FINALTERM EXAMINATION
Fall 2009
MGT201- Financial Management (Session - 3)
Shared by Tahir Qazi
Solved by vuZs Team
Mehreen Humayun
MGT201 Question No: 1 ( M a r k s: 1 )
ABC’s and XYZ’s debt-to-total assets ratio is 0.4. What is its debt-to-equity ratio?
► 0 .2
► 0 .77
► 0.667
► 0.333
Lesson 03
Debt to equity, explicitly shows the proportion to debt to equity. A ratio of 60 to 40 is used for new projects, i.e., for a project it is permitted to raise its finances 60 percent from the debt and 40 percent from equity. Debt to equity formula = Total Debt / Total Equity
MGT201 Question No: 2 ( M a r k s: 1 )
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
MGT201 Question No: 3 ( M a r k s: 1 )
A 5-year ordinary annuity has a future value of Rs.1,000. If the interest rate is 8 percent, the amount of each annuity payment is closest to which of the following?
► Rs.231.91
► Rs.184.08
► Rs.181.62
► Rs.170.44
=(i)*(1-(1/(1+i)^n))/i
=(1.08)*(1-(1/(1.08)^5))/0.08=4.312127
PV=1000/4.312127=231.91
MGT201 Question No: 4 ( M a r k s: 1 )
Managers prefer IRR over net present value because they evaluate investments:
► In terms of dollars
► In terms of Percentages
► Intuitively
► Logically
Lesson 08
IRR is a widely used and an important measure, which is more common in practice than the NPV. IRR, unlike NPV that is expressed in dollar amounts, is always quoted in terms of percentage, which makes it comparable to the other market interest rates or the inflation rate.
MGT201 Question No: 5 ( M a r k s: 1 )
When there is single period capital rationing, what would be the most sensible way of making investment decisions?
► Choose all projects with a positive NPV
► Group projects together to allocate the funds available and select the group of projects with the highest NPV
► Choose the project with the highest NPV
► Calculate IRR and select the projects with the highest IRRs
When a company invests in projects with positive NPV, they raise the shareholders’ wealth or company’s value. This would also increase the market value added and the economic value added for the firm.
MGT201 Question No: 6 ( M a r k s: 1 )
Which of the following is the value of bond that we expect the bond to be?
► Intrinsic value
► Fair value
► Both intrinsic and fair value
► Market price
Lesson 14
The fair or intrinsic value of the bond is the value that we expect the bond to be.
MGT201 Question No: 7 ( M a r k s: 1 )
An investment opportunity set formed with two securities that are perfectly negatively correlated. What will be standard deviation in the global minimum variance portfolio?
► Equal to zero
► Greater than zero
► Equal to the sum of the securities' standard deviations
► Equal to -1
Lesson 27
If there is no relation between the movements of the stocks then the correlation coefficient is zero.
MGT201 Question No: 8 ( M a r k s: 1 )
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
Lesson 16
Another thing about the shares is to remember that par value is the value when they are issued the market value of the shares changes with investor’s perception about the company’s future and supply and demand situation.
MGT201 Question No: 9 ( M a r k s: 1 )
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.
Lesson 21
It is the weighted average of the expected returns of each individual investment in the portfolio.
MGT201 Question No: 10 ( M a r k s: 1 )
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
MGT201 Question No: 11 ( M a r k s: 1 )
The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as __________.
► A probability distribution
► The expected return
► The standard deviation
► Coefficient of variation
http://en.wikipedia.org/wiki/Standard_deviation
MGT201 Question No: 12 ( M a r k s: 1 )
The Higher the Risk of a Share, the ___________ its Rate of Return and the _____ its Market Price.
► Higher; Lower
► Lower; Higher
► Higher; Higher
► Lower; Lower
Lesson 20
Consequences on Share Price: The Higher the Risk of a Share, the Higher its Rate of Return and the Lower its Market Price.
MGT201 Question No: 13 ( M a r k s: 1 )
If a company intends to start a new project, ________ technique are employed to assess the financial viability of the project.
► Financial planning
► Financial forecasting
► Capital budgeting
► Capital rationing
Lesson 08
MGT201 Question No: 14 ( M a r k s: 1 )
The logic behind _________ is that instead of looking at net cash flows you look at cash inflows and outflows separately for each point in time.
