190SolvedMCQsofMGT201.pdf

190 Solved MCQs of MGT201

By http://vustudents.ning.com

1. If coefficient of Correlation, Ro = 0 then :

Investments are perfectly positively correlated

Investments are uncorrelated

Investments are perfectly negatively correlated

None of the above

2. This is the measure that how closely the investments move.

Standard Deviation

Mean Deviation

Correlation Coefficient

None of the above

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

Minimize the Risk

Maximize the return

A & B

None of the Above

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

Market Risk

Company’s unique Risk

Capital Risk

None of the above

5. Total Risk for Investment consists of Diversifiable Risk and :

Market Risk

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Capital Risk

Dividend Yield

Capital Gain Yield

6. If a share A’s Beta = + 1.0 then :

That share is twice as risky as the Market

That share is exactly as risky as the Market

That share is half as risky as the Market

None of the above

7. The Beta for the most Stocks ranges between :

-2.5 and -1.5

-1.5 and -0.5

-0.5 and +0.5

+0.5 and +1.5

8. According to the capital-asset pricing model (CAPM), a security's expected

(required) return is equal to the risk-free rate plus a premium

Equal to the security's beta.

Based on the unsystematic risk of the security.

Based on the total risk of the security.

Based on the systematic risk of the security.

9. The risk-free security has a beta equal to ------------, while the market

portfolio's beta is equal to ------------.

one; more than one.

one; less than one.

zero; one

less than zero; more than zero.

10. An "aggressive" common stock would have a "beta"


Equal to zero

Greater than one

Equal to one.

Less than one.

11. In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?

Common stock. Debt. Preferred stock None of the given options

12. Optimal capital structure refers to the particular combination that minimizes the------------while maximizing the------------.

Operating cost, sales Taxes, Interest expense Cost of capital, Stock price None of the given options

13. The dividend-payout ratio is equal to:

The dividend yield plus the capital gains yield. Dividends per share divided by earnings per share. Dividends per share divided by par value per share. Dividends per share divided by current price per share.

14. Which of the following would be consistent with a more aggressive approach to financing working capital?

Financing short-term needs with short-term funds. Financing permanent inventory buildup with long-term debt. Financing seasonal needs with short-term funds. Financing some long-term needs with short-term funds.

15. The opportunity cost of holding cash rises when:

Interest rates are high Interest rates are low Central bank issue more bank notes None of the given options

16. Which of the following source of financing involve no transactions costs?

Common shares Preferred shares Retained earnings


All of the given options

17. Texas Products Inc. has a division that makes plastic composite bags for the space industry. The division has fixed costs of $45,000 per month, and it expects to sell 45,000 bags per month. If the variable cost per bag is $6.00, what price must the division charge in order to break even?

$6.00 $7.00 $8.00 $9.00

18.The Free Indeed Company manufactures ladies shoes that are sold through discount houses. The shoes are sold for $20 each pair; the fixed costs are $110,000 for up to 30,000 pairs of shoes; variable costs are $13 per pair of shoes. What is the firm’s breakeven point in units sold?

30,000 pairs of shoes 15,714 pairs of shoes 8,462 pairs of shoes 5,500 pairs of shoes

19. Suppose you know that your firm is facing relatively poor prospects but needs new capital. If you also know that investors do not have this information, signaling theory would predict that you would:

Issue debt to maintain the returns of equity holders. Issue equity to share the burden of decreased equity returns between old and

new shareholders. Both a and b are correct None of the given option is correct

20. The extent to which fixed costs are used in a firm’s operations is called its:

Financial leverage. Operating leverage. Financial leverage. Foreign risk exposure.

21. Which of the following statement refers to the concept of ‘Hedging and Risk

Management?

