FIN 622 DATED 14-05-11
MCQS =28
THEORY =4 QUESTIONS
SOME MCQS ARE GIVEN BELOW.
Which of the following is a necessary condition for issuing shares through Initial Public Offerings (IPO’s)?
►The firm must be listed on the stock exchange
Which of the following transactions would occur in a primary financial market?
►Initial public offering
Which of the following would be a consequence of a high Inventory Turnover Ratio?
►Low level of inventory and frequent stock-outs
Which of the following is known as market portfolio?
► A portfolio consists of all securities available in the market
Which of the following is the principal advantage of high debt financing?
► Tax savings
Which of the following would be a consequence of a high Inventory Turnover Ratio?
► low level of inventory and frequent stock-outs.
In which one of the following markets the bonds of a Corporation shall be traded now who were issued 10 years back?
► Secondary market
Which one of the following is an offering in which the shares of a company - to a limited number of investors?►Private Placement
If the common stocks of a company have beta value less than 1, then such stocks refer to
►Defensive stocks
Which of the following statements is TRUE regarding Balance Sheet of a firm?
►It shows the firm’s financial position at a specific point in time.
Suppose that a corporation of which you are a shareholder has just gone bankrupt. Its liabilities are far in excess of its assets. How much of your investment would you get back?
►Nothing at all
| A company can improve (lower) its debt-to-total assets ratio by doing which | of | the |
| following? | | |
►By selling the common stock Reference:
Which of the following terms refers to the process of systematic investigation of the effects on estimates or outcomes of changes in data or parameter inputs or assumptions to evaluate a capital project?
► Sensitivity Analysis
Which of the following conditions, if exist, will make the diversification of stocks more effective?
► Securities contained in a portfolio are negatively correlated
Which one of the following terms refers to the variability of return on stocks or portfolios not explained by general market movements, and is avoidable through proper diversification?
► Unsystematic risk
Short-term creditors would be most interested in which of the following ratios of a firm? ► Liquidity ratios
Which of the following is the rate of return earned on a bond if held till maturity? ► Yield-to-maturity
Which one of the following statements best describes the relationship between market interest rates and bond prices?
► Market interest rates and bond prices move in opposite directions
In which of the following situations market price of a security will move down? ► When market price of the security is above the intrinsic value of the security
Which of the following focuses on long-term investment decision-making process?
► Capital Budgeting
When faced with mutually exclusive options, which project should be accepted under the
'Payback Method'?
► It doesn’t matter because the payback method is not theoretically correct
| | Which one of the following values refers to the amount of money that could be | Realized if |
| | an asset or group of assets is sold separately from its operating organization? | |
Liquidation value
Which of the following statements is applied to weighted average cost of capital (WACC)?
It is used as an evaluation tool
If a creditor wants to know about the bill payment status of a potential customer, the creditor could look at which one of the following ratios?
Average age of accounts payable.
Which of the following refers to the value at which an asset is carried on a balance sheet?
Book Value
.
When the market's required rate of return for a particular bond is much less than
its coupon rate, the bond will be selling at which one of the following?
At premium.
Which of the following transactions would occur in a primary financial market?
Initial public offering
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.
A person has invested some of its personal spare funds in the common stocks of a public limited company. Which of the following would be the total return for this person on his common stocks?
Dividend yield and capital gains yield.
Which of the following is included in the cost of capital of a firm?
Cost of retained earnings
Which of the following best define the term 'Capital Structure'?
The proportion of debt and equity capital used by a firm
In which of the following dividend policies, the amount of dividend is relatively fixed?
Constant payout ratio policy
A public limited Company had sales of Rs.2 million this year. The marketing manager expects sales to grow at a 10 percent compound annual rate over the next 10 years. On this basis, which of the following is the closest amount of sales in 10 years?
► Rs.5,187,485.
The present value of Rs.100 per year received for 10 years discounted at 8 percent is closest to which of the following amounts?
► Rs.671
If you want to earn 8 percent, approximately how much should you pay for a security which matures in one year at Rs. 1,000?
► Rs. 926
ABC Company will pay a dividend of Rs.2.40 per share at the end of this year. Its dividend yield is 8%. At what price is the stock selling?
► 30
uppose a stock is selling today for Rs.35 per share. At the end of the year, it pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield on this stock?
► 5%
You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of $7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you want an annual return of 24.0%, what is the most you should pay for the stock now?
► $56.68
An investor buys a bond that will pay the interest amount of Rs.60 annually, forever. If there is
If you deposit $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?
► $768,901.12
( M a r k s: 1 ) Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and a net profit margin of 5%. What are its sales?
► Rs.480,000
A firm had an interest expense of Rs.400,000 on its outstanding debt during the financial
year 2006-2007. If the firm marginal tax rate is 40%, what was the total tax savings of the firm during the period 2006-2007?
► Rs.160,000
Market demand allowed a company, to raise its price by 20% to $60. What is the new level of break-even revenues if fixed charges including depreciation are $1 million and variable costs were 70% of the old price?
$2,400,000
Question No: 30 (M a r k s: 3)
Suppose you have 40% of your portfolio invested in firm A, 30% in firm B, 20% in firm C, and 10% in firm D. You know that the betas for these firms are, respectively, 1.2, 1.4, 0.8, and 1.1. Calculate your portfolio beta.
Portfolio beta = XaBa + XbBb +XcBc + XdBd
Xa = portfolio invested in firm A
Ba = beta for firm A
Portfolio beta = (40% * 1.2) + (30% * 1.4) + (20% * .8) + (10%*1.1) = .48 + 0.42 + .16 + .11 = 1.17
In the year ending January 2008, Wal-Mart paid out Rs.1,326 million as debt interest. How much more tax would Wal-Mart have paid if the firm had been entirely financed by equity? What would be the present value of Wal-Mart’s interest tax shield if the company planned to keep its borrowing permanently at the 2008 level? Assume an interest rate of 8% and a corporate tax rate of 35%.
More tax in case of entirely finance by equity:
1326 million *35/100 =464 million
Present value of interest = 1326 million /1 .08 =1218.75 million
1. Systemic and unsystematic risk (3 Marks)
Systematic Risk:
Systematic risks are unanticipated that effects all the assets to some degree. It is nondiversifiable. Systematic risk influences large number of assets and is also known as market risk. Systematic Risk is measured by Beta Coefficient or Beta. Beta measure the systematic risk inherent in an asset relative to the market as whole.
Unsystematic Risk or Unique Risk:
It affects only specific assets or a firm. it is also known as Diversifiable or Unique or Asset- specific Risk. It can be eliminated by Diversification therefore; a Portfolio with many assets has almost zero Unsystematic Risk.
