virtual university of pakistan: 2011

MGT201 Quiz # 2

Solved by Azeem Ullah

Which group of ratios measures a firm's ability to meet short-term obligations?
Select correct option:

Liquidity ratios
Debt ratios
Coverage ratios
Profitability ratios

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?
Select correct option:

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

The value of direct claim security is derived from which of the following?
Select correct option:

Fundamental analysis
Underlying real asset
Supply and demand of securities in the market
All of the given options

The risk that covers events like unexpected changes in the economy refers to:
Select correct option:

Systematic risk
Unsystematic risk
Total risk
All of the above

Choose the correct statement regarding the calculations of NPV (Net Present Value).
Select correct option:

Exclude sunk costs and include opportunity costs and externalities
Exclude sunk costs and externalities and include opportunity costs
Include sunk costs, opportunity costs, and externalities
Exclude sunk costs and opportunity costs and include externalities

When the bond approaches its maturity, the market value of the bond approaches to which of the following?
Select correct option:

Intrinsic value
Book value
Par value
Historic cost

Choose among the followings, the correct statement regarding every journal entry.
Select correct option:

Sum of Debits = Sum of Credits
Sum of Debits >Sum of Credits
Sum of Debits < Sum of Credits
None of the given options

A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the future value of this annuity is closest to which of the following equations?
Select correct option:

(Rs.100)(FVIFA at 8% for 5 periods)
(Rs.100)(FVIFA at 8% for 4 periods)(1.08)
(Rs.100) (FVIFA at 8% for 5 periods)(1.08)
(Rs.100)(FVIFA at 8% for 4 periods) + Rs.100

Which of the following would be considered a cash-flow item from an "operating" activity?
Select correct option:

Cash outflow to the government for taxes
Cash outflow to shareholders as dividends
Cash inflow to the firm from selling new common equity shares
Cash outflow to purchase bonds issued by another company

What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream?
Select correct option:

Long-term debt
Preferred stock
Common stock
None of the given options

The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = ________.
Select correct option:

Net profit margin × Total asset turnover × Equity multiplier
Total asset turnover × Gross profit margin × Debt ratio
Total asset turnover × Net profit margin
Total asset turnover × Gross profit margin × Equity multiplier

Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows?
Select correct option:

Discount rate
Profitability index
Internal rate of return
Multiple Internal rate of return

Which of the following would NOT improve the current ratio?
Select correct option:

Borrow short term to finance additional fixed assets
Issue long-term debt to buy inventory

Sell common stock to reduce current liabilities
Sell fixed assets to reduce accounts payable

The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you deposit Rs.20, 000 you would expect to earn around________ in interest.
Select correct option:

Rs.840
Rs.858
Rs.1,032
Rs.1,121

Which of the following should be included while calculating the cash flows associated with a project?
Select correct option:
Cash flows at the time of investment
Cash flows during the life of project
Cash flows at the termination date
All of the given options

Which of the following is NOT the type of Hybrid organizations?
Select correct option:

S-Type Corporation
Limited Liability Partnership
Sole Proprietorship
Professional Corporation

When the bond approaches its maturity, the market value of the bond approaches to which of the following?
Select correct option:
Intrinsic value
Book value
Par value
Historic cost

Which of the following is the risk of investing funds in another country?
Select correct option:
Default risk premium
Sovereign Risk Premium
Market risk premium
Maturity risk premium

________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification.
Select correct option:

Systematic risk
Standard deviation
Unsystematic risk
Coefficient of variation

In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would ________.
Select correct option:
Fall
Rise
Remain unchanged
Incomplete information

______ are also known as Spontaneous Financing.
Select correct option:

Current liabilities
Current assets
Fixed assets
Long-term liabilities

A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow is known as:
Select correct option:

Payback period
Internal rate of return
Net present value
Profitability index

If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows?
Select correct option:

An increase
A decrease
No change
Incomplete information

Where there is single period capital rationing, what is the most sensible way of making investment decisions?
Select correct option:

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 coupon bonds are issued, they are typically sold at which of the following value?
Select correct option:

