Fin 622 Mcqs and Ref

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Fin 622 solved material
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ALL SOLVED DATA WITH REFRENCE OF CORPORATE FINANCE (FIN622)
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KINDLY IF YOU FIND ANY MISTAKE THEN TELL ME I WILL CHECK
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ACCODING TO MY KNOWDELGE AS WELL AS I CONCERN BOOKS
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SERCHING AND OTHER MATERIAL
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Question # 9 of 15 ( Start time: 03:20:24 PM ) Total Marks: 1
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The effective annual rate of an investment with a nominal annual rate of 10%
compounded monthly is closest to ______.
Select correct option:
11.04%
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10.47%
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10.00%
or
10.12%
ref: at
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%2520TVM1.doc+The+effective+annual+rate+of+an+investment+with+a+nominal+ann
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ual+rate+of+10%25+compounded+monthly+is+closest+to+______.&cd=1&hl=en&ct=c
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lnk&gl=pk&client=firefox-a
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The formula for the break-even quantity of output (QBE), given the price per unit (P),
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fixed costs (FC), and variable cost per unit (V), is:
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QBE = (P - V)/FC.
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QBE = (P/FC) - V.
QBE = (FC/P) - V.
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QBE = FC/ (P - V).
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or
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If an investor buys a non-zero coupon bond and holds it to maturity, then the rate of
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return she will receive depends on:

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FC
FC
The bond's maturity value.

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The price paid for the bond

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The interest payments to be received.

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All of the given options not sure

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.c
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or
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Which one of the following statements describe "Shareholders¶ wealth" in a firm?
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FC
FC
The number of people employed in the firm
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The book value of the firm's assets less the book value of its liabilities
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The market price per share of the firm's common stock
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The amount of salary paid to its employees
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Ref:
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http://wiki.answers.com/Q/Maximizing_shareholder_wealth_means_maximizing_the_fir
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ms_what
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If common stocks of a company have beta value equal to 1, then such stocks are known
as:
Normal stocks
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Aggressive stocks
Defensive stocks
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Income stocks
or
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Aggressive stok beta value greater than one and defensive stock beta value less than
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one so reminder is Normal stock so I think it,s Normal stock

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Holding everything else constant, increasing fixed costs ______ the firm's break-even
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point.
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Decreases
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Increases the covariance of

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Increases
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Does not affect

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Suppose you have a 2-stocks portfolio, which consists of Stock A and Stock B. If stock A
has a beta value of 1.8 and stock B has a beta value of 0.68, and your investment in stock
A and stocks B is equal, then the beta of this 2-stock portfolio would be equal to:
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1.20
or
or
1.24
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1.30
FC
FC
1.45
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Which of the following is known as market portfolio?

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or
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A portfolio consists of all risk free securities available in the market
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A portfolio consists of securities of the same industry
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A portfolio consists of all aggressive securities available in the market
FC
FC
A portfolio consists of all securities available in the market
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Ref: http://en.wikipedia.org/wiki/Market_portfolio
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The term structure of interest rates refers to the relationship between yield and:
Rating, for securities with the same maturity.
Marketability, for securities with the same tax status.
Maturity, for the same security class.
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Risk, for securities with the same maturity.
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or
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Ref: http://www.investopedia.com/university/advancedbond/advancedbond4.asp
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If you deposit $12,000 per year for 16 years (each deposit is made at the beginning of
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each year) in an account that pays an annual interest rate of 15%, what will your account
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be worth at the end of 16 years?

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$82,168.44
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$71,450.82
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$768,901.12
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$668,609.67
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Which of the following changes will occur if a bond's yield-to-maturity increases,

keeping other things equal ?
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Its price will rise

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Its price will remain unchanged

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Its price will fall. 100% sure

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Can not be determined

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FC
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Which of the following is a major advantage of the corporate form of organization?

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Reduction of double taxation.

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.c
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or
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Limited owner liability. Page 4
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Legal restrictions.
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Ease of organization
FC
FC
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The present value of Rs.5,000 received at the end of 5 years, discounted at 10 percent, is
closest to:
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Rs.3,105.
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Rs.823.
or
Rs.620.
Rs.3,403. at
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If two projects offer the same, positive NPV, then which of the following would be a
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reasonable conclusion?
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The projects would have the same IRR.

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The projects would have the same payback period.

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The projects are mutually exclusive.

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The projects would add the same amount to the value of the firm.
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Ref: http://highered.mcgraw-
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hill.com/sites/0073012386/student_view0/chapter7/multiple_choice_quiz.html
Which of the following should be ignored, while evaluating the financial viability of a
project?
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Initial cost
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.c
Equipment cost
or
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Cost of capital
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Sunk cost
FC
FC
Ref: http://www.scribd.com/doc/18688564/A-Note-on-the-Financial-Evaluation-of-
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Projects
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.c
.c
or
or
Which of the following methods would be most suitable for selecting capital project (s) in
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case of multi-period capital rationing?
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FC
FC
Simple payback period
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Discounted payback period
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Multiple Internal Rate of Return
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Linear Programming page 45
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Which one of the following transactions take place in a primary financial market?
Initial Public Offering slide 18
Buying Mutual Funds Certificates
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Selling old shares
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Buying Bonds issued in previous year
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You have calculated that the required rate of return on a particular common stock is less
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than the expected rate of return. Therefore, you would conclude:
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That the stock is more risky than the market portfolio. Page 57
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That an investor should buy the stock.

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That the stock has a high dividend payout ratio.

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That an investor should sell the stock.

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Which of the following investment criteria does not take the time value of money into
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consideration?
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Simple payback method page 34
Net present value
Profitability index
Internal rate of return for borrowing projects
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.c
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or
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What is the future value of Rs.1 invested for 10 years if the 12 percent annual rate of
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interest is compounded quarterly?

re
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FC
FC
Rs.2.30
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Rs.3.26 FV= PV.(1+I) n

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Rs.3.25
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Rs.2.93
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.c
.c
or
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FC
FC
Average beta has value equal to:
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1 slide 16
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2
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3
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4
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A company has fixed costs of $50,000 and variable costs per unit of output of $8. If its
sole product sells for $18, what is the break-even quantity of output?
2,500
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5,000
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1,500
or
7,500
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REF: BEQ= FC/P-VC
FC
= 50000 / 18-8 = 50000 / 10 = 5000

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Which of the following is a main purpose of the Sensitivity Analysis?

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To find out the optimal level of capital budget.

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To find out that how price changes affect break-even volume.

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To find out the seasonal variation in product demand.

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To find out that how variables in a project affect profitability

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REF: http://www.investopedia.com/terms/s/sensitivityanalysis.asp
which of the following conditions a stock is said to be overvalued?

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If the stock has market value less than the expected value
or
or
If the stock has market value more than the expected value PAGE 57
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If the stock has market value equal to the expect value

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If the stock has market value less than its intrinsic value
FC
FC
D
D
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: Which of the following statement it TRUE regarding a risk free security?

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or
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It has a zero return
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It has a beta equal to zero
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It can not be added to a portfolio
FC
FC
It has relatively a high rate of return
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REF: http://web.utk.edu/~jwachowi/mcquiz/mc5.html
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: Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in an
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account paying 12 percent compounded annually. You accumulate at the end of 10 years
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an amount closest to:
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Rs.22,456
Rs.35,098
Rs.28,324.
Rs.20,324
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.c
or
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You plan to deposit Rs.400 at the end of each year for 16 years in an account that pays 9
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percent compounded annually. The terminal value at the end of the 16 year period is
FC
closest to:
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Rs.13,201
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Rs.17,667
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Rs.9,634
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Rs.19,329.
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The employment of fixed costs associated with the actual production of goods or services
is known as:
Financial leverage
Volume discounting
Operating leverage SLIDE 13
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Covariance
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or
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Which of the following shows the reward to risk ratio of a security A ?

FC
FC

Expected return of A (rA) ± Risk free return / Beta of A
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D
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Expected return of A (rA) ± Risk free return / required return of A

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Expected return of A (rA) ± Beta of A / Risk free return

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Risk free return - Expected return of A (rA)/ Beta of A

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or
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at
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In the formula rE = (D1/P0) + g, what does the symbol "g" represent?
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FC
FC
The expected price appreciation yield from a common stock.
D
The expected dividend yield from a common stock.
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The dividend yield from a preferred stock.
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The interest payment from a bond.
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Which of the following measures systematic risk of a firm¶s common stock?
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Beta PAGE 50
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CAPM
MM -Model
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If two projects are independent, that means that _________.
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Selection of one precludes selection of the other.
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You should analyze the projects independently.
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Both the given options may apply

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None of the given options

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REF
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http://webcache.googleusercontent.com/search?q=cache:mz7017EARDIJ:www.amc.edu.
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au/system/files/module%2B6%2Binvestment%2Bdecision%2B%281%29.ppt+If+two+pr
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ojects+are+independent+Selection+of+one+precludes+selection+of+the+other.&cd=9&h
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l=en&ct=clnk&gl=pk&client=firefox-a
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Which of the following capital budgeting technique ignores profitability and time value
of money?
Net Present Value
Internal Rate of Return
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Discounted Pay Back period

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.c
Simple Pay Back Period

or
or
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at
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Which of the following factor determines the financial viability of a project?

FC
FC

Future Profits
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D
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Future Cash flows PAGE 109

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Sunk Cost
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None of the given option

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.c
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or
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What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your
FC
FC
required rate of return is 15 percent?
D
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More than its face value
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Less than its face value.
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$1,000.
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Can not be determined
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REF: http://web.utk.edu/~jwachowi/mcquiz/mc4.html
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A risk free asset has a Beta value equal to:
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0 PAGE 54
1
2
3
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Which of the following is a long-term source of financing for a firm?
.c
or
Corporate Bonds
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Money Market instruments
FC
Trade credit
D
Accounts Payables
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REF: http://www.economywatch.com/finance/sources-of-finance.html
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http://en.wikipedia.org/wiki/Bond_%28finance%29
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Which of the following bonds will have the greatest percentage increase in value if all
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interest rates decrease by 1 percent?

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20-year, zero coupon bond.

