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1. The difference between the return on a risky investment and that on a risk-free investment.

Risk Return Risk Premium Risk Factor None of the above

2. A group of assets such as stocks and bonds held by an investor.

Portfolio Capital Structure Budget None of the above

3. If the variance or standard deviation is larger then the spread in returns will be:

Less More Same None of the Above

4. The following risk is entirely wiped out by Diversification.

Systematic Risk Unsystematic Risk Portfolio Risk Total Risk

5. The objective for using the concept of Diversification is to :

Minimize the Risk Maximize the return A & B None of the Above

6. While studying the relationship in risk and return, It is commonly known that:

Higher the risk, lower the return Lower the risk, higher the return Higher the risk, higher the return None of the above

7. This type of risk affects almost all types of assets.

Systematic Risk Unsystematic Risk Total Risk Portfolio Risk

MCQ # 08 – 10 are based on the following data:

Suppose you bought 1,500 shares of a corporation at Rs. 25 each. After a year, you received Rs. 3000 (Rs. 2 per share) in dividends. At the end of year the stock sells for Rs. 30 each. If you sell the stock at the end of the year, your total cash inflow will be Rs. 48,000 (1500 shares @ 30 each = Rs. 45000 & Dividend = 3000).

8. According to the given data, the Capital Gain will be:

10,500 7,500 10,000 7,000

9. According to the given data, the Dividend yield will be:

8.50 % 6.25% 8.00% 6.67%

10. According to the given data, Total Percentage Returns will be:

20% 28% 32% 35%

1.      Which one of the given options involves the sale of new securities from the issuing company to general public?

A.    Secondary market

B.      Primary market

C.     Capital market

D.    Money market

2.      In financial statement analysis, shareholders focus will be on the:

A.    Liquidity of the firm

B.      Long term cash flow of the firm

C.     Profitability and long term health of the firm

D.    Return on investment

3.      The statement of cash flows helps users to assess and identify all of the following except:

A.    The impact of buying and selling fixed assets.

B.      The company's ability to pay debts, interest and dividends.

C.     A company's need for external financing.

D.    The company's reliance on capital leases.

                                                                                                                                      

4.      Suppose Younas Corporation has balance of merchandise of 5000 units. It wants to sell 2000 units at 90% of its cost on cash. What would be the affect of this transaction on the current ratio?

A.    Fall

B.      Rise

C.     Remain unchanged

D.    None of the given option

5.      If the interest rate is 18% compounded quarterly, what would be the 8-year discount factor?

A.    1.42215

B.      2.75886

C.     3.75886

D.    4.08998

6.      You have a cash of Rs.150, 000. If a bank offers four different compounding methods for interest, which method would you choose to maximize the value of your Rs.150, 000?

A.    Compounded daily

B.      Compounded quarterly

C.     Compounded  semiannually

D.    Compounded  annually

7.      Ali Corporation has a cash coverage ratio of 6.5 times. Whereas its earning before interest and tax is Rs.750 million and interest on long term loan is Rs.160 million. What would be the annual depreciation for the current year?

A.    a.Rs. 200 million

B.      b.Rs.240 million

C.     c.Rs.275 million

D.    d.Rs.290 million

8.      Suppose RZ Corporation sales for the year are Rs.150 million. Out of this 20% of the sales are on cash basis while remaining sales are on credit basis. The past experience revealed that the average collection period is 45 days. What would be the receivable turnover ratio?

A.    6.12 times         

B.      7.11 times

C.     8.11 times

D.    9.11 times

9.      A bank offers 20% compounded monthly. What would be the effective annual rates of return?

A.    20.00%

B.      20.50%

C.     21.00%

D.    21.99%

10.  Nz Corporation reported earning before interest and taxes of Rs.500, 000 for the current year. It has taken a long term loan of Rs.2 million from a local bank @ 10% interest. The tax is charged at the rate of 32%.What will be the saving in taxes due to presence of debt financing in the capital structure of the firm? http://www.vustudents.net

A.    Rs.60, 000

B.      Rs.64, 000        

C.     Rs.72, 000

D.    Rs.74, 000

1. Ntp Corporation has decided to pay Rs.16 per share dividend every year. If this policy is to continue indefinitely, then the value of a share of stock would be --------------, if the required rate of return is 25%?

a. Rs.60

b. Rs.64

c. Rs.68

d. Rs.74

2. MT Corporation has a previous year dividend of Rs.14 per share where as investors require a 17% return on the similar stocks .The Company’s dividend grows by 7%.The price per share in this case would be______________.

a. Rs.149.8

b. Rs.184.9

c. Rs.198.4

d. Rs.229.9

3. RTU Corporation stock is selling for Rs.150 per share. The next dividend is Rs.35 per share and it is expected to grow 14% more or less indefinitely. What would be the return does this stock offer you if this is correct?

a.  17%

b.  27%

c.  37%

d.  47%

4. Suppose a Corporation has 3 shareholders; Mr.Salman with 25 shares, Mr. Kareem with 35 shares, and Mr.Amjad with 40 shares. Each wants to be elected as one of the six directors. According to cumulative voting rule Mr.Kareem would cast

a. 150 votes

b. 210 votes

c. 240 votes

d. 300 votes

5. ________ is the market in which already issued securities are traded among investors.

a. Primary market

b. Secondary market

c. Financial market

d. Capital market

6. Suppose Mehran Corporation is dealing in the Automobile industry. Based on projected costs and sales, it expects that the cash flows over the 3-year life of the project will be Rs.5, 000,000 in first year, Rs.7, 000,000 in the next year and Rs.8, 000,000 in the last year. This project would cost about Rs. 10,000,000.The net present value of the project would be ________, if discount rate is assumed to be 25%.  http://www.vustudents.net

a. Rs.2, 576, 000

b. Rs.3, 576, 000

c. Rs.1, 576, 000

d. Rs.4, 576, 000

7. The Projected cash flows from a proposed investment are

    Year                                Cash Flows

01                                                                     Rs.500,000

02                                                                     Rs.800,000

03                                                                     Rs.600,000

The projects costs are Rs.1, 500,000. The payback period for this investment would be ______________.