Above par value
Below par
At or near par value
At a value unrelated to par

At the termination of project, which of the following needs to be considered relating to project assets?
Select correct option:

Salvage value
Book value
Intrinsic value
Fair value

Which of the following is simply the weighted average of the possible returns, with the weights being the probabilities of occurrence?
Select correct option:

Probability distribution
Expected return
Standard deviation
Coefficient of variation

Which of the following portfolio statistics statements is correct?
Select correct option:

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 the percentage of interest charged at each compounding time?
Select correct option:

Nominal interest Rate
Effective interest Rate
Annual percentage rate
Periodic interest rate

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 yield to maturity on the two bonds change from 12% to 10%, __________.
Select correct option:

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
Both bonds will decrease in value, but bond A will decrease more than bond B
Both bonds will decrease in value, but bond B will decrease more than bond A

Which of the following refers to the cost of taking up one option while sacrificing the other?
Select correct option:

Opportunity cost
Operating cost
Sunk cost
Floatation cost

What is the present value of Rs.8,000 to be paid at the end of three years if interest rate is 11%?
Select correct option:

Rs.6,015
Rs.4,872
Rs.6,725
Rs.1,842

Which of the following is a capital budgeting technique that is NOT considered as discounted cash flow method?
Select correct option:

Payback period
Internal rate of return
Net present value
Profitability index

The statement of cash flows reports a firm's cash flows segregated into which of the following categorical order?
Select correct option:

Operating, investing, and financing
Investing, operating, and financing
Financing, operating and investing
Financing, investing, and operating

Who determine the market price of a share of common stock?
Select correct option:

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

Which of the following can not be the drawback of using payback period technique of capital budgeting?
Select correct option:

It does not account for time value of money
It neglects cash flows after the payback period
It does not use interest rate while making calculations
It is a tricky and complicated method

If Net Present Value technique is used, what is the minimum acceptance criterion for a project?
Select correct option:

NPV<0
NPV=0
NPV>0
NPV<=0

Which of the following is TRUE about IRR (Internal Rate of Return)?
Select correct option:

It changes for each and every year over the life of the project
It remains same for each and every year over the life of the project
It increases over the life of the project
It decreases over the life of the project

The return in excess to risk free rate that investors require for bearing the market risk is known as:
Select correct option:

Default risk premium
Sovereign Risk Premium
Market risk premium
Maturity risk premium

What should be the focal point of financial management in a firm?
Select correct option:

The number and types of products or services provided by the firm
The minimization of the amount of taxes paid by the firm
The creation of value for shareholders
The dollars profits earned by the firm

The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as ________.
Select correct option:

Probability distribution
Expected return
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 ________.
Select correct option:

Probability distribution
The expected return
The standard deviation
Coefficient of variation

Which of the following should be included while calculating the cash flows associated with a project?
Select correct option:

Cash flows at the time of investment
Cash flows during the life of project
Cash flows at the termination date
All of the given options

The value of the bond is NOT directly tied to the value of which of the following assets?
Select correct option:

Real assets of the business
Liquid assets of the business
Fixed assets of the business
Long term assets of the business

Which of the following would generally have unlimited liability?
Select correct option:

A limited partner in a partnership
A shareholder in a corporation
The owner of a sole proprietorship
A member in a limited liability company (LLC)

Which if the following refers to capital budgeting?
Select correct option:

Investment in long-term liabilities
Investment in fixed assets
Investment in current assets
Investment in short-term liabilities

When bonds are issued, under which of the following category the value of the bond appears?
Select correct option:

Equity
Fixed assets
Short term loan
Long term loan

To increase a given future value, the discount rate should be adjusted ________.
Select correct option:

Upward
Downward
First upward and then downward
None of the given options

Total portfolio risk is ________.
Select correct option:

Equal to systematic risk plus non-diversifiable risk
Equal to avoidable risk plus diversifiable risk
Equal to systematic risk plus unavoidable risk
Equal to systematic risk plus diversifiable risk

Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following?
Select correct option:

Life span of the project
Cost of the capital
Return on asset
None of the given options

Why companies invest in projects with negative NPV?
Select correct option:

Because there is hidden value in each project
Because there may be chance of rapid growth
Because they have invested a lot
All of the given options