Don’t compare apples to oranges

Get insurance because you will break some eggs

A safe rupee is worth more than a risky rupee

Don’t put all your eggs in one basket

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


Portfolio

Capital Structure

Budget

None of the above

23. _______________ refers to the risk that the company might go bankrupt or close

down & bonds, or shares issued by the company may collapse

Inflation Risk

Default Risk

Sovereign Risk

Maturity Risk

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

Systematic Risk

Unsystematic Risk

Portfolio Risk

Total Risk

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

Minimize the Risk

Maximize the return

A & B

None of the Above

26. 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

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

Systematic Risk

Unsystematic Risk

Total Risk

Portfolio Risk


MCQ # 28, 29, 30 are based on the following data:

SNT Corporation has a bond issue outstanding with an annual coupon rate of 7

percent and 4 years remaining until maturity. The par value of the bond is Rs.

1,000. The bond pays interest annually.

28. What will be the current value of bond if present market conditions justify a 14

percent required rate of return?

Rs. 975.25

Rs. 795.77

Rs. 840.30

Rs. 610.56

29. What would be the current value on the same rate if there are 20 years

remaining to maturity?

Rs. 795.77

Rs. 840.30

Rs. 536.16

Rs. 672.25

30. According to the data of Question # 8, the bond is selling on _______________

and according to the data of Question # 9, the bond is selling on _______________.

Premium; Premium

Discount; Discount

Premium; Discount

Discount; Premium

31. _____________ is a statistical spread of possible returns for a Stock and

____________ is a statistical spread of possible returns for that Stock relative to the

market spread.

Market Risk; Market Beta

Market Risk; Market Return

Market Beta; Market Risk

Market Return; Market Risk

32. Capital structure decisions refer to the:


Dividend yield of the firm’s stock

Blend of equity and debt used by firm

Capital gains available on the firm’s stock

Maturity date for the firm’s securities

33. The company cost of capital for a firm with a 60/40 debt/equity split, 8% cost of

debt, 15% cost of equity, and a 35% tax rate would be:

7.02 %

9.12 %

11.08 %

13.80 %

34. A project with an initial investment of Rs. 1,000 generates a cash flow of Rs. 200

in year 1, Rs. 300 in year 2, and Rs. 350 in next three years. The Payback for the

project will have NPV of __________ at a 12% required rate of return and payback

period of ______ years.

Rs. 10.87; 3.60

Rs. 15.19; 3.43

Rs. 87.88; 3.60

Rs. 87.88; 3.43

35. According to CAPM estimates, what is the cost of equity for a firm with beta of

1.5 when the risk-free interest rate is 6% and the expected return on the market

portfolio is 15%?

19.5 %

21.0 %

22.5 %

24.0 %

36. Higher operating leverage is related to the use of additional _____________.

Fixed Costs

Variable Costs

Debt Financing


Common Equity Financing

37. Lower financial leverage is related to the use of additional ______________.

Fixed Costs

Variable Costs

Debt Financing

Common Equity Financing

38. Gordon and Lintner Theory is also known as ________________________.

MM Irrelevance Theory

Tax Preference Theory

MM Capital Structure Theory

Bird in the Hand Theory

39. Relaxed Policy requires ____________ amount of Current Assets whereas

Restricted Policy requires _____________ amount of Current Assets.

Small; Small

Large; Large

Small; Large

Large; Small

40. Which of the following Cash Management Policy minimize cash holdings when

interest rates are high?

Interest-based Policy

Cash Flow Synchronization Policy

Speed up Cash Collection Policy

Float Policy

41. What approximate annual interest rate would you have to earn in order to double your money in six years?

16 percent 7 percent 10 percent 12 percent

42. National Automobile Parts had sales of $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, sales in 10 years should be closest to

$5,187,485.


$2,593,722.

$4,622,885. $5,081,309.

43.The present value of an annuity due exceeds the value of a comparable ordinary annuity because ------------.

Each cash flow occurs at the beginning of the period for an ordinary annuity Each cash flow of the annuity due is compounded one additional period Each cash flow of the annuity due is discontinued one less period Each cash flow of the ordinary annuity is discounted one less period

44.The buyer of a zero-coupon bond expects to receive

Price appreciation. A rate of return equal to zero over the life of the bond. Variable dividends instead of a fixed interest payment annually. All interest payments in one lump sum at maturity

45.If interest rates rise, which of the following bonds will suffer the greatest decline in price?