► IRR
► MIRR
► PV
► NPV
Lesson 11
MGT201 Question No: 15 ( M a r k s: 1 )
Expected Portfolio Return = ___________
► rP * = xA rA + xB rB
► rP * = xA rA - xB rB
► rP * = xA rA / xB rB
► rP * = xA rA * xB rB
Lesson 21
MGT201 Question No: 16 ( M a r k s: 1 )
Market risk is measured in terms of the ___________ of the market portfolio or index.
► Variance
► Covariance
► Standard deviation
► Correlation coefficient
Lesson 23
MGT201 Question No: 17 ( M a r k s: 1 )
Which of the following represent all Risk –Return Combinations for the efficient portfolios in the capital market?
► Parachute graph
► CML straight line equation
► Security market line
► All of the given options
CML Straight Line Equation (T-Bill Portfolio and Optimal Portfolio Mix on Efficient Frontier Curve) connects rRF (Risk-free or T-Bill return) to the Tangent Point on the Efficient Frontier Curve. It represents all Risk-Return Combinations for Efficient Portfolios in the Capital Market.
MGT201 Question No: 18 ( M a r k s: 1 )
Generally companies want to keep the balance in the form of:
► Debt
► Equity
► Hybrid security
► Both debt and equity
Lesson 30
MGT201 Question No: 19 ( M a r k s: 1 )
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%
► 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%
(DFL) Degree of Financial Leverage=% Change in EPS/ % Change in EBIT
www.vuzs.net
MGT201 Question No: 20 ( M a r k s: 1 )
Which of the following is the maximum amount of debt (and other fixed-charge financing) that a firm can adequately service?
► Debt capacity
► Debt-service burden
► Adequacy capacity
► Fixed-charge burden
It is the assessment of the amount of debt an individual or firm can repay in a timely manner (from available means or resources) without jeopardizing its financial viability.
MGT201 Question No: 21 ( M a r k s: 1 )
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
Lesson 31
MGT201 Question No: 22 ( M a r k s: 1 )
Which of the following statements regarding leverage is true?
► The ultimate effect of leverage depends on the firm's EBIT
► If things go poorly for the firm, increased leverage provides greater returns to shareholders.
► As a firm lever up, shareholders are exposed to less risk
► The benefits of leverage always outweigh the costs of financial distress
As firm levers up, shareholders are exposed to more and more risk. And the benefits of leverage will not be a great in a firm with substantial accumulated losses or other types of tax shields as for a firm without many tax shields.)
MGT201 Question No: 23 ( M a r k s: 1 )
Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate form for financing a new capital investment in plant and equipment?
► 6-month bank notes
► Accounts payable
► Common stock equity
► Trade credit
MGT201 Question No: 24 ( M a r k s: 1 )
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
Lesson 43
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing).
MGT201 Question No: 25 ( M a r k s: 1 )
Which of the following is NOT a form of short-term, spontaneous credit?
► Accrued wages
► Trade credit
► Commercial paper
► Accrued taxes
Lesson 41
Spontaneous Financing - Current Liabilities like Trade Credit and Accrued Taxes
(payable) and Wages payable form its base.
MGT201 Question No: 26 ( M a r k s: 1 )
Which of the following would NOT be included in inventory carrying cost?
► Insurance expense for the inventory
► Opportunity cost of capital for inventory investment
► Cost of inventory
► Cost of shelf space
Lesson 40
Inventory Carrying Costs is cost of capital, storage / warehouse rent, insurance premium, wastage.
MGT201 Question No: 27 ( M a r k s: 1 )
What would be the result when there is an increase in the number of shares outstanding by reducing the par value of stock?
► Stock split
► Stock dividend
► Extra dividend
► Regular dividend
Lesson 38
MGT201 Question No: 28 ( M a r k s: 1 )
What would you expect to happen to the price of a share of stock on the day it goes ex-dividend?
► The price should increase by the amount of the dividend
► The price should decrease by the amount of the dividend
► The price should decrease by one-half the amount of the dividend
► The price should remain constant
Lesson 38
MGT201 Question No: 29 ( M a r k s: 1 )
Which of the following add up to the costs of financial distress?
► Direct bankruptcy costs, primarily legal and administrative costs
► Indirect bankruptcy costs, reflecting the difficulty of managing a company when it is in bankruptcy proceedings
► Costs of the threat of bankruptcy, such as poor investment decisions resulting from conflicts of interest between debtholders and stockholders
► All of the given options are correct
A common example of a cost of financial distress is bankruptcy costs. These direct costs include auditors' fees, legal fees, management fees and other payments. Cost of financial distress can occur even if bankruptcy is avoided (indirect costs). The result is a conflict of interest between bondholders (creditors) and shareholders.