a. 1.50 years      

b. 2.00 years

c. 2.33 years

d. 3.00 years

8. Suppose Z Corporation, has the present value of its future cash flows is Rs.450, 000 and the project has a cost of Rs.300, 000, then the profitability index would be ________________.

a. 0.667

b. 1

c. 1.25

d. 1.50

9. Fee paid to the consultant for evaluating the project is an example of ______________.

a. Opportunity cost

b. Sunk cost

c. Decremental cost

d. None of the given option

10. If the sales of the AB corporation is Rs.20, 000,000 where as its cost is

Rs.12, 000,000 during the same period. Assume the annual tax rate is 37%.Its annual depreciation is Rs.5, 000, 000.The operating cash flow of the organization would be _______________.

a. Rs. 3,810,000

b. Rs. 4,810,000

c. Rs. 5,190,000

d. Rs. 6,890,000

Select the correct option form the following choices:

1. Treasury notes and bonds are:
1. Default free
2. Taxable
3. Highly liquid
4. All of the given options

2. The difference between an investment’s market value and its cost is called the __________ of the investment.
1. Net present value
2. Economic value
3. Book value
4. Future value

3. When real rate is high, all the interest rates tend to be _______.
1. Higher
2. Lower
3. Constant
4. None of the given options

4. _______ is a grant of authority by a shareholder to someone else to vote the shareholder’s share.
1. Cumulative voting
2. Straight voting
3. Proxy voting
4. None of the given options

5. The payment of the dividend is at the discretion of the:
1. Chairman
2. Board of directors
3. Shareholders
4. Stakeholders

6. Based on ________ the investment is accepted if the _____ exceeds the required return. It should be rejected otherwise.
1. Profitability index
2. Payback period
3. Internal rate of return
4. Net present value

7. If two investments are mutually exclusive, then taking one of them means that:
1. We cannot take the other one
2. The other is pending for the next period
3. The projects are independent
4. None of the given options

8. Profitability index (PI) rule is to take an investment, if the index exceeds______:
1. -1
2. 0
3. 1
4. All of the given options

9. Average Accounting Return is a measure of accounting profit relative to:
1. Book value
2. Intrinsic value
3. Cost
4. Market value

10. It is not unusual for a project to have side or spillover effects both good and bad. This phenomenon is called:
1. Erosion
2. Piracy
3. Cannibalism
4. All of the given options

                                                                                  

1.  The average time between purchasing or acquiring inventory and receiving cash proceeds from its sale is called --------------.

a)      Operating Cycle

b)      Cash Cycle

c)       Receivable period

d)      Inventory period

2. Which of the following does not affect cash cycle of a company?

a)      Inventory period

b)      Accounts receivable period

c)       Accounts payable turnover

d)      None of the given option

3. Mr.Munir purchased goods of Rs.100,000 on June01, 2006 from Zeeshan and brothers on credit terms of 3/10, net 30. On June 09 Mr. Munir decided to make payment to Zeeshan and brothers. How much he would pay to Zeeshan and brothers.

a)      100,000

b)      97,000

c)       103,000

d)      50,000

4. A firm has cash cycle of 100 days. It has an inventory turnover of 5 and receivable turnover of 2. What would be its accounts payable turn over?

a)      3.347 approximately

b)      5.347 approximately

c)       2.347 approximately

d)      6.253 approximately

5. During the financial year 2005-2006 ended on June 30, the cash cycle of Climax company was 150 days, and its payable turnover was 5. What was the operating cycle of the company during 2005-2006?

a)      234 days

b)      223 days

c)       245 days

d)      230 days

6. Which of the following is the cheapest source of financing available to a firm?

a)      Bank loan

b)      Commercial papers

c)       Trade credit

d)      None of the given options.

7. Which of the following illustrates the use of a hedging (or matching) approach to financing?

a)      Short-term assets financed with long-term liabilities.

b)      Permanent working capital financed with long-term liabilities.

c)       Short-term assets financed with equity.

d)      All assets financed with a 50 percent equity, 50 percent long-term debt mixture

8. --------------- is an incentive offered by a seller to encourage a buyer to pay within a stipulated time. http://www.vustudents.net

a)      Cash discount

b)      Quantity discount

c)       Float discount

d)      All of the given options

9. If a firm has a net float less than zero, then which of the following statements is true about the firm.

a)      The firm’s disbursement float is less than its collection float.

b)      The firm’s collection float is equal to zero.

c)       The firm’s collection float is less than its disbursement float.

d)      None of the given options.

10. Financing a long-lived asset with short-term financing would be

a)      An example of "moderate risk -- moderate (potential) profitability" asset financing.

b)      An example of "low risk -- low (potential) profitability" asset financing.

c)       An example of "high risk -- high (potential) profitability" asset financing.

d)      An example of the "hedging approach" to financing

Note: Correct options have been highlighted.

1. Suppose Flatiron Corporation has a debt-to- equity ratio of 2/3. You are analyzing the capital structure of this Corporation. Base on debt-to- equity ratio of the corporation, how much portion of the capital structure is financed through equity.

a)      66.67%

b)      33.34%

c)       0%

d)      60%

2. Suppose the common stocks of Bonanza Corporation have book value of $29 per share. The market price of these common stocks is $69.50 per share. The corporation paid $5.396 per share in dividend last year and analysts estimate that this dividend will grow at a rate of 6% through the next three years.  Using the dividend growth model, estimated cost of equity of  Bonanza corporation would be

a)      11.15%

b)      16.13%

c)       15.80%

d)      13.14% 

3. Which statement is true about the relationship between weighted average cost of capital and value of a firm in the eyes of investors?

a)      They have a direct relationship

b)      They have an indirect relationship

c)       They have spontaneous relationship

d)      None of the given options

4. ---------------- refers to the extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure.