10-year, zero coupon bond.
20-year, 10 percent coupon bond
20-year, 5 percent coupon bond.
REF:
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http://webcache.googleusercontent.com/search?q=cache:aJbJs0lnLJYJ:www.csun.edu/~v
.c
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covrig/FIN303_Examtypeq2.doc+Which+of+the+following+bonds+will+have+the+great
or
or
est+percentage+increase+in+value+if+all&cd=3&hl=en&ct=clnk&gl=pk&client=firefox
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-a
FC
FC
D
The longer the maturity of a bond, the more of an effect a change in

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interest rates will have on it. The reason for this is that the price
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change is compounded into the bond price for more periods. Therefore,
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you can rule out statements b and e. A bond that pays coupons will be
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less affected by interest rate changes than one that doesn¶t pay
coupons. The bond price is the NPV of all the future cash flows, both
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.c
.c
or
or
the coupon payments and the par value paid at maturity. The first
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coupon payment is only discounted one period. The second coupon is
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discounted two periods, and so on. The par value is discounted for the
full life of the bond. Thus, statements c and d can be eliminated.
FC
FC
Since a zero coupon bond¶s price today is determined just by the NPV of
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its par value, all of its payment is discounted for the maximum amount
tP
tP
of time, whereas a coupon bond has many payments discounted for less
ar
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than the maximum amount of time. Therefore, a zero coupon bond is most
m
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affected by interest rate changes. So, the longest zero coupon bond is
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the correct answer, which is statement a.
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If an investor buys a non-zero coupon bond and holds it to maturity, then the rate of
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return she will receive depends on:
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The bond's maturity value.
The price paid for the bond NOT SURE
The interest payments to be received.
All of the given options
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Which of the following focuses on long-term decision-making regarding the acquisition
or
of projects?
Select correct option: at
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Working Capital Management
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Capital Budgeting
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Cash Budgeting
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A firm can lower its breakeven level by doing which of the following actions?
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Lowering direct cost

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Increasing variable cost

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Increasing direct cost

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Lowering sales price
Which of the following method of stock evaluation tries to predict the future movement
of a stock based on past data?
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.c
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Trend analysis
or
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Fundamental analysis PAGE 45

at
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Horizontal analysis
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Vertical analysis
FC
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tP
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m
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.c
.c
or
or
at
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re
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FC
FC
D
D
tP
tP
Which of the following may be a major reason for hard capital rationing?
ar
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m
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Dilution of earning per share (EPS)
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High interest expense
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High interest rate SLIDE 13 BOOK PAGE 44
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Company own policies
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Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in an
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Rs.22,456
Rs.35,098
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Rs.28,324.
or
Rs.20,324
at
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FC

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Which of the following best illustrates the problem imposed by capital rationing?
ar

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Accepting projects with the highest NPVs first

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Accepting projects with the highest IRRs first

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Bypassing projects that have positive NPVs

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Bypassing projects that have positive IRRs

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REF:
http://novella.mhhe.com/sites/0073012386/student_view0/chapter7/multiple_choice_quiz
.html
Suppose 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 the
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stock?
.c
.c

or
or
2%
at
at
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3%
FC
FC
4%
5%
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tP
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om
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.c
.c
or
or
Which of the following stock would provide a regular income to the investors?
at
at
re
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Growth stock
FC
FC
Income stock
D
Aggressive stock
tP
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Defensive stock
ar
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m
m
REF: http://www.investopedia.com/terms/i/incomestock.asp
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Average beta has value equal to:
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1 SLIDE 16
2
3
4
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Which one of the following terms refers to the variability of return on stocks or portfolios
.c
associated with changes in return on the market as a whole?
or
at
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Unsystematic risk
FC
Unique risk
D
Systematic risk
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Company specific risk

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REF: http://wps.pearsoned.co.uk/wps/grader
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_________ is the variability of return on stocks or portfolios not explained by general

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market movements. It is avoidable through diversification.

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Systematic risk
Standard deviation.
Unsystematic risk
Coefficient of variation.
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.c
.c
REF: http://wps.pearsoned.co.uk/wps/grader
or
or
at
at
re
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In which of the following situations market price of a security will move up?
FC
FC

When market price of the security is above the intrinsic value of the security
D
D
tP
tP
When market price of the security is equal to the intrinsic value of the security
ar
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When market value of the security is equal to the face value of the security
m
When market price of the security is below the intrinsic value of the security
.S
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.c
.c
or
or
at
at
REF: value investing is buying stocks at less than their intrinsic value
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FC
FC
http://en.wikipedia.org/wiki/Value_investing
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ar
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Quiz #2(1--18)
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Fin 622
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MC080200627: Muhammad Naveed
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Question # 1 of 15 (Start time: 07:42:42 PM)
If sensitivity analysis concludes that the largest impact on profits would come from
changes in the sales level, then which of the following recommendations should be
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considered
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Fixed costs should be traded for variable costs
or
Variable costs should be traded for fixed costs.
at
re
The project should not be undertaken.
FC
Additional marketing analysis may be beneficial before proceeding.

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m
Which of the following capital budgeting technique ignores profitability and time value
.S
of money?
w
w
Net Present Value

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Question # 3 of 15 ( Start time: 07:44:01 PM )
Which of the following methods would be most suitable for selecting capital project (s) in
case of multi-period capital rationing?
om
om

.c
.c

or
or

at
at
re
re
Linear Programming
FC
FC
D

tP
tP
A project would be financially feasible in which of the following situation?

ar
ar
If Internal Rate of Return of a project is greater than zero

m
If Net Present Value of a project is less than zero

.S
.S
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om
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.c
.c
or
or
If the project has Profitability Index less one.
at
at
If the project has Profitability Index greater than one.
re
re
FC
FC
D
What is the future value of Rs.1 invested for 10 years if the 12 percent annual rate of
tP
tP
interest is compounded quarterly?
ar
ar
m
m
Rs.2.30
.S
.S
w
w
Rs.3.26
w
w
Rs.3.25
w
w
Rs.2.93
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tp
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ht
ht
Growth stock
Income stock
om
Aggressive stock
Defensive stock
.c
or
at
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Which of the following is included in the cost of capital of a firm?
FC
Cost of sales
D
Depreciation cost
tP
Depletion cost
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Cost of retained earnings

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.S

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A company has a dividend yield of 8%. If its dividend is expected to grow at a constant
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13%
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Which of the following is a disadvantage of Capital Asset Pricing model?
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It consider market risk

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It can be used for listed companies

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It can be used for Non-listed companies

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It is based on Past data

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Suppose that market now requires an 8 percent return for a bond that was issued some
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At a premium over face value.

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The present value of Rs.5,000 received at the end of 5 years, discounted at 10 percent, is
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closest to:
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Rs.3105
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Rs.823.
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Rs.620.
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Rs.3,403.
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Which of the following is a major advantage of the corporate form of organization?
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Limited owner liability.
Legal restrictions.
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Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in an
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Rs.22,456
Rs.35,098
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Rs.20,324
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Which of the following equation shows the cost of Preferred stocks of a
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company?
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Cost of Preferred stocks = Dividend / Market Price
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Cost of Preferred stocks = Market Interest rate / Market Price
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Cost of Preferred stocks = Face value / Market Price
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Cost of Preferred stocks = Dividend / Face value
Virgo Airlines will pay 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?
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4 percent.
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5 percent.
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7 percent.
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9 percent.
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The formula for the break-even quantity of output (QBE), given the price per unit
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(P), fixed costs (FC), and variable cost per unit (V), is:
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QBE = (P - V)/FC.
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QBE = (FC/P) - V.
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QBE = FC/ (P - V).
The variance of an investment's returns is a measure of the:

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Volatility of the rates of return.

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Probability of a negative return.

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Historic return over long periods.

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Average value of the investment.

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Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5
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percent, total assets are $8 million, and ROI is 8 percent.

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2.05
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Ref: (ROI) / (NPM) = TAT
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(.08) / (.05) = 1.6
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If the Net Present Values of two, mutually exclusive options are both greater than
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zero, which option should be selected if the firm uses the Net Present Value
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method?
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The one with the largest Net Present Value.
The one with the smallest Net Present Value.
Either one. Both are greater than the cost of capital.
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A company has a dividend yield of 8%. If its dividend is expected to grow at a
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constant rate of 5%, what must be the expected rate of return on the company¶s
or
stock?
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FC
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14%
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13%
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When a firm places a budgetary constraint on the projects it invests in, this is
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called:
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Capital rationing
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Working capital management
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Cash budgeting
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None of the above
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The decision rule for net present value is to:
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FC
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Accept all projects with cash inflows exceeding initial cost.
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Reject all projects with rates of return exceeding the opportunity cost of capital.
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Accept all projects with positive net present values.
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Reject all projects lasting longer than 10 years
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or
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FC
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m
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.c
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or
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In the formula rE = (D1/P0) + g, what does the symbol "g" represent?
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FC
FC
The expected price appreciation yield from a common stock.
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The expected dividend yield from a common stock.
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The dividend yield from a preferred stock.
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The interest payment from a bond.
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w
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Which of the following reason justifies the need for financial statement analysis?
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It will help improve capital budgeting process of the company
It will help improve future planning
It will help improve accounting policies of the company
It will help improve purchasing polices of the company
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Which of the following is a necessary condition for issuing shares through IPO¶s?
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or
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The firm must have a stable dividend policy
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The firm must have a low cost of capital

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The firm must have l low level of debt

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The firm must be listed on the stock exchange page 61

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Dividend discount Model states that today¶s price of a stock is equal to:
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The Present Value of all future dividends of the stock page 115
The Present Value of the face value of the stock
The Present Value of the Sales price of the stock
The Present Value of the book value of the stock
Which of the following is a main purpose of the Sensitivity Analysis?

om
om

.c
.c
or
or
To find out the optimal level of capital budget.

at
at
re
re
To find out that how price changes affect break-even volume.

FC
FC
To find out the seasonal variation in product demand.

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To find out that how variables in a project affect profitability

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.c
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or
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at
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Which one of the following is a major limitation of Linear Programming Technique of
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capital projects selection?
FC
FC
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Ignores the relative size of the Investment slide 14
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Time value of money is not considered
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Project cash flows are ignored
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Project profitability is ignore
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.
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Which of the following statement best describe the term Market Correction?
Market Correction refers to the situation where equilibrium of supply & demand of
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shares occurs in the market
Market correction occurs when shares¶ intrinsic values becomes equal to face values
.c
Market Correction occurs when there is a boom in the economy
or
at
Market Correction occurs when inflation rate is above the market interest rate
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Ref: I m not sure on this question but ithink the choosen option is right
one
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Which of the following statements applies to Dividend Growth Model?

