Thursday 7 April 2011

MGT201- Financial Management mid term papers solved


MIDTERM  EXAMINATION
Spring 2010
MGT201- Financial Management

     
Question No: 1    ( Marks: 1 )    - Please choose one
 Which type of responsibilities are primarily assigned to Controller and Treasurer respectively?
       Operational; financial management
       Financial management; accounting
       Accounting; financial management
       Financial management; operations
   
Question No: 2    ( Marks: 1 )    - Please choose one
 Which of the following is equal to the average tax rate?
                   Total tax liability divided by taxable income
        Rate that will be paid on the next dollar of taxable income
        Median marginal tax rate
        Percentage increase in taxable income from the previous period
   
Question No: 3    ( Marks: 1 )    - Please choose one
 In finance we refer to the market where existing securities are bought and sold as the __________ market.
       Money
       Capital
       Primary
       ► Secondary
   
Question No: 4    ( Marks: 1 )    - Please choose one
  Which of the following statement (in general) is correct?
       A low receivables turnover is desirable
       ► The lower the total debt-to-equity ratio, the lower the financial risk                                  for a firm
        An increase in net profit margin with no change in sales or assets means a weaker ROI
       The higher the tax rate for a firm, the lower the interest coverage ratio
   
Question No: 5    ( Marks: 1 )    - Please choose one
 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
   
Question No: 6    ( Marks: 1 )    - Please choose one
 A 5-year ordinary annuity has periodic cash flows of Rs.100 each year.  If the interest rate is 8 percent, the present value of this annuity is closest to which of the following?
       Rs.331.20
       Rs.399.30
       Rs.431.24
       Rs.486.65
   
Question No: 7    ( Marks: 1 )    - Please choose one
 In proper capital budgeting analysis we evaluate incremental __________ cash flows.

       Accounting
       Operating
       Before-tax
       Financing
   
Question No: 8    ( Marks: 1 )    - Please choose one
 Mortgage bonds are secured by real property whose value is generally _______ than that of the value of the bonds issue?.


       Higher
       Lower

       Equal

       Higher or lower

   
Question No: 9    ( Marks: 1 )    - Please choose one
 If a 7% coupon bond is trading for Rs. 975 it has a current yield of _________ percent.

     7.00
       6.53
       8.53
       7.18
   
Question No: 10    ( Marks: 1 )    - Please choose one
 If a company issues bonus shares, what will be its effect on the debt equity ratio?

       It will improve
       It will deteriorate
       No effect
       None of the given options
   
Question No: 11    ( Marks: 1 )    - Please choose one
 _________ is equal to (common shareholders' equity/common shares outstanding).

       Book value per share
       Liquidation value per share
       Market value per share
       None of the above
   
Question No: 12    ( Marks: 1 )    - Please choose one
 You wish to earn a return of 13% on each of two stocks, X and Y.  Stock X is expected to pay a dividend of Rs. 3 in the upcoming year while Stock Y is expected to pay a dividend of Rs. 4 in the upcoming year.  The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X:
           

       Will be greater than the intrinsic value of stock Y
       Will be the same as the intrinsic value of stock Y
       Will be less than the intrinsic value of stock Y
       Cannot be calculated without knowing the market rate of return
   
Question No: 13    ( Marks: 1 )    - Please choose one
 You wish to earn a return of 12% on each of two stocks, A and B.  Each of the stocks is expected to pay a dividend of Rs. 2 in the upcoming year.  The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A:


       Will be greater than the intrinsic value of stock B
       Will be the same as the intrinsic value of stock B
       Will be less than the intrinsic value of stock B
       None of the given options
   
Question No: 14    ( Marks: 1 )    - Please choose one
 How dividend yield on a stock is similar to the current yield on a bond?

        Both represent how much each security’s price will increase in a year
       Both represent the security’s annual income divided by its price
       Both are an accurate representation of the total annual return an investor can expect to earn by owning the security
       Both incorporate the par value in their calculation
   
Question No: 15    ( Marks: 1 )    - Please choose one
 Which of the following would tend to reduce a firm's P/E ratio?

       The firm significantly decreases financial leverage
       The firm increases return on equity for the long term
       The level of inflation is expected to increase to double-digit levels
       The rate of return on Treasury bills decreases
   
Question No: 16    ( Marks: 1 )    - Please choose one
 When Return is being estimated in % terms, the units of Standard Deviation will be mention in __________.

       Percentage (%)
       Times
       Number of days
       All of the given options
   
Question No: 17    ( Marks: 1 )    - Please choose one
 ___________ is one of the most common techniques of financial analysis.


