Mgt201 Collection of Old Papers

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MGT201 Financial Management

Final Term Examination - February 2005
Time Allowed: 150 Minutes
INSTRUCTIONS
Please read the following instructions carefully before attempting any question:
1. This exam consists of 5 Multiple Choice Questions (MCQs), 5 short questions and 1
descriptive question.
2. Each MCQ carries 2 Marks; each short question carries 5 Marks and Descriptive Question
carry 15 Marks.
3. The use of calculator is allowed.
4. The use of Financial Tables is allowed.
5. For each MCQ question, read the choices available and select the choice which you
consider is the correct answer, by clicking on the appropriate check box.
6. Save your answer before proceeding to the next question.
7. Do not click the "Finish button" while solving your paper. Once you clicked the "Finish"
button, you will not be able to access your paper again. Click it at the end of your paper.
That means you have submitted your complete paper.
8. A clock is given in the exam software. Software will automatically be closed at the end of
90 minutes.
9. Remember not to spend too much time on any one MCQ. Since all MCQs carry equal
marks, it is important to manage your time and response to test questions effectively.
10. Failure to comply with the Supervisor's directions will result in your test being cancelled.
Please comply with supervisor's directions to avoid any unpleasant event.
Total Marks: 50 Total

Questions: 11
Question No. 1 Marks : 5
What is advocated by the bird in hand theory regarding the dividend policy?
Why EBIT is generally considered to be independent of financial leverage?

Suppose you borrow $12 and promise to pay it back over twelve months in monthly
installments. If the interest rate were positive, your payment would be:
1 One dollar a month.

2 Twelve dollars a month.
3 Less than one dollar a month.
4 More than one dollar a month.
The ABC company is currently in this situation

EBIT Rs 4 Million
Cost of equity, 15%
Shares outstanding, n 600,000
Tax rate, T (Federal plus state) 35%
Value of debt D Rs 2 Million
Kd 10 %
The firm's Market is stable, and it expects no growth, so all the earnings are paid out as
dividends. The debt consists of perpetual bonds.
a. What is the total market value of the firm's stock, S, its price per share Po and the firm's
total market value?
b. What is the firm's weighted average cost of capital?
What is the difference between present value and net present value?
How can investors reduce the variability of returns in their investment portfolio?
1 By diversifying their investments.

2 By adding securities to their portfolio that are not perfectly correlated.
3 By adding some mutual funds to their portfolio.
4 All of the given options.
What is the definition of operating leverage?
1 Additional variability in earnings available to the firm's common shareholders.

2 Responsiveness of the firm's EBIT to fluctuations in sales.
3 Concept of financing a portion of the firm's assets with securities bearing a fixed rate
of return.
4 Concept of financing a portion of the firm's assets with securities bearing a variable
rate of return.
What is meant by Budget Constraints?
What is the difference between the Pure MM model and traditionalist view?
What financial statement measures the amount of profits generated by a firm over a given
period of time?
1 Statement of cash flow
2 Balance sheet.
3 Income statement or profit and loss statement.
4 Operating Income Statement.
How would a firm use its calculated weighted average cost of capital of 12.5 percent?
5 As a hurdle rate for decisions related to project acceptance or rejection.

6 To determine how much of its earnings the firm should retain.
7 To calculate the weights in the capital structure.
8 To determine the expected rate of return on a potential project
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FINALTERM EXAMINATION
FALL 2006 Marks: 60
MGT201 - FINANCIAL MANAGEMENT (Session - 2 ) Time: 120min
StudentID/LoginID: ______________________________
Student Name: ______________________________
Center Name/Code: ______________________________
Exam Date: Tuesday, February 06, 2007
• All questions are compulsory.

• This exam consists of 15 Multiple Choice Questions (MCQ’s), 5 True/False Questions, 5 Fill in the
Blanks,5 Short Questions and 2 Numerical Questions.
• For each MCQ, read the choices available carefully and select the choice which you consider is the
most suitable.
• This examination is closed book, closed notes, closed neighbours.
• Do not ask any question about the contents of this examination from anyone.
• You are required to show the working of all Numerical questions.
• The use of calculator and financial tables is allowed.
• You may wish to pace yourself with your own watch, but the Supervisor will be the official
timekeeper of the test.
• Failure to comply with the supervisor’s directions will result in your test being cancelled. Please
comply with supervisor’s directions to avoid any unpleasant event.
For Teacher's use only

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21 22 23 24 25 26 27 28 29 30
Marks
Question 31 32
Marks
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following is not the objective of capital budgeting techniques?
► Financial viability of the project
► To assess working capital requirement
► To evaluate the value of investment
► To measure durability of the project
Which of the following statements is correct?
► (A). Ratio analysis can be distorted by seasonal factors.
► (B). Ratio analysis is a great tool, because it allows a firm to be fairly compared to
any other company.
► (C). It is difficult to generalize financial ratios as being strictly good or bad.
► Both A and C are correct
The buyer of a zero-coupon bond expects to receive:
► Price appreciation
► A rate of return equal to zero over the life of the bond.

► Variable dividends instead of a fixed interest payment annually.
► All interest payments in one lump sum at maturity
An ordinary annuity whose payments or receipts continue forever is called ------------.
► Annuity due
► Deferred annuity
► Perpetuity
► None of the given options
Which of the following is a financial asset?
► A building
► Bonds
► Inventories
► Equipment
Working capital management deals with all of the following, except:
► The composition of current assets

► The amount of current assets
► The financing of current assets
► The depreciation of current assets
Which of the following is not a factor that business risk is dependent upon?
► Product/service demand variability
► Sales price variability
► Foreign risk exposure
► Interest rate levels
Which of the following cost of capital factors, firms can NOT control?
► Capital structure policy
► Investment policy
► Interest rate levels
► Dividend policy
Which of the following is not a spontaneous source of financing?

► Accrued taxes
► Bank loans
► Accrued wages
► Accounts payable
According to the hedging approach to financing, seasonal variations in current assets should be
financed with:
► Short-term debt.
► Retained earnings.
► Common stock.
► Long-term debt.
One difference between a financial lease and operating lease is that:
► There is often a call option in a financial lease.
► There is often an option to buy in an operating lease.
► An operating lease is often cancelable by the lessee
► A financial lease is often cancelable by the lessee.

Risk can be analyzed:
► Only on a stand-alone basis
► Only on a portfolio basis.
► Both on a stand-alone and portfolio basis
► Neither of the given option is correct.
The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is
called the:
► Financial risk.
► Operating leverage.
► Business risk.
► Target capital structure.
Which of the following would appear as liability in the balance sheet of a company?
► The value of Bonds purchased for investment purposes
► The value of Bonds issued for raising capital
► The value of Stocks purchased for investment purposes

Suppose you know that your firm is facing relatively poor prospects but needs new capital. If you
also know that investors do not have this information, signaling theory would predict that you
would:
► (A). Issue debt to maintain the returns of equity holders.
► (B). Issue equity to share the burden of decreased equity returns between old and new
shareholders.
► Both A and B are correct
► None of the given option is correct
Market risk could be reduced through diversification.
► True
► False
A service company would be a good candidate for an LBO.
► True
► False
The spot rate is simply the exchange rate between two currencies as determined by the respective
governments.
► True
► False

The expected return on a risk-free security is zero.
► True
► False
Preferred stock, like debt, could provide financial leverage to a firm.
► True
► False
Question No: 21 ( Marks: 1 )
Yield to maturity (YTM) of a Bond = -------------- + capital gain.
A collection of securities held by an individual investor or an institution is called ----------.
A ----------- merger takes place when firms operating in same industries combine together.
------------ refers to the amount of a company’s annual dividend expressed as a percentage of the
current price of the share of that company.
Optimal capital structure refers to the particular combination of debt and equity finances that
minimizes the ---------------while maximizing the----------.
A corporation just paid a dividend of Rs.2. Its stocks have a required rate of return of 13% and
investors expect the dividend to grow at a constant 5% rate in the future. Calculate the intrinsic
value (Present value) of the Corporation’s stocks.
Under what conditions leasing of an asset is better than buying it.

Differentiate between business risk and financial risk.
An investor places 60% of his funds in Security A and the balance in Security B. The expected
returns on A and B are 15% and 20%, respectively. The standard deviations of returns on A and B
are 20% and 15% respectively. Calculate the expected return on the portfolio.
A firm may pursue an aggressive, moderate or a conservative working capital financing policy.
Discuss these three working capital financing policies briefly:
Suppose your firm is considering an investment project that has a cost of Rs.1 million and is
expected to generate an annual after-tax cash flow of Rs.250,000 for five years. You have already
spent Rs.50,000 in research and development costs for the project. If the firm's required rate of
return is 14 percent, what is the NPV and pay back period of this project? Comment on the
financial viability of the project.
A Corporation has the following Target capital structure:

Debentures = Rs. 3 Billion
Preferred shares = Rs. 0.48 Billion
Common shares = Rs. 6.52 Billion
Total = Rs.10 Billion
Under the prevailing market conditions, financial analysts have estimated a risk free rate of return
β
of 10% and a market rate of return of 14%. The corporation’s common stocks have a beta ( ) of
1.5. Bonds carry an interest rate of 9.5%. Preferred stocks has a return of 10% p.a. corporate tax
rate is 40%. Compute the present weighted average cost of capital of the corporation.
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FALL 2007 Marks: 60
Student Name: ______________________________
Center Name/Code: ______________________________
Exam Date: Thursday, March 13, 2008
Please read the following instructions carefully before attempting any

question:
All questions are compulsory.
This exam consists of 15 Multiple Choice Questions (MCQs) carrying 1 mark each; 5
True/ False statements carrying 1 mark each; 5 Fill in the Blanks carrying 1 mark
each; 3 Short Questions carrying 5 marks each; and 2 descriptive numerical
questions carrying 10 marks each.
For each MCQ, read the available choices carefully and select the most appropriate
choice which you consider is the correct answer, by clicking on the appropriate check
box.
For a true/false statement, recognize the concept and answer accordingly.
For Fill in the Blank questions, provide the appropriate word(s) in the given blank.
Remember not to spend too much time on any one objective type question since all
objective type questions carry equal marks; it is important to manage your time
according to the marks allocated to each question.
Use of Calculators and Financial Tables is allowed.
You are required to show all the Necessary Calculations where needed as the
necessary calculations carry considerable marks.
If you believe that some essential data or piece of information is missing, make an
appropriate assumption and use it to solve the problem to the best of your knowledge.
Save your answer before proceeding to the next question.
Do not click the “Finish” button while solving your paper. Once you clicked the
“Finish” button, you will not be able to access your paper again. Click it at the end of
your paper. That means you have submitted your complete paper.
A clock is given in the exam software. Software will automatically close at the end of
given time.
Use of mobile phone is strictly prohibited. Switch off your mobile phone during the
exam.
Failure to comply with the Supervisor’s directions will result in your test being
cancelled. Please comply with supervisor’s directions to avoid any unpleasant event.

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21 22 23 24 25 26 27 28 29 30
Marks
A(n) __________________ is a stream of cash payments that continues forever.
► Discounted Cash Flow
► Ordinary Annuity
► Annuity Due
► Perpetuity
The stock is over-valued if :
► Market Price < Fair Value
► Market Price > Fair Value
► Market Price = Fair Value
____________ is the amout of other goods and services that must be given up to get
something.
► Opportunity Cost
► Sunk Cost
► Administrative Cost
► Operating Cost
The term _______________ refers to the measure of the spread or dispersion of a set of
data.
► Variance
► Covariance
► Standard Deviation
Business risk stems from the operation and the assets of the firm. These may be caused
by:
► Uncertainty and fluctuations in prices and costs
► Specific business and market causes
► Higher operating leverage
► All of the given options
Which of the following show(s) all possible risk-return combinations for all combinations
of stocks in the portfolio?
► Parachute Graph
► Efficient Frontier
► Both Parachute Graph & Effiecient Frontier
_________________ is a measurement of the degree to which a firm or project relies on

fixed rather than variable costs.
► Operating Leverage
► Financial Leverage
► Net Present Value
The firm’s capital structure refers to :
► The mix of the various types of debt and equity capital maintained by a firm
► A company's financial framework, including long term debt, preferred stock

and net worth
► The mixture of debt and equity resulting from decisions on financing

operations
Common stock is considered as ____________ financing and current liabilities are

considered as _____________ financing.
► Permanent; permanent
► Temporary; temporary
► Permanent; temporary
► Temporary; permanent
rCE = (DIV1 / P0) + g is known as :
► Total Risk Formula
► Bond Pricing Equation
► Gordon’s Formula
► SML Equation
High current assets means _________ Liquidity but _________ Profitability ?
► High; high
► Low; low
► High; low
► Low; high
______________ is an inventory management policy in which supplies arrive just a few

hours before they are used.
► Technology Based
► Just in Time (JIT)
► Outsourcing
Which of the following is NOT a type of Lease Finance?
► Financial Lease
► Operating Lease
► Sale & Lease-Back
► Functional Lease
Restricted Working Capital policy is also known as ___________.
► Fat Cat Policy
► Lean and Mean Policy
► Bird in Hand Policy

Which of the following is NOT a reason for multinational companies to do business

internationally ?
► To expand market share
► To create distance from End Users
► To bypass trade barriers
► To diversify and reduce sovereign risk
The objective of Financial Management is to minimize the shareholders wealth.
► True
► False
Portfolio Diversification is a method of reducing the overall risk of an investment

portfolio by holding a range of different types of assets.
► True
► False
Business Risk is defined as the risk faced by common stockholders if firm takes debt.
► True
► False
Technology based inventory management policy states that supplies arrive just a few
hours before they are used.
► True
► False

Market Multiple Analysis (MMA) is an approach to Merger analysis and valuation.
► True
► False
_______________ is the discount or interest rate at which the net present value of an
investment is equal to zero.
CAPM stands for _______________________________.
_________________ represents the relationship between required return and beta.
___________________ is the difference between current assets and current liabilities.
Acquisition is the most common form of _________________.
Two common stocks A and B have beta ( β ) values of 0.70 and 1.50 respectively. Using
capital asset pricing model (CAPM) compute the required rate of return for both the
stocks if risk free rate is 9% and the market risk premium is 6%.
Differentiate between business risk and financial risk.
What is the relation between bond prices and interest rates ? Under what market
conditions a bond would be selling at premium, at par or at a discount ?
SNT Corporation has a bond issue outstanding with an annual coupon rate of 7 percent
and 4 years remaining until maturity. The par value of the bond is Rs. 1,000.
Required:
(i) Determine the current value of bond if present market conditions justify a 14
percent required rate of return. The bond pays interest annually.
(ii) What would be the current value at the same required rate of return if there are
10 years remaining until maturity?
Sumi Inc. has the following Target capital structure:
Debentures = Rs. 3.00 Billion

Preferred shares = Rs. 1.45 Billion
Common shares = Rs. 7.55 Billion
Total = Rs. 12 Billion
Under the prevailing market conditions, financial analysts have estimated a risk free rate
of return of 12% and a market rate of return of 15%. The corporation’s common stocks
have a beta ( β ) of 1.25. Bonds carry an interest rate of 9.5%. Preferred stocks have a
return of 10% p.a. and corporate tax rate is 40%. Compute the present Weighted Average
Cost of Capital (WACC) for Sumi Inc.

