MIDTERM EXAMINATION
Fall 2009
MGT201- Financial Management (Session - 4)
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Question No: 1 ( Marks: 1 ) - Please choose one
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Among the pairs given below select a(n) example of a principal and a(n) example of an agent respectively.
► Shareholder; manager
► Manager; owner
► Accountant; bondholder
► Shareholder; bondholder
Question No: 2 ( Marks: 1 ) - Please choose one
What should be the focal point of financial management in a firm?
► 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
► The dollars profits earned by the firm
Question No: 3 ( Marks: 1 ) - Please choose one
Which of the following financial market is referred to the market for short-term government and corporate debt securities?
► Money market
► Capital market
► Primary market
► Secondary market
Question No: 4 ( Marks: 1 ) - Please choose one
Which of the following would generally have unlimited liability?
► A limited partner in a partnership
► A shareholder in a corporation
► The owner of a sole proprietorship
► A member in a limited liability company (LLC)
Question No: 5 ( Marks: 1 ) - Please choose one
Which of the following is a major disadvantage of the corporate form of organization?
► Double taxation of dividends
► Inability of the firm to raise large sums of additional
► Limited liability of shareholders
► Limited life of the corporate form
Question No: 6 ( Marks: 1 ) - Please choose one
Which of the following statement is most accurate?
► Coverage ratios also shed light on the "liquidity" of current ratios
► Receivable- and inventory-based activity ratios also shed light on the "liquidity" of current assets
► Receivable- and inventory-based activity ratios also shed light on the firm's use of financial leverage
► Liquidity ratios also shed light on the firm's use of financial leverage
Question No: 7 ( Marks: 1 ) - Please choose one
In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would __________.
► Incomplete information
► Fall
► Rise
► Remain unchanged
Question No: 8 ( Marks: 1 ) - Please choose one
You are going to invest Rs.12,500 into a certificate of deposit (CD) at a 6% annual rate (compounded annually) with a maturity of 30 months. How much money will you receive when the CD matures?
► Rs.14,491
► Rs.14,518
► Incomplete information
► Rs.14,460
Rationale:
30months = 2.5 year
FV = amt * (1+i)^n = 12500(1.06)^2.5 = 14460
FV = amt * (1+i)^n = 12500(1.06)^2.5 = 14460
Question No: 9 ( Marks: 1 ) - Please choose one
Which of the following would be considered a cash-flow item from a "financing" activity?
► A cash outflow to the government for taxes
► A cash outflow to repurchase the firm's own common stock
► A cash outflow to lenders as interest
► A cash outflow to purchase bonds issued by another company
Question No: 10 ( Marks: 1 ) - Please choose one
In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT __________.
► Changes in costs due to a general appreciation in those costs
► The amount (net of taxes) that we could realize from selling a currently unused building of ours that we intend to use for our project
► Changes in working capital resulting from the project, net of spontaneous changes in current liabilities
► Costs that have previously been incurred that are unrecoverable
Question No: 11 ( Marks: 1 ) - Please choose one
The basic capital budgeting principles involved in determining relevant after-tax incremental operating cash flows require us to __________.
► Include sunk costs, but ignore opportunity costs
► Include opportunity costs, but ignore sunk costs
► Ignore both opportunity costs and sunk costs
► Include both opportunity and sunk costs
Question No: 12 ( Marks: 1 ) - Please choose one
Interest payments, principal payments, and cash dividends are __________ the typical budgeting cash-flow analysis because they are ________ cash flows.
► Included in; financing
► Excluded from; financing
► Included in; operating
► Excluded from; operating
Question No: 13 ( Marks: 1 ) - Please choose one
Why Payback period is a poor gauge of profitability?
► It ignores the time value of money
► It gives rough indication to the liquidity of the project
► It does not consider cash flows after expiration of the payback period
► All of the given options
Question No: 14 ( Marks: 1 ) - Please choose one
To estimate an unknown number that lies between two known numbers is knows as ___________.
► Capital rationing
► Capital budgeting
► Interpolation
► Amortization
In the mathematical subfield of numerical analysis, interpolation is a method of constructing new data points within the range of a discrete set of known data points.
Question No: 15 ( Marks: 1 ) - Please choose one
Which of the following make the calculation of NPV difficult?
► Estimated cash flows
► Discount rate
► Anticipated life of the business
► All of the given options
Question No: 16 ( Marks: 1 ) - Please choose one
When there is single period capital rationing, what would be the most sensible way of making investment decisions?
