FIN622 Question No: 1 ( M a r k s: 1 )
A project would be financially feasible in which of the following situations?
► If Internal Rate of Return of a project is greater than zero
► If Net Present Value of a project is less than zero
► If the project has Profitability Index less than one
► If the project has Profitability Index greater than one
Ref: (BOOK FM) PAGE # 42
Those projects with a profitability index ratio of more than one (PI >= 1.0) are considered
FIN622 Question No: 2 ( M a r k s: 1 )
Which one of the following statements applies to Dividend Growth Model?
► It is difficult to understand and use
► It is used for non-listed companies
► It is used for debt securities also
► It do not consider risk level of a security
Ref: PAGE # 60
This approach does not take into account the risk level. There is no direct adjustment for the risky ness of the investment. For instance, there is no adjustment for the degree of certainty or uncertainty in estimated growth rate for dividends
FIN622 Question No: 3 ( M a r k s: 1 )
Which of the following statements is true regarding Weighted Average Cost of Capital (WACC)?
► WACC of a levered firm is greater than that of an un-levered firm
► WACC of a levered firm is lesser than that of an un-levered firm
► WACC of a levered firm is equal to that of an un-levered firm
► An Un-levered firm has zero WACC.
Ref: PAGE # 71
The after tax cash flow of two identical firms in terms of EBIT but having different capital structure – debt – equity weight age will effect the value of firm. This is because debt in capital structure provides tax shield as interest on debt is tax deductible expense. Thus tax shield increases the value of firm: a levered firm’s value is greater than the un-levered firm.
FIN622 Question No: 4 ( M a r k s: 1 )
Which of the following risks is independent of capital structure of a firm?
► Financial risk
► Systematic risk
► Business risk
► Total risk
Slide number 16 of above link
FIN622 Question No: 5
Which of the following is a dividend that is paid in the form of additional shares, rather than a cash payout?
► Stock Dividend
► Cum Dividend
► Ex Dividend
► Extra Dividend
Ref: PAGE # 75
Dividend:
A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property.
FIN622 Question No: 6 ( M a r k s: 1 )
In which of the following situations, a company has the ability to pay off its short-term obligations easily?
► If the company has a positive working capital
► If the company has a negative working capital
► If the company has a zero working capital
► None of the given option
Working capital is often used as a barometer to measure a company's over health and liquidity. If a company has negative working capital, it means that the current liabilities are greater than the current assets. This may mean that the company may have trouble paying off it's short-term obligations. This can impact the overall efficiency of the company because the company may not be able to spend as aggressively as its competitors. Investors often watch working capital closely to check on the financial health of a company.
And
If a company has ample positive working capital, then they are in good shape with plenty of cash on hand to pay for everything they might need to buy. If a company has negative working capital, then their current liabilities are actually greater than their current assets and they lack the ability to spend
FIN622 Question No: 7 ( M a r k s: 1 )
In the formula Q = , “I” denotes which of the following?
► Initial cash out flow
► Interest cost of holding cash
► Investment required
► Initial investment
Ref: PAGE # 95
Q = √ 2 FS / i
Where:
S = is the amount of cash to be used in each period
F = fixed cost of obtaining new funds
i = interest cost of holding cash
Q = quantity of cash to be held per period.
FIN622 Question No: 8 ( M a r k s: 1 )
Keeping all other things constant, an increase in storage cost will result ________ in the EOQ (Economic Order Quantity).
► A decrease
► No change
► An increase
► Cannot be told without additional information
Note: Storage Cost = Carrying cost = Holding cost
42. Which of the following statements about the basic EOQ model is true?
a. If the ordering cost were to double, the EOQ would rise.
b. If annual demand were to double, the EOQ would increase.
c. If the carrying cost were to increase, the EOQ would fall.
d. If annual demand were to double, the number of orders per year would decrease.
e. All of the above statements are true.
FIN622 Question No: 9 ( M a r k s: 1 )
Which of the following is a re-structuring strategy in which employees buy a majority share in their own firm?