Final Term Examination – Spring 2005
INSTRUCTIONS:

question:

• This exam consists of 5 Multiple Choice Questions (MCQs) carrying 2 marks each, 5 Short
questions carrying 5 marks each and 1 Descriptive questions carrying 15 marks.
• You are required to show all the working of short questions as well as descriptive question.
• This examination is closed book, closed notes, closed neighbors.
• Do not ask any questions about the contents of this examination from anyone.
• The use of calculator is allowed.
• The Use of Financial Tables is allowed.
Failure to comply with the Supervisor's directions will result in your test being cancelled. Please
comply with supervisor's directions to avoid any unpleasant event.
Total Marks: 52 Total Questions: 11
If interest expenses for a firm rise, we know that firm has taken on more
______________.
o Financial Leverage
o Operating Leverage
o Fixed Assets
o None of the given options
What is meant by Budget Constraints?
What does IRR mean?
Capital _____________ is the term that means the size of the capital budget is
constrained.
o Fractioning
o Rationing
o Budgeting
o Cost
What are the General Advantages of Leasing from Lessee's (Borrower / user) Point
of View?
What is meant by the Capital Asset Pricing Model (CAPM)?
From the given options, select the optimal capital structure for a company:
o Debt = 40%; Equity = 60%; EPS = Rs.2.95; Stock price = Rs.26.50

o Debt = 50%; Equity = 50%; EPS = Rs.3.05; Stock price = Rs.28.90.
You have the following information about a company for a year:
Operating Revenue = Rs.100 per unit

Variable Costs = Rs.50 per unit
a. Calculate breakeven quantity for the company if fixed cost is Rs.500 and interpret
the result.
b. What happens to the breakeven quantity if fixed cost of the company rises to
Rs.600? Show the calculations and interpret the result.
c. What will be operating leverage of the firm when fixed cost is Rs.500 and when fixed
cost is Rs.600 at the breakeven quantity calculated in part (a), show all the
calculations involved? What conclusion can you draw about the relationship between
operating leverage and breakeven quantity from your answers?
Why do Multinationals do business internationally?
A __________ occurs when two firms in totally different industries combine.
o Conglomerate
o Co generic
o Horizontal
o Vertical
Worth of one currency in terms of another currency is called __________.
o Euro
o Exchange Rate
o Spot Rate
o Forward Rate
FINAL TERM EXAMINATION
Total Marks: 50
SEMESTER SPRING 2005
MGT201-Financial Management(Paper 3) Duration: 120 min
Student ID/Login
ID
Name
PVC Name/Code
Date
INSTRUCTIONS:
• This exam consists of 5 Multiple Choice Questions (MCQs) carrying 2 marks each, 5 Short questions carrying 5 marks
each and 1 Descriptive questions carrying 15 marks.
• You are required to show all the working of short questions as well as Descriptive question.
• This examination is closed book, closed notes, closed neighbors.
• Do not ask any questions about the contents of this examination from anyone.
• The use of calculator is allowed.
• The Use of Financial Tables is allowed.
• You may wish to pace yourself with your own watch, but the Supervisor will be the official timekeeper of the test.
• Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please comply with
supervisor’s directions to avoid any unpleasant event.
For teacher’s use only.
Question Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Total

Marks
Question No: 1 Marks: 2
If two projects are completely independent (or unrelated), the measure of correlation between them is:
a. 0
b. 0.5
c. 1
d. -1
The euro is the name for:

a. A currency deposited outside its country of origin.
b. A bond sold internationally outside the country in whose currency the bond is denominated.
c. A common European currency.
d. A type of sandwich.
Permanent working capital:

a. Varies with seasonal needs.
b. Includes fixed assets.
c. Is the amount of current assets required to meet a firm's long-term minimum needs.
d. Includes accounts payable.
A company estimates that an average-risk project has a WACC of 10 percent, a below-average risk project
has a WACC of 8 percent, and an above-average risk project has a WACC of 12 percent. Which of the given
independent projects should the company accept?
a. Project A has average risk and a return of 9 percent.
b. Project B has below-average risk and a return of 8.5 percent.
c. Project C has above-average risk and a return of 11 percent.
d. All of the given options of projects should be accepted.
Financial statements that forecast the company’s financial position and performance over a period of years
are called:
a. Strategic mission financial statements.
b. Pro forma financial statements.
c. Corporate purpose financial statements.
d. Realized financial statements.
Briefly explain MM Irrelevance (Miller Modigliani) Theory of dividend?
Why EBIT is generally considered to be independent of financial leverage?
How might increasingly volatile inflation rates, interest rates and bond prices affect the optimal capital
structure for corporations?
How are the bonds classified in the balance sheets?
Define Payback period?

Descriptive Question
Currently under consideration is a project with a beta of 1.50. At this time, the risk free rate of return is 7% and the
return on the market portfolio of assets is 10%.The project is actually expected to earn an annual rate of return of
11%.
a. If the return on the market portfolio were to increase by 10%, what would be expected to happen to the
project’s required return? What if the market return were to decline by 10%?
b. Use the CAPM to find the required return on this investment.
c. On the basis of your calculations in b, would you recommend this investment? Why or why not?
d. Assume that as a result of investors becoming less risk – averse, the market return drops by 1% to
9%.what impact would this change have on your response in b and c?
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SPRING 2007 Marks: 60
Student Name: ______________________________
Center Name/Code: ______________________________
Exam Date: Wednesday, July 04, 2007

• This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 True/False
questions of 1 mark each, 3 Short questions of 5 marks each and 3 long questions of 10 marks
each.
• For each Multiple Choice Question, read the choices available carefully and encircle the choice
which you consider is the most suitable on the question paper.
• You are required to show the working of all Numerical questions.
• Use of calculator and financial tables is allowed.
• This examination is closed book, closed notes and closed neighbours.
• Do not ask question about the contents of this examination from anyone.
• Use of mobile phones is strictly prohibited.
• Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21
Marks
The price of a share of common stock represents:
► Earnings after tax divided by the number of shares outstanding
► The board of directors' assessment of the intrinsic value of the firm
► The book value of the firm's assets less the book value of its liabilities
► The market's evaluation of a firm's present and future performance
An investor who is attempting to compare equally risky certificates of deposit (CD) investments
with different compounding periods per year should compare the _________ interest rate for each
investment.
► Annual
► Effective annual
► Periodic
► Nominal
Suppose you wish to set aside Rs.2,000 at the end of each of the next 10 years in 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
► Rs.20,324
If a company issues a preferred stock of Face Value Rs. 10 and the board of directors announce
annual dividend of Rs. 2 per share. What would be the required rate of return?
► 20%
► 20.5%
► 19%
► 21%
Which of the following is not a cause of “Basic Business Risk”?
► Large changes in customer demand
► Unstable selling price
► Uncertainty in input costs
In ____________ market stocks and bonds are traded.
► Capital
► Money
► Real asset
► Efficient
According to portfolio theory there is ______________ relation between risk and return.
► No
► Direct
► Inverse
Which of the following problems, for a firm may emerge due to rumors of bankruptcy?
► Suppliers will refuse to supply raw material
► Banks will demand higher interest rates
► Customers will cancel purchase orders
Maturity period of short term debt is ___________ one year.
► Equal to
► Less than
► Greater than
The use of financial leverage
► Reduces the variability of earnings available to common shareholders
► Reduces the risk of bankruptcy
► Increases the variation of operating earnings
► Increases the variability of earnings per share
A major shortcoming of the payback method is that it ignores cash flows after the payback period.
► True
► False
Increase in dividend payout gives positive signal to investors.
► True
► False

The variable that most directly affects the cash budget is sales.
► True
► False
In general, the shorter the maturity schedule of a firm's debt, the lower the risk that it will be
unable to meet its debt obligations.
► True
► False
Depreciation increases a firm's taxable income.
► True
► False
“Financial leverage and operating leverage have a similar effect on ROE (Return On Equity) of a
firm”. Discuss?
From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it
ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?
A Manufacturing concern has fixed costs (e.g., depreciation) of Rs 50,000 directly attributable to
producing a particular product. The product sells for Rs 5 a unit and variable costs are Rs 2.00 per
unit. What is the break-even point in units produced?
You have an Rs 2,000,000 portfolio consisting of an Rs 100,000 investment in each of 20 different

stocks. The portfolio has a beta equal to 1.1. You are considering selling Rs 100,000 worth of one
stock which has a beta equal to 0.9 and using the proceeds to purchase another stock that has a beta
equal to 1.4. What will be the new beta of your portfolio following this transaction?
Suppose Ford Motor Company sold an issue of bonds with a 10 year maturity, an Rs 1,000 par
value, a 10% coupon rate, and annual interest payments. Two years after the bonds were issued, the
going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?
A company has the following optimal capital structure:

Debt = Rs 3 million
Preferred shares = Rs 1.5 million
Common shares = Rs 5.5 million
Total capital = Rs 10 million
Financial analysts have estimated a return of 13% p.a for common share of the company. Debt
carries an interest rate of 9.5% p.a. Preferred stocks of the company has a return of 10% p.a.
Corporate tax rate is 39%. Calculate Weighted Average Cost of Capital of the company.
Spring 2009
MGT201- Financial Management (Session - 2)

What is the long-run objective of financial management?
► Maximize earnings per share
► Maximize the value of the firm's common stock
► Maximize return on investment
► Maximize market share

Which of the following statement (in general) is correct?
► A low receivables turnover is desirable
► The lower the total debt-to-equity ratio, the lower the financial risk for a
firm
► An increase in net profit margin with no change in sales or assets means a weaker
ROI
► The higher the tax rate for a firm, the lower the interest coverage ratio

What is the present value of a Rs.1,000 ordinary annuity that earns 8% annually for an
infinite number of periods?
► Rs.80
► Rs.800
► Rs.1,000
► Rs.12,500

Companies and individuals running different types of businesses have to make the
choices of the asset according to which of the following?
W
M
► Life span of the project
► Validity of the project
► Cost of the capital
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► Return on asset

What is the advantage of a longer life of the asset?
► Cash flows from the asset becomes non-predictable

► Cash flows from the asset becomes more predictable
► Cash inflows from the asset becomes more predictable
► Cash outflows from the asset becomes more predictable
Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs.
1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond
B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to
10%, ____________.
► Both bonds will increase in value, but bond A will increase more than bond B
/
► Both bonds will increase in value, but bond B will increase more than bond
A
o m
► Both bonds will decrease in value, but bond A will decrease more than bond B
c
► Both bonds will decrease in value, but bond B will decrease more than bond A
.
ng
i
Given no change in required returns, the price of a stock whose dividend is constant
.t n
will__________.
► Remain unchanged
n a
► Decrease over time at a rate of r%
a n
► Increase over time at a rate of r%
► Decrease over time at a rate equal to the dividend growth rate
u j
/ v
For most firms, P/E ratios and risk_________.
:/
► Will be directly related
tt p
► Will have an inverse relationship
► Will be unrelated
h
► Will both increase as inflation increases

Which of the following statement about portfolio statistics is CORRECT?
► A portfolio's expected return is a simple weighted average of expected

returns of the individual securities comprising the portfolio.

► A portfolio's standard deviation of return is a simple weighted average of
individual security return standard deviations.
► The square root of a portfolio's standard deviation of return equals its variance.
► The square root of a portfolio's standard deviation of return equals its coefficient
of variation.