MGT201 Question No: 30 ( M a r k s: 1 )
A technique that tells us the number of years required to recover our initial cash investment based on the project’s expected cash flows is:
► Pay back period
► Internal rate of return
► Net present value
► Profitability index
Lesson 08
MGT201 Question No: 31 ( M a r k s: 1 )
Which is the best measure of risk for a single asset held in an isolation, and which is the best measure for an asset held in a diversified portfolio?
► Variance, correlation coefficient
► Standard deviation, correlation coefficient
► Beta, variance
► Coefficient of variation, beta
Correlation Coefficient measures the correlation in the returns of the two investments.
MGT201 Question No: 32 ( M a r k s: 1 )
All of the following are used in calculation of required return on a particular stock using SML equation EXCEPT:
► Risk free rate
► Market risk premium
► Stock’s beta
► Stock’s price
MGT201 Question No: 33 ( M a r k s: 1 )
What will be the Stock Y’s risk premium if the average share of stock Y has a required return of 20% and beta for that stock is 1.0? In addition, treasury bonds yield is 10%?
► 5%
► 10%
► 20%
► 30%
MGT201 Question No: 34 ( M a r k s: 1 )
What should be used to calculate the proportional amount of equity financing employed by a firm?
► The book value of the firm
► The sum of common stock and preferred stock on the balance sheet
► The current market price per share of common stock times the number of shares outstanding
► The common stock equity account on the firm's balance sheet
MGT201 Question No: 35 ( M a r k s: 1 )
According to Traditionalist Theory, when an un-leveraged firm takes on more and more debt, which of the following phenomenon is observed?
► Cost of Capital increases, reaches a minimum point, and then falls
► Cost of Capital decreases, reaches a minimum point, and then rises
► Cost of Capital increases, reaches a maximum point, and then rises
► None of the given options
Lesson 36
MGT201 Question No: 36 ( M a r k s: 1 )
In the WACC equation (rDxD + rExE + rPxP), xD represents which of the following?
► Weight or Fraction of Total Capital value raised from bonds
► Weight or Fraction of Total Capital value raised from preferred stock
► Weight or Fraction of Total Capital value raised from common stock
► Weight or Fraction of Total Capital value raised from retained earnings
Lesson 34
xD= Fraction of Debt = A Measure of Leverage
MGT201 Question No: 37 ( M a r k s: 1 )
In residual dividend model, what does the term ‘Conservatism‘ refer?
► Overvaluation of free cash flows
► Underestimation of free cash flows
► Overestimation of free cash flows
► None of the given option
Lesson 37
MGT201 Question No: 38 ( M a r k s: 1 )
The date on which the names of stockholders in the Stock Transfer Register of firm are documented is referred as:
► Declaration Date
► Holder-of-record Date
► Ex-Dividend Date
► Payment Date
Lesson 38
MGT201 Question No: 39 ( M a r k s: 1 )
XYZ Corporation has offered its shareholders the option that their dividends will be used to purchase additional shares of this corporation. This offer of XYZ Corporation is referred as:
► Stock repurchases
► Dividend reinvestment
► Stock dividends
► Stock splits
Dividend Reinvestment Plans (DRIP):Firms give stockholders option to automatically reinvest cash dividends by buying more of the same stock.
MGT201 Question No: 40 ( M a r k s: 1 )
When IRR < WACC it means that:
► Investment is acceptable as required rate of return is less then cost of capital
► Investment is not acceptable as required rate of return is less then cost of capital
► Investment is acceptable as required rate of return is equal to the cost of capital
► None of the given options is true
MGT201 Question No: 41 ( M a r k s: 1 )
Which of the following statement depicts the advantage of raising capital through debt?
► Debt adds to company specific risk
► If company does not pay interest it can be close down
► It can improve the return on equity
► Not required to pay fixed amount of interest
MGT201 Question No: 42 ( M a r k s: 1 )
Which of the following can be defined as “additional risk faced by common stockholders if firms take debt.”?
► Unsystematic risk
► Systematic risk
► Business risk
► Financial risk
Financial Risk: Additional Risk faced by Common Stockholders if Firm takes Debt. It is a pure debt related Risk.