► Employee Dividend Scheme
► Employee Buyout
► Employee Empowerment
► Leverage Buyout
Ref: PAGE # 124
Employee Buyout – EBO
A restructuring strategy in which employees buy a majority stake in their own firms. This form of buyout is often done by firms looking for an alternative to a leveraged buyout. Companies being sold can be either healthy companies or ones that are in significant financial distress
FIN622 Question No: 10 ( M a r k s: 1 )
All of the following could be an outcome of financial distress of a firm EXCEPT:
► Employees are leaving the firm
► Suppliers refuse to supply on credit
► Banks do not provide loans
► Financial markets become instable
Tight cash situation in which a business, household, or individual cannot pay the owed amounts on the due date. If prolonged, this situation can force the owing entity into bankruptcy or forced liquidation. It is compounded by the fact that banks and other financial institutions refuse to lend to those in serious distress. When a firm is under financial distress, the situation frequently sharply reduces its market value, suppliers of goods and services usually insist on COD terms, and large customer may cancel their orders in anticipation of not getting deliveries on time
FIN622 Question No: 11 ( M a r k s: 1 )
A firm can fix effective interest rate on short-term borrowings by doing which of the following?
► Buying a forward rate agreement
► Selling a forward rate agreement
► Borrowing local currency
► Borrowing base currency
Ref: PAGE # 137
Forward rate agreement(FRA)
FRA offer companies the facility to fix future interest today either on short-term borrowing or deposit for an agreed future period. An effective interest rate can be fixed on future short-term borrowing by buying an FRA. Alternatively, An effective interest rate can be fixed on short-term deposit or investment by selling FRA.
FIN622 Question No: 12 ( M a r k s: 1 )
In the long run, a successful acquisition is one that:
► Enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage
► Enables the acquirer to diversify its asset base
► Increases the market price of the acquirer's stock over what it would have been without the acquisition
► Increases the financial leverage of the firm
Ref:
Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.
FIN622 Question No: 13 ( M a r k s: 1 )
Which of the following formulas can be used to calculate the value of the firm while considering merger/acquisition?
► Value of all-equity financed firm + FV of tax benefits + Expected Bankruptcy Costs
► Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy Costs
► Value of all-equity financed firm + tax benefits + Expected Bankruptcy Costs
► Value of all-equity financed firm + Expected Bankruptcy Costs
Ref: PAGE # 116
Value of firm = Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy Costs
FIN622 Question No: 14 ( M a r k s: 1 )
Which of the following effects should be considered by a firm if it allows credit to its customers?
► Cost of discount
► Arrange loans to finance short term operations
► Prices of goods
► All of the given options
Ref: PAGE # 103
Analyzing Credit Policy:
When a firm allows credit to its customers there are some effects that should be considered. First, allowing credit to customers means that the revenues to the firm will be delayed. A firm may charge higher prices to the customers for allowing them on credit and this will result in increased sales. Total revenues may increase but still the company will receive it late. Secondly, if the company allows credit to customers and then offers cash discounts for early payment from debtors it will incur cost of discount. In other words, it is reducing its profits. After allowing credit to parties the firm must arrange some loans to finance its short term operations. Such finances do carry a handsome interest rate and this need to be considered. Increasing sales by allowing generous credit to customers also increased the probability of default and thus may incur bad debts.
FIN622 Question No: 15 ( M a r k s: 1 )
Which of the following is generally the objective of the firms behind offering discount to customers?
► To improve the cash flow
► To increase the bad debts
► To improve return on equity
► To improve the PE ratio
Ref: PAGE # 106
The motive behind offering discount to customers may have different secondary meaning to the firm. However, The main objective is to improve the cash flow. Other may include increasing the sales as the discounts directly affect the cost of sales of customer and customer may place enhanced order, thus increasing the turnover.
FIN622 Question No: 16 ( M a r k s: 1 )
Which of the following types of dividend policies results in the most volatile dividend payments and stock holder discomfort?