Which of the following is simply the weighted average of the possible returns, with the
weights being the probabilities of occurrence?
► A probability distribution
► The expected return
► The standard deviation
► Coefficient of variation

The square of the standard deviation is known as the ________.
► Beta
► Expected return
/
► Variance
o m
. c
ng
Why companies invest in projects with negative NPV?
i
.t n
n a
a n
► Because there is hidden value in each project
► Because they have chance of rapid growth
u
► All of the given options j
► Because they have invested a lot
/ v
:/
An investor was expecting a 18% return on his portfolio with beta of 1.25 before the
tt p
market risk premium increased from 8% to 10%. Based on this change, what return will
now be expected on the portfolio?
► 22.5%
► 20.0%
► 20.5%
h
► 26.0%

Which of the following is the characteristic of a well diversified portfolio?

► Its market risk is negligible
► Its unsystematic risk is negligible
► Its systematic risk is negligible

How the beta of a stock can be calculated?
► By monitoring price of the stock

► By monitoring rate of return of the stock
► By comparing the changes in the stock market price to the changes in the
stock market index

Which of the following formula relates beta of the stock to the standard deviation?
► Covariance of stock with market * variance of the market
► Covariance of stock with market / variance of the market
► Variance of the market / Covariance of stock with market
► Slope of the regression line
/
o m
A beta greater than 1 for a stock shows:
. c
ng
► Stock is relatively more risky than the market
i
► If the market moves up by 10% the stock will move up by 12%
.t n
► As the market moves the stock will move in the same direction
n a
n
If stock is a part of totally diversified portfolio then its company risk must be equal to:
a
►0
► 0.5
u j
►1
/ v
:/
► -1
tt p
If risk and return combination of any stock is above the SML, what does it mean?
h
► It is offering lower rate of return as compared to the efficient stock
► It is offering higher rate of return as compared to the efficient stock
► Its rate of return is zero as compared to the efficient stock
► It is offering rate of return equal to the efficient stock

An arbitrage opportunity exists if an investor can construct a __________ investment
portfolio that will yield a sure profit.
► Positive
► Negative
► Zero

Which of the following factors might affect stock returns?
► The business cycle
► Interest rate fluctuations
► Inflation rates

If arbitrage opportunities are to be ruled out, what would be the expected excess return
of each well-diversified portfolio?
► Inversely proportional to the risk-free rate s
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► Inversely proportional to its standard deviation
► Proportional to its standard deviation
/
► Proportional to its beta coefficient
o m
.c
Which of the following represent all Risk –Return Combinations for the efficient
portfolios in the capital market?
n g
i
.t n
► Parachute graph
► CML straight line equation
► Security market line
na
a n
by a firm?
u j
What should be used to calculate the proportional amount of equity financing employed
/ v
► The common stock equity account on the firm's balance sheet
:/
► The sum of common stock and preferred stock on the balance sheet
► The book value of the firm
tt p
► The current market price per share of common stock times the number of shares
Outstanding
h
Which of the following is the market for short term debt?
► Money market
► Capital market
► Real asset market
► Equity market

Bonds are issued in the market at _________.
► Premium
► Discount
► Both premium and discount

Why debt is a less costly source of fund?
► Because additional interest creates a new form of tax shield
► Because additional money creates a new form of tax shield
► Because banks extend loan at lower interest rates

Which of the following is as EBIT?
/
► Funds provided by operations
o m
► Earnings before taxes
► Net income
. c
ng
► Operating profit
i
.t n
Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The
with variable costs of Rs.5 per unit.

n a
firm has Rs.1, 000,000 in fixed costs. The firm anticipates selling each unit for Rs.25
► 3.33
► 1.25
a n
► 1.14
u j
► There is not sufficient information provided to calculate the degree of operating
leverage (DOL).
/ v
:/
tt p
A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
► If sales rise by 3.5% at the firm, then EBIT will rise by 1%
h
► If EBIT rises by 3.5% at the firm, then EPS will rise by 1%
► If EBIT rises by 1% at the firm, then EPS will rise by 3.5%
► If sales rise by 1% at the firm, then EBIT will rise by 3.5%

Which of the following represents financial leverage?
► Use of more debt capital to increase profit

► Debt is not used in capital to increase profit
► High degree of solvency
► Low degree of solvency

Which of the following best describes the statement; “The value of an asset is preserved
regardless of the nature of the claims against it”?
► Law of diminishing marginal returns
► Law of conservation of value
► Law of return on equity
► Law of return on assets
Firm ABC has Rs.5 million in outstanding debt, currently has 200,000 shares
outstanding priced at Rs.60 a share, and has a borrowing rate of 10%. If the firm's return
on equity is 15%, what is the firm's WACC?
► 5.00%
► 3.23%
► 4.25%
► 2.16%
/
o m
true?
. c
Which of the following statements regarding the M&M Propositions without taxes is
ng
► The total value of the firm depends on how cash flows are divided up between
i
stockholders and bondholders, under M&M Proposition I.
.t n
► The firm's capital structure is relevant under M&M Proposition I.
► The cost of equity depends on the firm's business risk but not its financial risk,
under M&M Proposition II.
n a
► The cost of equity rises as the firm increases its use of debt financing under
M&M Proposition II.
a n
u j
Which one of the following is correct for the spot exchange rate?
/ v
► This is the rate today for exchanging one currency for another for immediate
:/
delivery
► This is the rate today for exchanging one currency for another at a specific
future date
tt p
h
location on a specific future date
location for immediate delivery

The restructuring of a firm should be undertaken, when:
► The restructuring is expected to create value for shareholders

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► The restructuring is expected to increase earnings per share next year
► The restructuring is expected to increase the firm's market share power in industry
► The current employees will receive additional stock options to align employee
interest

Which of the following term is used when the firm can independently control
considerable assets with a very limited amount of equity?
► Joint venture
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► Leveraged buyout (LBO)
► Spin-off
► Consolidation

What is the economic order quantity for an automobile dealer selling 2,000 cars per year,
at a cost of Rs.750 per order, and a carrying cost of Rs.300 per automobile?
M
► 40 cars
► 71 cars O
► 100 cars
► 126 cars
g .C
i n
.t n
As the amount of __________ increases the present value of net tax-shield
benefits of debt increases.
► Debt
n a
► Common equity
an
► Preffered equity
► Assets
u j
. v
Why the present value of the costs of financial distress increases with increases
in the debt ratio?
W
► Expected return on assets increases
W
► Present value of the interest tax shield is greater
► Equity tax shield is depleted
W
► Probability of default and/or bankruptcy is greater

What are the real markets effects of leverage on WAAC? (Answer the
question in bulleted form only).
Answer: Real Markets Effects of leverage on WACC:
• Increase in leverage causes a a large increase in cost of equity

• Increase in leverage causes relatively small increase in cost of debt as compared
to cost of equity
• As leverage increases WACC 1st falls because of tax saving shield.
• With further increase in leverage WACC fall to its minimum point which is the
optimal point for capital structure
• Further increase in leverage causes increase in WACC because of bankruptcy risk

Suppose a Firm ABC has Total Assets of Rs.1000 and is 100% Equity based
(i.e. Un-levered). There were 10 equal Owners and 5 of them want to leave. So
the Firm takes a Bank Loan of Rs.500 (at 10%pa Mark-up) and pays back the
Equity Capital to the 5 Owners who are leaving. Now, half of the Equity Capital
has been replaced with a Loan from a Bank (i.e. Debt). What impact does this
have on ROE?
Answer: As the firm replaces equity with debt it is increasing financial leverage
which is a cause of financial risk. The impact of debt on ROE is that ROE will
increase but with the greater uncertainty hence greater will be the risk.
M
O
g .C
Stock X has a beta of 0.5, stock Y has a beta of 1.0, and stock Z has a beta
n
of 1.25. The risk free rate is 10% and the expected market return is 18%.
i
a. Find the expected return on stock X
.t n
b. Find the expected return on stock Y
n a
c. Find the expected return on stock Z
an
u j
d. Suppose that you construct a portfolio consisting of 40% X, 20% Y
and 40% Z. What is the beta of the portfolio?
Answer:
a. rM = 18% . v
rRF = 10%
β = 0.5 W
W
r = rRF + ( rM + rRF ) β
= 10% + (18%-10%) 0.5
W
= 10% + 4%
= 14%
b. rM = 18%
rRF = 10%
β = 1.00
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W
= 10% + (18%-10%) 1.00
= 10% + 8%
= 18%
c. rM = 18%
rRF = 10%
β = 1.25
= 10% + (18%-10%) 1.25
= 10% + 10%
= 20%
d. Beta of portfolio = βP = X βX + Y βY + Z βZ
= (40/100)0.5 + (20/100)1.0 + (40/100)1.25
= 0.4x0.5 + 0.2x1.0 + 0.4x1.25
= 0.2 + 0.2 + 0.5 M
= 0.9 O
g .C
i n
.t n
The ABC company is in the 35% marginal tax bracket. The current market value
a
of the firm is Rs. 12 million. If there are no costs to bankruptcy:
n

n
What will be ABC’ annual tax savings from interest deductions be if
a
be the value of the firm?
u j
it issues Rs. 2 million of five years bonds at 12 % interest rate? What will
. v
ANSWER: Annual Coupon payment each yr = 12% of 2,000,000
= 2000000 x 12/100
W
Tax saving for 5 yrs = 5(35 % of 24000)
= 24000
W
= 5(24000 x 35/100)
= 5x8400
W= 42000
What will ABC’ annual tax savings from interest deductions be if it

issues Rs. 2 million of seven years bonds at 12 % interest rate? What will
be the value of the firm?

W
Answer: Annual Coupon payment each yr = 12% of 2,000,000
= 2000000 x 12/100
= 24000
Tax saving for 7 yrs = 7(35 % of 24000)
= 7(24000 x 35/100)
= 7x8400
= 58800
Using the Capital Asset Pricing Model (CAPM), determine the required return on
equity for the following situations:
Situation Expected return on Risk- free Beta

s market portfolio rate
1 16% 12% 1.00
2 18 8 0.80
3 15 14 0.70
4 17 13
M
1.20
5 20 15
O1.60
What generalization can you make?
g .C
ANSWER: Required return= r = rRF + ( rM + rRF ) β
Where rRF = risk free return
i n
rM = expected return on market
β = beta of stock .t n
1. rM = 16%
n a
rRF = 12%
an
β = 1.00
u j
= 12% + (16%-12%)1.00
= 12% + 4%
= 16% . v
W
2.
W
rM = 18%
rRF = 8%
W
β = 0.80
= 8% + (18%-8%)0.80
= 8% + 8%
= 16%
3. rM = 15%

W
rRF = 14%
β = 0.70
= 14% + (15%-14%)0.70
= 14% + 0.70
= 14.7%
4. rM = 17%
rRF = 13%
β = 1.20
= 13% + (17%-13%)1.20
= 13% + 4.8%
= 17.8%
5. rM = 20%
rRF = 15%
β = 1.60
= 15% + (20%-15%) 1.60 M
= 15% + 8% O
= 23%
g .C
GENERALIZATION: As beta of stock rises the return on stock also rises.
i n
.t n
n a
an
u j
. v
W
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Spring 2009
Which of the following type of lease is a long-term lease that is not cancelable and its life often
matches the useful life of the asset?
► A financial
► An operating
► Both financial & operating lease
Among the pairs given below select a(n) example of a principal and a(n) example of an agent
respectively.
► Shareholder; manager
► Manager; owner M
O
► Accouor ntant; bondholder
► Shareholder; bondholder g .C
i n
.t n
n a
What is the present value of Rs.8,000 to be paid at the end of three years if the interest rate is
11%?
► Rs.5,850
an
► Rs.4,872
► Rs.6,725
u j
► Rs.1,842 . v
Question No: 4 W
( Marks: 1 ) - Please choose one
W
What is the present value of Rs.717 to be paid at the end of 2 years if the interest rate is 9%?
► Rs.604
► Rs.417
W
► Rs.715
► Rs.556

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As
interest rates go up, the present value of a stream of fixed cash flows _____.
► Goes down
► Goes up
► Stays the same
► Can not be found
An
8-year annuity due has a present value of Rs.1,000. If the interest rate is 5 percent, the amount of
each annuity payment is closest to which of the following?
► Rs.154.73
► Rs.147.36
► Rs.109.39
► Rs.104.72
M
capital budgeting technique that is NOT considered as discounted cash flow method is:
A
O
► Payback period
► Internal rate of return
► Net present value g .C
► Profitability index
i n
.t n
n a
which of the following situations you can expect multiple answers of IRR?
In
an
► More than one sign change taking place in cash flow diagram
► There are two adjacent arrows one of them is downward pointing & the other one is
upward pointing
u j
. v
► During the life of project if you have any net cash outflow
W
Question No: 9 W ( Marks: 1 ) - Please choose one
W
value of a bond is directly derived from which of the following?
The
► Cash flows
► Coupon receipts

W
► Par recovery at maturity
Which of the following is a characteristic of a coupon bond?
► Pays interest on a regular basis (typically every six months)
► Does not pay interest on a regular basis but pays a lump sum at maturity
► Can always be converted into a specific number of shares of common stock in the issuing
company
► Always sells at par

A
zero-coupon bond has a yield to maturity of 9% and a par value of Rs.1,000. If the bond matures
in 8 years, the bond should sell for a price of _______ today.
M
O
► Rs. 422.41
► Rs. 501.87
► Rs. 513.16 g .C
► Rs. 483.49
i n
.t n
- Please choose one
When a bond will sell at a discount?

n a
an
► The coupon rate is greater than the current yield and the current yield is greater than yield
to maturity
u j
► The coupon rate is greater than yield to maturity
. v
► The coupon rate is less than the current yield and the current yield is greater than the
yield to maturity
W
► The coupon rate is less than the current yield and the current yield is less than yield to
maturity
W
Which of the following is the variability of return on stocks or portfolios not explained by
general market movements. It is avoidable through diversification?
► Systematic risk
► Standard deviation
► Unsystematic risk
► Financial risk

W
According to the Capital Asset Pricing Model (CAPM), which of the following combination is
equal to the expected rate of return on any security?
► Rf + ?[E(RM)]
► Rf + ?[E(RM - Rf]
► Rf + ?[E(RM) - Rf]
► E(RM) + Rf
What is the expected return of a zero-beta security?