If the probability is written on Y-axis and the rate of return is mentioned on the X-axis, Which kind of relationship it shows when there is higher the standard deviation the higher the risk.
Select correct option:

Indirect relationship
Inverse relationship
Direct relationship
No relationship

The objective of financial management is to maximize _______ wealth.
Select correct option:

Stakeholders
Shareholders
Bondholders
Directors

For Company A, plow back ratio is 30%. What will be its Pay-out ratio?
Select correct option:

3.33%
30%
31%
70%

The ________ the coefficient of variation ______ the relative risk of the investment.
Select correct option:

Larger; Larger
Larger; Smaller
Smaller; Larger
Smaller; Smaller

Which of the following are the approaches used to make two projects with different life spans comparable?
Select correct option:

Modified internal rate of return and equivalent annual annuity
Common life and equivalent annual annuity
Common life and modified internal rate of return
None of the given options

_______ is equal to (common shareholders' equity/common shares outstanding).
Select correct option:

Book value per share
Liquidation value per share
Market value per share
None of the above

Nominal Interest Rate is also known as:
Select correct option:

Effective interest Rate
Annual percentage rate
Periodic interest rate
Required interest rate

All of the following are the reasons for Uncertain NPV calculations EXCEPT:
Select correct option:

Estimated discount rate does not change with the markets
Estimated Life of project is doubtful
Annual after-tax cash flows are difficult to estimate
Timing of cash flows is not exactly predictable

Which of the following term may be defined as incidental cash flows that arise because of the effect of new project on the running business?
Select correct option:
Sunk cost
Opportunity cost
Externalities
Contingencies

The risk that covers events like unexpected changes in the economy refers to:
Select correct option:

Systematic risk
Unsystematic risk
Total risk
All of the above

What are the Indirect securities?
Select correct option:

The securities whose value depends on the cash flows generated by the underlying assets
The securities whose value depends on the value of the underlying assets
The securities that indirectly generate returns for its investors
All of the given options

What is yield to maturity on a bond?
Select correct option:

Below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium
The discount rate that will set the present value of the payments equal to the bond price
Based on the assumption that any payments received are reinvested at the coupon rate
None of the above

Which group of ratios shows the extent to which the firm is financed with debt?
Select correct option:

Liquidity ratios
Debt ratios
Coverage ratios
Profitability ratios

According to timing difference problem a good project might suffer from ___ IRR even though its NPV is ______.
Select correct option:

Higher; lower
Lower; Lower
Lower; higher
Higher; higher

Study the time line and accompanying 5-period cash-flow pattern below. 0 1 2 3 4 5 6 Time line |--------|--------|--------|--------|--------|--------| Rs.10 Rs.10 Rs.10 Rs.10 Rs.10 Cash flows ¦ ¦ A B The present value of the 5-period annuity shown above as of Point A is the present value of a 5-period ____________ , whereas the future value of the same annuity as of Point B is the future value of a 5-period ____________ .
Select correct option:

Ordinary annuity; ordinary annuity
Ordinary annuity; annuity due
Annuity due; annuity due
Annuity due; ordinary annuity

Why we need Capital rationing?
Select correct option:

Because, there are not enough positive NPV projects
Because, companies do not always have access to all of the funds they could make use of
Because, managers find it difficult to decide how to fund projects
Because, banks require very high returns on projects

Which of the following is NOT a cash outflow for the firm?
Select correct option:

Depreciation
Dividends
Interest
Taxes

Which type of responsibilities are primarily assigned to Controller and Treasurer respectively?
Select correct option:

Operational; financial management
Financial management; accounting
Accounting; financial management
Financial management; operations

Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows?
Select correct option:

Cash flow diagram
Cash budget
Cash flow statement
None of the given options

Which of the following is a limitation of a Corporation?
Select correct option:

Easy to set up
Double-taxation
Inexpensive to maintain
Unlimited liability

What is potentially the biggest advantage of a small partnership over a sole proprietorship?
Select correct option:

Unlimited liability
Single tax filing
Difficult ownership resale
Raising capital

Which of the following is correct, if a firm has a required rate of return equal to the ROE?
Select correct option:

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.
The amount of earnings retained by the firm does not affect market price or the P/E.
None of the given options

For most firms, P/E ratios and risk_______.
Select correct option:

Will be directly related
Will have an inverse relationship
Will be unrelated
None of the above.