a)      Financial risk

b)      Portfolio risk

c)       Operating risk

d)      Market risk

5. Let’s imagine that Sony Corporation currently uses no-debt financing, it has decided to go for capital restructuring. As result it would incorporate $ 1 billion of debt at 6.6% p.a in its capital structure. Sony Corporation has 30 million Shares outstanding and the price per share is $ 125. If the restructuring is expected to increase EPS, what would be the minimum level of EBIT that Sony management must be expecting?

a)      $202,200,000

b)      $247,500,000

c)       $283,500,000

d)      $321,250,000

6. A corporation has WACC of 13.5 %( excluding taxes). The current borrowing rate in the market is 9.25%.If the corporation has a target capital structure of 65% equity (there is no preferred stock in the capital structure of the corporation) and 35% debt, what would be the cost of equity of this corporation?

a)      13.5%

b)      17.75%

c)       15.79%

d)      17.13%    

7. Suppose Dux Corporation has current assets of $44 Million. Cash is 25% of the total current assets. After one year the cash item increase by 12%.This increase in cash item is a

a)      Source of cash

b)      Use of cash

c)       Neither of the source of cash nor a use of cash

d)      None  of  the given option

8. During 2005 a merchandize sales company had cash sales of $56.25 million, which were 15% of the total sales. During this period accounts receivables of the company were13% of total sales. What was the average collection period of the company during 2005?   

       

a)      62 days

b)      18 days

c)       56 days

d)      19 days

9. Suppose that Pearson Corporation has a capital structure which consists of both equity and debt. It had issued two million worth of bonds at 6.5 % p.a. The tax rate is 40%. Its EBIT is one million. The  present value of tax shield for Pearson corporation would be

a)      Rs.1,000,000 

b)      Rs.1,200,000

c)        Rs800,000

d)      Rs.1,400,000         

10. The use of Personal borrowing to alter the degree of financial leverage is called _________________.

a)      Homemade leverage

b)      Financial    leverage

c)       Operating leverage

d)      None of the given option

Choose the Most Appropriate Answer among the given choices.

1. _______________ refers to the most valuable alternative that is given up if a particular investment is undertaken.

Sunk cost Opportunity cost Financing cost All of the given options

2. SNT company paid a dividend of Rs. 5 per share last year. The stock’s current price is Rs. 50 per share. Assuming that the dividends are estimated to grow steadily at 8% per year, the cost of the capital for SNT company will be?

13.07 % 15.67 % 16.00 % 18.80 %

3. ________________ is the group of assets such as stocks and bonds held by an investor.

E.     Portfolio Diversification Stock Bundle None of the given options

4. Which of the following measures the present value of an investment per dollar invested?

Net Present Value (NPV) Profitability Index (PI) Average Accounting Return (AAR) Internal Rate of Return (IRR)

5. If we have Rs. 150 in asset A and Rs. 250 in asset B, then the percentage of asset B in the portfolio will be:

37.5 % 47.5 % 62.5 % 72.5 %

6. A risk that influences a large number of assets is known as:

Systematic Risk Market Risk Non-diversifiable  Risk All of the given options

7. Which of the following risk can be eliminated by diversification?

Systematic Risk Unsystematic Risk A & B None of the given options

8. Suppose the initial investment for a project is Rs. 160,000 and the cash flows are Rs. 40,000 in the first year and Rs. 90,000 in the second and Rs. 50,000 in the third. The project will have a payback period of:

2.6 Years 3.1 Years 3.6 Years 4.1 Years

9. A model which makes an assumption about the future growth of dividends is known as:

Dividend Price Model Dividend Growth Model Dividend Policy Model All of the given options

10. Which of the following is not a quality of IRR ?

Most widely used Ideal to rank the mutually exclusive investments Easily communicated and understood Can be estimated even without knowing the discount rate

Most Appropriate Answer among the given choices has been selected..

1. _________ is a special case of annuity, where the stream of cash flows continues forever.

Ordinary Annuity Perpetuity Dividend Interest

2. If a bank offers 15% annual rate of return compounded quarterly, what would be the Effective Annual Rate (EAR)?

15.00 % 15.34 % 15.87 % 16.42 %

3. A bond represents a _______________ made by an investor to the ________________.

loan; receiver dividend; issuer dividend, receiver loan; issuer

4. When the interest rates fall, the bond is worth ______________.

More Less Same All of the given options.

5. If SNT Corporation pays out 30% of net income to its shareholders as dividends. What would be the Retention Ratio for SNT Corporation? http://www.vustudents.net

30 % 50 % 70 % 90 %

6. If sales are to grow at a rate higher than the sustainable growth rate, the firm must:

Increase Profit Margin Increase Total Assets Turnover Sell new shares All of the given options.

7. ____________ is the current value of the future cash flow discounted at an appropriate discount rate.

Present Value Future Value Capital Gain Net Profit

8. SUMI Inc. has outstanding bonds having a face value of Rs. 500. The promised annual coupon is Rs. 50. The bonds mature in 30 years and the market’s required rate on similar bonds is 12% p. a. What would be the present value of each bond?

Rs. 319.45 Rs. 390.75 Rs. 419.45 Rs. 463.75

9. The sensitivity of Interest Rate Risk of a bond directly depends upon:

Time to maturity Coupon rate A and B None of the given options

10. An insurance company offers to pay you Rs. 1000 per year if you pay Rs. 6,710 up front. What would be the rate applicable in this 10-year annuity?

8 % 10 % 12 % 14 %

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ACC501 Current 11 Solved Finalterm Papers and Important MCQS

Solved…

By

EXAMINATION

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

The accounting definition of income is:

►Income = Current Assets      -Current Liabilities

►Income = Fixed Assets -       Current Assets

►Income  =  Revenues -  Current  Liabilities

►Income = Revenues   - Expenses pg 17

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

What would be the capital spending for an organization who has purchased fixed assets of Rs. 200,000 and sold fixed assets of Rs. 45,000?