► Choose all projects with a positive NPV
► Group projects together to allocate the funds available and select the group of projects with the highest NPV
► Choose the project with the highest NPV
► Calculate IRR and select the projects with the highest IRRs
Question No: 17 ( Marks: 1 ) - Please choose one
The sinking fund retirement of a bond issue takes __________.
► Only one form -- the corporation purchases bonds in the open market and delivers a given number of bonds to the trustee
► Only one form -- the corporation pays cash to the trustee, who in turn calls the bonds for redemption
► Only one form -- bonds mature periodically and the corporation retires them in the order that they mature
► 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
Question No: 18 ( Marks: 1 ) - Please choose one
Which of the following statements is correct in distinguishing between serial bonds and sinking-fund bonds?
► Serial bonds mature at a variety of dates, but sinking-fund bonds mature at a single date
► Serial bonds provide for the deliberate retirement of bonds prior to maturity, but sinking-fund bonds do not provide for the deliberate retirement of bonds prior to maturity
► Serial bonds do not provide for the deliberate retirement of bonds prior to maturity, but sinking-fund bonds do provide for the deliberate retirement of bonds prior to maturity
► None of the above are correct since a serial bond is identical to a sinking fund bond
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Question No: 19 ( Marks: 1 ) - Please choose one
__________ is a long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt.
► A subordinated debenture
► A debenture
► A junk bond
► An income bond
Question No: 20 ( Marks: 1 ) - Please choose one
Bond is a type of Direct Claim Security whose value is NOT secured by __________.
► Tangible assets
► Intangible assets
► Fixed assets
► Real assets
Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following is NOT the present value of the bond?
► Intrinsic value
► Market price
► Fair price
► Theoretical price
not sure about this answer.
Question No: 22 ( Marks: 1 ) - Please choose one
A coupon bond pays annual interest, has a par value of Rs.1,000, matures in 4 years, has a coupon rate of 10%, and has a yield to maturity of 12%. What is the current yield on this bond?
► 10.65%
► 10.45%
► 10.95%
► 10.52%
In this we have to first calculate the price of bond first
=100*(1 + 0.12)^-1+100*(1 + 0.12)^-2+100*(1 + 0.12)^-3+1100*(1.12)^-4 = 939.25
Current yield = coupon amount /Price of bond
100/939.25 =
So coupon payment for 4 year @ 10% = 100*4 = 400
Plug the values in Current yield formula = 400/1000 = .1064 = 10.64%
Question No: 23 ( Marks: 1 ) - Please choose one
A coupon bond that pays interest annually is selling at par value of Rs.1,000, matures in 5 years, and has a coupon rate of 9%. What is the yield to maturity on this bond?
► 8.0%
► 8.3%
► 9.0%
► 10.0%
Rationale: When a bond sells at par value, the coupon rate is equal to the yield to maturity
Question No: 24 ( Marks: 1 ) - Please choose one
What is yield to maturity on a bond?
► It is below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium
► The discount rate that will set the present value of the payments equal to the bond price
► It is based on the assumption that any payments received are reinvested at the coupon rate
► None of the given options
Question No: 25 ( Marks: 1 ) - Please choose one
Which of the following value of the shares changes with investor’s perception about the company’s future and supply and demand situation?
► Par value
► Market value
► Intrinsic value
► Face value
Question No: 26 ( Marks: 1 ) - Please choose one
The value of direct claim security is derived from which of the following?
► Fundamental analysis
► Underlying real asset
► Supply and demand of securities in the market
► All of the given options
Question No: 27 ( Marks: 1 ) - Please choose one
Low Tech Company has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.
► 6.0%
► 4.8%
► 7.2%
► 3.0%
Growth = ROE * plow back ratio
Plowback ratio ratio that measures the amount of earnings retained after dividends have been paid out (100%-40% = 60%)
Let us plug in the value into above formula
10% * .60 = 6%
Question No: 28 ( Marks: 1 ) - Please choose one
How dividend yield on a stock is similar to the current yield on a bond?
► Both represent how much each security’s price will increase in a year
► Both represent the security’s annual income divided by its price
► Both are an accurate representation of the total annual return an investor can expect to earn by owning the security
► Both incorporate the par value in their calculation
Question No: 29 ( Marks: 1 ) - Please choose one
In the dividend discount model, which of the following is (are) NOT incorporated into the discount rate?
► Real risk-free rate
► Risk premium for stocks
► Return on assets
► Expected inflation rate
not sure about this
Question No: 30 ( Marks: 1 ) - Please choose one
Total portfolio risk is __________.