What is the long-run objective of financial management?
Select correct option:

Maximize earnings per share
Maximize the value of the firm's common stock
Maximize return on investment
Maximize market share

When a bond will sell at a discount?
Select correct option:

The coupon rate is greater than the current yield and the current yield is greater than yield to maturity
The coupon rate is greater than yield to maturity
The coupon rate is less than the current yield and the current yield is greater than the yield to maturity
The coupon rate is less than the current yield and the current yield is less than yield to maturity

Which of the following is not the present value of the bond?
Select correct option:

Intrinsic value
Market price
Fair price
Theoretical price

Which of the following are known as Discretionary Financing?
Select correct option:

Current liabilities
Current assets
Fixed assets
Long-term liabilities

Which of the following is NOT true regarding an ordinary annuity?
Select correct option:

It is a series of equal cash flows
Cash flows occur for a specific time period
Payments are made at the start of each period
It is also known as deferred annuity

What is the present value of Rs. 3,500,000 to be paid at the end of 50 years if the correct risk adjusted interest rate is 18%?
Select correct option:

Rs.105,000
Rs.1,500,000
Rs.3975,000
Rs. 350,000

Which of the following is NOT the step of Percentage of sales to be used in Financial Forecasting?
Select correct option:

Estimate year-by-year Sales Revenue and Expenses
Estimate Levels of Investment Needs required to Meet Estimated Sales
Estimate the Financing Needs
Estimate the retained earnings

Which of the following is FALSE about Perpetuity?
Select correct option:

It is a series of cash flows
Cash flows occur for a specific time period
Its cash flows are identical
None of the given options

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?
Select correct option:

Rs.154.73
Rs.147.36
Rs.109.39
Rs.104.72

Which of the following techniques would be used for a project that has non–normal cash flows?
Select correct option:

Internal rate of return
Multiple internal rate of return
Modified internal rate of return
Net present value

Which of the following refers to time value of money concept?
Select correct option:

A rupee in one’s hand at present is worth less than the rupee that one is going to receive tomorrow
A rupee in one’s hand at present is worth more than the rupee that one is going to receive tomorrow
A rupee in one’s hand at present is worth same as the rupee that one is going to receive tomorrow
All of the given options

______ is paid by companies with lower grade bonds like CC or C ratings.
Select correct option:

Default risk premium
Sovereign Risk Premium
Market risk premium
Maturity risk premium

When Investors want high plowback ratios?
Select correct option:

Whenever ROE > k
Whenever k > ROE
Only when they are in low tax brackets
Whenever bank interest rates are high

A statistical measure of the variability of a distribution around its mean is referred to as ______.
Select correct option:

Probability distribution
Expected return
Standard deviation
Coefficient of variation

Which of the following affects price of the bond?
Select correct option:

Market interest rate
Required rate of return
Interest rate risk
All of the given options

Coefficient of variation is NOT the measure of ______.
Select correct option:

Risk
Probability
Relative dispersion
Risk per unit of expected return

Which of the following equation is NOT correct?
Select correct option:

Gross Revenue – Admin & Operating Expenses = Operating Revenue
Other Expenses + Other Revenue = EBIT
EBIT – Financial Charges & Interest = EBT
Net Income – Dividends = Retained Earning

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _______.
Select correct option:

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

All of the following are the financial statements used for the purpose of reporting and analysis EXCEPT:
Select correct option:

Balance Sheet
Income Statement
Cash budget
Statement of Retained Earnings

interest rate is different from nominal rate of interest because:
Select correct option:

Nominal interest rate ignores compounding
Nominal interest rate includes frequency of compounding
Periodic interest rate ignores the effect of inflation
All of the given options

Which of the following is the general assumption of Percent of Sales Forecasting?
Select correct option:

Current Assets usually grow in proportion to Revenues
Current Assets usually grow in proportion to Expenses
Current Assets usually grow in proportion to Liabilities
Current Assets usually grow in proportion to Sales