► The risk-free rate
► Zero rate of return
► A negative rate of return
► The market rate of return

M
How the beta of a stock can be calculated?
O
► By monitoring price of the stock
► By monitoring rate of return of the stock g .C
i n
► By comparing the changes in the stock market price to the changes in the stock market
.t n
index

n a
- Please choose one
an
stock is a part of totally diversified portfolio then its company risk must be equal to:
If
►0
u j
► 0.5
►1 . v
► -1
W
Question No: 18
W ( Marks: 1 ) - Please choose one
W
How can you limit company-specific risks?
► Invest in that company's bonds
► Invest in a variety of stocks
► Invest in securities that do well in a recession
► Invest in securities that do well in a boom

W
Find
the Risk-Free Rate given that the Expected Return on Stock is 12.44%, the Expected Return on
the Market Portfolio is 13.4%, and the Beta for Stock is 0.9.
► 3.8%
► 4.9%
► 5.34%
► 6.38%
Which of the following can be used to calculate the risk of the larger portfolio?
► EPS approach
► Matrix approach
► Gordon’s Approach
M
Market risk is measured in terms of the ___________ of the market portfolio or index.
► Variance
► Covariance
O
► Correlation coefficient
g .C
i n
.t n
If 2
stocks move in the same direction together then what will be the correlation coefficient?
n a
►0
► 1.0
an
► -1.0
► 1.5
u j
Question No: 23 ( Marks: 1 ). v- Please choose one
W
Which of the following is NOT the cost of equity?
W
► The minimum rate that a firm should earn on the equity-financed part of an investment
► Generally lower than the before-tax cost of debt
W
► It is the most difficult cost component to estimate
Assume management is looking at a set of possible projects with regards to their expected NPV,
standard deviation, and management's risk attitude. The firm should attempt to take the set of

W
projects __________.
► That falls on the lowest indifference curve
► That falls on the highest indifference curve
► That has the lowest standard deviation
► That has the highest standard deviation

The
overall (weighted average) cost of capital is composed of weighted averages of which of the
following?
► The cost of common equity and the cost of debt
► The cost of common equity and the cost of preferred stock
► The cost of preferred stock and the cost of debt
► The cost of common equity, the cost of preferred stock, and the cost of debt
How economic value added (EVA) is calculated?
M
► It is the difference between the market value of the firm and the book value of equity
► It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge
O
► It is the net income of the firm less a dollar cost that equals the WAAC only
g .C
i n
.t n
Upon which of the following a firm's degree of operating leverage (DOL) depends primarily?
► Sales variability
► Level of fixed operating costs
n
► Closeness to its operating break-even pointa
► Debt-to-equity ratio
an
j
- Please choose one
vu
A
.
firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?
► If sales rise by 3.5% at the firm, then EBIT will rise by 1%
W
► If EBIT rises by 3.5% at the firm, then EPS will rise by 1%
► If EBIT rises by 1% at the firm, then EPS will rise by 3.5%
W
► If sales rise by 1% at the firm, then EBIT will rise by 3.5%
Question No: 29
an all-equity firm, what is the effect of EBIT on the EPS?

For
► As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS)
increases by the same percent
► As EBIT increases, the EPS increases by a larger percent
► As EBIT increases, the EPS decreases


The
beta of an all-equity firm is 1.2. If the firm changes its capital structure to 50% debt and 50%
equity using 8% debt financing, what will be the beta of the levered firm? The beta of debt is 0.2.
(Assume no taxes.)
► 1.2
► 2.4
► 2.2
► 1.8

The
Serfraz Company is financed by Rs. 2 million (market value) in debt and Rs. 3 million (market
value) in equity. The cost of debt is 10% and the cost of equity is 15%. Calculate the weighted
average cost of capital. (Assume no taxes.)
► 10%
► 15%
► 13% M
► 8%
O
g .C
i n
Which of the following expressed the proposition that the value of the firm is independent of its
.t n
capital structure?
► The Capital Asset Pricing Model
► M&M Proposition I
► M&M Proposition II
n a
► The Law of One Price
an
j
- Please choose one
u
. v
Which of the following could NOT be defined as the capital structure of the Company?
► The firm's mix of Assets and liabilities
W
► The firm's debt-equity ratio
► All of the given option
W
► The firm's common stocks only
Question No: 34
Which of the following would express the negative net worth of a firm?
► Experiencing a business failure
► A legal bankruptcy
► Experiencing technical insolvency
► Experiencing accounting insolvency
OM

W
Suppose that the Euro is selling at a forward discount in the forward-exchange market. This
implies that most likely __________.
► The Euro has low exchange-rate risk
► The Euro is gaining strength in relation to the dollar
► Interest rates are higher in Euroland than in the United States
► Interest rates are declining in Europe
Which of the following term is used when the firm can independently control considerable assets
with a very limited amount of equity?
► Joint venture
► Leveraged buyout (LBO)
► Spin-off
► Consolidation
M
O
g .C
Which of the following is NOT a reason that DeStore.com would prefer to pay a stock dividend
rather than a regular cash dividend?
i n
► It decreases the supply of shares and enhances shareholder wealth
.t n
► It may conserve cash for other firm needs
► It will reduce the stock price
a
► The investors anticipates that it cannot convey credibly otherwise
n
n
- Please choose one
a
u j
After the payment of a 25% stock dividend, an investor has 500 shares of stock and Rs. 400 total
value. What did the investor have prior to the stock dividend?
. v
► 375 shares of stock and Rs. 375 total value
W
W
What is the proportion of assets in debt financing for a firm that expects a 24% return on equity,
a 16% return on assets, and a 12% return on debt? Ignore taxes.
► 54.0%
► 60.0%
► 66.7%
► 75.0%

W
When financial disaster is looming, why management may borrow to invest in projects having a
negative expected NPV?
► The firm's beta is now negative
► Taxes are no longer a concern
► The interest tax shield will cover the loan costs
► The lender bears all the risk
Zee
Zee Tops Inc., manufacturer’s plaid vinyl and chenille cartops for convertibles. These roofs sell
for Rs. 200 each and have an associated variable cost per unit of Rs. 120. Management fully
expects next year’s sales and NOI to drop sharply, by 20% and 50%, respectively, due to lack of
demand (i.e., “consumer resistance”). If Zee Zee‘s current level of production and sales is 112
cartops, what is the level of fixed costs?

M
How working capital affects performance of a business?
O
g .C
i n
Hoskins Hiking Boot Company is trying to devise an appropriate working capital policy. Their
.t n
most recent balance sheet is as follows:
ASSETS
n a LIABILITIES AND OWNER'S
Cash Rs.30
an Accounts payable
EQUITY
Rs.35
Accounts receivable
Inventories
50
30 u j Notes payable
Accruals
10
5
Current Assets
Net fixed assets .
110
150
v Current liabilities
Mortgage loan (at
50
W 13%)
Common equity
80
130
Total assets W Rs.260

Total liabilities &
Owner's equity Rs.260
W
You know that net profits in 2004 were Rs.28, 000.
a. What is Hoskin's current level of gross and net working capital? (Marks 2)
b. What percentage of total assets is invested in gross working capital? (Marks 1)
c. Calculate Hoskins' return on investment. (Marks 2)

W
d. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the
proceeds to pay off some of its accounts payable. Now, assuming all other items remain the
same, answer a, b, and c above using these new figures. (Marks 5)
ANS
a. What is Hoskin's current level of gross and net working capital? (Marks 2)
b. What percentage of total assets is invested in gross working capital? (Marks 1)
c. Calculate Hoskins' return on investment. (Marks 2)
= [Net Income / Total Assets] X 100
d. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the
proceeds to pay off some of its accounts payable. Now, assuming all other items remain the
same, answer a, b, and c above using these new figures. (Marks 5)
b. What percentage of total assets is invested in gross working capital?

M
O
g .C
i n
Earnings before interest and taxes (EBIT) of Firm is Rs.1000 and Corporate Tax Rate, Tc is 30%

.t n
If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the
WACCU of Un-levered Firm?

n a
If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then what is the
n
WACCL of Levered Firm? (There is no change in return in equity)
a

u j
If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the
WACCU of Un-levered Firm?
. v
W

W
If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then what is the
WACCL of Levered Firm? (There is no change in return in equity)

W
If the capital-asset pricing model approach is appropriate, compute the required rate of return for
each of the following stocks: Assume a risk-free rate of .09 and an expected return for the market
portfolio of .12.
Stock A B C D E
Beta 2.0 1.5 1.0 0.7 0.2
M
O
g .C
i n
.t n
n a
an
u j
. v
W
W
W

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Mid Term Examination - November 2004
INSTRUCTIONS
1. This exam consists of 5 Multiple Choice Questions (MCQs), 5 short questions and 1
descriptive question.
2. Each MCQ carries 2 Marks; each short question carries 5 Marks and Descriptive Question
carry 15 Marks.
3. The use of calculator is allowed.
4. The use of Financial Tables is allowed.
5. For each MCQ question, read the choices available and select the choice which you
consider is the correct answer, by clicking on the appropriate check box.
6. Save your answer before proceeding to the next question.
7. Do not click the "Finish button" while solving your paper. Once you clicked the "Finish"
button, you will not be able to access your paper again. Click it at the end of your paper.
That means you have submitted your complete paper.
8. A clock is given in the exam software. Software will automatically be closed at the end of
90 minutes.
9. Remember not to spend too much time on any one MCQ. Since all MCQ's carry equal
marks, it is important to manage your time and response to test questions effectively.
10. Failure to comply with the Supervisor's directions will result in your test being cancelled.
Please comply with supervisor's directions to avoid any unpleasant event.
Total Marks: 50 Total

Questions: 11
Which of the following items would NOT be included in the cash budget?
1 Depreciation charges
2 Sales
3 Cash receipts
4 Interest on existing debt
Use the table or a financial calculator to find the value of initial Rs 600 compounded for 10
years at 6%
Define bonds and what is meant by the convertible bonds?
Calculate the Debt to Equity Ratio given that Total Assets = Rs 2401 and Total Owners'
Equity = Rs 1977
1 0.21
2 1.02
3 1.83
4 2.61
What ratios would you calculate to measure the firm's profitability? Explain these
Descriptive Question
You are a financial analyst for the AB Company. The director of capital budgeting has asked
you to analyze the proposed capital investments, project X and Y. each project has cost of Rs
10, 000 and the cost of capital for both projects is 12%. The projects expected net cash flows
are as follows;
Expected net cash flow
Year Project X Project Y

0 (Rs 10,000) (Rs 10,000)
1 6500 3500
2 3000 3500
3 3000 3500
4 1000 3500
a) Calculate each projects payback and net present value.

b) On the basis of above calculations in which project do you invest?
All of the following factors influence the investor's required rate of return except
1 The real required rate of return
2 The inflation premium
3 The risk premium
4 The risk aversion factor
All of the following are true of shareholders' equity except
1 It represents the total contribution and ownership interest of preferred and common
shareholders
2 It represents the combined total of the firm's current and long term assets
3 The three basic components are preferred stock, common stock, and retained earnings
4 Represents the difference between the firm's assets and liabilities
Suppose interest rates on Treasury bonds rose from 7 to 14 percent as a result of increased
government borrowing. What effect would this have on the price of an average company's
common stock?
What is the payback period for a project with the following cash flows if the firm's discount
rate is 12 percent and the project costs Rs 450
Year Cash flows Rs

1 325
2 65
3 100
1 2.17 years
2 3.13 years
3 4 years
4 2.60 years
Define percent of sale method?

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MIDTERM EXAMINATION
FALL 2006 Marks: 40
Student Name: ______________________________
Center Name/Code: ______________________________
Exam Date: Tuesday, November 28, 2006
INSTRUCTIONS:

• This exam consists of 10 Multiple Choice Questions (MCQ’s), 5 True/False Questions, 5 Short
Questions and 1 Numerical Question.
• Question No.1-10 are MCQs carrying 1 Mark each, Question No.11-15 are True/ False Questions
carrying 1 Mark each, Question No.16-20 are short questions carrying 3 Marks each and Question
No.21 is the numerical question carrying 10 Marks.
most suitable.
• You are required to show all the working of all numerical questions.
• Remember do not spend too much time on any one MCQ. Since all MCQ’s carry equal marks, it is
important to manage your time and responses to test questions effectively.
Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21
Marks
A major advantage of the corporation relative to other forms of business organization is:
► Lower cost to organize.
► Limited owner liability.
► Higher credit ratings.
► Reduction of double taxation.
The purpose of financial markets is to:
► Increase the price of common stocks.
► Lower the yield on bonds.
► Allocate savings efficiently.
► Control inflation.
Short-term creditors would be most interested in a firm's
► Coverage ratios.
► Liquidity ratios.
► Profitability ratios.
► Debt ratios.
Firm A has a total asset turnover ratio of 5, a net profit margin of 2 percent, and return on equity of
15 percent. Its return on assets is
► 3 percent.
► 10 percent.
► 6 percent.
► 2 percent.
Which of the following arrangements for a Rs.1,000 CD yields the largest terminal (future) value?
► 9.65% compounded daily
► 9.75% compounded monthly
► 10.00% compounded semiannually
► 10.2% compounded annually
A debenture
► Is an agreement between the trustee and the firm which guarantees the marketability
of the bond issue.
► Is an unsecured bond.
► May be changed by the firm if it gives the trustee 90 days written notice.
► Contains the terms of a bond issue.
In the formula ke = (D1/P0) + g, what does g represent?
► The expected price appreciation yield from a common stock.
► The expected dividend yield from a common stock.
► The dividend yield from a preferred stock.
► The interest payment from a bond.
To increase a given present value, the discount rate should be adjusted ------------.
► Upward.
► Downward.
► True.
► Fred.

