402

FINALTERM  EXAMINATION

Fall 2009

MGT402- Cost & Management Accounting (Session - 4)

 Solved by vuZs Team

Mehreen Humayun

www.vuzs.net

Time: 120 min

M a r k s: 84

Question No: 1    ( M a r k s: 1 )    http://vuzs.net

 All of the following are the features of fixed costs EXCEPT:

       ► Although fixed within a relevant range of activity level but are relevant to a decision making when it is avoidable.

       ► Although fixed within a relevant range of activity level but are relevant to a decision making when it is incremental.

       ► Generally it is irrelevant

       ► It is relevant to decision making under any circumstances

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Question No: 2    ( M a r k s: 1 )    http://vuzs.net

 The total cost of the beginning inventory was Rs. 60,000. During the month, 50,000 units were transferred out. The equivalent unit cost was computed to be Rs. 4.00 for materials and Rs. 7.40 for conversion costs under the weighted-average method.

With the help of given information, what was the total cost of the units completed and transferred out during the month.

       ► Rs. 480,000

       ► Rs. 570,000

       ► Rs. 540,000

       ► Rs. 510,000

   4+7.40=11.4,

11.4*50,000=570,000

Question No: 3    ( M a r k s: 1 )    http://vuzs.net

 Cost of incoming freight on merchandise to be sold to customers by a retail chain would be considered by that merchandiser to be:

       ► Prime costs

       ► Inventoriable costs

       ► Period costs

       ► None of the given options

 The term inventoriable cost is used interchangeably with product cost because a product is stored as the cost of inventory until the goods are sold.

Examples of Inventoriable costs: Unit invoice price, port handling fees, import duties and freight cost etc.

Question No: 4    ( M a r k s: 1 )    http://vuzs.net

 Which of the following is a cost that changes in proportion to changes in volume?

        ► Fixed cost

       ► Sunk cost

       ► Opportunity cost

       ► None of the given options                                       

   

Question No: 5    ( M a r k s: 1 )    http://vuzs.net

 The second name of explicit cost is?

       ► Opportunity cost

       ► Out of pocket cost

       ► Implicit cost

       ► None of the given options

Economic Cost: The value of the next best alternative of a business resource. The economic cost of an activity is equal to total explicit costs plus total implicit costs. It is also known as opportunity cost.

Question No: 6    ( M a r k s: 1 )    http://vuzs.net

 The net profit or loss for a particular period of time is reported on which of the following?

       ► Statement of cash flows

       ► Statement of changes in owner's equity

       ► Income statement

       ► Balance sheet

   

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Question No: 7    ( M a r k s: 1 )    http://vuzs.net

 Which of the following is deducted from purchases in order to get the value of Net purchases?

       ► Purchases returns

       ► Carriage inward

       ► Custom duty

       ► All of the given options

   

Question No: 8    ( M a r k s: 1 )    http://vuzs.net

 When prices are rising over time, which of the following inventory costing methods will result in the lowest gross margin?

       ► FIFO

       ► LIFO

       ► Weighted Average

       ► Cannot be determined

   Question No: 9    ( M a r k s: 1 )    http://vuzs.net

 A store sells five cases of soda each day. Ordering costs are Rs. 8 per order, and soda costs Rs. 3 per case. Orders arrive four days from the time they are placed. Daily holding costs are equal to 5% of the cost of the soda. What is the EOQ for soda?

       ► 4 cases

       ► 8 cases

       ► 10 cases

       ► 23 cases

   

Question No: 10    ( M a r k s: 1 )    http://vuzs.net

 If, Basic Salary                        Rs.10,000

Per Piece commission             Rs. 5

Unit sold                                   700 pieces

Amount of commission received will be:

        ► Rs. 3,500

       ► Rs. 13,500

       ► Rs. 10,000

       ► Rs. 6,500

Commission received= 5×700=3,500

Question No: 11    ( M a r k s: 1 )    http://vuzs.net

 Increased cost of production due to high labor turnover is a result of which of the following factor?

       ► Interruption of production

       ► Coordination between new and old employee to produce more

       ► Increased production due to newly motivated employees

       ► Decrease losses as new employees will be more concerned towards output

   

Question No: 12    ( M a r k s: 1 )    http://vuzs.net

 The Process of cost apportionment is carried out so that:

        ► Cost may be controlled

       ► Cost unit gather overheads as they pass through cost centers

       ► Whole items of cost can be charged to cost centers

       ► Common costs are shared among cost centers

   

Question No: 13    ( M a r k s: 1 )    http://vuzs.net

 Which of the following is TRUE regarding the use of blanket rate?