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It is difficult to understand and use

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It is used for non-listed companies

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It is used for debt securities also

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It do not consider risk level of a security

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What is the main purpose of constructing a portfolio of financial assets?
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or
or
To maximize risk and minimize the return

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at
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re
To minimize the risk and minimize the return

FC
FC
To maximize the return and minimize the risk

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To minimize the return and minimize the risk

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m

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.c
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or
or
Which of the following is a measure of risk of an asset?
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Weighted average
FC
FC
Standard deviation ref : fm book
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Probability distribution
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Geometric mean
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.
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Which of the following methods would be most suitable for calculating the
tp
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return on stocks of a non-listed company?
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Dividend Growth model
Capital Asset Pricing Model
Security Market Line
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Characteristics line
.c
or
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FC
D
This file is good and all option were correct

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What's the value to you of a $1,000 face-value bond with an 8% coupon rate
tp
when your required rate of return is 15 percent?

ht
More than its face value.

Less than its face value.
$1,000.
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True.
.c
.c
If the intrinsic value of a stock is greater than its market value, which of the
or
or
at
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following is a reasonable conclusion?

re
re
The stock has a low level of risk.

FC
FC
D
The stock offers a high dividend payout ratio.

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The market is undervaluing the stock.

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The market is overvaluing the stock.

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.c
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or
or
at
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When the market's required rate of return for a particular bond is much less than
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FC
FC
its coupon rate, the bond is selling at:
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a premium.
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a discount.
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cannot be determined without more information.
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face value.
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If an investor may have to sell a bond prior to maturity and interest rates have
tp
tp
risen since the bond was purchased, the investor is exposed to
ht
ht
the coupon effect.
interest rate risk.
a perpetuity.
om
an indefinite maturity.
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Virgo Airlines will pay a $4 dividend next year on its common stock, which is
at
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currently selling at $100 per share. What is the market's required return on this
FC

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4 percent.
ar
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5 percent.
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7 percent.
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9 percent.
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ht
If a bond sells at a high premium, then which of the following relationships hold
true? (P0 represents the price of a bond and YTM is the bond's yield to maturity.)
P0 < par and YTM > the coupon rate.
P0 > par and YTM > the coupon rate.
om
om
P0 > par and YTM < the coupon rate.
.c
.c
or
or
P0 < par and YTM < the coupon rate.

at
at
re
re
Interest rates and bond prices

FC
FC
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move in the same direction.

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ar
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move in opposite directions.

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.c
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or
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sometimes move in the same direction, sometimes in opposite
at
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directions.
FC
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have no relationship with each other (i.e., they are independent).
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tP
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ar
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In the formula ke = (D1/P0) + g, what does g represent?
m
m
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the expected price appreciation yield from a common stock.
w
w
w
w
the expected dividend yield from a common stock.
w
w
://
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the dividend yield from a preferred stock.
tp
tp
ht
ht
the interest payment from a bond.
In the United States, most bonds pay interest a year, while many
European bonds pay interest a year.
om
once; twice
.c
twice; once
or
once; once
at
re
FC
twice; twice
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The expected rate of return on a bond if bought at its current market price and
ar
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held to maturity.
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yield to maturity
w
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current yield
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coupon yield
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capital gains yield
The concept of risk can be expressed quantitatively as the ________ of expected

om
om
future cash flows.
.c
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or
or
at
at
re
re
• Present value
FC
FC
• Probability
D
D
tP
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• Standard deviation
ar
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• Market value
m
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w
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ht
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om
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.c
.c
or
or
Which of the following method should be used to evaluate the riskiness of an
at
at
investment?
re
re
FC
FC
• Profitability index
• Sensitivity analysis
D
tP
tP
ar • Net present value
ar
• Internal rate of return
m
m
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w
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If sensitivity analysis concludes that the largest impact on profits would come
ht
ht
from changes in the sales level, then which of the following recommendations
should be considered
Fixed costs should be traded for variable costs

Variable costs should be traded for fixed costs.
om
The project should not be undertaken.
.c
or
Additional marketing analysis may be beneficial before proceeding.
at
re
FC
Which of the following capital budgeting technique ignores profitability and

D
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time value of money?

ar
Net Present Value

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w

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ht
Which of the following methods would be most suitable for selecting capital
project (s) in case of multi-period capital rationing?
om
om
.c
.c
Linear Programming
or
or
at
at
re
re
A project would be financially feasible in which of the following situation?

FC
FC
If Internal Rate of Return of a project is greater than zero

D
If Net Present Value of a project is less than zero

tP
tP
ar
ar
If the project has Profitability Index less one.

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If the project has Profitability Index greater than one.

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.c
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or
or
What is the future value of Rs.1 invested for 10 years if the 12 percent annual rate
at
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of interest is compounded quarterly?
re
re
FC
FC
D
D
Rs.2.30
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Rs.3.26 ar
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m
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Rs.3.25
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Rs.2.93
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Growth stock
Income stock
Aggressive stock
Defensive stock
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Which of the following is included in the cost of capital of a firm?
.c
or
Cost of sales
Depreciation cost
at
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Depletion cost
FC
Cost of retained earnings

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A company has a dividend yield of 8%. If its dividend is expected to grow at a

m
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constant rate of 5%, what must be the expected rate of return on the companyȂs
w
stock?
w
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14%
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13%
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ht
12%
10%
Which of the following is a disadvantage of Capital Asset Pricing model?

It consider market risk
om
om
It can be used for listed companies
.c
.c
It can be used for Non-listed companies

or
or
It is based on Past data

at
at
re
re
FC
FC
Suppose that market now requires an 8 percent return for a bond that was issued
D
some years ago with a 10 percent coupon. This bond will currently be priced:
tP
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ar
ar
At a premium over face value.

m
At par value.
.S
.S
At a discount from face value.

w
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ht
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.c
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or
or
At face value.
at
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FC
FC
The present value of Rs.5,000 received at the end of 5 years, discounted at 10
D
percent, is closest to:
tP
tP
ar
ar
m
m
Rs.3105
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.S
Rs.823.
w
w
Rs.620.
w
w
w
w
Rs.3,403.
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tp
ht
ht
Which of the following is a major advantage of the corporate form of
organization?
Limited owner liability.
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Legal restrictions.
.c
or
at
re
FC
0
D
tP
1
ar
2
m
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3
w
w
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Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in
tp
ht
an account paying 12 percent compounded annually. You accumulate at the end

of 10 years an amount closest to:
Rs.22,456
Rs.35,098
Rs.28,324.
om
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Rs.20,324
.c
.c
or
or
at
at
re
re
FC
FC
D
tP
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ar
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m
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w
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ht
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om
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.c
.c
or
or
What are the earnings per share (EPS) for a company that earned Rs.100, 000 last
at
at
year in after-tax profits, has 200,000 common shares outstanding and Rs.1.2
re
re
FC
FC
million in retained earning at the year end?
Ź Rs.1.00
D
tP
tP
Ź Rs. 6.00
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ar
Ź Rs. 0.50
m
m
.S
.S
Ź Rs. 6.50
w
w
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tp
Which of the following is the variability of return on stocks or portfolios
ht
ht
not explained by general market movements. It is avoidable through
diversification?
Ź Systematic risk
Ź Standard deviation
Ź Unsystematic risk
om
Ź Financial risk
.c
or
at
In which of the following approach you need to bring all the projects to
re
the same length in time?
FC
D
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Ź MIRR approach
ar
Ź Going concern approach

m
Ź Common life approach

.S
w
Ź Equivalent annual approach

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ht
Beta is the slope of

the security market line.
the capital market line.
a characteristic line.
om
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the CAPM
.c
.c
or
or
at
at
re
re
The weighted average of possible returns, with the weights being the
FC
FC
probabilities of occurrence is referred to as __________.

D
D
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Ź A probability distribution
m
Ź The expected return

.S
.S
w
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w
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.c
.c
or
or
Ź The standard deviation
at
at
Ź Coefficient of variation
re
re
FC
FC
D
D
tP
tP
ar
ar
m
m
A measure of "risk per unit of expected return."
.S
.S
standard deviation
w
w
w
w
w
w
coefficient of variation
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tp
tp
correlation coefficient
ht
ht
beta
What is a legal agreement, also called the deed of trust, between the
om
corporation issuing bonds and the bondholders that establish the terms
.c
of the bond issue?
or
Indenture. at
re
FC
Debenture.
D
Bond.
tP
Bond trustee.
ar
m
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w
To increase a given present value, the discount rate should be adjusted

w
w
://
upward.
tp
downward.
ht
True.
Fred.
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.c
.c
Which of the following would NOT improve the current ratio?

or
or
Borrow short term to finance additional fixed assets.

at
at
re
re
Issue long-term debt to buy inventory.