When the market's nominal annual required rate of return for a particular bond is less than its
coupon rate, the bond will be selling at -------------.
► A discount
► A premium
► Par value
► An indeterminate price
Interest rates and bond prices
► Move in the same direction.
► Move in opposite directions.
► Sometimes move in the same direction, sometimes in opposite directions.
► Have no relationship with each other (i.e., they are independent).
The principal shortcoming of the sole proprietorship is the owner's legal liability for all obligations
of the business.
► True
► False
Shareholder wealth is best measured in terms of the market price of the firm's common stock.
► True
► False
The times interest earned ratio is the best measure of a firm's ability to service long-term debt.
► True
► False
The current ratio is never larger than the quick ratio.
► True
► False
An investment with a short payback period is almost certain to have a positive net present value.
► True
► False
At the end of three years, how much is an initial Rs.100 deposit worth, assuming a quarterly
compounded annual interest rate of 10%.
Mathematically, net present value (NPV) and internal rate of return methods of capital budgeting
always lead to the same acceptance/rejection decision for independent projects. Why?
Suppose Ford Motor Company has outstanding bonds with 10-year maturity, Rs.1000 par value, a
10% coupon rate, with annual interest payment. If your required rate of return is 12%, what price
would you place on these bonds?
Differentiate between a sole proprietorship and a partnership.

What do you mean by the time value of money, explain briefly.
(a)
Ezzell Corporation issued preferred stock with a stated dividend of 10% of par value. Preferred
stock of this type currently yields 8%, and the par value is Rs.100. Assume dividends are paid
annually. What would be the value of Ezzell’s preferred stock? ( Assume a perpetual investment in
preferred stocks) .(5)
(b)
Your broker offers to sell you some shares of CIT corporation common stock that paid a dividend
of Rs.2 yesterday. You expect the dividend to grow at rate of 5% per year. If you plan to buy the
stock, hold it for three years, and then sell it for Rs.34.73, what would be the present value per
share of this common stock? ( Assume a required rate of return of 12% p.a). (5)
MIDTERM EXAMINATION
FALL 2007 Marks: 40
Student Name: ______________________________
Center Name/Code: ______________________________
Exam Date: Thursday, November 29, 2007

question:
This exam consists of 10 Multiple Choice Questions (MCQs) carrying 1 mark each; 5
True/ False statements carrying 1 mark each; 3 Short Questions carrying 5 marks
each; and 1 descriptive numerical question carrying 10 marks.
For each MCQ, read the available choices carefully and select the most appropriate
choice which you consider is the correct answer, by clicking on the appropriate check
box.
For a true/false statement, recognize the concept and answer accordingly.
Remember not to spend too much time on any one objective type question since all
objective type questions carry equal marks; it is important to manage your time
according to the marks allocated to each question.
Use of Calculators is allowed and you will be provided with Financial Tables by
Campus administrator, if needed.
You are required to show all the Necessary Calculations where needed as the
necessary calculations carry considerable marks.
If you believe that some essential data or piece of information is missing, make an
appropriate assumption and use it to solve the problem to the best of your knowledge.
Save your answer before proceeding to the next question.
Do not click the “Finish” button while solving your paper. Once you clicked the
“Finish” button, you will not be able to access your paper again. Click it at the end of
your paper. That means you have submitted your complete paper.
A clock is given in the exam software. Software will automatically close at the end of
given time.
Use of mobile phone is strictly prohibited. Switch off your mobile phone during the
exam.
Failure to comply with the Supervisor’s directions will result in your test being
cancelled. Please comply with supervisor’s directions to avoid any unpleasant event.

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19
Marks
Question
Marks
Which of the following statement is snapshot of an organization’s financial health at a

particular date ?
► Income Statement
► Balance Sheet
► Stockholder’s Equity Statement
► Cash Flow Statement
The statement “Don’t compare apples to oranges” refers to the concept of :
► Risk & Return
► Discounting & NPV
► Portfolio Diversification
► Hedging & Risk Management
SNT Corp. has a profit margin of 20 percent, whereas payout ratio is 45 percent. What
will be the estimated retained earnings if estimated sales are Rs. 300,000 ?
► Rs. 27,000
► Rs. 30,000
► Rs. 33,000
► Rs. 35,000
A project with an initial investment of Rs. 50,000 gives the cash flows of Rs. 20,000 for first
three years and Rs. 10,000 for next two years. Payback period for the project will be :
► 2.0 Years
► 2.5 Years
► 3.0 Years
► 3.5 Years
A cost that has been incurred and cannot be reversed is called _____________.
► Preliminary Cost
► Operating Cost
► Sunk Cost
► Synergy Cost
Which of the following type of bonds is not secured by real property ?
► Mortgage Bonds
► Junk Bonds
► Debentures
► Eurobonds
If the intrinsic value of a stock is greater than its market value, which of the following is a
reasonable conclusion ?
► The stock has a low level of risk

► The stock offers a high dividend payout ratio
► The market is undervaluing the stock
► The market is overvaluing the stock
Which of the following bonds are issued from foreign country.
► Convertible Bonds
► Eurobonds
► Junk Bonds
Suppose you deposit in saving Rs. 100 at a nominal or stated 8% semiannual interest rate.
The future value at the end of a year will exactly be :
► Rs. 105.12
► Rs. 108.00
► RS. 108.16
► Rs. 110.80
Which of the following statement is true :
► Stocks are equity papers representing ownership
► Common stockholders always get a preference over the preferred

stockholders
► A Limited Company cannot raise money by issuing equity in the form of

shares
► Common stockholders are the owners but do not have voting rights in
management decision

Value of an asset shown on the Balance Sheet is known as book value.
► True
► False
An Indenture is an agreement between the trustee and the firm which guarantees the
marketability.
► True
► False
In Common Life Approach, you need to bring all the projects to the same length in time.
► True
► False
The principal advantage of the sole proprietorship is the owner's limited liability.
► True
► False
When interest rates go up, the market price of a bond goes down.
► True
► False
Mr. Saeed has Rs. 1,200 today and he wants to invest the amount with a bank for five
years. The bank is offering an annual interest rate of 8 percent.
a. What would be the future value of the investment if bank offers a simple interest ?
b. What would be the future value of the investment if bank offers a compound
interest ?

A project with an initial investment of Rs. 100 is followed by the cash flow of Rs. 40 in
year 1, Rs. 50 in year 2 and Rs. 40 in year 3. Calculate the IRR for the project. Is the project
feasible if the required rate of return is 12% ?
Write down the two approaches that are used to rank the projects with different lives.
SNT Corporation has a bond issue outstanding with an annual coupon rate of 7 percent
and 4 years remaining until maturity. The par value of the bond is Rs. 1,000.
Required:
(i) Determine the current value of bond if present market conditions justify a 14
percent required rate of return. The bond pays interest annually.
(ii) What would be the current value at the same required rate of return if the bond
had a semiannual coupon?
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Mid Term Examination – Spring 2006
INSTRUCTIONS:

• This exam consists of 10 Multiple Choice Questions (MCQ’s), 5 Fill in the Blanks, 5 Short
Questions and 1 Descriptive Question.
• Question No.1-10 are MCQs carrying 1 Mark each, Question No.11-15 are fill in the blanks
carrying 1 Mark each, Question No.16-20 are short questions carrying 3 Marks each and
Question No.21 is the numerical question carrying 10 Marks.
• You should try to complete MCQ’s in 10 - 15 minutes in order to avail 75 - 80 minutes for
descriptive questions.
• For each MCQ, read the choices available carefully and select the choice which you
consider is the most suitable, by clicking on the appropriate check box.
• Save your answer before proceeding to the next question.

• Do not click the “Finish button” while solving your paper. Once you clicked the “Finish”
button, you will not be able to access your paper again. Click it only at the end after
solving the whole paper, which will be an indication that you have submitted your
complete paper.
• You are required to show all the working of short questions as well as descriptive
question.
• A clock has been given in the exam software. Software will automatically be closed after
90 minutes.
• Remember do not spend too much time on any one MCQ. Since all MCQ’s carry equal
marks, it is important to manage your time and responses to test questions effectively.
• Failure to comply with the supervisor’s directions will result in your test being cancelled.
Please comply with supervisor’s directions to avoid any unpleasant event.
__________ is concerned with the acquisition, financing and management of

assets with some overall goal in mind.
Financial management
Profit maximization
Agency theory
Social responsibility
The level of risk generally reduces as the size of the portfolio _________.
Decreases
Increases
Remains unchanged
Non of the above
If the intrinsic value of a stock is greater than its market value, which of the given
options is a reasonable conclusion?
The stock has a low level of risk.

The stock offers a high dividend payout ratio.
The market is undervaluing the stock.
The market is overvaluing the stock
A market where new securities are bought and sold for the first time is called_________
Two projects A & B have payback periods of 4 years and 5 years respectively. Which of
these projects would be more attractive to an investor?
Project A
Project B
Both the projects A&B
Non of the given options
The gross profit margin is unchanged, but the net profit margin declined over the same
period. This could be the result of:
Cost of goods sold increased relative to sales

Sales increased relative to expenses
Increase in tax rate
Dividends were decreased
Net working capital is equal to _____________.
The variation in the market price of a security caused by changes in interest rate is
called ___________.
The ratios that relate profits to sales and investment are known as ____________
Interest paid (earned) on both the original principal borrowed (lent) and
previous interest earned on that principal amount is often referred to as
_________
Present value
Simple interest
Future value
Compound interest
A company reported current liabilities of Rs.823,000 and long-term liabilities of

Rs.631,000.If the company had a Debt-Assets ratio of 0.50 : 1, the value of its total
Assets would be ________
Rs.2,908,000
Rs.3,270,000
Rs.3,380,000
Rs.2,250,000
What do you mean by fair price of a share? Explain
What would be the future value of an initial investment of $1000 after 5 years, if
compounded annually at 10%?
What does double taxation of corporate income mean? Explain.
Define systematic Risk. How can we reduce this Risk?
Bond prices move inversely to changes in __________

In 2 years, you are to receive $10,000. If the interest rate decreases, the
present value of that future amount to you would __________
Fall
Rise
Remain unchanged
The correct answer cannot be determined without more information
A manufacturing concern is considering a new product line to supplement its range

line. It is anticipated that the new product line will involve cash investment of
Rs.700,000 at year 0 and Rs.1.0 million in year 1. After tax cash inflows of Rs.250,000
are expected in year 2, Rs.300,000 in year 3, Rs.350,000 in year 4, and Rs.400,000 each
year thereafter through year 10. Though the product line might be viable after year 10,
the company prefers to be conservative and end all calculations at that time. If the
required rate of return is 15%, what is the net present value of the project? Is the
project acceptable or not?
In financial management, the value calculated by summing up the discounted future

cash flows is called __________.
Intrinsic value
Market value
Liquidation value
Book value
Define IRR (Internal rate of return). How would we analyze a project by using IRR
method?
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.
A discount.
Cannot be determined without more information
Face value.
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MIDTERM EXAMINATION
Student Name: ______________________________
Center Name/Code: ______________________________
Exam Date: Wednesday, May 16, 2007
INSTRUCTIONS:

This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 True/False
questions of 1 mark each, 5 Short questions of 3 marks each and one long question of 10 marks.
For each Multiple Choice Question, read the choices available carefully and select the choice which
you consider is the most suitable.
You are required to show the working of all Numerical questions.
Use of calculator and financial tables is allowed.
This examination is closed book, closed notes and closed neighbours.
Do not ask question about the contents of this examination from anyone.
You may wish to pace yourself with your own watch, but the Supervisor will be the official
Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please
comply with supervisor’s directions to avoid any unpleasant event
Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21
Marks
When the intrinsic value of an asset is less than its ______, the asset is perceived as “undervalued”.
► Book Value
► Market Value
► Liquidation Value
When current liabilities rise faster than current assets, the current ratio will _______.
► Fall
► Rise
► Remain same
Yield to Maturity (YTM) of a bond = Interest yield + _________
► Annual coupon interest

► Market price
► Capital gain
_________ are also known as Hybrid equity.
► Common shares
► Preferred shares
► Bonds
__________ is a measure of risk.
► Mean
► Mode
An annuity whose payments are made at the end of each period is called _________.
► Ordinary Annuity
► Annuity Due
► Perpetuity
A bond that pays no annual interest but is sold at a discount below the par value is called:
► An original maturity bond

► A floating rate bond
► A fixed maturity date bond
► A zero coupon bond
The present value of Rs. 5,000 received at the end of 5 years, discounted at 10 percent, is closest
to__________.
► Rs.3,105
► Rs.823
► Rs.620
► Rs.3,403
Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing:
► A zero growth common stock