       ► The use of a single blanket rate makes the apportionment of overhead costs unnecessary

       ► The use of a single blanket rate makes the apportionment of overhead costs necessary

       ► The use of a single blanket rate makes the apportionment of overhead costs uniform

       ► None of the given options

The use of a single blanket rate makes the apportionment of overhead costs unnecessary since

the total production costs are to be used.

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 Question No: 14    ( M a r k s: 1 )    http://vuzs.net

 Nelson Company has following FOH detail.

                                                        Budgeted (Rs.)              Actual (Rs.)

Production Fixed overheads           36,000                            39,000

Production Variable overheads        9,000                            12,000

Direct labor hours                             18,000                            20,000

What would be the applied rate.

       ► Rs.2.00  per labor hour

       ► Rs.2.50 per labor hour

       ► Rs.2.55 per labor hour

       ► Rs.0.50 per labor hour

   36000/18000=2

Question No: 15    ( M a r k s: 1 )    http://vuzs.net

 Which of the following is the best define a by-product?

        ► A by-product is a product arising from a process where the wastage rate is higher than a defined level

       ► A by-product is a product arising from a process where the sales value is insignificant by comparison with that of the main product or products

       ► A by-product is a product arising from a process where the wastage rate is unpredictable

       ► A by-product is a product arising from a process where the sales value is significant by comparison with that of the main product or products

   

Question No: 16    ( M a r k s: 1 )    http://vuzs.net

 Which of the following method of accounting for joint product cost will produce the same gross profit rate for all products?

       ► Actual costing method

       ► Services received method

       ► Market value method

       ► Physical quantity method

Market value: The effect is to make each product appear to be equally profitable.

Question No: 17    ( M a r k s: 1 )    http://vuzs.net

 Profit under absorption costing will be higher than under marginal costing if:

       ► Produced units > Units sold

       ► Produced units < Units sold

       ► Produced units =Units sold

       ► Profit cannot be determined with given statement

  Produced units > Units sold 

Question No: 18    ( M a r k s: 1 )    http://vuzs.net

 Which of the following costs do NOT change when the activity base fluctuates?

       ► Variable costs

       ► Discretionary costs

       ► Fixed costs

       ► Mixed costs

   

Question No: 19    ( M a r k s: 1 )    http://vuzs.net

 In CVP analysis, when the number of units sold changes, which one of the following will remain the same?

       ► Total contribution margin

       ► Total sales revenues

       ► Total variable costs 

       ► Total fixed costs

   

Question No: 20    ( M a r k s: 1 )    http://vuzs.net

 Terrell, Inc. sells a single product at a selling price of Rs. 40 per unit. Variable costs are Rs. 22 per unit and fixed costs are Rs. 82,800. Terrell's break- even point is:

       ► Rs. 184,000

       ► 3,764 units

       ► Rs. 150,540

       ► 2,070 units

Contribution to sales ratio (C/S ratio) = Contribution Margin in Rs = 18 = 0.45

          Sales in Rs 40      

Break even Sales in Rs. =Fixed cost = 82,800 = Rs. 184,000

                                         C/S ratio        0.45    

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 Question No: 21    ( M a r k s: 1 )    http://vuzs.net

 The following detail is related to Bloch Company:

Opening work-in-process	2,000 litres,100% completed to material, 40% as to conversion cost
Material put in process	24,000 liters
Closing work-in-process	3,000 litres,100% completed to material and 45% as to conversion cost

Required: The numbers of equivalent units as to material, using FIFO method would be:  

      ► 24,000 units

       ► 26,000 units

       ► 28,000 units

       ► 20,000 units

   

Question No: 22    ( M a r k s: 1 )    http://vuzs.net

 The following detail is related to Bloch Company:

Opening work-in process	2,000 litres,100% completed to material, 40% as to conversion cost
Material put in process	24,000 liters
Closing work-in-process	3,000 litres,100% completed to material and 45% as to conversion cost

Required: The numbers of equivalent units as to Conversion cost, using FIFO method would be:

       ► 26,000 units

       ► 25,550 units

       ► 24,200 units

       ► 24,350 units

   

Question No: 23    ( M a r k s: 1 )    http://vuzs.net

 The by-product of flour is:

        ► Fats

       ► Bran

       ► Glycerin

       ► Meat Hides

 Bran, a by-product of flour production, is mainly made up of the outer covering of the wheat grain. 