► Equal to systematic risk plus non-diversifiable risk
► Equal to avoidable risk plus diversifiable risk
► Equal to systematic risk plus unavoidable risk
► Equal to systematic risk plus diversifiable risk
Question No: 31 ( Marks: 1 ) - Please choose one
The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as __________.
► A probability distribution
► The expected return
► The standard deviation
► Coefficient of variation
Question No: 32 ( Marks: 1 ) - Please choose one
A well-diversified portfolio is defined as:
► One that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero
► One that contains securities from at least three different industry sectors
► A portfolio whose factor beta equals 1.0
► A portfolio that is equally weighted
Question No: 33 ( Marks: 1 ) - Please choose one
If a company intends to start a new project, ________ technique are employed to assess the financial viability of the project.
► Financial planning
► Financial forecasting
► Capital budgeting
► Capital rationing
from handouts
if a company intends to start a new project, Capital Budgeting techniques are employed to assess the financial viability of the project.
Question No: 34 ( Marks: 1 ) - Please choose one
Capital budgeting is a decentralized function assigned to:
► Individuals
► Departments
► Teams
► All of the given options
Not sure about the answer
Question is bit ambiguous, if we take Dept. correct option, then “team” option is violated.
from handouts
Capital budgeting is a decentralized function. In big corporations, this function is not an individual’s job, rather, different departments and teams are assigned to work on different aspects of capital budgeting.
Question No: 35 ( Marks: 1 ) - Please choose one
The biggest challenge in capital budgeting is to keep finding:
► Valuable projects
► Sources of funds
► Blue chips
► Fixed assets
from handouts
The biggest challenge in capital budgeting is to keep finding the valuable projects, i.e., projects that may add to the value of the firm. You must be familiar with the basic objective of financial management
Question No: 36 ( Marks: 1 ) - Please choose one
The objective of financial management is to maximize _________ wealth.
► Stakeholders
► Shareholders
► Bondholders
► Directors
Question No: 37 ( Marks: 1 ) - Please choose one
Information that goes into __________ can be used to prepare __________.
► A forecast balance sheet; a forecast income statement
► Forecast financial statements; a cash budget
► Cash budget; forecast financial statements
► A forecast income statement; a cash budget
Question No: 38 ( Marks: 1 ) - Please choose one
A proposal is accepted if payback period falls within the time period of 3 years. According to the given criteria which of the following project will be accepted?
Payback period | |
Project A | 1.66 |
Project B | 2.66 |
Project C | 3.66 |
► Project A
► Project B
► Project C
► Project A & B
Question No: 39 ( Marks: 1 ) - Please choose one
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate is 8% compounded annually?
► Rs.680.58
► Rs.1,462.23
► Rs.322.69
► Rs.401.98
PV = amt / (1+i)^n
PV = 1000/(1+.08)^5 = 680.53
Question No: 40 ( Marks: 1 ) - Please choose one
What is the present value of Rs.6,500 to be paid at the end of 8 years if the interest rate is 10% compounded annually?
► Rs.3,032
► Rs.3,890
► Rs.3,190
► Rs.4,301
PV = amt / (1+i)^n
PV = 6500/(1+.10)^8 = 3032.29
Question No: 41 ( Marks: 5 )
Suppose Ali Inc. issues ten-year bonds (par Rs. 1,000) with an annual coupon of 8.6%. Similar ten-year bonds are paying 8.0% interest. What is the value of one Ali's new bonds that is, what should be its price?
Bond Price = PV(all inflows) + PV(face value)
So in this case
Bond Price = PV(of all coupon payments) +PV(1000)
as bond will pay same amount for the next 10 year assume it annuity so we use annuity formula if some done get this formula he/she can try manually PV for every year for ten years.
8.6% of one thousand = 1000*.086 = 86
Which he gets every year as coupon payment
PV = Amt * PVIF = [1 - (1+i)^-n ]/i
i = 8%
price = 86* [( 1 – (1.08)^-10) ]/.08 + (1000/1.08)^10
price = 577.0670003 + 463.1934881 = 1040.260488
= 1040.26
Question No: 42 ( Marks: 5 )
Draw a three year time line which illustrates the following situation:
i. An outflow of Rs. 10,000 occurs at time 0
ii. Inflows of Rs. 5,000 occur at the end of year 1, 2 and 3.
iii. The interest rate during the three year is 10%.
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