► A positive growth common stock
► A short-term bond
► An option
You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of
Rs. 7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you
want an annual return of 24.0%, what is the most you should pay for the stock now?
► Rs.52.00
► Rs.56.68
► Rs.32.50
► Rs.35.43
The yield on common stock comes from two sources: the dividend yield and the capital gains
yield.
► True
► False
A saving account at Bank A pays 6 percent interest, compounded annually. Bank B's savings
account pays 6 percent compounded semiannually. Bank B is paying twice as much interest.
► True
► False
An investment with a short payback period is almost certain to have a positive net present value.
► True
► False
The liquidation value of a firm is based on its future cash flows.
► True
► False
Combining securities that are not perfectly positively correlated helps to reduce the risk of a
portfolio.
► True
► False
A public limited company has sales of Rs. 6 million, a total asset turnover ratio of 6 for the year,
and a net profit of Rs. 120,000. What is the company’s return on assets?
Project K has a cost of capital of Rs. 52,125, its expected net cash inflows are Rs. 12,000 per year
for 8 years, and its cost of capital is 12 percent. What is the project’s payback period?
If interest rates in an economy rise after a bond have been issued, what will happen to the bond’s
market price? Explain briefly.
Differentiate between Systematic risk (Market Risk) and Non-systematic risk (Diversifiable Risk).
A bond that pays interest forever and has no maturity date is a perpetual bond. In what respect is a
perpetual bond similar to a no-growth common stock, and to a share of preferred stock?
Assume that it is now January 1, 2001. On January 1, 2002, you will deposit Rs. 1,000 into a
savings account that pays 8 percent.
a. If the bank compounds interest annually, how much will you have in your account on
January 1, 2005?
b. What would your January 1, 2005, balance be if the bank used quarterly compounding
rather than annual compounding?
c. Suppose you deposited the Rs. 1,000 in 4 payments of Rs. 250 each on January 1 of 2002,
2003, 2004, and 2005. How much would you have in your account on January 1, 2005,
based on 8 percent annual compounding?
d. Suppose you deposited 4 equal payments in your account on January 1 of 2002, 2003,
2004, and 2005. Assuming an 8 percent interest rate, how large would each of your
payments have to be for you to obtain the same ending balance as you calculated in part a?
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MIDTERM EXAMINATION
Student Name: ______________________________
Center Name/Code: ______________________________
Exam Date: Wednesday, May 16, 2007
INSTRUCTIONS:
This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 True/False
questions of 1 mark each, 5 Short questions of 3 marks each and one long question of 10 marks.
For each Multiple Choice Question, read the choices available carefully and select the choice which
you consider is the most suitable.
You are required to show the working of all Numerical questions.
Use of calculator and financial tables is allowed.
This examination is closed book, closed notes and closed neighbours.
Do not ask question about the contents of this examination from anyone.
You may wish to pace yourself with your own watch, but the Supervisor will be the official
Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please
comply with supervisor’s directions to avoid any unpleasant event

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21
Marks
An initial investment of Rs. 200,000 is required to start the business; Rs. 9,000 per month is
expected to be earned for the first year and Rs. 20,000 would be earned every month in the second
year. How many months will it take to recover your initial investment?
► 14 months
► 16 months
► 18 months
► 20 months
“Don’t put all eggs in one basket” explains _____________ concept of finance.
► Time value of money
► Risk and Return
► Discounting and NPV
► Portfolio Diversification
_________ is equal to risk per unit return.
► Variance
► Coefficient of Variation
A bond that pays no annual interest but is sold at a discount below the par value is called:
► An original maturity bond
► A floating rate bond
► A fixed maturity date bond
► A zero coupon bond
Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing:
► A zero growth common stock
► A positive growth common stock
► A short-term bond
► An option
An unincorporated business owned by one individual is called _________.
► Partnership
► Company
► Sole proprietorship
► None of given options
_______ is a ratio of the present value of future cash flows to the initial investment.
► Return on Investment
► NPV
► Payback Period
► Profitability Index
_______ is the actual price at which share is bought or sold.
► Fair price
► Par value
► Market price
► Written down value
_____ ratio gives an indication how equity investors regard the company’s value.
► Price / Earning
► Market / Book
► Earning / Share
► Price / Cash flow
In the formula rCE = (D1V1/Po) + g, what does (D1V1/Po) represent?
► The expected dividend yield from a common stock
► The expected price appreciation yield from a common stock
► The dividend yield from a preferred stock
► The interest payment from a bond
For a given nominal interest rate, the more numerous the compounding periods, the less the
effective annual interest rate.
► True
► False
The current ratio is never larger than the quick ratio.
► True
► False
When interest rates go up, the market price of a bond goes up.
► True
► False
Maximizing the price of a share of the firm's common stock is the equivalent of maximizing the
wealth of the firm's present owners.
► True
► False
You can reduce systematic risk by adding more common stocks to your portfolio.
► True
► False
Assume that one year from now; you will deposit Rs. 1,000 into a saving account that pays 8%
interest. If the bank compounds interest semi-annually, how much will you have in your account
four years from now?
How much should you pay for the preferred stock of the PST Corporation, if it has Rs. 50 par
value, pays Rs. 20 a share in annual dividends, and your required rate of return is 15%.
What is a portfolio? Why an investor should invest his/her funds in a portfolio rather than in the
stocks of a single corporation.
What do you mean by yield to maturity (YTM) of a bond? Explain briefly.
Explain briefly the Constant Growth Dividends Model of common stocks valuation.
Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are
expected to grow at a rate of 15% during the next 2 years, at 13% in the third year, and at a
constant rate of 6% thereafter.
Snyder’s last dividend was Rs. 1.15, and the required rate of return on the stock is 12%.
Required:
I. Calculate the expected dividends of the firm in the first three years.
II. Calculate the fair value per share of these stocks at the end of third year.
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MIDTERM EXAMINATION
Spring 2009
M
Mutually exclusive means that you can invest in _________ project(s) and having chosen
______ you cannot choose another.
O
g .C
i n
► One; one
.t n
► Two; two
► Two; one
n a
► Three; one
an
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- Please choose one
. v The
weighted average of possible returns, with the weights being the probabilities of occurrence is
referred to as __________.
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►
► W
A probability distribution
The expected return
►
► W
The standard deviation
Coefficient of variation

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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► Probability distribution
► The expected return
► The standard deviation

The
present value of growth opportunities (PVGO) is equal to
I) The difference between a stock's price and its no-growth value per share
II) The stock's price
III) Zero if its return on equity equals the discount rate
IV) The net present value of favorable investment opportunities
► I and IV
► II and IV
► I, III, and IV
► II, III, and IV M
O
g .C
n
Which of the following is CORRECT, if a firm has a required rate of return equal to the ROE?
i
.t n
► The firm can increase market price and P/E by retaining more earnings
►The firm can increase market price and P/E by increasing the growth rate
P/E
n a
►The amount of earnings retained by the firm does not affect market price or the
►None of the given options
an
j
- Please choose one
u
. v
Which of the following would tend to reduce a firm's P/E ratio?
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►The firm significantly decreases financial leverage
►The firm increases return on equity for the long term
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► The level of inflation is expected to increase to double-digit levels
►The rate of return on Treasury bills decreases

A
company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index, most
likely has _________.
►An anticipated earnings growth rate which is less than that of the average firm

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►A dividend yield which is less than that of the average firm
► Less predictable earnings growth than that of the average firm
►Greater cyclicality of earnings growth than that of the average firm

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

The
market capitalization rate on the stock of Steel Company is 12%. The expected ROE is 13% and
M
the expected EPS are Rs. 3.60. If the firm's plowback ratio is 50%, what will be the P/E ratio?
►7.69
O
►8.33
►9.09
►11.11 g .C
i n
.t n
a
How dividend yield on a stock is similar to the current yield on a bond?
n
an
►Both represent how much each security’s price will increase in a year
►Both represent the security’s annual income divided by its price
u
can expect to earn by owning the security
j
► Both are an accurate representation of the total annual return an investor
. v
►Both incorporate the par value in their calculation
Question No: 12
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Low
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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%
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►7.2%
►3.0%

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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
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
How efficient portfolios of "N" risky securities are formed? M

O
► These are formed with the securities that have the highest rates of return regardless of
their standard deviations
g .C
► They have the highest risk and rates of return and the highest standard deviations
► They are selected from those securities with the lowest standard deviations regardless of
their returns
i n
.t n
► They have the highest rates of return for a given level of risk

a
- Please choose one
n
an
than yield to maturity
u j
► The coupon rate is greater than the current yield and the current yield is greater
. v
yield to maturity
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maturity
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Question No: 17

► Can always be converted into a specific number of shares of common stock in the issuing

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company

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%

If a
7% coupon bond is trading for Rs. 975 it has a current yield of _________ percent.
► 7.00
► 6.53
► 8.53 M
► 7.18
O
g .C
i n
Interest rate risk for long term bonds is more than the interest rate risk for short term bonds
.t n
provided the _________ for the bonds is similar.
► Interest rate risk

► Market rate
n a
► Coupon rate
► Inflation rate
an
u j
- Please choose one
. v
When market is offering lower rate of return than the bond, the bond becomes valuable, with
W
respect to the given scenario which of the following is correct?
W
► Market interest rate < coupon interest rate, market value of bond is > par value
► Market interest rate > coupon interest rate, market value of bond is > par value
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► Market interest rate < coupon interest rate, market value of bond is < par value
► Market interest rate = coupon interest rate, market value of bond is > par value
Which of the following affects the price of the bond?

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► Market interest rate
► Required rate of return
► Interest rate risk
Bond is a type of Direct Claim Security whose value is NOT secured by __________.
► Tangible assets
► Intangible assets
► Fixed assets
► Real assets
Question No: 24 ( Marks: 1 ) - Please choose one M

O
than other classes of debt.
► A subordinated debenture g .C
__________ is a long-term, unsecured debt instrument with a lower claim on assets and income
► A debenture
i n
.t n
► A junk bond
► An income bond

n a
- Please choose one
an A
12% coupon rate, Rs.1,000 par bond currently trades at 90 one year after issuance. Which of the
following is the most likely call price?
u j
► Rs. 87
► Rs. 90 . v
► Rs. 102
► Rs. 112 W
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Which of the following is a legal agreement between the corporation issuing bonds and the
bondholders that establish the terms of the bond issue?
► Indenture

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► Debenture
► Bond
► Bond trustee
Companies and individuals running different types of businesses have to make the choices of the
asset according to which of the following?
► Life span of the project
► Validity of the project
► Cost of the capital
► Return on asset
M
O
g .C
n
Which of the following technique would be used for a project that has non-normal cash flows?
i
.t n
► Multiple internal rate of return
n a
► Modified internal rate of return
an
► Net present value
u j
. v
Question No: 29
W
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Why net present value is the most important criteria for selecting the project in capital
budgeting?
W
► Because it has a direct link with the shareholders dividends maximization
► Because it has direct link with shareholders wealth maximization
► Because it helps in quick judgment regarding the investment in real assets
► Because we have a simple formula to calculate the cash flows

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From which of the following category would be the cash flow received from sales revenue and
other income during the life of the project?
► Cash flow from financing activity
► Cash flow from operating activity
► Cash flow from investing activity
An
investment proposal should be judged in whether or not it provides:
► A return equal to the return require by the investor
► A return more than required by investor
► A return less than required by investor
► A return equal to or more than required by investor
M
ABC Co. will earn Rs. 350 million in cash flow in four years from now. Assuming an 8.5%
weighted average cost of capital, what is that cash flow worth today?
O
► Rs.253 million
► Rs.323 million
► Rs.380 million g .C
► Rs.180 million
i n
.t n
- Please choose one
n a An
8-year annuity due has a future value of Rs.1,000. If the interest rate is 5 percent, the amount of
► Rs.109.39
an
each annuity payment is closest to which of the following?
► Rs.147.36
► Rs.154.73
u j
► Rs.99.74
. v
Question No: 34
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As
W
► Goes down
► Goes up W
► Stays the same

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An
annuity due is always worth _____ a comparable annuity.
► Less than
► More than
► Equal to
What is the present value of an annuity that pays 100 per year for 10 years if the required rate of
return is 7%?
► Rs.1000
► Rs.702.40
► Rs.545.45
► Rs.13,816

M
O
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 g .C

i n
.t n
► A cash outflow to lenders as interest
a
► A cash outflow to purchase bonds issued by another company
n
an
- Please choose one
u j
Which group of ratios relates profits to sales and investment?
► Liquidity ratios
► Debt ratios . v
► Coverage ratios
► Profitability ratios W
W
Which of the following statements is the least likely to be correct?
► A firm that has a high degree of business risk is less likely to want to incur financial risk
► There exists little or no negotiation with suppliers of capital regarding the financing
needs of the firm
► Financial ratios are relevant for making internal comparisons
► It is important to make external comparisons or financial ratios

Which of the following statement (in general) is correct?