An 8 percent bond maturing in 2008 A 6 percent bond maturing in 2008 An 8 percent bond maturing in 2018 A 6 percent bond maturing in 2018

46. The return to an investor on a share of common stock

Cannot be related to earnings or earnings payout. Includes both a dividend yield and a capital gains yield. Cannot be calculated if dividend growth rate is not constant. Is zero if dividends are not expected to grow.

47.How much should you pay for a bond with a $700 face value, a 5 percent coupon rate, and five years to maturity if your appropriate discount rate is 7 percent and interest is paid annually? Answers are rounded to the nearest dollar.

$1,000 $761 $643 $918

48.If the general level of interest rates rise, the prices of already issued bonds will

Remain unchanged. Rise. Fluctuate violently. Fall.


49.The present value of $100 per year received for 10 years discounted at 8 percent is closest to

$177. $362. $425. $671.

50.An investor holding a well-diversified portfolio will not be exposed to

Unsystematic risk. Default risk. Systematic risk. Inflation risk.

51. An investor holding a well-diversified portfolio will not be exposed to Unsystematic risk. Default risk. Systematic risk. Inflation risk

52. An investor is considering investing in only one of the following securities:

A B C Expected Return 0.10 0.10 0.15 Standard Deviation 0.05 0.06 0.09 Which of the following statements is true?

Securities B and C are of equal relative risk. Securities A and B are equally desirable if the investor is risk-averse. Security C is more desirable than Security A if the investor is very risk-averse. Security B is relatively less risky than Security C.

53. If the expected return on Treasury securities is 7 percent, the expected return on the market portfolio is 10 percent, and the beta of the Tolliman Lighting Corp. is 1.25, then the required return on TLC stock is

7 percent. 10.75 percent. 3 percent. 3.75 percent.

54. In the Capital Asset Pricing Model, the term (Rm - Rf) represents

The unsystematic risk premium for a security. The security market line. The market risk premium. The expected return of a security.

55. The risk-free security has a beta equal to ………, while the market portfolio's beta is equal to …………....

One; more than one.


One; less than one.

Zero; One. Less than zero; more than zero.


Equal to zero. Greater than one. Equal to one. Less than one.

57. The SML (security market line) equation shows the relationship between a security’s market risk and its …………...

Intrinsic value Required rate of return Face Value Book Value

58. A line that describes the relationship between an individual security's returns and returns on the market portfolio.

Characteristic line Security market line Capital market line Beta

59. The CAPM can be used to estimate

Dividends. The required rate of return on a security. The actual price of a security when the market opens tomorrow morning. Betas.

60.Holding everything else constant, increasing fixed costs ………. the firm's break-even point.

Decreases Increases the covariance of Increases Does not affect

61. ----------------- reflects the operating efficiency of a company during an accounting period.

Balance Sheet Income Statement Cash Flow statement


Cost of Goods Sold

62. In finance we refer to the market for short-term government and corporate debt securities as the __________ market.

Money Capital Primary Secondary

63. A company reported a net income of Rs 120,000 during 2004-2005 .During that period the company reported total assets of Rs1, 000,000. What would be the Return on Assets (ROA) of the company?

12% 0.12% 120% 120

64. The future value of a bank deposit of Rs 100,000 after 5 years, if the interest rate is 12% and is compounded semiannually would be --------------.

more than Rs 100,000 Less than Rs 100,000 Equal to Rs 100,000 Impossible to calculate future value of the deposit.

65. -------------- represents ownership of the holder in a company.

Common Stocks Debentures Mortgage bonds Accounts payable

66. If the number of outstanding common shares of a company decreases then its EPS ------------------.

Falls Rises Remains unchanged Non of the above.

67. Financial Accounting deals with Book Value (historical cost minus accumulated depreciation) whereas Financial Management focuses on _______________.