►Rs. 245,000

►Rs. 200,000

►Rs.1 55 , 0 0 0

►Rs. 45,000

200000-

45000=155000

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

Selected  information from SNT Company's accounting records  is  as  follows:
     o Cash paid to retired common shares Rs. 15,000

o Proceeds from issuance of preferred shares Rs. 20,000 o Cash dividends paid Rs. 8,000

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o Proceeds from sale of equipment Rs. 25,000

On its cash flow statement for the year, SNT Company should report net cash flow from financing activities as:

►Rs. 3,000 net cash inflow
►Rs. 3,000 net cash outflow

►Rs. 8,000 net cash inflow

►Rs. 8,000 net cash inflow

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

SNT Company has a current ratio of 3:2. Current Liabilities reported by the company are Rs. 30,000 . What would be the Net Working Capital for the
company?

►Rs. 45,000

►Rs. 15,000

► ( R s . 4 5  ,0 0 0 )
►( Rs. 15,000)

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

Which of the following would not improve the current ratio?

►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

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

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Which of the following are incorporated into the calculation of the Du  -Pont Identity?

I. Return on assets II.
Equity Multiplier

III. Total Assets Turnover
IV. Profit Margin

►I, II, and III only
►I, III, and IV only

► II, III and IV only pg 45

►I, II, III, a n d IV

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

The concepts of present value and future value are:

►Directly related to each other

►Not related to each other

►Proportionately related to each other

►Inversely related to each other

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

Which of the following is a special case of annuity, where the stream of cash flows continues forever?

►Special Annuity

►Ordinary Annuity

►Annuity Due

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►Perpetuity

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

Which of the following is an unsecured bond for which no specific pledge of property is made?

►Mortgage

►Debenture
►Collateral

►Note Payable

Debenture is an unsecured bond
for which no specific pledge of
property is made

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

Which of the following type of return refers to the percentage change in the amount of money you have?

►Nominal return

►Real return

►Inflation return

►None of the given option

Your nominal return is the

percentage change in the amount
of money you have.

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

When real rate is _____, all interest rates will tend to be _____.

►Low; higher

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►High; lower

►High; higher

►None of the given options

When real rate is high, all interest
rates will tend to be higher and
vice versa.

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

Which of the following is the extra yield that investors dem and on a taxable bond as a compensation for the unfavorable tax treatment?

►Interest rate risk premium

►Inflation risk premium
►Default risk premium

►Taxability premium

Investors demand extra yield on a taxable bond as a compensation for the unfavorable tax
                   treatment, known as

taxability premium

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

In which type of the market, previously issued securities are traded among investors ?

►Primary Market

►Secondary Market  pg 100

►Tertiary Market

►None of the given options

Secondary Market

The market in which previously
issued securities are traded among

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investors

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

Place the following items in the proper order of completion regarding the capital budgeting process.

(I) Perform a post-audit for completed projects; (II) Generate project proposals;

(III) Estimate appropriate cash flows; (IV)
Select value-maximizing projects; (V)
Evaluate projects.

►II, V, III, IV, and I
►III, II, V, IV, and I

►II, III, V, IV, and I

►II, III, IV, V, and I

http://wps.pearsoned.co
.uk/wps/grader

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

An investment w ill be ___________ if the IRR doesn’t exceed s the required return and ___________ otherwise.

►Accepted; rejected
►Accepted; accepted
►Rejected; rejected

►Rejected; accepted  pg 109

Question No: 16   ( Marks: 1 ) - Please choose one

IRR and NPV rules always lead to identical decisions as long as :

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►Cash flows are conventional

►Cash flows are independent

►Cash flows are both conventional and independent

►None of the given options

Question No: 17                 ( Marks: 1 ) - Please choose one

A project whose acceptance does not prevent or require the acceptance of one or more alternative projects is referred to as :

►A mutually exclusive project

►An independent project
►A dependent project
►A contingent project

Question No: 18                 ( Marks: 1 ) - Please choose one

Finding Net Present Value comes under which type of capital budgeting criteria
?

►Discounted Cash Flow Criteria   pg 118

►Accounting Criteria

►Payback Criteria

►None of the given options

Question No: 19                 ( Marks: 1 ) - Please choose one

___________ Cost is an outlay that has already occurred and hence is not affected by

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the decision under consideration.

►Sunk

►Opportunity
►Fixed

►Variable

Question No: 20 ( Marks: 1 ) - Please choose one

Which of the following is the overall return the firm must earn on its existing assets to maintain the value of the stock ?

►WACC (Weighted Average Cost of Capital)

►AAR (Average Accounting Return)
►IRR (Internal Rate of Return)

►MIRR (Modified Internal Rate of Return)

Question No: 21                 ( Marks: 1 ) - Please choose one

Mr. A, as a financial consultant, has prepared a feasibility report of a project for XYZ Company that the company is planning to undertake. He has suggested that the project is feasible. The consultancy fee paid to Mr. A will be considered as:

►Sunk cost

►Opportunity cost

►Both sunk cost and opportunity cost
►Neither sunk cost nor opportunity cost

Question No: 22                 ( Marks: 1 ) - Please choose one

The current price of SNT stock is Rs. 50. Dividends are expected to grow at 7 percent indefinitely and the most current dividend was Rs. 1.00. What is the

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required rate of return on SNT stock?

►9.00 percent

►9.14 percent

►9.33 percent

►10.65 percent

Question No: 23                 ( Marks: 1 ) - Please choose one

Which of the following are rights of an owner of a share of common stock for firm which has no preferred share?

►The right to vote for directors

►The right to share proportionately in dividend paid

►The right to vote on stockholder matters of great importance ►All of the given options

Question No: 24                 ( Marks: 1 ) - Please choose one

Which one of the following typically applies to preferred stock but not to common stock?