► Target dividend-payout policy
► Low-regular-and-extra dividend policy
► Regular dividend policy
► Constant payout-ratio dividend policy
Ref: PAGE # 74
Constant dividend payout (div per share/Eps)
A fixed %age is paid out as dividend. Under this policy the dividend amount will vary because the net income is not constant. Thus results in variability of return to investors. The dividends may drop to nil in case of loss. Market price of share will lower.
Same McQ on web see below link
FIN622 Question No: 17 ( M a r k s: 1 )
► 100% debt financed
► 100% equity financed
► 50% equity and 50% debt financed
► 60% equity and 40% debt financed
Ref: PAGE # 66
Example:
We need to un-gear the beta. Why? Note that the beta of the industry in which the proposed project falls has D/E ratio of 40:60 but the new project shall be all equity financed. We un-gear the beta – that means the financial risk element needs to be removed from the geared beta
FIN622 Question No: 18 ( M a r k s: 1 )
Which of the following shows the reward to risk ratio of a Security A?
► Expected return of A (rA) – risk free return / beta of A
► Expected return of A (rA) – risk free return / required return of A
► Expected return of A (rA) – beta of A / risk free return
► Risk free return - expected return of A (rA)/ beta of A
Ref: PAGE # 55 see formula
Reward to Risk = (ER a - ER rf) / BETA a
Which of the following transactions affects the acid-test ratio?
► Receivables are collected
► Inventory is liquidated for cash
► New common stock is sold and used to retire a debt issue
► New common stock issue is sold and equipment purchased
Ref: PAGE # 11
Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.
The current ratio is the ratio of current assets to current liabilities:
Current Ratio = Current Assets/Current Liabilities
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:
Quick Ratio = (Current Assets – Inventory)/ Current Liabilities
FIN622 Question No: 20 ( M a r k s: 1 )
If you deposit Rs. 12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%, what will your account be worth at the end of 16 years?
► Rs. 82,168.44
► Rs. 71,450.82
► Rs. 768,901.12
► Rs. 668,609.67
FVA = PMT[(1+I)n-1/i]
= 12000[(1+.15)16-1/.15]
= 668,609.67
FIN622 Question No: 21 ( M a r k s: 1 )
A 30-year corporate bond issued in 1985 would now be traded in which of the following markets?
► Primary capital market
► Primary money market
► Secondary money market
► Secondary capital market
Ref:
FIN622 Question No: 22 ( M a r k s: 1 )
Which of the following is reflected by the price of a share of common stock?
► Earnings after tax divided by the number of shares outstanding
► The board of directors' assessment of the intrinsic value of the firm
► The book value of the firm's assets less the book value of its liabilities
► The market's evaluation of a firm's present and future performance
Ref:
FIN622 Question No: 23 ( M a r k s: 1 )
You are considering buying common stock in Sumi Inc. The firm yesterday paid a dividend of Rs.7.80. You have projected that dividends will grow at a rate of 9% per year indefinitely. If you want an annual return of 24, what should you pay for the stock now?
► Rs.52.00
► Rs.56.68
► Rs.32.50
► Rs.35.43
Answer with reference by Mehreen
PV = Po* = DIV1 / (rCE -g)
= 7.80(1+.09)/(.24-.09)= 56.68
FIN622 Question No: 24 ( M a r k s: 1 )
Which of the following capital budgeting methods focuses on firm's liquidity?
► Internal Rate of Return
► Payback method
► Net Present Value
► None of the given options
FIN622 Question No: 25 ( M a r k s: 1 )
In deciding the optimal level of current assets for the firm, management is confronted with __________.
► A trade-off between profitability and risk
► A trade-off between liquidity and risk
► A trade-off between equity and debt
► A trade-off between short-term versus long-term borrowing
Ref: PAGE # 101
There are significant funds invested in accounts receivables and there must be some trade off between the profitability and risk. The optimal level of investment should be based on the benefit resulting from a specific level of investment in debtors.