Market Value Fixed cost Historic cost Accumulated depreciation


68. Economic Value Added for a firm is obtained by subtracting cost of capital from ----------------------------.

Operating Cost Operating profit Net income Revenue

69. Which group of ratios measures a firm's ability to meet its short-term obligations?

Debt ratios Liquidity ratios Coverage ratios Profitability

70. Which of the following is not a cash outflow for a firm? Depreciation Dividends Interest payments Taxes

71. Money paid (earned) for the use of money is called ____________.

Inflation Interest Earnest money Non of the above

72.A person deposited Rs.50,000 in a bank. What would be the worth of this amount after 5 years, if the bank pays 12% p.a, and is compounded quarterly?

86,400 87,400 100,000 84,500

73.At 15% discount rate a project has NPV equal to zero, what would be the IRR of this project.

10% 15% 12% 14%

74.A public limited company sold bonds to a firm for Rs.150,000. The company would retire these bonds for Rs.200,000 at maturity, and would pay no interest to the holder during this period. Which type of bonds the company issued?

Zero coupon bonds Debentures Mortgage Bond


Non of the above

75.Which of the following capital budgeting technique ignores time value of money?

IRR method NPV method Payback period method Non of the given options

76.Which of the following have variable future dividends?

Preferred Stock Common stock Bonds Non of the above

77.When market interest rate increases, the market price of bonds usually ___________.

Increases Decreases Remains unchanged Non of the above

78.Which of the following is not included in the cash flows of a project?

Opportunity cost Depreciation Tax savings Sunk costs

79.Which of the following is not the objective of capital budgeting techniques?

Financial viability of the project To assess working capital requirement To evaluate the value of investment To measure durability of the project

80.An ordinary annuity whose payments or receipts continue forever is called___________.

Annuity due Deferred annuity Perpetuity Non of the above

81. The greater the beta, the_________of the security involved.

Greater the unavoidable risk Greater the avoidable risk Less the unavoidable risk


Less the avoidable risk

82. According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal to the risk-free rate plus a premium

Equal to the security's beta. Based on the unsystematic risk of the security. Based on the total risk of the security. Based on the systematic risk of the security.

83.In Efficient Markets, Price of Stocks is based on ____________.

Market Risk Liquidation Value Diversifiable Risk Book Value

84.The SML (security market line) equation shows the relationship between a security’s market risk and its ____________.

Intrinsic value Required rate of return Face Value Book Value

85.The risk-free security has a beta equal to____________, while the market portfolio's beta is equal to ____________.

One; more than one. One; less than one. Zero; One. Less than zero; more than zero.

86. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be ____________, and the required return on Acme's common stock should be ____________ .

3.6 percent; 7.2 percent 9.6 percent; 13.2 percent 9.0 percent; 18.0 percent


14.0 percent; 23.0 percent

87. Following are the possible one year returns estimates for common stocks of a corporation.

Possibility of occurrence 0.1 0.2 0.4 0.2 0.1 Possible returns -10% 5% 20% 35% 50%

The expected return on this common stock would be

10.45%s 16.43% 20.75% 25%


Equal to zero. Greater than one. Equal to one. Less than one.

89. A line that describes the relationship between an individual security's returns and returns on the market portfolio.

Characteristic line Security market line Capital market line Beta

90. Because investors dislike uncertainty, they will require _________ rates of return from risky investments.

Higher Lower The same None of the above

91. Preferred shareholders' claims on assets and income of a firm come _______ those of creditors __________those of common shareholders.

Before; and also before After; but before After; and also after


Equal to; and equal to

92. Which of the following would appear as liability in the balance sheet of a company?

The value of Bonds purchased for investment purposes The value of Bonds issued for raising capital The value of Stocks purchased for investment purposes None of the given options

93. Operating leverage may be defined as:

The degree to which debt is used in financing the firm The difference between price and variable costs The extent to which capital assets and fixed costs are utilized The difference between fixed costs and the contribution margin

94. The ultimate ownership of the firm resides:

With management With common shareholders With preferred shareholders With bondholders

95. Preferred shareholders:

Play a primary role in the financing of the firm Have a subordinated claim to dividends Possess an ownership interest in the firm Normally have no vote on corporate issues

96. The cost of each component of a firm's capital structure multiplied by its weight in the capital structure is called the:

Marginal cost of capital Cost of debt Weighted average cost of capital None of the above

97. The cost of new common stock (external equity) is generally higher than the cost of retained earnings (internal equity) because of:

Tax effects. Investors’ required returns. Flotation costs.