►Dividend yield

►Cumulative dividends

►Voting rights

►Tax deductible dividends

Question No: 25                 ( Marks: 1 ) - Please choose one

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You must own which of the following to vote against a merger proposal from another corporation?

►Preferred share
►A debenture

►Common stock

►Cumulative dividend stock

Question No: 26                 ( Marks: 1 ) - Please choose one

Which of the following strategy belongs to flexible policy regarding size of investments in current assets ?

►To maintain a high ratio of current assets to sales

►To maintain a low ratio of current assets to sales

►To  maintain less  short-term  debt  and  more  long-term  debt ►To maintain more short-term debt and less long-term debt

Size of investments in current assets

•Flexible policy

•maintain a high ratio of current assets to sales

•Restrictive policy

•maintain a  low  ratio  of current  assets to sales Financing of current assets

•Flexible policy

•less short-term debt and more long-term debt

•Restrictive policy

•more  short-term  debt  and  less  long-term  debt
                   If policies

Question No: 27                 ( Marks: 1 ) - Please choose one

Which of the following strategy belongs to flexible policy regarding financing of

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current assets ?

►To maintain a high ratio of current assets to sales
►To maintain a low ratio of current assets to sales

►To maintain less short-term debt and more long-term debt

►To maintain more short-term debt and less long-term debt

Question No: 28         ( Marks: 1 ) - Please choose one

Suppose you have Rs. 10,000 on deposit. One day, you write a cheque for Rs. 2,000 and deposit Rs. 4,000. What is your collection float ?

►Rs. 4,000

►+ Rs. 2,000
►Rs. 2,000
►+ Rs. 4,000

Question No: 30                 ( Marks: 1 ) - Please choose one

Which of the following is known as the group of assets such as stocks and bonds held by an investor ?

►Stock Bundle

►Portfolio

►Capital Structure

►None of the given options

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Question No: 31                 ( Marks: 1 ) - Please choose one

Which of the following is referred as the ratio of the standard deviation of a distribution to the mean of that distribution ?

►Probability distribution

►The expected return

►The standard deviation
►Coefficient of variation

Question No: 32         ( Marks: 1 ) - Please choose one

The MC Inc. purchased a share of common stock exactly one year ago for Rs. 45.
During the past year the common stock paid an annual dividend of Rs. 2.40. The
firm sold the stock today for Rs. 80. What is the rate of return the firm has
earned?

►5.3%

►194.2%

►83.11%
►94.2%

Question No: 33                 ( Marks: 1 ) - Please choose one

Mr. Sami has bought 50 shares of a corporation one year ago at Rs. 20 per share. Over
the  last  year,  he  received  a  dividend  of  Rs. 2  per  share.  At  the  end  of  the

year, the stock sells for Rs.  25. As per given information, what will be his total percentage return ?

►10 %

►20 %

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►35 %

►45 %

Dividend yield= 2/20=0.1%

Capital gain yield =(25-20)/20=0.25%

Total percentage return 0.1+0.25*100=35%

Question No: 34                 ( Marks: 1 ) - Please choose one

While performing the feasibility analysis for a project, an operating cash flow of Rs.

225,000 has been calculated. Net working cap ital has declined by Rs. 40,000. There w as a net capital sp ending of Rs. 100,000 d u ring the year. What w ill be the
total cash flow for the project?

►Rs. 85,000

►Rs. 165,000

►Rs. 285,000

►Rs. 365,000

Operating cash
flow - change in
NWC - Capital
spending

225000-(-40000)-
100000=165000

Question No: 35                 ( Marks: 1 ) - Please choose one

The total market value of a company s stocks is calculated as Rs. 250 million and the total market value of the company s debt are calculated as Rs. 150 million.
What percent of the firm s financing is debt?

►37.50%

►50.00%

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►62.50%

►70.00%

250+150=400
250/400=0.625

0.625*100=62.5 is equity and
100-62.5=37.5 is debt

Question No: 36                 ( Marks: 1 ) - Please choose one

Suppose a firm borrow s Rs. 800,000 at 7%. What w ill be the after -tax interest rate if tax rate is 34%?

►3.00%

►4.62%

►5.20%

►8.00%

RD x (1

- TC).

7%X(1-

0.34)=4
.62

Question No: 37                 ( Marks: 1 ) - Please choose one

Opportunity losses from having inadequate inventory are termed as:

►Carrying costs

►Opportunity costs
►Restocking costs

►Safety reserve costs

Restocking costs - costs of placing an order with suppliers or the cost of setting up a production
run

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•Safety  reserve costs  - opportunity losses from having inadequate inventory e.g. lost sales and goodwill

•A trade-off

•Carrying costs increase with inventory levels and shortage or restocking costs decline with inventory levels

•The goal of inventory

management is to minimize
the sum of these two costs

Question No: 38                 ( Marks: 1 ) - Please choose one

What w ill be the Economic Order Quantity (EOQ) if total u nit sales (T) = 400, fixed costs (F) = Rs. 30 and carrying costs (CC) = Rs. 5 ?

►65 units

►69 units

►89 units

►95 units

EOQ = (2T x F
/ CC)1/2

2*400=800

800*30=24000
24000/5=4800
4800^0.5=69.28

Question No: 39                 ( Marks: 1 ) - Please choose one

The cost of common equity for a firm is:

►The required rate of return on the company's stock ►The yield to maturity on the bond

►The risk-free rate

►The market risk premium

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Question No: 40                 ( Marks: 1 ) - Please choose one

A firm has 3 million in comm on stock, 1 million in preferred stock and 2 million in debt. What is the percentage of firm s financing that is debt ?

►20%

►33%
►40%

►67%

Question No: 41         ( Marks: 1 ) - Please choose one

The book value of a system is Rs. 50,350 at the end of year 3 of its life. What will be the
total after-tax cash flow from sale if we sell this system for Rs. 30,000 at this time? (Tax rate is 34%)

►Rs. 20,350
►Rs. 30,919

►Rs. 36,919

►Rs. 80,350

50350-30000=20350x34%=6919
30000+6919=36919

Question No: 42                 ( Marks: 1 ) - Please choose one

What w ill be the variance if standard deviation for the returns of an investment is

0.2829 ?