OR see below images
FIN622 Question No: 26 ( M a r k s: 1 )
Mr. Joseph Steve has changed the working capital policy of his company recently. As a result, the liquidity for the company has decreased but an increase in profitability has been observed alongside. From this information we can conclude that the company must have changed his working capital policy from ________ to ________.
► Conservative; Aggressive
► Aggressive; Moderate
► Aggressive; Conservative
► None of the given options
Ref: PAGE # 89
FIN622 Question No: 27 ( M a r k s: 1 )
When the firm considers working capital management, the trade-off between risk and return is affected by all of the followingEXCEPT:
► The pattern of cash borrowing needs of the firm
► The difference between long-term and short-term interest rates
► The ratio of cash to marketable securities
► The debt maturity schedule
FIN622 Question No: 28 ( M a r k s: 1 )
Cash management involves all of the following EXCEPT:
► Efficient disbursement of cash
► Efficient collection of cash
► Wise investment of temporarily surplus cash
► Raising cash through the sale of new stock and bonds
Ref:
FIN622 Question No: 29 ( M a r k s: 1 )
Which of the following type of customers enjoy comparatively longer credit periods?
► Corporate customers
► Individual customers
► Both corporate and individual customers
► Neither corporate nor individual customers
Ref: PAGE # 102
Customer type:
Corporate customers enjoy longer credit periods compared to individual customers due to their business credibility.
FIN622 Question No: 30 ( M a r k s: 1 )
Total credit cost curve consists of which of the following?
► Total of ordering cost and the opportunity cost of credit policy
► Total of carrying cost and the opportunity cost of credit policy
► Total of opportunity cost of credit policy and the bad debts
► Total of production cost and the cost of credit policy
Ref: PAGE # 105
The total of carrying cost and the opportunity cost of credit policy is called the total credit cost curve. There is a point on the total cost curve where the total credit cost curve is minimized. This point corresponds to the optimal amount of credit or investment in receivables.
FIN622 Question No: 31 ( M a r k s: 1 )
A firm has 30 days collection period and it is offering terms of 2/10, net 30. The estimations shows that around 70% customers will avail this opportunity by paying within 10 days whereas remaining will pay after 30 days. What would be the Average Collection Period (ACP) of the firm?
► 10 days
► 12 days
► 16 days
► 18 days
Ref:
70% x 10 days + 70% x 30 days = 12 days
WORKING:
i)
10 x 70% = 7
Days = 10 – 7 = 3
ii)
30 x 70% = 21
Days = 30 – 21 = 9
Hence, Average Collection Period (ACP) = 9 + 3 = 12 days
FIN622 Question No: 32 ( M a r k s: 1 )
Which of the following statement is CORRECT regarding Conglomerate mergers?
► A firm acquires another firm that is in the same industry but at another stage in the production cycle.
► It occurs when one firm purchases other firms that produce similar or competing products.
► It occurs when unrelated businesses merge.
► None of the given options
Ref: PAGE # 110
Types of Mergers
From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:
Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.
Vertical merger - A customer and company or a supplier and company. Think of a cone supplier
merging with an ice cream maker.
Market-extension merger - Two companies that sell the same products in different markets.
Product-extension merger - Two companies selling different but related products in the same
market.
Conglomeration - Two companies that have no common business areas.
FIN622 Question No: 33 ( M a r k s: 1 )
Which of the following is(are) reason(s) for determining shares value in mergers and acquisitions?
► To set up the terms of takeovers
► To value the company for stock exchange listing
► To value shares – for establishing value of share of retiring directors
► All of the given options
Ref: PAGE # 114
Valuation of shares:
When the consideration of merger transaction has been decided to be settled in shares, then comes the stage to determine the value of share. There are some reasons why we need to value the shares.
