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www.financecottage.com

Mid Term Exam (BBA 5th Semester)

Course Title: Financial Management

Course Instructor: Hammad Hassan Mirza

1.

2.

3.

4.

5.

Maximum Marks: 30

This paper consists of 30 multiple choice questions (MCQs), Please attempt all questions

Do not write any thing on this question paper. A separate Answer sheet is designed in the

end of this question paper. Only fill the relevant circles in the answer sheet.

Cutting/erasing/rewriting will be awarded zero

Please return this question paper along with answer sheet to the invigilators. No answer

sheet will be accepted / marked with out this question paper.

Write your name and roll number only in the space provided below:

Name of Student

Roll Number of Student

Obtained marks out of 30

Question Paper Code:

Yes

No

**//!!//!!!*!!!///!!!*//

1. ___________ refers to meeting the needs of the present without compromising the ability of future

generations to meet their own needs.

a) Corporate Social Responsibility

b) Sustainability

c) Convergence

d) Future generation needs

2. The Counting House, Inc., purchased 5-year property class equipment for $60,000. It uses the MACRS

method of depreciation. What is tax depreciation for the second year of the asset's life?

a) $24200

b) $20,000

c) $19200

d) Non of the above

3. Which of the following is NOT an example of a financial intermediary?

a) Askari Mutual funds

b) Taseer Hadi Mechaincs Inc

c) Mujahid Khan Loan Association.

d) Bank of Punjab.

4. With continuous compounding at 8 percent for 20 years, what is the approximate future value of a $20,000

initial investment?

a) $52,000

b) $93,219

c) $99,610

d) None of the above

SolvedExaminationPapers(MidTerm21stNovember,2011)FinancialManagement

www.financecottage.com

5. You are considering investing in a zero-coupon bond that sells for $500. At maturity in 8 years, it will be

redeemed for $1,000. During the life of the bond NO interest coupons will be paid. Using the Rule of 72, what

approximate annual rate of growth does this represent?

a) 8 percent

b) 9

c) 12

d) None of the above

6. For $1,000 you can purchase a 5-year ordinary annuity which will pay you a yearly payment of $263.80 for

5 years. What is the annual interest rate implicit in this investment to the nearest whole percentage point?

a) 8

AccurateAnswer=10%

b) 9

Nearestis9%

c) 7

d) Cannot be calculated from given information

7. You have just graduated and have decided to purchase a brand new sports car to enjoy your newfound

freedom. Your local credit union will provide financing for 60 months at a 9 percent annual rate,

compounded monthly. You will give 15 percent of the $26,000 purchase price in cash to the dealer. The credit

union will be used to finance the remaining 85 percent of the purchase price with the first payment due 1

month from today. What will be your monthly payment?

a) $539.71

b) $457.99

c) $458.76

d) $368.33

8. You have just agreed to a new loan and have purchased a $3,000 computer today. The loan has a 19.6%

annual interest rate, compounded monthly. The minimum monthly payment is $58 and you do not expect to

ever pay more than the minimum payment. Assuming no additional charges or costs will occur with this loan,

approximately what will you owe on the loan at the end of 3 years (36 months) when you expect to need

another new computer?

a) $2,676

b) $2,546

c) $2,304

d) None of the above

9. You expect to deposit the following cash flows at the end of years 1 through 5, $1,000; $4,000; $9,000;

$5,000; and $3,000 respectively. Alternatively, you could deposit a single amount today at the beginning of

year 1 (end of year 0). How large does the single deposit need to be today if you can earn 10% compounded

annually?

a) $15,633.62

b) $21,000.00.

c) $25,178.10

d) None of the above

10. What is the market value of a $1,000 face-value bond with a 10 percent coupon rate when the market's

rate of return is 11 percent?

a) More than its face value.

b) Less than its face value

c) $1,000

d) Cannot be solved

11. If the intrinsic value of a share of common stock is greater than its market value, which of the following is

the most reasonable conclusion?

a) The stock has a low level of risk.

b) The stock offers a high dividend payout ratio

c) The market is undervaluing the stock

d) The market is overvaluing the stock

SolvedExaminationPapers(MidTerm21stNovember,2011)FinancialManagement

www.financecottage.com

12. When the market's required rate of return for a particular bond is greater than its coupon rate, the bond

is referred to as a __________.

a) premium bond

b) discount bond

c) par bond

d) None of the above

13. Which of the following best describes intrinsic value?

a) The price a security "ought to have" based on all factors bearing on valuation.

b) The amount a firm could be sold for as a continuing operating business

c) The amount of money that could be realized if an asset or a group of assets is sold separately from its

operating organization.

d) The market price at which an asset trades.

