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Tag: VU. FIN622-. Corporate. Finance. (Session – 2). MIDTERM .EXAMINATION .Spring .2009

VU FIN622- Corporate Finance (Session – 2) MIDTERM EXAMINATION Spring 2009

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MIDTERM EXAMINATION

Spring 2009

FIN622- Corporate Finance (Session – 2)

Question No: 1- Please choose one

In which one of the following markets the bonds of a Corporation shall be traded now

who were issued 10 years back?

Primary market

Secondary market

Money Market

All of the above

Question No: 2 – Please choose one

Following are amongst the three main areas of Finance EXCEPT:

Financial institutions

Investments

Accounting

Financial management

Question No: 3 – – Please choose one

Which one of the following types of companies enjoys the ‘Limited Liability’?

A general partnership.

A corporation.

A sole proprietorship.

None of the given options.

Question No: 4 – – Please choose one

A company can improve (lower) its debt-to-total assets ratio by doing which of the

following?

By increasing the amount of borrowings

By shifting short-term to long-term debt

By shifting long-term to short-term debt

By selling the common stock

Question No: 5 – – Please choose one

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What are the earnings per share (EPS) for a company that earned Rs.100,000 last year in

after-tax profits, has 200,000 common shares outstanding, and Rs.1.2 million in retained

earnings at the year end?

Rs. 6.50

Rs. 6

Rs. 100,000

Rs. 0.50

*Earning Per Share (EPS):

= Net Income / Average Number of Common Shares Outstanding

Question No: 6 – – Please choose one

Which of the following refers to the value at which an asset is carried on a balance sheet?

Book Value

Market Value

Fair Value

Liquidation Value

Question No: 7 – – Please choose one

In 3 years you are to receive Rs.5,000. What will be the effect on the present value of that

future amount to you if the interest rates increase suddenly?

Remain unchanged

RiseFall

Can not be determined

Question No: 8 – – Please choose one

Which of the following change will occur if a bond’s yield-to-maturity increases, keeping

other factors constant?

Its price will rise

Its price will remain unchanged

Its price will fall.

Can not be determined

Question No: 9 – – Please choose one

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.

Question No: 10 – – Please choose one

When the market’s nominal annual required rate of return for a particular bond is

less than its coupon rate, the bond will be selling at which of the following?

At discount

At premium

At par value

At indeterminate price

Question No: 11 – – Please choose one

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If the intrinsic value of a stock is greater than its market value, then 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 undervaluing the stock.

The market is overvaluing the stock.

Reference:

Question No: 12 – – Please choose one

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 per share and market interest rate.

Dividend yield and capital gains yield.

Earning per share and dividend per share

Market interest rate and dividend yield.

Question No: 13 – – Please choose one

Which one of the following costs should be ignored, while evaluating the

financial viability of a project?

Initial cost

Equipment cost

Cost of capital

Sunk cost

Question No: 14 – – Please choose one

Which of the following statements best describes the term Market Correction?

Market Correction refers to the situation where equilibrium of supply & demand

of shares occurs in the market

Market correction refers to the situation where shares’ intrinsic values becomes equal to

face values

Market Correction refers to the situation when there is a boom in the economy

Market Correction refers to the situation where inflation rate is above the market interest

rate

Question No: 15 – – Please choose one

Which of the following statements is Correct regarding the fundamental analysis?

Fundamental analysts use only Economic indicators to evaluate a stock

Fundamental analysts use only financial information to evaluate a company’s stocks

Fundamental analysts use financial and non -financial information to evaluate a

company’s stocks

Fundamental analysts use only non -financial information to evaluate a company’s stocks

Question No: 16 – – Please choose one

Since the capital budgeting techniques use cash flows instead of accounting flows,

therefore, the financial manager must add back which one of the following to the

analysis?

.

The cost of fixed assets

The cost of accounts payable

Investments

Depreciation

Question No: 17 – – Please choose one

According to the reinvestment rate assumption, which method of capital budgeting

assumes that the cash flows are reinvested at the project’s rate of return?

Payback period

Net present value

Internal rate of return

None of the given options

Question No: 18 – – Please choose one

What is the Net Present Value (NPV) of a project that costs $100,000 and returns

$45,000 annually for three years if the opportunity cost of capital is 14%?

$3,397.57

$4,473.44

NPV = – I0 + CF1/(1+i)n + CF2/(1+i)n + CF3/(1+i) n

= -100000 + 45000/(1.14) + 45000/(1.14)2+ 45000/(1.14)3

= -100000 + 39474 + 34626 + 30374

= 4474

$16,100.00

$35,000.00

Question No: 19 – – Please choose one

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?

$2,000,000

$2,400,000

$2,857,143

$3,333,333

Question No: 20 – – Please choose one

Which of the following best illustrates the problem imposed by capital rationing?

Accepting projects with the highest NPVs first

Accepting projects with the highest IRRs first

Bypassing projects that have positive NPVs

Bypassing projects that have positive IRRs

Question No: 21 – – Please choose one

Which of the following is determined by variance of an investment’s returns?

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Volatility of the rates of return.

Probability of a negative return.

Historic return over long periods.

Average value of the investment.

Question No: 22 – – Please choose one

Which one of the following terms refers to the variability of return on stocks or

portfolios, associated with changes in return on the market as a whole?

Unsystematic risk

Unique risk

Systematic risk

Company specific risk

Question No: 23 – – Please choose one

Suppose a stock is selling today fo r Rs.40 per share. At the end of the year, it pays a

dividend of Rs.2.00 per share and sells for Rs.44.00. what is the rate of return on this

stock?

12%

13%

14%

15%

Expected Returns:

Total Return = Dividends + Capital Gains

= D1 + (P1 – P0) / P0

= 2 + (44 – 40) / 40

= 2 + 4 / 40

= 6/40= 0.15*100

= 15%

Question No: 24 – – Please choose one

Suppose a stock is selling today fo r Rs.60 per share. At the end of the year, it

pays a dividend of Rs.2.00 per share and sells for Rs.66.00. what is the capital gain yield

on the stock?

7%

8%

9%

10%

Capital Gain Yield = ( Pn -Po) / Po)

Capital Gain Yield = ( 66 -60) / 60)

Capital Gain Yield = 6/60 = 0.1*100

Capital Gain Yield = 10%

Question No: 25 – – Please choose one

If the common stocks of a company have beta value less than 1, then such stocks refer

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to which of the following?

Normal stocks

Aggressive stocks

Defensive stocks

Income stocks

Question No: 26 – – Please choose one

Which of the following statements applies to capital asset pricing model?

It tells us about the changes in the stock market index

It tells us about specific risk of a security

It tells us about specific risk of a portfolio

It tells us that how risk is rewarded in the market

Question No: 27 – – Please choose one

Which of the following is included in the cost of capital of a firm?

Cost of sales

Depreciation cost

Depletion cost

Cost of retained earnings

Question No: 28 – – Please choose one

Suppose a firm has weighted average cost of capital (WACC) of 15% based

on the

market values of Debt and equity. Which of the following is the suitable

discount rate to

be used by the firm to evaluate financial viability of its investment projects?

10%

12%

13%

15%

Question No: 29 – – Please choose one

Which of the following best define the term ‘Capital Structure’?

The proportion of debt and equity capital used by a firm

The proportion of long-term liabilities used by a firm

The proportion of equity used by a firm

The proportion of short-term bank loan used by a firm

Question No: 30 – – Please choose one

In which of the following dividend policies, the amount of dividend is

relatively fixed?

.

Constant payout ratio policy

Hybrid dividend policy

Residual dividend policy

Stable dividend policy

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