►0.0800

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►0.0892

►0.5319

►Cannot be estimated without more information

Question No: 43                 ( Marks: 3 )

Write down the components of total return in terms of dividend growth model. Answer

R = D1 /P0 + g

This tells us that the total return, R, has two components

D1/P0 is called the Dividend Yield. Because this is calculated as the expected cash dividend by
the

current price, it is conceptually similar to the current yield on a bond

Growth rate, g, is also the rate at which the stock price grows. So it can be interpreted as

capital

gains yield

Question No: 44                 ( Marks: 3 )

What is the difference between operating cycle and cash cycle?

The operating cycle is the sum of the inventory and receivable periods
      Operating cycle = Inventory period + Receivable period

Cash cycle

•The time between cash disbursement and cash collection. (We spend cash on day 30, but don't collect until

day 105. so we have to arrange finances $1,000 for 105 - 30 = 75 days)

•So we can describe the cash cycle as:

Cash  cycle  =  Operating  cycle  -  Accounts  payable  period
      75 days = 105 days - 30 days

Question No: 45                 ( Marks: 3 )

How a firm s overall cost of capital is calculated ?

We know that a firm’s overall cost of capital will reflect the required return on the firm’s assets as a
whole.

•Given that a firms uses both debt and equity capital, this overall cost of capital will be a mixture
of the

returns needed to compensate its creditors and stockholders.

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•Cost of capital will reflect

•Cost of equity capital

•Cost of debt capital
      Cost of Equity

Question No: 46                 ( Marks: 5 )

Define the following terms:

(i)       Dealer

An agent who buys and sells securities from a maintained inventory

It stands ready to buy securities from investors wishing to sell them and sells securities to investors

wishing to buy them

(ii)          Broker

An agent who arranges security transactions among investors, matching investors wishing to buy securities with investors wishing to sell securities

They do not buy or sell securities for their own accounts. Facilitating trades others is their business

(iii) Bid Price

(iv) Strike Price

The price that the dealer wishes to pay is the bid price and the price at which the dealer sells the
            securities is called the

strike price.

(v)           Spread

The difference

between the bid and
ask price is called the
spread

Question No: 47   ( Marks: 5 )

A firm has a total value of Rs. 1 million and debt valued at Rs. 400,000. What is the

after-tax weighted average cost of capital if the cost of debt is 12%, the cost of equity is

15% and tax rate is 35% ?

Question No: 48         ( Marks: 10 )

SNT & Co. has the following Target capital structure :

Debentures              =         Rs. 5.00 Billion

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Preferred shares       =         Rs. 2.65 Billion

Common shares       =         Rs. 9.35 Billion

Total                        =         Rs. 17 Billion

Bonds carry an interest rate of 11.5%. Common stocks and Preferred stocks have a return of 15.50 % and 12% respectively and corporate tax rate is 40%. Compute the present Weighted Average Cost of Capital (WACC) for SNT & Co.

Question No: 49                 ( Marks: 10 )

Standard Manufacturing Company (SMC) need s one of two machines. Machine X

costs Rs. 25,000 and has cash flow s of Rs. 8,000 a year for six years. Machine Y costs Rs. 30,000 and has cash flow s Rs. 7,000 a year for six years. SMC has 12% cost of
capital. Calculate each machine s Payback Period and NPV (N et Present Value) and
evaluate the results.

Paper 2

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

Which of the following is the difference between current assets and current? Liabilities?

►Surplus Asset

►Short-term Ratio

►Working Capital

►Current Ratio

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

A business owned by a single person is known as:

►Sole-proprietorship

►General partnership
►Limited partnership

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►Corporation

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

In a common-size balance sheet, all items are shown as a percentage of:

►Total Assets

►Total Liabilities

►TotalOwnersEquity

►None of the given options

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

A company's ability to meet long-term obligations can be estimated by      using

which of the following set of ratios?

►Liquidity Ratio

►Solvency Ratios
pg 34

►Asset Management Ratios
►Market Value Ratios

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

According to Du Pont Identity, ROE is affected by which of the following?

►Operating efficiency

►Asset use efficiency
►Financial Leverage

►All of the given options

The Du Pont identity tells us that ROE is affected by three things:
Operating efficiency (as measured by profit margin)
Asset use efficiency  (as measured by total assets turnover)

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Financial Leverage (as

measured by equity multiplier)

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

Which of the following is a series of constant cash flows that occur at the end of? each period for some fixed number of periods?

►Ordinary annuity

►Annuity due

►Perpetuity

►None of the given options

A series of constant, or level, cash flows that occur at the end of each period for some fixed number of

periods is called an ordinary

Annuity

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

A portion of profits, which a company distributes among its shareholders, is known as:

►Dividends

►Retained Earnings

►Capital Gain

►nterest

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

What amount a borrower would pay at the end of fourth year with a 4 -year, 12%, interest-only loan of Rs. 3,000?

►Rs. 360

►Rs. 2,000
►Rs. 3,000
►Rs. 3,360

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

A company issues bonds with a Rs. 1,000 face value. What is the coupon rate if the coupon payments of Rs. 45 are paid every 6 months?

►3 percent

►6 percent
►9 percent
►12 percent

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

Given two bonds identical but for maturity, the price of the longer-term bond will change _ _ _ _ _ _ _ _ that of the shorter-term bond, for a given change in market interest rates.

►More than

►Lessthan
►Equal to

►None of the given options

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

When corporations borrow, they generally promise to:

I.        Make regular scheduled interest payments

II. Give the right of voting to bondholders

III. Repay the original amount borrowed (principal) IV. Give an ownership interest in the firm

►I and II

►I and III  pg
77

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►II and IV

►I, III, and IV

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

Which of the following allows a company to repurchase part or all of the bond? issue at a stated price?