- To set up the terms of takeovers
- To value the company for stock exchange listing
- For tax purposes
- To value shares – for establishing value of share of retiring directors
FIN622 Question No: 34 ( M a r k s: 1 )
Value of firm = ___________________________________________
► Value of all equity financed firm + PV of tax benefits + Expected Bankruptcy Costs
► Value of all equity financed firm – PV of tax benefits + Expected Bankruptcy Costs
► Value of all equity financed firm + PV of tax benefits – Expected Bankruptcy Costs
► Value of all equity financed firm – PV of tax benefits – Expected Bankruptcy Costs
Ref: PAGE # 114
Value of firm = Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy Costs
FIN622 Question No: 35 ( M a r k s: 1 )
Which of the following statements is TRUE regarding the LBO (Leverage Buyout)?
► New common stocks are issued to acquire the firm
► Shareholders’ dividend is used to acquire the firm
► Company’s reserves are used to acquire the firm
► Borrowed money is used to acquire the firm
Ref: PAGE # 124
Leveraged Buyout – LBO
The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
FIN622 Question No: 36 ( M a r k s: 1 )
Which of the following terms refer to the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition?
► Management Buyout
► Management Buy-In
► Leverage Buyout
► None of the given options
Ref: PAGE # 124
Leveraged Buyout – LBO
The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
FIN622 Question No: 37 ( M a r k s: 1 )
Which of the following statements is INCORRECT regarding currency future?
► Reversal of currency future is simple.
► Parties have to put an initial margin in currency future.
► The size is pre-determined or fixed in currency future.
► Reversing of currency future requires original parties.
Ref: PAGE # 136
Forward contract vs. Currency future
In currency futures, commodity exchanges are involved and credit risk is eliminated. However, a forward contract is made between parties and each party needs to confirm the credit worthiness of each other. Reversal of currency future is very simple. Large buyers and sellers exist. Reversing forward contract is difficult. Original parties have to set off the deal. Future currency contract become a “commodity” and reversing does not require original parties.
FIN622 Question No: 38 ( M a r k s: 1 )
An option is termed as "out of money" if:
► The exercise price of an option is not favorable than the market price of the underlying item
► The exercise price mentioned in the option is favorable than the market price of the underlying commodity
► The exercise price mentioned in the option is equal to the market price of the underlying commodity
► The exercise price mentioned in the option is above the option cost
Ref: PAGE # 139
Options pricing:
The strike price may be higher, lower or equal to the current market price of underlying item.
For example,
A call option gives the right to its holder to buy x number of shares of y company at Rs 10 per share and the current price could be greater than Rs. 10/-, less than Rs. 10/- or exactly Rs 10/- per share. If the strike price is more favorable than the current market price of underlying asset or item, the option is termed as “in-the-money.” If the strike price is not favorable than the current market price of underlying asset or item, the option is called “out-of-money.” If the strike price and current market price are equal, then it is known as “at-the-money.”
FIN622 Question No: 39 ( M a r k s: 1 )
Short-term Interest Futures (STIRs) are settled through which of the following?
► Cash
► Physical delivery
► Both cash and physical delivery
► Neither cash nor physical delivery
Ref: PAGE # 138
Interest Rate Future:
Interest rate futures are also contracts, which have following features:
- These contracts are similar to currency futures.
- These are traded in standardized form on future exchanges.
- Settlement dates on future exchanges are calendar quarters.
- Each future contract is for standardized quantity of underlying security.
- Price of the future is expressed in terms of underlying item.
- Interest rate future, like currency futures may be settled before the maturity date.
- Short Term Interest Rate futures – STIRs are cash settled.
FIN622 Question No: 40 ( M a r k s: 1 )
An option is termed as “at the money” if:
► The strike price and current market price are equal
► The strike price is higher than current market price
► The strike price is lower than current market price
► None of the given options
Ref: PAGE # 139
Options pricing:
The strike price may be higher, lower or equal to the current market price of underlying item.
