mgt201 solved midterm paper(1)

SPRING 2007             Marks: 40

MGT201 - FINANCIAL MANAGEMENT (Session - 3 )              

An initial investment of Rs. 200,000 is required to start the business; Rs. 9,000 per month is

expected to be earned for the first year and Rs. 20,000 would be earned every month in the second

year. How many months will it take to recover your initial investment?

►   14 months

►   16 months

►   18 months

►   20 months

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

“Don’t put all eggs in one basket” explains _____________ concept of finance.

►   Time value of money

►   Risk and Return

►   Discounting and NPV

►   Portfolio Diversification

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

_________ is equal to risk per unit return.

► Standard Deviation

►   Variance

►   Coefficient of Variation

►   None of the given options

Ref: http://74.125.153.132/search?q=cache:57jrkpN0nqkJ:www.pitt.edu/~schlinge/fall99/l9.doc+"is+equal+to+risk+per+unit+return"&cd=7&hl=en&ct=clnk&lr=lang_en

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

A bond that pays no annual interest but is sold at a discount below the par value is called:

►   An original maturity bond

►   A floating rate bond

►   A fixed maturity date bond

►   A zero coupon bond

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

Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing:

►   A zero growth common stock

►   A positive growth common stock

►   A short-term bond

►   An option

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

An unincorporated business owned by one individual is called _________.

►   Partnership

►   Company

►   Sole proprietorship

►   None of given options

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

_______ is a ratio of the present value of future cash flows to the initial investment.

►   Return on Investment

►   NPV

►   Payback Period

►   Profitability Index

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

_______ is the actual price at which share is bought or sold.

►   Fair price

►   Par value

►   Market price

►   Written down value

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

_____          ratio gives an indication how equity investors regard the company’s value.

►   Price / Earning

►   Market / Book

►   Earning / Share

►   Price / Cash flow

http://www.fiu.edu/~keysj/Financial_Statement_Analysis.doc

Question No: 10     ( Marks: 1 )       -   Please choose one

In the formula r_CE = (D1V1/Po) + g, what does (D1V1/Po) represent?

►   The expected dividend yield from a common stock

►   The expected price appreciation yield from a common stock

►   The dividend yield from a preferred stock

►   The interest payment from a bond

Question No: 11     ( Marks: 1 )       -   Please choose one

For a given nominal interest rate, the more numerous the compounding periods, the less theeffective annual interest rate.

►   True

►   False

Question No: 12     ( Marks: 1 )       -   Please choose one

The current ratio is never larger than the quick ratio.

►   True

►   False

if firm has more inventory it will be having large current ratio

Question No: 13     ( Marks: 1 )       -   Please choose one

When interest rates go up, the market price of a bond goes up.

►   True

►   False

Question No: 14     ( Marks: 1 )       -   Please choose one

Maximizing the price of a share of the firm's common stock is the equivalent of maximizing the

wealth of the firm's present owners.

►   True

►   False

Question No: 15     ( Marks: 1 )       -   Please choose one

You can reduce systematic risk by adding more common stocks to your portfolio.

►   True

►   False

Question No: 16     ( Marks: 3 )

Assume that one year from now; you will deposit Rs. 1,000 into a saving account that pays 8%interest. If the bank compounds interest semi-annually, how much will you have in your account four years from now?

FV = PV(1+i/m)^mn

FV = 1000 (1.04)^6   ( m*n = 2*3 as we are depositing after one year so total years will be 3)

FV = 1265

Question No: 17     ( Marks: 3 )

How much should you pay for the preferred stock of the PST Corporation, if it has $ 50 par value, pays $20 a share in annual dividends, and your required rate of return is 15%.

=20/.15 = 133.33

Question No: 18     ( Marks: 3 )

What is a portfolio? Why an investor should invest his/her funds in a portfolio rather than in thestocks of a single corporation.

Question No: 19     ( Marks: 3 )

What do you mean by yield to maturity (YTM) of a bond? Explain briefly.

Question No: 20     ( Marks: 3 )

Explain briefly the Constant Growth Dividends Model of common stocks valuation.

Question No: 21     ( Marks: 10 )

Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends areexpected to grow at a rate of 15% during the next 2 years, at 13% in the third year, and at aconstant rate of 6% thereafter.

Snyder’s last dividend was Rs. 1.15, and the required rate of return on the stock is 12%. Required:

I. Calculate the expected dividends of the firm in the first three years.

II.             Calculate the fair value per share of these stocks at the end of third year.