MGT201 Question No: 43 ( M a r k s: 1 )
The decisions regarding working capital management of a firm are mainly concerned with which of the following?
► Current assets & long-term liabilities of balance sheet
► Current assets & current liabilities of balance sheet
► Fixed assets & current liabilities of balance sheet
► Fixed assets & long-term liabilities of balance sheet
Lesson 39
MGT201 Question No: 44 ( M a r k s: 1 )
If Current assets = Rs. 16,000,
Current liabilities= Rs. 10,000
Inventory= Rs. 2500
Calculate quick ratio for the firm?
► 1.35
► 6.0
► 1.60
► 0.25
Lesson 39
Quick Assets = Current Assets – Inventory=16000-2500=13,500
Acid Test or Quick Ratio = Quick Assets / Current Liabilities=13,500/10,000=1.35
MGT201 Question No: 45 ( M a r k s: 1 )
Which of the following states that “Cash is King and only Cash can pay the bills”?
► Fat cat working capital policy
► Lean & Mean perspective
► Balance Sheet Perspective
► Moderate working capital policy
Lesson 39
MGT201 Question No: 46 ( M a r k s: 1 )
Which of the following depicts the break even point in best way?
► EBIT = 0
► EBIT < 0
► EBIT > 0
► None of the given options
Lesson 30
Breakeven Point: Quantity of Sales at which EBIT = 0 therefore ROE = 0.
MGT201 Question No: 47 ( M a r k s: 1 )
Financial leverage is considered good in which of the following?
► Earning after interest & tax / Total asset > Interest cost
► Earning after interest & tax / Total asset < Interest cost
► Earning before interest & tax / Total asset < Interest cost
► Earning before interest & tax / Total asset > Interest cost
Lesson 32
MGT201 Question No: 48 ( M a r k s: 1 )
Suppose that there is no personal or corporate income tax and that the firm's WACC is not affected by its capital structure, then which of the following statements is true?
► A firm's cost of equity depends on the firm's business and financial risks
► The value of the firm is dependent on its capital structure
► The cost of equity increases as the firm's leverage decreases
► The greater the financial leverage, the more valuable is the firm
MGT201 Question No: 49 ( M a r k s: 1 )
Company A has to purchase another company. How do Company A pay for buying the other company?
► In Cash
► In Shares
► Bank Borrowing
► All of the given options
MGT201 Question No: 50 ( M a r k s: 1 )
A car manufacturing firm buys steel from a steel mill. Both these entities combined together to form a new firm. It is referred to which of the following?
► Horizontal Merger
► Vertical Merger
► Congeneric Merger
► Conglomerate Merger
Vertical Merger: merger of a supplier with a buyer
MGT201 Question No: 51 ( M a r k s: 1 )
Under efficient market, the effect of debt on WACC can be represented with the help of which of the following?
► Straight line
► U shaped curve
► Concave
► Time to time fluctuation
MGT201 Question No: 52 ( M a r k s: 1 )
What is the effect on WACC if debt increases under pure M&M theory model?
► It will increase
► It will decrease
► It remains unchanged
► None of the given options
MGT201 Question No: 53 ( M a r k s: 1 )
Most of the firms wish to maintain their capital structure in the form of which of the following?
► 100% equity
► 100% debt
► Mix of debt and equity
► 100% from the personal savings
Capital Structure is a Firm’s Mix of Debt & Equity.
MGT201 Question No: 54 ( M a r k s: 1 )
Under Net income approach, which of the following is a correct sequence of calculating cost of capital?
► Net income – Total firm’s market value – WACC
► WACC – Net income – market value of equity
► Market value of firm – WACC – Net income
MGT201 Question No: 55 ( M a r k s: 3 )
If capital structure changes from equity to debt then what will be the effect on capital structure.
MGT201 Question No: 56 ( M a r k s: 5 )
How are dividends paid, and how do companies decide on dividend payments?
MGT201 Question No: 57 ( M a r k s: 5 )
Write a note on capital structure of organizations and cost of capital.
MGT201 Question No: 58 ( M a r k s: 10 )
Why is stock price volatility more likely to imply risk than earnings volatility? Explain with the help of some examples.
MGT201 Question No: 59 ( M a r k s: 10 )
Explain the following conditions:· IRR WACC> SML,· IRR
0 comments:
Post a Comment