For example,
a call option gives the right to its holder to buy x number of shares of y company at Rs 10 per share and the current price could be greater than Rs. 10/-, less than Rs. 10/- or exactly Rs 10/- per share. If the strike price is more favorable than the current market price of underlying asset or item, the option is termed as “in-the-money.” If the strike price is not favorable than the current market price of underlying asset or item, the option is called “out-of-money.” If the strike price and current market price are equal, then it is known as “at-the-money.”
FIN622 Question No: 41 ( M a r k s: 1 ) Which of the following is the CORRECT statement regarding the Law of One Price?
► The law of one price applies to only tradable goods
► The law of one price applies to all goods
► The law of one price applies to immovable goods
► The law of one price applies to services only
Ref: PAGE # 145
There are three caveats with this law of one price.
(1) As mentioned above, transportation costs, barriers to trade, and other transaction costs, can be significant.
(2) There must be competitive markets for the goods and services in both countries.
(3) The law of one price only applies to tradable goods; immobile goods such as houses, and many services that are local, are of course not traded between countries.
FIN622 Question No: 42 ( M a r k s: 1 )
“Companies may be stretching to other countries in search and import to the home country cheap raw materials.” This statement depicts which of the following strategic motives of multinational companies for foreign investment?
► Market development
► Backward integration
► Political safety
► None of the given options
Ref: PAGE # 149
Strategic Motives:
Market Development: A MNC may invest in foreign country in order to expand to new markets. Such companies have very strong product line and have expertise in the field of sales and marketing. Car assembly plants in Pakistan are a good example of market development.
Backward Integration: companies may be stretching to other countries in search and import to the home country cheap raw materials.
Cheap inputs: labor and raw materials in developing countries provide MNCs an opportunity to reduce the cost of sales, as labor is expensive in developed countries. This results in larger profit margin.
Political safety: Political stability and non-interference is what a MNC is looking for. Above all every company will ensure the safety of its investment.
FIN622 Question No: 43 ( M a r k s: 1 )
Which of the following is a mutually controlled entity by two or more business enterprisers having a shared motive?
► Subsidiary
► Branch
► Joint Venture
► Licensing branch
Ref: PAGE # 150
Joint venture:
A jointly controlled entity by two or more venture having a joint motive. Normally one venture comes of local market or country of JV operations. Local venture is considered expert and knowledgeable person as far as local market is concerned. This will help managing the business like obtaining loans, statutory regulation compliance, local laws, taxes etc.
FIN622 Question No: 44 ( M a r k s: 1 )
Between 1870 and 1914, the globally fixed exchange rate was accepted in which the currencies were linked to which of the following?
► Any commodity
► Diamond
► Gold
► Wheat
Ref: Page # 147
Between 1870 and 1914, there was a global fixed exchange rate. Currencies were linked to gold, meaning that the value of a local currency was fixed at a set exchange rate to gold ounces. This was known as the gold standard. This allowed for unrestricted capital mobility as well as global stability in currencies and trade; however, with the start of World War I, the gold standard was abandoned.
FIN622 Question No: 45 ( M a r k s: 3 )
Give at least three sources of synergies and explain each of them briefly.
FIN622 Question No: 46 ( M a r k s: 5 )
How would you expect the firm’s cash balance to respond to the following changes?
a) Interest rates increase.
b) The volatility of daily cash flow decreases
c) The transaction cost of buying or selling marketable securities goes up
FIN622 Question No: 47 ( M a r k s: 5 )
The Inventory Manager of a firm has given the following data:
Consumption per Period = S = 4000 Units
Economic Order Quantity = EOQ = 80 Units
Lead Time = L = 1 Month
Stock out Acceptance Factor = F = 1.10
Requirement:
Determine the Economic Order Point for the firm.
FIN622 Question No: 48 ( M a r k s: 5 )
How a firm can create a money market hedge against transaction exposure, when the firm has to make a payment at some future date?
FIN622 Question No: 49 ( M a r k s: 10 )
Describe in detail the major steps in short term financial planning process of a firm.
FIN622 Question No: 50 ( M a r k s: 10 )
Explain the process of re-organization of a firm in a financial distress.