       Analyzing the statement of equity
       Preparing the cash budget
       scrutinizing of Financial statement
       Forecasting the income statement
   
Question No: 18    ( Marks: 1 )    - Please choose one
 Which of the following formula is used to calculate the future value in simple interest?
       FV = PV + (PV× i × n)
       FV / (PV× i × n) = PV
       FV = PV - (PV× i × n)
       FV = PV × (PV× i × n)
   
Question No: 19    ( Marks: 1 )    - Please choose one
 Which of the following are the types of annuities?
       Perpetuity and discrete annuity
       Ordinary and discrete annuity
       Discrete and simple annuity
       Ordinary and annuity due
   
Question No: 20    ( Marks: 1 )    - Please choose one
 Value of annuity depends upon which of the following factors?
       Cash inflows & outflows
       Required rate of return & cash flows
       Constant cash flows & discount factor
       Constant cash flows & life of investment
   
Question No: 21    ( Marks: 1 )    - Please choose one
 Which of the following statement best describes capital budgeting?
       It’s a tool which is used to evaluate the projects and fixed assets of the company
       A technique used to assess the working capital requirement
       It will help the management to decide whether the new venture should be taken up or not.
       All of the given options are correct
   
Question No: 22    ( Marks: 1 )    - Please choose one
 IRR can be defined as:
       A discount rate that equates the PV of a project’s expected cash inflows to the PV of project’s cost
       Present value of the stream of net cash flows from project’s net investment
       It’s a cost & benefits ratio used to assess the validity of a project
       The time period required to receive back the initial investment.
   
Question No: 23    ( Marks: 1 )    - Please choose one
 If the life of a project is 6 years and the life of other project is 2 years then least common multiple will be:
       2 years
        6 years
       8 years
       12 years
   
Question No: 24    ( Marks: 1 )    - Please choose one
 Which of the following is the price which is mentioned on the bonds?
       Face value
       Salvage value
       Market value
       Book value
   
Question No: 25    ( Marks: 1 )    - Please choose one
 _________ is the value of bond, which we expect the bond to be.
       Fair value
       Book value
       Market value
       Maturity value
   
Question No: 26    ( Marks: 1 )    - Please choose one
 When you allocate capital, you choose investments that are more beneficial and less
       Diversified
       Risky
       Costly
       Value based
   
Question No: 27    ( Marks: 1 )    - Please choose one
 Which of the following is a major disadvantage of the corporate form of organization?
       Double taxation of dividends
       Inability of the firm to raise large sums of additional capital
       Limited liability of shareholders
       Limited life of the corporate form
   
Question No: 28    ( Marks: 1 )    - Please choose one
 Which of the following is NOT the form of cash flow generated by the investments of the shareholders?

       Income
       Capital loss
       Capital gain
          ► Operating income
   
Question No: 29    ( Marks: 3 )
 Define interest rate risk and investment risk.

Interest rate risk
Interest rate risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa. Interest rate risk is commonly measured by the bond's duration.

Investment Risk
            The uncertainties attached while making an investment that the investment may not yield the expected returns.
                                                            OR
Possibility of a reduction in value of an insurance instrument resulting from a decrease in the value of the assets incorporated in the investment portfolio underlying the insurance instrument. This reduction can also be effected by a change in the interest rate.

   
Question No: 30    ( Marks: 3 )
 What is risk averse assumption?
When we talk in terms of risk averse, we know that most investors are psychologically risk averse. In case of two investments offer with the same prospective return most investor would choose the one with the lower risk or standard deviation or spread or votality. In other words most of the investors are not major gamblers. Gamblers would choose that project which appeals to investors greed by offering upsite return of 30% plus 10% = 40%. The consequences on the share price, the higher the risk of share the higher its rate of return and the lower its market price, so any investor will choose surely with the low risk and he will take care of very closely risk averse assumption while finalizing any project.
   



Question No: 31    ( Marks: 5 )
 How negatively correlated investments behave in a market?

Solution:
If Ro = - 1.0, it means that Investments are Perfectly Negatively Correlated and the Returns (or Prices or Values) of the 2 Investments move in Exactly Opposite directions. In this Ideal Case, All Risk can be diversified away. For example, if the price of one stock increases by 50% then the price of another stock goes down by 50%.

   
Question No: 32    ( Marks: 5 )
 What types of shares are available in the market?

The following are the shares available normally in the market;

1. Preferred Stock:
These stocks have regular Constant / Fixed Future Dividends Certain for the Preferred Shareholders. Use old Perpetuity Cash Flow Pattern and formulas to estimate theoretical Fair Stock Price.
2. Common Stock:
Theses stocks have variable future dividends expected by the common shareholders. Use Zero
& Constant Growth Models to simplify future Dividend forecasts in estimated Theoretical Stock Price (or PV) equation. There dividend depend upon the income earned by the company and also upon the management decision regarding the dividend declaration.

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