Question No: 24    ( M a r k s: 1 )    http://vuzs.net

 The point at which the cost line intersects the sales line will be called:

       ► Budgeted sales

       ► Break Even sales

       ► Margin of safety

       ► Contribution margin

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Question No: 25    ( M a r k s: 1 )    http://vuzs.net

 All of the following are assumptions in constructing a Break even chart EXCEPT:

       ► There is no change of time value of money

       ► Price of cost factors remains constant

       ► Long term period will be considered

       ► Cost is affected by volume

In cost-volume-profit analysis, it is assumed that variable costs are perfectly and completely variable at all levels of activity and fixed cost remains constant throughout the range of volume being considered. However, such situations may not arise in practical situations.

Question No: 26    ( M a r k s: 1 )    http://vuzs.net

 When using conventional cost-volume-profit analysis, some assumptions about costs and sales prices are made. Which one of the following is NOT one of those assumptions?

       ► The sales price will remain unchanged per unit

       ► The actual variable cost per unit must vary over the production range

       ► The costs can be expressed as straight lines in a break-even graph

       ► The variable cost will remain unchanged per unit

Variable costs and selling price (and hence contribution) per unit are assumed to be unaffected by a change in activity level.   

Question No: 27    ( M a r k s: 1 )    http://vuzs.net

 Which one of the following is NOT a tool of financial forecasting?

       ► Cash budget

       ► Capital budget

       ► Pro forma balance sheet

       ► Pro forma income statement

 Question No: 28    ( M a r k s: 1 )    http://vuzs.net

 Which of the following factor/s should be considered while constructing an administrative selling expense budget?

       ► Fixed expenses

       ► Past experience

       ► Variable expenses

       ► All of the given options

   

Question No: 29    ( M a r k s: 1 )    http://vuzs.net

 The master budget usually begins with a:

        ► Production budget

       ► Direct materials budget

       ► Direct labor budget

       ► Sales budget

   

Question No: 30    ( M a r k s: 1 )    http://vuzs.net

 Financial managers use which of the following to plan for monthly financing needs?

       ► Capital budget

       ► Cash budget

       ► Income Statement budget

       ► Selling & administrative expenses budget

   

Question No: 31    ( M a r k s: 1 )    http://vuzs.net

 When using a flexible budget, a decrease in production levels within a relevant range:

       ► Decreases variable cost per unit

       ► Decreases total costs

       ► Increases total fixed costs

       ► Increases variable cost per unit

The variable costs change in direct proportion to output if flexible budgeting approach is adopted.

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 Question No: 32    ( M a r k s: 1 )    http://vuzs.net

 The decision to drop a product line should be based on:

       ► The fact that the product line shows a net loss over several periods

       ► The ability of the firm to eliminate some fixed costs as a result of dropping the product

       ► Whether the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost

       ► Whether the fixed costs that can be avoided by dropping the product line are greater than the contribution margin lost

   

Question No: 33    ( M a r k s: 1 )    http://vuzs.net

 A cost that has been incurred but cannot be changed by present or future decisions is called:

       ► Sunk cost

       ► Differential cost

       ► Opportunity cost

       ► Marginal cost

   

Question No: 34    ( M a r k s: 1 )    http://vuzs.net

 If sales is greater than cost, it means:

       ► Profit

       ► Loss

       ► Neither profit nor Loss

       ► Can not be determined

   

Question No: 35    ( M a r k s: 1 )    http://vuzs.net

 If, Total fixed cost Rs. 2,000, Variable manufacturing cost Rs. 3,000, Variable selling cost Rs. 1,000 and Sales Rs. 10,000 then what will be the profit under absorption costing?

       ► Rs.7,000

       ► Rs.5,000

       ► Rs.4,000

       ► Rs.8,000

Question No: 36    ( M a r k s: 1 )    http://vuzs.net

 Which of the following cannot becomes a part of product cost under absorption costing?

       ► Fixed manufacturing overhead

       ► Selling cost

       ► Direct materials

       ► Variable manufacturing overhead

   

Question No: 37    ( M a r k s: 1 )    http://vuzs.net

 A company ABC has contribution to sales ratio of 35%, variable cost to sales ratio of 65% and a profit to sales ratio of 17%. What will be the margin of safety ratio?

       ► 48.6%

       ► 53.8%

       ► 26.2%

       ► It can not be calculated from the given data

   

Question No: 38    ( M a r k s: 1 )    http://vuzs.net

 Which of the following is TRUE at Break even point?

       ► Profit is zero

       ► Fixed cost + variable cost = sales

       ► Fixed cost = contribution margin

       ► All of the given options

   

Question No: 39    ( M a r k s: 1 )    http://vuzs.net

 Which one of the following factors would caused a budgeted revenue to be less than the expected demand?