FC
FC
D
Sell common stock to reduce current liabilities.

tP
tP
ar
ar
Sell fixed assets to reduce accounts payable

m
m
.S
.S
w
w
w
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ht
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om
om
.c
.c
or
or
The sinking fund retirement of a bond issue takes __________.
at
at
re
re
FC
FC
only one form -- the corporation purchases bonds in the open market and
D
delivers a given number of bonds to the trustee
tP
tP
ar
ar
m
m
only one form -- the corporation pays cash to the trustee, who in turn calls
.S
.S
the bonds for redemption.
w
w
w
w
w
w
only one form -- bonds mature periodically and the corporation retires
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tp
tp
them in the order that they mature.
ht
ht
two forms -- (1) the corporation purchases bonds in the open market and
delivers a given number of bonds to the trustee; or (2) the corporation
pays cash to the trustee, who in turn calls the bonds for redemption.
om
.c
or
at
re
What type of long-term financing most likely has the following
FC
features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash

D
tP
flows are expected to be a constant annuity stream?

ar
m
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Long-term debt.
w
Preferred stock.
w
w
Common stock.
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Both the second and third answers are

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What type of long-term financing most likely has the following

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features: 1) it has a finite life, 2) failure to pay the cash flows could lead
.c
.c
to bankruptcy, and 3) its cash flows are expected to be a constant

or
or
annuity stream?
at
at
re
re
FC
FC
Long-term debt.
D
Preferred stock.
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ar
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Common stock.
m
Both the second and third answers are

.S
.S
w
w
w
w
w
w
://
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ht
ht
om
om
.c
.c
or
or
at
at
re
re
FC
FC
A proxy is __________.
D
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a unique voting system that allows minority shareholders to elect at least one
ar
ar
m
m
director.
.S
.S
w
w
a protective agreement that allows shareholder the ability to purchase new
w
w
w
w
shares in the same percentage as their current ownership proportion.
://
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ht
ht
a legal document giving one entity or person the authority to vote for another.
All of the above answers are in
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.c
or
at
Bond is a type of Direct Claim Security whose value is NOT secured by
re
__________.
FC
D
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ar
Ź Tangible assets
m
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w
Ź Intangible assets
w
w
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Ź Fixed assets
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Ź Real assets
Why companies invest in projects with negative NPV?

om
om
.c
.c
Ź Because there is hidden value in each project

or
or
Ź Because they have chance of rapid growth

at
at
re
re
Ź Because they have invested a lot

FC
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Ź All of the given options

D
D
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ar
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m
m
.S
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w
w
w
w
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om
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.c
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or
or
Mutually exclusive means that you can invest in _________ project(s) and having
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chosen ______ you cannot choose another.
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re
FC
FC
D
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Ź One; one
ar
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Ź Two; two
m
m
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Ź Two; one
w
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w
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w
Ź Three; one
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ht
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A set of possible values that a random variable can assume and their associated
probabilities of occurrence are referred to as __________.
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Ź
or
Probability distribution
at
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FC
D
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ar
m
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w
Which of the following would tend to reduce a firm's P/E ratio?

w
w
://
ŹThe firm significantly decreases financial leverage

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ŹThe firm increases return on equity for the long term

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ŹThe level of inflation is expected to increase to double-digit

levels
ŹThe rate of return on Treasury bills decreases
om
om
.c
.c
or
or
at
at
re
re
What mechanism ensures that large firms who benefit from tax laws pay some
FC
FC
minimum amount of tax?

D
D
tP
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ar
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Annual minimum tax.

m
Alternative minimum tax.

.S
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Minimum tax law.

w
w
w
w
w
w
://
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ht
ht
om
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.c
.c
or
or
Corpulent minimum tax.
at
at
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FC
FC
D
D
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ar
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m
m
What is potentially the biggest advantage of a small partnership over a sole
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proprietorship?
w
w
Unlimited liability.
w
w
w
w
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Single tax filing.
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Difficult ownership resale
Raising capital.
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Among the pairs given below select a(n) example of a principal and a(n) example
.c
or
of an agent respectively.
Ź Shareholder; manager
at
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FC
Ź Manager; owner
D
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ar
Ź Accountant; bondholder
m
.S
w
Ź Shareholder; bondholder
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w
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Which group of ratios measures a firm's ability to meet short-term obligations?

Ź Liquidity ratios
Ź Debt ratios
Ź Coverage ratios
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Ź Profitability ratios
.c
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or
or
at
at
re
re
FC
FC
A project whose acceptance does not prevent or require the acceptance of one
D
or more alternative projects is referred to as __________.

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ar
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a mutually exclusive project

.S
.S
an independent project
w
w
w
w
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w
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om
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.c
.c
or
or
a dependent project
at
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a contingent project
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FC
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D
D
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ar
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m
m
.S
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_________ is equal to (common shareholders' equity/common shares
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outstanding).
w
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A) Book value per share
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B) Liquidation value per share
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C) Market value per share
D) Tobin's Q
________ are analysts who use information concerning current and prospective
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profitability of a firms to assess the firm's fair market value.
.c
or
A) Credit analysts
B) Fundamental analysts
at
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C) Systems analysts
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D) Technical analysts
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ar
m
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w
The _______ is defined as the present value of all cash proceeds to the investor in
w
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the stock.
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A) dividend payout ratio

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B) intrinsic value
C) market capitalization rate
D) plowback ratio
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.c
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A statistical measure of the variability of a distribution around its mean is

or
or
referred to as __________.
at
at
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FC
FC
D
A probability distribution
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ar
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m

.S
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w
w
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w
w
w
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om
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.c
.c
or
or
at
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re
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FC
FC
Total portfolio risk is __________.
D
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equal to systematic risk plus nondiversifiable risk
ar
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m
m
.S
.S
equal to avoidable risk plus diversifiable risk
w
w
w
w
w
w
equal to systematic risk plus unavoidable risk
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tp
tp
ht
ht
equal to systematic risk plus diversifiable risk
__________ is the variability of return on stocks or portfolios associated with

changes in return on the market as a whole.
om
.c
or
Systematic risk
Ź Standard deviation
at
re
FC
Ź Financial risk
D
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For most firms, P/E ratios and risk

m
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A) will be directly related.

w
B) will have an inverse relationship.

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w
C) will be unrelated.
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D)will both increase as inflation increases

tp
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Dividend discount models and P/E ratios are used by __________ to try to find
mispriced securities.
A) technical analysts
om
om
B) statistical analysts
.c
.c
C) fundamental analysts
or
or
D) dividend analysts
at
at
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FC
FC
D
Discounted cash flow methods provide a more objective basis for evaluating and
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ar
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selecting an investment project. These methods take into account

m
m
.S
.S
Magnitude of expected cash flows

w
w
w
w
w
w
://
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tp
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ht
ht
om
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.c
.c
or
or
Timing of expected cash flows
at
at
Both timing and magnitude of cash flows
re
re
FC
FC
D
tP
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ar
ar
m
m
Which of the following would be considered a cash-flow item from an
.S
.S
"operating"activity?
w
w
w
w
w
w
://
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tp
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ht
ht
Cash outflow to the government for taxes
Cash outflow to shareholders as dividends
om
.c
or
Cash inflow to the firm from selling new common equity shares
at
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Cash outflow to purchase bonds issued by another compan
FC
D
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ar
m
.S
According to timing difference problem a good project might suffer from _____
w
IRR even though its NPV is ________.

w
w

://
tp
ht
Higher; lower
Lower; Lower
om
om
.c
.c
Lower; higher
or
or
at
at
re
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Higher; higher
FC
FC
D
D
tP
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ar
ar
m
The value of direct claim security is derived from which of the following?
.S
.S

w
w
w
w
w
w
://
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ht
ht
om
om
.c
.c
or
or
at
at
re
re
FC
FC
D
D
Fundamental analysis
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ar
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m
m
Underlying real asset
.S
.S
w
w
Supply and demand of securities in the market
w
w
w
w
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tp
All of the given options
ht
ht
When the market's required rate of return for a particular bond is much less than
its coupon rate, the bond is selling at:
a premium.
om
a discount.
.c
or
cannot be determined without more information.
face value at
re
FC
D
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The benefit we expect from a project is expressed in terms of:

ar
m

.S
w
w
w
://
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Cash in flows
ht
Cash out flows
Cash flows
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None of the given option

.c
.c
or
or
at
at
re
re
FC
FC
D
D
tP
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Cash budgets are prepared from past:

ar
ar

m
m
.S
.S
w
w
w
w
w
w
://
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tp
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ht
ht
om
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.c
.c
or
or
Balance sheets
at
at
re
re
FC
FC
Income statements
D
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Income tax and depreciation data
ar
ar
m
m
.S
.S
w
w
w
w
w
w
://
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tp
tp
ht
ht
In the dividend discount model, _______ which of the following are not
incorporated into the discount rate?
om
.c
or
Real risk-free rate
at
re
Risk premium for stocks
FC
D
tP
Return on assets
ar
m
.S
Expected inflation rate

w
w
w
://
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ht
om
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.c
.c
An investment opportunity set formed with two securities that are perfectly
or
or
negatively correlated. What will be standard deviation in the global minimum

at
at
re
re
variance portfolio?
FC
FC
Ź Equal to zero
D
Ź Greater than zero

tP
tP
Ź Equal to the sum of the securities' standard deviations

ar
ar
m
Ź Equal to -1
.S
.S
w
w
w
w
w
w
://
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tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
When Return is being estimated in % terms, the units of Standard Deviation will
re
re
FC
FC
be mention in __________.
D
tP
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Ź% ar
ar
Ź Times
m
m
.S
.S
Ź Number of days
w
w
Ź All of the given options
w
w
w
w
://
://
tp
tp
ht
ht
What are two major areas of capital budgeting?
Net present value, profitability index
Net present value; internal rate of return
Net present value; payback period
om
Pay back period; profitability index
.c
or
at
re
FC
When Investors want high plowback ratios?

D
tP
ar
Whenever ROE > k

m
.S
Whenever k > ROE

w
Only when they are in low tax brackets

w
w
Whenever bank interest rates are high

://
tp
ht
To increase a given future value, the discount rate should be adjusted

om
om
__________.
.c
.c

or
or
at
at
re
re
Upward
FC
FC
D
Downward
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ar
ar
m
First upward and then downward

.S
.S
w
w
w
w
w
w
://
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tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
re
re
FC
FC
D
D
tP
tP
Which of the following is NOT a cash outflow for the firm?
ar
ar
m
m
.S
.S
w
w
Depreciation
w
w
w
w
://
://
tp
tp
Dividends
ht
ht
Interest
Taxes
om
.c
or
Which of the following market in finance is referred to the market for short-term
government and corporate debt securities?
at
re
FC
D
tP
Money market
ar
m
.S
Capital market
w
w
w
Primary market
://
tp
ht
Secondary market
In finance we refer to the market where new securities are bought and sold for
the first time as the __________ market
om
om
.c
.c
Money market
or
or
at
at
re
re
Capital market
FC
FC
D
Primary market
tP
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ar
ar
m
Secondary market
.S
.S
w
w
w
w
w
w
://
://
tp
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ht
ht
om
om
.c
.c
or
or
at
at
re
re
FC
FC
In finance we refer to the market for relatively long-term financial instruments
D
as the __________ market.
tP
tP
ar
ar
m
m
.S
.S
Money market
w
w
w
w
w
w
Capital market
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tp
tp
ht
ht
Primary market
Secondary market
om
.c
How "Shareholder wealth" is represented in a firm?
or
at
re
FC
The number of people employed in the firm