Coupon payments

98. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the:

Financial risk. Operating leverage. Business risk. Target capital structure.

99. Which of the following can be a cause of a high basic business risk? High operating leverage Large changes in customers’ demand Uncertainty in input costs All of the above

100. Which of the following causes an increase in a company diversifiable risk?

Issuance of bonds Issuance of common stocks Investing in short term money market securities Non of the given option

101. ---------------- refers to the overall cost to an organization of obtaining investment funds, including the cost of both debt sources and equity sources.

Operating cost Cost of outsourcing Cost of capital Cost of Debt

102. -------------- represents the risk borne by common stockholders as a result of the introduction of fixed obligations such as debt and preferred stock in the capital structure.

Financial risk Market risk Operating risk None of the given options.

103. ---------------increases financial risk and bankruptcy risk of a firm.

Debt financing Equity financing Spontaneous financing All of the above options


104. In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?

Common stock. Debt. Preferred stock None of the given options

105. Which of the following sources of financing involve no transactions costs?

Common shares Preferred shares Retained earnings All of the above options

106. Optimal capital structure refers to the particular combination that minimizes the ---------------while maximizing the------------.

Operating cost, sales Taxes, Interest expense Cost of capital, Stock price None of the given options

107. The -------------- is the interest rate that it is assumed can be obtained by investing in financial instruments with no risk.

Risk-free interest rate Effective interest rate Nominal interest rate All of the above options

108.According to signaling theory of capital structure, if future prospects of a firm genuinely looks good then financial managers of the firm would prefer to raise financing through --------------.

Equity capital Borrowed capital Issuance of preferred stock None of the given options.

109. The extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure is called ------------.

Financial risk Financial leverage Cost of capital


None of the given options

110. ---------------- refers to the net income expressed as a percentage of average equity.

Capital gain Return on equity EBIT Tax shield

111. A debenture

is an agreement between the trustee and the firm which guarantees the marketability

Of the bond issue. Is an unsecured bond. May be changed by the firm if it gives the trustee 90 days written notice.

112.A $1,000 face value convertible bond can be converted into 20 shares of common stock. If the market price of the common stock is $40, the conversion price per share is

75 50 35 20

113.Interest rate risk on ling term bonds is ___________ than the interest rate risk for short term risk.

Less More None of the above All of the given options

114. Bonds which are backed by real assets are called ________________

Debentures Junk Bonds Convertible bonds Mortgage Bonds

115. When required rate of return is equal to coupon rate then market value is ___________ par value.

Greater than


Less than

Equal to None of the given option

116. If market price of bond is less than its par value then this bond is selling at a __________

Premium Discount Face value Market price

117._________ receives a fixed regular dividend.

Common shareholder Preferred shareholder Bondholder None of the given options

118. __________ is issued from foreign country.

Eurobond Junk bond Zero bond None of the given options

119. Which of the following is not considered as bond?

Term Finance Certificate T-Bill Defense Saving Certificate None of the given options

120. Which of the following is the fair price of a preferred stock (perpetual investment)? If Dividend of the preferred stock = Rs. 2 / share Par Value = Rs. 10/ share Expected price after 2 years =Rs. 13 Required rate of Return = 15%

Rs. 12.99 Rs. 13.33 Rs. 13.08


None of the given options

121. You are considering buying common stocks in GTC Corporation. The firm yesterday paid a dividend of Rs.5.5. you have projected that dividends will grow at a rate of 10% per year indefinitely. If you want an annual return of 20%, what is the most you should pay per share of these common stocks?

Rs.60.50 Rs.80.00 Rs.70.50 Rs.55.43

122. You are considering buying common stocks in ZTC Corporation. You have projected that the next dividend the company will pay will equal Rs.6.00 and that dividends will grow at a rate of 8% per year thereafter. If you want an annual return of 16%, what is the most you should pay per share of these common stocks?