►Repayment
►Seniority

►Call provision

►Protective covenants

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

Sumi Inc. has policy of paying a Rs. 9 per share dividend every year. If this

policy is to continue indefinitely, what will be the value of a share of stock at a 12% required rate of return?

►Rs. 30

►Rs. 45

►Rs. 60

►Rs. 75

9/0.12=75

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

In which type of the market, previously issued securities are traded among investors ?

Primary Market

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Secondary Market

Tertiary Market

None of the given options

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

An investment should be accepted if the net present value is __________ and rejected if it is ________.

Positive; positive

Positive; negative

Negative; negative
Negative; positive

Question No: 16                 ( Marks: 1 ) - Please choose one

The XYZ Corporation is considering an investment that will cost Rs. 80,000 and have a useful life of 4 years. During the first 2 years, the net incremental after-tax cash flows are Rs. 25,000 per year and for the last two years they are Rs. 20,000 per year. What is the payback period for this investment ?

3.2 Years

3.5 Years

4.0 Years

Cannot be determined from the given information

Question No: 17                 ( Marks: 1 ) - Please choose one

Which of the following statement is INCORRECT regarding a normal project ?

If the IRR of a project is greater than the discount rate, k, then its PI will be

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greater than 1

If the NPV of a project is greater than 0, then its PI will exceed 1

If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will be less than 0

If the PI of a project equals 0, then the project's initial cash outflow equals the PV of its cash flows

Question No: 18                 ( Marks: 1 ) - Please choose one

Which of the following set of cash flows represent the change in the firm s total cash flow that occurs as direct result of accepting the project ?

Relevant Cash Flows

Incremental Cash Flows
Negative Cash Flows
All of the given options

Question No: 19                 ( Marks: 1 ) - Please choose one

Which of the following is NOT a problem while determining incremental cash flows?

Merchandize cost

Sunk cost

Opportunity cost

None of the given options

Question No: 20                 ( Marks: 1 ) - Please choose one

___________ Cost refers to the cash flows that could be generated from an asset the firm already owns provided it is not used for the project in question.

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Sunk

Opportunity
Fixed

Variable

Question No: 21         ( Marks: 1 ) - Please choose one

The overall (weighted average) cost of capital is composed of a weighted average

of :

The cost of common equity and the cost of debt pg
146

The cost of common equity and the cost of preferred stock The cost of preferred stock and the cost of debt

The cost of common equity, the cost of preferred stock, and the cost of debt

Question No: 22                 ( Marks: 1 ) - Please choose one

Which of the following is a characteristic of preferred stock?

These stocks have not stated liquidating value

Dividends on these stocks can be cumulative pg100

These stocks hold credit ratings quite different from bonds

These stocks have not any kind of priority over common stocks

Question No: 23                 ( Marks: 1 ) - Please choose one

Mr. A, as a financial consultant, has prepared a feasibility report of a project for

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XYZ Company that the company is planning to undertake. He has suggested that the project is feasible. The consultancy fee paid to Mr. A will be considered as:

Sunk cost

Opportunity cost

Both sunk cost and opportunity cost
Neither sunk cost nor opportunity cost

Question No: 24                 ( Marks: 1 ) - Please choose one

One would be indifferent between taking and not taking the investment when:

NPV is greater than Zero

NPV is equal to Zero

NPV is less than Zero
All of the given options

Question No: 25                 ( Marks: 1 ) - Please choose one

Which of the following is a measure of accounting profit relative to book value?

Net Present Value

Profitability Index

Internal Rate of Return

Average Accounting Return

Average Accounting Return

•AAR is a measure of accounting profit relative to book value

•AAR rule is to take an investment

if its AAR exceeds a benchmark
AAR

Question No: 26                 ( Marks: 1 ) - Please choose one

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Which of the following M&M propositions states that it is completely irrelevant how a firm chooses to arrange its finances ?

1st proposition

2nd  proposition
3rd proposition

None of the given options

Question No: 27                 ( Marks: 1 ) - Please choose one

According to 2nd M&M proposition, cost of equity does NOT depend upon which of the following ?

The required return of firm s assets
The firm s cost of debt

The firm s stockholders pg 153

The firm s debt-equity ratio

Question No: 28                 ( Marks: 1 ) - Please choose one

Which of the following risk is associated with the unique circumstances of a particular company ?

Financial Risk

Business Risk found
on internet

Functional Risk

None of the given options

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Question No: 29                                                                   ( Marks: 1 ) - Please choose one

Which of the following type of risk influences a large number of assets ?

Systematic Risk

Unsystematic Risk
Diversifiable Risk
Asset-specific risk

The true risk of an investment is the unanticipated or surprising part of the return.

•If we always receive exactly what we expect then the investment will be risk-free.

•Systematic Risk

•A risk that influences a

large number of assets. It is
also called market risk

Question No: 30                 ( Marks: 1 ) - Please choose one

Which of the following is an example of unsystematic risk ?

Increasing Recession

Rise in Interest Rate
Rise in Inflation

Strike call in a company pg
140

Question No: 31                 ( Marks: 1 ) - Please choose one

A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred as :

Probability distribution

The expected return

The standard deviation

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Coefficient of variation

Question No: 32                 ( Marks: 1 ) - Please choose one

Mr. Sami has bought 50 shares of a corporation one year ago at Rs. 20 per share.

Over the last year, you received a dividend of Rs. 2 per share. At the end of the year, the stock sells for Rs. 25. If Mr. Sami sells the stock at the end of the year,
what will be his total cash inflow ?

Rs. 100

Rs. 250

Rs. 1,000
Rs. 1,350

50*20=1000
50*25=1250
1250-1000=250

Question No: 33                 ( Marks: 1 ) - Please choose one

While performing the feasibility analysis for a project, an operating cash flow of Rs.

250,000 has been calculated . Net working capital has increased by Rs. 50,000. There was no capital spending during the year. What w ill be the total cash flow
for the project?