D
tP
The book value of the firm's assets less the book value of its liabilities
ar
m
.S
The market price per share of the firm's common stock

w
w
w
The amount of salary paid to its employees

://
tp
ht
Which of the following examples would be deductible as an expense on the

corporation's income statement?
om
om
Interest paid on outstanding bonds
.c
.c
or
or
Cash dividends paid on outstanding common stock

at
at
re
re
FC
FC
Cash dividends paid on outstanding preferred stock

D
D
tP
tP
All of the above.

ar
ar
m
m
.S
.S
w
w
w
w
w
w
://
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tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
The firm has 20,000 common shares authorized, 15,000 shares outstanding, and
re
re
FC
FC
3,000 shares of treasury stock. How many common equity shares are issued?
D
tP
tP
2,000 ar
ar
m
m
5,000
.S
.S
17,000
w
w
18,000
w
w
w
w
://
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tp
tp
ht
ht
Which of the following statements is the least likely to be correct?
Ź A firm that has a high degree of business risk is less likely to want to incur
financial risk
Ź There exists little or no negotiation with suppliers of capital regarding
om
the financing needs of the firm
.c
Ź Financial ratios are relevant for making internal comparisons
or
at
Ź It is important to make external comparisons or financial ratios
re
FC
D
tP
ar
An annuity due is always worth _____ a comparable annuity.

m
.S
w
Ź Less than
w
Ź More than
w
://
Ź Equal to
tp
Ź Can not be found

ht
Which of the following would be considered a cash-flow item from a "financing"

om
om
activity?
.c
.c
Ź A cash outflow to the government for taxes

or
or
Ź A cash outflow to repurchase the firm's own common stock

at
at
re
re
Ź A cash outflow to lenders as interest

FC
FC
Ź A cash outflow to purchase bonds issued by another company

D
D
tP
tP
ar
ar
m
m
.S
.S
w
w
w
w
w
w
://
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tp
tp
ht
ht
om
om
.c
.c
or
or
The market price of a share of common stock is determined by:
at
at
re
re
the board of directors of the firm.
FC
FC
the stock exchange on which the stock is listed.
D
tP
tP
the president of the company.
ar
ar
m
m
individuals buying and selling the stock
.S
.S
w
w
w
w
w
w
://
://
tp
tp
The focal point of financial management in a firm is:
ht
ht
the number and types of products or services provided by the firm.
the minimization of the amount of taxes paid by the firm.
the creation of value for shareholders.
om
the dollars profits earned by the firm.
.c
or
at
re
FC
D
The controller's responsibilities are primarily in nature, while the treasurer's

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responsibilities are primarily related to .

ar
m
operational; financial management

.S
w
financial management; accounting

w
w
accounting; financial management

://
tp
financial management; operations

ht
A company's is (are) potentially the most effective instrument of good corporate

om
om
governance.
.c
.c
or
or
common stock shareholders

at
at
re
re
board of directors
FC
FC
top executive officers

D
D
tP
tP
ar
ar
m
m
.S
.S
___________ refers to meeting the needs of the present without compromising

w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
the ability of future generations to meet their own needs.
at
at
re
re
Corporate Social Responsibility (CSR)
FC
FC
Sustainability
D
tP
tP
Convergence
ar
ar
m
m
Green Economics
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
What is difference between shares and bonds?
om
Bonds are representing ownership whereas shares are not
.c
or
Shares are representing ownership whereas bonds are not
at
re
FC
Shares and bonds both represent equity

D
tP
Shares and bond both represent liabilities

ar
m
.S
w
w
w
Which group of ratios shows the extent to which the firm is financed with debt?
://
tp
ht
Liquidity ratios
Debt ratios
Coverage ratios
Activity ratios.
om
om
.c
.c
or
or
at
at
re
re
Which of the following portfolio statistics statements is correct?

FC
FC
D
D
tP
tP
A portfolio's expected return is a simple weighted average of expected returns

ar
ar
of the individual securities comprising the portfolio.

m
m
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
A portfolio's standard deviation of return is a simple weighted average of
at
at
individual security return standard deviations.
re
re
FC
FC
D
D
The square root of a portfolio's standard deviation of return equals its variance.
tP
tP
ar
ar
m
m
The square root of a portfolio's standard deviation of return equals its coefficient
.S
.S
of variation.
w
w
w
w
w
w
://
://
tp
tp
ht
ht
Which of the following is a method of evaluating securities by analyzing statistics
generated by market activity, such as past prices and volume
Technical analysis
Fundamental analysis
om
.c
Common size analysis
or
Ration analysis at
re
FC
Ref: http://www.investopedia.com/terms/t/technicalanalysis.asp
D
tP
ar
m
Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to
.S
valuing
w
w
w
A zero growth common stock.

://
tp
A positive growth common stock

ht
A short-term bond
An option.
om
om
Ref: http://www.wattpad.com/73486?p=2
.c
.c
or
or
at
at
Which of the following equation shows the cost of Preferred stocks of a company
re
re
FC
FC
D
D
tP
tP
Cost of Preferred stocks = Dividend / Market Price

ar
ar
m
Cost of Preferred stocks = Market Interest rate / Market Price

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Cost of Preferred stocks = Face value / Market Price
at
at
re
re
Cost of Preferred stocks = Dividend / Face value
FC
FC
D
D
tP
tP
Which of the following changes will increase the Net Present Value (NPV ) of a project
ar
ar
m
m
.S
.S
w
w
A decrease in the discount rate
w
w
w
w
A decrease in the size of the cash inflows
://
://
tp
tp
ht
ht
An increase in the initial cost of the project
A decrease in the number of cash inflows
reF: iMportant links msut check
om
http://webcache.googleusercontent.com/search?q=cache:iv45Jjtq7f0J:students.uta.edu/yx/
.c
yxd0907/fina3313/Answer%2520key%2520to%2520homework%25202.doc+Which+of+
or
at
the+following+changes+will+increase+the+Net+Present+Value+%28NPV+%29+of+a+p
re
roject&cd=1&hl=en&ct=clnk&gl=pk&client=firefox-a
FC
D
tP
Since companies in some industries typically have high fixed costs, but have stable and
ar
predictable revenues. Which of the following statement would be TRUE about these
m
companies?
.S
w
w
w
Their degree of operating leverage is relatively low.

://
tp
ht
Their bond issues would tend to have a speculative rating.
Their overall business risk is relatively low.
They are unable to take on much additional financial risk.

om
om
.c
.c
MIDTERM EXAMINATION
or
or
Fall 2009
at
at
re
re
FIN622- Corporate Finance (Session - 4)

FC
FC
Time: 60 min
D
Marks: 50
tP
tP
ar
ar
m
m
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
Question No: 1 ( Marks: 1 ) - Please choose one
re
re
Which of the following statements is TRUE regarding Profitability Index?
FC
FC
D
D
Ź It ignores time value of money
tP
tP
Ź It ignores future cash flows
ar
ar
Ź It ignores the scale of investment
m
m
Ź It ignores return on investment
.S
.S
w
w
w
w
w
w
://
://
tp
tp
A company can improve (lower) its debt-to-total assets ratio by doing which of the
ht
ht
following?
Ź By increasing the amount of borrowings

Ź By shifting short-term to long-term debt
Ź By shifting long-term to short-term debt
om
Ź By selling the common stock
.c
Ref: http://web.utk.edu/~jwachowi/mcquiz/mc6.html
or
at
re
FC

D
A public limited Company had sales of Rs.2 million this year. The marketing manager
tP
expects sales to grow at a 10 percent compound annual rate over the next 10 years. On
ar
this basis, which of the following is the closest amount of sales in 10 years?
m
.S
Ź Rs.5,187,485.
w
w
Ź Rs.2,593,722.
w
Ź Rs.4,622,885.
://
tp
Ź Rs.5,081,309.
ht

Suppose you wish to set aside Rs.2,000 at the beginning of each of the next 10 years (the
first Rs.2,000 deposit would be made now) in an account paying 12 percent compounded
annually. Approximately how much will you accumulate at the end of 10 years?
om
om
Ź Rs.22,863
.c
.c
Ź Rs.35,097
or
or
Ź Rs.39,310
at
at
re
re
Ź Rs.25,151
FC
FC
D

tP
tP
Which of the following terms refers to the process of systematic investigation of the
ar
ar
effects on estimates or outcomes of changes in data or parameter inputs or assumptions to

m
evaluate a capital project?

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
Ź Sensitivity Analysis
re
re
Ź Fundamental Analysis
FC
FC
Ź Technical Analysis
D
Ź Trend Analysis
tP
tP
ar
ar
m
m
The percentage change in a firm's operating profit (EBIT) resulting from a 1% change in
.S
.S
w
w
output (sales) is known as the ________.
w
w
w
w
://
://
tp
tp
Ź Degree of operating leverage
ht
ht
Ź Degree of profit leverage
Ź Degree of total leverage
Ź Degree of financial leverage
om
A project would be financially feasible in which of the following situations?
.c
Ź If Internal Rate of Return of a project is greater than zero
or
at
Ź If Net Present Value of a project is less than zero
re
Ź If the project has Profitability Index less than one
FC
Ź If the project has Profitability Index greater than one

D
tP

ar
Which of the following is determined by variance of an investment's returns?

m
.S
Ź Volatility of the rates of return.

w
w
Ź Probability of a negative return.

w
Ź Historic return over long periods.