What is difference between shares and bonds?
Select correct option:

Bonds are representing ownership whereas shares are not
Shares are representing ownership whereas bonds are not
Shares and bonds both represent equity
Shares and bond both represent liabilities

MIRR (discount rate) equates which of the following?
Select correct option:
Future value of cash inflows to the present value of cash outflows
Future value of cash flows to the present value of cash flows
Future value of all cash flows to zero

Which of the following is/are the component(s) of working capital management?
Select correct option:

Current assets
Fixed assets
Fixed assets and long-term liabilities
Current assets and current liabilities

Mutually Exclusive projects refer to what?
Select correct option:

One can invest in one of the projects and not in both
One can invest in both projects
Cash flows of the two projects are not linked to each other
Cash flows of the two projects are linked to each other

In the dividend discount model, _____ which of the following are not incorporated into the discount rate?
Select correct option:

Real risk-free rate
Risk premium for stocks
Return on assets
Expected inflation rate

Which of the following would be considered a cash-flow item from an "investing" activity?
Select correct option:

Cash outflow to the government for taxes
Cash outflow to shareholders as dividends
Cash outflow to lenders as interest
Cash outflow to purchase bonds issued by another company

How "Shareholder wealth" is represented in a firm?
Select correct option:

The number of people employed in the firm
The book value of the firm's assets less the book value of its liabilities
The market price per share of the firm's common stock
The amount of salary paid to its employees

The conventional measure of dispersion is _____.
Select correct option:

A probability distribution
The expected return
The standard deviation
Coefficient of variation

Which of the following includes the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization?
Select correct option:

Financial accounting
Financial management
Financial engineering
Financial budgeting

Which of the following refers to bringing the future cash flow to the present time?
Select correct option:

Net present value
Discounting
Opportunity cost
Internal rate of return

An investment proposal should be judged in whether or not it provides:
Select correct option:

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

Which of the following market in finance is referred to the market for short-term government and corporate debt securities?
Select correct option:

Money market
Capital market
Primary market

Secondary market

What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue?
Select correct option:

Indenture
Debenture
Bond
Bond trustee

Which of the following is NOT a type of bond?
Select correct option:

Tertiary bond
Bearer bond
Fixed income bond
Euro bond

Which of the following is NOT true regarding the capital market?
Select correct option:

Where long-term funds can be raised
Money is invested for periods longer than a year
Where TFCs and NIT are exchanged and traded
Where overnight lending & borrowing takes place

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:
Select correct option:

Pay back period
Internal rate of return
Net present value
Profitability index

Which of the following equations is the correct one?
Select correct option:

Net incremental after tax cash flows = net operating income + depreciation +Tax savings from depreciation + net working capital + other cash flow
Net incremental after tax cash flows = net operating income - depreciation +Tax savings from depreciation + net working capital + other cash flow
Net incremental after tax cash flows = net operating income + depreciation -Tax savings from depreciation - net working capital + other cash flow
Net incremental after tax cash flows = net operating income + depreciation +Tax savings from depreciation + net working capital - other cash flow

Which one of the following selects the combination of investment proposals that will provide the greatest increase in the value of the firm within the budget ceiling constraint?
Select correct option:

Cash budgeting
Capital budgeting
Capital rationing
Capital expenditure

What is the present value of Rs.1,000 to be paid at the end of 5 years if the correct risk adjusted interest rate is 8%?
Select correct option:

Rs.714
Rs.1,462
Rs.322.69
Rs.401.98

Which of the following is NOT true regarding an annuity due?
Select correct option:

It is a series of equal cash flows
It is also known as deferred annuity
Cash flows occur for a specific time period
Payments are made at the start of each period

Which of the following statements is TRUE regarding Permanent Accounts?
Select correct option:

Accounts that are found on Income Statement
Accounts that are found on Statement of Retained Earnings
Accounts that are found on Balance Sheet
All of the given options

Which of the following is the main objective of ‘Economics’?
Select correct option:

Profit maximization
Maximization of shareholders wealth
Collection of accurate, systematic, and timely financial data
All of the given options

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