Rs. 170,000

Rs. 200,000

Rs. 215,000

Rs. 230,000
2050000-
(+50000)
200000

Question No: 34                 ( Marks: 1 ) - Please choose one

Autos & computers are included in which of the following MACRS property

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class?

3-year

5-year

7-year

None of the given options

3-year Equipment used in research
5-year Autos, Computers

7-year Most industrial equipment

Question No: 35                 ( Marks: 1 ) - Please choose one

The next dividend for a company is Rs. 5 per share. The stock current price is Rs. 50 per share. What w ill be the cost of capital if the dividend s are estimated to
Grow steadily at 5%?

12.88%

13.07%

14.22%

15.00% pg
142

Question No: 36                 ( Marks: 1 ) - Please choose one

Trade credit is more likely to be granted if:

The selling firm has a cost advantage over other lenders
The selling firm can engage in price discrimination
The selling firm can obtain favorable tax treatment

All of the given options

Trade Credit is more likely to be granted if:

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•The selling firm has a cost advantage over other lenders.

•The selling firm can engage in price discrimination.

•The selling firm can obtain favorable tax treatment.

•The selling firm has no established reputation for quality products or services.

•The selling firm perceives a long-term strategic relationship.

•The optimal credit policy depends on the characteristics of particular firms.

•Excess capacity

Question No: 37                 ( Marks: 1 ) - Please choose one

A firm makes a sale of Rs. 2,000 on January 05, 2005. The firm is offering credit term of 3/10 net 30. How much it will receive if the customer makes the payment on January 09, 2005 ?

Rs. 1,000

Rs. 1,940

Rs. 2,000
Rs. 2,100

Question No: 38   ( Marks: 1 ) - Please choose one

Shortage  or  Restocking  costs                    with  inventory

levels

Rise

Decline

Remain unaffected

None of the given options

Carrying costs increase with

inventory levels and shortage or
restocking costs decline with
inventory levels

Question No: 39                 ( Marks: 1 ) - Please choose one

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Which one of the following motives refers to the need for holding cash to satisfy norm al disbursement  and collection activities associated with a firm s ongoing Operations?

Speculative motive

Transaction motive

Precautionary motive

Personal motive

Speculative Motive - the need to hold cash to take advantage of additional investment opportunities,

such as bargain purchases, attractive interest rates and favorable exchange rater fluctuations.

•Reserve borrowing utility and Marketable securities

•Transaction Motive - the need to hold cash to satisfy normal disbursement and collection activities

associated with a firm’s
ongoing operations.

Question No: 40                 ( Marks: 1 ) - Please choose one

What would be the standard deviationof returns for aninvestmentthat has a Variance of 0.008?

0.08944

0.09101

0.09487

0.10521

Question No: 41                 ( Marks: 1 ) - Please choose one

A firm has 3 million in common stock, 1 million in preferred stock and 2 million in debt. What is the that is debt ?

20%

33%

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40%

67%

Question No: 42         ( Marks: 1 ) - Please choose one

Which of the following statement is INCORRECT regarding financial leverage ?

Financial leverage can dramatically alter the payoffs to the shareholders. Financial leverage refers to the extent to which a firm relies on the debt.

Financial leverage must affect the overall cost of capital in any condition.  pg 149

Financial leverage may not affect the overall cost of capital.

Question No: 43                 ( Marks: 3 )

Define Net Present Value (NPV) and write down the NPV rule to accept a project.

Question No: 44                 ( Marks: 3 )

What do you mean by the terms of business risk and financial risk?

Question No: 45                 ( Marks: 3 )

Suppose there is an operating cash flow of Rs. 520,000. Net working capital has

increased by Rs. 200,000 and there is a net capital spending of Rs. 120,000 during the year. Calculate total cash flow.

Question No: 46                 ( Marks: 5 )

A replacement project has an initial investment of Rs.10,000; and cash flows are

Rs.3,400; Rs. 2,500; Rs.3,900; and Rs.5,200 for years 1 through 4, respectively. The

firm has decided to assume that the appropriate cost of capital is 10%. What will be the net present value of the project? Is the project feasible?

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Question No: 47                 ( Marks: 5 )

Describe the relationship between capital structure and weighted average cost of capital (WACC).

Question No: 48                 ( Marks: 10 )

The capital budgeting director of MKJ Inc. is supposed to analyze two proposed

capital investments projects S and T. Each project has a cost of Rs.100,000, and the cost of capital (discounting rate) for each project is 12%. The projects
expected net cash flows are as follows :

Cash flow rs

Year                                     Project A                             Project B

1                                           30000                                   30000

2                                           30000                                   30000

3                                           35000                                   20000

4                                           25000                                   30000

5                                           25000                                   250000

Calculate Internal Rate of Return (IRR) for both projects. On the basis of findings in (i):

a. Which project should be selected if projects are mutually exclusive?

b. Which project or projects should be selected if projects are independent

Question No: 49                 ( Marks: 10 )

Identify the sources and uses of cash and complete the table by following the example.

Example Increasing current liabilities                                 Increase             Sourc

e

1.   Increasing fixed asset

2.   Decreasing equity

3.   Increasing long-term debt

4.   Decreasing fixed assets

5.  Increasing current assets other than cash

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6.   Increasing equity

7.   Decreasing long-term debt

8.   Decreasing current assets other than cash

9.   Accounts Payable go up by Rs. 1,500

10. Accounts receivable go up by Rs.
     2,000

Paper 3

FINALTERM EXAMINATION

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

Which of the following refers to a conflict of interest between principal and agent?

Management Conflict
Interest Conflict

Agency Problem

None of the given options

The Agency Problem

Agency relationship

Principal hires an agent to represent their interest

Stockholders  (principals)  hire  managers   (agents)  to  run  the  company

Agency problem

Conflict of interest between principal and agent

Management goals and agency

costs

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

Which of the following term refers to the ease and quickness with which assets can be converted to cash?

Analysis

Structuring