Rs.80.00 Rs.75.00 Rs.85.00 Rs.81.00

123. How much should you pay for the preferred stock of the ETC Corporation, if it has Rs.100 par value, pays Rs.10 a share in annual dividends, and your required rate of return is 10%.

Rs.85.00 Rs.75.00 Rs.100.00 Rs.60.00

124. If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion?

The stock has a low level of risk. The stock offers a high dividend payout ratio. The market is overvaluing the stock. The market is undervaluing the stock.

125. Just today ABC Corporation paid an annual dividend of Rs.1.00 per share on its common stocks. The stock market analysts have estimated a fair price of Rs.20.00 per share for these stocks. Assume that the market expects this company’s annual dividend to grow at a constant rate of 6% indefinitely. The expected Dividend Yield for these common stocks would be:

5.3% 6.5% 7.5% None of the given options

126. A measure of “risk per unit of expected return.”

Standard deviation


Coefficient of variation

Correlation Coefficient Beta

127. An investor places 40% of his funds in security A and the balance in security B. The expected returns on A and B are 12% and 18% respectively. The standard deviations of returns on A and B are 20% and 15% respectively. The expected return on this 2-stock portfolio would be:

20% 17% 15.6% It can not be determined

128. This type of risk is avoidable through proper diversification.

Portfolio risk Systematic risk Total risk Unsystematic risk

129. XYZ Airlines will pay a Rs.4.00 dividend next year on its common stock, which is currently selling at Rs.100 per share. What is the market’s required return on this investment if the dividend is expected to grow at 5% forever?

9% 4% 5% 7%

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

The expected dividend yield from a common stock. The expected price appreciation yield from a common stock The dividend yield from a preferred stock The interest payment from a bond

Total marks: 10 131. The benefit we expect from a project is expressed in terms of:

Cash in flows Cash out flows Cash flows Returns

132. A plant space is allocated to a project. If this space can be used for some other project then, for project evaluation we must consider its:

Opportunity cost Sunk cost


Recoverable past cost

Irrecoverable past costs.

133. In case of project evaluation, when capital investments contain Current asset component, it is treated as part of:

Working capital Operating cash inflows Capital investment Additional cash inflow

134. If the cash flow stream for a project is NOT a uniform series of inflows. Initial outflow occur at time 0. 15% discount rate produces a resulting present value of Rs. 104,000 (approximately) that is greater than the initial cash outflow of Rs. 100,000. Now if we want to calculate the best discount rate:

We need to try a higher discount rate We need to try a lower discount rate 15% is the best discount rate Interpolation is not required here

135. Which of the following technique would be used for a project that has non –normal cash flows?

Internal rate of return Multiple internal rate of return Modified internal arte of return Net present value

136. A capital budgeting technique that is NOT considered as a discounted cash flow method is:

Payback period Internal rate of return Net present value Profitability index

137. To select the combination of investment proposals that will provide the greatest increase in the value of the firm within the budget ceiling constraint is:

Cash budgeting Capital budgeting Capital rationing


Capital expenditure

138. For issuance of bond, the discount or capitalization rate, applied to the cash flow stream will differ among bonds depending upon the:

Risk and return Risk structure Risk free rate Premium for risk

139. AT & T and General Electric Company have exceptionally strong credit positions. They are such strong that they don’t have to put up property as security for debt issue. The debt instrument they would use to borrow money is:

Mortgage bonds Indentures Debentures T-bills

140. If a bond’s

Market required rate of return 13% Stated coupon rate 12%

In case of bond discount, price for this bond:

Will be less then its face value Will be more than its face value Depends upon the market conditions Cannot be determined

141. Which of the followings states that the cost of equity is a positive linear function of capital structure?

The Capital Asset Pricing Model M&M Proposition I M&M Proposition II The Law of One Price

142. Which of the following is called the tax savings of the firm derived from the deductibility of interest expense?

Interest tax shield Depreciable basis Financing umbrella


Current yield

143. Above the breakeven EBIT, increased financial leverage will __________ EPS, all else the same. Assume there are no taxes.