► A low receivables turnover is desirable
► The lower the total debt-to-equity ratio, the lower the financial risk for a firm
► An increase in net profit margin with no change in sales or assets means a weaker ROI
► The higher the tax rate for a firm, the lower the interest coverage ratio
WWW.vujannat.ning. COM
You
are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to
analyze two proposed capital investments Project X and Project Y. Each project has a cost of Rs.
10,000 and the cost of capital for both projects is 12%. The projects’ expected cash flows are as
follows:
Expected net cash flows

Year Project X Project Y
M
0
1
(10,000)
6,500 O
(10,000)
3,500
C
2
3
3,000
3,000
g . 3,500
3,500
4 1,000
i n 3,500
t . n
i. Calculate each project’s payback, net present value (NPV), internal rate of return (IRR),
and profitability index (PI).
n a
ii. Which project or projects should be accepted if they are independent?
n
iii. Which project should be accepted if they are mutually exclusive?
a
ANSWER:
u j
1.
. v
Payback: PROJECT X: Cost of project = Rs. 10,000
Payback period is the time required by the project to recover its costs.
Year 1 the project will recover Rs. 6,500
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Year 2 the project will recover Rs 3000
Year 3 project will recover the remaining Rs. 500 in 1st month of 3rd yr.
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So payback period for Project X is 2 yrs and 1 month.
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PROJECT Y: Cost of project= Rs 10,000
Year 1 project will recover Rs 3,500
Year 2 project will recover Rs 3,500
Year 3 project will recover remaining Rs 3000 in approximately 11 months of 3rd yr.
So payback period of project Y is 2 yrs and 11 months.
2. Net Present Value:

Project X: Initial investment, I0 = Rs 10,000
Cash flow in yr 1, CF1 = Rs 6500
Discount rate, I = 12 %
No. of yrs, n = 4
NPV = - I0 + CF1/(1+i)n + CF2/(1+i)n + CF3/(1+i) n + CF4/(1+i) n
= -10,000 + 6500/(1.12) + 3000/(1.12)2+ 3000/(1.12)3+ 1000/(1.12)4
= Rs 966
Project Y: Initial investment, I0 = Rs 10,000

Discount rate, I = 12 %
No. of yrs, n = 4 M
NPV = - I0 + CF1/(1+i)n + CF2/(1+i)n + CF3/(1+i) n + CF4/(1+i) n O
.C
= -10,000 + 3500/(1.12) + 3500/(1.12)2+ 3500/(1.12)3+ 3500/(1.12)4
g
= Rs 631
i n
.t n
= 0 vujannat.ning.Com For Video Lectures ,previous assi
3. IRR: Project X: Put NPVVisit
NPV = - 10000 + 6500/(1+i) + 3000(1+i)2+ 3000(1+i) 3+ 1000/(1+i) discussions
4
and many more.
4. Profitability Index:
n a
Project X: PI= Sum(CFt/(1+i)t)/Io
= 10,966/10000 = 1.096
an
Project Y : PI= Sum(CFt/(1+i)t)/Io
u
= 10631/10000 = 1.0631
j
. v
Result: Since NPV and PI of project X are higher than that of project Y so Project X
will be accepted.
W
W
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MIDTERM EXAMINATION
Spring 2009
Time: 60 min
Marks: 50
M
O
g.C
n
Visit vujannat.ningi.Com For Video Lectures ,previous assi
.t n discussions and many more.
n a
an
u j
. v
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What are the earnings per share (EPS) for a company that earned Rs.100, 000 last year in after-
tax profits, has 200,000 common shares outstanding and Rs.1.2 million in retained earning at the
year end?
► Rs.1.00
► Rs. 6.00
► Rs. 0.50
► Rs. 6.50
Among the pairs given below select a(n) example of a principal and a(n) example of an agent
respectively.
► Manager; owner
M
► Accountant; bondholder
O
► Shareholder; bondholder
g .C
Question No: 3 ( Marks: 1 ) i n
- Please choose one
.t n
Which of the following is equal to the average tax rate?
n a
► Total tax liability divided by taxable income
► Rate that will be paid on the next dollar of taxable income
► Median marginal tax rate
an
j
► Percentage increase in taxable income from the previous period
u
Question No: 4
v
( Marks: 1 )
. - Please choose one
W
Which of the following would be deductible as an expense on the corporation's income
statement?
W
► Interest paid on outstanding bonds
► Cash dividends paid on outstanding common stock
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► Cash dividends paid on outstanding preferred stock

In
conducting an index analysis every balance sheet item is divided by __________ and every
income statement is divided by __________ respectively.
Visitvujannat.ning.Com For Video Lectures ,previous assigmnets ,Papers,Chat, Study

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► Its corresponding base year balance sheet item; its corresponding base year income
statement item
► Its corresponding base year income statement item; its corresponding base year balance
sheet item
► Net sales or revenues; total assets
► Total assets; net sales or revenues
Which group of ratios measures a firm's ability to meet short-term obligations?
► Debt ratios
► Coverage ratios
► Profitability ratios

M
► Debt ratios
► Coverage ratios O
g .C
n
- Please choose one
i
.t n
Interest paid on the original principal borrowed is often referred to as __________.
► Compound interest
► Present value
n a
an
► Simple interest
u j
► Future value
. v
Question No: 9 W
W If
the following are the balance sheet changes, which one of them would represent use of funds by
a company?
W
► Rs. 8,950 decrease in net fixed assets
► Rs. 5,005 decrease in accounts receivable
► Rs. 10,001 increase in accounts payable

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► Rs. 12,012 decrease in notes payable

In
preparing a forecast balance sheet, it is likely that either cash or __________ will serve as a
"plug figure" or balancing factor to ensure that assets equal liabilities plus shareholders' equity.
► Retained earnings
► Accounts receivable
► Shareholders' equity
► Notes payable (short-term borrowings)
What is the present value of Rs.8,000 to be paid at the end of three years if the interest rate is
11%?
M
► Rs.5,850
► Rs.4,872 O
► Rs.6,725
g .C
► Rs.1,842
i n
.t n
- Please choose one
► Rs.680.58
n a
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate is 8%.
► Rs.1,462.23
an
► Rs.322.69
► Rs.401.98
u j
Question No: 13
.
( Marks: 1 )v - Please choose one
As
W
►
►
W
Goes down
Goes up
►
►
W
Stays the same
Can not be found

The
benefit we expect from a project is expressed in terms of:
► Cash in flows

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► Cash out flows
► Cash flows

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
M
O
.C
If a
get the nearest discount factor by:

n g
project’s initial cash outflow of Rs. 100,000 is followed by four annual receipts of 36,000 we can
► Interpolation
i
► Dividing 100,000 by 36,000
► Dividing 36,000 by 100,000 .t n
► Insufficient information
n a
n
- Please choose one
a
u j
which of the following situations you can expect multiple answers of IRR?
In
. v
► There are two adjacent arrows one of them is downward pointing & the other one is
upward pointing
W
W
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Which of the following technique would be used for a project that has non-normal cash flows?

W


M
O
Which one of the following is NOT the disadvantage of the asset with very short life?
g .C
n
► Money has to be reinvested in some other project with uncertain NPV
i
.t n
► Money has to be reinvested in some other project with certain NPV
a
► Money has to be reinvested in some other project with return so risky
n
an
u j
. v - Please choose one
You
W
are selecting a project from a mix of projects, what would be your first selection in descending
order to give yourself the best chance to add most to the firm value, when operating under a
W
single-period capital-rationing constraint?
► Profitability index (PI)
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► Net present value (NPV)
► Internal rate of return (IRR)
► Payback period (PBP)
Which one of the following is the right of the issuer to call back or retire the bond by paying off
the bondholders before the maturity date?

W
► Call in
► Call option
► Call provision
► Put option

M
► Can always be converted into a specific number of shares of common stock in the
issuing company
C O
g .
When a bond will sell at a discount? i n
.t n
yield to maturity
n a
► The coupon rate is greater than the current yield and the current yield is greater than
an
yield to maturity
u j
maturity
.v
Question No: 25
W
An
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investment opportunity set formed with two securities that are perfectly negatively correlated.
What will be standard deviation in the global minimum variance portfolio?
W
► Equal to zero
► Greater than zero
► Equal to the sum of the securities' standard deviations
► Equal to -1
How efficient portfolios of "N" risky securities are formed?

► These are formed with the securities that have the highest rates of return regardless of
their standard deviations
► They have the highest risk and rates of return and the highest standard deviations
► They are selected from those securities with the lowest standard deviations regardless
of their returns

Which of the following is NOT an example of hybrid equity?
► Convertible bonds
► Convertible debenture
► Common shares

The
value of dividend is derived from which of the following?
M
► Cash flow streams
C O
►
►
Capital gain /loss
Difference between buying & selling price
g .
i n
.t n
- Please choose one
a
n
an
► Both represent how much each security’s price will increase in a year
u j
► 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
.v
earn by owning the security
► Both incorporate the par value in their calculation
Question No: 30
W
The
W
market capitalization rate on the stock of Fast Growing Company is 20%. The expected ROE is
22% and the expected EPS ia Rs. 6.10. If the firm's plowback ratio is 90%, the P/E ratio will be
________.
► 8.33
W
► 50.0
► 9.09
► 7.69

W
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

A
company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index, most
likely has _________.
► An anticipated earnings growth rate which is less than that of the average firm
► A dividend yield which is less than that of the average firm
►
M
Less predictable earnings growth than that of the average firm
►
O
Greater cyclicality of earnings growth than that of the average firm
C
g .
i n
Which of the following is the variability of return on stocks or portfolios not explained by
general market movements. It is avoidable through diversification?
► Systematic risk
► Standard deviation .t n
► Financial risk
n a
j an
- Please choose one
u
When Return is being estimated in % terms, the units of Standard Deviation will be mention in
__________.
.v
►
►
%
Times W
►
► W
Number of days
All of the given options
Question No: 35W ( 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

W
► 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
Which of the following is NOT a major cause of unsystematic risk.
► New competitors
► New product management
► Worldwide inflation
► Strikes

You
are considering two investment proposals, project A and project B. B's expected net present
value is Rs. 1,000 greater than that for A and A's dispersion of net present value is less than that
for B. On the basis of risk and return, what would be your conclusion?
► Project A dominates project B M

►
►
Project B dominates project A
C O
Neither project dominates the other in terms of risk and return
► Incomplete information
g .
i
- Please choose one
n
. n
Which of the following is a drawback of percentage of sales method?
t
n na
ja
►
► vu
It is a rough approximation
There is change in fixed asset during the forecasted period
►
► W
Lumpy assets are not taken into account

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Which of the following need to be excluded while we calculate the incremental cash flows?

W
► Depreciation
► Sunk cost
► Opportunity cost
► Non-cash item

M
C O
g . ICO
Company must decide between two mutually exclusive projects. The following information
describes the cash flows of each project.
i n
Year Project "A" Project "B" .t n
0 Rs. (20,000)
n
Rs. 24,000 a
an
1 10,000 10,000
2
3
8,000
6,000
u j
10,000
10,000
.v
a. Assume that 15% is the appropriate required rate of return. What decision should the firm
W
make about these two projects?
b. If the firm reevaluated these projects at 10%, what decision should the firm make about
W
these two projects?

WW
What are the earnings per share (EPS) for a company that earned Rs.100, 000 last year in
after-tax profits, has 200,000 common shares outstanding and Rs.1.2 million in retained
earning at the year end?
► Rs.1.00
► Rs. 6.00
► Rs. 0.50
► Rs. 6.50

Among the pairs given below select a(n) example of a principal and a(n) example of an
agent respectively.
MIDTERM EXAMINATION
► Manager; owner Spring 2009
om
► Accountant; bondholder
g .c Time: 60 min
Marks: 50
Quesbondholder
► Shareholder;
i n
tion No: 1 ( Marks: 1 ) - Please choose one
.t n
n a
Which of the following is equal to the average tax rate?
an
► Total tax liability divided by taxable income
► Rate that will be paid on the next dollar of taxable income
► Median marginal tax rate
u j
► Percentage increase in taxable income from the previous period
.v
W
Which of the following would be deductible as an expense on the corporation's income
statement?
W
► Interest paid on outstanding bonds
► Cash dividends paid on outstanding common stock
W
► Cash dividends paid on outstanding preferred stock

In conducting an index analysis every balance sheet item is divided by __________ and
every income statement is divided by __________ respectively.
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► Its corresponding base year balance sheet item; its corresponding base year
income statement item
► Its corresponding base year income statement item; its corresponding base year
balance sheet item
► Net sales or revenues; total assets
► Total assets; net sales or revenues

Which group of ratios measures a firm's ability to meet short-term obligations?
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► Debt ratios
► Coverage ratios

► Debt ratios
► Coverage ratios M
C O
g .
Interest paid on the original principal borrowed is often referred to as __________.
i n
► Compound interest
► Present value
t. n
► Simple interest
n a
► Future value
a n
u j
.V
If the following are the balance sheet changes, which one of them would represent use of
funds by a company?
W
W
► Rs. 8,950 decrease in net fixed assets
W
► Rs. 5,005 decrease in accounts receivable
► Rs. 10,001 increase in accounts payable
► Rs. 12,012 decrease in notes payable

OM

In preparing a forecast balance sheet, it is likely that either cash or __________ will
serve as a "plug figure" or balancing factor to ensure that assets equal liabilities plus
shareholders' equity.
► Retained earnings
► Accounts receivable
► Shareholders' equity
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► Notes payable (short-term borrowings)

What is the present value of Rs.8,000 to be paid at the end of three years if the interest
rate is 11%?
► Rs.5,850
► Rs.4,872
► Rs.6,725
M
► Rs.1,842
C O
g .
What is the present value of Rs.1,000 to be paid at the end of 5 years if the interest rate is
8%.
i n
► Rs.680.58
► Rs.1,462.23
t. n
► Rs.322.69
► Rs.401.98
n a
a n
j
As interest rates go up, the present value of a stream of fixed cash flows _____.
u
.V
► Goes down
► Goes up
► Stays the same
W
W
W
The benefit we expect from a project is expressed in terms of:
► Cash in flows
► Cash out flows
► Cash flows