://
tp
Ź Average value of the investment.

ht

Which of the following conditions, if exist, will make the diversification of stocks more
effective?
Ź Securities contained in a portfolio are positively correlated

om
om
Ź Securities contained in a portfolio are negatively correlated

.c
.c
Ź Securities contained in a portfolio have high market values

or
or
Ź Securities contained in a portfolio have low market values

at
at
re
re
FC
FC
D

tP
tP
Which one of the following terms refers to the variability of return on stocks or
ar
ar
portfolios not explained by general market movements, and is avoidable through proper
m
diversification?
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
Ź Total risk
re
re
Ź Systematic risk
FC
FC
D
Ź Market risk
tP
tP
ar
ar
m
m
.S
.S
w
w
dividend of Rs.2.00 per share and sells for Rs.44.00. what is the rate of return on this
w
w
stock?
w
w
://
://
tp
tp
Ź 12%
ht
ht
Ź 13%
Ź 14%
Ź 15%
om
If the common stocks of a company have beta value less than 1, then such stocks refer to
which of the following?
.c
or
Ź Normal stocks
at
re
Ź Aggressive stocks
FC
Ź Defensive stocks
D
Ź Income stocks
tP
ar

m
What will be the risk premium if the market portfolio has an expected return of 10% and
.S
the risk free rate is 4%?

w
w
w
Ź 4%
://
tp
Ź 5%
ht
Ź 6%
Ź 7%
formula required

A firm had an interest expense of Rs.400,000 on its outstanding debt during the financial
om
om
year 2006-2007. If the firm marginal tax rate is 40%, what was the total tax savings of the
.c
.c
firm during the period 2006-2007?

or
or
at
at
re
re
Ź Rs.150,000
FC
FC
Ź Rs.160,000
Ź Rs.170,000
D
D
tP
tP
Ź Rs.180,000
ar
ar
to be solved
m
m
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
In which of the following dividend policies, the amount of dividend is relatively fixed?
re
re
FC
FC
Ź Constant payout ratio policy
D
Ź Hybrid dividend policy
tP
tP
Ź Residual dividend policy
ar
ar
Ź Stable dividend policy
m
m
.S
.S
w
w
w
w
Which of the following is a proposition of Miller and Modigliani theory of Capital
w
w
structure?
://
://
tp
tp
ht
ht
Ź Value of a firm is independent of its capital structure
Ź Value of a firm is independent of its level of debt
Ź Value of a firm is dependent of its cost of capital
Ź Value of a firm is independent on its level of equity finances
om
.c
Which of the following companies may be considered as a Pure Play in the beverages
or
industry in Pakistan?
at
re
FC
Ź Coca Cola
D
Ź Pepsi
tP
Ź Shezan
ar
Ź Nestlé
m
answer required
.S
w
w

w
Which of the following is a disadvantage of Capital Asset Pricing Model?

://
tp
ht
Ź It considers market risk

Ź It can be used for listed companies
Ź It can be used for non-listed companies
Ź It is based on past data
om
om
Which of the following methods would be most suitable for calculating the return on
.c
.c
stocks of a non-listed company?

or
or
at
at
re
re
Ź Dividend Growth Model

FC
FC
Ź Capital Asset Pricing Model

Ź Security Market Line
D
D
tP
tP
Ź Characteristics Line
ar
ar
m

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
What will be the effect of reduction in the cost of capital on the accounting break-even
at
at
level of revenues?
re
re
FC
FC
D
D
Ź It raises the break-even level.
tP
tP
Ź It reduces the break-even level.
ar
ar
Ź It has no effect on the break-even level. Slide 13
m
m
Ź This cannot be determined without knowing the length of the investment horizon.
.S
.S
w
w
w
w
w
w
Which of the following statements is TRUE regarding Balance Sheet of a firm?
://
://
tp
tp
ht
ht
Ź It reports how much of the firm¶s earnings were retained in the business rather
than paid out in dividends.
Ź It reports the impact of a firm¶s operating, investing, and financing activities on
cash flows over an accounting period.
Ź It shows the firm¶s financial position at a specific point in time.
om
Ź It summarizes the firm¶s revenues and expenses over an accounting period.
.c
or
at
Which of the following would be a consequence of a high Inventory Turnover Ratio?
re
FC
Ź Low level of inventory and frequent stock-outs

D
Ź Seasonal elements peculiar to the business

tP
Ź Efficient inventory management

ar
Ź Any of the given option

m
.S

w
w
Short-term creditors would be most interested in which of the following ratios of a firm?
w
://
tp
Ź Coverage ratios
ht
Ź Liquidity ratios
Ź Profitability ratios
Ź Debt ratios

What are the earnings per share (EPS) for a company that earned Rs.100,000 last year in
om
om
after-tax profits, has 200,000 common shares outstanding, and Rs.1.2 million in retained
.c
.c
earnings at the year end?

or
or
at
at
re
re
Ź Rs. 6.50
FC
FC
Ź Rs. 6
Ź Rs. 100,000
D
D
tP
tP
Ź Rs. 0.50
ar
ar
m

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Which of the following statements is CORRECT with respect to common-size income
at
at
and balance sheet statements?
re
re
FC
FC
Ź They show how total sales change over time, but not total assets.
D
Ź They show how both total sales and total assets change over time.
tP
tP
Ź They provide no information about how total assets or total sales change over
ar
ar
time.
m
m
Ź They show how total assets change over time, but not total sales.
.S
.S
w
w
w
w
w
w
Which one of the following statements is TRUE regarding Present Value of an amount
://
://
tp
tp
to be received at some future date?
ht
ht
Ź It increases as the years to receipt increases
Ź It remains unaffected as the years to receipt increases
Ź It decreases as the years to receipt increases
Ź None of the given options
om
.c
How many years will it take for Rs.152,000 to grow to be Rs. 405,000 if it is invested in
or
an account with an annual interest rate of 10%?
at
re
FC
Ź 13.68
D
Ź 8.23
tP
Ź 10.28
ar
Ź Cannot be calculated from the given data

m
answer required
.S
w
w
w

://
tp
If you deposit Rs. 12,000 per year for 16 years (each deposit is made at the beginning of
ht
each year) in an account that pays an annual interest rate of 15%, what will your account
be worth at the end of 16 years?
Ź Rs. 82,168.44
Ź Rs. 71,450.82
Ź Rs. 768,901.12
om
om
Ź Rs. 668,609.67
.c
.c
or
or

at
at
re
re
Which of the following types of bonds pays no annual interest to the holder, but is sold
FC
FC
at discount below the par value?

D
D
tP
tP
Ź An original maturity bond

ar
ar
Ź A floating rate bond

m
Ź A fixed maturity date bond

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź A zero coupon bond
at
at
re
re
FC
FC
Which of the following is the rate of return earned on a bond if held till maturity?
D
tP
tP
Ź Yield-to-call
ar
ar
Ź Coupon payment
m
m
Ź Yield-to-maturity
.S
.S
w
w
Ź Sinking fund yield
w
w
w
w
://
://
tp
tp
Which one of the following statements best describes the relationship between market
ht
ht
interest rates and bond prices?
Ź Market interest rates and bond prices move in the same direction
Ź Market interest rates and bond prices move in opposite directions
Ź Sometimes move in the same direction, sometimes in opposite directions
om
Ź Market interest rate and bond prices have no relationship with each other
.c
or
at
When the market's required rate of return for a particular bond is much less than its
re
coupon rate, the bond will be selling at which one of the following?
FC
D
Ź At premium
tP
Ź At discount
ar
Ź At par
m
Ź Cannot be determined without more information

.S
w
w

w
Which of the following techniques of stock evaluation considers quantitative factors as

://
tp
well as qualitative factors for valuation?

ht
Ź Constant Growth Model
Ź No Growth Model
om
om

.c
.c
In which of the following situations market price of a security will move down?
or
or
at
at
re
re
Ź When market price of the security is above the intrinsic value of the security
FC
FC
Ź When market price of the security is equal to the intrinsic value of the security
Ź When market value of the security is equal to the face value of the security
D
D
tP
tP
Ź When market price of the security is below the intrinsic value of the security
ar
ar
m
Question No: 35 ( M arks: 1 ) - Please choose one

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Which of the following could be used to calculate the cost of common equity?
at
at
re
re
Ź Interpolation method
FC
FC
Ź Dividend discount model
D
Ź YTM (Yield-to-Maturity) method
tP
tP
Ź Capital structure valuation
ar
ar
m
m
.S
.S
w
w
Which of the following is a long-term source of financing for a firm?
w
w
w
w
Ź Corporate bonds
://
://
tp
tp
Ź Money market instruments
ht
ht
Ź Trade credit
Ź Accounts payables
Ref: Bonds provide the borrower with external funds to finance long-term
investments, or, in the case of government bonds, to finance current expenditure
om
http://en.wikipedia.org/wiki/Bond_%28finance%29
.c
or
at
Which of the following focuses on long-term investment decision-making process?
re
FC
Ź Working Capital Management

D
Ź Capital Budgeting
tP
Ź Cash Budgeting
ar

m
.S

w
w
Since the capital budgeting techniques use cash flows instead of accounting flows,
w
therefore, the financial manager must add back which one of the following to the
://
tp
analysis?
ht
Ź The cost of fixed assets

Ź The cost of accounts payable
Ź Investments
Ź Depreciation
om
om
Ref: Ref: http://highered.mcgraw-

.c
.c
or
or
at
at
re
re

FC
FC
Which of the following capital budgeting methods focuses on firm's liquidity?

D
D
tP
tP
Ź Internal Rate of Return

ar
ar
Ź Payback method
m
Ź Net Present Value

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
re
re
FC
FC
D
tP
tP
When faced with mutually exclusive options, which project should be accepted under the
ar
ar
'Payback Method'?
m
m
.S
.S
w
w
Ź The one with the longest payback period
w
w
Ź The one with the shortest Payback period
w
w
Ź It doesn¶t matter because the payback method is not theoretically correct
://
://
tp
tp
ht
ht
Question No: 41 ( Marks: 5 )
om
A manufacturing concern is able to borrow an amount of Rs.1
.c
or
at
re
MIDTERM EXAMINATION
FC
Fall 2009
D

tP

ar
m
.S
Following are amongst the three main areas of Finance EXCEPT:

w
w
w
Ź Financial institutions
://
tp
Ź Investments
ht
Ź Accounting
Ź Financial management

Which one of the following is an offering in which the shares of a company are offered
to a limited number of investors?
om
om
Ź Initial Public Offering

.c
.c
Ź Private Placement
or
or
Ź Direct Public Offering

at
at
re
re
Ź Primary Offering
FC
FC
D

tP
tP
If you want to earn 8 percent, approximately how much should you pay for a security
ar
ar
which matures in one year at Rs. 1,000?

m
m
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź Rs. 1,080
at
at
Ź Rs. 940
re
re
Ź Rs. 920
FC
FC
Ź Rs. 926
D
tP
tP
Question No: 4
ar ( Marks: 1 ) - Please choose one
ar
m
m
When the market's nominal annual required rate of return for a particular bond is less
.S
.S
w
w
than its coupon rate, the bond will be selling at which of the following?
w
w
Ź At discount
w
w
Ź At premium
://
://
tp
tp
Ź At par value
ht
ht
Ź At indeterminate price

Which of the following terms refers to the process of systematic investigation of the
effects on estimates or outcomes of changes in data or parameter inputs or assumptions to
om
evaluate a capital project?
Ź Sensitivity Analysis
.c
or
at
re
Ź Trend Analysis
FC
D

tP
For a firm with a Degree of Operating Leverage of 3.5, an increase in sales of 6% will:
ar
m
Ź Increase pre-tax profits by 3.5%

.S
Ź Decrease pre-tax profits by 3.5%.

w
w
Ź Increase pre-tax profits by 21.0%.

w
Ź Increase pre-tax profits by 1.71%.