Increase Decrease Either increase or decrease Increase EBIT but decrease

144. A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?

If sales rise by 3.5% at the firm, then EBIT will rise by 1% If EBIT rises by 3.5% at the firm, then EPS will rise by 1% If EBIT rises by 1% at the firm, then EPS will rise by 3.5% If sales rise by 1% at the firm, then EBIT will rise by 3.5%

145. A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?

If sales rise by 3.5% at the firm, then EBIT will rise by 1% If EBIT rises by 3.5% at the firm, then EPS will rise by 1% If EBIT rises by 1% at the firm, then EPS will rise by 3.5% If sales rise by 1% at the firm, then EBIT will rise by 3.5%

146. Which of the following is an example of restructuring strategy?

Dividends are increased from Rs.1 to Rs.2 per share A new investment increases the firm's business risk New equity is issued and the proceeds repay debt A new Board of Directors is elected to the firm

147. The stability of a firm's operating income is the focus of:

Financial leverage Weighted-average cost of capital Capital structure Business risk

148. The presence of which one of the following costs is not used as a major argument against the M&M arbitrage process?

Bankruptcy costs Agency costs Transactions costs Insurance costs

149. When a firm declares a special cash dividend of $1 per share, shareholders realize that the:


Annual dividend will be $4 per share

Dividends are considered regular Dividend is not likely to be repeated Stock must be owned prior to the declaration date to receive the dividend

150. What would you expect to happen to the price of a share of stock on the day it goes ex-dividend?

The price should increase by the amount of the dividend The price should decrease by the amount of the dividend The price should decrease by one-half the amount of the dividend The price should remain constant

151. Who determine the market price of a share of common stock?

The board of directors of the firm The stock exchange on which the stock is listed The president of the company Individuals buying and selling the stock

152. What should be the focal point of financial management in a firm?

The number and types of products or services provided by the firm The minimization of the amount of taxes paid by the firm The creation of value for shareholders The dollars profits earned by the firm

153. Which of the following would generally have unlimited liability?

A limited partner in a partnership A shareholder in a corporation The owner of a sole proprietorship A member in a limited liability company (LLC)

154. Which of the following is equal to the average tax rate?

Total tax liability divided by taxable income Rate that will be paid on the next dollar of taxable income Median marginal tax rate Percentage increase in taxable income from the previous period

155. Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and a net profit margin of 5 percent. What are its sales?

Rs.3, 750,000 Rs.480, 000 Rs.300, 000 Rs.1, 500,000

Since ROI=8% on $300,000 of assets, then net profit is Rs.24,000 (8% × Rs.300,000). Using the net profit and given that the NPM=5%, sales equals Rs.480,000 (Rs.24,000 / 5%).


156. 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

157. With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs.20,000 initial investment?

Rs.52,000 Rs.93,219 Rs.99,061 Rs.915,240

Rs.20,000[ e(.08 × 20) ] = Rs.20,000(4.9530324) = Rs.99,061. 158. In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would __________.

Fall Rise Remain unchanged Incomplete information

159. Cash budgets are prepared from past:

Balance sheets Income statements Income tax and depreciation data None of the given options

160. Which of the following is part of an examination of the sources and uses of funds?

A forecasting technique A funds flow analysis A ratio analysis Calculations for preparing the balance sheet

161. An annuity due is always worth _____ a comparable annuity.

Less than More than Equal to Can not be found

162. As interest rates go up, the present value of a stream of fixed cash flows _____.

Goes down Goes up Stays the same Can not be found


163. ABC company is expected to generate Rs.125 million per year over the next three

years in free cash flow. Assuming a discount rate of 10%, what is the present value of that cash flow stream?

Rs.375 million Rs.338 million Rs.311 million Rs. 211 million

$311 million. The The cash flow stream would look like this: 125.00 x 0.9090 = 113.63; 125.00 x 0.8264 = 103.30; 125.00 x 0.7513 = 93.91. The sum of the three is $310.84, or $311 million. 164. If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows?