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

If a project’s initial cash outflow of Rs. 100,000 is followed by four annual receipts of
36,000 we can get the nearest discount factor by:
► Interpolation
► Dividing 100,000 by 36,000 M
► Dividing 36,000 by 100,000
C O
► Insufficient information
g .
i n
In which of the following situations you can expect multiple answers of IRR?
t. n
► There are two adjacent arrows one of them is downward pointing & the other
one is upward pointing
n a
n
a
u j
Question No: 18 .V
W
Which of the following technique would be used for a project that has non-normal cash
flows?
W
W
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Which one of the following is NOT the disadvantage of the asset with very short life?
► Money has to be reinvested in some other project with uncertain NPV
► Money has to be reinvested in some other project with certain NPV
► Money has to be reinvested in some other project with return so risky

M
C O
g .
i n
You are selecting a project from a mix of projects, what would be your first selection in
descending order to give yourself the best chance to add most to the firm value, when
.t n
operating under a single-period capital-rationing constraint?
► Profitability index (PI)
► Net present value (NPV)
► Internal rate of return (IRR)
n a
► Payback period (PBP)
j an
u
.v
Which one of the following is the right of the issuer to call back or retire the bond by
paying off the bondholders before the maturity date?
W
W
► Call in
W
► Call option
► Call provision
► Put option


► Does not pay interest on a regular basis but pays a lump sum at
maturity
► Can always be converted into a specific number of shares of common stock
in the issuing company
► The coupon rate is greater than the current yield and the current yield is greater
► The coupon rate is less than the current yield and the current yield is greater
than the yield to maturity
M
► The coupon rate is less than the current yield and the current yield is less
C O
g .
An investment opportunity set formed with two securities that are perfectly negatively
i n
correlated. What will be standard deviation in the global minimum variance portfolio?
► Equal to zero
► Greater than zero
t. n
► Equal to -1
n a
► Equal to the sum of the securities' standard deviations
a n
u j
How efficient portfolios of "N" risky securities are formed?
► These are formed with the securities that have the highest rates of return
.V
regardless of their standard deviations
► They have the highest risk and rates of return and the highest standard
deviations
W
► They are selected from those securities with the lowest standard deviations
W
regardless of their returns
W
Which of the following is NOT an example of hybrid equity?
► Convertible bonds
► Convertible debenture
► Common shares

W
The value of dividend is derived from which of the following?
► Cash flow streams

► Capital gain /loss
► Difference between buying & selling price
► 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
om
The market capitalization rate on the stock of Fast Growing Company is 20%. The
expected ROE is 22% and the expected EPS ia Rs. 6.10. If the firm's plowback ratio is
90%, the P/E ratio will be ________.
g .c
► 8.33
► 50.0
i n
► 9.09
► 7.69 .t n
n a
an
In the dividend discount model, which of the following is (are) NOT incorporated into
the discount rate?
u j
► Real risk-free rate
.v
► Risk premium for stocks
W
► Return on assets
► Expected inflation rate
W
W
A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market
index, most likely has _________.
► An anticipated earnings growth rate which is less than that of the average firm
► A dividend yield which is less than that of the average firm
► Less predictable earnings growth than that of the average firm
► Greater cyclicality of earnings growth than that of the average firm

Which of the following is the variability of return on stocks or portfolios not explained
by general market movements. It is avoidable through diversification?
► Systematic risk
► Financial risk
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When Return is being estimated in % terms, the units of Standard Deviation will be
mention in __________.
►%
► Times
► Number of days

M
A well-diversified portfolio is defined as:
C O
nonsystematic variance is essentially zero
g .
► One that is diversified over a large enough number of securities that the
► A portfolio whose factor beta equals 1.0

i n
► One that contains securities from at least three different industry sectors
► A portfolio that is equally weighted

.t n
n a
Which of the following is NOT a major cause of unsystematic risk.
► New competitors
j an
► New product management
u
.v
► Worldwide inflation
► Strikes
W
You are considering two investment proposals, project A and project B. B's expected net
W
present value is Rs. 1,000 greater than that for A and A's dispersion of net present value
►
W
is less than that for B. On the basis of risk and return, what would be your conclusion?
Project A dominates project B

► Project B dominates project A
► Neither project dominates the other in terms of risk and return
► Incomplete information

Which of the following is a drawback of percentage of sales method?
► It is a rough approximation
► There is change in fixed asset during the forecasted period
► Lumpy assets are not taken into account

Which of the following need to be excluded while we calculate the incremental cash
flows?
M
C O
► Depreciation
g .
► Sunk cost
► Opportunity cost
i n
► Non-cash item
.t n
n a
j an
u
► .v
Because there is hidden value in each project
►
► W
Because they have chance of rapid growth
Because they have invested a lot
►
W
W
ICO Company must decide between two mutually exclusive projects. The following
information describes the cash flows of each project.
Year Project "A" Project "B"

Student Name: ______________________________
Center Name/Code: ______________________________
Exam Date: Tuesday, August 22, 2006

• This exam consists of 15 Multiple Choice Questions (MCQ’s), 5 True/False Questions, 5 Fill in the
Blanks,5 Short Questions and 2 Numerical Questions.
• Question No.1-15 are MCQs carrying 1 Mark each, Question No.16-20 are fill in the blanks carrying
1 Mark each, Question No.21-25 True/False Questions carrying 1 Mark each, Question No.26-30
are short questions carrying 3 Marks each and Question No.31-32 are numerical questions
carrying 10 Marks each.
most suitable, by clicking on the appropriate check box.
• Save your answer before proceeding to the next question.

• Do not click the “Finish button” while solving your paper. Once you clicked the “Finish” button, you
will not be able to access your paper again. Click it only at the end after solving the whole paper,
which will be an indication that you have submitted your complete paper.
• You are required to show all the working of short questions as well as Numerical questions.
• A clock has been given in the exam software. Software will automatically be closed after 150
minutes.
• Remember do not spend too much time on any one MCQ. Since all MCQ’s carry equal marks, it is
ww
important to manage your time and responses to test questions effectively.

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21 22 23 24 25 26 27 28 29 30
Marks
Question 31 32
Marks
EBIT is usually the same thing as:
► Funds provided by operations.
► Earnings before taxes.
► Net income.
► Operating profit
A major advantage of the corporate form of organization is:
► Reduction of double taxation.

► Limited owner's liability.
► Legal restrictions.
► Ease of organization
A profitability index of 0.85 for a project means that:
► The present value of benefits is 85% greater than the project's costs.
► The project's NPV is greater than zero.
► The project returns 85 cents in present value for each current dollar invested.
► The payback period is less than one year.
The ultimate ownership of the firm resides:
► With management
► With common shareholders
► With preferred shareholders

► With bondholders
---------------- refers to the financial projection of cash disbursements and receipts during the next
planning period.
► Cash investment plan
► Cash budget
► Capital budgeting
► None of the given options.
An arrangement whereby a firm sells land, buildings, or equipment and simultaneously leases the
property back for a specified period under specific terms is called a:
► Service lease
► Capital lease.
► Sale and leaseback.
► Lessor agreement.

The market price of a share of common stock is determined by:
► The board of directors of the firm.
► The stock exchange on which the stock is listed.
► The president of the company.
► Individuals buying and selling the stock.
The controller's responsibilities are primarily ________ in nature, while the treasurer's
responsibilities are primarily related to __________.
► Operational; financial management
► Financial management; accounting
► Accounting; financial management
► Financial management; operations
Current assets that a firm must carry even at the trough of sales are _____________, while current
assets that fluctuate with seasonal or cyclical variations in sales are _____________.
► Temporary assets; permanent assets

► Permanent assets; temporary assets
► Matched assets; non-matched assets
► Non-matched assets; matched assets
An expression of creditworthiness of a firm based on its present financial condition and past credit
history is called ----------------.
► Credit rating
► Trade credit
► Liquidity
A stock split:
► Does not change the amount in the common stock account
► Is treated by accountants just like a stock dividend
► Reduces retained earnings

Syndicated Loan is a large loan arranged by a group of ------------ that form a syndicate, headed by
the lead manager.
► Bond holders
► Individuals
► Brokers
► Banks
--------------------merger takes place when firms operating in different industries combine together.
► Conglomerate
► Vertical
► Co generic
► Horizontal
In breakeven analysis, if fixed costs rise, then the breakeven point will --------.
► Fall
► Rise
► Stay the same
A firm that operates in an integrated fashion in a number of countries is called a:
► Spot corporation.
► Future Corporation.
► Domestic Corporation.
► A multinational corporation
--------------- is the graphical representation of the linear relationship between a security‘s

systematic risk and its expected return in a financial market.
------------- refers to the mixture of debt and equity maintained by a company.
A portfolio that offers the highest possible yield for a given level of risk, or the lowest possible risk
for a given yield level is know as -----------.
In finance, the costs associated with buying or selling of financial instruments are called ------------
---------.
In ----------- plan firms give stockholders option to automatically reinvest cash dividends by buying
more of the same stock.
The most common type of spontaneous financing is a commercial bank loan.
► True
► False
All other things being the same, if the firm raises funds by selling common stock, it will increase
its degree of financial leverage.
► True
► False
The hedging approach to financing involves matching maturities of debt with specific financing
needs.
► True
► False
Generally, a greater margin of safety would be provided by more current assets and fewer current
liabilities.
► True
► False
A service company would be a good candidate for an LBO.
► True
► False
Differentiate between intrinsic value and market value of a common share.
According to signaling theory if a firm’s future genuinely looks good then management will
choose to raise financing through Debt. Why?
Why spontaneous financing is a cheap source of financing for a firm? Name some sources of
spontaneous financing.
In which ways financial lease is different from operating lease? Explain.
Following are given the capital structures of two companies A and B.
Company A Company B
Bonds = Rs.5.6 Billion Debenture = Rs.1.3 Billion
Preferred stocks = 3.4 Billion Preferred stocks = 1.7 Billion
Common stocks = 1 Billion Common stocks = 7 Billion
Total = Rs.10 Billion Total = Rs.10 Billion
Analyze capital structures of both the companies and identity that which Company has high degree
of financial leverage, and why?
An individual is considering two different savings plans. The first plan would have her deposit
Rs.500 every six months, and she would receive interest at a 7% annual rate, compounded semi-
annually.
Under the second plan she would deposit Rs.1000 every year with a rate of interest 8%,
compounded annually. The initial deposit of the first plan would be made six months from now
and that of second plan one year hence.
Required: Calculate future value of both the saving plans at the end of 10 years.(5+5)
Suppose you are working as a financial analyst in an investment bank. Currently your bank is
considering to invest in the common stocks of Pak Cement Company Limited. Following
information is available to you.
The pak cement company limited common stocks have a beta of 1.45. The risk free rate is 8% and
the expected return on the market portfolio is 13%. The company presently pays a dividend of Rs.2
a share, and it is expected that it will grow at 10% per annum for many years to come. What
required rate of return would you suggest for this investment? The company policy is to use capital
asset pricing model (CAPM) to calculate required rate of return on stocks. Based on your required
rate of return what present market price would you place on each share, using perpetual dividend
growth model? (5+5)

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MGT201 Financial Management

Total Marks: 50 Total

Question No. 1 Marks : 5

Question No. 2 Marks : 5

Why EBIT is generally considered to be independent of financial leverage?

1 One dollar a month.

Question No. 4 Marks : 15

The ABC company is currently in this situation

b. What is the firm's weighted average cost of capital?

Question No. 5 Marks : 5

Question No. 6 Marks : 2

1 By diversifying their investments.

Question No. 7 Marks : 2

What is the definition of operating leverage?

1 Additional variability in earnings available to the firm's common shareholders.

Question No. 8 Marks : 5

What is meant by Budget Constraints?

Question No. 9 Marks : 5

Question No. 10 Marks : 2

Question No. 11 Marks : 2

5 As a hurdle rate for decisions related to project acceptance or rejection.

Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Tuesday, February 06, 2007

• All questions are compulsory.

• This examination is closed book, closed notes, closed neighbours.

• You are required to show the working of all Numerical questions.

• The use of calculator and financial tables is allowed.

For Teacher's use only

Question No: 1 ( Marks: 1 ) - Please choose one

Which of the following is not the objective of capital budgeting techniques?

► Financial viability of the project

► To assess working capital requirement

► To evaluate the value of investment

► To measure durability of the project

Question No: 2 ( Marks: 1 ) - Please choose one

Which of the following statements is correct?

► (A). Ratio analysis can be distorted by seasonal factors.

► (C). It is difficult to generalize financial ratios as being strictly good or bad.

► Both A and C are correct

Question No: 3 ( Marks: 1 ) - Please choose one

The buyer of a zero-coupon bond expects to receive:

► A rate of return equal to zero over the life of the bond.

► All interest payments in one lump sum at maturity

Question No: 4 ( Marks: 1 ) - Please choose one

An ordinary annuity whose payments or receipts continue forever is called ------------.

► None of the given options

Question No: 5 ( Marks: 1 ) - Please choose one

Which of the following is a financial asset?

Question No: 6 ( Marks: 1 ) - Please choose one

Working capital management deals with all of the following, except:

► The composition of current assets

► The financing of current assets

► The depreciation of current assets

Question No: 7 ( Marks: 1 ) - Please choose one

► Product/service demand variability

► Sales price variability

► Foreign risk exposure

► Interest rate levels

Question No: 8 ( Marks: 1 ) - Please choose one

► Capital structure policy

► Interest rate levels

Question No: 9 ( Marks: 1 ) - Please choose one