://
tp
ht

The percentage change in a firm's operating profit (EBIT) resulting from a 1% change in
output (sales) is known as the ________.
Ź Degree of operating leverage

Ź Degree of profit leverage
om
om
Ź Degree of total leverage

.c
.c
Ź Degree of financial leverage

or
or
at
at
re
re

FC
FC
dividend of Rs.2.00 per share and sells for Rs.66.00. what is the capital gain yield on the
D
D
tP
tP
stock?
ar
ar
m
m
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź 7%
at
at
Ź 8%
re
re
Ź 9%
FC
FC
Ź 10%
D
tP
tP
ar
ar
Which of the following is considered as a risk free financial asset?
m
m
.S
.S
w
w
Ź Government T-bills
w
w
Ź Junk bonds
w
w
Ź Preferred stock
://
://
tp
tp
Ź Secured bonds
ht
ht
Ref: http://www.investopedia.com/terms/r/riskfreeasset.asp
om
.c
If the common stocks of a company have beta value less than 1, then such stocks refer to
or
which of the following?
at
re
FC
Ź Normal stocks
D
Ź Aggressive stocks
tP
Ź Defensive stocks
ar
Ź Income stocks
m
.S

w
w
Which of the following is known as market portfolio?

w
Ź A portfolio consists of all risk free securities available in the market

://
tp
Ź A portfolio consists of securities of the same industry

ht
Ź A portfolio consists of all aggressive securities available in the market

Ź A portfolio consists of all securities available in the market

What will be the risk premium if the market portfolio has an expected return of 10% and
om
om
the risk free rate is 4%?

.c
.c
Ź 4%
or
or
Ź 5%
at
at
re
re
Ź 6%
FC
FC
Ź 7%
D
D
tP
tP

ar
ar
Which of the following statements is true regarding Weighted Average Cost of Capital
m
(WACC)?
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź WACC of a levered firm is greater than that of an un-levered firm
at
at
Ź WACC of a levered firm is lesser than that of an un-levered firm
re
re
Ź WACC of a levered firm is equal to that of an un-levered firm
FC
FC
Ź An Un-levered firm has zero WACC.
D
tP
tP
ar
ar
XYZ Airlines will pay a Rs.4.00 dividend next year on its common stock, which is
m
m
currently selling at Rs.100 per share. What is the market¶s required return on this
.S
.S
w
w
w
w
w
w
Ź 9%
://
://
tp
tp
Ź 4%
ht
ht
Ź 5%
Ź 7%

A Pure Play method of selecting a discount rate is most suitable in which of the
om
following situations?
.c
Ź When the intended investment project has a Non-conventional stream of cash
or
flows
at
re
Ź When the intended investment project is a replacement project
FC
Ź When the intended investment project belongs to industry other than the
D
firms operating in
tP
Ź When the intended investment project has a conventional stream of cash flows
ar
m

.S
A Levered firm has a lower weighted average cost of capital as compare to an Un-
w
w
levered firm because of which of the following?

w
://
tp
Ź Interest tax shield

ht
Ź Low level of financial risk

Ź Low level of business risk
Ź Low level of systematic risk

ABC Corporation declared 10% dividend on its shares. A person purchased some shares
om
om
of this corporation after the dividend was announced. If he is entitled to receive the
.c
.c
declared dividend, his shares would be categorized as which of the following?

or
or
at
at
re
re
Ź Ex-Dividend
FC
FC
Ź Cum-Dividend
Ź Stock- Dividend
D
D
tP
tP
Ź Cash Dividend
ar
ar
m

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Which of the following is a dividend that is paid in the form of additional shares, rather
at
at
than a cash payout?
re
re
FC
FC
Ź Stock Dividend
D
Ź Cum Dividend
tP
tP
Ź Ex Dividend
ar
ar
Ź Extra Dividend
m
m
.S
.S
w
w
w
w
Which of the following firms would have the highest financial leverage?
w
w
://
://
tp
tp
Ź A firm having debt-to-equity ratio of 30:70
ht
ht
om
Which of the following is the principal advantage of high debt financing?
.c
Ź Tax savings
or
Ź Low Bankruptcy costs
at
re
Ź Minimum financial risk
FC
Ź Low financial leverage

D
tP

ar

m
structure?
.S
w
w

w

://
tp

ht

Which of the following is a disadvantage of Capital Asset Pricing Model?
Ź It considers market risk
om
om
Ź It can be used for listed companies

.c
.c
Ź It can be used for non-listed companies

or
or
Ź It is based on past data

at
at
re
re
FC
FC

Which of the following shows the reward to risk ratio of a Security A?
D
D
tP
tP
Ź Expected return of A (rA) ± risk free return / beta of A

ar
ar
Ź Expected return of A (rA) ± risk free return / required return of A

m
Ź Expected return of A (rA) ± beta of A / risk free return

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź Risk free return - expected return of A (rA)/ beta of A
at
at
re
re
FC
FC
D
In Capital Assets Pricing Model, which of the following shows time value of money?
tP
tP
ar
ar
Ź Beta of the security
m
m
Ź Risk free rate of return
.S
.S
w
w
Ź Risk premium
w
w
Ź Market rate of return
w
w
://
://
tp
tp
ht
ht
Which of the following statements is TRUE regarding Balance Sheet of a firm?
Ź It reports how much of the firm¶s earnings were retained in the business rather
than paid out in dividends.
Ź It reports the impact of a firm¶s operating, investing, and financing activities on
om
cash flows over an accounting period.
Ź It shows the firm¶s financial position at a specific point in time.
.c
Ź It summarizes the firm¶s revenues and expenses over an accounting period.
or
at
re
FC
Suppose that a corporation of which you are a shareholder has just gone bankrupt. Its
D
liabilities are far in excess of its assets. How much of your investment would you get
tP
back?
ar
m
.S
Ź A proportionate share of bondholder claims based on the number of common

w
w
shares that you own

w
Ź A proportional share of all creditor claims based on the number of common shares
://
tp
that you own

ht
Ź An amount that could, at most, equal what you originally paid for the shares of
common stock in the corporation
Ź Nothing at all doubt

The gross profit margin is unchanged, but the net profit margin declined over same
om
om
period. This could have happened due to which one of the following reasons?
.c
.c
Ź Cost of goods sold increased relative to sales

or
or
Ź Sales increased relative to expenses

at
at
re
re
Ź The tax rate has been increased

FC
FC
Ź Dividends were decreased

D
D
tP
tP

ar
ar
Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average
m
of 1.4. What do these ratios tell about this company?

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź The company will be viewed as having high creditworthiness
at
at
Ź The company has greater than average financial risk when compared to
re
re
other firms in its industry
FC
FC
Ź The company will not experience any difficulty with its creditors
D
Ź The company has less liquidity than other firms in the industry
tP
tP
ar
ar
m
m
If a creditor wants to know about the bill payment status of a potential customer, the
.S
.S
w
w
creditor could look at which one of the following ratios?
w
w
Ź Current ratio
w
w
Ź Acid ratio
://
://
tp
tp
Ź Average age of accounts payable
ht
ht
Ź Average age of accounts receivable

Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a year,
compounded annually. How much amount your account will have at the end the end of
om
four years?
.c
or
Ź Rs.9,624
at
re
Ź Rs.10,208
FC
Ź Rs.9,728
D
Ź Rs.10,880
tP
ar

m
The present value of Rs.100 per year received for 10 years discounted at 8 percent is
.S
closest to which of the following amounts?

w
w
Ź Rs.177
w
Ź Rs.362
://
tp
Ź Rs.425
ht
Ź Rs.671

How 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%?
om
om
.c
.c
Ź 13.68
or
or
Ź 8.23
at
at
re
re
Ź 10.28
FC
FC
Ź Cannot be calculated from the given data

D
D
tP
tP

ar
ar
Which of the following types of bonds pays no annual interest to the holder, but is sold
m
at discount below the par value?

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź An original maturity bond
at
at
Ź A floating rate bond
re
re
Ź A fixed maturity date bond
FC
FC
Ź A zero coupon bond
D
tP
tP
ar
ar
Which of the following is a financial asset?
m
m
.S
.S
w
w
Ź A building
w
w
Ź Bonds
w
w
Ź Inventories
://
://
tp
tp
Ź Equipments
ht
ht
An 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
om
percent?
Ź Rs. 1,200
.c
Ź Rs. 800
or
Ź Rs. 600
at
re
Ź Rs. 1,000
FC
D
tP
ar

m
.S
w
level of revenues?
w

w
Ź It raises the break-even level

://
tp
Ź It reduces the break-even level. Doubted

ht
Ź It has no effect on the break-even level.



om
om

.c
.c

or
or
Ź Risk premium
at
at
re
re

FC
FC
Ref: http://www.answers.com/topic/capital-asset-pricing-model
D

tP
tP

ar
ar
structure?
m
m
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
re
re
FC
FC
D
D
tP
tP
ar
ar
m
m
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht

Which of the following risks increases as the debt level of a business increases?
om
Ź Financial risk
Ź Operating risk
.c
or
Ź Business risk
Ź Investment risk
at
re
FC

D
Which of the following risks is independent of capital structure of a firm?

tP
ar
Ź Financial risk
m
Ź Systematic risk
.S
w
Ź Business risk
w
Ź Total risk
w
://
tp

ht
Which of the following bestdefine the term 'Capital Structure'?
Ź The proportion of equity used by a firm

Ź The proportion of debt and equity capital used by a firm
Ź The proportion of long-term liabilities used by a firm
om
om
Ź The proportion of short-term bank loan used by a firm
.c
.c
or
or
at
at

re
re
Which of the following is tax deductible?

