56 ( Marks: 5 )
How can a manager calculate the opportunity cost of capital for a project? Give answer in bulleted form only.Question No: 57 ( Marks: 5 )
Suppose you are a financial manager of XYZ Corporation and you have been assigned the task to calculate the numerical value of your firm’s WACC (Weighted Average Cost of Capital), what procedure would you follow keeping in mind that the firm is using NOI (Net Operating Income) approach?Question No: 58 ( Marks: 10 )
Suppose that the risk free rate is 12% and the expected market return is 20%. The FM Corporation has a beta of 0.75 and the Gord Corporation has a beta of 1.25. a. Find the expected return on the FM Corporation.
b. Find the expected return on the Gord Corporation.
c. Suppose that because of a suddenly unanticipated increase in inflation, the risk free rate raises to 16% and the market risk premium remains at 8%. Find the expected return on of FM and Gord.
Question No: 59 ( Marks: 10 )
Ammar Watch Company is the renowned ladies watch manufacturers. They are offering watch in the market at a price of Rs. 30. They have estimated that they will manufacture and sale almost 30, 000 watches. Fixed cost for the preparation of these watches is Rs.150, 000. Variable cost associated with the preparation of these watches is Rs. 20 per watch. From the above information you are required to calculate the followings:
· What is the profit or loss for the units of 8, 000 or 18, 000?
· Calculate the break even point? (in units and sales)
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