14. The firm of Sun and Moon purchased a share of Acme.com common stock exactly one year ago for $45.

During the past year the common stock paid an annual dividend of $2.40. The firm sold the security today for

$85. What is the rate of return the firm has earned?

a) 5.3

b) 194.2

c) 88.9

d) 94.2

15. The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as:

a) coefficient of variation

b) coefficient of covariance

c) the expected return

d) the standard deviation

16. Clive Rodney Megabucks offers your friend, Yunyoung, an interesting gamble involving giving her the

choice of the contents in one of two sealed, identical-looking boxes. One box has $20,000 in cash and the

second has nothing inside. There is an equal probability that the chosen box contains cash versus nothing.

Yunyoung states that she would not call off the gamble if you offered her a certain $4,999 instead of her

choice of box. However, she would be indifferent if $5,000 was offered in place of the risky gamble; and she

would definitely take $5,001 to call off the gamble. We would describe Yunyoung as __________ in this

instance.

a) being risk averse

b) being risk indifferent

c) Having a risk preference

17. __________ is the variability of return on stocks or portfolios not explained by general market

movements. It is avoidable through diversification.

a) Systematic risk

b) Standard Deviation

c) Unsystematic risk

d) Coefficient of Variation.

18. Which of the following items describes an index measure of unsystematic risk?

a) Beta

b) Standard Deviation

c) Coefficient of Variation

d) None of the above

SolvedExaminationPapers(MidTerm21stNovember,2011)FinancialManagement

www.financecottage.com

19. Assume that a firm's common stock can be valued using the constant dividend growth model. As an

analyst you expect that the return on the market will be 15% and the risk-free rate is 7%. You have

estimated that the dividend next period will be $1.50, the firm will grow at a constant 6%, and the firm beta is

0.50. The common stock is currently selling for $30.00 in the market place. Which of the following statements

is correct?

a) The firm's stock is over priced.

GraceMarksAwarded

b) The firm's stock is fairly priced

c) The firm's stock is under priced.

d) The firm's stock cannot be valued because of missing information.

20. Beta Budget Brooms will pay a big $2 dividend next year on its common stock, which is currently selling

at $50 per share. What is the market's required return on this investment if the dividend is expected to grow

at 5% forever?

a) 4

b) 5

c) 7

d) 9

21. Which of the following best describes going-concern value?

a) The price a security "ought to have" based on all factors bearing on valuation.

b) The amount a firm could be sold for as a continuing operating business

c) The amount of money that could be realized if an asset or a group of assets is sold separately from its

operating organization.

d) The market price at which an asset trades

22. Which of the following best describes liquidation value?

a) The price a security "ought to have" based on all factors bearing on valuation

b) The amount a firm could be sold for as a continuing operating business.

c) The amount of money that could be realized if an asset or a group of assets is sold separately from its

operating organization.

d) The market price at which an asset trades

23. What is the intrinsic value of a $1,000 face value, 8% coupon paying perpetual bond if an investor's

required rate of return is 6%? (Assume annual interest payments and discounting.)

a) $1,333.33

b) $1,000.00

c) $750.00

d) Maturity time is not given: None of the above

24. Fruitellas common stock is currently expected to maintain its current earnings level indefinitely (earnings

will stay at the current $4.00 per share). Investors in Fruitella expect to earn 10% on this investment since the

firm anticipates retaining only 10% of earnings. What is the intrinsic value of a share of Fruitella?

a) $4

b) $36

c) $40

d) It is not possible to calculate the intrinsic value since there is important information missing from the

problem.

25. Which of the following statements is correct regarding profit maximization as the primary goal of the

firm?

a) Profit maximization considers the firm's risk level.

b) Profit maximization will not lead to increasing short-term profits at the expense of lowering expected future

profits.

c) Profit maximization does consider the impact on individual shareholder's EPS.

d) Profit maximization is concerned more with maximizing net income than the stock price.

SolvedExaminationPapers(MidTerm21stNovember,2011)FinancialManagement

www.financecottage.com

26. If all things equal, when diversification is at its least effective?

a) Securities' returns are positively correlated

b) Securities' returns are uncorrelated

c) Securities' returns are high

d) Securities' returns correlation is closer to 1

27. Which of the followings expressed the proposition that the value of the firm is independent of its capital

structure?

a) The Capital Asset Pricing Model

b) M&M Proposition I

c) M&M Proposition II

d) The Law of One Price

28. According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a

function of which of the following

a) Unique risk

b) Reinvestment risk

c) Unsystematic risk

d) None of the above

29. As interest rates go up, the present value of a stream of fixed cash flows _____.

a) Stays the same

b) Goes up

c) Goes down

d) Can not be found from the given information

30. Which of the following is simply the weighted average of the possible returns, with the weights being the

probabilities of occurrence?

a) Probability distribution

b) Expected return

c) Standard deviation

d) Coefficient of variation

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