FC
FC
D
Ź Dividend on preferred shares

tP
tP
Ź Dividend on common stocks

ar
ar
Ź Coupon payments on bonds

m
Ź Capital gain on common stocks DOUBTED

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
MIDTERM EXAMINATION
re
re
Spring 2009
FC
FC
D

tP
tP
ar
ar
Which of the following could be used to calculate the cost of common equity?
m
m

.S
.S
w
w
Ź Interpolation method
w
w
Ź Dividend discount model
w
w
://
://
Ź YTM method
tp
tp
Ź Capital structure valuation
ht
ht

level of revenues?

om
Ź It raises the break-even level.
Ź It reduces the break-even level.
.c
or
Ź It has no effect on the break-even level.
at
re

FC

D
tP

ar

m

.S
w
Ź Risk premium
w

w

://
tp

ht

structure?

om
om

.c
.c

or
or
at
at

re
re

FC
FC
D

tP
tP

ar
ar

m

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
at
at
re
re
A constant payout ratio policy is a policy of paying a FIXED percentage of a firm¶s earnings
FC
FC
as dividends in each period. Such a policy is likely to result in wildly fluctuating dividends. As a
D
result, only a small percentage of dividend paying firms follow such a policy.
tP
tP
ar
ar
m
m
Which of the following risks increases as the debt level of a business increases?
.S
.S

w
w
w
w
Ź financial risk
w
w
Ź Operating risk
://
://
Ź Business risk
tp
tp
ht
ht
Ź Investment risk

Which of the following risks is independent of capital structure of a firm?

Ź Financial risk
om
Ź Systematic risk
.c
Ź Business risk
or
Ź Total risk DOUBT
at
re

FC

D
Which of the following bestdefine the term 'Capital Structure'?

tP

ar
Ź The proportion of equity used by a firm

m
Ź The proportion of debt and equity capital used by a firm

.S
Ź The proportion of long-term liabilities used by a firm

w
w
Ź The proportion of short-term bank loan used by a firm

w

://

tp
ht

Which of the following is tax deductible?

Ź Dividend on preferred shares
Ź Dividend on common stocks
Ź Coupon payments on bonds
om
om
Ź Capital gain on common stocks

.c
.c

or
or

at
at
re
re

FC
FC
Which of the following is determined by variance of an investment's returns?

D
D
tP
tP
Ź Volatility of the rates of return.

ar
ar
Ź Probability of a negative return.

m
Ź Historic return over long periods.

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź Average value of the investment.
at
at

re
re
FC
FC
Which of the following best illustrates the problem imposed by capital rationing?
D

tP
tP
Ź Accepting projects with the highest NPVs first
ar
ar
Ź Accepting projects with the highest IRRs first
m
m
.S
.S
Ź Bypassing projects that have positive NPVs
w
w
Ź Bypassing projects that have positive IRRs
w
w

w
w
://
://
tp
tp
Market demand allowed a company, to raise its price by 20% to $60. What is the new
ht
ht
level of break-even revenues if fixed charges including depreciation are $1 million and
variable costs were 70% of the old price?

Ź $2,000,000
Ź $2,400,000
om
Ź $2,857,143
Ź $3,333,333
.c
or

at
re
Which of the following capital budgeting methods states the project return as a
FC
percentage?
D

tP
Ź Payback period
ar
Ź Net present value

m
Ź Internal Rate of Return fm bok

.S
w

w
w
://
tp
is always quoted in terms of percentage,

ht
which makes it comparable to the other market interest rates or the inflation rate

om
om
Which of the following capital budgeting methods focuses on firm's liquidity?

.c
.c
or
or

at
at
Ź Payback method
re
re
Ź Net Present Value

FC
FC
Ź Internal Rate of Return

D

tP
tP

ar
ar
In which of the following situations a project is acceptable?

m

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź When a project has conventional cash flows patterns
at
at
Ź When a project has a non-conventional cash flow pattern
re
re
Ź When a project has a discounted rate higher than the inflation rate
FC
FC
Ź When a project has a positive net present value
D

tP
tP
ar
ar
Which of the following statements is Correct regarding the fundamental analysis?
m
m

.S
.S
w
w

w
w
Ź Fundamental analysts use only Economic indicators to evaluate a stock
w
w
://
://
Ź Fundamental analysts use only financial information to evaluate a company¶s
tp
tp
stocks
ht
ht
Ź Fundamental analysts use financial and non-financial information to evaluate a
company¶s stocks
Ź Fundamental analysts use only non-financial information to evaluate a company¶s
stocks

om

.c
or
You are considering buying common stock in Grow On, Inc. The firm yesterday paid a
at
dividend of $7.80. You have projected that dividends will grow at a rate of 9.0% per year
re
indefinitely. If you want an annual return of 24.0%, what is the most you should pay for
FC
the stock now?

D

tP
Ź $52.00
ar
Ź $56.68
m
Ź $32.50
.S
w
Ź $35.43
w

w

://
tp
If a bond sells at a high premium, then which of the following relationships hold true?
ht
(P0 represents the price of a bond and YTM is the bond's yield to maturity.)

Ź P0 < par and YTM < the coupon rate.
Ź P0 < par and YTM > the coupon rate.

om
om
Ź P0 > par and YTM > the coupon rate.
Ź P0 > par and YTM < the coupon rate.
.c
.c
or
or
at
at
http://web.utk.edu/~jwachowi/mcquiz/mc4.html
re
re

FC
FC

D

tP
tP
Which one of the following is a long-term contract under which a borrower agrees to
ar
ar
make payments of interest and principal on specific dates?

m

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź Common stock.
at
at
Ź Preferred stock
re
re
Ź Equity contract.
FC
FC
Ź Bond.
D

tP
tP
ar
ar
Which of the following transactions affects the acid-test ratio?
m
m

.S
.S
w
w
Ź Receivables are collected.
w
w
Ź Inventory is liquidated for cash.
w
w
Ź New common stock is sold and used to retire a debt issue.
://
://
tp
tp
Ź A new common stock issue is sold and equipment purchased.
ht
ht

Which of the following would be a consequence of a high Inventory Turnover Ratio?
Ź Too low a level of inventory and frequent stock-outs.
Ź Seasonal elements peculiar to the business.
om
Ź Efficient inventory management.
Ź Any of the given option.
.c
or

at
re
Which of the following statements (in general) is correct?
FC

D
Ź A low receivables turnover is desirable.

tP
Ź The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
ar
Ź An increase in net profit margin with no change in sales or assets means a poor
m
ROI.
.S
w
Ź The higher the tax rate for a firm, the lower the interest coverage ratio
w
w
http://web.utk.edu/~jwachowi/mcquiz/mc6.html
://
tp

ht

Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average
of 1.4. What do these ratios tell about this company?

Ź The company will be viewed as having high creditworthiness
om
om
Ź The company has greater than average financial risk when compared to other
firms in its industry
.c
.c
Ź The company will not experience any difficulty with its creditors
or
or
at
at
Ź The company has less liquidity than other firms in the industry
re
re

FC
FC

D

tP
tP
In which one of the following markets the bonds of a Corporation shall be traded now
ar
ar
who were issued 10 years back?

m

.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht
om
om
.c
.c
or
or
Ź Primary market
at
at
Ź Secondary market
re
re
Ź Money Market
FC
FC
Ź All of the above
D

tP
tP
ar
ar
A Company had the following data, extracted from its financial statements for the year
m
m
.S
.S
ending June 30, 2008:
w
w

w
w
a) Current Ratio = 2
w
w
Acid Ratio = 1.5
://
://
b)
tp
tp
c) Current Liabilities = $500,000
ht
ht
d) Inventory Turnover = 5
e) Gross Profit Margin = 20 percent

What were its sales for the year?

om
Bank A pays 6.2% interest compounded semiannually and Bank B pays 6% interest,
.c
or
compounded monthly. Which bank offers the higher effective annual rate?

at
re

FC

D

tP
ar
m
.S
w
w
w
://
tp
ht
om
om
.c
.c
or
or
at
at
re
re
FC
FC
D
D
tP
tP
ar
ar
m
m
.S
.S
w
w
w
w
w
w
://
://
tp
tp
ht
ht

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om

return she will receive depends on:

The bond's maturity value.

The price paid for the bond

The interest payments to be received.

All of the given options not sure

one so reminder is Normal stock so I think it,s Normal stock

Select correct option:

Increases the covariance of

Does not affect

Select correct option:

Which of the following is known as market portfolio?

Select correct option:

be worth at the end of 16 years?

Select correct option:

Which of the following changes will occur if a bond's yield-to-maturity increases,

Its price will rise

Its price will remain unchanged

Its price will fall. 100% sure

Can not be determined

Question # 4 of 15 ( Start time: 03:33:44 PM ) Total Marks: 1

Which of the following is a major advantage of the corporate form of organization?

Select correct option:

Reduction of double taxation.

Select correct option:

The projects would have the same IRR.

The projects would have the same payback period.

The projects are mutually exclusive.

Select correct option:

That an investor should buy the stock.

That the stock has a high dividend payout ratio.

That an investor should sell the stock.

Select correct option:

interest is compounded quarterly?

Select correct option:

Rs.3.26 FV= PV.(1+I) n

= 50000 / 18-8 = 50000 / 10 = 5000

Which of the following is a main purpose of the Sensitivity Analysis?

Select correct option:

To find out the optimal level of capital budget.

To find out that how price changes affect break-even volume.

To find out the seasonal variation in product demand.

To find out that how variables in a project affect profitability

which of the following conditions a stock is said to be overvalued?

If the stock has market value equal to the expect value

: Which of the following statement it TRUE regarding a risk free security?

Select correct option:

Select correct option:

Question # 3 of 15 ( Start time: 03:59:51 PM ) Total Marks: 1

Which of the following shows the reward to risk ratio of a security A ?

Select correct option:

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 A

Both the given options may apply

None of the given options

Discounted Pay Back period

Simple Pay Back Period

Which of the following factor determines the financial viability of a project?

Select correct option:

Future Cash flows PAGE 109

None of the given option

interest rates decrease by 1 percent?