       ► Excess capacity exists

       ► Abundant resources are available 

       ► Demand exceeds capacity

       ► Excess supply of labor exists

If demand exceeds capacity, then a firm could probably not meet the demand that is in the marketplace.

Question No: 40    ( M a r k s: 1 )    http://vuzs.net

 If:

Cost of goods available for sales Rs. 7,000

Cost of opening finished goods inventory is Rs. 1,000

Commercial expenses Rs. 2,000.

Which of the following is the cost of goods to be produced?

       ► Rs. 6,000

       ► Rs. 4,000

       ► Rs. 8,000

       ► Rs. 10,000

   

Question No: 41    ( M a r k s: 1 )    http://vuzs.net

 If:

Cost of opening finished goods Rs. 2,000

Cost of goods to be produced Rs. 6,000

Operating expenses Rs. 1,000.

Which of the following is the cost of goods available for sale?

       ► Rs. 8,000

       ► Rs. 4,000

       ► Rs. 7,000

       ► Rs. 9,000

   

Question No: 42    ( M a r k s: 1 )    http://vuzs.net

 All of the following are features of a relevant cost EXCEPT:

       ► They affect the future cost

       ► They cause an increment in cost

       ► Relevant cost is a sunk cost

       ► They affect the future cash flows

   

Question No: 43    ( M a r k s: 1 )    http://vuzs.net

 Which of the following statement is TRUE about the relevant cost?

       ► It is a sunk cost

       ► It is an opportunity cost

       ► It do not affect the decision making process

       ► All costs are relevant

   

Question No: 44    ( M a r k s: 1 )    http://vuzs.net

 A company produced a desired level of product ‘A’ in 5,500 Hours. The standard hours required to produce the same product are 5,000 Hours. What is the amount & nature of variance?

       ► 500 hours (Favorable)

       ► 500 hours (Unfavorable)

       ► 5,000 hours (Favorable)

       ► 5,000 hours (Unfavorable)

   

Question No: 45    ( M a r k s: 1 )    http://vuzs.net

 Which of the following cost would be increases with an increase in activity level?

       ► Incremental cost

       ► Avoidable cost

       ► Sunk cost

       ► Opportunity cost

   

Question No: 46    ( M a r k s: 1 )    http://vuzs.net

 An ice factory has a contribution margin of Rs. 450,000 and fixed cost for the year amounts to Rs. 495,000. The fixed cost of Rs. 215,000 can be eliminated if the operations are to be closed during winter season. An extra sale of Rs. 25,000 is also expected during winter season. What would be the decision?

       ► Operations would be closed during winter season

       ► Operations would be continued as we are having extra sales in winter season

       ► Operations would be partially closed

       ► None of the given options

   

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 Question No: 47    ( M a r k s: 1 )    http://vuzs.net

 A contract will be accepted in which of the following condition?

       ► If it reduces the contribution margin

       ► If it increases the contribution margin

       ► If it increases the fixed cost

       ► If it decreases sales revenue

   

Question No: 48    ( M a r k s: 1 )    http://vuzs.net

 Which of the following statement is TRUE about opportunity cost?

       ► It is irrelevant to decision making

       ► It is always a sunk cost

       ► It is always a historical cost

       ► It is relevant to decision making

uestion No: 49    ( M a r k s: 3 )

 Define contribution margin?

Question No: 50    ( M a r k s: 3 )

 What is a principle budget factor?

Question No: 51    ( M a r k s: 5 )

 Ali Company produces and sells Amrat Cola to retailers. The Cola is bottled in 2-litter plastic bottles. The estimated budgeted sales for the year 2009 would be Rs. 360,000 and the estimated Profit for the year 2009 would be Rs 10,000.

The Margin of safety Ratio is calculated as 20%.

Required: Breakeven Sales for the year 2009

Absolute amount of mos = 360,000 * 20% = 72,000

MOS = budgeted sales – break even sales

Break even sales = Budgeted sales – MOS

= 360,000 – 72,000 = 288,000

Question No: 52    ( M a r k s: 5 )

 The management of Franco Corporation is concerned about department B, which showed a loss of Rs. 1,300 last quarter. You have been asked to prepare an analysis that will help management to decide whether to discontinue the department. Below is the Franco’s Income Statement for last quarter:

	Department A	Department B	Total
Sales (Rs)	260,000	130000	390,000
Variable Cost (Rs)	156,000	117000	273,000
Contribution margin	104,000	13,000	117,000
Less: Fixed Costs:
Separable (Rs)	11,300	5700	17,000
Joint (Rs)	17,400	8600	26,000
Total	28,700	14300	43,000
Profit (Loss) (Rs)	75,300	(1,300)	74,000

Showing all calculations, determine the effect of closing department B on Franco Corporation and make a recommendation.