An increase A decrease No change Incomplete information

165. In proper capital budgeting analysis we evaluate incremental __________ cash flows.

Accounting Operating Before-tax Financing

166. A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow is known as:

Payback period Internal rate of return Net present value Profitability index

167. Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account:

Magnitude of expected cash flows Timing of expected cash flows Both timing and magnitude of cash flows None of the given options

168. Which of the followings make the calculation of NPV difficult?

Estimated cash flows Discount rate Anticipated life of the business All of the given options


169. From which of the following category would be the cash flow received from sales revenue and other income during the life of the project?

Financing activity Operating activity Investing activity All of the given options

170. Which of the following technique would be used for a project that has non –normal cash flows?

Multiple internal rate of return Modified internal arte of return Net present value Internal rate of return

171. Why net present value is the most important criteria for selecting the project in capital budgeting?

Because it has a direct link with the shareholders dividends maximization Because it helps in quick judgment regarding the investment in real assets Because we have a simple formula to calculate the cash flows Because it has direct link with shareholders wealth maximization

172. In which of the following situations you can expect multiple answers of IRR?

More than one sign change taking place in cash flow diagram There are two adjacent arrows one of them is downward pointing & the

other one is upward pointing During the life of project if you have any net cash outflow All of the given options

173. Which one of the following selects the combination of investment proposals that will provide the greatest increase in the value of the firm within the budget ceiling constraint?

Cash budgeting Capital budgeting Capital expenditure Capital rationing

174. Who is responsible for the decisions relating capital budgeting and capital rationing?

Chief executive officer Junior management Division heads All of the given option

175. What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue?

Indenture Debenture Bond


Bond trustee

176. __________ is a high-risk, high-yield bond rated below investment grade; while a/ (an) __________ bond has its interest payment contingent on sufficient earnings of the firm.

A junk bond; income A subordinated debenture; mortgage A debenture; subordinated debenture An income bond; mortgage

177. __________ is a long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; while a/(an) __________ bond issue is secured by the issuer's property.

A subordinated debenture; mortgage A debenture; subordinated debenture A junk bond; income An income bond; junk

178. The value of the bond is NOT directly tied to the value of which of the following assets?

Liquid assets of the business Fixed assets of the business Lon term assets of the business Real assets of the business

179. The value of a bond is directly derived from which of the following?

Cash flows Coupon receipts Par recovery at maturity All of the given options

180. Which of the following is not the present value of the bond?

Intrinsic value Fair price Theoretical price Market price

181. The current yield on a bond is equal to ________.

The yield to maturity Annual interest divided by the par value Annual interest divided by the current market price The internal rate of return

182. A coupon bond pays annual interest, has a par value of Rs.1,000 matures in 4 years, has a coupon rate of 10%, and has a yield to maturity of 12%. What is the current yield on this bond is?

10.45%


10.95%

10.65% 10.52%

183. Which of the following is a characteristic of a coupon bond?

Does not pay interest on a regular basis but pays a lump sum at maturity Can always be converted into a specific number of shares of common

stock in the issuing company Pays interest on a regular basis (typically every six months) Always sells at par

184. Which of the following value of the shares changes with investor’s perception about the company’s future and supply and demand situation? (Comprehension)

Par value Intrinsic value Market value Face value

185. The value of direct claim security is derived from which of the following?

Fundamental analysis Underlying real asset Supply and demand of securities in the market All of the given options

186. _________ is equal to (common shareholders' equity/common shares outstanding).

Liquidation value per share Book value per share Market value per share None of the above

187. Low Tech Company has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

4.8% 6.0% 7.2% 3.0%

188. High Tech Chip Company is expected to have EPS in the coming year of Rs. 2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, what would be the growth rate of dividends?

6.25% 8.75% 6.60%


7.50%

189. In the dividend discount model, _______ which of the following are not incorporated into the discount rate?

Real risk-free rate Risk premium for stocks Return on assets Expected inflation rate

190. Bond is a type of Direct Claim Security whose value is NOT secured by __________.

Tangible assets Fixed assets Intangible assets


Real assets

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