    

Question No: 53    ( M a r k s: 10 )

 Classify following organization with respect to cost accumulation procedure generally used either Job order costing or Process costing by filling the appropriate boxes given below.

Industries	Costing Procedure to be applied
Paint	Process Costing
Leather	Process Costing
Printing press	Job Order
Wood furniture	Job Order
Steel	Process Costing
Jewelry items	Job Order
Accounting firms	Job Order
Mobile phones	Job Order
Tires and tubes	Process Costing
Sugar	Process Costing

Question No: 54    ( M a r k s: 10 )

 Ali and Co. has sales of Rs. 50,000 in March and Rs. 60,000 in April. Forecasted sales for May, June and July are Rs. 70,000, Rs. 80,000 and 100,000 respectively. The firm has a cash balance of Rs. 5,000 on May 01 and wishes to maintain a minimum cash balance of Rs. 5,000. Given the following data, prepare a cash budget for the month of May, June and July.

1.      The firm makes 20% of sales for cash, 60% are collected in the next month and the remaining 20% are collected in the second month following the sale.

2.      The firm receives other income of Rs. 2,000 per month.

3.      The firm’s actual or expected purchases, all made for cash, are Rs. 50,000, Rs. 70,000 and Rs. 80,000 for the months of May through July, respectively.

4.      Rent is Rs. 3,000 per month.

5.      Wages and salaries are 10% of the previous month’s sales.

6.      Cash dividends of Rs. 3,000 will be paid in June.

7.      Payment of principal and interest of Rs. 4,000 is due in June.

8.      A cash purchase of equipment costing Rs. 6,000 is scheduled in July.

9.      Taxes of Rs. 6,000 are due in June.

Cash budget for the month of May

Opening balance of cash                                      Rs. 5,000

Add: receipts                                                            62000

Total amount of cash                                               67000

Less: payments                                                        (59000)

Closing balance of cash                                            8000         

Receipts = cash sales+ Previous month sales + Previous last 2 months sales + receives other income

              = 14000+ 36000 + 10000 + 2000 = 62000

Rs.70000 *20% = 14000

Previous month sales = 60000*60/100=36000

Previous last 2 months sales = 50000 * 20/100 = 10000

1.      Payments = purchases + Rent + Wages and salaries 10% of the previous month’s sales

                 =50000 + 3,000 + 10% * 60000                 = 59000

Cash budget for the month of June

Cash budget for the month of May

Opening balance of cash                                      Rs. 5,000

Add: receipts                                                             76000

 Total amount of cash                                               81000

Less: payments                                                       (90000)

Closing balance of cash                                           (9000)          

Receipts = cash sales+ Previous month sales + Previous last 2 months sales + receives other income

              = 14000 + 48000 + 12000 + 2000 = 76000

             =70000*20/100 = 14000

Previous month sales =80000* 60/100 = 48000

Previous last 2 months sales = 60000*20/100=12000

2.      Payments = purchases + Rent + Wages and salaries 10% of the previous month’s sales + Payment of principal and interest + Taxes                       

 70000 + 3000 + 7000 + 4000 + 6000 = 90000

 

Cash budget for the month of July

 Opening balance of cash                                      Rs. 5,000

Add: receipts                                                            92000

Total amount of cash                                               97000

Less: payments                                                       (97000)

Closing balance of cash                                               0

Receipts = cash sales+ Previous month sales + Previous last 2 months sales + receives other income

              = 60000 + 14000 + 16000 +2000 = 92000

100000*60/100 = 60000

70000*20/100=14000

80000*20/100=16000

Payments = purchases + Rent + Wages and salaries 10% of the previous month’s sales + cash purchase of equipment

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                = 80000 + 3000 + 8000 + 6000= 97000 

Fall 2009 MGT201- Financial Management (Session - 3) Shared by Tahir Qazi Solved by vuZs Team Mehreen Humayun

FINALTERM  EXAMINATION

Fall 2009

MGT201- Financial Management (Session - 3)

Shared by Tahir Qazi

Solved by vuZs Team

Mehreen Humayun 

 www.vuzs.net

 

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.

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 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

   Ref:

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

 The coefficient of variation is the ratio of the standard deviation to the mean.

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.

  http://groups.google.com/group/vuZs

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.

 http://groups.google.com/group/vuZs

 

 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

 Ref:

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 (r_Dx_D + r_Ex_E + r_Px_P), x_D 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

  x_D= 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

       ► Net income – WACC – total firm’s market value

       ► 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